Herath Gunatilake

Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review

This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and countryspecific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.

Energy Security, Food Security, and Economics of Sugarcane Bioethanol in India

Energy security has been an important global policy issue for more than 4 decades. Transport biofuels like bioethnol have been receiving increased attention in recent years as a solution to heavy dependence on imported petroleum fuels, which brings destabilizing price effects on the economy and causes serious environmental problems like climate change. India’s biofuel policy proposes an ambitious target of replacing 20% of petrol by blending bioethanol by 2017. This paper examines the economic feasibility of sugarcane bioethanol in India while considering food security as a competing policy priority. The analyses show that 20% blending of bioethanol cannot be achieved without affecting food production in India at the current level of productivity. Moreover, the cost of sugarcane bioethanol production exceeds the social benefits, hence use of sugarcane bioethanol cannot be justified on economic grounds. Molasses, a byproducts of sugar manufacturing, can support up to 5% blending on bioethanol without compromising food production while improving social welfare. Given that first-generation bioethanol has limited scope in the country, India’s ambitions to enhance energy security should rely on second-generation bioethanol technologies, which require improvements to become commercially viable.

Valuing Electricity Service Attributes: A Choice Experiment Study in Madhya Pradesh, India

This paper presents the results of a choice experiment study undertaken to value electricity service attributes in Madhya Pradesh, India. Primary data was collected from 2,083 households using stratified random sampling method. Results show that existing service is very poor and consumers have substantial willingness to pay (WTP) for changing the status quo. Amongs the studied service attributes, hours of supply captures the highest WTP and WTP declines significantly with reduced hours of supply. However, quality, customer service, and accuracy of billing together accounts for 56% of the total WTP. Assessment of WTP with different service attribute combinations show that value of other service attributes become relatively more important when supply is less than 24 hours. Simulations show that uptake rates increase substantially when improved hours of supply is supplemented with other service attributes. Development impact of

Financial and Economic Assessment of Biodiesel Production and Use in India

1.2 billion worth physical infrastructure investments on Madhya Pradesh power distribution network for 24-hour supply can be significantly enhanced if quality, customer service, transparency, and accuracy of billing are also improved simultaneously.

Willingness to Pay for Electricity Supply Improvements in Rural India

In recent times, biofuels are receiving increased attention because they have the potential to enhance the energy security of energy deficit nations while reducing greenhouse gas emissions. They also provide opportunities for inclusive rural development. This paper shows that prevailing administered prices do not provide adequate financial incentives to produce biodiesel in India. In contrast to financial analysis results, social cost–benefit analysis shows that biodiesel production from jatropha and pongamia is economically viable. This paper illustrates that financial analysis results may not provide a sound basis for pubic policy, particularly when there are distortions in the market. Biodiesel has the potential to significantly generate rural employment and reduce greenhouse gas emissions. If the production is limited only to wastelands, in meeting 20 per cent blending target, biodiesel would not affect food production in India. While explaining the reasons for failure of biodiesel production taking off in a big way in India, the paper argues that public sector interventions are necessary to correct existing market, non-market, and institutional failures, which prevent development of biodiesel markets.

Forest Resource Extraction by Local Communities: A Comparative Dynamic Analysis

This study undertakes a survey using a random sample of 2083 households in rural Madhya Pradesh, India, to estimate benefits of improved electricity supply to rural households. The survey estimated that the Willingness to Pay (WTP) for a household for improved service is 340 per month, on average. Results of this study support similar investments in other states of India with similar electricity services and socio-economic characteristics. Simulations using the estimated WTP function show possibility of progressive tariff increase as household income increases. Block and flat tariff show similar impacts on revenue generation but block tariffs have the ability to induce energy conservation at household level. This study casts doubts about the need for subsidies for below poverty line and scheduled caste households.

Energy Security and Economics of Indian Biofuel Strategy in a Global Context

Much of the worlds gene pool is located in tropical rainforests, which are being destroyed at an alarming rate. Proper management of protected forests is crucial to avoid further loss of forest resources and biodiversity. Resource extraction by local communities has been cited as a major impediment to the efficient management of protected forests. This paper develops a two sector dynamic model for agriculture and forest resource extraction which suggests that agricultural development in the periphery of protected forests may be an effective strategy for forest protection. Comparative dynamic results show that higher prices for agricultural output, lower input prices, better knowledge of agricultural production techniques and a lower rate of individual time preferences result in higher equilibrium stock of forest resources. Tobit analysis with data collected from the Sinharaja forest in Sri Lanka provides supportive empirical evidence.

Energy security for India: Biofuels, energy efficiency and food productivity

The emergence of biofuel as a renewable energy source offers opportunities for climate change mitigation and greater energy security for many countries. At the same time, biofuel represents the possibility of substitution between energy and food. For developing countries like India, which imports over 75% of its crude oil, fossil fuels pose two risks—global warming pollution and negative economic impacts of oil price hikes. This paper examines India’s options for managing energy price risk in three ways: biofuel development, energy efficiency promotion, and food productivity improvements. The overall results suggest that biodiesel shows promise as a transport fuel substitute that can be produced in ways that fully utilize marginal agricultural resources and hence promote rural livelihoods. First-generation bioethanol, by contrast, appears to have a limited ability to offset the impacts of oil price hikes. Combining the biodiesel expansion policy with energy efficiency improvements and food productivity increases proved to be a more effective strategy to enhance both energy and food security, help mitigate climate change, and cushion the economy against oil price shocks.