|Welcome to Research Highlights 2008, the annual report of the World Bank’s research department, the Development Research Group (DECRG) in the Development Economics Senior Vice Presidency.
What a year! The food, fuel, and financial crises of 2008 naturally dominated attention, including the Bank’s research department. Our researchers have responded in assessing the causes of the crises, the likely impacts on poverty and human development, and appropriate policy responses.
The obvious first step was to take stock of what we know from past work. In fact past crises have been much studied by DECRG’s researchers, in many 100s of papers going back to 1990. As the world enters what is clearly a truly major financial crisis, it is of interest to look at some of the main lessons that can be drawn from our past research.
The existence of financial crises does not change our assessment that, on balance, financial development and globalization are good for poverty reduction in the longer term. However, this positive long-run relationship can coexist with a negative short-run relationship through financial fragility. This can reflect fundamental distortions that build up for a long time, largely hidden from view, before a macro shock reveals the underlying vulnerabilities. But financial crises can also strike economies with relatively sound institutions and generally good policies.
Arguably, greater openness in areas such as trade and migration helps countries deal with domestic shocks, but may well increase vulnerability to external shocks. Globalization has probably facilitated contagion of the 2008 financial crisis, although some economies and some people are likely to be more vulnerable than others.
Even an economy-wide crisis can have diverse, heterogeneous impacts that warn against simple generalizations, and also point to the need for a flexible social policy response. It should not be presumed that the poorest will be hit hardest; indeed, some of the same (undesirable) factors that have kept a significant share of the developing world’s population in deep and persistent poverty—including a lack of connectivity to markets, and consequent lack of opportunity for economic advancement—will protect them to some degree from the crisis. However, significant welfare impacts can be expected, notably in countries, and regions within countries, that have benefited from market-oriented development.
Poverty is very likely to be higher as a result of the financial crisis, although by how much will depend on the extent of the aggregate economic contraction and the rise in inequality (if any). DECRG has been providing regular assessments of the likely poverty impacts; our latest estimates suggest that in 2009 alone the crisis will trap an extra 40-50 million people in extreme poverty. However, an aggregate poverty measure cannot tell the whole story. There are likely to be both gainers and losers at any level of living, including among the poor. And there may well be adverse impacts on important non-income dimensions of welfare, including the nutrition and schooling of children.
Even a short-lived crisis can have longer-term impacts for some of those affected, most notably through the nutrition and schooling of children in poor families. And deficient crisis responses can lay the seeds of longer-term vulnerability to crises. The extent to which these adverse outcomes materialize will depend in part on the policies adopted by developing-country governments. The record of past policy responses to crises contains both successes and failures.
The lessons for policy from our past research on crises span financial sector policies, macroeconomic stabilization, external trade policies, education and health care, and social protection. A number of specific lessons emerge, but there is only space here to point to some generic lessons. The paper on “Lessons from World Bank Research on Financial Crises” goes into more detail on those lessons.1
The generic lessons include the importance of an early response.The fiscal cost of interventions can be quite large, but the cost of inaction can be even larger. Other generic lessons include the importance of understanding incentives in the design of policy responses, the importance of spending composition in designing a fiscal stimulus or adjustment program, and the importance of sound information on what is happening on the ground as the crisis unfolds.
However, if there is one lesson that stands out it is that the short-term responses to a crisis cannot ignore longer-term implications for development in all its dimensions. The macroeconomic stabilization response must be consistent with restoring the growth process and (hence) the pace of poverty reduction. Financial sector policies need to balance (understandable) concerns about the fragility of the banking system with the needs for sound longer-term financial institutions. The paper by Asli Demirgüç-Kunt, and Luis Servén,“Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies, ” focuses on financial sector policies, where the challenge ahead is to align private incentives with public interest without taxing or subsidizing private risk-taking.2
Some broadly similar issues of information and incentives underlie our discussions of social policy responses, which must provide rapid income support to those in most need—giving highest on the poorest among those affected—while preserving the key physical and human assets of poor people and their communities. Difficult choices will be faced in addressing the (inevitable) tradeoffs between rapid crisis response and these longer-term development goals.
Social protection will figure prominently in the crisis responses of developing countries. Many governments and citizens are asking what can be done to help protect the poorest. There is a compelling case for believing that the composition of public spending and taxation should change in favor of the poor, although the evidence on past performance is not encouraging; too often it is spending on the non-poor that is protected. A recently popular class of transfer programs requires the children of the recipient family to demonstrate adequate school attendance (and health care in some versions).
Our research has provided evidence from impact evaluations that such Conditional Cash Transfer (CCT) programs bring non-negligible benefits to poor households—in terms of both current incomes and future incomes, through higher investments in child schooling and health case. The 2008 Policy Research Report, "Conditional Cash Transfers: Reducing Present and Future Poverty," documents the evidence from past evaluative research on CCTs, and points to important lessons for the ongoing efforts to introduce and scale up these programs, as part of the efforts of governments to respond to the crisis.3
Our past research has covered other important policies for social protection, including workfare programs. In 2008 we completed an overview of our past research on the range of social protection programs, “Bailing out the Poorest,” that can help protect the poor in a crisis, pointing to both successes and failures, and emphasizing the need for care in thinking about incentives in policy design, the role played by political economy, and the importance of flexibility in adapting to the settings faced, informed by rigorous monitoring and evaluation.4
Having taken stock of what we have learned, we have proceeded to start filling some of the obvious gaps in our knowledge about the crises that emerged so visibly in 2008. By re-deploying the department’s own resources, we instigated rapidly a series of ten or so small research projects in 2008, as well as a number of other projects financed by external resources.
Among the topics being studied are the following: international capital flows and portfolio allocations, including studying the behaviors of institutional investors; international transmission mechanisms of the sub-prime crisis, including through trade and migration; understanding stock market reactions in times of crises; and assessing the likely impacts on poverty and human development, including impacts on child welfare and schooling.
There are huge information challenges in a crisis—even to know what exactly is happening on the ground in a timely way, let alone to figure out what is the best policy response in specific circumstances. Since data are at the core of almost everything DECRG’s researchers do, we have also been active in exploring new ways of monitoring what is happening and evaluating interventions. New high-frequency data sources are being explored actively—data sources that have only become possible with advances in information technology, including (of course) the internet.
Just as the crisis brings new economic opportunities in its wake, with gainers as well as losers, it creates research opportunities. For example, the crisis caused havoc in one of our research projects on the role of management skill in firm performance in India, but the researchers concerned were also able to seize the opportunity to learn about the potential role of better management in helping firms protect themselves from the crisis.
Crisis responses cannot ignore longer-term impacts. The faster the developing world gets back on track toward a sustainable path of poverty reduction, the better. Nor can we ignore research on our longer-term development goals at a time of crisis. Research continues on our core areas of long-run growth, distributional change and poverty reduction, climate change, pollution, energy, finance for development, private sector development, trade reform, migration, governance and delivering better schooling and health care services.
Our research also continued on measuring and monitoring progress against poverty in the world. In 2008 we completed a major update of our estimates of the extent of absolute poverty in the developing world, and we found that the incidence of poverty was greater than our past estimates had suggested, although we still find that there has been substantial long-term progress against extreme poverty in the developing world as a whole, though certainly not in all regions.5
The lack of progress in Sub-Saharan Africa over 1981-2005 is notable and worrying, though, prior to the crisis, there are some recent signs that this may be reversing. Our current expectations are that the crisis will essentially stall that progress over 2009-2010. In 2008 we also instigated a major long-term initiative to improve poverty data for Sub-Saharan Africa, thanks to substantial financial support from the Gates Foundation.
This year also saw the publication of two new books on trade distortions in agriculture in Latin America and Europe’s transition economies.6 Strikingly these studies find that the direct taxation of export-oriented agriculture, which was once so common 20 years ago, has largely vanished. In its place, we have seen greater protection of import-competing agriculture.
One of the unusual, and possibly unique, features of DECRG is the fact that we span such a wide range of development issues. Research is conducted both within and across the six teams, in collaboration with researchers in other parts of the Bank, with colleagues in universities and research institutions throughout the world, and collaborators in almost all the developing countries in which the department’s work is focused. In 2008, the department’s country-specific research spanned 45 developing countries (on top of cross-country comparative work).
Introduction to the 2008 edition of Highlights
We have greatly shortened our highlights report over past years. The full online Research Highlights 2008 report (available at http://econ.worldbank.org/research/highlights2008) provides a complete list of publications by team in calendar year 2008, which included 21 books, 161 journal articles, 69 book chapters, well over 176 working papers (that will be published in due course), and 19 new and updated datasets.
The full report also gives details on the group’s outreach efforts, which included 10 web articles, 15 web briefs, blog entries, and 9 conferences organized or co-organized by staff with other institutions. And, of course, staff gave well over 500 presentations at seminars and conferences throughout the year.
I very much hope that you enjoy reading this edition of Research Highlights. Please tell us what you think about the issues raised in these pages, and bring up topics you think need more research. In the end, it is the active interaction with development thinkers and practitioners that will continue to assure that research at the World Bank remains relevant to our shared goals of achieving inclusive and sustainable economic development.
1. Development Research Group. 2008. “Lessons from World Bank Research on Financial Crises.” Policy Research Working Paper 4779, World Bank, Washington, DC.
2. Demirgüç-Kunt, Asli, and Luis Servén. 2008. “Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro and Financial Policies.” Policy Research Working Paper 4807, World Bank, Washington, DC.
3. Fiszbein, Ariel, and Norbert Schady. 2009. Conditional Cash Transfers: Reducing Present & Future Poverty. Washington, DC: World Bank.
4. Ravallion, Martin. 2008. “Bailing Out the World’s Poorest.” Policy Research Working Paper 4763, World Bank, Washington, DC.
5. Chen, Shaohua, and Martin Ravallion. 2008. “The Developing World is Poorer than We Thought, But No Less Successful in the Fight against Poverty.” Policy Research Working Paper 4703, World Bank, Washington, DC.
6. Anderson, Kym, and Alberto Valdes. 2008. Distortions to Agricultural Incentives in Latin America. Washington, DC: World Bank; Anderson, Kym, and Johan Swinnen. 2008. Distortions to Agricultural Incentives in Europe's Transition Economies. Washington, DC: World Bank.