77977 ResearchDigest World Bank VOLUME 7 L NUMBER 2 L WINTER 2013 Cities: Planning, Coordinating, and Financing for a Better Future Policy makers can harness rapid development: planning, connecting, IN THIS ISSUE urbanization to build productive, financing—terms that policy makers Cities: Planning, Coordinating, and inclusive, and sustainable cities. use on a daily basis: Financing for a Better Future … page 1 • Planning—The top priority is A new report shows how A new report lays out a framework aimed at planning for land management, which helping city leaders identify the most feasible D matters for countries and cities at all policy options for “building cities right� eveloping countries must stages of urban growth. To attract pri- prepare to house an additional vate investment, and enable provision Measuring Inequality 2.7 billion people between now of affordable housing and basic servic- of Opportunity … page 2 and 2050, as people move in unprec- es, policy makers need to strengthen Two new measures make it possible to edented numbers from rural areas to land use planning and coordinate it compare inequality of opportunity across pursue their hopes and aspirations in with infrastructure, transport, and countries. What do they show? cities. Surging populations will place natural hazard risk. Breaking Out of the Middle-Income intense pressure on basic services and • Connecting—Cities need to con- Trap … page 3 urban infrastructure at a time when nect people with jobs and schools, and How to sustain economic growth over the cities in developing countries still businesses with markets. The appropri- long term? A sound education system is lack the resources and institutions to ate infrastructure will depend on the almost always key provide all new arrivals with access speed and magnitude of urban growth. to jobs, housing, and basic services. It requires careful analysis that identi- Real-Time Macro Monitoring and Fiscal And so migrants often settle in slums fies short- and medium-term priorities, Policy … page 4 and areas vulnerable to the effects of and needs to be coordinated with how Estimates of an economy’s output may be climate change to be close to jobs and land is used in cities. frequently revised. What are the implications opportunities. • Financing—Financing rapid urban for fiscal policy planning? Yet this need not happen; policy growth is challenging. But financing makers can in fact harness rapid urban- can become possible and more reli- Bank Regulation and Supervision: A Crisis Update … page 5 ization to build productive, inclusive, able through taxes that come with and sustainable cities. A new World increased economic growth—and Analysis of new data finds that the Bank report, Planning, Connecting, and through the ability of policy makers to regulatory responses to the global financial crisis have been quite slow Financing Cities—Now: Priorities for City leverage land markets and approach Leaders, shows how. The report builds local-currency debt markets. How Does Nationalizing Water Services on a three-year effort to develop a What are the specific tasks under Affect Quality? … page 6 bedrock of credible facts and analysis planning, connecting, and financing Should ownership of water suppliers be from countries as diverse in their urban that policy makers should focus on? public or private? Evidence from Uruguay experiences as Uganda, China, India, Value, coordinate, and leverage are the suggests that may be the wrong question and the Republic of Korea. The report marching orders that can help sharpen also provides a framework that can help the effectiveness of planning, connect- What Drives Investments under the Clean mayors and other policy makers uncov- ing, and financing (figure 1). Development Mechanism? … page 7 er the impediments to urbanization and The underlying diagnostic review Do relative abatement costs determine identify the policy options for “building starts by assessing a country’s or re- project choices under the Clean Development cities right� that are most politically, gion’s spatial transformation: how Mechanism? Perhaps only in part technically, and fiscally feasible. the urban economy is evolving, how The framework is shaped around three main dimensions of urban (continued on page 8) 2 World Bank ResearchDigest Measuring Inequality of Opportunity International comparisons of the population into types: groups of average access rate to a particular ser- inequality of opportunity are now people with identical predetermined vice, say, sanitation. The HOI is built possible—but different indices tell circumstances. After that, the two ap- as the product of a mean (access rate) proaches diverge. Ex ante measures attri- and 1 minus an inequality index (the very different stories bute a value to the opportunity set of dissimilarity index, used as a measure P each type and compute the inequality of inequality of opportunity). Like the ublic interest in inequality has among those values. Ex post measures IEO, the HOI must lie between 0 and boomed in recent years, as in- compare incomes in given quantiles of 100 percent. Computed for 39 coun- come disparities rose in some of the income distributions (for example, tries, the HOI ranges from 10 percent the world’s largest economies. Some the 17th percentile) across types, (Niger) to 91 percent (Chile). of this interest arises from the percep- then aggregate the inequality over all Although the two country samples tion that not only wages or household quantiles. are neither representative of the world incomes have been growing apart. Although both approaches have as a whole nor fully comparable to Along with inequality in outcomes, been used, only two indices—both each other, it is nevertheless clear that inequality of opportunity has also in the ex ante family—have been ap- the two indices measure quite different been growing, hampering fairness and plied to enough countries to permit things. The IEO is positively correlated economic dynamism. reasonably meaningful international with income inequality (figure 1) and Most of the empirical literature on comparisons. One is the Inequality of negatively with intergenerational mo- the relationship between inequality of Economic Opportunity index (IEO), bility, both in incomes and in years of opportunity, income inequality, and which estimates the (lower bound) schooling. It has an inverse U-shaped economic growth has used measures share of income inequality that can be association with income per capita, of economic mobility—chiefly the in- attributed to differences in people’s reminiscent of the Kuznets curve. The tergenerational earnings elasticity—as predetermined circumstances (such as HOI, on the other hand, is highly cor- a proxy for inequality of opportunity. race, gender, and family background). related with the Human Development In large part this is because until re- The valuation of the opportunity Index. Its internal measure of inequal- cently there was little agreement on set facing each type is given by its ity of opportunity—the dissimilarity how—or indeed whether—inequality observed mean income, and the in- index—yields very different country of opportunity could be measured equality measure is computed with rankings than the IEO. directly. population weights. Computed for 41 While related, the indices differ in But in the past decade or so a num- countries, the index ranges from 2 per- at least two big ways. First, the HOI ber of indices to measure inequality cent of total inequality (Norway) to 34 is a “welfare� or “development� index of opportunity directly have been pro- percent (Guatemala). that contains a measure of inequality posed, in two broad groups. Both sets The second, the Human of opportunity, while the IEO is an in- of indices begin with a choice: the ana- Opportunity Index (HOI), is an index equality of opportunity measure, pure lyst must decide which income deter- of children’s access to basic services, and simple. Second, they evaluate the minants individuals should not be held penalized by unequal opportunities in opportunity set of each type in differ- accountable for. Those characteristics, that access. Here, the valuation of each ent spaces—incomes in one case and or circumstances, are used to partition type’s opportunity set is given by its access to basic services in the other. The two indices are more likely to be Figure 1. Inequality of Opportunity and Income Inequality useful complements than substitutes, 40 so long as users understand what each Inequality of Economic Opportunity index (%) one really captures. GCA BRA 30 CYP PAN PER TUR ECU LUX IRL COL AUT NLD GBR ESP MDG 20 DEU USA IND ZAF BEL GRC DNK SVK ITA LTU LVA CIV FRA GIN SWE CZE PRT EGY 10 FIN EST POL GHA UGA HUN SVN NOR Paolo Brunori, Francisco H. G. Ferreira, and 0 Vito Peragine. 2013. “Inequality of Opportunity, 0.0 0.2 0.4 0.6 0.8 Income Inequality and Economic Mobility: Some Income inequality (mean logarithmic deviation) International Comparisons.� Policy Research European Union Africa Latin America and the Caribbean Other Working Paper 6304, World Bank, Washington, Note: Correlation coef�cient = 0.5230 (0.0004). DC. World Bank Research Digest 3 Breaking Out of the Middle-Income Trap What have Malaysia and Thailand Malaysia and Thailand have suc- income-contingent loan financing done in their education systems to cessfully provided schooling access to schemes to expand higher education. support innovation-led growth—and children and young adults, particularly Each country has already taken at primary levels—both achieved uni- some steps in these directions. For what remains to be done? versal primary school enrollment in example, Thailand created its National S the 1980s. But quality remains an is- Education Plan (2002–16) to promote ustaining economic growth over sue. Students in both countries score a balance in educational development the long term presents a great achievement levels well below interna- between economic competitiveness challenge for many countries. tional and OECD averages. Malaysian and cultural self-reliance. The govern- Countries tend to lose momentum in and Thai students on average score ment is committed to ensuring mini- making the transition from middle- to 1.2–1.5 standard devia- mum quality standards high-income status. Indeed, of 101 tions below Korean stu- Education can help for basic education middle-income economies in 1960, dents in mathematics. only 15 had become high income by Almost half of 15-year- spur innovations that for all and established a fast track for high- 2010. Some analysts have opined that old Thai students fail enable a middle- achieving students. countries may risk falling into a to achieve the level of The Office for National “middle-income trap.� functional literacy in the income country to Education Standards Many factors determine which OECD’s Programme for continue increasing and Quality Assessment countries boost themselves from International Student middle- to high-income status, such as Assessment (PISA) re- productivity growth is strengthening its capacity to monitor sustained good governance that pro- sults. Moreover, quality school quality assess- tects a sound investment climate. But has deteriorated over time. For stu- ments, to raise community awareness a sound education system is almost dents in both countries, mean math on school quality and management, always a vital ingredient. (A possible scores from the Trends in International and to propose actions for nonper- exception might be in resource-depen- Mathematics and Science Study forming schools. In addition, the Office dent countries.) Education can help (TIMSS) declined between 1999 and of Basic Education Commission seeks spur innovations that enable a middle- 2007. For Thai students, reading per- to offer schools greater autonomy income country to continue increasing formance in the PISA results has de- while empowering and motivating productivity growth. A good education creased since 2000; though there was a them to develop their own measures system is fundamental for equipping slight increase between 2006 and 2009, to improve students’ performance. workers with marketable skills. it was not enough to return to 2000 Malaysia has also recently taken Investments in improving educa- levels. some initiatives to address the qual- tion should be aligned with the needs Improving quality requires reforms ity of education, including the release of an evolving economy. For example, of the education system within each of the National Education Blueprint the Republic of Korea phased in its country’s economic and political con- and the Education National Key Result public investments by focusing ini- text. Importing education policies from Areas. The future challenges are to tially on basic education. As its skill a country that successfully transitioned implement them well and adjust them needs progressed—first to more tech- to high-income status, such as Korea, in accordance with evolving needs. nical and then to managerial and cre- is unlikely to work, since Malaysia ative domains—it turned its attention and Thailand have different economic to strengthening secondary education structures than Korea did at a similar and achieving world-class tertiary stage of its development. Based on education. their assessment, the authors suggest What are the challenges for the that the aim of education policies in fast-growing economies of East Asia the two countries should be to provide as they strive to replicate such out- universally available, quality educa- comes? In a recent paper Jimenez, tion by prioritizing budgets to focus Nguyen, and Patrinos examine two on basic education before expanding middle-income countries on the verge higher levels of schooling; providing of becoming high income, Malaysia appropriate incentives and rewards and Thailand. Their aim is to under- to teachers; permitting school au- Emmanuel Jimenez, Vy Nguyen, and Harry An- stand what has been done in the two tonomy and ensuring accountability thony Patrinos. 2012. “Stuck in the Middle? Hu- countries’ education systems to sup- for results; and investing in early child- man Capital Development and Economic Growth port innovation-led growth—and what hood development. Consideration in Malaysia and Thailand.� Policy Research Work- remains to be done next. could also be given to implementing ing Paper 6283, World Bank, Washington, DC. 4 World Bank ResearchDigest Real-Time Macro Monitoring and Fiscal Policy Budgetary planning and fiscal as well. Third, decomposing the overall period, the debt stock may decline or surveillance are necessarily balance into the cyclical and structural increase by more than 3 percent of based on real-time estimates of balance requires estimates of the out- GDP. put gap (defined as the deviation of The advantage of this type of simu- output. When these are inaccurate, actual from potential output, as a per- lation exercise is that it makes it pos- governments will miss fiscal targets centage of potential output), and these sible to evaluate the effects of one and fiscal surveillance becomes less too are subject to revision. particular and potentially important reliable Inaccurate real-time output data cause of fiscal revisions and “switch F can therefore be a major concern for off� all other factors that may play a or budgetary planning and fiscal fiscal policy. When output data revi- role, in particular, strategic and politi- surveillance, it is imperative to sions trigger revisions of the overall cal considerations. World Economic correctly project and estimate the balance, governments inevitably miss Outlook data are particularly suitable overall fiscal balance and the struc- deficit or surplus targets. Depending for the purposes of this exercise, be- tural balance. The overall fiscal bal- on the nature of the output data re- cause they are less likely to be subject ance drives public debt dynamics and visions, fiscal policy either will be to political interference and are avail- is therefore the main reference indica- too tight or will result in unplanned able and comparable for a large num- tor in assessing fiscal sustainability. increases in debt relative to GDP. In ber of countries (though governments And the structural balance is key in addition, fiscal surveillance becomes of more advanced countries are more fiscal surveillance because it separates considerably more difficult and less likely to use higher-frequency data the effect on the budget of temporary reliable, especially when estimates of from national sources for fiscal policy). changes in the economic environ- the structural balance turn out to be These features of the data make it ment from the effect of discretionary inaccurate. possible to obtain credible measures policies. In a new paper Ley and Misch use of government ability (in contrast to However, fundamental data un- real-time and final output data as well government willingness) to correctly certainty, resulting in frequent output as the discrepancy between the two project fiscal balances. Thanks to the data revisions, may impede budgetary to simulate the effects of output data large number of country-year obser- planning and fiscal surveillance. As revisions on revisions of the overall vations, the authors are able to draw new and better information becomes balance and the structural balance general conclusions for different coun- available, GDP figures are revised, as well as on unplanned debt accu- try groups. The results have important so that real-time GDP figures rarely mulation or reduction. The authors policy implications. For example, the correspond to final GDP figures. In use a novel data set derived from results suggest that countries may de- some cases output revisions are so the International Monetary Fund’s viate from fiscal plans even if govern- large that governments do not know World Economic Outlook database, ments are benevolent and want to stick whether their country is in a recession consisting of real-time output growth to fiscal targets—important in the con- or not, or whether growth is positive or and gap data for 1991–2007 and final text of multilateral fiscal surveillance. negative. output data from 2012 for 169 coun- The results also provide guidance on Conceptually, there are several tries. These data allow the authors to safety margins for fiscal contingency channels through which output re- obtain for every country and every year planning. visions translate into revisions of during 1991–2007 real-time and final real-time estimates of the overall and estimates of output growth and of the structural balances—that is, estimates output gap. These estimates, together made shortly before or even during the with a few assumptions on structural fiscal year to which they refer. First, parameters, then enable the authors changes in output automatically in- to compute revisions of fiscal balances duce changes in the volume of public and to simulate unplanned changes in spending and revenue. Even if spend- the stock of public debt. ing and revenue output elasticities are Under conservative assumptions, known with complete certainty, inaccu- the authors’ simulation results sug- rate real-time output growth estimates gest that revisions of the overall bal- therefore mean that it is impossible to ance and the structural balance may correctly estimate fiscal revenue and be substantial and significantly larger expenditure streams. Second, fiscal than 1 percent of GDP in more than Eduardo Ley and Florian Misch. 2013. “Real- indicators are often reported as shares 20 percent of the cases. Chances are Time Macro Monitoring and Fiscal Policy.� Policy of GDP. As output revisions occur, the similar that as a result of the revisions Research Working Paper 6303, World Bank, denominator of these ratios changes of the overall balance during a 10-year Washington, DC. World Bank Research Digest 5 Bank Regulation and Supervision: A Crisis Update Much room remains for further tests, the authors find that crisis coun- aspects of regulation and supervision improvements in bank regulation tries had significantly weaker regulato- changed the most rapidly during the and supervision as well as in ry and supervisory frameworks than did crisis. They find that capital ratios countries that avoided a direct impact. increased, primarily among noncrisis incentives to monitor risk-taking The main differences are in four areas. countries. In addition, deposit insur- B First, crisis countries tended to ance schemes became more generous, ank regulation and supervision have significantly less stringent defini- and many countries introduced re- became the subject of vigorous tions of capital, and they gave banks forms in areas of bank governance and debates during the global fi- more discretion in how they calcu- bank resolution. nancial crisis. Many observers pointed lated capital requirements. Banks in More generally, however, the main out regulatory and supervisory weak- crisis countries were finding from the analy- nesses in the run-up to the crisis, and allowed to use more Despite the vigorous sis is that the regula- there were many policy discussions complex approaches tory responses to the on the subject. But the discussions to measuring capital policy debates, crisis have been quite focused largely on a small number of requirements, and they actual changes in slow and change has major, mostly high-income, econo- had lower actual capital mies. And despite the many debates ratios. These results are bank regulation and been gradual at best in most areas. The crisis on the global regulatory framework, in line with the notion supervision have did not trigger a major there has been a surprising lack of that overly complex consistent and up-to-date informa- regulations are difficult been gradual at best and sudden change in national regulatory and tion on the national regulatory and to monitor and enforce supervisory frameworks supervisory approaches pursued in and ultimately contribute to financial around the world. This reflects both countries around the world during the instability. the complexity of the issues at hand crisis. This lack of information led to Second, the analysis reveals that and the political economy of financial important gaps in the understanding banks in crisis countries faced fewer reforms. While some of the measures of what works in regulation and super- activity restrictions. They were much adopted during the crisis (such as im- vision and what does not. less restricted from engaging in non- provements in resolution regimes in With the publication of the World bank activities such as insurance, some countries) are encouraging, oth- Bank’s 2011–12 Bank Regulation and investment banking, and real estate. ers (such as extension of blanket guar- Supervision Survey, these gaps are While this finding does not necessarily antees and increased coverage of de- now being filled. The data set, released indicate that lack of restrictions is be- posit insurance schemes) are less so. together with the World Bank’s Global hind the crisis, it is consistent with the The results suggest substantial room Financial Development Report 2013, is the notion that weak incentives to monitor for further improvements in regulation first to provide comprehensive data on and greater risk-taking opportunities and supervision as well as in private regulation and supervision after the can be a dangerous combination. incentives to monitor risk-taking. onset of the global financial crisis. It is Third, crisis countries were less an updated and expanded version of likely to have in place nonperforming earlier surveys released in 2001, 2003, loan and provisioning requirements and 2007. This fourth iteration makes and were more lax in the treatment of publicly available detailed data for 143 bad loans and loan losses. In addition, jurisdictions, covering everything from regulators in crisis countries were less rules for entry into banking to deposi- able to force corrective actions (such tor protection schemes, accounting as recapitalization and suspension of and information disclosures, rules bonuses) in distressed banks. on capital and liquidity, and tools for Fourth, crisis countries had stron- dealing with problem institutions. ger information disclosure require- A recent paper by Cihák, Demirgüç- ments, but the incentives for the pri- Kunt, Martínez Pería, and Mohseni- vate sector to actually monitor banks’ Cheraghlou uses the Bank Regulation risks were relatively weaker. This is and Supervision Survey data to ex- an important point: simply requiring Martin Cihák, Aslı Demirgüç-Kunt, Maria plore differences between countries banks to disclose their financial infor- Soledad Martínez Pería, and Amin Mohseni- that were in the epicenter of the global mation does not help much if banks’ Cheraghlou. 2012. “Bank Regulation and Super- financial crisis and those that man- counterparts lack strong incentives to vision around the World: A Crisis Update.� Policy aged to avoid a direct impact from the use that information. Research Working Paper 6286, World Bank, crisis. Based on a series of statistical The authors also examine which Washington, DC. 6 World Bank ResearchDigest How Does Nationalizing Water Services Affect Quality? A backlash to privatization in first such study to focus on an episode levels in microbiological and inorganic Uruguay’s water sector led to of nationalization and not just privati- water tests is always negative and has nationalization. What were the zation. Their study is also interesting a relatively large coefficient. because household access to piped While it may be tempting to con- effects on service quality? sewerage networks is particularly low clude from these results that the M in Uruguay compared with countries at public sector can perform as well as any publicly owned water similar levels of development. So own- or better than the private sector, this monopolies have been char- ership may have a more important im- conclusion cannot be reached on the acterized by poor performance pact on access than in other countries. basis of the authors’ empirical evi- and corruption, hampering the exten- The existing empirical evidence dence. Indeed, the inclusion of cities sion of services to those lacking them. on the effect of privatization on water that had always been served by public More than one billion people in devel- quality, access, and child mortality companies in the authors’ control oping countries are without access to tends to suggest a positive impact. group makes it impossible to answer clean and safe water, and 40 percent Sebastian Galiani, Paul Gertler, and that question. of the world’s population is without Ernesto Schargrodsky provide convinc- What the results do suggest is that access to safe and clean sanitation ing evidence that in Argentine mu- the privatization of water companies services. A solution promoted by many nicipalities where water services were had little impact on network access, international financial institutions privatized, the incidence of child mor- confirming the public opinion that in the 1990s was the privatization of tality from water-related diseases de- privatization failed to keep its promis- water services. During that decade clined significantly (“Water for Life: The es. But the subsequent nationalization water services were privatized in many Impact of the Privatization of Water of water companies led to improve- countries in Eastern Europe and Latin Services on Child Mortality,� Journal of ments in both network access and wa- America and some in Asia and Sub- Political Economy 113 [2005]: 83–120). ter quality relative to the performance Saharan Africa. They therefore provide indirect evi- of companies that had always been But the involvement of the private dence of improvements in water qual- publicly owned. This goes against most sector in the provision of water is con- ity and access. of the existing evidence for developing troversial. It is even more so when for- The authors of the Uruguay study countries, which generally shows that eign multinationals are involved, be- follow a similar empirical methodol- water privatization leads to a higher cause of the perception among many ogy. Using panel data around the quality of service. people that water is an issue of nation- nationalization episode, they identify Thus in Uruguay public operators al sovereignty. Moreover, the privatiza- differences in sanitation rates, water appear to have provided services of tion of water services did not always quality indicators, and water-related equal if not better quality than those deliver on its promises. Large price child mortality between regions that previously provided by private firms. hikes by private firms and episodes of first privatized and later national- This seems to suggest that in the de- colored water coming out of the tap ized their water suppliers and those bate over provision of water or other led to popular unrest and reversals in which water suppliers were always natural monopoly services, the focus of water privatization in many Latin under public ownership. To correct on whether ownership should be pub- American countries in the early 2000s. for unobservable differences, the au- lic or private may be misleading. Uruguay is one country where there thors use a differences-in-differences was such a backlash. A 2004 amend- estimator as well as time- and region- ment to its constitution declared water varying control variables, such as rain- to be part of the public domain and fall, average household education, and made private provision of water illegal. average income per capita. This constitutional amendment led to The results suggest that the nation- the nationalization of all private water alization of water services had a posi- supply companies in Uruguay—for rea- tive and statistically significant impact sons no different from those observed on access to the sanitation network, in other Latin American countries particularly among the poorest house- over the past decade. A new paper holds. By contrast, the earlier privatiza- by Borraz, González Pampillón, and tion of water services had no impact Olarreaga analyzes the effects of this on access to water services. Fernando Borraz, Nicolás González Pampillón, decision on access to sanitation net- Nationalization also seems to have and Marcelo Olarreaga. 2013. “Water Nation- works and the quality of water. led to an improvement in water qual- alization and Service Quality.� Policy Research The authors’ analysis of Uruguay’s ity. Indeed, the impact of nationaliza- Working Paper 6318, World Bank, Washington, private-public provision of water is the tion on the detection of abnormal DC. World Bank Research Digest 7 What Drives Investments under the Clean Development Mechanism? In choosing projects under the Clean mitigation and the price of carbon. CDM board only when an inspection Development Mechanism, investors These were either built up from the and evaluation process is complete, appear to be weighing more than the bottom using firm data or estimated and different types of projects come top down from country and sector with different methodologies for verify- relative abatement costs characteristics. ing abatement claims. Differences in T In a recent paper Rahman, Larson, the costs of implementing the method- he Clean Development Mechan- and Dinar examine this basic premise ologies are captured in the cost data, ism (CDM) emerged late in the that relative abatement costs drive but perceived differences in success final stages of negotiations of CDM investments. Using data from rates among the methodologies are the Kyoto Protocol. Arguably the more than 6,000 CDM projects, they not. least loved of the protocol’s market found significant variation in the costs In addition, the volume of credits mechanisms, the CDM is the single of abatement by type and location of earned for CDM projects often de- conduit through which industrial coun- the projects. Surprisingly, however, pends on underlying businesses that tries that had pledged to limit their they found little evidence that the generate their own outputs and in- greenhouse gas emissions could tap per-unit costs of generating certified come streams. The secondary project mitigation opportunities in developing emission reductions were lower in the output is most often electricity, but the countries that had not. While there places where investments most often pool of projects contains a diverse set was a consensus view among scientists took place. Similarly, the types of proj- of activities, including the treatment and social scientists that mitigation ects that were more common and that of potent industrial gases, by-products opportunities in developing countries attracted greater investment were not of manufacturing processes, and the were abundant and that private sector those associated with lower per-unit management of organic runoff from capital would be needed to make use production costs. In addition to the starch factories. Consequently, a set of them, many observers were deeply aggregate analysis, the authors exam- of risks related to the underlying busi- skeptical that the project-based CDM ined three countries—Brazil, China, ness can directly affect the outcome of could deliver real and significant and India, each of which hosts a large planned abatement activities. In turn, environmental benefits. Optimism number of projects—and found that these heterogeneous risks, which also and the potential advantages of there too investments were not con- go unmeasured in the cost data, affect the CDM drove the postconference centrated in projects with the lowest how investors value the projects. rule-making forward, but skepticism per-unit costs. Taken together, there are good rea- and the technical challenges of safe- The authors offer several possible sons to believe that the cost of abate- guarding the environmental integrity explanations. They speculate that the ment is an important but partial deter- of CDM projects slowed the process. lowest-cost opportunities identified minant of the value of a CDM project Consequently, while the broad outlines in the early analysis may have been to investors, and the study supports of the program formed quickly, the de- fully exploited and that investors have this view. As the second commitment tails were left unfinished until the 2001 therefore moved on to higher-cost period of the Climate Change Treaty Marrakesh Accords. alternatives. And they note the pos- begins, it will be important for policy Before its launch, much effort went sibility that the methodology used to makers, responsible for shaping future into understanding how the CDM calculate project costs is incomplete agreements and the institutions that might perform and modeling its likely and that improved data and methods support carbon markets, to distinguish impact. Predictions about how much might reverse the findings. between transactions costs reflecting investment it would leverage and how But the authors favor an alterna- poor policies and weak institutions much mitigation it would achieve tive explanation based on the view and hard-to-measure valuation differ- ranged widely. But there was an ac- that observable project costs and total ences rooted in project characteristics. cepted assumption that investments project costs differ significantly. These would be driven primarily by relative differences arise in part because of dif- abatement costs—that is, the cost of ferences in policy. The cost of doing reducing emissions by switching to business is higher in some countries alternative technologies or by trapping than in others, and some countries greenhouse gases in soils or plants. have invested more heavily in the insti- Indeed, most estimates of the mecha- tutions that facilitate CDM projects. In nism’s potential, including those used addition, CDM projects are expected to by the Intergovernmental Panel on deliver abatement in combination with Shaikh M. Rahman, Donald F. Larson, and Ariel Climate Change, were based on sets safeguards that ensure that the proj- Dinar. 2012. “The Cost Structure of the Clean of abatement schedules that mapped ects’ environmental benefits are real. Development Mechanism.� Policy Research Work- the relationship between levels of Marketable credits are issued by the ing Paper 6262, World Bank, Washington, DC. 8 World Bank ResearchDigest (continued from page 1) Figure 1. Policy Framework for Urbanization Recent Policy Research Planning Connecting Financing Working Papers • Value the city’s land by • Value the city’s external • Value and develop the 6335 Structural Change and Cross-Country Growth establishing systematic and and internal connections city’s creditworthiness Empirics transparent assessment Markus Eberhardt and Francis Teal 6336 Political Reforms and Public Policy: Evidence from Agricultural and Food Policies • Coordinate land • Coordinate among • Coordinate public and Alessandro Olper, Jan Fałkowski, and Johan management with transport options and with private finance using clear Swinnen infrastructure, natural land use and consistent rules 6337 Intrahousehold Bargaining and Resource resources, and hazard risk Allocation in Developing Countries Cheryl Doss • Leverage competitive • Leverage investments • Leverage existing assets 6338 Does Urbanization Affect Rural Poverty? Evidence from Indian Districts markets alongside that will generate to develop new ones, Massimiliano Calì and Carlo Menon regulation to expand basic the largest returns— linking both to land use infrastructure individually and collectively planning 6339 Buying Votes vs. Supplying Public Services: Political Incentives to Under-Invest in Pro- Poor Policies Stuti Khemani 6342 Achieving Medium Term Expenditure demand for the city is changing with very quickly led to their demise. Land Framework Reform: A Case Study of Korea Jae-Young Choi and Nowook Park economic development, what the pace use policies need to be aligned with 6343 How Subjective Beliefs about HIV Infection of new arrivals is in the city, and how infrastructure plans, such as for public Affect Life-Cycle Fertility: Evidence from Rural Malawi these new arrivals are finding places transit. In Tunisia the national upgrad- Gil Shapira to live and commuting to their jobs. ing program reduced slum housing 6346 Is Foreign Aid Fungible? Evidence from the Education and Health Sectors It then compares the city’s observed from 23 percent of the housing stock in Nicolas Van de Sijpe patterns with benchmarks in other 1975 to 2 percent in 1995. 6349 Service Sector Reform and Manufacturing Productivity: Evidence from Indonesia places or with past conditions. Such Once the diagnostic review has Victor Duggan, Sjamsu Rahardja, and comparisons help reveal how policy identified the possible constraints and Gonzalo Varela distortions constrain urbanization and shortfalls, it proposes policy options. 6351 How Much International Variation in Child Height Can Sanitation Explain? how investment shortfalls restrict the It aims to show how a city can harness Dean Spears benefits from it. economic and social benefits not just 6352 Government Connections and Financial Constraints: Evidence from a Large The report uses examples from the today but in the future, as economies Representative Sample of Chinese Firms seven countries where it carried out grow, technologies change, and insti- Robert Cull, Wei Li, Bo Sun, and Lixin Colin Xu detailed urbanization reviews (Brazil, tutions are strengthened. 6354 Productivity, Innovation and Growth in Sri China, Colombia, India, Indonesia, Lanka: An Empirical Investigation Mark A. Dutz and Stephen D. O’Connell Korea, and Vietnam). For example, co- 6355 Vietnam’s Evolving Poverty Map: Patterns ordinating public and private finance is and Implications for Policy World Bank. 2013. Planning, Connecting, Peter Lanjouw, Marleen Marra, and Cuong recommended but requires clear rules. and Financing Cities—Now: Priorities for Nguyen Ghana encouraged public-private City Leaders. Washington, DC: World Bank. partnerships in the urban water sector Report prepared by Somik V. Lall, with Om Working Papers can be downloaded at http://econ.worldbank.org starting in 2002, but lack of transpar- Prakash Agarwal, Michael Klein, Nancy Lozano To download the World Bank Research E-Newsletter, ency and accusations of corruption Gracia, and Hyoung Gun Wang. go to Data & 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 disseminating findings of World Bank research. Research Committee and managed by DECRS, the editor) and Aslı Demirgüç-Kunt. Research assistance: The views and interpretations in the articles are those research support unit of the Development Economics Alexander Moore; editor: Alison Strong; production: of the authors and do not necessarily represent the Senior Vice Presidency (DEC). The Research Digest is Roula Yazigi. For information or free subscriptions, views of the World Bank, its Executive Directors, or the not copyrighted and may be reproduced with appropri- send email to research@worldbank.org or visit countries they represent. ate source attribution. http://econ.worldbank.org/research_digest. The World Bank 1818 H Street, NW Washington, DC 20433, USA Printed on Recycled Paper