PSD Blog - The World Bank Group

The latest news from Bubblesville

FT Alphaville has published a chart, via The Global Property Guide, showing the latest trends in real estate prices from around the world:

 

A few observations from the bottom of the list:

• Western Europe's most vulnerable economies continue to suffer. Spanish home prices are down more than last year, the UK remains in the red, and Irish prices have declined by a whopping 21 percent. As the ECB puts forth its strategy of removing many of its exceptional crisis support provisions, Europe's recovery will become even more uneven (just ask Greece). This has already led some to re-ignite the debate over the future of the eurozone, though currency markets seem to be shrugging it off. 

• Parts of Eastern Europe's real estate market are in dire straits. Latvian prices are down by nearly 60 percent, while Bulgaria (28%), Russia (19%) and Slovakia (15%) are all experiencing double-digit falls.

• Dubai is looking to be the ultimate boom and bust story. One year ago, real estate prices had increased by over 61 percent. Now, they are down by 48 percent. The government-owned holding company, Dubai World, is struggling to service its $59bn in liabilities, in spite of a recent $5bn bailout by Abu Dhabi.

Who Creates Jobs?

Editor's note: Dorsati Madani is a Senior Economist at the World Bank's Strategy and Analysis Unit (CICSA) of the Investment Climate Advisory

There is widespread perception that small businesses are the primary creators of jobs in most countries. A presentation from the World Bank's recent Conference on Entrepreneurship and Growth entitled, "Who Creates Jobs? Small vs. Large vs. Young" used US census data to add an interesting twist to the debate regarding the role of firm size in employment creation.

The paper finds that business start-ups contribute substantially to both gross and net job creation, but that young firms also have very high rates job destruction due to frequent failures. Conditional on survival, young firms grow more rapidly (in terms of employment) than their more mature counterparts. A related finding is that once the authors account for firm age, it becomes the definitive factor in job creation. Firms employing 5-499 employees are found to have lower net growth rates than the largest firms (10000 or more workers) in the economy. 

These results raise an interesting policy issue. Assuming a similar pattern of job creation for developing countries, how do we reconcile the emphasis placed by development institutions - including the WBG - on small and medium enterprise (SME) development? Is this sub-sector the right focus of our PSD efforts? If so, how can we ensure not only SME creation, but survival to support net job creation over the medium to long term? On the other hand, if the SME approach does not create the net medium to long term jobs so desperately needed in high unemployment developing countries, what should our policy recommendations be?

What inspires reform (besides Doing Business)?

Yesterday I discussed the launch of the latest Doing Business sub-report, which focuses on the ease of paying taxes. This is a laudable effort- paying taxes is painful enough to begin with, why make it more difficult than necessary?

Doing Business seeks to recognize and celebrate policy reforms that improve the ease of doing business, of which tax policy is a critical component. For governments, the incentive to reform in this area seems relatively straightforward: make it easier to pay taxes, and your tax revenue is likely to increase. But what about areas where the results of reform are less immediate and tangible, such as closing a business?

In some cases, it is the desire to improve one's national ranking in the Doing Business report that triggers reform. This was Rwanda's strategy, as outlined by minister of finance James Musoni in a recent World Bank speech (you can review parts of the speech on our Twitter account). These accomplishments fit well into the country's Vision 2020 of becoming a middle income country by the end of the next decade.

Financial Paradigms: What Do They Suggest about Regulatory Reform?

Editor's note: Augusto de la Torre is chief economist, and Alain Ize a consultant, in the Latin America and the Caribbean Region of the World Bank. This is the 10th in a series of policy briefs on the crisis—assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers.

What market and regulatory issues led to the subprime crisis? How should prudential regulation be fixed? The answers depend on the interpretative lenses—or “paradigms”—through which one sees finance. The agency paradigm, which has dominated recent regulatory policy, seems to be influencing much of the emerging reform agenda. But collective welfare failures—particularly externalities—and collective cognition failures—particularly mood swings—were at least as important in driving the crisis. All three paradigms should therefore be integrated into a more balanced policy agenda. But doing so will be difficult because they often have inconsistent policy implications.

Click here to view the full note.

Paying Taxes 2010-The global picture

The latest publication of the Doing Business franchise is out: Paying Taxes 2010-The global picture.

The study measures tax systems from the point of view of a domestic company complying with the different tax laws and regulations in each economy. The case study company is a small to medium-size manufacturer and retailer, deliberately chosen to ensure that its business can be identified with and compared worldwide.

For the second year in a row Maldives, Qatar and Hong Kong have taken the top three spots as the easiest places to pay taxes. Maldives has been the top performer since the first report was published in 2007.

Some of the report's key findings include:

• The top reformer was Timor-Leste, which introduced a new tax law, streamlined the business tax regime, and simplified tax administration.
• Between June 2008 and May 2009, 45 economies made it easier to pay taxes as measured by Doing Business, almost 25% more than in the previous year.
• Eastern Europe and Central Asia had the most reforms for the third year in a row, with 10 economies reforming.
• Around the world on average, the case study company faces a total tax rate (percentage of profit paid out in taxes) of 48.3% and spends 286 hours a year, and makes 31 tax payments, to comply with tax laws.
• The time to comply with tax requirements ranges from 212 hours a year on average in OECD high-income economies to 638 in Latin America.
• The number of payments also varies widely. The company makes the most payments in Eastern Europe and Central Asia, 53 a year on average. It makes the fewest in OECD high-income economies, just 14 on average.
• Survey respondents identified the way tax audits are dealt with and the approach of the tax authorities as the elements of the tax system most in need of improvement.

PricewaterhouseCoopers contributed to the report, giving its perspective on the data via case studies in various countries. The consultancy concludes:

Tax reform remains firmly on the government agenda. Through its Doing Business indicators, the World Bank Group has recorded tax reforms in 104 economies around the world during the five years of the Paying Taxes study. The recession is not likely to lessen the pace of these changes. The downturn has reduced corporate profitability and slowed investment and transaction activity, thus reducing government tax revenues from business. The challenge for government is not only to rebuild revenues, but also to help businesses survive through a difficult time and position themselves best for recovery, while also exploring possibilities for easing complexity and administrative burden.

Benjamin Franklin once famously quipped, "In this world nothing can be said to be certain, except death and taxes." Thanks to the Doing Business team, the latter is becoming a little less painful.
 

 

Weekend Reading

Regulatory failure, special interests, and financial sector lobbying: European Union edition.

Negative interest rates on T-bills: This time is different.

"The fact that oil is trading at $80 a barrel in this climate should tell you that it is trading more as a financial asset than on supply/demand imbalances".

California is doing its part in the fight against deflation, one university at a time.

The recession is having quite an impact on migration trends in the United States. Plus, our People Move blog looks at new remittance data.

Tyler Cowen describes these two posts from Paul Krugman and Brad Delong as "critically important stuff and two of the best recent economics blog posts, in some time."

War is brewing in the financial blogosphere.

Matthew Yglesias thinks that Chinese leverage over the US is overblown.

More emerging market attempts to stop the appreciation of their currencies.

Finally, as the US gets ready for the Thanksgiving holiday, Adam Gopnik analyzes our hunger for cookbooks.

The Curious Indian Entrepreneur

I attended a session from yesterday's Entrepreneurship and Growth Conference on "Indian Entrepreneurial Success in the United States, Canada, and the United Kingdom". RAND corporation's Krishna B Kumar attempted to explain the extraordinary successes of Indian expatriate entrepreneurs in these three countries, arguing that much can be attributed to observable differences such as education, family ties, and choice of sector.

In the United States, the typical Indian entrepreneur has an average business income that is substantially higher than the national average and is higher than any other immigrant group. Net annual income in the United States is 60 percent higher than the overall average. Meanwhile, in Canada and the UK, Indian entrepreneurs make similar incomes as other immigrants, but employ more employees than almost any other ethnic group.

What explains these differences? The authors attribute around 50 percent of this success to higher rates of education. For example, in the United States 68 percent of Indians have college degrees, which is twice the rate for whites. This is also true for Canada, where immigrants are largely admitted on a points based system that rewards higher education.

Today in Capital Controls

Yesterday I suggested that emerging market economies, rather than the United States, were better poised to criticize China's currency policy. It looks like, rather than criticizing China's policy, many are simply trying replicate it. Brazil and Taiwan are leading the way:

Asian currencies came under pressure on Thursday as a move from Brazil to further curb foreign inflows sparked fears that other countries would follow suit. Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

Speculative flows have now reached the point where many emerging market currencies have hit levels that threaten to undermine their export sectors.

So far most emerging market economies have managed the problem by intervening in currency markets to slow the appreciation of their currencies. However, Brazil and Taiwan have taken more dramatic action, imposing capital controls designed to limit the appreciation of their currencies.

Speculation has risen that other countries will follow their lead.

“Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications,” said David Bloom at HSBC.

Taiwan's decision to ban foreigners from putting money into time deposits seems to be working. Investors have pulled out roughly 12 percent of this 'hot' money. Taiwan's success, and Brazil's apparent determination, are likely to encourage others to take a more assertive stance.

Low interest rates in the West, coupled with a fixed renminbi and weaker dollar, have left many emerging markets somewhere between a rock and a hard place. They now must try to avoid excessive currency appreciation without appearing hostile to the foreign investment that is fueling much of their growth.

The global economy is unlikely to reach any sort of equilibrium for a very long time.

In search of PSD’s “holy grail”

The “holy grail” for those working in PSD is the scalable and sustainable business model that engages the poor while delivering social and developmental outcomes. Finding the PSD grail will potentially empower large numbers of poor men and women to find their own way out of poverty as well as generating, on a commercial basis, socially desirable goods and services. But there have been many false trails in the quest for the PSD grail. Among them are supply chain development initiatives that remain external to the economic lives of the poor, and heavily subsidized models that engage the poor but have limited prospects for wider replication, scaling or longer term sustainability.

Occasionally something comes along that captures our imagination and seems to offer a glimpse of the elusive grail. Mohammed Yunus' recent speech on social business at IFC was a widely reported example. Another similar but smaller event was more quietly inspirational. Harold Rosen, IFC’s former in-house serial entrepreneur and inspiration behind many of the IFC’s small and medium enterprise interventions, returned to IFC to discuss the performance of his Grassroots Business Fund (GBF), which was spun off from IFC in 2008.  

Is the US the appropriate renminbi critic?

Free Exchange has observed over the past few days that the blogosphere, financial press, and political punditry have put forth a plethora of opinions about Chinese economic policy. Let's take a look at some of the latest:

Bill Owens argues for closer cooperation in just about everything:

The US-China relationship is a vital interest for the two countries and the world. Throughout history, great powers have tended to become adversaries. Now, for a few years, we have a chance to break that cycle. It will take strong and enduring commitment on both sides. But a new and engaging relationship is imperative for our common good

Martin Wolf puts wishful words into the mouth of Barack Obama:

At a time of such weak global demand, yours is a 'beggar thy neighbor' policy. You complain about the protectionist actions I have implemented. But their impact will be trivial compared with China's 'exchange rate protectionism'. This policy will shift the costs of adjustment on to China's trading partners.