53508 ResearchDigest World Bank Volume 4 l NumbeR 2 l wiNteR 2010 Scoring Poverty Reduction in Brazil, China, and India Lessons from a comparative most of the period, though picking up In ThIs Issue assessment of countries' progress in the reform period. Scoring Poverty Reduction in brazil, China, against poverty Nonetheless, Brazil has been doing and india ... page 1 B well against poverty in its reform pe- An assessment of progress against poverty razil, China, and India have riod, by combining greater macroeco- points to key differences in pro-poor growth embarked on programs of nomic stability with more effective and and pro-poor social policies market-oriented economic re- pro-poor social policies. While Brazil's forms. China was the first; 25 years of macroeconomic instability of the past FoCuS a control economy left large potential was rather extreme, the experiences of Agricultural Price Policy: Revisiting Krueger, for gains from reform by the time all three countries confirm the impor- Schiff, and Valdés ... page 2 that process started in the late 1970s. tance of keeping inflation under con- What does the history of agricultural policy Brazil and India followed in earnest in trol; periods of higher inflation brought reform suggest about its future? the early to mid-1990s. All three coun- slower progress against poverty in all making Sense of innovative Finance for tries have also seen progress against three countries. Without substantially Development ... page 3 poverty in their reform periods. China higher growth rates, however, it will Innovative financial solutions offer promise has clearly seen the most rapid prog- be very difficult for Brazil to achieve for meeting national and global development ress overall. More surprisingly, Brazil China's success against poverty. challenges is ahead of India in the proportionate Rising inequality in China since the rate of poverty reduction. late 1980s has attenuated the gains to trade in Health Services ... page 4 History is important in understand- the poor from growth and threatens What benefits does trade in health services ing the differences among these three the growth process. Indeed, without bring to countries--and what risks? It countries in their progress against pov- more effective efforts at redistribution, depends on the trade arrangements erty. China's fast pace of poverty reduc- China is well on the way to becoming a tion reflects both growth-promoting high-inequality country. In addressing Can Climate Change Actions Avoid Harm to policies--to undo the damage left by its new inequality problem, China can manufacturing? ... page 5 past policy failures--and the advanta- learn from Brazil. Combining China's A new study looks at how climate change geous initial conditions left by the pre- growth-promoting policies with Brazil's actions would affect manufacturing in reform regime--notably the relatively social policies would surely be a good developing countries under different policy scenarios low inequality in access to productive formula for any country. inputs (land and human capital). That In all three countries the sectoral too Poor to Grow ... page 6 low inequality meant that the poor pattern of growth mattered for poverty New research quantifies the adverse effect were able to share more fully in the reduction, independent of the overall of poverty on growth and investigates the gains from growth. rate of growth. In China growth in the mechanism through which it operates By contrast, Brazil's prereform re- output of the primary sector (mainly gime was one of high inequality, with agriculture) was the chief driving force Can informal Finance Substitute for Formal distortions that probably kept inequal- in poverty reduction, while in Brazil Finance? ... page 7 ity high. Brazil's historically high in- and India the tertiary (services) sector Firm-level survey data from China provide equality has clearly been a constraint was more important. The secondary new evidence on the relative roles of formal on progress against poverty. High in- (industrial) sector played a less impor- and informal finance in promoting firm equality meant that a low share of the tant direct role in all three countries growth gains from growth went to the poor. And the high inequality may well have retarded growth, which was low over (continued on page 8) 2 World Bank ResearchDigest FOCUS Agricultural Price Policy: Revisiting Krueger, Schiff, and Valdés Two alternative interpretations sample of developing countries than the example of higher-income coun- of history have very different for the smaller K/S/V sample. High- tries in moving from anti- to pro-farmer implications for future agricultural income countries have also under- policies as they develop. Supporters trade reform taken some agricultural policy reforms of that view could point to another T since the late 1980s, reversing their finding of the new World Bank study, wo decades ago a major World protection growth of the previous three showing that import-competing farm- Bank study of distortions to decades. The world is estimated to ers in developing countries are be- agricultural incentives in 18 de- have moved nearly three-fifths of the ing increasingly protected over time. veloping countries was published by way toward global free trade in goods Moreover, there are few signs of a Anne O. Krueger, Maurice Schiff, and over the quarter century since the slowdown in that upward trend in the Alberto Valdés (The Political Economy mid-1980s. World Trade Organization's ongoing of Agricultural Pricing Policy, 3 vols., Developing countries have ben- Doha Round of multilateral trade ne- Baltimore: Johns Hopkins University efited proportionately more (relative gotiations, suggesting that developing- Press, 1991). That K/S/V study, which to GDP) than high-income economies country governments want to keep covered 1960­84, found that policies from those trade-related policy re- open their options to increase agricul- in most of those developing countries forms, and they would gain nearly twice tural assistance in the future, particu- were harming their farmers--either as much as those richer economies by larly through import restrictions. directly, through such things as taxes completing that reform process--with These two alternative interpreta- on agricultural exports, or indirectly, 72 percent of those prospective gains tions of history have profoundly dif- through manufacturing protection to developing countries coming from ferent implications for the future. The and exchange rate overvaluation. agricultural and food policy reform. In first suggests that the Doha Round is Revisiting this issue, a new World the developing-country group, net farm likely to conclude with substantial cuts Bank study provides indicators for a income (agricultural value added) is es- to agricultural tariff and subsidy bind- much larger sample--more than 40 timated to have been 5 percent higher ings that lock in recent reforms. The developing countries (plus all high- in 2004 than it would have been with- second suggests that the Doha Round income countries and key European out the reforms since the mid-1980s. will struggle to reach an ambitious re- transition economies)--for as many And if policies remaining in 2004 were form outcome in agriculture. years as possible since 1955. A com- removed, that net farm income would parison of the results of the two stud- rise by another 6 percent (far more ies reveals that if Krueger, Schiff, and than the proportional gain to nonag- Valdés had included the same broader ricultural households). These findings range of countries and covered prod- suggest that such reforms could further ucts as the new study, they would not alleviate global inequality and poverty, have altered their key conclusions. since three-quarters of the world's ex- But they would have been able to treme poor are in farm households in stress the policy implications even developing countries. more forcefully, because the estimated If the trade reform processes of the magnitudes of the antiagricultural past quarter century were to continue, and antitrade bias indicators would this could suggest that the period on have been about two-thirds larger. The which K/S/V focused, from the early difference is due mainly to the inclu- 1960s to the mid-1980s, was an aber- sion of China and India but also to rant period of welfare-reducing policy the inclusion of far more Sub-Saharan divergence and that the reforms since African countries and far more live- the 1980s are the result of learning stock products. from the differing growth experiences Since the mid-1980s many devel- of more and less open developing oping countries have undertaken a economies. Kym Anderson. 2010. "Krueger/Schiff/Valdés great deal of policy reform and opened An alternative interpretation of his- Revisited: Agricultural Price and Trade Policy Re- form in Developing Countries since 1960." Policy to trade. The new study estimates that tory is that it is the most recent 25-year Research Working Paper 5165, World Bank, the intersectoral bias against agricul- period of policy changes that is aber- Washington, DC. (Also forthcoming in Applied ture and the antitrade bias have been rant. The policy changes of develop- Economic Perspectives and Policy.) reduced substantially--and more ing countries, in this alternative view, For more resources, visit the study's Web site so, and at a faster pace, for the full might simply involve their following (http://www.worldbank.org/agdistortions). World Bank Research Digest 3 Making Sense of Innovative the country level (using partial credit Finance for Development guarantees, local currency lending us- ing derivatives, and insurance pools) and advance market commitment and Innovations show more promise solidarity, partnership, and catalytic copayment schemes to strengthen in delivering financial solutions mechanisms, all of which either mo- the market for vaccines and essential tailored to country and global bilize or deploy official flows, using a drugs at the global level. A second ma- challenges than in mobilizing range of cash and derivative instru- jor share involved PPPs that leveraged additional financing from new ments (figure 1). private flows to support infrastructure sources What makes these development and social service delivery using risk finance mechanisms innovative is not management instruments (such as A necessarily their intrinsic financial nov- partial risk and political risk guaran- decade ago, development part- elty. Instead, innovative fund-raising tees) and output-based aid schemes. ners embarked on a search comprises solidarity, partnership, and This group also included sovereign for innovative sources of offi- catalytic mechanisms that depart from catastrophe risk management and cial development assistance (ODA) traditional approaches to mobilizing debt swaps funded by private donors. to help finance achievement of the official flows--that is, through budget Innovative solidarity efforts comprised Millennium Development Goals. outlays from established sovereign do- debt buydowns by bilateral donors and Sovereign and private donors cham- nors or through bonds issued by devel- countercyclical loans that adjust terms pioned a variety of initiatives: France opment banks to exclusively achieve and conditions in response to shocks. proposed global solidarity levies, the funding objectives. Similarly, innova- Three key messages emerge for United Kingdom advocated frontload- tive financial solutions are those that developing countries and their part- ing future aid commitments, and oth- break with traditional means of deliv- ners. First, innovations that deliver ers, including private foundations, ering official flows--that is, through financial solutions tailored to country argued for results-based financing. grants and loans. and global challenges have thus far Development banks issued new bonds Using these definitions, the paper played a more significant role than linking resource mobilization to devel- finds that fund-raising innovations those seeking to exploit alternative opment objectives--for example, debt generated an estimated $57.1 billion sources of ODA. Development partners offerings with climate-related themes. in official flows, or at least 4.5 percent can build on their track record of de- And developing countries sought not of total gross ODA and international livering innovative financial solutions only more financial flows but bet- financial institution bond proceeds, in by expanding the use of catalytic and ter financial solutions--for example, 2000­08. Most of these efforts involved PPP mechanisms, particularly in lower- through partnerships that mobilize new debt offerings by development income countries; promoting the use private finance for public service deliv- banks (such as bonds issued in of a broader range of risk management ery, mechanisms to promote carbon developing-country currencies or products and packaging these with trading, and risk reduction to promote targeting sustainable investors). traditional loans and grants; and main- private entry into markets. A new Alternative sources of concessional streaming the use of global market- paper by Girishankar offers a frame- flows, including solidarity levies and making mechanisms (such as advance work for making sense of this mix of contributions from emerging donors, market commitments) across sectors. innovations and takes stock of the totaled at least $11.7 billion, or 1.3 international landscape of innovative percent of gross ODA, in 2000­08. development finance. Carbon finance and frontloading of (continued on page 7) Four types of innovative mecha- ODA for global programs, nisms make up this landscape. Private while modest in volume, mechanisms involve private-to-private also grew. Figure 1. Innovative Mechanisms of Development Finance flows in the market and civil soci- Innovative financial Uses ety. Solidarity mechanisms support solutions used an esti- Public Private sovereign-to-sovereign transfers and mated $52.7 billion in of- private finance Public-private form the backbone of multilateral and ficial flows, or 5.7 percent Leveraging partnerships Pure private bilateral ODA and other official flows. of the total to developing Private finance for public Private initiative in the Public-private partnership (PPP) mecha- countries, in 2000­08. service delivery and other market and in civil society public functions Sources nisms leverage or mobilize private The largest share in- finance in support of public service volved catalytic mecha- Solidarity Catalytic public support delivery and other public functions. nisms to promote private Mobilizing Public-to-public transfers Public support for creating Catalytic mechanisms provide public investment in the finan- using concessional flows and developing markets or (official development for promoting private entry support for creating and developing cial, private insurance, assistance) into existing markets private markets. The paper focuses on and productive sectors at 4 World Bank ResearchDigest Trade in Health Services Developing countries can benefit it could become a costly substitute system would benefit indirectly from trade in health services, as for badly needed domestic reforms, as the movement abroad exposes exporters or as importers--but also this trade should be phased out as providers to training and new tech- face risks domestic capacity expands. In Oman, nologies. But while brain circula- H for example, government-sponsored tion should be encouraged, brain ealth tourism grew at a phe- medical travel, estimated to cost $3 drain could adversely affect local nomenal rate in the past million in 2001­03, was supplemented public health. Adequately regulated decade, with clinics serv- by domestic reforms aimed at limit- trade with incentives to return to the ing foreign clientele springing up ing imports. The reforms halved the home country could prevent this. across the world. Clinics in over 35 number of Omanis seeking treatment The study also outlines strate- countries serve more than a mil- abroad between 1990 and 2006. gies combining domestic reforms lion medical tourists annually, and This type of trade can benefit ex- and trade negotiations to fos- demand for these services contin- porters of services by creating more ter trade in the health sector: ues to grow. In 2007 an estimated opportunities at home for health · Assessing and fixing fun- 750,000 Americans sought health care personnel and thus a disincen- damentals using SWOT analysis care abroad, and annual growth rates tive to migrate. It may also help im- (evaluating strengths, weaknesses, are projected to reach 100 percent. prove the services available locally. In opportunities, and threats) as a Developing countries are expected Morocco, for example, health tourism diagnostic and planning tool. to benefit most from the trade. In resulted in a greater supply of health · Improving domestic regulation 2008, 1.2 million non-U.S. residents services available to both foreigners and removing unnecessary obstacles sought care in Thailand, 450,000 and locals. But exporters also face the to trade. While strict regulation of in India, 410,000 in Singapore, and risk of ending up with a health care the health sector is necessary--for 300,000 in Malaysia. Moreover, system dedicated entirely to foreign example, to avoid malpractice-- prospects for South-South trade patients. In Thailand it is estimated regulation should be minimally are strong: Libyans represent more that an additional 100,000 foreign restrictive and should contribute than 80 percent of foreign medi- patients seeking medical treatment to the desired policy objectives. cal patients in Tunisia, and more could lead to an internal brain drain · Identifying high-potential than 80 percent of Omani patients of 240­700 doctors, posing a signifi- markets and export niches us- abroad were treated in India. cant challenge to achieving universal ing knowledge of foreign markets, A recent paper by Cattaneo sum- and equitable access to health care. health care needs, health care sup- marizes existing research on trade in Third, a foreign-operated medical facility ply, and insurance coverage. health services to describe potential is established on consumer territory. For im- · Reforming the institutional benefits and risks of the trade. The au- porters, such foreign investment could framework to promote trade, with state thor presents these separately for four bring new resources to the domestic involvement supporting the design types of trading arrangements, both health system and foster competition and implementation of coherent sec- in countries that export these services among service providers, improving toral export promotion strategies. and in countries that import them. quality and lowering prices. But foreign · Using public and private in- First, health services are delivered across establishments may target only foreign ternational cooperation to promote borders without the patient or the provider clients or rich domestic ones and di- trade through bilateral, regional, or moving. This type of trade can benefit vert scarce human resources, reinforc- multilateral initiatives. These could importing countries by alleviating ing inequality in access to health care. include social security conven- human resource and infrastructure Fourth, foreign health professionals are tions and the General Agreement constraints, particularly in remote, un- allowed to practice (temporarily) on con- on Trade in Services, which allows derserved areas. It can benefit export- sumer territory. This type of trade could the anchoring of commitments to ing countries by increasing domestic ease shortages of health personnel domestic reforms in the interna- health revenues and profitability of in importing countries, reduce the tional system, buffering governments health investments. But this mode of cost of medical education and train- from interest group pressures. delivery is not yet cost-efficient, most- ing, and provide access to special- ly for technological reasons, and it ists not available locally. But foreign creates new challenges for regulators. health workers could be perceived Second, the consumer moves across bor- as a threat by local employees. ders to access a service provider abroad. This For exporting countries, exports Olivier Cattaneo. 2009. "Trade in Health Services: type of trade can also ease human re- could be an important source of in- What's in It for Developing Countries?" Policy source and infrastructure constraints come, such as the remittances sent Research Working Paper 5115, World Bank, in importing countries. But because home by Filipino nurses. The health Washington, DC. World Bank Research Digest 5 Can Climate Change Actions Avoid Harm to Manufacturing? Even modest mitigation efforts the most carbon-intensive sector after have a limited impact on manufac- would hurt industry in countries the energy sector itself. turing. In Sub-Saharan Africa greater with high carbon intensity. In a subset of these countries the transfers may have an adverse effect, Are there policy solutions? introduction of emissions trading but this could be remedied by diver- A and transfers offsetting welfare losses sion of resources into well-planned s governments worldwide start would exacerbate the decline. In China investments that enhance productiv- to recognize the urgent need for and India, for example, manufacturing ity in manufacturing and reduce trade actions in response to climate output would decline by 6­7 percent costs. change, opportunities for cooperative and manufacturing exports by 9­11 In high-carbon-intensity countries, reductions in greenhouse gas emis- percent. While transfers would allevi- however, where manufacturing exports sions and their potential impact have ate welfare declines experienced under and output would be significantly af- received growing scrutiny. But re- the no-trading scenario, they would fected, policy options would depend search on mitigation actions and their tend to magnify the negative impact on whether the long-run growth exter- costs has remained focused on aggre- through Dutch-disease-type mecha- nality resides outside energy-intensive gate output and neglected the struc- nisms and hurt exports more than manufacturing sectors or within such tural implications of such actions. output. sectors. In addition, the first-best A recent paper by Mattoo, In Sub-Saharan Africa the manufac- policy option of taxing the carbon ex- Subramanian, van der Mensbrugghe, turing sector would expand under the ternality, and addressing the growth and He seeks to add to this body of no-trading scenario, but the authors externality through a combination of research. The authors measure the po- warn that large public transfers to either production or export subsidies, tential impact of a set of cooperative the region could lead to a 4 percent may not be feasible because of World policy actions on both manufacturing decline in manufacturing exports. In Trade Organization regulations as well output and exports, in aggregate and countries with low levels of carbon in- as challenges associated with indus- in selected sectors. The first policy tensity, such as Brazil and other Latin trial policies and "picking winners." scenario they consider assumes a re- American countries, manufacturing The authors point to a silver lining, duction in emissions alone, with high- would be minimally affected by the however: the carbon and growth exter- income countries reducing emissions mitigation actions considered. nalities do not necessarily translate by 30 percent relative to 2005 levels, The adverse effects of emissions into irreconcilable policy objectives. and developing countries cutting back reductions and emissions rights trad- They argue that if the future growth po- by 30 percent relative to business-as- ing would not be restricted to energy- tential of these high-carbon-intensity usual levels, by 2020. The authors then intensive manufacturing sectors. countries lies in non-energy-intensive consider a scenario that combines Indeed, countries such as China and sectors and green technologies, the ex- emissions reductions with trading of India would experience adverse effects ternalities could be mutually reinforc- emissions rights in an international even in manufacturing sectors such ing given the right policy environment. market, and a third scenario that also as clothing, electronics, and transport Is it then possible to devise a hedging includes public and private transfers equipment. Output would decline by strategy that creates incentives for necessary to compensate for welfare 5 percent in China and 3.3 percent in technological innovation and adoption losses that occur in poor countries as India, and exports by approximately in green sectors without hurting the a result of mitigation actions. 7 percent in both countries. For other existing manufacturing sector? Only The study finds that in a number countries, such as Brazil and those further research will tell. of countries with currently high levels in East Asia and Sub-Saharan Africa, of carbon intensity, including China, the impact would be relatively mod- India, and a few in Europe and Central est. Notably, Dutch-disease-type Asia and in the Middle East and North effects induced by transfers would Africa, emissions reductions alone remain strong in China, India, and would lead to serious declines in Sub-Saharan Africa, with declines in manufacturing output and exports. exports ranging from 2.4 percent to 5.2 Manufacturing exports would fall by percent. 4.5 percent in China and 7.3 percent The findings suggest that the policy in India, and manufacturing output by options for mitigation action available Aaditya Mattoo, Arvind Subramanian, Domi- 2.9 percent in China and 3.7 percent in to countries will vary. Countries at low nique van der Mensbrugghe, and Jianwu He. India. Not surprisingly, manufacturing levels of carbon intensity will face little 2009. "Can Global De-Carbonization Inhibit would suffer the most as a result of tension between the two externalities Developing Country Industrialization?" Policy increases in the price of carbon follow- of carbon and growth, because mitiga- Research Working Paper 5121, World Bank, ing the cuts in emissions, since it is tion actions in these countries would Washington, DC. 6 World Bank ResearchDigest Too Poor to Grow Higher poverty leads to slower annual per capita growth by approxi- headcount, and gross fixed capital for- growth by deterring investment mately 1 percentage point. The sign, mation relative to GDP, are then plot- A significance, and magnitude of the ted against its income rank. Together, rapidly growing theoretical poverty effect all remain essentially the figures suggest a close associa- literature has suggested a vari- unchanged even after controlling for tion between poverty and investment. ety of mechanisms through the level of inequality. The finding sug- Headcount poverty falls dramatically which poverty may deter growth and gests that policies aimed at promoting between the first and fourth groups, generate self-perpetuating poverty growth could increase their payoffs if then declines much more modestly. traps. But a basic implication of the they exerted an independent, direct Similarly, investment increases from theoretical models--that countries impact on poverty. 14 percent of GDP to suffering from higher levels of pov- The finding that 22 percent between erty should grow more slowly--has poverty has a nega- Policies to promote the first and fourth remained untested. Instead, the tive impact on growth growth could have groups, then remains empirical literature has focused on survives a variety of virtually constant be- the poverty-reducing effects of growth robustness checks, bigger payoffs if tween the fourth and or the consequences of inequality for including using alter- they exerted an tenth ones. growth. A recent paper by Lopez and native poverty lines, Formally testing Servén attempts to bridge this gap by alternative poverty independent, direct this relationship in offering a first empirical assessment measures, alterna- impact on poverty a regression frame- of the impact of poverty on growth. tive sets of control work, the authors find The paper's strategy involves esti- variables in the re- that poverty deters mating a growth equation with poverty gression, alternative investment, espe- added to an otherwise standard set of sets of instruments in the estimation, cially where financial development is growth determinants. The framework and alternative estimation methods as limited. While this result is sensitive is very close to that used in recent well as allowing for nonlinear effects of to how the poverty line is defined, empirical work studying the effects inequality on growth. it appears consistent with stylized of inequality on growth. It retains Through what mechanism does theoretical models in which financial inequality as a control variable, but poverty adversely affect growth? In the market imperfections prevent the poor shifts the emphasis from inequality to theoretical model presented in the from taking advantage of investment poverty. The data used consist of an study, poverty affects growth through opportunities. unbalanced panel of nonoverlapping its negative impact on investment, five-year periods spanning the years which in turn results from the absence 1960­2000 for 85 countries. of well-developed capital markets. The The results reveal a consistently study also explores this hypothesized negative impact of poverty on growth, relationship empirically. As an illustra- a result that is both economically tion, in figures 1a and 1b countries and statistically significant: a 10 per- are ranked by per capita income in the Humberto Lopez and Luis Servén. 2009. "Too centage point increase in the poverty 1990s and ordered in 10 groups of 10. Poor to Grow." Policy Research Working Paper headcount rate is estimated to reduce For each country group the poverty 5012, World Bank, Washington, DC. Figure 1. Relationship between Headcount Poverty and Investment a. Poverty and countries by income rank b. Investment and countries by income rank 0.7 25 0.6 23 Investment (% of GDP) 0.5 21 0.4 Poverty 19 0.3 17 0.2 0.1 15 0 13 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Income ranking Income ranking World Bank Research Digest 7 Can Informal Finance Substitute for Formal Finance? reinvestment rates for the firms that receive it. The authors find no evidence Contrary to earlier findings in China, the informal financial sector in that that alternative financing channels are finance from informal channels is country. Is the informal financial sec- associated with higher growth. Their not associated with faster growth tor associated with high growth and findings suggest that reputation- and for firms profit reinvestment, and does it serve relationship-based informal financing A as a substitute for the formal financial and governance mechanisms are likely large literature in law and system? Or does the informal sector to play a limited role in supporting the finance has shown that de- primarily serve the lower end of the growth of private sector firms and un- velopment of formal finan- market? likely to substitute for formal mecha- cial institutions is associated with The authors find that in China nisms. These findings confirm the faster growth and better resource the use of bank financing by private important role of formal finance in the allocation. This literature has also firms is comparable to that in other development process and underline recognized the complementary role developing countries. The breakdown the importance of focusing on financial played by informal financial systems, of nonbank financing sources shows sector reforms. especially in developing economies. greater differences. Compared with Informal financing typically consists firms in other countries, those in the Meghana Ayyagari, Asli Demirgüç-Kunt, and of small, unsecured, short-term loans study's sample rely on a large informal Vojislav Maksimovic. Forthcoming. "Formal versus restricted to rural areas, agricultural sector and alternative financing chan- Informal Finance: Evidence from China." Review contracts, households, individuals, or nels. These other financing sources of Financial Studies. small entrepreneurial ventures and could well be the large underground helps in servicing the lower end of the lending in China. market. There is a direct parallel even But the authors find that it is fi- Making Sense of Innovative in developed markets such as the nancing from formal bank sources Finance for Development United States: angel finance, in which that is positively associated with firm high-net-worth individuals--"angel growth and reinvestment. Contrary (continued from page 3) investors"--provide initial funding to earlier findings, fund-raising from to young firms with modest capital informal channels is not associated Second, fund-raising innovations needs until they are able to receive with faster firm growth. To the extent should be viewed as a complement more formal venture capital financing. that there are measurable benefits to--rather than as a substitute for-- According to this view, however, in- of informal financing, they arise only traditional efforts to mobilize official formal financial systems cannot sub- when retained earnings are classified flows, particularly ODA. Budget outlays stitute for formal ones because their as informal financing, as in some ear- from established sovereign donors re- monitoring and enforcement mecha- lier studies. main the only significant source of ad- nisms are ill equipped for scaling up While the authors find that the ditional ODA. Global PPP initiatives to and meeting the needs of the higher majority of firms that receive bank pool sovereign and private donations end of the market. loans grow faster as a result, they find or frontload ODA can broaden the base But an important branch of the a subpopulation of firms that do not. of support for development but should literature often mentions China as Firms reporting that government help be used selectively. They may compete a counterexample to the findings in was instrumental in obtaining a bank with country-based modalities for the finance and growth literature and loan do not show faster growth, higher scarce ODA (such as the International its focus on formal systems. It is true reinvestment, or greater productivity, Development Association) and may that China is one of the fastest grow- unlike firms getting bank loans with- also contribute to aid proliferation and ing economies in the world despite out government help. But these re- fragmentation. weaknesses in its formal banking sys- sults do not make China an exception Third, innovations need to be test- tem. The fast growth of Chinese pri- to the growth and finance literature. ed and evaluated to determine their vate sector firms is taken as evidence They are consistent with previous work value added. While some innovations that what supports China's growth is showing the disadvantages of state- show promise, the jury is still out on alternative financing and governance owned banking. others. More in-depth evaluation will mechanisms. Overall, the results suggest that be needed to determine the net bene- In recent research Ayyagari, even in fast-growing economies where fits of fund-raising efforts and financial Demirgüç-Kunt, and Maksimovic use the formal financial system serves only solutions. detailed, firm-level survey data from a small part of the private sector be- the World Bank Investment Climate cause of a poorly developed financial Navin Girishankar. 2009. "Innovating Develop- Surveys on 2,400 firms in China to and legal system, external finance from ment Finance: From Financing Sources to Finan- investigate which of the two views the formal financial system is associat- cial Solutions." Policy Research Working Paper is consistent with the operation of ed with faster growth and higher profit 5111, World Bank, Washington, DC. 8 World Bank ResearchDigest (continued from page 1) (though there may well have been indi- more robust growth process. Just as Recent Policy Research rect effects through growth in the other Brazil has begun to seriously tackle its Working Papers two sectors). Because different types of high income inequality, India needs policies are needed to foster growth in to more vigorously address its own 5153 international Growth Spillovers, Geography different sectors, the sectoral priorities inequalities, particularly in human and infrastructure of policy makers--which have varied development. Mark Roberts and Uwe Deichmann 5154 Are irrigation Rehabilitation Projects Good over time within as well as among the One way to summarize this compar- for Poor Farmers in Peru? countries--have also mattered for ative assessment is to imagine a sim- Gayatri Datar and Ximena V. Del Carpio 5157 Corruption and Confidence in Public progress against poverty. ple scorecard for the two key dimen- institutions: evidence from a Global Survey Brazil (since the mid-1990s) and sions of effective country performance Bianca Clausen, Aart Kraay, and Zsolt Nyiri 5161 Density and Disasters: economics of urban India (going back to the 1970s) have against poverty: pro-poor growth and Hazard Risk clearly been more aggressive than pro-poor social policies. In the reform Somik V. Lall and Uwe Deichmann China in their efforts to attack poverty periods China clearly scores well on 5162 international Aid and Financial Crises in Donor Countries through direct interventions, such as the pro-poor growth side of the card, Hai-Anh Dang, Steve Knack, and using conditional or unconditional but Brazil and India do not--in Brazil's Halsey Rogers 5163 "Green Stimulus," economic Recovery, transfers. This may not be too surpris- case for lack of growth and in India's and long-term Sustainable Development ing, since Brazil clearly has greater case for lack of poverty-reducing Jon Strand and Michael Toman 5167 Price elasticity of Nonresidential Demand capacity for attacking poverty through growth. Brazil scores well on the social for energy in South eastern europe redistribution than either China or policies side, but China and India do Atsushi Iimi India. But countries such as China and not. In China progress in implement- 5168 Developing Countries, Dispute Settlement, and the Advisory Centre on wto law India can learn from Brazil's success ing new social policies more relevant Chad P. Bown and Rachel McCulloch in addressing the continuing problem to the new market economy has been 5170 Social impacts of Climate Change in Chile: A municipal level Analysis of the effects of high inequality. Indeed, China ap- slow (despite historical advantages of Recent and Future Climate Change pears to be well on the way to having in this area, inherited from the past on Human Development and inequality Lykke E. Andersen and Dorte Verner a capacity for redistribution similar regime). In India the bigger problem 5171 taxes and Caps as Climate Policy instruments to Brazil's. All three countries need to has been the extent to which nonpoor with Domestic and imported Fuels Jon Strand invest more in rigorous impact evalua- groups have captured the many exist- 5172 Sponsoring a Race to the top: the Case tions of their future social policies. ing policies. for Results-based intergovernmental Finance for merit Goods Looking forward, India's success Anwar Shah in delivering better health and educa- 5173 understanding options for Public-Private tion to its poor must surely be seen as Partnerships in infrastructure: Sorting out the Forest from the trees: bot, DbFo, DCmF, the key factor in ensuring more rapid Martin Ravallion. 2009. "A Comparative Perspec- Concession and lease Jeffrey Delmon poverty reduction--by allowing the tive on Poverty Reduction in Brazil, China and 5174 Valuation effects with transitory and trend poor to participate more fully in the India." Policy Research Working Paper 5080, Productivity Shocks opportunities unleashed by India's World Bank, Washington, DC. Ha Nguyen working Papers can be downloaded at http://econ.worldbank.org to download the World Bank Research E-Newsletter, 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 Asli Demirgüç-Kunt. 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