Journal Issue: World Bank Economic Review, Volume 31, Issue 1
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31
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1
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1564-698X
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World Bank Economic Review
1564-698X
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Budget Rules and Resource Booms and Busts
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Devarajan, Shantayanan; Go, Delfin S.
This paper develops a dynamic, stochastic, general-equilibrium model to analyze and derive simple budget rules in the face of volatile public revenue from natural resources in a low-income country like Niger. The simulation results suggest three policy lessons or rules of thumb. When a resource price change is positive and temporary, the best strategy is to save the revenue windfall in a sovereign fund and use the interest income from the fund to raise citizens’ consumption over time. This strategy is preferred to investing in public capital domestically, even when private investment benefits from an enhanced public capital stock. Domestic investment raises the prices of domestic goods, leaving less money for government to transfer to households; public investment is not 100 percent effective in raising output. In the presence of a negative temporary resource price change, however, the best strategy is to cut public investment. This strategy dominates other methods, such as trimming government transfers to households, which reduces consumption directly, or borrowing, which incurs an interest premium as debt rises. In the presence of persistent (positive and negative) shocks, the best strategy is a mix of public investment and saving abroad in a balanced regime that provides a natural insurance against both types of price shocks. The combination of interest income from the sovereign fund, transfers to households, and output growth brought about by public investment provides the best protective mechanism to smooth consumption over time in response to changing resource prices.
Remittances and Vulnerability in Developing Countries
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Bettin, Giulia; Presbitero, Andrea F.; Spatafora, Nikola L.
This paper examines how international remittances are affected by structural characteristics, macroeconomic conditions, and adverse shocks in recipient economies. We exploit a novel, rich panel data set, covering bilateral remittances from 103 Italian provinces to seventy-nine developing countries over the period 2005–2011. We find that remittances are negatively correlated with the business cycle in recipient countries and in particular increase in response to adverse exogenous shocks, such as large terms-of-trade declines. This effect is stronger where the migrant communities have a larger share of newly arrived migrants. Finally, we show that recipient-country financial development is negatively associated with remittances, suggesting that remittances help alleviate credit constraints.
Asymmetric Information about Migrant Earnings and Remittance Flows
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Seshan, Ganesh; Zubrickas, Robertas
We examine asymmetric information about migrant earnings and its implications for remittance behavior using a sample of Indian households with husbands working overseas in Qatar. On average, wives underreport their husbands’ income and underreporting is more prevalent in households with higher earning migrants. The discrepancy in earning reports is strongly correlated with variation in remittances: greater underreporting by wives is associated with lower remittances. We develop an exchange model of remittances with asymmetric information and costly state verification. The optimal remittance contract prescribes a threshold for remittances that invites verification only if unmet. The model's predictions closely match our empirical findings.
Comparing Cash and Voucher Transfers in a Humanitarian Context
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Aker, Jenny C.
Despite recent calls in support of cash transfers, there is little rigorous evidence of the relative impacts of cash versus in-kind transfers, especially in humanitarian contexts, where a majority of such programs take place. This paper uses data from a randomized experiment in the Democratic Republic of Congo to assess the relative impacts and costs of equivalently valued cash and voucher transfers. The voucher program distorted households' purchases along both the extensive and intensive margin as compared with unconstrained cash households. Yet there were no differences in food consumption or other measures of well-being, in part due to the fact that voucher households were able to resell part of what they purchased. As there were no significant benefits to vouchers, cash transfers were the more cost effective modality for both the implementing agency and program recipients in this context.
Public Good Provision in Indian Rural Areas
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Casini, Paolo; Vandewalle, Lore; Wahhaj, Zaki
Self-help groups (SHGs) are the most common form of microfinance in India. We provide evidence that SHGs, composed of women only, undertake collective actions for the provision of public goods within village communities. Using a theoretical model, we show that an elected official, whose aim is to maximize re-election chances, exerts higher effort in providing public goods when private citizens undertake collective action and coordinate their voluntary contributions towards the same goods. This effect occurs although government and private contributions are assumed to be substitutes in the technology of providing public goods. Using firsthand data on SHGs in India, we test the prediction of the model and show that, in response to collective action by SHGs, local authorities tackle a larger variety of public issues, and are more likely to tackle issues of interest to SHGs. Our findings highlight how the social behavior of SHGs can influence the governance of rural Indian communities.
Genuine Fakes
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Finn, Arden; Ranchhod, Vimal
How prevalent is data fabrication in household surveys? Would such fabrication substantially affect the validity of empirical analyses? We document how we identified such fabrication in South Africa's longitudinal National Income Dynamics Study, which affected about 7% of the sample. The fabrication was detected while fieldwork was still on-going, and the relevant interviews were reconducted. We thus have an observed counterfactual that allows us to measure how problematic such fabrication would have been, had it remained undetected. We compare estimates from the dataset that includes the fabricated interviews with corresponding estimates that includes the corrected data instead. We find that the fabrication would not have affected our univariate and cross-sectional estimates meaningfully, but would have led us to reach substantially different conclusions when implementing panel estimators. We estimate that the data quality investigation in this survey had a benefit-cost ratio of at least 24, and was thus easily justifiable.
Grain Price Spikes and Beggar-thy-Neighbor Policy Responses
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Jensen, Hans G.; Anderson, Kym
When prices spike in international grain markets, national governments often reduce the extent to which that spike affects their domestic food markets. Those actions exacerbate the price spike and international welfare transfer associated with that terms of trade change. Several recent analyses have assessed the extent to which those policies contributed to the 2006–08 international price rises but only by focusing on one commodity or by using a back-of-the envelope (BOTE) method. The present more comprehensive analysis uses a global, economy-wide model that is able to take account of the interactions between markets for farm products that are closely related in production and/or consumption and able to estimate the impacts of those insulating policies on grain prices and on the grain trade and economic welfare of the world's various countries. Our results support the conclusion from earlier studies that there is a need for stronger WTO disciplines on export restrictions.
Volunteerism after the Tsunami
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Freire, Tiago; Henderson, J. Vernon; Kuncoro, Ari
Using three waves of survey data from fishing villages in Aceh, Indonesia for 2005–09, we examine the determinants of local volunteer labor after the tsunami. Volunteer labor is the village public sector labor force for maintenance, clean-up and renovation of public capital. While also examining the effects on volunteerism of village destruction and trauma, pre-existing social capital, diversity, and aid delivery, we focus on effects of democratization. The tsunami and massive international aid effort prompted the settlement of the insurgency movement in Aceh, which had led to suspension of local elections over the prior twenty or more years. Until 2006, village heads who call volunteer days were effectively selected by village elites, who may highly value the public facilities maintained by volunteer labor. With elections, volunteer days fall under the new regime, with democratically elected village heads calling fewer volunteer days, which may appeal more to the typical villager. Identification comes from pseudo-randomized differential timing of elections.
A New Cross-National Measure of Corruption
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Escresa, Laarni; Lucio, Picci
A new measure of cross-national corruption is constructed based on the geographic distribution of public officials involved in cross-border corruption cases. A comparison is made between the Public Administration Corruption Index (PACI) and perception-based measures, considers the extent to which differences between them are driven by systematic factors, and concludes that they are not. As more data on cases of cross-border bribery incidents become available, the PACI will provide an increasingly valid cross-national measure of corruption.
The Effects of Volumetric Pricing Policy on Farmers’ Water Management Institutions and Their Water Use
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Kajisa, Kei; Dong, Bin
We use original water user group (WUG) data from a reservoir irrigation system in China to examine the effect of water pricing policies on farmers’ water saving behaviors. The introduction of volumetric water pricing at the group level, to replace area-based pricing, induces institutional change to prevent each member's overuse of water when the volumetric price levels are moderate. Depending on the initial conditions, the multiple pathways of change lead to new institutional arrangements, with all of them contributing to water savings. However, when the price is set high enough, many farmers exit a WUG for private irrigation. This tendency is associated with an increased probability that the remaining members do not undertake institutional change and that they do not end up saving water. This may be due to the increased management difficulties among the remaining members whose fields are separated by former members who have now opted out for private irrigation across the WUG. As a result, we do not find evidence that the reservoir water is saved at high volumetric price levels.
On the Impact of Regulating Commissions
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Santosh, Anagol; Marisetty, Vijaya; Sane, Renuka; Buvaneshwaran, Venugopal
Commissions-motivated agents have historically helped the development of many markets, but research suggests brokers motivated by commissions sometimes steer consumers towards inappropriate products. This issue is particularly important in household financial markets where consumers may be unable to evaluate products on their own. While reforms attempting to limit commission payments have been undertaken worldwide, little research has evaluated the impact of these reforms. We study a major Indian investor protection reform that attempted to reduce commissions tied to mutual fund sales by banning the distribution fees that mutual funds had previously earmarked for commissions. We analyze the policy impact by comparing funds charging high versus low distribution fees pre-reform and find no evidence that the reform itself reduced fund flows. We argue that the most plausible explanation is that the Indian asset management industry maintained substantial commissions to brokers through other revenue sources apart from the banned distribution fees.
The Effect of Metro Expansions on Air Pollution in Delhi
(Published by Oxford University Press on behalf of the World Bank, 2017-02) Goel, Deepti; Gupta, Sonam
The Delhi Metro (DM) is a mass rapid transit system serving the National Capital Region of India. It is also the world's first rail project to earn carbon credits under the Clean Development Mechanism of the United Nations for reductions in CO2 emissions. We analyze whether the DM led to localized reduction in three transportation source pollutants. Looking at the period 2004–2006, one of the larger rail extensions of the DM led to a 34 percent reduction in localized CO at a major traffic intersection in the city. Results for NO2 are also suggestive of a decline, while those for PM2.5 are inconclusive due to missing data. These impacts of pollutant reductions are for the short run. A complete accounting of all long run costs and benefits should be done before building capital intensive metro rail projects.