rafmacalaba/datause-encoder-data huggingface dataset:
# **3. DEFINING EVENTS**

We are interested in the relation between a “significant” change in fiscal spending and a “significant” change in GDP growth - what Hausmann, Pritchett and Rodrick (henceforth HPR, 2005), call “growth acceleration”. Per capita GDP _growth_ and primary fiscal expenditures (in GDP %) _growth_ are then our two indicator values. Call these growth indicators, _z_ . Average annual _changes_ , _zt_ , _n_ , are computed for each year over successive windows of length _n_ . Here, because of the limited sample size for the fiscal data (1972 to 2005) we choose a succession of windows of _n_ = 5 years. So we compute Δ _zt_ , _n_ : Δ _zt_ , _n_ = _zt_ , _t_ + _n_ − _zt_ , _t_ − _n_ If the change Δ _zt_ , _n_ in the average indicator value satisfies certain conditions (see below), we will say that an “event” has taken place for _z_ in t. The annexes A.1 and A.1 describes in detail the sample and annex A.3 reports how we selected the parameter values defining an event and how sensitive our sample of events is to changes in the conditioning values. Here we summarize the conditions for our ‘benchmark’ set of parameters starting with GDP per capita growth, and then turning to primary fiscal expenditures. In this benchmark case, the sample produces 58 growth events and 95 growth events. Sensitivity of the number of events to the choice of parameter values is reported in the annex A.3, table A.4.

**<u>Growth Events.</u>** A growth event will have taken place in _t_ if the following conditions are met:

- (i) an increase in the average per-capita growth of 2 ppa or more (percentage points per annum, ppa),

- (ii) growth acceleration sustained for at least 5 years _[t;t+4]_ ,

- (iii) an average annual growth rate at least 3.5 ppa during the acceleration period _[t;t+4],_

- (iv) a post-acceleration output exceeding the pre-episode peak level of GDP.

With this selection process, several events could follow one another over consecutive years capturing in fact the same event. To select the more “relevant” year, we fit a spline regression and choose the year for which the change in indicator value is statistically the most significant. Finally, we impose the restriction that two events must be separated by at least five years. This method is used for both growth and fiscal events.

Here, we strictly follow HPR in their definition of growth acceleration. However, since there is considerable variation in growth performance associated with terms-of-trade changes, especially for low-income countries (see Easterly et al. 1993), one might also wish to refine the definition of a growth event to purge 6
informal sector.<sup>2</sup> Azuara and Marinescu (2013) and Hernandez and Ramirez (2011), on the other hand, analyzed the impact of the same program on informality and find little or no overall effect.

Our work contributes to the literature by bringing additional evidence—from the emerging market of Turkey—on the interaction between social assistance programs and labor market status. In contrast to the previous studies that focused mainly on developed countries, the labor supply decisions of workers are more complicated in Turkey due to the sizable informal market and the wide availability of self/family employment. Turkey thus requires an analysis of the transition between several labor market statuses instead of only participatory choice, which is the primary margin that is examined in developed countries.

The rest of the paper is organized as follows. We present a brief description of the Turkish social assistance system in section 2, our methodology and dataset in section 3 and 4, the results in section 5, and finally our conclusions in section 6.

# **2 Overview of the Social Assistance System in Turkey**

Social assistance is only a small component of the overall social protection system in Turkey. The system has historically been based on a traditional social insurance model whereby pensions, health insurance, disability benefits, are all linked to employment in the formal sector and are based on employer and employee contributions. The non-contributory system in Turkey developed much later. It provides support to the poorest segments of the population and has traditionally been much smaller, characterized by few programs and limited coverage. The informal economy in Turkey is still large, representing 35 percent of all employment in 2014.<sup>3</sup> Given this large informal economy, the need to provide support to those falling outside of the contributory safety net to ensure that they are able to meet their basic needs and manage shocks has been critical.

Nevertheless, public social assistance has developed slowly in Turkey. The foundations of the current social assistance system were created in 1976 with the approval of Law 20224, which provided a small monthly benefit payment to the elderly or disabled poor, though coverage remained low. It

> 2 Camacho et al. (2014) and Gasparini et al. (2009) find similar results for the cases of Colombia and Argentina, respectively.

> 3 Household Labor Force Statistics, TurkStat.

> 4 Law on the Payment of Pensions to Old-Aged Persons [65 years old and over] who are Destitute.

5
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# Part II: Options for the Future

EECA countries will have to adopt a comprehensive reform of their pension systems eventually, as the squeeze of declining revenues and increasing claims will only get worse over time. A successful reform is likely to involve adding at least one more pillar. Below, some approaches to developing the multi-pillar system are outlined.<sup>9</sup> EECA pension systems today face a conflict between the objectives of savings and insurance (old age security for the middle and upper classes) and redistribution (old-age security for the lifetime poor). This conflict is inherent in an earnings-related PAYG system, which tries to address two problems with one instrument. Public pension systems were created to reduce elderly poverty both by- (a) increasing savings for old age and (b) reducing elderly poverty through cash transfers to those who cannot save enough (the lifetime poor). PAYG systems face conflicts between these objectives because of realizing the savings objective requires an investment, while realizing the redistribution objective requires a transfer program. Countries have tried to resolve this conflict by partially funding the public system (e.g. U. S. and Japan, where the surplus is invested in government bonds). Others have encouraged or even mandated fualded, privately-maaaged pensions systems as the main old-age savings instrument for middle and upper income workers.

We recommend an alternative approach for transition economies. Rather than attempt to pardally fund the public system, we recommend scaling back the public system and developing a universal mandatory savings system for the second pillar. Under such a system, the PAYG public pillar would carry primary responsibility for providing redistributive twansfers. The second pillar would be a funded, mandatory, privatelymanaged, savings system, similar to that found today in Chile, and under development in Mexico and Argentina. As it would be mandatory, coverage would be higher than in OECDtype occupational schemes. Together, these two pillars should provide income replacement for the average worker equal to about 40 percent of gross wages (more for lower income workers, less for higher income workers, who will have other assets).

Implementing a two-pillar system in EE_A countries implies first and foremost reducing entitlements in the public scheme, and consequently the share of income the active age cohorts pay in contributions. If not, there will be no room for the growth of other pillars, as employees will have no money left to save. This is a particularly difficult problem in EECA countries, as most are faced with a very sizeable population of _50_ years and older. The old-age security needs of this group are significantly different than those of the active generation.

_Providing for the older age cohorts._ The generations already retired or about tco retire had fewer opportunities to save, as most income was earned during the period of central I The concepual basi for the approach described here is found in James, (1992) and is elaborated in the World Bank's forthcoming Old-Age Security Report.
waves of the RPED surveys. But we need more detailed survey data to enhance our understanding of investment dynamics. In particular, very limited information is available on the fixed costs of investment, the degree of reversibility or on the perceived risk that firms associate to a certain investment decision.

# **Unemployment and the labor market**

Recently, researchers have investigated the high rates of job creation and job destruction experienced by market economies.'<sup>2</sup> This continuous reallocation of resources, which occurs within industries and is somewhat obscured by the aggregate measures of unemployment, is an important part of economic adjustment and growth. The smoothness of these reallocation processes impacts economic performance by affecting the evolution of firms and industries and thus productivity growth. Reallocating jobs and factor inputs from less efficient to more efficient plants may help improve industry-level productivity in an environment with frictions and imperfect infornation (Baily, Hulten and Campbell 1992, and Olley and Pakes 1996). The same theoretical approach, which allows for frictions in reallocating workers and jobs, helps also to shed light on business cycle behavior of gross worker flows (Mortensen, 1994; Ramey and Watson, 1997).

World Bank coverage of employment dynamics is limited in part because the literature itself is limited. The firm-level data necessary to test hypotheses is not yet fully available even for industrialized economies. Moreover, empirical research on this front is hampered by the lack of micro time-series data. Some notable exceptions include the East Asia Competitiveness Survey, the RPED, and the data collected by Haltiwanger and Vodopivec in Poland and Estonia (1995).

The East Asia survey collects detailed infornation on the workforce, but has limited data on average tenure. The Labor section of the RPED questionnaire focuses on the structure of the workforce, but less on the dynamic aspect of employment flows. The RPED collects informnation on seasonal hires, apprentices, paid and unpaid relatives of the owner, but mainly for the second or third waves of the survey. In addition, the usefulness of the data is limited by consistency

> 12 For excellent surveys of this literature, see Davis and Haltiwanger (1998), Mortensen (1986), Pissarides (1990), and Mortensen and Pissarides (1997).

21
women in the upper house that begins in 1965 and covers 175 countries. For the years for which we do not have data from the Inter-Parliamentary Union, we use the Melander’s data with an adjustment made for the differences in measurement.

There is little correlation between this measure of equal access and the other measures of institutions. For example, there is virtually zero correlation between the Heritage Foundation Index of Economic Freedom and the fraction of women in parliament.

# **IV.** **<u>Do Economic and Political Freedoms Raise Returns to Schooling?</u>**

Private returns to schooling are derived from standard Mincerian earnings function estimated over 122 different household data sets. The data sets come from 86 countries, and so we have repeated observations for some countries at different points in time. Four data sets are from Chile, three each from Bulgaria, El Salvador, Guatemala and Uruguay. We have two data sets from 25 other countries. The data sets are dated in various years between 1989 and 2007 with 68% dated 2000 or later. A listing of countries, survey dates, and estimated returns to schooling and potential experience can be found in the Appendix.

In order to standardize our measure of the returns to schooling, we apply the same earnings specification to each data set. Our use of a common specification removes one source of spurious variation in estimated returns across countries. For each country _j_ and year _t_ , we estimate equations of the form where ����� includes _K_ measures of individual attributes including marital status, gender and urban or rural residence. The estimated return per year of schooling is years of schooling ����. The estimated return per year of experience is ������, the coefficient on ����� � 2���� �������, computed at the average age in the country.

Returns to human capital have clear advantages as measures of the returns to individual investments in developing countries. Investments in human capital are the most ubiquitous investment in the world. In developing countries where households may be liquidity constrained, households will devote investments to human capital before they invest in physical capital. Only when the anticipated return to an additional investment in human capital falls to the market return on physical capital will a household diversify its investment to include physical capital. Even if the household determines that schooling is not warranted, it will invest in occupational skills. The estimated return to an additional year of life will reflect investments in training on the job. As with schooling, investment in job skills will be undertaken before the household devotes resources to physical capital. Figures 2A and 2B show that while there is considerable variation in estimated returns across countries for both types of human capital investments, almost all are positive with returns to schooling and experience averaging 8.1% and 4.6%, respectively.

Note also that we are agnostic about why human capital generates returns. As shown by T.P. Schultz (1988) , human capital improves individual well-being along many dimensions 10
Table 7 reports the required contribution rate relevant to 2304 different combinations of assumptions. All contribution rates have been rounded-up to the nearest full percentage point. The table shows clearly that higher rates of real earnings growth require higher contribution rates (because of the relative diminution in value of contributions earlier in life) and higher real rates of return require lower contribution rates for any particular target roolacement rate, because of the faster growth of the capital fund. Ihe greater the excess of real rate of return over real earnings growth, the lower the required contribution rate. Higher contribution ages increase the required contribution rate, and higher retirement ages reduce it.

The apparent 'affordability' of any funded pension system will depend crucially on the key assumptions used in table 7, and there is likely to be a diversity of opinion about the appropriateness of each. The mid-range assumptions that seem most appropriate to Britain are of a long run real rate of return of 3% per annum, and of long-run real earnings growth of 1.5% per annum. The UK Government Actuary's long-run social security projections assumne that earnings will grow at 1.5% p.a., and a 3% real rate of return is consistent with achieved investment returns across two investment cycles from the mid 1960s to the mid-1980s (Government Actuary, 1990). This empirical support for these assumptions provides a strong justification for applying them to the LIFEMOD model. In addition, however, there are technical reasons relating to the equivalence of PAYG and funded pension systems in this modelling exercise which require the adoption of a real rate of return around 1.5 percentage points higher than the rate of earnings growth. This issue is considered more fully below in the discussion of hybrid pension systems.

The contribution conditions presented in Table 7 relate to a hypothetical average LIFEMOD male, but we need to determine how many people do better or worse than this average, and by how much. This we can do with the individual life-cycle earnings profiles for the LIFEMOD population. These individuals do not all have a work history of 52 weeks of employment in every year between the first year of pension contribution and the age of retirement, and they have a wide dispersion of earnings according to their past employment and educational history. LIFEMOD 40
(1.11) While the EDD and voters do not, initially, know the former’s competency, they can use the EDDs actions in the first period to deduce it. Thus, it becomes possible to calculate the EDD’s probability for reelection. Which is simply determined by the level of _ri_ 1 set by the EDD knowing that the level of _gi_ 1 is residually determined from the electorally dependent budget constraint ατ _y_ . The estimated competency of the incumbent EDDs, ε ̃ _i_ 1 , can be calculated by:

* The interesting thing to note about (1.12) is that, unless there are no NEDDs, that is β _j_ 1 = 0 , the overall level of rents in a polity will be higher, ceteris paribus, as β → 1. As will know be shown this is not due to the fact that voters are any less capable of evaluating the competency of the incumbent but simply because a larger percentage of policy-making is not under the control of agents who can be incentivized via elections to refrain from maximal rent-extraction. Thus, the effect of a higher (lower) EDDs/NEDDs ratio is that because voters will only use the EDD’s contribution to policy-making to assess her competency pervasive corruption may persists in a polity, due to the activity of NEDDS even if the democratic context works to limit rent-extraction by EDDs.

Combining (1.11) and (1.12), the event ε ̃ _i_ ≥ 1 is thus equivalent to: Consequently, the probability of wining the elections is, as before, the probability that (1.13) is satisfied. It is important to note that _r_ ̃ here refers to the rent solution over those substantive policy decisions over which an EDD has discretion and not the rents generated by NEDDs (therefore, unless there are no NEDDs, is different from its counterpart in the simple model of the previous section). Given _r_ ̃ the above noted distribution assumptions (1.03) the task discounted probability _p_ 1 can be written as: Thus, the incumbent maximizes (1.05) subject to (1.14) by choice of _r_ 1. Note that the resulting first order condition is: In equilibrium, politicians’ choice must be consistent with voters’ conjunctures about those choices: 9
Russia of liberalization of trade in goods and services associated with accession to the WTO. Their estimates are decisively affected by liberalization of FDI in business services sectors and endogenous productivity effects in business services and goods.

# **5.3 Modeling regional services liberalization**

The recent CGE literature has also shifted focus to services when examining regional integration issues. This is very similar to global or country-based analyses, with the exception of work that is motivated by the European Union and European integration, which centers more on the impacts of differences in national regulation of services. For example, Lejour, Rojas-Romagosa and Verweij (2008) emphasize efforts within the EU to deepen integration of European services markets. The EU is not (yet) a customs union for services (Langhammer, 2005), and deeper integration in this area is politically contested. Lejour et al. estimate that while there are potential gains from further integration of EU markets, magnitudes depend on the extent to which intra-EU barriers protect rents, or actually involve dead-weight costs. Hence, they support the notion that how we treat barriers to services trade is important. Political economy factors (generally not found in CGE models) also matter. Kox and Lejour (2006) project that the original 2004 EU Services Directive could have increased intra-EU services trade by 30 to 60 percent and direct investment in services by 18 percent to 36 percent. The revised directive that was adopted in 2006 is unlikely to have such effects given that key aspects of the initial proposal were removed, in particular acceptance of home country regulation. The EU experience illustrates the difficulty for (unwillingness of) polities to converge on common norms and to allow for regulatory arbitrage even in situations where in principle all are agreed that common minimum standards exist. Research on the potential gains from further integration of EU services markets confirms the findings of the work by Tarr and co-authors discussed above that what matters in welfare terms is to new entry by foreign firms (FDI). Lejour, Rojas-Romagosa, and Verweij (2008) conclude that although further integration of EU services markets rsulting from the revised directive will be beneficial, relative to initial GDP the increases will be limited (less than 1 percent of GDP) because they are unlikey to stimulate a significant net increase in investment as a result of the continued prevalence of country-specific regulation (i.e., differences in regulatory regimes will continue to create country-specific fixed costs of entry).

Dee (2006) is representative of CGE analysis of shallower forms of regional integration of services markets than the EU. She focuses on the regional trade agreements that have been proliferating in Asia, and investigates whether these have tended to target regulatory restrictions that discriminate explicitly against foreigners, and if so, if these are the restrictions that matter most, in an economic sense. Focusing on banking, distribution, ports, professions, telecommunications, 25