PSD Blog - The World Bank Group

The Lure of Local Bonds

IFC announced yesterday that it will issue a $43m local currency bond in Central Africa, a first for the World Bank institution, and also a first for a non-local financial institution. This is IFC's second local currency bond in Sub-Saharan Africa, following its issuance of a West African Kola Bond in late 2006:

The 20 billion Central African francs ($43 million equivalent), five-year tenor bond will be listed on the regional exchange in Libreville and on the Doula Stock Exchange. It will be tax-exempt in all six countries in the Economic and Monetary Community of the Central African zone. The countries are Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon. All proceeds will be reinvested in the zone.

IFC's timing is quite prescient. As the recovery from the crisis continues to be lopsided, strongly favoring emerging markets, there should be substantial outside investor interest in these types local-currency bonds (see previous post).

Furthermore, increased dollar volatility will enhance the attractiveness of local currency bonds in two ways. First, judging by the market's negative reaction to Ben Bernanke's dollar reassurances, foreign investors should be more willing to take on local currency risk, as they remain convinced that dollar depreciation will continue for some time.

Second, while foreign investors seem sanguine about the dollar's weakness, local investors from fragile emerging markets, such as those in Central Africa, are more likely to recall the dollar's upside potential. Should another crisis occur, triggering a flight to safety along the lines of what we saw in the aftermath of last year's crisis, emerging market currencies will be the first to fall. Local currency bonds offer a layer of insurance against the damage that such a precipitous outflow of capital can cause, making them an attractive option for local businesses and investors alike. 

How relevant is the location of informal businesses for policy?

A distinction is often made between informal firms operating within, versus outside, household premises. In some sense, the former represent the quintessential informal firms beset with a number of problems, such as low efficiency, etc. Policies aimed at bringing informal firms into the fold of the formal sector could therefore be expected to have a bigger impact when targeted toward informal firms operating within, rather than outside, the household.

A survey of informal firms in Ivory Coast, Madagascar and Mauritius conducted by Enterprise Surveys provides some support to this idea. The survey shows that 81 percent of the firms in Ivory Coast, 72 percent in Madagascar and 49 percent in Mauritius operate within household premises. The figures below show the percentage of firms that report various benefits from registering. Overall, a larger percentage of firms located within household premises expect the various benefits from registration. These preliminary findings suggest that understanding the types of informal firms that operate within and outside household premises could be an interesting area for future research.

 

China stat of the day; plus, a turnaround in Zimbabwe?

While IFC is strengthening its involvement in India, China is deepening its economic ties in Africa.

In his opening speech at this week's Forum on China-Africa Cooperation in Egypt, Chinese Prime Minister Wen Jiabao announced Beijing's latest commitment to its African trading partners, which includes $10bn in fresh loans (on top of $5bn already pledged in 2006):

We will help Africa build up its financing capabilities...we will provide 10 billion US dollars for Africa in concessional loans... China is ready to deepen practical cooperation in Africa.

China will also set up over 100 clean energy programs, and relieve or cancel the debt of 31 countries. Chinese direct investment in Africa has increased from nearly $500m in 2003 to $7.8bn in 2008.

Wen claims that this latest round of assistance comes with no strings attached:

Africa is fully capable of solving its own problems, in an African way

There is one story floating around the blogosphere that seems to highlight an African economy solving its own problems. The Telegraph is reporting an economic turnaround in Zimbabwe, which has been buoyed by the dollarization of the local economy:

The theory of industrial policy meets reality

The idea of industrial policy has been seeing a bit of a resurgence since the financial crisis. It's good to be reminded of the reality of what these policies end up looking like in practice. It seems that Ethiopia's private sector coffee exporters are not too sympathetic to the idea. (H/t African Agriculture)  

Small businesses and the case for safe savings

Writing in this blog last July, Anushka Thewarapperuma penned a favorable review of a new book by Daryl Collins and Jonathan Morduch on how people living on less than $2/day manage their financial lives. The authors discovered that the world's poor are quite good at managing their finances:

The poorest people on earth engage in the sort of sophisticated money management that would make Chuck Schwab proud.

Thewarapperuma ended her post by noting that Collins "will be coming out soon with a pilot study using the same methodology of financial diaries, this time for small businesses."

Flash-forward to today, and Collins is back with her new study, commissioned by FinMark Trust, which gathers cash flow and qualitative information for small businesses in South Africa. The report, which surveyes 26 businesses in Langa and Nyanga townships across a range of industries, makes some initial conclusions about the financial services and training needs of these small enterprises, including:

Weekend Reading

Zimbabwe's inflation ranks as the second worst in history. Who's first?

Cool graph on the commitment to development of specific countries. Sweden comes on top.

The two Koreas.

Rural to urban migration in China has reached 1.5 million people per month.

Happy Halloween.

Informal Sector Comparison: Manufacturing vs Services

I have been comparing the differences between manufacturing and services firms in the informal or unregistered sector. There is a rich literature on how and why these firms differ, but it is based on firms in the formal or registered sector. It’s a moot point whether differences between manufacturing and service firms in the formal sector also hold for the informal sector. For example, differences in scale economies between service and manufacturing firms are known to be important for the formal sector, but this is not immediately obvious when comparing these firms in the informal sector.

“Unwilling” Entrepreneurs

The common perception of the informal sector is that unregistered businesses are not as efficient as registered or formal businesses. One proposed reason for this is that, by not being registered, informal businesses face severe hardships in accessing finance, markets, public services and government programs. Hence, the usual policy response to informality is simple: try and encourage informal businesses to register.

However, another problem in regards to informal firms may be the underlying motivation for starting the business in the first place. There are many informal businesses that are started not because the owner sees a good business opportunity, but because he or she cannot find a satisfactory job (“unwilling” entrepreneurs). A survey of informal firms conducted by Enterprise Surveys shows that 46 percent of informal firms in Ivory Coast, 39 percent in Madagascar and 31 percent in Mauritius were started because the (largest) owner could not find alternative employment opportunities.

A Chinese Marshall Plan?

Geoff Dyer explores the idea of using China's massive foreign exchange reserves to form an investment vehicle for emerging markets. He has assembled a series of proposals from leading Chinese thinkers, including some from within the government.

For example:

• Hu Xiaolian, deputy governor of the central bank, has proposed the idea of a "supra-sovereign wealth investment fund" which would invest in developing countries so that "these countries (can) serve as new engines in global recovery and growth."
• World Bank Chief Economist Justin Lin thinks that "Chinese companies should step up investment in Africa and south-east Asia, including outsourcing some low-end manufacturing, to boost consumer demand."
• And finally, Xu Shanda, former head of China's federal tax bureau, has "called for the creation of a ($500bn) Chinese 'Marshall Plan' to lend money to Africa, Asia and Latin America to boost living standards in those regions and create demand for Chinese products to replace struggling US and European customers."

I find myself in agreement with Dyer's take on the idea:

If China can channel even a modest portion of its vast liquidity to the developing world in a responsible way that boosts demand without creating new, suffocating debt burden, it will be pushing on a door that is already opening.

Doing Business in Kenya 2010

The Doing Business in Kenya 2010 report is out today, just on the heels of the annual Doing Business 2010 report. Globally, Kenya ranked 95 out of 183 economies. Doing Business in Kenya 2010, the first subnational report on Kenya, suggests Kenya could improve its ranking by 17 positions simply by adopting best practices already in place in the 11 Kenyan localities covered in the report:

If a hypothetical city, "Kenyana", were to adopt the best practices already in place in Kenya, its ranking would improve in all four areas of regulation that are the focus of this study, putting "Kenyana" in 78th place among the 183 economies measured in the global Doing Business report. That is 17 positions better than Kenya’s current global rank (represented by Nairobi).

Here is the full report, plus the press release and a Powerpoint presentation.