Showing papers by "World Institute for Development Economics Research published in 2008"

Regional determinants of entrepreneurial start-ups in a developing country

Abstract: In this paper we use data from a developing country, South Africa, to empirically identify the determinants of start-up rates across different sub-national regions and in particular to investigate the role of access to finance on a regional (sub-national) level on start-ups. We find that the most important determinants of start-up rates across South Africa's magisterial districts are profit rates, educational levels, agglomeration as measured by the economic size of a district, and access to formal bank finance. Profits have by far the strongest effect on start-up rates. This, together with the insignificance of unemployment for start-ups, may imply that start-ups in South Africa are mainly opportunity-driven, as opposed to being necessity driven. It is also found that access to formal bank finance matter for regional start-up rates, which is not typical for a developing country and that market-size (agglomerations) is negatively associated with start-up rates in South Africa–an unexpected finding which m...

What Determines Bilateral Aid Allocations? Evidence From Time Series Data

Abstract: This paper models the allocation of bilateral foreign development aid to developing countries. A simple theoretical framework is developed, in which aid is treated as a private good of a donor country bureaucratic group responsible for bilateral aid allocation. This model is applied to time series data for ten principal recipients of bilateral official development assistance. Features of this application are that it caters for the joint determination of aid allocations and for donor allocation behavior to differ among individual recipient countries. Results indicate that both recipient need and donor interest variables determine the amount of foreign aid to developing countries, and that donor allocation behavior often differs markedly among recipients.

Trade Expansion of China and India: Threat or Opportunity?

Abstract: By exploring the export performances and specialisation patterns of China and India, we assess their trade competitiveness and complementarity vis-a-vis each other as well as with the rest of the world. Our analysis indicates that (a) India faces tough competition from China in the third markets especially in clothing, textiles and leather products; (b) there is a moderate potential for expanding trade between the two countries; (c) China poses a challenge for the East Asian economies, the US, and most European countries especially in medium-technology industries; (d) India appears to be a competitor mainly for its neighbouring South Asian countries; (e) complementarity exists between the imports of China and India, and the exports of the US, some European states and East Asian countries, especially Japan, Korea, Malaysia, Singapore and Thailand, implying opportunities for trade expansion; and finally (f) the export structure of China is changing with the exports of skill-intensive and high-technology products increasing and those of labour-intensive products decreasing gradually. This suggests that challenges created by China in traditional labour-intensive products might reduce in the long run.

Macro-Micro Feedback Links of Water Management in South Africa: CGE Analyses of Selected Policy Regimes

Abstract: The pressure on an already stressed water situation in South Africa is predicted to increase significantly under climate change, plans for large industrial expansion, observed rapid urbanization, and government programs to provide access to water to millions of previously excluded people. The present study employed a general equilibrium approach to examine the economy-wide impacts of selected macro and water related policy reforms on water use and allocation, rural livelihoods, and the economy at large. The analyses reveal that implicit crop-level water quotas reduce the amount of irrigated land allocated to higher-value horticultural crops and create higher shadow rents for production of lower-value, water-intensive field crops, such as sugarcane and fodder. Accordingly, liberalizing local water allocation in irrigation agriculture is found to work in favor of higher-value crops, and expand agricultural production and exports and farm employment. Allowing for water trade between irrigation and non-agricultural uses fueled by higher competition for water from industrial expansion and urbanization leads to greater water shadow prices for irrigation water with reduced income and employment benefits to rural households and higher gains for non-agricultural households. The analyses show difficult tradeoffs between general economic gains and higher water prices, making irrigation subsidies difficult to justify.

Strengthening African Governance: Ibrahim Index of African Governance, Results and Rankings 2008

Abstract: The Index of African Governance is a project to measure and assess the quality of governance across the forty-eight countries of sub-Saharan Africa. It focuses on performance in five areas: Safety and Security; the Rule of Law, Transparency, and Corruption; Participation and Human Rights; Sustainable Economic Opportunity; and Human Development. Using 57 indicators, the Index offers a report card on performance in each country. The 2008 edition of the Index assesses the years 2000, 2002, 2005, and 2006.Data are drawn from a variety of sources, including our own in-country research. The Index is updated annually and all data are back-updated to reflect the latest data available and to allow for comparisons over time.

The Clean Development Mechanism and Low Carbon Development: A Panel Data Analysis

Abstract: The Clean Development Mechanism (CDM) of Kyoto Protocol, designed for the industrialized countries to earn emission credits by investing in greenhouse gas (GHG) emission reduction projects in developing countries, shall contribute to emission reductions and sustainable development in the host countries. However, whether the CDM is achieving its dual goals has been questionable. This research empirically investigates the long-run impacts of CDM projects on CO₂ emission reductions for 80 eligible CDM host countries over 1993-2009. By allowing for considerable heterogeneity across countries, this research provides evidence in support of a decline in CO₂ emissions associated with CDM projects. It serves to encourage developing countries to effectively develop CDM projects towards low carbon development.

Small island states development challenges: introduction

Abstract: This Policy Arena examines some of the development challenges faced by SIDS. It brings together a collection of papers arising from the United Nations University World Institute for Development Economics Research (UNU-WIDER) project [Fragility and Development]. These investigations were presented at the UNU-WIDER project meeting held in Lautaka, Fiji in December 2006. The Policy Arena contains four studies that look, respectively, at various aspects of trade, foreign direct investment, aid and remittances, and migration, focusing on countries in the Pacific and the Caribbean. This introduction briefly describes the papers and distills some key messages for development policy. Copyright © 2008 John Wiley & Sons, Ltd.

Measuring Agricultural Policy Bias: General Equilibrium Analysis of Fifteen Developing Countries

Abstract: The measurement issue is the key issue in the literature on trade policy-induced agricultural price incentive bias. This paper introduces a general equilibrium effective rate of protection (GE-ERP) measure, which extends and generalizes earlier partial equilibrium nominal protection measures. For the 15 sample countries, the results indicate that the agricultural price incentive bias, which was generally perceived to exist during the 1980s, was largely eliminated during the 1990s. The results also demonstrate that general equilibrium effects and country-specific characteristics – including trade shares and intersectoral linkages – are crucial for determining the sign and magnitude of trade policy bias. The GE-ERP measure is therefore uniquely suited to capture the full impact of trade policies on agricultural price incentives. A Monte Carlo procedure confirms that the results are robust with respect to tradability assumptions.

Explaining the Poverty Difference between Inland and Coastal China: A Regression-based Decomposition Approach

Abstract: This study proposes a decomposition framework for quantifying contributions of the determinants of poverty to spatial differences or temporal changes in poverty. This framework is then applied to address the issue why poverty incidence is higher in inland than in coastal China. The empirical application requires household or individual income observations which, generally speaking, are not available. Thus, a data-generation method developed by Shorrocks and Wan is introduced to construct such observations from grouped income data. It is found that inland China is poorer than coastal China, mainly due to lower efficiency in resource utilization rather than less endowment of resources. Also, trade became poverty-reducing in coastal China in the late 1990s but remained poverty-inducing in inland China. Policy implications are briefly discussed.

Distributional Consequences of Globalisation: Empirical Evidence from Panel Data

Abstract: This paper investigates the impact of globalisation on cross-country inequality using a large panel dataset. The findings reveal that location and capital are the main determinants of inequality; trade intensity and foreign direct investment make only a small contribution (approximately 4%). The relative contributions of trade and foreign direct investment to inequality have changed little over time and have certainly not increased at the same rate as the rise in global trade and investment activity. Hence, globalisation does not emerge as a significant factor in driving cross-country inequality. Differences emerge when countries are grouped by relative income, but the main findings persist.

Higher Fuel and Food Prices: Impacts and Responses for Mozambique

Abstract: Rising world prices for fuel and food represent a negative terms-of-trade shock for Mozambique. The impacts of these price rises are analyzed using various approaches. Detailed price data show that the world price increases are being transmitted to domestic prices. Short-run net benefit ratio analysis indicates that urban households and households in the southern region are more vulnerable to food price increases. Rural households, particularly in the North and Center, often benefit from being in a net seller position. Longer-term analysis using a computable general equilibrium (CGE) model of Mozambique indicates that the fuel price shock dominates rising food prices from both macroeconomic and poverty perspectives. Again, negative impacts are larger in urban areas. The importance of agricultural production response in general and export response in particular is highlighted. Policy analysis reveals difficult trade-offs between short-run mitigation and long-run growth. Improved agricultural productivity has powerful positive impacts, but remains difficult to achieve and may not address the immediate impacts of higher prices.

Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005

Abstract: Using register-based panel data covering all Finnish firms in 1999-2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 10-50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.

Introduction to the Special Section: Poverty and Inequality in China

Abstract: Pre-reform China can be characterized as a country with equality of poverty—a largely egalitarian society with very low per capita GDP. In the late 1970s, hundreds of millions of people lived in absolute poverty. Economic reforms that began with the rural household production responsibility system in late 1978, and then spread into other sectors of the economy, have transformed China economically and socially. The annual growth rate has averaged 9% in the last quarter of a century. The 2005 per capita income is almost six times that of 1985. This unprecedented growth rate, coupled with government efforts in reducing poverty which first started in 1980, has led to remarkable poverty reduction, particularly in rural China.According to the World Bank, China lifted 422 million people out of poverty during 1981–2001. This large-scale poverty reduction in China owes a great deal to the rural production responsibility system, which is sometimes termed “second land reform”. Under this system, land was decollectivized and allocated to individual households on the basis of household size and household labor force. This ensured that early economic growth in China was pro-rural and inclusive. As a consequence, rural inequality declined and the urban–rural gap narrowed. Since the urban–rural gap comprises over 50% of China’s total inequality, income distribution in China must have improved significantly over that period. This, together with high economic growth, necessarily translated into large drops in poverty. As the impact of rural reform leveled off and the reform emphasis was shifted to urban China in the mid 1980s, overall inequality in China stopped declining and started to climb. Since then, little attention had been paid to equity concerns until very recently. In other words, subsequent reforms were primarily targeted at improving economic efficiency, which prompted resource flows to coastal provinces and non-farming sectors. This market-driven mechanism of factor allocation has undoubtedly contributed to the remarkable growth in China, particularly in the relatively affluent areas and urban China, leading to an enlarged urban–rural gap and a growing regional inequality. From this perspective, the rich have gained more than the poor from reforms in China. It is precisely this worsening distribution that has caused the recent slowdown in poverty reduction, even reversal, in China. At present, the Chinese government is confronted with the poverty–growth– inequality triangle. While equity may have to be sacrificed in order to initiate and maintain growth, future poverty reduction cannot be achieved without improved distribution. Conversely, tackling inequality and poverty in China requires more resources for the less efficient rural sector and perhaps less productive regions, which would

Wider impacts of microcredit: evidence from labor and human capital in urban Mexico

Abstract: This paper presents an estimation of the impacts of microcredit on labor and human capital following a quasi-experiment specifically designed to control for endogeneity and selection bias in the context of urban Mexico. We find important indirect trickle-down effects of credit through labor expenditure that benefit poor laborers; however, these effects were only observed when loan-supported enterprising households reached a level of income well above the poverty line. We also find significant, although small impacts of credit on children´s schooling that could be potentially reinforced by improvements in lending technology, school grants and additional ex-ante preventive and ex-post protective riskcoping products.

Entrepreneurship and Regional Economic Growth: Towards A General Theory of Start-Ups

Abstract: Start-ups of new firms are important for economic growth. However, start-up rates differ significantly between countries and within regions of the same country. A large empirical literature studies the reasons for this and attempts to identify the regional determinants of start-ups. In contrast, there is a much smaller theoretical literature that attempts the formal modelling of the start-up process within a region. In this paper, we attempt to contribute to this small literature by introducing a general theoretical model of the entrepreneurial start-up process. The model links start-ups to economic growth and can be applied to understand growth in a regional context. We derive five propositions that fit the stylized facts from the empirical literature: (i) growth in the regional economy is driven by an expansion in the number of start-up firms that supply intermediate goods and services; (ii) improvements in human capital will enhance the rate of start-ups; (iii) improvements in the relative rates of return to entrepreneurs and business conditions will raise start-up rates; (iv) an increase in regional financial concentration will reduce the start-up rate in a region and; (v) increased agglomeration/urbanization in a region has an a priori ambiguous effect on start-up rates.

Measuring Distortions to Agricultural Incentives in Mozambique

Abstract: First paragraph of Chapter: In recent decades, Mozambique has undergone enormous political and economic transformations. Once a colony of Portugal, the country moved to a phase of socialism after gaining independence in 1975, and then from 1986 the government initiated a program of economic reform aimed at establishing a market economy. Mozambique suffered from more than a decade of armed conflict, however, which together with other socioeconomic changes caused production to continue declining during much of the period to the end of civil war in 1992. Since then, a combination of peace, political stability, economic reform, and large aid flows has helped the country move from being the poorest nation in the world to achieving the highest growth rates in the region. Poverty rates have been significantly reduced and agricultural incomes have increased.

The Optimal Distance to Port for Exporting Firms

Abstract: Success in international trade depends, amongst other things, on distance from markets. Most new economic geography models focus on the distance between countries. In contrast much less theorizing and empirical analysis have focused on how distances within a country?for instance due to the location behaviour of exporting firms?matter to international trade. In this paper we contribute to the literature on the latter by offering a theoretical model to explain the optimal distance that an export-oriented firm would locate from a port. We present empirical evidence from South Africa in support of the model.

Democratic Transition and Democratic Survival in Benin

Abstract: Through its National Conference in 1990 and presidential and legislative elections in 1991, Benin successfully undertook a transition to democracy. Notwithstanding some electoral irregularities, this (minimal) democracy has survived since, witnessing three successful alternations of executive power. A 'deviant' case, Benin is not well explained by theories of democratization that highlight economic development and diffusion effects. In examining the Beninese case, this article focuses on the transition in three stages: the collapse of the incumbent government; the transition to democracy; and the survival (or 'consolidation') of minimal democracy thereafter. In explaining each of these stages, it argues that different factors were key: in the first, economic crisis exacerbated existing weaknesses in the incumbent government; in the second, external actors supported democratization, while diverse domestic groups contributed to a process that was not dominated by any single group; and in the third, domestic leadership and institutional incentives became particularly important. The article concludes by discussing democratic deepening in Benin.