China has been the most successful developing country in this modern era of globalization. Since initiating economic reform after 1978, its economy has expanded at a steady rate over 8 percent per capita, fueling historically unprecedented poverty reduction (the poverty rate declined from over 60 percent to 7 percent in 2007). Other developing countries struggling to grow and reduce poverty are naturally interested in what has been the source of this impressive growth and what, if any, lessons they can take from China. This paper focuses on four features of modern China that have changed significantly between the pre-reform period and today. The Chinese themselves call their reform program Gai Ge Kai Feng, "change the system, open the door." "Change the system" means altering incentives and ownership, that is, shifting the economy from near total state ownership to one in which private enterprise is dominant. "Open the door" means exactly what it says, liberalizing trade and direct investment. A third lesson is the development of high-quality infrastructure: China's good roads, reliable power, world-class ports, and excellent cell phone coverage throughout the country are apparent to any visitor. What is less well known is that most of this infrastructure has been developed through a policy of "cost recovery" that prices infrastructure services at levels sufficient to finance the capital cost as well as operations and maintenance. A fourth important lesson is China's careful attention to agriculture and rural development, complemented by rural-urban migration.
This paper analyzes the importance of strengthening the relationship of accountability between health service providers and citizens for improving access to and quality of health care. How this is to be achieved, and whether it works, however, remain open questions. The paper presents a randomized field experiment on increasing community-based monitoring. As communities began to more extensively monitor the provider, both the quality and quantity of health service provision improved. One year into the program, there are large increases in utilization, significant weight-for-age z-score gains of infants, and markedly lower deaths among children. The findings on staff behavior suggest that the improvements in quality and quantity of health service delivery resulted from an increased effort by the staff to serve the community. Overall, the results suggest that community monitoring can play an important role in improving service delivery when traditional top-down supervision is ineffective.
China in the past few years has emerged as a net foreign creditor on the international scene with net foreign assets slightly greater than zero percent of wealth. This is surprising given that China is a relatively poor country with a capital-labor ratio about one-fifth the world average and one-tenth the U.S. level. The main questions that the authors address are whether it makes economic sense for China to be a net creditor and how they see China's net foreign asset position evolving over the next 20 years. They calibrate a theoretical model of international capital flows featuring diminishing returns, production risk, and sovereign risk. The calibrations for China yield a predicted net foreign asset position of -17 percent of China's wealth. The authors also estimate nonstructural cross-country regressions of determinants of net foreign assets in which China is always a significant outlier with 5 to 7 percentage points more of net foreign assets relative to wealth than is predicted by its characteristics. China's extensive capital controls can explain why its current net foreign asset position is far away from what is predicted by open-economy models and cross-country empirics. It seems reasonable to assume that China's international financial integration will increase over time. The authors calibrate and predict different scenarios out to 2025. These scenarios are necessarily speculative, but it is interesting that they typically imply negative net foreign asset positions between 3 and 9 percent of wealth. What may be counter-intuitive for many policymakers is that successful institutional reform and productivity growth are likely to lead to more negative net foreign asset positions than occurs with stagnation. Starting from China's zero net foreign assets position, it would take current account deficits in the range of 2-5 percent of GDP to reach any of these net foreign assets positions. These are not unreasonable deficits, but they require a large adjustment from the present 6 percent of GDP current account surplus.
Reinikka and Svensson demonstrate that, with appropriate survey methods and interview techniques, it is possible to collect quantitative micro-level data on corruption. Public expenditure tracking surveys, service provider surveys, and enterprise surveys are highlighted with several applications. While often broader in scope, these surveys permit measurement of corruption at the level of individual agents, such as schools, health clinics, or firms. They also permit the study of mechanisms responsible for corruption, including leakage of funds and bribery, as data on corruption can be combined with other data collected in these surveys. This paper--a product of Public Services, Development Research Group--is part of a larger effort in the group to measure and explain corruption at micro level and to explore its effects on service delivery.
Reinikka and Svensson exploit an unusual policy experiment to evaluate the effects of increased public access to information as a tool to reduce capture and corruption of public funds. In the late 1990s, the Ugandan government initiated a newspaper campaign to boost schools' and parents' ability to monitor local officials' handling of a large school-grant program. The results were striking: capture was reduced from 80 percent in 1995 to less than 20 percent in 2001. The authors use distance to the nearest newspaper outlet as an instrument for exposure to the campaign. Proximity to a newspaper outlet is positively correlated with the head teachers' knowledge about rules governing the grant program and the timing of releases of funds from the center, but uncorrelated with test scores of general ability. A strong (reduced-form) relationship exists between proximity to a newspaper outlet and reduction in capture of school funds since the newspaper campaign started. This pattern contrasts sharply with the outcomes in the five-year period prior to the campaign. Instrumenting for head teachers' knowledge about the grant program, the authors find that public access to information is a powerful deterrent to capture at the local level. This paper--a product of Public Services, Development Research Group--is part of a larger effort in the group to study the role of information in making services work for poor people.
Dollar and Levin examine the allocation of foreign aid by 41 donor agencies, bilateral and multilateral. Their policy selectivity index measures the extent to which a donor's assistance is targeted to countries with sound institutions and policies, controlling for per capita income and population. The poverty selectivity index analogously looks at how well a donor's assistance is targeted to poor countries, controlling for institutional and policy environment as measured by a World Bank index. The authors' main finding is that the same group of multilateral and bilateral aid agencies that are very policy focused are also very poverty focused. The donors that appear high up in both rankings are the World Bank's International Development Association, the International Monetary Fund's Enhanced Structural Adjustment Facility, Denmark, the United Kingdom, Norway, Ireland, and the Netherlands. As a robustness check the authors alternatively use institutional quality measures independent of the World Bank and find the same pattern of selectivity. They also find that policy selectivity is a new phenomenon: in the 1984-89 period, aid overall was allocated indiscriminately without any consideration to the quality of governance, whereas in the 1990s there was a clear relationship between aid and governance (institutions and policies). This increasing selectivity of aid is good news for aid effectiveness. The bad news is that the aid agencies that the authors survey vary greatly in size. Some donors that are largest in absolute size, such as France and the United States, are not particularly selective. Japan comes in high on the policy selectivity index but far down on the poverty selectivity index, reflecting its pattern of giving large amounts of aid in Asia to countries that are well governed but in many cases not poor. This paper--a product of Development Policy, Development Economics Senior Vice Presidency--is part of a larger effort in the Bank to examine aid effectiveness.
June 1998 Aid spurs growth and poverty reduction only in a good policy environment so it should be targeted to countries that have improved their economic policy. That aid tends to be allocated relatively indiscriminately is one factor that undermines its potential impact. Spurring growth in the developing world is one stated objective of foreign aid. Another, more commonly cited, objective is reducing poverty. Generally poverty reduction and growth go hand in hand, but could aid mitigate poverty without measurably affecting growth? Burnside and Dollar examine how foreign aid affects infant mortality-an important social indicator that provides indirect evidence that the benefits of development are reaching people everywhere. They conclude that in developing countries with weak economic management-evidenced by poor property rights, high levels of corruption, closed trade regimes, and macroeconomic instability-there is no relationship between aid and the change in infant mortality. In distorted environments, development projects promoted by donors tend to fail. And aid resources are typically fungible, so the aid does not in fact finance these projects. Aid finances the whole public sector at the margin, which is why the quality of management is the key to effective assistance. A government that cannot put effective development policies in place is unlikely to oversee the effective use of foreign aid. On the other hand, there is a relationship between aid and a change in infant mortality when the recipient country has relatively good management. When management is good, additional aid worth 1 percent of GDP has a powerful effect, reducing infant mortality by 0.9 percent. In other words, aid spurs growth and improvements in social indicators only in a good policy environment. These findings strengthen the case for targeting foreign aid to countries that have improved their economic policy. But after controlling for per capita income and population, there has been almost no relationship between countries' economic policies and the amount of aid they get. The relatively indiscriminate allocation of assistance is one factor undermining the potential impact of aid. This paper-a product of Macroeconomics and Growth, Development Research Group-is part of a larger effort in the group to examine aid effectiveness. The study was funded by the Bank's Research Support Budget under the research project Economic Policies and the Effectiveness of Foreign Aid (RPO 681-70). The authors may be contacted at email@example.com or firstname.lastname@example.org.
February 1998 Why has foreign aid had so seemingly poor a macroeconomic impact in many developing countries? Is there a relationship between concessional assistance, widespread corruption, and other types of rent-seeking? To address the relationship between concessional assistance, corruption, and other types of rent-seeking activities, the author provides a simple game-theoretic rent-seeking model. Insights with interesting implications emerge from the analysis: - An increase in government revenue (from windfalls, for example, or from increased foreign aid) does not necessarily lead to the provision of more public goods and in certain circumstances may reduce it. - The mere expectation of aid may suffice to increase rent-dissipation and reduce productive public spending. But if the donor community can enter into a binding policy commitment, this result may be reversed. The author provides some preliminary empirical evidence in support of the hypothesis that windfalls and foreign aid, in countries suffering from a divided policy process, are on average associated with more extensive corruption. He finds no evidence that donors systematically allocate aid to countries with less corruption. The results accords with recent empirical findings that aid is more effective, the greater the effort to direct it to good performers. But such a regime shift may involve an aid policy that in the short run provides more assistance to countries in less need and less aid to those in most need. Enforcing such a regime shift might be difficult. This paper--a product of the Development Research Group--is part of a larger effort in the group to study the effectiveness of foreign aid.
Several recent papers have attempted to identify the partial effects of trade integration and institutional quality on long-run growth using the geographical determinants of trade and the historical determinants of institutions as instruments. Dollar and Kraay show that many of the specifications in these papers are weakly identified despite the apparently good performance of the instruments in first-stage regressions. Consequently, they argue that the cross-country variation in institutions, trade, and their geographical and historical determinants is not very informative about the partial effects of these variables on long-run growth. This paper--a product of Investment Climate, Development Research Group--is part of a larger effort in the group to study institutions and development.
Based on a survey that we designed and that covers a stratified random sample of 12,400 firms in 120 cities in China with firm-level accounting information for 2002-2004, this paper examines the presence of systematic distortions in capital allocation that result in uneven marginal returns to capital across firm ownership, regions, and sectors. It provides a systematic comparison of investment efficiency among wholly and partially state-owned, wholly and partially foreignowned, and domestic privately owned firms, conditioning on their sector, location, and size characteristics. It finds that even after a quarter-of-century of reforms, state-owned firms still have significantly lower returns to capital, on average, than domestic private or foreign-owned firms. Similarly, certain regions and sectors have consistently lower returns to capital than other regions and sectors. By our calculation, if China succeeds in allocating its capital more efficiently, it could reduce its investment intensity by 5 percent of GDP without sacrificing its economic growth (and hence deliver a greater improvement to its citizens' living standard).
A collaborative effort by Western specialists and some of Taiwan's leading social scientists, this timely study addresses the cause and effects of Taiwan's dramatic achievements in economic growth and income distribution as a market-oriented yet highly government-interventionist economy. The relevance of this success could not be more telling for other market-oriented economies as well as for the rapidly decentralizing economies of Russia, Eastern Europe, and China. Using a case-study approach, the contributors examine the transition to export-led growth, foreign trade, investment patterns, the role of financial institutions, fiscal and monetary policy, the educational and agrarian systems, and the role of women and ideology.