world bank document...2563 tsunehiro otsuki, john s. wilson, a race to the top? a case study of food...

2 1990ABSTRACTS

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Numbers 2499-25 67 paragraph of each abstract.

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The World Bank

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January-March 2001

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ABSTRACTSJANUARY-MARCH 2001

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas aboutdevelopment issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. Thepapers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in thispaper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or thecountries they represent.

Produced by the Policy Research Dissemination Center

Policy ResearchWorking Paper Series

Numbers 2499-2567

Index

WPS # Author Working Paper Title Page

Agriculture

2499 Isidro Soloaga The Treatment of Non-Essential Inputs in aCobb-Douglas Technology: An Application toMexican Rural Household-Level Data 1

2563 Tsunehiro Otsuki, John S. Wilson, A Race to the Top? A Case Study of Foodand Mirvat Sewadeh Safety Standards and African Exports 28

Infrastructure

2507 Gunnar S. Eskeland Public Expenditures and Environmental P3rotection:When Is the Cost of Funds Irrelevant? 4

2510 Gunnar S. Eskeland Environmental Protection and Optimal Taxation 6

2513 Michel Kerf Do State Holding companies Facilitate PrivateParticipation in the Water Sector? Evidence fromC6te d'Ivoire, the Gambia, Guinea, and Senegal 7

2516 Jean-Paul Faguet Does Decentralization Increase Responsivenessto Local Needs? Evidence from Bolivia 8

2522 Carsten Fink, Aaditya Mattoo, Trade in International Maritime Services:and Ileana Cristina Neagu How Much Does Policy Matter? 11

2537 Juan Rosell6n and Jonathan Halpern Regulatory Reform in Mexico's Natural Gas Industry:Liberalization in the Context of a DominantUpstream Incumbent 17

2538 Juan Rosell6n and Jonathan Halpern Designing Natural Gas Distribution Concessionsin a Megacity: Tradeoffs between Scale Economiesand Information Disclosure in Mexico City 17

2545 Marianne Fay Financing the Future: Infrastructure Needsin Latin America, 2000-05 20

2551 Kristin Komives, Dale Whittington, Infrastructure Coverage and the Poor: A Glnobal Perspective 23and Xun Wu

2552 J. Luis Guasch and Joseph Kogan Inventories in Developing Countries: Levels andDeterminants-a Red Flag for Competitiveness and Growth 23

2567 Susmita Dasgupta, Somik Lall, Policy Reform, Economic Growth, and the Digital Divide:and David Wheeler An Econometric Analysis 30

Domestic finance

2507 Gunnar S. Eskeland Public Expenditures and Environmental Protection:When Is the Cost of Funds Irrelevant? 4

2510 Gunnar S. Eskeland Environmental Protection and Optimal T'axation 6


ii Index

WPS# Author Working Paper Title Page

2519 Shantayanan Devarajan, William R. Is Investment in Africa Too Low or Too High?Easterly, and Howard Pack Macro and Micro Evidence 9

2529 Graciela Kaminsky, Richard Lyons, Mutual Fund Investment in Emerging Markets:and Sergio Schmukler An Overview 13

2540 Patrick Honohan Recapitalizing Banking Systems: Implicationsfor Incentives and Fiscal and Monetary Policy 18

2543 Philip Keefer When Do Special Interests Run Rampant? Disentanglingthe Role in Banking Crises of Elections, IncompleteInformation, and Checks and Balances 20

2544 Leora Klapper The Uniqueness of Short-Term Collateralization 20

2553 Giovanni Ferri, Tae Soo Kang, The Value of Relationship Banking during Financial Crises:and In-June Kim Evidence from the Republic of Korea 24

2554 Estelle James, James Smalhout, Administrative Costs and the Organization of Individualand Dimitri Vittas Retirement Account Systems: A Comparative Perspective 24

2559 Thorsten Beck Deposit Insurance as Private Club: Is Germany a Model? 26

2560 John D. Pollner Catastrophe Risk Management: Using Alternative RiskFinancing and Insurance Pooling Mechanisms 27

Environment



2524 David Wheeler Racing to the Bottom? Foreign Investmentand Air Pollution in Developing Countries 11

2567 Susmita Dasgupta, Somik Lall Policy Reform, Economic Growth, and the Digital Divide:and David Wheeler An Econometric Analysis 30

Industry

2512 Keith E. Maskus, John S. Wilson, Quantifying the Impact of Technical Barriers to Trade:and Tsunehiro Otsuki A Framework for Analysis 6


2539 Francesca Recanatini and Randy Ryterman Disorganization or Self-Organization? The Emergenceof Business Associations in a Transition Economy 18


Index iii


Private sector development

2506 Abigail Barr and Abena Oduro Ethnicity and Wage Determination in Ghana 4

2509 Jacques Morisset and Neda Pirnia How Tax Policy and Incentives Affect ForeignDirect Investment: A Review 5

2513 Michel Kerf Do State Holding companies Facilitate PrivateParticipation in the Water Sector? Evidence fromC6te d'Ivoire, the Gambia, Guinea, and Senegal 7

2515 Mary Hallward-Driemeier Firm-Level Survey Provides Data on Asia'sCorporate Crisis and Recovery 8



2534 Taye Mengistae Indigenous Ethnicity and Entrepreneurial Successin Africa: Some Evidence from Ethiopia 16

2537 Juan Rosell6n and Jonathan Halpern Regulatory Reform in Mexico's Natural Gas Industry:Liberalization in the Context of a DominantUpstream Incumbent 17

2538 Juan Rosell6n and Jonathan Halpern Designing Natural Gas Distribution Concessionsin a Megacity: Tradeoffs between Scale Economiesand Information Disclosure in Mexico City 17


2544 Leora Ilapper The Uniqueness of Short-Term Collateralization 20


2567 Susmita Dasgupta, Somik Lall Policy Reform, Economic Growth, and the Digital Divide:and David Wheeler An Econometric Analysis 30

Governance

2500 Canice Prendergast Investigating Corruption 1

2501 Jeff Huther and Anwar Shah Anti-Corruption Policies and Programs:A Framework for Evaluation 1

2504 Stephen Knack Social Capital and the Quality of Government:Evidence from the United States 3

2512 Keith E. Maskus, John S. Wilson, Quantifying the Impact of Technical Barriers to Trade:and Tsunehiro Otsuki A Framework for Analysis 6

iv Index

WPS# Author Working Paper Title Page


2521 Alvaro Forteza and Martin Rama Labor Market Rigidity and the Success of EconomicReforms across More than 100 Countries 10


2533 Ibrahim Elbadawi and Nicholas Sambanis How Much War Will We See? Estimating the Incidenceof Civil War in 161 Countries 15


2542 Philip Keefer and David Stasavage Checks and Balances, Private Information,and the Credibility of Monetary Commitments 19


2555 Yan Wang, Dianqing Xu, Zhi Wang, Implicit Pension Debt, Transition Cost, Options,and Fan Zhai and Impact of China's Pension Reform: A Computable

General Equilibrium Analysis 25

2557 Stuti Khemani Decentralization and Accountability: Are VotersMore Vigilant in Local than in National Elections? 26

2561 Mark Gradstein, Branko Milanovic, Democracy and Income Inequality: An Empirical Analysis 27and Yvonne Ying

2565 David A. Robalino, Oscar F. Picazo, Does Fiscal Decentralization Improve Health Outcomes?and Albertus Voetberg Evidence from a Cross-Country Analysis 29

Urban development



Transition

2535 Will Martin Trade Policy Reform in the East Asian Transition Economies 16


2546 Paulette Castel and Louise Fox Gender Dimensions of Pension Reformin the Former Soviet Union 21

2549 Erzo F. P. Luttmer Measuring Poverty Dynamics and Inequality in TransitionEconomies: Disentangling Real Events from Noisy Data 22

Index v


2556 Michael M. Lokshin and Ruslan Yemtsov Household Strategies for Coping with Povertyand Social Exclusion in Post-Crisis Russia 25

Poverty


2508 Mattias Lundberg, Mead Over, Sources of Financial Assistance for Householdsand Phare Mujinja Suffering an Adult Death in Kagera, Tanzania 4

2517 William Easterly The Effect of International Monetary Fundand World Bank Programs on Poverty 8

2525 Vinod Thomas, Yan Wang, and Xibo Fan Measuring Education Inequality:Gini Coefficients of Education 12

2526 Carrie Turk Linking Participatory Poverty Assessments to Policyand Policymaking: Experience from Vietnam 12

2527 Alice Mesnard and Martin Ravallion Is Inequality Bad for Business? A Nonlinear MicroeconomicModel of Wealth Effects on Self-Employment 13

2528 Vijayendra Rao Poverty and Public Celebrations in Rural India 13


2549 Erzo F. P. Luttmer Measuring Poverty Dynamics and Inequa:lity in TransitionEconomies: Disentangling Real Events from Noisy Data 22

2550 Adam Wagstaff Measuring Equity in Health Care Financing:Reflections on (and Alternatives to) the World HealthO-ganization's Fairness of Financing Index 22

2551 Kristin Komives, Dale Whittington, Infrastructure Coverage and the Poor: A Global Perspective 23and Xun Wu


2558 Martin Ravallion Growth, Inequality, and Poverty: Looking beyond Averages 26

2562 Branko Milanovic and Shlomo Yitzhaki Decomposing World Income Distribution:Does the World Have a Middle Class? 28

2563 Tsunehiro Otsuki, John S. Wilson, A Race to the Top? A Case Study of Foodand Mirvat Sewadeh Safety Standards and African Exports 28


vi Index


Rural development





International economics

2502 Masahiro Kawai and Shigeru Akiyama Implications of the Currency Crisis for ExchangeRate Arrangements in Emerging East Asia 2

2503 Masahiro Kawai and Shinji Takagi Proposed Strategy for a Regional ExchangeRate Arrangement in Post-Crisis East Asia 2

2509 Jacques Morisset and Neda Pirnia How Tax Policy and Incentives AffectForeign Direct Investment: A Review 5

2512 Keith E. Maskus, John S. Nilson, Quantifying the Impact of Technical Barriers to Trade:and Tsunehiro Otsuki A Framework for Analysis 6

2518 Andres Solimano Can Reforming Global Institutions HelpDeveloping Countries Share More in theBenefits from Globalization? 9

2522 Carsten Fink, Aaditya Mattoo, Trade in International Maritime Services:and Ileana Cristina Neagu How Much Does Policy Matter? 11

2523 Olivier Cadot, Jaime de Melo, Can Duty Drawbacks Have a Protectionist Bias?and Marcelo Olarreaga Evidence from Mercosur 11


2529 Graciela Karminsky, Richard Lyons, Mutual Fund Investment in Emerging Markets:and Sergio Schmukler An Overview 13

2531 William Easterly Growth Implosions, Debt Explosions, and My Aunt Marilyn:Do Growth Slowdowns Cause Public Debt Crises? 14

2532 Maurice Schiff and Won Chang Market Presence, Contestability, and theTerms-of-Trade Effects of Regional Integration 15

2535 Will Martin Trade Policy Reform in the East Asian Transition Economies 16

2536 Ron Hood Malaysian Capital Controls 17

2548 Alan V. Deardorff International Provision of Trade Services, Trade,and Fragmentation 22

Index vii


2563 Tsunehiro Otsuki, John S. Wilson, A Race to the Top? A Case Study of Food Safetyand Mirvat Sewadeh Standards and African Exports 28

Social development


2520 Kristin F. Butcher and Cecilia Elena Rouse Wage Effects of Unions and IndustrialCouncils in South Africa 10



2530 Shanti Jagannathan The Role of Nongovernmental Organizations in PrimaryEducation: A Study of Six NGOs in India 14

2554 Estelle James, James Smalhout, Administrative Costs and the Organization of Individualand Dimitri Vittas Retirement Account Systems: A Comparative Perspective 24

2555 Yan Wang, Dianqing Xu, Zhi Wang, Implicit Pension Debt, Transition Cost, Options,and Fan Zhai and Impact of China's Pension Reform:

A Computable General Equilibrium Analysis 25


2561 Mark Gradstein, Branko Milanovic, Democracy and Income Inequality: An Empirical Analysis 27and Yvonne Ying

2562 Branko Milanovic and Shlomo Yitzhaki Decomposing World Income DistributionDoes the World Have a Middle Class? 28


Labor and employment


2505 Roberta Gatti Family Altruism and Incentives 3

2506 Abigail Barr and Abena Oduro Ethnicity and Wage Determination in Glhana 4

2520 Kristin F. Butcher and Cecilia Elena Rouse Wage Effects of Unions and IndustrialCouncils in South Africa 10



viii Index




2566 Norbert R. Schady Convexity and Sheepskin Effects in the Human CapitalEarnings Function: Recent Evidence for Filipino Men 29

Macroeconomics and growth

2511 Pierre-Richard Agenor Monetary Policy under Flexible Exchange Rates:An Introduction to Inflation Targeting 6

2514 Norbert M. Fiess and Dorte Verner Intersectoral Dynamics and Economic Growth in Ecuador 7

2518 Andr6s Solimano Can Reforming Global Institutions HelpDeveloping Countries Share More in theBenefits from Globalization? 9

2519 Shantayanan Devarajan, William R. Is Investment in Africa Too Low or Too High?Easterly, and Howard Pack Macro and Micro Evidence 9






2536 Ron Hood Malaysian Capital Controls 17


2542 Philip Keefer and David Stasavage Checks and Balances, Private Information,and the Credibility of Monetary Commitments 19



Education



Index ix


2530 Shanti Jagannathan The Role of Nongovernmental Organizations inPrimary Education: A Study of Six NGOs in India 14

2541 Yasayuki Sawada and Michael Lokshin Household Schooling Decisions in Rural Pakistan 19

2564 Ayesha Yaqub Vawda, Peter Moock, J. Price Economic Analysis of World Bank EducationGittinger, and Harry Anthony Patrinos Projects and Project Outcomes 28

2566 Norbert R. Schady Convexity and Sheepskin Effects in the Human CapitalEarnings Function: Recent Evidence for Filipino Men 29

Health and population


2547 Jeffrey S. Hammer and William G. Jack The Design of Incentives for Health Care :Providersin Developing Countries: Contracts, Competitionand Cost Control 21

2550 Adam Wagstaff Measuring Equity in Health Care Financing:Reflections on (and Alternatives to) the World HealthOrganization's Faimess of Financing Index 22


Public sector management

2500 Canice Prendergast Investigating Corruption 1

2501 Jeff Huther and Anwar Shah Anti-Corruption Policies and Programs:A Framework for Evaluation 1

2504 Stephen Knack Social Capital and the Quality of Governrent:Evidence from the United States 3

2505 Roberta Gatti Family Altruism and Incentives 3







Policy Research Working Paper Series 1

2499. The Treatment of ceptual and practical issues relative to the bringing cases to light, but a bureaucratNon-Essential Inputs in a effects of international trade policy on could then waste resources by generatingCobb-Douglas Technology: individual producers. Copies of the paper "nuisance cases" simply to receive theAn Application to Mexican are available free from the World Bank, bonus.Rural Household-Level Data 1818 H Street NW, Washington, DC In each of these cases, harmful re-

20433. Please contact Lili Tabada, room sponses to investigations and incentivesIsidro Soloaga MC3-333, telephone 202-473-6896, fax may be costly enough that it would be(December 2000) 202-522-1159, email address Itabada more efficient simply to pay a flat wage

@worldbank.org. Policy Research Work- and accept some corruption.One problem when estimating a Cobb- ing Papers are also posted on the Web at In other words, incentive contractsDouglas production function with micro w w w .w o r I d b a n k. o r g I r e s e a r c h / may not work so well in reducing bureau-data is how to deal with the observations workingpapers. The author may be con- cratic corruption, because of the varietythat show positive output but do not use tacted at [email protected]. (18 of dysfunctional responses that investiga-some ofthe inputs. As the log ofzero is not pages) tions may elicit. It may be best to limitdefined, one standard procedure is to ar- investigations to cases where thebitrarily replace those zero values with investigator can find direct evidence of"sufficiently small" numbers. But can we 2500. Investigating Corruption wrongdoing (for example, cash beingdo better than that? An alternative ap- handed over, or bureaucrats living beyondproach is presented and applied to Mexi- Canice Prendergast their means).can farm-level data. (December 2000) This paper-a product of Public

Economics, Development ResearchThe standard approach for fitting a Cobb- Why incentive contracts and independent Group-is part of a larger effort in theDouglas production function to micro data investigations may not be the perfect group to analyze decentralization andwith zero values is to replace those values solution to the problem of bureaucratic governance in the public sector. Copies ofwith "sufficiently small"numbers to facili- corruption. the paper are available free from thetate the logarithmic transformation. In World Bank, 1818 H Street NW, Washing-general, the estimates obtained are ex- Agency theory has had little to say about ton, DC 20433. Please contact Hedytremely sensitive to the transformation the control of bureaucratic corruption, Sladovich, room MC2-609, telephone 202-chosen, generating doubts about the use perhaps the greatest agency problem that 473-7698, fax 202-522-1154, email ad-of a specification that assumes that all exists. Prendergast considers the role of dress [email protected]. Policyinputs are essential (as the Cobb-Douglas incentive contracting in reducing corrup- Research Working Papers are also posteddoes) when that is not the case. tion through the use ofindependent inves- on the Web at www.worldbank.org/

Soloaga presents an alternative method tigations-a common way to monitor research/workingpapers. The author maythat allows one to estimate the degTee corruption. be contacted at [email protected] essentiality of the production inputs In simple settings, bureaucratic corrup- edu. (37 pages)while retaining the Cobb-Douglas tion can be suppressed by rewarding andspecification. By using the properties of penalizing bureaucrats, depending on thetranslatable homothetic functions, he independent investigators' findings. But 2501. Anti-Corruption Policiesestimates by how much the origin of the Prendergast shows that incentive con- and Programs: A Frameworkinput set should be translated to allow the tracts can change behavior in both unde- for EvaluationCobb-Douglas functional form to capture sirable and beneficial ways. He analyzesthe fact that the data have a positive three possible harmful behavioral re- Jeff Huther and Anwar Shahoutput even when some of the inputs are sponses to investigations. (December 2000)not used. * Many investigations are (officially)

To highlight the empirical importance instigated by customer complaints. Bu- In a largely corruption-free environment,of the approach, he applies it to Mexican reaucrats could become overinterested in anticorruption agencies, ethics offices, andfarm-level production data that he "keeping the customer happy," even when ombudsmen strengthen the standards ofgathered. it is not efficient to do so. accountability. In countries with endemic

Many households did not use family or * Bureaucrats often have private infor- corruption, however, the same institutionshired labor in farm production, or had mation on how cases should be handled, function in form but not in substance;different capital composition (that is, zero information that is hard for investigators under a best-case scenario such institu-value for non-land farm assets). to verify. Prendergast shows that investi- tions might be helpful, but the more likely

The estimations provide a clear mea- gations can give bureaucrats excessive outcome is that they help topreserve socialsurement of the degree of essentiality of incentives to 'do things by the book," injustice.potentially nonessential inputs. They also offering decisions that are more likely toindicate the size of the error introduced be consistent with the opinions of their The anticorruption strategy the Worldby the common "trick" of adding a "small" superiors. Bank announced in September 1997 de-value to zero input values. * Bureaucrats sometimes collect bribes fined corruption as the "use of public of-

This paper-a product of Trade, Devel- to "look the other way"-that is, ignore fice for private gain" and called for theopment Research Group-is part of a known transgressions. A solution to this Bank to address corruption along fourlarger effort in the group to explore con- problem might be to offer rewards for dimensions:

2 Policy Research Working Paper Series

*Preventing fraud and corruption in 2502. Implications of the ment, capita] flows, and exchange rateBank projects. Currency Crisis for Exchange arrangement3 in East Asia. Copies of the

* HelpingcountriesthatrequestBank Rate Arrangements in paper are available free from the Worldassistance for fighting corruption. Emerging East Asia Bank, 1818 H Street NW, Washington, DC

* Mainstreaming a concern about 20433. Please contact Athena Azarcon,corruption in Bank work. Masahiro Kawai and Shigeru Akiyama room MC9- 142, telephone 202-473-6049,

* Lending active support to interna- (December 2000) fax 202-477-0169, email address aazarcontional efforts to address corruption. @worldbank.org. Policy Research Work-

The menu of possible actions to contain More effort should be made to develop a ing Papers are also posted on the Web atcorruption (in both countries and Bank framework for international monetary co- http://econ.worldbank.org. The authorsprojects) is very large, so Huther and ordination, not only to maintain stable ex- may be contacted at [email protected] develop a framework to help change rates among the U.S. dollar, the org or [email protected]. (65 pages)assign priorities, depending on views of Japaneseyen, and the euro, but to minimizewhat does and does not work in specific the risk of currency and financial crises incountries. Their framework, based on emerging economies in East Asia and 2503. Proposed Strategy forpublic officials' incentives for opportunis- elsewhere. a Regional Exchange Ratetic behavior, distinguishes between highly Arrangement in Post-Crisiscorrupt and largely corruption- Kawai and Akiyama examine the implica- East Asiafree societies. Certain conditions encour- tions of the East Asian currency crisis forage public officials to seek or accept exchange rate arrangements in the region's Masahiro Kaw ai and Shinji Takagicorruption: emerging market economies. They focus on (December 2000)

* The expected gains from undertaking the roles of the U.S. dollar, the Japanesea corrupt act exceed the expected costs. yen, and the euro in the emerging East A coordinatedi action by East Asian coun-

* Little weight is placed on the cost that Asian economies' exchange rate policies. tries to stabil ize their currencies against acorruption imposes on others. They claim that these economies are common basket of major currencies

In a country with heavy corruption and particularly susceptible to large exchange (broadly representative of their averagepoor governance, the priorities in anticor- rate fluctuations because they have been structure oftrade and foreign direct invest-ruption efforts would then be to establish pursuing financial deregulation, opening ment) would' help stabilize both intra-rule of law, strengthen institutions of markets, and liberalizing capital ac- regional exchange rates and effective ex-participation and accountability, and limit counts, and because they face increased change rates--in a way consistent with thegovernment interventions to focus on core risk of sudden capital flow reversals, with medium-ternm objective ofpromoting trade,mandates. attendant instabilityintheir financial sys- investment, and growth in the region.

In a country with moderate corruption tem and foreign exchange market.and fair governance, the priorities would KawaiandAkiyamafindthatthedollar's After discussing major conceptual andbe decentralization and economic reform, role as the dominant anchor currency in empirical issues relevant to the exchangeresults-oriented management and evalu- East Asia was reduced during the recent rate policies of EastAsian countries, Kawaiation, and the introduction of incentives currency crisis but has become prominent and Takagi propose a regional exchangefor competitive delivery ofpublic services. again since late 1998. It is too early for rate arrangement designed to promote

In a country with little corruption and conclusions, but the economies seem likely intraregional exchange rate stability andstrong governance, the priorities might be to maintain more flexible exchange rate regional economic growth. They argue that:explicit anticorruption agencies and pro- arrangements, at least officially. * For developing countries, exchangegrams, stronger financial management, At the same time, these economies pre- rate volatility tends to significantly hurtincreased public and government aware- sumably will continue to prefer to main- trade and investment, making it inadvis-ness, no-bribery pledges, efforts to fry the tain exchange rate stability without fixed able to adopt a system of freely floating"big fish,' and so on. rate commitments. They are better off exchange rates.

This paper-a product of the Country choosing a balanced currency basket sys- * Given the high share ofintraregionalEvaluation and Regional Relations Divi- tem in which the yen and the euro play a trade and the similarity of trade composi-sion, Operations Evaluation Depart- more important role than before. tion in East Asia, exchange rate policyment-is part of a larger effort in the de- The ASEAN countries have a special should be directed toward maintainingpartment to improve the development ef- incentive to avoid harmful fluctuations in intraregional exchange rate stability, tofectiveness of external assistance. Copies exchange rates within the region, which promote trade, investment, and economicof the paper are available free from the could suddenly alter their international growth.World Bank, 1818 H Street NW, Washing- price competitiveness and make prospec- * The current policy of maintainington, DC 20433. Please contact Agnes tive free trade agreements unsustainable. exchange rate stability against the U.S.Santos, room H3-425, telephone 202-473- So they may stabilize their exchange rates dollar as an informal, uncoordinated1675, fax 202-522-3124, email address against similar currency baskets, to en- mechanism for ensuring [email protected]. Policy Research sure intraregional exchange rate stability. exchange rate stability is suboptimal. AWorking Papers are also posted on the This paper-a product of the Office of pragmatic policy option-conducive to aWeb at http://econ.worldbank.org. Anwar the Chief Economist, East Asia and Pacific more robust framework for cooperation inShah may be contacted at ashah Region-is part of a larger effort in the monetary and exchange rate [email protected]. (17 pages) region to study financial market develop- would be a coordinated action to shift the


target of nominal exchange rate stability Consistent with these arguments, use intergenerational transfers strategi-to a basket of tripolar currencies (the U.S. Putnam (1993) has shown that regional cally to elicit effort from their children. Asdollar, the Japanese yen, and the euro). governments in the more trusting, more a result, gifts and bequests are less reac-This alternative would better reflect the civic-minded northern and central parts tive to the income realizations of the chil-region's diverse structure of trade and of Italy provide public services more effec- dren than the standard altruistic model offoreign direct investment. tively than do those in the less trusting, the family predicts. Ricardian equivalence

The authors envision no rigid peg. In- less civic-minded southern regions. Using holds in this setup whenever the non-nega-stead, at least initially, each country could cross-country data, La Porta and others tivity constraint on bequests is not binding.choose its own formal exchange rate ar- (1997) and Knack and Keefer (1997) ob-rangement-be it a currency board, a tained findings consistent with Putnam's Gatti builds on the altruistic model of thecrawling peg, or a basket peg with wide evidence. For samples of about 30 nations family to explore the strategic interactionmargins. At times of crisis, the peg might (represented in the World Value Surveys), between altruistic parents and selfish chil-be temporarily suspended, subject to the they found that societies with greater dren when children's efforts are endog-rule that the exchange rate would be re- trust tended to have governments that enous. If there is uncertainty about thestored to the original level as soon as prac- performed significantly better. The amount of income the children will real-tical. Only in extreme circumstances authors used survey measures of citizen ize, and if parents have imperfect infor-would the level be adjusted to reflect new confidence in government as well as mation, the children have an incentive toequilibrium conditions. subjective indicators of bureaucratic exert little effort and to rely on their

This paper-a product of the Office of inefficiency. parents' altruistically motivated trans-the Chief Economist, East Asia and Pa- Knack further analyzes links between fers. Because of this, parents face acific Region-is part of a larger effort in social capital and government perfor- tradeoff between the insurance thatthe region to study financial market de- mance using data for the United States. bequests implicitly provide their childrenvelopment, capital flows, and exchange In states with more social capital (as mea- and the disincentive to work prompted byrate arrangements in East Asia. Copies sured by an index of trust, volunteering, their altruism.of the paper are available free from the and census response), government perfor- Gatti shows that if parents can crediblyWorld Bank, 1818 H Street NW, Wash- mance is rated higher, based on ratings commit to a pattem oftransfers, they willington, DC 20433. Please contact Athena constructed by the Government Perfor- choose not to compensate children in badAzarcon, room MC9-142, telephone 202- mance Project. outcomes as much as predicted by the473-6049, fax 202-477-0169, email ad- This result is highly robust to including standard (no uncertainty, no asymmetricdress [email protected]. Policy a variety of control variables, considering information) dynastic model of the family.Research Working Papers are also posted the possibility of influential outlying val- Alternatively, parents may choose to forgoon the Web at http://econ.worldbank.org. ues, treating the performance ratings as any insurance and offer a fixed level ofMasahiro Kawai may be contacted at ordinal rather than cardinal, and correct- bequest, to elicit greater effort from [email protected]. (46 pages) ing for possible endogeneity. children.

This paper-a product of Regulation The optimal transfers structure thatand Competition Policy, Development Gatti derives reconciles the predictions of

2504. Social Capital and Research Group-is part of a larger effort the altruistic family model with much ofthe Quality of Government: in the group to identify the determinants the existing evidence on intergenerationalEvidence from the United States of good governance and of institutions transfers, which suggests that parents

conducive to long-term economic develop- compensate only partially, or not at all,Stephen Knack ment. Copies of the paper are available for earnings differentials among their(December 2000) free from the World Bank, 1818 H Street children.

NW, Washington, DC 20433. Please con- Moreover, Gatti shows that RicardianGovernmentsperform better where there is tact Paulina Sintim-Aboagye, room MC3- equivalence holds in this setup, exceptmore general trust and strong civic norms; 422, telephone 202-473-8526, fax 202-522- when non-negativity constraints arethey perform less well where citizens are 1155, email address psintimaboagye binding.less trusting and less civic-minded. @worldbank.org. Policy Research Work- This paper-a product of Macroeconom-

ing Papers are also posted on the Web at ics and Growth, Development ResearchSocial capital-in the form of general trust http://econ.worldbank.org. The author Group-is part of a larger effort in theand strong civic norms that call for coop- may be contacted at sknack@worldbank. group to understand intrahousehold re-eration when large-scale collective action org. (32 pages) source allocation. Copies of the paper areis needed-can improve government per- available free from the World Bank, 1818formance in three ways: H Street NW, Washington, DC 20433.

* It can broaden government account- 2505. Family Altruism Please contact Rina Bonfield, room MC3-ability, making government responsive to and Incentives 354, telephone 202-473-1248, fax 202-522-citizens at large rather than to narrow 3518, email address abonfieldinterests. Roberta Gatti @worldbank.org. Policy Research Work-

* It can facilitate agreement where (December 2000) ing Papers are also posted on the Web atpolitical preferences are polarized. http://econ.worldbank.org. The author

* Itisassociatedwithgreaterinnovation In the presence of imperfect information may be contacted at [email protected] policymakers face new challenges. and uncertainty, altruisticparents might org. (38 pages)


2506. Ethnicity and Wage in labor market outcomes and entrepre- benefits are derived from markets that areDetermination in Ghana neurial success in Africa. The study was otherwise taxable. Government can cap-

funded by the Bank's Research Support ture those cost savings at no distortionaryAbigail Barr and Abena Oduro Budget under the research project 'The cost by increasing the tax rates for each(December 2000) Economics of Ethnicity and Entrepreneur- good, to match the cost savings provided.

ship in Africa." Copies of the paper are In practice, do public programs to pro-In Ghana's manufacturing sector, workers available free from the World Bank, 1818 tect the environment benefit mostly con-tend to be employed by members of their H Street NW, Washington, DC 20433. sumers or mostly producers? Eskelandown ethnic group, and different ethnic Please contact Rina Bonfield, room MC3- suggests that environmental protectiongroups run very different types of enter- 354, telephone 202-473-1248, fax 202-522- has direct value for consumers and indi-prises. Employers favor their relatives in 3518, email address abonfield rect value, as inputs, for producers. In thepay and injob allocation, possibly because @worldbank.org. Policy Research Work- case of programs to reduce emissions ofthey are more productive. There is no ing Papers are also posted on the Web at global greenhouse gases, for instance,evidence of pay discrimination between http://econ.worldbank.org. Abigail Barr most of the benefits appear to be in agri-ethnic groups. may be contacted at abigail.barr culture, a productive sector. Public pro-

@economics.ox.ac.uk. (42 pages) grams in general provide a combinationBarr and Oduro look at earnings differen- of public and private benefits: the sharetials between members of different ethnic of commercial vehicles on roads is typi-groups and between employers' relatives, 2507. Public Expenditures and cally high in poor countries.unrelated members of the same ethnic Environmental Protection: When In related papers, "Externalities andgroup, and other workers in Ghana's Is the Cost of Funds Irrelevant? Production Efficiency" (Policy Researchmanufacturing sector. Working Paper 2319) and 'Environmen-

They find that a significant proportion Gunnar S. Eskeland tal Protection and Optimal Taxation"of the earnings differentials identified (December 2000) (Policy Research Working Paper 2510),between ethnic groups can be explained Eskeland shows that under optimal taxa-with reference to a fairly standard set of Pigou's conjecture was that under costly tion, marginal abatement costs should beobservations about workers' characteris- taxation public expenditures should not the samne for polluting government, pollut-tics. Labor market segregation along eth- reach the point where marginal benefits ing producers, and polluting consumers,nic lines-combined with considerable equal marginal costs. In the treatment rich and poor.variation in employers'characteristics (es- here, public expenditures (and environ- This paper-a product of Public Eco-pecially educational attainment and fam- mental protection) may provide public nomics, Development Research Group-ily background, possibly because of dis- goods for consumption but also collective is part of a larger effort in the group tocrimination in other markets)-accounts inputs for production. When the benefits provide guiding principles in public fi-for most of the remaining differentials. are in production, the cost of funds is ir- nance and environmental protection. Cop-

Northerners earn considerably less relevant. Why? Collective inputs benefit ies ofthe paper are available free from thethan othergroups mainlybecause they are goods that are taxed, while forpublicgoods World Bank, 1818 H Street NW, Washing-less educated. The Other Akan earn much the shadow price of funds reduces provi- ton, DC 20433. Please contact Hedymore than the relatively low-earning sion as if they were. Sladovich, room MC2-609, telephone 202-Asante, Fante, and Ewe. 473-7698, fax 202-522-1154, email ad-

There is no evidence of discrimination Assume that a public program-whether dress [email protected]. Policybetween ethnic groups, although there is in the form of public expenditures or regu- Research Working Papers are also postedevidence of discrimination in favor of in- lation of private activities- provides not on the Web at http://econ.worldbank.org.experienced workers from the same eth- only a public good to consumers but also a The author may be contacted at geskelandnic group, who can be assessed and collective input (say, a less polluted wa- @worldbank.org. (32 pages)matched with jobs more easily than simi- ter source for brewers, or better roads forlar workers from other ethnic groups. their trucks).

Finally, workers who are related to their In a context of optimal taxation and 2508. Sources of Financialemployers earn a considerable premium, constant returns to scale, Eskeland shows Assistance for Householdspossibly because they contribute more to that only the direct benefits to consumers Suffering an Adult Deathproductivity than their fellow workers in the form of a public good are adjusted in Kagera, Tanzania(perhaps through an effect on esprit de by the shadow price of public revenuecorps). (typically downward, as Pigou conjec- Mattias Lundberg, Mead Over,

'rhe authors' results draw attention to tured) before benefits are aggregated to and Phare Mujinjasome startling differences in educational establish optimal provision. When public (December 2000)and labor market attainment between programs benefit productive sectorsgroups. A strong case can be made for in- through cost savings, the marginal cost of Why do some households manage bettercluding such issues in the policy debate, provision is in optimum equal to the mar- than others in overcoming the impact ,fan

This paper-a product ofMacroeconom- ginal cost savingsinthe benefiting sectors. adult deatht? The household's ability toics and Growth, Development Research The reason that programs that benefit cope is a function of the resources it canGroup-is part of a larger effort in the production are not scaled down by the command, including its access to privategroup to understand the role of ethnicity shadow price of public revenue is that the networks for social insurance and credit.


Public intervention can reduce vulnerabil- informed the World Bank Policy Research incentives to attract genuine long-termity ex ante, or target assistance ex post, to Report Confronting AIDS: Public Priori- investment.the hardest-hit households. ties in a Global Epidemic. Copies of this But more recent evidence has shown

paper are available free from the World that when other factors-such as infra-The AIDS crisis in Africa and elsewhere Bank, 1818 H Street NW, Washington, DC structure, transport costs, and politicalcompels us to design appropriate assis- 20433. Please contact Viktor Soukhanov, and economic stability-are more or lesstance policies for households experiencing room MC2-523, telephone 202-473-5271, equal, the taxes in one location may havea death. Policies should take into account fax 202-522-3230, email address a significant effect on investors' choices.and strengthen existing household coping [email protected]. Policy Re- This effect is not straightforward, how-strategies, rather than duplicate or under- search Working Papers are also posted on ever. It may depend on the tax instrumentmine them. the Web at http:/econ.worldbank.org. The used by the authorities, the characteris-

Lundberg, Over, and Mujinja investi- authors may be contacted at mlundberg tics of the multinational company, and thegate the nature of coping mechanisms @worldbank.org, meadover@worldbank. relationships between the tax systems inamong a sample of households in Kagera, org, or [email protected]. (30 pages) the home and recipient countries. ForTanzania in 1991-94. They estimate the example, tax rebates are more importantmagnitude and timing of receipts of pri- for mobile firms, for firms that operate invate transfers, credit, and public assis- 2509. How Tax Policy and multiple markets, and for firms whosetance by households with different char- Incentives Affect Foreign home country exempts any profit earnedacteristics. Their empirical strategy ad- Direct Investment: A Review abroad (Canada, France) rather than us-dresses three common methodological dif- ing tax credit systems (Japan, the Unitedficulties in estimating the impact of adult Jacques Morisset and Neda Pirnia Kingdom, the United States).death: selection bias, endogeneity, and (December 2000) Even if tax incentives were quite effec-unobserved heterogeneity. tive in increasing investment flows, the

Lundberg, Over, and Mujinja find that Tax incentives neither make up for serious costs might well outweigh the benefits.less-poor households (those with more deficiencies in a country's investment en- Tax incentives are not only likely to havephysical and human capital) benefit from vironment nor generate the desired exter- a negative direct effect on fiscal revenueslarger receipts of private assistance than nalities. But when other factors-such as but also frequently create significant op-poor households. Resource-abundant infrastructure, transport costs, andpoliti- portunities for illicit behavior by tax ad-households are wealthy in social assets as cal and economic stability-are more or ministrators and companies. This issuewell as physical assets. Poor households, less equal, the taxes in one location may has become crucial in emerging econo-on the other hand, reiy relatively more on have a significant effect on investors' mies, which face more severe budgetaryloans than private transfers, for up to a choices. This effect varies, however, de- constraints and corruption than industrialyear after a death. This suggests that pending on the tax instrument used, the countries do.credit acts as insurance for households characteristics of the multinational com- Morisset and Pirnia suggest research inwhere informal interhouseholdassis ance pany, and the relationship between the five areas:contracts are not enforceable. A donor in tax systems of the home and recipient * The eventual nonlinear impact of taxKagera can be sure that assistance to a countries. rates on the investment decisions of mul-wealthy household will be reciprocated, tinational companies.whereas a poor household may not be able With an increasing number of govern- * The effect of tax policy on the compo-to return the favor. Assistance to the poor ments competing to attract multinational sition of foreign direct investment (foris more likely to come with more formal companies, fiscal incentives have become example, greenfield, reinvested earnings,arrangements for repayment. Formal-sec- a global trend thathas grown considerably and mergers and acquisitions).tor assistance is targeted toward the poor in the 1990s. Poor African countries rely * The development of new technologiesimmediately following the death. on tax holidays and import duty exemp- and global companies that are likely to be

The impact of adult deaths on house- tions, while industrial Western European more sensitive to, and able to exploit,holds may be mitigated either ex ante, countries allow investment allowances incentives.through programs that minimize poverty or accelerated depreciation. Have govern- * The need for a global approach to theand vulnerability, or expost, by assistance ments offered unreasonably large incen- taxation of multinational companies.targeted to the poorest and most vulner- tives to entice firms to invest in their * The question of whether tax incen-able households. In addition, to the extent countries? tives should be directed only at (foreign)to which micro-credit programs improve Morisset and Pirnia review the litera- investors that make the "right things"access and lower the total costs of borrow- ture on tax policy and foreign direct invest- (such as environmentally safe products)ing, they may not only stimulate growth ment and explore possibilities for re- or more broadly at those that bring jobs,and investment but also help resource- search. They observe that tax incentives technology transfers, and marketingpoor households overcome the impact of neither make up for serious deficiencies skills.an adult death in the areas hard-hit by the in a country's investment environment This paper-a product of the ForeignAIDS epidemic. nor generate the desired externalities. Investment Advisory Service, Interna-

This paper-a product of Infrastructure Long-term strategies to improve human tional Finance Corporation-is part of aand Environment, Development Research and physical infrastructure-and, where larger effort to understand the behaviorGroup-extends research on the house- necessary, to streamline government poli- of multinational companies. Copies of thehold-level impact of adult death which cies and procedures-are more likely than paper are available free from the World


Bank, 1818 H Street NW, Washington, DC change the role of demand management implicit exchange rate targeting, it can20433. Please contact Nessa Busjeet, room in environmental protection. improve the design and performance of19-107, telephone 202-473-3997, fax 202- This paper-a product of Public Eco- monetarypolicycomparedwith otherpolicy522-3262, email address [email protected]. nomics, Development Research Group- approaches that central banks may follow.Policy Research Working Papers are also is part of a larger effort in the group to Not all countries may be able to satisfyposted on the Web at http://econ. provide guiding principles in public fi- the technica] requirements (such as ad-worldbank.org. Jacques Morisset may be nance and environmental protection. Cop- equate price data, adequate understand-contacted [email protected]. (29 pages) ies ofthe paper are available free from the ing of the links between instruments and

World Bank, 1818 H Street NW, Washing- targets of monetary policy, and adequateton, DC 20433. Please contact Hedy forecasting capabilities), but such require-

2510. Environmental Protection Sladovich, room MC2-609, telephone 202- ments should not be overstated. Forecast-and Optimal Taxation 473-7698, fax 202-522-1154, email ad- ing capability can never be perfect, and

dress [email protected]. Policy sensible projections always involve quali-Gunnar S. Eskeland Research Working Papers are also posted tative judgment.(December 2000) on the Web at http://econ.worldbank.org. More important, and often more difficult,

The author maybe contacted at geskeland is the task of designing or improving anSimple unweighted cost-effectiveness @worldbank.org. (31 pages) institutional framework that would allowanalysis remains relevant and correct the central bank to pursue the goal of low,when one introduces costly redistribution stable inflation while maintaining the abil-and revenue generation. 2511. Monetary Policy under ity to stabilize fluctuations in output.

Flexible Exchange Rates: An This paper-a product of the EconomicStruck by the fact that economists did not Introduction to Inflation Targeting Policy and Poverty Reduction Division,have a plausible model for why emissions World Bank Institute-is part of a largerstandards and mandated technologies play Pierre-Richard Agenor effort in the institute to understand thea dominant role in pollution control, (December 2000) dynamics of.monetary policy in developingEskeland sought answers to two questions: countries. Copies of the paper are available

4 Should one stimulate emissions re- Inflation targeting is a flexible policy free from the World Bank, 1818 H Streetductions by firms and households, rich and framework that allows a country's central NW, Washington, DC 20433. Please contactpoor in the same way? bank to exercise some degree of discretion Maria Gosiengfiao, room J4-282, telephone

* How should one combine instruments without putting in jeopardy its main ob- 202-473-3363, fax 202-676-9810, emailthat make activities cleaner with instru- jective of maintaining stable prices. address [email protected] that shift the economy toward less- Policy Research Working Papers are alsopolluting activities? In the past few years a number of central posted on the Web at http:/econ.

Using clean air as an example of a pure banks have adopted inflation targeting for worldbank.o:rg. The author may be contactedpublic good, he shows the role of emissions monetary policy. Agenor provides an intro- at [email protected]. (94 pages)taxes or such surrogate instruments such duction to inflation targeting, with an em-as emissions standards and presumptive phasis on analytical issues and the recentPigouvian taxes. experience of middle- and high-income de- 2512. Quantifying the Impact

To illustrate the combination of demand veloping countries (which have relatively of Technical Barriers to Trade:management and technical controls, he low inflation to begin with and reasonably A Framework for Analysiscomputes a marginal cost curve for emis- well-functioning financial markets).sions reductions in the form ofcleaner cars After presenting a formal analytical Keith E. Maskus, John S. Wilson,and fuels. And he estimates a demand framework, Agenor discusses the basic and Tsunehiro Otsukimodel for cars and driving. requirements for inflation targeting and (December 2000)

The result: under the assumption that how such a regime differs from money andrevenue and redistributive transfers bear exchange rate targeting regimes. The application ofproduct regulations andno premia, the cost of reducing pollution After discussing the operational frame- standards is becoming increasingly conten-in Mexico City increases 44 percent if an work for inflation targeting (including the tious as an implicit nontariff barrier toemissions standards program is used and price index to monitor, the time horizon, trade. This overview of the policy debate andthe presumptive Pigouvian tax on gasoline the forecasting procedures, and the role of methodological issues surrounding productis not. asset prices), he examines recent experi- standards and technical barriers to trade

The important finding, as costly redis- ences with inflation targets, providing proposes concrete steps to move forwardtribution and revenue generation are in- new evidence on the convexity of the empirical analysis ofregulations and trade.troduced, is that this influences the gen- Phillips curve for six developing countries.eral scheme of taxation (in well-known His conclusions: Inflation targeting is a There has been increasing use of techni-ways), and it influences the conditions for flexible policy framework that allows a cal regulations as instruments of commer-optimal environmental quality in accor- country's central bank to exercise some cial policy in the context of multilateral,dance with Pigou's conjecture. However, degree ofdiscretion without putting injeop- regional, and global trade. These nontariffit does not change or invalidate the ardy its main objective of maintaining barriers are of special concern to develop-rankings of technologies and interven- stable prices. In middle- and high-income ing countries, which may bear additionaltions on the control cost curve, nor does it developing economies that can refrain from costs in meeting mandatory standards.


Many industrial and developing countries water sector?Apparently not,judging from Vice Presidency-is part of a larger effortexpress frustration with regulations that experience in fourAfrican countries. There to analyze the factors that contribute tovary across their export markets, require are very few functions that state holding the success of private participation in in-duplicative conformity procedures, and companies are better suited for performing frastructure. Copies of the paper are avail-are continually revised to exclude imports. than other entities are. able free from the World Bank, 1818 H

Maskus, Wilson, and Otsuki provide a Street NW, Washington, DC 20433.comprehensive overview of the policy de- When the Gambia, Guinea, and Senegal Please contact Marie Leon, room Fl lK-bate and methodological issues surround- decided to involve the private sector in the 190, telephone 202-473-6151, fax 202-522-ing product standards and technical bar- provision of water services, they also es- 2961, email address [email protected] to trade. They begin with a review of tablished state holding companies-state- org. Policy Research Working Papers arethe policy context driving demand for owned entities with exclusive or partial re- also posted on the Web at http://econ,empirical analysis of standards in trade, sponsibility for: worldbank.org. The author may be con-then provide an analytical overview of the * Owning infrastructure assets. tacted at mkerftworldbank.org. (33role of standards and their relationship to * Planning and financing investments pages)trade. They then review methodological (replacing assets and expanding net-approaches that have been used to ana- works).lyze standards and their impact on trade. * Regulating the activities of the pri- 2514. Intersectoral Dynamics

Their main interest lies in advancing vate operator. and Economic Growth in Ecuadortechniques that are practical and may be * Promoting public acceptance of pri-fruitfully extended to the empirical analy- vate participation in the sector. Norbert M. Fiess and Dorte Vernersis of regulations and trade. They discuss In C6te d'Ivoire, by contrast, when pri- (January 2001)concrete steps that could be taken to move vate participation was introduced (inforward a practical, policy-relevant pro- 1960), no state holding company was es- The frequent recommen-dation to excludegram of empirical research. Such steps tablished. the oil sector from economic analysis maywould include: To determine whether state holding be short-sighted, as adverse shocks to the

* Administering firm-level surveys in companies help private participation in oil industry are likely to affect other sec-developing countries. the water sector succeed, Kerfreviews the tors through the financial and public sec-

- Devising methods for assessing how four functions these entities are expected tors, with which the oil sector has manymuch standards restrict trade. to perform in the Gambia, Guinea, and links. There are also significant long-run

* Establishingeconometricapproaches Senegal. In light of experience in all four relationships between the agricultural, in-that could be applied to survey and countries, he examines whether, and un- dustrial, and service sectors.microeconomic data, to improve under- der what circumstances, state holdingstanding of the role of standards in exports. companies might be the entities best Fiess and Verner analyze sectoral growth

This paper-a product of Trade, Devel- suited for carrying out such functions. in Ecuador using multivariateopment Research Group-is part of a He concludes that creating a state hold- cointegration analysis. They find signifi-larger effort in the group to study new ing company is often not the best solution. cant long-run relationships between theissues in international trade. Copies ofthe A state holding company might be better agricultural, industrial, and service sec-paper are available free from the World suited than other entities for planning and tors. Moreover, they are able to deriveBank, 1818 H Street NW, Washington, DC financing investments when (and only dynamic sector models that combine the20433. Please contact Lili Tabada, room when): short-run links between the three sectorsMC3-333, telephone 202-473-6896, fax * Investmentresponsibilitiescannotbe with long-run dynamics.202-522-1159, email address Itabada transferred to the private operator. When they disaggregate the three [email protected]. Policy Research Work- * Tariffs are insufficient, at least for a tors into their intrasectoral components,ing Papers are also posted on the Web at time, to cover investment needs, so it is they discover many interesting relation-http://econ.worldbank.org. The authors crucial that a public entity have access to ships that contribute to a better under-may be contacted at keith.maskus other sources of finance. standing of inter- and intrasectoral [email protected], [email protected], * The holding company's financial namics in the context of Ecuadorian eco-or [email protected]. (51 pages) strength and accountability, or its incen- nomic growth.

tives and ability to promote the gradual Their findings suggest that more atten-adoption of cost-covering tariffs, are supe- tion should be paid to interdependencies

2513. Do State Holding Companies rior to those of a ministerial department. in sectoral growth, since an improvedFacilitate Private Participation When one or more of these conditions understanding of intersectoral dynamicsin the Water Sector? Evidence are not met, the main investment respon- may facilitate the implementation offrom Cote d'lvoire, the Gambia, sibilities should be transferred to the pri- policy aimed at increasing economicGuinea, and Senegal vate operator or, if that is not possible, left growth in Ecuador.

to the government itself. There appears to be no direct linkMichel Kerf The other three functions should not, as between the oil sector and the non-oil(December 2000) a general rule, be performed by a state industrial sectors. But strong evidence

holding company. supports cointegration between the oil in-Do state holding companies promote the This paper-a product of the Private dustry and financial services as well as be-success of private participation in the Sector Development and Infrastructure tween the oil industry and public services.


This means, among other things, that the This database-the first step in the development, water management, wateroil sector cannot be excluded from important Firm Analysis and Competi- and sanitation, and possibly health. Theseintersectoral growth analysis, because an tiveness Surveys initiative that the World results are robust and insensitive toadverse shock to the oil industry is likely Bank is spearheading-will be joined by specification.to affect other sectors through the finan- additional country databases. The aim is As the smallest, poorest municipalitiescial sector, the public sector, or both. to fill the gap in much-needed micro- invested newly devolved public funds in

This paper-a product of the Economic economic evidence using comparable their highest priority projects, investmentPolicy Sector Unit, Latin America and instruments. showed a strong, positive relationshipthe Caribbean Region-is part of a This paper-a product of Macroeconom- with need in agriculture and the social sec-larger effort in the region to investigate ics and Growth, Development Research tors. In sectors where decentralization didintersectoral growth dynamics. Copies of Group-is part of a larger effort in the not bring about changes, the central gov-the paper are available free from the group to collect comparable firm-level in- ernment had invested little before 1994World Bank, 1818 H Street NW, Washing- formation from developing countries. The and the local government continued toton, DC 20433. Please contact Anne research was funded by the Bank's Re- invest little afterward.Pillay, room 18-154, telephone 202-458- search Support Budget under the research These findings are consistent with a8046, fax 202-522-2119, email address project 'Impact of the East Asian Crisis" model of public investment in which [email protected]. Policy Research (RPO 632-28). Copies of this paper are govermnent's superior knowledge of localWorking Papers are also posted on the available free from the World Bank, 1818 needs dominates the central government'sWeb at http://econ.worldbank.org. The H Street NW, Washington, DC 20433. technical and organizational advantage inauthors may be contacted at nfiess Please contact Emily Khine, room MC3- the provision of public [email protected] or dverner@worldbank. 341, telephone 202-473-7471, fax 202-522- This paper-a product of Public Eco-org. (29 pages) 3518, email address kkhine@worldbank. nomics, Development Research Group-

org. Policy Research Working Papers are is part of a larger effort in the group toalso posted on the Web at http:l/ analyze fiscal decentralization in develop-

2515. Firm-Level Survey Provides econ.worldbank.org. The author may be ing countries. Copies of the paper areData on Asia's Corporate Crisis contacted at [email protected]. available free from the World Bank, 1818and Recovery (33 pages) H Street NW, Washington, DC 20433.

Please contact Hedy Sladovich, roomMary Hallward-Driemeier MC2-609, telephone 202-473-7698, fax(January 2001) 2516. Does Decentralization 202-522-1154, email address hsladovich

Increase Responsiveness to Local @worldbank.org. Policy Research Work-This rich new database on 4,000 Asian Needs? Evidence from Bolivia ing Papers are also posted on the Web atfirms-operating in Indonesia, the Repub- http://econ.worldbank.org. The authorlic of Korea, Malaysia, the Philippines, Jean-Paul Faguet maybe contacted [email protected] Thailand-focuses on the impact of (January 2001) (44 pages)Asia's economic crisis and on the longer-run determinants ofproductivity, employ- Bolivia's 1994 decentralization led toment practices, and financial structure. changes in the gcographic allocation of 2517. The Effect of International

funds and to the development of innova- Monetary Fund and World BankResearchers have decried the limited sup- tive institutions of local governance. The Programs on Povertyply of objective, comparable firm-level changes in the sectoral (and geographic)data from developing countries. Hallward- allocations of public funds show a strong William EasterlyDriemeier describes a new database that relationship with objective indicators of (January 2001)helps fill this information gap. social need, evidence that local priorities

T'he database has detailed records on are being reflected. There is some evidence that IMF and4,000 firms operating in Indonesia, the World Bank adjustment lending smoothsRepublic of Korea, Malaysia, the Philip- Significant changes in public investment consumption for thepoor, reducing the risepines, and Thailand. A comparable survey patterns-in both the sectoral uses of in poverty fir any given contraction of theinstrument and sampling methodology funds and their geographic distribution- economy but also reducing the fall in pov-was used in each country, and all five stud- emerged after Bolivia devolved substan- erty for any given expansion. Adjustmenties were carried out simultaneously. The tial resources from central agencies to lendingplays a similar role as inequality,data cover three years (1996-98), allow- municipalities in 1994. By far the most reducing poverty's sensitivity to theing for measurements of firm performance important determinant of these changes economy's aggregate growth rate.before and immediately after the East are objective indicators of social need (forAsian financial crisis. example, education investment rises Structural adjustment-as measured by

The questionnaire focused on measur- where illiteracy is higher). Indicators of in- the number of adjustment loans from theing the impact of the regional financial stitutional capacity and social organiza- IMF and World Bank-reduces thecrisis at the microeconomic level and un- tion are less important. growth elasticity of poverty reduction.derstanding the longer-run determinants Empirical tests using a unique database Easterly finds no evidence for structuralof productivity, employment practices, show that investment changed signifi- adjustment having a direct effect onand financial structure. cantly in education, agriculture, urban growth.


The poor benefit less from output expan- in the 1960s? Can growth-orientedpolicies Group-is part of a larger effort in thesion in countries with many adjustment be harmonized at national andglobal lev- group to understand the impact of global-loans than they do in countries with few els to reduce volatility and promote social ization on developing countries. Copies ofsuch loans. By the same token, the poor equity? the paper are available free from thesuffer less from an output contraction in World Bank, 1818 H Street NW, Washing-countries with many adjustment loans Globalization could significantly expand ton, DC 20433. Please contact Rinathan in countries with few. Why would trade, international investment, and tech- Bonfield, room MC3-354, telephone 202-this be? nological advances, but the gains from 473-1248, fax 202-522-3518, email ad-

One hypothesis is that adjustment lend- global integration have been unevenly dress [email protected]. Policying is countercyclical in ways that smooth distributed across and within nations. Research Working Papers are also postedconsumption for the poor. There is evi- Greater global interdependence has also on the Web at http://econ.worldbank.org.dence that some policy variables under brought greater macroeconomic volatility, The author may be contacted atadjustment lending are countercyclical, resulting in several serious financial cri- [email protected]. (30 pages)but no evidence that the cyclical compo- ses in the second half of the 1990s.nent of those policy variables affects The global matrix ofBretton Woods andpoverty. United Nations institutions that devel- 2519. Is Investment in Africa

Easterly speculates that the poor may oped starting in the 1940s formed under Too Low or Too High?be ill placed to take advantage of new a different balance of power, in a world Macro and Micro Evidenceopportunities created by structural ad- of fixed exchange rates and limitedjustment reforms,just as they may suffer capital mobility. Since the 1960s regional Shantayanan Devarajan, William R. Easterly,less from the loss of old opportunities in financial institutions have emerged be- and Howard Packsectors that were artificially protected cause ofthe greater autonomy of different (January 2001)before reform. regions and the greater financial needs of

Poverty's lower sensitivity to growth development. Many analysts decry the level of invest-under adjustment lending is bad news Solimano reviews different proposals ment in Africa, saying it is too low. Butwhen an economy expands and good news for reform of the international financial there is no evidence, in cross-country datawhen it contracts. These results could be institutions and changes in the roles of the or in microeconomic data from Tanzania,interpreted as giving support to either the International Monetary Fund (IMF) and that private and public capital is produc-critics or the supporters of structural; id- the World Bank. He highlights the impli- tive in Africa. In that sense, investment injustment programs. cations for developing countries of: Africa may be viewed as too high.

This paper-a product of Macroeconom- * Policy conditionality.ics and Growth, Development Research * The countercyclical role of multila- Devarajan, Easterly, and Pack investigateGroup-is part of a larger effort in the terals' lending. the relationship between weak growthgroup to understand the effect of growth * Greater lending to middle-income performance and low investment rates inon poverty. Copies of the paper are -.vail- than to low-income developing countries. Africa. The cross-country evidence sug-able free from the World Bank, 1818 H * Access to liquidity at times of crisis. gests no direct relationship. The positiveStreet NW, Washington, DC 20433. * Mechanisms for giving low-income and significant coefficient on private in-Please contact Kari Labrie, room MC3- countries a greater voice in IMF and vestment appears to be driven by456, telephone 202-473-1001, fax 202-522- World Bank decisionmaking. Botswana's presence in the sample. Allow-1155, email address klabrie@worldbank. Solimano stresses the overlapping re- ing for the endogeneity of private invest-org. Policy Research Working Papers are sponsibilities of the Bretton Woods and ment, controlling for policy, and positingalso posted on the Web at http:// regional financial institutions and the a nonlinear relationship make no differ-econ.worldbank.org. The author may be need to reassess the allocation of respon- ence to the conclusion.contacted at [email protected]. sibilities and to develop better coordina- Higher investment in Africa would not(31 pages) tion mechanisms between these institu- by itself produce faster GDP growth.

tions. Those designing institutional re- Africa's low investment and growth ratesform must consider the corporate capabili- seem to be symptoms of underlying

2518. Can Reforming Global ties of each type of institution. The corpo- factors.Institutions Help Developing rate cultures of global and regional insti- To investigate those factors and to cor-Countries Share More in the tutions differ. So does the kind of knowl- rect for some of the problems with cross-Benefits from Globalization? edge they generate and disseminate, and country analysis, Devarajan, Easterly,

so do patterns of interactions with, and and Pack undertook a case study ofmanu-Andres Solimano mechanisms for representation of, client facturing investment in Tanzania. They(January 2001) countries. tried to identify why output per worker

Finally, Solimano calls attention to the declined while capital per worker in-Globalization has expanded both opportu- need to harmonize national and global creased. Some of the usual suspects-suchnities and risks. How should responsibili- growth-oriented policies in a way that as shifts from high- to low-productivityties be allocated (and coordinated) between reduces volatility and promotes social subsectors, the presence of state-ownedthe global financial institutions that de- equity. enterprises, or poor policies-did not playveloped in the 1940s and the regional fi- This paper-a product of Macroeconom- a significant role in this decline. Instead,nancial institutions that began developing ics and Growth, Development Research low capacity utilization (possibly the


byproduct ofpoor policies) and constraints from apartheid, are coming under fire, maybe contacted at [email protected] absorptive capacity for skill acquisition Some argue that a high union wage pre- org or [email protected]. (47 pages)seem to be critical factors. If Tanzania is mium and the industrial council systemnot atypical, the low productivity of invest- are important causes of inflexibility inment in Africa was the result of a combi- South Africa's labor market. 2521. Labor Market Rigiditynation of factors that occurred simulta- Butcher and Rouse analyze unions' di- and the Success of Economicneously, not any single factor. rect effect on workers' wages (including Reforms across More than 100

What does this tell us? First, we should the time-honored question about whether Countriesbe more careful about calling for an invest- the union wage gap is real or reflects thement boom so that Africa can resume fact that workers who are members of Alvaro Forteza and Martin Ramagrowth. Unless some or all of the under- unions differ from those who are not) and (January 2001)lying problems are addressed, the results ask whether there is evidence that indus-may be disappointing. We should also be trial council agreements force affected Labor market policies and institutionsmore circumspect about Africa's low sav- employers to pay union wages for non- affect the success of economic reform butings rate; it may be low because returns union workers. probably more for political than for eco-to investment were so low. The relatively They estimate that among Africans nomic reasons. Growth appears not to behigh level of capital flight from Africa may union members earn about 20 percent hurt by minimum wages and mandatoryhave been a rational response to the lack more than nonmembers, while among benefits. But the relative size of organizedof investment opportunities at home. whites union workers earn 10 percent labor (in government and elsewhere) is

Second, there is probably no single key more than nonunion workers. crucial.to unlocking investment and GDP growth They find that African nonunion work-in Africa. All of the factors contributing to ers who are covered by industrial council Forteza and Rama show that labor mar-low productivity should be addressed agreements receive a premium of 6 to 10 ket policies and institutions affect the ef-simultaneously. percent; the premium is positive but not fectiveness of economic reform programs.

This paper-a joint product of Public statistically significant for whites. They compare annual growth rates acrossEconomics and Macroeconomics and In addition, the union gap is smaller 119 countries, using data from 449 WorldGrowth, Development Research Group- inside the industrial council system than Bank adjustment credits and loans be-is part of a larger effort in the group to outside the system for Africans, implying tween 1980 and 1996.study growth and development in Africa. that the total union premium for union The results indicate that countries withCopies ofthe paper are available free from members covered by an industrial coun- relatively rigid labor markets experiencedthe World Bank, 1818 H Street NW, cil agreement is similar to the union deeper recessions before adjustment andWashington, DC 20433. Please contact premium outside the industrial council slower recoveries afterward.Hedy Sladovich, room MC2-609, tele- system. The authors also disentangle thephone 202-473-7698, fax 202-522-1154, Among Africans, the industrial council mechanisms through which labor marketemail address [email protected]. and union wage gaps are greatest among rigidity operates.Policy Research Working Papers are also low-wage workers. They find that minimum wages andposted on the Web at http://econ. To increase employment, policies in mandatory benefits do not hurt growth.worldbank.org. The authors may be con- South Africa should focus on increasing But the relative size of organized labor (intacted at [email protected], competition among employers within sec- government and elsewhere) appears [email protected], or packh tors, rather than increasing competition [email protected]. (36 pages) among workers by trying to reduce union Labor market rigidity seems to be rel-

power. evant more for political reasons than forThis paper-a product of Poverty and economic reasons. The authors' findings

2520. Wage Effects of Unions and Human Resources, Development Re- suggest that not enough attention hasIndustrial Councils In South Africa search Group-is part of a larger effort in been paid to vocal groups (urban, middle-

the group to understand the impact of class groups) that stand to lose from eco-Kristin F. Butcher and Cecilia Elena Rouse labor market policies and institutions on nomic reform. The implications of the find-(January 2001) economic performance. The study was ings for policymakers: There should be

funded by the Bank's Research Support less focus on deregulating the labor mar-Do union workers earn higher wages than Budget under the research project "The ket and more on defusing the oppositionnonunion workers in South Africa? Impact of Labor Market Policies and In- of (vocal) losers.(Yes, but less so than previous estimates stitutions on Economic Performance" The results are robust to changes inwould suggest.) And do industrial council (RPO 680-96). Copies of this paper are measurement, controls, and sample andagreements extend these premia to available free from the World Bank, 1818 do not suffer from self-selection bias.nonunion workers? (On the surface, yes, H Street NW, Washington, DC 20433. This paper-a product of Poverty andbut the effects are too small to be the Please contact Patricia Sader, mail stop Human Resources, Development Re-primary reason for South Africa's vast MC3-306, telephone 202-473-3902, fax search Group-is part of a larger effort inunemployment.) 202-522-1153, email address psader the group to understand the impact of

@worldbank.org. Policy Research Work- labor market policies and institutions onIn South Africa unions, which played a ing Papers are also posted on the Web at economic performance. The study wascrucial role in the country's transition http./lecon.worldbank.org. The authors funded by the Bank's Research Support


Budget under the research project "The available free from the World Bank, 1818 their incentives to counterlobby againstImpact of Labor Market Policies and In- H Street NW, Washington, DC 20433. high tariffs on their inputs. Indeed, understitutions on Economic Performance" Please contact Lili Tabada, room MC3- a full duty drawback regime, tariffs on(RPO 680-96). Copies of this paper are 333, telephone 202-473-6896, fax 202-522- intermediate goods are irrelevant to ex-available free from the World Bank, 1818 1159, email address ltabada@worldbank. porters because they are fully rebated. InH Street NW, Washington, DC 20433. org. Policy Research Working Papers are equilibrium, higher tariffs will be ob-Please contact Patricia Sader, mail stop also posted on the Web at http:// served on these goods.MC3-306, telephone 202-473-3902, fax econ.worldbank.org. The authors may be Creating a regional trading bloc alters202-522-1153, email address psader contacted at [email protected], the incentives by eliminating duty [email protected]. Policy Research Work- [email protected], or ineagu backs on intraregional exports, whiching Papers are also posted on the Web at @worldbank.org. (33 pages) leads to lower tariffs for goods thathttp://econ.worldbank.org. The authors intraregional exporters use as inputs.may be contacted at alvarofRdecon.edu.uy Evidence from Mercosur suggests thator [email protected]. (49 pages) 2523. Can Duty Drawbacks eliminating duty drawbacks for intra-

Have a Protectionist Bias? regional exports would lead to increasedEvidence from Mercosur counterlobbying against protection of in-

2522. Trade in International termediate products. Cadot, de Melo, andMaritime Services: How Much Olivier Cadot, Jaime de Melo, Olarreaga estimate that without thisDoes Policy Matter? and Marcelo Olarreaga mechanism, the common external tariff

(January 2001) would have been 3.5 percentage points (25Carsten Fink, Aaditya Mattoo, percent) higher on average.and Ileana Cristina Neagu Evidence from Mercosur suggests that This paper-a product of Trade, Devel-(January 2001) eliminating duty drawbacks for intra- opment Research Group-is part of a

regional exports would lead to increased larger effort in the group to study the po-Trade liberalization and the breakup of counterlobbying against protection of litical economy of trade policy. The re-private carrier agreements could reduce intermediate products. Without the duty search was funded by the Bank's Researchaverage liner transport prices by a third drawback, the common external tariff Support Budget under the researchand cut costs ongoods carriedto the United would have been an estimated 3.5 project 'The Anti-export Bias of DutyStates alone by up to $3 billion. percentage points (25 percent) higher on Drawbacks." Copies ofthe paper are avail-

average. able free from the World Bank, 1818 HMaritime transport costs significantly Street NW, Washington, DC 20433.impede international trade. Fink, Mattoo, Duty drawback (or rebate) systems reduce Please contact Lili Tabada, room MC3-and Neagu examine why these costs are or eliminate the duties paid on imported 333, telephone 202-473-6896, fax 202-522-so high in some countries and quantify the intermediate goods or raw materials used 1159, email address [email protected] of two explanations: restric- in the production of exports. When a firm org. Policy Research Working Papers aretive trade policies and private anti-com- imports an intermediate product for also posted on the Web at http://petitive practices. Both matter, they find, use in the production of an export econ.worldbank.org. The authors may bebut private anti-competitive practices good, tariff payments on the imported in- contacted at [email protected],have the greater impact. terrnediate good are either waived (duty [email protected], or molarreaga

Trade liberalization and the breakup of drawback) or returned to the producer @worldbank.org. (33 pages)private carrier agreements would lead to once the final product is exported (rebate).a reduction in average liner transport These incentive systems are oftenjustifiedprices of a third and cost savings of up to on the grounds that they tend to correct 2524. Racing to the Bottom?$3 billion on goods carried to the United the anti-trade bias imposed by high tariff Foreign Investment and AirStates alone. levels. Pollution in Developing Countries

The policy implications are clear: not The problem with this line of reasoningonly should government policy be further is that it assumes that tariffs are prede- David Wheelerliberalized, but there should be stronger termined policy variables; iftheywere, the (January 2001)international disciplines on restrictive easiest way to reduce their anti-trade biasbusiness practices. Fink, Mattoo, and would be to eliminate them. But this is Critics of free trade have raised the spec-Neagu propose developing such disci- rarely done because existing levels of pro- terofa "race to the bottom," in which envi-plines in the current round of services tection correspond to a political economy ronmental standards collapse becausenegotiations at the World Trade equilibrium difficult to modify in the pres- polluters threaten to relocate to 'pollutionOrganization. ence of lobbying pressures. havens" in the developing world. The flaw

This paper-a product of Trade, Devel- Cadot, de Melo, and Olarreaga show in the race-to-the-bottom model is that itsopment Research Group-is part of a that in a political economy setting where basic assumptions misrepresent thepoliti-larger effort in the group to assess the tariffs and duty drawbacks are endog- cal economy of pollution control in devel-implications of liberalizing trade in ser- enously chosen through industry lobbying, oping countries.vices. This research is supported in part full duty drawbacks are granted to export-by the U.K. Department for International ers that use imported intermediate goods Critics of free trade have raised the spec-Development. Copies of the paper are in their production. This in turn decreases ter of a "race to the bottom," in which en-


vironmental standards collapse because ing. An education Gini index-a new in- 2526. Linking Participatorypolluters threaten to relocate to 'pollution dicatorfor the distribution ofhuman capi- Poverty Assessments to Policyhavens" in the developing world. tal and welfare-facilitates comparison of and Policymaking: ExperienceProponents of this view advocate high, education inequality across countries and from Vietnamglobally uniform standards enforced by over time.punitive trade measures that neutralize Carrie Turkthe cost advantage of would-be pollution Thomas, Wang, and Fan use a Gini index (January 2001)havens. to measure inequality in educational at-

To test the race-to-the-bottom model, tainment. They present two methods (di- Much of the qualitative research aboutWheeler analyzes recent air quality trends rect and indirect) for calculating an edu- poverty in Vietnam over the past 8 to 10in the United States and in Brazil, China, cation Gini index and generate a quin- years was overlooked bypolicymakers, whoand Mexico, the three largest recipients quennial data set on education Gini in- tended to view it as "unscientific"and lack-of foreign investment in the developing dexes for the over-15 population in 85 ing in credibility. So why did the fourpar-world. countries (1960-90). Preliminary empiri- ticipatory poverty assessments imple-

The evidence clearly contradicts the cal analysis suggests that: mented in 1999 grab their attention?model's central prediction. The most dan- * Inequality in education in most of thegerous form of air pollution-suspended countries declined over the three decades, The year 1999 was important for poverty-particulate matter-has actually declined with a few exceptions. related research and policy developmentin major cities in all four countries during * Inequality in education as measured in Vietnam. The General Statistics Officethe era of globalization. by the education Gini index is negatively had collected household data in the sec-

Citing recent research, Wheeler associated with average years of school- ond Vietnam Living Standards Survey inargues that the race-to-the-bottom ing, implying that countries with higher 1998 and made it available for analysis inmodel is flawed because its basic assump- educational attainment are more likely to 1999. And four participatory poverty as-tions misrepresent the political economy achieve equality in education than those sessments (PPAs) were implementedof pollution control in developing with lower attainment. during 1999.countries. * A clear pattern of an education Turk's case study describes how govern-

He proposes a more realistic model, Kuznets curve exists if the standard de- ment agencies, donors, and nongovern-in which low-income societies serve their viation of education is used. mental organizations collaborated inown long-run interests by reducing * Gender gaps are clearly related to implementing the PPAs. The considerablepollution. He concludes with recommen- education inequality, and over time, the amount of qualitative information aboutdations for international assistance mea- association between gender gaps and in- poverty produced in Vietnam over the pastsures that can improve environmental equality becomes stronger. 8 to 10 years has rarely grabbed the at-quality without counterproductive en- * IncreasesinpercapitaGDP(adjusted tention of policymakers, who tend to viewforcement ofuniform standards and trade for purchasing power parity) seem to be such information as 'unscientific" andsanctions. negatively associated with education in- lacking in credibility. By contrast, the

This paper-a product of Infrastructure equality and positively related to the la- PPAs implemented in 1999 have beenand Environment, Development Research bor force's average years of schooling, af- widely circulated, used, and quoted.Group-is part of a larger effort in the ter controlling for initial income levels. What WELs different about those PPAsgroup to study the economics of pollution This paper-a joint product of the Of- that led their findings to be brought intocontrol in developing countries. Copies of fice of the Vice President and the Eco- local and national policy debates, as pre-the paper are available free from the nomic Policy and Poverty Reduction Di- vious findings had not been?World Bank, 1818 H Street NW, Washing- vision, World Bank Institute-is an exten- Working partnerships among donorston, DC 20433. Please contact David sion ofthe paper"Measuring Educational and nongovernmental organizations wereWheeler, room MC2-529, telephone 202- Inequality: Education Gini Index from important and helped build consensus on473-3401, fax 202-522-3230, email ad- 1960 to 1990" (Vinod Thomas, Yan Wang, the research findings, but more crucialdress [email protected]. Policy and Xibo Fan, World Bank, Washington, was the active engagement of governmentResearch Working Papers are also posted DC). This study was funded by the Bank's partners firom the very early stages. Es-on the Web at http://econ.worldbank.org. Research Support Budget under the re- tablishing a Poverty Working Group pro-(24 pages) search project "The Quality of Growth" vided a structure for implementing the

(RPO 682-02). Copies of this paper are PPAs, for feeding analysis through to theavailable free from the World Bank, 1818 poverty assessment, and for keeping gov-

2525. Measuring Education H Street NW, Washington, DC 20433. ernment fully involved. The PovertyInequality: Gini Coefficients Please contact Agnes Datoloum, room J4- Working Group now supports the govern-of Education 259, telephone 202-473-6334, fax 202-676- ment in drafting its poverty reduction

9810, email address adatoloum strategy.Vinod Thomas, Yan Wang, and Xibo Fan @worldbank.org. Policy Research Work- Strong WMorld Bank leadership, finan-(January 2001) ing Papers are also posted on the Web at cial support from the U.K. Department for

http://econ.worldbank.org. The authors International Development, the technicalEqual access to education is a basic human may be contacted at vthomas@worldbank. expertise and commitment of the PPAright. But in many countries gaps in edu- org, [email protected], or xfan partner agencies, and the availability ofcation between variousgroups are stagger- @worldbank.org. (37 pages) recent high-qualityhousehold survey data


played an important part in ensuring the In other words, at any given mean, the vide a space for maintaining socialPPAs' credibility. higher the initial inequality ofwealth, the reputations and webs of obligation, and

This paper-a product of the Hanoi lower the rate of new business start-ups, they serve as arenas for status-makingCountry Office, East Asia and Pacific through the existence of diminishing competitions.Region-is part of a larger effort in the returns to capital given liquidity con- The first role is central to maintainingregion to encourage greater participation straints. In this sense, the results suggest the networks essential for social relation-by poor households in policymaking and that inequality is bad for business- ships and coping with poverty. The secondprogramming for poverty reduction. Cop- but the size of this effect is small. is a correlate of mobility that may becomeies of the paper are available free from the The findings do not constitute a case more prevalent as incomes rise.World Bank, 1818 H Street NW, Washing- for public redistribution of wealth as a Development policies that favor indi-ton, DC 20433. Please contact Herawaty means of stimulating business activity. vidual over collective action reduce theSutrisna, room MC9-242, telephone 202- There should probably be more research incentives for the networking function458-8032, fax 202-522-1556, email ad- on interventions to reduce liquidity and increase the incentives for status-dress [email protected]. Policy constraints. enhancing functions-thus reducingResearch Working Papers are also posted This paper-a product of Poverty and social cohesion and increasing conspicu-on the Web at http://econ.worldbank.org. Human Resources, Development Re- ous consumption.The author may be contacted at cturk search Group-is part of a larger effort in Market-driven improvements in [email protected]. (25 pages) the group to understand how the distri- employment, for example, could reduce a

bution ofwealth in an economy influences family's dependence on its traditionalmacroeconomic activity and occupational networks, could reduce incentives to main-

2527. Is Inequality Bad for structure. Copies of the paper are avail- tain these networks, and could reduceBusiness? A Nonlinear able free from the World Bank, 1818 H social cohesion within a village and thusMicroeconomic Model of Wealth Street NW, Washington, DC 20433. its capacity for collective action. In con-Effects on Self-Employment Please contact Patricia Sader, room MC3- trast, microfinance programs and social

556, telephone 202-473-3902, fax 202-522- funds try to retain and even build aAlice Mesnard and Martin Ravallion 1153, email address psader@worldbank. community's capacity for collective action.(January 2001) org. Policy Research Working Papers are This paper-a product of Poverty and

also posted on the Web at http:// Human Resources, Development Re-Data on occupational choice among return econ.worldbank.org. Martin Ravallion search Group-is part of a larger effort inmigrants in Tunisia reveal that higher may be contacted at mravallion the group to study the relationship be-inequality of wealth reduces the level of @worldbank.org. (28 pages) tween poverty and collective action. Cop-new business activity. The effect is not ies of the paper are available free from thelarge, however. Even dramatic redistribu- World Bank, 1818 H Street NW, Washing-tions of wealth would not provide much 2528. Poverty and Public ton, DC 20433. Please contact Patriciastimulus to entrepreneurship. Celebrations in Rural India Sader, room MC3-556, telephone 202-473-

3902, fax 202-522-1153, email addressIt is widely assumed that pervasive credit Vijayendra Rao [email protected]. Policy Researchmarket failures mean that a person's cur- (January 2001) Working Papers are also posted on therent wealth is critical to whether or not Web at http://econ.worldbank.org. Thethat person takes up opportunities to start Verypoor households spend large sums on author may be contacted at vraoa new business. celebrations. To the extent that these expen- @worldbank.org. (25 pages)

Mesnard and Ravallion show that in- ditures are central to maintaining the net-equality in wealth can be either good or works essential for social relationshipsbad for the level of entrepreneurship in an and coping with poverty, these are reason- 2529. Mutual Fund Investmenteconomy, depending on how diminishing able expenses. To the extent that they are In Emerging Markets: An Overviewreturns to capital interact with borrowing status competitions, they may merely in-constraints at the microeconomic level. crease conspicuous consumption. Graciela Kaminsky, Richard Lyons,

They use nonparametric regression and Sergio Schmuklermethods to study wealth effects on busi- Rao examines the paradox of very poor (January 2001)ness start-ups among migrants returning households spending large sums on cel-to their home country, Tunisia. They ebrations. Using qualitative and quanti- How do mutual funds behave when theyinclude controls for heterogeneity, with tative data from South India, Rao demon- invest in emerging economies? For onespecification tests for the nonseparable strates that spending on weddings and thing, mutual funds'flows are not stable.effects with wealth and for selection festivals can be explained by integrating Withdrawals from emerging marketsbias. an anthropological understanding of how during recent crises were large, which

There is no evidence of increasing re- identity is shaped in Indian society with squares with existing evidence offinancialturns at low wealth. an economic analysis of decisionmaking contagion.

The aggregate number of business under conditions of extreme poverty andstart-ups is an increasing function of ag- risk. International mutual funds are one of thegregate wealth but a decreasing function Rao argues that publicly observable main channels for capital flows to emerg-of wealth inequality, celebrations have two functions: they pro- ing economies. Although mutual funds


have become important contributors to may be contacted at [email protected], * Teachers need a range of knowledgefinancial market integration, little is [email protected], or sschmukler and skills to teach underprivileged chil-known about their investment allocation @worldbank.org. (37 pages) dren effectively. Here again, NGO modelsand strategies. Kaminsky, Lyons, and would be a useful tool for teacher train-Schmukler provide an overview of mutual ing institutes,fund activity in emerging markets. 2530. The Role of * NGOs and the government could col-

First, they describe international mu- Nongovernmental Organizations laborate in developing appropriate andtual funds' relative size, asset allocation, in Primary Education: A Study of flexible learning assessment tools, in lineand country allocation. Six NGOs in India with innovative teaching and learning

Second, they focus on fund behavior dur- methods.ing crises, by analyzing data at the level of Shanti Jagannathan * But without safeguards, large-scaleboth investors and fund managers. (January 2001) replication by the government of such

Among their findings: Equity invest- NGO innovations as the "alternativement in emerging markets has grown rap- Nongovernmental organizations working school" and the 'voluntary teacher" couldidly in the 1990s, much of it flowing in education in India are professional re- lower the quality of education.through mutual funds. Collectively, these source centers and innovators able to reach Government -NGO linksfunds hold a sizable share of market capi- children who are educationally disadvan- * The government and NGOs will needtalization in emerging economies. Asian taged. The Indian government could im- to share a common vision on how toand Latin American funds achieved the prove the effectiveness of primary educa- achieve universal primary education iffastest growth, but are smaller than do- tion by increasing its collaboration with India is to reach this goal.mestic U.S. funds and world funds. such organizations. * NGOscanbecrediblepartnerswiththe

When investing abroad, U.S. mutual government in shaping policies for primaryfunds invest more in equity than in bonds. NGOs extend education to underprivi- education. This entails collaboration ratherWorld funds invest mainly in developed leged children in India and develop inno- than parallel initiatives by NGOs.nations (Canada, Europe, Japan, and the vations that improve the quality of pri- * To stay at the cutting edge in educa-United States). Ten percent of their in- mary education. In this study of six NGOs tion, NGOs should continually evaluatevestment is in Asia and Latin America. working with school-age children in India, and refine their models.Mutual funds usually invest in a few coun- Jagannathan shows the potential benefits * If NGOs are to play a policy role intries within each region. of a government-NGO alliance to achieve education, two areas that have been ne-

Mutual fund investment was very universal primary education. The author glected will need to be addressed-responsive to the crises of the 1990s. emphasizes several areas in which col- NGO capacity building and organizationalWithdrawals from emerging markets laboration can be particularly fruitful. development.during recent crises were large, which Targeting underserved children This paper-a product of the Robertsquares with existing evidence of financial * The government could support the ef- McNamara Fellowships Program, Worldcontagion. forts of NGOs to bring out-of-school chil- Bank Institute-is part of a larger effort

Investments in Asian and Latin Ameri- dren into schools through timely supply of in the Bank to contribute toward the de-can mutual funds are volatile. Because teachers, classroom space, and other re- velopment ofknowledge and human capi-redemptions and injections are large rela- sources. Targeted action is needed to'reach tal. Copies of the paper are available freetive to total funds under management, different types of out-of-school children- from the World Bank, 1818 H Street NW,funds' flows are not stable. The cash held those who work, those who live in slums, Washington, DC 20433. Please contactby managers during injections and re- those on the street, those who are members Shobha Kumnar, room J4-053, telephonedemptions does not fluctuate significantly, of tribes or of migrant families, and those 202-458-7021, fax 202-522-4036, emailso investors' actions are typically reflected who live in places without schools. address [email protected]. Policyin emerging market inflows and outflows. * To encourage young, first-generation Research Working Papers are also posted

This paper-a product ofMacroeconom- learners to stay in school requires a sup- on the Web at http://econ.worldbank.org.ics and Growth, Development Research portive and nurturing environment. To The author may be contacted at shanti.Group-is part of a larger effort in the help make learning interesting and worth- [email protected]. (54 pages)group to understand the operation of fi- while for such children, teachers in govern-nancial markets and the effects of fman- ment schools could receive special trainingcial globalization. The study was funded in new methods developed by NGOs. 2531. Growth Implosions, Debtby the Bank's Research Support Budget Enhancing quality Explosions, and My Aunt Marilyn:under the research project "Mutual Funds * Improving the quality of education Do Growth Slowdowns Causein Emerging Markets." Copies of this pa- requires working closely with key agents Public Debt Crises?per are available free from the World of change, such as teachers, school heads,Bank, 1818 H Street NW, Washington, DC school man agement committees, and vil- William Easterly20433. Please contact Emily Khine, room lage education committees. (January 2001)MC3-347, telephone 202-473-7471, fax * To develop a cadre of trainers for pri-202-522-3518, email address kkhine mary school teachers, teacher training The worldwide slowdown in growth [email protected]. Policy Research Work- institutes would do well to evaluate and 1975played an important role in the debting Papers are also posted on the Web at learn from NGO models for teacher crisis ofthe middle-income countries in thehttp://econ.worldbank.org. The authors training. 1980s, the crisis of the heavily indebted


poor countries in the 1980s and 1990s, and present and on whether potentially viable may be contacted at mschiffiworldbank.the increased public debt burden of the entrants to that market exist. A preferred org. (26 pages)industrial countries in the 1980s and supplier market presence and threat of1990s. entry lessen a nonmember country's price

reaction to most-favored-nation trade lib- 2533. How Much War Will We See?'Never take a sleeping pill and a eralization and increase its price reaction Estimating the Incidence of Civil

laxative on the same night." to preferential trade liberalization. War in 161 Countries-Saying passed along by author's AuntMarilyn How firms react to a given shock may Ibrahim Elbadawi and Nicholas Sambanis

The worldwide slowdown in growth af- depend on the degree to which rivals are (January 2001)ter 1975 was a major negative fiscal shock. present and on whether potentiallyviableSlower growth lowers the present value of entrants to that market exist. Schiff and As important as knowing how wars starttax revenues and primary surpluses and Chang try to measure these effects inter- and end is knowing how mzuch war we arethus makes a given level of debt more nationally by examining the price behav- likely to observe in any given period. Inburdensome. Most countries failed to ad- ior of the United States in Brazil's mar- strategies for preventing civil war, politi-just to the negative fiscal consequences of ket when MERCOSUJR trade liberaliza- cal liberalization should be a higher pri-the growth implosion, so public-debt-to- tion and most-favored-nation (MFN) trade ority than economic development, but theGDP ratios exploded. liberalization take place. best possible results would combine politi-

The growth slowdown therefore played Using detailed panel data on trade and cal reform, economic diversification, andan important role in the debt crisis of the tariff rates, they find that both the mar- poverty reduction.middle-income countries in the 1980s, the ket presence of a preferred supplier andcrisis of the heavily indebted poor coun- expected entry lessen the U.S. price reac- Quantitative studies of civil war have fo-tries (HIPCs) in the 1980s and 1990s, and tion to MFN trade liberalization and in- cused either on war's onset or its termi-the increased public debt burden of the crease the U.S. price reaction to preferen- nation, producing important insights intoindustrial countries in the 1980s and tial trade liberalization. Argentina's pres- these end points of the process. Elbadawi1990s. ence in Brazil's market results in a smaller and Sambanis complement these studies

Moreover, the HIPCs' debt problems U.S. price response to Brazil's MFN tariff by studying how much war we are likelywere worse than elsewhere because, as a change and in a larger response to a pref- to observe in any given period.result of poor policies, these countries erential tariff change. To answer this question, they combinegrew more slowly after 1975 than other More surprisingly, the quantitative ef- recent advances in the theory of civil warlow-income countries. fects of market presence and expected initiation and duration and develop the

Econometric tests and fiscal solvency entry (contestability) are not significantly concept of war incidence, denoting theaccounting confirm the important role of different from each other. Contestability probability of observing an event of civilgrowth in debt crises. plays no significant role when Argentina war in any given period. They test theo-

This paper-a product ofMacroeconom- is present in Brazil's market. When Ar- ries ofwar initiation and duration againstics and Growth, Development Research gentina is absent from Brazil's market, this new concept using a five-year panelGroup-is part of a larger effort in the contestability lessens the U.S. response to data set for 161 countries. Their analysisgroup to study economic growth and fis- changes in the MFN tariff and increases of the incidence of war corroborates mostcal sustainability. Copies of the paper are it in response to changes in the preferen- of the results of earlier studies, enrichingavailable free from the World Bank, 1818 tial tariff. those results by highlighting the signifi-H Street NW, Washington, DC 20433. It follows from these results that pres- cance of sociopolitical variables as determi-Please contact Kari Labrie, room MC3- ence in, as well as threat of entry into, nants ofthe risk ofcivil war. Their findings:456, telephone 202-473-1001, fax 202-522- partners' markets implies lower optimal * Steps toward advancing political lib-3518, email address klabrie@worldbank. external tariffs and suggests that regional eralization or economic development re-org. Policy Research Working Papers are agreements can have pro-competitive ef- duce the risk of civil war, whatever thealso posted on the Web at http:/l fects in the presence of contestability. degree of ethnolinguistic fractionalizationecon.worldbank.org. The author may be The authors also examine the hypoth- in a society.contacted at [email protected]. esis of "symmetry" between the effect of * This effect is amplified in polarized(35 pages) tariffs and that of exchange rates. societies. The probability of civil war is

This paper-a product of Trade, Devel- lower in very homogeneous societies andopment Research Group-is part of a (less so) in more diverse societies.

2532. Market Presence, larger effort in the group to understand * In polarized societies the risk of civilContestability, and the the effects of regional integration. Copies war can be reduced by political ratherTerms-of-Trade Effects of the paper are available free from the than economic liberalization. At high lev-of Regional Integration World Bank, 1818 H Street NW, Washing- els ofpolitical freedom, ethnic diversity-

ton, DC 20433. Please contact Lili Tabada, even polarization-has a minimal impactMaurice Schiff and Won Chang room MC3-333, telephone 202-473-6896, on the risk of civil war.(January 2001) fax 202-522-1159, email address Itabada * Economic diversification that would

@worldbank.org. Policy Research Work- reduce a country's reliance on primaryHow firms react to a given shock may de- ing Papers are also posted on the Web at exports would also reduce the risk of civilpend on the degree to which rivals are http://econ.worldbank.org.MauriceSchiff wars, especially in polarized societies.


* In strategies for preventing civil war, Other things being equal, Gurage- trade policy problems that remain in thesepolitical liberalization should be a higher owned businesses are normally larger, EastAsianecoromiesappeartobeproblemspriority than economic development, but partlybecause they are bigger as start-ups nwre of development than of transition.the best possible results would combine and partly because they grow faster. Andpolitical reform, economic diversification, yet Gurage business owners are the least The performance of the East Asian tran-and poverty reduction. educated ethnic group in the sample. Be- sition economies in export and income

This paper-a product of Public Eco- cause the size and growth rate of a busi- growth has been strikingly better thannomics, Development Research Group- ness also increases with the entre- that of countries in Eastern Europe andis part of a larger effort in the group to preneur's education, the performance of the former Soviet Union. The East Asianstudy the economics ofviolence. The study other businesses would have been even economies have achieved remarkably highwas funded by the Bank's Research Sup- worse if their owners hadn't been better growth rates in outputs and exports with-port Budget under the research project educated than the Gurage. Indeed, dropout the often large declines in output and"The Economics of Political and Criminal ping education variables from the size exports obser-7ed in Eastern Europe andViolence" (RPO 682-99). Copies of this determination equation drastically re- the former Soviet Union.paper are available free from the World duces the estimated advantage of Gurage- East Asian reformers have successfullyBank, 1818 H Street NW, Washington, DC run businesses. made many of the parallel changes needed20433. Please contact Hedy Sladovich, This suggests that the observed effect in both domestic and trade policies to se-room MC2-609, telephone 202-473-7698, of ethnicity could be indicative of inter- cure export arnd income growth. (It makesfax 202-522-1154, email address group differences in unmeasured ability. no sense, for example, to introduce [email protected]. Policy Re- More important, it means that whether or trade policy instruments of a marketsearch Working Papers are also posted on not the effect will persist in the long run economy when the domestic economy isthe Web athttpJ/econ.worldbank.org. The will depend on the trend in interethnic still based on central planning.)authors may be contacted at ielbadawi differences in investment in education. But there has been no single magic [email protected] or nsambanis This paper-a product ofMacroeconom- mula for their success. Martin [email protected]. (32 pages) ics and Growth, Development Research what each of the economies (Cambodia,

Group-is part of a larger effort in the China, Lao People's Democratic Republic,group to investigate the microeconomic and Vietnam) has done.

2534. Indigenous Ethnicity and foundation of the association between eth- China experienced an extended transi-Entrepreneurial Success in Africa: nic diversity and the poor growth perfor- tion process; the transition was muchSome Evidence from Ethiopia mance that seems to characterize Sub- shorter in other East Asian transition

Saharan Africa. The study was funded by economies-especially Cambodia.Taye Mengistae the Bank's Research Support Budget un- Several of the East Asian transition(January 2001) der the research project "The Economics economies used accession to a regional

of Ethnicity and Entrepreneurship in Af- arrangement, as part of their reform strat-Manufacturing businesses owned by an in- rica." Copies of this paper are available egy. China focused mainly on unilateraldigenous ethnic group, the Gurage, typi- free from the World Bank, 1818 H Street reforms and, more recently, reforms asso-cally perform better than those ofmembers NW, Washington, DC 20433. Please con- ciated with its accession to the Worldof any other (major or minority) groups in tact Rina Bonfield, room MC3-354, tele- Trade Organization.Ethiopia. Gurage-owned businesses are phone 202-473-1248, fax 202-522-3518, Most have made extensive use of poli-normally larger and grow faster. Yet email address [email protected]. cies to attract foreign investment and toGurage business owners typically are less Policy Research Working Papers are also mitigate the burden of protection oneducated than their counterparts in other posted on the Web at http:fl manufacturing exporters.groups and have less formal vocational econ.worldbank.org. The author may be Most of the remaining trade policytraining. contacted at [email protected]. problems, although difficult, appear to be

(26 pages) problems more of development than ofResearchers have recently been asking transition.why Asian and European minorities in This paper-a product of Trade, Devel-Africa seem to be more successful in busi- 2535. Trade Policy Reform in the opment Research Group-is part of aness than are people of indigenous East Asian Transition Economies larger effort in the group to understandethnicity. Mengistae draws attention the role of trade reform in successful de-to the significant disparity in business Will Martin velopment and poverty alleviation. Cop-ownership and performance that seems (January 2001) ies ofthe paper are available free from theto exist among African ethnic groups as World Bank., 1818 H Street NW, Washing-well. There has been no single magic formula ton, DC 204,33. Please contact Lili Tabada,

After analyzing a random selection of forthe success ofthe EastAsian transition room MC3-333, telephone 202-473-6896,small to medium-size manufacturers in economies (Cambodia, China, Lao People's fax 202-522-1159, email address ltabadaEthiopia, he finds that establishments Democratic Republic, and Vietnam), @worldbank.org. Policy Research Work-owned by an indigenous minority ethnic whose performance in export and income ing Papers are also posted on the Web atgroup, the Gurage, typically perform bet- growth has been strikingly better than that http://econ.worldbank.org. The authorter than those owned by other (major or oftransition economies in Eastern Europe may be contacted at wmartinlminority) groups. and the former Soviet Union. Most of the @worldbank.org. (37 pages)


2536. Malaysian Capital Controls org. Policy Research Working Papers are statutory monopoly in domestic produc-also posted on the Web at http://econ. tion posed a challenge to regulators. Their

Ron Hood worldbank.org. The author may be con- response in liberalizing trade, setting first-(January 2001) tacted at [email protected]. (17 pages) hand sales prices, and regulating natural

gas distribution makes the Mexican caseLate in the Asian crisis, Malaysian au- an interesting example of regulatorythorities implemented controlson interna- 2537. Regulatory Reform in design.tional capital flows, providing insurance Mexico's Natural Gas Industry: As the first phase of investment mobili-against the consequences of possible fur- Liberalization in the Context of zation and competition for the market inther disturbances and creating a breath- a Dominant Upstream Incumbent Mexican distribution projects concludes,ing space for essential reforms. Both the remaining challenges include consistentlybenefits from and the costs of the controls Juan Rosell6n and Jonathan Halpern and transparently enforcing regulations,have been modest. (January 2001) coordinating tasks among government

agencies, and ensuring expansion ofMalaysian authorities implemented con- Liberalization ofthe naturalgas industry gas transport services and domestictrols on international capital flows late in is complex because the sector combines production.the Asian crisis, when most of the portfo- activities with natural monopoly charac- A key challenge in the near term will belio outflows had already occurred. The teristics with activities that are potentially fostering competition in the market. Inexchange rate had depreciated sharply competitive. The challenges are com- strengthening the role of market forces,and was fixed at an undervalued level, pounded when the State opts to retain ver- one issue is Pemex's discretionary dis-making further capital flight unlikely. tically integrated monopolies in otherwise counts on domestic gas and access to trans-

The turnaround in the stock market, the contestable segments ofthe industry. Regu- port services, made possible by its mo-return of positive GDP growth, the build- latory issues associated with partial lib- nopoly in domestic production and mar-ing of reserves, and the relaxation of in- eralization of natural gas markets are keting activities and its overwhelmingterest rates all coincided with the imposi- analyzed through a case study of Mexico. dominance in transport. The main instru-tion of controls. But the same changes took ment available to the regulator is proscrib-place in other crisis countries that did not The natural gas industry combines activi- ing Pemex contract pricing, but more du-follow the same control policies. ties with natural monopoly characteristics rable and tractable instruments should be

However, the controls provided insur- with those that are potentially competi- considered.ance against the consequences of possible tive. Pipeline transport and distribution, This paper-a product of the Finance,further disturbances. They created a which have natural monopoly character- Private Sector, and Infrastructure Sectorbreathing space for making needed re- istics, require regulation of price and Unit, Latin America and the Caribbeanforms, and the authorities made good use nonprice behavior. Production is a contest- Region-is part of a larger effort in theof this time, stabilizing the financial sys- able activity, but in a few countries (in- region to evaluate and disseminate lessonstem and pushing ahead with regulatory cluding Mexico) it remains a state mo- of experience in designing policies to im-and supervisory reform for the financial nopoly. Gas marketing is also contestable, prove the quality and sustainability ofsector and capital markets-a prerequisite but the presence of a dominant, upstream, infrastructure services. Copies of this pa-for fully liberalizing the capital account. vertically integrated incumbent may pose per are available free from the World

Malaysia incurred a cost: an additional significant barriers to entry. Market archi- Bank, 1818 H Street NW, Washington, DC300 basis point spread paid on floating tecture decisions-such ashorizontal struc- 20433. Please contact Katia Nemes, roomrate debt for a period after the controls ture, regional development, and the degree I5-178, telephone 202-458-5440, fax 202-were instituted. But the exit strategy has of vertical integration-are also crucial. 676-1821, email address knemeslso far not resulted in lasting flight of port- Rosell6n and Halpern report that @worldbank.org. Policy Research Workingfolio capital. Foreign direct investment Mexico has undertaken structural reform Papers are also posted on the Web at http:/remains below precrisis levels, but it is not in the energy sector more slowly than /econ.worldbank.org. The authors maybepossible at this stage to attribute this to many other countries, but it has intro- contacted at [email protected] effect of controls. duced changes to attract private invest- mx or [email protected]. (37 pages)

On balance, it appears that both the ment in natural gas transport and distri-benefits from and the costs of the controls bution. These changes were a response tohave been modest. the rapid growth in demand for natural 2538. Designing Natural Gas

This paper-a product of the Poverty gas (about 10 percent a year) in Mexico, Distribution ConcessionsReduction and Economic Management which was in turn a response to economic in a Megacity: Tradeoffs betweenSector Unit, East Asia and Pacific Re- development and the enforcement of envi- Scale Economies and Informationgion-is part of a larger effort in the re- ronmental regulations. The new regulatory Disclosure in Mexico Citygion to help reestablish growth in the framework provides incentives for firms topostcrisis period. Copies of the paper are invest and operate efficiently and to bear Juan Rosell6n and Jonathan Halpernavailable free from the World Bank, 1818 much of the risk associated with new (January 2001)H Street NW, Washington, DC 20433. projects. It also protects captive consumersPlease contact Hedwig Abbey, room MC8- and improves general economic welfare. Private participation in the development150, telephone 202-458-0512, fax 202-522- The continued vertical integration ofthe of natural gas distribution networks is1557, email address habbey@worldbank. state-owned company Pemex and its often introduced through the award of ex-


clusive concessions for definedgeographic region to evaluate and disseminate les- ness associations that emerged spontane-zones. Designing such franchises in a sons of experience in designing policies to ously in response to the transition's chal-megacity poses a challenge in striking a improve the quality and sustainability of lenges. They provide empirical evidencebalance between economies of scale (few infrastructure services. Copies of this pa- that institutions that help coordinate pro-distributors) and information disclosure per are available free from the World duction and trade emerge spontaneouslyfor regulation (more distributors). Ap- Bank, 1818 H Street NW, Washington, DC in a widely "disorganized" environment.proaches to making these and related 20433. Please contact Katia Nemes, room Using a largely unexplored set of firm-tradeoffs are analyzed through a case 15-178, telephone 202-458-5440, fax 202- level data, they document the emergencestudy of Mexico City. 676-1821, email address knemesl of business associations at the beginning

@worldbank.org. Policy Research Work- of the transition and provide evidence thatUnlike in other privatizations in Mexico, ing Papers are also posted on the Web at these new coordinating institutions miti-in the tender for natural gas distribution http://econ.worldbank.org. The authors gated the initial decline in output. Build-franchises the govemment stipulated only may be contacted at [email protected]. ing on the growing literature on complex-the minimum number of consumers to be [email protected]. (25 pages) ity and transaction costs, they interpretserved at the end of the first five years. the emergence of these informal institu-Concessions were awarded to the firms tions as the firms' rational attempt to co-that offered the lowest initial average rev- 2539. Disorganization or ordinate activities in a decentralizedenue. Where applicable, the government Self-Organization? The Emergence economy.also set the value of preexisting distribu- of Business Associations in a In other words, the creation of complextion facilities to be acquired by the win- Transition Economy organizations such as associations is thening bidder. These features, together with spontaneous result of a natural tendencythe specifics ofprice and access regulation Francesca Recanatini and Randi Ryterman in every system to create order at the edgeand the zone's technical characteristics, (January 2001) of chaos. Business associations are moredetermine the allocation of risks and likely to emerge where there is disorder,method of financing for distribution During the period of widespread disorga- to provide their members with stability,activities. nization experienced during the former coordination, and the information needed

Rosell6n and Halpern assess the subdi- Soviet Union's transition to a market to improve performance.vision of the Mexico City metropolitan economy, business associations emerged This paper-a product of the Povertyarea into natural gas distribution fran- spontaneously to share information about Reduction and Economic Managementchise zones. In a megacity with extensive, an uncertain environment. Joining a busi- Sector Unit, Europe and Central Asiadensely populated areas, more distribu- ness or trade association helped firms re- Region-is part of a larger effort in thetion franchise zones mean more informa- duce transaction costs by providing them region to analyze the impact of the tran-tion for regulating regional monopolies; with access to information about the loca- sition process on institutional develop-fewer zones permit greater economies of tion and reliability of potential trading ment. Copies of the paper are availablescale. The optimal number of distribution partners. Disorganization mayprovide the free from the World Bank, 1818 H Streetfranchises should reach an equilibrium proper conditions for the development of NW, Washington, DC 20433. Please con-between adequate information (to permit certain nonmarket institutions, which in tact Mala Johnson, room H4-208, tele-the regulator to optimize social welfare) turn affect firms' behavior in the face of phone 202-473-6320, fax 202-522-2751,and unit cost minimization. market failures. email address mdjohnson@worldbank.

Large distribution franchise zones- org. Policy Research Working Papers arewith an adequate mix of consumers-re- The transition from plan to market pro- also posted on the Web at http://duce the financial risk of operating distri- vides a rare opportunity for insight into econ.worldbank.org. The authors may bebution systems. If the number of distribu- the endogenous development of economic contacted at [email protected] franchises in a distribution area de- institutions. Economic activities under the or [email protected]. (36 pages)clines, financial risks may also decline. As Soviet regime were coordinated by a cen-the number of zones increases, so does the tral authority. Soviet coordinating mecha-financial impact of losing large industrial nisms were disrupted during the transi- 2540. Recapitalizing Bankingconsumers. If every distributor had only tion period, leading to anincrease in firms' Systems: Implications fora few anchor consumers, demand in a transaction costs. Incentives and Fiscal andfranchise zone might drop abruptly if one Blanchard and Kremer (1997), among Monetary Policyof the anchor consumers went bankrupt others, emphasize the negative impact ofor exited the market for other reasons. this "disorganization" on output behavior Patrick Honohan

The authors analyze the empirical ba- at the beginning of the transition. Al- (February 2001)Si5 for the demarcation of distribution though their argument is correct,franchise zones in the Mexico City metro- Rec-natini and Rvterman believe that After a banking crisis, when authoi ` espolitan area and compare outcomes with their work and similar analyses stop short have decided to use budgetary funds toinitial projections. of fully characterizing the transition by help restructure a large failed ba.,,;. or

This paper-a product of the Finance, concentrating only on reform's disruptive banking system, apparent conflicts be-Private Sector, and Infrastructure Sector effects. tween various goals (involving incentivesUnit, Latin America and the Caribbean Recanatini and Ryterman start where for the new bank management, for theRegion-is part of a larger effort in the the earlierwork ends, examining the busi- government's budget, and for monetary


stability) can be resolved by suitably de- paper are available free from the World cation-for example, providing more girls'signing financial instruments and appro- Bank, 1818 H Street NW, Washington, DC primary schools close to villages and em-priately allocating responsibility between 20433. Please contact Agnes Yaptenco, ploying more female teachers.different arms of government. room MC3-446, telephone 202-473-1823, This paper-a product of Poverty and

fax 202-522-1155, email address Human Resources, Development Re-In the aftermath of a banking crisis, most [email protected]. Policy Re- search Group-is part of a larger effort inattention is rightly focused on allocating search Working Papers are also posted on the group to study the role of gender in thelosses, rebuilding properly managed insti- the Web at http:/econ.worldbank.org. The context ofthe household, institutions, andtutions, and achieving debt recovery. But author may be contacted at phonohan society. Copies of the paper are availablethe authorities' decision to use budgetary @worldbank.org. (23 pages plus 20 pages free from the World Bank, 1818 H Streetfunds to help restructure a large failed of annexes) NW, Washington, DC 20433. Please con-bank or banking system also has conse- tact Patricia Sader, room MC3-632, tele-quences for the incentive structure for the phone 202-473-3902, fax 202-522-1153,new bank management, for the 2541. Household Schooling email address psader0worldbank.org.govermnent's budget, and for monetary Decisions in Rural Pakistan Policy Research Working Papers are alsostability. These issues tend to be lumped posted on the Web at http://econ.together, but each should be dealt with in Yasayuki Sawada and Michael Lokshin worldbank.org. The authors may be con-a distinctive manner. (February 2001) tacted at [email protected] or

Honohan points out, among other [email protected]. (31 pages)things, how apparent conflicts between An analysis ofa field survey to investigatethe goals in each of these areas can be household decisions about schooling inresolved by suitably designing financial rural Pakistan suggests that hiring more 2542. Checks and Balances,instruments and appropriately allocating female teachers and providing more pri- Private Information, and theresponsibility between different arms of maryschoolsforgirlsclosertovillageswill Credibility of Monetarygovernment. improve the chances of rural Pakistani Commitments

First the government must have a co- girls entering school and staying enrolled.herent medium-term fiscal strategy that Philip Keefer and David Stasavagedetermines broadly how the costs of the Human capital investments in Pakistan (February 2001)crisis will be absorbed. Then the failed are performing poorly: school enrollmentbank must be securely reestablished with is low, the high school dropout rate is high, In economically volatile conditions inenough capital and franchise value to and there is a definite gender gap in edu- which it is more diffLcult for the public tomove forward as a normal bank. This will cation. Sawada and Lokshin conducted distinguish inflation deliberately gener-typically entail new financial instruments field surveys in 25 Pakistani villages and ated bygovernment from inflation createdinvolving the government on both the as- integrated their field observations, eco- by unanticipated economic shocks, theset and the liability sides of the bank's nomic theory, and econometric analysis to anti-inflationary effect of central bank in-balance sheet. The bank should not be left investigate the sequential nature of edu- dependence will be unchanged but the ef-with mismatches of maturity, currency, or cation decisions-because current out- fectiveness of exchange rate pegs will berepricing. Assets that are injected should comes depend not only on current deci- significantly improved.be bankable and preferably negotiable. sioIis but also on past decisions.The liability structure should give bank Their full-information maximum like- Keefer and Stasavage develop and testinsiders the incentive to manage the bank lihood estimate of the sequential school- several new hypotheses about the anti-prudently. ing decision model reveals important dy- inflationary effect of central bank inde-

Financial instruments can be complex namics affecting the gender gap in educa- pendence and exchange rate pegs in theand sophisticated but only if the govern- tion, the effects of transitory income and context of different institutions and differ-ment has the credibility to warrant mar- wealth, and intrahousehold resource allo- ent degrees of citizen information aboutket confidence that it will deliver on the cation patterns. They find, among other government policies.contracts rather than trying to use its law- things, that in rural Pakistan: Theory provides strong reason to believemaking powers to renege. Innovative use * There is a high educational retention thatwhile central bank independence willof segregating sinking funds and "Brady"- rate, conditional on school entry, and that prove more effective as a commitmenttype bonds can help where government male and female schooling progression mechanism in countries where multiplecredibility is weak. rates become comparable at higher levels players in government have veto power

Restructuring the bank will alter the of education. (checks and balances), the number of vetosize, maturity, and other characteristics * A household's human and physical players will have no effect on the credibil-of the government's debt. These charac- assets and changes in its income signifi- ity of exchange rate pegs. Conversely,teristics should be optimized separately cantly affect children's education pat- Keefer and Stasavage argue that centraland with the market as a whole, not just terns. Birth order affects siblings' compe- bank independence does not solve prob-the affected banks. tition for resources. lems of commitment that arise when citi-

This paper-a product of Finance, De- * Serious supply-side constraints on zens are imperfectly informed about thevelopment Research Group-is part of a village girls' primary education suggest contribution ofgovernment policy to infla-larger effort in the group to examine the the importance of supply-side policy inter- tion. Exchange rate pegs, however, miti-effects of bank regulation. Copies of the ventions in Pakistan's rural primary edu- gate these problems.


The authors present extensive evidence checks and balances are missing. These cerned with the credit risk of thefrom cross-country tests using newly de- policies include: borrower's customers and the borrower'sveloped data that provide strong support * Disseminatinginformationaboutthe ability to continue to generate newfor their propositions. costs of inefficient government decisions. sales.

This paper-a product of Regulation * Improvingthestructureoflegislative A stylized theoretical model demon-and Competition Policy, Development regulatory oversight. strates that the value of a secured line-Research Group-is part of a larger effort * Intervening early in insolvent banks. of-credit loan in minimizing contractingin the group to understand the institu- Keefer concludes that the more veto costs is associated with the borrower'stional conditions for policy reform and players there are, the less likely policies business risk and the quality of thesuccess. Copies of the paper are available are to favor special interest groups (con- borrower's customers. Empirical testsfree from the World Bank, 1818 H Street trary to previous views). Moreover, the on a sample of publicly traded U.S. manu-NW, Washington, DC 20433. Please closer the elections, the less likely policies facturing firms find that firms withcontact Paulina Sintim-Aboagye, room are to favor special interest groups. secured line of credit loans are observablyMC3-422, telephone 202-473-7644, fax This paper-a product of Regulation riskier and have fewer expected growth202-522-1155, email address and Competition Policy, Development [email protected]. Policy Research Group-is part of a larger effort Klapper's findings suggest thatResearch Working Papers are also posted in the group to explore the policy conse- observably riskier borrowers can borrowon the Web at http://econ.worldbank.org. quences ofpolitical and social institutions. more on a secured than on an unsecuredThe authors may be contacted at Copies of the paper are available free from basis. The results highlight the [email protected] or d.stasavage the World Bank, 1818 H Street NW, role of secured letters of credit [email protected]. (40 pages) Washington, DC 20433. Please contact providing liquidity to risky, credit-

Paulina Sintim-Aboagye, room MC3-422, constrained firms that rnight not havetelephone 202-473-7644, fax 202-522- access to external financing through other

2543. When Do Special Interests 1155, email address psintimaboagye channels.Run Rampant? Disentangling @worldbank.org. Policy Research Work- This paper-a product of Finance, De-the Role in Banking Crises of ing Papers are also posted on the Web at velopment Research Group-is part of aElections, Incomplete http://econ.worldbank.org. The author larger effort in the group to study financ-Information, and Checks may be contacted at pkeefer ing for small and medium-size enter-and Balances @worldbank.org. (47 pages) prises. Copies of the paper are available

free from the World Bank, 1818 H StreetPhilip Keefer NW, Washington, DC 20433. Please con-(February 2001) 2544. The Uniqueness of Short- tact Agnes Yaptenco, room MC3446, tele-

Term Collateralization phone 202-473-1823, fax 202-522-1155,Government responses to banking crises email address [email protected] less likely to favor special interest Leora Kapper Policy Research Working Papers are alsogroups when elections are near, voters are (February 2001) posted on the Web at http:/lecon.better informed about the costs of ineffi- worldbank.org. The author may be con-cient government decisions, and govern- A secured letter-of-credit loan allows tacted at [email protected]. (37ments have multiple veto players. a lender to make larger loans than pages)

would be permissible on an unsecuredKeefer investigates the political determi- basis, maximizing a risky borrower's in-nants of government decisions that ben- vestment capital. Empirical evidence 2545. Financing the Future:efit special interest groups-especially shows that secured letters ofcredit are used Infrastructure Needs in Latingovernment decisions to deal with bank- by borrowers who are informationally America, 2000-05ing crises. He finds that the better in- opaque and have higher observable risk.formed the voters, the more proximate Such borrowers also have fewer growth Marianne Fayelections, and the larger the number of opportunities and are less likely to pay (February 2001)political veto players (conditional on the dividends.costs to voters ofrelevant policy decisions), A model developed to predict demandthe smaller the government's fiscal trans- KMapper finds evidence that lines of credit for infrastructure in Latin Americafers are to the financial sector and the less secured by accounts receivable are asso- performs reasonably well for power andlikely the government is to exercise for- ciated with business borrowers with a telecommunications-and less well forbearance in dealing with insolvent finan- high risk of default. While an unsecured water and sanitation (for which datacial institutions. short-term loan is repaid from the are scarce) and transport infrastructure

The results suggest that policies that borrower's future cash flow, a loan secured (which is less closely related to permight be appropriate for mitigatingbank- by accounts receivable (a unique form of capita income). The model projects a dou-ing crises in the United States might be 'inside' collateral) is repaid from previ- bling of telephone mainlines per capita, aless effective in settings where voters are ously generated and observed sales (the steady increase in power infrastructure,less informed, where elections are less borrower's trade credit terms to its cus- steady growth in road infrastructure, andcompetitive, and where there are fewer tomers). Consequently, lenders that se- small increases in water and sanitationveto players, because in these settings cure accounts receivable are most con- coverage.


To assess five-year demand for infrastruc- 2546. Gender Dimensions of worldbank.org. The authors may be con-ture investment in Latin America and Pension Reform in the Former tacted at [email protected] or Ifoxthe Caribbean, and the private sector's Soviet Union @worldbank.org. (32 pages)role in meeting this demand, Fay devel-oped a model to predict future demand Paulette Castel and Louise Foxfor infrastructure-defined as what (February 2001) 2547. The Design of Incentivesconsumers and producers would ask for, for Health Care Providers ingiven their income and level of economic Under pension reforms in the former So- Developing Countries: Contracts,activity. viet Union,unisex annuities benefit women Competition, and Cost Control

Overall projections over the next five more than men because of a major redis-years: tribution toward women. But they also Jeffrey S. Hammer and William G. Jack

* A doubling of telephone mainlines per penalize women more for shifting toward (February 2001)capita. unpaid household work and may cause

* A steady increase in electricity increased poverty among lone elderly Whatever the theoretical attractiveness ofgenerating capacity. women-especially in Kazakhstan, which certain policy options, the fact that public

* Small increases in water and sanita- has a high service requirement for the employees are people who make indepen-tion coverage. minimum pension and provides no com- dent decisions about their careers and

* Steady expansion of road infrastruc- pensation for time out to have children. lifestyles can set bounds on how well gov-ture, with rail transport becoming less ernment agencies can deliver promisedimportant. Castel and Fox analyze the gender impli- services, such as universal health care,

Investments of $57 billion annually for cations of pension reform in Kazakhstan, including in rural areas.2000-05 (roughly 2.6 percent of Latin the Kyrgyz Republic, Latvia, andAmerica's GDP) are expected to be ab- Moldova. The new systems deliberately Hammer and Jack examine the designsorbed largely by electricity ($22 billion), penalize early retirement and reward and limitations of incentives for healthroads ($18 billion), and telecommunica- longer careers, so that with no change in care providers to serve in rural areas intions ($6 billion). behavior or policy, women's pensions will developing countries. Governments face

A surge in private financing of be lower than men's on average. two problems: it is costly to compensateinfrastructure in recent years (roughly Still, the implicit financial returns for well-trained urban physicians enough to$35 billion in 1998, excluding divestiture women remain higher on average than relocate to rural areas, and it is difficultpayments) has disproportionately favored returns for men, because of women's to ensure quality care when monitoringtelecommunications ($14 billion) and longer life expectancy and because of performance is costly or impossible.transport ($12 billion). Private investment redistributory minimum pensions. The goal of providing universal primaryexceeds predicted need for telecommuni- Overall, however, the net change in health care has been hard to meet, in partcations (although the model did not wealth resulting from the reforms will be because of the difficulty of staffing ruralinclude costs associated with the larger on average for men than for women, medical posts with conscientiousemergence of cellular phones), covers because they will work longer and get a caregivers. The problem is providing phy-about half the demand for roads, and larger pension. sicians with incentives at a reasonablemeets just a fraction of needs in power Women's longer life expectancy means cost. Govemments are often unable toand water and sanitation-where there that women can expect to spend the last purchase medical services of adequatewill be a shortfall in investments. Projec- years of their lives alone. Iftheir pensions quality even from civil servants.tions are likely to be on the low side are too low because oftheir work histories, Using simple microeconomic models ofbecause they cover the extension of poverty among elderly women may contracts and competition, Hammer andnetworks rather than upgrading and cover increase. Jack examine questions about:new investments, not rehabilitation or This paper-a joint product of the Gen- * The design of rural service require-maintenance. der Board; the Social Protection Team, ments and options for newly trained

This paper-a product of the Finance, Human Development Network; and the physicians.Private Sector, and Infrastructure Sector Poverty Reduction and Economic Manage- * The impact of local competition on theUnit, Latin America and the Caribbean ment Sector Unit, Europe and Central desirable level of training for new doctors.Region-is part of a larger effort in the Asia Region-is part of a larger effort in * The incentive power that can be rea-region to develop its knowledge of future the Bank to understand how the reforms sonably expected from explicit contracts.client needs. Copies of the paper are avail- and new institutions being put in place in One problem a government faces isable free from the World Bank, 1818 H Eastern European and Central Asian choosing how much training to give phy-Street NW, Washington, DC 20433. countries affect women's lives and oppor- sicians it wants to send to rural areas.Please contact Adeline Francois, room I5- tunities. Copies of the paper are available Training is costly, and a physician relo-004, telephone 202-473-7841, fax 202-676- free from the World Bank, 1818 H Street cated to the countryside is outside the9594, email address afrancois NW, Washington, DC 20433. Please con- government's direct control. Should [email protected]. Policy Research Work- tact Jennifer E. Smith, room H4-353, tele- doctors face a ceiling on the prices theying Papers are also posted on the Web at phone 202-458-7215, fax 202-522-2751, charge patients? Can it be enforced?http://econ.worldbank.org. The author email address [email protected]. Hammer and Jack discuss factors tomay be contacted at mfay Policy Research Working Papers are also consider in determining how to pay [email protected]. (25 pages) posted on the Web at http://econ. medical workers but conclude that we


might have to set realistic bounds on our enhanced by the phenomenon offragmen- to distinguish Lmderlying income inequal-expectations about delivering certain tation. The more that production pro- ity and changes in poverty from the effectskinds of services. If we can identify rea- cesses become split across locations, with attributable tlo measurement error orsons why the best that can be expected is the fragments tied together and coordi- transitory shccks. He applies this meth-not particularly good, it might lead us to nated by various trade services, the odology to household-level panel data forexplore entirely different policy systems. greater the gains from reductions in the Russia and Poland in the mid-1990s.Maybe it is too hard to run certain decen- costs of services. Luttmer finds that:tralized systems. Maybe we should focus The incentives for such fragmentation * Accounting for noise in the data re-on less ambitious but more readily achiev- can be greater across countries than duces inequality (as measured by the Giniable goals, such as providing basic within countries because of the greater coefficient) by 10-45 percent.infrastructure. differences in factor prices and technolo- * Individuals in both countries face

This paper-a product of Public Eco- gies. But the service costs of international much economic insecurity. The mediannomics, Development Research Group- fragmentation can also be larger, espe- absolute annual change in income oris part of a larger effort in the group to cially if regulations and restrictions im- spending is about 50 percent in Russia andanalyze service delivery in the social sec- pede the international provision of ser- about 20 percent in Poland. But roughlytors. Copies of the paper are available free vices. As a result, trade liberalization in half of these fluctuations reflect measure-from the World Bank, 1818 H Street NW, services can stimulate the fragmentation ment error or transitory shocks, so under-Washington, DC 20433. Please contact of production of both goods and services, lying levels of income and spending areHedy Sladovich, room MC2-609, tele- thus increasing international trade and much more stable than the data suggest.phone 202-473-7698, fax 202-522-1154, the gains from trade even further. * The apparent high levels of economicemail address [email protected]. Since fragmentation seems to charac- mobility are driven largely by transitoryPolicy Research Working Papers are also terize an increasing portion of world spe- events and noisy data. After transitoryposted on the Web at http://econ. cialization, the importance of service lib- shocks are accounted for, about 80 percentworldbank.org. The authors may be con- eralization is growing apace. of the poor in both Russia and Poland re-tacted at [email protected] or This paper-a product of Trade, Devel- main in poverty for at least one year. [email protected]. (15 pages) opment Research Group-is part of a there is a real risk of an entrenched

larger effort in the group to improve trade underclass emnerging in these transitionpolicy in goods and services. Copies of the economies.

2548. International Provision paper are available free from the World This paper-a product of the Povertyof Trade Services, Trade, Bank, 1818 H Street NW, Washington, DC Reduction and Economic Managementand Fragmentation 20433. Please contact Lili Tabada, room Sector Unit, Europe and Central Asia

MC3-333, telephone 202-473-6896, fax Region-is part of a larger effort in theAlan V. Deardorff 202-522-1159, email address ltabada region to anaLlyze poverty and inequality(February 2001) @worldbank.org. Policy Research Work- in Europe and Central Asia. Copies of the

ing Papers are also posted on the Web at paper are available free from the WorldBy reducing the costs of such trade services http://econ.worldbank.org. The author Bank, 1818 H Street NW, Washington, DCas transport, insurance, and finance, lib - may be contacted at [email protected]. 20433. Please contact Cecile Wodon, roomeralizing trade in services can generate (33 pages) J7-268, telephone 202-473-2542, fax 202-benefits in the markets for every kind of 473-8466, email address cwodontrade they facilitate. It can also stimulate @worldbank org. Policy Research Work-the fragmentation of production of both 2549. Measuring Poverty Dynamics ing Papers are also posted on the Web atgoods and services, thus increasing inter- and Inequality in Transition http:/lecon.worldbank.org. The authornational trade and the gains from trade Economies: Disentangling may be contacted at [email protected] further. Real Events from Noisy Data edu. (38 pages)

Deardorff examines the special role that Erzo F. P. Luttmertrade liberalization in services industries (February 2001) 2550. Measuring Equity in Healthcan play in stimulating trade in both ser- Care Financing: Reflections onvices and goods. International trade in Estimates ofincome inequality and the dy- (and Alternatives to) the Worldgoods requires inputs from such trade namics of poverty are highly sensitive to Health Organization's Fairnessservices as transportation, insurance, and measurement error and transitory shocks of Financing Indexfinance, for example. in micro-level data. The apparent high

Restrictions on services across borders levels of economic mobility in Poland and Adam Wagstaffand within foreign countries add costs and Russia are driven largely by transitory (February 2001)barriers to international trade. Liberaliz- shocks and noisy data. There is a real risking trade in services could also facilitate of an entrenched underclass emerging in The World Health Organization's latesttrade in goods, providing more benefits these transition economies. World Health Report proposes an index ofthan one might expect from analysis fairness in health care financing. Themerely of the services trade. Luttmer uses instrumental variable index's chief weakness is that it cannot

To emphasize the point, Deardorffnotes methods and the decomposition of income discriminate among progressive, regres-that the benefits for trade are arguably into transitory and persistent components sive, and horizontally inequitable health


financing systems. An alternative ap- This paper-a product of Poverty and The results also suggest that if the poorproach proposed in the early 1990s is Human Resources, Development Re- gain access to services in their communi-shown to do a better job. search Group, and the Health, Nutrition, ties, many will decide to connect.

and Population Team, Human Develop- This paper-a product of the PrivateIn its latest World Health Report, the ment Network-is part of a larger effort Provision of Public Services Group, Pri-World Health Organization (WHO) in the Bank to investigate the links be- vate Sector Advisory Services Depart-argues that a key dimension of a health tween health and poverty. Copies of the ment-is part of a larger effort in the de-system's performance is the fairness of its paper are available free from the World partment to identify ways of improvingfinancing system. The report discusses Bank, 1818 H Street NW, Washington, DC services to the poor through private par-how policymakers can improve this aspect 20433. Please contact Anna Maranion, ticipation in infrastructure. Preparationof performance, proposes an index of room MC3-558, telephone 202-473-8009, of the paper was supported by the Public-fairness, discusses how it should be put fax 202-522-1153, email address Private Infrastructure Advisory Facility,into operation, and presents a league [email protected]. Policy Re- a multidonor technical assistance facilitytable of countries ranked by the fairness search Working Papers are also posted on aimed at helping developing countrieswith which their health services are the Web at http-J/econ.worldbank.org. The improve the quality oftheir infrastructurefinanced. author may be contacted at awagstaff through private sector involvement. For

Wagstaff shows that the WHO index @worldbank.org. (21 pages) more information on the facility see thecannot discriminate between health fi- Web site www.ppiaf.org. Copies of thisnancing systems that are regressive and paper are available free from the Worldthose that are progressive-and cannot 2551. Infrastructure Coverage Bank, 1818 H Street NW, Washington, DCdiscriminate between horizontal inequity and the Poor: A Global Perspective 20433. Please contact Shokraneh Minovi,and progressiveness or regressiveness. room I9-320, telephone 202-473-0012, fax

The index cannot tell policymakers Kristin Komives, Dale Whittington, 202-522-3481, email address sminoviwhether it deviates from 1 (complete fair- and Xun Wu @worldbank.org. Policy Research Work-ness) because households with similar (February 2001) ing Papers are also posted on the Web atincomes spend different amounts on http://econ.worldbank.org. The authorshealth care (horizontal inequity) or be- The poor in most parts of the world may may be contacted at [email protected] households with different incomes have electricity (especially in urban areas), edu, [email protected], or xunspend different proportions of their in- but they rarely have water, sewer, and tele- @email.unc.edu. (46 pages)come on health care (vertical inequity, phone services. When they gain access togiven the WHIO's interpretation of the local services, however, many do decide toability-to-pay principle)-although the connect. 2552. Inventories in Developingtwo have different policy implications. Countries: Levels and

With the WHO's index, progressiveness Komives, Whittington, and Wu use the Determinants-a Red Flag forand regressiveness are both treated as World Bank's Living Standards Measure- Competitiveness and Growthunfair. This makes no sense, because ment Study (LSMS) surveys from 15 coun-policymakers who may be strongly averse tries (covering more than 55,500 house- J. Luis Guasch and Joseph Koganto regressive payments (which worsen holds) to examine the relationship be- (February 2001)income distribution) may in the name of tween infrastructure coverage and house-fairness be quite receptive to progressive hold income. The results show that High inventory levels in developing coun-payments (requiring that the better-off, throughout the world all income groups tries increase the cost ofdoing business andwho may be willing to spend proportion- have much higher levels of coverage for limit productivity and competitiveness.ately more on health care, are required to electricity than for other formal infra- Improvements in infrastructure (roads,pay proportionately more). structure services (in-house piped water ports, and telecommunications) and in

Wagstaff compares the WHO index with service, sewerage service, and private tele- market development can help to signifi-an alternative and more illuminating ap- phone service). cantly reduce inventory levels (and thus theproach developed in the income redistri- In many countries most households in cost of doing business), especially whenbution literature in the early 1990s and urban areas now have electricity service. accompanied by effective regulation andused in the late 1990s to study the fair- As monthly household incomes increase the development and deregulation ofasso-ness of various OECD health care financ- from $100 to $250, coverage of all these ciated markets.ing systems. infrastructure services rises, but at differ-

He illustrates the differences between ent rates. Raw materials inventories in the manu-the approaches with an empirical com- The findings confirm that the very poor facturing sector in the 1970s, 1980s, andparison, using data on out-of-pocket pay- rarely have these infrastructure ser- 1990s were two to five times as high inments for health services in Vietnam for vices-with exceptions. The very poor of- developing countries as in the United1993 and 1998. This analysis is of some ten do have electricity if they live in ur- States, despite the fact that in most de-interest in its own right, given the large ban areas. The very poor in Eastern Eu- veloping countries real interest rates areshare of health spending from out-of- rope and Central Asia have much higher at least twice as high. Given the high costpocket payments in Vietnam and the levels of coverage than those elsewhere in of capital in most developing countries,changes in fees and drug prices over the the world; they often have electricity, these high inventory levels have an enor-1990s. water, sewer, and telephone services. mous impact on the cost of doing business


and on productivity and competitiveness. temic financial crisis. For many viable larger effort in the group to study the rolePoor infrastructure and ineffective regu- small and medium-size businesses in the of relationship banking. Copies of thelation as well as deficiencies in market Republic of Korea, relationship banking paper are available free from the Worlddevelopment-rather than the traditional reduced liquidity constraints and thus Bank, 1818 HStreet NW, Washington, DCfactors used in inventory models, such as diminished the probability of unwar- 20433. Please contact Agnes Yaptenco,interest rates and uncertainty-are the ranted bankruptcy during the country's room MC3-44,6, telephone 202-473-1823,main determinants of these differences. financial crisis of 1997-98. fax 202-522-1155, email address

Cross-country estimates show that a one- [email protected]. Policy Re-standard-deviation improvement in infra- A systemic financial crisis with monetary search Working Papers are also posted onstructure reduces raw materials invento- restriction is probably the most promising the Web at http:llecon.worldbank.org. Theries by 27-47 percent. Poorly functioning occasion for assessingwhether and towhat authors may be contacted at gioferrimarkets, as measured by the ratio oftrans- extent relationship banking is valuable to @tiscalinet.it, [email protected], orfers and subsidies to GDP, are also an im- borrowers. Ferri, Kang, and Kim take this [email protected] kr. (43 pages)portant factor, with a one-standard-devia- question to a unique database of credittion improvement leading to a 19-30 per- bureau microeconomic information cover-centreduction inraw materials inventories. ingthe pervasivefinancial crisis the Repub- 2554. Adminiistrative Costs and

Guasch and Kogan show that these re- lic of Korea experienced in 1997-98. the Organization of Individualductions in raw materials inventories are The database includes all corporate Retirement Account Systems:not offset by a reduction in finished goods borrowers surveyed by the Korean Credit A Comparative Perspectiveinventories upstream. Bureau, providing details on the structure

The policy implications are clear and of their borrowings and on their relation- Estelle James, James Smalhout,strong. Improvements in infrastructure ship with lending banks. The authors did and Dimitri Vittas(roads, ports, and telecommunications) not have access to the identity of the cor- (February 2001 )can help to significantly reduce inventory porate borrower and their only nonfinan-levels (and thus the cost of doing busi- cial control variable was the borrower's Organizing individual retirement ac-ness), especially when accompanied by Standard Industrial Classification (SIC). counts through the institutional marketeffective regulation and the development This restriction limited their analysis to and with constrained choice could sub-and deregulation of associated markets. smaller borrowers, keeping their sample stantially lower administrative costs. The

This paper-a joint product of the Of- focused on small and medium-size enter- tradeoff: rebiddingproblems, weakerper-fice ofthe SeniorVice President and Chief prises, which were likely to rely on banks formance incentives, inflexibility in theEconomist, Development Economics, and for external financing. Their findings: face of unforeseen contingencies, and anthe Finance, Private Sector, and Infra- * Outstanding loans plunge more for increasedprobability of corruption, collu-structure Sector Management Unit, Latin firms with weaker pre-crisis relationship sion, and regulatory capture.America and the Caribbean Region-is banking.part of a larger effort in the Bank to as- * The drop in credit lines-arguably a What is the most cost-effective way tosess and improve the competitiveness and proxy identifying shifts in the loan sup- organize individual accounts that are partproductivity of developing countries. Cop- ply-is larger for firms relying less on of a mandatory social security system?ies of the paper are available free from the strong relationship banking. Defined-contribution individual-accountWorld Bank, 1818 H Street NW, Washing- * More intense pre-crisis relationship components of social security systems areton, DC 20433. Please contact Joy banking reduces the probability that a pre- criticized for being too expensive. James,Troncoso, room 15-062, telephone 202-473- viously nondelinquent firm would build (in- Smalhout, and Vittas investigate the cost-7826, fax 202-522-2106, email address crease)itsloansinarrearsin 1998, theyear effectiveness oftwo methods for [email protected]. Policy Research of the sharpest liquidity constraints. ing mandatory individual accounts:Working Papers are also posted on the * All things equal, this probability de- * Investing through the retail marketWeb at http://econ.worldbank.org. The pends on whether firms were borrowing with relatively open choice among invest-authors may be contacted at jguasch from one (or more) of the five banks fore- ment companies (the method first used [email protected] or [email protected]. closed in June 1998, showing that it might Chile and adopted by most Latin Ameri-edu. (25 pages) be particularly difficult for borrowers to can countries).

replace distressed lending banks during * Investing through the institutionala financial crisis. market with constrained choice.

2553. The Value of Relationship The authors' findings support the hy- For the retail market, they use dataBanking during Financial Crises: pothesis that relationship banking-with from mandatory pension funds in ChileEvidence from the Republic of surviving banks-has a positive value and other Latin American countries andKorea during a systemic financial crisis. They from voluntary mutual funds in the

argue that for many viable small and United States. For the institutional mar-Giovanni Ferri, Tae Soo Kang, medium-size businesses in Korea, rela- ket, they use data from systems in Boliviaand In-June Kim tionship banking reduced liquidity con- and Sweden and from larger pension plans(February 2001) straints and thus diminished the probabil- and the federal Thrift Saving Plan in the

ity of unwarranted bankruptcy. United States.Relationship banking-with surviving This paper-a product of Finance, De- The institutional approaches aggregatebanks-has a positive value during a sys- velopment Research Group-is part of a numerous small accounts into large blocks


of money and negotiate fees on a central- percent in 1999 to 25 percent in 2030 and This paper-a product of the Economicized basis, often through competitive bid- 36percent in 2050. Currently, three work- Policy and Poverty Reduction Division,ding. They retain workers' choice on some ers support one retiree; without reform, the World Bank Institute-was presented atfunds. Fees and costs are kept low by re- system dependency ratio will climb to 69 the conference Developing through Glo-ducing incentives for marketing, avoiding percent in 2030 and 79 percent in 2050. balization: China's Opportunities andexcess capacity at system start-up, and The pension system has been in deficit, Challenges in the New Century (Shang-constraining choice to investment portfo- with an implicit pension debt in 2000 as hai, China, July 5-7,2000). The study waslios that are inexpensive to manage. high as 71 percent of GDP. The lack of an funded by the Bank's Research Support

In developed financial markets, the big- effective, sustainable pension system is a Budget under the research project "Effi-gest potential cost saving stems from con- serious obstacle to Chinese economic ciency and Distribution Effects of China'sstrained portfolio choice, especially from a reform. Social Security Reform" (RPO 683-52).concentration on passive investment. The Copies ofthis paper are available free frombiggest cost savingforagiven portfolio and The main problems with China's pension the World Bank, 1818 H Street NW,for countries with weak financial markets system-the heavy pension burdens of Washington, DC 20433. Please contactcomes from reduced marketing activities. state enterprises and the aging of the Agnes Datoloum, room J4-259, telephone

In the retail market, where annualized population-have deepened in recent 202-473-6334, fax 202-676-9810, emailfees and costs range from 0.8 percent to years. address [email protected] percent of assets, use of the institu- Using a new computable general equi- Policy Research Working Papers are alsotional market in individual retirement librium model that differentiates between posted on the Web at http://econ.account systems has reduced those fees three types of enterprise ownership and worldbank.org. The authors may be con-and costs to less than 0.2 percent to 0.6 22 groups in the labor force, Wang, Xu, tacted at [email protected] orpercent of assets. This reduction can in- Wang, and Zhai estimate the effects of [email protected]. (47 pages)crease pensions by 10-20 percent relative pension reform in China, comparing vari-to the retail market. Countries that can ous options for financing the transitionsurmount rebidding problems, weaker cost. They examine the impact that vari- 2556. Household Strategies forperformance incentives, inflexibility in the ous reform options would have on the Coping with Poverty and Socialface of unforeseen contingencies, and an system's sustainability, on overall eco- Exclusion in Post-Crisis Russiaincreased probability of corruption, collu- nomic growth, and on income distribution.sion, and regulatory capture should seri- The results are promising. Michael M. Lokshin and Ruslan Yemtsovously consider the institutional approach, The current pay-as-you-go system, with (February 2001)especially at the start-up of a new a notional individual account, remainsmultipillar system or for systems with unchanged in the first scenario examined. For Russian households coping with eco-small asset bases. Simulations show this system to be unsus- nomic hardship in the wake of the recent

This paper-a product of Finance, De- tainable. Expanding coverage under this financial crisis, the choice ofsurvival strat-velopment Research Group-is part of a system would improve financial viability egy has strongly depended on their humanlarger effort in the group to study pension in the short run but weaken it in the long capital. The higher a household's level ofsystems. Copies ofthe paper are available run. human capital, the more likely it is tofree from the World Bank, 1818 H Street Other scenarios assume that the tran- choose an active strategy.NW, Washington, DC 20433. Please con- sition cost will be financed by varioustact Agnes Yaptenco, room MC3-446, tele- taxes and that a new, fully funded indi- What strategies have Russian householdsphone 202-473-1823, fax 202-522-1155, vidual accountwill be established in 2001. used to copewith economic hardship in theemail address ayaptencoCworldbank.org. The authors compare the impact of a cor- wake of the recent financial crisis? WhichPolicy Research Working Papers are also porate tax, a value-added tax, a personal coping strategies have been most effectiveposted on the Web at http://econ. income tax, and a consumption tax. They in reducing poverty for different groups ofworldbank.org. The authors may be con- estimate the annual transition cost to be households? And how have people beentacted at [email protected] or about 0.6 percent of GDP between 2000 able to adapt to the dramatic drop in [email protected]. (76 pages) and 2010, declining to 0.3 percentby2050. mal cash incomes?

Using a personal income tax to finance Lokshin and Yemtsov look at thesethe transition cost would best promote questions using subjective evaluations of

2555. Implicit Pension Debt, economic growth and reduce income coping strategies used by household sur-Transition Cost, Options, and inequality. vey respondents to mitigate the effects ofImpact of China's Pension Reform: Levying a social security tax and inject- the Russian financial crisis on their wel-A Computable General ing fiscal resources to finance the transi- fare. The data come from two rounds (1996Equilibrium Analysis tion costs would help make the reformed and 1998) of the Russian Longitudinal

public pillar sustainable. To finance a Monitoring Survey.Yan Wang, Dianqing Xu, Zhi Wang, benefit of 20 percent of the average wage, The results of their analysis showand Fan Zhai a contribution rate of only 10 percent-12.5 that a household's choice of survival strat-(February 2001) percent would be enough to balance the egy strongly depends on its human

basic pension pillar. Gradually increasing capital: the higher its level of human capi-China's population is aging rapidly: the the retirement age would further reduce tal, the more likely it is to choose anold-age dependency ratio will rise from 11 the contribution rate. active strategy (such as finding a


supplementary job or increasing home states in India over the period 1960-92, complement and possibly modify growth-production). she contrasts voters' behavior in state leg- oriented policies.

Households with low levels of human islative assembly elections with their be- This paper--a product of Poverty andcapital, those headed by pensioners, and havior in national legislative elections. Human Resources, Development Researchthose whose members have low levels of In state assembly elections voters re- Group-is part ofalarger effortin the groupeducation are more likely to suffer social ward incumbents for local income growth, to better inform development policy de-exclusion. To prevent poverty from becom- and punish them for a rise in inequality, bates. Copies of the paper are available freeing entrenched, the trend toward over their entire term in office. But in from the World Bank, 1818 H Street NW,marginalization and impoverishment of national elections voters behave myopi- Washington, DC 20433. Please contactthese groups of households needs to be cally, rewarding growth in national Patricia Sader, room MC3-556, telephonemonitored and targeted policy interven- income and a fall in inflation and inequal- 202-473-3902, fax 202-522-1153, emailtions need to be undertaken to reverse the ity only in the year preceding the election. address [email protected]. Policytrend. The evidence is consistent with greater Research Working Papers are also posted

This paper-a joint product of Poverty voter vigilance and government account- on the Web al; http://econ.worldbank.org.and Human Resources, Development Re- ability in local than in national elections. The author may be contacted atsearch Group, and Poverty Reduction and This paper-a product of Public Eco- [email protected]. (27 pages)Economic Management Sector Unit, Eu- nomics, Development Research Group, isrope and Central Asia Region-is part of part of a larger effort in the group to un-a larger effort in the Bank to understand derstand the role of decentralization in 2559. Deposit Insurance as Privatehousehold-level vulnerability to shocks improving public service delivery. Copies Club: Is Germany a Model?and the ability of households to cope with of the paper are available free from thecrisis. Copies of the paper are available World Bank, 1818 H Street NW, Washing- Thorsten Beckfree from the World Bank, 1818 H Street ton, DC 20433. Please contact Hedy (February 2003.)NW, Washington, DC 20433. Please con- Sladovich, room MC2-609, telephone 202-tact Patricia Sader, room MC3-556, tele- 473-7698, fax 202-522-1154, email ad- Germany's private deposit insurancephone 202-473-3902, fax 202-522-1153, dress [email protected]. Policy scheme with its "clublike" nature, cannotemail address [email protected]. Research Working Papers are also posted easily be transplanted to countries withPolicy Research Working Papers are also on the Web at http:/fecon.worldbank.org. weaker institutions. But it offers usefulposted on the Web at http://econ. The author may be contacted at lessons for countries that want to set up aworldbank.org. The authors may be con- [email protected]. (23 pages) new scheme or reform an existing one.tacted at [email protected] [email protected]. (27 pages) Beck describes and evaluates the deposit

2558. Growth, Inequality, insurance scheme set up by private com-and Poverty: Looking mercial banks in Germany in 1975. The

2557. Decentralization and beyond Averages scheme's funding and management areAccountability: Are Voters More completely private, with no public super-Vigilant in Local than in National Martin Ravallion vision. Where other schemes relyon moni-Elections? (February 2001) toring by depositors to decrease moral

hazard problems, the German schemeStuti Khemani One side in the current debate about who relies on peer monitoring by its member(February 2001) benefits from growth has focused solely on banks. The system has weathered several

average impacts on poverty and inequal- small bank crises but has not yet beenVoters in India are more vigilant in moni- ity, while the other side has focused on the exposed to a major bank failure or a sys-toring government at the local than at the diverse welfare impacts found beneath the temic crisis.national level. In state assembly elections averages. Both sides have a point. To what extent can it serve as a modelvoters reward incumbents for local income for other countries?growth, and punish them for a rise in in- The evidence is compelling that the poor The success of the German scheme hasequality, over their entire term in office. in developing countries do typically share to be judged against an institutional en-But in national elections voters behave in the gains from rising aggregate afflu- vironment that fosters contract enforce-myopically, rewardinggrowth in national ence and in the losses from aggregate con- ment and the rule of law and discouragesincome and a fall in inflation and inequal- traction. But how much do poor people corruption. In a country with weaker in-ity only in the year preceding the election. share in growth? Do they gain more in stitutions, the voluntary membership

some settings than others? Do some gain might quickly lead to adverse selection,Defining vigilance as retrospective vot- while others lose? Does pro-poor growth with strong banks leaving the scheme. Theing-where voters evaluate incumbents mean more or less aggregate growth? high coverage limit might induce bankon their performance during their entire Recent theories and evidence suggest managers sand owners to abuse theterm in office-Khemani compares voter some answers, but deeper microeconomic scheme. Banks might intentionallybehavior in local and national elections to empirical work is needed on growth and underfund the scheme, counting on addi-make inferences aboutwhether voters are distributional change. Only then will we tional government resources in times ofmore vigilant in monitoring government have a firm basis for identifying the spe- crisis. And the secrecy of funds might de-at the local level. Using data from 14 major cific policies and programs needed to crease fund managers' accountability in


societies with little transparency and fundingfor investment in mitigation as an This paper-a product of the Finance,much corruption. explicit tool for sustainable development. Private Sector, and Infrastructure Sector

In Germany's highly concentrated com- Now it must enter a new phase: applying Unit, Latin America and the Caribbeanmercial banking sector, the small number risk transfer mechanisms to address the Region, and developed under the Carib-of banks facilitates a club atmosphere and financial risk of exposure to catastrophic bean Country Program-is part of a largerquick resolution of banking crises. But it events that require funding beyond what effort in the region to modernize clientcould also prevent the entry of new, inno- can be controlled solely through mitigation country strategies and financial instru-vative market participants, so that the and physical measures. ments for risk management, particularlyclub becomes a cartel. Germany's anti- against natural disaster shocks. Copies ofbankruptcy bias might help prevent moral Residual stochastic risks from cata- the paper are available free from thehazard but can also stifle entrepreneur- strophic natural events can be addressed World Bank, 1818 H Street NW, Washing-ship. There is a tradeoff between the effi- through insurance pooling and risktrans- ton, DC 20433. Please contact Johnciency gain of a privately run deposit in- fer mechanisms that provide the basis for Pollner, room 15-099, telephone 202-473-surance scheme and its potentially nega- financial protection and instill strong in- 0079, fax 202-522-2106, email addresstive impact on competition and entrepre- centives for reducing vulnerability. [email protected]. Policy Researchneurship. To reduce the economic stress after di- Working Papers are also posted on the

Although the scheme cannot easily be sasters, Pollner shows, World Bank in- Web at http://econ.worldbank.org. (126transplanted to developing countries, it struments could be used to support initia- pages)offers lessons for other economies. tives to help correct market imperfectionsSchemes with a clublike character rein- in catastrophe insurance. He takes a step-force peer monitoring and minimize the by-step approach to showing how both risk 2561. Democracy and Incomerisk of free riding. Risk-based premiums pooling structures and alternative catas- Inequality: An Empirical Analysisbased on auditing by the deposit insurance trophe coverage mechanisms (long-matu-scheme create a healthy link between the rity risk financing facilities, weather-in- Mark Gradstein, Branko Milanovic,protection an insurance offers and the dexed contracts, and capital market in- and Yvonne Yingmoral hazard it aims to prevent. One com- struments) can achieve better risk protec- (March 2001)promise might be a combination of ex ante tion and financing terms-enough to al-funding that guarantees credibility with low the expansion of insurance coverage Ideology, as proxied by a country's domi-depositors and ex post bank funding that of public assets and private property. nant religion, seems to be related to in-gives banks an incentive to monitor one Pollner examines the insurable assets equality. In Judeo-Christian societies in-another to minimize costs. (private and public) in eight countries in creased democratization appears to lead to

This paper-a product of the Financial the easternmost part of the Caribbean lower inequality; in Muslim and Confu-Sector Strategy and Development Depart- and, by quantifying the portion of the pre- cian societies it has an insignificant effect.ment-is part of a larger effort in the de- mium and risk used to fund catastrophe One reason for this difference may be thatpartment to understand the link between losses, shows that through pooling and the Muslim and Confucian societies rely onfinancial development and economic use of credit-type instruments for catas- informal transfers to reach the desiredgrowth. Copies of the paper are available trophe coverage, governments and unin- level of inequality, while Judeo-Christianfree from the World Bank, 1818 H Street sured property owners or enterprises societies, where family ties are weaker, useNW, Washington, DC 20433. Please con- (with insurable assets) could expect to political action.tact Paulina Sintim-Aboagye, room MC3- improve their terms of coverage. Neither422, telephone 202-473-8526, fax 202-522- local insurers nor reinsurers would suffer Standard political economy theories sug-1155, email address psintimaboagye in profitability. gest that democratization has a modi:[email protected]. Policy Research Work- The risk management options Pollner ing effect on income inequality. But theing Papers are also posted on the Web at examines could lead to real benefits for all empirical literature has failed to uncoverhttp://econ.worldbank.org. The author participants (buyers and sellers) in insur- any such robust relationship. Gradstein,may be contacted at tbeck@worldbank. ance markets. But four factors are essen- Milanovic, and Ying take another look atorg. (28 pages) tial for ensuring the integrity of any par- the issue.

ticipatory insurance scheme for providing The authors argue that prevailing ide-risk management in disaster-prone areas ology may be an important determinant

2560. Catastrophe Risk such as the Caribbean: ofinequality and that the democratizationManagement: Using Alternative * Stronger regulatory requirements effect 'works through" ideology. In societ-Risk Financing and Insurance and supervision in the insurance sector. ies that value equality highly there is lessPooling Mechanisms * Broad-based, pooled catastrophe distributional conflict among income

funding structures with efficient risk groups, so democratization may have onlyJohn D. Pollner transfer tools. a negligible effect on inequality. But in(February 2001) * Public insurance policies linked to societies that value equality less, democ-

programs for loss reduction in uninsured ratization reduces inequality through re-In providing support for disaster-prone sectors. distribution as the poor outvote the richareas such as the Caribbean, the develop- * Strongerriskassessmentandenforce- The authors' cross-country empiricalment community has begun to progress ment of such structural measures as zon- analysis, covering 126 countries in 1960-from disaster reconstruction assistance to ing and compliance with building codes. 98, confirms the hypothesis: ideology, as


proxied by a country's dominant religion, They use a Gini decomposition that allows front of trade policy debate. At the heartseems to be related to inequality. In addi- for an exact breakdown (without a residual of this debate is the "precautionary prin-tion, while in Judeo-Christian societies term) of the overall Gini by recipients. ciple," which holds that precautionsincreased democratization appears to lead Looking first at income inequality in should be taken against health, safety,to lower inequality, in Muslim and Con- income between countries is more impor- and environmental risks even when sci-fucian societies it has an insignificant ef- tant than inequality within countries. ence has not established direct cause-and-fect. The authors hypothesize that Mus- Africa, Latin America, and Western Eu- effect relationships-as with, for example,lim and Confucian societies rely on infor- rope and North America are quite homo- the European ban on hormone-treatedmal transfers to reach the desired level of geneous continents, with small differences beef.inequality, while Judeo-Christian societ- between countries (so that most of the Otsuki, Wilson, and Sewadeh quantifyies, where family ties are weaker, use inequality on these continents is ex- the impact on food exports from Africanpolitical action. plained by inequality within countries). countries of new EU standards for aflatox-

This paper-a product of Poverty and Next the authors divide the world into ins, structurally related toxic compoundsHuman Resources, Development Re- three groups: the rich G7 countries (and that contaminate certain foods and leadsearch Group-is part of a larger effort in those with similar income levels), the less to the production of acute liver carcino-the group to study inequality and income developed countries (those with per capita gens in the human body.redistribution. The study was funded by income less than or equal to Brazil's), and The authors estimate the impact ofthe Bank's Research Support Budget un- the middle-income countries (those with changes in differing levels of such protec-der the research projects "Democracy, per capita income between Brazil's and tion based on the EU standards (and sug-Redistribution, and Inequality" (RPO 683- Italy's). They find little overlap between gested by international standards) for 1501) and"DerivingWorld Income Distribu- such groups-very few people in develop- European countries and 9 African coun-tion in 1988 and 1993" (RPO 683-68). ing countries have incomes in the range tries between 1989 and 1998.Copies of the paper are available free from of those in the rich countries. The results suggest that implementa-the World Bank, 1818 H Street NW, This paper-a product of Poverty and tion of the EU's new aflatoxin standardsWashington, DC 20433. Please contact Human Resources, Development Re- will significantly hurt African exports toPatricia Sader, room MC3-556, telephone search Group-is part of a larger effort in Europe of nuts, cereals, and dried fruits,202-473-3902, fax 202-522-1153, email the group to study inequality and income which are highly sensitive to the aflatoxinaddress [email protected]. Policy redistribution. Copies of the paper are standards.Research Working Papers are also posted available free from the World Bank, 1818 The EU standards would reduce healthon the Web at http://econ.worldbank.org. H Street NW, Washington, DC 20433. risks by only about 1.4 deaths per billionThe authors may be contacted at bgumail. Please contact Patricia Sader, room MC3- a year but would cut African exports bybgu.ac.il, [email protected], or 556, telephone 202-473-3902, fax 202-522- 64 percent, or $670 million, compared [email protected]. (44 pages) 1153, email address psader@worldbank. their level under international standards.

org. Policy Research Working Papers are This paper-a product ofTrade, Devel-also posted on the Web at http:// opment Research Group-is part of a

2562. Decomposing World Income econ.worldbank.org. Branko Milanovic larger effort in the group to study the tradeDistribution: Does the World Have may be contacted at bmilanovic impact of regulation and standards froma Middle Class? @worldbank.org. (41 pages) a development perspective. Copies of the

paper are available free from the WorldBranko Milanovic and Shlomo Yitzhaki Bank, 1818 H Street NW, Washington, DC(March 2001) 2563. A Race to the Top? A Case 20433. Please contact Lili Tabada, room

Study of Food Safety Standards MC3-333, telephone 202-473-6896, faxIn Asia inequality inincomebetweencoun- and African Exports 202-522-1159, email address Itabadatries is more important than inequality @worldbank.org. Policy Research Work-within countries. InAfrica, LatinAmerica, Tsunehiro Otsuki, John S. Wilson, ing Papers are also posted on the Web atand Western Europe and North America, and Mirvat Sewadeh http:l/econ.worldbank.org. Tsunehiroby contrast, there are only small differences (March 2001) Otsuki may be contacted at totsukibetween countries; inequality within @worldbank.org. (32 pages)countries is more important. And when Implementation of the European Union'scountries are divided into three groups by new aflatoxin standards will reduce Afri-income level, there is little overlap-very can exports to Europe of nuts, cereals, and 2564. Economic Analysis of Worldfew people in developing countries have dried fruits, products highly sensitive to Bank Education Projects andincomes in the range of those in the rich the aflatoxin standards. The EU stan- Project Outcomescountries. dards would reduce health risks by only

about 1.4 deaths per billion a year but Ayesha Yaqub Vawda, Peter Moock,Using national income and expenditure would cut African exports by 64 percent, J.PriceGittinger,andHarryAnthonyPatrinosdistribution data from 119 countries, or $670 million, compared with their level (March 2001)Milanovic and Yitzhaki decompose total under international standards.income inequality between the individu- Outcomes ,n World Bank educationals in the world, by continent and by "re- Growing concern over health risks asso- projects are better when the quality ofgion" (countries grouped by income level). ciated with food products is at the fore- project appraisal is good.


Research reported in this paper tests the rates. And its positive effects on infant vate rate of return to education by level:hypothesis that Bank education projects mortality are greater in institutional en- the wage premia associated with anfor which the project appraisal documents vironments that promote political rights. additional year of schooling are aboutare judged "good" have a higher probabil- twice as large at the university level as theyity of leading to successful outcomes than Decentralization of fiscal responsibilities are at theprimary school level. In addition,projects for which the appraisals are has emerged as a primary objective on the there are large 'sheepskin effects." Comple-judged 'poor." agendas of national governments and in- tion of the last year of schooling within

The research draws on project docu- ternational organizations alike. Yet there a given level is rewarded dispropor-ment evaluations carried out between is little empirical evidence on the poten- tionately, particularly for university1993 and 1998. tial benefits ofthis intervention. Robalino, graduates.

Analysis shows a strong relationship Picazo, and Voetberg fill in some quanti-between the quality of cost-benefit and tative evidence. Much attention has been paid to thecost-effectiveness analysis and the qual- Using panel data on infant mortality issue of possible nonlinearities in theity of project outcomes. Economic analy- rates, GDP per capita, and the share of relationship between log wages andsis of projects is a tool for weeding out public expenditures managed by local schooling in the literature on bothpotentially poor investments and select governments, they find that greater fiscal the United States and developing coun-potentially w'orthwhile ones. The eco- decentralization is consistently associated tries. Schady uses data from a recentnomic analysis can be used to select among with lower mortality rates. The results household survey for the Philippines, thealternative projects or to redesign project suggest that the benefits of fiscal decen- 1998 Annual Poverty Indicator Survey,components so that they yield more and tralization are particularly important for to test the fit of the log-linear specificationproduce better outcomes. poor countries. They suggest also that the for Filipino men. He presents results

Good practice education projects require positive effects of fiscal decentralization based on various estimation strategies,good economic analysis-analysis of de- on infant mortality are greater in institu- including spline regressions and semi-mand, of the counterfactual private sec- tional environments that promote politi- parametric regressions with a largetor supply, of the project's fiscal impact, cal rights. number of dummy variables for years ofof lending's fungibility-and strong sector Fiscal decentralization also appears to schooling and experience. He concludeswork before project design. be a mechanism for improving health out- that:

This paper-a joint product of the Edu- comes in environments with a high level * There appear to be large differencescation Team, Human Development Net- of corruption. In environments with a high between rates of return to educationwork, and the Human Development Sec- level of ethnolinguistic fractionalization, across different levels in the Philippines.tor Unit, East Asia and Pacific Region- however, the benefits from fiscal decen- The wage premia for both primary andis part of a larger effort in the Bank to tralization tend to be smaller. secondary education are significantlyimprove the quality of education projects. This paper-a product of Human Devel- smaller than those for tertiaryThe study was funded by the Bank's Re- opment 1, Africa Technical Families-is education.search Support Budget under the research part of a larger effort in the region to con- * Within each level-primary, second-project "Economic Analysis in Education duct rigorous analysis of the implications ary, and university-the last year ofProjects" (RPO 682-95). Copies of this of fiscal decentralization on the financing schooling is disproportionately rewardedpaper are available free from the World and delivery of social services. Copies of in higher wages. That is, there appear toBank, 1818 H Street NW, Washington, DC the paper are available free from the be clear sheepskin effects associated with20433. Please contact Energy James, room World Bank, 1818 H Street NW, Washing- graduation.G8-058, telephone 202-473-1756, fax 202- ton, DC 20433. Please contact Oscar This paper-a product of the Poverty522-3233, email address ejames2 Picazo, room J10-062, telephone 202-458- Reduction and Economic [email protected]. Policy Research Work- 7954, fax 202-473-8239, email address Sector Unit, East Asia and Pacificing Papers are also posted on the Web at [email protected]. Policy Research Region-is part of a larger effort in thehttp://econ.worldbank.org. The authors Working Papers are also posted on the region to understand the links betweenmay be contacted at avawda@worldbank. Web at http://econ.worldbank.org. The education, earnings, and welfare.org, [email protected], or hpatrinos other authors may be contacted at Copies of the paper are available [email protected]. (34 pages) [email protected] or avoetberg from the World Bank, 1818 H Street

@worldbank.org. (14 pages) NW, Washington, DC 20433. Pleasecontact Tania Gomez, room 18-102,

2565. Does Fiscal Decentralization telephone 202-473-2127, fax 202-522-Improve Health Outcomes? 2566. Convexity and Sheepskin 0054, email address [email protected] from a Cross-Country Effects in the Human Capital org. Policy Research Working Papers areAnalysis Earnings Function: Recent also posted on the Web at http://econ.

Evidence for Filipino Men worldbank.org. The author may beDavid A. Robalino, Oscar F. Picazo, contacted at [email protected]. (38and Albertus Voetberg Norbert R. Schady pages)(March 2001) (March 2001)

Greater fiscal decentralization is consis- Data on education in the Philippines showtently associated with lower mortality that there are large differences in the pri-


2567. Policy Reform, Economic they find no gap in Internet intensity. Simulations based on the econometricGrowth, and the Digital Divide: When differences in urbanization and results suggest that feasible reforms couldAn Econometric Analysis competition policy are controlled for, low- sharply narrow the digital divide during

income countries have intensities as high the next decade for many countries inSusmita Dasgupta, Somik Lall, as those of industrial countries. While Africa, Asia, and Latin America. The au-and David VVheeler income does not seem to matter in this thors' review of the literature also sug-(March 2001) context, competition policy matters a gests that direct access promotion would

great deal. Low-income countries with yield substantial benefits for poor house-The digital divide reflects agap in telecom high World Bank ratings for competition holds and that cost-effective interventionaccess, not lower propensity to use the policy have significantly higher Internet strategies are now available.Internet in poor countries. Promoting intensities. This paper--a product of Infrastructureaccess for poor households will help, The authors'finding on Internet inten- and Environment, Development Researchbut pro-competitive policy holds the key sity implies that the digital divide is not Group-is part of a larger effort in theto rapid progress in narrowing the really new, but reflects a persistent gap group to identify effective policies for nar-divide. in the availability of mainline telephone rowing the digital divide. Copies of the

services. After identifying mobile tele- paper are available free from the WorldRapid growth of Internet use in high-in- phones as a promising new platform for Bank, 1818 H Street NW, Washington, DCcome economies has raised the specter of Internet access, they use panel data to 20433. Please contact Yasmin d'Souza,a 'digital divide" that will marginalize study the determinants of mobile tele- room MC2-635, telephone 202-473-1449,developing countries because they can phone diffusion during the past decade. fax 202-522-3230, email address ydsouzaneither afford Internet access nor use it Their results show that income explains @worldbank.org. Policy Research Work-effectively when it is available. part of the diffusion lag for poor countries, ing Papers are also posted on the Web at

Using a new cross-country data set, but they also highlight the critical role of http://econ.worldbank.org. The authorsDasgupta, Lall, and Wheeler investigate policy. Developing countries whose poli- may be contacted at sdasguptatwo proximate determinants of the digi- cies promote economic growth and private @worldbank.org, [email protected], ortal divide: Internet intensity (Internet sector competition have experienced much [email protected]. (18 pages)subscriptions per telephone mainline) and more rapid diffusion of mobile telephoneaccess to telecom services. Surprisingly, services.

world bank document...2563 tsunehiro otsuki, john s. wilson, a race to the top? a case study of food...

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