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World Bank Research E-Newsletter, April 2014
  Apr 29, 2014

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In this Issue
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Policy Research Talk: Twenty-First Century Trade Policy: Pushing the Limits of International Cooperation

Over the last two decades, tariffs in nearly all emerging economies have dropped substantially. In many cases, the average tariff rate applied by a given country has fallen below 10 percent, a historical low since the Second World War. Despite this clear downward trend, over the same time period the world has witnessed a commensurate increase in non-tariff barriers, partially offsetting the benefits of reduced tariffs. These and many other findings on current and future challenges in trade policy were discussed by Chad P. Bown, lead economist in the World Bank’s research department, at April’s Policy Research Talk.

Read the feature story | Watch the video | Policy Research Talk Series

Government Investment Crowds In Private Investment, but This Does Not Imply It Has Positive Returns

There is considerable debate over the optimal scale of government investment. A new paper contributes to this debate by examining the effect of government investment on private investment in 39 low-income countries. Using the fluctuations in predetermined disbursements on loans from official creditors to developing country governments as an instrument for government investment, they find evidence of "crowding in": an extra dollar of government investment raises private investment by roughly two dollars and output by 1.5 dollars. While this finding at first glance suggests a large payoff to government investment, the authors show the evidence is more nuanced. The response of private investment is not sufficient to determine the desirability of government investment; rather, it depends on the returns to government investment. To measure this, they use the empirical evidence to calibrate a constant elasticity of substitution production function with public and private capital as inputs. For most of the countries in the sample, the returns to government investment exceed the world interest rate, suggesting more public investment is desirable. But for some countries that already have high government investment rates, the return to further investment is below the world interest rate.

World Bank Policy Research Working Paper 6781 by Maya Eden and Aart Kraay

Using Subjective Welfare Data to Measure Poverty Rates Can Be Tricky

Self-assessments of economic welfare have become popular for measuring poverty and estimating welfare effects. But as a recent paper shows, these methods are potentially flawed. The main concern is possible differences in how respondents respond—namely, the consistency across households in judging what it means to be economically well-off or not. One way to address this problem of different scales to define poverty is to ask households to score the economic welfare of hypothetical households described to them in a vignette. The scoring of the vignettes can be used to adjust the problematic variations in own-welfare reporting across households. Adjusting the scales matters considerably for summary poverty measures. However, the difference in scales matters little when studying how subjective economic status maps to monetary poverty measures.

World Bank Policy Research Working Paper 6726 by Martin Ravallion, Kristen Himelein, and Kathleen Beegle

Efficient Regulations Boost the Pro-Cyclical Pattern in Entrepreneurship

Economic theory does not offer a clear prediction on the relationship between the business cycle and entrepreneurship. A recent analysis draws on new panel data on firm registrations in 109 countries during 2002-2012 to study this relationship. The data show strong evidence of a pro-cyclical pattern in entrepreneurship. Moreover, the relationship between new firm registration and the business cycle shows that higher levels of financial development and better business environments are associated with stronger pro-cyclicality of entrepreneurship both across countries and within countries over time. The results are robust to various measures of business regulation, such as the cost and time of starting a new firm and closing an insolvent firm. These findings suggest an efficient regulatory environment for the financial and private sector is important for encouraging the formation of new firms during economic expansions and aiding the efficient wind-down of insolvent firms during economic contractions.

World Bank Policy Research Working Paper 6775 by Leora Klapper, Inessa Love, and Douglas Randall

Labor Market Imperfections Drive the Inverse Farm-Size Productivity Relationship in Rwanda

Although a large literature has confirmed a negative relationship between farm size and productivity, the underlying reasons often remain unclear. A new paper investigates the potential causes of this relationship in Rwanda, where policy makers consider land fragmentation and small farm sizes an important bottleneck to agricultural growth. Nationwide plot-level data point toward constant returns to scale in crop production and a strong negative relationship between farm size and output per hectare, as well as labor intensity that is robust across specifications. The inverse relationship continues to hold if profits with family labor valued at shadow wages are used, but disappears if family labor is valued at village-level market wage rates. These findings imply that, in Rwanda, labor market imperfections, rather than other unobserved factors, are the major drivers of the inverse farm-size productivity relationship.

World Bank Policy Research Working Paper 6770 by Daniel Ayalew Ali and Klaus Deininger

Low-Scoring University Students Do Worse When Housed Together

How do students’ academic outcomes differ when they are randomly assigned to university dormitories, instead of being tracked into dormitories with academically similar peers? New research shows that dormitory tracking at a South African university lowers students’ mean grades in their first year of university and increases the inequality of grades. This result is driven by a large negative effect on low-scoring students and a near-zero effect on high-scoring students. Low-scoring students are more sensitive to changes in their peer group composition and their grades suffer if they live only with low-scoring peers. These findings isolate a pure peer effect of tracking, whereas classroom tracking studies identify a combination of peer effects and differences in teacher behavior across tracked and untracked classrooms. The negative pure peer effect of residential tracking suggests that classroom tracking may also have negative effects unless teachers are more effective in homogeneous classrooms. The same pattern of results holds when comparing students who are randomly assigned to live with higher- or lower- scoring peers. Living with higher-scoring peers increases students’ grades and the effect is larger for low-scoring students. However, using peer effects estimated in randomly assigned dormitories to predict outcomes in tracked dormitories yields unreliable predictions. This highlights the risk of extrapolating peer effects estimated under one peer group assignment policy to other types of peer group assignment policies.

World Bank Policy Research Working Paper 6787 by Robert Garlick

Negative Import Demand Shocks Are a Key Event Prior to Petitions for Import Protection

What kinds of changes in foreign competition lead domestic industries to seek import protection? A new study addresses this question using monthly U.S. import data to investigate changes in import composition during the 24-month period immediately preceding the filing of a petition for protection. A decomposition analysis compares imports from two groups of countries supplying the same product: those named in the petition and those not named. The same decomposition can be applied to similar products that are not named in a petition. The results suggest that industries typically seek protection when faced with a specific pattern of shocks. Initially, a persistent positive relative supply shock favors imports from named countries. Later, a negative demand shock hits imports from all sources just prior to domestic industries’ petition for protection. The relative supply shock is broad, affecting both named products and reference products. The import demand shock, however, is narrow, hitting only named products. The latter shock is also large: during the 24-month period imports of products named in petitions grow 15 percentage points less than imports of reference products, with most of this gap arising in the final two quarters before the petition. The negative import demand shock appears to be a key event in the run-up to filing a petition, a point missed by studies using more aggregated data.

World Bank Policy Research Working Paper 6796 by Russell Hillberry and Phillip McCalman

New Book: Right to Work? Assessing India's Employment Guarantee Scheme in Bihar

A new book by Puja Dutta, Rinku Murgai, Martin Ravallion, and Dominique van de Walle looks at how successful India’s 2005 National Rural Employment Guarantee Act has been in creating 100 days of wage employment per year to all rural households whose adult members volunteer to do unskilled manual work in public works projects at a stipulated minimum wage. The bulk of the study focuses on the scheme’s performance in one of India’s poorest states, Bihar. There the scheme seems to be falling well short of its potential impact on poverty. Workers are not getting all the work they want and they are not getting the full wages due. Many report that they had to give up some other income-earning activity when they took up work. The unmet demand for work is the single most important policy-relevant factor in accounting for the gap between actual performance and the scheme’s potential impact on poverty. The book suggests that supply-side constraints must be addressed in addition to raising public awareness, and identifies a number of specific supply-side constraints to work, including poor implementation capacity, weak financial management and monitoring systems.

Order or download the book

ANNOUNCEMENT:

Massive Open Online Course on World Development Report 2014: Risk and Opportunity

At the end of June the World Bank Institute's Open Learning Campus will launch the World Bank Group's second Massive Open Online Course (MOOC), based on the flagship World Development Report 2014, Risk and Opportunity: Managing Risk for Development. The course synthesizes, in an accessible and interactive way, the report's main messages and policy recommendations—showing how effective risk management is crucial for unlocking development opportunities, preventing crises, and protecting the poor. Click here for more details and to sign up.

Media and Blogs

Rehabilitation and Attack: The biggest study so far finds that microcredit helps the poor after all (Economist, April 16, 2014)
“The new study [of microfinance] is distinctive because of its size (it covers more than 3,000 households in 87 villages) and longevity: interviews took place over 20 years. Previous studies have mostly been smaller or just snapshots…. Critics of microfinance argue that borrowing from multiple sources leads to over-indebtedness, trapping people in poverty. The study finds no evidence of that. Rather, borrowing, whether from one institution or several, increases personal expenditure, household assets, the labour supply and children’s education.”

Read the article | Access the related working paper by Shahidur Khandker and Hussain Samad, two economists in the World Bank’s research department.

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A Slippery Ladder: 2.8bn People on the Brink (Financial Times, April 13, 2014)
In this special issue on the global economy, the Financial Times draws on the data in PovcalNet, a tool developed by the World Bank’s research department, to trace the exponential growth of the “fragile middle,” those just above the poverty line who are at risk of teetering back into poverty as growth slows in emerging markets.

“According to Kaushik Basu, chief economist of the World Bank, even if the developing world delivered the above-average growth that it did in the past 20 years it is unlikely that the bank would meet its goal of effectively eliminating extreme poverty by 2030. More worrying is the possibility that a prolonged period of slow growth would erode the gains of recent decades. How vulnerable would those who have risen out of poverty be to sliding back into it? ‘That’s a very good question,’ Mr Basu says. ‘And I think they are still very vulnerable.’ ”

Read the article and view the numbers (both items are gated).

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Of Oxfam, Inequality, Public Services and Twinning (Let’s Talk Development blog, April 14, 2014)
“Last week, Oxfam released a powerful report on inequality, “Working for the Many: Public Services Fight Inequality.” The report makes a persuasive case for the need to bring more attention to the issue of inequality in policy discussions . . . . but a singular focus on inequality would lead us to undervalue some very important progress that has been made in the fight to eliminate poverty. In contrast, by ‘twinning’ the goals of eliminating extreme poverty and boosting shared prosperity, the policies we design may be more likely to ensure that everyone shares in growth and prosperity.”

Read the blog and view the presentation by Dean Jolliffe, a senior economist in the World Bank’s research department.

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Friday round up: Spring Meetings at the WB and IMF
“From calling for a Data Revolution to analyzing the power of migration and development, to sharing prosperity and the moral imperative of ending poverty and discrimination, there are a dizzying array of events, meetings and ideas buzzing at this week's Spring Meetings of the WB and IMF.”

Read the blog.

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River Salinity in Coastal Bangladesh in a Changing Climate (Let’s Talk Development blog, March 31, 2014)
“The urgency of responding to the growing alarm over climate change effects worldwide is hitting headlines this week, as the Intergovernmental Panel on Climate Change (IPCC) just released its Climate Change 2014 report warning that climate change is already having widespread effects on every continent and throughout the world’s oceans.” In this blog, Susmita Dasgupta and colleagues at the Institute of Water Modeling in Bangladesh report on an analysis of sea level rise and salt water intrusion on the southwest coast of Bangladesh where there is already a serious problem.”

Read the post | Access the related working paper authored by Susmita Dasgupta, Farhana Akhter Kamal, Zahirul Huque Khan, Sharifuzzaman Choudhury, and Ainun Nishat.

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Taking Ethical Validity Seriously (Development Impact blog, March 17, 2014)
Martin Ravallion, former director of research at the World Bank, reflects on the ethical validity of some randomized control trials. “I don’t think development specialists have given the ethical issues enough attention. But nor do I think the issues are straightforward. So this post is my effort to make sense of the debate.”

Read the blog by Martin Ravallion and subsequent posts by Berk Özler, David McKenzie, and Markus Goldstein debating points raised by Martin.

Read the story about how the Bank is developing ethical guidelines for research.

List of New Policy Research Working Papers
 
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