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World Bank Research E-Newsletter, June 2014
  Jul 03, 2014

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Policy Research Talk: Growth, Inequality, and Social Welfare: Cross-Country Evidence

Trends in inequality around the world have become a focus of media attention and policy debate over the last few years. From the conversation about increasing inequality that Thomas Piketty’s research has prompted to protests against wealth concentration in rich countries, the issue is at the forefront of public concern and the development policy agenda. In June’s Policy Research Talk, Senior Research Adviser Aart Kraay provided new evidence on one of the key questions in the debate: how much do trends in inequality matter for changes in social welfare?

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

Asymmetric Punishment as an Instrument of Corruption Control

The control of bribery is a policy objective in many developing countries. It has been argued that asymmetric punishments could reduce bribery by incentivizing whistle-blowing. This paper investigates the role played by asymmetric punishment in a setting where bribe size is determined by Nash bargaining, detection is costly, and detection rates are set endogenously. First, when detection rates are fixed, the symmetry properties of punishment are irrelevant to bribery. Bribery disappears if expected penalties are sufficiently high; otherwise, bribe sizes rise as expected penalties rise. Second, when detection rates are determined by the bribe-giver, a switch from symmetric to asymmetric punishment either eliminates bribery or allows it to persist with larger bribe sizes. Furthermore, when bribery persists, multiple bribe sizes could survive in equilibrium. The paper derives parameter values under which each of these outcomes occurs and discusses how these could be interpreted in the context of existing institutions.

World Bank Policy Research Working Paper 6933 by Karna Basu, Kaushik Basu, and Tito Cordella

Tracking Deposit Insurance through the Financial Crisis

This paper provides a comprehensive global database of deposit insurance arrangements as of 2013. The authors extend their earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks' assets and liabilities, including during the recent global financial crisis. They also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks' balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward.

World Bank Policy Research Working Paper 6934 by Asli Demirguc-Kunt, Edward Kane, and Luc Laeven | Read the blog | Access the data

Foreign Aid Increases Economic Growth among Poor Countries Where It Is a Large Source of Funding

Convincingly identifying the impact of aid on growth is difficult. However, an instrumental variable to identify this impact can be constructed utilizing the World Bank's International Development Association (IDA) eligibility criteria. Since 1987 eligibility for aid from IDA has been based partly on whether or not a country is below a certain threshold of per capita income. This country grouping is particularly interesting, because it is composed of poor countries for which aid is particularly important. The evidence suggests that other donors reinforce rather than compensate for reductions in IDA aid when countries exceed the IDA eligibility threshold. Overall aid as a share of gross national income (GNI) drops about 59 percent on average after countries exceed the threshold. Among the 35 countries that moved from below to above the income threshold between 1987 and 2010, one finds a sizable positive effect of foreign aid on economic growth. A one percentage point increase in the aid-to-GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points, mainly as a result of increasing physical investment. However, this finding is limited in scope to those poor countries where foreign aid is a large source of funding. But these results may generalize to countries still under the IDA threshold as they grow closer to the threshold.

World Bank Policy Research Working Paper 6865 by Sebastian Galiani, Stephen Knack, Lixin Colin Xu, and Ben Zou

Easing Access to Credit Could Increase Income Diversity and Agricultural Productivity in Rural Rwanda

Credit constraints may affect rural development more broadly by preventing households from using productivity enhancing agricultural inputs and taking up nonagricultural activities, which many studies identify as key to households’ ability to move out of poverty. However, identifying credit-constrained households poses challenges. This work identifies households’ credit status using a direct elicitation approach for a national sample of Rwandan rural households to assess the extent and nature of credit rationing in the semi-formal sector and its impact on income diversification and agricultural productivity. Being credit constrained reduces the likelihood of participating in off-farm self-employment activities by 6.3 percent, making participation in low-return farm wage labor more likely. Even within agriculture, elimination of all types of credit constraints in the semi-formal sector could increase output by some 17 percent. Two policy implications emerge. First, the estimates suggest that access to information (education, listening to the radio, and membership in a farm cooperative) can reduce the incidence of credit constraints in the semi-formal credit sector. Expanding access to information in rural areas is thus a promising strategy to improve credit access in the short term. Second, making it easy to identify land owners and transfer land could reduce transaction costs associated with credit access. In the medium- and long-term, the impact of Rwanda’s nationwide effort to formalize land rights on enhancing credit supply through a collateral effect remains to be seen.

World Bank Policy Research Working Paper 6769 by Daniel Ayalew Ali, Klaus Deininger, and Marguerite Duponchel

Several Distinct Dynamics Are at Work across the Convergence Process to the Managerial Frontier

Improving managerial quality appears to be an important but understudied ingredient in fostering economic development. What is the process by which a country becomes better at managing firms? Does convergence to the managerial frontier arise from progressively trimming the left tails, a more general rightward shift of the distribution due to, perhaps, the general accumulation of human capital, or perhaps the emergence of superstars in the right tails? Detailed survey data on management practices suggest that part of the process of convergence to the frontier across the development process represents a trimming of the left tail as well as movement of the central mass, with the latter accounting for much of the phenomenon. For rich countries, it is actually the best firms that lag the frontier benchmark. Among potential explanatory variables that may drive these movements, ownership and human capital appear critical, the former especially for poorer countries and the latter for richer countries, suggesting that the mechanics of convergence change across the spectrum. These variables lose their explanatory power as firm and average country management quality rises. Hence, once in the advanced country range, the factors that improve management quality are less easy to document and hence influence.

World Bank Policy Research Working Paper 6822 by William F. Maloney and Mauricio Sarrias

Exploring Self-Enforcing Contracts in the Forest Sector as a Way to Reduce Carbon Emissions

The United Nations has set up a program for Reducing Greenhouse Gas Emissions from Deforestation and Forest Degradation (REDD), but there is little information available to guide policy makers or investors on what form agreements with landholders should take to accomplish those aims. An inherent problem with forest carbon credits are high transaction costs, especially for measuring, monitoring, and verification. To reduce these costs, self-enforcing contracts are useful. These are agreements where it is in the best interest of the environmental service providers to comply, even if monitoring is limited. These issues arise generally in international agreements involving Payments for Ecosystem Services, so experience with those programs provides lessons for structuring REDD agreements. Contractual mechanisms from other agricultural and forestry related projects—that have been proposed or are being used in practice—also shed light on design and implementation of REDD.

World Bank Policy Research Working Paper 6829 by Lea Fortmann, Paula Cordero, Brent Sohngen, and Brian Roe

High Inequality in Childhood Cognitive Skills as a Channel for Intergenerational Transmission of Poverty

Research in developed and developing countries shows multiple and durable benefits from investing in early childhood, including direct links to socioeconomic outcomes later in life. And while emerging literature in the United States also shows how gaps in early cognitive and non-cognitive ability appear early in the life cycle, we know very little about these gaps in developing countries. New research shows evidence of sharp differences in cognitive development by socioeconomic status in early childhood for five Latin American countries. For poorer children, this implies cognitive delays of one to 2.5 years relative to the least poor children. And for the three countries where data are available to follow children over time, wealth gradients that are apparent at young ages continue into primary school, suggesting no evidence of catch-up. Given that observed cognitive impacts of existing early childhood interventions that target poor children in the region are substantially lower, they highlight the big challenge policy makers face in seeking to close gaps in development in early childhood and the intergenerational transmission of poverty in Latin America.

World Bank Policy Research Working Paper 6779 by Norbert Schady, Jere Behrman, Maria Caridad Araujo, Rodrigo Azuero, Raquel Bernal, David Bravo, Florencia Lopez-Boo, Karen Macours, Daniela Marshall, Christina Paxson, and Renos Vakis

Detecting the Effect of Remittances On Economic Growth in Origin Countries Is Likely to Remain Elusive

Remittances by migrant workers have soared in recent years, but their effect on economic growth in countries of origin is difficult to detect. First, a large majority of the recent rise in measured remittances may be illusory—arising from changes in measurement, not changes in real financial flows. Second, even if these increases were correctly measured, cross-country regressions are not powerful enough to detect their effects on growth. Third, the greatest driver of rising remittances is rising migration, which has an opportunity cost to economic output at the origin. Net of that cost, there is little reason to expect large growth effects of remittances in the origin economy. Migration and remittances clearly have first-order effects on poverty at the origin, on the welfare of migrants and their families, and on global gross domestic product; but detecting their effects on growth of the origin economy is likely to remain elusive.

World Bank Policy Research Working Paper 6856 by Michael A. Clemens and David McKenzie

Non-OECD Destinations Account for One-Third of Global High-Skilled Migrants

Among various dimensions of international migration, the movement of highly-skilled professionals, commonly referred to as “brain drain,” is one of the most intensely debated. The discussion typically focuses on the movement of human capital from poorer to wealthier countries. On the one hand, many governments are designing policies to attract the best and the brightest in an increasingly competitive global labor market. On the other hand, many poorer countries, especially those already suffering from low levels of human capital, are deeply concerned about retaining their skilled workers, whose absence is likely to impact their long-term development. However, this debate has almost completely ignored skilled migration flows between developing countries. Based on newly collected data and novel statistical techniques, a global overview of bilateral human capital mobility—by gender and education categories—is now available for 1990 and 2000 for 190 countries. In addition to identifying key determinants of global migration patterns, the analysis provides various nuanced brain drain indicators. Among the important findings, while OECD countries are extremely important destinations, non-OECD destinations account for one-third of total highly skilled migration stocks and are increasing in importance. Most migration takes place between neighboring countries, but several regional magnets are emerging. Still, developing countries are experiencing net human capital losses while the U.S., the U.K., Canada, and Australia attract two-thirds of all highly skilled migrants.

World Bank Policy Research Working Paper 6863, by Erhan Artuç, Frédéric Docquier, Çağlar Özden, and Christopher Parsons

ANNOUNCEMENTS:

New Edition of the Research Digest

The Spring-Summer issue of the Research Digest showcases seven Policy Research Working Papers on Africa. It includes articles on “Tackling Malaria among Schoolchildren in Kenya”, “Are Small Farmers More Productive in Rwanda?”, “Postharvest Loss in Africa—What Do Farmers Say?”, “Explaining Gender Gaps in Farm Productivity in Nigeria”, “The Challenge of Measuring Hunger”, “Moving Up a Gear: Structural Change in Ethiopia”, and “Transactional Sex as Risk-Coping Behavior.”

Read this issue.

Book Launch: Over the Horizon: A New Levant

The new World Bank publication Over the Horizon: A New Levant points to the untapped potential for economic integration in the “New Levant”, defined in this study as a sub-region composed of Egypt, Turkey, Jordan, Lebanon, Iraq, Syria, and the Palestinian Territories. In the absence of sectarian conflict and brewing regional tensions, these countries could be well positioned to benefit from dynamic gains of integration given the geographical proximity to major markets. Furthermore, similarities in stages of economic development, resources endowment, or factor costs generate high potential to benefit from competitiveness and complementarities. The volume and structure of trade and investment flows among the New Levant countries indicate that there could be large untapped potentials for deeper and wider integration in the sub-region. This report, completed prior to the incursions in Iraq and widespread conflict in Syria, discusses how to tap these large potentials for mutual benefit.

More about the report | Watch the launch.

MEDIA AND BLOGS

World Bank: Emerging Nations Have Borne Brunt of Protectionism (Financial Times, June 26, 2014)
“Manufacturers from emerging economies have borne the brunt of protectionist measures introduced since the 2008 global financial crisis, with most of the trade barriers raised by other developing countries, according to the World Bank. Releasing an annual update of its database on ‘temporary trade barriers’ on Thursday, the bank’s economists said there was evidence that the relatively limited wave of protectionism that followed the crisis had peaked. But they also warned that manufacturers from China and other emerging economies had been affected by a disproportionate number of those measures. According to the World Bank, 6.4 per cent of China’s exports were subject to anti-dumping measures and other trade barriers introduced by G20 countries at the end of 2013, or more than five times the 1.2 per cent figure for the US.”

Read the article (gated) | Read the executive summary | Access the database | Read a VoxEU blog by Chad Bown, a lead economist in the World Bank’s research department.

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Are Impact Evaluations Enough? The Social Observatory Approach to Doing-by-Learning (Development Impact blog, June 16, 2014)
“Building adaptive capacity, which is premised on a fundamental change in the culture of projects towards an honest engagement with evidence and data, can be the key to improving development effectiveness. To incubate this approach, the Social Observatory (SO henceforth)—a team of economists, sociologists, behavioral scientists, and computer systems experts—have been collaborating closely for over two years with staff from the World Bank’s South Asia Region Livelihoods Team, and government officials from Bihar and Tamil Nadu states in India. Our goal has been to improve the adaptive capacity of “Livelihoods Projects,” and, in particular, Jeevika in Bihar and the Pudhu Vaazhvu Project, or PVP, in Tamil Nadu.”

Read the blog by Vijayendra Rao | Read the story.

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Development Economics and Method: A Quarter Century of ABCDE (Let’s Talk Development blog, June 4, 2014)
“This is a special year for us for two reasons. It is the 25th anniversary of the ABCDE, an initiative that was an unlikely venture when Stanley Fischer, and Dennis de Tray (his director of research), launched it in 1989. The stated goals at the time were “to improve member country and World Bank policymaking by enhancing the knowledge base”, and to “open up the Bank to outside ideas and problems, and if possible, to help shape the research agendas of those outside the Bank who were also thinking about development.” One can read either humility or arrogance from these stated objectives...”

Read the opening remarks delivered by by Kaushik Basu, Chief Economist, World Bank, at the ABCDE 2014.

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Poverty, Shared Prosperity, and Trade-Offs (Let’s Talk Development blog, June 11, 2014)
“In April 2013, the World Bank Group endorsed two ambitious goals: (1) to end extreme poverty by 2030, and; (2) to promote “shared prosperity” by boosting the incomes of the poorest 40 percent of the population in every country. The introduction of the second goal marked a shift in the World Bank Group’s poverty reduction mission. Some might consider the goal #2 to constitute a refinement of a longer-standing—albeit implicit—emphasis on growth, widely considered a necessary condition for poverty reduction”

Read the blog by Kathleen Beegle.

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Finance and Growth in China and India (Let’s Talk Development blog, June 2, 2014)
“China and India are hard to ignore. Over the past 20 years they have risen as global economic powers, at a very fast pace. By 2012, China has become the second-largest world economy (based on nominal GDP) and India the tenth. Together, they account for about 36% of world population.”

Read the blog by Sergio Schmukler and Tatiana Didier.

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LICs, LMICs, UMICs, and HICs: classifying economies for analytical purposes (Open Data blog, June 13, 2014)
“Two previous posts outlined plans to review the World Bank's analytical income classification…Since we are updating this classification with new data soon (July 1, 2014), we wanted to let users know where this work stands.”

Read the blog by Neil Fantom, Haishan Fu, and William C. Prince.

List of New Policy Research Working Papers
 
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