Journal Issue: World Bank Economic Review, Volume 32, Issue 3

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Evolving Wage Cyclicality in Latin America
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Gambeti, Luca; Messina, Julian
This paper examines the evolution of the cyclicality of real wages and employment in four Latin American economies, Brazil, Chile, Colombia, and Mexico, during the period 1980–2010.Wages were highly procyclical during the 1980s and early 1990s, a period characterized by high inflation. As inflation declined wages became less procyclical, a feature that is consistent with emerging downward wage rigidities in a low inflation environment. Compositional effects associated with changes in labor participation along the business cycle appear to matter less for estimates of wage cyclicality than in developed economies.
Inequality is Bad for Growth of the Poor (but Not for That of the Rich)
(Published by Oxford University Press on behalf of the World Bank, 2018-10) van der Weide, Roy; Milanovic, Branko
The paper investigates the relationship between income inequality and future income growth rates of households at different points of the income distribution. The analysis uses micro-census data from U.S. states covering the period from 1960 to 2010, and controls for exposure to imports from China and share of routine jobs, among other variables. It finds evidence that high levels of inequality reduce the income growth of the poor but, if anything, help the growth of the rich.
Retooling Poverty Targeting Using Out-of-Sample Validation and Machine Learning
(Published by Oxford University Press on behalf of the World Bank, 2018-10) McBride, Linden; Nichols, Austin
Proxy means test (PMT) poverty targeting tools have become common tools for beneficiary targeting and poverty assessment where full means tests are costly. Currently popular estimation procedures for generating these tools prioritize minimization of in-sample prediction errors; however, the objective in generating such tools is out-of-sample prediction.We present evidence that prioritizing minimal out-of-sample error, identified through cross-validation and stochastic ensemble methods, in PMT tool development can substantially improve the out-of-sample performance of these targeting tools.We take the United States Agency for International Development (USAID) poverty assessment tool and base data for demonstration of these methods; however, the methods applied in this paper should be considered for PMT and other poverty-targeting tool development more broadly.
Preferential Resource Spending under an Employment Guarantee
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Sheahan, Megan; Liu, Yanyan; Barrett, Christopher B.; Narayanan, Sudha
Are ostensibly demand-driven public works programs with high levels of safeguards nonetheless susceptible to politi al influence?We investigate this conjecture using expenditure data at the local level from India’s National Rural Employment Guarantee Scheme. Focusing on one state where accountability and transparency mechanisms have been employed and implementation efforts have been widely applauded, we find no evidence of partisan-influenced spending before the 2009 election and find that the political leaning of a mandal played only a small part in fund distribution after the 2009 election. Most variation in public works expenditures is explained by the observed needs of potential beneficiaries, as the scheme intended.
Better Knowledge Need Not Affect Behavior
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Zenker, Juliane; Wagener, Andreas; Vollmer, Sebastian
Many households in developing countries spend substantial amounts on lottery tickets but have only poor knowledge about the properties of the game and hold upwardly biased beliefs on the prospects of winning. To test whether more accurate knowledge reduces lottery participation, households in rural Thailand were informed, in a randomized intervention, on the actual probability distribution of the Thai Government Lottery. This indeed led to a better knowledge about the Thai Government Lottery in the treatment group. However, the improved knowledge did not (substantially) affect the willingness to pay for lottery tickets.
Dictators Walking the Mogadishu Line
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Larcom, Shaun; Sarr, Mare; Willems, Tim
History offers many examples of dictatorswho worsened their behavior significantly over time (like Zimbabwe’s Mugabe) as well as dictators who displayed remarkable improvements (like Rawlings of Ghana).We show that such mutations can result from rational behavior when the dictator’s flow use of repression is complementary to his stock of wrongdoings: past wrongdoings then perpetuate further wrongdoings and the dictator can unintentionally get trapped in a repressive steady state where he himself suffers from ex-post regret. This then begs the question why such a dictator would ever choose to do wrong in the first place. We show that this can be explained from the dictator’s uncertainty over his degree of impunity in relation to wrongdoing, which induces him to experiment along this dimension. This produces a setting where any individual rising to power can end up as either a moderate leader, or as a dreaded tyrant. Since derailment is accidental and accompanied by ex-post regret, increasing accountability can be in the interest of both the public and the dictator.
Why Is China Investing in Africa? Evidence from the Firm Level
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Chen, Wenjie; Dollar, David; Tang, Heiwai
China’s increased trade with, and investment in, Africa have boosted the continent’s economic growth but have also generated considerable controversy. The aggregate data on China’s overseas direct investment (ODI) in African countries reveal that China’s share of the stock of foreign investment is small, though growing rapidly. China’s attraction to resource-rich countries is no different from Western investment. China’s overall ODI is uncorrelated with a measure of rule of law, whereas Western investment favors the better governance environments. As a result, Chinese investment in strong and weak governance environments is about the same, but its share of foreign investment is higher in the weak governance states. Micro data from MOFCOM’s database on registered Chinese firms investing in Africa between 1998 and 2012 provide a different perspective. Key words in project descriptions are used to code the investments into 25 sectors. This database captures the small and medium private firms investing in Africa. Contrary to common perceptions, there are few projects in natural resource sectors. Most projects are in services, with a significant number in manufacturing as well. Country-sector-level regressions based on firms’ transaction-level data find that Chinese ODI, both horizontal and vertical, is profit-driven, like investment from other countries. In particular, regressions show that Chinese ODI is relatively more concentrated in skill-intensive sectors in skill-abundant countries but in capital-intensive sectors in capital-scarce countries. These patterns are mostly observed in politically unstable countries, suggesting stronger incentives to seek profits in tougher environments.
Does Improved Local Supply of Schooling Enhance Intergenerational Mobility in Education? Evidence from Jordan
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Assaad, Ragui; Saleh, Mohamed
The impact of the growth of the local supply of public schools in the post-Colonial period on intergenerational mobility in education is a first-order question in the Arab World. This question is examined in Jordan using a unique dataset that links individual data on own schooling and parents’ schooling for adults, from a household survey, with the supply of schools in the subdistrict of birth at the time the individual was of age to enroll, from a school census. The identification strategy exploits the variation in the supply of basic and secondary public schools across cohorts and subdistricts of birth in Jordan, controlling for year and subdistrict-of-birth fixed effects and interactions of governorate and year-of-birth fixed effects. The findings show that the local availability of basic public schools does, in fact, increase intergenerational mobility in education. For instance, a one standard deviation increase in the supply of basic public schools per 1,000 people reduces the father-son and mother-son associations of schooling by 18–20 percent and the father-daughter and mother-daughter associations by 33–44 percent. However, an increase in the local supply of secondary public schools does not seem to have an effect on the intergenerational mobility in education.
Networks and Manufacturing Firms in Africa
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Fafchamps, Marcel; Quinn, Simon
We run a novel field experiment to link managers of African manufacturing firms. The experiment resembles the many forms of interaction that business and community organizations offer to their members. The design features exogenous link formation, exogenous seeding of information, and exogenous assignment to treatment and placebo.We study the impact of the experiment on firm business practices outside of the lab. We find that the experiment successfully created new variation in social networks. We find significant diffusion of business practices in terms of VAT registration and having a bank current account. This diffusion is a combination of diffusion of innovation and simple imitation. At the time of our experiment, all three studied countries were undergoing large changes in their VAT legislation.
Food Prices and Poverty
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Headey, Derek D.
Do higher food prices help or hinder poverty reduction? Despite much debate, existing research has almost solely relied on simulation models to address this question. In this article World Bank poverty estimates are used to systematically test the relationship between changes in poverty and exogenous changes in real domestic food prices. We uncover indicative evidence that increases in food prices are associated with reductions in poverty, not increases. We empirically explain this result in terms of relatively strong agricultural supply and wage responses to food price increases, and the fact that the majority of the world’s poor still heavily rely on agriculture or agriculture-related activities to earn a living.
Dynamics of Demand for Rainfall Index Insurance
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Stein, Daniel
This paper analyzes the dynamic nature of rainfall insurance purchasing decisions. Customers of the Indan microfinance institution BASIX who receive an insurance payout are 9 to 22 percentage points more likely to purchase insurance the following year. This effect cannot be satisfactorily explained by trust, learning, or direct effects ofweather, leading to the conclusion that it is driven by behavioral effects. Overall, low repurchasing rates even after payouts suggest that the studied rainfall index insurance products are likely to continue struggling to achieve significant sales at market prices.
Shoeing the Children
(Published by Oxford University Press on behalf of the World Bank, 2018-10) Wydick, Bruce; Katz, Elizabeth; Calvo, Flor; Gutierrez, Felipe; Janet, Brendan
We carry out a cluster-randomized trial among 1,578 children from 979 households in rural El Salvador to test the impacts of TOMS shoe donations on children’s time allocation, school attendance, health, self-esteem, and aid dependency. Results indicate high levels of usage and approval of the shoes by children in the treatment group, and time diaries show modest evidence that the donated shoes allocated children’s time toward outdoor activities.Difference-in-difference and ANCOVA estimates find generally insignificant impacts on overall health, foot health, and self-esteem but small positive impacts on school attendance for boys. Children receiving the shoes were significantly more likely to state that outsiders should provide for the needs of their family. Thus, in a context where most children already own at least one pair of shoes, the overall impact of the shoe donation program appears to be negligible, illustrating the importance of more careful targeting of in-kind donation programs.