The World Bank Economic Review - recent issues

Postconflict Transitions: An Overview

Elbadawi, I. A. — 2008-02-29

In the two to five years immediately following end of conflicts, UN peacekeeping operations have succeeded in maintaining peace, while income and consumption growth rates have been higher than normal and recovery on key education and health indicators has been possible. Aid also has been super-effective in promoting recovery, not only by financing physical infrastructure but also by helping in the monetary reconstruction of postconflict economies. However, sustaining these short-term gains was met with two difficult challenges. First, long-term sustainability of peace and growth hinges primarily on the ability of postconflict societies to develop institutions for the delivery of public goods, which, in turn, depends on the capacity of post-conflict elites to overcome an entrenched culture of political fragmentation and form stable national coalitions, beyond their immediate ethnic or regional power bases. Second, after catch-up growth runs its course, high levels of aid could lead to overvalued real currencies, at a time when growth requires a competitive exchange rate and economic diversification. Successful peace-building would, therefore, require that these political and economic imperatives of postconflict transitions be accounted for in the design of UN peacekeeping operations as well as the aid regime.

Short- and Long-Term Effects of United Nations Peace Operations

Sambanis, N. — 2008-02-29

In an earlier study Doyle and Sambanis (2000) [Doyle, Michael W., and Nicholas Sambanis. 2000. "International Peacebuilding: A Theoretical and Quantitative Analysis." American Political Science Review 94(4):779–801.] showed that United Nations (UN) peace operations have made positive contributions to peacebuilding in the short term, helping parties implement peace agreements. But are the effects of UN peace operations lasting? Because the UN cannot fight wars, such operations should not be used to enforce a peace. Peacekeeping operations contribute more to the quality of the peace—that is, to securing more than the mere absence of war—than to its duration, because the effects of such operations dissipate over time. For peace to be self-sustaining, countries must develop institutions and policies that generate economic growth. UN peacebuilding lacks a strategy for fostering self-sustaining economic growth that could connect increased participation with sustainable peace. The international community would benefit from an evolution that uses economic reforms to plug the gap between peacekeeping and humanitarian assistance on the one hand and development on the other.

Insurgency and Credible Commitment in Autocracies and Democracies

Keefer, P. — 2008-02-29

The inability of political actors to make credible promises to broad segments of society—a previously unexplored determinant of civil war—causes both elected and unelected governments to pursue public policies that leave citizens worse off and more prone to revolt. Noncredible political actors are also less able to build counterinsurgency capacity. Popular dissatisfaction with rulers reduces the costs to counterinsurgents of overthrowing regimes, discouraging rulers from building counterinsurgency capacity in the first place; lack of credibility prevents rulers from writing contracts with counterinsurgents that maximize counterinsurgency effort. Empirical tests across numerous subsamples using various measures of political credibility support the conclusion that broad political credibility ranks at least as high as social fractionalization and natural resource rents as a cause of conflict.

The Aftermath of Civil War

Chen, S., Loayza, N. V., Reynal-Querol, M. — 2008-02-29

Using an event-study methodology, the article analyzes the aftermath of civil war in a cross-section of countries. It focuses on cases where the end of conflict marks the beginning of relatively lasting peace. The analysis considers 41 countries involved in internal wars over the period 1960–2003. To provide a comprehensive evaluation of the aftermath of war, a range of social areas is considered: basic indicators of economic performance, health and education, political development, demographic trends, and conflict and security issues. For each indicator the post- and pre-war situations are compared and their dynamic trends during the post-conflict period are examined. The analysis is conducted in both absolute terms and relative to control groups of countries that are similar except for conflict. The findings indicate that even though war has devastating effects and its aftermath can be immensely difficult, when the end of war marks the beginning of lasting peace, recovery and improvement are achieved.

Postconflict Monetary Reconstruction

Adam, C., Collier, P., Davies, V. A.B. — 2008-02-29

During civil wars governments typically resort to inflation to raise revenue. A model of this phenomenon is presented, estimated, and applied to the choices and constraints faced during the postconflict period. The results show that far from there being a fiscal peace dividend, postconflict governments tend to face even more pressing needs after than during war. As a result, in the absence of postconflict aid, inflation increases sharply, frustrating a more general monetary recovery. Aid decisively transforms the path of monetary variables in the postconflict period, enabling the economy to regain peacetime characteristics. Postconflict aid thus achieves a monetary "reconstruction" analogous to its more evident role in infrastructure.

Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars

Elbadawi, I. A., Kaltani, L., Schmidt-Hebbel, K. — 2008-02-29

Foreign aid, the real exchange rate (RER), and economic growth are three key variables that shape the aftermath of civil wars in many developing countries. Panel estimations drawn from a sample of 39 conflict and 44 nonconflict countries between 1970 and 2004 indicate that although postconflict countries receive larger aid flows and exhibit moderate RER overvaluation after peace is attained, overvaluation cannot be traced to aid. Yet foreign aid is among the significant determinants of the equilibrium RER. Aid is also an important determinant of economic growth, particularly after peace is reached. Aid exhibits decreasing returns, however, and interacts negatively with RER overvaluation. RER overvaluation reduces growth, but this effect is ameliorated by financial development. Postconflict policies should therefore aim to use aid prudently, avoid RER misalignment, and support financial and capital market development to achieve high and stable growth in the aftermath of war and beyond.

Disability, Poverty, and Schooling in Developing Countries: Results from 14 Household Surveys

Filmer, D. — 2008-02-29

Analysis of 14 household surveys from 13 developing countries suggests that 1–2 percent of the population have disabilities. Adults with disabilities typically live in poorer than average households: disability is associated with about a 10 percentage point increase in the probability of falling in the two poorest quintiles. Much of the association appears to reflect lower educational attainment among adults with disabilities. People of ages 6–17 with disabilities do not live in systematically wealthier or poorer households than other people of their age, although in all countries studied they are significantly less likely to start school or to be enrolled at the time of the survey. The order of magnitude of the school participation deficit associated with disability—which is as high as 50 percentage points in 3 of the 13 countries—is often larger than deficits related to other characteristics, such as gender, rural residence, or economic status differentials. The results suggest a worrisome vicious cycle of low schooling attainment and subsequent poverty among people with disabilities in developing countries.

The Impact of Decentralized Data Entry on the Quality of Household Survey Data in Developing Countries: Evidence from a Randomized Experiment in Vietnam

Glewwe, P., Dang, H.-A. H. — 2008-02-29

Computers were provided to randomly selected districts participating in a household survey in Vietnam to assess the impact on data quality of entering data within a day or two of completing the interview rather than several weeks later in the provincial capital. Provision of computers had no significant effect on the observed distribution of household expenditures and thus no effect on measured poverty. Provision of computers reduced the mean number of errors per household by 5–23 percent, depending on the type of error. Given the already low rate of errors in the survey, however, the goal of increasing the precision of the estimated mean of a typical variable can be achieved at a much lower cost by slightly increasing the sample size. Provision of additional computers did substantially reduce the time interviewers spent adding up and checking the data in the field, with the value of the time saved close to the cost of purchasing desktop computers.

Macroeconomic Volatility and Welfare in Developing Countries: An Introduction

Loayza, N. V., Ranciere, R., Serven, L., Ventura, J. — 2007-10-29

Macroeconomic volatility, both a source and a reflection of underdevelopment, is a fundamental concern for developing countries. Their high aggregate instability results from a combination of large external shocks, volatile macroeconomic policies, microeconomic rigidities, and weak institutions. Volatility entails a direct welfare cost for risk-averse individuals, as well as an indirect one through its adverse effect on income growth and development. This article provides a brief overview of the recent literature on macroeconomic volatility in developing countries, highlighting its causes, consequences, and possible remedies. It then introduces the contributions of a recent conference on the subject, sponsored by the World Bank and Pompeu Fabra University, Barcelona.

The Structural Determinants of External Vulnerability

Loayza, N. V., Raddatz, C. — 2007-10-29

This article examines empirically how domestic structural characteristics related to openness and product- and factor-market flexibility influence the impact of terms of trade shocks on aggregate output. Applying semistructural vector autoregressions to a panel of 88 countries with annual observations for the period 1974–2000, the analysis isolates and standardizes the shocks, estimates their impact on GDP, and examines how this impact depends on the domestic conditions outlined above. The article finds that greater trade openness magnifies the output impact of terms of trade shocks, particularly negative ones, while financial openness reduces their impact. Flexibility of labor and firm-entry are beneficial, with labor flexibility dampening the impact of negative shocks and ease of firm-entry magnifying positive ones only. Domestic financial depth has a more nuanced role in stabilizing the economy. Analysis of interactions across structural determinants reveals complementarities among macroeconomic conditions (trade and financial openness and depth) and, separately, among microeconomic conditions (flexibility of labor markets and ease of firm-entry). Variables across these groups tend to behave as substitutes for each other.

Do Some Forms of Financial Flows Help Protect Against "Sudden Stops"?

Levchenko, A. A., Mauro, P. — 2007-10-29

There is a debate on whether some forms of financial flows offer better protection against crises than others. Using a large panel data set that includes advanced, emerging, and developing economies during 1970–2003, this article analyzes the behavior of several types of flows: foreign direct investment (FDI), portfolio equity investment, portfolio debt investment, other flows to the official sector, other flows to banks, and other flows to the nonbank private sector. Differences across types of flows are limited with respect to volatility, persistence, cross-country comovement, and correlation with growth at home or in the world economy. However, consistent with conventional wisdom, FDI is the least volatile form of financial flow, when the average size of net or gross flows is taken into account. The differences are striking during "sudden stops" in financial flows (defined as drops in total net financial inflows of more than percentage points of GDP compared with the previous year). In such episodes, FDI is remarkably stable, and portfolio equity seems to play a limited role. Portfolio debt experiences a reversal, though it recovers relatively quickly, and other flows (including bank loans and trade credit) experience severe drops and often remain depressed for a few years.

Creditor Protection and Credit Response to Shocks

Galindo, A. J., Micco, A. — 2007-10-29

This article studies the relationship between creditor protection and credit responses to macroeconomic shocks. Using a data set on legal determinants of finance in a panel of data on aggregate credit growth for 79 countries during 1990–2004, it is shown that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement. The results are statistically and economically significant and robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to only developing economies, to the controls for systemic crises, to alternative shock measures, and to vector autoregressive specifications.

Crises, Volatility, and Growth

Kharroubi, E. — 2007-10-29

How do volatility and liquidity crises affect growth? When credit is constrained, a bias toward short-term debt can arise in financing long-term investments, generating maturity mismatches and leading potentially to liquidity crises. The frequency of liquidity crises ("abnormal" volatility) and the volatility of growth ("normal" volatility) are found to have independent negative effects on growth. Financial development however dampens the growth cost of volatility, but only in the case of normal volatility. The growth cost of volatility therefore depends critically on the composition of normal and abnormal volatility, the latter being more costly for growth.

Is Land Titling in Sub-Saharan Africa Cost-Effective? Evidence from Madagascar

Jacoby, H. G., Minten, B. — 2007-10-29

Formalizing land rights has been promoted as a way to encourage agricultural investment and stimulate land markets, yet little is known about the benefits of such policies in Sub-Saharan Africa, where the preconditions for success are less favorable. The analysis uses a large sample of plots from an intensively titled rice-growing area of Madagascar and compares land-specific investments, land productivity, and land values for titled and untitled plots cultivated by the same household. Having a title has no significant effect on plot-specific investment and correspondingly little effect on land productivity and land values. These results are broadly consistent with a simulation of a theoretical model of investment under expropriation risk calibrated to the same data. A cost–benefit analysis suggests that the current system of formal titling should not be extended in rural Madagascar and that any new system of land registration would have to be quite inexpensive to be worthwhile.

Land Tenure, Investment Incentives, and the Choice of Techniques: Evidence from Nicaragua

Bandiera, O. — 2007-10-29

The choice of cultivation techniques is a key determinant of agricultural productivity and has important consequences for income growth and poverty reduction in developing countries. Household data from Nicaragua are used to show that the choice of cultivation technique depends on farmers' tenure status even when techniques are observable and contractible. In particular, tree crops are less likely to be grown on rented than on owner-cultivated plots. Further evidence indicates that the result follows from landlords' inability or unwillingness to commit to long-term tenancy contracts rather than from agency costs due to risk aversion or limited liability.

Earnings, Schooling, and Economic Reform: Econometric Evidence From Hungary (1986 2004)

Campos, N., Jolliffe, D. — 2007-10-29

How does the relationship between earnings and schooling change with the introduction of comprehensive economic reform? This article sheds light on this question using a unique data set and procedure to reduce sample-selection bias. The evidence is from consistently coded, nonretrospective data for about 4 million Hungarian wage earners. Returns to skill increased 75 percent from 1986 to 2004 (that is, during the period stretching from communism to full membership in the European Union). The winners were those with a college or university education and those employed in the services sector (which here excludes those in public services). The reform losers were those in construction and agriculture, those with only a primary or vocational education (who experienced a decline in returns to their education), and younger workers who acquired most of their education after the main reforms were in place.

Migration, Remittances, and the Brain Drain: a Symposium in Memory of Riccardo Faini--an Introduction

de Melo, J. — 2007-07-05

Remittances and the Brain Drain: Do More Skilled Migrants Remit More?

Faini, R. — 2007-07-05

In most destination countries, immigration policies are tilted more and more in favor of skilled individuals. Whether this shift hurts economic prospects in sending countries, as argued by the traditional brain drain literature, is somewhat controversial. The most recent literature focuses on the link between skilled outmigration and educational achievements in the home country. This article emphasizes a different channel. It considers the argument that skilled migrants raise economic welfare at home by sending a relatively larger flow of remittances. While skilled migrants typically earn more, and so might be expected to remit more, they are also likely to spend more time abroad and to reunite with their close family in the host country. These second two factors should be associated with a smaller propensity to remit. Thus, the sign of the impact of the brain drain on total remittances is an empirical question. A simple model has been developed showing that skilled migrants may indeed have a lower propensity to remit from a given flow of earnings. An empirical equation of remittances is estimated as a measure of the brain drain in developing countries using the Docquier and Marfouk (2004) data set. Evidence is found that the brain drain is associated with a smaller propensity to remit.

Brain Drain in Developing Countries

Docquier, F., Lohest, O., Marfouk, A. — 2007-07-05

An original data set on international migration by educational attainment for 1990 and 2000 is used to analyze the determinants of brain drain from developing countries. The analysis starts with a simple decomposition of the brain drain in two multiplicative components, the degree of openness of sending countries (measured by the average emigration rate) and the schooling gap (measured by the education level of emigrants compared with natives). Regression models are used to identify the determinants of these components and explain cross-country differences in the migration of skilled workers. Unsurprisingly, the brain drain is strong in small countries that are close to major Organisation for Economic Co-operation and Development (OECD) regions, that share colonial links with OECD countries, and that send most of their migrants to countries with quality-selective immigration programs. Interestingly, the brain drain increases with political instability and the degree of fractionalization at origin and decreases with natives' human capital.

Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines

Yang, D., Choi, H. — 2007-07-05

Do remittances sent by overseas migrants serve as insurance for recipient households? In a study of how remittances from overseas respond to income shocks experienced by Philippine households, changes in income are found to lead to changes in remittances in the opposite direction, consistent with an insurance motivation. Roughly 60 percent of declines in household income are replaced by remittance inflows from overseas. Because household income and remittances are jointly determined, rainfall shocks are used as instrumental variables for income changes. The hypothesis cannot be rejected that consumption in households with migrant members is unchanged in response to income shocks, whereas consumption responds strongly to income shocks in households without migrants.

Measuring International Skilled Migration: A New Database Controlling for Age of Entry

Beine, M., Docquier, F., Rapoport, H. — 2007-07-05

Recent data on international migration of skilled workers define skilled migrants by education level without distinguishing whether they acquired their education in the home or the host country. This article uses immigrants' age of entry as a proxy for where they acquired their education. Data on age of entry are available from a subset of receiving countries that together represent 77 percent of total skilled immigration to countries of the Organisation for Economic Co-operation and Development. Using these data and a simple gravity model to estimate the age-of-entry structure of the remaining 23 percent, alternative brain drain measures are proposed that exclude immigrants who arrived before ages 12, 18, and 22.

The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics

Roodman, D. — 2007-07-05

The recent literature contains many stories of how foreign aid affects economic growth. Aid raises growth in countries with good policies, or with difficult economic environments, or outside the tropics, or on average but with diminishing returns. The diversity of the results suggests that many are fragile. Seven important aid-growth papers are tested for robustness, using 14 minimally arbitrary tests deriving mainly from differences among the studies themselves. This approach investigates the importance of potentially arbitrary specification choices while minimizing the arbitrariness in testing choices. All of the results appear fragile, especially to sample expansion.

Incremental Reform and Distortions in China's Product and Factor Markets

Zhang, X., Tan, K.-Y. — 2007-07-05

The purpose of economic reform is to reduce distortions and enhance efficiency. However, when reforms are partial and incremental, individuals and local governments are often able to capture the rent inherent in the gradual transition process. Young (2000) warned that such rent-seeking behavior might lead to increasing market fragmentation. Empirical studies have shown the opposite in the product market. This article argues that as the rent from China's product market has been squeezed out due to deepening reforms, rent-seeking behavior may have shifted to the capital market. Further reforms are needed in the capital market to squeeze out these rent-seeking opportunities, just as those from the product and labor markets were squeezed out earlier.

Child Labor, School Attendance, and Intrahousehold Gender Bias in Brazil

Emerson, P. M., Souza, A. P. — 2007-07-05

An extensive survey data set of Brazilian households is used to test whether intrahousehold gender bias affects the decisions of mothers and fathers to send their sons and daughters to work and to school. An intrahousehold allocation model is examined in which fathers and mothers may affect the education investment and the child labor participation of their sons and daughters differently because of differences in parental preferences or differences in how additional schooling affects sons' and daughters' acquisition of human capital. Brazilian household survey data for 1998 are used to estimate the impact of each parent's education on the labor market participation and school attendance of their sons and daughters. For labor market participation, the father's education has a greater negative impact than the mother's education on the labor status of sons. The father's education also has a greater impact on sons' labor status than on daughters'. For schooling decisions, the mother's education has a greater positive impact than the father's education on daughters' school attendance, but fathers have a greater positive impact on sons' school attendance than on daughters'.

Tracking Poverty Over Time in the Absence of Comparable Consumption Data

Stifel, D., Christiaensen, L. — 2007-07-05

Following the endorsement by the international community of the Millennium Development Goals, there has been an increasing demand for practical methods for steadily tracking poverty. An economically intuitive and inexpensive methodology is explored for doing so in the absence of regular, comparable data on household consumption. The minimum data requirements for this methodology are the availability of a household budget survey and a series of surveys with a comparable set of asset data also contained in the budget survey. This method is illustrated using a series of Demographic and Health Surveys for Kenya.