Showing papers by "World Bank published in 2001"

Estimating Wealth Effects Without Expenditure Data—Or Tears: An Application to Educational Enrollments in States of India

Abstract: This paper has an empirical and overtly methodological goal. The authors propose and defend a method for estimating the effect of household economic status on educational outcomes without direct survey information on income or expenditures. They construct an index based on indicators of household assets, solving the vexing problem of choosing the appropriate weights by allowing them to be determined by the statistical procedure of principal components. While the data for India cannot be used to compare alternative approaches they use data from Indonesia, Nepal, and Pakistan which have both expenditures and asset variables for the same households. With these data the authors show that not only is there a correspondence between a classification of households based on the asset index and consumption expenditures but also that the evidence is consistent with the asset index being a better proxy for predicting enrollments--apparently less subject to measurement error for this purpose--than consumption expenditures. The relationship between household wealth and educational enrollment of children can be estimated without expenditure data. A method for doing so - which uses an index based on household asset ownership indicators- is proposed and defended in this paper. In India, children from the wealthiest households are over 30 percentage points more likely to be in school than those from the poorest households.

Growth is Good for the Poor

Abstract: When average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This holds across regions, periods, income levels, and growth rates. But relatively little is known about the broad forces that account for the variations across countries and across time in the share of income accruing to the poorest fifth. When average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. Dollar and Kraay document this empirical regularity in a sample of 92 countries spanning the past four decades and show that it holds across regions, periods, income levels, and growth rates. Dollar and Kraay next ask whether the factors that explain cross-country differences in the growth rates of average incomes have differential effects on the poorest fifth of society. They find that several determinants of growth - such as good rule of law, openness to international trade, and developed financial markets - have little systematic effect on the share of income that accrues to the bottom quintile. Consequently, these factors benefit the poorest fifth of society as much as everyone else. There is some weak evidence that stabilization from high inflation and reductions in the overall size of government not only increase growth but also increase the income share of the poorest fifth in society. Finally, Dollar and Kraay examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that relatively little is known about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study growth and poverty reduction. The authors may be contacted at ddollar@worldbank.org or akraay@worldbank.org.

New tools in comparative political economy : the database of political institutions

Abstract: This article introduces a large new cross-country database, the database of political institutions. It covers 177 countries over 21 years, 1975-95. The article presents the intuition, construction, and definitions of the different variables. Among the novel variables introduced are several measures of checks and balances, tenure and stability, identification of party affiliation with government or opposition, and fragmentation of opposition and government parties in the legislature.

Capital Structures in Developing Countries

Abstract: This study uses a new data set to assess whether capital structure theory is portable across countries with different institutional structures. We analyze capital structure choices of firms in 10 developing countries, and provide evidence that these decisions are affected by the same variables as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. Our findings suggest that although some of the insights from modern finance theory are portable across countries, much remains to be done to understand the impact of different institutional features on capital structure choices. OUR KNOWLEDGE OF CAPITAL STRUCTURES has mostly been derived from data from developed economies that have many institutional similarities. The purpose of this paper is to analyze the capital structure choices made by companies from developing countries that have different institutional structures. The prevailing view, for example Mayer ~1990!, seems to be that financial decisions in developing countries are somehow different. Mayer is the most recent researcher to use aggregate f low of funds data to differentiate between financial systems based on the “Anglo-Saxon” capital markets model and those based on a “Continental-German-Japanese” banking model. However, because Mayer’s data comes from aggregate f low of funds data and not from individual firms, there is a problem with this approach. The differences between private, public, and foreign ownership structures have a profound inf luence on such data, but the differences may tell us little about how profit-oriented firms make their individual financial decisions. This paper uses a new firm-level database to examine the financial structures of firms in a sample of 10 developing countries. Thus, this study helps determine whether the stylized facts we have learned from studies of developed countries apply only to these markets, or whether they have more general applicability. Our focus is on answering three questions:

Trust and Growth

Abstract: Why does trust vary so substantially across countries? This paper presents a general equilibrium growth model in which heterogeneous agents transact and face a moral hazard problem. Agents may trust those with whom they transact, but they also have the opportunity to invest resources in verifying the truthfulness of claims made by transactors. We characterise the social, economic and institutional environments in which trust will be high, and show that low trust environments reduce the rate of investment. The predictions of the model are examined empirically for a cross-section of countries and have substantial support in the data.

Trade, growth, and poverty*

Abstract: The evidence from individual cases and from cross-country analysis supports the view that globalization leads to faster growth and poverty reduction in poor countries. To determine the effect of globalization on growth, poverty, and inequality, the authors first identify a group of developing countries that are participating more in globalization. China, India, and several other large countries are part of this group, so well over half the population of the developing world lives in these globalizing economies. Over the past 20 years, the post-1980 globalizers have seen large increases in trade and significant declines in tariffs. Their growth rates accelerated between the 1970s and the 1980s and again between the 1980s and the 1990s, even as growth in the rich countries and the rest of the developing world slowed. The post-1980 globalizers are catching up to the rich countries, but the rest of the developing world (the non-globalizers) is falling further behind. Next, the authors ask how general these patterns are, using regressions that exploit within-country variations in trade and growth. After controlling for changes in other policies and addressing endogeneity with internal instruments, they find that trade has a strong positive effect on growth. Finally, the authors examine the effects of trade on the poor. They find little systematic evidence of a relationship between changes in trade volumes (or any other measure of globalization they consider) and changes in the income share of the poorest-or between changes in trade volumes and changes in household income inequality. They conclude, therefore, that the increase in growth rates that accompanies expanded trade translates on average into proportionate increases in incomes of the poor. Absolute poverty in the globalizing developing economies has fallen sharply in the past 20 years. The evidence from individual cases and from cross-country analysis supports the view that globalization leads to faster growth and poverty reduction in poor countries.

It's Not Factor Accumulation : Stylized Facts and Growth Models

Abstract: We document five stylized facts of economic growth. (1) The "residual" rather than factor accumulation accounts for most of the income and growth differences across nations. (2) Income diverges over the long run. (3) Factor accumulation is persistent while growth is not persistent and the growth path of countries exhibits remarkable variation across countries. (4) Economic activity is highly concentrated, with all factors of production flowing to the richest areas. (5) National policies closely associated with long-run economic growth rates. We argue that these facts do not support models with diminishing returns, constant returns to scale, some fixed factor of production, and that highlight the role of factor accumulation. Empirical work, however, does not yet decisively distinguish among the different theoretical conceptions of "total factor productivity growth." Economists should devote more effort towards modeling and quantifying total factor productivity.

How Does Foreign Entry Affect Domestic Banking Markets

Abstract: Banking markets are becoming increasingly international through financial liberalization and general economic integration. Using bank-level data for 80 countries for 1988-95, the authors examine the extent of foreign ownership in national banking markets. They compare net interest margins, overhead, taxes paid, and profitability of foreign and domestic banks. The comparative functions of foreign banks and domestic banks is very different in developing and industrial countries, possibly because of a different customer base, different bank procedures, and different regulatory and tax regimes. In developing countries foreign banks tend to have greater profits, higher interest margins, and higher tax payments than do domestic banks. In industrial countries it is the domestic banks that have greater profits, higher interest margins, and higher tax payments. It is common to read, in the literature on foreign banking, that the entry of foreign banks can make national banking markets more competitive, thereby forcing domestic banks to operate more efficiently. The authors show that increasing the foreign share of bank ownership does indeed reduce profitability and overhead expenses in domestically owned banks - so the general effect of foreign bank entry may be positive. Interestingly, the number of foreign entrants matters more than their market share, suggesting that they affect local bank competition more on entry rather than after gaining a substantial market share. These effects hold even when controlling for the fact that foreign banks may be attracted to markets with certain characteristics, such as low banking costs.

Growth is Good for the Poor

Abstract: When average income rises, the average incomes of the poorest fifth of society rise proportionately. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. The authors document this empirical regularity in a sample of 92 countries spanning the past four decades and show that it holds across regions, periods, income levels, and growth rates. The authors next ask whether the factors that explain cross-country differences in the growth rates of average incomes have differential effects on the poorest fifth of society. They find that several determinants of growth--such as good rule of law, opennness to international trade, and developed financial markets--have little systematic effect on the share of income that accrues to the bottom quintile. Consequently, these factors benefit the poorest fifth of society as much as everyone else. Thee is some weak evidence that stabilization from high inflation and reductions in the overall size of government not only increase growth but also increase the income share of the poorest fifth in society. Finally, the authors examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that relatively little is known about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society.

On Decomposing the Causes of Health Sector Inequalities with an Application to Malnutrition Inequalities in Vietnam

Abstract: A method for decomposing inequalities in the health sector into their causes is developed and applied to data on child malnutrition in Vietnam. Wagstaff, van Doorslaer, and Watanabe propose a method for decomposing inequalities in the health sector into their causes, by coupling the concentration index with a regression framework. They also show how changes in inequality over time, and differences across countries, can be decomposed into the following: - Changes due to changing inequalities in the determinants of the variable of interest. - Changes in the means of the determinants. - Changes in the effects of the determinants on the variable of interest. The authors illustrate the method using data on child malnutrition in Vietnam. They find that inequalities in height-for-age in 1993 and 1998 are accounted for largely by inequalities in household consumption and by unobserved influences at the commune level. And they find that an increase in such inequalities is accounted for largely by changes in these two influences. In the case of household consumption, rising inequalities play a part, but more important have been the inequality - increasing effects of rising average consumption and the increased protective effect of consumption on nutritional status. In the case of unobserved commune-level influences, rising inequality and general improvements seem to have been roughly equally important in accounting for rising inequality in malnutrition. This paper - a joint product of Public Services for Human Development, Development Research Group, and the Development Data Group - is part of a larger effort in the Bank to investigate the links between health and poverty. The authors may be contacted at awagstaff@worldbank.org, vandoorslaer@econ.bmg.eur.nl., or nwatanabe@worldbank.org.

Bank Regulation and Supervision: What Works Best?

Abstract: The authors draw on their new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and evaluate the efficacy of different regulatory and supervisory policies. First, the authors assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach, according to which governments regulate to support political constituencies. Second, they assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector. These policies include the following: Regulations on bank activities and the mixing of banking and commerce. Regulations on entry by domestic and foreign banks. Regulations on capital adequacy. Design features of deposit insurance systems. Supervisory power, independence, and resources; stringency of loan classification; provisioning standards; diversification guidelines; and powers to take prompt corrective action. Regulations governing information disclosure and fostering private sector monitoring of banks. Government ownership of banks. The results raise a cautionary flag with regard to reform strategies that place excessive reliance on a country's adherence to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. The findings, which are much more consistent with the grabbing-hand view of regulation than with the helping-hand view, suggest that the regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control.

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Abstract: In this Paper we assess the progress made by the profession in understanding whether and how exchange rate intervention works. To this end, we review the theory and evidence on official intervention, concentrating primarily on work published within the last decade or so. Our reading of the recent literature leads us to conclude that, in contrast with the profession's consensus view of the 1980s, official intervention can be effective, especially through its role as a signal of policy intentions, and especially when it is publicly announced and concerted. We also note, however, an apparent empirical puzzle concerning the secrecy of much intervention and suggest an additional way in which intervention may be effective but which has so far received little attention in the literature, namely through its role in remedying a coordination failure in the foreign exchange market.

Are women really the "fairer" sex? Corruption and women in government

Abstract: Numerous behavioral studies have found women to be more trust-worthy and public-spirited than men. These results suggest that women should be particularly effective in promoting honest government. Consistent with this hypothesis, we find that the greater the representation of women in parliament, the lower the level of corruption. We find this association in a large cross-section of countries; the result is robust to a wide range of specifications.

The ability of banks to lend to informationally opaque small businesses

Abstract: Consolidation of the banking industry is shifting assets into larger institutions that often operate in many nations. Large international financial institutions are geared toward serving large wholesale customers. How does this affect the banking system's ability to lend to informationally opaque small businesses? The authors test hypotheses about the effects of bank size, foreign ownership, and distress on lending to informationally opaque small firms, using a rich new data set on Argentinean banks, firms, and loans. They also test hypotheses about borrowing from a single bank versus borrowing from several banks. Their results suggest that large and foreign-owned institutions may have difficulty extending relationship loans to opaque small firms, especially if small businesses are delinquent in repaying their loans. Bank distress resulting from lax prudential supervision and regulation appears to have no greater effect on small borrowers than on large borrowers, although even small firms may react to bank distress by borrowing from multiple banks, despite raising borrowing costs and destroying some of the benefits of exclusive lending relationships.

Financial Development and Financing Constraints: International Evidence from the Structural Investment Model

Abstract: This article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment. The financing constraints are inferred from the investment Euler equation by assuming that the firm's stochastic discount factor is a function of the firm's financial position (specifically, the stock of liquid assets). The magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development. The size effect, business cycles, and legal environment effects are also considered. Copyright 2003, Oxford University Press.

Do Ethnic and Nonethnic Civil Wars Have the Same Causes?: A Theoretical and Empirical Inquiry (Part 1)

Abstract: A booming quantitative literature on large-scale political violence has identified important economic and political determinants of civil war. That literature has treated civil war as an aggregate category and has not considered if identity (ethnic/religious) wars have different causes than nonidentity wars. The author argues that this is an important distinction and that identity wars are due predominantly to political grievance rather than lack of economic opportunity. Ethnic heterogeneity is also associated differently with identity than nonidentity wars. Some systemic variables are also important determinants of civil war, and these have been neglected in the existing literature. An important new result is that living in a bad neighborhood, with undemocratic neighbors or neighbors at war, significantly increases a country’s risk of experiencing ethnic civil war.

Dimensions of women's autonomy and the influence on maternal health care utilization in a north Indian city.

Abstract: The dimensions of women’s autonomy and their relationship to maternal health care utilization were investigated in a probability sample of 300 women in Varanasi, India. We examined the determinants of women’s autonomy in three areas: control over finances, decision-making power, and freedom of movement. After we control for age, education, household structure, and other factors, women with closer ties to natal kin were more likely to have greater autonomy in each of these three areas. Further analyses demonstrated that women with greater freedom of movement obtained higher levels of antenatal care and were more likely to use safe delivery care. The influence of women’s autonomy on the use of health care appears to be as important as other known determinants such as education.

Aid Dependence and the Quality of Governance: Cross-Country Empirical Tests

Abstract: Aid dependence can potentially undermine the quality of governance and public sector institutions by weakening accountability, encouraging rent-seeking and corruption, fomenting conflict over control of aid funds, siphoning off scarce talent from the bureaucracy, and alleviating pressures to reform inefficient policies and institutions. Analyses of cross-country data in this paper provide evidence that higher aid levels erode the quality of governance, as measured by indices of bureaucratic quality, corruption, and the rule of law. These findings support the need for donors to develop less costly and less intrusive ways of disseminating state-of-the-art knowledge on public sector reform in developing countries.

Women's Autonomy in India and Pakistan: The Influence of Religion and Region

Abstract: THE CULTURES OF South Asia are largely gender stratified, characterized by patrilineal descent, patrilocal residence, inheritance and succession practices that exclude women, and hierarchical relations in which the patriarch or his relatives have authority over family members. Levels and patterns of female autonomy vary considerably within the region, however, and the question is why. Two arguments have been advanced in the literature to support the hypothesis that women in Pakistan have less autonomy and control over their own lives than do women in India. The first argues that in Pakistan as in other Islamic settings, women occupy a separate and distinctive position that effectively denies them education and autonomy. Women’s lack of control over their own lives has been cited as the central factor underlying the poorer mortality outcomes experienced by Islamic societies (Caldwell 1986: 175). The second argument draws on research conducted in India that demonstrates the dominant influence of behavior and norms imprinted by regionally prescribed social systems, and points out that the social systems that characterize the southern region provide women more exposure to the outside world, more voice in family life, and more freedom of movement than do the social systems of the north (Dyson and Moore 1983; Basu 1992; Jejeebhoy 2000). In this view, to which we subscribe, region plays the major conditioning role, and once region is controlled, Muslim women exert about as much autonomy in their lives as do Hindu women, wherever they reside. The argument in favor of regional social systems as opposed to religion as the driving force is strengthened by evidence suggesting wide variations in the ways in which gender and behavioral norms are manifested across a range of Islamic countries (see for example, Obermeyer 1992).

Trade Credit, Financial Intermediary Development, and Industry Growth

Abstract: Recent work suggests that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. For firms in poorly developed financial markets, implicit borrowing in the form of trade credit may provide an alternative source of funds. We show that industries with higher dependence on trade credit financing exhibit higher rates of growth in countries with weaker financial institutions. Furthermore, consistent with barriers to trade credit access among young firms, we show that most of the effect that we report comes from growth in the size of preexisting firms. IN RECENT YEARS, there has been increasing interest in the economics literature in the role of financial intermediaries in promoting economic growth. Recent papers have shown that improved financial market development is associated with growth, using a variety of methodologies and data sets. 1 One of the basic explanations for this pattern is that the financial sector serves to reallocate funds from those with an excess of capital, given their investment opportunities, to those with a shortage of funds (relative to opportunities). Thus, an economy with welldeveloped financial institutions will be better able to allocate resources to projects that yield the highest returns. This allocative role of financial institutions in promoting development was the focus of Rajan and Zingales (1998), who found that industrial sectors with a greater need for external finance developdisproportionately faster in countries with more developed financial markets. This then begs the question of whether firms with high return projects in countries with poorly developed financial institu

Trade Credit, Financial Intermediary Development and Industry Growth

Abstract: Where do firms turn for financing in countries with poorly developed financial markets? One source is trade credit. And where formal financial intermediaries are deficient, industries that rely more on this source of financing grow faster. Recent empirical work has shown that financial development is important for economic growth, since well-developed financial markets are more effective at allocating capital to firms with high-value projects. This raises the question of whether firms with high-return projects in countries with poorly developed financial institutions are able to draw on alternative sources of capital to offset the effects of deficient (formal) financial intermediaries. Recent work suggests that implicit borrowing in the form of trade credit may provide one such source of funds. Using the methodology of Rajan and Zingales (1998), Fisman and Love show that in countries with relatively weak financial institutions, industries with greater dependence on trade credit financing (measured by the ratio of accounts payable to total assets) grow faster than industries that rely less on such credit. Furthermore, consistent with the notion that young firms may not use trade credit, the authors show that most of the effect they report comes from growth in preexisting firms rather than from an increase in the number of firms. This paper has also been published in the Journal of Finance. This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study the determinants of access to finance.

Do Depositors Punish Banks for "Bad" Behavior?: Market Discipline, Deposit Insurance, and Banking Crises

Abstract: This paper empirically investigates two issues largely unexplored by the literature on market discipline. We evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline. We focus on the experiences of Argentina, Chile, and Mexico during the 1980s and 1990s. We find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates. Deposit insurance does not appear to diminish the extent of market discipline. Aggregate shocks affect deposits and interest rates during crises, regardless of bank fundamentals, and investors' responsiveness to bank risk taking increases in the aftermath of crises.

Accountability and Corruption: Political Institutions Matter

Abstract: The results of a cross-country empirical analysis suggest that political institutions are extremely important in determining the prevalence of corruption: democracy, parliamentary systems, political stability, and freedom of the press are all associated with lower corruption. Using a cross-country panel, Lederman, Loayza, and Soares examine the determinants of corruption, paying particular attention to political institutions that increase political accountability. Previous empirical studies have not analyzed the role of political institutions, even though both the political science and the theoretical economics literature have indicated their importance in determining corruption. The main theoretical hypothesis guiding the authorsi empirical investigation is that political institutions affect corruption through two channels: political accountability and the structure of the provision of public goods. The results suggest that political institutions are extremely important in determining the prevalence of corruption: democracy, parliamentary systems, political stability, and freedom of the press are all associated with lower corruption. In addition, the authors show that common findings of the earlier empirical literature on the determinants of corruption related to openness and legal traditionodo not hold once political variables are taken into account. This paper - a product of the Office of the Chief Economist, Latin America and the Caribbean Region - is part of a larger effort to conduct research on pressing policy issues in the region. The authors may be contacted at dlederman@worldbank.org or nloayza@worldbank.org.