PSD Blog - World Bank Group

Not so simple, Mr. Watson

For the more theoretically minded and for the critics of the logical framework approach - a recent ODI paper attempts to articulate the implications of complexity science for the development sector.

From Robert Chamber's preface:

"Much development and humanitarian thinking and practice is still trapped in a paradigm of predictable, linear causality and maintained by mindsets that seek accountability through top-down command and control. Recent years have seen more emphasis on the mechanistic approaches of this paradigm and the kinds of procedures which are increasingly questioned by successful private sector organizations." Food for thought.

The subprime mess - what's the cost?

Accurate estimates of the fall-out are certainly a moving target , but a recent paper estimates the financial and economic cost of the crisis, predicting total loan losses of $400 billion and a 1.3 percent lower GDP growth this year. This paper also contains a nice explanation of how the subprime crisis infected other financial markets and the channels through which it affects overall lending standards and economic activity.

Aids in Asia: alarming numbers

A new United Nations report, Redefining Aids in Asia: Crafting an Effective Response, was just released and makes an astonishing prediction: 500,000 peaple could die each year people due to AIDS-related illnesses by 2020.

The report released Wednesday also contends that the number of infected people could potentially double to 10 million by 2020 if prevention work is not undertaken. The cost of such an increase in infected people would be great in all levels, including economic cost, since Aids is one of the major causes of death among working-age adults in Asia. According to the chairman of the Commission on AIDS in Asia, Dr Chakravarthi Rangarajan, the cost could be up to $2 billion annually until 2020.

The subprime mess - how did we get here?

A recent IMF paper tries to understand what caused the recent deterioration of lending standards in the U.S. and shows that many parties have to take some blame. Lending standards in the subprime market deteriorated in markets with more competition, faster rising house prices and better opportunities to securitize loans once they're originated.

The relaxation of lending standards was stronger during times of lax monetary policy. While loan decisions in the prime market still seemed to follow fundamentals such as borrower characteristics, this certainly did not hold for the subprime market.

Development 2.0: on which camp are you?

Literature on Web 2.0 technologies applied to developmental problems is rapidly growing, and with it, two camps are beginning to emerge. On the one hand, there are those who see Web 2.0 tools as an enhancement of traditional collaboration and outreach capabilities. On the other hand – and to my mind more intriguing – there are those who believe that Web 2.0 is heralding a new business paradigm.

To the former, the failure to jump on the Web 2.0 bandwagon is a missed opportunity to tap into new audiences and fundraising possibilities. To the latter, it represents the risk to development organizations of becoming obsolete, bypassed by new players who are more adept to exploiting the innovative potential of "radical collaboration". A recent online dialogue titled "NGO 2.0 – the end of the organization?" sheds some light on this issue.

Does tax registration increase profits?

A large number of firms in developing countries operate in the informal sector. It is often argued that informality lowers profits and growth, but is this true? A recent paper on Bolivia finds that formality leads indeed to higher profit - on average. However, distinguishing between firms of different sizes shows that it is only mid-sized firms that stand to benefit from formality, whereas both smaller and larger firms suffer.

Partial Credit Guarantee Schemes – around the world and here in Washington

Partial Credit Guarantee Schemes – around the world and here in Washington As reported earlier, March 13 and 14 saw an interesting conference on Partial Credit Guarantee Schemes, co-sponsored by the Rensselaer Institute and the Journal of Financial Stability.

A variety of papers considered conceptual and theoretical aspects of these schemes, while others evaluated specific schemes, including in Chile, Italy, Japan, Mexico, Nigeria, UK, and the U.S. Two panel discussions complemented the paper presentations and discussions, one composed of practitioners with experiences from different regions of the world, the other of policy makers and advisers to policy makers. So, what were the main findings of the conference?

Negroponte's competitor: One laptop per rich child

Classmate PC – Intel's low-cost educational laptop – which was initially designed for developing countries is now going to be distributed in Europe and in the United States.

Here's a cost comparison of the low-cost and educational laptops out there:

• Eee PC from Taiwan's Asustek Computer: $399
• XO from One Laptop Per Child Foundation: $188
• Classmate PC from Intel: $350
• Making a profit from a do-good idea: priceless (or is it?).

To export or not to export?

A recent paper looks at possible reasons why farmers in parts of the developing world insist in growing crops for local markets when crops for export markets are considered to be more profitable. The authors suggest that this could be explained by:

"[M]issing information about the profitability of these crops, lack of access to the necessary capital to make the switch possible, lack of infrastructure necessary to bring the crops to export outlets, high risk of the export markets, lack of human capital necessary to adopt successfully a new agricultural technology, and misperception by researchers and policymakers about the true profit opportunities and risk of crops grown for export markets."

The paper also takes a look at the work of DrumNet, a social enterprise in Africa, to analyze whether a package of services could help farmers switch to export crops and market them. The researchers found a slightly positive impact from DrumNet’s package of services, but nothing overwhelming.

More on the microfinance dialogue

James Surowiecki's wrote a piece in March 17 issue of the The New Yorker on how the hype around microfinance is fogging the way to development. "What poor countries need most[...]is not more microbusinesses. They need more small-to-medium-sized enterprises," writes Surowiecki. He explained further that focusing on SMEs, rather than on microbusinesses, could generate higher rates of employment. Jacqueline Novogratz from the Acumen Fund, wrote a piece in response where she gives some practitioner's insights:

"In my own experience corroborated James' findings that only a small percentage of borrowers went onto create larger businesses that employed significant numbers of people. But we've learned how to deliver at least one product to the poor, and we have an unprecedented opportunity not only to build larger businesses that employ people but also to deliver other critical products — health care, clean water, housing and alternative energy — to the poor in ways they can access and afford."

Credit Guarantee Schemes - all over the globe - and here in DC

From this week's Partial Credit Guarantee Conference, we learned that credit guarantees have become the direct intervention mechanism of choice of SME credit activists. Almost all of the OECD countries have them, as well as many developing countries. Multilateral and bilateral donors support them throughout the developing world.

While government is heavily involved in funding and management of these schemes, loan assessment and recovery are mostly undertaken by the private sector, mostly by the lenders - and perhaps for the better, as schemes where the government is in charge of choosing borrowers and recovering loans have typically higher loan losses.

Partial Credit Guarantees - is there an additionality effect?

The ultimate success criterion for credit guarantees (as for other government interventions) is whether they increase access and/or reduce costs for constrained enterprises. Methodologically, that is a difficult question, as proper identification of the causality is a challenge.

Several papers at the World Bank's Partial Credit Guarantee Schemes conference are addressing the issues. One paper finds that participants in mutual guarantee schemes in Italy pay lower interest rates than non-participants, but are also less likely to default. Peer evaluation and monitoring seems to play a role, similar as in the microfinance group lending schemes.

Shakespearean drama: can higher oil prices be good for the world economy?

Yet again, oil prices broke record highs recently, and who benefits? A McKinsey report pointed to the fact that oil-exporting nations would pump $382 billion a year into financial markets around the globe, that's over $1 billion a day; but wait, that's if oil were traded at $50 a barrel, not at the recently traded $110. Potentially, at the real price level the total injected in financial markets would be greater than the GDP of several emerging economies.

So at the same time that financial markets are enjoying the influx of capital and the higher liquidity it creates, could there be a danger for a bubble burst if oil prices dramatically and suddenly decreased given the current economic woes and enviromental concerns? Would a contemporary and "green" Shakespeare bolster: Frailty thy name is oil?

So are oil prices heading toward $150 or downward to $50? Oil price volatility is the subejct of a new World Bank forum that tries to answer this and other questions. 

Partial Credit Guarantees Conference

The World Bank will host a conference on Partial Credit Guarantee Schemes this week (March 13-14, 2008) in Washington DC. Credit guarantee schemes play an important role in the distribution of credit risk, can improve access to finance and stimulate private sector development.

All the conference papers are now available. Presentations and discussions as well as the two panels promise to turn this into an interesting and informative event. Co-organizer and blogger Thorsten Beck will keep you updated.

Tsunami insurance for the poor

A new health insurance plan will enable the poor in India to buy health insurance for less than 10 cents a month, and it will cover natural disasters including Tsunamis.

The new program is a partnership between and aid group, CARE International, and a private insurer, Allianz. It is expected that over 200,000 customers will buy insurance within a year. According to Allianz, the communities have been involved in designing the new policies, which will cover death, medical treatment for injuries in accidents, help with funeral and hospital expenses, as well as paying wages during illness.

"Microinsurance provides a comprehensive measure of social security in an area which desperately needs this sort of protection against accidents and shocks that can push poor communities right to the limit," said Wolfgang Jamman, national director of CARE Germany.

But don't be so quick in calling this charity work. With an estimated market of 250 million policy holders in India, there sure is a buck or two to be made.

From growing cassava to funding a university

Beatrice Ayuru introduces herself as a teacher and businesswoman. She is from northern Uganda, a war-ravaged area with much poverty and few schools.

A few years ago, with no business training and no money, Beatrice decided that she would build her own school. "No girl should endure what I had to go through myself," says Beatrice. "Education is the best way to help reduce poverty in my region […] and giving girl children education empowers them. In my village, women are over-dependent on men."

Beatrice started with a small garden of cassava. That earned her a little money which she used to buy wheelbarrows that she subsequently rented out. With that income, she managed to open a canteen. Soon, she had enough savings to start a school. Getting the land was a struggle.

Which one to blame: caipirinhas or red tape?

"If Bill Gates had started Microsoft in a garage in Brazil, it would still be in the garage," says Eduardo Giannetti da Fonseca in a recent article published by The Economist. The article points to the fact that Brazilian entrepreneurs are more risk-averse than the ones in Russia and China.

That's a no-brainer, for instance, according to the Doing Business 2008 (and for full disclosure, the authors are just down the hall from me) it takes an astonishing amount of effort to start a new business in Brazil: 152 days and 18 different procedures. Thus, absolving caipirinhas, soccer, or other Brazilian passions from any culpability. Whew!

Can the private sector teach development?

Professor William Duggan argues in his book, Strategic Intuition: The Creative Spark in Human Achievement, that disciplines such as psychology, military history, and business strategy may collectively teach strategies that could be used by development agencies in order to ensure success. He discusses this idea in depth on his blog.

Bill Easterly will join Duggan at the Center for Global Development on March 12, for a discussion on how lessons from the private sector may enhance development success.

Recession: time to expand marketing budget

According to billionaire investment guru Warren Buffett, there is no denying that the U.S. economy is in recession. He recently declared unequivocally: "we are in a recession."

However, if you are thinking about stopping to spend on marketing read this warning from the Harvard Business School's Working Knowledge:

In a recession, consumers become value oriented, distributors are concerned about cash, and employees worry about their jobs. But a downturn is no time to stop spending on marketing.

New directions in the compass of development

Emerging markets are becoming important sources of foreign direct investment (FDI), with south-south – investments flowing among emerging markets – playing a bigger role.

According to recent MIGA report, the reasons for the increase in south-south FDI include, rising demand for energy in emerging markets, increase in south-south trade, proximity and cultural affinity, cost competitiveness, and outward FDI support.

The graph below shows global FDI outflows for developed and emerging markets, with a steady growth of both types of FDI since 2003.

   

Microfinance's "two cents" on its own future

Microfinance professionals, who responded to a new survey by the Center for the Study of Financial Innovation, identified poor management skills as the main risk the industry faces. Poor corporate governance is also seen as a great risk, but more so by investors and analysts than by practitioners.

According to the report "microfinance institutions tend to be dominated by 'visionaries' who are strong on charisma but less so on management skills and strategic flexibility."

More than 300 respondents from 74 countries contributed to the survey. It focused on institutions with more than $5m in assets which are profitable and capable of commercial growth.

Do you have any insights to share? Feel free to leave your own "two cents".

Innovative thinkers wanted

The 2008 Global Development Marketplace competition's theme is "Sustainable Agriculture for Development."

This competition is an avenue for creative thinkers to turn their ideas for sustainable agriculture in developing countries into reality. The grand prize: $200,0000 in grant funding. Applications are open until March 21, 2008.   

Calm waters for offshore outsourcing

Despite some evidence that offshoring did little or nothing to help U.S. original equipment manufacturers (OEMs), the practice across industries has doubled since 2004 according to a survey recently published by CFO magazine.

Not only have the numbers grown, but also the spectrum of services using offshore outsourcing. These services range from the traditional information technology services, to legal research, and analysis of medical test results.

Also, favorite offshoring destination is still India with China as a big competitor. On a lighter note, CIO magazine ran a fun head-to-head comparison between these two countries showcasing their respective comparative advantages when it comes to IT outsourcing.