The World Bank Economic Review - recent issues

Dollar a Day Revisited

Ravallion, M., Chen, S., Sangraula, P. — Fri, 24 Jul 2009 08:20:57 PDT

The article presents the first major update of the international $1 a day poverty line, proposed in World Development Report 1990: Poverty for measuring absolute poverty by the standards of the world's poorest countries. In a new and more representative data set of national poverty lines, a marked economic gradient emerges only when consumption per person is above about $2.00 a day at 2005 purchasing power parity. Below this, the average poverty line is $1.25, which is proposed as the new international poverty line. The article tests the robustness of this line to alternative estimation methods and explains how it differs from the old $1 a day line.

Evidence on Changes in Aid Allocation Criteria

Claessens, S., Cassimon, D., Van Campenhout, B. — Fri, 24 Jul 2009 08:20:57 PDT

Have donors changed their aid-allocation criteria over the past three decades toward greater selectivity, a frequently stated goal of the international development community? Using data on how 22 donors allocated their bilateral aid among 147 countries over 1970–2004, the article finds that after the fall of the Berlin wall in 1989 and especially in the late 1990s, bilateral aid responded more to poverty and the quality of the policy and institutional environment in the recipient countries. Furthermore, the sensitivity of aid allocation to the country's size and its debt burden has declined over time. These results are robust to different samples and model specifications, various econometric techniques, and alternative measures of institutional quality. While the specific factors causing these changes cannot be identified—these presumably include geopolitical and economic concerns and the many changes in the international aid architecture—donors still differ greatly in their selectivity. This suggests that further, multifaceted reforms are needed to ensure even greater selectivity of aid.

Does Education Affect HIV Status? Evidence from five African Countries

de Walque, D. — Fri, 24 Jul 2009 08:20:58 PDT

Data from the first five Demographic and Health Surveys to include HIV testing for a representative sample of the adult population are used to analyze the socioeconomic correlates of HIV infection and associated sexual behavior. Emerging from a wealth of country relevant results, some important findings can be generalized. First, successive marriages are a significant risk factor. Second, contrary to prima facie evidence, education is not positively associated with HIV status. However, schooling is one of the most consistent predictors of behavior and knowledge: education level predicts protective behaviors such as condom use, use of counseling and testing, discussion of AIDS between spouses, and knowledge about HIV/AIDS, but it also predicts a higher level of infidelity and a lower level of abstinence.

A Cost-Benefit Analysis of Cholera Vaccination Programs in Beira, Mozambique

Jeuland, M., Lucas, M., Clemens, J., Whittington, D. — Fri, 24 Jul 2009 08:20:58 PDT

Economic and epidemiological data collected in Beira, Mozambique, are used to conduct this first social cost–benefit analysis for cholera vaccination in Sub-Saharan Africa. The analysis compares the net economic benefits of three immunization strategies with and without user fees: school-based vaccination for school children only (age 5–14), school-based vaccination for all children (age 1–14), and a mass vaccination campaign for all people older than one year. All options assume the use of a low-cost new-generation oral cholera vaccine. The analysis incorporates the latest knowledge of vaccine effectiveness, including new evidence on the positive externality associated with the resulting herd protection (both protection of unvaccinated individuals and enhanced protection among vaccinated individuals arising from vaccination of a portion of the population). It also uses field data for incidence, benefits (private willingness to pay, public cost of illness), and costs (production, shipping, delivery, private travel costs). Taking herd protection into account has important economic implications. For a wide variety of parameters values, vaccination programs in Beira pass a cost–benefit test. Small school-based programs with and without user fees are very likely to provide net benefits. A mass vaccination campaign without user fees would result in the greatest reduction in the disease burden, but the social costs would likely outweigh the benefits, and such a program would require substantial public sector investment. As user fees increase, mass vaccination becomes much more attractive, and the reduction in disease burden remains above 70 percent at relatively low user fees.

Do Exporters Pay Higher Wages? Plant-level Evidence from an Export Refund Policy in Chile

Kandilov, I. T. — Fri, 24 Jul 2009 08:20:58 PDT

The impact of increased export activity on plant wages is estimated in a developing country context. To avoid potential endogenous selection problems, the empirical analysis benefits from exogenous variation in exports induced by a policy experiment—an export subsidy system implemented in Chile in 1986. Analyses using data from a panel survey of Chilean manufacturing establishments show that while the export subsidy had only a modest positive impact on the industrywide relative high-skilled wage, it significantly increased the plant-level relative high-skilled wage in medium-size establishments, which are most likely to take advantage of the subsidy and enter the export market.

The Determinants of Funding to Ugandan Nongovernmental Organizations

Fafchamps, M., Owens, T. — Fri, 24 Jul 2009 08:20:58 PDT

Original Ugandan data collected by the authors are used to examine the determinants of funding to local nongovernmental organizations (NGOs). Success in attracting grants from international donors depends mostly on network effects. NGOs that raise in-kind resources locally tend to be young and managed by someone who is simultaneously employed elsewhere. There is some evidence of crowding out: NGOs that receive grant funding are less likely to obtain resources locally, whether in cash or in kind. But this seems to be primarily the result of selection. Once NGO-fixed effects are controlled for, there is no evidence that NGOs receive less revenue from fees and donation after obtaining a grant. These results suggest that donors regard Ugandan NGOs as subcontractors of their development efforts, not as charitable organizations in their own right.

Liquidity Constraints and Firms' Linkages with Multinationals

Javorcik, B. S., Spatareanu, M. — Fri, 24 Jul 2009 08:20:58 PDT

Using a unique data set on the Czech Republic for 1994–2003, this article examines the relationship between a firm's liquidity constraints and its supply linkages with multinational corporations (MNCs). The empirical analysis indicates that Czech firms supplying multinationals are less credit constrained than are nonsuppliers. Closer inspection of the timing of the effect, however, suggests that the result is due to self-selection of less constrained firms into supplying multinationals rather than to the benefits derived from the supplying relationship. As the recent literature finds that productivity spillovers from foreign direct investment (FDI) are most likely to take place through contacts between MNCs and their local suppliers, this finding suggests that well-developed financial markets may be needed to take full advantage of the benefits associated with FDI inflows.

Decentralizing Eligibility for a Federal Antipoverty Program: A Case Study for China

Ravallion, M. — Thu, 26 Feb 2009 08:08:44 PST

In theory, the informational advantage of decentralizing the eligibility criteria for a federal antipoverty program could come at a large cost to the program's performance in reaching the poor nationally. Whether this happens in practice depends on the size of the local-income effect on the eligibility cutoffs. China's Di Bao program provides a case study. Poorer municipalities adopt systematically lower thresholds—roughly negating intercity differences in need for the program and generating considerable horizontal inequity, so that poor families in rich cities fare better. The income effect is not strong enough to undermine the program's overall poverty impact; other factors, including incomplete coverage of those eligible, appear to matter more.

Mental Health Patterns and Consequences: Results from Survey Data in Five Developing Countries

Das, J., Do, Q.-T., Friedman, J., McKenzie, D. — Thu, 26 Feb 2009 08:08:44 PST

The social and economic consequences of poor mental health in the developing world are presumed to be significant, yet remain underresearched. This study uses data from nationally representative surveys in Bosnia and Herzegovina, Indonesia, and Mexico and from special surveys in India and Tonga to show similar patterns of association between mental health and socioeconomic characteristics. Individuals who are older, female, widowed, and report poor physical health are more likely to report worse mental health. Individuals living with others with poor mental health are also significantly more likely to report worse mental health themselves. In contrast, there is little observed relation between mental health and consumption poverty or education, two common measures of socioeconomic status. Indeed, the results here suggest instead that economic and multidimensional shocks, such as illness or crisis, can have a greater impact on mental health than poverty. This may have important implications for social protection policy. Also significant, the associations between poor mental health and lower labor force participation (especially for women) and more frequent visits to health centers suggest that poor mental health can have economic consequences for households and the health system. Mental health modules could usefully be added to multipurpose household surveys in developing countries. Finally, measures of mental health appear distinct from general subjective measures of welfare such as happiness.

Psychological Health Before, During, and After an Economic Crisis: Results from Indonesia, 1993-2000

Friedman, J., Thomas, D. — Thu, 26 Feb 2009 08:08:44 PST

The 1997 Indonesian financial crisis resulted in severe economic dislocation and political upheaval. Previous studies have established the detrimental consequences for economic welfare, physical health, and child education. The crisis also affected the psychological well-being of the Indonesian people. Comparing responses of the same individuals interviewed before and after the crisis, this study documents substantial increases in several dimensions of psychological distress among men and women across the age distribution. It shows larger impacts of the economic crisis on the more vulnerable groups, including those with low education, the rural landless, urban residents, and those in provinces most affected by the crisis. Elevated psychological distress persists even after the economy returns to precrisis levels, suggesting that the deleterious effects of the crisis may persist longer on the psychological well-being of the Indonesian population than on standard measures of economic well-being.

Infrastructure and Public Utilities Privatization in Developing Countries

Auriol, E., Picard, P. M. — Thu, 26 Feb 2009 08:08:44 PST

Should governments in developing countries promote private ownership and deregulated prices in noncompetitive sectors? Or should they run publicly owned firms and regulate prices at the expense of rents to insiders? A theoretical model is used to answer these normative questions. The analysis focuses on the tradeoff between fiscal benefits and consumer surplus during privatization of noncompetitive sectors. Privatization transfers control rights to private interests and eliminates public subsidies, yielding benefits to taxpayers at the cost of increased prices for consumers. In developing countries, where budget constraints are tight, privatization and price liberalization may be optimal for low profitability industries but suboptimal for more profitable industries. And once a market has room for more than one firm, governments may prefer to regulate the industry. Without a credible regulatory agency, regulation is achieved through public ownership.

Systemic Risk, Dollarization, and Interest Rates in Emerging Markets: A Panel-Based Approach

Bacha, E. L., Holland, M., Goncalves, F. M. — Thu, 26 Feb 2009 08:08:44 PST

This study investigates the impact of systemic risks and financial dollarization on real interest rates in emerging economies. Higher systemic risks induce both higher real interest rates and increased dollarization. Using appropriate instruments for the dollarization ratio, the study overcomes the simultaneous equation problem and correctly estimates a negative coefficient for the dollarization ratio in the interest rate equation. It confirms the theoretical prediction that a strategy of "dedollarizing" the economy will raise the equilibrium domestic real interest rate if the strategy fails to address fundamental macroeconomic risks. Even so, it also finds that this effect is small, after controlling for the risks of dilution and default. The results bring to light the systemic-risk reasons for high interest rates in emerging economies—and contribute to evaluating the difficulties of dedollarization policies.

Quantitative Approaches to Fiscal Sustainability Analysis: A Case Study of Turkey since the Crisis of 2001

Budina, N., van Wijnbergen, S. — Thu, 26 Feb 2009 08:08:44 PST

This case study of fiscal sustainability in Turkey after the crisis in 2001 reviews and extends quantitative approaches to fiscal sustainability analysis and brings them together in a user-friendly tool applicable in a data-sparse environment. It combines a dynamic simulations approach with a steady-state consistency approach. It also incorporates user-defined stress tests and stochastic simulations to deal with uncertainty. And it derives the future distribution of debt-output ratios, evaluating the fiscal adjustment required to stabilize them. Value at Risk analysis shows that considerable risks remain unless explicit feedback rules from debt surprises to the primary surplus are implemented.

Globalization and the Gender Wage Gap

Oostendorp, R. H. — Thu, 26 Feb 2009 08:08:44 PST

There are several theoretical reasons why globalization will have a narrowing as well as a widening effect on the gender wage gap, but little is known about the actual impact, except for some country studies. This study contributes to the literature in three respects. First, it is a large cross-country study of the impact of globalization on the gender wage gap. Second, it employs the rarely used ILO October Inquiry database, which is the most far-ranging survey of wages around the world. Third, it focuses on the within-occupation gender wage gap, an alternative to the commonly used raw and residual wage gaps as a measure of the gender wage gap. This study finds that the occupational gender wage gap tends to decrease with increasing economic development, at least in richer countries, and to decrease with trade and foreign direct investment (FDI) in richer countries, but finds little evidence that trade and FDI also reduce the occupational gender wage gap in poorer countries.

Access to Finance: An Unfinished Agenda

Beck, T., Demirguc-Kunt, A. — Mon, 15 Dec 2008 13:57:17 PST

Recent data compilations show that many poor and nonpoor people in many developing countries face a high degree of financial exclusion and high barriers in access to finance. Theory and empirical evidence point to the critical role that improved access to finance has in promoting growth and reducing income inequality. An extensive literature shows the channels through which finance promotes enterprise growth and improves aggregate resource allocation. There is less evidence at the household level, however, and on the effectiveness of policies to overcome financial exclusion. The article summarizes recent efforts to measure and analyze the impact of access to finance and discusses the unfinished research agenda.

Banking Services for Everyone? Barriers to Bank Access and Use around the World

Beck, T., Demirguc-Kunt, A., Martinez Peria, M. S. — Mon, 15 Dec 2008 13:57:17 PST

Information from 209 banks in 62 countries is used to develop new indicators of barriers to banking services around the world, show their correlation with measures of outreach, and explore their association with bank and country characteristics suggested by theory as potential determinants. Barriers such as minimum account and loan balances, account fees, and required documents are associated with lower levels of banking outreach. While country characteristics linked with financial depth, such as the effectiveness of creditor rights, contract enforcement mechanisms, and credit information systems, are weakly correlated with barriers, strong associations are found between barriers and measures of restrictions on bank activities and entry, bank disclosure practices and media freedom, and development of physical infrastructure. In particular, barriers are higher in countries where there are more stringent restrictions on bank activities and entry, less disclosure and media freedom, and poorly developed physical infrastructure. Also, barriers for bank customers are higher where banking systems are predominantly government-owned and are lower where there is more foreign bank participation. Larger banks seem to impose lower barriers on customers, perhaps because they are better positioned to exploit economies of scale and scope.

What Can We Learn about Financial Access from U.S. Immigrants? The Role of Country of Origin Institutions and Immigrant Beliefs

Osili, U. O., Paulson, A. — Mon, 15 Dec 2008 13:57:17 PST

Immigrants from countries with more effective institutions are more likely than other immigrants to have a relationship with a bank and to use formal financial markets more extensively. The evidence that a country's institutional environment shapes beliefs—and by extension the use of financial services—provides support for policies that focus on institutional reforms in promoting financial access. After holding wealth, education, and other factors constant, the impact of institutional quality in the country of origin affects the financial market participation of all immigrant groups except those who have lived in the United States for more than 28 years. These findings are robust to alternative measures of institutional effectiveness, to controlling for additional country of origin characteristics, and to various methods for addressing potential biases caused by immigrant self-selection.

Experimental Evidence on Returns to Capital and Access to Finance in Mexico

McKenzie, D., Woodruff, C. — Mon, 15 Dec 2008 13:57:17 PST

A strong theoretical argument for focusing on access to finance is that financial market imperfections can result in large inefficiencies, as firms with productive investment opportunities underinvest. Lack of access to finance is a frequent complaint of microenterprises, which account for a large share of employment in developing countries. However, assessing the extent to which a lack of capital affects their business profits is complicated by the fact that business investment is likely to be correlated with a host of unmeasured characteristics of the owner and firm, such as entrepreneurial ability and demand shocks. In a randomized experiment that gave cash and in-kind grants to small retail firms, providing an exogenous shock to capital, the shock generated large increases in profits, with the effects concentrated among firms that were more financially constrained. The estimated return to capital was at least 20–33 percent a month—three to five times higher than market interest rates.

How Important Are Financing Constraints? The Role of Finance in the Business Environment

Ayyagari, M., Demirguc-Kunt, A., Maksimovic, V. — Mon, 15 Dec 2008 13:57:17 PST

What role does the business environment play in promoting or restraining firm growth? Recent literature points to a number of factors as obstacles to growth. Inefficient functioning of financial markets, inadequate security and enforcement of property rights, poor provision of infrastructure, inefficient regulation and taxation, and broader governance features such as corruption and macroeconomic stability are all discussed without any comparative evidence on their ordering. Using firm-level survey data on the relative importance of different features of the business environment, the article finds that although firms report many obstacles to growth, not all the obstacles are equally constraining. Some affect firm growth only indirectly through their influence on other obstacles, or not at all. Analyses using directed acyclic graph methodology and regressions find that only obstacles related to finance, crime, and policy instability directly affect firm growth. The finance result is shown to be the most robust. The results have important implications for the priority of reforms. Maintaining policy stability, keeping crime under control, and undertaking financial sector reforms to relax financing constraints are likely to be the most effective routes to promote firm growth.

The Unbanked: Evidence from Indonesia

Johnston, D., Morduch, J. — Mon, 15 Dec 2008 13:57:17 PST

To analyze the prospects for expanding financial access to the poor, bank professionals assessed 1,438 households in six provinces in Indonesia to judge their creditworthiness. About 40 percent of poor households were judged creditworthy according to the criteria of Indonesia's largest microfinance bank, but fewer than 10 percent had recently borrowed from a microbank or formal lender. Possessing collateral appeared as a minor determinant of creditworthiness, in keeping with microfinance innovations. Although these households were judged able to service loans reliably, most desired small loans. Calculations show that the bank, given its current fee structure and banking practices, would lose money when lending at the scales desired. So, while innovations have helped to extend financial access, it remains difficult to lend in small amounts and cover costs.

Patterns of Rainfall Insurance Participation in Rural India

Gine, X., Townsend, R., Vickery, J. — Mon, 15 Dec 2008 13:57:17 PST

Take-up of an innovative rainfall insurance policy offered to smallholder farmers in rural India decreases with basis risk between insurance payouts and income fluctuations, increases with household wealth, and decreases with binding credit constraints. These results are consistent with the predictions of a simple neoclassical model with borrowing constraints. Other patterns are less consistent with the benchmark model. For example, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance take-up decisions, and risk-averse households are less, not more, likely to purchase insurance. These results may reflect household uncertainty about the product, given their limited experience with it.