publication April 11, 2019

Development Digest: The Potential of Human Endeavor

A group of multiracial students smiling with their teacher

This Digest begins with a note from the Executive Director and Dean of the Board at the World Bank Group, Merza Hussain Hasan, who reflects on the Hub within the grander scheme of how the Bank, as an institution, has evolved over the decades. We explore issues surrounding human capital in Malaysia, the regions’ economic headwinds, the latest Doing Business rankings, public sector performance and digital taxation. Other articles include informality, how Islamic social finance can further the Sustainable Development Goals (SDGs), oral democracy, the productivity gap between female and male-managed private firms in Malaysia, fiscal policy and making sense of Malaysia’s current account balance. Finally, we highlight the winner of this year’s Sundaran Memorial Prize for Young Malaysian Researchers.

  1. Foreword
  2. The Force of Ideas
    Nearly 75 years ago in Bretton Woods, New Hampshire, a group of nations met to discuss the establishment of a global system of cooperation for supporting the economic recovery of countries affected by the Second World War. The outcome of these deliberations resulted in the creation of the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund, as well as an immediate post-war focus on financing the reconstruction of war-torn countries, particularly in Europe. The first few loans issued by the IBRD were to France, the Netherlands, and Denmark.
    Merza Hussain Hasan
  3. The Potential of Human Endeavor
    Making greater gains in human capital accumulation will be critically important for the quality of Malaysia’s transition into high-income and developed country status when it crosses the threshold into the ranks of high-income countries. In this article, Firas Raad, Country Manager for Malaysia, World Bank Group Global Knowledge and Research Hub, discusses unleashing more broadly the rivers of innovation and productivity in Malaysia by improving the quality of education.
    Firas Raad
  4. East Asia Must Clear Hurdles to Sustain Growth
    In the past half-century, East Asia has made extraordinary progress in sustaining economic growth and improving living standards. Some of the region’s developing economies are now middle-income countries and have collectively grown more than threefold. Some of the economies that moved up from low- to middle-income status in the past quarter-century can realistically aspire to high-income status in the space of the next generation.
    Sudhir Shetty and Andrew Mason
  5. Malaysia Doing Business 2019: Tougher at the Top
    Competition amongst the world’s economies to provide the best business environment possible is no walk in the park. Even top-tier countries in the World Bank’s Doing Business index are not immune to this challenge. In the latest edition of the World Bank Group’s Doing Business 2019: Training for Reform report, there was a peak in reform activity with 128 economies undertaking a record total of 314 business reforms. The numbers show that countries must sustain their best possible pace of reforms in order to stay competitive. Malaysia has done just that.
    Maksym Iavorskyi
  6. Improving Public Sector Performance Through Innovation and Inter-Agency Coordination
    Bureaucracy, politics, lack of IT, corruption, low motivation – these are just some of the excuses we often hear around the world for why public sector services and agencies do not work as effectively as they should. Citizens in developing countries and emerging markets have often grown accustomed to poor quality in service delivery or a lack of services altogether. The real reasons behind the performance failures and the corresponding lack of corrective measures is not always obvious. This most likely involves some combination of the factors above, and others.
    Bernard Myers
  7. Taxing the Digital Economy in Malaysia: How do We Balance Growth with Sustainability?
    Malaysia wants the digital economy to play a central role in the next chapter of the country’s development – that much is clear. However, what may be less clear is why taxation should be part of the policy mix that will help deliver the country’s digital economy ambitions. This is important because taxes raise the cost of doing business rather than reducing it. 
    Richard Record and Jonathan Leigh-Pemberton
  8. Informality: Why is it So Widespread and How Can it be Reduced?
    In a typical developing country, about 70 percent of workers and 30 percent of production are informal. Informality is a cause and a consequence of the lack of economic and institutional development. It implies productive inefficiency and a culture of evasion and noncompliance. Informality, however, exists because it offers the advantages of flexibility and employment in economies with low labor productivity and an excessive regulatory burden. Under these conditions, if there were no informality, there would be greater unemployment, poverty, conflict, and crime. A well-conceived formalization strategy should seek to make formality more attractive. As the causes of informality are complex and interrelated, the reforms to reduce it must include all relevant areas. A formalization strategy should consist of making labor markets flexible, reforming social protection, increasing labor productivity, making the regulatory framework and the justice system efficient, and rationalizing the tax system.
    Norman Loayza
  9. Can Islamic Social Finance be the Key to End Poverty and Hunger?
    As the world works toward achieving the Sustainable Development Goals, Islamic social finance provides new options to help mobilize these efforts, especially with regard to ending poverty and hunger.
    Ahmad Hafiz Abdul Aziz and Wei Zhang 
  10. Oral Democracy
    The challenges of electoral democracy are becoming increasingly visible worldwide. Elite capture, corruption, and patronage are serious concerns, and the legitimacy of some elections has come under critical scrutiny. This has led to a revival of the idea of direct democracy – giving power directly to groups of people to make collective decisions.
    Vijayendra Rao and Paromita Sanyal
  11. Understanding the Productivity Gap Between Female and Male-managed Private Firms
    Using firm-level survey data from World Bank’s Enterprise Surveys for 128 developing countries, the difference in labor productivity between firms with a female versus male top manager has been analyzed. Female-managed firms have 11 percent lower labor productivity than their male counterparts. Using the Oaxaca-Blinder decomposition technique, several factors that contribute to the narrowing and widening of the productivity gap between female-managed and male-managed firms have been highlighted. Factors such as firm-size, sector of activity, foreign ownership, protection against crime, having a generator, and age of the firm seem to make a significant contribution to the productivity gap.
    Asif IslamAmparo Palacios Lopez, and Mohammad Amin
  12. Fiscal Space: Concept, Measurement, and Policy Implications
    Effective fiscal policy depends on the amount of budget resources available to raise spending or lower taxes without jeopardizing fiscal sustainability, or ‘fiscal space’. Fiscal space can be broadly grouped into four dimensions: government debt sustainability, balance sheet composition, external and private sector debt, and market perception of sovereign risk. Since the global financial crisis (GFC), fiscal space in emerging market and developing economies has narrowed. This makes these economies more vulnerable to sudden spikes in financing costs and limits their ability to counteract adverse shocks. Both policy measures and institutional mechanisms are critical in improving fiscal space.
    Ayhan KoseFranziska Ohnsorge, and Naotaka Sugawara
  13. Good or Bad? Making Sense of the Current Account Balance
    On the surface, a current account surplus seems to have many more positive implications than a current account deficit, with the latter raising greater fears of illiquidity and insolvency than the former. However, depending on what drives the balance, a deficit may not necessarily be a bad thing. Similarly, a surplus does not necessarily imply that all is well in an economy, despite its suggestion of a stronger net foreign assets (NFA) position. In addition, whether in deficit or surplus, the current account balance may not in itself be sufficient to indicate near-term financial vulnerabilities. What matters for macroeconomic stability is that the external position (including the current account and gross foreign flows and stocks) is sustainable, without the risk of drastic disruptions or the need for sharp policy adjustments in response to domestic or external shocks. 
    Sharmila Devadas and Norman Loayza
  14. The Sundaran Memorial Prize for Young Malaysian Researchers 2018-19
    To promote high quality and relevant research, the World Bank Development Research Group based in Kuala Lumpur awards a prize for the best academic paper on economics and related social sciences by an early-career Malaysian national. The Sundaran Memorial Prize for Young Malaysian Researchers 2018-19 was awarded to Dr. Wong Woan Foong for her paper “The Round Trip Effect: Endogenous Transport Costs and International Trade.” Dr. Wong’s paper found that once transport costs are recognized to change according to market conditions, exports and imports become closely linked through cost-related spillovers. Hence, protectionist policies can backfire, increasing rather than balancing a trade deficit.