ISSUE 01 - October 2016 Global Knowledge & Research Hub in Malaysia Development Digest Featured Work from the World Bank Group Global Knowledge and Research Hub in Malaysia New Narratives in Economic Growth Development Digest October 2016 IN THIS ISSUE FOREWORD 4 TRIBUTE TO: 5 DATUK DR SUNDARAN ANNAMALAI A GLOBAL HUB FOR DEVELOPMENT SOLUTIONS 6 NEW GENERATION TRADE 8 AGREEMENTS FOR MALAYSIA RISE OF THE SOUTH AT A CROSSROADS: A VIEW FROM 11 EAST ASIA AND LATIN AMERICA THE MIDDLE-INCOME TRAP: MYTH OR REALITY? 13 PRODUCTIVITY AS THE KEY TO ECONOMIC GROWTH AND 16 DEVELOPMENT STRUCTURAL TRANSFORMATION OF THE AGRICULTURAL SECTOR 19 UNCOVERING THE RELATIONSHIP BETWEEN WOMEN’S 22 EMPLOYMENT AND TRADE ORIENTATION USING CASE STUDIES TO EXPLORE AND EXPLAIN COMPLEX 24 INTERVENTIONS FOREW0RD SELAMAT DATANG ! [WELCOME!] The team at the World Bank Group Global Knowledge and Research Hub in Malaysia is honored to present the inaugural issue of the Development Digest. This publication will feature some of the key work coming out from the Hub, gathered from the various practice and research teams based in Kuala Lumpur every six months. We commence this issue with a dedication to the memory of the late Datuk Dr. Sundaran Annamalai. Dr. Sundaran was and remains a key figure, both in Malaysia and in the World Bank Group, having played a pivotal role in the setting up of the Hub. We pay tribute to his life, his fruitful career and his profound contributions to Malaysia and the World Bank Group. The first part touches on the new and unique Hub in Malaysia–the first global center of the World Bank Group that unites its operational practices with its global research and indicators groups. The remainder of the digest highlights emerging new research on key topics of interest, both in Malaysia and globally. This publication adds a comprehensive editorial dimension to the rich work of the World Bank Group Global Knowledge and Research Hub in Malaysia. This diverse body of work ranges from matters related to unlocking new dimensions of economic growth, to new generations of trade agreements, to the impacts of sectoral transformation and the importance of human capital development. Looking forward, the Malaysia Hub will continue to scale up its work, with its diverse team of experts and leveraging new local and international partners, including academic institutions and think tanks. We hope that this publication will serve as a bridge to connect minds and ideas, promote knowledge sharing and build a network of discourse on key areas of economic development. From the team at the World Bank Group Global Knowledge and Research Hub in Malaysia World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 4 TRIBUTE TO: DATUK DR SUNDARAN ANNAMALAI This first issue of Development Digest is dedicated to Research Hub in Kuala Lumpur in 2016. As one of its the memory of our dear esteemed colleague, Datuk chief architects, his spirit, unwavering dedication and Dr. Sundaran Annamalai. keen intellect remain a foundation of our work and our mission. As one of our family, he remains in our Datuk Dr. Sundaran served admirably as the World hearts and minds. Bank’s Executive Director for South East Asia from 2012 to 2014, before returning to the Malaysian civil The World Bank Group family gratefully service to continue his successful career as Deputy acknowledges the enduring contributions of the late Secretary-General of the Treasury and Secretary Datuk Dr. Sundaran and his esteemed family. General of the Ministry of Plantation Industries and Commodities. Datuk Dr. Sundaran was instrumental in translating the long-standing relationship between the Government of Malaysia and the World Bank Group into the creation of the new Global Knowledge and World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 5 A GLOBAL HUB FOR DEVELOPMENT SOLUTIONS The World Bank Group Global Knowledge and Research Hub in Malaysia is the first office of its kind for the World Bank. It is a Knowledge and Research Hub that serves as a global platform to share Malaysia’s development experience by leveraging local and international expertise and a network of partners. The Hub in Malaysia was officially opened on March 28, 2016 and marked a new beginning in the relationship between the organization and the host country. The work undertaken by the World Bank Group Pillar 1: Sharing the Malaysia experience with the world Global Knowledge and Research Hub in Malaysia can be summarized in three core pillars. First, the Hub The Malaysia experience is relevant for emerging provides analytical and advisory services to the Malaysian economies in Asia, Africa and elsewhere that are Government. Second, it helps Malaysia share its successful transitioning out of poverty and into shared prosperity. development experiences to other countries. And third, Goals it carries out cutting-edge research through the Kuala • Organize and present Malaysia’s expertise via Lumpur-based teams of the global research and indicators publications, seminars, and study tours to benefit groups, while supporting the country’s efforts to build its other countries own global research capacity. • Facilitate South-South knowledge collaboration among policymakers and researchers across “ regions The Hub reflects the strategic partnership between the • Advocate for regional integration across sectors World Bank and Malaysia in creating a regional center The Malaysia experience includes ” of excellence that promotes learning opportunities, • Economic planning to support long-term national thought leadership and innovation. goals • People-centered development policy and smart - Datuk Muhammad Ibrahim, Governor, Bank Negara Malaysia. public investments • Inclusive and integrated financial system • Effective public sector governance World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 6 Pillar 2: Supporting Malaysia’s goal of Pillar 3: Learning together for global solutions becoming a high-income economy The new hub carries out cutting-edge development policy The World Bank Group’s international experience will research in partnership with local and international provide Malaysia with a wide array of development research institutions. Through the World Bank’s solutions and expertise, customized to specific challenges. Development Economics Research Group (DECRG), the Hub in Malaysia conducts original studies spanning Goals economic growth and risk management to program • Opening access to our global data, policy advice evaluation and the implementation of key public services. and technical assistance Through the Global Indicators Group (DECIG), the • Connecting international expertise and Malaysia’s Hub in Malaysia carries out primary data collection and development challenges research for the Doing Business, Enterprise Surveys and • Implementing advisory services across sectors Enabling the Business of Agriculture projects. and themes in support of Malaysia’s 11th Development Plan Goals “ • Conducting development policy research on global, regional and national issues [The Hub] directly supports Malaysia in achieving • Obtaining and processing regional and global its goal of becoming a high-income country by 2020. data in the areas of Doing Business, Enterprise The office in Malaysia will become a global center ” Surveys and Enabling the Business of Agriculture for development excellence. • Connecting leading researchers and practitioners via seminars and conferences - The late Datuk Dr. Sundaran Annamalai, former • Hosting visiting scholars and training programs World Bank Executive Director for Malaysia at the World Bank, and former Secretary General for the Ministry of Plantation Industries and Commodities. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 7 NEW GENERATION TRADE AGREEMENTS FOR MALAYSIA BY RAFAEL MUNOZ MORENO Malaysia has embarked on a wave of “new generation” potentially opening new opportunities for FDI and trade trade agreements that will set trade and investment rules in services. over the next few decades. Second, commitments in these agreements go beyond Mega regional trade agreements, such as the Trans-Pacific trade—they can have a significant positive impact on Partnership (TPP), Malaysia-EU FTA (MEUFTA), and attracting investment, including investment that spurs Regional Comprehensive Economic Partnership (RCEP) innovation and technological upgrading. come with deeper commitments beyond those already set by the multilateral trading system of the WTO. They Lastly, they can also spur policy advances in new areas, include areas such as competition policy, government such as competition policies, government procurement, procurement, investment policies and investors’ investment-state disputes and investment policies. protection, intellectual property rights, labor standards, and Government-Linked Companies (GLCs). Implementation of these trade agreements does not automatically translate into economic gains. Despite These new trade agreements open up opportunities for the intention to promote deeper liberalization, trade Malaysia to move up the value chain, diversify its exports, agreements went through intense negotiations and and create more and better jobs for its workers. bargaining processes which introduced carve outs to protect domestic interests and provide policy space for First, they widen Malaysia’s market access to large trade governments to regulate. partners (i.e. TPP represents 40 percent of global GDP), World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 8 Necessary Reforms These trade agreements can facilitate reforms to support Malaysia’s transition to become a high income nation. Achieving high income status will involve advances in overcoming key constraints, such as the following: Services: In terms of services contribution to GDP and exports, Malaysia still trails many EAP countries. An efficient services market is essential in enhancing the country’s competitiveness by supporting other export sectors. Investment: Improved investment policies can further support Malaysia’s business environment and help to attract a new wave of FDI that supports the country’s economic diversification. Furthermore, as Malaysia becomes more integrated with the global economy, the new trade agreements do provide additional investment safeguards for domestic firms investing abroad. For example, the Investor State Dispute Resolution mechanism. Competition: A more open and level playing field in the domestic economy facilitates the entry of new firms, and a reallocation of resources to more productive companies. Competition provides strong incentives to innovate, raise productivity and create jobs- issues at the core of the 11th Increasing liberalization, competitiveness and Malaysia Plan. productivity SMEs: SMEs in Malaysia represent 97.3 percent of Malaysia has several policy options that can complement firms and accounted for 35.9 percent of GDP in firms its commitments under the new agreements to help ensure and accounted for 35.9 percent of GDP in 2015 but wider benefits. they only account for 17.8 percent of exports. They are substantially less productive than large firms which limit In the short term, to the extent that Malaysia’s their capacity to integrate into the global value chain. applied policies in services trade may remain more Thus, undertaking productivity enhancing reforms that restrictive compared to other countries in the TPP— enable SMEs to compete effectively in the global market notwithstanding the recent liberalization of foreign would be essential. ownership limits—the Economic Planning Unit (EPU) may consider strengthening the coordination mechanism The new trade agreements can strategically support for the implementation of the Services Blueprint to boost reforms in the areas mentioned above. Such reforms have competitiveness of the services sector. high payoffs, because they broaden market access and could also lead to higher investment. Moreover, they are In the medium term, the Ministry of International Trade facilitated by firm-level incentives, as heightened foreign and Industry (MITI) can further review policies affecting competition will raise the need for less-performing firms the establishment and operations of foreign services to adjust. providers. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 9 The new trade agreements facilitate improvements in may consider working together with Khazanah Nasional the business environment that Malaysia offers to foreign and the Government Investment Companies Division at investments. In the short term, MITI may consider the Treasury to ensure smooth implementation of the establishing a mechanism to domestically handle competition related measures in relation to GLCs. investors’ grievances to ensure compliance of existing policies with commitments on the investments chapter It will be critical to address the constraints that SMEs and decrease the risk of ISDS cases. Furthermore, the face in order to raise productivity and reap the benefits of Malaysia Productivity Corporation can strengthen its emerging trade opportunities. capacity to conduct regulatory impact analysis on existing or proposed new policies affecting trade in goods and In the short term, SME Corp. Malaysia can carry out services. a preliminary assessment of the implementation of the SME Masterplan to assess its effectiveness. This initiative Continued implementation of policies that increase can help ensure that the programs being put in place competition can create a level playing field for the private are effectively implemented to realize their intended sector. Malaysia has negotiated significant carve-outs objectives. It can be complemented with a review of on Government Linked Companies (GLCs) in the TPP current R&D support programs that are administered agreement that provide time for these incumbents and the by various agencies, to ensure that SMEs get adequate market structure to adapt to heightened competition. support. In the short term, it will be important to assess the impact In the medium term, a continued focus on an enabling that the different sector chapters of the TPP may have on regulatory framework will be key, to foster strengthened the GLCs operating in those sectors. competition, and to facilitate the bankruptcy process to allow entrepreneurs to reinvent their businesses and take In the medium term, the Malaysia Competition more risk. Commission (MyCC) can implement existing regulations to prevent designated monopolies from engaging in For the full report of the Malaysia Economic Monitor, key highlights anti-competitive practices and to foster compliance with and video, please see: bit.ly/MEM_201606 competition-related commitments under the TPP. MyCC World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 10 RISE OF THE SOUTH AT A CROSSROADS: A VIEW FROM EAST ASIA AND LATIN AMERICA The first Development Research Kuala Lumpur greater economic integration, regionally and globally,” Conference Series featured a dialogue on inter-regional Bank Negara deputy governor Dr Sukhdave Singh trade and integration, fusing the regional economic said, adding that it is becoming increasingly difficult for contexts of East Asia and Latin America into a singular individual countries to determine their independent path conversation on the global market and economic growth. to prosperity. Titled the “Rise of the South at a Crossroads: A View Norman Loayza, Lead Economist, Development Research from East Asia and Latin America”, the conference in Kuala Lumpur, World Bank, builds on this fact. focused on the opportunities and challenges of regional and global integration, reflecting on the linkages promoted “No country has been able to develop, grow, and prosper by international trade, financial flows, knowledge sharing, in isolation. The drive towards trade openness and market- and diffusion of new technologies. oriented reforms that started three decades ago has led to economic growth and poverty alleviation all over the The one-day conference in May 2016 commenced with a world. Yet, openness and trade agreements, in particular, World Bank Flagship Report Presentation on The Rising are under attack from left and right,” Loayza said. South – A Latin America Perspective and Implications for East Asia and Malaysia. Presenting the report was While some have criticized that the initial effects of trade Augusto de la Torre, Chief Economist for Latin American agreements could be relatively small, Robert Koopman, and the Caribbean. chief economist at the World Trade Organization opined that the dynamic effects that come about from increased “The rise of the South has left a noticeable mark upon the competitiveness and productivity growth, better consumer world economy. But this unquestionable impact conceals choices and lower prices can lead to positive benefits in important differences among the countries of the South. the economy in the long run. The differences between the wealth of connections from Asia, compared to those of Latin America, suggest that “Trade agreements have very positive effects on economies, our region is still not benefitting from the virtuous circle particularly on the longer run. They take actions to align created by integrating more with your neighbors and then domestic policies to better address some of the global with the world,” said De la Torre. challenges,” Koopman said. The conference provided a venue to consider the different The conference was a cross-regional collaboration within vantage points of East Asian and Latin American countries the Bank; jointly organized by the Latin America and as their importance in global markets keeps rising. Caribbean Chief Economist Office and the Development Research Group, with the participation of the East Asia “We have to look at alternative means of creating more and Pacific Chief Economist and the support of the sustainable growth. One of those alternatives may be Malaysia Country Office. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 11 Featured work at the event Internalizing Global Value Chains: A Firm-Level Analysis Recent studies and developments on international Laura Alfaro (Harvard Business School), Pol Antras (Harvard economic integration, particularly from an emerging University), Davin Chor (National University of Singapore), and economy perspective were discussed in the afternoon Paola Conconi (Université Libre de Bruxelles). section of the event. Here are the featured work: Technological progress in information and communication technology and falling trade barriers have led firms The Rising South - A Latin America Perspective to retain within their boundaries and in their domestic and Implications for East Asia and Malaysia economies only a subset of their production stages. A key Augusto de la Torre, Tatiana Didier, Alain Ize, Daniel Lederman, decision facing firms worldwide is the extent of control and Sergio L. Schmukler (World Bank) to exert over the different segments of their production For most of the 20th century, the world economy was processes. Our results suggest that contractual frictions characterized by developed (North) countries acting as play an important role in shaping the integration choices ‘center’ to a ‘periphery’ of developing (South) countries. of firms around the world. However, the recent rise of developing economies suggests the need to go beyond this North-South dichotomy. This Linkages and Economic Development tectonic re-configuration of the global landscape has Dominick Bartelme (University of Michigan) and Yuriy brought about significant changes to countries in the Gorodnichenko (University of California, Berkeley). Latin America and Caribbean (LAC) region. The study is Specialization is a powerful source of productivity gains, an in-depth analysis of the dynamics and nature of LAC’s but how production networks at the industry level are external connections. related to aggregate productivity in the data is an open question. This study constructs a database of input- Urban Networks: Connecting Markets, People, output tables covering a broad spectrum of countries and Ideas and times, develops a theoretical framework to derive Edward L. Glaeser (Harvard University), Giacomo A. M. Ponzetto an econometric specification, and documents a strong (University Pompeu Fabra, Barcelona), and Yimei Zou (University and robust relationship between the strength of industry Pompeu Fabra, Barcelona) linkages and aggregate productivity. Exploring the trade-off between networks and big cities: local returns to scale in innovation, the elasticity of The Rise of China and Labor Market Adjustments housing supply, and the importance of local amenities. in Latin America Even if there are global increasing returns, the returns Erhan Artuc (World Bank), Daniel Lederman (World Bank), and to local scale in innovation may be decreasing, and that Luis Diego Rojas (University of Maryland). makes networks more appealing than mega-cities. Larger This paper assesses the impact of the rise of China on the cities can dominate networks because of amenities, as trade of Latin American and Caribbean economies. The long as the benefits of scale overwhelm the downsides of study proposes an index to measure the impact on trade, density. The skilled are more likely to prefer mega-cities which suggests sizable effects, especially in Argentina, than the less skilled, and the long-run benefits of either Brazil, Chile, Honduras, Mexico, and Paraguay. The mega-cities or networks may be quite different from the paper uses the index and a model of labor mobility to short-run benefits. calculate the impact of China’s growth on labor markets in Argentina, Brazil, and Mexico. For more information of the event, please see: bit.ly/DECRG_risesouth World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 12 THE MIDDLE-INCOME TRAP: MYTH OR REALITY? BY GREG LARSON, NORMAN LOAYZA, MICHAEL WOOLCOCK In recent years, policymakers in slower-growing middle- East to the possibility of slowdowns in East Asia’s emerging income countries have been preoccupied with the notion economies. that they are stuck in a “middle-income trap.” This so- called trap has been exhaustively deliberated to see if it They had observed these countries experiencing rapid actually exists and policy interventions that can be made growth from low-income to middle-income levels. These to escape it. were transitions from low-productivity sectors fueled by cheap labor, technology, and capital like traditional The “middle-income trap” may be a myth. Nonetheless, agriculture to export-driven, high-productivity sectors it provides impetus for policymakers to reassess their like manufacturing. strategies based on productivity improvement once the traditional sources of economic growth have lost their Very often this is followed by lower growth. As the rural strength. labor force shrinks and wages rise, the factor accumulation that once propelled high growth eventually loses strength. Reaching a high-income level is challenging. Strong Unless new sources of economic growth are found, a likelihoods of growth slowdowns are also expected. But country may find itself unable to compete with either stagnation is not inevitable, and middle-income countries low-wage countries that dominate mature industries or must manage the transition responsibly, avoid pitfalls, and high-income countries that dominate innovative, high- promote new opportunities for growth. technology industries. What is a middle-income trap? This popular narrative has been used to describe the preoccupations of policymakers in middle-income The “middle-income trap” was first coined by Indermit countries, particularly in the fallout of the global financial Gill and Homi Kharas, comparing a general phenomenon crisis. observed in regions like Latin America and the Middle World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 13 What does the empirical evidence suggest? Much analytical effort has been focused on deliberating on why so few middle-income countries have transitioned into high-income status and what the proper policy approaches are. However, analyses vary considerably and in many cases point to opposite conclusions. Some support the existence of a middle-income trap by finding empirical evidence that growth slowdowns are more likely at middle-income levels. Others question the existence of a trap altogether. Close examination of countries’ transitions between income levels shows that per capita incomes have grown steadily in majority of countries in the past six decades. This does not suggest a trap-like pattern and casts doubt on the notion that high growth was a temporary phenomenon of any particular era. The “trap” literature is further complicated by lack of any consensus on methodology or definition. Similarly, there is no consensus on what length of time would constitute a trap. Some studies seek to address these issues with enhanced income status is rare, difficult, and requires different rigor. However, there is often a degree of arbitrariness growth strategies than the ones that propel countries out in the parameters used. At times it may seems that of low-income levels. methodological and definitional choices are driven by the goals of the research or the characteristics of the particular When growth related to factor accumulation declines, country(ies) or region(s) being assessed. countries must find new sources of growth based on productivity improvement. Does the concept of a “trap” assists or impedes effective Four lessons from the larger literature on policy? long-run growth The debate around the middle-income trap offers no quick Growth does not occur randomly; rather, it responds or easy solutions to the problem of slow growth. However, to four main qualities consisting of public policies and the concept has undeniable power to influence policy institutions, as well as the effort and entrepreneurship of makers. This can be both productive and unproductive. the private sector. On one hand, the danger of being stuck in a trap First, strong macroeconomic stabilization policies such as can encourage desperate policymaking. Focusing sound fiscal, monetary, and financial policymaking will on a small number of countries that have escaped the support long-run economic growth by helping countries middle income trap may inspire efforts to maintain control inflation, avoid crises, and strengthen resilience to unrealistically high growth rates. When growth wavers, cyclical volatility. there may be immediate pressure to revise policies. During periods of growth, important reforms may be postponed Second, strong institutions and rule of law are essential to or dismissed. growth. The quality of governance-including public sector efficiency, control of corruption, effective legal systems On the other hand, the middle-income trap notion may be and enforcement of contracts, and civil and political useful to shape policy discussions on particular challenges rights-are all associated with increased productivity and faced by middle-income countries. Transitioning to high- innovation. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 14 Third, investment in education and human capital The transition from middle-income to high-income levels development. As the returns to physical capital takes time, and requires countries to pursue consistently accumulation diminish, the rate of productivity sound but evolving policies to sustain growth. Different improvement and technological innovations depend stages of growth call for different strategies and policies, largely on the presence of highly skilled human capital. and the right reforms often take time to impact economic growth. Finally, open and competitive markets will promote increased specialization, efficient resource allocation Ultimately, each country’s growth story is unique but based on comparative advantage, improved productivity, the general prescription remains the same. Policymakers and diffusion of knowledge and technology. should critically examine their growth strategies to find the most effective ways to boost productivity improvement, Of course, achieving and sustaining economic growth is which is the key to supporting, nourishing, and preserving easier said than done. External conditions and cyclical long-run economic growth. fluctuations in international trade and capital flows can weaken the impact of countries’ growth efforts and policy For the full text of the Research Policy Brief, diagrams and reforms. The middle-income trap debate underscores that reference list, please see: bit.ly/DECRG_incometrap countries should tailor these fundamental ingredients to fit their economic and political realities and constraints. Conclusion The middle-income trap is a narrative of growth stagnation that reflects (and exacerbates) current and long-standing anxieties about slow growth. This anxiety is perhaps only growing more acute amid the prevailing notion of a global growth slowdown. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 15 PRODUCTIVITY AS THE KEY TO ECONOMIC GROWTH AND DEVELOPMENT BY YOUNG EUN KIM, NORMAN LOAYZA AND CLAUDIA MEZA-CUADRA Without improvements in productivity, there is no Environments that promote innovation have sufficient economic growth—either sustained or inclusive. and sustainable investment in research and development (R&D), companies with the capacity to promote and An analysis across 132 countries shows global GDP per support innovation, talent resource, high-quality research capita growth highly correlated with productivity growth institutions, university-industry collaboration, and over the period 1960–2014 (with a correlation coefficient intellectual property protection. of 0.86). Around half the variance of GDP per capita across these countries for the same period is explained by A comparison of factors influencing innovation indicates the variance of productivity. that Singapore and Malaysia have very favorable environments for innovation. Chile and Mexico rank Four components must work together to boost productivity third and fourth respectively, largely differentiated in – innovation, education, efficiency, and infrastructure. lower levels of company investment in research and They are interrelated and influence one another and development and government spending on advanced require contributions from the public and private sectors. technology products versus the first two countries. These interactions are explored further by analyzing six Vietnam, which is ranked fifth, has higher government countries in Asia and Latin America: Malaysia, Singapore, spending on advanced technology products than Chile and Vietnam, and Chile, Mexico, and Peru. and Mexico, but scores lower in quality of scientific research institutes and university-industry collaboration Innovation in research and development. Peru, ranked last, scores lowest in most factors among the six countries. Innovation in the economy can potentially lead to the development of high value-added activities through the In another indicator of innovation, the annual average creation of new technologies, products and processes. number of patent applications, Singapore significantly World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 16 outperformed the other five countries from 2011 to 2012 with 127.0 applications per million people. Malaysia had 11.6 applications per million people, followed by Chile with 7.1, Mexico with 1.9, Peru with 0.3, and Vietnam with 0.2. Education A strong education system can elevate the human capacity and capability to participate in valuable economic activities. The comparison of indicators of education systems shows that Singapore scores the highest in all relevant factors including school enrollment, quality of primary education, adaptability of higher education to economic needs, and company investment in staff training and development. This is followed by Malaysia, Chile, Vietnam, Mexico, and Peru. In terms of equity in access to educational opportunities, a report by the Organisation for Economic Co-operation and Development (OECD) indicates that equity in the allocation of resources between socioeconomically advantaged and disadvantaged schools is the highest in stable in Chile; reduction in Singapore, particularly since Singapore, followed by Malaysia, Vietnam, Chile, Mexico, the mid-1980s. and Peru. Flexibility of resource allocation and use is critical. In an indicator of the performance of education systems, Singapore, which has demonstrated the most dramatic scores on the recent PISA (Programme for International transformation over the six decades have the least Student Assessment) test, Singapore had the highest math regulatory burden on market, trade, and labor. Vietnam, score of the six countries, Vietnam scored the second on the other hand, is the most regulated country, with the highest, followed by Chile, Malaysia, Mexico, and Peru. highest burden on starting a business and trade and high corporate taxation and trade tariffs. Efficiency Regulatory rigidity has been an obstacle in many Efficiency fuels economic transformation, ending less developing countries, impeding the adoption of new productive activities and sparking growth in higher-value technologies and processes, the emergence of new activities. We looked at the evolving fabric of three main enterprises, and the transition of companies from informal sectors – agriculture, industry and services – across the to formal sectors. six countries. Infrastructure From 1965 to 2014, the decreasing share of total value added represented by the agriculture sector and the The comparison of the quality of physical infrastructure in increasing share of service sectors was a common feature. terms of transportation and electricity supply shows that However, the share of the industry sector varied, with Singapore and Malaysia have the first and second strongest Mexico, Peru, Malaysia, and Vietnam on the uptrend; World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 17 infrastructure of the six countries, respectively. Chile and As the analysis of the six countries exemplifies, every Mexico lag behind these two mainly due to a low quality country is in a different stage of development and has its of railroads. The physical infrastructure in Vietnam and own strengths and weaknesses in terms of the drivers of Peru is generally weak in all relevant indicators. productivity. The investment needs and level of urgency for reform in the four main components of productivity Good public institutions offer robust protection of vary by country, generally depending on the stage of intellectual property, have a transparent policy process, economic development. ensure prudent budgeting, provide reliable public security, and maintain a stable macroeconomic environment. Developed countries—because they are forerunners in technology and tend to have slower economic growth— In turn, a stable macroeconomic environment can generally need to prioritize promoting innovation, while promote sustainable government budget balances, also alleviating the regulatory burden. sufficient national savings and a stable inflation rate and debt level. Developing countries typically need to prioritize strengthening physical and institutional infrastructure Singapore and Malaysia again rank first and second in and primary and secondary education systems. terms of public institution performance out of the six countries followed by Chile, Vietnam, Peru and Mexico. For the full text of the Research Policy Brief, diagrams and reference list, please see: bit.ly/DECRG_productivity Conclusion Productivity is key for economic development, and is driven by four interrelated components: innovation; education; efficiency; and infrastructure. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 18 STRUCTURAL TRANSFORMATION OF THE AGRICULTURAL SECTOR BY RAIAN DIVANBEIGI, NINA PAUSTIAN AND NORMAN LOAYZA Trends and driving forces Change in mode of commercialization. Agricultural market transactions have become more integrated with Agriculture is transforming. The relative decline of basic the rest of the economy, more dependent on finance, agriculture, the rising importance of agribusiness and and more oriented to international trade. Fueled by food growing shares of high-value agricultural products in industries and services, agribusiness has expanded in international trade with respect to traditional exports most developing countries, despite the decline in the share characterize the structural transformation of the sector. of agriculture in GDP. Three interrelated processes are shaping the structural The three processes that characterize agricultural transformation in this sector – improvements in structural transformation have, in turn, been driven by productivity, changing production composition, and technological progress, public goods and market access. increasing integration with domestic and international markets Technology Improvements in productivity. Higher yields and lower Technological progress has brought forth the use of more costs from existing and new farming lands have increased efficient irrigation, adoption of modern technologies and agricultural productivity. mechanization, and new and improved inputs (seeds, fertilizers, and pesticides). Much of the success has been Change in composition in production. The types of generated by the combination of high rates of investment agricultural products have changed, from subsistence to in crop research, infrastructure, and market development, cash crops, from food staples to intermediate inputs, and and appropriate policy support that took place during the from low-value/low-risk to high-value/high-risk varieties. Green Revolution (1966 to 1985) and the two decades that This change is reflected in the evolution of agricultural followed. commodities in global markets. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 19 The rapid increase in agricultural productivity resulting from the Green Revolution came from an impressive increase in yields. Global total factor productivity for agriculture nearly doubled from the 1970–89 period (0.87 percent) to 1.56 percent for the 1990–2006 period. The decrease in time to maturity allowed for an increase in cropping intensity. This inadvertently led to a change in agriculture production composition. Access to technology influences choices in crop allocation. Modern production depends on purchased inputs; thus effective input supply systems are essential. On the ground, farmers supported the shift from traditional to modern and market-oriented agriculture, responding positively to the promotion of extension services offering new and available technology. Public goods By setting the right institutional and regulatory framework, governments can help increase the competitiveness of farmers, enabling them to integrate in regional and global markets. Important elements of a conducive institutional and As shown, the provision of public goods to strengthen regulatory framework that can foster positive changes in farmers’ competitiveness and create a favorable investment productivity are secure, clearly defined and transferable climate is key to integrate farmers into value chains and property and land rights and the regulation and international markets, especially more demanding ones. enforcement of water rights. Several factors like the establishment of sound food safety and animal and plant health standards, and a financial The transferability of land rights promotes efficiency gains infrastructure with corresponding enabling regulatory by allowing land to be reallocated to more efficient users framework, for example, is crucial to promote agricultural via land markets. Land consolidation is largely easier and growth. productivity can increase through economies of scale and crop specialization. Market access Meanwhile, infrastructure can reduce transaction costs, Sustained trade liberalization over the past five decades protecting against shocks, and providing vital inputs. has greatly boosted exports of agricultural products from Public investment in irrigation systems can significantly developing countries, which has multiplied eight-fold, reduce the dependency on rain and therefore the while those of agriculture-based manufactured products vulnerability to shocks such as droughts. has increased ten-fold. The examples above illustrate some of the policy and Better market access facilitates specialization and exchange physical infrastructural enablers for more farmers to transactions in rural areas, allowing producers to allocate access input and product markets. This will signal a change their land to higher value crops. Moreover, as the costs of in production. Farmers will begin to produce goods for trading agricultural products decline, farmers raise their more distant markets, and away from an exclusive focus productivity by using inputs more intensively. on goods for local consumption. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 20 Proximity to markets and roads, higher ownership of Conclusion transport means or access to affordable transport services have reduced marketing costs, thus encouraging market Far from becoming unimportant, agriculture in participation by farmers. developing countries is experiencing a remarkable structural transformation, characterized by an increase Greater market integration allows countries to diversify in productivity, a change in production composition, their trade patterns. In the past 50 years, the share of and a renovation in its mode of commercialization. raw traditional agricultural exports in global agricultural This transformation is supported on technological, exports has declined significantly, while the weight of high governmental, and commercial pillars. Agriculture is value-added agricultural trade has increased. becoming agribusiness, in the good sense of market integration and entrepreneurship. Recent increase in agricultural trade has been accompanied by a shift toward nontraditional products. A question remains for future work. Agriculture has High-value crops such as fruits and vegetables are usually consistently alleviated poverty across developing associated with higher levels of market participation than countries. Will agribusiness continue to do so? And will staple crops. the conditions that facilitate the transformation also be necessary to benefit the poor? Until the mid-1980s, raw traditional agricultural products represented around 40 percent of total trade in agricultural For the full excerpt of the Policy Note, diagrams and goods. In the following decade, the share dropped sharply reference list, please see: bit.ly/DECRG_agri by over 10 percentage points. Processed agricultural products (which include processed traditional export products) now represent over 60 per cent of total exports of agricultural goods. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 21 UNCOVERING THE RELATIONSHIP BETWEEN WOMEN’S EMPLOYMENT AND TRADE ORIENTATION USING FIRM-LEVEL DATA BY MOHAMMAD AMIN, ASIF ISLAM AND KHRYSTYNA KUSHNIR While international trade tends to increase overall income A positive relationship, not necessarily uniform levels, it may not benefit all groups of individuals equally. In fact, following trade liberalization, movements in There is reason to believe that the relationship between relative prices and the costs incurred in re-allocating export orientation and women’s employment is not production from one activity to another can make some necessarily uniform. Three possibilities were identified. individuals worse off than before. First, some industries may be more amenable to women’s This leads to the question about women’s position in employment than others. This could be due to reasons the labor market: What is the impact of trade or export related to skill requirement, cultural factors or simply orientation on women’s employment? tradition. Thus, an increase in exporting activity is likely to have a much larger impact on women’s employment if The study, “Uncovering the Relationship between the exporting firm belongs to a women-friendly industry. Women’s Employment and Trade Orientation Using Firm-level data”, addresses the above question using Second, firm-size and age of the firm capture complex and micro or firm-level survey data for private manufacturing contrasting forces for women’s employment and export firms in developing countries. Unlike much of the existing orientation relationship. According to the monopsony literature, use of firm-level survey data allows for controls model of women’s employment, firms try to exercise their for country-specific differences that often complicate monopsony power in the labor market to depress women’s identification issues, and to explore possible heterogeneity wages, moving down the supply curve of women’s labor in the relationship between export orientation and and reducing number of women employees. Trade women’s employment. liberalization or greater export orientation increases World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 22 competition in the product and labor markets, weakening Future research to deepen perspectives such monopsony power and thereby increasing women’s employment. However, issues of monopsony power are A number of issues remain to be explored, suggesting much more relevant for large firms compared with the ample scope for future research on the topic. small firms since it is the former that has any kind of market power. The same can be said for old vs. young Labor intensive industries like textiles and garments, and firms since it is the older firms that have more established service industries such as retail, telecommunications, products and hence market power. On this count alone, health care, etc., are known to be more favorable towards one can expect the impact of export orientation on women than men compared with manufacturing. At the women’s employment to be much larger (more positive) same time, international trade in services is increasing for the relatively larger and older firms. rapidly, although conceptual problems remain in properly estimating this form of trade. Thirdly, trade liberalization can contribute to women’s employment by increasing the employer’s cost of What is the impact of trade in services on women’s discriminating against women workers. It is plausible employment, and is the impact stronger favoring women that the positive effect of trade liberalization on women’s than in the manufacturing sector? Answering this employment may be weaker (less positive) among large question is important to assess the full impact of trade and older firms as such firms are more visible and hence liberalization on women’s job opportunities. less likely to discriminate against women workers to begin with than the less visible small and young firms. That is, Second, only one dimension of women’s labor market export orientation and women’s employment relationship outcome – employment – was explored. Another may be stronger (more positive) among small and young dimension is the wage rate. What is the impact of greater firms compared with large and old firms. The contrasting export orientation on the wage rates for women? Does predictions regarding firm-size and firm’s age suggest that the impact vary depending on firm characteristics such the issue is essentially an empirical one. as frim-size, industry to which it belongs and gender composition of firm’s owners? What do the data reveal? It is hoped that this paper inspires more research along Results using firm-level survey data for 81 developing these and other lines. countries reveal a strong positive relationship between women’s employment and export orientation of the firm, For the full excerpt of the study, diagrams and reference list, a relationship that survives controls for a number of firm please see: bit.ly/womenjobstrade characteristics as well as all country specific differences. This stated relationship is far from uniform – it varies sharply between industry sectors (garments and textiles and manufacturing were the two focused areas in the study), between young and old firms, and between small and large firms. That is, the positive relationship between women’s employment and export orientation of firms is much stronger (more positive) in the garments and textiles industries vs. the rest of manufacturing, among the relatively larger firms, and among the relatively younger firms. World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 23 USING CASE STUDIES TO EXPLORE AND EXPLAIN COMPLEX INTERVENTIONS BY MICHAEL WOOLCOCK One of the most cited of Martin Ravallion’s many papers extending a term developed by physicists and neuro- implores researchers to “look beyond averages” if they scientists – call its causal density, or the number of want to better understand development processes. One independent discretionary interactions connecting inputs fruitful area in which this might happen is the assessment and outcomes. By this definition, families are decidedly of complex interventions, a defining characteristic of complex whereas smart phones are merely complicated. By which is that they generate wide variation in outcomes. extension, raising (lowering) interest rates by a quarter of Even when controlling for standard factors that might a percentage point yields predictable decreases (increases) account for this variation – income, education levels, in inflation, whereas after 18 billion experiments in how proximity to transport – outcomes in education, the to raise children (i.e., roughly the total number of homo performance of health care systems, or the extent to sapiens that have ever lived) each new parent remains which villages participating in community-driven highly unsure about how to carry out this most primal of development programs manage conflict, can nonetheless tasks: there is no certainty, only a variable probability, that vary considerably: some will be outstanding, some will following key principles (themselves often culturally and muddle through, and some will fail spectacularly. In historically contingent) will yield the desired outcome. such situations, an important initial task for evaluators is determining the nature and extent of that variation: it will Development interventions in fields such as governance inform the overall assessment of whether the intervention and justice are complex in this sense, as are key aspects is deemed to ‘work’ (or not). of public services such as education (classroom teaching) and health (curative care). While we should expect high An important secondary task when assessing complex variation in the effectiveness of such interventions, interventions, however, is explaining and learning even when they’re carefully designed and faithfully from this variation. What makes a complex system implemented, explaining how and why specific forms truly ‘complex’ is something some social scientists – of variation occur is both necessary and difficult. It is World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 24 necessary because this variation can itself be a valuable source of intra-project learning; discerning where and for whom a particular intervention is working (or not) can be a basis on which mid-course corrections are made (e.g., with regard to resource allocation and personnel deployment). Moreover, a second defining feature of complex interventions is that it is virtually impossible to specify or anticipate exactly the precise problems and solutions that are likely to emerge during implementation; as such, having high quality monitoring systems in place can help to identify problems before they get too severe, and locate specific examples of where and how such problems have been solved. Explaining variation is difficult, however, because it is likely to remain even after controlling for observable factors. Household survey instruments are crucial for mapping the nature and extent of variation, and for enabling observable factors to be incorporated into explanations of it. But a third defining feature of complex interventions is that they are highly susceptible to the influence of statistically ‘unobservable’ factors, such as those stemming from and the household data could only tell us so much (since it social networks, motivation, legitimacy, expectations and typically contained only rather crude information on local power. Lots of devils lurk in lots of details, and to tease structural variables). Conducting case studies in some of these out, different methodological tools are needed. If these exceptional places – in Palestine (education) and the great strength of statistical methods is ‘breadth’, then Jordan (health) – helped unpack the causal mechanisms the complementary strength of qualitative approaches by which, in these contexts, extant policies were being is ‘depth’. Conducting some “deep dives” in exceptional transformed into superior outcomes; in other words, places helps researchers to observe unobservables, to get it helped us understand the ‘causes of effects’ (as a a more precise read on the specific micro mechanisms by counterpart to orthodox evaluation techniques that focus which prevailing inputs manifest themselves as particular on discerning the ‘effects of causes’). Put differently, it outcomes. helped discern how certain teams in certain communities were able to take the same policy ‘ingredients’ as everyone An example of this approach in action can be seen in a else but somehow bake a much better cake. recent study a team of us undertook on the quality of service delivery in the Middle East and North Africa These findings may or may not be generalizable, but region. Analyses of the existing household data sets in they unpack how complex interventions can work and MENA, however, revealed enormous variation in how showcase practical examples of how others working in the well these policies were being implemented; absenteeism same contexts might seek improvement. They also help in health clinics in Yemen ranged from 8 to 83%, for shape a broader policy dialogue that is simultaneously example, while schools in Palestine, though generally honest with regard to the overall effectiveness of a given struggling, nonetheless sometimes yielded performance delivery system (which is often parlous) yet not without scores on standardized international tests (TIMSS) that hope: someone, somewhere, somehow has figured out were ‘average’ by global standards – an extraordinary how to do a better job than others. Their insights can be a accomplishment in a veritable war zone. But what basis on which improvements elsewhere are sought. accounts for this variation? It can’t be policy variation, since policies are effectively ‘constant’ in centralized states, World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 25 ABOUT THE DEVELOPMENT DIGEST The Development Digest is a half-yearly publication that features key works from the team based at the World Bank Group Global Knowledge and Research Hub in Malaysia. The views and interpretations in the articles are those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. Work from this publication may be reproduced with appropriate source attribution. Editor: Joshua Foong For more information visit: www.worldbank.org/malaysia Email: malaysia@worldbank.org World Bank Group Global Knowledge and Research Hub in Malaysia: Development Digest, October 2016 26 Development Digest ISSUE 01 - October 2016 Website: www.worldbank.org/malaysia Email: malaysia@worldbank.org