48383 ResearchDigest WorldBank Volume 1 l NumbeR 4 l SummeR 2007 The Urbanization of Global Poverty l Martin Ravallion, Shaohua Chen, and Prem Sangraula Urbanization has generally done ferent countries have somewhat In ThIs Issue more to reduce rural than urban different definitions of urban and poverty rural. Another is that the urban-rural The urbanization of Global Poverty ... page 1 H differential in cost of living may vary Is urbanization a good or bad thing for ow much of the world's pov- by income. As a result, the differen- fighting poverty? New data suggest it's a erty is found in rural areas, tial from the poverty assessments in good thing and how much in urban? How middle-income countries may not be quickly is the problem of poverty right for the $1-a-day international FoCuS shifting to urban areas? Is urbaniza- poverty line, which is based on the macroeconomic Volatility and tion a good or bad thing from the concept of poverty typically found in Development ... page 2 point of view of fighting poverty? low-income countries. Volatility is linked with lack of development. To help answer these questions, What do these new data show? How to tackle it? With a three-pronged Ravallion, Chen, and Sangraula On average, the urban poverty line strategy created a new data set, drawing on is about 30 percent higher than the more than 200 household surveys rural line. Even allowing for the brain Waste? educated Immigrants for about 90 countries. The data rep- higher cost of living facing the poor in the u.S. labor market ... page 3 resent 92 percent of the population in urban areas, the "$1 a day" rural Fine-tuning education standards might be of the developing world. poverty rate of 30 percent in 2002 is one way to reduce "brain waste" The task is not as easy as one more than twice the urban rate (ta- might guess. The first problem is ble 1). Similarly, while 70 percent of Inefficient lobbying, Populism, and that existing purchasing power par- the rural population lives below $2 a oligarchy ... page 4 ity exchange rates do not provide a day, less than half that share does in Does lobbying lead to inefficiencies? Yes, cost-of-living differential between urban areas. and they are likely to favor lagging sectors urban and rural areas. Yet it is clear About three-quarters of the de- or regions that the cost of living is higher in veloping world's poor still live in Weaponomics: The Global market urban than in rural areas of most rural areas. But poverty is becoming for Assault Rifles ... page 5 developing countries. To address more urban over time. The share of this measurement problem, the the "$1 a day" poor living in urban New data on prices of assault rifles help show what affects the flows of these weapons authors derived estimates of the areas rose from 19 percent to 25 and what might help control them urban-rural differential in cost of liv- percent over 1993­2002 (while the ing for the poor from what appears urban share of the population as a exit and exclusion as Routes to be the best available source, the whole rose from 38 percent to 42 to Informality ... page 6 World Bank's poverty assessments, percent). How to reduce informality? Increase which have now been done for most The poor are urbanizing faster the benefits of formality as well as the developing countries. than the population as a whole, re- opportunity cost of remaining informal By estimating everything from the flecting a lower-than-average pace primary data, the authors were able of urban poverty reduction. Over Will markets Direct Investments to assure a relatively high degree of 1993­2002, while 50 million people under the Kyoto Protocol? ... page 7 internal consistency (compared with were added to the count of the "$1 a Costs are probably not the only factor other compilations of distributional day" poor in urban areas, the aggre- determining where private investors locate data). But of course there are data gate count of the poor fell by about emission reduction projects problems that cannot be resolved from existing data. One is that dif- (continued on page 8) 2 WorldBankResearch Digest FOCUS Macroeconomic Volatility and Development Reducing volatility in developing roeconomic volatility by conducting volatility by controlling the level and countries calls for a three-pronged erratic fiscal policy and, even worse, variability of fiscal spending, by keep- sometimes financing it through ing a stable monetary and financial strategy, including stronger shock similarly volatile inflationary mon- policy, and by avoiding price rigidity absorbers etary policy. In low-income countries (including that of the exchange rate), B especially, domestically induced which eventually leads to drastic y any measure, developing shocks--related to social conflict, adjustments. countries always have the most economic mismanagement, and po- The second element is to strength- macroeconomic volatility. The litical instability--account for most en the economy's shock absorbers. connection between volatility and lack of the fluctuations in GDP per capita. Creating room for countercyclical fis- of development is undeniable, making For these countries external shocks-- cal policies is essential. This depends volatility a fundamental development linked to terms of trade, foreign aid, on the ability of the authorities to concern. What is behind this relation- international finance, and climatic reduce public debt to internationally ship? Is volatility a source or a reflec- conditions--contribute a significant acceptable levels, establish a record tion of underdevelopment? And what but small share of macroeconomic of saving in good times, and develop characteristics of underdevelopment volatility. credibility against perceptions of put poor countries more at risk? Third, developing countries have wasteful spending and default risk. Macroeconomic volatility in devel- weaker "shock absorbers," so external The financial sector can also play a oping countries has particularly large fluctuations have larger effects on role as a shock absorber. Governments welfare costs. The direct welfare loss their macroeconomic volatility. Econ- can help by reducing financial fragili- of deviating from a stable consump- omists have traditionally identified ties and deepening financial markets tion path reaches up to 5­10 percent shock absorbers with two elements: through the elimination of implicit of annual consumption in some financial markets to diversify macro- contingent liabilities and insurance Latin American countries, compared economic risk and stabilization poli- schemes (such as fixed exchange with less than 1 percent in industrial cies to counteract aggregate shocks. rate regimes) and through the proper countries. No less important, macro- Both are deficient in developing protection of creditor and share- economic volatility has an adverse countries. Financial markets are shal- holder rights. Finally, firms and other impact on output growth and thus low, drying up in times of crisis when microeconomic agents should have on future consumption. This is worst they would be most useful and fail- the flexibility to adjust to shocks by in countries that are poor, financially ing to provide adequate instruments reallocating resources across plants, and institutionally underdeveloped, to diversify away the risk posed by areas, and sectors. Competition and or unable to conduct countercyclical external shocks. Similarly, macroeco- trade provide the basic incentives and fiscal policies. The average effect of nomic policies often tend to amplify mechanisms for effective resource re- a one-standard-deviation increase volatility in developing countries. allocation, but governments can help in macroeconomic volatility (the Fiscal policy is generally procyclical, by reducing the burden of regulations. distance between the output gap expanding in booms and contracting The third element is to manage variance of Indonesia and the United in recessions. external shocks. Governments have Kingdom) is a loss of 1.28 percentage Mainstream analysis of shock ab- traditionally had three options: self- points of per capita GDP growth. sorption has traditionally focused on protection (reducing the exposure to The greater volatility in developing macroeconomic policy. More recently, risk through, for example, low trade countries stems from three sources. microeconomic policy also has been and financial openness), self- First, developing countries receive found to play an important role. In par- insurance (transferring resources bigger exogenous shocks. These may ticular, the high levels of microeconom- across time by, for example, accumu- come from financial markets, taking ic regulation in developing countries lating foreign reserves during tranquil the form of, for example, "sudden hamper the adjustment to shocks by times), and full hedging and insurance stops" of capital inflows. Or they may restricting the ability to reallocate re- (transferring resources across "states come from goods markets, especially as sources. There is evidence that tighter of nature" by, for example, securing abrupt and large changes in the inter- barriers to microeconomic realloca- contingent credit lines or trading national terms of trade. tion--particularly related to regulation commodity-linked options). Second, developing countries of labor markets--make countries more An optimal strategy would typically seem to experience more domestic vulnerable to economic shocks. combine all three options to different shocks. These are generated by a The three main sources of macro- degrees. But hedging and insurance, combination of the intrinsic insta- economic volatility suggest a need for the option that potentially entails the bility of the development process a three-pronged strategy to manage smallest costs in forgone investment and self-inflicted policy mistakes. it. The first element of such a strategy Governments often instigate mac- is to reduce domestic policy­induced (continued on page 5) WorldBankResearch Digest 3 Brain Waste? Educated Immigrants in the U.S. Labor Market l Aaditya Mattoo, Ileana Cristina Neagu, and Çaglar Özden Education policies at home ness of U.S. immigration policies to appropriate. They could even target and immigration policies abroad residents of the country. For example, specific export markets. One success- both offer ways to reduce a large share of immigrants from some ful example: the nursing schools in the "brain waste" countries (such as Mexico) are admit- Philippines that use an American cur- ted through family preferences, visa riculum to train their students for the E lotteries, and political asylum, while U.S. market. veryone in New York has a story more immigrants from other countries In some regulated professions about how they discovered that (such as India) have to rely on employ- nonrecognition of foreign qualifica- their taxi driver was an Eastern ment preferences. Military conflict tions and licenses may be a barrier to European scientist. And many taxi in the home country can have both a entry. Denial of recognition may be drivers tell stories about how their quality effect, because it weakens insti- legitimate when home country quali- Indian passengers are nearly always tutions that create human capital, and fications are inadequate. But in some computer scientists. A paper by Mat- a selection effect, because it lowers the cases the burdensome requalification too, Neagu, and Özden investigates threshold quality of immigrants. requirements imposed on foreign- the empirical basis for these popu- The results have implications for ers reflect the protectionist capture lar perceptions. It addresses three policy. In many developing countries of regulatory processes by domestic related questions: How widespread today, public and private resources vested interests. The authors' results is unskilled employment among are being devoted to providing uni- suggest that individuals educated in educated immigrants in the United versity and professional education some countries are better equipped States? Does the incidence differ with to those who may end up in jobs to overcome these barriers, mainly the immigrants' country of origin? (domestically and abroad) that make because of greater compatibility of Can any differences be explained by little use of their education. Gaining education and professional standards. observable attributes of the country a better sense of their destiny should In any case, more needs to be done, of origin? help individuals and their countries and one possible venue is the services Using U.S. census data, the au- improve their allocation of resources and Mode 4 negotiations at the World thors demonstrate striking differences for education. Trade Organization. in the occupational attainment of Developing countries face a di- There are also implications for immigrants with similar educational lemma in setting education standards. the design of immigration policies in backgrounds but different countries of A standard for tertiary education that destination countries. For example, origin. Even after controlling for age, is locally appropriate (but low rela- a simple "points based" system experience, and education level, they tive to developed country standards) might not be the ideal mechanism find that highly educated immigrants reduces the likelihood of skilled mi- for choosing skilled migrants, since from certain countries are less likely gration--yet increases the likelihood it would assign similar points to to obtain skilled jobs. For example, a that those who migrate will be trapped nominally identical degrees received hypothetical 34-year-old Indian col- in unskilled jobs. But a standard that in countries with considerable differ- lege graduate who arrived in 1994 has is inappropriately high for domestic ences in the quality of human capi- a 69 percent probability of obtaining needs might increase the probability tal. The system might operate more a skilled job, while for a Mexican im- of skilled emigration--though improve effectively if it gave more points to migrant of identical age, experience, the labor market placement of edu- degrees earned in countries with and education the probability is only cated migrants. higher-quality education. Informa- 24 percent. One solution might be to move tion on migrants' employment histo- Much of this country-level variation away from a uniform national stan- ry in their home country or evidence can be explained by certain country at- dard--that is, to set one standard of an offer of skilled employment in tributes. Some of these affect the qual- at a level suited for foreign markets the destination country (as in the ity of human capitaltal accumulated and another at a level more appropri- U.S. H-1B program) would also be at home, such as spending on tertiary ate and cost-effective for domestic effective in identifying relevant skill education and the use of English as a needs. If brain drain is a concern, levels. medium of education. Others lead to a country could direct most public a selection effect--variation in the abili- funding toward institutions that ap- ties of migrants because they come ply the second standard, while pri- from different sections of the skill vate sources fund the education of Aaditya Mattoo, Ileana Cristina Neagu, and distribution of their home countries-- potential migrants. At the same time, Çaglar Özden. Forthcoming. "Brain Waste? and include GDP per capita, distance "export quality" institutions could be Educated Immigrants in the U.S. Labor Market." to the United States, and the open- liberated from the need to be locally Journal of Development Economics. 4 WorldBankResearch Digest Inefficient Against this background a new be expected from such groups as Lobbying, article by Campante and Ferreira farmers in Europe, steel employers makes three contributions. First, it and workers in the United States, Populism, and shows that the Pareto efficiency of and computer makers in Brazil, but truthful equilibria in lobbying games not from farmers or steel producers Oligarchy applies to a production economy in Brazil or computer makers in the only if there are perfect commitment United States. mechanisms. If capital markets are Finally, the article considers the l Filipe R. Campante and imperfect or if contract enforcement implications of this more nuanced un- Francisco H. G. Ferreira problems exist, lobbying will in gen- derstanding of lobbying for the distri- eral lead to an inefficient allocation bution of wealth. While many papers Lobbying is likely to create of resources. have suggested that lobbying always inefficiencies that favor less The intuition is simple: in a truth- favors the rich, this article shows that productive groups at the expense ful equilibrium private agents offer the distributive bias of lobbying de- of more productive ones contributions that return to the gov- pends on why the rich are rich. If they ernment agent the full value of the are rich because they inherited their D policy actions they are lobbying for. wealth (and wealth and productivity oes lobbying--using private This enables the government to ap- are independent, and the rich have an resources to influence public propriate all the surplus generated by advantage in politics), lobbying is gen- policy--cause inefficiency? policy. It therefore chooses the policy erally pro-rich. Across the world private groups that maximizes social Alternatively, if the routinely lobby governments in pur- surplus. rich are rich because suit of favorable treatment: trade But this requires Declining they are more produc- protection, regulatory benefits, that private groups are tive, lobbying may dis- lower taxes, or preferred public ex- able (as well as will- sectors will tort the composition penditures. Lobbying is sometimes ing) to transfer the full of public spending illegal--through corrupting elected surplus. What if they spend more against them. On the politicians--but legal forms abound are credit constrained on lobbying margin there will be in almost all countries. and can make the "too much" spending Does all this (costly) activity transfer only after pro- than vibrant on welfare and on bad simply redistribute resources from duction takes place? If public schools and too a given pie, or are there aggregate people cannot credibly emerging little on goods valued efficiency losses resulting from lob- commit to contribu- sectors by the rich (such as bying that reduce the overall size of tions that exhaust security and universi- the pie? Clearly, if the lobby transfers their gains from a par- ties). Such a "populist to government agents are seen as ticular policy, the gov- equilibrium" may be a deadweight loss, lobbying is inef- ernment no longer has an incentive reversed, however, if the rich are bet- ficient by definition. But government to maximize the full surplus, and the ter able than the poor to organize employees and politicians are part Pareto-efficiency result breaks down. themselves. of society too, so perhaps their gains Second, the article characterizes The upshot is that the reassuring should not be treated as social loss- the nature of the inefficiency gener- theoretical result that lobbying is ef- es. Lobbying transfers to politicians ated by lobbying. The article shows ficient is valid only in highly restrictive can be viewed as undesirable, but that the outcome of lobbying under situations. In general, the existence that does not make them necessarily imperfect commitment is not only of lobbying is most likely to create inefficient. almost always inefficient; it is also economic inefficiencies--a result with In fact, a central result in the biased against the most productive implications for the design of political economics literature on lobbying group. This follows from specializa- systems, including governance and is precisely that, under a set of as- tion in accordance with comparative campaign finance reforms in develop- sumptions about how lobbying takes advantage: those who are most pro- ing countries. Those inefficiencies are place, the outcome is Pareto efficient. ductive tend, on the margin, to allo- likely to favor less economically pro- In other words, lobbying may redis- cate more resources to private capital ductive groups (such as lagging sec- tribute resources among agents in and fewer to political contributions. tors or regions) at the expense of more society, but it does not cause an ag- The reverse is true for those who are productive ones. gregate loss. While influential, this less productive. result has also been met with some The prediction is a world in which surprise. After all, lobbying is seen as declining sectors spend more re- a more distortionary form of political sources on lobbying than vibrant Filipe R. Campante and Francisco H. G. action than voting, and electoral out- emerging sectors, which tend to Ferreira. 2007. "Inefficient Lobbying, Populism, comes have been shown to be gener- channel funds toward productive and Oligarchy." Journal of Public Economics ally prone to inefficiency. investment. Lobbying would thus 91: 993­1021. WorldBankResearch Digest 5 Weaponomics: The Global Market government effectiveness reduce for Assault Rifles proneness to civil war directly--and also indirectly, by raising the effective barriers to illicit trade in small arms. l Phillip Killicoat Research in this area is nascent, and this study raises a range of additional Prices for assault rifles suggest regimes and rebels sympathetic to questions: Does the availability of contagion effects of conflicts in the Soviet Union. small arms (as proxied by price) affect neighboring countries--and reflect The AK-47 has dominated the mar- the probability of civil war? Does it lead ket for assault rifles for the past half to longer war? Does it result in more the arms flows feeding African century. Since its technology does not battle deaths? If collection of the price battles differ significantly from the original, data continues, and further analyses S the prices observed across time and incorporate quantities supplied and mall arms cause an estimated countries mainly reflect market con- demanded, much stronger evidence on 200,000­400,000 deaths each ditions, not changes in the rifle. The policy options to prevent, reduce, and year--and assault rifles in civil study therefore uses AK-47s to repre- end civil conflict is likely to emerge. conflict about 10,000 of these. Despite sent small arms flows. the global prevalence of small arms, Theory suggests that four factors reliable information on the market drive prices in the small arms mar- Phillip Killicoat. 2007. "Weaponomics: The Global for such weapons has been extremely ket: on the demand side, income and Market for Assault Rifles." Policy Research Work- limited. In 1999 the Swiss Small Arms motivation, and on the supply side, ing Paper 4202. World Bank, Washington, D.C. Survey project began to compile data regulation and supply costs. Drawing This paper is part of a series on Post-conflict on production, stockpiles, transfers, on the new database, a model of the Transitions. and government policies. But until small arms market finds that regula- recently the survey lacked price tion and supply costs are significant data--crucial in understanding the determinants of price. Indicators of FOCUS flows of these weapons and gaining government effectiveness--proxies Macroeconomic Volatility insight into policies for their control. for barriers to weapons trade within and Development A recent study by Killicoat estab- and between countries--are consis- lished a database of prices, observed tently significant in determining price. (continued from page 2) in 117 countries from 1986 to 2005, Surprisingly, the collapse of the So- for Kalashnikov assault rifles--or viet Union has a smaller impact than and access to the advantages of inte- AK-47s (from Avtomat Kalashnikova might be expected. The significance of gration, is currently unfeasible for de- 1947, the original model). Through the military expenditures of neighbor- veloping countries. They have therefore preliminary analysis of those data, the ing countries suggests that regional relied excessively on self-insurance as study shows that conflict in neighbor- weapons trade is at least as important a compromise solution between the ing countries is closely associated in pricing as global trade. extremes of isolation and no protec- with large and significant declines in Weapons demand across the Afri- tion, and have started to accumulate domestic AK-47 prices. By contrast, can continent has changed over time massive foreign reserves. Although this better governance is closely related as local tensions have risen and re- may be a sensible temporary solution, to higher AK-47 prices, suggesting the ceded. But without fail, AK-47 prices the focus for the future should be on importance of government effective- in Africa have been hugely and sig- developing hedging instruments. There ness in restricting small arms traffic. nificantly lower than those elsewhere. are hopeful signs that some of these Most strikingly, prices in Africa are Even controlling for income, govern- instruments--linked, for example, to dramatically lower than those else- ment effectiveness, war legacy, and world financial indicators--are becom- where, a stark reflection of the ubiq- supply cost variables, being located in ing available to developing countries. uity of AK-47s across the continent. an African country makes purchasing AK-47s are in the arsenals of more an assault rifle on average more than than 80 countries and in practically $200 cheaper than the global average. every theater of insurgency or guer- The study posits that because African Norman Loayza and Claudio E. Raddatz. Forth- rilla combat. This pervasiveness may borders are porous and effective trade coming. "The Structural Determinants of External be explained in large part by their barriers negligible, arms supply nearly Vulnerability." World Bank Economic simplicity. Initially designed for use meets demand and prices converge. Review. by glove-wearing Soviet soldiers in Countries whose neighbors have Norman Loayza, Romain Rancière, Luis Servén, arctic conditions, the AK-47 is so higher military spending face signifi- and Jaume Ventura. Forthcoming. "Macroeconom- simple it is operated by child soldiers cantly lower weapons prices domes- ic Volatility and Welfare in Developing Countries." World Bank Economic Review. in the African desert. As a Soviet in- tically. Thus mutual disarmament, Claudio E. Raddatz. Forthcoming. "Are External vention, the AK-47 was not subject to where feasible, may reduce weapons Shocks Responsible for the Instability of Output in patent and so could be freely copied, supply through at least one channel. Low-Income Countries?" Journal of Develop- and large caches were distributed to Economic development and greater ment Economics 6 WorldBankResearch Digest Exit and Exclusion as Routes to Informality institutional failures that lead to, and are reinforced by, generalized social norms of noncompliance with regula- l Guillermo E. Perry, William F. Maloney, Omar S. Arias, tions and tax obligations. Pablo Fajnzylber, Andrew D. Mason, and Jaime Saavedra-Chanduvi Unsurprisingly, the report's analy- sis gives rise to recommendations spanning the policy agenda. Since the Many workers, finding no benefit metric. This suggests that entry into high level of informality in develop- to interacting with the state, opt the informal sector is often voluntary, ing countries is due largely to the low voluntarily into informality a finding confirmed by novel survey opportunity cost of opening a micro data on sectoral choice decisions. business, the gamut of measures to I Broadly, informal workers form two increase formal sector productivity-- nformality is a way of life in Latin clearly distinct groups. The informal improving the business climate, fos- America and the Caribbean-- self-employed (including owners of tering innovation, and the like--and indeed, in much of the developing microenterprises) are largely volun- improve workers' skills is important. world. In most countries of the region, tary, older workers, while the informal Labor market reform continues many workers are not covered by la- wage earners tend to be young workers to be key, since part of the growth in bor protections, the microenterprises searching for better jobs, either formal the share of workers not covered by found on every street corner often are salaried jobs or self-employment. But labor protections in Latin America in not registered with authorities and the report also finds much heteroge- the 1990s appears to be due to the comply only partially with other regu- neity within these groups and across increased burden of labor costs and lations, and tax evasion is the norm countries. restrictions in several countries. But among rich and poor Informal micro firms reform also needs to extend to rem- alike. exhibit dynamics simi- edying the poor design of the social These features of Much lar to those of small protection system, which creates in- the Latin American informality firms in the indus- centives favoring informality. landscape are not trial world. The small More generally, shifting the cost- new. But the strik- has to do with steady-state firm size benefit analysis of workers toward ing increase in their often means little de- engaging with the institutions of the incidence in some exclusion. But mand for services asso- state--both by increasing the benefits countries in the 1990s exit also plays ciated with formaliza- of formality and by improving monitor- has given new life to tion (such as support ing--is critical to reducing their often the debate about what an important programs for micro and voluntary entry into informality. The high levels of informal- small firms and access experiments in reducing the costs of ity tell us about how part to financial and judicial registering businesses and simplifying economies are func- services). and reducing taxes for small firms have tioning--and about Measures to lower led to a modest formalization of exist- what we can do to overcome that in- the costs of formality therefore yield ing businesses, though with potentially formality. effects that, while positive, are often important impacts on these firms. A new report by a World Bank modest. A more holistic approach is Progress in this area therefore con- team, Informality: Exit and Exclusion, recommended, one that would also tinues to be important and should be explores the richly varied informal improve the benefits of formality and complemented with policies that could sector from a range of perspectives-- increase the opportunity cost of re- enhance the access to and quality of from the protection of workers and maining informal. Firm-level analysis services associated with formalization. the productivity of firms to the deter- identifies several plausible channels All these reforms need to take place minants of tax evasion. Much infor- through which informality may affect in a context of improving the efficiency mality has to do with exclusion--with overall productivity, but cross-country and fairness of the state, which is often citizens being left outside formal panel analysis is unable to identify perceived as ineffective and serving institutions. But exit also plays an im- robust aggregate impacts on growth. only the needs of elites. In the long run portant part: many workers, firms, and Poorly designed social security sys- this is the only way to change social families, dissatisfied with the perfor- tems, and alternative free services for norms of noncompliance and reduce mance of the state or simply finding the informal, create both a push and the "culture of informality." no benefit to interacting with it, opt a pull toward the informal sector. The voluntarily into informality. report speculates on the link between The gross flows of workers between informality and the soundness of the Guillermo E. Perry, William F. Maloney, Omar S. the formal and informal sectors often "social contract"--a shorthand for Arias, Pablo Fajnzylber, Andrew D. Mason, and mimic search behavior found in the how citizens of the region relate to the Jaime Saavedra-Chanduvi. 2007. Informality: job-to-job flows in the United States: state and to one another. It suggests Exit and Exclusion. Washington, D.C.: World they are procyclical and broadly sym- that high informality indicates serious Bank. WorldBankResearch Digest 7 Will Markets Direct Investments under the Kyoto Protocol? minimize abatement costs and thus maximize emission reduction, objec- tive criteria are needed for project l Donald F. Larson and Gunnar Breustedt approval that guarantee quality but omit political objectives. Theories Political aims and cultural ties may without the government approval of political economy would suggest, influence the placement of emission process? Qualitative studies of such perhaps somewhat more realistically, reduction projects under the Kyoto processes found that they often include that country preferences be explicitly Protocol panels with representatives from sev- stated to allow potential investors to eral government agencies, suggesting accurately account for them. G that they are likely to be subject to Another interpretation of the re- overnments alone cannot agency mandates and objectives. That sults is that preferences of approving finance enough investment to literature indicates that abatement cost agencies reflect deeper bilateral rela- significantly reduce greenhouse was just one of several factors affecting tionships, or cultural ties that could gas emissions; private participation approval of AIJ projects. also influence investor choice. Said is essential. Under the Kyoto Protocol Building on those precedents, the differently, deep-seated cultural ties private investments in emission reduc- study models investor decisions and may influence bilateral policy more tion can count toward a country's re- government approval in the AIJ sys- generally, including aid decisions and duction obligations. And those invest- tem. In the model the investor's choice AIJ approvals. Such ties may also be ments can occur in partner countries of host country is influenced by the important for bilateral investments where costs and emissions are low. investment climate and various gov- such as those under the AIJ program, But a new study by Larson and Breust- ernance attributes of host countries since studies of bilateral ties related edt suggests that political objectives and by investor and host countries' to language, culture, and history in- and cultural ties influence the place- commitment to climate change. For dicate lower transaction costs where ment of emission reduction projects. the government approval process, the bilateral interactions are frequent and If so, the lowest-cost projects may not authors assume that some of the na- long-lasting. be approved, and greenhouse abate- tional policy objectives that influence For these reasons the analysis may ment costs under the Kyoto Protocol bilateral aid also affect approval of AIJ be observing the results of private and are likely to be higher than predicted. host countries. public decisions: private investors Costs have played an important If this is true, many aid recipient responding to lower transaction costs part in negotiating implementation of countries also should be host to AIJ and risks and public agents respond- the Kyoto Protocol. While developed projects. To compare the aid and AIJ ing to established sociopolitical ties countries produce by far the great- approval processes, the authors model and preferences. If this is so, the hur- est share of emissions, they also face donor country aid as a product of sev- dles to bilateral financing are higher higher costs of abatement. To obtain eral recipient country characteristics-- and greater effort is required to find the greatest reduction in global emis- need, size, democratic institutions, open and transparent ways to contain sions, "flexibility mechanisms" allow civil order, and bureaucratic efficiency transaction costs. a country nearing its domestic emis- --and two variables that reflect the With the approval processes, sions limit to get credit for reducing investor country's desire to influence panels, and channels with host coun- emissions in any of 36 developing and that partner. tries established, countries may be transition economies. Investors would The data and different versions of inclined to retain the institutions built be motivated by lower costs in devel- the model are consistent with the during the pilot phase. Under the oping countries, host countries would hypothesis that donor countries prefer Kyoto Protocol, Clean Development benefit from greater investment, and projects that help achieve policy Mechanisms rather than the AIJ will be global abatement costs would be sub- objectives also pursued through bilat- implemented, and binding regulatory stantially lowered. eral aid. All but 5 of the 147 AIJ proj- constraints will govern them in some Given the complexity of the issues ects involved investor and recipient countries. Nonetheless, the study sug- involved, treaty participants agreed countries that also were partners in gests that countries need to consider to launch pilot projects before treaty bilateral aid. And the analysis shows the effects of the AIJ institutions on ratification. The first of these bilat- a strong and significant association both costs and abatement in decid- eral projects, referred to as "activities between bilateral aid flows and AIJ ing on new mechanisms and approval implemented jointly" (AIJ), began in investments, both in models that processes. 1992. Data are available on the proj- consider whether a donor-host pair ects approved in the first 10 years, al- had any AIJ projects and in those that lowing examination of the outcomes count the number of joint projects. of investor application and national This finding of such a clear and Donald F. Larson and Gunnar Breustedt. 2007. approval processes. strong association suggests that "Will Markets Direct Investments under the Kyoto How much do AIJ investments differ earlier predictions of the effects of the Protocol?" Policy Research Working Paper 4131. from those that would have occurred Kyoto Protocol may be optimistic. To World Bank, Washington, D.C. 8 WorldBankResearch Digest (continued from page 1) 100 million, thanks to a decline of 150 ted largely through higher economic Recent Policy Research million in the rural poor. growth associated with more rapid Working Papers Latin America has had the fastest urbanization rather than through urbanization of poverty, and now the redistribution. Indeed, this new evi- majority of the region's poor live in dence suggests that urbanization has 4259 Are All labor Regulations equal? Assessing the effects of Job Security, labor urban areas. By contrast, less than 10 generally done more to reduce rural Dispute, and Contract labor laws in India percent of East Asia's poor live in ur- poverty than urban poverty. Urbaniza- Ahmad Ahsan and Carmen Pagés 4258 The Cost of being landlocked: ban areas. This is due mainly to China, tion in the developing world appears logistics Costs and Supply Chain Reliability where absolute poverty is overwhelm- to be having a compositional effect Jean François Arvis, Gael Raballand, and Jean-François Marteau ingly rural. on the urban population that slows 4257 Consumption Risk, Technology Adoption, and Is this urbanization of poverty in urban poverty reduction--even as Poverty Traps: evidence from ethiopia Stefan Dercon and Luc Christiaensen most developing countries good or poverty falls in rural areas and for the 4256 Nigeria's Growth Record: bad news? To some observers it is the population as a whole. Dutch Disease or Debt overhang? Nina Budina, Gaobo Pang, unwelcome forebear of new poverty New urban problems are emerging and Sweder van Wijnbergen problems, with urban slums blos- in poor and rapidly urbanizing coun- 4255 Public Finance, Governance, and Growth in Transition economies: soming in congested cities. To others, tries. But the experiences of countries empirical evidence from 1992­2004 urbanization is a positive force for de- over time are generally consistent Taras Pushak, Erwin R. Tiongson, and Aristomene Varoudakis velopment, as the economy gradually with the view that a rising share of 4254 The Causes of Civil War shifts out of agriculture to more remu- the population living in urban areas Simeon Djankov and Marta Reynal-Querol nerative activities. plays a positive role in overall poverty 4253 Poverty, Inequality, and Social Disparities during China's economic Reform Across countries and over time, reduction. David Dollar as the urban share of the total popu- 4252 About urban mega Regions: Knowns and unknowns lation rises, the overall (urban and Shahid Yusuf rural) poverty rate tends to fall. (Of 4251 The living Conditions of Children Martin Ravallion, Shaohua Chen, and Prem San- Harry A. Patrinos course there are exceptions to this graula. 2007. "New Evidence on the Urbanization 4250 economic Information and Finance: generalization, but the overall pat- of Global Poverty." Policy Research Working Paper more Information means more Credit, Fewer bad loans, and less Corruption tern is clear.) This effect is transmit- 4199. World Bank, Washington, D.C. Roumeen Islam 4249 What Is the Impact of International Remittances on Poverty and Inequality in latin America? Table 1. Urban and Rural "$1 a Day" Poverty Measures for 1993 and 2002 Pablo Acosta, Cesar Calderon, Pablo Fajnzylber, and Humberto Lopez Number of poor (millions) Share below poverty line (percent) Urban share of the poor Year Urban Rural Total Urban Rural Total (percent) Working Papers can be downloaded at http://econ.worldbank.org 1993 242 1,038 1,280 13.8 36.6 28.0 18.9 To download the World Bank Research E-Newsletter, go to Data 2002 291 890 1,181 13.2 29.7 22.7 24.6 & Research at http://www.worldbank.org The World Bank Research Digest is a quarterly publica- The Research Digest is financed by the bank's editorial Committee: Jean-Jacques Dethier (managing tion aimed at disseminating findings of World bank Research Committee and managed by DeCRS, the editor), Asli Demirgüç-Kunt, and Alan Gelb. editor: research. The views and interpretations in the articles research support unit of the Development economics Alison Strong; research assistance: Thi Trang linh Phu; are those of the authors and do not necessarily repre- Vice Presidency (DeC). The Research Digest is not production: Roula I. Yazigi. Information or free sub- sent the views of the World bank, its executive Direc- copyrighted and may be reproduced with appropriate scriptions: send email to researchdigest@worldbank. tors, or the countries they represent. source attribution. org or visit http://econ.worldbank.org/research_digest The World Bank 1818 H Street, NW Washington, DC 20433, USA Printed on Recycled Paper