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on Development |
| By: | Vikram Nehru (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper examines the complementary and competitive roles of the World Bank and the Asian Development Bank (ADB) in Asia given the backdrop of a changing world in which development priorities and challenges are changing rapidly and the rapid expansion of financial flows to developing countries is challenging the influence of these organizations. The paper highlights changes to the international aid architecture, its increasing fragmentation, the rise of non-traditional donors, and recent efforts at improving aid coordination. With this background, the paper examines the roles of the World Bank and ADB in Asia, provides some comparisons of their performance, notes their overlapping responsibilities, and explains current approaches to coordination and cooperation between them. After examining alternative approaches toward improving the division of labor between the two organizations, the author concludes that the most likely scenario will be one of “muddling through†in which stakeholders are likely to tinker at the margins at sharpening the specialization of each institution rather than push through any radical reallocation of financial and knowledge management responsibilities. |
| Keywords: | the World Bank, ADB, aid coordination |
| JEL: | F34 O1 O19 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23346&r=dev |
| By: | Addison, Tony; Anand, P. B. |
| Abstract: | The central argument of this study is that given the magnitude of the investment in infrastructure that is required, especially in Africa, the role of foreign aid in the future should be distinctly different. While aid will be required to continue to fill |
| Keywords: | aid, infrastructure, Africa, finance, funds, private sector |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-56&r=dev |
| By: | Conor M. O.Toole |
| Abstract: | This paper considers the effect of financial liberalisation on access to investment finance using firm level data covering 57 developing and transition countries. An index is presented which measures financial market liberalisation along the following pol |
| Keywords: | Financial liberalisation, access to credit, firm level investment |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-67&r=dev |
| By: | van de Walle, Nicolas |
| Abstract: | Mali long seemed a model, low-income democracy. Yet, in a few short weeks in early 2012, more than half of the territory came under the military control of an Islamist secessionist movement, and a military coup deposed the democratically-elected governmen |
| Keywords: | Mali, democracy, foreign aid, military coup, inequality |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-61&r=dev |
| By: | Bevan, David |
| Abstract: | This paper sets out to provide an introduction to two sets of questions, and to some relevant literature that has tried to answer them. The first set of questions concern what determines growth in low-income countries, and how the answers are conditioned |
| Keywords: | structural change, low-income countries, environment, public capital and public financing |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-77&r=dev |
| By: | Acharya, Arnab; Alvarez, Melisa Mart.nez |
| Abstract: | This paper explores the current evidence underlying the debate on aid effectiveness, with a specific focus on the health sector. It summarizes the history of aid and outlines the methodological challenges encountered when assessing its effectiveness. The |
| Keywords: | aid effectiveness, health, fungibility, harmonization |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-69&r=dev |
| By: | Siba, Eyerusalem; Soderbom, Mans; Bigsten, Arne; Gebreeyesus, Mulu |
| Abstract: | We use census panel data on Ethiopian manufacturing firms to analyze the connections between enterprise agglomeration, firm-level output prices and physical productivity. We find a negative and statistically significant relationship between the agglomerat |
| Keywords: | agglomeration, productivity, output prices, firm-level data, Ethiopia, Africa, manufacturing |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-85&r=dev |
| By: | Jayaraj, D.; Subramanian, S. |
| Abstract: | This paper reviews the evidence on the .inclusiveness. of the growth in consumption expenditure that has occurred in India over the last four decades or so. The notion of dynamic inclusiveness is framed in terms of imagined normative allocations of the in |
| Keywords: | absolute inequality, relative inequality, equal division rule, vertical inclusiveness, horizontal inclusiveness |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-57&r=dev |
| By: | Bhalotra, Sonia; Umana-Aponte, Marcela |
| Keywords: | insurance, women.s labour supply, added worker effect, business cycles, Africa |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-66&r=dev |
| By: | Neumann, James E.; Emanuel, Kerry A.; Ravela, Sai; Ludwig, Lindsay C.; Verly, Caroleen |
| Abstract: | This paper considers the impact of sea level rise and storm surge on the Red River delta region of Vietnam an area already known to be highly vulnerable to coastal risks. By combining a range of sea level rise scenarios for 2050 with the simulated storm s |
| Keywords: | sea level rise, storm surge, tropical cyclone risk, flood risk, South East Asia |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-81&r=dev |
| By: | Fields, Gary |
| Abstract: | Various development objectives are worthy, but to my mind, one objective dominates all others: reducing the scourge of absolute economic misery in the world. In this paper, I focus on an important but relatively underemphasized approach to poverty reducti |
| Keywords: | foreign assistance, economic growth, employment, poverty, developing countries |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-86&r=dev |
| By: | Quibria, M.G. |
| Abstract: | This paper explores the relationship between microcredit and poverty reduction. To investigate this question, we posit a bare-bone, household model that outlines the economic environment within which various types of family microenterprises operate. It hi |
| Keywords: | microcredit, poverty reduction, labour market, and intra-household decision-making |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-78&r=dev |
| By: | Marjit, Sugata |
| Abstract: | In the presence of inequality a status-driven utility function reconciles the conflict between income-based and nutrition-based measures of poverty. Moreover, it can explain why the poor tend to save less, an established empirical fact in the developing c |
| Keywords: | inequality, inter-temporal consumer choice, utility, poverty |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-58&r=dev |
| By: | Stefan Leiderer |
| Abstract: | The .right. choice of instruments and modalities to provide aid to developing countries in support of poverty reduction and economic development is arguably the most contested issue in the current international debate on aid effectiveness. A particular co |
| Keywords: | aid, fungibility, government spending |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-68&r=dev |
| By: | Chinowsky, Paul S.; Schweikert, Amy E.; Strzepek, Niko L.; Strzepek, Kenneth |
| Abstract: | Climate change is a potential threat to Vietnam.s development as current and future infrastructure will be vulnerable to climate change impacts. This paper focuses on the physical asset of road infrastructure in Vietnam by evaluating the potential impact |
| Keywords: | climate change, road infrastructure, stressor response functions, Vietnam |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-80&r=dev |
| By: | Binagwaho, Agnes; Hartwig, Renate; Ingeri, Denyse; Makaka, Andrew |
| Abstract: | Rwanda is among the few countries in Sub-Saharan Africa and the developing approaching universal health insurance coverage. To date, over 90 per cent of the population are enrolled in the Mutuelles de Santé - a system that started off from a number of stand-alone community based health insurance schemes and gradually evolved into a unified social health insurance plan. The country has also made remarkable progress in ameliorating child health, particularly since 2005, which coincides with the year when the Mutuelles de Santé was standardised and raises the question to what extent the insurance scheme did contribute to the observed improvements. In order to address this issue we conduct a quantitative impact evaluation using nationally representative micro-data from the 2005 and 2010 Rwandan Demographic and Health Surveys (RDHSs) and also consider potential channels from which improvements could originate. Our results suggest the following: The Mutuelles de Santé improves access to preventative and curative health services. Insured households are more sensitive to health issues, in the sense that they are more inclined to use bed nets and ensure safe drinking water. Despite a weak effect on health outcomes overall, the insurance scheme seems to have contributed to improvements in stunting and mortality, at the critical ages (before the age of two). -- |
| Keywords: | Health Insurance,Child Health,Mutuelles de Santé,Rwanda |
| JEL: | I11 I38 J13 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:upadvr:v6612&r=dev |
| By: | Sawada, Yasuyuki; Kasahara, Ryuji; Aoyagi, Keitaro; Shoji, Masahiro; Ueyama, Mika |
| Abstract: | In a canonical model of collective action, individual contribution to collective action is negatively correlated with group size. Empirical evidence on the group size effect has been mixed, partly due to heterogeneities in group activities. In this paper, we first construct a simple general model of collective action with the free-riding problem, altruism, public goods, and positive externalities of social networks. We then empirically test the theoretical implications of group size effect on individual contribution to four different types of collective action, i.e., monetary or nonmonetary contribution to directly or indirectly productive activities. To achieve this, we collect and employ artefactual field experimental data such as public goods and dictator games conducted in southern Sri Lanka under a natural experimental situation where the majority of farmers were relocated to randomly selected communities based on the government lottery. This unique situation enables us to identify the causal effects of community size on collective action. We find that the levels of collective action can be explained by the social preferences of farmers; we show evidence on the free-riding by self-interested households with no land holdings. The pattern of collective action, however, differs significantly by the mode of activities; the collective action which is directly related to production is less likely to suffer from the free rider problem than from indirectly productive activities. Finally, the monetary contribution is less likely to cause the free riding than the non-monetary contribution. |
| Keywords: | collective action , social preference , natural and artefactual field experiment , irrigation , South Asia |
| Date: | 2012–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:jic:wpaper:47&r=dev |
| By: | Lagrange, Arthur Alik; Ravallion, Martin |
| Abstract: | Prevailing practices in evaluating workfare programs have ignored the disutility of the type of work done, with theoretically ambiguous implications for the impacts on poverty. In the case of India's National Rural Employment Guarantee Scheme, past assessments have relied solely on household consumption per person as the measure of economic welfare. The paper generalizes this measure to allow for the disutility of casual manual work. The new measure is calibrated to the distribution of the preference parameters implied by maximization of an idiosyncratic welfare function assuming that there is no rationing of the available work. The adjustment implies a substantially more"poor-poor"incidence of participation in the scheme than suggested by past methods. However, the overall impacts on poverty are lower, although still positive. The main conclusions are robust to a wide range of alternative parameter values and to allowing for involuntary unemployment using a sample of (self-declared) un-rationed workers. |
| Keywords: | Rural Poverty Reduction,Economic Theory&Research,Labor Markets,Services&Transfers to Poor |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6272&r=dev |
| By: | Beath, Andrew; Christia, Fotini; Enikolopov, Ruben |
| Abstract: | In societies with widespread gender discrimination, development programs that encourage female participation in local governance can potentially redress gender imbalances in economic, political, and social outcomes. Using a randomized field experiment encompassing 500 Afghan villages, this study finds that a development program which incorporates mandated female participation increases female mobility and involvement in income generation, but does not change female roles in family decision-making or attitudes toward the general role of women in society. |
| Keywords: | Gender and Law,Gender and Health,Housing&Human Habitats,Anthropology,Gender and Development |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6269&r=dev |
| By: | Pitt, Mark M.; Khandker, Shahidur R. |
| Abstract: | "The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence,"by David Roodman and Jonathan Morduch (2011) is the most recent of a sequence of papers and postings that seeks to refute the findings of the Pitt and Khandker (1998) article"The Impact of Group-Based Credit on Poor Households in Bangladesh: Does the Gender of Participants Matter?"that microcredit for women had significant, favorable effects on poverty reduction. In this paper the authors show that these latest Roodman and Morduch claims are based on seriously flawed econometric methods and theory and a lack of due diligence in formulating models and interpreting output from packaged software. On the basis of Roodman and Morduch's preferred two-stage least squares regression, an alternative calculation of the standard errors would lead one to conclude that the problem with Pitt and Khandker is that they underestimate the positive and statistically significant effect of women's credit on household consumption. As in their previous efforts, the methods of Roodman and Morduch are shown to bias the findings in the direction of rejecting the results of Pitt and Khandker. We also further examine two aspects of our instrumental variable approach that have been attacked by Roodman and Morduch. The first is the validity of the exclusion restrictions underlying the use of interactions between program choice and the set of exogenous variables (including the village fixed effects) as instruments. The second is the application of the"one-half acre"program eligibility rule. The authors show that identification does not require both of these, and present new results dropping each assumption in turn. The results originally reported in the Pitt and Khandker paper hold up extremely well in this new analysis. |
| Keywords: | Statistical&Mathematical Sciences,Economic Theory&Research,Econometrics,Scientific Research&Science Parks,Science Education |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6273&r=dev |
| By: | Andrews, Colin; Ovadiya, Mirey; Ribes Ros, Christophe; Wodon, Quentin |
| Abstract: | This paper presents an assessment of the first phase (2008?2009) of Sierra Leone's cash for work program based on a qualitative and quantitative analysis examining program design features, mainprocesses and impact. The assessment highlights that while cash for work was an appropriate crisis response, the challenge of achieving good targeting should not be underestimated. Findings from the assessment point to high inclusion errors of non?poor population quintiles, despite the program apparently many rules of best practice in program design. The assessment points to a series of factors to explain targeting performance, and future strategies consider mixed methods with a greater emphasis on the role of communities in affecting overall outcomes. The assessment notes areas of success during implementation, including the impact of the program in promoting cohesion amongst youth groups, as well as women. In this sense the assessment points to future strategies and options for moving cash for work forward under its expanded incarnation of the Youth Employment Support Project. Through the use of light qualitative and quantitative methods, the paper also advocates for similar assessments where monitoring and evaluation capacity are weak and time constraints tight. |
| Keywords: | Safety Nets and Transfers,Rural Poverty Reduction,Housing&Human Habitats,Poverty Monitoring&Analysis,Labor Markets |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:hdnspu:73719&r=dev |
| By: | Isik-Dikmelik, Aylin |
| Abstract: | Social benefits can potentially play an important role in protecting the poor and minimizing the impacts of an economic crisis. While many studies estimate the impacts of a crisis, there is little evidence of the actual response of social safety nets to systematic shocks. This study traces the response of social benefits during the 2008-10 global crisis for 14 countries in Europe and Central Asia (ECA). The study first sets out a framework for defining the'expected'response of social benefits covering an assessment of pre-crisis preparedness of social benefits and the severity of the crisis for all countries in the ECA region to provide the context; and then develops a typology of all countries categorized by expected response. Using this typology the study analyzes the monthly administrative data on the observed patterns within social benefit programs. Main findings indicate that actual responses were largely in line with expectations. Pre-crisis preparedness clearly influenced the ability of social benefits to respond to the crisis. Unemployment benefits were generally the first line of response in countries that have them, while social assistance programs also expanded coverage during the crisis. Lessons learned from the 2008?2010 global crisis (such as the importance of structural reform, design, and implementation which affect the success of social benefits programs in crisis response) are also presented. The study concludes with some policy recommendations to help ECA countries prepare for future crises. |
| Keywords: | Safety Nets and Transfers,Social Protections&Assistance,Labor Policies,Economic Theory&Research,Gender and Law |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:hdnspu:73696&r=dev |
| By: | Martijn Boermans; Daan Willebrands |
| Abstract: | Financial constraints and risk taking are two well-established determinants of firm performance, however, no research analyzes how these variables are connected in the context of a high risk environment. Using data from microfinance clients in Tanzania, we derive a novel financial constraints measure and incorporate a psychometric risk taking scale. Results confirm the importance of access to finance and risk attitudes for business development. Also, we provide preliminary evidence for an interaction between financial constraints and risk taking. Financial constraints “throw sand in the wheels” and protect risk taking entrepreneurs from the negative impact of risk taking on microenterprise performance. |
| Keywords: | micro-credit; access to finance; risk attitude; entrepreneurship; Africa |
| JEL: | D22 G29 O16 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:358&r=dev |
| By: | Nicholas Spaull (Department of Economics, University of Stellenbosch); Stephen Taylor (Department of Economics, University of Stellenbosch) |
| Abstract: | In this paper we question the existing practice of reporting enrolment statistics that ignore quality, but also quality-statistics that ignore enrolment differentials. The extant literature on education in Africa is bifurcated in that reports focus either on the quality of education or on access to education, but not both. This is problematic for two reasons: 1) observing access to education without regard for the quality of that education clouds the analysis, primarily because labour-market prospects and social mobility are driven by cognitive skills acquired rather than only by years of education attained, and 2) analysing the quality of education without taking cognizance of the enrolment and dropout profiles of the countries under review is likely to bias the results due to sample selection. In the paper we propose a new composite statistic - effective enrolment - that calculates the proportion of the age-appropriate population that has reached some basic threshold of numeracy and literacy proficiency. Put simply, it is enrolment that produces learning. To do so we combine household data on enrolment (from the Demographic and Health Surveys - DHS) with survey data on cognitive outcomes (from the Southern and Eastern African Consortium for Monitoring Educational Quality - SACMEQ III) for ten sub-Saharan African countries: Kenya, Lesotho, Malawi, Namibia, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. We calculate and report the effective enrolment rates for each country by gender, location and wealth quintile as well as highlighting the patterns of differential access and achievement across countries and sub-groups. As far as we are aware, these figures are the most accurate and comprehensive statistics on basic education system performance for each of the ten countries under review. Using these figures for analyses overcomes the selection bias inherent in all cross-national comparisons of educational achievement, and is far superior to simple comparisons of traditional enrolment rates. We argue that the method should be applied to all developing regions, and outline the prerequisites for doing so. The paper refocuses the discussion on education system performance in Africa by providing a composite measure of access and quality and in so doing places educational outcomes at the centre of the discourse. |
| Keywords: | Access to education, quality of education, educational statistics, Education For All, Millenium Development Goals, SACMEQ, DHS |
| JEL: | I21 I24 I25 I28 I32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers174&r=dev |
| By: | Kudamatsu, Masayuki; Persson, Torsten; Strömberg, David |
| Abstract: | We estimate how random weather fluctuations affected infant mortality across 28 African countries in the past, combining high-resolution data from retrospective fertility surveys (DHS) and climate-model reanalysis (ERA-40). We find that infants were much more likely to die when exposed in utero to much longer malaria spells than normal in epidemic malaria regions, and to droughts in arid areas, especially when born in the hungry season. Based on these estimates, we predict aggregate infant deaths in Africa, due to extreme weather events and to maternal malaria in epidemic areas for 1981-2000 and 2081-2100. |
| Keywords: | climate change; maternal malaria; maternal malnutrition; natural experiments |
| JEL: | I15 O13 O15 O55 Q54 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9222&r=dev |
| By: | Alesina, Alberto F; Michalopoulos, Stelios; Papaioannou, Elias |
| Abstract: | This study explores the consequences and origins of contemporary differences in well-being across ethnic groups within countries. We construct measures of ethnic inequality combining ethnolinguistic maps on the spatial distribution of groups with satellite images of light density at night. Ethnic inequality is strongly inversely related to per capita income; this pattern holds when we condition on the overall degree of spatial inequality -that is also associated with underdevelopment. We further show that differences in geographic endowments across ethnic homelands explain a sizable portion of contemporary ethnic inequality. This deeply rooted inequality in geographic attributes across ethnic regions is also negatively related to comparative development. We also show that ethnic inequality goes in tandem with lower levels development within countries. Using micro-level data from the Afrobarometer surveys we show that individuals from the same ethnic group are worse off when they reside in districts with a high degree of ethnic inequality. |
| Keywords: | development; diversity; ethnicity; geography; inequality |
| JEL: | O10 O40 O43 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9225&r=dev |
| By: | Giovanna d’Adda (University of Birmingham, Department of Economics); Ian Levely (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | In this paper we examine the effects that variations in the quality of the environment at birth have on children’s other-regarding preferences, as measured through four binary-choice dictator games run with school-age children in rural Sierra Leone. We examine the effect of exogenous variations in rainfall level by location and year on children’s social preferences. We also study how age at which children had access to improved water sources, such as protected wells, correlates with preferences. Children born within a healthier environment are more generous, when generosity comes at no personal cost, more likely to choose socially efficient allocations and less averse to advantageous inequality. The correlation between rainfall shocks at birth and children’s height-for-age suggest that environmental quality affects preferences through its impact on health. We find that proxies for early childhood health affect experimental outcomes in a similar way as age, which helps to explain the process by which individuals develop social preferences. No significant relationship is found in our data between environmental quality and educational outcomes, such as school attendance and grades. |
| Keywords: | Field experiments, Health and Economic Development, Altruism, Inequality Aversion |
| JEL: | C93 I15 D64 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2012_26&r=dev |
| By: | Britta Augsburg; Ralph De Haas; Heike Harmgart; Costas Meghir |
| Abstract: | We use an RCT to analyze the impact of microcredit on poverty reduction, child and teenage labour supply, and education. The study population consists of loan applicants to a major MFI in Bosnia who would have been rejected through regular screening. Access to credit allowed borrowers to start and expand small-scale businesses. Households that already had a business and where the borrower had more education, ran down savings, presumably to complement the loan and achieve the minimum investment amount. However, in less-educated households consumption went down. A key new finding is a substantial increase in the labor supply of children aged 16-19 year old together with a reduction in their school attendance, raising important questions about the unintended intergenerational consequences of relaxing liquidity constraints for self-employment and business creation or expansion. |
| JEL: | D1 D12 D14 G21 H52 H53 J22 J24 O16 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18538&r=dev |
| By: | Victor A.B. Davies; Sylvain Dessy |
| Abstract: | This paper examines the post-war strategies of Liberia and Sierra Leone to generate revenues from their natural resources. We document the challenges faced by the government of the two countries, contrasting measures taken to address these challenges as well as the outcomes. We complement the analysis with an analytical model which explores the implications of exploiting natural resources in the aftermath of a civil conflict before public management institutions are developed, as observed in Liberia and Sierra Leone. The key lesson is that resource-rich countries emerging from conflict face a difficult trade-off between relatively large longer-term gains which accrue when institutional capacity is developed prior to exploiting the resources, and smaller short-term revenues that come with immediate exploitation of the resources. The findings call attention to the potential role of the international community in developing post-conflict countries’ natural resource and revenue institutional capacity, as well as transparent corporate and government institutions for resource management. |
| JEL: | O11 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18539&r=dev |
| By: | Kalina Manova; Zhihong Yu |
| Abstract: | Global supply chains allow firms in developing countries to share in the gains from trade by conducting either ordinary or processing trade. This paper examines how financial constraints affect companies’ choice of trade regime and ultimately profitability. We exploit matched customs and balance sheet data from China, where processing trade is further divided into import-and-assembly (processing firm pays for imported inputs) and pure assembly (processing firm receives imported inputs for free). We establish two main results. First, profits, profitability and value added fall as exporters orient sales from ordinary towards processing trade, and from import-and-assembly towards pure assembly. Second, less financially constrained firms perform more ordinary trade relative to processing trade, and more import-and-assembly relative to pure assembly. We rationalize these patterns with a model that incorporates credit constraints and imperfect contractibility in companies’ choice of trade regime. Our results imply that limited access to capital restricts firms to low value-added stages of the supply chain and precludes them from pursuing more profitable opportunities. Financial frictions thus affect the organization of production across firm and country boundaries, and inform optimal trade policy in the presence of trade in intermediates. |
| JEL: | F10 F13 F14 F23 F34 G32 O19 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18561&r=dev |