The World Bank Research Observer

More than US $1.6 billion is spent annually on 104 programs in nineteen Latin American and Caribbean countries to subsidize or provide food for people supposedly at risk of malnutrition. This amount constitutes only 0.2 percent of these countries' gross national product. If there is no double-counting, these programs reach more than 80 million people, or 21 percent of the population, at a cost of $20 per beneficiary or $4 per capita. Yet some 10 million children are malnourished, which suggests that the expenditures are poorly directed or ineffective. There is little hard evidence that these programs are preventing much malnutrition; even curative results are seldom measured. The effort is too small in some countries with great needs, while other countries have nearly eliminated malnutrition. Where coverage is high, programs—although generally targeted and with sensible criteria—do not always reach the neediest. They may also fail to provide enough food or to combine food with the health care and nutritional education necessary to attack all three root causes of malnutrition: poverty, disease, and ignorance. The evidence, limited mostly to program inputs rather than results, suggests that greater progress against undernourishment is possible even with current spending levels.

PIP Concern is rising over the deleterious effects of tropical deforestation. For example, the loss of forest cover influences the climate and reduces biodiversity, while reduced timber supplies, siltation, flooding, and soil degradation affect economic activity and threaten the livelihoods and cultural integrity of forest-dependent people. Such concerns have led economists to expand their efforts to model why, where, and to what extent forests are being converted to other land uses. This synthesis of the results of more than 140 economic models analyzing the causes of tropical deforestation brings into question many conventional hypotheses upon deforestation. More roads, higher agricultural prices, lower wages, and a shortage of off-farm employment generally lead to more deforestation. However, it is not known how technical change, agricultural input prices, household income levels, and tenure security affect deforestation. The role of macroeconomic factors such as population growth, poverty reduction, national income, economic growth, and foreign debt is also unclear. The authors nonetheless determine through their review that policy reforms included in current economic liberalization and adjustment efforts may increase pressure upon forests.

Discussion of the macroeconomic consequences of rapid population growth is organized into three schools: pessimists, optimists, and the recent revisionists. For the revisionists, differing views are presented about the pervasiveness and relevance of market failures, such as the negative externalities of childbearing, and about the ability of families and institutions to adjust rapidly to changes brought on by rapid population growth. A welfare economics approach is used to review the merits of various public policies to reduce fertility, including public financing of family planning services and taxes and incentives associated with childbearing.

In most economies women are less attached than men to the labor force. This has important implications for development. This article examines definitions and theories of female labor supply and relates them to statistical evidence from 136 countries in the early 1980s. The findings support the view that, during the transformation from an agrarian subsistence economy, the participation of women in the labor force initially decreases and picks up later after a critical level of development has been achieved. Education is seen as a potential booster of the officially recorded female labor supply in developing countries.

One of the most contentious issues of globalization is the effect of global economic integration on inequality and poverty. This article documents five trends in the modern era of globalization, starting around 1980. The first trend is that growth rates in poor economies have accelerated and are higher than growth rates in rich countries for the first time in modern history. Developing countries' per capita incomes grew more than 3.5 percent a year in the 1990s. Second, the number of extremely poor people in the world has declined significantly--by 375 million people since 1981--for the time in history. The share of people in developing economies living on less than $1 a day has been cut in half since 1981, though the decline in the share living on less than $2 per day was much less dramatic. Third, global inequality has declined modestly, reversing a 200-year trend toward higher inequality. Fourth, within-country inequality in general is not growing, though it has risen in several populous countries (China, India, the United States). Fifth, wage inequality is rising worldwide. This may seem to contradict the fourth trend, but it does not because there is no simple link between wage inequality and household income inequality. Furthermore, the trends toward faster growth and poverty reduction are strongest in developing economies that have integrated with the global economy most rapidly, which supports the view that integration has been a positive force for improving the lives of people in developing areas. Copyright 2005, Oxford University Press.

A new assessment is made of the developing world's progress against poverty. By the frugal $1 a day standard there were 1.1 billion poor people in 2001--almost 400 million fewer than 20 years earlier. During that period the number of poor people declined by more than 400 million in China, though half the decline was in the early 1980s and the number outside China rose slightly. At the same time the number of people in the world living on less than $2 a day rose, so that there has been a marked bunching up of people living between $1 and $2 a day. Sub-Saharan Africa has become the region with the highest incidence of extreme poverty and the greatest depth of poverty. If these trends continue, the 1990 aggregate $1 a day poverty rate will be halved by 2015, meeting the Millennium Development Goal, though only East and South Asia will reach this goal. Copyright 2004, Oxford University Press.

The intensity of the crisis in financial markets has surprised nearly everyone. The authors search out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on markto-market accounting, an unexpected loss of liquidity, trends in globalization, and deregulation in financial markets. The authors' analysis finds disturbing implications of the crisis for Basel II and its implementation. They conclude by drawing out lessons for developing countries and identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike. © The Author 2010. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development/The World Bank. All rights reserved. For permissions, please e-mail: [email protected] /* */

How is the attempt of the European Community (EC) to create a single market going to affect the developing countries? This article argues that the net direct effects of EC-92 may be rather small: the trade creation and trade diversion effects brought about by the program may cancel each other out, with few repercussions for the developing countries as a group. The expected changes in trade flows arising from relatively small changes in nominal prices and aggregate incomes, the changes in market structure, the removal of internal barriers, and a predicted 5 percent increase in EC output may be important to European policymakers, but they are rather remote from the developing countries. The threat of EC-92 to the developing countries lies elsewhere: from diversion of investment from those countries to the EC and from the resurrection of protectionism by the EC, especially in the form of nontariff barriers, toward the outside world.

In many developing countries less than half the population has access to formal financial services, and in most of Africa less than one in five households has access. Lack of access to finance is often the critical mechanism for generating persistent income inequality, as well as slower economic growth. Hence expanding access remains an important challenge across the world, leaving much for governments to do. However, not all government actions are equally effective and some policies can even be counterproductive. This paper sets out principles for effective government policy on broadening access, drawing on the available evidence and illustrating with examples. The paper concludes with directions for future research. Copyright The Author 2009. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

This article reviews the evidence on the importance of finance for economic well-being. It provides data on the use of basic financial services by households and firms across a sample of countries, assesses the desirability of universal access, and provides an overview of the macroeconomic, legal, and regulatory obstacles to access. Despite the benefits of finance, the data show that use of financial services is far from universal in many countries, especially developing countries. Universal access to financial services has not been a public policy objective in most countries and would likely be difficult to achieve. Countries can, however, facilitate access to financial services by strengthening institutional infrastructure, liberalizing markets and facilitating greater competition, and encouraging innovative use of know-how and technology. Government interventions to directly broaden access to finance, however, are costly and fraught with risks, among others the risk of missing the targeted groups. The article concludes with recommendations for global actions aimed at improving data on access and use and suggestions on areas of further analysis to identify constraints to broadening access.

To achieve certain policy objectives, governments frequently provide private borrowers with loan guarantees that cover some or all of the risk that the borrower will be unable to repay the loan. Such guarantees are extremely valuable, and their value increases with the riskiness of the underlying asset or credit, the size of the investment, and the duration of the loan. The flip side of a guarantee's value to a lender is its cost to the government. Such a cost is not explicit but is real nevertheless. When providing guarantees, governments therefore must establish accounting, valuation, and risk-sharing mechanisms. This article describes methods of valuing guarantees; reports estimates of the value of guarantees in different settings; and summarizes new methods of accounting designed to anticipate losses, create reserves, and channel funds through transparent accounts to ensure that the costs of guarantees are evident to government decisionmakers.

For decades, earnings from farming in many developing countries have been depressed by a pro-urban bias in own-country policies, as well as by governments of richer countries favoring their farmers with import barriers and subsidies. Both sets of policies reduce national and global economic welfare and inhibit agricultural trade and economic growth. They almost certainly add to inequality and poverty in developing countries, since three-quarters of the world's billion poorest people depend on farming for their live-lihood. During the past two decades, however, numerous developing country governments have reduced their sectoral and trade policy distortions, while some high-income countries also have begun reducing market-distorting aspects of their farm policies. The author surveys the changing extent of policy distortions to prices faced by developing-country farmers over the past half century, and provides a summary of new empirical estimates from a global economy-wide model that yield estimates of how much could be gained by removing the interventions remaining as of 2004. The author concludes by pointing to the scope and prospects for further pro-poor policy reform in both developing and high-income countries. © The Author 2009. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development/The World Bank. All rights reserved. For permissions, please e-mail: [email protected] /* */

Private interhousehold cash transfers are an important source of income in many developing countries. Among the countries whose experience is reviewed in the article, the proportion of all households receiving private transfers ranges from a fifth to a half. The amounts received are large, particularly when compared with the incomes of the poorest households. Understanding more about these transfers is important for designing policy because, among other things, these remittances provide social and economic benefits similar to those of public programs, such as unemployment insurance, pension support, educational credit, and health assistance. As such, private transfers may supplement or overlap with public transfers, and, if private donors give less as public transfers increase, the effect of public programs on beneficiaries would be less than originally intended. Or the transfers may alter the distributional effects of public programs: for again, if private donors give less as public transfers increase, they share in some of the benefits of public programs.

Recent writings on poverty and hunger agree broadly on objectives and means but diverge significantly in emphasis. Views differ on the importance and function of economic growth and on how much weight to give to direct public support. These differences can matter in policy choices. "Hunger and Public Action" by Jean Dreze and Amartya Sen, is an important contribution to the literature on antihunger policy. This article critically examines the issues raised by the book, its differences with other recent writings, and the implications for both policy and future research on policy. Copyright 1992 by Oxford University Press.

Climate change is a new and important challenge to development strategies. In light of the current literature a framework for assessing responses to this challenge is provided. The presence of climate change makes it necessary to at least review development strategies--even in apparently nonclimate-sensitive and nonpolluting sectors. There is a need for an integrated portfolio of actions ranging from avoiding emissions (mitigation) to coping with impacts (adaptation) and to consciously accepting residual damages. Proactive (ex ante) adaptation is critical, but subject to risks of regrets when the magnitude or location of damages is uncertain. Uncertainty on location favors nonsite-specific actions, or reactive (ex post) adaptation. However, some irreversible losses cannot be compensated for. Thus, mitigation might be in many cases the cheapest long-term solution to climate change problems and the most important to avoid thresholds that may trigger truly catastrophic consequences. To limit the risks that budget constraints prevent developing countries from financing reactive adaptation--especially since climate shocks might erode the fiscal base--"rainy-day funds" may have to be developed within countries and at the global level for transfer purposes. Finally, more research is required on the impacts of climate change, on modeling the interrelations between mitigation and adaptation, and on operationalizing the framework. Copyright The Author 2009. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

Because most developing countries depend heavily on agriculture, the effects of global warming on productive croplands are likely to threaten both the welfare of the population and the economic development of the countries. Tropical regions in the developing world are particularly vulnerable to potential damage from environmental changes because the poor soils that cover large areas of these regions already have made much of the land unusable for agriculture. Although agronomic simulation models predict that higher temperatures will reduce grain yields as the cool wheat-growing areas get warmer, they have not examined the possibility that farmers will adapt by making production decisions that are in their own best interests. A recent set of models examines cross-sectional evidence from India and Brazil and finds that even though the agricultural sector is sensitive to climate, individual farmers do take local climates into account, and their ability to do so will help mitigate the impacts of global warming. Copyright 1999 by Oxford University Press.

Some individuals who are destitute report to be happy, while others who are very wealthy report to be miserable. There are many possible explanations for this paradox; the author focuses on the role of adaptation. Adaptation is the subject of much work in economics, but its definition is a psychological one. Adaptations are defense mechanisms; there are bad ones like paranoia, and healthy ones like humor, anticipation, and sublimation. Set point theory--which is the subject of much debate in psychology--posits that people can adapt to anything, such as bad health, divorce, and extreme poverty, and return to a natural level of cheerfulness. The author's research from around the world suggests that people are remarkably adaptable. Respondents in Afghanistan are as happy as Latin Americans and 20 percent more likely to smile in a day than Cubans. The findings suggest that while this may be a good thing from an individual psychological perspective, it may also shed insights into different development outcomes, including collective tolerance for bad equilibrium. The author provides examples from the economics, democracy, crime, corruption, and health arenas. Copyright The Author 2010. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oup.com, Oxford University Press.

The comprehensive value added tax (VAT), now a principal source of revenue for some forty countries, was nowhere to be found only thirty years ago. This article analyzes the reasons for this dramatic change and weighs the advantages and disadvantages of the VAT for developing countries. It points out the choices a government instituting a VAT must make with respoect to taxing all final products or only consumer goods, and it offers suggestions on how to treat exports and imports, how to compute the VAT payable, whether to use "exemption" or "zero-rating" approaches, and whether to have one or various tax rates. For countries with a fragmented retail trade the VAT may apply only to wholesale and earlier stages. The article draws no general conclusions on the suitability of the VAT for developing coutnries, because these countries differ so widely. Copyright 1988 by Oxford University Press.

Agricultural growth has long been recognized as an important instrument for poverty reduction. Yet, measurements of this relationship are still scarce and not always reliable. The authors present additional evidence at both the sectoral and household levels based on recent data. Results show that rural poverty reduction has been associated with growth in yields and in agricultural labor productivity, but that this relation varies sharply across regional contexts. GDP growth originating in agriculture induces income growth among the 40 percent poorest, which is on the order of three times larger than growth originating in the rest of the economy. The power of agriculture comes not only from its direct poverty reduction effect but also from its potentially strong growth linkage effects on the rest of the economy. Decomposing the aggregate decline in poverty into a rural contribution, an urban contribution, and a population shift component shows that rural areas contributed more than half the observed aggregate decline in poverty. Finally, using the example of Vietnam, the authors show that rapid growth in agriculture has opened pathways out of poverty for farming households. While the effectiveness of agricultural growth in reducing poverty is well established, the effectiveness of public investment in inducing agricultural growth is still incomplete and conditional on context. © The Author 2009. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development/The World Bank. All rights reserved. For permissions, please e-mail: [email protected] /* */

The short-run adjustment problem in developing countries involves both the improvement of the current account and the reduction of inflation. In both cases, the usual reason for adjustment is shown to be the fiscal deficit. The article distinguishes primary adjustment costs, which are inevitable, from secondary costs, which result, for example, from failure to devalue or from real wage rigidity. The article then analyzes the effects of expenditure reduction and currency devaluation on various sectors of the economy. Reducing inflation involves both an inflation tax replacement and a price adjustment problem, and “heterodox” policies designed to deal with the latter are discussed. If the fiscal deficit cannot be reduced, the article argues, improving the current account may be at the cost of increasing inflation and likewise reducing inflation may be at the cost of worsening the current account.

Four years after the onset of the world debt crisis, the issue is how to restore growth. The answer is structural adjustment, both macro and micro. At the macro level, adjustments have to be made to the structure of aggregate demand and supply to restore growth while generating the needed trade surpluses. This means primarily real exchange rates that are maintained at appropriate levels and an emphasis on investment. At the micro level, it is argued that most developing countries need to liberalize trade, allow the price system to operate, develop financial systems, reform taxes, and improve the efficiency of public enterprises, perhaps by selling them. The article discusses the nature of these two types of reforms and the policy and research issues relevant to World Bank analysis of growth programs.

New data on Thailand's industrial firms shed light on the origins of the East Asian financial crisis and on the response of the manufacturing sector to the structural adjust-ment program supported by the international financial institutions. Before the crisis, Thai firms had declining profitability, but they nevertheless maintained high levels of investment, often in domestically oriented areas (notably the auto sector). Thai firms financed these investments with short-term borrowing from financial institutions, which in turn borrowed short term on foreign markets. That only 40 percent of firms provided audited financial statements to their banks meant that the financial sector had poor information for assessing the true riskiness of these investments. The financial structure was thus vulnerable even to small shocks. How well did the adjustment program deal with the crisis? Thai firms had difficulty increasing their exports quickly because of investment in the wrong sectors, a decline in regional demand, and bottlenecks that included red tape and poor customs administration. Because of the poor export response, the brunt of adjustment had to come through compression of demand and of imports. In retrospect, the macroeconomic program— which assumed quick export recovery— was too tight.

The view that macroeconomic adjustment disproportionately hurts the poor in Africa has become commonplace. The popular media and the nongovernmental aid community frequently express this view in critiques of Bankfunded economic reform programs. Yet the evidence on which the claim has been based is flimsy and anecdotal. The emergence of more convincing data, from detailed household surveys in Africa, provides an opportunity to set the record straight. The evidence from six African countries reviewed in this article demonstrates that poverty was more likely to decline in those that improved their macroeconomic balances than in those that did not. The critical factor is economic growth: the economy grew more rapidly and poverty declined faster in countries that improved macroeconomic balances, depreciating the real effective exchange rate. Changes in the real exchange rate also immediately and favorably affected rural incomes, benefiting the poor both directly and indirectly. But the findings also highlighted three causes for policy concern. First, many African governments have yet to display a real commitment to macroeconomic reform; second, the poorest of the poor have not benefited from recent growth in some countries; and, third, the prospects for the poor are not rosy unless there is more investment in human capital and better targeting of social spending.

This article reviews theories of investment behavior and examines empirical studies of investment in developing countries. The emphasis is on understanding the interactions among macroeconomic policies, structural adjustment and private investment. The article deals with the effect of exchange rate policy on investment, the relationship between public and private investment, the importance of market imperfections and financial constraints on capital formation, and the effect of economic instability on irreversible investment decisions. Copyright 1992 by Oxford University Press.