c october-december 1996 k' i0 volume 7, number 4...

W O R L D B A N K P O L I C Y A N D R E S E A R C H

October-December 1996

k' NK I0 I CY AN Volume 7, Number 4

5 New Research

11 iPublications and Data

16 Order Form

Controlling pollution-A new approach 122110he environmental performance of factories in developing policy analysis has focused on regulation

(legal or market-based) as the control

countries varies enormously. Even in the poorest countries instrument and liability claims bysome plants would satisf~~r the best OECD emissions injured parties as the principal means of

some pla-nts would satisfy the best OECD emissions enforcement. The regulatory problem in

this traditional world is straightforward:

standards-and in industrial countries some plants fall well short of Having determined the optimal amount

of pollution with full information,those standards. regulators seek to attain it through

command and control-by mandating

Conventional thinking about controlling industrial pollu- factories not to pollute above a determined level-or

tion says that plants in countries with weak environmental through market-based instruments-by setting a price for

regulation are likely to treat the environment as a free input pollution or allowing factories to trade pollution permits.

and make no effort to control emissions, while plants in Prices and tradable permits can be effective under the

countries with stronger regulation are likely to comply with right conditions. But research and field experience show

regulatory standards. Since neither view is consistent with that conventional regulation pays too little attention to

the facts, a new approach is necessary. defining the right conditions.

World Bank experience in partnership with environmen-

tal agencies in six big developing countries-Brazil, China, First things first

India, Indonesia, Mexico, and the Philippines-sheds light In the six developing countries environmental agencies are

on this problem. It shows that the traditional assumptions plagued by problems with:

of optimal regulation theory-full information and no Information. Monitoring is often so poor that compliance is

transactions costs-are not met in practice. And regulators difficult to assess. When collected, data on factory emissions

are not the only source of pressure on plants to improve are often held by separate agencies with different responsibili-

environmental performance. Communities and markets also ties. Information on abatement costs is rarely available.

play important roles. Fortunately, the traditional theoretical Bureaucracy. Agencies responsible for monitoring air and

view has an alternative-one that links the plant, the state, water quality rarely talk with each other or with thosethe community, and the market. responsible for monitoring emissions.

Human and technical resources. Agencies generally have lit-

Traditional regulation tle capacity for assessing the benefits of alternative programs

The law and regulators traditionally set and enforce the rules and using the results to establish priorities for allocating

of environmental behavior. In keeping with this, traditional scarce resources. Few trained inspectors are available.

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Political support. Serious An alternative view of local communities, responding toenforcement often meets political explicit or implicit threats of social,

resistance. pollution control links the political, or physical sanctions if

Under these conditions it is they fail to reduce pollution. In

hard to implement pollution con- plant, the state, the countries as far apart as Brazil,

trol, including market-based mea- China, Indonesia, and the United

sures. It would be pointless- community, and the market States, much of the variation in fac-

indeed, counterproductive-to tories' environmental performance

advocate pollution charges or is explained by variation among

tradable permits under conditions that guarantee failure and communities in income, education, and bargaining power.

risk discrediting these potentially powerful regulatory tools.

Near-term policy problems are more pressing and should The market

be addressed first: Factories operate in local, national, and international mar-

* Identify a target group of serious polluters that environ- kets, where many agents can affect revenues and costs.

mental agencies can regulate effectively with existing Many of these agents take environmental considerations

resources. into account in making decisions. In both industrial and

* Mobilize political and community support for action. developing countries environmentalism is a big factor in

* Develop an integrated information system with good consumer decisions. Investors also scrutinize environmental

quality control. performance, weighing the potential for financial losses

* Establish ambient quality targets for air and watersheds from regulatory penalties and liability settlements. For simi-

and link them to pollution reduction measures that are lar reasons, international and local suppliers of financing,

applied to the target polluters. industrial equipment, and engineering services, too, pay* Use simple cost-effectiveness principles to reform licens- close attention to firms' environmental performance. Public

ing and inspection procedures. certification of good or bad performance can translate into* Develop capacity for setting priorities using integrated large expected gains or losses.

information systems.

* Carry out pilot experiments with new regulatory instru- A new view of regulationments (charges, permits, public disclosure). Once the community and the market are introduced, varia-

These steps will lay the foundation for more sophisticated tions in factory pollution are more easily explained. Clean

pollution control strategies. factories are possible in poor countries, and polluting plants

in rich countries. Under this new view of regulation the tra-

A broader vision ditional model-in which the state and the factory are the

The traditional view of regulation is misguided because its sole players-is replaced by a regulatory triangle (figure 1).

focus is too narrow. Conventional policy has focused almost In this world of multiple agents and multiple incentives,

solely on the state and the plant. But there are potentially it is necessary to rethink the regulator's role, which no

powerful roles for the community and the market. longer needs to be confined to producing, monitoring, and

enforcing rules and standards. Instead, regulators can use

The community nontraditional programs that harness the power of commu-Evidence from Asia, Latin America, and North America nities and markets. But what does this new view of regula-

suggests that neighboring communities can have a powerful tion mean in practice? Let's look at experience in China and

influence on plant emission levels. Communities that are Indonesia.

richer, better educated, and more organized find ways to

enforce environmental norms. The agents of informal regu- China's charge

lation vary from country to country-religious groups, China's Environmental Protection Law says that "in cases

social organizations, community leaders, and politicians. where the discharge of pollutants exceeds the limit set by

But the pattern is similar: Factories negotiate directly with the state, a compensation fee shall be charged, according to

2 World Bank Policy and Research Bulletin October-December 1996

the quantities and concentration Communities that are richer, ernment sets the official levy at a

of the pollutants released." reference level and allows officials in

Roughly 300,000 factories are better educated, and more each province to trade off costs and

monitored and potentially subject benefits in effective implementa-

to the levy. organizedfind ways to enforce tion. The implications are clear:

Case studies have suggested Uniform implementation of uni-that the system is poorly adminis- environmental norms form standards or levy rates is not

tered and that enforcement is optimal. Local conditions deter-

largely arbitrary and ineffective. mine what these should be.

But the results of econometric analysis are more positive.

The analysis sought to explain variations in two province- Indonesia andpublic disclosure

level measures-industrial emissions of biological oxygen Manufacturing in Indonesia is growing at more than

demand (a common measure of organic water pollution) 10 percent a year, and though formal regulation is weak,

and the effective water pollution levy rate (the ratio of the government recognizes the risk of severe pollution.

provincial levy collections for wastewater discharge above Indonesia's National Pollution Control Agency decided to

standard to total provincial wastewater discharge above initiate a program for rating and disclosing the environmen-

standard). tal performance of factories. It hopes that this will provide a

Although the national government sets an official levy low-cost substitute for formal regulations and create incen-

rate that applies uniformly across China, the effective levy tives for cleaner technologies.

rate varies significantly across provinces, reflecting differ- The agency gives a blue rating to factories that comply

ences in monitoring and enforcement. The variation is not with national regulatory standards. Gold is reserved for

random: effective levies are much higher in urbanized and world-class performers, and black for factories that have

industrialized provinces. Differences in enforcement and made no attempt to control pollution and are causing seri-

large increases in the official levy have also led to a varied ous damage. Intermediate ratings are red, for factories that

pattern of pollution intensities across provinces and over have some pollution control but fall short of compliance,

time. Between 1987 and 1993 provincial levels of biological and green, for factories whose procedures significantly

oxygen demand fell at a median rate of 50 percent, and exceed those needed for compliance.

total discharges at a median rate of 22 percent. The results How could such a system have an impact on pollution?

suggest that China's water pollution levy has been neither Informal regulation, or community influence on polluters'

arbitrarily administered nor ineffective. behavior, is widespread, but information problems may dis-

Two local factors largely explain variations in the effec- tort public perceptions of the problem. It is often easy to see

tive levy. The first, local valuation of pollution damage, has or smell organic water pollution or sulphur oxide air pollu-

three components-total pollution load, size of exposed tion. But metals and other toxins are likely to go unnoticed.

population, and local income. The second is community Even where pollutants are visible, communities often can-

capacity to understand and act on local environmental not gauge the long-run impact. And communities down-

problems. Lacking adequate information for determining stream from polluting plants may have difficulty identifying

optimal pollution levels in each province, the national gov- the culprits. Armed with government-certified performance

F I G U R E 1 ratings, communities are in a stronger position to negotiateThe new model-Multiple agents, multiple incentives pollution control agreements with neighboring factories.

Indonesia's program also provides a novel application of

The state incentive regulation. Regulators need reliable data about aThe law firm's performance but firms have incentives to withhold

Regulators pefrac,Regulators such information. Like traditional regulation, Indonesia's

The market The communty program penalizes noncompliance. But it also rewards supe-

Consumers The facr Politicians rior performance with green and gold ratings. The hope isInvestors Social organizations that firms will condude that the value of this status will

October-December 1996 World Bank Policy and Research Bulletin 3

more than offset the costs of Much local variation in ations between communities andcleaner production. factories by supplying reliable infor-

In the pilot phase Indonesia's regulation is legitimate mation on emissions and local envi-program rated 187 plants but ronmental conditions, providingpublicized the names of only five technical advice, and transferringgreen plants when it was officially launched in June 1995. experience from other locations. Third, central regulatorsThe 121 plants rated red or black were privately notified can level the playing field for communities facing severeand given until December 1995 to cut back on pollution. pollution problems because of lack of education, organiza-Before full disclosure on December 29 half the black plants tion, and bargaining power.and many red plants had upgraded their status. * Structured learning. Environmental policy reform is com-

plex and subject to uncertainties. So reforms should empha-7ha new approach size structured learning. Rather than precommitting toAlthough the state can (and should) have a role in regulat- broadly based programs, environmental agencies shoulding pollution, the importance of the community and launch pilot projects and build larger programs as lessonsthe market must be recognized. The environmental are learned.performance of factories is determined by the interactions * Adaptation. Newly industrializing economies can seeof multiple agents, with multiple incentives. Regulators rapid changes in the quality of air and watersheds.should be relegated to their proper place. Five features Regulators should counter environmental degradation byare key for effective pollution regulation in developing tightening existing regulations. At the same time the systemcountries: should minimize disruption for investors. Meeting both

l information intensity. Effective pollution management by objectives implies transparent adjustment rules, linked tothe state is impossible unless regulators have reliable data, publicly available data.integrated information systems, and the capacity to set pri-orities that reflect comparative benefits and costs. Markets The futureand communities need timely and accurate information to The conventional policy discussion on pollution is too shal-assess the environmental performance of factories. low and too narrow-too shallow because it ignores the* Information leveraging. Activities by environmental agen- preconditions for applying any instrument effectively, andcies that influence polluters indirectly may be as important too narrow because it focuses on the interaction betweenas direct enforcement. These activities include educating state and factory as the sole determinant of environmentalcommunities about the environment; publicly disclosing fac- performance.tory ratings; promoting voluntary, public agreements for pol- There is a less heroic approach-a broader model thatlution reduction by industries in environmentally degraded includes the community and the market in determiningregions; and training environmental personnel in polluting the environmental performance of factories, along with thefactories. five key principles of information intensity, information* Community control. Regardless of formal regulation, local leveraging, community control, structured learning, andinformal regulation is stronger in areas with higher pollu- adaptation.tion, bigger populations, and higher incomes. From thisthere are three implications. First, strengthening central Drawn from Shakeb Afsah, Benoit Laplante, and Davidregulatory agencies should not empower them to impose Wheeler "Controlling Industrial Pollution: A New Paradigm,"uniform standards. Much local variation in regulation is Policy Research Working Paper 1672, World Bank, Policylegitimate. Second, regulatory agencies can facilitate negoti- Research Department, Washington, DC, 1996


tion depends on the sex of the The models will feature two mainNew Research participant. actors: parents (or their representa-The study will then look at the tives), who choose the levels and allo-

The research projects described here effects of participation on consump- cation of spending, and the educators.

are directed by World Bank staff and tion smoothing. In rural Bangladesh, The models will involve different

funded by the Banks central Research where employment is primarily in assumptions about the valuation of

Support Budget (RSB). Research agriculture and highly seasonal, the school outputs-whether parents care

proposals being prepared with RSB ability to smooth consumption across only about test scores or whether they

funding are listed on page 11. For seasons is critical. The study will assess value other, nonacademic features of

information about the research whether program participation affects schools-and about the parents'

projects described here, contact the the seasonality of consumption and knowledge of the "true" production

researchers at the Banks main address labor supply by enabling participants function-whether it is perfect,

(see back page). to start new, countercyclical self- uninformed, or relies on information

employment activities. provided by the (probably self-inter-

R E S E A R C H S T A R T S RSB support: $38,900 ested) educators. The study will test the

Staff weeks: 3 models by exploring hypotheses that

Impact of Targeted Credit they generate through empirical work

Programs on Consumption Understanding the Rationale for on the effects of expenditures on educa-

Smoothing and Nutrition Education Reform: Parents as tion outcomes.in Bangladesh Principals and Teachers as Agents RSB support: $37,100Shahid Khandker Lant Pritchett Staff weeks: 5

Poverty and Social Policy Department Policy Research Department, Poverty

Ref no. 681-09 and Human Resources Division Welfare Impacts of AlternativeOn the premise that women have less Ref. no. 681-12 Ways of Providinig Rural

access to credit and employment and Much research on education spending Infrastructure

less power in the household than men, has focused on the relationship Dominique van de Walle and Frannie

group-based credit programs targeting between inputs (books, teacher Humplick

the poor in developing countries often training) and outputs (student Policy Research Department, Public

serve primarily women. But does the achievement), treating the allocation of Economics Division, and South Asia,

sex of program participants really mat- expenditures as exogenous or under the Country Department I, Infrastructure

ter for household outcomes? Using direct control of policymakers. Many Division

survey data for 1991-92, this study of the current reforms in education, Ref no. 681-13

will address that issue, looking at the meanwhile, focus not on spending lev- Although the provision of roads is

effects of participation in three such els or allocations, but on the process for widely believed to be key to raising

credit programs in rural Bangladesh in spending decisions-changing incen- living standards in poor rural areas,

two areas critical to the well-being of tives through decentralization and there is little hard evidence to supportpoor households. increased parental involvement. that contention. Measuring the bene-

It will look first at the effect of pro- To help in predicting the effects of fits from infrastructure involves many

gram participation on children's nutri- reforms that change incentives, this complexities, and analyses have tended

tional status, based on measures of study will develop five theoretical to focus on indicators that give no

height, weight, and arm circumference models of the allocation of public edu- direct evidence on the effects on living

and dietary intake. In addition, the cation expenditures. It will treat the standards-such as kilometers of road

study will determine whether partici- current allocation as the result of an built, traffic or freight levels, or agri-

pation affects the distribution of endogenous process-the interaction cultural production. In addition, past

resources between sons and daughters, between parents and educators, medi- work has neglected the effect of the

and whether the size of any redistribu- ated by some political mechanism. way in which infrastructure is pro-


vided. Yet such factors as the degree This project will undertake such the importance of replacing govern-

of competition, participation, and trials in collaboration with a non- ment political appointees with a pro-

decentralization in the planning and governmental organization working in fessional bureaucracy in order to

execution of road works can have an Kenya, examining three education create an institutional environment in

important bearing on the benefits. policies over the next four years. In the which private enterprises can flourish.

This research will lay the ground- first year 25 randomly selected pri- This study will investigate, theoreti-

work for measuring the effects of rural mary schools will receive textbooks. In cally and empirically, whether two fea-

roads on living standards in Vietnam, the second year school committees at a tures of a professional bureaucracy-

taking into account the organizational second group of 25 schools will meritocratic recruitment and

and institutional arrangements used in receive a grant to spend on a menu of career-building opportunities-

providing the roads. The focus will be options, including desks, textbooks, restrain the corrupt tendencies of gov-

a large-scale World Bank-financed and classroom repair; this will allow ernment bureaucracy and improve its

rural roads project aimed at reducing examination of decentralized decision- performance.

poverty. The institutional arrangements making. In the third year another Through surveys of at least three

are being determined locally and com- group of 25 schools will receive grants, experts for each of a sample of 35

bine some degree of participation, but with an added incentive to developing countries, the study will

decentralization, and competition. improve education performance: those collect information on the extent of

The study will conduct a baseline that raise test scores the most will meritocratic recruitment and career-

survey of initial conditions in areas receive part of their grant for un- building opportunities in core eco-

where the benefits are to be assessed restricted use. nomic agencies. It will test hypotheses

and in control areas. It will develop a The project will measure the effect about how these features are linked to

theoretical framework and index for of each policy on test scores, grade bureaucratic performance, relating the

use in summarizing project design fea- repetition, attendance, years of school- survey data to measures of perfor-

tures, and a conceptual and empirical ing attained, and long-run socioeco- mance in terms of corruption, auton-

model for estimating the effects of nomic outcomes by comparing these omy, bureaucratic delay and red tape,

infrastructure investments on living outcomes with those for a control and ability to formulate and imple-

standards, allowing for project design. group of 25 randomly selected ment policy. The study will also

RSB support: $40,000 schools. By comparing the results of explore possible links between bureau-

Staff weeks: 20 these randomized trials with those cratic structure and both bureaucratic

obtained using standard econometric performance and economic growth.Improving Primary Education techniques, the study will also shed RSB support: $37, 317

in Kenya: A Randomized Evaluation light on the size of the statistical prob- Staff weeks: S

of Different Policy Options lem inherent in using those techniques.

Paul Glewwe RSB support: $469,910 The Cultural FoundationsPolicy Research Department, Poverty Staff weeks: 40 of Economic Reformand Human Resources Division Randi Ryterman

Ref no. 681-14 Bureaucratic Structures Policy Research Department, Finance

Many econometric studies have tried and Economic Performance and Private Sector Development

to estimate the effect of education in Developing Countries Division

policies on school performance. But Philip Keefer Ref no. 681-18

even the most sophisticated econo- Policy Research Department, Finance A central tenet of neoclassical eco-

metric techniques may yield biased and Private Sector Development nomics is that human initiative arises

estimates if schools with differences in Division from the incentives embodied in freeinputs also differ in other, unobserved Ref no. 681-16 markets. But other branches of eco-

ways. Randomized trials can overcome Recent work on the sociology of economics-and branches of other social

this problem. nomic development has emphasized sciences-suggest that human initia-

6 Wzorld Bank Policy and Research Bulletin October-December 1996

tive cannot be explained by economic productivity in that country. These income among households and toincentive alone. As Adam Smith studies warn that if the research efforts increasing poverty, how have house-clearly perceived, economic life is are not sustained, China could be holds coped and how successful havedeeply embedded in social life and importing huge amounts of grain by they been? Poland provides an espe-cannot be understood apart from the 2030. cially interesting case for investigatingcustoms, morals, and habits of the The latest data suggest, in fact, these questions. Households in thatsociety. In short, it cannot be divorced that in real terms investment in country have been exposed to the fullfrom culture. agricultural research in China has range of economic effects from

One area in which culture might slowed. But the aggregate figures reform-from declining output dur-play an important role is in the way a conceal growth in some research areas ing stabilization and liberalization tosociety adapts to economic reform. and in some provinces. And while rapid but unevenly distributed growthAttitudes toward political, economic, government funding may have during recovery.and judicial institutions are deeply declined, funding from development Using data from Poland's annualrooted in historical experience and income-income that research household budget survey forare often slow to change. When institutes earn through sales of tech- 1989-95, this study will look at howattitudes do not support reform and nology, goods, and services and the household welfare changed during thethe new institutions it brings, the leasing of land and buildings-has recession and recovery phases of thesustainability of the reform comes increased. transition. Although the study willinto question. What would induce the Chinese analyze year-to-year changes in

This research will examine the government to invest more in agricul- income, it will pay special attention toeffect of culture on the progress of tural research? And what would lead changes in real per capita consump-economic reform in Russia by investi- to increased development income, tion as the preferred measure of wel-gating the role of managers' and which the government plans to rely fare. And it will distinguish betweenbureaucrats' attitudes in adjustment to on more in funding research? To help transitory and persistent declines inthe market and to a rule of law. The answer these questions, this study welfare-a critical distinction foranalysis will draw on data collected in will develop and estimate two models: policy.a European Union survey of 400 man- a political economy model of govern- The study will also investigate howagers and 100 bureaucrats and in a ment funding of provincial agricul- different households respond toWorld Bank survey of 60 managers tural research and a model to explain income shocks and try to identifiand legal experts in 15 Russian firms. research institutes' development which household "capacities" explainThe data come from six geographically income by province and by commod- the ability of some to avoid falling fur-dispersed regions with varied historical ity group. Based on the findings, ther into poverty. It will test theand cultural legacies. the study will suggest policy alterna- assumption that households differ inRSB support: $35, 000 tives that could encourage increased their response to reforms mainly

funding of agricultural research in because of differences in their humanPotential Sources of Growth China. and physical assets.in Funding for Chinese RSB support: $30,000 RSB support: $29,400Agricultural Research Staff weeks: 2

Rapeepun Jaisaard Household Welfare Change duringEast Asia and the Pacific, Country the Transition in Poland Ownership, Labor Strategies,Department II, Rural and Social EmmanuelJimenez and Firm Performance in ChinaDevelopment Division Policy Research Department, Poverty Shyam KhemaniRef no. 681-19 and Human Resources Division Private Sector Development DepartmentSeveral recent studies have shown that Ref no. 681-21 Ref no. 681-22agricultural research in China plays a As the transition in Eastern Europe Many governments are transformingcritical role in growth in agricultural has led to a widening distribution of the ownership structure of enter-


prises-through corporatization, External Asset-Liability Investment Performance

transfer to employee ownership, or Management in Developing in the Corporate Sector

sale to foreign investors. One impor- Countries Jack Glen

tant consequence of these changes Stijn Claessens, Jerome Kreuser, International Finance Corporation,

for firms is greater flexibility in labor and Lester Seigel Economics Department

decisions-to set wages, create and East Asia and the Pacific, Office Ref no. 681-25

eliminate jobs, and reallocate of the Vice President, Information Private investment is widely believed

workers. and Technology Services Department, to be a powerful source of economic

How strongly is ownership struc- Information Engineering Unit, growth because private investors'

ture linked to such flexibility? Does and Financial Operations Department, practice of seeking out the highest

greater flexibility automatically lead Office of the Director returns results in optimal use of the

to job destruction, or does it lead in Ref no. 681-23 physical assets in which they invest.

the long term to job creation? Is flexi- Risk management has become increas- But how optimal are private invest-

bility in labor allocation linked to ingly important for developing coun- ment decisions in the conditions that

firm performance? And do high- tries exposed to market risk. But prevail in many developing countries,

performing and low-performing firms despite the growing array of tools for where domestic competition may be

utilize labor flexibility in different hedging risk, developing countries limited by entry barriers and import

ways? generally are not putting these tools protection?

This study will investigate these to use. One reason may be the lack of This research will investigate that

questions through a case study of adequate strategic planning: typical question by examining the investment

China. Two main characteristics make approaches to asset-liability manage- activities of a set of private corpora-

this country a good choice for deter- ment exclude such country-specific tions in 12 developing countries.

mining the effect of ownership struc- factors as trade flows, and thus result Using a corporate finance database

ture on firms' labor policies and in strategies that are unrelated to a compiled by the International Finance

performance: the three main types of country's earning potential and neglect Corporation, the study will compare

enterprise ownership-state, collec- the natural hedges in the import- the efficiency with which these corpo-

tive, and foreign-are associated with export sector. rations use their physical and financial

varying degrees of state control, and This study will produce a frame- assets with the efficiency of asset use

state control of firms has changed over work for developing country-specific by corporations in other countries,

time. Although labor flexibility can be strategies for asset-liability manage- both industrial and developing. This

defined in many ways, the study will ment, building on work in risk man- analysis will look at the amount of

focus on how quickly enterprises can agement, financial engineering, capital of different types that the cor-

adjust employment in response to stochastic optimization, modeling sys- porations employ, the operating mar-

demand shocks. tems, and determination of optimal gins produced by their physical and

Using econometric analysis and currency composition. It will develop financial assets, and the asset-capital

panel data on a large number of a computer model incorporating trade ratio.

Chinese firms, the study will estimate flows and fiscal revenues and expendi- The research should throw light

a flexibility parameter and correlate it tures and estimates of the sensitivity of not only on the efficiency of invest-

with types of ownership. On the basis these variables to commodity prices, ment in the 12 countries, but also on

of this parameter, it will then separate interest rates, and exchange rates. And the competition facing firms in those

each set of enterprises (grouped by it will study the application of the countries and on how competition

type of owniership) into three samples model to a few developing countries changes over time as a result of

and compare profitability and growth that are particularly vulnerable to changes in the environment in which

in each sample. market risk. firms operate.

RSB support: $38,080 RSB support: $140,834 RSB support: $35, 000

Staff weeks: 1 Staff weeks: 36 Staff weeks: 6


Effectiveness of World Bank Exchange Rate Policy and Explaining Gender DisparityNonlending Services Medium-Term Adjustment and in South Asia: A Cross-SectionalKlaus Deininger and Lyn Squire Growth in SouLth Africa ApproachPolicy Research Department, Office YvonneM. Tsikata Lant Pritchett and Elizabeth Kingof the Director Southern Africa Department, Macro, Policy Research Department, PovertyRef no. 681-26 Industry, and Finance Division and Human Resources DivisionThe policy, institutional, and public Ref no. 681-28 Ref no. 681-29expenditure framework within which South Africa's economic situation pre- Social and economic indicators showdonors provide assistance to develop- sents difficult choices for policymak- that women fare worse relative toing countries has received increasing ers. Exchange rate policy, for example, men in South Asia-particularly theattention in recent years as an impor- must balance short-run monetary con- northern crescent of Bangladesh,tant factor in the success of projects. cerns-containing inflation and Pakistan, and northern India-thanBecause of this perceived importance, ensuring the rand's stability in the face in most other parts of the world.donors and governments often agree of variable capital flows-with longer- To address such gender disparity,on reforms to this framework. But term economic objectives-reducing governments need to know howthese reforms are not always carried unemployment and increasing export extensive it is and what its patternsout or sustained. competitiveness, goals that argue for a and correlates are.

How effective are the Bank's non- real depreciation. Exchange rate policy This study will examine gender dis-lending services-its economic and will also be critical in any strategy for parity in South Asia using a data setsector work and policy advice-in shifting away from the economy's constructed from several sources. Itprompting reform in its client coun- reliance on gold. will compare indicators of gender dis-tries? This study will look at how This study will analyze South parity for South Asia-in health, edu-often and how fully governments have Africa's exchange rate policy over the cation, economic status, and suchimplemented key recommendations past three decades and develop theory- areas as political representation-withby the Bank on government policies, based empirical models for the real indicators in countries at a similarthe institutional framework, and the equilibrium exchange rate reflecting the level of development. It will also com-allocation of public spending and economy's structural characteristics and pare indicators across regions withinidentify factors associated with posi- policy regimes: a basic model, a model countries in South Asia. And it willtive outcomes. The study will focus on extended to treat disaggregated capital identify socioeconomic correlates ofreforms relating to overall government flows, and an optimum savings model. differences in gender disparity acrossrevenue and expenditure and to the Using quarterly data for the past three countries and across regions withineducation and agriculture sectors in a decades, the study will then estimate those countries.sample of 30 to 40 countries for the these models for different scenarios The study will also identifyperiod 1970-90. based on policy targets and forecasts, hypotheses from different social

In assessing what works best in and draw out the policy implications. science disciplines about the determi-inducing reform, the study will look at How exchange rate policy evolves nants of gender disparity, determininghow tightly linked policy advice and in South Africa will not only be key to which can be tested using availablelending are-whether policy actions are medium-term adjustment and growth data and which require further investi-a precondition for further lending in in that country. It will also have gation. Possible determinants to bethe sector, for example-and whether important effects on the economy of examined include the relative economicthere is a systematic link between the the southern African region, with value of female labor, the relative valuetype of lending instrument and the which South Africa is becoming of children, and cultural beliefs andeffectiveness of nonlending services. increasingly integrated. practices.RSB support: $39,000 RSB support: $40,000 RSB support: $38,600Staff weeks: 14 Staff weeks: 14 Staff weeks: 11

October-Decembei- 1996 World Bank Policy and Research Bulletin 9

An Evaluation of Cane Payment crisis, such as high and accelerating Trade Reform, Incentives on the

Systems in Selected Sugar inflation, seems to increase the Ground, and Firm PerformanceIndustries probability that a country will under- John Nash

Donald Mitc/sell and Donald Larson take successful reform leading to International Economics Department,

International Economics Department, increased growth. And second, International Trade Division

Commodity Policy and Analysis Unit although economic reasoning would Ref no. 681-33

Ref no. 681-30 suggest that aid also should increase To give sound policy advice to govern-

At the core of the incentive system for the likelihood of successful reform ments, the World Bank needs to know

sugar cane producers is the cane pay- because it could be expected to ease the outcome of policy reforms it has

ment system. By influencing farmers' the adjustment process, it does not recommended in the past. But the

choices of cane varieties and of pro- always have this effect, even with outcome is not always apparent. For

duction and harvesting methods, the well-meaning policymakers. The example, there is much uncertainty

payment system helps determine the study will develop political economy about the effects of the trade reforms

level of recoverable sugar in cane and models to explain these relationships implemented by many African govern-

therefore the efficiency of the mills. and draw on the Bank's extensive ments. Have the reforms led to the

Some payment systems pay by the experience with reform to undertake intended changes in incentives for

ton, encouraging a focus on yield. rigorous empirical testing of the firms, or have they been offset by

Others pay according to sugar con- models. other policy changes or neutralized by

tent, leading to a focus on quality. In analyzing the link between a failure to make complementary

And some give the producer an inter- crisis and reform, the study will reforms? Available data at the macro-

est in the final product, providing an look at the role of uncertainty about economic level will not reveal the

incentive to ensure high quality in the the permanence of the economic answer; what is needed is a close

delivered cane, which deteriorates deterioration and the need to retain examination of the issue at the firm

rapidly after harvest. political support in the face of level.

What type of payment system leads multiple interest groups with different Using 1991-93 survey data on

to the greatest efficiency? This study agendas. And it will investigate 200 manufacturing firms, this study

will address that question through case whether crisis helps lead to reform will assess the effect of Ghana's trade

studies of 12 sugar cane industries, in because it acts as a cleansing mecha- policy reforms in the 1980s and 1990s

both industrial and developing coun- nism, removing economic and by evaluating the extent to which

tries, representing the main types of political distortions standing in they have led to effective changes in

ownership structures. It will compare the way. the incentive structure facing firms,

the effectiveness of payment systems In examining the link between aid as reflected in the effective rate of

in raising the quality of cane and the and reform, the study will attempt to protection. The study will also analyze

level of recoverable sugar, focusing on identify the circumstances under the relationship between changes in

systems that work well for smallholders. which foreign aid will make reform incentives and broad indicators of

RSB support: $39,500 more likely when the political nature economic performance during the

Staff weeks: 5 of economic decisionmaking is explic- reform period at the sector and firm

itly taken into account. It will look at levels. The results of this analysisPnliticai Economy of Aid, Crises, the role of conflicts between interest should show whether resources have

andd eform groups over the distribution of the flowed across sectors as would be

David Dollar benefits of aid and the role of conflicts predicted by changes in the relative

Policy Research Department, of interest between aid donors and protection offered to firms in these

lMacroeconomics and Growth Division recipients. sectors.

Ref no. 681-31 RSB support: $39,500 RSB support: $33,500

This study will explore two puzzles Staff weeks: 30 Staff weeks: 33

relating to reform. First, economic


State Action and Private Sector R E S E A R C H P R O P O S A L S

Development UN DER PREP ARA T IO N Publicatio nsBrian Levy

World Development Report Office Land Quality Indicators Program a nd DataRef no. 681-34 Christian PieriThis study will "harvest" ideas from Agriculture and Natural Resources For information on how to order thethe new institutional economics to Department, Agriculture and Forestry World Bank publications reviewed inexplore the effect of state actions in Systems Division this issue, seepage 16.fostering "workable rules of the game" Ref no. 681-02for private sector development. Its aim RSB support: $27, 000 B 0 0 K S

is to identify what is needed to put inplace (and what inhibits) policies con- Pilot Study of Congestion Pricing The Informal Sector andducive to private sector development in Ho Chi Minh City, Vietnam Microfinance Institutionsin different settings. Slobodan Mitric in West Africa

The study will focus on five main Transportation, Water, and Urban Leila Webster and Peter Fidlerareas of state action that influence the Development Department, Transport A Regional and Sectoral Studybusiness environment: macroeco- Division This book examines the informal sec-nomic management, regulatory behav- Ref no. 681-07 tor in West Africa, providing evidenceior, the resolution of private-private RSB support: $9,000 that the problems it faces are not fun-disputes and enforcement of out- damentally different from those facedcomes, mechanisms for resolving pub- Pollujtion Control Data: lianjin, by the sector in other regions. Itlic-private disputes and other restraints China includes preappraisals of nine supporton legislative or executive action, and Susmita Dasgupta and Benoit Laplante schemes for microfinance institutions(efficient) operation of public agencies Policy Research Department, and case studies for 12 countries inthat deal with the private sector. Environment, Infrastructure, and the region.

From empirical and theoretical Agriculture Divisionresearch identifying key determinants Ref no. 681-15 Decentralization of Education:of state action in these five areas, two RSB support: $20,000 Community Financingsets of hypotheses about state action Mark Braycan be organized. The first focuses on Regulatory Performance across Directions in Development Seriesthe role of public economic agencies Indian States This study discusses ways in which(central banks, the judiciary, regula- Sheoli Pargal and Mainul Huq community financing can support for-tory agencies, and the like) in shaping Policy Research Department, mal and primary education in thethe business environment, and the Environment, Infrastructure, and wake of decentralization. It considerssecond on the effect on economic Agriculture Division not only monetary financing, but alsooutcomes of core political and social Ref no. 681-32 community contributions of land,institutions (such as constitutional RSB support: $14,000 labor, materials, and expertise. Afterstructures, the alignment of political examining the volume, nature, andinterests, and political processes). The mechanics of community financing instudy will explore the existing hypothe- a range of settings, the report discussesses and develop new ones, focusing on policy issues facing governments,direct links between state actions affect- strategies pursued in different coun-ing private sector development and the tries, and the importance of monitor-institutional context of these actions. ing and evaluation. It also presentsRSB support: $38, 000 case studies and examples of bestStaff weeks: 8 practice.


J O U R N A L S income that incorporates improve- Industrial Centralizationments in quality and significantly in Indonesia

The articles summarized below expanded coverage. Based on this J Vernon Henderson andAri Kuncoroappear in the September issue of the new data set, the authors find no sys- This article explores the effects of eco-World Bank Economic Review, tematic link between growth and nomic liberalization and historicalvol. 10, no. 3. changes in aggregate inequality, but do patterns of location on the spatial

find a strong positive relationship concentration of manufacturing byWhy and When Do Governments between growth and reduction of specifying and estimating a nestedInitiate Public Enterprise Reform? poverty. logit model of industrial location inJose Edgardo Campos and Hadi Salehi Java. The results show that plants pre-Esfahani Patterns of Transition from Plan fer locations with mature plants inThis article argues that the decision to to Market related industries. The 1983 liberaliza-initiate public enterprise reform Martha de Melo, Cevdet Denizer, tion in Indonesia was associated withdepends fundamentally on the poten- andAlan Gelb increased centralization of unincorpo-tial efficiency gains from the reform Using data from 26 transition rated firms, to take advantage of betterand its associated transactions costs. economies for 1989-94, this article access to government and other cen-Costs arise because of asymmetries in develops an index of economic liberal- tralized services.information and opportunism, prob- ization and analyzes its interactionlems that usually plague contract with growth and inflation. It reveals Guidelines on Searching for anegotiations. The article constructs a two paradoxes of transition: Dalton-improving Tax Reform:simple probit decisionmaking model Attempting to maintain output by An Illustration with Dataand tests it using data from 15 devel- subsidizing enterprises results in larger from Indonesiaoping countries. declines in output than reducing sub- Shlomo Yitzhaki andJeffrey D. Lewis

sidies. And liberalizing prices results in This article documents the search forRoads, Land Use, and lower inflation than maintaining price a Dalton-improving tax and expendi-Deforestation: A Spatial Model controls. Strong common patterns ture reform. It uses a method thatApplied to Belize exist among countries at similar stages overcomes the need to define a specificKenneth M. Chomitz and David A. of reform. social welfare function by searchingGray instead for reforms that improve eachRural roads promote economic devel- Hungary's Bankruptcy Experience, social welfare function in a wideopment, but also facilitate deforesta- 1992-93 class of functions. The authorstion. To explore this tradeoff, this arti- Cheryl W Gray, Sabine Schlorke, and apply the method to the energy sectorcle develops a spatially explicit model Miklos Szanyi of Indonesia, with specificationsof land use and estimates probabilities This article provides a detailed picture ignoring and including distributionalof alternative land uses as a function of Hungary's experience with bank- constraints.of land characteristics and distance to ruptcy reform in the first two years.market using a multinomial logit spec- The bankruptcy process has spurred D I S C U S S I 0 N

ification. The model is applied to data institution building in the courts, T E C H N I C A L , A N D

for southern Belize using geographic trustee profession, and banks and may R E L A T E D P A P E R S

information system techniques. also have separated viable from un-viable firms. But it did little to further Saving across the World:

A New Data Set Measuring Income deep restructuring or the exit of ailing Puzzles and PoliciesInequality firms. Klaus Schmidt-Hebbel and Luis ServenKlaus Deininger and Lyn Squire Discussion Paper 354This article presents a new data set on Promoting a healthy savings rate isinequality in the distribution of high on the World Bank's agenda for


promoting national income growth. State, Community, and Local Why Have Some Indian States Done

This study surveys broad savings Development in Nigeria Better Than Others at Reducing Rural

trends worldwide, summarizes current Paul Francis and others Poverty?

knowledge about saving and con- Technical Paper 336 Gaurav Datt and Martin Ravallion

sumption, identifies the main This paper presents the results of con- WV7PS 1594 Contact Patricia Sader,

unresolved issues, and outlines the sultative surveys undertaken in 36 room N8-040, tel. 202-473-3902.

major policy questions to be rural and urban communities across In Search of Owners: Lessons

researched. The paper includes case Nigeria. The study examines the effec-studies from China, Colombia, India, tiveness and accountability of local an Cop er nance i n

Mexico, Pakistan, and Sub-Saharan institutions in local decisionmaking Transitonr Eoomies

Africa. and participation. It also looks at some

common limitations, such as the nar- Cheryl W Gray

From Universal Food Subsidies to rowness of membership and goals and V/S 1595 * Contact Michael Geller,

a Self-Targeted Program: A Case limited technical and managerial room N7-078, tel. 202-473-1393.

Study in Tunisian Reform capacities. Agrarian Structure in Poland:

Laura Tuck and Kathy LindertLaura Thck and Kathy Lindert The Myth of Large-Farm SuperiorityDiscussion Paper 351 PO LI CY RES EAR CH

. ., . ~~~~~~~~~~~~~Johan van Zyl, Bill R. Miller, andThis paper outlines Tunisias innova- W 0 R K I N G PAPERS Andrew Parker

tive strategy of reducing the budgetary

costs of food subsidies in a manner Working Papers disseminate the find- S81596 tac Melisa8 illams. . , ] . J ~~~~~~~~~~~~room S8-222, tel. 202-458-7297.

that is politically acceptable and that ings of work in progress and encour-

protects the nutritional status of the age the exchange of ideas among Egypt and the Uruguay Round

poor. The government adopted self- Bank staff and all others interested in Bernard Hoekman and Arvind

targeted programs, shifting subsidies development issues. Subramanian

to items consumed primarily by low- Working Papers are not available WIPS 1597 * Contact Faten Hatab,

income groups and liberalizing the through the Publications Sales Unit. room H8-087, tel. 202-473-5835.

prices of unsubsidized, higher-quality Please address requests for papers to Logistical Constraints on

items that appeal to higher-income the contact indicated at the Bank' Intetal tramts ongroup - manades International Trade in the Maghreb

Fran,ois Amiot and Ovadia Salama

Beyond Privatization: The Second The Stockmarkets as a Source of WVIS 1598 * Contact Laverne Lewis,

Wave of Telecommunications Finance: A Comparison of U.S. room H4-167, tel. 202-473-7369.

Reform in Mexico and Indian Firms Economic Implications for Turkey

Bjorn Wellenius and Gregory Staple Cherian Samuel of a Customs Union with the

Discussion Paper 341 W/PS 1592 * Contact Cherian Samuel, European Union

In 1994 Mexico successfully com- room MC10-362, tel. 202-473-0802. Glenn W Hairison, Thomas F

pleted a first phase of telecommunica- Rural Finance for Growth and Poverty Rutherford, and David G. Tarr

tions reforms, which included priva- Alleviation V/S 1599 * Contact A/finerva Patena,

tizing its state-owned telephone Saeed Qureshi, Ijaz Nabi, and room N5-048, tel. 202-473-9515.

company. This paper gives a concise covervew Thes sapergivesacondcw o Rashid Faruqee Is Commodity-Dependence Pessi-

overvieform which begand in 19 aPS 1593 * Contact Clydina Anbiah, mism Justified? Critical Factors andreforms, which bega- in 1995,and room T7-020, tel. 202-458-1275. Government Policies That Characterize

tracks key related events to May 1996. Dynamic Commodity Sectors

This second phase opened the marketsto competition, ensuring greater diver- Nanae Yabuki and Takamasa Akiyamasity and better quality in services. W/PS 1600 * Contact Grace Ilogon,

room N5-032, tel. 202-473-3732.


The Domestic Benefits of Tropical Fiscal Decentralization, Public Issues in Measuring and Modeling

Forests: A Critical Review Spending, and Economic Growth Poverty

Emphasizing Hydrological Functions in China Martin Ravallion

Kenneth M Chomitz and Kanta Kumnri Tao Zhang and Heng-fu Zou WIPS 1615 * Contact Patricia Sader,

WVPS 1601 * Contact PRDEI, room WPS 1608 * Contact Cynthia room N8-040, tel. 202-473-3902.

NI0-033, tel. 202-458-0513. Bernardo, room N10-053, tel.202-473-1148. ~~~~Transient Poverty in Rural China

Program-Based Pollution Control 202-473-1148. JyotsnaJalan and Martin Ravallion

Management: The lndonesian The Public Sector in the Caribbean: WIPS 1616 * Contact Patricia Sader

PROKASIH Program Issues and Reform Options room N8-040, tel. 202-473-3902.

Shakeb Afsah, Benoit Laplante, and Vinaya Swaroop Why Is Unemployment Low in the

Nabiel Makarim WPS 1609 * Contact Cynthia Former Soviet Union? Enterprise

WPS 1602 - Contact Angela Williams, Bernardo, room NIO-053, tel. Restructuring and the Structure

room NI0-021, tel. 202-473-7176 202-473-1148. of Compensation

Infrastructure Bottlenecks, Private Foreign Aid's Impact on Public Simon Commander and Andrei

Provision, and Industrial Productivity: Spending Tolstopiatenko

A Study of Indonesian and Thai Cities Tarhan Feyzioglu, Vinaya Swaroop, WIPS 1617 * Contact Latifah Alsegaf,

Alc Anas, Kyu Sik Lee, and Michael Murray and Min Zhu room M7-036, tel 202-473-6442.

WVPS 1603 * Contact Stacy Ward, room WVPS 1610 * Contact Cynthia Analytical Aspects of the Debt

G6-132, tel. 202-473-1707. Bernardo, room Ni0-053, tel. Problems of Heavily Indebted Poor202-473-1148.

Costs of Infrastructure Deficiencies Countries

in Manufacturing in Indonesia, Economic Analysis for Health Projects Stijn Claessens, Enrica Detragiache,

Nigeria, and Thailand Jeffrey S. Hammer Ravi Kanbur, and Peter Wickham

Kyu Sik Lee, ALzcAna, and Gi-Taik Oh WIPS 1611 * Contact Cynthia WIPS 1618 * Contact Rommel

WIPS 1 604 * Contact Stacy Ward, room Bernardo, room N1O-053, tel. Velasquez, room EIO-029, tel.

G6-132, tel. 202-473-1707. 202-473-1148. 202-473-9290.

Why Manufacturing Firms Produce Stock Market and Investment: Capital Flows to Latin America:

Some Electricity Internally The Signaling Role of the Market Is There Evidence of Contagion

Kyu Sik Lee, Alex Anas, Satyendra Cherian Samuel Effects?

Verma, and Michael Murray WVPS 1612 a Contact Cherian Samuel, Sara Calvo and Carmen Reinhart

WIPS 1605 * Contact Stacy Ward, room room MC10-362, tel. 202-473-0802. WIPS 1619 * Contact Mary Lou

G6-132, tel. 202-473-1707. Gomez, room M8-056, tel. 202-473-Does Public Capital Crowd Ourt41

The Benefits of Alternative Power Private Capital? Evidence from India 8451.

Tariffs for Nigeria and Indonesia Luis Serven Bank Insolvencies: Cross-Country

Alex Anas and Kyu Sik Lee WPS 1613 * Contact Emily Khine, Experience

WPS 1606 * Contact Stacy Ward, room room N11-061, tel. 202-473-7471. Gerard Caprio Jr. and Daniela

G6-132, tel. 202-473-1707. Growth, Globaization, and Gains Klingebiel

Population Aging and Pension from the Uruguay Round V/PS 1620 3 Contact Bill Moore, room

Systems: Reform Options for China Thomas W Hertel, Christian E Bach, N9-038, tel. 202-473-8526

E DesmondMcCarthy andKangbin Zheng Betina Dimaranan, and Will Martin The Sustainability of African Debt

WPS 1607 * Contact Mila Divino, WPS 1614 * ContactAudrey Kitson- Daniel Cohen

room N6-056, tel. 202-473-3739. Walters, room N5-039, tel. 202-473- WPS 1621 * Contact Sheilah King-

2947 Watson, room N3-040, tel. 202-473-

3730.


E L E C T R 0 N I C Bank Infrastructure Projects Much of the data will soon be avail-I N F 0 R M A T I 0 N A N D D A T A This database contains information on able on the World Wide Web.

World Bank infrastructure projects Contact Helene Stephan by emailTo aid efforts to assess the growth and with private participation. It is ([email protected]), telephone

performance of infrastructure, the updated regularly. (202-473-6434), or fax (202-522-

World Bank has constructed several * Period covered: 1988-96 (continu- 3223).databases, ranging from broad ones ing).encompassing several infrastructure * Scope: 600 projects in more than 50 Global Urban and Housingsectors to narrower ones covering a countries. Indicatorssingle sector in depth. Information on * Contents: Information on size and This database is the product of theprivate participation in infrastructure type of project, financing arrange- Urban and Housing Indicatorsis provided in some, in response to the ments, mechanism for private partici- Program, a joint initiative of theneed to increase private sector invest- pation, and associated regulatory World Bank and the United Nationsment and management in the sector. reforms (24 variables). Centre for Human SettlementsMeasures of the size, capacity, and * Format: Data are stored in (Habitat). The underlying survey wasfinancing of infrastructure projects are Microsoft Access. Printouts are avail- designed and the database constructedalso included. able free of cost, and electronic ver- by the Bank and Habitat, and the

sions can be obtained by supplying database is now being maintained byPrivate Participation diskettes. Habitat in Nairobi.in Infrastructure Contact Sandra Vivas by email * Period covered: Benchmark data forThis database tracks private infrastruc- ([email protected]), telephone 1990 based on an extensive survey.ture activity in gas, power, waste, (202-458-2809), orfax (202-522- Habitat hopes to periodically updatewater, transport, and telecommunica- 3481). the database.tions worldwide. Although the data- * Scope: 53 urban areas spanning 6base does not contain time-series data Railways continents and containing 90 percentin the formal sense, it is updated regu- This database provides information on of the world's urban population.larly. The database allows searches and the scale, output, and performance of * Contents: Indicators of affordability,aggregation by region, country, sector, railways worldwide to allow compari- quality, financing, production, andproject status, and type of contract or son of performance over time or across subsidization of housing and of thefinancing arrangement. regions and railways and thus provide regulatory and institutional environ-* Period covered: 1984-96 (continu- a basis for setting railway performance ment (more than 50 variables).ing). targets. It is updated annually. * Format: Electronic versions of the* Scope: Nearly 4,000 projects in * Period covered: 1980-94 (continu- data will be available after Septembermore than 100 countries. ing but with gaps). 1997. Until then requests may be* Contents: Information on type and * Scope: More than 100 railways in made for printouts of results for spe-size of project, mechanism for private about 90 countries. cific countries or cities.participation (such as build-own- * Contents: Information on extent Contact the Coordinator of theoperate, privatization, or management and type of system, rolling stock, and Indicators Program at UNCHScontract), and financing arrangements freight and passenger traffic, and indi- (Habitat), PO Box 30030, Nairobi,(12 variables). cators of productivity, operating effi- Kenya, or by email (salome.gathu* Format: Data arc stored in ciency, and financial performancc @unchs.org), telephone (254-262-Microsoft Access. Printouts are avail- (more than 50 variables). 3184), orfax (254-262-4264).able free of cost. * Format: Data are now stored inContactAlbertAmos by email Lotus but in the future will be trans- World Bank staff named as contacts(aamosl @worldbank. org), telephone ferred to Excel. Data can be obtained above can also be contacted at the Bank'(202-473-7834), orfax (202-522-3181). free of cost by supplying diskettes. main address (see back page).


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