The World Bank Research Observer - recent issues

Rural Poverty: Old Challenges in New Contexts

Dercon, S. — 2009-04-23

Poverty is still a predominantly rural phenomenon. However, the context of rural poverty has been changing across the world, with high growth in some economies and stagnation in others. Furthermore, increased openness in many economies has affected the specific role of agricultural growth for rural poverty reduction. This paper revisits an ‘old’ question: how does growth and poverty reduction come about if most of the poor live in rural areas and are dependent on agriculture? What is the role of agricultural and rural development in this respect? Focusing on Sub-Saharan Africa, and using economic theory and the available evidence, the author comes to the conclusion that changing contexts has meant that agricultural growth is only crucial as an engine for growth in particular settings, more specifically in landlocked, resource-poor countries, which are often also characterized by relatively low potential for agriculture. However, extensive market failures in key factor markets and likely spatial effects give a remaining crucial role for rural development policies, including focusing on agriculture, to assist the inclusion of the rural poor in growth and development. How to overcome these market failures remains a key issue for further research.

Evaluation in the Practice of Development

Ravallion, M. — 2009-04-23

Standard methods of impact evaluation often leave significant gaps between what we know about development effectiveness and what we want to know—gaps that stem from distortions in the market for knowledge. The author discusses how evaluations might better address these knowledge gaps and so be more relevant to the needs of practitioners. It is argued that more attention needs to be given to identifying policy-relevant questions (including the case for intervention), that a broader approach should be taken to the problems of internal validity (including heterogeneity and spillover effects), and that the problems of external validity (including scaling up) merit more attention by researchers.

Timing and Duration of Exposure in Evaluations of Social Programs

King, E. M., Behrman, J. R. — 2009-04-23

Impact evaluations aim to measure the outcomes that can be attributed to a specific policy or intervention. While there have been excellent reviews of the different methods for estimating impact, insufficient attention has been paid to questions related to timing: How long after a program has begun should it be evaluated? For how long should treatment groups be exposed to a program before they benefit from it? Are there time patterns in a program's impact? This paper examines the evaluation issues related to timing, and discusses the sources of variation in the duration of exposure within programs and their implications for impact estimates. It reviews the evidence from careful evaluations of programs (with a focus on developing countries) on the ways that duration affects impacts.

Competition in the Financial Sector: Overview of Competition Policies

Claessens, S. — 2009-04-23

Competition in the financial sector, as in other sectors, matters for allocative, productive, and dynamic efficiency. Theory suggests, however, that unfettered competition is not necessarily best given the special features of financial services. The author discusses these analytical complications before reviewing how to assess competition in the financial sector and its determinants. It is shown that competitiveness varies greatly across countries, in perhaps surprising ways, and that it is not driven by financial system concentration. Rather, systems with greater foreign entry and fewer entry and activity restrictions tend to be more competitive, confirming that contestability—the lack of barriers to entry and exit—determines effective competition. The author then analyzes how competition policy in the financial sector has generally been conducted and how changes in competition in the financial services industries should affect competition policy going forward. In part based on comparison with other industries, the author provides some suggestions on how competition policy in the financial sector could be better approached as well as what institutional arrangements best fit a modern view of competition policy in the sector. The specific competition challenges for developing countries is also highlighted. The author concludes that practices today fall far short of the need for better competition policy in the financial sector.

Access to Financial Services: Measurement, Impact, and Policies

Beck, T., Demirguc-Kunt, A., Honohan, P. — 2009-04-23

In many developing countries less than half the population has access to formal financial services, and in most of Africa less than one in five households has access. Lack of access to finance is often the critical mechanism for generating persistent income inequality, as well as slower economic growth. Hence expanding access remains an important challenge across the world, leaving much for governments to do. However, not all government actions are equally effective and some policies can even be counterproductive. This paper sets out principles for effective government policy on broadening access, drawing on the available evidence and illustrating with examples. The paper concludes with directions for future research.

Collecting the Pieces of the FDI Knowledge Spillovers Puzzle

Smeets, R. — 2008-08-04

Recent surveys of the empirical literature have concluded that the evidence is mixed on the magnitude, direction, and even existence of knowledge spillovers from foreign direct investment (FDI). This article reviews the recent theoretical and empirical literature that responds to these inconclusive results and considers three main issues: spillover channels, mediating factors, and FDI heterogeneity. Studies that take into account individual spillover channels find robust evidence of knowledge spillovers from FDI. Studies on the importance of mediating factors and FDI heterogeneity are less conclusive and could benefit from greater convergence in methodologies and greater specificity in the spillover channels of interest. More generally, many studies do not properly distinguish between knowledge spillovers and knowledge transfers, and empirical studies seem to greatly outnumber theoretical studies.

Can Survey Evidence Shed Light on Spillovers from Foreign Direct Investment?

Javorcik, B. S. — 2008-08-04

Although some economists remain skeptical of the existence of positive externalities associated with foreign direct investment (FDI), many countries spend large sums attracting foreign investors in the hope of benefiting from knowledge spillovers. Data collected through enterprise surveys conducted in the Czech Republic and Latvia suggest that the entry of multinationals affects domestic enterprises in the same industry or in upstream or downstream sectors through multiple channels. Some of these channels represent true knowledge spillovers while others have positive or negative effects on domestic producers in other ways. The relative magnitudes of these channels depend on host country conditions and the type of FDI inflows, which explains the seemingly inconsistent findings of the literature. The focus of the debate should shift from attempting to generalize about whether or not FDI leads to productivity spillovers to determining under what conditions it can do so.

The Growing Phenomenon of Private Tutoring: Does It Deepen Human Capital, Widen Inequalities, or Waste Resources?

Dang, H.-A., Rogers, F. H. — 2008-08-04

Does private tutoring increase parental choice and improve student achievement, or does it exacerbate social inequalities and impose heavy costs on households, possibly without improving student outcomes? Private tutoring is now a major component of the education sector in many developing countries, yet education policy too seldom acknowledges or makes use of it. This survey of the literature examines the extent of private tutoring, identifies the factors that explain its growth, and analyzes its cost-effectiveness in improving student academic performance. It also presents a framework for assessing the efficiency and equity effects of tutoring. The results suggest that even taking equity concerns into account, tutoring can raise the effectiveness of the education system under certain reasonable assumptions. Guidance is offered for attacking corruption and other problems that diminish the benefits of private tutoring.

Can Biological Factors Like Hepatitis B Explain the Bulk of Gender Imbalance in China? A Review of the Evidence

Das Gupta, M. — 2008-08-04

A recent study challenges the assumption that the large deficit of girls in East and South Asia reflects the preference for sons, suggesting that much of the deficit—as much as 75 percent in China—is attributable to hepatitis B (HBV). The claim is inconsistent with the results of a study based on a large medical data set from Taiwan (China), which indicates that HBV infection raises a woman's probability of having a son by only 0.25 percent. In addition, demographic data from China show that the only group of women who have elevated probabilities of bearing sons are those who have already borne daughters. This pattern makes it difficult to see how any biological factor can explain a large part of the imbalance in China's sex ratios at birth, unless it can be shown that it somehow selectively affects those who have borne girls or causes them to first bear girls and then boys. The Taiwanese example suggests that this is not the case with HBV, the impact of which is unaffected by the sex composition of previous births. The data thus support the cultural rather than the biological explanation for gender imbalance.

Industrial Location in Developing Countries

Deichmann, U., Lall, S. V., Redding, S. J., Venables, A. J. — 2008-08-04

Despite a diminishing role in industrial countries, the manufacturing sector continues to be an engine of economic growth in most developing countries. This article surveys the evidence on the determinants of industry location in developing countries. It also employs micro data for India and Indonesia to illustrate recent spatial dynamics of manufacturing relocation within urban agglomerations. Both theory and empirical evidence suggest that agglomeration benefits, market access, and infrastructure endowments in large cities outweigh the costs of congestion, higher wages, and land prices. Despite this evidence, many countries have tried to encourage industrial firms to locate in secondary cities or other lagging areas. Cross-country evidence suggests that fiscal incentives to do so rarely succeed. They appear to influence business location decisions among comparable locations, but the result may be a negative-sum game between regions and inefficiently low tax rates, which prevent public goods from being funded at sufficiently high levels. Relocation tends to be within and between agglomerations rather than from large cities to smaller cities or lagging regions. Rather than provide subsidies and tax breaks, policymakers should focus on streamlining laws and regulations to make the business environment more attractive.

Governance Indicators: Where Are We, Where Should We Be Going?

Kaufmann, D., Kraay, A. — 2008-02-21

Progress in measuring governance is assessed using a simple framework that distinguishes between indicators that measure formal rules and indicators that measure the practical application or outcomes of these rules. The analysis calls attention to the strengths and weaknesses of both types of indicators as well as the complementarities between them. It distinguishes between the views of experts and the results of surveys and assesses the merits of aggregate as opposed to individual governance indicators. Some simple principles are identified to guide the use and refinement of existing governance indicators and the development of future indicators. These include transparently disclosing and accounting for the margins of error in all indicators, drawing from a diversity of indicators and exploiting complementarities among them, submitting all indicators to rigorous public and academic scrutiny, and being realistic in expectations of future indicators.

Two Comments on "Governance Indicators: Where Are We, Where Should We Be Going?" by Daniel Kaufmann and Aart Kraay

Devarajan, S., Johnson, S. — 2008-02-21

Walking up the Down Escalator: Public Investment and Fiscal Stability

Easterly, W., Irwin, T., Serven, L. — 2008-02-21

When growth-promoting spending is cut so much that the present value of future government revenues falls by more than the immediate improvement in the cash deficit, fiscal adjustment becomes like walking up the down escalator. Although short-term cash flows matter, too tight a focus on them encourages governments to invest too little. Cash-flow targets also encourage governments to shift investment spending off budget by seeking private investment in public projects, irrespective of its real fiscal or economic benefits. To deal with this problem, some observers have suggested excluding certain investments (such as those undertaken by public enterprises deemed commercial or financed by multilaterals) from cash-flow targets. These stopgap remedies may help protect some investments, but they do not provide a satisfactory solution to the underlying problem. Governments can more effectively reduce the biases created by the focus on short-term cash flows by developing indicators of the long-term fiscal effects of their decisions, including accounting and economic measures of net worth, and, where appropriate, including such measures in fiscal targets or even fiscal rules.

What Can Countries in Other Regions Learn from Social Security Reform in Latin America?

Gill, I. S., Ozer, C., Tatucu, R. — 2008-02-21

About a dozen countries in Latin America have enacted reforms that include elements being contemplated elsewhere, including the partial privatization of social security. It is not easy to draw universal lessons for social security reform from the experience of countries such as Argentina, Chile, and Mexico, however, where sizeable public pension systems went bankrupt before the populations aged, mainly because of mismanagement. Most developing economies have much smaller social security systems. Relatively well-managed systems in industrial countries face problems that are long term in nature and have been brought about by an aging population. The experiences of Latin America nevertheless offer some general lessons for countries in other parts of the world. These lessons relate to changes in labor market incentives accompanying reforms and how workers react to them, government actions that have met with success in managing the transition to funded pensions, and the expectations of individuals from social security systems. Latin America's reforms suggest that the most effective approach is to keep payroll taxes low, governments solvent, and social security systems focused on providing reasonable insurance against poverty in old age.

Why OECD Countries Should Reform Rules of Origin

Cadot, O., de Melo, J. — 2008-02-21

With preferential trade agreements on the rise worldwide rules of origin—which are necessary to prevent trade deflection—are attracting increasing attention. At the same time, preference erosion for Generalized System of Preferences (GSP) recipients is increasing resistance to further multilateral negotiations. Drawing on different approaches, this article shows that the current system of rules of origin that is used by the European Union and the United States in preferential trade agreements (including the GSP) and that is similar to systems used by other Organisation for Economic Co-operation and Development countries should be drastically simplified if developed economies really want to help developing economies integrate into the world trading system. In addition to diverting resources for administrative tasks, current rules of origin carry significant compliance costs. More fundamentally, it is becoming increasingly clear that they are often been designed to force developing economies to buy inefficient intermediate products from developed economies to "pay for" preferential access for the final product. The evidence also suggests that a significant share of the rents associated with market access (net of rules of origin compliance costs) is captured by developed economies. Finally, the restrictiveness of rules of origin is found to be beyond the levels that would be justified to prevent trade deflection, suggesting a capture by special interest groups. The article outlines some alternative paths to reforms.