Showing papers by "World Institute for Development Economics Research published in 2005"

Income inequality in rural China: regression-based decomposition using household data

Abstract: A considerable literature exists on the measurement of income inequality in China and its increasing trend. Much less is known about the driving forces of this trend and their quantitative contributions. Conventional decompositions, by factor components or by population subgroups, provide only limited information on the determinants of income inequality. This paper represents an early attempt to apply the regression-based decomposition framework to the study of inequality accounting in rural China, using household-level data. It is found that geography has been the dominant factor but is becoming less important in explaining total inequality. Capital input emerges as a most significant determinant of income inequality. Farming structure is more important than labor and other inputs in contributing to income inequality across households.

Does External Trade Promote Financial Development

Abstract: Several recent papers have argued that trade and financial development may be linked, either for political economy reasons, or because foreign competition and exposure to shocks lead to changes in the demand for external finance. In this paper, we use the cross-country and time-series variation in openness to study the relationship between trade and finance in more detail. Our results suggest that increases in goods market openness are typically followed by sustained increases in financial depth.

A Decomposition Analysis of Regional Poverty in Russia

Abstract: The paper applies a new decomposition technique to the study of variations in poverty across the regions of Russia. The procedure, which is based on the Shapley value in cooperative game theory, allows the deviation in regional poverty levels from the all-Russia average to be attributed to three proximate sources: per capita income, inequality, and local prices. Contrary to expectation, regional poverty variations turn out to be due more to differences in inequality across regions than to differences in real income per capita. However, when real income per capita is split into nominal income and price components, differences in nominal incomes emerge as more important than either inequality or price effects for the majority of regions.

Measuring non‐economic well‐being achievement

Abstract: It is common to treat human well-being as a multidimensional concept, enveloping diverse, separable or behaviourally distinct components, domains or dimensions (Finnis 1980; Nussbaum 1988; Sen 1990, 1993; UNDP 1990–2003; Doyal and Gough 1993; Galtung 1994; Cummins 1996; Qizilbash 1996; Stewart 1996; Narayan 2000; Alkire 2002, among many other studies).1 It is in particular thought to be a much richer or vital concept than economic well-being: much of the literature is justifiably emphatic about this point. Accordingly, there is a long history of efforts both to refocus attention away from the established, although invariably far less than perfect, monetary measures of national economic well-being achievement and to capture better non-economic well-being achievement. A plethora of indicators of national well-being achievement has been proposed for these purposes. Indicators of health and educational status are most widely-used in inter-country ordinal and cardinal assessments of national well-being achievement, and are now available for diverse samples of 160 or more countries (see UNDP 2003). Multidimensional indicators are also available for similar samples, based either solely or predominantly on these indicators, and include the Physical Quality of Life Index (PQLI) and the very well-known Human Development Index (HDI).

Aid heterogeneity: looking at aid effectiveness from a different angle

Abstract: The paper uses an aid disaggregation approach to examine the impact of different aid modalities on the fiscal sector of the aid-recipient country. It uses time-series data on different types of development aid (project aid, programme aid, technical assistance and food aid) for Uganda, an important aid recipient in recent years, to estimate a model of fiscal response in the presence of aid which combines aid heterogeneity and endogenous aid. The empirical findings clearly suggest the importance of the above approach for delving deeper into aid effectiveness issues since different aid categories have different effects on key fiscal variables—an impact that could not be revealed if a single figure for aid were employed. Project and food aids appear to cause a reduction in public investment whereas programme aid and technical assistance are positively related to public investment. The same applies for government consumption. A negligible impact on government tax and non-tax revenues, and a strong displacement of government borrowing are also found. Copyright © 2005 John Wiley & Sons, Ltd.

What Determines Financial Development

Abstract: This paper studies the fundamental determinants of cross-country differences in finnancial development. Two prominent tools for addressing model uncertainty, Bayesian Model Averaging and General-to-specific approaches, are jointly applied to investigate the financial development effects of a wide range of variables taken from various sources. The analysis suggests that the level of financial development in a country is determined by its institutional quality, macroeconomic policies, and geographic characteristics, as well as the level of income and cultural characteristics.

Development assistance and development finance: evidence and global policy agendas

Abstract: Understanding the development effects of official aid is crucial to building a better bridge between research and policy. This paper reviews the current evidence regarding the impact of aid on growth and poverty reduction, and develops a new narrative. In the light of this narrative, the paper then examines aid trends, focusing on the regions of sub-Saharan Africa and the Pacific. The paper then turns to recent discussion of new and innovative sources of development finance and considers how research has influenced the policy debate through a recent World Institute for Development Economics Research (UNU–WIDER) study for the United Nations (UN) General Assembly. The paper concludes that aid broadly works, that poverty would be higher in the absence of aid, and that the shortfall in aid during the 1990s has, by implication, made it more difficult to meet the Millennium Development Goals (MDGs). Hence, a considerable catch-up in aid and other development finance flows is now necessary if poverty is to be substantially reduced by 2015. Copyright © 2005 John Wiley & Sons, Ltd.

Aid to Africa: an unfinished agenda

Abstract: The Millennium Development Goals (MDGs) give aid to Africa a new emphasis. Yet aid flows to Africa have trended downward over the last decade, and as a consequence more Africans now live in poverty. This is especially true of Sub-Saharan Africa. Any progress towards the main MDG target of halving the number of people living in poverty clearly requires more aid. It also requires a better understanding of what drives aid volumes to Africa and precisely how these flows impact on African economies. This paper examines trends in official aid to Africa, Sub-Saharan Africa in particular, over the period 1960 to 2002, highlighting falls in aid since the early 1990s. It concludes with consideration of future challenges for aid to Africa. Copyright © 2005 John Wiley & Sons, Ltd.

Trade Liberalisation and Economic Performance: Theory and Evidence for Developing Countries

Abstract: The last five decades have witnessed a profound evolution of economic policy in developing countries, particularly in the case of trade strategies. Both internal, as well as external, factors have prompted the need for more outward-oriented (or liberalised) trade policy regimes. The creation of the General Agreement on Tariffs and Trade (GATT) in 1947 and the World Trade Organisation (WTO) in 1995 have been important driving forces for free trade. Since then, the major quantitative barriers to trade, i.e. tariffs and non-tariff barriers (quotas, licences and technical specifications, among other restrictions), have substantially been reduced or dismantled. Also, the progress towards more liberalised trade regimes, mainly in developing countries, has been manifested in the trade and development literature. Major studies suggest that the performance of more outward-oriented economies is superior to that of those countries pursuing more inward-looking trade practices (Greenaway and Nam, 1988; Dollar, 1992; Sachs and Warner, 1995; and Rodriguez and Rodrik, 2000). Recent developments in the international trade literature focus on the potential dynamic effects of trade liberalisation, i.e. simplification of tariff structures and elimination of non-tariff barriers, in reducing the incentives to rent seeking and in accelerating the flow of technical knowledge from the world market. Moreover, there have been important advances regarding the study of trade liberalisation and its impact on exports, imports and the balance of payments, largely neglected in the literature, often driven by supply-side considerations.

Pawns and Queens Revisited: Public Provision of Private Goods when Individuals make Mistakes

Abstract: This paper analyses the optimal tax policy and public provision of private goods when individuals differ in two respects: income-earning ability and rationality. Publicly provided goods should be overprovided or subsidised, relative to the decentralised optimum, if society's marginal valuation of them exceeds the individual valuation and if these goods help relax the self-selection constraints, formulated in a new way. Optimal marginal income tax rates are shown to differ from the standard rules if publicly provided goods and labour supply are related.

Innovation and Competitiveness: Trends in Unit Prices in Global Trade

Abstract: This paper seeks to build on theory, to develop new methods for understanding the nature and basis of sectoral and national competitive advantage, and to do so with a temporal perspective. Neo-Schumpeterian and evolutionary economics perspectives (which place innovation at the forefront of accumulation) highlight the importance of economic rents, barriers to entry and core competencies. There is no one measure that adequately reflects these barriers to entry, and much of the research has been concerned to generate proxies, each of which is in itself partial, but which together provide a comprehensive picture. During the late 1970s, preliminary work was undertaken on the unit price of UK trade as an indicator of relative technological competence. However, this approach has largely been neglected since then, receiving only sporadic attention in US literature, and at high levels of product aggregation. This paper utilizes this approach to try and reflect the dynamic process of shifting competitive advantage ...

Transnational terrorism as a spillover of domestic disputes in other countries

Abstract: This paper models transnational terrorism as a three‐way strategic interaction involving a government that faces armed opposition at home, which may spill over in the form of acts of terrorism by the state's opponents against the government's external sponsor. The external sponsor also utilises deterrence against potential terrorists, which only lowers terrorism if terrorists are not intrinsically motivated by a deep‐seated sense of humiliation. The model highlights the importance of intrinsic motivation. A rise in the external power's preference for deterrence against terrorism may backfire in these circumstances. Increases in the government's military efficiency against the rebels, who are also terrorists against the government's sponsor, raises overall levels of violence.

Inequality and Multidimensional Well-Being

Abstract: The world has undergone rapid and tremendous change in the last couple of decades, much of it attributed to some facet of globalization. We have witnessed the collapse of the Soviet Union; conflict and civil wars in many developing nations; the rapid economic progress of many countries in Asia, most significantly China and India; ongoing economic and social decline in sub-Saharan Africa; increased economic uncertainty in parts of Latin America and the Caribbean; and stagnation in many parts of the Pacific. Developed countries have not remained immune to the same global forces. While they have achieved ever higher per capita incomes, and higher well-being according to traditional measures, they have also experienced profound internal change, causing widespread concerns regarding, inter alia, social exclusion, human security, levels of personal satisfaction, and happiness. Thus everywhere we look seems to accord with the view of a global environment that is more dynamic and diverse, and, arguably, more volatile and uncertain. Social science research on living standards, human well-being and quality of life has altered in response to the changing global conditions, new research priorities and improved data resources. Two decades ago, for example, a comparison of living standards across countries was typically accomplished using figures on average incomes converted into U.S. dollars using market exchange rates. Nowadays, a similar exercise would almost certainly take account of variations in purchasing power parity (PPP) between countries, and would also be likely to recognize two other important factors: the non-income dimensions of well-being that contribute to quality of life, and population heterogeneity, which casts doubt on the reliability and relevance of data on average income. The increased recognition of population heterogeneity is reflected in the attention given to the distribution of income and expenditure, both within and among countries. There is now much more information on levels and trends in income inequality, prompted in part by the availability of more comprehensive and reliable data sets, and by greater comparability in national and sub-national

Inequality and multidimensional well-being†

Abstract: The world has undergone rapid and tremendous change in the last couple of decades, much of it attributed to some facet of globalization. We have witnessed the collapse of the Soviet Union; conflict and civil wars in many developing nations; the rapid economic progress of many countries in Asia, most significantly China and India; ongoing economic and social decline in sub-Saharan Africa; increased economic uncertainty in parts of Latin America and the Caribbean; and stagnation in many parts of the Pacific. Developed countries have not remained immune to the same global forces. While they have achieved ever higher per capita incomes, and higher well-being according to traditional measures, they have also experienced profound internal change, causing widespread concerns regarding, inter alia, social exclusion, human security, levels of personal satisfaction, and happiness. Thus everywhere we look seems to accord with the view of a global environment that is more dynamic and diverse, and, arguably, more volatile and uncertain. Social science research on living standards, human well-being and quality of life has altered in response to the changing global conditions, new research priorities and improved data resources. Two decades ago, for example, a comparison of living standards across countries was typically accomplished using figures on average incomes converted into U.S. dollars using market exchange rates. Nowadays, a similar exercise would almost certainly take account of variations in purchasing power parity (PPP) between countries, and would also be likely to recognize two other important factors: the non-income dimensions of well-being that contribute to quality of life, and population heterogeneity, which casts doubt on the reliability and relevance of data on average income. The increased recognition of population heterogeneity is reflected in the attention given to the distribution of income and expenditure, both within and among countries. There is now much more information on levels and trends in income inequality, prompted in part by the availability of more comprehensive and reliable data sets, and by greater comparability in national and sub-national

Estimating Utility-Consistent Poverty Lines

Abstract: The "Cost of Basic Needs" (CBN) approach to drawing consumption-based poverty lines is widely applied and lays credible claim to being the best practice for estimating poverty measures. Unfortunately, a growing mass of evidence indicates that poverty estimates obtained under the CBN approach are often demonstrably utility inconsistent. Here, we introduce an information theoretic approach for estimating utility-consistent poverty lines. An example of the approach is provided for the case of Mozambique. The approach represents a powerful addition to the poverty analyst's tool kit and enhances the attractiveness of the CBN approach for practical povertymeasurement problems.

What Determines African Bilateral Aid Receipts

Abstract: This paper empirically models aid allocation to four African countries—Egypt, Kenya, Morocco and Tanzania—using 1968–1999 time series data. The econometric method employed allows for the joint determination of aid to these countries and for recipient-specific coefficients. It is hypothesised that aid to these countries has been determined by a diverse set of determinants, ranging from their developmental needs or requirements through to donor commercial, political and strategic interests. A special interest of the paper is whether policy regimes have impacted on the amounts of aid received by these countries. Results indicate that they have for all four countries, although the direction of influence differs among them. Copyright © 2005 John Wiley & Sons, Ltd.

China's Business Cycles: Perspectives from an AD–AS Model*

Abstract: This paper represents a first attempt to study China business cycles using a formal analytical framework, namely, a structural VAR model. It is found that: (a) demand shocks were the dominant source of macroeconomic fluctuations, but supply shocks had gai

The Doha Trade Round and Mozambique

Abstract: This paper considers the potential implications of the Doha Development Agenda, as well as other trade liberalization scenarios, for Mozambique. An applied general equilibrium model, which accounts for high marketing margins and home consumption in the Mozambique economy, is linked to results from the GTAP model of global trade. In addition, a microsimulation module is employed to consider the subsequent implications of trade liberalization for poverty. The implications of trade liberalization, particularly the Doha scenarios, are found to be relatively small. Presuming that a more liberal trading regime will positively influence growth in Mozambique, an opportunity exists to put in place such a regime without imposing significant adjustment costs.

Development Assistance and Development Finance: Evidence and Global Policy Agendas

Abstract: Understanding the development effects of official aid is crucial to building a better bridge between research and policy. This paper reviews the current evidence regarding the impact of aid on growth and poverty reduction, and develops a new narrative. In the light of this narrative, the paper then examines aid trends, focusing on the regions of sub-Saharan Africa and the Pacific. The paper then turns to recent discussion of new and innovative sources of development finance and considers how research has influenced the policy debate through a recent World Institute for Development Economics Research (UNU-WIDER) study for the United Nations (UN) General Assembly. The paper concludes that aid broadly works, that poverty would be higher in the absence of aid, and that the shortfall in aid during the 1990s has, by implication, made it more difficult to meet the Millennium Development Goals (MDGs). Hence, a considerable catch-up in aid and other development finance flows is now necessary if poverty is to be substantially reduced by 2015.

Spatial decomposition of inequality

Abstract: This paper reviews the theory and application of the decomposition methods commonly used to measure the impact of spatial location on income inequality. It establishes some new theoretical results with potentially wide applicability, and examines empirical evidence drawn from a large number of countries.

Measuring Non-Economic Well-Being Achievement

Abstract: Income per capita and most widely reported, non- or non-exclusively income based human well-being indicators are highly correlated among countries. Yet many countries exhibit higher achievement in the latter than predicted by the former. The reverse is true for many other countries. This paper commences by extracting the inter-country variation in a composite of various widely-reported, non-income-based well-being indices not accounted for by variations in income pre capita. This extraction is interpreted inter alia as a measure of non-economic well-being. The paper then looks at correlations between this extraction and a number of new or less widely-used well-being measures, in an attempt to find the measure that best captures these achievements. A number of indicators are examined, including measures of poverty, inequality, health status, education status, gender bias, empowerment, governance and subjective well-being.

Conflict and peace building: Interactions between politics and economics

Abstract: Violent conflict is inflicting immense damage on the societies and economies of the developing world. This paper introduces the UNU-WIDER special issue of The Round Table on‘Conflict and Peace Building: Interactions between Politics and Economics’. The issue assesses experiences in Burundi, Sierra Leone, Sri Lanka and Uganda, as well as the potential for Africa's regional organizations to contribute to peace building and the role of constitution writing in conflict resolution across the world. The issue has five main messages, namely: 1) good economics is broadly good politics; 2) getting the economic and political dimensions of peace building to work together is harder than governments and donors think; 3) an over-simplistic view of how economies respond to ceasefires can undermine otherwise promising political settlements; 4) foreign aid is valuable but only if carefully used; and 5) the process of constitution writing and the ways in which regional organizations work matter greatly to the chan...

Reforms and Confidence

Abstract: We examine the choice of economic reforms when policymakers have present-biased preferences and can choose to discard information (maintain confidence) to mitigate distortions from excess discounting. The decisions of policymakers and firms are shown to be interdependent. Confident policymakers carry out welfare-improving reforms more often, which increases the probability that firms will invest in restructuring. While policymakers in different countries can be equally irrational, the consequences of bounded rationality are less severe in economies with beneficial initial conditions. We also examine how present-biased preferences influence the choice between big bang versus gradualist reform strategies. Our findings help explain differences in economic reform success in various countries.

Development Assistance and Development Finance: Evidence and Global Policy Agendas

Abstract: Understanding the development effects of official aid is crucial to building a better bridge between research and policy. This paper reviews the current evidence regarding the impact of aid on growth and poverty reduction, and develops a new narrative. In the light of this narrative, the paper then examines aid trends, focusing on the regions of sub-Saharan Africa and the Pacific.