Interest Bearing Notes                                          June 2020

                A Finance & Private Sector Development Research Newsletter

                                        What's new on our website

Which jobs are most vulnerable to COVID-19?
In a new policy brief, Daniel Garrote Sanchez, Nicolas Gomez Parra, Caglar Ozden, and Bob
Rijkerscalculate labor market exposure to COVID-19 in the European Union (EU) by examining which
jobs in non-essential industries cannot be performed from home. Many of these jobs are in lagging
regions; tend to be low paid and less secure; and are held by young, poorly educated workers and
migrants. For this reason, in the absence of policy action, the COVID-19 crisis is likely to exacerbate
preexisting socioeconomic and regional disparities.


                                            Worldbank research


The transformative effects of privatization in China
The literature on the effects of privatization is large, but two areas that might benefit from further attention
are how time-varying firm characteristics affect the timing of privatization (non-random selection), and
more detailed, analytically rigorous studies of privatization in China. Zhangkai Huang, Jinyu
Liu, Guangrong Ma, and IBN co-editor Colin Xu address these issues by exploiting a natural experiment
based on the age-promotion rules for local politicians, under which promotion probability drops sharply
after age 58. Using a regression discontinuity framework, the authors find that cities with top politicians
older than 58 were significantly less likely to privatize SOEs under their oversight, presumably because
the political advancement associated with privatization was no longer possible. To address the selectivity
of privatization with respect to firm performance, they use a dummy variable indicating that the top local
politician was 58 or older as the instrumental variable for privatization. They offer evidence that this
instrumental variable does not show a significant correlation with SOE performance, consistent with it
satisfying the exclusion restriction. They then show that their instrumental variable estimate of the causal
effects of privatization is an order of magnitude larger than those obtained from the traditional firm-fixed-
effect specifications. Furthermore, where the local government is more actively involved in developing
local businesses, the effects of privatization are significantly smaller, indicating complementarity between
privatization and marketization. This paper indicates that privatization is a key reason behind China’s
economic transformation.
Female business leaders, the business and cultural environment, and productivity
While women are beginning to get ahead of men in selective areas, such as college admission, in both
high-paying and leadership jobs, women continue to lag men. Sheng Fang, Chorching Goh, Mark
Roberts, Albert Zeufack and IBN co-editor Colin Xu use worldwide firm-level data from the World Bank
Enterprise Survey to study how female-headed firms differ from male-headed firms in their productivity
levels and growth, and whether male-female leader performance disparities hinge on the underlying
environment. They find that female-headed firms are more prevalent in countries with better rule of law,
greater gender equality, and a stronger individualistic culture. After conditioning on basic country-and firm-
level characteristics, female-headed firms have significantly lower productivity levels and labor
productivity growth than male-headed firms. The disadvantage derives from manufacturing firms but is
hardly evident among service firms, and it shows up only among relatively small firms. Although the
female leader performance disadvantage is not related to gender equality, it is smaller where there is less
emphasis on personal networks, less competition, and the culture is more collective. Contrary to the
literature showing that corruption can have particularly adverse effects on women, the study does not find
that the female leader disadvantage is amplified in corrupt environments.


Winners and losers when private banks distribute government loans
Our own Alvaro Pedraza and Claudia Ruiz-Ortega, together with Jose Renato Haas
Ornelas and Thiago Silva analyze the effects of Brazil’s earmarked credit program, one of the world’s
largest second tier lending programs, under which a substantial portion of the funds were transferred from
the Brazilian National Development Bank to private banks that then selected loan recipients. These
earmarked loans were intended to complement banks’ commercial lending but had regulated interest
rates set below the average market rate. To mitigate the negative effects from the Global Financial Crisis
and to alleviate credit constraints among micro, small, and medium size firms, in 2008 the Brazilian
government substantially expanded the program. The authors consider two types of loans – working
capital and vehicle financing – which accounted for roughly half of the total outstanding volume of private
credit to businesses. While the purchase of vehicles can be financed via loans from both the ‘free’ market
and the earmarked credit market, working capital loans are almost exclusively accessed in the free
market. Using data from 5.8 million loans to 1.85 million firms from 2005 to 2016, the authors find
evidence that banks offset some of the lower expected revenue from government loans by increasing
their interest rates on other credit products. Specifically, once an earmarked loan was received, the
recipient firm experienced an average increase of 38 basis points on the interest rates on new working
capital loans contracted with the bank. There was not a similar interest rate increase in the sample of
vehicle loans, where earmarked and commercial loans were both prevalent, and banks had less flexibility
to adjust rates. Moreover, increased rates on working capital loans were only observed among high-risk
firms – those with below-median credit ratings, for which banks were required to hold more provisions.
Thus, riskier borrowers received earmarked loans only if they paid a premium for other non-earmarked
loans. Finally, although the expansion of the program was meant to promote investment among micro,
small, and medium enterprises, it was larger firms and those with existing credit relationships with the
largest banks in the country that disproportionally benefited from the loan subsidies. The patterns are
consistent with a risk mitigating strategy, under which banks bearing the credit risk associated with
earmarked loans at a capped interest rate had a strong incentive to select borrowers that were ex-ante
less risky.

Remote-learning, time-use, and mental health of Ecuadorian high-school students during the
COVID-19 quarantine
Our own David McKenzie along with Igor Asanov, Francisco Flores, Mona Mensmann, and Mathis
Schulte conduct a rapid response phone survey among high school students in Ecuador to understand
and learn about their time use during quarantine, and to understand their access to remote learning
opportunities. The findings show that most students have developed daily education routines, with 74
percent engaging in some online or telelearning activities. Female students spend more time on
schoolwork and are also responsible for more household tasks; meanwhile, male students are more likely
to be working than their female counterparts. The survey also includes questions to measure the mental
health status of students, who identify disruptions to learning and social isolation as their two biggest
concerns due to COVID-19. In addition, 16 percent have mental health scores that lie below a threshold
indicative of major depression, which suggests scope for social support programs and interventions to
supplement remote learning.

Financing firms in hibernation during the COVID-19 pandemic
In past crises, policy makers have tried to resolve the financial intermediaries, creditors, and firms in
trouble, while shielding the rest of the financial system and the real economy from a collapse. Tatiana
Didier, Federico Huneeus, Mauricio Larrain, and Sergio Schmukler point out that this approach is ill-
suited to dealing with the generalized shock of the COVID-19 pandemic on firms and financial systems.
They remind us that firms depend on key and unique relationships with different stakeholders, such as
workers, suppliers, customers, and creditors. These relationships are costly and time-consuming to build,
maintain, and adjust, and therefore difficult to re-create. An overarching goal should be to work with the
financial sector to improve the likelihood that viable firms are not pushed into default and bankruptcy by a
financial infrastructure that is not prepared to deal with a pandemic. While some commentators favor a
“freeze” of the economy until the health crisis abates, the authors favor “hibernation,” which means using
the minimum cash necessary for firms to withstand the lockdown and the social distancing measures.
That cash could be used to freeze firms’ relationships with their stakeholders, while adapting their
activities, but not to freeze firms themselves. They go on to discuss specific policies for adapting the
institutional framework to meet the challenges imposed by the pandemic and others regarding the
provision of credit to firms. The choices here will not be easy ones. Should support go to large firms
(which have many workers, but better access to alternative sources of finance) or to small firms? Or to
firms in essential industries versus the hardest hit? Or to those whose failure would be most disruptive to
value chains, or those whose relationships would be most difficult to reconstruct? Country context matters
greatly for how these questions are answered. Emerging and developing countries face sudden
reductions in capital inflows, additional debt will be pricey, and many have depreciating currencies (and
firms with loans denominated in foreign currency). Those factors limit the range of solutions available.
That said, many developing countries have banking systems that they could use to channel credit to firms
and tools to assist banks, and the prevalence of informal firms might help them reestablish relationships
faster once the lockdown measures are eased. These informal firms might be better targeted through
programs that assist households, through cash transfers and personal loans.

Measuring employment: Experimental evidence from urban Ghana
Rachel Heath, Ghazala Mansuri, Bob Rijkers, William Seitz, and Dhiraj Sharma conducted a
randomized survey experiment in Ghana to assess the impact of the reference period and survey
modality (being interviewed over the phone) on measures of employment. The experiment tracked 954
respondents of the Ghana Urban Household Panel Survey. Respondents were randomly allocated to one
of three groups (a) a group that was interviewed by phone three times a week for 10 weeks, (b) another
that was interviewed by phone once a week for 10 weeks, and (c) a third that was interviewed in person
once a week for 10 weeks. The results show that both survey modality and the reference period matter for
measuring employment, particularly for the self-employed in mobile or home-based self-employment. On
average, interviewing respondents over the phone instead of in person reduced the reported incidence of
employment by 8 percentage points, the number of days worked by 0.6 and the number of hours by 7.
One potential explanation for this finding is that respondents feel less compelled to report socially
desirable outcomes over the phone than in person. With regards to the reference period, those
interviewed over the phone three times a week were 7 percentage points more likely to report having
done any work than those interviewed over the phone once a week. Conditional on reporting any work,
they reported 0.6 fewer days and 4.7 fewer hours than those interviewed once a week. Shorter reference
periods thus appear to allow respondents to better recall shorter employment spells.

                            Our eclectic guide to recent research of interest

COVID-19 and the future of microfinance: Evidence and insights from Pakistan
Kashif Malki, Muhammad Meki, Jonathan Morduch, Timothy Ogden, Simon Quinn, and Farah
Saidprovide new and timely evidence on the implications of COVID-19 for the microfinance sector in
Pakistan. Pakistan has a mature microfinance sector that serves a wide distribution of businesses and
households, and as such these findings are important and relevant for other settings. The authors report
results from rapid response phone surveys of 1,000 microfinance clients, along with a survey of 200
microfinance loan officers, and qualitative evidence from interviews with regulators and senior
representatives of microfinance institutions. They find massive drops in weekly sales and household
income among the microfinance clients – a drop of about 90 percent. The respondents report their
primary concern as being able to acquire food for their household, and 70 percent report an inability to
repay their loans. This latter finding is confirmed by the loan officer surveys, which report loan repayment
rates fell from 98 percent in February 2020 to 81 percent in March 2020 and were predicted to fall
precipitously to 34 percent by April 2020. This drop in repayment, in turn, has caused a liquidity crisis
among the microfinance providers who are unable to service their investors. The qualitative interviews
suggest a need for a concerted effort by investors, regulators, and other public service actors to stabilize
and manage liquidity under the pandemic emergency.

Resisting social pressure in the household using mobile money
Emma Riley studies whether changing the way loans are disbursed impacts the businesses of female
borrowers. In a randomized control trial in Uganda, 3,000 female microfinance clients were randomly
allocated to one of three groups (1) a treatment group that received their microfinance loans in cash and
received a mobile money account explicitly designated for the woman’s business (2) a second treatment
group that received their loans deposited into a mobile money account and (3) a control group that
received their microfinance loan as cash and was not given a mobile money account. Emma argues that,
when loans are disbursed in cash, family may expropriate funds away from the woman’s business.
Instead, women may be more likely to resist sharing pressure when loans are deposited into a private
mobile money account. Results from a follow-up survey, conducted 8 months after loan disbursement,
show indeed that women who received their microfinance loan through the mobile money account had
15% higher business profits and 11% higher levels of business capital than women in the control group.
These impacts were greatest for women who experienced pressure to share money with others in the
household at baseline. Receiving a mobile money account on top of cash loan payments had no effect on
business outcomes.

                                    Upcoming events and miscellanea

Conference on Political Economy of Finance 2020 - Should Corporations Have a Social Purpose?
The Stigler Center at the University of Chicago Booth School of Business is launching the fourth
conference on the Political Economy of Finance. The conference is open to theoretical and empirical
contributions on themes including corporate social responsibility, the purpose of corporations, ESG
objectives, the interaction between politics and business, and more. Papers may be submitted by visiting
the Ex Ordo paper submission system (please note that you will be required to set up an account
first): https://pef2020.exordo.com. The deadline for submissions is July 19, 2020. In accordance with
University of Chicago guidance on COVID-19, the conference will be held virtually in a series of webinars
throughout September 2020.

Special Issue "Financial Literacy and Financial Education"
The Journal of Behavioral and Experimental Finance is inviting submissions to a special issue titled
“Recent Developments in Financial Literacy and Financial Education.” The deadline is June 30, 2021.
Articles will be published in the journal upon acceptance like regular articles and will thus not have to wait
for the entire special issue to be compiled. In addition to publication in regular journal issues, articles will
also be published together in a virtual special issue, available both online and for print-on-demand.

Call for papers: Special issue on Fintech’s Impact on Payments
The Journal of Payments Strategy & Systems will publish a special issue on Fintech’s Impact on
Payments. This issue will take stock of current developments and initiatives and will reflect on the
medium- and long-term impact of Fintech on payments. The deadline for submitting a practice article or
research paper is August 18, 2020.

Call for papers: World Finance & Banking Symposium
The World Finance & Banking Symposium (2020) will take place in Riga - Latvia on December 3–4, 2020.
The conference is hosted by the Faculty of Business, Management and Economics at the University of
Latvia and is open to submissions in all areas of finance, banking and economics. The deadline for
submitting a paper is September 7, 2020.


Happy reading!

Your editors Miriam Bruhn (mbruhn@worldbank.org), Bob Cull (rcull@worldbank.org), Colin Xu
(lxu1@worldbank.org), and Bilal Zia (bzia@worldbank.org)



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