48387 ResearchDigest WorldBank Volume 2 l NumbeR 4 l SummeR 2008 Dollar a Day Revisited Recent price survey results imply is little scope for personal feelings of In ThIs Issue marked upward revisions to the relative deprivation. Dollar a Day Revisited ... page 1 purchasing power parities of the The results of the 2005 round of New purchasing power parities for the poorest countries price surveys imply marked upward poorest countries suggest a need for a new revisions to the PPPs of the poorest international poverty line T countries. There were substantial re- he original "$1 a day" poverty visions to the PPPs in the 2005 round FoCuS line, introduced by the World relative to 1993. Probably the most Strategies for Developing Bank's World Development Report important difference for the authors' Countries ... page 2 1990, was aimed at assessing pov- purposes is that the 1993 round is Two key strategies for development: erty in the world as a whole by the believed to have used less rigorous follow comparative advantage and take a pragmatic approach to designing policies standards of what poverty means in standards for specifying the quality the poorest countries. In a recent of goods in poor countries, so that Farm Policy in Developing Countries: paper Ravallion, Chen, and San- the goods priced were of a lower What Next? ... page 3 graula revisit that idea armed with a quality than would have been found Export-oriented farmers in developing new set of national poverty lines for in the U.S. market. countries still face policies that cut off low- and middle-income countries. Because of these PPP revisions, opportunities to contribute to growth To arrive at these, the authors draw simply updating the old international on the World Bank's country-specific poverty line for U.S. inflation gives a land in Transition: Reform and Poverty in Poverty Assessments and the Pov- poverty line well above those found Rural Vietnam ... page 4 erty Reduction Strategy Papers among the poorest countries at 2005 Vietnam has both decollectivized farming prepared by the governments of the PPP. The authors propose a new in- and introduced land markets. How have the countries. They then convert these ternational poverty line of $1.25 a poor fared? national poverty lines to a common day for 2005 (equivalent to $1.00 a unpredictable Aid ... page 5 currency using the new set of con- day in 1996 U.S. prices), the mean What are the costs of unpredictable aid sumption purchasing power parities of the lines found in the poorest 15 flows for the recipients? And are there some (PPPs) estimated from the 2005 countries. This poverty line is quite remedies? round of price surveys done by the robust to the choice of the poorest International Comparison Program. 15 countries. Focusing on the poor- microfinance meets the market ... page 6 The authors find that, across est 15 makes sense, since these cor- Should microfinance follow a nonprofit countries, national poverty lines respond closely to the critical level of approach or a commercial model? The tend to rise with mean consumption consumption above which the pov- question misses the point above a critical level, but below that erty line tends to rise. level the relationship is quite flat This basis for measuring global Development Impact of the War (figure 1). This pattern is consistent absolute poverty is clearly conserva- on Drugs ... page 7 with their interpretation of a nation- tive. One could hardly argue that the The war on drugs has triggered a long train al poverty line as a "social" subjec- people in the world who are poor by of unintended consequences, and developing tive poverty line, defined as the level the standards of the poorest coun- countries have been most affected. What can they do? of consumption below which people tries are not in fact poor. This gives in that country tend to think they are the global poverty line a salience in poor and above which they do not. focusing on the world's poorest that In very poor countries standards of living are generally so low that there (continued on page 8) 2 WorldBankResearch Digest FOCUS Strategies for Developing Countries The Bank's new Chief Economist A country's endowments of human Political wisdom derived from outlines key concepts and strategies and physical capital, labor, and natural Chinese culture--shishiqiushi (finding of development and transition resources--which are accumulated truth from the facts), jiefangsixiang (free- and altered over time--determine its ing one's mind from dogmatism), and J wealth and, with their relative prices, yushijujin (adapting to the changing ustin Yifu Lin became the World determine endogenously what the environment)--could be relevant to Bank's new Chief Economist in most competitive technologies and in- reform-minded governments in other June 2008. He succeeds François dustries in the country are at that time. developing and transition economies, Bourguignon, now head of the Paris A developing country that relies on its says Lin. He adds that the experience School of Economics; Lord Nicholas comparative advantages to guide its of China convincingly demonstrates Stern, who holds the IG Patel Chair choice of industry and technology will that "in a gradual, piecemeal reform at the London School of Economics; be competitive in domestic and inter- . . . the government should not have Nobel Prize winner Joseph Stiglitz; national markets, produce the largest a predetermined, grand blueprint. and former U.S. Treasury Secretary possible economic surplus, accumu- Instead, it should follow a diagnostic Lawrence Summers. Lin brings a late the largest possible capital, and approach, finding out the most crucial unique perspective to the job--as upgrade its human capital, technology, binding constraints on incentives and professor and founding director at the and industry in the fastest possible resource allocation and introducing China Center for Economic Research way. A developing country attempting reform measures that are effective at Peking University; an adviser to his to violate its comparative advantages but which can be regarded as `halfway country's central, regional, and mu- will encounter stagnation and various measures' by market fundamentalists. nicipal governments; and a first-hand economic crises. In the process, the government should expert on China's transition. He has The most important concept for encourage and pay attention to local a PhD from the University of Chicago understanding the cause of various and private initiatives in institutional (where he wrote his dissertation on institutional distortions in develop- innovations." China's household responsibility ing countries is viability. An enterprise East Asian countries have created system, with a committee composed will be viable in a competitive market one economic miracle after another of D. Gale Johnson, T. W. Schultz, and only if its technological and industrial since the end of World War II, thanks Sherwin Rosen) and is a specialist in choices are consistent with its com- to development policies closely follow- agricultural policy, rural industrializa- parative advantages. Many developing ing their comparative advantages and tion, and development strategy. country governments, influenced by transition policies designed pragmat- In 2007 Lin delivered the Marshall erroneous economic ideas, have at- ically--and with a high social capacity Lectures at Cambridge University on tempted to develop industries that inherited from their long-established "Development and Transition: Idea, are overly capital intensive, rendering civilizations. Strategy, and Viability." In these lec- them nonviable, and were obliged to But the success of East Asia has tures he compares strategies that he support them with protection and sub- involved an element of luck. Resource calls "comparative advantage defying" sidies. The institutional distortions are constraints and a long-established and "comparative advantage follow- therefore endogenous to the viability civilization are neither necessary nor ing" based on his personal observa- constraints of the enterprises. sufficient conditions for successful tion and understanding of the reasons Pragmatism is the best approach development--as demonstrated by the behind development successes and for development, Lin argues. Develop- success of Botswana, Chile, and Mau- failures. He describes how develop- ment amounts to practical solutions ritius. What is crucial is leadership. Lin ing countries--by using what he calls drawn from universal forms of knowl- ends his Marshall Lectures by quoting "the advantage of backwardness"--can edge (like economics and the social Arthur Lewis: "All nations have oppor- leapfrog to achieve dynamic growth sciences) but depends heavily on local tunities which they may grasp if only and converge with developed coun- experience. The more successful devel- they can summon up the courage and tries. Ideas and continual technologi- opment experiences (China, Japan, the the will. . . . It is possible for a nation cal upgrading are the most important Republic of Korea, Southeast Asia) and to take a new turn if it is fortunate to driving forces for growth. But the the more successful transition experi- have the right leadership at the right dominant thinking about industrial- ences (Eastern Europe, China again) time." ization in developing countries erred have involved importing and trans- because it assumed incorrectly that planting useful policy lessons from the the result of development--possess- West, adapting them to local circum- Justin Yifu Lin. 2007. "Development and Transi- ing advanced industries--was the stances, and undergoing a learning tion: Idea, Strategy, and Viability." Marshall Lec- cause of development. It is the pro- process in which local experience was tures delivered at Cambridge University, October cess that counts. critical. 31­November 1. WorldBankResearch Digest 3 Farm Policy in Developing Countries: What Next? Agricultural protectionism could rate of assistance to farmers has in- the quantities available for consump- erode benefits from removal of creased rather than decreased, sug- tion through fluctuations in barriers anti-agriculture policy biases in gesting that there are opportunities to trade--as has been evident in gov- developing countries for reducing distortions in the use of ernment reactions to the spike in in- resources in agriculture through more ternational food prices in 2008. Some T policy-reform-induced international developing country governments are wo decades ago a major World relocation of production. again taxing export-oriented farmers, Bank research project showed · The dispersion in nominal rates cutting off their opportunity to contrib- that many developing countries, of assistance to farmers also has in- ute to economic growth and poverty postindependence, directly or indi- creased rather than decreased within reduction. rectly taxed agriculture relative to most developing countries studied. The distortion estimates will be other sectors of their economy (Anne That means that there is still much placed on the project's Web site (http:// O. Krueger, Maurice Schiff, and Al- scope for reducing distortions in re- www.worldbank.org/agdistortions) in berto Valdés, "Agricultural Incentives source use within the farm sector even October 2008. Meanwhile, a prerelease in Developing Countries," World Bank in countries with an average nominal version of the database has been made Economic Review 2 [1988]: 255­72). A rate of assistance for agriculture close available to analysts in the second new research project revisits that is- to zero. stage of the project. One group is seek- sue to see how much the situation · A strong anti-agricultural-trade ing to better understand the political has changed in different parts of the bias in assistance rates remains in economy forces behind the patterns world since the mid-1980s. It seeks place: the positive assistance for that have evolved over the past five to draw out lessons from successful import-competing farm industries has decades. Another is examining the reform experiences for countries that increased over the decades studied at inequality and poverty consequences are still discriminating against their the same time as the negative nominal of the distortions remaining in 2004. farmers--or that have "overshot" and rate of assistance for agricultural ex- Preliminary findings were discussed in are now protecting their farmers from portables has been phased down. May and June 2008 at conferences in import competition. · The products with the highest Washington, D.C., and Helsinki. They Based on a sample of more than 70 rates of distortion and highest gross will be fine-tuned over the summer, countries, the project covers the full subsidy equivalent values are rice, then placed on the project's Web site spectrum of per capita incomes and sugar, and milk, just as in high-income and prepared for publication in 2009. food trade positions--and up to 50 countries. years of policy history. Its estimates of · The most important instruments Kym Anderson, ed. Forthcoming. Distortions to distortions, derived using a standard of farm taxation and assistance con- Agricultural Incentives: A Global Perspec- tive, 1955­2005. New York: Palgrave Mac- methodology, account for more than tinue to be trade-restrictive measures, millan; Washington, DC: World Bank. 60 percent of global agricultural pro- with domestic taxes and subsidies on Kym Anderson and Will Martin, eds. Forthcom- duction and consumption. The results farm inputs and outputs, and non- ing. Distortions to Agricultural Incentives of the country case studies will ap- product-specific assistance, making in Asia. Washington, DC: World Bank. pear in a series of books covering four only minor contributions to the esti- Kym Anderson and Will Masters, eds. Forthcom- regions--Africa, Asia, Latin America, mates of nominal rates of assistance ing. Distortions to Agricultural Incentives and European transition economies-- for most developing countries. in Africa. Washington, DC: World Bank. that are being published by the World · Movements in the consumer tax Kym Anderson and Johan Swinnen, eds. 2008. Bank by late 2008. They will also be equivalent closely replicate changes Distortions to Agricultural Incentives in Europe's Transition Economies. Washing- summarized, along with comparable in farm support and taxation, because ton, DC: World Bank. studies of high-income countries, in agricultural assistance or taxation is Kym Anderson and Alberto Valdés, eds. Forthcom- an overview volume to appear in early due mostly to trade measures. ing. Distortions to Agricultural Incentives 2009, Distortions to Agricultural Incentives: · Rates of assistance to nonagri- in Latin America. Washington, DC: World A Global Perspective, 1955­2005. cultural sectors have declined as much Bank. What has been learned so far? as rates of taxation of agricultural Kym Anderson and Ernesto Valenzuela. Forth- · Since the 1980s there has been a sectors, underscoring the fact that re- coming. "Global Estimates of Distortions to Agri- gradual move away from taxing farm- ductions in distortions to agricultural cultural Incentives, 1955 to 2005." Spreadsheet. ers relative to nonagricultural produc- incentives have been part of a series http://www.worldbank.org/agdistortions. Kym Anderson, Marianne Kurzweil, Will Martin, ers, and during the past decade posi- of economywide reform programs and Damiano Sandri, and Ernesto Valenzuela. 2008. tive assistance on average for develop- not just due to farm policy reforms. "Measuring Distortions to Agricultural Incentives, ing country farmers has emerged. · Food price and trade policies Revisited." Policy Research Working Paper 4612, · The dispersion across develop- continue to be used to reduce fluctua- World Bank, Washington, DC. Also forthcoming ing countries in the average nominal tions in domestic food prices and in in World Trade Review. 4 WorldBankResearch Digest Land in Transition: Reform and Poverty in Rural Vietnam Vietnam's rural land reforms was more equitable. This suggests an landlessness would not be a surprising have led to gains in both equity effort by the authorities to protect the finding. Many farmers will benefit from and efficiency, despite greater poorest and reduce overall inequality the new opportunities to use their landlessness and some losers at the expense of aggregate consump- limited wealth in other ways, includ- T tion. The solution entailed a trade-off ing spending on consumer durables he most important nonlabor between equity and efficiency, indicat- and housing. But there will also be asset in any developing rural ing that both objectives were valued losers. Welfare losses can occur for the economy is land. The institu- positively. previously landless, who receive lower tions determining how land is used In 1993 a new land law attempted wages than without the reform, and for are thus at the core of efforts to fight to foster free transactions in land-use farmers who lost other benefits previ- poverty. In the 1980s and 1990s Viet- rights, leading to much debate. Some ously provided by the cooperatives. nam undertook truly major reforms believed that this reform would allow Ravallion and van de Walle's analy- of the laws and regulations governing a closer approximation to the efficient sis of the survey data for Vietnam-- agricultural land. Before that, farming allocation, but at the expense of eq- spanning a decade after legal reforms had been collectivized, but Vietnam uity. The prospect of renewed class to introduce markets in land-use (like China) came to realize that this differentiation--the reemergence of a rights--confirms the expected rise in system was not performing well. The rural proletariat--has fueled debate the rate of landlessness among the cooperatives and collectives were about the wisdom of Vietnam's efforts poor. But the authors find little sign dismantled, and the land assigned at liberalizing land markets. that rising landlessness has under- to individual households under con- One long-standing view is that mined the gains to the poor from the tracts with the government. This sys- even from an equal starting point the relatively equitable assignment of tem clearly had better incentives, and market mechanism will generate ex- land-use rights at decollectivization. agricultural output rose accordingly. cess inequality. Against that view, the On the whole, rising rural landlessness Further pro-market reforms to agrar- same features that helped ensure an appears to have been a positive factor ian institutions followed, including equitable allocation at decollectiviza- in Vietnam's process of poverty reduc- introduction of a market in land-use tion will moderate any unequalizing tion. Farm households are taking up rights. forces generated by the emerging mar- new opportunities, notably in the labor The reform process faced a poten- ket economy. And the fact that other market. tially major threat. The central govern- policy reforms, including more open Starting from a relatively equitable ment had to rely heavily on decentral- external policies, were creating new allocation of land, the introduction ized implementation of the reforms, opportunities for diversification and of free exchange did not end in peril raising concerns about capture by growth is clearly relevant to the out- and poverty for the rural population, local commune elites whose interests comes of these reforms. though (as in any major policy reform) were not well served by the center's Ravallion and van de Walle's re- there are both losers and gainers. aims. Were these concerns justified? search for Vietnam finds that after the Vietnam's experience also reminds us In a new book Ravallion and van legal reforms land was reallocated in a that the efficiency gains from reform de Walle use econometric models of way that attenuated the inefficiencies do not happen overnight and may well both household consumption and of the initial administrative assign- take many years to be realized. But local cadre behavior to assess the dis- ment of land. Households that started gains can be expected, including for tribution of the consumption impacts with an inefficiently small amount of the poor. of the administrative land allocation land tended to increase their holdings achieved at decollectivization. The ac- over time, while those starting with an tual allocation is assessed relative to inefficiently large amount tended to counterfactual allocations, including decrease their holdings. The adjust- the one that would have maximized ment was not rapid; in the aggregate aggregate consumption and been the only a third of the initial proportionate competitive market allocation. gap between the actual and the effi- Their results are not consistent cient allocation was eliminated within with an unjust land allocation stem- five years. Some local governments ming from the power of local cadres continued to intervene, but it appears to capture the process. But the ob- that the market mechanism did start to served allocation differed significantly take hold. Martin Ravallion and Dominique van de Walle. from what would have been expected Did these efficiency gains from 2008. Land in Transition: Reform and from a competitive privatization at introducing land markets come at a Poverty in Rural Vietnam. New York: Palgrave market-clearing prices--the outcome cost to the poor? A higher incidence of Macmillan; Washington, DC: World Bank. WorldBankResearch Digest 5 Unpredictable Aid Low predictability may not always harm aid effectiveness. For example, unexpected delays in project implementation by the recipients Unpredictability in flows of aid can on macroeconomic programs. The lead to unexpected shortfalls in hurt its effectiveness. Changes in IMF data set includes projections and disbursements without undermining how it is delivered might help disbursements of aid and a large set aid effectiveness. Similarly, aid in A of other fiscal and macroeconomic response to emergencies should be id recipients have long com- indicators. unexpected to be effective. More plained about the unpredict- Contrary to the common belief hotly debated is whether specific ability of aid flows. In most that donors systematically disburse conditions meant to ensure that years the aid disbursed by donors less than they commit, low aid country objectives are aligned with differs sharply from the amount prom- predictability in both data sets is a donor objectives also justify lack of ised, forcing recipient governments result of disbursements exceeding predictability. to adjust spending plans on short commitments as well as falling The study by Celasun and Walliser notice. Unexpected aid shortfalls may short. According to DAC data, annual yields two key findings: Statistical force governments to disproportion- aid disbursements in Sub-Saharan methods cannot explain a significant ately cut investments in physical and Africa in 1990­2005 deviated from part of low predictability with aid human capital, while aid windfalls aid commitments by 3.4 percent of effectiveness concerns. And low may disproportionately boost govern- GDP on average. Other regions show predictability of budget aid can ment consumption--which, unlike deviations in the range of 1.7­2.4 hurt aid effectiveness by shifting investment spending, can be adjusted percent of GDP. government spending from investment without much delay. Unpredictability Predictability of budget aid to consumption. The study also thus affects how aid is spent, reducing is strikingly low even for better- highlights several issues needing its intended impact. Enhancing the performing recipient countries. further consideration. predictability of aid has therefore be- In IMF program data, budget First, the predictability debate come a key priority of the internation- aid disbursements deviate from should be linked more closely to al agenda, enshrined in the 2005 Paris projections by about 1 percent of the issue of aid effectiveness, since Declaration on Aid Effectiveness. GDP, representing about 30 percent in some cases donors are justified In a recent study of this issue of expected budget aid, on average. in being unpredictable. Laying Celasun and Walliser use two data Predictability varies considerably. out up front the circumstances in sets, both of which show that aid Sierra Leone, a postconflict country, which donors are not expected to has been highly unpredictable: received 6 percent of GDP in budget be predictable--such as in major data from the Development aid--but 50 percent of this aid arrived emergencies--would help better Assistance Committee (DAC) of unexpectedly, implying that half of quantify and measure the aid the Organisation for Economic Co- each year's budget aid was either cut effectiveness targets of the Paris operation and Development on aid or added while the budget was under Declaration. disbursements and commitments implementation. In Ghana less than 25 Second, the persistence of and detailed information from the percent of budget aid was unexpected unpredictability, especially for International Monetary Fund (IMF) (figure 1). budget support, suggests a need to reconsider some of the mechanisms Figure 1. Unpredictability of Aid in Selected Countries, 1993­2005 of aid delivery to some countries. One 7 possibility is to lengthen aid allocation periods and tie them to slower- 6 Average budget aid moving country indicators rather Mean forecasting error than reconsidering fast-disbursing 5 PDGfoegatnecreP aid volumes annually within annual conditionality frameworks. Longer- 4 term commitments to budget aid would imply a need to also reconsider 3 aid funding mechanisms, including for multilateral institutions. 2 Third, a stable program relationship between donor and aid recipients is 1 crucial. Recipient countries that have more stable relationships with donors, 0 as signaled by a sustained track record Full sampleAlbania BeninBurkFaso ina Ghana Mali SieLeone Tanzania rra KRepuMada yrgyzblic gascar Mozambique Rwanda Senegal Uganda (continued on page 6) 6 WorldBankResearch Digest Microfinance Meets the Market Debating about a single vision for banks, and nonbank financial institu- · Thus subsidies and noncommer- microfinance misses the reality that tions that are a cross between banks cial funding continue to be important it flourishes thanks to a diversity of and NGOs. to NGOs, while banks rely mainly on strategies · Being a nonprofit institution does social investment and commercial W not mean being unprofitable. A large sources of capital. hen Muhammad Yunus share of microfinance institutions with · Data on the financial side of mi- and Grameen Bank won the nonprofit status in fact earn steady crofinance are of greater quality and Nobel Peace Prize in 2006, profits--but they reinvest their profits quantity than data on social outreach the world community celebrated in the institution and cannot legally and impacts, but even data on finan- the ways that expanding financial distribute earnings to shareholders. cial basics such as "profits" and "subsi- access can improve the lives of the Earning profits (and thus limiting de- dies" are inadequate. Current reporting poor. Many microfinance "insiders" pendence on subsidies) and becoming practices tend to overstate profits and have been working toward a second a commercial entity are thus distinct understate subsidies. goal as well: to find ways to provide activities. Neither implies the other. The microfinance sector has grown microfinance on a commercial basis, · Microfinance institutions have tremendously, and institutions are without long-term subsidies. Relying found reliable ways to get custom- continually reducing costs, improving on subsidies, they argue, can reduce ers to repay loans. The group-lending quality, and expanding services. efficiency and hinder the massive methods pioneered by Grameen Bank Debating about a single, correct vision expansion of services necessary to are best known but far from universal. for microfinance--whether a nonprofit reach hundreds of millions of addi- Microfinance institutions using stan- approach or a commercial model-- tional "unbanked" customers. dard individual-based loan contracts misses the reality that microfinance So it should have caused broad also boast high rates of loan repay- flourishes thanks to a diversity of excitement when Mexico's Banco ment and gain added flexibility. strategies. Improving and refining Compartamos held a public offering · Commercial microfinance banks those strategies will require better of its stock in April 2007. Here was a as a group make loans that on average data and the continuing embrace of microfinance institution serving low- are about four times as large as loans experimentation. income women with small loans--and from NGOs. Since poorer customers earning profits sufficient to attract generally demand smaller loans, aver- Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch. Forthcoming. "Microfinance Meets the outside investors on a big scale. At age loan size is a rough proxy for the Market." Journal of Economic Perspectives. the conclusion of the public offering poverty level of customers. On average, the bank was worth $1.6 billion. microfinance banks thus tend to serve In a new paper Cull, Demirgüç- a substantially better-off group of Unpredictable Aid Kunt, and Morduch clarify what's at borrowers than do NGOs. Banks also (continued from page 5) stake when the worlds of nonprofit serve fewer women as a share of their microfinance and commercial bank- customers. of implementing IMF-supported ing intersect. They use a data set that · Most microfinance institutions programs, receive more predictable includes 346 of the world's leading charge inflation-adjusted interest rates aid. This relative stability of relations microfinance organizations and covers between 20 and 40 percent a year. De- could reflect greater trust or sound nearly 18 million borrowers. The data spite the evidence from Mexico's Com- macroeconomic policy implementation suggest that while commercialization partamos, NGOs as a group charge in- by the recipient country. is a powerful trend, banks like Com- terest rates that are roughly twice the Finally, to more accurately measure partamos and avowedly "social busi- rates charged by commercial micro- the impact of low predictability, nesses" like Grameen Bank are not finance banks. Thus the poorest cus- data collection should be improved. substitutes for one another. The data tomers tend to pay the highest interest Recording the mutual expectations show that microfinance is not taking a rates on loans. The high interest rates of donors and recipients is critical single path, nor should it. The authors are necessary to cover the added costs to capture aid flows expected by put forward eight basic findings that of making small loans, and the NGOs' recipients. Better data would help frame debates. record of expansion and high loan re- explain, for different types of aid, low · Licensed commercial banks payment rates over time suggests that predictability caused by conditionality, with for-profit status serve a growing customers value the services, even at administrative delays, and sudden share of microfinance customers and high costs. adjustments by donors. garner media attention, but the share · Despite the high interest rates, remains relatively small. Globally, mi- most of the institutions serving the Oya Celasun and Jan Walliser. 2008. "Predict- crofinance continues to be dominated poorest customers earn profits too ability of Aid: Do Fickle Donors Undermine Aid by nongovernmental organizations small to attract profit-maximizing Effectiveness?" Economic Policy 23 (55): (NGOs), government-owned investors. 545­94. WorldBankResearch Digest 7 Development Impact of the War on Drugs The war on drugs has failed to in an effort to penetrate wealthy con- erally relax their stance against the achieve its objectives--and may sumer markets, traffickers bring drugs cultivation and trafficking of narcotic cause more damage than the drugs to new, impoverished markets, such as drugs because of the threat of inter- themselves Guinea-Bissau or Central Asia, where national sanctions. But they can raise M governments are hard pressed to limit the issues for public and international otivated by the pernicious growing problems of addiction. Pro- debate. They can emphasize the unin- effects of narcotic drugs, hibition impedes efforts to treat drug tended negative consequences of the most governments have users and to prevent the spread of dis- war on drugs. They can also open a prohibited their trade and consump- ease through drug use, as the spread discussion on the real consequences tion. Some have invested enormous of AIDS among intravenous drug users of relaxing the prohibition regime. This resources to enforce these prohibi- sadly exemplifies. would undeniably lead to an increase tions. By the end of the 1990s the Second, even if supply eradication in drug consumption. For cocaine, United States was spending about $35 efforts associated with prohibition are the prevalence of consumption in rich billion a year on the war on drugs and unsuccessful in the aggregate, they country markets is likely to increase had incarcerated one in every four still impose losses on individual farm- by 50­80 percent. But this increase, prisoners for drug-related offenses. ers who cultivate poppies or coca. though significant, would not amount Similarly, the Colombian government Since these farmers usually lack insur- to widespread or epidemic cocaine committed the country to raising ance, losses for "eradicated" farmers use. defense expenditures to 6 percent of are often catastrophic. Ironically, while The evidence argues for modulated GDP by 2006, more than it spends on successful eradication expropriates drug policies that emphasize regula- public health. farmers' wealth, it generates enormous tion, education, and treatment rather Despite these efforts, the drug profits for the organized criminal net- than outright prohibition. Modula- trade has flourished and drug con- works that traffic in drugs. tion also calls for tailoring policies to sumption shows no signs of abating. Third, the most harmful of the un- particular circumstances, taking into Opium cultivation in Afghanistan intended consequences of the prohibi- account the differences in the harm reached one of its highest points his- tion of the drug trade are organized posed by different drugs (for example, torically in 2004 and has almost dou- crime and the social instability it can high for heroin, low for marijuana), the bled since then. Aggregate cultivation unleash. The potentially large rents responsiveness of their consumption of coca in Bolivia, Colombia, and Peru for the production and distribution of to price changes (for example, high in 2004 was similar to the level ob- illegal drugs induce the formation of for cocaine, low for heroin), and their served at the end of the 1990s, despite criminal organizations, which assert level of entrenchment in society (for a substantial increase in reported their power through violence, insur- example, high for marijuana, low for eradication. This is unsurprising: drug gency, and corruption. Organized crime methamphetamines). producers and traffickers can shift the groups link with other opponents of The lack of success of drug prohi- areas of cultivation, the inputs of pro- state institutions, compounding one bition efforts raises questions about duction, and the methods of transport another's harmful effects. Drug traffick- the wisdom of continuing to devote to at relatively low cost. Consequently, ers and guerrillas in Colombia (Revo- them the substantial resources they heroin and cocaine prices in the Unit- lutionary Armed Forces of Colombia, have demanded. Developing countries ed States have actually declined since or FARC) and Peru (Shining Path) can play a role both by insisting that the early 1980s. This is not because of exchanged money and arms for pro- the costs and benefits of drug policies declining demand: drug-related hos- tection until they eventually became be shared more equitably and by help- pital admissions more than doubled indistinguishable from one another. In ing to design policies that improve on between 1990 and 2002. Afghanistan the Taliban-led insurgency prohibition in every respect. While the war on drugs has not relies on the production of poppy- achieved its intended objectives, it related drugs to finance its operations. has triggered a long train of unin- The challenge that organized crime tended consequences, raising the poses to a country also takes more possibility that the war against drugs subtle, nonviolent forms. Petty corrup- causes more damage than the drugs tion of police and customs officials, themselves. In a new paper Keefer, and grand corruption involving financ- Loayza, and Soares outline some of ing of political campaigns and judicial those unintended consequences and systems, undermine institutional sta- Philip Keefer, Norman Loayza, and Rodrigo their implications. bility and can be very damaging in the Soares. 2008. "The Development Impact of the First, criminalization can exacer- long run. Prohibition of the Drug Trade." Policy Research bate the adverse public health effects So, what options do developing Working Paper 4543, World Bank, Washington, of drug use. Seeking transit countries countries have? They cannot unilat- DC. 8 WorldBankResearch Digest (continued from page 1) Figure 1. National Poverty Lines Plotted Against Mean Consumption 300 )PPP5002tahtnom/$(enilytrevoplanoitaN Recent Policy Research Working Papers 200 4629 Who benefits from Promoting Small and medium Scale enterprises? Some empirical evidence from ethiopia Bob Rijkers, Caterina Ruggeri Laderchi, and Francis Teal 4632 Instrumental Variables Regressions with 100 Honestly uncertain exclusion Restrictions Aart Kraay 4636 Real exchange Rates, Saving and Growth: Is There a link? Peter J. Montiel and Luis Servén 4637 The Impact of Remittances on Rural Poverty 0 and Inequality in China Nong Zhu and Xubei Luo 3 4 5 6 7 4639 The Social Discount Rate: estimates for Nine Log consumption per person at 2005 PPP latin American Countries Humberto Lopez Note: Fitted values use a lowess smoother with a bandwidth of 0.8. 4640 oil Intensities and oil Prices: evidence for latin America a higher line would not have. At the consistent with the data on national Veronica Alaimo and Humberto Lopez 4642 Are low Food Prices Pro-Poor? Net Food other extreme, suppose one judged poverty lines. These have a lower buyers and Sellers in low-Income Countries poverty in developing countries by, say, bound of $1.25--which applies to the M. Ataman Aksoy and Aylin Isik-Dikmelik 4643 Demanding to be Served: Holding U.S. standards. Learning that perhaps reference group of 15 countries--but Governments to Account for Improved Access 95 percent or more of the population then rise according to mean consump- Anwar Shah 4646 bank Regulations Are Changing: For better or is poor by such a standard is unlikely tion with a gradient of one-in-three. Worse? to have much relevance, since U.S. This offers a very good fit with the data James R. Barth, Gerard Caprio Jr., and Ross Levine standards of living are not within the on national poverty lines. 4648 Cyclical movements in unemployment and foreseeable reach of most people in a In ongoing work the authors are ap- Informality in Developing Countries Mariano Bosch and William Maloney typical developing country. plying their absolute and relative pov- 4650 Do the biggest Aisles Serve a brighter The results suggest that relative erty lines to their data set of more than Future? Global Retail Chains and Their poverty is a more important concern 500 household surveys spanning more Implications for Romania Beata S. Javorcik and Yue Li in developing countries than it was 20 than 100 countries to estimate aggre- 4652 Fiscal Policy Instruments for Reducing years ago. More countries are found in gate poverty measures for the develop- Congestion and Atmospheric emissions in the Transport Sector: A Review the region where the poverty line rises ing world and its main regions. The Govinda R. Timilsina and Hari B. Dulal with mean consumption. Across the new series of poverty measures will 4653 minority Status and labor market outcomes: Does India Have minority enclaves? sample of developing countries the span 1981­2005 at three-year intervals. Maitreyi Bordia Das elasticity of the poverty line to mean 4654 Governance matters VII: Aggregate and Individual Governance Indicators 1996­2007 consumption is around 0.7--close to Martin Ravallion, Shaohua Chen, and Prem San- Daniel Kaufmann, Aart Kraay, and Massimo the values for developed countries. Mastruzzi graula. 2008. "Dollar a Day Revisited." Policy The authors propose a parsimoni- Working Papers can be downloaded at http://econ.worldbank.org Research Working Paper 4620, World Bank, To download the World Bank Research E-Newsletter, ous schedule of relative poverty lines, Washington, DC. 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 aimed at disseminating findings of World bank Research Committee and managed by DeCRS, the editor), Asli Demirgüç-Kunt, and Alan Gelb. research. The views and interpretations in the articles research support unit of the Development economics editor: Alison Strong; production: Roula I. Yazigi. are those of the authors and do not necessarily repre- Vice Presidency (DeC). The Research Digest is not Information or free subscriptions: send email to sent the views of the World bank, its executive Direc- copyrighted and may be reproduced with appropriate researchdigest@worldbank.org or visit http://econ. tors, or the countries they represent. source attribution. worldbank.org/research_digest The World Bank 1818 H Street, NW Washington, DC 20433, USA Printed on Recycled Paper