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World Bank Research E-Newsletter, July 2014
  Jul 30, 2014

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Who Will Feed China in the 21st Century?

Rapid economic growth has contributed greatly to changes in Chinese diets. The demand for food calories is probably close to its peak in China, but the ongoing dietary shift to animal-based foods is likely to impose considerable pressure on agricultural resources. This research uses cereal-equivalent measures for many countries to explore the relationship between income growth and the resulting pressures on agricultural resources. Growth in China’s demand for food appears consistent with global patterns. On the supply side, food output depends strongly on the productivity growth associated with income growth and the country’s agricultural land endowment, with China appearing to be an outperformer. Analysis of income-consumption-production dynamics suggests that China is currently in an income range where consumption growth would be expected to outstrip production growth, but that the gap between production and demand is likely to narrow as China’s population growth stops and the dietary transition decelerates. Continued agricultural productivity growth through research and development, mechanization and farm growth, and sustainable resource management are vital for ensuring that it is primarily China that feeds China in the 21st century.

World Bank Policy Research Working Paper 6926 by Emiko Fukase and Will Martin

Ponzis: The Science and Mystique of a Class of Financial Frauds

Ponzis are among the most ubiquitous and least understood phenomena of economic life. They acquired a certain salience with the global financial crisis of 2008 and the crash of Bernie Madoff’s celebrated Ponzi scheme. This paper explains the structure of Ponzi schemes and goes on to argue that what makes this such a troubling phenomenon is its ability to be camouflaged amidst legitimate practices. It is shown, for instance, that the common practice of giving stock options to employees could be a potential Ponzi that allows corporations to flourish for a while by borrowing from its own future. The paper goes on to discuss the need for intelligent regulation to incise harmful Ponzis—not all Ponzis are harmful—while taking care not to damage other legitimate activities that surround them.

World Bank Policy Research Working Paper 6967 by Kaushik Basu | Read the article in Scientific American.

Strong Link between Climate and Urbanization in Africa

Climate variation has a significant impact on urbanization in Sub-Saharan Africa, primarily in more arid countries. By lowering farm incomes, reduced moisture availability encourages migration to nearby cities, while wetter conditions slow migration. The evidence for rural-urban income links shows that in countries with a larger industrial base, reduced moisture shrinks the agricultural sector and raises total incomes in nearby cities. However, if local cities are entirely dependent on servicing agriculture, their fortunes move with those in the rural sector—reduced moisture tends to reduce local urban incomes. Finally, climate change is likely to result in employment changes within the rural sector itself. Drier conditions induce a shift out of farm activities, especially for women, into non-farm activities, and especially out of the workforce.

World Bank Policy Research Working Paper 6925 by J. Vernon Henderson, Adam Storeygard, and Uwe Deichmann

Is Inequality of Opportunity Bad for Growth? The Cross-Country Evidence Is Inconclusive

Income differences arise from many sources. While the kinds of inequality caused by differences in effort exerted might be associated with faster economic growth, other kinds arising from unequal opportunities for investment might be detrimental to economic progress. This study uses two new metadata sets consisting of 118 household surveys and 134 Demographic and Health Surveys, to revisit the question of whether inequality is associated with economic growth and, in particular, to examine whether inequality of opportunity—driven by circumstances at birth—has a negative effect on subsequent growth. The results are suggestive but not robust: while overall income inequality is generally negatively associated with growth in the household survey sample, there is no evidence that this is due to the component associated with unequal opportunities. In the Demographic and Health Surveys sample, both overall wealth inequality and inequality of opportunity have a negative effect on growth in some of the preferred specifications, but the results are not robust to relatively minor changes. On balance, although the results are suggestive of a negative association between inequality and growth, the data do not permit robust conclusions as to whether inequality of opportunity is bad for growth.

World Bank Policy Research Working Paper 6915 by Francisco H. G. Ferreira, Christoph Lakner, Maria Ana Lugo, and Berk Özler

Tracking Deposit Insurance through the Financial Crisis

A comprehensive global database of deposit insurance has been updated (as of 2013) to include both 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. A new Safety Net Index captures 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 Demirgüç-Kunt, Edward Kane, and Luc Laeven, Edward Kane, and Luc Laeven | Blog | Data

Transparency Policies May Be Ineffective If They Undermine the Commercial Interest of Financial Institutions

The limited success of policies promoting transparency and mandated low-cost savings products in the financial sector is well known. How does this affect the poor? An audit study was conducted in peri-urban cities in Mexico to understand the quality of information and products offered to potential low-income customers. Trained auditors visited multiple financial institutions seeking credit and savings products. Staff at these institutions provided enough information to allow auditors to apply for the loan or open a savings account, but they offered little to no voluntary information about avoidable fees and commissions, especially to auditors trained to appear uninformed about the market. In addition, the printed materials given to auditors of all profile types contained too little information to compare across products. Clients are almost never offered the cheapest product, most likely because staff are incentivized to offer more expensive products that are profitable to the institution. This suggests that disclosure and transparency policies may be ineffective if they undermine the commercial interest of financial institutions.

World Bank Policy Research Working Paper 6902 by Xavier Giné, Cristina Martínez Cuellar, and Rafael Keenan Mazer

The Rapid Growth of Institutional Investors Has Not Lead to Long-Term Financial Markets

Many countries have tried to foster long-term lending through various measures that tackle different parts of the financial system. For example, it was thought that institutional investors would play a key role in developing long-term financial markets. But evidence on the universe of institutional investors from the leading case of Chile does not support this expectation. The investment portfolios of mutual funds, pension funds, and insurance companies show that mutual and pension funds invest mostly in short-term assets relative to insurance companies. The significant difference across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by manager incentives (related to short-run monitoring and the liability structure) that, combined with risk factors, tilt portfolios toward short-term instruments, even when long-term investing yields higher returns.

World Bank Policy Research Working Paper 6922 by Luis Opazo, Claudio Raddatz, and Sergio L. Schmukler

Patchy Progress on the Health-Related Millennium Developments Goals among the Poorest 40 Percent

As the December 31, 2015 target date for the attainment of the Millennium Development Goals (MDGs) approaches, ministries of health are fervently discussing the health-related indicators. This research looks at the differential progress on the health-related MDGs between the poor and better-off within countries. The findings are based on an analysis of 235 Demographic and Health Surveys and Multiple Indicator Cluster Surveys, spanning 64 developing countries over the period 1990-2011. Five health status indicators and seven intervention indicators are tracked. They show that in most countries the poorest 40 percent have made faster progress than the richest 60 percent. On average, relative inequality in the indicators has been falling. Unfortunately, the opposite is true in a sizable minority of countries, especially on child health status indicators, and on some intervention indicators. Absolute inequality has been rising in a larger fraction of countries than has relative inequality, and in around one-quarter of countries the poorest 40 percent have been slipping backward in absolute terms. Despite reductions in most countries, relative inequalities in the health indicators are still appreciable, with the poor facing higher risks of malnutrition and death in childhood and lower odds of receiving key health interventions.

World Bank Policy Research Working Paper 6894 by Adam Wagstaff, Caryn Bredenkamp, and Leander R. Buisman

Restrictions on Liner Shipping Raise Transport Costs and Hurt Trade

The current perception is that maritime transport costs cannot be further lowered through policy reform because the market for maritime services is largely free of distortions. But a new services trade restrictions database reveals that protection persists. This research on policy barriers in the shipping sector addresses a blind spot in the existing literature on the determinants of maritime transport costs. It examines how policy governing the liner shipping sector affects maritime transport costs and seaborne trade flows. Restrictions, particularly on foreign investment, increase maritime transport costs, strongly but unevenly. The cost-inflating effect ranges from 24 to 50 percent, and trade on some routes may be inhibited altogether. Distance increases maritime transport costs, but also lessens the cost impact of policy barriers. Overall, policy restrictions may lower trade flows on specific routes by up to 46 percent and therefore deserve greater attention in national reform programs and international trade negotiations.

World Bank Policy Research Working Paper 6921 by Fabien Bertho, Ingo Borchert, and Aaditya Mattoo


Conference on Food Price Volatility, Food Security, and Trade Policy,
September 18–19

Food price volatility raises very serious concerns in developing countries, given the large share of income spent on food by the poor, and the importance of agriculture as a source of income for many poor people. It can result in sharp declines in the incomes of poor people, potentially throwing them into poverty, and pose serious threats to their food security. The challenge for policy makers is to identify policies or combinations of policies that can ensure both the livelihood security and the food security of vulnerable people. Meeting this challenge is made much more difficult by collective-action problems. While individual countries may insulate themselves from a food price surge using measures such as export bans, these exacerbate the increase in the world price, creating particular difficulties for poor net-food-importing countries. Join the research department for a two-day conference at World Bank headquarters in Washington, DC for a far-ranging discussion and debate on the trade-offs faced by policy makers trying to increase food security for their populations. For more information and to register for the event, click here.


Lessons From Brazil’s War on Poverty (FiveThirtyEightEconomics blog, July 2, 2014)
“In 2001, Brazil’s Gini coefficient—the most common (but not necessarily most attractive) measure of inequality—hovered around 0.60, a very high figure by any standard. (A Gini coefficient of 0 represents perfect equality where everyone earns the same income, and 1 represents complete inequality where all the country’s income accrues to a single person.) By comparison, the U.S.—not exactly a bastion of equality—had a Gini coefficient of 0.4 in 2000.

But from 2001 to 2007, income inequality in Brazil started to decline at an unprecedented rate: The Gini coefficient fell from above 0.60 to below 0.55, reaching its lowest level in more than 30 years. The incomes of the poorest tenth of Brazilians grew by 7 percent per year, nearly three times the national average of 2.5 percent. In less than a decade, Brazil had managed to cut the proportion of its population living in extreme poverty in half.”

Read the blog by Berk Özler, Senior Economist, Development Research Group.


Income Inequality Is Not Rising Globally. It's Falling (New York Times, July 19, 2014)
“Income inequality has surged as a political and economic issue, but the numbers don’t show that inequality is rising from a global perspective. Yes, the problem has become more acute within most individual nations, yet income inequality for the world as a whole has been falling for most of the last 20 years. It’s a fact that hasn’t been noted often enough.

The finding comes from a recent investigation by Christoph Lakner, a consultant at the World Bank, and Branko Milanovic, senior scholar at the Luxembourg Income Study Center. And while such a framing may sound startling at first, it should be intuitive upon reflection. The economic surges of China, India and some other nations have been among the most egalitarian developments in history.”

Read the article | Access the working paper co-authored by Christoph Lakner | Read the blog.


Internet or Toilets? (Let’s Talk Development blog, July 21, 2014)
“Why should we invest in internet access in developing countries when there are more important problems like providing clean toilets? That was one of the questions posed to Vint Cerf following his recent presentation on Emerging Internet Trends that will Shape the Global Economy here at the World Bank. Vint is one of the “Fathers of the Internet”. In the 1970s he was part of a small team that developed the protocols and standards that guide the open, global communication system that we all rely on every day. Today he is Google’s Chief Internet Evangelist and a preeminent thinker about the current state and future of the internet.”

Read the blog by Uwe Deichmann, Director of the World Development Report 2016: The Internet and Development.

List of New Policy Research Working Papers