Working Papers
2020
September 25, 2020
Managing Fiscal Risks from State-Owned Enterprises
Description: Ensuring that state-owned enterprises (SOEs) are efficient and managed prudently is important for economic and social reasons. It is also crucial to contain fiscal risks and reduce the burden on taxpayers from recurrent and large bailouts. Governments need to develop stronger capacity to monitor and mitigate the risks from SOEs. We present a risk tool to benchmark the performance of SOEs relative to their peers and assess their vulnerabilities, including through stress tests. A strategy to mitigate risks requires the right incentives for managers to perform and for government agencies to conduct effective oversight. Incorporating SOEs in overall fiscal targets would promote greater fiscal discipline and transparency.
September 25, 2020
IT Shields: Technology Adoption and Economic Resilience during the COVID-19 Pandemic
Description: We study the economic effects of information technology (IT) adoption during the COVID-19 pandemic. Using data on IT adoption covering almost three million establishments in the US, we find that technology adoption can partly shield the economy from the impact of the pandemic. In areas where firms adopted more IT the unemployment rate rose less in response to social distancing. Our estimates imply that if the pandemic had hit the world 5 years ago, the resulting unemployment rate would have been 2 percentage points higher during April and May 2020 (16% vs. 14%), due to the lower availability of IT. Local IT adop-tion mitigates the labor market consequences of the pandemic for all individuals, regardless of gender and race, except those with the lowest level of educational attainment.
September 25, 2020
COVID-19 and SME Failures
Description: We estimate the impact of the COVID-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost-minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. We estimate a large increase in the failure rate of SMEs under COVID-19 of nearly 9 percentage points, ab-sent government support. Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. The jobs at risk due to COVID-19 related SME business failures represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. We evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at risk firms can be modest (0.54% of GDP). However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
September 25, 2020
Market Power, Growth, and Inclusion: The South African Experience
Description: Before the pandemic, the South African economy remained stuck in low gear, with anemic growth, stagnant private investment, and a shrinking tradable sector. Subdued growth has raised unemployment, poverty, and inequality, hindering inclusion efforts. The pandemic has worsened economic and social vulnerabilities. Economic recovery and social inclusion hinge critically on structural reforms to boost competiveness and growth. Product markets represent a cornerstone of the reform strategy. Firms have used their market power to drive up prices and limit competition. Important state-owned monopolies provide low-quality services, while representing a fiscal drag. Existing regulations inhibit the entry of both domestic and foreign firms. Addressing product markets constraints could boost per capita growth by 1 percentage point—adding about 2½ percentage points to headline growth—and foster greater inclusion.
September 25, 2020
Worker Mobility and Domestic Production Networks
Description: We show that domestic production networks shape worker flows between firms. Data on the universe of firm-to-firm transactions for the Dominican Republic, matched with employer-employee records, reveals that about 20 percent of workers who change firms move to a buyer or supplier of their original firm. This is a considerably larger share than would be implied by a random allocation of movers to firms. We find considerable gains associated with this form of hiring: higher worker wages, lower job separation rates, faster firm productivity growth, and faster coworker wage growth. Hiring workers from a supplier is followed by a rising share of purchases from that supplier. These findings indicate that human capital is easily transferable along the supply chain and that human capital accumulated while working at a firm is complementary with the intermediate products/services produced by that firm.
September 25, 2020
In the Eye of the Storm Firms and Capital Destruction in India
Description: This paper examines the response of firms to capital destruction, using a new measure of firm exposure to tropical storms as a negative exogenous shock on firms’ capital stock. Drawing on a panel of Indian manufacturing firms between 1995 and 2006, we establish that, depending on their strength, storms destroy up to 75.3% of the fixed assets of the median firm (in terms of its productivity and industry performance). We quantify the response of firm sales within and across industries and find effects akin to Schumpeterian creative destruction, where surviving firms build back better. Within an industry, the sales of less productive firms decrease disproportionately more, while across industries capital destruction leads to a shift in sales towards more performing industries. This build-back better effect is driven by firms active in multiple industries and, to a large extent, by shifts in the firm-level production mix within a firm’s active set of industries. Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tend to abandon production in industries that exhibit lower comparative advantage.
September 25, 2020
A Simple Macrofiscal Model for Policy Analysis: An Application to Cambodia
Description: The paper describes a semistructural macrofiscal approach to simulating and forecasting macroeconomic policies. Our canonical model is adapted to Cambodia and we demonstrate its application with an illustrative scenario of macroeconomic effects of the Covid-19 pandemic. Complemented with near-term forecasting tools and expert judgment, the dynamics of the model helps to inform policymakers about medium-term transmission channels and thus guide policy advice.
September 25, 2020
Beyond the COVID-19 Crisis: A Framework for Sustainable Government-To-Person Mobile Money Transfers
Description: During the 2020 pandemic, the majority of countries have provided income support to households at an unprecedented speed and scale. Social distancing measures and the large penetration of mobile phones in emerging markets and developing economies (EMDEs) have encouraged government-to-person (G2P) transfers through mobile platforms. This paper presents a comprehensive framework for sustainable money solutions in support of social assistance. The framework consists of eight building blocks that may help policymakers i) take stock and assess emergency fixes taken to scale up mobile money in a crisis context and ii) develop sustainable long-term solutions for mobile G2P transfers.
September 25, 2020
Do FX Interventions Lead to Higher FX Debt? Evidence from Firm-Level Data
Description: Central banks often buy or sell reserves-–-so called FX interventions (FXIs)---to dampen sharp exchange rate movements caused by volatile capital flows. At the same time, these interventions may entail unintended side effects. In this paper, we investigate whether FXIs incentivize firms to take on more unhedged FX debt, thereby increasing medium-term corporate vulnerabilities. Using a novel dataset with close to 5,000 nonfinancial firms across 19 emerging markets covering 2002--2017, we find that the firm-level share of FX debt rises following intensive use of FXIs, particularly for non-exporting firms in shallow financial markets with no FX debt to begin with. The magnitude of this effect is economically significant, with one standard deviation increase in FXI leading to an average 2 percentage points increase in the FX debt share. For reference, the median share of FX debt in the sample is zero.
September 25, 2020
The Macroeconomic Effects of Structural Reforms in Latin America and the Caribbean
Description: This paper estimates the macroeconomic effects of structural reforms in Latin America and the Caribbean (LAC) using the dataset constructed by Alesina et al. (2020). We find that large changes in the reform index have positive effects on GDP and employment that reach 2 percent after 5 years. Furthermore, reforms boost investment, exports, imports, and reduce export concentration, in addition to favoring tradable sectors. Nonetheless, the results also indicate that the effects of reforms have not been uniform across different segments of the population. These findings bring to the forefront the need to consider accompanying policies to ensure that reforms promote inclusive growth. Moreover, evidence from country case studies using the synthetic control method point to heterogeneous effects of reforms on income per capita.