Policy Research Working Paper | Finance_and_Financial_Sector_Development | World Bank

Land fragmentation, cropland abandonment, and land market operation in Albania

2012-04-09T04:00:00.000Z

Albania's radical farmland distribution is credited with averting an economic crisis and social unrest during the transition. But many believe it led to a holding structure too fragmented to be efficient, and that public efforts to consolidate plots are needed to lay the foundation for greater rural productivity. This paper uses farm-level data from the 2005 Albania Living Standards Measurement Survey to explore this quantitatively. The analysis finds no support for the argument that fragmentation reduces productivity. However, producers fail to utilize about 10 percent of the country's productive land, and, in the majority of cases, this land has been idle for at least five years. Farmers quote inefficiently-small plots as the reason for this in few cases, casting doubt on the scope for land consolidation to solve this issue. Instead, the data are consistent with the notion of land market imperfections, which can be traced to gaps in the legal and policy framework, as well as inefficiencies in registry operations, leading to land abandonment on a large scale. To maintain the productive potential of Albania's rural economy and, if and when needed, the ability to conduct consolidation in a cost-effective and sustainable manner, it will be critical to complement the emphasis on consolidation with an effort to address those gaps and inefficiencies on a priority basis.

How economic growth and rational decisions can make disaster losses grow faster than wealth

2012-04-10T04:00:00.000Z

Assuming that capital productivity is higher in areas at risk from natural hazards (such as coastal zones or flood plains), this paper shows that rapid development in these areas -- and the resulting increase in disaster losses -- may be the consequence of a rational and well-informed trade-off between lower disaster losses and higher productivity. With disasters possibly becoming less frequent but increasingly destructive in the future, average disaster losses may grow faster than wealth. Myopic expectations, lack of information, moral hazard, and externalities reinforce the likelihood of this scenario. These results have consequences on how to design risk management and climate change policies.

World food prices and human development: Policy simulations for archetype low-income countries

2012-04-10T04:00:00.000Z

In recent years, world food prices have increased and fluctuated widely. This paper explores the impact of international food prices and domestic policies on Millennium Development Goal (MDG) and macro indicators for two archetype low-income countries, a net food exporter and a net food importer, using Maquette for MDG Simulations (MAMS), a Computable General Equilibrium model. The simulations, which cover the period 2011-2025, indicate that the size of positive (negative) effects on macro and MDG indicators of a food export (import) price increase depend on the initial gross domestic product share for food exports (imports), leaving countries that are heavily involved in international food trade more exposed to international shocks. Given relatively low elasticity estimates, the impact of changes in food prices on undernourishment are relatively marginal. Flexible responses (in terms of production shares, whether output is exported or sold at home, and whether domestic demanders buy imports or domestic output) enable countries to benefit from or be less hurt by price changes. The case for policy responses to higher import prices is stronger for the net food importer. An untargeted food subsidy, financed by taxes or spending cuts, reduces undernourishment at the cost of a slight deterioration for most other indicators. By contrast, aid-financed food subsidies neutralize the negative impact of higher import prices whereas financing via domestic borrowing is counterproductive, leading to a deterioration across all indicators. If administered at moderate costs, tax-financed targeted transfers more effectively reduce headcount poverty and inequality with macroeconomic repercussions similar to those of tax-financed subsidies.

How does bank competition affect systemic stability ?

2012-04-11T04:00:00.000Z

Using bank level measures of competition and co-dependence, the authors show a robust positive relationship between bank competition and systemic stability. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, in this paper we examine the correlation in the risk taking behavior of banks, hence systemic risk. The analysis finds that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, high government ownership of banks, and in countries with public policies that restrict competition. Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with generous safety nets and weak supervision.

Financing of firms in developing countries : lessons from research

2012-04-12T04:00:00.000Z

This paper reviews and synthesizes theoretical and empirical research on the role of finance in developing countries. First, the paper presents the stylized facts about firms in developing nations as well as the legal, financial and broader institutional framework in which these firms operate. Next, the paper focuses on the financing choices available to small and medium firms in developing countries and highlights areas needing additional research.

Identifying aid effectiveness challenges in fragile and conflict-affected states

2012-04-12T04:00:00.000Z

Fragile and conflict-affected states face daunting challenges for development. Aid has a greater importance on development in these states than in others, and therefore aid effectiveness management and delivery of aid bears serious consideration. Despite its significance, aid effectiveness is appreciably lower in fragile and conflict-affected states than in others. What are the key aid effectiveness challenges in these states and how can these issues be better addressed? As important initial steps, this paper aims to identify (i) aid effectiveness challenges facing fragile and conflict-affected states and (ii) good aid effectiveness examples using the results of the Survey on Monitoring the Paris Declaration on aid effectiveness, which was designed as a mechanism to support global and country level accountability. Both fragile and conflict-affected states (recipients) and development partners (providers) are mutually accountable for aid effectiveness; therefore, this paper focuses on both sides. While the analysis confirms the significantly lower aid effectiveness performance in fragile and conflict-affected states -- especially on aid on budget, aid predictability, and use of country systems -- good performance examples in several of these states are identified. The aid effectiveness performance of development partners in fragile and conflict-affected states differs significantly across different groups. Multilateral development banks and other multilateral organizations perform better on average than bilateral organizations and vertical funds. Disaggregation of development partner performance at the institutional level and the partner country level enables the analysis successfully to identify good performance examples. In using the results of this paper to improve aid effectiveness, key additional steps should include (i) considering whether the identified challenges are essential; (ii) analyzing the factors/reasons behind good performance examples; and (iii) discussing whether good performance examples can provide lessons that can be adapted and applied.

Import protection, business cycles, and exchange rates : evidence from the great recession

2012-04-16T04:00:00.000Z

This research estimates the impact of macroeconomic fluctuations on import protection policies over 1988:Q1-2010:Q4 for the United States, European Union, and three other industrialized economies. First, estimates on a pre-Great Recession sample provide evidence of three key relationships for the US and EU. Increases in domestic unemployment rates and real appreciations in bilateral exchange rates led to substantial increases in antidumping and related forms of import protection. Furthermore, economies historically imposed these bilateral import restrictions on trading partners going through their own periods of weak economic growth. Second, estimates from the pre-Great Recession model predict a major trade policy response during 2008:Q4-2010:Q4, given the realized macroeconomic shocks. New US and EU trade barriers were projected to cover up to an additional 15 percentage points of nonoil imports, well above the baseline level of 2-3 percent of import coverage immediately preceding the crisis. Third, re-estimating the model on data from the Great Recession period illustrates why the realized trade policy response differed from model predictions based on historical data. While exchange rate movements played an important role in limiting new import protection, the US and EU also "switched" from their historical behavior during the Great Recession and shifted new import protection toward trading partners experiencing economic growth and away from those that were contracting.

Managing state debt and ensuring solvency : the Indian experience

2012-04-18T04:00:00.000Z

The paper presents the policymakers perspective on the reforms undertaken to manage states debt and ensure solvency. While the sustained high growth rates of the Indian economy played a part in alleviating the interest burden on debt and ensuring that the debt does not grow in an explosive trajectory, major reforms were implemented to reverse the fiscal decline, develop fiscal responsibility rules to ensure sustained adjustment, and move toward a market-based financing of state deficits. The serious efforts at fiscal consolidation and institutional reforms have enabled states to set on the path toward fiscal correction. Nonetheless, weak global growth prospects and the risk of a further rise in global commodity and fuel prices could generate the dilemma of needing to compress expenditures for ensuring fiscal sustainability while simultaneously needing counter-cyclical spending to boost growth, and challenge the fiscal adjustment process.

Measuring financial inclusion : the Global Findex Database

2012-04-19T04:00:00.000Z

This paper provides the first analysis of the Global Financial Inclusion (Global Findex) Database, a new set of indicators that measure how adults in 148 economies save, borrow, make payments, and manage risk. The data show that 50 percent of adults worldwide have an account at a formal financial institution, though account penetration varies widely across regions, income groups and individual characteristics. In addition, 22 percent of adults report having saved at a formal financial institution in the past 12 months, and 9 percent report having taken out a new loan from a bank, credit union or microfinance institution in the past year. Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy. Among the most commonly reported barriers are high cost, physical distance, and lack of proper documentation, though there are significant differences across regions and individual characteristics.

Shifting patterns of economic growth and rethinking development

2012-04-19T04:00:00.000Z

This paper provides an historical overview of both the evolution of the economic performance of the developing world and the evolution of economic thought on development policy. The 20th century was broadly characterized by divergence between high-income countries and the developing world, with only a limited number (less than 10 percent of the economies in the world) managing to progress out of lower or middle-income status to high-income status. The last decade witnessed a sharp reversal from a pattern of divergence to convergence --particularly for a set of large middle-income countries. The latter phenomenon was also driven by increasing economic ties among developing countries, and on the intellectual scale, increased knowledge generation and sharing among the developing countries. Re-thinking development policy implies confronting these realities: 20th century economic divergence, the experience of the handful of success stories, and the recent rise of the multi-polar growth world. The paper provides descriptive data and a literature survey to document these trends. The paper also provides a brief survey of the role of multilateral institutions -- in particular, the World Bank -- in this changing context and offers suggestions on how they can adapt their strategies to improve development outcomes.

Correcting real exchange rate misalignment : conceptual and practical issues

2012-04-20T04:00:00.000Z

This paper studies the issue of real exchange rate misalignment and the difficulties in settling international real exchange rate disputes. The authors show theoretically that determining when a country should be sanctioned for real exchange rate "manipulations" is difficult: in some situations a country's real exchange rate targeting can be beneficial to other countries, while in others it is not. Regardless, it is difficult to establish whether a misaligned real exchange rate is intentionally manipulated rather than unintentionally caused by other policies or by various distortions in the economy. The paper continues by illustrating the difficulty in measuring real exchange rate misalignment, and provides a critical assessment of existing methodologies. It concludes by proposing a new method for measuring real exchange rate misalignment based on differences in marginal products between producers of tradable and non-tradable goods.

Global fiscal adjustment and trade rebalancing

2012-04-20T04:00:00.000Z

The emergence of substantial fiscal deficits and a large build up of government debt in major advanced economies will inevitably lead to a period of fiscal consolidation in coming years. In an earlier paper, McKibbin and Stoeckel (2010) explored the effects of this fiscal adjustment in advanced economies on the global economic outlook. This paper focuses on the differences between the impacts of fiscal policy in advanced versus emerging economies. In particular, the need for more fiscal spending on infrastructure in emerging economies and the need for fiscal consolidation in advanced economies leads naturally to the question of what this asymmetric fiscal adjustment might do to global trade balances as well as global economic growth over the coming decades. The adjustment needed in both regions is substantial and the asymmetry of the adjustment implies important consequences for trade and capital flows between regions as well as asset price adjustments within and between regions.

How bribery distorts firm growth : differences by firm attributes

2012-04-23T04:00:00.000Z

How corruption affects economic performance has been studied for over a decade. Yet the lack of detailed firm-level data has limited research regarding who is carrying the real burden of corruption. This study shows that for firms in the Latin America and Caribbean region, bribery significantly distorts firm growth. Firms that pay bribes when conducting business transactions -- such as applying for permits, electricity, or water connections -- have 24 percent lower annual sales growth than firms that do not face such solicitations. Moreover, these distortions are more severe for low-revenue-generating and young firms. Using the instrumental variables method, the authors show that these results are robust to different specifications and the use of different sub-samples.

External finance and firm survival in the aftermath of the crisis : evidence from Eastern Europe and Central Asia

2012-04-24T04:00:00.000Z

Two data sets are used to study how country and firm characteristics affected firms' financial constraints and their likelihood of survival during the early phase of the recent global financial crisis in Eastern Europe and Central Asia, a region that was especially hard hit. The first data source provides information on the reported severity of financial constraints for 360 firms from 23 countries in 2002, 2005, and 2008. By following the same firms over time, the study summarizes both the gradual easing of financial constraints from 2002 to 2005 and their tightening during the crisis. Key findings are that financial constraints during the crisis were less severe in countries with well-established foreign banks (entered prior to year 2000), and that changes in the severity of financial constraints were more pronounced for large firms than others during the crisis (although large firms continued to have less severe constraints on average). The second data source provides information on whether firms remained in operation in 2009 in six countries in Eastern Europe and Central Asia. Controlling for other relevant characteristics, firms were more likely to survive the crisis if they had access to external credit.

How pro-poor and progressive is social spending in Zambia ?

2012-04-24T04:00:00.000Z

This paper analyzes the distributional effect of public spending in Zambia using the most recent data from the 2010 Living Conditions Monitoring Survey. The analysis focuses on both the "traditional" social sectors, such as education and public healthcare, as well as other spending areas less thoroughly studied, such as agricultural support programs. Ultimately, this benefit incidence analysis addresses the extent to which spending is pro-poor and progressive; that is, it primarily benefits the poor and does so at an increasing rate as welfare levels decrease. The results indicate that overall public education spending in Zambia is neither pro-poor nor progressive, but while this is true for the system as a whole it is not true for all of its parts. The net unitary benefits of primary and secondary education are clearly both pro-poor and progressive. However, their progressivity is ultimately outweighed by the extreme concentration of tertiary education benefits among the wealthiest members of Zambian society. Health spending is also regressive and not pro-poor. Although unitary net benefits are slightly progressive, unequal access remains the key constraint. In contrast, the benefits of agricultural-input subsidy programs follow a somewhat progressive pattern (for each beneficiary in the top quintile there are almost two beneficiaries in the poorest quintile) but clearly suffer from targeting problems. Consequently, without better-designed and more conscientiously implemented targeting mechanisms, public spending on health, education, and fertilizers will not be able to further the government's larger objectives for pro-poor and progressive development policy.

Orderly sovereign debt restructuring : missing in action !

2012-05-02T04:00:00.000Z

This paper takes a hard look at the experience with official intervention in sovereign debt crises, focusing on debt crises of the 1980s, Russia in 1998, Argentina in 2001, and Greece in 2010. Based on the track record, the authors argue that in situations where countries face a solvency problem, official intervention is more likely to succeed if official money is lent at the risk-free rate reflecting its seniority and private creditors receive an upfront haircut. Such an approach would limit the costs associated with procrastination and increase the chances of success by enabling a more realistic fiscal program to restore solvency. They examine the moral hazard implications for debtor countries of this proposal and find that these are unlikely to be severe. In fact, after their crises of 1997-2001, emerging market countries embarked on an aggressive and comprehensive program of self-insurance, indicating that they are weary of debt crises and their costs. However, the prospect of an upfront haircut for private creditors in the event of insolvency is likely to make them more diligent in their sovereign lending decisions.

Excessive financial intermediation in a model with endogenous liquidity

2012-05-04T04:00:00.000Z

Does an unregulated financial system absorb too many productive inputs? This paper studies this question in the context of a dynamic model with heterogeneous producers. In the absence of a financial system, the only way to purchase inputs is using internal funds. Producers are subject to idiosyncratic productivity shocks, and will decide to produce only if their productivity is high enough. Otherwise, they will hold money. A financial intermediation technology allows producers to purchase inputs in excess of their internal funds, by borrowing from unproductive agents. However, intermediation requires the use of costly monitoring services. In equilibrium, intermediation increases the money in circulation and raises nominal prices, thereby reducing the value of internal funds and making producers increasingly reliant on costly monitoring services. For this reason, society is better off when intermediation is restricted.

Gender and rural non-farm entrepreneurship

2012-05-08T04:00:00.000Z

Despite their increasing prominence in policy debates, little is known about gender inequities in non-agricultural labor market outcomes in rural areas. Using matched household-enterprise-community data sets from Bangladesh, Ethiopia, Indonesia and Sri Lanka, this paper documents and analyzes gender differences in the individual portfolio choice and productivity of non-farm entrepreneurship. Except for Ethiopia, women are less likely than men to become nonfarm entrepreneurs. Women's nonfarm entrepreneurship isn't strongly correlated with household composition or educational attainment, but is especially prevalent amongst women who are the head of their household. Female-led firms are much smaller and less productive on average, though gender differences in productivity vary dramatically across countries. Mean differences in log output per worker suggest that male firms are roughly 10 times as productive as female firms in Bangladesh, three times as those in Ethiopia and twice as those in Sri Lanka. By contrast, no significant differences in labor productivity were detected in Indonesia. Differences in output per worker are overwhelmingly accounted for by sorting by sector and size. They can't be explained by differences in capital intensity, human capital or the local investment climate, nor by increasing returns to scale.

Financing infrastructure and monitoring fiscal risks at the subnational level

2012-05-10T04:00:00.000Z

This paper explores the building blocks of an institutional framework to govern borrowing by subnational entities to finance infrastructure investment. The framework should help in achieving sustainable financing of development needs and sound management of fiscal risks. Based on international experience, the authors suggest a minimum set of indicators for monitoring fiscal and debt developments. Recognizing the different nature and operations of the subnational entities, they propose specific indicators for special purpose vehicles and the government's general budget. The paper outlines an analytical framework to inform policy decisions concerning subnational debt limits, which are country-specific and should not be mechanically applied. Basic notions underpinning medium-term macro-fiscal frameworks and debt sustainability analyses provide effective guidance for identifying prudent levels of subnational debt. The authors argue that developing fiscal and debt indicators and setting borrowing limits should be part of a broader strategy to put in place an adequate fiscal architecture to coordinate and monitor the budgetary and borrowing policies conducted by individual subnational governments. Consistent with this general principle, they explore several areas of subnational public finance and management that need to be addressed with adequate governance structures and policy choices.

Reform of the international monetary system : a jagged history and uncertain prospects

2012-05-15T04:00:00.000Z

This paper analyzes the historical evolution of the international monetary system in the context of the rising role of developing countries in the world economy and the emerging multi-polar growth setting. It evaluates the stability of the current "non-system" and how the global economic context is likely to affect that stability in the coming years with potential adverse effects on both advanced and developing economies. Given the likely trend toward a multi-polar reserve currency system, the paper evaluates the stability of the emerging system, as well as the current proposals for reform of the international monetary system. The paper concludes that more ambitious reforms of the system may be needed to meaningfully reduce future global economic and financial instability.