nep-dev New Economics Papers
on Development
Issue of 2007‒04‒21
forty-four papers chosen by
Jeong-Joon Lee
Towson University

  1. The Empirical Instituions-Growth Literature: Is Something Amiss at the Top? By John W. Dawson
  2. Ruggedness: The Blessing of Bad Geography in Africa By Nunn, Nathan; Puga, Diego
  3. Geography, Health, and the Pace of Demo-Economic Development By Strulik, Holger
  4. Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries By Bjerg, Christina; Bjørnskov, Christian; Holm, Anne
  5. The Political Economy of Growth and Governance By Paul G. Hare
  6. Determinants of Credit Participation and Its Impact on Household Consumption: Evidence From Rural Vietnam By Cuong H. Nguyen
  7. Trade, Knowledge, and the Industrial Revolution By Kevin H. O'Rourke; Ahmed S. Rahman; Alan M. Taylor
  8. Human Capital, Economic Growth, and Regional Inequality in China By Belton Fleisher; Haizheng Li; Min Qiang Zhao
  9. Love on the Rocks: Alcohol Abuse and Domestic Violence in Rural Mexico By Manuela Angelucci
  10. Child Labor and Household Wealth: Theory and Empirical Evidence of an Inverted-U By Kaushik Basu; Sanghamitra Das; Bhaskar Dutta
  11. Labor Retrenchment Laws and their Effect on Wages and Employment: A Theoretical Investigation By Kaushik Basu; Gary S. Fields; Shub Debgupta
  12. Bribery in Health Care in Peru and Uganda By Jennifer Hunt
  13. Does sending farmers back to school have an impact? a spatial econometric approach By Satoshi Yamazaki; Budy P. Resosudarmo
  14. Endogenous Policy and Cross-Country Growth Empirics By Günther Rehme
  15. Book Production and the Onset of Modern Economic Growth By Jörg Baten; Jan Luiten van Zanden
  16. The aftermath of civil war By Reynal-Querol, Marta; Loayza, Norman V.; Chen, Siyan
  17. Ethnic polarization and the duration of civil wars By Reynal-Querol, Marta; Montalvo, Jose G.
  18. Horizontal inequalities, political environment, and civil conflict : evidence from 55 developing countries, 1986-2003 By Ostby, Gudrun
  19. Oil and the propensity to armed struggle in the Niger Delta region of Nigeria By Oyefusi, Aderoju
  20. Political leadership, conflict, and the prospects for constitutional peace By Jennings, Colin
  21. Current and forthcoming issues in the Sout h African electricity sector By Maurer, Luiz; Bogetic, Zeljko; Kessides, Ioannis N.
  22. The pricing dynamics of utilities with underdeveloped networks By Kessides, Ioannis N.; Chisari, Omar O.
  23. How Corruption Hits People When They Are Down By Jennifer Hunt
  24. Policy, Economic Federalism & Product Market Entry: The Indian Experience By Sumon Bhaumik; Shubhasish Gangopadhyay; Shagun Krishnan
  25. On the Role of Absorptive Capacity: FDI Matters to Growth By Yuko Kinoshita; Chia-Hui Lu
  26. Is Education the Panacea for Economic Deprivation of Muslims? Evidence from Wage Earners in India, 1987-2004 By Sumon Kumar Bhaumik; Manisha Chakrabarty
  28. Dutch Disease Scare in Kazakhstan: Is It Real? By Balázs Égert; Carol S. Leonard
  29. "Minerals, Openness, Institutions and Growth: An Empirical Analysis" By James L. Butkiewicz; Halit Yanikkaya
  30. Great Expectations? The Subjective Well-Being of Rural-Urban Migrants in China By John Knight; Ramani Gunatilaka
  31. Microfinance and Investment: a Comparison with Bank and Informal Lending By Lucia Dalla Pellegrina
  32. Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions By Dean Karlan; Martin Valdivia
  33. Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts By Dean Karlan; Jonathan Zinman
  34. Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Report By Dean Karlan; Jonathan Zinman
  35. Credit Elasticities in Less-Developed Economies: Implications for Microcredit By Dean Karlan; Jonathan Zinman
  36. Group Versus Individual Liability: A Field Experiment in the Philippines By Dean Karlan; Xavier Giné
  37. Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa By Nancy Birdsall
  38. Pathways Out of Poverty During an Economic Crisis: An Empirical Assessment of Rural Indonesia By Neil McCulloch; C. Peter Timmer; Julian Weisbrod
  39. What Have IMF Programs With Low-Income Countries Assumed About Aid Flows? By David Goldsbrough and; Ben Elberger
  40. How May International Trade affect Poverty in a Developing Country Setup? The Inequality Channel By Mamoon, Dawood
  41. Human Capital Investment and Poverty Reduction over Generations: A Case from the Rural Philippines, 1979-2003 By Takahashi, Kazushi; Otsuka, Keijiro
  42. Local Firms in Latecomer Developing Countries amidst China's Rise -The case of Vietnam's motorcycle industry- By Fujita, Mai
  43. Trade Liberalisation, Financial Development and Economic Growth By Muhammad Arshad Khan; Abdul Qayyum
  44. Preference for Public Sector Jobs and Wait Unemployment: A Micro Data Analysis By Asma Hyder

  1. By: John W. Dawson
    Abstract: The initial publication of the Fraser Institute’s Economic Freedom of the World index prompted an explosion of empirical research on the institutions-growth relationship. To date, little of this research has appeared in the top economics journals. Subsequently, a number of empirical growth studies using alternative sources of data on institutions have appeared in top journals. This paper explores the two tracks of empirical research on the institutions-growth relationship—one track that recognizes all the relevant literature, and one that seems wanting in that respect.
    Date: 2007
  2. By: Nunn, Nathan; Puga, Diego
    Abstract: There is controversy about whether geography matters mainly because of its contemporaneous impact on economic outcomes or because of its interaction with historical events. Looking at terrain ruggedness, we are able to estimate the importance of these two channels. Because rugged terrain hinders trade and most productive activities, it has a negative direct effect on income. However, in Africa rugged terrain afforded protection to those being raided by slave traders. Since the slave trade retarded subsequent economic development, in Africa ruggedness also has had a historical indirect positive effect on income. Studying all countries worldwide, we find that both effects are significant statistically and that for Africa the indirect positive effect dominates the direct negative effect. Looking within Africa, we provide evidence that the indirect effect operates through the slave trade. We also show that the slave trade, by encouraging population concentrations in rugged areas, have also amplified the negative direct impact of rugged terrain in Africa.
    Keywords: Africa; economic development; geography; slave trades; terrain ruggedness
    JEL: N40 N50 O11 O13
    Date: 2007–04
  3. By: Strulik, Holger
    Abstract: This paper investigates the impact of subsistence consumption and extrinsic and intrinsic causes of child mortality on fertility and child expenditure. It offers a theory for why mankind multiplies at higher rates at geographically unfavorable, tropical locations. Placed into a macroeconomic framework this behavior creates an indirect channel through which geography shapes economic performance. It is explained why it are countries of low absolute latitude where we observe exceedingly slow (if not stalled) economic development and demographic transition.
    Keywords: Demographic Transition, Geography, Health, Nutrition, Cross-Country Divergence
    JEL: J10 J13 O11 O12
    Date: 2007–04
  4. By: Bjerg, Christina (Department of Economics, Aarhus School of Business); Bjørnskov, Christian (Department of Economics, Aarhus School of Business); Holm, Anne (Department of Economics, Aarhus School of Business)
    Abstract: In this paper, we explore the potential growth effects of foreign aid when in conjunction with severe debt problems. We first argue that aid, when used to finance debt repayments, does not lead to Dutch Disease while still alleviating an economic problem. A set of empirical estimates show that while inflows of foreign aid in general are not associated with growth in a sample of 38 Least Developed Countries, an interaction term with the level of external debt is significant. We take this as suggestive evidence of an alleviating effect of aid in these countries and offer some tentative thoughts on the implications for future aid policies
    Keywords: Economic growth; foreign aid; external debt
    JEL: F34 F35 O40
    Date: 2007–01–01
  5. By: Paul G. Hare
    Abstract: There are diverse ideas about governance around the world, and this paper studies them through the following questions: (a) what does the available evidence tell us about the political and institutional requirements for sustained economic growth? (b) What do we need from the state to secure growth? (c) How do a country's internal characteristics support or impede its growth? (d) How does the external environment of a country influence its economic growth prospects? These elements are then put together into a model of growth, from which we derive conclusions about governance arrangements. Thus the paper outlines a simple framework within which to think about the political economy of growth that can be summed up in five points: good government, with secure political conditions; credible macroeconomic stability; savings and investment high enough to sustain adequate growth; openness to the world economy; and the discipline of external engagement. It then argues that the growth model needs to be underpinned by suitable governance arrangements, and suggests that good governance has two main elements, each quite complex in practice, namely: protection of property rights, and accountability of government.
    Keywords: political economy, global economy, economic growth, governance, macroeconomic stability, property rights
    JEL: O43 H11
    Date: 2007
  6. By: Cuong H. Nguyen
    Abstract: This paper analyses the Vietnam's rural credit market to understand the determinants of credit choices and to measure impacts of borrowing activities on borrower's consumption in the 1992-1998 period. There are three main results. First, there exists uniform access to formal credit among rural households in Vietnam. Households' financial activity is found to be determined by household size and agricultural work rather than education or distance from the commune to the nearest bank branch. Education level seems to have an inverse U-shape effect on credit taking possibility; the least and the most educated households borrow least. Second, there is evidence of money lenders being crowded out by formal institutions via competition. Finally, we apply fix-effected regression and propensity score matching estimation on cross-sectional and panel data to assess impact of credit taking on household consumption. Our study demonstrates that formal credit positively affects borrowers' consumption while informal finance has mixed results.
    Keywords: rural credit, credit participation, Vietnam
    JEL: O12 O16 O17
    Date: 2007
  7. By: Kevin H. O'Rourke; Ahmed S. Rahman; Alan M. Taylor
    Abstract: Technological change was unskilled-labor-biased during the early Industrial Revolution of the late eighteenth and early nineteenth centuries, but is skill-biased today. This fact is not embedded in extant unified growth models. We develop a model of the transition to sustained economic growth which can endogenously account for both these facts, by allowing the factor bias of technological innovations to reflect the profitmaximising decisions of innovators. Endowments dictated that the initial stages of the Industrial Revolution be unskilled-labor biased. The transition to skill-biased technological change was due to a growth in “Baconian knowledge” and international trade. Simulations show that the model does a good job of tracking reality, at least until the mass education reforms of the late nineteenth century.
    Keywords: Endogenous growth, Demography, Trade
    Date: 2007–04–17
  8. By: Belton Fleisher (Ohio State University and IZA); Haizheng Li (Georgia Institute of Technology); Min Qiang Zhao (Ohio State University)
    Abstract: We study the dispersion in rates of provincial economic- and TFP growth in China. Our results show that regional growth patterns can be understood as a function of several interrelated factors, which include investment in physical capital, human capital, and infrastructure capital; the infusion of new technology and its regional spread; and market reforms, with a major step forward occurring following Deng Xiaoping’s "South Trip" in 1992. We find that FDI had much larger effect on TFP growth before 1994 than after, and we attribute this to emergence of other channels of technology transfer when marketization accelerated. We find that human capital positively affects output per worker and productivity growth. In particular, in terms of its direct contribution to production, educated labor has a much higher marginal product. Moreover, we estimate a positive, direct effect of human capital on TFP growth. This direct effect is hypothesized to come from domestic innovation activities. The estimated spillover effect of human capital on TFP growth is positive and statistically significant, which is very robust to model specifications and estimation methods. The spillover effect appears to be much stronger before 1994. We conduct cost-benefit analysis and a policy "experiment," in which we project the impact increases in human capital and infrastructure capital on regional inequality. We conclude that investing in human capital will be an effective policy to reduce regional gaps in China as well as an efficient means to promote economic growth.
    Keywords: regional inequality, TFP growth, FDI, human capital, technology spillovers
    JEL: O15 O18 O47 O53
    Date: 2007–03
  9. By: Manuela Angelucci (University of Arizona and IZA)
    Abstract: What causes alcohol abuse and domestic violence and how can we stop them? These behaviors have multiple determinants, making the effects of changes in wife's and husband's income ambiguous. This paper estimates the effects of exogenous changes in wife's and husband's income on husband alcohol abuse and alcohol-induced violence using new data from rural Mexico. A long-lasting 20 dollar monthly increase in wife income decreases husbands' alcohol abuse by 15% and aggressive behavior by 21%; the extra money increase the wife's freedom and security, is spent on individual and household goods, and it crowds out transfers from the husband only for 5% of the wives whose income increases. Alcohol abuse and violence are insensitive to short-term fluctuations in husband's income. These findings suggest that the wife uses her higher income to reduce the consumption of goods that lower her utility, that alcohol abuse responds more to changes in permanent than in temporary income, and that targeting women as recipients of micro-credit or of other welfare programs may have beneficial effects in reducing alcohol dependence and domestic violence.
    Keywords: public health, household behavior, Mexico
    JEL: D13 I18 O12
    Date: 2007–03
  10. By: Kaushik Basu (Cornell University, Indian Statistical Institute and IZA); Sanghamitra Das (Indian Statistical Institute); Bhaskar Dutta (Warwick University)
    Abstract: Some studies on child labor have shown that greater land wealth leads to higher child labor, thereby casting doubt on the hypothesis that child labor is caused by poverty. This paper argues that the missing ingredient is an explicit modeling of the labor market. We develop a simple model which suggests an inverted-U relationship between land holdings and child labor. A unique data set from India that has child labor hours information confirms this hypothesis. It is shown that the turning point beyond which more land leads to a decline in child labor occurs at 3.6 acres of land per household, which is well below the observed maximum value of land-holding.
    Keywords: child labor, land-holding, education, labor markets
    JEL: D13 J20 O12
    Date: 2007–04
  11. By: Kaushik Basu (Cornell University, Indian Statistical Institute and IZA); Gary S. Fields (Cornell University and IZA); Shub Debgupta (Corporate Executive Board)
    Abstract: Many countries have legislation which make it costly for firms to dismiss or retrench workers. In the case of India, the Industrial Disputes Act, 1947, requires firms that employ 50 or more workers to pay a compensation to any worker who is to be retrenched. This paper builds a theoretical model to analyze the effects of such anti-retrenchment laws. Our model reveals that an anti-retrenchment law can cause wages and employment to rise or fall, depending on the parametric conditions prevailing in the market. We then use this simple model to isolate conditions under which an anti-retrenchment law raises wages and employment. In a subsequent section we assume that the law specifies exogenously the amount of compensation, s, a firm has to pay each worker who is being dismissed. It is then shown that as s rises, starting from zero, equilibrium wages fall. However beyond a certain point, further rises in s cause wages to rise. In other words, the relation between the exogenously specified cost to the firm of dismissing a worker and the equilibrium wage is V-shaped.
    Keywords: labor laws, retrenchment, severance pay, unemployment
    JEL: O15 O17 J32 J63
    Date: 2007–04
  12. By: Jennifer Hunt
    Abstract: In this paper, I examine the role of household income in determining who bribes and how much they bribe in health care in Peru and Uganda. I find that rich patients are more likely than other patients to bribe in public health care: doubling household consumption increases the bribery probability by 0.2-0.4 percentage points in Peru, compared to a bribery rate of 0.8%; doubling household expenditure in Uganda increases the bribery probability by 1.2 percentage points compared to a bribery rate of 17%. The income elasticity of the bribe amount cannot be precisely estimated in Peru, but is about 0.37 in Uganda. Bribes in the Ugandan public sector appear to be fees-for-service extorted from the richer patients amongst those exempted by government policy from paying the official fees. Bribes in the private sector appear to be flat-rate fees paid by patients who do not pay official fees. I do not find evidence that the public health care sector in either Peru or Uganda is able to price-discriminate less effectively than public institutions with less competition from the private sector.
    JEL: H4 K4 O1
    Date: 2007–04
  13. By: Satoshi Yamazaki; Budy P. Resosudarmo
    Abstract: The Farmer Field School (FFS) is an intensive training program providing farmers with science based knowledge and practices, including integrated pest management (IPM). Recently there has been intensive debate as to whether or not this kind of training has any significant impact. Most case studies argue that the impact, in terms of a farmer’s ability to reduce the use or pesticides while increasing yields, is significant. However, studies conducted by Feder et al., using a household panel data set for Indonesia, could not confirm that this is the case. This paper utilizes Feder et al.’s data set and applies a modified model specification and a spatial econometric technique to re-evaluate whether or not the FFS induces better performances among farmers enrolled in the program and also among their neighbors, who are expected to receive some spillover knowledge from the FFS alumna.
    Keywords: agricultural economics, spatial econometrics, economic development
    JEL: Q12 C59 O13
    Date: 2007
  14. By: Günther Rehme (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: In this paper it is shown that it matters a lot for empirical research whether policy is taken to be exogenously set or to be endogenous. In the model investment depends on policy which depends on economically important fundamentals and is, thus, endogenous. Conditioning on factor accumulation in growth regressions that also include endogenous policy variables may then be problematic. When policy is endogenous the measured effects of policy on growth will generally be biased. Based on the model and OECD data, the signs of the biases for tax variables related to the tax base and for redistribution are derived. Based on these signed biases the paper discusses some empirical results that seem puzzling from a theoretical viewpoint. The paper argues that regressing growth on policy may still yield important information if policy endogeneity is taken account of.
    Keywords: Growth, Policy, Cross-Sectional Models
    JEL: O4 D3 C2
    Date: 2007–04
  15. By: Jörg Baten; Jan Luiten van Zanden
    Abstract: Endogenous growth theory suggests that human capital formation plays a significant role for the ‘wealth and poverty of nations.’ In contrast to previous studies which denied the role of human capital as a crucial determinant of for really long-term growth, we confirm its importance. Indicators of human capital like literacy rates are lacking for the period of 1450-1913; hence, we use per capita book production as a proxy for advanced literacy skills. This study explains how, and to what extent, growth disparities are a function of human capital formation.
    Keywords: Book Produktion, Economic Growth, Human Capital
    JEL: O14 O40 N10
    Date: 2007–04
  16. By: Reynal-Querol, Marta; Loayza, Norman V.; Chen, Siyan
    Abstract: Using an " event-study " methodology, this paper analyzes the aftermath of civil war in a cross-section of countries. It focuses on those experiences where the end of conflict marks the beginning of a relatively lasting peace. The paper considers 41 countries involved in internal wars in the period 1960-2003. In order to provide a comprehensive evaluation of the aftermath of war, the paper considers a host of social areas represented by basic indicators of economic performance, health and education, political development, demographic trends, and conflict and security issues. For each of these indicators, the paper first compares the post- and pre-war situations and then examines their dynamic trends during the post-conflict period. The paper concludes that, even though war has devastating effects and its aftermath can be immensely difficult, when the end of war marks the beginning of lasting peace, recovery and improvement are indeed achieved.
    Keywords: Population Policies,Peace & Peacekeeping,Post Conflict Reintegration,Services & Transfers to Poor,Social Conflict and Violence
    Date: 2007–04–01
  17. By: Reynal-Querol, Marta; Montalvo, Jose G.
    Abstract: The authors analyze the relationship between ethnic polarization and the duration of civil wars. Several recent papers have argued that the uncertainty about the relative power of the contenders in a war will tend to increase its duration. In these models, uncertainty is directly related to the relative size of the contenders. The authors argue that the duration of civil wars increases the more polarized a society is. Uncertainty is not necessarily linked to the structure of the population but it could be traced back to the measurement of the size of the different groups in the society. Given a specific level of measurement error or uncertainty, more polarization implies lengthier wars. The empirical results show that ethnically polarized countries have to endure longer civil wars than ethnically less polarized societies.
    Keywords: Social Conflict and Violence,Population Policies,Peace & Peacekeeping,Post Conflict Reintegration,Services & Transfers to Poor
    Date: 2007–04–01
  18. By: Ostby, Gudrun
    Abstract: Several studies of civil war have concluded that economic inequality between individuals does not increase the risk of internal armed conflict. This is perhaps not so surprising. Even though an individual may feel frustrated if he is poor compared with other individuals in society, he will not start a rebellion on his own. Civil wars are organized group conflicts, not a matter of individuals randomly committing violence against each other. Hence, we should not neglect the group aspect of human well-being and conflict. Systematic inequalities that coincide with ethnic, religious, or geographical cleavages in a country are often referred to as horizontal inequalities (or inter-group inequalities). Case studies of particular countries as well as some statistical studies have found that such inequalities between identity groups tend to be associated with a higher risk of internal conflict. But the emergence of violent group mobilization in a country with sharp horizontal inequalities may depend on the characteristics of the political regime. For example, in an autocracy, grievances that stem from group inequalities are likely to be large and frequent, but state repression may prevent them from being openly expressed. This paper investigates the relationship between horizontal inequalities, political environment, and civil war in developing countries. Based on national survey data from 55 countries it calculates welfare inequalities between ethnic, religious, and regional groups for each country using indicators such as household assets and educational levels. All the inequality m easures, particularly regional inequality, are positively associated with higher risks of conflict outbreak. And it seems that the conflict potential of regional inequality is stronger for pure democratic and intermediate regimes than for pure autocratic regimes. Institutional arrangements also seem to matter. In fact it seems that the conflict potential of horizontal inequalities increases with more inclusive electoral systems. Finally, the presence of both regional inequalities and political exclusion of minority groups seems to make countries particularly at risk for conflict. The main policy implication of these findings is that the combination of politically and economically inclusive government is required to secure peace in developing countries.
    Keywords: Population Policies,Social Conflict and Violence,Education and Society,Parliamentary Government,Services & Transfers to Poor
    Date: 2007–04–01
  19. By: Oyefusi, Aderoju
    Abstract: This paper attempts to explain the determinants of the propensity to armed struggle and the probability of participation by individuals in t he Niger Delta region of Nigeria using primary (micro) data. While grievance appears to be pervasive among individuals and communities in the region and can be systematically explained, neither the grievance level nor its commonly cited causal factors appear to be strong enough to create a disposition toward armed rebellion. Rather, factors that reduce the opportunity cost and risk of participation or increase the perceived benefits appear to be more important. The study identifies three of these factors that are amenable to the policymaker ' s (government ' s) control as income level, educational attainment, and government presence.
    Keywords: Social Conflict and Violence,Population Policies,Education and Society,Corporate Law,Community Development and Empowerment
    Date: 2007–04–01
  20. By: Jennings, Colin
    Abstract: The emphasis on constitutional political economy has been that new rules and institutions can be devised that improve the welfare of a society. Given the number of societies that are infected with political conflict and, as a result, lower levels of welfare, this pape r attempts to analyze why we do not see more constitutional conventions aimed at eliminating conflict. The key idea is that expressively motivated group members may create incentives for instrumentally motivated group leaders such that it leads them to choose conflict rather than compromise. Nonetheless, it is not argued that such a peace is impossible to obtain. This leads to a further question, that if such a constitutional agreement could be found, would the expressive perspective alter the conventional instrumental perspective on the sort of constitutional reform that should be undertaken?
    Keywords: Education and Society,Post Conflict Reintegration,Peace & Peacekeeping,Social Conflict and Violence,Services & Transfers to Poor
    Date: 2007–04–01
  21. By: Maurer, Luiz; Bogetic, Zeljko; Kessides, Ioannis N.
    Abstract: One of the contentious issues in electricity reform is whether there are significant gains from restructuring systems that are moderately well run. South Africa ' s electricity system is a case in point. The sector ' s state-owned utility, Eskom, has been generating some of the lowest-priced electricity in the world, has largely achieved revenue adequacy, and has financed the bulk of the government ' s ambitious electrification program. Moreover, the key technical performance indicators of Eskom ' s generation plants have reached world-class levels. Yet the sector is confronted today with serious challenges. South Africa ' s electricity system is currently facing a tight demand/supply balance, and the distribution segment of the industry is in serious financial trouble. This paper provides a careful diagnostic assessment of the industry and identifies a range of policy and restructuring options to improve its performance. It suggests removing distribution from municipal control and privatizing it, calls for vertical and horizontal unbundling, and argues that the cost-benefit analysis of different structural options should focus on investment incentives and not just current operating efficiency.
    Keywords: Energy Production and Transportation,Electric Power,Environment and Energy Efficiency,Energy and Environment,Infrastructure Economics
    Date: 2007–04–01
  22. By: Kessides, Ioannis N.; Chisari, Omar O.
    Abstract: This paper uses an analytically tractable intertemporal framework for analyzing the dynamic pricing of a utility with an underdeveloped network (a typical case in most developing countries) facing a competitive fringe, short-run network adjustment costs, theft of service, and the threat of a retaliatory regulatory review that is increasing with the price it charges. This simple dynamic optimization model yields a number of powerful policy insights and conclusions. Under a variety of plausible assumptions (in the context of developing countries) the utility will find its long-run profits enhanced if it exercises restraint in the early stages of network development by holding price below the limit defined by the unit costs of the fringe. The utility ' s optimal price gradually converges toward the limit price as its network expands. Moreover, when the utility is threatened with retaliatory regulatory intervention, it will generally have incentives to restrain its pricing behavior. These findings have important implications for the design of post-privatization regulatory governance in developing countries.
    Keywords: Ec onomic Theory & Research,Markets and Market Access,Urban Water Supply and Sanitation,Infrastructure Regulation,Access to Markets
    Date: 2007–04–01
  23. By: Jennifer Hunt
    Abstract: Using cross–country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non–victims to bribe public officials. Misfortune increases victims’ demand for public services, raising bribery indirectly, and also increases victims’ propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
    Keywords: Corruption, bribery, governance
    JEL: H1 K4 O1
    Date: 2006–08–01
  24. By: Sumon Bhaumik; Shubhasish Gangopadhyay; Shagun Krishnan
    Abstract: Productivity growth has long been associated with, among others, contestability of markets which, in turn, is dependent on the ease with which potential competitors to the incumbent firms can enter the product market. There is a growing consensus that in emerging markets regulatory and institutional factors may have a greater influence on a firm’s ability to enter a product market than strategic positions adopted by the incumbent firms. We examine this proposition in the context of India where the industrial policies of the eighties and the nineties are widely believed to be pro-incumbent and procompetition, respectively, thereby providing the setting for a natural experiment with 1991 as the watershed year. In our analysis, we also take into consideration the possibility that the greater economic federalism associated with the reforms of the nineties may have affected the distribution of industrial units across states after 1991. Our paper, which uses the experiences of the textiles and electrical machinery sectors during the two decades as the basis for the analysis, finds broad support for both these hypotheses.
    Keywords: Entry, Institutions, Regulations, India, Textiles, Electrical Machinery, Reforms
    JEL: L11 L52 L64 L67 O14 O17
    Date: 2006–11–01
  25. By: Yuko Kinoshita; Chia-Hui Lu
    Abstract: The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country to grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a lowgrowth equilibrium. We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They support the model that FDI and infrastructure are complementary in affecting per capita GDP growth.
    Keywords: foreign direct investment; economic growth, technology diffusion, infrastructure
    JEL: F21 O40 O33 H54
    Date: 2006–11–01
  26. By: Sumon Kumar Bhaumik; Manisha Chakrabarty
    Abstract: Few researchers have examined the nature and determinants of earnings differentials among religious groups, and none has been undertaken in the context of conflict-prone multi-religious societies like the one in India. We address this lacuna in the literature by examining the differences in the average (log) earnings of Hindu and Muslim wage earners in India, during the 1987-2004 period. Our results indicate that education differences between Hindu and Muslim wage earners, especially differences in the proportion of wage earners with tertiary education, are largely responsible for the differences in the average (log) earnings of the two religious groups across the years. By contrast, differences in the returns to education do not explain the aforementioned difference in average (log) earnings. Citing other evidence about persistence of educational achievements across generations, however, we argue that attempts to narrow this gap using quotas for Muslim households at educational institutions might be counterproductive from the point of view of conflict avoidance.
    Keywords: earnings gap, education, decomposition, religion
    JEL: J31 J15 I28
    Date: 2007–01–01
  27. By: Aleksander Aristovnik
    Abstract: The main aim of the paper is to examine the short- and medium-term empirical link between current account balances and a broad set of (economic) variables proposed by theoretical and empirical literature. The paper focuses on the Middle East and North Africa (MENA), an economically diverse region, which has so far mainly been neglected in such empirical analyzes. For this purpose, a (dynamic) panel-regression technique is used to characterize the properties of current account variations across selected MENA economies in the 1971-2005 period. The results, which are generally consistent with theoretical and previous empirical analyses, indicate that higher (domestic and foreign) investment, government expenditure and foreign interest rates have a negative effect on the current account balance. On the other hand, a more open economy, higher oil prices and domestic economic growth generate an improvement in the external balance, whereas the latter implies that the domestic growth rate is associated with a larger increase in domestic savings than investment. Finally, the results show a relatively high persistency of current accounts and reject the validity of the stages of development hypothesis as poorer countries in the region reveal a higher current account surplus (or lower deficit).
    Keywords: MENA countries, current account, determinants, dynamic panel data
    JEL: C23 F32 O53
    Date: 2007–03–01
  28. By: Balázs Égert; Carol S. Leonard
    Abstract: In this paper we explore the evidence that would establish that Dutch disease is at work in, or poses a threat to, the Kazakh economy. Assessing the mechanism by which fluctuations in the price of oil can damage non-oil manufacturing—and thus long-term growth prospects in an economy that relies heavily on oil production—we find that non-oil manufacturing has so far been spared the perverse effects of oil price increases from 1996 to 2005. The real exchange rate in the open sector has appreciated over the last couple of years, largely due to the appreciation of the nominal exchange rate. We analyze to what extent this appreciation is linked to movements in oil prices and oil revenues. Econometric evidence from the monetary model of the exchange rate and a variety of real exchange rate models show that the rise in the price of oil and in oil revenues might be linked to an appreciation of the U.S. dollar exchange rate of the oil and non-oil sectors. But appreciation is mainly limited to the real effective exchange rate for oil sector and is statistically insignificant for non-oil manufacturing.
    Keywords: Dutch Disease, Kazakhstan, real exchange rate
    JEL: F31 F36 O11
    Date: 2007–03–01
  29. By: James L. Butkiewicz (Department of Economics,University of Delaware); Halit Yanikkaya
    Abstract: Empirical evidence from a panel-data analysis indicates that a mineral resource curse exists for certain developing countries, but not for developed countries. Countries with weak institutions are cursed, while developing countries with strong institution are able to avoid the curse. These results are consistent the hypothesis that owners of mineral resources use weak institutions and openness to trade to stifle the development of human capital, to the detriment of growth of other sectors of the economy. Imports of manufactured goods substitute for the development of domestic manufacturing, so openness to trade correlates with lower growth in mineral dependent countries.
    Keywords: Mineral Resources, Institutional Quality, Economics Growth
    JEL: Q32 O11 O50
  30. By: John Knight; Ramani Gunatilaka
    Abstract: This paper may be the first to link the literatures on migration and on subjective well-being in developing countries. It poses the question: why do rural-urban migrant households settled in urban China have an average happiness score lower than that of rural households? Three basic hypotheses are examined: migrants had false expectations about their future urban conditions, or about their future urban aspirations, or about their future selves. Estimated happiness functions and decomposition analyses, based on a 2002 national household survey, indicate that certain features of migrant conditions make for unhappiness, and that their high aspirations in relation to achievement, influenced by reference groups, also make for unhappiness. It is difficult to form unbiased expectations about life in a new and different world.
    Keywords: Rural-urban migration, Subjective well-being, Happiness, Relative deprivation, Aspirations, China
    JEL: I32 O15
    Date: 2007
  31. By: Lucia Dalla Pellegrina
    Abstract: Using data from a World Bank survey carried out in Bangladesh during the period 1991-1992, we compare the impact of microfinance programs and other types of credit on agricultural investment. After controlling for several measurable determinants of credit agreements, such as interest rates and collateral, estimates still show that microfinance programs are more likely to increase variable input expenditure than informal and bank credit are able to do. This provides evidence that microfinance incentive devices (joint responsibility, peer monitoring, social sanctions, future credit denial in case of default, etc.), perhaps together with other services associated with programs, are effective in order to promote a productive use of funds.
    Keywords: Microfnance, Banks, Informal lending, Investment.
    JEL: O16 O17 G21
    Date: 2007–04
  32. By: Dean Karlan; Martin Valdivia
    Abstract: Can one teach basic entrepreneurship skills, or are they fixed personal characteristics? Most academic and development policy discussions about microentrepreneurs focus on their access to credit, and assume their human capital to be fixed. The self-employed poor rarely have any formal training in business skills. However, a growing number of microfinance organizations are attempting to build the human capital of micro-entrepreneurs in order to improve the livelihood of their clients and help further their mission of poverty alleviation. Using a randomized control trial, we measure the marginal impact of adding business training to a Peruvian group lending program for female microentrepreneurs. Treatment groups received thirty to sixty minute entrepreneurship training sessions during their normal weekly or monthly banking meeting over a period of one to two years. Control groups remained as they were before, meeting at the same frequency but solely for making loan and savings payments. We find that the treatment led to improved business knowledge, practices and revenues. The program also improved repayment and client retention rates for the microfinance institution. Larger effects found for those that expressed less interest in training in a baseline survey. This has important implications for implementing similar market-based interventions with a goal of recovering costs.
    Keywords: entrepreneurship, microentrepreneur, business skills, business training, credit
    JEL: M13 M0 M40
  33. By: Dean Karlan; Jonathan Zinman
    Abstract: Expanding access to credit is a key ingredient of development strategies worldwide, and the microfinance industry is generally credited with success in helping to alleviate poverty and improve the lives of the poor. But there is less consensus on the role of consumer loans in credit expansion initiatives. In fact, many practitioners and policymakers are skeptical about the benefits of consumer lending. This working paper by CGD non-resident fellow Dean Karlan and Jonathan Zinman estimates the impacts of expanding the consumer credit supply using a South African field experiment in which some loan applicants who had been denied credit were randomly selected to be "unrejected" for a loan. They find that compared to those who did not receive credit, borrowers showed increased employment, reduced hunger and reduced poverty. The loans also appear to have been profitable for the lender. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106-111).
    Keywords: access to credit, microfinance, consumer loans
    JEL: G21 M20
  34. By: Dean Karlan; Jonathan Zinman
    Abstract: Information asymmetries--which occur when one party to a transaction has more or better information than the other party--such as moral hazard or adverse selection, can cause inefficiency, overinvestment, or poverty traps. Unfortunately, they are difficult to identify in practice. This working paper by Dean Karlan, CGD non-resident fellow, and his co-author provides a microfoundation for studying the real effects of credit constraints by identifying the presence (or absence) of two specific credit market failures: adverse selection adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The experiment identifies information asymmetries by randomizing loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate" featured on the direct mail solicitation, the actual interest rate on the loan contract revealed only after the borrower agreed to the initial offer rate, and the interest rate on future loans offered only to those who remained in good standing. Findings show evidence of moral hazard with weaker evidence of adverse selection. A rough calibration shows that approximately 7% to 16% of default is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: Information asymmetries, adverse selection, moral hazard, microfinance, credit market
    JEL: G21 M20 E51 D82
  35. By: Dean Karlan; Jonathan Zinman
    Abstract: Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. However, existing research provides little evidence on interest rate sensitivities in MFI target markets as well as little guidance on how to derive rates. MFI policymakers generally presume that the poor are largely insensitive to interest rates and recommend that MFIs increase interest rates without fear of diminishing access. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. A for-profit South African lender worked with the authors to randomize 50,000 individual interest rate direct mail offers and tracked gross revenue and repayment, allowing the authors to access the effects on the targeted access margin that interests policymakers. They also worked with the lender to explore a margin of loan contracting that has been largely ignored by academics, policy makers and practitioners: loan maturity. They found that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: interest rates, subsidies,credit elasticity,loan maturity, microfinance, credit market
    JEL: G21 M20 E51 E43 H20
  36. By: Dean Karlan; Xavier Giné
    Abstract: This working paper by CGD non-resident fellow Dean Karlan explores whether group liability in lending practices improves lender's overall profitability and the poor's access to financial markets. Group liability is a common microcredit lending mechanism that makes a group, rather than an individual recipient, responsible for repayment. It claims to improve repayment rates by providing incentives for peer's to screen, monitor and enforce each other's loans. But some argue that group liability actually discourages good clients from borrowing by creating tension among group members and causing dropouts, jeopardizing growth and sustainability. Also, bad clients can "free ride" off of good clients causing default rates to rise. In this paper, Karlan and his co-authors discuss the results of a field experiment at a bank in the Philippines, where they randomly reassigned half of the existing group liability centers as individual liability centers. They find that converting group liability to individual liability, while keeping aspects of group lending like weekly repayments and common meeting place, does not affect the repayment rate, and actually attracts new clients. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: group liability, lending practices, financial markets, repayment rates, free ride, Philippines
    JEL: G10 G21 M20 D81 D71
  37. By: Nancy Birdsall
    Abstract: The implicit assumption of the donor community is that Africa is trapped by its poverty, and that aid is necessary if Africa is to escape the trap. In this note I suggest an alternative assumption: that Africa is caught in an institutional trap, signaled and reinforced by the small share of income of its independent middle-income population. Theory and historical experience elsewhere suggest that a robust middle-income group contributes critically to the creation and sustenance of healthy institutions, particularly healthy institutions of the state. I propose that if external aid is to be helpful for institution-building in Africa’s weak and fragile states, donors need to emphasize not providing more aid but minimizing the risks more aid poses for this group in Africa. Most middle-income households in Africa are actually poor by international standards, or at risk of becoming poor. While maintaining their concern for the “poor” as conventionally defined, donors need also to avoid harm to the fragile “middle”. Of special concern should be the implications of high and unpredictable aid inflows for small entrepreneurial activity and job creation in the private sector. In the more than 20 countries already highly dependent on aid (where aid constitutes 10 percent or more of GNP and as much as 50 percent of total government spending), donors (in collaboration with recipient governments) should be monitoring more closely than has been the case the effects of aid and of planned aid increases on the labor market, particularly for skilled workers; on interest rates and other macroeconomic variables; on domestic investor confidence (given the volatility of past aid); and on incentives for domestic revenue generation.
    Keywords: sub-Saharan African, institution-building, external aid, weak and fragile states, private sector, domestic investor confidence, private investment
    JEL: E0 F33 F34 F35 O43
  38. By: Neil McCulloch; C. Peter Timmer; Julian Weisbrod
    Abstract: Most poor people in developing countries still live in rural areas and are primarily engaged in low productivity farming activities. Thus pathways out of poverty are likely to be strongly connected to productivity increases in the rural economy, whether they are realised in farming, rural non-farm enterprises or via rural-urban migration. We use cross-sectional data from the Central Statistical Board (BPS) for 1993 and 2002, as well as a panel data set from the Indonesia Family Life Survey (IFLS) for 1993 and 2000, to show which pathways out of poverty were most successful over this period. Our findings suggest that increased engagement of farmers in rural non-farm enterprises is an important route out of rural poverty, but that most of the rural agricultural poor that exit poverty still do so while remaining rural and agricultural. Thus changes in agricultural prices, wages and productivity still play a critical role in moving people out of poverty.
    Keywords: Poverty dynamics, non-farm sector, micro-growth regression
    JEL: O12 O13 O18 O53 R11
  39. By: David Goldsbrough and; Ben Elberger
    Abstract: This paper examines the nature of aid projections in IMF programs with low-income countries. On average, IMF projections of net aid increased sharply in the first year of programs but tapered off in subsequent years. Projections were also significantly more optimistic in countries with low initial levels of aid but differed little across regions. Most notably, projections of net aid to countries in Sub-Saharan Africa following the Gleneagles Summit are significantly more pessimistic than the path implied by commitments to double aid to Africa by 2010. This pattern is strong throughout the group with only two Sub-Saharan African countries showing increases in net aid consistent with the Gleneagles commitments. We argue that much greater clarity is needed about the role of the IMF in the aid architecture. In addition to projecting likely aid flows based on detailed discussions with donors, the IMF should utilize sector-level inputs to assess the macroeconomic effects of a significant scaling-up of aid in programs with low-income countries. Such a scenario would help the international community and the country itself judge whether there are any macroeconomic constraints to absorbing more aid. The obvious benchmark to use for aid levels in such a scenario would be what donors have committed to globally--i.e. a doubling of aid in the case of African countries. Finally, we conclude that the IMF should be more transparent about what its collective program projections imply for the expected path of global aid flows.
    Keywords: International Monetary Fund, foreign aid, ODA, projections, Gleneagles Summit,macroeconomic frameworks, macroeconomic programs, Africa
    JEL: F33 F35 F37
  40. By: Mamoon, Dawood
    Abstract: Recently there has been an influx of literature which tries to find out relationship between trade and poverty. Right is of the view that more international trade is good for the poor whereas left is quite skeptical of pro poor effects of trade. The paper provides a comprehensive review of recent literature on the topic in order to reach some neutral grounds. The paper finds out that though trade might carry positive affects for the poor in developing countries through growth, such gains are not equally distributed among the rich and the poor. The paper identifies at least 8 different effects of international trade which result in unequal outcomes and thus defies Heckscher-Ohlin-Samuelson theorem in a developing country set up. Since per decomposition, poverty is affected by growth or inequality, evidence of unequal gains from trade does imply that the relationship between trade and poverty is not as simple as the right seems to suggest. To this effect, the paper calls for more empirical work on trade and inequality especially as single country case studies.
    Keywords: Economic Integration; Welfare and Poverty
    JEL: F15 F16 F11 I30
    Date: 2007
  41. By: Takahashi, Kazushi; Otsuka, Keijiro
    Abstract: This paper attempts to identify a pathway out of poverty over generations in the rural Philippines, based on long-term panel data spanning for nearly a quarter of a century. Specifically, it sequentially examines the determinants of schooling, subsequent occupational choices, and current non-farm earnings for the same individuals. We found that an initial rise in parental income, brought about by the land reform and the Green Revolution, among other things, improves the schooling of children, which later allows them to obtain remunerative non-farm jobs. These results suggest that the increased agricultural income, improved human capital through schooling and the development of non-farm sectors are the keys to reducing poverty in the long run. It must be also pointed out that the recent development of the rural non-farm sector offers ample employment opportunities for the less educated, which also significantly contributed to the poverty reduction.
    Keywords: Intergenerational poverty dynamics, Child schooling, Occupational choice, Non-farm earnings, Philippines, Poverty, Rural societies, Human resources
    JEL: I32 J24 J62 O15
    Date: 2007–03
  42. By: Fujita, Mai
    Abstract: This paper examines the impact of China’s recent rise on the development of local firms in latecomer developing countries. Based on a detailed analysis of Vietnam’s motorcycle industry, the paper argues that China’s impact may go beyond what a trade analysis suggests. Indeed, China’s rise induced a dynamic transformation in the structure of value chains within Vietnam’s motorcycle industry, bringing about far-reaching consequences on the development and upgrading trajectories of local firms. The implications of the case study for the wider “global value chain†approach is also discussed.
    Keywords: Global value chain, Motorcycle industry, Vietnam, China, Upgrading, Motorcycles
    JEL: F23 L22 L62
    Date: 2007–03
  43. By: Muhammad Arshad Khan (Pakistan Institute of Development Economics, Islamabad); Abdul Qayyum (Pakistan Institute of Development Economics, Islamabad)
    Abstract: This paper empirically investigates the impact of trade and financial liberalisation on economic growth in Pakistan using annual observations over the period 1961-2005. The analysis is based on the bound testing approach of cointegration advanced by Pesaran, et al. (2001). The empirical findings suggest that both trade and financial policies play an important role in enhancing economic growth in Pakistan in the long-run. However, the short-run responses of the real deposit rate and trade policy variables are very low, suggesting further acceleration of the reform process. The feedback coefficient suggests a very slow rate of adjustment towards long-run equilibrium. The estimated equation remains stable over the period of study as indicated by CUSUM and CUSUMQ stability tests.
    Keywords: Trade Liberalisation, Financial Development, Economic Growth, Bound Test
    JEL: F43 G10 O10 C22
    Date: 2007
  44. By: Asma Hyder (Pakistan Institute of Development Economics, Islamabad)
    Abstract: This paper exploits responses on the stated preferences for public sector jobs among a sample of unemployed in Pakistan to inform on the existence of public sector job queues. The empirical approach allowed job preference to influence unemployment duration. The potential wage advantage an unemployed individual would enjoy in a public sector job was found to exert no independent influence on the stated preference indicating that fringe benefits and work conditions are perhaps more important considerations. The stated preference for a public sector job was found to be associated with higher uncompleted durations. The estimated effect suggests that, on average and controlling for education and other characteristics, those unemployed who stated a preference for public sector jobs had higher uncompleted durations of between four and six months. This finding was taken to confirm that there are long queues for public sector jobs in Pakistan.
    Keywords: Wage Differentials, Wage Structure, Unemployment: Models, Duration, Incidence, and Job Search
    JEL: J31 J64
    Date: 2007

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