Themes | Highlights | Team | Notes | Current Research Program | 2009 PublicationsGrowth is essential for sustained poverty reduction. The research program aims to guide policies and reform strategies conducive to sustained high growth. To do this, researchers seek to explain the diversity of aggregate economic performance across the world and understand how it is affected by policy and institutional changes under different country circumstances.
The research program explores the micro- and macroeconomic foundations of growth and aggregate economic performance. It has an empirical orientation and draws on firm surveys, national macroeconomic data, as well as analytical and simulation models. Current research investigates how micro- and macroeconomic policy actions and reforms translate into growth, with special attention to the role of country-specific initial conditions and policy complementarities.
The global crisis has led to new research initiatives to identify the key factors behind the turmoil, the real and financial mechanisms facilitating its propagation across the developing world, and the lessons for macroeconomic and development policies. Ongoing work also examines the effectiveness of policy responses—especially fiscal—to mitigate the crisis’ adverse consequences for growth and employment. Other research, based on a large-scale collection of firm-level data from several countries, will examine how financial crises affect aggregate income and productivity growth by distorting microeconomic dynamics.
The opportunities and risks posed by deepening international economic integration represent a major research theme. Integration expands firms’ and countries’ access to global real and financial markets, but also increases their vulnerability to global disturbances. Research examines these conflicting effects and the trade-offs between them, to identify suitable risk-management strategies for developing countries.
Research on the contribution of governance and political economy to sustained growth and development draws on both aggregate and micro data to assess the consequences of weak governance for government performance, economic efficiency and growth, and to identify the institutional and political economy factors that contribute to good governance, such as the extent to which citizens are informed and able to respond collectively to governance failures. As part of this work, the widely used Worldwide Governance Indicators dataset was updated with new data for over 200 countries over the period 1996-2008.1
After the crisis: new questions on macro-financial policies and propagation mechanisms
The global crisis has prompted a reassessment of traditional macroeconomic and development policies adopted in recent years by many developing economies. The macroeconomic dimensions of financial fragility, ignored by traditional prudential regulation concerned with the solvency of the individual bank, call for the design of an adequate macro-prudential regime. Absent the latter, monetary policy may have to forgo its exclusive focus on price stability, under the inflation targeting regimes embraced by emerging markets, and replace it with a shared focus on financial stability, to deter boom-bust cycles of credit and asset prices. In theory, temporary capital controls also might help to curtail asset bubbles driven by surging capital inflows, but evidence on their effectiveness remains inconclusive.2
An old question, newly underscored by the crisis, is why shocks from advanced countries often have disproportionate effects on developing economies. New research highlights how international technology diffusion can partly account for this fact, making macroeconomic fluctuations larger and more persistent in developing than in advanced countries. Innovation in rich economies results in new goods, at first produced at home, and eventually transferred to developing economies through direct investment. This process of technology diffusion creates a medium-term connection between advanced and developing economies, over and above the short-term link through trade and finance flows. Short-run shocks to the pace of innovation in rich countries can therefore lead to larger and more persistent medium-term fluctuations in developing countries. As an illustration, the research shows that this mechanism can account for the different dynamic responses to shocks of the United States and Mexico.3
Short-term debt has long been recognized as a source of vulnerability to financial turmoil, and emerging economies have sought to extend the maturity of their liabilities. New evidence from Chile sheds light on the task ahead. Detailed data on asset-level portfolios of Chilean institutional investors were used to compare their maturity structure to that of U.S. bond mutual funds. Chilean asset-management institutions hold substantially larger amounts of short-term assets than do U.S. mutual funds. Short-termism is not driven by lack of instrument availability or tactical behavior. Instead, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments. Extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.4
Microeconomic regulation is a major determinant of macroeconomic performance
There is broad agreement that productivity improvements account for the bulk of long-run income growth. Much less is known, however, notably in developing countries, about how firm-level performance—especially the Schumpeterian process of “creative destruction” that transfers resources from low to high-productivity industries, activities, and firms—contributes to aggregate growth and efficiency. Recent work on Morocco finds that entering and exiting firms play a big role in raising overall productivity. Firm turnover also contributes indirectly to productivity—it is positively associated with subsequent productivity growth of incumbents.5
Related work using data from Eastern Europe and Central Asia shows that corruption and weak property rights reduce the efficiency of firm renewal—the extent to which low-productivity firms exit and are replaced by high-productivity firms. Greater costs and regulatory burdens raise the probability that more productive firms exit, while weak financial and legal institutions shelter less productive firms. Thus, the more productive firms stand to gain the most from improvements in the business environment. These results hold both within countries and across countries.6
Collective action by informed citizens and good governance may be mutually reinforcing
New research using data from India shows how citizen information can facilitate collective action and thereby improve governance. India’s constituency development funds (CDFs) allow individual legislators to finance local public infrastructure in their electoral districts. Legislator effort is the main determinant of whether the funds are used to this end. However, voters are often uninformed about legislator effort, so CDFs frequently go unused. The data show that politicians are indeed less likely to spend their CDF entitlement when media coverage of the program is low and in constituencies where voters care more about the party affiliation and caste identity of candidates—a pattern contrary to commonly held beliefs about the political economy of developing democracies. One potential solution—improving oversight by independent mass media—is being rigorously examined in ongoing research.7
Poorly functioning, unaccountable institutions may undermine collective action by citizens. Research using data from the Gallup World Poll, a unique and very large global household survey, documents a quantitatively large and statistically significant negative correlation between corruption and confidence in public institutions. The correlation is robust to the inclusion of a large set of controls for country and respondent-level characteristics, so it can plausibly be interpreted as reflecting at least in part a causal effect from corruption to confidence. The data also show that individuals with low confidence in institutions exhibit low levels of political participation, show increased tolerance for violent means to achieve political ends, and have a greater desire to “vote with their feet” through emigration.8 Overall, this suggests that corruption can inhibit development by eroding confidence in public institutions.
|1.||Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2009. “Governance Matters VIII: Aggregate and Individual Governance Indictors 1996-2008.” Policy Research Working Paper 4978, World Bank, Washington, DC. Dataset: http://www.govindicators.org.|
|2.||Demirgüç-Kunt, Asli, and Luis Servén. 2009. “Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies.” Policy Research Working Paper 4807, World Bank, Washington, DC.|
|3.||Comin, Diego, Norman Loayza, Farooq Pasha, Luis Servén. 2009. “Medium-Term Business Cycles in Developing Countries.” World Bank Policy Research Working Paper 5146. World Bank, Washington, DC.|
|4.||Opazo, Luis, Claudio Raddatz, and Sergio Schmukler. 2009. “The Long and the Short of Emerging Market Debt.” Policy Research Working 5056, World Bank, Washington, DC.|
|5.||Hallward-Driemeier, Mary, and Fraser Thompson. 2009. “Creative Destruction and Policy Reforms: Changing Productivity Effects of Firm Turnover in Moroccan Manufacturing.” Policy Research Working Paper 5085, World Bank, Washington, DC.|
|6.||Hallward-Driemeier, Mary. 2009. “Who Survives? The Impact of Corruption, Competition and Property Rights across Firms.” Policy Research Working Paper 5084, World Bank, Washington, DC.|
|7.||Keefer, Philip, and Stuti Khemani. 2009. “When Do Legislators Pass on ‘Pork’? The Determinants of Legislator Utilization of a Constituency Development Fund in India.” Policy Research Working Paper 4929, World Bank, Washington, DC.|
|8.||Clausen, Bianca, Aart Kraay, and Zsolt Nyiri. 2009. “Corruption and Confidence in Public Institutions: Evidence from a Global Survey.” Policy Research Working Paper 5157, World Bank, Washington, DC.|