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February 2012

What a political economy perspective can contribute to development effectiveness

Verena Fritz's picture

The term ‘political economy’ has become an increasingly popular part of the vernacular at the World Bank and other development agencies. In parallel, interest in the political economy aspects of development has also seen a resurgence in academia, within both economics and political science departments, and even in leading business programs.

Impact evaluation as leverage

Shanta Devarajan's picture

While banks, homeowners and a few governments in the US and Europe are "de-leveraging," the buzzword in the aid business is "leveraging"--using scarce aid resources to crowd-in other resources, such as tax revenues and private capital flows.  The reason is simple:   aid resources are limited (partly due to the economic slowdown in donor countries from their de-leveraging) but development needs are great, so using aid money to stimulate tax revenues or guarantee private investors' risk could square the circle.

But we don’t just want to increase the amount of resources available:  we want to make sure those resources are spent on activities that reduce poverty.  This suggests a different way of thinking of leveraging. 

Love and the City: Happy Valentine’s Day

Dan Hoornweg's picture

Newtown Creek Wastewater Treatment PlantUrbanists are quick to champion the benefits of cities and how they drive economic growth, education, health improvements, and if built and managed well are the best way to achieve ‘sustainable development.’ But rarely do we talk about how cities nurture and encourage love, not to mention great parties, rock and roll, and all those passionate sporting events.

Cities don’t make love possible, but they sure do make it easier. Cities are all about connections, opportunities and logistical challenges. Take Valentine’s Day and the ‘average guy’ in the US. He will spend about $168 this year to celebrate, and woo, his love (women spend about half that). Over the last six weeks about 700 million fresh cut flowers passed through Miami International to be processed at one of the 23 chilled warehouses within five miles of the airport. Making sure no pests or contraband were brought in with the flowers required several thousand US Customs and Agriculture officers working round the clock.

When women are in charge

Markus Goldstein's picture

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.  

Lucian Bebchuk’s Response on Executive Pay and the Financial Crisis

Lucian Bebchuk's picture

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).

Executive Compensation: The $950 Million Dollar Question

René M. Stulz's picture

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.

Rejuvenating the Cacao Industry in Trinidad & Tobago

Jan Engels's picture

Photo Credit: www.trinitario-cacao.orgA 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.

BRIC Spillovers helped Low Income Countries Withstand Crisis

Justin Yifu Lin's picture

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.

A deep dive into climate finance

Ari Huhtala's picture

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.

Mobile-Enhanced Participatory Budgeting in the DRC

Felipe Estefan's picture

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.