Journal Issue: World Bank Economic Review, Volume 22, Issue 2

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Trade Liberalization and Growth: New Evidence
(World Bank, 2008-05-30) Wacziarg, Romain ; Horn Welch, Karen
A new data set of on openness indicators and trade liberalization dates allows the 1995 Sachs and Warner study on the relationship between trade openness and economic growth to be extended to the 1990s. New evidence on the time paths of economic growth, physical capital investment, and openness around episodes of trade policy liberalization is also presented. Analysis based on the new data set suggests that over the 1950–98 period, countries that liberalized their trade regimes experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization. Postliberalization investment rates rose 1.5–2.0 percentage points, confirming past findings that liberalization fosters growth in part through its effect on physical capital accumulation. Liberalization raised the average trade to GDP ratio by roughly 5 percentage points, suggesting that trade policy liberalization did indeed raise the actual level of openness of liberalizers. However, these average effects mask large differences across countries.
HIV Pandemic, Medical Brain Drain, and Economic Development in Sub-Saharan Africa
(World Bank, 2008-05-30) Bhargava, Alok ; Docquier, Frédéric
Country-level longitudinal data at three-year intervals over 1990–2004 are used to analyze the factors affecting emigration of physicians from Sub-Saharan countries and the effects of this medical brain drain on life expectancy and number of deaths due to AIDS. Data are compiled on emigrating African physicians from 16 receiving Organisation for Economic Co-operation and Development (OECD) countries. A comprehensive longitudinal database is developed by merging the medical brain drain variables with recent data on HIV prevalence rates, public health expenditures, physicians' wages, and economic and demographic variables. A triangular system of equations is estimated in a random effects framework using five time observations for medical brain drain rates, life expectancy, and number of deaths due to AIDS, taking into account the interdependence of these variables. Lower wages and higher HIV prevalence rates are strongly associated with the brain drain of physicians from Sub-Saharan African to OECD countries. In countries in which the HIV prevalence rate exceeds 3 percent, a doubling of the medical brain drain rate is associated with a 20 percent increase in adult deaths from AIDS; medical brain drain does not appear to affect life expectancy. These findings underscore the need to improve economic conditions for physicians in order to retain physicians in Sub-Saharan Africa, especially as antiretroviral treatment becomes more widely available.
World Bank Lending and Financial Sector Development
(World Bank, 2008-05-30) Cull, Robert ; Effron, Laurie
A new database of World Bank loans to support financial sector development is used to investigate whether countries that received such loans experienced more rapid growth on standard indicators of financial development than countries that did not. Self-selection is accounted for with treatment-effects regressions. The results indicate that borrowing countries had significantly more rapid growth in M2/GDP than nonborrowers and swifter reductions in interest rate spreads and cash holdings (as a share of M2). Borrowers also had higher private credit growth rates than nonborrowers in some treatment-effects regressions but not in standard panel regressions with fixed country effects. On the whole, the results indicate some significant advantages in financial development for borrowers over nonborrowers.
Comparison of Net Benefits of Incentive-Based and Command and Control Environmental Regulations:
(World Bank, 2008-05-30) O'Ryan, Raúl ; Sánchez, José Miguel
The ambient permit system proposed in the literature for cost-effective pollution reduction is difficult to implement and may result in lower net benefits than using another instrument. The article develops a model for comparing the environmental net benefits of three policy instruments for Santiago, Chile, when the policy problem is to meet a given ambient quality standard. Two market-based instruments—the ambient permit system and a simpler emission permit system—are examined along with an emission standard, a command and control instrument usually favored by regulators. Both emission permit system and emission standard are costlier than the ambient permit system, sometimes in large part because they improve ambient emission concentrations beyond the required target in much of the city, but the ambient permit system requires a lower degree of control to comply with the standard. The somewhat costlier emission permit system and emission standard provide much higher net benefits than the ambient permit system when the health benefits of their "excessive" air quality improvements are taken into account. These benefits are different from the fact that an ambient permit system is administratively costlier to implement.
Comprehensive Wealth and Future Consumption:
(World Bank, 2008-05-30) Ferreira, Susana ; Hamilton, Kirk ; Vincent, Jeffrey R.
Economic theory predicts that the current change in national wealth, broadly defined to include natural and human capital as well as produced capital ("genuine savings"), determines whether the present value of future changes in consumption is positive or negative. Theoretical research has focused on the effects of population growth on this relation, but no rigorous empirical investigation has been conducted. Panel data for 64 developing countries during 1970–82 are used to test the effects of three adjustments for population growth, including one that controls for omitted wealth. Although the adjustments have substantial impacts on estimates of genuine savings, they lead to only limited improvements in the relation between those estimates and subsequent consumption changes. Even without adjustments for population growth, adjustments for natural resource depletion improve the relation significantly. Policymakers and economists can interpret published estimates of genuine savings as signals of future consumption paths if and only if the estimates include adjustments for natural resource depletion. But better estimates of capital stocks are needed before it can be confidently said that adjustments for population growth significantly improve the accuracy of those signals.
Foreign Direct Investment, Access to Finance, and Innovation Activity in Chinese Enterprises
(World Bank, 2008-05-30) Girma, Sourafel ; Gong, Yundan ; Görg, Holger
A recent, comprehensive database is used to investigate the link between inward foreign direct investment (FDI) and innovation activity in China. The results of the analysis suggest that private and collectively owned firms with foreign capital participation and those with good access to domestic bank loans innovate more than other firms do. Among enterprises not owned by the state, inward FDI at the sectoral level is positively associated with domestic innovative activity only among firms that engage in their own research and development or that have good access to domestic finance. At the sector level the effect of inward FDI into technology transfer is distinguished from the effect on domestic credit opportunities. FDI affecting credit is of little significance for state-owned enterprises and is independent of their access to finance. In contrast, better access to credit is an important channel through which FDI affects the innovation of domestic private and collectively owned enterprises.
Women's Power, Conditional Cash Transfers, and Schooling in Nicaragua
(World Bank, 2008-05-30) Gitter, Seth R. ; Barham, Bradford L.
The Social Safety Net (Red de Protección Social, RPS) program in Nicaragua is one of many conditional cash transfer programs that pay households cash stipends in exchange for school attendance and regular visits to health clinics by the children. A key feature is that payments go to the female head of household. Previous research suggests that exogenous transfers to women are more likely to be spent on their children's health, nutrition, and education and thus to reinforce the goals of these programs. Randomized experimental data from RPS are used to test for heterogeneous program impacts on school enrollment and spending based on a woman's power, as proxied by her years of schooling relative to her husband's years of schooling. The results confirm previous findings that more household resources are devoted to children when women are more powerful. However, when a woman's power greatly exceeds her husband's, additional female power reduces school enrollment. RPS impacts on schooling are much larger than the expected income effects estimated from the control group, although no evidence is found that female power alters the impact of RPS on school enrollment. The conditionality of RPS is probably decisive. While RPS significantly increases food and education expenditures, the impact is attributable primarily to income effects.
Does Aid for Education Educate Children? Evidence from Panel Data
(World Bank, 2008-05-30) Dreher, Axel ; Nunnenkamp, Peter ; Thiele, Rainer
Most of the aid effectiveness literature has focused on the potential growth effects of aggregate aid, with inconclusive results. Considering that donors have repeatedly stressed the multidimensionality of their objectives, a more disaggregated view on aid effectiveness is warranted. The impact of aid on education is analyzed empirically for almost 100 countries over 1970–2004. The effectiveness of sector-specific aid is assessed within the framework of social production functions. The Millennium Development Goals related to education, particularly the goal of achieving universal primary school enrollment, are considered as outcome variables. The analysis suggests that higher per capita aid for education significantly increases primary school enrollment, while increased domestic government spending on education does not. This result is robust to the method of estimation, the use of instruments to control for the endogeneity of aid, and the set of control variables included in the estimations.