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World Bank Research E-Newsletter, December 2013
  Dec 17, 2013

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Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession

In a new working paper, Christoph Lakner and Branko Milanovic present a newly compiled database, based on national household surveys from 1988 to 2008. In 2008, the global Gini index was 70.5 percent, after declining by about two Gini points in the past 20 years. When adjusted for the likely under-reporting of top incomes in surveys – by using the gap between national accounts consumption and survey means, in combination with a Pareto-type imputation of the upper tail – the estimate for the global Gini was much higher, at nearly 76 percent. With that adjustment, the downward trend in the Gini almost disappears. A key concept is individual country-deciles, (i.e., in every country, the income distribution is split into 10 groups and every person is assigned the average income of his or her income decile, e.g. the poorest 10 percent). The evolution of the country-deciles shows the underlying elements that drive the changes in the global distribution: China has graduated from the bottom ranks, modifying the overall shape of the global income distribution during the process and creating an important global "median" class. The "winners" were country-deciles that in 1988 were around the median of the global income distribution, 90 percent of whom were in Asia. The "losers" were the country-deciles that in 1988 were at around the 85th percentile of the global income distribution, almost 90 percent of whom were from developed countries.

World Bank Policy Research Working Paper 6719 | Related feature | Related blogpost »

From Pawn Shops to Banks: How Formal Credit Affects Informal Households

In a recent working paper, Claudia Ruiz examines how expanding access to credit affects household decision-making and welfare, using the example of Banco Azteca, the first bank in Mexico offering credit to households employed by the informal sector. While credit from this new bank cost significantly more than commercial banks — with a yearly interest rate of 130 percent vs. 40 percent charged by regular banks — it was cheaper than its competitors, mainly pawn shops, which charge an annual rate of 220 percent. Panel data suggest that in municipalities where Banco Azteca opened, informal households were less likely to borrow from pawn shops, more likely to accumulate more durable goods, and were better able to smooth their consumption. But the proportion of households that held liquid savings declined by 6.6 percent. The results suggest that once credit is available, households are less likely to use savings as a buffer against income fluctuations. Among informal households, those who never obtained formal job offers saw the biggest drop in savings rates. Simulations suggest that if the Mexican government were to cap the interest rate of Azteca at the rate for traditional banks, Azteca would stop operating in the poorest and least populated municipalities.

World Bank Policy Research Working Paper 6634 »

Is Workfare Cost-Effective against Poverty in a Poor, Labor-Surplus Economy?

Workfare schemes impose work requirements on beneficiaries, seemingly an attractive way to self-target transfers to poor people. This incentive argument does not imply that workfare is more cost-effective in poverty reduction than even poorly targeted options, given the hidden costs of participation, according to a recent working paper by Rinku Murgai, Martin Ravallion and Dominique van de Walle. In particular, even poor workfare participants in a labor-surplus economy can be expected to have forgone income when they participate in such a scheme. The paper uses a survey-based method to assess the cost-effectiveness of India’s National Rural Employment Guarantee Scheme in Bihar, one of India's poorest states. Participants are found to have forgone earnings, although these fall well short of market wages on average. Factoring in these hidden costs, the analysis finds that for the same budget, workfare has less impact on poverty than either a basic-income scheme (providing the same transfer to all rural households) or uniform transfers based on the government’s below-poverty-line ration cards. For workfare to dominate other options, it would have to work better in practice. Reforms would need to reduce the substantial, unmet demand for work, close the gap between stipulated wages and wages received, and ensure that the assets created are of value to poor people. Cost-effectiveness would need to be reassessed at the implied higher levels of funding.

World Bank Policy Research Working Paper 6673 »

The Method of Randomization, Economic Policy and Reasoned Intuition

The method of randomization has been a major driver in the recent rise to prominence of empirical development economics. It has helped uncover patterns and facts that had earlier escaped attention. But it has also given rise to heated debate and controversy. In a new working paper, Kaushik Basu evaluates the method of randomization and concludes that, while the method of randomization is the gold standard for description, it is not able to demonstrate causality. Nor does it, in itself, lead to policy conclusions, as is often claimed by its advocates. To get to policy conclusions requires combining the findings of randomized experiments with human intuition, which, being founded in evolution, has innate strengths. Moreover, even non-randomized empirical methods combined with reasoned intuition can help in crafting development policy.

World Bank Policy Research Working Paper 6722 »

A Comprehensive Analysis of Poverty in India

In a new working paper, Arvind Panagariya and Megha Mukim offer a comprehensive analysis of poverty in India. It shows that no matter which of the two official poverty lines is used, poverty has declined steadily in all states and for all social and religious groups. Accelerated growth between fiscal years 2004-2005 and 2009-2010 led to an accelerated decline in poverty rates. Moreover, the decline in poverty rates during these years was larger for the socially disadvantaged groups than upper caste groups, so that a narrowing of the gap in the poverty rates is observed between the two sets of social groups. The paper also provides a discussion of the recent controversies in India regarding the choice of poverty lines.

World Bank Policy Research Working Paper 6714 »

Collective Action is Essential to Development — but Organization is Key to Collective Action

Development policy failures, whether they are in education, public health or property protection, represent breakdowns in collective action, or the inability of citizens to act collectively to sway governments to act in their collective interests. In a new working paper, Philip Keefer uses two lines of research to argue that this inability is linked to the absence of organizations that help citizens solve collective action problems. Exhaustive research on the management of open access resources demonstrates that citizens’ ability to act collectively depends on non-trivial organizational arrangements that allow leaders to sanction free-riding (such as by farmers who extract more irrigation water than is allocated to them by the water collective, or party members who fail to support party initiatives) and allow members to replace leaders if they shirk. Other research demonstrates wide variability in the organization of political parties. In countries where political parties do not have these two organizational characteristics, public sector reform is less likely to succeed, vote-buying is likely to be more common and public policies are less friendly to economic development. This evidence suggests that in future research on democracy, state-building and development, citizen organization should be included as a central element.

World Bank Policy Research Working Paper 6583 »

Why Does the Informal Sector Grow after Trade Liberalization?

Informal employment is ubiquitous in developing countries, but few studies have estimated the costs for workers when they switch between informal and formal employment. In a recent working paper, Javier Arias, Erhan Artuc, Daniel Lederman, and Diego Rojas estimate those costs in the aftermath of trade liberalization in labor reallocation, wage and welfare in Brazil and Mexico, two developing countries that appear to reflect the range of informality rates observed in Latin America. The results suggest that inter-industry labor mobility costs are large, but the cost of entering informal employment is significantly lower than that of entering formal employment. Simulations of labor-market adjustments caused by a trade-related drop in manufacturing goods prices indicate that the share of informally employed workers rises after liberalization, but that is because previously idle labor enters the labor market.

World Bank Policy Research Working Paper 6614 »

Corruption in Schools: Admission Is Free Only If Your Dad Is Rich

In Bangladesh, nearly half of the households reported paying bribes for their children’s education. In the standard model of corruption, the rich can afford, and are more likely to, pay bribes. But the assumption – namely the probability and severity of punishment for bribe-taking doesn’t vary across households – doesn’t hold, according to a recent working paper by M. Shahe Emran, Asadul Islam and Forhad Shilpi. In a developing country where the rule of law is lacking and the poor have little bargaining power, the enforcement of law is frequently selective and biased against them. A more realistic model, where the probability of punishment for bribe-taking depends on the household’s economic status, implies that bribes are likely to be regressive. Using 10-year average rainfall variations across villages to correct for the endogeneity of household income in rural areas, the evidence shows that corruption in schools is doubly regressive: the poor are more likely to pay bribes, and they also pay a higher share of their income. At the end of the day, “free schooling” is free only for the rich and corruption makes the playing field skewed against the poor.

World Bank Policy Research Working Paper 6671 »

Do Agricultural Commercialization and Food Price Shocks Lead to Higher Rates of Stunting among Children?

Diversification into high-value cash crops among smallholder farmers has been touted as a way to improve welfare in rural areas. But the benefits haven’t been thoroughly researched, especially given that market imperfections lead to non-separable production and consumption decisions, and price shocks to staple crops might be displaced on the farm by cash crops. In a recent working paper, Benjamin Wood, Carl Nelson, Talip Kilic, and Siobhan Murray explore the link between agricultural commercialization and nutrition. Using nationally representative household survey data from Malawi, they estimate how the household adoption of an export crop — tobacco — affects child height-for-age z-scores. The analysis takes into account the non-random nature of tobacco adoption and isolates the causal effect by comparing impact estimates for two unique samples of children, who differ in their exposure to an exogenous, domestic, staple-food price shock during a critical stage of growth, from the time of conception to two years of age. The analysis finds that household tobacco production in the year of, or the year after, child birth, combined with the exposure to an exogenous, staple-food price shock, lowers the child height-for-age z-score by 1.27, implying a 70-percent drop in z-score. But the negative effect isn’t statistically significant among children who were not exposed to the same shock. The results show that food insecurity and malnutrition risks can materialize amid high food prices, which might negatively affect uninsured cash crop producers disproportionately.

World Bank Policy Research Working Paper 6650 »

ANNOUNCEMENTS

2014 Annual Bank Conference on Development Economics (ABCDE): Call for Papers

The conference, organized by the World Bank Development Economics Vice Presidency, will be held June 2–3, 2014 at the World Bank's headquarters in Washington, D.C. With "The Role of Theory in Development Economics" as the theme, the conference is calling for papers that examine in innovative ways how analytical and deductive methods, as well as issues of methodology such as the use of randomizations, can be used in development. Topics could include poverty and social protection, behavioral economics, human development, the role of social norms, environment, macroeconomics, trade, and finance. Papers that don't fit into these categories but are related to the main conference theme are also welcome. Selected papers will be presented at main sessions. Draft papers or two-page proposals should be submitted by February 21 to abcde@worldbank.org, along with the title of the paper, authors, affiliation, and contact information. They should also address the main questions to be examined, relevant literature, unique contribution to the literature, and methodology. Selected conference papers will be included in a special issue of the World Bank Economic Review along the lines of the American Economic Review Papers and Proceedings. In addition to the papers selected for the main sessions of the conference, some papers will be selected for a poster presentation session. Authors of accepted proposals will be contacted by March 21. For more information, please click here.

Subset of World Development Indicators Data Now Available in 17 Languages

In an effort to expand global access through the World Bank’s Open Data initiative, 70 of the most popular indicators from the World Development Indicators database (WDI) have been translated into 17 languages and published on 24 World Bank country sites. The languages include Albanian, Bahasa Indonesia, Bulgarian, Hindi, German, Japanese, Korean, Macedonian, Mongolian, Polish, Portuguese, Romanian, Russian, Thai, Turkish, Ukrainian, and Vietnamese. The World Bank country sites for related countries (Albania, Angola, Brazil, Bulgaria, Cape Verde, Germany, Guinea Bissau, India, Indonesia, Japan, Korea, Rep., Korea, Dem Rep, FYR Macedonia, Mongolia, Mozambique, Poland, Romania, Russian Federation, Sao Tome and Principe, Thailand, Turkey, Ukraine, Uzbekistan, and Vietnam) have been updated accordingly, so users can download WDI data for those 70 indicators in their local language. The download file also provides translations of indicator names and metadata descriptions. In addition, all 1,300 indicators from the full WDI data set are available in French, Spanish, Chinese, and Arabic. For more information, please e-mail data@worldbank.org.

Media and Blogs

World Bank Says Expanded Access to Banking Services Comes with Risks (All about Finance blog, World Bank, Nov.13)
“‘Islamic finance’ is a phrase that you hear a lot in development circles these days. … Yet little is actually known about the degree to which individual Muslims are not accessing conventional financial institutions, and even less about how much they demand and use Sharia-compliant financial products, particularly within the realm of household finance. In an attempt to add some empirical rigor to the Islamic finance conversation, we recently published a Working Paper and Findex Note that explore these questions using Findex and Gallup World Poll data.”

Read the post by Asli Demirgüç-Kunt, the World Bank’s research director; Leora Klapper, lead economist in the World Bank’s research group; and Douglas Randall, a research analyst there.

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What Exactly Is the Public-Private Mix in Health Care? (Let’s Talk Development blog, World Bank, Dec.2)
"I’ve been in quite a few meetings recently and read quite a lot of documents where people have made claims about the relative sizes of the public and private sectors in health care delivery. A recent report from the World Bank Group on the private sector in Africa claims that ‘the private health sector now provides half of all health services in the region.’ A document I reviewed recently claimed that “much” of medical care is provided by the private sector — an assertion I hear quite often.

As far as I can make out, the data underlying such claims reflect a very partial picture."

Read the post by Adam Wagstaff, research manager of the Human Development and Public Services team in the World Bank’s research department.

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Did Trade-Policy Responses to Food-Price Spikes Reduce Poverty? (VoxEU blog, Aug. 3)
“Food prices in international markets have spiked three times in the past five years. Most governments responded by altering trade restrictions to insulate the domestic market. Did this work? This column presents new research suggesting that altering trade restrictions has less impact than is commonly thought. Since there are other options — such as conditional cash transfers — that could better, more efficiently and more equitably protect against poverty, it is time we sought a multilateral agreement to desist from changing restrictions on trade when international food prices spike.”

Read the post co-authored by Will Martin, research manager of the Agriculture and Rural Development team in the World Bank’s research department.

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The Program Costs of Impact Evaluation (Development Impact, blog, World Bank, Oct.30)
“I was at a workshop last week where I was moderating a discussion of the practicalities of doing impact evaluations in conflict and post-conflict settings.  One of the program-implementation folks made clear that working with the impact evaluation was a strain — as she put it this "was pulling our field staff through a keyhole.” Which got me thinking about the costs that we, as impact evaluators, can cause for a program”

Read the post by Markus Goldstein, a lead economist in the World Bank’s research department and gender practice leader in the Africa Region.

List of New Policy Research Working Papers
 
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