The Impact of Primary School Investment Reallocation on Educational Attainment in Rural Areas of the People’s Republic of China by Asian Development Bank Institute (ADBI)

Due to rapidly decreasing birth rates and a declining number of primary-school-aged children, the People’s Republic of China has drastically reduced the number of primary schools across the country since the 1980s.

We analyze the effect of removing village-level primary schools and effectively merging these into larger township-level schools on educational attainment in rural areas of the People’s Republic of China. We employ individual- and village-level information from the China Household Ethnic Survey, which covers regions that are intensively affected by the removal campaign. We find a negative effect of school removals on primary school and junior high school completion rates. However, we also find positive effects on educational attainment beyond junior high school for those students who began their education in the new merged primary schools. This effect can be attributed to resource pooling and higher teacher quality in the new schools. The adverse effects are more severe for girls, especially if the new schools do not provide boarding and are located far away from student residences, and for children whose parents have low educational attainment, thus exacerbating gender inequality and the intergenerational transmission of education inequality. Our findings provide an important reference for other developing countries that will need to reallocate primary school investment in the future.

Was Higher Education a Major Channel through which the United States Became an Economic Superpower in the 20th Century? by Asian Development Bank Institute (ADBI)

The higher education movement appears to have spearheaded a higher long-term rate of growth in per capita income in the United States relative to the United Kingdom and other major European countries.

We offer a thesis for why the United States (US) overtook the United Kingdom (UK) and other European countries in the 20th century in both aggregate and per capita GDP as a case study of recent models of endogenous growth, where “human capital” is the engine of growth. By human capital we mean an intangible asset, best thought of as a stock of embodied and disembodied knowledge comprising education, information, entrepreneurship, and productive and innovative skills, which is formed through investments in schooling, job training, and health as well as through research and development projects and informal knowledge transfers (cf. Ehrlich and Murphy 2007). The conjecture is that the ascendancy of the US as an economic superpower in the 20th century owes considerably to its faster human capital formation relative to that of the UK and “old Europe.” We assess whether the thesis has legs to stand on through both stylized facts and a supplementary quasi-experimental empirical analysis. The stylized facts indicate that the US led other major developed countries in schooling attainments per adult population member, beginning in the latter part of the 19th century and lasting throughout the 20th century, especially at the secondary and tertiary levels. The quasi-experimental analysis constitutes the first attempt to test the hypothesis that the US’s ascendancy to a major economic power stems largely from the impact of the first Morrill Act of 1862, which launched the public higher education movement in the US through the establishment of land grant colleges and universities across the nation during the latter part of the 19th century.

On the Dynamics of Small and Medium-Sized Enterprises: Evidence from Japan by Asian Development Bank Institute (ADBI)

Different types of small and medium-sized enterprises respond uniquely to changes in macroeconomic conditions depending on their size, growth, investment, and financing needs.

We examine how changes in macroeconomic conditions (the global financial crisis) relate to investment and financial decision making for each of the different size categories of small and medium-sized enterprises (SMEs). We use a large dataset of 764,963 observations in Japan for the time period from 2006 to 2014 to understand the heterogeneity of SMEs in financing and investment decision making, such in size, industry, and region. Our findings are of particular importance for regulators because we show that SMEs are dynamic in nature where they change their financial behavior in response to any macroeconomic shock. In addition, we report differences among the different size subsample at the sales growth and state/industry GDP growth levels. Hence, this requires designing a unique set of regulations for each group accordingly to effectively enhance the growth potential for each group and for SMEs as a whole. These findings have implications for lenders, especially banks, which should treat each size group within SMEs differently while lending or assessing creditworthiness.

Will Financial Liberalization Trigger the First Crisis in the People’s Republic of China? Lessons from Cross-Country Experiences by Asian Development Bank Institute (ADBI)

Financial liberalization in the PRC should work better when gradual and focused on sequencing of reforms, when institutions are able to contain financial risks, and when the central bank participates in financial regulation.

The People’s Republic of China (PRC) is beginning a new wave of financial liberalization, which is necessary to support strong economic growth, but will financial liberalization lead to major financial crises, as in many middle-income countries? We propose that financial liberalization generally lowers financial risks, especially for middle-income economies. Nevertheless, the pace of liberalization, quality of institutions, and regulatory structure also matter for outcomes of financial instability. From these findings, we draw some policy implications for the PRC: (1) further liberalization is important not only for economic growth but also for financial stability; (2) a gradual liberalization approach should work better, focusing on the sequencing of reforms; (3) the quality of institutions, especially strong market discipline, is also important for containing financial risks; and (4) it is better for the central bank to participate in financial regulation.

Slowdown in the People’s Republic of China: Structural Factors and the Implications for Asia by Asian Development Bank Institute (ADBI)

This book analyzes the causes of the recent slowdown in the PRC and assesses the growth potential of the PRC economy, the conditions under which that potential growth could be realized, and the implications for other Asian economies.

The People’s Republic of China (PRC) has been growing at an unprecedented rate since economic reforms were initiated in 1978, achieving an average annual real GDP growth rate of 9.7% over the entire period through 2015. As a consequence, the PRC has achieved a remarkably successful transition from one of the poorest countries to upper middle-income status in just over one generation. However, there are concerns that the PRC’s strong growth streak recently has run out of steam, showing a marked deceleration since 2010. The key question is whether the PRC’s economy will continue to slow and be trapped in slow growth, or whether its growth can re-accelerate. The chapters in this volume focus on the root causes of the current slowdown and, in light of these, assess the growth potential of the PRC’s economy, the conditions under which that potential growth could be realized, and the implications for other Asian economies.

Edited by: Justin Yi-fu Lin, Peter J. Morgan, and Guanghua Wan

Natural Disasters, Public Spending, and Creative Destruction: A Case Study of the Philippines by Asian Development Bank Institute (ADBI)

Natural disasters may cause suffering and threaten life, but they can also promote economic growth.

Typhoons, floods, and other weather-related shocks can inflict suffering on local populations and create life-threatening conditions for the poor. Yet, natural disasters also present a development opportunity to upgrade capital stock, adopt new technologies, enhance the risk-resiliency of existing systems, and raise standards of living. This is akin to the “creative destruction” hypothesis coined by economist Joseph Schumpeter in 1943 to describe the process where innovation, learning, and growth promote advanced technologies as conventional technologies become outmoded. To test the hypothesis in the context of natural disasters, we look at the case of the Philippines—among the most vulnerable countries in the world to such disasters, especially typhoons. Using synthetic panel data regressions, we show that typhoon-affected households are more likely to fall into lower income levels, although disasters can also promote economic growth. Augmenting the household data with municipal fiscal data, we show some evidence of the creative destruction effect: Municipal governments in the Philippines helped mitigate the poverty impact by allocating more fiscal resources to build local resilience while also utilizing additional funds poured in by the national government for rehabilitation and reconstruction.