Sonali Jain-Chandra

Inclusive Growth, Institutions, and the Underground Economy

Worldwide protests against the perceived lack of economic opportunity and failure of governance have refocused attention on the need for inclusive growth and strong institutions. In developing countries, large informal economies limit state capacity to deliver governance and strong institutions, which in turn discourages participation in and expansion of the formal economy. This paper analyzes the determinants of the underground economy, with particular emphasis on the role of institutions and the rule of law. We find that when businesses are faced with onerous regulation, inconsistent enforcement and corruption, they have an incentive to hide their activities in the underground economy. Empirical analysis suggests that institutions are a more important determinant of the size of the underground economy than tax rates.

Fair Play; More Equal Laws Boost Female Labor Force Participation

This Staff Discussion Note examines the effect of gender-based legal restrictions and other policy choices and demographic characteristics on female labor force participation. Drawing on a large and novel panel data set of gender-related legal restrictions, the study finds that restrictions on women’s rights to inheritance and property, as well as legal impediments to undertaking economic activities such as opening a bank account or freely pursuing a profession, are strongly associated with larger gender gaps in labor force participation. These factors have a significant additional impact on female labor force participation over and above the effects of demographic characteristics and policies. In many cases, the gender gaps caused by these restrictions also have macro-critical effects in terms of an impact on GDP. The results from this study suggest that it would be beneficial to level the playing field by removing obstacles that prevent women from becoming economically active if they choose to do so. In recommending equal opportunities, however, this study does not intend to render a judgment of countries’ broadly accepted cultural and religious norms.

Catalyst for Change; Empowering Women and Tackling Income Inequality

This study shows empirically that gender inequality and income inequality are strongly interlinked, even after controlling for standard drivers of income inequality. The study analyzes gender inequality by using and extending the United Nation’s Gender Inequality Index (GII) to cover two decades for almost 140 countries,. The main finding is that an increase in the GII from perfect gender equality to perfect inequality is associated with an almost 10 points higher net Gini coefficient. For advanced countries, with higher gender equity in opportunities, income inequality arises mainly through gender gaps in economic participation. For emerging market and developing countries, inequality of opportunity, in particular in education and health, appear to pose larger obstacles to income equality.

Women Workers in India; Why So Few Among So Many?

This paper examines the determinants of female labor force participation in India, against the backdrop of India having one of the lowest participation rates for women among peer countries. Using extensive Indian household survey data, we model the labor force participation choices of women, conditional on demographic characteristics and education, as well as looking at the influence of state-level labor market flexibility and other state policies. Our main finding is that a number of policy initiatives can help boost female economic participation in the states of India, including increased labor market flexibility, investment in infrastructure, and enhanced social spending.

The Impact on India of Trade Liberalization in the Textiles and Clothing Sector

We analyze the impact of the elimination of textile and clothing (T&C) quotas in 2005 on India. Our simulations suggest that while Indian exports of T&C will continue to expand in the presence of the safeguards on China, they will be affected adversely once these safeguards are lifted. We argue that India could emerge much stronger and expand its trade in T&C at a much faster pace, if some of the key domestic structural weaknesses are overcome.

Sharing the Growth Dividend; Analysis of Inequality in Asia

This paper focusses on income inequality in Asia, its drivers and policies to combat it. It finds that income inequality has risen in most of Asia, in contrast to many regions. While in the past, rapid growth in Asia has come with equitable distribution of the gains, more recently fast-growing Asian economies have been unable to replicate the “growth with equity” miracle. There is a growing consensus that high levels of inequality can hamper the pace and sustainability of growth. The paper argues that policies could have a substantial effect on reversing the trend of rising inequality. It is imperative to address inequality of opportunities, in particular to broaden access to education, health, and financial services. Also fiscal policy could combat rising inequality, including by expanding and broadening the coverage of social spending, improving tax progressivity, and boosting compliance. Further efforts to promote financial inclusion, while maintaining financial stability, can help.

How can Korea Boost Potential Output to Ensure Continued Income Convergence

Korea’s rapid growth has slowed in recent years, suggesting lower potential growth. This paper uses an array of techniques, including statistical filters, a multivariate model and the production function, to estimate Korea’s potential growth. The main finding is that trend growth has fallen from around 4¾ percent during 2000-07 to around 3¼ -3½ percent by 2011-12. Absent reforms, it is projected to fall further to around 2 percent by 2025, primarily due to declining working-age population. However, Korea’s potential growth can be maintained at a higher level by putting in place a comprehensive structural reform agenda, including increased female and youth labor force participation, liberalization of product and labor market regulation. Staff simulations suggest that such reforms could lift potential growth by around 1¼ percentage point over the next decade, maintaining potential growth at around 3¼ percent, counteracting the effect of population aging, and enabling Korea to continue to converge to income levels of the United States.

The Domestic Credit Supply Response to International Bank Deleveraging: Is Asia Different?

During the global financial crisis, European banks contracted foreign claims on recipient economies sharply. This paper examines the impact of that deleveraging on credit supply in recipient economies, with a particular focus on Asia. Identification is achieved by exploiting heterogeneity in ex-ante patterns of funding reliance on different European banking systems, and in variation in the ratio of local claims in local currency to total foreign claims in recipient economies. These sources of variation are used to create instruments for the deleveraging shock. We find that the contraction in European bank foreign claims was associated with a substantial reduction in domestic credit supply in a broad sample of countries. However, the credit supply response in Asia was only about half the size of the response in non-Asian countries, possibly due to a more robust policy response and healthier local bank balance sheets at the outset of the crisis.

The Impact of Foreign Bank Deleveraging on Korea

Korea was hit hard by the 2008 global financial crisis, with the foreign bank deleveraging channel coming prominently into play. The global financial crisis demonstrated that a sharp deleveraging can be transmitted to emerging markets through the bank lending channel to a slowdown in credit growth. The analysis finds that a sharp decline in external funding led to relatively modest decline in domestic credit by Korean banks, due to concerted policy efforts by the government in 2008. Impulse responses from a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to Korea shows that it appears better prepared to handle such shocks relative to 2008. Indeed, Korea is much more resilient to such shocks due to the efforts by the authorities, which has led to the strengthening of external buffers, such as higher foreign exchange reserves and bilateral and multilateral currency swap arrangements.

Gender Equality: Which Policies Have the Biggest Bang for the Buck?

This paper analyzes the relationship between fiscal and structural policies and gender inequality in education and labor force participation for countries at different stages of development. Due to the substantial number of possible factors that link with gender inequality previously highlighted in the literature, we pay particular attention to addressing model uncertainty and using various statistical methods to find the variables with the strongest links to gender gaps. We find that higher public spending on education, better sanitation facilities, low adolescent fertility, and narrower marriage age gaps are significantly related to narrower gender gaps in education. We also find that better infrastructure, a stronger institutional environment, more equal legal rights, and low adolescent fertility rates are strongly associated with higher female labor force participation. When labor market protection is low, an increase in protection is associated with a narrowing of labor force participation gaps between men and women. But when labor market protection levels are high, an increase in protection is associated with a widening in labor force participation gaps.