Social welfare functions that assign weights to individuals based on their income levels can be used to document the relative importance of growth and inequality changes for changes in social welfare. This method is applied in a new working paper by David Dollar, Tatjana Kleineberg, and Aart Kraay. They find that, in a large panel of industrial and developing countries over the past 40 years, most of the cross-country and over-time variation in changes in social welfare is due to changes in average incomes. In contrast, the changes in inequality observed during this period are on average much smaller than changes in average incomes, are uncorrelated with changes in average incomes, and have contributed relatively little to changes in social welfare.
In recent years, much has been written about the benefits of teacher incentive schemes for improving education in both developed and developing countries, but little is known about teachers’ opinions of incentives. Teachers’ opinions could vary as widely as the types of incentive schemes, since the schemes themselves can be as different as apples and oranges: differing in terms of what behavior is rewarded, whether an individual teacher or group of teachers is rewarded, and whether or not the incentive involves competition. Theoretically, teacher incentives motivate teacher behaviors that improve student learning and reward teachers who demonstrate desired behaviors or whose students show improved learning. But the empirical literature – especially from developing countries—is far from conclusive regarding these effects. Moreover, some research suggests that extrinsic rewards, such as salary bonuses, actually reduce motivation rather than stimulate it.
A new book by Puja Dutta, Rinku Murgai, Martin Ravallion, and Dominique van de Walle looks at how successful India’s 2005 National Rural Employment Guarantee Act has been in creating 100 days of wage employment per year to all rural households whose adult members volunteer to do unskilled manual work in public works projects at a stipulated minimum wage. The bulk of the study focuses on the scheme’s performance in one of India’s poorest states, Bihar. There the scheme seems to be falling well short of its potential impact on poverty. Workers are not getting all the work they want and they are not getting the full wages due. Many report that they had to give up some other income-earning activity when they took up work. The unmet demand for work is the single most important policy-relevant factor in accounting for the gap between actual performance and the scheme’s potential impact on poverty. The book suggests that supply-side constraints must be addressed in addition to raising public awareness, and identifies a number of specific supply-side constraints to work, including poor implementation capacity, weak financial management and monitoring systems.
The proliferation of new financial products and services continues to outpace the capacity of individuals and families to make informed financial choices. Financial education geared toward adults has shown low uptake, so the focus has shifted to introducing financial literacy during the schooling years. This research looks at a comprehensive financial education program spanning six states, 868 schools, and approximately 20,000 high school students in Brazil through a randomized control trial. The program increased student financial knowledge by a quarter of a standard deviation and led to a 1.4 percentage point increase in saving for purchases, better likelihood of financial planning, and greater participation in household financial decisions. “Trickle-up” impacts showed improvements in parental financial knowledge, savings, and spending behavior. The evidence suggests the program affected students’ preferences and attitudes about financial decisions well beyond the schooling years. Read the entire paper here.
Philippe Aghion, Harvard economics professor and director of Industrial Organization at the Centre for Economic and Policy Research (CEPR) delivered a lecture at the Bank on April 17 on 'What do we Learn from Shumpeterian Growth Theory?'
It was interesting to hear from the co-founder of the Shumpeterian paradigm about the relationship between economic growth, innovation, creative destruction, and competition. Aghion’s approach is to examine how various factors interact with local entrepreneurs’ incentives to either innovate or to imitate frontier technologies.
Equitablog, run by the Washington Center for Equitable Growth, has launched a series of 'Notes and Finger Exercises on Thomas Piketty’s “Capital in the Twenty-First Century”.' Brad DeLong's post, 'There Are Four r’s', details some alleged oversights in Piketty's book. In particular, DeLong focuses on how the real interest rate behaves at different levels of economic activity. He highlights Larry Summers' concern about secular stagnation and the risk that rich folks might retreat from investing in industry. And DeLong pulls out some sexy math.
Matthew Gentzkow has won the John Bates Clark Medal, an honor conferred by the American Economic Association for his contributions to "our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement..."
Last week the President of the World Bank Group launched at the Spring Meetings the report "Prosperity for All." One of the interesting areas the note reported on was the interrelationship between growth, movements in the income distribution and poverty reduction.
There are various ways of showing the impact of growth on people’s income and its interrelationship with a country’s income distribution. In comparing distributions over time, one of the more useful graphs is a Pen’s Parade (figure 1a), named after another Dutch economist as so many inequality or poverty measures are (other examples are the Theil index and Thorbecke for the Foster-Greer-Thorbecke Poverty Measure).
Poor countries invest far less in research and development (R&D) as a share of their GDP than rich countries. Even middle income countries often invest well under 0.5%, compared to 3% and above in advanced countries.
This fact poses a profound development mystery, and at the surface, suggests huge missed opportunities. Estimates of the social rates of return to R&D - often above 40% - in advanced countries are so high, as to justify levels of investment in developing countries that are multiples greater than those actually found. The case appears to be particularly strong for poor countries, where R&D is essential to the "absorptive'' or "national learning'' capacity that is needed to exploit technological advance originating from rich countries.
With the phenomenal growth of microfinance institutions representing 30 million members with over $2 billion of annual disbursement over the past two decades, it is important to understand the dynamics of microcredit expansion and its induced impact on household welfare. A new World Bank working paper by Shahidur R. Khandker and Hussain A. Samad uses long panel survey data spanning over 20 years to examine the dynamics of microcredit programs in Bangladesh.
President Jim Yong Kim, Prof Jeff Sachs, Chief Economist Kaushik Basu and Annie Lowrey of the New York Times participated in a panel last Friday titled 'Sharing Prosperity, Delivering Results.'
The four discussed the challenges of achieving the World Bank Group's goals of ending extreme poverty and boosting shared prosperity, and in so doing, all stressed the need to take on the goals with an activist's zeal.