Interest Bearing Notes                                       JUNE 2022


                A Finance & Private Sector Development Research Newsletter


                                      What's new on our website


Fintech and the future of finance
The ongoing digitization of services and money creates opportunities to build more inclusive and efficient
financial services and promote economic development. But for regulators and supervisors, digital
transformation has also created challenges. To help inform policymakers in navigating a complex financial
system, the World Bank recently launched a new report that explores the digital transformation underway
in financial services and the implications of fintech for market outcomes, as well as regulation and
supervision.


                                          World Bank research


Globally engaged firms in the COVID-19 crisis
Firms whose inputs and products cross borders multiple times may be especially vulnerable to global
economic downturns due to factors including currency risk, risk of non-payment, and shipping risk. At the
same time, access to international markets could also make these globally engaged firms resilient to
shocks by diversifying sources of demand and access to inputs. Using data from 45 countries from three
rounds of the Business Pulse Surveys (BPS) and validating their findings using customs data from 20
countries covering the universe of globally engaged firms, Cristina Constantinescu, Ana Margarida
Fernandes, Arti Grover, Stavros Poupakis, and Santiago Reyes uncover a number of patterns that
help explain why globally engaged firms were affected more adversely during the initial phases of the
COVID-19 crisis, but also why they rebounded better and more quickly than other firms. For example, the
decline in firm-level exports and imports at the outset of the crisis was most pronounced for global value
chain (GVC) firms, which they define as those participating in both international exports and imports (as
opposed to firms engaged only in exports or only in imports). While most firms suffered an immediate
decline in sales, globally engaged firms recovered faster than domestically oriented firms. And
manufacturing exporters in GVC-intensive sectors recovered especially quickly, perhaps because of the
practices used within supply chains (such as just-in-time production and lean manufacturing) that had left
them vulnerable at the beginning of the crisis. More generally, the heightened response of globally
engaged firms to the crisis involved finding novel ways to adapt supply chains even in the presence of
lockdowns and uncertainty. They swiftly digitalized, introduced new products and changed their markets
and sources of inputs. While the authors are quick to acknowledge that the lines of causation can be a bit
murky – do better-managed firms become exporters or does global engagement force firms to become
better managed? – it seems clear that the capabilities and adaptability of globally engaged firms were
crucial sources of resilience during COVID-19.

How urban land titling and registry reform affect land and credit markets
Although land titling has been advocated to increase access to credit by transforming dead assets into
‘live capital’ since at least de Soto (2000), little micro evidence exists to support that conjecture. To fill that
gap, Klaus Deininger and Daniel Ayalew Ali study the Lesotho Land Administration Reform Project,
which was designed to improve land registry operation and coverage through policy reforms and
systematic first registration of land rights. Using registry data from 2000-2019 on the stock of registered
parcels, the flow of parcels registered for the first time, and registered land sales and mortgages,
buttressed by satellite data on built area and population density, they construct a panel data set using
250m x 250m blocks as their unit of observation. Taking advantage of the program’s phased roll-out over
space and time, they identify significant program-induced increases in the number of registered parcels,
female co-ownership of land, built registered area, and registered sales over the short term, though the
number of mortgages did not increase. Over the medium term, however, the number of registered
mortgages and land sales did increase, and these gains were particularly large for female co-owners.
These credit and land market activation effects coincided with a reduction in the cost of registering land
transactions, which they also document. Further, their time series enables Klaus and Daniel to show that
these gains for women did not occur with the passage of the 2006 Legal Capacity of Married Persons Act,
but rather required a 2010 Land Act that made co-ownership of land the default option for common-law
marriages, an awareness campaign, and procedures for systematic initial registration that were designed
to put such rights into practice. Based on their findings from this first study to document at the parcel level
the credit- and land-market activation effects of land titling, they conclude that to move beyond the short-
term effects of systematic initial registration, complementary policy reforms associated with titling are
often necessary, and the potential benefits of reducing transactions costs are likely higher in urban areas
than in the informal settlements and rural areas that have typically been the focus of titling programs.


Talk or text? Evaluating response rates by remote survey method during COVID-19
In a new paper, Sofia Amaral, Lelys Dinarte-Diaz, Patricio Dominguez, Santiago M. Perez-Vincent,
and Steffanny Romero, measure the relative effectiveness of collecting data on sensitive topics through
two remote survey methods: phone-based surveys and self-completion surveys over WhatsApp. The
authors embedded a survey-mode experiment in the midline survey of an impact evaluation of a positive-
parenting and stress-management intervention for caregivers in El Salvador. Survey respondents were
randomly assigned to one of two groups: (1) 300 individuals received a call from a live person asking
them to complete a Computer Assisted Telephone Interview (CATI), and (2) 299 individuals received a
WhatsApp message inviting them to complete an online survey. The results show that the survey
completion rate in the CATI group (72%) was much higher than in the WhatsApp group (30%). This
finding implies that, although the direct costs of CATIs are twice as high as the costs of WhatsApp
surveys, CATIs are less expensive than WhatsApp surveys when adjusting for the survey completion rate.
The differences in survey completion rates are larger for women than for men and they are mostly driven
by individuals 40 years or older.


Globalization and factor income taxation
How has globalization affected the relative taxation of labor and capital, and why? To address these
questions, Pierre Bachas, Matthew Fisher-Post, Anders Jensen, and Gabriel Zucman built and
analyzed a new database of effective rates on labor and capital covering more than 150 countries since
1965. The authors digitized and harmonized historical data published by national statistical offices. Using
national accounts data, they first computed total labor and capital income in each country. Using
government revenue statistics, they then classified all government revenue sources into either labor
taxes, capital taxes, or indirect taxes. Finally, they computed effective tax rates on labor and capital by
dividing labor or capital taxes by the corresponding income flow. The data show that labor tax rates have
risen over time in both high-income and developing countries, primarily due to an expansion of payroll
taxes. In high-income countries, capital tax rates dropped from close to 40% to about 30%, while capital
tax rates rose from about 10% to 20% in developing countries. The authors argue that these different
trends in capital tax rates are due to trade liberalization. Trade liberalization exerts a positive effect on
developing countries’ ability to raise tax revenue by increasing the concentration of economic activity in
formal corporate structures at the expense of smaller informal businesses. Meanwhile, globalization also
exacerbates tax competition and creates new opportunities for tax avoidance, putting downward pressure
on capital tax rates in high-income countries. The authors use event studies and instrumental variables
regressions to provide empirical evidence for these arguments.



                            Our eclectic guide to recent research of interest


Barriers to public pension program participation in a developing country
Under-saving for retirement is a vexing issue in both developed and developing countries. Tomoaki
Tanaka, Junichi Yamasaki, Yasuyuki Sawada and Khaliun Dovchinsuren study the barriers to
retirement savings in rural Mongolia, a setting where most people are self-employed as nomadic herders.
This context prevents solutions that have increased retirement savings in the US such as making
automatic contributions from people’s paychecks the default option. In addition, because it is a rural area,
the transaction costs of traveling to a bank branch are high. The authors designed an RCT around three
important frictions: information frictions, transaction costs, and trust. They find that providing information
about subsidiary monetary benefits (survivors’ and disability pensions) did not increase participation
significantly. However, providing information about the option to contribute to the pension fund via a
mobile phone payment and dispatching experts to a pension administrative agency from a foreign aid
agency both increased payments. These results imply that perceived transaction costs and trust affect
demand for pension services. They also suggest that foreign aid can affect citizen participation in public
services by changing their perception of these services.


Cognitive endurance as human capital
Economists have increasingly recognized that non-cognitive skills are a critical part of human capital.
Christina Brown, Supreet Kaur, Geeta Kingdon, and Heather Schofield examine the effect of
cognitive endurance, defined to be the ability to remain attentive over a sustained period. They conducted
a field experiment with 1,600 Indian primary students, in which they randomly assigned some students to
have more cognitive endurance activities, which could be either school-like activities such as solving math
problems or play activities. Interestingly, cognitive endurance activities of both types resulted in 22% less
decline in performance over time on listening comprehension and IQ tests, better scores on psychological
measures of sustained attention, and remarkably, substantially better overall performance in school (by
about 0.1 standard deviation). They then provide quasi-experimental evidence that additional schooling
increases cognitive endurance only in high-quality schools. The studies underline the critical importance
of cognitive endurance, and the importance of school quality in building such endurance.


Culture and the gender pay gap among corporate executives
Using a large cross-country sample, Natasha Burns, Kristina Minnick, Jeffrey Netter, and Laura
Starks examine the role of culture in explaining the gender pay gaps among top corporate executives.
They measure cultural norms based the World Values Survey, with questions covering general values,
attitudes, beliefs about women in society, religious beliefs, and tolerance of different views, as well as
values, attitudes and beliefs about work, success, markets, and ethics. They then relate these cultural
measures to executive gender pay gaps, which vary quite widely, with a small number of countries even
featuring female advantage in executive pay. Their cultural measures explain substantial variation in the
pay gap and tend to be significant individually or as part of principal components. Their principal
components analysis identifies three key factors, or latent unobservable variables, that capture similarities
between cultural norms based on: (1) beliefs and attitudes about religion, violence, intolerance, and
corruption; (2) attitudes toward gender, and (3) attitudes toward hard work, individualism, and trust. Using
the Oaxaca-Blinder decomposition, the authors show that adding these cultural measures to a model
based on only variables that have previously been shown to be significant determinants of executive
compensation increases explanatory power from 44% to 95% of the executive gender pay gap.



                                   Upcoming events and miscellanea

Call For Papers: CEMLA/Dallas Fed Financial Stability Workshop
The Center for Latin American Monetary Studies (CEMLA) and the Federal Reserve Bank of Dallas will
hold a Financial Stability Workshop at CEMLA’s premises in Mexico City on December 12 and 13, 2022.
The organizers invite theoretical and empirical submissions focusing on the interplay between financial
intermediation, banking, and financial stability. The deadline for submitting a paper is July 1, 2022.


Call For Papers: NEUDC 2022 Conference
The North East Universities Development Consortium (NEUDC) annual conference will be held in-person
this year and hosted by the Economic Growth Center at Yale University in New Haven, CT. Sessions will
run all day on Saturday, November 5, 2022 and on Sunday morning, November 6, 2022. The call for
papers is now open until August 15, 2022. This conference is a major forum in development economics,
held annually since 1967.


Call For Papers: 2022 Paris Financial Management Conference
The 2022 Paris Financial Management Conference (PFMC-2022) will take place in Paris, France on
December 19 to 21, 2022. This two-and-a-half-day conference, hosted by the IPAG Business School
(France), aims to bring together academics, practitioners, and policymakers sharing interests in financial
management, financial markets, corporate governance, etc. The scientific and organizing committee
welcome submissions in all areas of financial management, by the deadline of August 31, 2022.


Happy reading!


    Your editors Miriam Bruhn (mbruhn@worldbank.org), Bob Cull (rcull@worldbank.org), Xavier Giné
                       (xgine@worldbank.org), and Colin Xu (lxu1@worldbank.org)




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