The World Bank Economic Review

• The Whole is Greater than the Sum of Its Parts: Complementary Reforms to Address Microeconomic Distortions

  Bergoeing, R., Loayza, N. V., Piguillem, F., 2015-09-24 16:33:28 PM

  This paper links microeconomic rigidities and technological adoption to propose a partial explanation for the observed differences in income per capita across countries. The paper first presents a neoclassical general equilibrium model with heterogeneous production units. It assumes that developing countries do not generate frontier technologies but can adopt them by investing in new capital, which requires firm renewal. The model analyzes how this process can be hindered by barriers to the entry of new investment projects and the exit of obsolete ones. It finds that there are nonlinearities in the way entry and exit barriers operate: Barriers have increasing costs, and they reinforce each other's negative impact. The paper then calibrates and simulates the model to measure the impact of these barriers on the GDP per capita gap between the United States and a large sample of developing countries. It accounts for a range of 26 to 60% of the income gap between the United States and 107 developing countries. Most importantly, the model implies that, for the median developing economy, about 50% of the simulated gap is explained by the interaction of entry and exit barriers (and the rest by their individual effects). The paper's main policy implication is that only comprehensive reforms can have substantial effects, especially when initial distortions are large. If they are too narrow (focusing on only one barrier) or too mild (leaving in place a large distortion), microeconomic reforms are unlikely to have significant effects on aggregate productivity and output growth.
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• The Cost of Road Infrastructure in Low and Middle Income Countries

  Collier, P., Kirchberger, M., Soderbom, M., 2015-09-24 16:33:28 PM

  The connections between transport infrastructure and economic development have been extensively analyzed in previous research, but little is known about the cost of infrastructure investments in poor countries. This paper examines drivers of unit costs of construction and maintenance of transport infrastructure in low and middle income countries and documents that: (i) there is a large dispersion in unit costs for comparable road work activities; (ii) after accounting for environmental drivers of costs, residual unit costs are significantly higher in conflict countries; (iii) there is evidence that costs are higher in countries with higher levels of corruption; (iv) these effects are robust to controlling for a country's public investment capacity and business environment. Our findings have implications for governments aiming to increase connectivity in poor countries.
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• The Impact of Vocational Schooling on Human Capital Development in Developing Countries: Evidence from China

  Loyalka, P., Huang, X., Zhang, L., Wei, J., Yi, H., Song, Y., Shi, Y., Chu, J., 2015-09-24 16:33:28 PM

  A number of developing countries are currently promoting vocational education and training (VET) as a way to build human capital and strengthen economic growth. The primary aim of this study is to understand whether VET at the high school level contributes to human capital development in one of those countries—China. To fulfill this aim, we draw on longitudinal data on more than 10,000 students in vocational high school (in the most popular major, computing) and academic high school from two provinces of China. First, estimates from instrumental variables and matching analyses show that attending vocational high school (relative to academic high school) substantially reduces math skills and does not improve computing skills. Second, heterogeneous effect estimates also show that attending vocational high school increases dropout, especially among disadvantaged (low-income or low-ability) students. Third, we use vertically scaled (equated) baseline and follow-up test scores to measure gains in math and computing skills among the students. We find that students who attend vocational high school experience absolute reductions in math skills. Taken together, our findings suggest that the rapid expansion of vocational schooling as a substitute for academic schooling can have detrimental consequences for building human capital in developing countries such as China.
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• Bridging the Gender Gap: Identifying What Is Holding Self-Employed Women Back in Ghana, Rwanda, Tanzania, and the Republic of Congo

  Nix, E., Gamberoni, E., Heath, R., 2015-09-24 16:33:28 PM

  Quantile decomposition methods are used to study the determinants of the gender gap in self-employment earnings across the earnings distribution of four Sub-Saharan countries: the Republic of Congo, Ghana, Rwanda, and Tanzania. Techniques developed by Firpo, Fortin, and Lemieux (2007) are used to decompose the gap into a compositional effect (the part of the earnings gap that can be explained by observable factors) and a structural effect (the part of the gap that can be explained by returns to those factors, suggestive of discrimination) at various quantiles of the income distribution. While, in all countries and all points of the wage distribution, compositional effects help explain gender gaps in self-employment earnings, the majority of the wage gap is due to structural effects (with the exception of low income earners in the Republic of Congo). Still, the relative importance of specific compositional factors and the specific contribution of structural factors varies across countries and at different points of the income distribution within countries. There is some evidence of a glass-ceiling effect in the Republic of Congo and Tanzania but not in Ghana and Rwanda. These results suggest that discrimination is influenced by local conditions and that there is no single model of earnings gaps that can explain gender gaps in earning in sub-Saharan Africa.
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• The Decision to Invest in Child Quality over Quantity: Household Size and Household Investment in Education in Vietnam

  Dang, H.-A. H., Rogers, F. H., 2015-09-24 16:33:28 PM

  During Vietnam's two decades of rapid economic growth, its fertility rate has fallen sharply at the same time that its educational attainment has risen rapidly—macro trends that are consistent with the hypothesis of a quantity-quality tradeoff in child-rearing. We investigate whether the micro-level evidence supports the hypothesis that Vietnamese parents are in fact making a tradeoff between quantity and "quality" of children. We present private tutoring—a widespread education phenomenon in Vietnam—as a new measure of household investment in children's quality, combining it with traditional measures of household education investments. To assess the quantity-quality tradeoff, we instrument for family size using the commune distance to the nearest family planning center. Our IV estimation results based on data from the Vietnam Household Living Standards Surveys (VHLSSs) and other sources show that rural families do indeed invest less in the education of school-age children who have larger numbers of siblings. This effect holds for several different indicators of educational investment and is robust to different definitions of family size, identification strategies, and model specifications that control for community characteristics as well as the distance to the city center. Finally, our estimation results suggest that private tutoring may be a better measure of quality-oriented household investments in education than traditional measures like enrollment, which are arguably less nuanced and less household-driven.
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• Public Good Provision in Indian Rural Areas: The Returns to Collective Action by Microfinance Groups

  Casini, P., Vandewalle, L., Wahhaj, Z., 2015-09-24 16:33:28 PM

  Self-help groups (SHGs) are the most common form of microfinance in India. We provide evidence that SHGs, composed of women only, undertake collective actions for the provision of public goods within village communities. Using a theoretical model, we show that an elected official, whose aim is to maximize re-election chances, exerts higher effort in providing public goods when private citizens undertake collective action and coordinate their voluntary contributions towards the same goods. This effect occurs although government and private contributions are assumed to be substitutes in the technology of providing public goods. Using firsthand data on SHGs in India, we test the prediction of the model and show that, in response to collective action by SHGs, local authorities tackle a larger variety of public issues, and are more likely to tackle issues of interest to SHGs. Our findings highlight how the social behavior of SHGs can influence the governance of rural Indian communities.
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• Grain Price Spikes and Beggar-thy-Neighbor Policy Responses: A Global Economywide Analysis

  Jensen, H. G., Anderson, K., 2015-09-24 16:33:28 PM

  When prices spike in international grain markets, national governments often reduce the extent to which that spike affects their domestic food markets. Those actions exacerbate the price spike and international welfare transfer associated with that terms of trade change. Several recent analyses have assessed the extent to which those policies contributed to the 2006–08 international price rises but only by focusing on one commodity or by using a back-of-the envelope (BOTE) method. The present more comprehensive analysis uses a global, economy-wide model that is able to take account of the interactions between markets for farm products that are closely related in production and/or consumption and able to estimate the impacts of those insulating policies on grain prices and on the grain trade and economic welfare of the world's various countries. Our results support the conclusion from earlier studies that there is a need for stronger WTO disciplines on export restrictions.
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• Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession

  Lakner, C., Milanovic, B., 2015-09-24 16:33:28 PM

  We present an improved panel database of national household surveys between 1988 and 2008. In 2008, the global Gini index is around 70.5%, having declined by approximately 2 Gini points. China graduated from the bottom ranks, changing a twin-peaked global income distribution to a single-peaked one and creating an important global "median" class. 90% of the fastest growing country-deciles are from Asia, while almost 90% of the worst performers are from mature economies. Another "winner" was the global top 1%. Hence the global growth incidence curve has a distinct supine S shape, with gains highest around the median and top.
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• The Government Response to Informed Citizens: New Evidence on Media Access and the Distribution of Public Health Benefits in Africa

  Keefer, P., Khemani, S., 2015-09-24 16:33:28 PM

  We use a "natural experiment" in media markets in Benin to examine the impact of community radio on government responsiveness to citizens. Contrary to prior research on the impact of mass media, in this experiment government agents do not provide greater benefits to citizens whose exposure to community radio increased their demand for those benefits. Households with greater access to community radio were more likely to pay for government-provided bed nets to combat malaria than to receive them for free. Mass media changed the private behavior of citizens—they invested more of their own resources in the public health good of bed nets—but not citizens’ ability to extract greater benefits from government. While the welfare consequences of these results are ambiguous, the pattern of radio's effects that we uncover has implications for policy strategies to use mass media for development objectives.
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• Volunteerism after the Tsunami: The Effects of Democratization

  Freire, T., Vernon Henderson, J., Kuncoro, A., 2015-09-24 16:33:28 PM

  Using three waves of survey data from fishing villages in Aceh, Indonesia for 2005–09, we examine the determinants of local volunteer labor after the tsunami. Volunteer labor is the village public sector labor force for maintenance, clean-up and renovation of public capital. While also examining the effects on volunteerism of village destruction and trauma, pre-existing social capital, diversity, and aid delivery, we focus on effects of democratization. The tsunami and massive international aid effort prompted the settlement of the insurgency movement in Aceh, which had led to suspension of local elections over the prior twenty or more years. Until 2006, village heads who call volunteer days were effectively selected by village elites, who may highly value the public facilities maintained by volunteer labor. With elections, volunteer days fall under the new regime, with democratically elected village heads calling fewer volunteer days, which may appeal more to the typical villager. Identification comes from pseudo-randomized differential timing of elections.
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• Is Workfare Cost Effective against Poverty in a Poor Labor-Surplus Economy?

  Murgai, R., Ravallion, M., van de Walle, D., 2015-09-24 16:33:28 PM

  Workfare has often seemed an attractive option for making self-targeted transfers to poor people. But is this incentive argument strong enough in practice to prefer unproductive workfare to even untargeted cash transfers? A nonparametric survey-based method is used to assess the cost-effectiveness of a large workfare scheme in a poor state of India with high unemployment. Forgone earnings are evident but fall short of market wages. For the same budget, unproductive workfare has less impact on poverty than either a basic-income scheme or transfers tied to the government's assignment of ration cards. The productivity of workfare is thus crucial to its justification as an antipoverty policy.
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• Does Longer Compulsory Education Equalize Schooling by Gender and Rural/Urban Residence?

  Kırdar, M. G., Dayıoglu, M., Koc, I., 2015-09-24 16:33:28 PM

  This study examines the effects of the extension of compulsory schooling from 5 to 8 years in Turkey in 1997—which involved substantial investment in school infrastructure— on schooling outcomes and, in particular, on the equality of these outcomes between men and women, and urban and rural residents using the Turkish Demographic and Health Surveys. This policy is peculiar because it also changes the sheepskin effects (signaling effects) of schooling, through its redefinition of the schooling tiers. The policy is also interesting due to its large spillover effects on post-compulsory schooling as well as its remarkable overall effect; for instance, we find that the completed years of schooling by age 17 increases by 1.5 years for rural women. The policy equalizes the educational attainment of urban and rural children substantially. The urban-rural gap in the completed years of schooling at age 17 falls by 0.5 years for men and by 0.7 to 0.8 years for women. However, there is no evidence of a narrowing gender gap with the policy. On the contrary, the gender gap in urban areas in post-compulsory schooling widens.
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• The Effects of Volumetric Pricing Policy on Farmers' Water Management Institutions and Their Water Use: The Case of Water User Organization in an Irrigation System in Hubei, China

  Kajisa, K., Dong, B., 2015-09-24 16:33:28 PM

  We use original water user group (WUG) data from a reservoir irrigation system in China to examine the effect of water pricing policies on farmers’ water saving behaviors. The introduction of volumetric water pricing at the group level, to replace area-based pricing, induces institutional change to prevent each member's overuse of water when the volumetric price levels are moderate. Depending on the initial conditions, the multiple pathways of change lead to new institutional arrangements, with all of them contributing to water savings. However, when the price is set high enough, many farmers exit a WUG for private irrigation. This tendency is associated with an increased probability that the remaining members do not undertake institutional change and that they do not end up saving water. This may be due to the increased management difficulties among the remaining members whose fields are separated by former members who have now opted out for private irrigation across the WUG. As a result, we do not find evidence that the reservoir water is saved at high volumetric price levels.
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• What Is the Aggregate Economic Rate of Return to Foreign Aid?

  Arndt, C., Jones, S., Tarp, F., 2015-09-24 16:33:28 PM

  In recent years, academic studies have been converging towards the view that foreign aid promotes aggregate economic growth. We employ a simulation approach to: (i) validate the coherence of empirical aid-growth studies published since 2008; and (ii) calculate plausible ranges for the rate of return to aid. Our results highlight the long run nature of aid-financed investments and the importance of channels other than accumulation of physical capital. We find the return to aid lies in ranges commonly accepted for public investments and there is little to justify the view that aid has had a significant pernicious effect on productivity.
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• A New Cross-National Measure of Corruption

  Escresa, L., Picci, L., 2015-09-24 16:33:28 PM

  A new measure of cross-national corruption is constructed based on the geographic distribution of public officials involved in cross-border corruption cases. A comparison is made between the Public Administration Corruption Index (PACI) and perception-based measures, considers the extent to which differences between them are driven by systematic factors, and concludes that they are not. As more data on cases of cross-border bribery incidents become available, the PACI will provide an increasingly valid cross-national measure of corruption.
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• Asymmetric Information about Migrant Earnings and Remittance Flows

  Seshan, G., Zubrickas, R., 2015-09-24 16:33:28 PM

  We examine asymmetric information about migrant earnings and its implications for remittance behavior using a sample of Indian households with husbands working overseas in Qatar. On average, wives underreport their husbands’ income and underreporting is more prevalent in households with higher earning migrants. The discrepancy in earning reports is strongly correlated with variation in remittances: greater underreporting by wives is associated with lower remittances. We develop an exchange model of remittances with asymmetric information and costly state verification. The optimal remittance contract prescribes a threshold for remittances that invites verification only if unmet. The model's predictions closely match our empirical findings.
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• Risky Business: Political Instability and Sectoral Greenfield Foreign Direct Investment in the Arab World

  Burger, M., Ianchovichina, E., Rijkers, B., 2015-09-24 16:33:28 PM

  Which foreign direct investments are most affected by political instability? Analysis of quarterly greenfield investment flows into countries in the Middle East and North Africa during the period from 2003 to 2012 shows that adverse political shocks are associated with significantly reduced investment inflows in the non-resource tradable sectors. By contrast, investments in natural resource sectors and non-tradable activities appear insensitive to such shocks. Political instability is thus associated with increased reliance on non-tradables and aggravated resource dependence.
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• Financial Inclusion, Productivity Shocks, and Consumption Volatility in Emerging Economies

  Bhattacharya, R., Patnaik, I., 2015-09-24 16:33:28 PM

  How does access to finance impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. This puzzle is addressed in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are financially constrained, with no access to financial services. Unconstrained households can respond to shocks to trend growth by raising current consumption more than the rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre- and post–financial reform in India provides support for the model's key predictions.
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• Deals and Delays: Firm-level Evidence on Corruption and Policy Implementation Times

  Freund, C., Hallward-Driemeier, M., Rijkers, B., 2015-09-24 16:33:28 PM

  Whether demands for bribes for particular government services are associated with expedited or delayed policy implementation underlies debates around the role of corruption in private sector development. The "grease the wheels" hypothesis, which contends that bribes act as speed money, implies three testable predictions. First, on average, bribe requests should be negatively correlated with wait times. Second, this relationship should vary across firms, with those with the highest opportunity cost of waiting being more likely to pay and facing shorter delays. Third, the role of grease should vary across countries, with benefits larger where regulatory burdens are greatest. The data are inconsistent with all three predictions. According to the preferred specifications, ceteris paribus, firms confronted with demands for bribes take approximately 1.5 times longer to get a construction permit, operating license, or electrical connection than firms that did not have to pay bribes and, respectively, 1.2 and 1.4 times longer to clear customs when exporting and importing. The results are robust to controlling for firm fixed effects and at odds with the notion that corruption enhances efficiency.
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• Does Access to Foreign Markets Shape Internal Migration? Evidence from Brazil

  Hering, L., Paillacar, R., 2015-09-24 16:33:28 PM

  This paper investigates how internal migration is affected by Brazil's increased integration into the world economy. We analyze the impact of regional differences in access to foreign demand on sector-specific bilateral migration rates between the Brazilian states for the years 1995 to 2003. Using international trade data, we compute a foreign market access measure at the sectoral level, which is exogenous to domestic migration. A higher foreign market access is associated with a higher local labor demand and attracts workers via two potential channels: higher wages and new job opportunities. Our results show that both channels play a significant role in internal migration. Further, we find a heterogeneous impact across industries, according to their comparative advantage on the world market. However, the observed impact is driven by the strong reaction of low-educated workers to changes in market access. This finding is consistent with the fact that Brazil is exporting mainly goods that are intensive in unskilled labor.
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• Institutional Investors and Long-Term Investment: Evidence from Chile

  Opazo, L., Raddatz, C., Schmukler, S. L., 2015-09-24 16:33:28 PM

  Developing countries are trying to develop long-term financial markets and institutional investors are expected to play a key role. This paper uses unique evidence on the universe of institutional investors from the leading case of Chile to study to what extent mutual funds, pension funds, and insurance companies hold and bid for long-term instruments and which factors affect their choices. Using monthly asset-level portfolios we show that, despite the expectations, mutual and pension funds invest mostly in short-term assets relative to insurance companies. The significant difference across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by manager incentives (related to short-run monitoring and the liability structure) that, combined with risk factors, tilt portfolios toward short-term instruments, even when long-term investing has averaged higher returns. Thus, expanding large institutional investors does not necessarily imply more developed long-term markets.
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• Economic Shocks and Subjective Well-Being: Evidence from a Quasi-Experiment

  Hariri, J. G., Bjornskov, C., Justesen, M. K., 2015-09-24 16:33:28 PM

  This article examines how economic shocks affect individual well-being in developing countries. Using the case of a sudden and unanticipated currency devaluation in Botswana as a quasi-experiment, we examine how this monetary shock affects individuals' evaluations of well-being. We do so by using microlevel survey data, which—incidentally—were collected in the days surrounding the devaluation. The chance occurrence of the devaluation during the time of the survey enables us to use pretreatment respondents, surveyed before the devaluation, as approximate counterfactuals for post-treatment respondents, surveyed after the devaluation. Our estimates show that the devaluation had a large and significantly negative effect on individuals' evaluations of subjective well-being. These results suggest that macroeconomic shocks, such as unanticipated currency devaluations, may have significant short-term costs in the form of reductions in people's sense of well-being.
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• What Explains the Stagnation of Female Labor Force Participation in Urban India?

  Klasen, S., Pieters, J., 2015-09-24 16:33:28 PM

  Female labor force participation rates in urban India between 1987 and 2011 are surprisingly low and have stagnated since the late 1980s. Despite rising growth, fertility decline, and rising wage and education levels, married women's labor force participation hovered around 18 percent. Analysis of five large cross-sectional micro surveys shows that a combination of supply and demand effects have contributed to this stagnation. The main supply side factors are rising household incomes and husband's education as well as the falling selectivity of highly educated women. On the demand side, the sectors that draw in female workers have expanded least, so that changes in the sectoral structure of employment alone would have actually led to declining participation rates.
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• A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize Firms

  de Andrade, G. H., Bruhn, M., McKenzie, D., 2015-09-24 16:33:28 PM

  We conducted a field experiment in Belo Horizonte, Brazil to test which government actions work to encourage informal firms to register. We find zero or negative impacts of information and free cost treatments and a significant but small increase in formalization from inspections. The local average treatment effect estimates of the inspection impact are larger, providing a 21 to 27 percentage point increase in the likelihood of formalizing. The results show that most informal firms will not formalize unless forced to do so, suggesting that formality offers little private benefit to these firms.
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• The Impact of Business Environment Reforms on New Registrations of Limited Liability Companies

  Klapper, L., Love, I., 2015-09-24 16:33:28 PM

  Panel data for 91 countries are used to study how the ease of registering a business and the magnitude of registration reforms affect new registrations of limited liability companies (LLCs). The costs, days, and procedures required to start a business are found to be important predictors of new LLC registration. Panel regressions also show important synergies in multiple reforms of two or more business environment indicators. These results are consistent with the intuition that to be effective, reforms should be sufficiently large so that the costs of registration are lower than the expected benefits. In addition, countries with relatively weaker business environments prior to reforms require relatively larger reforms to impact the number of newly registered LLCs.
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• Managing Quantity, Quality, and Timing in Indian Cane Sugar Production: Ex Post Marketing Permits or Ex Ante Production Contracts?

  Patlolla, S., Goodhue, R. E., Sexton, R. J., 2015-09-24 16:33:28 PM

  Private sugar processors in Andhra Pradesh, India use an unusual form of vertical coordination. They issue ‘permits’ to selected cane growers a few weeks before harvest. These permits specify the amount of cane to be delivered during a narrow time period. This article investigates why processors create uncertainty among farmers using ex post permits instead of ex ante production contracts. The theoretical model predicts that ex post permits are more profitable than ex ante contracts or the spot market under existing government regulations in the sugar sector, which include a binding price floor for cane and the designation of a reserve area for each processor wherein it has a legal monopsony for cane. The use of ex post permits creates competition among farmers to increase cane quality, which increases processor profits and farmer costs. Empirical analysis supports the hypothesis that farmers operating in private factory areas have higher unit production costs than do their counterparts who patronize cooperatives.
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• Learning Dynamics and Support for Economic Reforms: Why Good News Can Be Bad

  van Wijnbergen, S. J. G., Willems, T., 2015-09-24 16:33:28 PM

  Support for economic reforms has often shown puzzling dynamics: many reforms that began successfully lost public support. We show that learning dynamics can rationalize this paradox because the process of revealing reform outcomes is an example of sampling without replacement. We show that this concept challenges the conventional wisdom that one should begin by revealing reform winners. It may also lead to situations in which reforms that enjoy both ex ante and ex post majority support will still not come to completion. We use our framework to explain why gradual reforms worked well in China (where successes in Special Economic Zones facilitated further reform), whereas this was much less the case for Latin American and Central and Eastern European countries.
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• How Bank Competition Affects Firms' Access to Finance

  Love, I., Martinez Peria, M. S., 2015-09-24 16:33:28 PM

  Using multi-year, firm-level surveys for 53 countries, this paper explores the impact of bank competition on firms’ access to finance. We find that low competition, as measured by high values on the Lerner index or Boone indicator, diminishes firms’ access to finance. In addition, the impact of competition on access to finance depends on the quality and scope of credit information sharing mechanisms, and better credit information mitigates the damaging impact of low competition. Overall, our paper offers consistent international evidence that supports the market power hypothesis, which argues that market power reduces access, and rejects the information hypothesis, which suggests that low competition improves access because it allows banks to internalize the investment in building firm-specific relationships.
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• Trade and Cities

  Karayalcin, C., Yilmazkuday, H., 2015-09-24 16:33:28 PM

  Many developing countries display remarkably high degrees of urban concentration that are incommensurate with their levels of urbanization. The cost of excessively high levels of urban concentration can be very high in terms of overpopulation, congestion, and productivity growth. One strand of the theoretical literature suggests that such high levels of concentration may be the result of restrictive trade policies that trigger forces of agglomeration. Another strand of the literature, however, points out that trade liberalization itself may exacerbate urban concentration by favoring the further growth of those large urban centers that have better access to international markets. The empirical basis for judging this question has been weak so far; in the existing literature, trade policies are poorly measured (or are not measured, as when trade volumes are used spuriously). Here, we use new disaggregated tariff measures to empirically test the hypothesis. We also employ a treatment-and-control analysis of pre- versus post-liberalization performance of the cities in liberalizing and non-liberalizing countries. We find evidence that (controlling for the largest cities that have ports and, thus, have better access to external markets) liberalizing trade leads to a reduction in urban concentration.
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• Product Relatedness and Firm Exports in China

  Poncet, S., de Waldemar, F. S., 2015-09-24 16:33:28 PM

  We propose the first evaluation using micro-level data of the gains from the consistency of activities with a local comparative advantage. Using firm-level data from Chinese customs over the 2000–6 period, we investigate the relationship between the export performance of firms and how their products relate to local comparative advantage. Our key indicator measures the density of the links between a product and the local product space. Hence, it combines information on the intrinsic relatedness of a good with information on the local pattern of specialization. Our results indicate that exports grow faster for goods that have denser links with those currently produced in the firm's locality. The density of links between products seems to yield export-enhancing spillovers. However, we show that this positive effect of product relatedness on export performance is mainly limited to ordinary trade activities and domestic firms. It is also stronger for more productive firms, suggesting that spillover diffusion may be hindered by insufficient absorptive capacity.
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• Exchange Rate Volatility, Financial Constraints, and Trade: Empirical Evidence from Chinese Firms

  Hericourt, J., Poncet, S., 2015-09-24 16:33:28 PM

  In this paper, we study how firm-level export performance is affected by Real Exchange Rate (RER) volatility and investigate whether this effect depends on existing financial constraints. Our empirical analysis relies on export data for more than 100,000 Chinese exporters over the 2000–6 period. We confirm a trade-deterring effect of RER volatility. We find that firms' decision to begin exporting and the exported value decrease for destinations with a higher exchange rate volatility and that this effect is magnified for financially vulnerable firms. As expected, financial development seems to dampen this negative impact, especially on the intensive margin of export. These results provide micro-founded evidence suggesting that the existence of well-developed financial markets allows firms to hedge exchange rate risk. The results also support a key role of financial constraints in determining the macro impact of RER volatility on real outcomes.
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