63296 ResearchDigest World Bank VOLUME 5 ✬ NUMBER 2 ✬ WINTER 2011 Growth and Development at the Center of the G-20 Agenda With developing countries now Level Conference on Development in IN THIS ISSUE generating nearly half of global Busan in June 2010. The conference Growth and Development at the Center economic growth, their resilience helped shape the final development of the G-20 Agenda … page 1 agenda by focusing on four areas for is vital to sustaining the recovery As growth in developing countries G-20 priority action. A new volume ed- increasingly matters for global economic ited by Fardoust, Kim, and Sepúlveda outcomes, development is being championed T he 2008–09 financial and captures the analytical underpinnings as a G-20 agenda item economic crisis showed that the of key policy recommendations. world economy is more fragile Infrastructure and sustainable develop- FOCUS and interdependent than previously ment. Provision of infrastructure is Food Price Inflation in South Asia: Crisis thought. It is a world of increasing critical to growth and sustainable de- Revisited? … page 2 multipolarity, with multiple sources velopment over the long term. Rough As food prices rise, does the 2007–08 global of growth and with powerful links estimates of developing countries’ food crisis offer lessons for policy responses? between developing and developed infrastructure needs range around How Fast Can Egypt Grow? … page 3 countries and among developing coun- $900 billion annually. To facilitate such A new study sheds light on the possibilities tries. As the recovery begins to mature, efforts, the G-20 should develop action and limits of a saving-based growth agenda the long-term growth and development plans for increasing public and private in the Egyptian economy agenda should be at the center of the financing of infrastructure, improv- broader G-20 agenda, in a way that al- ing its efficiency and environmental Sustainable Energy Policy and Nuclear lows all developing countries to close sustainability, and providing greater Power … page 4 development gaps and achieve the technical and financial assistance. In Despite concerns about climate change and Millennium Development Goals. addition to integrating economic and energy security, nuclear power still meets Developing countries now produce environmental concerns, it will be es- with much skepticism and opposition a greater share of global output—up sential to promote collaborative efforts from 35 percent in 2000 to 43 percent to collect and share data on infrastruc- Access to HIV/AIDS Treatment and Risky Sexual Behaviors … page 5 in 2008 (in purchasing power par- ture coverage and quality—and on ity terms). And trade in developing investments and impacts. What effect does access to HIV/AIDS countries is rising—up from 36 per- Agriculture and food security. Accord- treatment have on perceptions of risk and thus on behavior? cent of GDP in 1988 to 60 percent in ing to the Food and Agriculture 2008. Economic links among them are Organization, more than 1 billion The Investment Climate When Firms Have also becoming more important, with people were undernourished in 2009, Climate Control … page 6 South-South trade now accounting for about 100 million more than before Two World Bank initiatives offer different about 40 percent of developing country the crisis. Given the importance of pictures of the investment climate that firms imports. But even though developing agricultural productivity to economic face countries have been leading the way growth—and of food security to the out of the global crisis, they still face fight against malnutrition and social Bank Capital: Lessons from the Financial enormous poverty and huge gaps in unrest in developing countries—mul- Crisis … page 7 health, education, infrastructure, and tilateral action and coordination are What lessons can the recent financial crisis financial development. needed on many fronts, including food teach us about bank regulation? During its G-20 presidency, the and commodity price volatility. Republic of Korea put development high on the G-20 agenda and worked with the World Bank to host a High (continued on page 8) 2 World Bank ResearchDigest FOCUS Food Price Inflation in South Asia: Crisis Revisited? Experiences during the 2007–08 is driven largely by rises in prices of social protection, supply response ca- global food crisis offer lessons for noncereal commodities, cereals (and pacity, and trade and price policies. In dealing with current and future food oilseeds) are again becoming increas- 2010 food price inflation had increased ingly expensive. This has important greatly in India and somewhat in Nepal price inflation poverty implications; for example, a compared with 2007–08 rates, while 50 percent increase in the price of rice it had not yet reached those rates in T he price of food had been in Bangladesh leads to a rise in the other South Asian countries (figure 1). steadily declining for about three poverty headcount of five percentage In 2007–08 South Asian countries decades when the global food points, even after taking into account introduced short-term measures aimed crisis hit in 2007–08. The crisis seemed the responses of consumers and pro- at alleviating the negative effects of the to be over in 2009. But many analysts ducers to the price increase. Contrary food price rises on consumer welfare. thought it could well repeat itself. And to popular belief, throughout South Most popular have been trade policy in South Asia it soon became clear Asia the majority of rural as well as measures to dampen price increases that the 2007–08 food crisis was never urban households are net buyers of (such as abolishing import tariffs) or to really over. Domestic prices of rice and cereal staples and therefore suffer wel- ensure adequate supplies on domestic wheat never returned to their pre-2007 fare losses from price increases. markets (such as restricting exports); levels, despite substantial declines in At the heart of food policies building up or expanding public grain world market prices. throughout South Asia is the political reserves; controlling prices; and ex- Now that food price inflation is economy of the trade-off between con- tending existing social protection rapidly resuming in both global and sumers’ and producers’ interests, re- measures or, to a much lesser extent, domestic markets, governments in flected in the degree to which interna- introducing new ones. But price con- South Asia and elsewhere are again tional prices get transmitted to domes- trols alone (such as in Sri Lanka) have struggling to find appropriate policy tic prices. Large differences between not been very effective at limiting food responses. This makes it important countries in price transmission led to price inflation, while efforts to curtail to review experiences during 2007–08 wide differences in food price inflation food exports (for example, Pakistan’s and draw lessons for current and fu- in 2007–08, ranging from 7 percent ban on wheat exports) rarely succeed ture food price inflation, as Jansen and per year in India to 40–50 percent in and often generate significant negative Mghenyi have done in a recent paper Afghanistan. That country and Nepal externalities (as in Afghanistan). Public and data collection exercise. are the only two in the region where grain reserves have played an impor- In 2007–08 the price rises were domestic prices are left largely to tant part in dealing with the food crisis especially strong for cereals and oil- market forces. The differences in price in Bangladesh, India, and Pakistan. seeds, food staples throughout South transmission reflect several factors: the But they pose significant challenges Asia that account for particularly large share of domestic consumption met by of size, management, and fiscal costs. expenditure shares among the poor. imports, fiscal and institutional capac- Simulations with a global trade model While the current food price inflation ity to manage public food stocks and show that the potential impact of trade liberalization under the current South Asian Free Trade Area agreement Figure 1. Food Price Inflation in Selected South Asian Countries, 2007–08 and 2010 for mitigating food price inflation is 50 limited. Measures to address traditional 2007–08 constraints on agricultural production, 40 2010 or to otherwise facilitate a supply re- sponse, have been much less common. Continuing demand increases driven 30 by growth in population and income, combined with lagging growth in sup- Percent ply, are likely to create further upward 20 pressure on food prices in South Asia. Dealing with higher food prices in the future will require a two-track ap- 10 proach: protecting the poor through increased investments in safety nets, 0 India Nepal Bangladesh Pakistan Sri Lanka Afghanistan (continued on page 5) World Bank Research Digest 3 How Fast Can Egypt Grow? Current rates of national saving quite close. This is especially true in a simple theoretical model, calibrated in Egypt will not lead to high the long run, when external sources of to fit the Egyptian economy and simu- rates of economic growth funds can be tapped in only a limited lated to explore different potential sce- way: large current account deficits narios. The goal is to understand the unless accompanied by forceful cannot be sustained indefinitely. This two-way connection between saving productivity improvements is exemplified by the strong relation- and growth and the possibilities and ship between the average saving and limits of a saving-based growth agenda W ith per capita GDP growth investment rates in the Egyptian economy. averaging 3 percent over across countries The dynamic model used the past five decades, the in the past three If Egypt is to have makes it possible to follow Arab Republic of Egypt ranks among decades. Mirroring any plausible the evolution of the economy the top 25 percent of all countries. its saving-growth for an extended period, 25 This growth performance has been situation, Egypt chance of meeting years in this case. The results enabled by major private and public conforms to the its development are summarized in tables 1 investment and, at times, significant cross-country and 2, which reflect three productivity gains. This process would pattern in the aspirations, it scenarios for growth in total not have occurred if national saving relationship be- needs a stronger factor productivity: pessimis- had not been up to standards. Indeed, tween saving and tic (0 percent), moderate (1 Egypt’s national saving rate was well investment. performance in both percent), and optimistic (2 above that of the median country from The links in economic growth and percent). the 1960s to the 1990s. But since the the relationship The main conclusion is 1990s Egypt’s national saving rate has between saving national saving that without gains in produc- stopped increasing and has fluctuated and growth are not tivity—stemming from tech- around 20 percent of GDP. If Egypt is mechanical, however, but depend on nological innovation, improved public to have any plausible chance of meet- the quality of the financial system and management, and private sector re- ing its development aspirations, it public institutions in general. Without forms—a high rate of economic growth needs a stronger performance in both an efficient financial system, the best is not feasible at the current rate of na- economic growth and national saving. investment opportunities will not be tional saving. Indeed, the saving effort Some of the relationship between matched with the available saving. required would be highly unrealistic. growth and saving reflects the positive Similarly, without proper public insti- If productivity growth rises to at least impact of higher income on saving. tutions (guaranteeing macroeconomic moderate levels, sustaining (and im- But no less important is the causality stability and contract enforcement, for proving) high rates of economic growth that runs from higher saving to higher example), accumulated capital may becomes viable. But only through growth, with the mechanism being remain idle or ineffectively used. This forceful and purposeful productivity the process of capital accumulation. points to the importance of the effi- improvements would it be possible to Higher national saving provides the ciency or productivity with which phys- achieve high economic growth at the funds to take advantage of more and ical capital, human capital, and labor current national saving rate. larger investment opportunities. This are used in the production process. in turn increases the capital stock— The growth of factor productivity is which, used effectively for economic what in the end determines whether or production, contributes to higher out- not a saving and investment effort will put growth. result in improved economic growth. Although in theory domestic in- A new paper by Hevia and Loayza Constantino Hevia and Norman Loayza. 2011. vestment does not have to be sup- aims to illustrate the mechanisms “Saving and Growth in Egypt.” Policy Research ported by national saving, in practice linking national saving and economic Working Paper 5529, World Bank, Washington, the connection between the two is growth in Egypt. This is done through DC. Table 1. Saving Rate Required to Finance 4 Percent Per Capita Table 2. Projected Growth Rate If Saving Rate Remains at 20 GDP Growth Percent of GDP National saving rate over time (% of GDP) Per capita GDP growth rate over time (%) Productivity growth (%) 5 years 10 years 25 years Productivity growth (%) 5 years 10 years 25 years 0 41 48 81 0 1.0 0.9 0.8 1 32 34 42 1 2.1 2.2 2.4 2 24 23 21 2 3.1 3.6 4.2 4 World Bank ResearchDigest Sustainable Energy Policy and Nuclear Power Views on the role nuclear power in the earth’s crust and, with advanced range of cost estimates. The cost over- can and should play in sustainable technologies, could provide enough runs and schedule delays of Finland’s energy policy diverge widely. A fuel to meet the world’s electricity new Olkiluoto plant are rekindling old needs for several centuries. Moreover, fears about nuclear power being far too thorough evaluation is warranted advances in nuclear reactor technology complex and costly and raising new have substantially improved the un- questions about the viability of new M ore than 40 developing derlying economics and safety profile nuclear plants, especially in deregu- countries have recently ap- of nuclear power. lated electricity markets. Indeed, the proached United Nations Skeptics claim that nuclear power is costs of nuclear power stations (and officials to express interest in start- costly and technically complex. It in- large coal-fired power stations, par- ing nuclear power programs. In East volves the use of highly toxic materials ticularly those with carbon capture and and South Asia 40 new reactors are that must be kept secure from attack or sequestration) remain uncertain. Yet under construction and an additional theft. Moreover, a viable technology for countries’ continuing interest in build- 270 have been approved or are being the permanent disposal or reprocess- ing nuclear power stations suggests proposed. China, Japan, the Republic ing of spent nuclear fuel has not yet that their cost relative to low-carbon of Korea, and India are expected to been fully demonstrated. Finally, even alternatives seems attractive to at least experience the strongest growth in in a carbon-constrained world, nuclear some potential investors. the region. Indonesia, Malaysia, the power may be less economically at- Kessides calls for a thorough Philippines, Thailand, and Vietnam tractive than a host of decentralized evaluation of the issue, proposing are also expressing strong interest energy efficiency and distributed gen- the fundamental elements of a com- in nuclear power. In 2007 Egypt an- eration technologies. prehensive analysis of the costs and nounced that it would build several To assess the potential of nuclear benefits of nuclear power relative to nuclear power plants to meet rising power, its role as a relatively secure, investments in alternative base-load energy demands. South Africa is con- largely carbon-free alternative to fos- technologies. These include identifying templating the installation of almost sil fuels must be weighed against its the set of expected parameter values 10 gigawatts of nuclear power. Brazil technical risks. In three recent papers under which nuclear power becomes announced its intention to build 4 Kessides examines the challenges cost competitive relative to alternative new nuclear power plants by 2030. and opportunities of nuclear power in generating technologies; identifying Argentina, Chile, Mexico, Uruguay, and meeting the projected large increase in the main risk drivers and quantifying República Bolivariana de Venezuela energy demand throughout the indus- their effects on the costs of nuclear are also interested in expanding or trial and developing world while help- power; estimating the option value of installing nuclear power capacity. ing to mitigate the threat of climate nuclear power; assessing the nexus Several factors are driving this change. He assesses the current sta- between electricity market structure global resurgence of interest in nuclear tus and future plans for expansion of and the commercial attractiveness of power: nuclear power, the advances in nuclear nuclear power; evaluating the eco- t"EFTJSFUPNBLFFOFSHZTVQQMJFT reactor technology, and their effects on nomics of smaller nuclear reactors; more secure and energy prices more the associated risks and performance identifying options for strengthening stable by diversifying fuel sources and of nuclear power. Advanced nuclear the institutional underpinnings of the reducing dependence on fuel imports. reactors have been designed to be international safeguards regime; and t1SFTTVSFTUPSFEVDFBJSQPMMVUJPO simpler, safer, and lower cost than cur- evaluating the proliferation resistance t5IFJODSFBTJOHVSHFODZPGNJUJ- rently operating reactors. By address- of new generation reactors and fuel gating climate change. ing many of the public health and safe- cycles. Proponents argue that in relation ty risks that have plagued the industry, to the objectives of electricity sup- these reactors offer some promise for ply security, resource efficiency, and breaking the political deadlock over mitigation of the threat of climate nuclear power. Achilles G. Adamantiades and Ioannis N. Kes- change, nuclear power performs very Still, the views on nuclear power sides. 2009. “Nuclear Power for Sustainable De- well. Nuclear power represents a well- and its potential role in meeting the velopment: Current Status and Future Prospects.” established technology for generating projected growth in global energy de- Energy Policy 37: 5149–66. Ioannis N. Kessides. 2010. “Nuclear Power and electricity that produces almost no car- mand while mitigating the risks of seri- Sustainable Energy Policy: Promises and Per- bon dioxide or other climate-relevant ous climate disruption remain highly ils.” World Bank Research Observer 25(2): emissions. It can be scaled up signifi- divergent. Part of the controversy is 323–62. cantly and thus provide large amounts due to the large risks and uncertain- ———. 2010. “Nuclear Power: Understanding of power. It uses a natural resource ties underlying the cost elements of the Economic Risks and Uncertainties.” Energy (uranium) that is found in abundance nuclear power, as reflected in the wide Policy 38: 3849–64. World Bank Research Digest 5 Access to HIV/AIDS Treatment and Risky Sexual Behaviors Access to HIV/AIDS treatment, by 2008. After controlling for individual of increasing availability of ART. In ad- changing perceptions about the risk fixed effects, the authors find sugges- dition, prevention messages need to of AIDS, may lead to an increase in tive evidence of disinhibition behav- account for the gender difference in iors, consistent with earlier literature disinhibition behaviors. risky behaviors on risk taking in the United States and The authors’ results also provide a Europe following the introduction of framework for assessing the public ef- I n December 2009 an estimated 5.2 ART. fects of occasional media coverage of million people in developing coun- The findings suggest that men and false cures for AIDS. Their findings sug- tries were receiving antiretroviral women responded differently to per- gest that men may respond to these therapy (ART) and in Sub-Saharan ceived changes in risk that occur with types of announcements by increasing Africa nearly 37 percent of people greater access to ART. Men’s demand their demand for risky sexual behav- eligible for treatment were able to for risky sexual behaviors increases iors, thus contributing to the spread of access those lifesaving medicines, with the false belief that AIDS can be the disease. according to the Joint United Nations cured and decreases with the correct Programme on HIV/AIDS (UNAIDS). belief that AIDS can be treated but This is an extraordinary achievement not cured. Women’s demand for risky when one considers that as recently sexual behaviors increases only with Damien de Walque, Harounan Kazianga, and as 2003 only a few privileged HIV/AIDS the correct belief that AIDS can be Mead Over. 2010. “Antiretroviral Therapy Aware- patients had access to ART in Africa. treated. While the authors do not have ness and Risky Sexual Behaviors: Evidence from The scaling up of ART in Africa has a straight explanation for the observed Mozambique.” Policy Research Working Paper saved many lives and will continue to gender difference, one possible ex- 5486, World Bank, Washington, DC. do so. planation may stem from the cultural At the same time, access to HIV/ context of Sub-Saharan Africa. Men AIDS treatment might have trans- generally have greater autonomy in formed the perception of AIDS from sexual choices than women, so in gen- a death sentence to a manageable eral it would be easier for men than for chronic condition, not necessarily dif- women to adjust their sexual behav- ferent from any other chronic disease. iors when new information becomes Such a change in perception could available. lead to a change in sexual behaviors. If Regardless of the reason, it appears AIDS is no longer perceived as a killer that providing the correct information disease, this might induce compla- on ART is associated with reduced dis- cency and increase risky behavior and inhibition for men and increased dis- mixing between higher- and lower-risk inhibition for women. If these associa- groups in the population. This has tions were to be confirmed as causal (continued from page 2) been described as the “disinhibition” relationships, then overall women may hypothesis. be benefiting less from ART scale-up FOCUS Using data from Mozambique, a than men. But the authors also ob- new paper by de Walque, Kazianga, serve that the share of individuals who Food Price Inflation in South and Over tests for disinhibition be- wrongly believe that AIDS can be cured Asia: Crisis Revisited? haviors resulting from increased ac- remains small and is declining (from 8 cess to ART for HIV/AIDS patients. The percent in 2007 to 6 percent in 2008). which tend to be better targeted than main hypothesis tested is that people The impact of programs correcting the economy-wide policies; and investing may alter their sexual behaviors in re- wrong perceptions about AIDS treat- in stimulating broad-based agricultural sponse to a perceived decrease in the ment is therefore bound to be limited. productivity growth to increase food opportunity costs of contracting AIDS The results suggest that scaling production and lower consumer prices that results from expected access to up access to ART without prevention without hurting farmers’ incomes. ART. Such compensating behaviors, if programs may not be optimal if the large enough, could potentially offset objective is to contain the disease, some of the positive effects of greater since people would adjust their sexual access to ART. behavior in response to the perceived Hans G. P. Jansen and Elliot Mghenyi. 2010. The analysis draws on household changes in risk. Prevention programs “Food Price Increases in South Asia: National panel data that cover both randomly therefore need to include educational Responses and Regional Dimensions.” Sustainable selected HIV-positive individuals and messages about ART and address the Development Department, South Asia Region, the general population in 2007 and changing beliefs about HIV in the era World Bank, Washington, DC. 6 World Bank ResearchDigest The Investment Climate When Firms Have Climate Control Comparing measures of official view of full compliance might suggest the same temperature as before. But regulation with firms’ actual that actually reported days would rise if air conditioning were banned, expe- experience suggests new ways of one for one with DB days, but the pat- rienced temperature would skyrocket terns are much more complex. The de with no change in the climate. Given thinking about investment climate jure environment appears to affect only the study’s evidence, it is an open some firms. Thus favored firms (for question how much DB indicators (as T wo World Bank initiatives exam- example, at the 10th or 25th percen- proxies for costs of compliance) would ine the investment climate that tile) show minimal variation, so Doing have to be changed before the expe- firms face. The Doing Business Business has little pre- rienced investment cli- project (DB) provides measures of the dictive power for the Comparing the mate of most firms was time and costs associated with fully times they report. For affected—or became at- complying with an array of business disfavored firms (for de jure and de tractive to compliance- regulations. Enterprise Surveys (ES) example, at the 75th facto measures of constrained investors. ask a wide range of firms about their or 90th percentile) the Comparing the de jure actual experiences in doing business. variation is greater, al- regulation provides and de facto measures of A new paper by Hallward-Driemeier though still not signifi- a way to capture regulation provides a and Pritchett uses three comparable cantly correlated with way to capture the im- indicators from both—time to get an DB numbers. For ex- the importance of portance of implemen- operating permit, time to get a con- ample, as the de jure DB implementation and tation and governance struction permit, and time to import time to get a construc- more broadly. While goods—to compare these distinct de tion permit rose across governance more the paper provides no jure (DB) and de facto (ES) approaches countries by 524 days broadly direct evidence of cor- to assessing the investment climate in (from 77 to 601), the ruption, the massive, more than 100 countries. The analysis predicted time reported firm-specific deviations finds that the relationship between by the 25th percentile firm rose by just in reported compliance times and the them is neither one for one nor linear. 2.7 days. In contrast, the time reported deviation from the DB-estimated times Four patterns emerge in each of the by the 90th percentile firm rose by 130 for compliance are at least consistent three indicators. days, but all of this rise comes in the with environments of policy implemen- First, while DB, of necessity, re- lower range of the DB numbers. tation that are permeable. Indeed, the ports a single estimate of the days for Fourth, for countries with multiple authors’ earlier work focusing on Africa compliance for each indicator, firms in Enterprise Surveys that span a change found that where the gaps between the same country report significantly in the DB indicator, the authors find DB and ES were larger, the frequency different times to complete the same little association over time. Reductions of bribes paid increased. The evidence transaction. For example, the DB in- in DB days are as likely to be accom- also highlights how elusive a level dicators show that it takes 65 days panied by increases in ES days as they regulatory playing field is. Comparing to start a business in Ecuador, while are by decreases or no change. One the two sets of measures suggests very the distribution of the 265 firms that possible hypothesis for explaining the different ways of thinking about policy reported getting an operating license differential responses to policy reform versus policy implementation, about was between a 10th percentile report- is that when de jure and de facto policy what climate means, and about what the ing 1 day and a 90th percentile report- have diverged, de jure reform might options for policy reform really are. ing 60 days. have very different effects, depending Second, regulatory compliance on how it affects the distribution of appears to be “underwater,” because firms’ expectations (both mean and firms report actual times much shorter variance) about their future experi- than the DB-reported times. For ex- enced policy. ample, the median DB time to obtain To use a temperature analogy, the a construction permit across all coun- average daily high temperature in July tries is 210 days, while the median in Phoenix is 105 degrees—but most across countries of the average days people are not hot, they are indoors. firms reported was 59. The median How much would the experienced Mary Hallward-Driemeier and Lant Pritchett. “underwater” gap between DB and ES temperature change if the daily high 2011. “How Business Is Done and the ‘Doing measures was 145 days. were reduced to 100? To 95? It might Business’ Indicators: The Investment Climate Third, cross-nationally there is very actually be somewhat higher because When Firms Have Climate Control.” Policy Re- little association between the ES dis- more people would be outdoors while search Working Paper 5563, World Bank, Wash- tributions and DB numbers. A naive those indoors would be experiencing ington, DC. World Bank Research Digest 7 Bank Capital: Lessons from the Financial Crisis What type of capital should banks the financial crisis. They use a panel inception of the crisis. The results also hold to ensure that they can better of quarterly bank data for 12 countries show that during the crisis the stock withstand periods of stress? over the period 2006–09 to study the returns of large banks were more sen- impact of bank capital and its various sitive to the leverage ratio than to the definitions and components on chang- risk-adjusted capital ratio. This sug- T he recent financial crisis dem- es in the market valuation of banks. gests that market participants viewed onstrated that existing capital If bank capital truly helps in curbing the risk adjustment under Basel rules regulation, in its design or imple- banks’ incentives for risk taking and in as being more subject to manipula- mentation, was inadequate to prevent improving their ability to absorb loss- tion or, at the very least, not reflective a panic in the financial sector. Once es, one would expect that when a large of true risk in the case of large banks. again governments around the world unexpected negative shock to bank Finally, the results show that the posi- had to step in with emergency sup- value materializes—as was the case tive association with subsequent stock port to prevent a collapse. Widespread with the financial crisis that began in returns is stronger for higher-quality calls to reform bank regulation and August 2007—equity market partici- capital (Tier 1 leverage capital and tan- supervision naturally followed. In pants would judge better-capitalized gible common equity). redesigning capital standards, it is banks to be in a better position to These results have potential policy important to incorporate lessons from withstand the shock and that the stock implications for the current process of the latest crisis. Is capital regulation price of these banks would fall less regulatory reform. First, they support justified? What type of capital should than that of poorly capitalized banks. the view that a stronger capital posi- banks hold to ensure that they can The authors also investigate which tion is an important asset during a sys- better withstand periods of stress? concept of capital was more relevant temic crisis, suggesting that emphasis Should a simple leverage ratio be to stock valuation during the crisis. on strengthening capital requirements introduced to reduce regulatory arbi- Existing capital requirements are set is appropriate. Second, they indicate trage and improve transparency? as a proportion of risk exposure. But that introducing a minimum lever- Since the first Basel capital ac- if the risk exposure calculation under age ratio to supplement minimum cord, adopted in 1988, the prevailing Basel rules did not reflect actual risk, risk-adjusted capital requirements is approach to bank regulation has put equity traders might have considered important, because properly measur- capital front and center. The premise capital measures based on cruder ing risk exposure is very difficult, espe- is that banks holding more capital proxies of risk exposure, such as total cially for large and complex financial should be better able to absorb losses assets, to be more meaningful. organizations. But this finding also with their own resources, without be- Another issue is the quality of dif- calls into question the usefulness of coming insolvent or needing a bailout ferent types of capital used for regula- emphasizing risk-weighted concepts with public funds. In addition, by forc- tory purposes. As recognized by the of bank capital, which remain at the ing bank owners to have some “skin in Basel Committee, under current stan- core of Basel regulations. Finally, the the game,” minimum capital require- dards some banks were able to dem- results suggest that greater emphasis ments help counterbalance incen- onstrate strong capitalization while on higher-quality capital, in the form tives for excessive risk taking created holding a limited amount of tangible of Tier 1 capital or tangible equity, is by limited liability and amplified by common equity, which is the com- justified. deposit insurance and bailout expecta- ponent of capital that is available to tions. But many of the banks that were absorb losses while the bank remains rescued in the latest turmoil appeared a going concern. So it is important to to be in compliance with minimum see whether banks with higher-quality capital requirements shortly before capital were really viewed more posi- and even during the crisis. In the cur- tively by equity market participants. rent debate over how to strengthen What do the results show? Before regulation, capital continues to play the crisis, differences in initial capi- an important role. A consensus is be- tal—whether risk adjusted or not, ing forged around a new set of capital however defined—did not consistently standards (Basel III) aimed at making affect subsequent bank stock returns. capital requirements more stringent. But during the crisis period the impor- In a new paper Demirgüç-Kunt, tance of capital for returns became evi- Detragiache, and Merrouche investi- dent, particularly for the largest banks Aslı Demirgüç-Kunt, Enrica Detragiache, and gate whether banks that were better in the sample. These are the banks of Ouarda Merrouche. 2010. “Bank Capital: Lessons capitalized experienced a smaller de- systemic importance, as well as those from the Financial Crisis.” Policy Research Work- cline in their stock market value during holding capital of lesser quality at the ing Paper 5473, World Bank, Washington, DC. 8 World Bank ResearchDigest (continued from page 1) The G-20 should provide additional investment climate surveys consistent- Recent Policy Research resources to scale up agricultural and ly show that they are 30 percent more Working Papers food security assistance to eligible de- likely than large firms to rate financ- veloping countries, including through ing constraints as a major obstacle to 5528 Do Procurement Rules Impact Infrastructure the Global Agriculture and Food growth. The G-20 could improve finan- Investment Efficiency? An Empirical Analysis Security Program. Priority interven- cial access by forming a global part- of Inversão das Fases in São Paulo State Luis Blancas, Laura Chioda, Tito Cordella, tions in agriculture include research nership to advance progress toward Alexandre Oliveira, and Felix Várdy and extension relevant to smallholder universal access and focus on a range 5530 Equity and Public Governance in Health System Reform: Challenges and farmers, better management of land of financial products beyond credit. Opportunities for China and water resources, investment in ru- Building on the foundation laid Hana Brixi, Yan Mu, Beatrice Targa, and David Hipgrave ral infrastructure, and institutional im- at Busan, the G-20 development 5531 Crossing the Threshold: An Analysis of IBRD provements that allow the public and agenda received a boost at the Graduation Policy Jac C. Heckelman, Stephen Knack, and private sectors to mobilize resources Toronto Summit with the creation F. Halsey Rogers and share costs for country-led plans of the Development Working Group. 5538 Small and Medium Enterprises: A Cross- Country Analysis with a New Data Set that are inclusive and evidence based. Efforts culminated at the Seoul Oya Pinar Ardic, Nataliya Mylenko, and Aid for trade. Trade is among the Summit with the adoption of the Seoul Valentina Saltane 5539 Toward a Sustainable Global Energy Supply most powerful mechanisms for en- Development Consensus for Shared Infrastructure: Net Energy Balance and suring sustained global growth. Growth and Multi-Year Action Plan, Density Considerations Ioannis N. Kessides and David C. Wade Recognizing the importance of trade which consists of nine development 5543 Empowering Women: The Effect of Women’s capacity and market access for growth, pillars: infrastructure, human resource Decision-Making Power on Reproductive Health Services Uptake—Evidence from the G-20 should provide full “duty free, development, trade, private invest- Pakistan quota free” access for the least devel- ment and job creation, food security, Xiaohui Hou and Ning Ma oped countries, resist protectionism, growth with resilience, financial inclu- 5546 Foreign Aid and Business Bottlenecks: A Study of Aid Effectiveness recommit to the Doha trade agenda, sion, domestic resource mobilization, Esteban Ferro and John S. Wilson and maintain aid-for-trade levels. and knowledge sharing. With France 5548 Can We Rely on Cash Transfers to Protect Dietary Diversity during Food Crises? Estimates Research shows that investing in aid- now assuming the G-20 presidency, the from Indonesia for-trade policies has a large multiplier commitment to development contin- Emmanuel Skoufias, Sailesh Tiwari, and Hassan Zaman effect in trade outcomes. ues, with a focus on food security and 5549 The Two Poverty Enlightenments: Historical Financial inclusion. Greater access to food price volatility, infrastructure, and Insights from Digitized Books Spanning Three Centuries finance has a strong positive impact financial inclusion. Martin Ravallion on economic growth and employment 5550 Using Repeated Cross-Sections to Explore Movements in and out of Poverty generation. An estimated 2.7 billion Peter Lanjouw, Jill Luoto, and David working-age adults still lack access to McKenzie basic formal financial services. And 5553 Agriculture and Development: A Brief Review Shahrokh Fardoust, Yongbeom Kim, and Claudia of the Literature small and medium-size enterprises, Paz Sepúlveda, eds. 2011. Postcrisis Growth Jean-Jacques Dethier and Alexandra Effenberger important drivers of job creation and and Development: A Development Agenda GDP growth in developing countries, for the G-20. Washington, DC: World Bank. Working Papers can be downloaded at http://econ.worldbank.org face financing gaps: enterprise and http://bit.ly/Postcrisis. To download the World Bank Research E-Newsletter, go to Data & Research at http://www.worldbank.org The World Bank Research Digest is a quarterly publica- The Research Digest is financed by the Bank’s Editorial Committee: Jean-Jacques Dethier (managing tion disseminating findings of World Bank research. Research Committee and managed by DECRS, the editor) and Aslı Demirgüç-Kunt. Research assistance: The views and interpretations in the articles are those research support unit of the Development Economics Nicola Limodio; editor: Alison Strong; production: of the authors and do not necessarily represent the Senior Vice Presidency (DEC). 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