World Bank Blogs IBRD and IDA: Working for a World Free of Poverty. en A Fragile Country Tale: Restrictions, Trade Deficits, and Aid Dependence <p> <img alt=" Masaru Goto, World Bank" src="" style="float:left; height:261px; margin:4px; width:400px" title=" Masaru Goto, World Bank" />Part of the World Bank’s <a href="" rel="nofollow">new vision</a> is to step up its efforts to help fragile and conflict-afflicted states break the vicious cycle of poverty. But this is no easy task.<br /> &nbsp;<br /> The destruction of productive assets and the restrictions on the capacity to produce are among the most severe economic impacts of conflicts and fragility. These effects explain why countries in conflict or emerging out of conflict typically have very large trade deficits. The productive sector is often particularly weak by international standards, so exports are low and domestic consumption has to rely on imports. Indeed, five of the ten countries with the largest trade deficit in the world (Timor-Leste, Liberia, the Palestinian territories, Kosovo and Haiti) are <a href="" rel="nofollow">considered fragile</a> by the World Bank and other regional development banks (figure 1).<br /> &nbsp;</p> <!--break--> <p> <strong><img alt="" src="" style="float:right; height:224px; margin:4px; width:300px" /></strong>In the absence of substantial private capital flows and remittances, fragile countries have often to rely on foreign aid to fund the bulk of these trade deficits. In fact aid itself can in some instances contribute to expanding the trade deficit, for example by causing <a href="" rel="nofollow">the appreciation of the real exchange rate</a> (Dutch Disease).<br /> &nbsp;<br /> But the bottom line is that without foreign aid many fragile countries would not be able to fund much of their basic consumption and investments. Take the world’s ten most aid-dependent countries with a population above 1 million (figure 2). The top seven are all considered fragile. All five also have a trade deficit well in excess of 20 percent of GDP, with Afghanistan being the only exception (with a deficit of 18 percent of GDP).<br /> <strong><img alt="" src="" style="float:right; height:229px; margin:4px; width:300px" /></strong><br /> A vivid —albeit unique— illustration of this ‘fragile country’ tale is provided by the Palestinian territories. Here, we see both one the highest trade deficits and aid dependencies in the world.<br /> &nbsp;<br /> <a href="" rel="nofollow">Our recent World Bank report</a> helps explain why. It examines the economic impact of restrictions on movement and access imposed by Israel on Palestinian activities in “Area C”—a contiguous territory spanning 61 percent of the West Bank. Under the Oslo Peace Accords in 1993 this was defined as the area that would be gradually and almost entirely transferred to the Palestinian Authority within a period of 5 years. This transfer is yet to take place.<br /> &nbsp;<br /> In the meantime, access to Area C has been drastically limited due to Israeli security concerns. This has meant little possibility for most kinds of Palestinian economic activity, as the de facto manner in which the area is currently administered precludes Palestinian businesses from investing there.<br /> &nbsp;<br /> Yet, the potential contribution of Area C to the Palestinian economy is large. Area C contains the majority of Palestinian natural resources. Our estimates suggest that the potential value added from lifting the restrictions on access to, and activity and production in Area C amounts to some USD $3.4 billion —or 35 percent of Palestinian GDP (based on 2011 figures).<br /> &nbsp;<br /> The bulk of this potential would come from the tradable sectors, particularly agriculture and minerals-based industries. The restrictions have stifled agricultural production by limiting access to fertile land and the water to irrigate it. Cultivating the additional unexploited area notionally available to the Palestinians could mean adding up to at least US$704 million to the Palestinian economy—equivalent to 7 percent of total GDP in 2011.<br /> &nbsp;<br /> The report also estimates that the Palestinian economy could generate more than USD $900 million in additional value added if it were allowed to mine valuable Dead Sea minerals. That’s roughly the equivalent of the contribution of its entire manufacturing sector. Moreover the restrictions are harmful for other important exporting sectors as well, such as mining, quarrying and tourism.<br /> &nbsp;<br /> Taken together these restrictions play a major role in explaining the long-term decline of the Palestinian tradable sector. The manufacturing sector has shrunk in real terms since 1994, with its share in GDP falling from 19 to 10 percent by 2011. The importance of the agricultural sector in the Palestinian economy has also diminished. However unlike in a modernizing economy, this process has not been accompanied by any corresponding movement of workers out of agriculture into more productive sectors. Nor have these sectors been replaced by high value-added service exports like IT or tourism.<br /> &nbsp;<br /> So how can it be that the numbers still showed until recently the Palestinian economy being in balance?<br /> &nbsp;<br /> As in the tale of many other fragile and conflict-affected countries, the trade deficit generated by a weak tradable sector has been compensated by external resources. In the Palestinian territories, these have been aid inflows (essentially gross transfers in figure 3).<br /> <img alt="" src="" style="float:right; height:324px; margin:4px; width:400px" />&nbsp;<br /> The aid inflows almost single-handedly maintained the Palestinian current account in balance up to 2010. By 2012, however, foreign budget support—a key component of aid inflows to the Palestinian territories — had declined by more than half. As a result, GDP growth fell from 9 percent in 2008-11, to 5.9 percent by 2012, and to 1.9 percent in the first half of 2013. In the West Bank growth has actually completely stopped, with the economy shrinking 0.1 percent.<br /> <br /> This slowdown has exposed the distorted nature of the economy and its artificial reliance on donor-financed consumption. It provides resounding confirmation that any efforts to ensure fragile countries’ sustained economic development—falling short of ending instability and its associated disruptions—is to prove elusive.</p> Wed, 26 Mar 2014 11:17:00 -0400 Massimiliano Calì West Bank Check-Points Damage Economy, Illustrate High Cost of Trade Barriers <p> <img alt="Qalandia Check-point. Source -" src="/trade/files/trade/West%20Bank%20check-point.jpg" style="float:left; height:263px; margin:4px; width:350px" title="Qalandia Check-point. Source -" />Conflict&nbsp;is a major cause of poverty in the developing world today. In addition to endangering lives, conflict disrupts the functioning of an economy in many ways. It destroys infrastructure, prevents children from going to school, and closes factories. A little-studied economic impact is conflict’s tendency to restrict the mobility of goods and labor within and across borders. These restrictions are caused both by insecurity associated with the conflict and by explicit barriers that constrain the mobility of people and goods. Our recent <a href=";theSitePK=469382&amp;piPK=64165421&amp;menuPK=64166093&amp;entityID=000158349_20130522112115" rel="nofollow">World Bank study</a> measures the harm such barriers have caused the economy of the West Bank by limiting mobility in the Israeli-Palestinian conflict.</p> <!--break--> <p> <br /> <br /> Since the end of the 1980s Israel has erected check-points and other barriers to mobility inside and across the borders in the West Bank and Gaza. While these barriers were put in place to increase security, they have also reduced firms’ ability to transport goods and affected the day-to-day lives of people commuting to work. The creation of check-points has had a significant negative effect on residents of the West Bank, lowering their employment prospects, wages and days worked per month. This effect is quite costly to the economy – equivalent to 6 percent of GDP in 2007.<br /> <br /> By substantially increasing the costs of mobility, the check-points in the West Bank have an impact that is similar to that of inefficient borders or high <a href="" rel="nofollow">trade and transportation costs</a>. These check-points are easier to study than border delays, however. For one, they are well-documented, as is information about the population’s employment levels, wages, and working hours. In addition, because the changes in the check-points’ placement are more abrupt and frequent than improvements to infrastructure or <a href="" rel="nofollow">border management</a>, they provide a unique, quasi-natural experiment to test for the effects of variations in trade costs on economic welfare.<br /> <br /> In September 2000, with the outbreak of the second Intifada, Israel began scaling up and enforcing a particularly severe system of mobility barriers – including permanent and partial check-points, roadblocks, earth mounds and barrier gates – restricting the movement of goods and people within and across the West Bank. At the check-points, Israeli security personnel often search vehicles and check the documentation of people in transit. &nbsp;In some cases, as in Nablus until 2009, these barriers impede any vehicular traffic in and out of cities and towns. The measures dramatically increase traveling time between cities, villages and rural areas, forcing vehicles to make costly detours.<br /> <br /> We used data on these barriers, as well as labor force survey data, to identify the impacts of this system on the West Bank labor market in the period 2000-2009. Of all the barrier types, the check-points did the most harm to labor conditions. We found, for example, that placing just one check-point a minute away from a town reduced by half of a percentage point the probability of the town’s residents being employed. It reduced the residents’ hourly wage by 5.2 percent. We estimate that the presence of check-points caused approximately 6,900 more unemployed workers in 2007 in the West Bank. This translates into a monetary loss to the economy of approximately $38 million. If we also consider the impact of the check-points on hourly wages, the loss comes to $229 million, or approximately 6 percent of the West Bank GDP in 2007.<br /> <br /> We capture only the short-term impact of these restrictions, so it is likely that their effects are even more substantial. Our results suggest that the check-points damage the economy more by increasing goods transport costs, rather than by reducing labor mobility. To the extent that the effect of removing a check-point is akin to that of improving infrastructure or border management, our results confirm the importance of reducing trade costs for improving welfare. As this study shows, that is particularly the case in conflict and post-conflict countries, where such trade costs are highest and delay much-needed economic recovery.</p> Thu, 18 Jul 2013 13:46:44 -0400 Massimiliano Calì Urbanization is good for rural poverty (at least in India) <P>Driven by the rapid growth of urban population in developing countries, the world had become more urban than rural by 2007. This trend is expected to continue in the years ahead. Almost all of the future growth in the world population will be concentrated in the urban areas of developing countries. The <A href="">United Nations</A> projects that developing countries will almost double their urban population by 2050, adding a further 2.4 billion urban dwellers (figure 1).<!--break--></P> <P>While the urbanization of the world’s population has been accompanied by an “<A href="">urbanization of global poverty</A>” (Ravallion et al., 2007), poverty continues to be overwhelmingly concentrated in rural areas. According to the <A href="">World Development Indicators</A>, almost two third of the poor globally are still rural. Thus understanding the implications of urban growth for rural poverty in developing countries is crucial for any global poverty reduction strategy. That is what Carlo Menon and I try to do in a <A href="">recent paper</A>, examining the extent to which the growth in urban areas reduced poverty in surrounding rural areas in India (Calì and Menon, 2013). The focus on India is particularly relevant, as it is the country with the largest number of both rural and urban poor and with the largest expected absolute growth in urban population between now and 2050 (figure 2).</P> <P><SPAN style="FONT-SIZE: smaller"><STRONG>Figure 1: Urban and rural populations (in mln)&nbsp;by development group, 1950-2050<BR><IMG alt="" src="" width=489 height=279><BR></STRONG></SPAN><SPAN style="FONT-SIZE: smaller">Source: World Urbanization Prospects, the 2011 Revision</SPAN></P> <P>Using data on Indian districts from 1983 to 1999, we find that urbanization has a significant poverty-reducing effect in the surrounding rural areas. We use a variety of instrumental variable estimations to show that this effect is causal and in fact failure to control for causality downwardly biases the poverty reducing effect of urbanization. On average an increase in the urban population by 200,000 determines a decrease in rural poverty in the same district of between 1.3 and 2.6 percentage points. According to these figures, urbanization was responsible for between 13 percent and 25 percent of the overall reduction in rural poverty in India over the period. This is a substantial contribution, which is higher for example than that of an important rural policy in post-independence India, i.e. land reform, which explains approximately one-tenth of the rural poverty reduction between 1958 and 1992 (<A href="">Besley and Burgess, 2000</A>).</P> <P><STRONG><SPAN style="FONT-SIZE: smaller">Figure 2: Largest expected changes in urban population (in mln)&nbsp;in developing countries, 2010-2050<BR><IMG alt="" src="" width=454 height=272></SPAN></STRONG><BR><SPAN style="FONT-SIZE: smaller">Source: World Urbanization Prospects, the 2011 Revision</SPAN></P> <P>Our analysis suggests that the poverty-reducing impact of urbanization is a consequence of urban-rural economic linkages and it is not due to the re-location of the rural poor to urban areas. Distinguishing between these two effects is important. The latter entails no structural link between urbanization and rural poverty and the related variation in rural poverty is simply due to the change in residency from rural to urban areas of some of the rural poor. On the other hand, the economic linkage effects capture the impact of urbanization on the welfare of those who remain in rural areas through urban-rural linkages. This relationship indicates how good or bad urbanization is for rural poverty.</P> <P>We find that these economic linkage effects of urbanization on rural poverty are entirely accounted for by four channels. The first is due to the increase in the demand for rural goods by an expanding urban area, which in the absence of spatially integrated food markets, is disproportionately satisfied by surrounding rural areas. This channel alone explains around three quarter of the overall effect of urbanization on rural poverty. The second mechanism works through urban-rural remittances associated with urbanization, which account for less than a fifth of the rural poverty reducing effect of urbanization. The remaining small proportion of the effect of urbanization on rural poverty is explained by the increase in rural land/labor ratio due to rural-urban migration and to the increase in rural nonfarm employment. Expanding urban areas usually favor the diversification of economic activity away from farming in surrounding rural areas, which typically has a positive effect on income. In the case of India, this effect is small as rural nonfarm employment has an inverted-U shape relation with rural poverty.</P> <P>These findings suggest at least two policy messages. First, they can help to reassess the role of public investment in urban areas for poverty reduction. In fact, it is a popular tenet that investments in developing countries should be concentrated in rural areas to reduce poverty because the poor in developing countries are primarily concentrated there. However to the extent that urbanization can have substantial poverty-reducing effects on rural areas, urban investments should become an important complement to rural investments in rural poverty-reduction strategies. Second, our findings run counter the popular myth that rural-urban migration may deplete rural areas, causing them to fall further behind. The relatively low rate of urbanization in India itself (and in China) is likely to be due at least in part to public policies that have not facilitated (and, in certain instances, have even constrained) rural-urban migration. At the very least, this paper questions the appropriateness of this bias against rural-urban migration.</P> <P><BR><STRONG><SPAN style="FONT-SIZE: smaller">References </SPAN></STRONG></P> <P><SPAN style="FONT-SIZE: smaller">Besley, T., and R. Burgess. 2000. “Land Reform, Poverty Reduction and Growth: Evidence from India”.<BR>Quarterly Journal of Economics, 117(4): 389–430. </SPAN><BR><SPAN style="FONT-SIZE: smaller"><BR>Calì, M. and C. Menon (2013). “Does Urbanization Affect Rural Poverty? Evidence from Indian Districts”. World Ban Policy Research Working Paper 6338 (also forthcoming in the World Bank Economic Review).</SPAN><BR><SPAN style="FONT-SIZE: smaller"><BR>Ravallion, M., S. Chen, and P. Sangraula (2007). “New evidence on the urbanisation of global poverty”. Population and Development Review, 33(4): 667–701.</SPAN></P> <P>&nbsp;</P> Wed, 20 Feb 2013 13:49:46 -0500 Massimiliano Calì