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Research Highlights June 2014

Research Highlights June 2014

Research Highlights June 2014

Foreign aid increases economic growth among poor countries where it is a large source of funding

Convincingly identifying the impact of aid on growth is difficult. However, an instrumental variable to identify this impact can be constructed utilizing the World Bank's International Development Association (IDA) eligibility criteria. Since 1987 eligibility for aid from IDA has been based partly on whether or not a country is below a certain threshold of per capita income. This country grouping is particularly interesting because it is composed of poor countries for which aid is particularly important. The evidence suggests that other donors reinforce rather than compensate for reductions in IDA aid when countries exceed the IDA eligibility threshold. Overall aid as a share of gross national income (GNI) drops about 59 percent on average after countries exceed the threshold. Among the 35 countries that moved from below to above the income threshold between 1987 and 2010, one finds a sizable positive effect of foreign aid on economic growth. A one percentage point increase in the aid-to-GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points, mainly as a result of increasing physical investment. However, this finding is limited in scope to those poor countries where foreign aid is a large source of funding. But these results may generalize to countries still under the IDA threshold as they grow closer to the threshold.

The Effect of Aid on Growth: Evidence from a Quasi-Experiment, Sebastian Galiani, Stephen Knack, Lixin Colin Xu, and Ben Zou, World Bank Policy Research Working Paper 6865, May 2014.

Easing access to credit could increase income diversity and agricultural productivity in rural Rwanda

Credit constraints may affect rural development more broadly by preventing households from using productivity enhancing agricultural inputs and taking up nonagricultural activities, which many studies identify as key to households’ ability to move out of poverty. However, identifying credit-constrained households poses challenges. This work identifies households’ credit status using a direct elicitation approach for a national sample of Rwandan rural households to assess the extent and nature of credit rationing in the semi-formal sector and its impact on income diversification and agricultural productivity. Being credit constrained reduces the likelihood of participating in off-farm self-employment activities by 6.3 percent, making participation in low-return farm wage labor more likely. Even within agriculture, elimination of all types of credit constraints in the semi-formal sector could increase output by some 17 percent. Two policy implications emerge. First, the estimates suggest that access to information (education, listening to the radio, and membership in a farm cooperative) can reduce the incidence of credit constraints in the semi-formal credit sector. Expanding access to information in rural areas is thus a promising strategy to improve credit access in the short term. Second, making it easy to identify land owners and transfer land could reduce transaction costs associated with credit access. In the medium- and long-term, the impact of Rwanda’s nationwide effort to formalize land rights on enhancing credit supply through a collateral effect remains to be seen.

Credit Constraints, Agricultural Productivity, and Rural Nonfarm Participation: Evidence from Rwanda, Daniel Ayalew Ali, Klaus Deininger, and Marguerite Duponchel, World Bank Policy Research Working Paper 6769, January 2014.

Several distinct dynamics are at work across the convergence process to the managerial frontier

Improving managerial quality appears to be an important but understudied ingredient in fostering economic development. What is the process by which a country becomes better at managing firms? Does convergence to the managerial frontier arise from progressively trimming the left tails, a more general rightward shift of the distribution due to, perhaps, the general accumulation of human capital, or perhaps the emergence of superstars in the right tails? Detailed survey data on management practices suggest that part of the process of convergence to the frontier across the development process represents a trimming of the left tail as well as  movement of the central mass, with the latter accounting for much of the phenomenon. For rich countries, it is actually the best firms that lag the frontier benchmark. Among potential explanatory variables that may drive these movements, ownership and human capital appear critical, the former especially for poorer countries and the latter for richer countries, suggesting that the mechanics of convergence change across the spectrum. These variables lose their explanatory power as firm and average country management quality rises. Hence, once in the advanced country range, the factors that improve management quality are less easy to document and hence influence.

Convergence to the Managerial Frontier, William F. Maloney and Mauricio Sarrias, World Bank Policy Research Working Paper 6822, March 2014.

Exploring self-enforcing contracts in the forest sector as a way to reduce carbon emissions

The United Nations has set up a program for Reducing Greenhouse Gas Emissions from Deforestation and Forest Degradation (REDD), but there is little information available to guide policy makers or investors on what form agreements with landholders should take to accomplish those aims. An inherent problem with forest carbon credits are high transaction costs, especially for measuring, monitoring, and verification. To reduce these costs, self-enforcing contracts are useful. These are agreements where it is in the best interest of the environmental service providers to comply, even if monitoring is limited. These issues arise generally in international agreements involving Payments for Ecosystem Services, so experience with those programs provides lessons for structuring REDD agreements. Contractual mechanisms from other agricultural and forestry related projects—that have been proposed or are being used in practice—also shed light on design and implementation of REDD.

Incentive Contracts for Environmental Services and Their Potential in REDD, Lea Fortmann, Paula Cordero, Brent Sohngen, and Brian Roe, World Bank Policy Research Working Paper 6829, April 2014.

High inequality in childhood cognitive skills as a channel for intergenerational transmission of poverty

Research in developed and developing countries shows multiple and durable benefits from investing in early childhood, including direct links to socioeconomic outcomes later in life. And while emerging literature in the United States also shows how gaps in early cognitive and non-cognitive ability appear early in the life cycle, we know very little about these gaps in developing countries. New research shows evidence of sharp differences in cognitive development by socioeconomic status in early childhood for five Latin American countries. For poorer children, this implies cognitive delays of one to 2.5 years relative to the least poor children. And for the three countries where data are available to follow children over time, wealth gradients that are apparent at young ages continue into primary school, suggesting no evidence of catch-up. Given that observed cognitive impacts of existing early childhood interventions that target poor children in the region are substantially lower, they highlight the big challenge policy makers face in seeking to close gaps in development in early childhood and the intergenerational transmission of poverty in Latin America.

Wealth Gradients in Early Childhood Cognitive Development in Five Latin American Countries, Norbert Schady, Jere Behrman, Maria Caridad Araujo, Rodrigo Azuero, Raquel Bernal, David Bravo, Florencia Lopez-Boo, Karen Macours, Daniela Marshall, Christina Paxson, and Renos Vakis, World Bank Policy Research Working Paper 6779, February 2014.

Detecting the effect of remittances on economic growth in origin countries is likely to remain elusive

Remittances by migrant workers have soared in recent years, but their effect on economic growth in countries of origin is difficult to detect. First, a large majority of the recent rise in measured remittances may be illusory—arising from changes in measurement, not changes in real financial flows. Second, even if these increases were correctly measured, cross-country regressions are not powerful enough to detect their effects on growth. Third, the greatest driver of rising remittances is rising migration, which has an opportunity cost to economic product at the origin. Net of that cost, there is little reason to expect large growth effects of remittances in the origin economy. Migration and remittances clearly have first-order effects on poverty at the origin, on the welfare of migrants and their families, and on global gross domestic product; but detecting their effects on growth of the origin economy is likely to remain elusive.

Why Don’t Remittances Appear to Affect Growth? Michael A. Clemens and David McKenzie, World Bank Policy Research Working Paper 6856, May 2014.

Non-OECD destinations account for one-third of global high-skilled migrants

Among various dimensions of international migration, the movement of highly-skilled professionals, commonly referred to as “brain drain” is one of the most intensely debated. The discussion typically focuses on the movement of human capital from poorer to wealthier countries. On the one hand, many governments are designing policies to attract the best and the brightest in an increasingly competitive global labor market. On the other hand, many poorer countries, especially those already suffering from low levels of human capital, are deeply concerned about retaining their skilled workers, whose absence is likely to impact their long-term development. However, this debate has almost completely ignored skilled migration flows between developing countries. Based on newly collected data and novel statistical techniques, a global overview of bilateral human capital mobility—by gender and education categories—is now available for 1990 and 2000 for 190 countries. In addition to identifying key determinants of global migration patterns, the analysis provides various nuanced brain drain indicators. Among the important findings, while OECD countries are extremely important destinations, non-OECD destinations account for one-third of total highly-skilled migration stocks and are increasing in importance. Most migration takes place between neighboring countries, but several regional magnets are emerging. Still, developing countries are experiencing net human capital losses while the U.S., the U.K., Canada, and Australia attract two-thirds of all highly-skilled migrants.

A Global Assessment of Human Capital Mobility: The Role of Non-OECD Destinations, Erhan Artuç, Frédéric Docquier, Çağlar Özden, and Christopher Parsons, World Bank Policy Research Working Paper 6863, May 2014.

Last updated: 2014-06-23

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