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Policy Research Bulletin

April–June 1998
Volume 9, Number 2

New Research

The research projects described here are directed by World Bank staff and funded by the Bank’s central Research Support Budget (RSB). For information about the research projects described here, contact the researchers at the Bank’s main address.

RESEARCH STARTS

RESEARCH PROPOSALS UNDER PREPARATION

RESEARCH STARTS

Pollution Control in China: The Role and Impact of Inspections and Complaints
 Susmita Dasgupta
Development Research Group
Ref. no. 682-44

In recent decades governments have enacted a host of environmental laws and regulations aimed at controlling industrial emissions. But the resources available for monitoring compliance have often been inadequate. That makes knowing how environmental agencies’ monitoring and enforcement activities affect compliance and what determines those activities all the more important.

The few empirical studies that have looked at these issues have been in industrial countries. This study will look at the impact and determinants of environmental agencies’ monitoring and enforcement activities in a developing country, China. It will give particular attention to the role of citizens’ complaints about pollution. The study will focus on Tianjin and Zhenjiang, both cities that have experienced rapid industial growth.

Comparing data from the environmental protection bureaus of Tianjin and Zhenjiang, the study will examine patterns of emissions, inspections, and complaints at the district and sectoral level in each city. The study will then carry out an econometric analysis at the plant level, to investigate the effect of regulators’ monitoring and enforcement activities on the behavior of polluters, and the effect of citizens’ complaints on the behavior of regulators and on the environmental performance of plants.
RSB support: $66,850
Staff weeks: 29

Does More Intense Competition Lead to Higher Growth?
 Mark Dutz
Office of the Vice President, Development Economics and Chief Economist
Ref. no. 682-47

Most empirical studies of the links between competition and economic performance have been micro-level analyses and have not considered economy-wide effects, such as whether some sectors or firms grow at the expense of others. This study will investigate the effects of competition on aggregate growth. The aim is to provide evidence on the importance of promoting competition, to bolster flagging pro-competitive reforms.

The study will construct a database of economy-wide measures of the intensity of competition for a large number of countries. These measures will include qualitative indicators of intensity of competition based on surveys of businessmen and economists, as well as quantitative indicators of concentration and the mobility of firms. The database will then be used to conduct a cross-country regression analysis of the effect of competition on selected economic performance indicators. The study will also review theories relating to the mechanisms through which competition affects economic performance measures, such as the efficiency of investment and innovation.

The study is the first part of a broader research effort on the role of competition in making markets more effective; related work will attempt to provide more precise guidance on the relative importance of different pro-competitive measures.
RSB support: $39,700
Staff weeks: 12

Operating Costs and Investment Returns of Pension Funds
 Estelle James and Dimitri Vittas
Development Research Group
Ref. no. 682-50

As countries undertaking pension reform have introduced private pension plans, a complex debate has arisen on their relative desirability. Proponents tout their benefits, including high returns; opponents cite their high administrative costs. Some analysts argue that a group plan can constrain these costs, but here again there is a debate about the relative desirability of defined benefit and defined contribution plans.

To sort through the arguments and counter arguments, this study will analyze what determines costs in private pension funds and what the tradeoffs are between costs and benefits. It will research these issues through an econometric analysis using data for a large number of U.S. mutual funds (which operate similar to the Chilean private pension funds) and structured case studies of a few large pension or mutual funds. The case studies also will look at how changes in the competitive or regulatory environment may have affected costs and returns.

The study also will analyze funds widely considered well run to see whether they are less expensive to operate, how and how effectively they have been insulated from political control, whether the procedural safeguards applied could be implemented in developing countries, and what kinds of incentives elicit good performance. The objective is to suggest public policies that will ensure low-cost operation of pension plans without undue sacrifice of benefits.
RSB support: $40,000
Staff weeks: 23

The Political Economy of Social Policy in Transition Countries
 Branko Milanovic
Development Research Group
Ref. no. 682-52

A simple political economy model might conceptualize economic reform and social policy in transition economies as the outcome of decisions by self-interested politicians weighing the expected payoffs of favoring rent recipients (state enterprise workers and managers) against those of favoring transfer recipients (mostly pensioners). Such a model might predict similar social policy outcomes in the Czech Republic, Poland, and Russia, which started transition with similar conditions and with similar shares of pensioners in the population. Yet that has not been the case.

In Russia there has been massive redistribution of income and wealth, with privatization favoring insiders (managers and workers), tax revenue falling, and pensioners losing much ground relative to workers. In Poland privatization has proceeded more slowly, there has been much less redistribution and rent seeking, and pensioners have fared better than workers. The Czech Republic has seen some rent seeking, but privatization has benefited the population much more broadly and pensioners’ incomes have kept pace with workers’.

This study will seek to explain these disparate outcomes for pensioners through case study analysis of social policy formulation in these transition economies, drawing on official documents, secondary sources, and interviews. It will then attempt to enrich the simple political economy models of policy decision making.
RSB support: $37,500
Staff weeks: 8

Nature Tourism’s Contribution to Economic Development and Conservation Finance
 Ernst Lutz
Environment Department
Ref. no. 682-54

Through overuse or inappropriate use of natural resources, nature tourism can degrade or destroy the environmental assets on which it is based. But if managed wisely, it has the potential to generate revenues not just for social and economic development but also for conservation. This research will look at the potential contribution of nature tourism to conservation and to the economy as a whole, to demonstrate its importance. It will also delve more deeply into the choices that determine the sustainability of nature tourism assets and the process of their exploitation in developing countries.

The project, the first phase of a larger research effort, will begin developing a general sectoral multimarket analytic framework that clarifies the main direct and indirect links between the economic, environmental, social, and policy variables in nature tourism. The model will address such issues as the sustainability of resource use, the relative benefits from and interactions among multiple uses, and public and private sector roles in nature tourism.

The project will apply the draft framework in a "back-of-the-envelope" manner to cases in southern Africa to test its utility, particularly its ability to shed light on the relative importance of different policy variables in a particular ecological and economic context. The aim is to develop a framework that policy analysts can use to assess sustainability, multiple uses, and public and private sector roles in nature tourism in different regions.
RSB support: $40,000
Staff weeks: 9

The Impact of Colombia’s Voucher Program
 Elizabeth King
Development Research Group
Ref. no. 682-56

Facing overcrowding in public secondary schools that in some cases prevents children from attending, Colombia has introduced school vouchers to enable poor children to enroll in private secondary schools. Municipalities pay 20 percent of the cost, and the central government the rest. Each municipality decides how many vouchers to fund. Where more students wish to participate than there are vouchers, the vouchers are awarded through a lottery.

Should policymakers—in Colombia and elsewhere—invest in vouchers or in improving and expanding public schools? That question requires answers to others: Does the voucher program induce many students to attend school, or mainly subsidize families who would have enrolled their children anyway? How many of the students receiving vouchers would have attended a public school without the program? And how does the program affect the quality of the education that participating children receive?

Such questions are generally difficult to answer because of the problem of self-selection. But the allocation of vouchers through lottery makes it possible to control for endogenous factors. This study will analyze the program’s effect on individual enrollment and on the quality of education students receive by following up on 1,500 students who won the lottery and 1,500 who did not. It will use household questionnaires to analyze how households responded to winning a voucher, including in decisions on the education of siblings. And it will administer achievement tests to the students to determine how winning a voucher affected learning.

RSB support: $40,000
Staff weeks: 8

Auctions and Infrastructure
 Neil Roger
Private Sector Development Department
Ref. no. 682-58

In trying to move infrastructure activities from monopolies toward markets, governments have increasingly relied on auctions as an efficient and transparent way to privatize industries, to divest monopolies’ assets, and to allocate scarce resources such as concessions. In the early 1990s economists realized that existing auction theory was not sufficient for the kinds of auctions being used in infrastructure privatization. Auction theory for the sale of a single item was well developed, but infrastructure auctions generally involve the sale of multiple items, often with value interdependencies between them and with opportunities for strategic behavior. The design of auctions matters: different designs lead to different allocations, efficiency outcomes, and government revenues.

This study will extend the theory relating to auctions for multiple items. Focusing on issues especially relevant for developing countries, it will analyze the benefits and shortcomings of the simultaneous ascending auction, used in several countries for assigning radio spectrum licenses. It will also develop the theory of auctions for multiple identical items with resale possibilities. This analysis will compare the properties of different kinds of auctions, particularly their effects on revenues raised and their efficiency effects. The research will suggest guiding principles for the design of multiple-item auctions, aimed at
helping developing countries avoid costly mistakes.

RSB support: $25,000
Staff weeks: 2

Measuring the Efficiency and Productivity of National Agricultural Research Systems
 Uma Lele
Environmentally and Socially Sustainable Development Vice Presidency, Agricultural Research and Extension Group
Ref. no. 682-60

Most agricultural research systems have an ongoing process of evaluation to review research programs, almost always relying heavily on qualitative information. While such evaluations can yield useful recommendations for improving efficiency in the programs reviewed, they are poorly suited for comparing the performance of programs and for allocating resources. What is needed are systematic quantitative indicators that would provide benchmarks for comparing the efficiency and effectiveness of research programs across an organization, among organizations, and even among countries.

This need has become more pressing as new research issues have come to the fore, new types of institutions have entered the field, and new opportunities for international collaboration have emerged. And research institutions everywhere, facing increasing budgetary and competitive pressures and growing demand for accountability in the use of resources, need a method for allocating resources to improve efficiency and impact.

Brazil’s national agricultural research institution, Empresa Brasileira de Pesquisa Agropecuaria (EMBRAPA), has developed and tested a method for estimating the technical efficiency of research organizations, with quantitative management indicators for defining and monitoring research production goals. This study, in collaboration with experts from EMBRAPA and other organizations, will review the experience with the method and assess competing methods. And it will explore the potential for extending these techniques from within-country applications to cross-country comparisons.
RSB support: $30,000

The Role of Interfirm Linkages in Emerging Industrial Clusters
 R. Shyam Khemani and Hong Tan
Private Sector Development Department
Ref. no. 682-61

Both industrial and developing countries have seen rapidly growing regions emerge even as the surrounding economy experiences stagnation or decline. These dynamic regions tend to be characterized by industrial clusters—groups of highly specialized firms sharing horizontal and vertical linkages and benefiting from the sharing of information and resources and other forms of cooperation.

While many studies have analyzed such industrial clusters, most have done so only after the clusters have become successful, not during their transformation. This study will examine an emerging industrial cluster in a Turkish industrial district known as Corum. Once a poor area with little infrastructure and industry, Corum has seen rapid economic growth and diversification in the past two decades, the emergence of a lively export trade, and a reversal of the outmigration to larger cities.

Using data from a survey of 75 firms in the district, the study will explore the formation of interfirm linkages and their effects on firms’ productivity. Through econometric analysis, it will identify firm characteristics most likely to be associated with stronger linkages, such as age, export orientation, and type of sector (whether one that is experiencing rapid technological development or one that is declining, for example). This analysis should shed light on why and how linkages form. Using production function estimates, the study will then test whether these linkages translate into productivity increases for firms.
RSB support: $38,520
Staff weeks: 2

Inequality and Development
 Lyn Squire and Halsey Rogers
Office of the Vice President, Development Economics and Chief Economist
Ref. no. 682-63

Other things equal, research has shown, increased equality reduces poverty and may lead to faster growth. But some policies used to reduce inequality may slow growth, and some policies to promote growth may increase inequality. Certain redistributive policies, for example, might lead to a decline in investment or change incentives in a way that slows growth; if so, the policies’ net effect on poverty might be negative.

To identify policies that have a beneficial effect on inequality, this study will investigate the joint impact of a broad array of policies on inequality and growth both at the national level, drawing on a panel data set of more than 100 countries, and at the state level in India. In doing so, it will also attempt to identify the net effect on poverty of different sets of policies. The study will carry out a set of nested empirical estimations. It will first take an aggregate approach, examining the effects of different policy and structural variables on overall inequality. Then, using a disaggregated approach and stratifying for income level, it will examine the impact of policies among the poorer quintiles of the population.
RSB support: $25,000
Staff weeks: 8

Competition and Privatization in Urban Water Supply
 George Clarke
Development Research Group
Ref. no. 682-64

The recent wave of infrastructure privatization has been accompanied by increased competition, which, recent research suggests, improves sector performance even when enterprises retain some market power. In the urban water sector private participation has been slower to develop and less comprehensive than in other infrastructure sectors, with leases and concessions more common and full privatization less common. One possible reason for this may be the greater difficulty of introducing direct product market competition in the sector.

This study will examine the only recent case of full privatization of a public water utility, in the United Kingdom, and compare the change in welfare resulting from that privatization with the change in welfare associated with concession and lease contract privatizations. It will investigate which institutional characteristics shaped the outcome of the privatization, using a research framework based on the New Institutional Economics.

The study will also analyze the effectiveness in the privatized U.K. water sector of yardstick competition, an indirect form of competition that allows comparison of the performance of companies in an industry. It will assess which institutional characteristics contributed to or detracted from the success of yardstick competition and how well it substituted for repeated competition for the market.

The study aims to support policy advice to developing countries considering full privatization of their urban water sector.
RSB support: $31,000
Staff weeks: 4

Firm-Level Database for Analyzing the Impact of the Regional Crisis and Longer-Run Issues of Productivity Growth in East Asia
 Pieter Bottelier and Mary Hallward Driemeier
East Asia and Pacific, Poverty Reduction and Economic Management Sector Unit
Ref. no. 682-65

This project builds on an earlier effort, still under way, to collect firm-level information in Thailand. Begun before the East Asian banking and currency crisis, the Thailand Industrial Competitiveness Study is aimed at understanding what determines firms’ productivity and what impedes their ability to increase the value added and sophistication of their output. A detailed questionnaire, administered to 2,000 randomly selected firms in key sectors, asks questions about production and investment decisions, the firms’ financial structure, how the firms acquired new technologies, and whether they export or have significant links with multinational corporations. With the onset of the crisis, questions were added to measure its effect on firms’ capacity utilization, employment, and financial position.

This project will extend the survey to Indonesia, the Republic of Korea, Malaysia, and the Philippines, collecting comparable data across the five countries. The resulting database will help increase the understanding of how capital and technology transfers are effected and how they influence industrial productivity. In addition, because of the timing of the survey and its regional coverage, the database will allow researchers to test the effectiveness of different policy regimes in mitigating the effects of the crisis and facilitating export-led growth and productivity gains. And it will make it possible to investigate how the effects of the crisis are transmitted through inter- and intra-regional trade and investment flows.
RSB support: $39,000
Staff weeks: 23

Small Plants, Pollution, and Poverty
 Susmita Dasgupta and David Wheeler
Development Research Group
Ref. no. 682-66

The argument that small firms are disproportionately damaging to the environment is widely shared but based almost entirely on anecdotal evidence. The issue calls for more empirical research, because it is critical for the design and implementation of pollution control policies in developing countries. If small plants are generally clean, regulators can focus on large, polluting plants. But pollution management strategies will have to focus on small firms if they are dirty, highly competitive under conditions of rapid development, and, in the aggregate, a major source of pollution.

This study seeks to improve the understanding of the links between economic development, small-scale industry, and pollution. Using new manufacturing and emissions data from Brazil and Mexico, the study will address four questions: First, are small plants generally more pollution intensive than large plants in developing countries, and if so, by what margin? Second, what is the effect of economic development on small enterprises’ share of industrial activity? Third, what is the effect of economic development on small enterprises in pollution-intensive sectors? And finally, what happens to pollution damage from small enterprises as development proceeds? How does it compare with pollution damage from large enterprises?

RSB support: $39,750
Staff weeks: 16

Colombia’s Pollution Charge System: Implementation, Impact, and Implications
David Wheeler and Susmita Dasgupta
Development Research Group
Ref. no. 682-69

Although long advocated over command-and-control regulation of emissions, pollution charges have rarely been used outside Eastern Europe and the OECD countries. Where they have been adopted, such charges have generally been used to finance regulatory administration rather than to provide significant incentives for reducing pollution. And the few exceptions in developing countries all depart from a true Pigovian scheme in failing to charge for each unit of emissions—instead charging for pollution above the legal limits.

Colombia, however, is adopting a new pollution charge system that reflects classic Pigovian principles. It focuses on creating significant incentives for pollution control, and it is decentralized so that local charges can reflect local conditions. In each of 37 regions an administrative council representing key stakeholders sets targets for emissions reductions. Starting with a common charge, local committees can raise charges incrementally until the targets are met.

This research will take advantage of this unique opportunity to study the administration and impact of pollution charges in a developing country. It will address three research questions: What factors determine regional differences in ambient quality goals and emissions reduction targets? What determines regional differences in implementation of the charge program? And how do charges affect polluters’ behavior? The study will address these questions econometrically, using panel date provided by the regional authorities that administer the charges.
RSB support: $39,400
Staff weeks: 20

RESEARCH PROPOSALS UNDER PREPARATION

Strategies for the Large-Scale Promotion of IPM Practices in Asia: An Economic Appraisal
 Gershon Feder
Development Research Group
Ref. no. 682-30
RSB support: $15,000

Forest Performance Indicators
 William B. Magrath
Rural Development Department
Ref. no. 682-45
RSB support: $15,000

Developing Countries and the Multilateral Trade Negotiations
 Will Martin
Development Research Group
Ref. no. 682-46
RSB support: $15,000

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