In 1993 India adopted gender quotas for local councils. In particular, the position of chief councilor (or Pradhan) was reserved for women in 1/3 of the village councils in any given election – and this 1/3 was selected at random. As one might expect, this has led to a surge in the number of women holding this post. It also provides a ripe environment for impact evaluation work.
In his opening statement, René Stulz relies on the results of the Fahlenbrach-Stulz study (FS study) to reject the view that executive compensation has contributed to the financial crisis. Stulz argues that the evidence in his study is “inconsistent with the view that banks performed poorly because CEOs had poor incentives.” However, as explained below, the FS study does not provide a good basis for rejecting the poor incentives view.
The FS study attempts to test the “poor incentives” hypothesis by examining whether banks whose CEOs had larger equity holdings performed better during the crisis. Failing to find such an association – and indeed finding that such banks performed worse – the FS study rejects the poor incentives hypothesis. But the poor incentives view does not attribute poor risk-taking incentives to relatively low equity holdings, and the analysis in the FS study does not supply an adequate test of this view.
As I explained in my opening statement, the poor incentives view does not regard large equity holdings as the way to ensure good risk-taking incentives and does not view poor incentives as rooted in insufficient equity holdings. Rather, as I explained, poor incentives have resulted from (i) design of equity compensation (as well as bonus compensation) that rewarded executives even for short-term results that were subsequently reversed, and (ii) linking executive payoffs only to payoffs for shareholders and not also to payoffs for other contributors of capital to financial firms (such as bondholders).
The question of the debate is whether executive compensation contributed to the crisis. Does contribute mean that executive compensation affected the behavior of executives, or does it mean that executive compensation made the crisis significantly worse? If it means that it affected the behavior of executives, surely that is the case. With different compensation schemes, the financial system would have been different and the crisis would have been different. If it means that it made the crisis worse, how could we know that executive pay made the crisis worse? It is an empirical issue and only empirical work can resolve it. Unfortunately, there is very little empirical work so far because it is so difficult to determine ex ante what excessive risk-taking is and data on executive compensation is limited.
Most of the studies of compensation arrangements in the financial industry look at the named executive officers in banks (i.e., the CEO, CFO, or President) because we have data on the compensation arrangements of these individuals. There has been much conjecture about compensation arrangements of traders in banks, but there is no data and thus no empirical evidence. In addition, even if we had such data, it could not be understood independently of the risk management practices of the institution. To see this, consider a trader: Risk-taking incentives for the trader can be affected by his compensation but also by how his performance is defined. If his funding cost reflects the risks he is taking, his attitude towards risk will be very different from a trader who pays the same cost that his institution pays regardless of the risks he takes.
Turning to the evidence on compensation arrangements for top executives, the published work is the paper that Rudiger Fahlenbrach and I published in the Journal of Financial Economics and the paper that Lucian Bebchuk published with Alma Cohen and Holger Spamann in the Yale Journal on Regulation. Although I discussed my paper already in my first blog post, it is useful to show how different researchers can draw seemingly contradictory conclusions from the same data.
A relic cacao tree nestles deep in the valleys of the Northern Range of the island of Trinidad in a sleepy cacao village called Brasso Seco. Moss hangs from this tree creating an eerie effect; its ripe, rough, “lagarta” (alligator) shaped pods only hint at their fascinating contents of pale-coloured, prized Criollo-influenced, flavourful beans.
This is the realisation of a cacao collector’s dream: ancient Trinitario cacao from the place where Trinitario originated. Likewise, across the numerous valleys in villages of Aripo, Lopinot, Naranjho, Cumana in North Trinidad and the steep terrains of Moriah, Runnemede and Lanse Fourmi in Western Tobago, cacao trees of mainly relic Trinitario genotype still survive, carefully conserved in farmers’ fields over the decades spanning from when cocoa reigned as king, in the Caribbean islands of Trinidad and Tobago, to the present day. The chocolate world owes these dedicated farmers a debt of gratitude.
Cacao scientists from Bioversity International and the University of British Colombia at Vancouver, joined forces with some from the Cocoa Research Section of the Ministry of Food Production, Land and Marine Affairs (MFPLMA) and the Cocoa Research Unit (CRU) of the University of the West Indies (UWI), St. Augustine, Trinidad and Tobago and conceived and fine-tuned an ambitious project to promote and utilise the latent treasures contained in the vast acreages of relic cacao still remarkably preserved in Trinidad and Tobago.
A clear pattern of 'two speed recovery' emerged from the global economic crisis: although the East Asian economies saw a drop of nearly 4 percentage points in their GDP growth to 8.5 percent in 2008 and a further decline to 7.5 percent in 2009, they rebounded quickly to 9.7 percent in 2010. At the same time, however, growth in high income countries fell by 6.6 percentage points during 2008-09, from 2.7 percent in 2007 to -3.9 in 2009. Moreover, these economies are not yet out of the woods given the sovereign debt crises in the Euro Area. This is one of the many fascinating patterns revealed in the newly updated online version of the World Development Indicators.
What is more striking is that low income countries (LICs) have been resilient during the crises, more so than in the past. The annual GDP growth rate for low income countries declined less than 1 percentage point in 2008, standing at 4.7 percent in 2009 and quickly recovered to 5.9 percent in 2010. In particular, Ethiopia, Mozambique, Tanzania, and Zambia have shown robust growth of 6 to 11 percent throughout this period. Similar conclusions were presented in Didier, Hevia and Schmukler April 2011.
What does climate finance really mean? Do we mean dedicated funds mobilized by donors in the carbon market, or do we mean funds actually used for mitigation and adaptation action? Definitions and publications abound, but the Climate Policy Initiative (CPI) has now taken the bull by the horns and launched two initiatives with an attempt to lend clarity. Last week, Director of the CPI Venice office, Dr. Barbara Buchner, was a guest speaker at the World Bank’s Washington DC office.
There have been a plethora of reports on climate finance by UN agencies, IFIs and think-tanks, but by far the most comprehensive attempt is a report The landscape of climate finance, launched by CPI last October. It describes the flows of finance, including the sources, intermediaries, instruments, channels, and end-users. After presenting estimates of current flows based on available data, describing the methodology, and discussing the sources of data, the paper offers recommendations on how to improve future data-gathering efforts.
CPI research suggests that at least US$97 billion is being provided to support low-carbon, climate-resilient development activities, US$55 billion by the private sector while at least US$21 billion comes from public budgets. Most of the flows can be classified as ``investment’’ or more generally including ownership interests.
In the Democratic Republic of the Congo, Information and Communication Technologies (ICTs) are helping increase citizen participation, positively transforming the relation between citizens and their government, ultimately resulting in more effective public service delivery.
In our (justifiable) enthusiasm for transparency, we rarely ask whether information provision leads private citizens to help themselves, thereby relieving governments of their responsibilities. If so, we may not be quite there (yet) in finding tools that improve government accountability.
Take the case of community radio, a classic tool for information sharing for accountability in Africa. It is supposed to organize communities and (literally) give voice to the opinions and needs of the marginalized. It also carries public interest messages, communicating the importance of health, education, and democratic values. New data from Benin, a country with a vibrant community radio network, show that people in poorer and far-flung regions are able to access news and information, and share views, because of this medium.
In villages with greater access to community radio, where people are more informed about the value of services, they are more likely to invest their own, private resources in health and education. More informed households are more likely to purchase bed nets from government officials, paying for this public health good to combat malaria, even though nets are supposed to be distributed free.
A recent open letter to the Bank of England raising concerns over the high level of black carbon assets held on London's stock exchange should be noted by urban leaders around the globe. Echoing an earlier commentary by Sir Nicholas Stern in the Financial Times, the letter raises profound questions about the financial risk and exposure of companies, investors and the UK economy stemming from holdings of high carbon assets. Indeed exposure to high carbon investments could be the game changer that determines which global financial centres rise, and which fall, in the immediate future.
London is without doubt a leading financial centre today, likely second only to New York City, but it has not always been that way. French historian Fernand Braudel skilfully traced the history of preeminent western financial centres, from Venice in 1500, via Antwerp, Genoa, Amsterdam, and London, with New York City emerging as the world's financial hegemon around 1930.
Recently I’ve done more than my usual amount of reviewing of grant proposals for impact evaluation work – both for World Bank research funds and for several outside funders. Many of these have been very good, but I’ve noticed a number of common issues which have cropped up in reviewing a number of them – so thought I’d share some pet peeves/tips/suggestions for people preparing these types of proposals.