PSD Blog - The World Bank Group

Dollars and sense

Editor's Note: Anushka Thewarapperuma is a consultant with Advisory Services - Access to Finance at the IFC.

Think you’ve got better money management skills than the world’s poorest? You might be surprised to find out that you’d be up against stiff competition.

Jonathan Morduch and Daryl Collins report on their journey to various corners of the world (Bangladesh, India and South Africa to be exact) to observe how people living on less than $2 a day managed their financial lives in the recently published book Portfolios of the Poor. Their findings were summed up nicely in a recent review in the Washington Post: "the poorest people on earth engage in the sort of sophisticated money management that would make Chuck Schwab proud."

The mysterious acronym PFI

I am often confused when using acronyms. In the vast terminology of public private partnerships (PPP), it’s not hard to do. For example in a lot of countries the acronym PFI, which stands for Private Finance Initiative, is used as a synonym for PPP (Public Private Partnership). While the term PFI originated in the UK, in that country it is not synonymous with PPP. PFI has a more specific meaning, relating to a special government investment policy that clearly indicates what is and what is not PFI.

Labor laws and Mexican spam

How hard is it to fire someone in Mexico? It is apparently sufficiently hard that they offer courses on how to do it.

I spent seven years in Mexico, and I still receive some Mexican spam. Here is my translation of an email I received which was advertising a one day course on how to fire employees:

Firing a person is a delicate process filled with legal “mines.” It doesn’t matter how prepared you feel or how correct your decision is. Not doing it the right way puts you at risk for a lawsuit. No manager should begin this process without attending this seminar!!

Involving the public in public private partnerships

Call them taxpayers, citizens, or just simply the public—they are the reason why public private partnerships (PPPs) are created. They are the users and the ultimate financiers, whether by paying taxes or tolls, and they want to have a bigger role in decisions about what infrastructure shall be built and how. It’s no surprise that public opinion is the ultimate judge of the success of PPP projects.

And this ultimate judge is not always just; it does not always have the right information at the right time. It’s up to fallible public sector officials to ensure that proper information and reporting is available to the public and that proper stakeholder consultations take place prior to key decisions regarding the project.

Big guy, little guy: Who suffers more from crime?

At first you might guess that it’s the big firms that make an easy target. But we need to do more than guess—the policy implications are quite different if the answer is “big” or “small.” If large firms are more efficient and do more R&D and export to other countries, then crime can be more harmful to the economy when directed against such firms. However, compared with large firms, wages and profits may be lower in the smaller firms. Crime directed against small firms can therefore be regressive (causing more harm to the relatively worse-off).

It turns out that getting to the bottom of this question requires drawing a careful distinction between two concepts: the incidence and burden of crime.

Doing Business in India

If you wanted to start a business in India, what city would you pick? The just-released report Doing Business in India 2009 has an answer: Ludhiana. Hyderabad and Bhubaneshwar would also be good choices. Why? These were ranked as the top three cities in India (out of 17 included in the ranking) in the overall ease of doing business. 

Celebrating failure

When oh when will we get the development version of Failcamp?

As I wrote previously, it seems to me that the development sector needs fewer "lessons learned" documents - fully polished and sanitised so that they read more like PR pieces - and more honest, "raw" conversations about what worked, and, most importantly, what didn't.

Charting a path out of the crisis

Editor's Note: Costas Stephanou is a senior financial economist in the Financial and Private Sector Development Vice Presidency of the World Bank Group.

The World Bank Group (WBG) has just released the first batch of a series of policy briefs on the financial crisis, whose aim is to assess government responses to the crisis, shed light on the financial reforms currently under debate, and provide insights for emerging-market policy makers. The first three papers cover a lot of ground in a short amount of space—sizing up the global policy response, forecasting what future financial systems will look like as a result of these policy responses, and determining how financial regulation will evolve. They will be followed by papers, written by different authors inside and outside the WBG, which will take ‘deep dives’ in specific crisis-related financial sector topics.

• Dealing with the Crisis: Taking Stock of the Global Policy Response provides an overview of the immediate financial sector policy responses to the financial crisis—including emergency liquidity support, expansion of financial safety nets, and interventions in financial institutions—that have succeeded in stemming widespread panic. But the effort has generally been ad hoc and insufficient. Issues that remain include the resolution of problem assets, the restructuring of troubled, systemically important financial institutions, and the development of credible exit strategies. Only a handful of countries have attempted to tackle these issues head-on. As past experience has shown, that may well have negative repercussions for the duration and strength of a subsequent recovery.

What can the London Underground tell us about PPPs?

If you’ve ever been to London, then you’ve almost certainly seen the emblematic red circle and blue stripe with the word UNDERGROUND emblazoned on it. The Underground is a huge operation, made up of some 270 stations and 400km of track. So how does London keep this operation running?

Earlier this decade, the government experimented with a public-private partnership (PPP) under the name of Metronet. The hope was to generate efficiencies by bringing in the private sector. So did it work? A recent report by the UK National Audit Office (published 5 June 2009) makes it pretty clear the answer is "no." The report pinned responsibility for this failure on poor corporate governance:

Reframing the debate

Benito Arruñada is guest blogging at Organizations and Markets. His first post states:

One of my recent research areas is the cost of business formalization. In particular, I have criticized the World Bank’s Doing Business project for the narrow focus of its “Starting a Business” indicator on reducing the initial costs of incorporating companies (Arruñada, 2007,  2009), which disregards the more important role of business registers as a source of reliable information for judges, which is essential for reducing transaction costs in future business dealings.

New Blogger: Filip Drapak

Public Private Partnership—so often the center of attention and so often misunderstood. Is it a method of public procurement of infrastructure or a tool to mobilize private finance for public infrastructure? Is it capable of transferring risks to the private sector or taking advantage of advanced performance management? And does it deliver value for money to taxpayers or “juicy” deals to rent seeking private companies—these are some of the questions we shall ask in this blog. We'll also look at what is going on in the market, how the financial crisis has affected PPPs, and what the most recent developments are in this field around the globe.

I've invited Filip Drapak, former Chairman of the Czech Republic PPP Centrum, to comment on these issues. Filip joined the World Bank Institute in 2007 to work as a Senior Specialist in the Public-Private Partnerships in Infrastructure practice.

Filip brings over 14 years of experience in finance, economics and banking. For the past 5 years, he has focused almost exclusively on public private partnerships, developing government policies and legislation, setting up institutional support for PPP and supporting the management of pilot projects. Welcome!

China's Venture Capital Markets: Nascent, but growing

Editor's Note: Brian Hoyt is a consultant with the Financial and Private Sector Development Vice Presidency of the World Bank Group.

The World Bank recently held a workshop on Closing the Private Equity Gap that discussed how government policy can nurture the growth and sustainability of emerging market private equity. Venture capital investments play an important role in filling the early stage funding gap, and China is one of the world's largest emerging markets for venture capital (VC).

Last May, the Bank released a report, Promoting Enterprise-Led Innovation in China, which gives an overview of the Chinese VC market, whose investments have grown from $764m to $3.88bn between 2003 and 2007. In order to mantain this growth, the report calls on the Chinese governement to continue building its venture capital infrastructure:

The smart economics of educated women

Editor's Note: Jennifer Yip is a consultant for the World Bank Group's Doing Business team.

At an age when mothers admonish their children to finish their brussels sprouts, my mother issued warnings about the importance of getting a PhD if I wanted to gain the respect of my future husband. Those warnings were followed by the oft-repeated reminder that I should "marry well, so you don’t have to work if you don’t want to."

Twenty years and a couple of degrees later I’ve often wondered how those two pieces of advice go together. What is the point of getting an advanced degree if I eventually decide not to work? 

iPhones for all!

The Economist has an interesting prediction for east Africa: "In a couple of years even fairly poor east Africans may be getting knowledge, news and entertainment on robust versions of existing Apple iPhone and Palm Pre models." This prediction comes just after Kenya's president connected the first of three planned fiber-optic submarine cables. For a bit of background on what all this means and what it took to get to this point, see this post on All things Africa and ICT. 

Thinking the unthinkable in Indian higher education

Greater financial autonomy for Indian universities? I can almost hear an audible gasp. Nevertheless, that's what Santosh Mehrotra, a senior adviser of India's Planning Commission, has recommended in a recent article in International Higher Education:

...The pace of expansion in the new few years may well turn out to be frenetic. The most serious problem that this sudden expansion will entail is finding faculty of appropriate quality in the public higher education system. Therefore, an initiative to be seriously considered involves giving greater financial autonomy to universities, to enable them to mobilize resources from sources other than the government—partly to attract Indian academics teaching abroad back to India. Salaries have risen sharply recently, thanks to the Sixth Pay Commission’s recommendations to make returning home attractive for nonresident Indians. However, the requisite autonomy of universities is also needed to encourage them to attract faculty back to India.

The win-win of financial sector reform

A new World Bank working paper looks at the relationship between the financial sector and inequality. Don't care for redistributive social policies? Then financial sector reform is the way to go (or so say the authors): 

...compare finance and redistributive policies. Many theories motivate redistributive policies as a mechanism for de-linking an individual’s opportunities from parental wealth. One problem with redistributive policies, however, is that they create disincentives to work and save, though researchers debate the actual magnitudes of these disincentive effects. These tensions between efficiency and equity, however, vanish when focusing on financial sector reforms. Financial developments that expand individual economic opportunity create positive, not negative incentive effects, and avoid the adverse repercussions associated with attempts to equalize outcomes. Financial development both boosts efficiency and the equality of opportunity.

Michela Wrong's turn at the World Bank

Michela Wrong, the author of It's Our Turn to Eat: The Story of a Kenyan Whistle-Blower and a former journalist at the Financial Times, has been making the rounds promoting her new book. It's Our Turn to Eat tells the story of John Githongo, a Kenyan anti-corruption crusader who was eventually forced into exile. Wrong has kindly to agreed to give a talk on June 29 at the World Bank, and I think this is an event not to be missed. 

For useful reviews of the book, check out Chris Blattman, the Financial Times, and the Economist. Also check out this recent interview with Wrong on NPR.   

Aid vs. development

Guest blogging for Bill Easterly, Lant Pritchett warns against any simple enthusiasm that mainstreaming aid evaluation at USAID (or anywhere else, for that matter) will by itself help bring about development. Pritchett draws a distinction between aid purely as assistance and the much larger goal of development:

Clay Shirky at the State Department

The social media guru Clay Shirky gave a talk earlier this month at the TED@State conference. (Shirky came to the World Bank just over a year ago and had some sage advice for the development community that is still worth heeding.) According to Shirky, we're witnessing "the largest increase in expressive capability in human history." I'd say he's onto something here, and institutions that don't figure this out are going to get left behind.

(Hat tip: Anthony Hecht)

An exceedingly simple answer

Oscar Calvo is an economist who works on economic policy for the Latin American and Caribbean region here at the World Bank. He shared with me some interesting research on the determinants of informality in Peru. Oscar and his team conducted a survey of 802 micro and small firms, both informal and formal, and came up with the following chart (below the jump) on the benefits of being registered to pay taxes. (The RUC number is the firm’s tax ID).

Who is the marginal firm?

Suppose a firm thinks it is not worthwhile to register formally. But this firm would register if the registration costs were a bit lower. Let’s call this firm a "marginal firm."

What would this firm look like? I don’t know that there is any empirical evidence, but two people who commented on this post share my intuition that a marginal firm is less productive than the typical formal-sector firm. This theoretical paper (ungated version here) by Pedro Amaral and Erwan Quintin says the same thing.

What will the long-term impact be of lowering registration costs? The obvious effect is that marginal firms will now be induced to formalize. But will this effect be important for aggregate productivity or employment?

Maybe these marginal firms will operate at low productivity for a year or two, and then leave the market. Or maybe enough of these marginal firms will “find themselves” given the new opportunities that go along with formalization and have important aggregate effects. I don’t think anyone really knows.

Coming your way: International Development Data Barcamp @ the World Bank

Here’s a great quote from Esther Dyson’s interview on the future of social media (via Working Wikily):

The opaque institutions around us are becoming semitransparent, in ways that people care about. Twenty years ago, if you bought a tube of toothpaste, it might have had the address of the manufacturer so you can write to it if you had questions. Then they added a toll-free number. Now it includes a Web site, and you can find out more about the ingredients. And there are third-party Web sites, like a project called Barcode Wikipedia, where information is posted that the manufacturer might not want to volunteer: for example, where products are manufactured, and whether children are used in the factories.

A competitor for Kiva?

Just a couple of weeks ago, I was calling for social media platforms that would allow donors and aid recipients to share their perspectives. Today, via Chris Kreutz, I learned about MobileMovement, a "next-generation microfinancing site, where donors and participants can communicate directly with young social entrepreneurs in the slums of Nairobi." So, if you find a youth enterpreneur group you’d like to finance, such as Be Smart Design Association or El Elohe Landscape and Artworks, you can ask them directly about their business plan, the way they work and how they intend to invest your money and decide whether to provide them with a loan or business advice.

ICT stat of the day

The World Bank's handy annual Little Data Books were released earlier this month. I came across some interesting stats from the Little Data Book on ICT. Between 2000 and 2007, internet subscribers per 100 people in low-income countries grew from only .1 to .8, but mobile cellular subscriptions per 100 people grew from .3 to an amazing 21.5. If you want to reach the poorest countries in the world, it looks like mobile phones are your best bet. No wonder that mobile money and insurance via SMS have taken off.

The beef with Dambisa

A few months ago Dambisa Moyo came to the World Bank to present her new book, Dead Aid. I had a favorable impression from her talk, but quickly became aware of a host of criticisms of the book (see, for instance, Owen Barder or Dani Kaufmann). 

Now that I've had a chance to read the book myself, I appreciate what the critics are getting at. Their criticism focuses on the first half of the book, where Moyo argues not only that aid has not worked, but that it is really an obstacle to development. (I should be quick to add that she is talking about what she terms "systematic aid" and not humanitarian or charity-based aid.) I summarize the main criticisms of her argument here briefly:

1. Correlation does not equal causality: Moyo points out that "over the past thirty years, the most aid-dependent countries have exhibited growth rates averaging minus 0.2 per cent per annum." However, critics of the book rebut that just because much of Africa remains poor and has received lots of aid does not mean aid was the cause. Kevin Watkins puts it well: "Using her logic, you could argue that fire engines cause fires because you find them near burning houses."
   
2. It really does depend on the context: Moyo attacks the notion that aid works even in good policy environments. Kaufmann counters that "the reality is more complicated and less PR-sexy, I am afraid: ‘Aid Can Work’, yet it can also fail miserably, as it has done in many countries. The mediating factor for aid effectiveness is governance and corruption."
   
3. Cherrypicking: Moyo cites selective data points to support her arguments, e.g. the democracy agenda is oversold because Senegal has been growing slowly but Sudan has grown quickly. However, a more systematic approach to the data (e.g. Do Democratic Transitions Produce Bad Economic Outcomes?) reveals that democracy does have a positive effect on growth, even in low-income countries. (This particular example is my own, but others also make this general point.)