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Policy Research Bulletin

January–March 1998
Volume 9, Number 1

New Research

The research projects described here are directed by World Bank staff and funded by the Bank's central Research Support Budget (RSB). Research proposals being prepared with RSB funding are listed on page 10. For information about the research projects described here, contact the researchers at the Bank's main address (see back page).

Research Starts

Research Proposal under Preparation


Research Starts

Marine System Valuation: An Application to Coral Reefs in the Developing Tropics

Richard Huber
Latin America and the Caribbean Region, Environmentally and Socially Sustainable
Development Unit
Ref. no. 682-22

Methods for valuing biodiversity have received increasing research attention in recent years as analysts have come to recognize the importance of estimating the potential economic benefits of biological resources in order to devise optimal conservation policies. This study is the second phase of research to adapt and refine valuation methods for use in estimating the benefits of coral reefs. The first phase sharpened and tested some of these methods; this phase will implement them in Montego Bay, Jamaica, and on the south coast of Curacao.

The study will administer a contingent valuation survey, pretested and revised in the first phase, to tourists and local residents at both sites. The survey's results on use values (such as fisheries and recreation) will complete a local use economic valuation.

At the Montego Bay site the study will also apply a marine bioprospecting valuation method to capture the expected biodiversity value of species. Drawing on inventories of species and estimates of the percentage with economic value, it will estimate biodiversity values through a production or rent capture function. It will also assess Jamaica's institutional capacity to capture marine resource rents, and carry out an analysis to show the distribution of rents under different institutional and revenue sharing scenarios.
RSB support: $95,500
Staff weeks: 95

Understanding Capital Market Crises in Emerging Economies: The Role of Announcements and News

Sergio L. Schmukler
Development Research Group
Ref. no. 682-26

Many of the currency crises of the 1990s have been followed by turbulence or even full-fledged crises in the currency markets of other countries. This study will look at what role information plays in triggering and spreading crises and whether announcements can help insulate countries from a foreign crisis.

Most studies of contagion effects have focused on these effects at monthly or even annual frequencies in order to isolate investors' herding behavior. This study's premise is that spillover effects generally occur at higher frequencies, as investors try to assess the differences or similarities across countries.

The study will therefore examine daily movements in stocks, exchange rates, interest rates, and secondary bond prices in Indonesia, Malaysia, the Philippines, and Thailand during the 1997 currency crises. It will relate changes in these variables with the daily economic news, such as new stabilization programs and asset trading restrictions. Using a new data bank, it will examine how changes in market fundamentals in one country are transmitted to others and quantify the pure contagion effect. It will also examine whether governments' announcements and information releases after the Thai crisis helped to avert contagion, and analyze what types of announcements seemed to be adequate to contain the spillover and what types accelerated it.
RSB funding: $30,000
Staff weeks: 13

Currency Crises, Financial Intermediation, and Nominal Rigidities

Craig Burnside
Development Research Group
Ref. no. 682-27

Dealing with currency crises requires understanding both their causes and their consequences. This study will focus on their consequences. It will first document the effects of rapid, substantial devaluations on the level and composition of economic activity, using statistical and case study methods to summarize differences in the behavior of aggregates between crisis and noncrisis periods. It will isolate common features of crisis episodes to identify the underlying economic mechanisms at work.

Using a multisector, open economy model, the study will then examine the financial sector's role in amplifying and spreading the effects of a currency crisis. Disruptions to the financial system can affect the economy through a direct negative wealth effect, as when banks that have foreign currency debt and have not hedged against exchange rate risk suffer large losses, and through the destruction of credit channels, which can reduce the supply and raise the cost of credit. The study will assess the importance of these effects by looking at such factors as the composition of bank assets and liabilities after a crisis and borrowing and lending activities in different sectors. The study will also analyze the role of nominal price and wage rigidities in spreading the effects of a crisis.
RSB support: $39,500
Staff weeks: 20

The Role of Agriculture in Venezuela's Economic Rise and Decline

Donald Larson
Development Research Group
Ref. no. 682-33

For almost three decades, from 1920 to 1958, Venezuela was the world's fastest-growing economy. But the next 38 years were characterized first by stagnation and then by decline.

A premise of this study is that the protectionist policies meant to aid the rural sector after 1958 failed to address more fundamental development problems of rural education, transport, and dissemination of new technologies. As a result, the study hypothesizes, rural labor was ill suited to move into the nonagricultural sector in the outmigration typical of a developing economy. In addition, productivity in agriculture remained low relative to manufacturing, but the large differences in sector income did not increase outmigration.

To test these premises, the study will model productivity in agriculture and the nonagricultural sector in Venezuela, as well as intersectoral migration. Combined, the models will provide an empirical measure of the determinants of productivity in agriculture and nonagriculture, including the effects of technology, infrastructure, and human capital on productivity and outmigration from agriculture. The results are expected to help in designing country assistance strategies for other countries with poorly integrated rural sectors.
RSB support: $28,600
Staff weeks: 12

Evaluation of the Impact of Investments in Early Child Development on Nutrition and Cognitive Development

Harold Alderman, Elizabeth King, and Jacques van der Gaag
Development Research Group and Human Development Network,
Office of the Vice President and Head of Network
Ref. no. 682-34

A growing share of World Bank lending is going to early child development projects. These projects seek to prevent a cycle in which poor health and inadequate learning environments early in life prevent children from fully benefiting from later schooling opportunities.

To assess the impact of such programs, this project will undertake case studies in coordination with Bank-supported early child development projects in Bolivia, the Philippines, and Uganda. The case studies will look at how stimulation and coaching affect cognitive development and the age of school enrollment. And they will relate indicators of early cognitive development to early primary school grade progression and performance. The case studies will also evaluate and compare the cost-effectiveness of different program approaches, important because of the high recurrent costs of early child development programs and the scant resources available for them.

The Uganda case study will also evaluate the effects of deworming on children under age six. Although deworming is generally targeted to school-age children, work in India has shown that it can dramatically increase the weight of younger children. This analysis will use a random assignment of treatment and control communities. The analyses of early child development programs, which have demand-driven components, will use longitudinal data and community fixed effects to control for selection bias.
RSB support: $395,500
Staff weeks: 61

External Financing, Macroeconomic Stability, and Government Policy in Eastern European Countries

Marcelo Selowsky
Europe and Central Asia Region,
Office of the Regional Vice President
Ref. no. 682-35

Policy responses to the unprecedented volatility in Southeast Asian financial markets in late 1997 varied widely—perhaps in part because of insufficient knowledge about what generates, amplifies, and transmits financial turbulence in and among today's internationally integrated markets. What can policymakers do to prevent or minimize the effects of externally generated financial crises? That question is valid everywhere, including Central Europe and the Baltics.

Several factors are of concern in that region. External account deficits are large, banks are channeling a large share of the external flows to finance the deficits to the private sector, and there has been a rapid accumulation of private debt, although from a low level.

This study is intended to be a first step in building a set of policy recommendations, specific to Central Europe, to prevent or to minimize the impact of externally generated financial crises. It will evaluate banking supervision and stock market regulation in the region relative to international best practice and point out critical deficiencies. It will also identify early warning indicators that could be developed to help policymakers gauge their country's capacity to accommodate external shocks. The study will result in a set of analytical notes providing useful policy advice.
RSB support: $38,000
Staff weeks: 12

Efficient Network Access Pricing Rules for Developing and Transition Economies

Ioannis Kessides
Office of the Senior Vice President, Development Economics, and Chief Economist
Ref. no. 682-36

As countries introduce competition in the traditional public utility industries, they must grapple with the problem of ensuring efficient pricing for access to infrastructure networks—to railway track, to natural gas pipelines, to electricity transmission facilities, to the local loop in telecommunications. Ensuring efficient pricing, and maintaining competition, is especially difficult where several firms compete in the sale of a final product, but one of these firms is the monopoly owner of an input—the network—that is indispensable in the supply of the product.

The economics literature offers two main approaches to efficient pricing of essential input facilities—the Efficient Component Pricing Rule and the Laffont-Tirole Ramsey Pricing Rule. Both are difficult to implement, particularly in developing and transition economies facing data and technical constraints. This study will produce a set of practical guidelines for implementing access pricing in such economies. It will develop approaches that build on the insights of the two pricing rules, and test the robustness of the approaches and their sensitivity to missing data and poor information on such parameters as cross-price elasticities. To gain additional insights on the pricing rules and modifications needed, the study will look at experience with access pricing policies in Australia, Japan, New Zealand, the United Kingdom, and the United States.
RSB support: $40,000
Staff weeks: 5

Optimal Choice of Industry Structure in Network Utilities

Ioannis Kessides
Office of the Senior Vice President, Development Economics, and Chief Economist
Ref. no. 682-37

The traditional structure for network utilities—railways, electricity, natural gas, telecommunications—is a monolithic one in which one integrated entity incorporates production, distribution, and retail sales and delivery. As technological and economic changes have allowed new forms of organization, governments are moving away from this structure to improve efficiency and performance.

Governments restructuring network industries have several options: vertical restructuring (separating production from distribution), horizontal restructuring (setting up competing but integrated firms), and competitive access (allowing competitive entry in particular activities). This study aims to develop an economically rigorous yet practical framework that policymakers in developing and transition economies can apply in evaluating the choices.

Through a review of theory, policy, and current practice, the study will assess which options are most effective in different contexts in achieving such policy objectives as efficiency and competition, coordination economies, scope economies, low transaction costs, and credible incentive structures. And it will assess what such factors as network development, the business environment, market size and density, and regulatory capacity and design mean for the optimal choice.

The study will focus on the electricity sector, analyzing experience in sector restructuring in Argentina, Chile, Norway, Poland, Russia, the United Kingdom, and the United States.
RSB support: $40,000
Staff weeks: 5

Environmental and Economic Analysis Incorporating Macro Issues

Desmond McCarthy
Development Research Group
Ref. no. 682-38

Despite the growing concern about environmental issues, relatively few of the Bank's country assistance strategies have linked environmental and macroeconomic analysis. The main reason may be lack of appropriate tools. Although several analytical frameworks linking environmental and macroeconomic variables have been developed, there are no well-articulated frameworks that could be readily applied in most developing countries because of data and resource constraints.

This study will build on a preliminary framework developed in earlier work in Jamaica that allows estimates of the macroeconomic effect of environmental initiatives and the environmental effect of macroeconomic policies. The study will draw on estimates of the environmental impact of different economic activities, which will enable it to develop cross-country, default parameter values for such environmental measures as emissions. It will apply the framework in two developing countries.
RSB support: $39,000
Staff weeks: 12

Pilot Study of City Economic Growth

Tim Campbell
Transportation, Water, and Urban Development Department, Transport Division
Ref. no. 682-39

Cities produce 60 percent of national output in developing countries—and 80 percent of production growth. Yet despite their key role in the national economy, little research has been done on how to accelerate and sustain urban growth, on how to ensure that it improves the quality of life, especially for the poor, and on what effect policies aimed at other objectives have in facilitating or restraining urban growth. These issues have gained increasing importance in recent years as economic liberalization and fiscal and administrative decentralization have broadened the role of urban governments.

This study will examine the experience of several developing country cities that have seen rapid growth in a key economic sector. It will identify which policies—local, provincial, and national—aided or obstructed the sector's growth. And it will examine the effect of the growth on urban management and on poverty reduction.

From these analyses the study will build an explanatory framework and a set of hypotheses for a more ambitious research project. The aim of the larger project will be to develop a framework and set of indicators to assist Bank staff in assessing urban economies and advising public authorities on actions they can take to boost growth.
RSB support: $40,000

Revisiting Development: Urban Perspectives

Christine Kessides
Transportation, Water, and Urban Development Department, Office of the Director
Ref. no. 682-40

A solid urban perspective on development issues is becoming increasingly essential as cities continue to grow, countries become predominantly urban, and local governments become responsible for a growing share of public policy and investment. This study aims to contribute to the World Bank's formulation of an urban perspective for the 21st century by assessing key aspects of urbanization in a historical perspective.

The study will describe, document, and evaluate cities' principal roles—subnational, national, regional, and global. It will trace the historical influences on cities of important global developments (such as revolutions in transport, communications, and information technology), the interaction of these influences with the efficiency and effectiveness of urban management and operation, and the effects of urban management and operation on broader regions. It will then project from these findings to the early decades of the 21st century.

The work will be aimed at assisting the staff who will have to define the Bank's role in supporting urban development within national and regional development strategies and in advising governments at all levels on appropriate policies relating to cities.
RSB support: $39,500
Staff weeks: 2

Financial Structure and Economic Development

Asli Demirgüç-Kunt
Development Research Group
Ref. no. 682-41

What can governments do to produce financial systems that encourage economic development? This study will focus on one part of that issue—financial structure, the mix of financial markets and institutions in an economy. The research will consist of three tasks.

First, the study will compile a cross-country data set on the mix of financial intermediaries and markets, construct measures of financial structure, and document how financial structure changes as countries develop. The data, covering a broad cross- section of industrial and developing countries, will include the size, activity, and efficiency of such intermediaries as banks, insurance companies, pension funds, development banks, and stock markets. The database will ease comparison of countries' financial systems with those of benchmark countries and support additional research.

Second, the study will compile data on laws, regulations, and policies relating to financial intermediaries and stock markets and investigate which have important influences on financial structure. And third, through firm-level, country-level, and cross-country analyses, the study will investigate whether a particular financial structure—a market-based one or an intermediary-based one like Japan's bank-based system—is especially helpful in promoting firm performance and national economic growth.
RSB support: $263,000
Staff weeks: 40

Reform along the Volga

Martha de Melo
Development Research Group
Ref. no. 682-42

Much research has looked at the transition from a planned to a market economy at the national and regional levels, but little at transition at the urban level. This study will focus on the role and experience of 8Ð10 Russian cities in the transition. These cities, all on the Volga River, span a wide range of income levels, but in many other ways are quite similar. Thus while some diversity in their reform experience will be due to differences in initial conditions, much will be due to differences in political and institutional change, governance, and economic policies.

The study will document the experience with transition in these cities and develop some hypotheses about the determinants and effects of reform that will help in better understanding the problems the cities face and developing research to address them. The study will examine the cities both as economies, assessing their progress in creating a market economy, and as governments, tracing the changes in city governments' character and role during the transition and the effects of these changes on the city economy.

Much of the research will be carried out by Russian graduate students, an arrangement designed to stimulate interest in practical problem solving and to build local research capacity.
RSB support: $40,000
Staff weeks: 15

The Impact of the Revival of the Andean Pact and ASEAN Group on Their Member Countries' Industrial Growth

Dorsati Madani and Maurice Schiff Development Research Group
Ref. no. 682-43

The renewed interest in regional integration arrangements necessitates a thorough understanding of how such arrangements affect their members' economies. This study will investigate how regional integration arrangements affect their members' industrial productivity and growth. It will focus on eight countries, four in the Andean Pact (Bolivia, Colombia, Ecuador, and Venezuela) and four in the Association of Southeast Asian Nations (ASEAN) group (Indonesia, Malaysia, the Philippines, and Singapore).

The study will be a disaggregated, panel data analysis spanning the period 1970–94. Unlike much of the literature, it will analyze the effect of regional integration at the industry level rather than at the macroeconomic level. It will extend the new growth theory models, testing the proposition that the effects of regional integration are realized through the liberalization of trade in intermediate inputs. The increased variety in these inputs, it is hypothesized, will cause a scale effect in industry growth.

The analysis will draw on industry-level data from the United Nations Industrial Development Organization on gross output, production, investment, wages, and number of employees and establishments.
RSB support: $39,700
Staff weeks: 2

Research Proposals under preparation

Regulation and Efficiency in Transport Privatization: The Latin America and Caribbean Region

J. Luis Guasch
Latin America and Caribbean Region Sector Units, Finance, Private Sector, and Infrastructure
Ref. no. 682-10
RSB support: $15,000

Guidelines for Pricing Irrigation Water Based on Efficiency and Implementation Costs

Ariel Dinar
Rural Development Department
Ref. no. 682-13
RSB support: $15,000

Comparative Poverty Assessment Using Purchasing Power Parities for Low-Income Households

Michael Ward and Sultan Ahmad
Development Data Group, Statistical Services Advisory Team
Ref. no. 682-14
RSB support: $40,000


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