PSD Blog - The World Bank Group

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:

Improving Credit in Armenia

The 2006 and 2007 Doing Business reports both found that Armenia has been reforming in the area of credit. Armenian lenders can now rely on a credit registry when deciding on loan applications. But have these reforms really had an impact?

The recently-released enterprise surveys country note on Running a Business in Armenia shows that these reforms have indeed resulted in improved access to credit, which in turn is making it easier for Armenian firms to operate efficiently.

Both prepaid sales and sales on credit nearly doubled in recent years, from 15 to 16 percent in 2005 to 30 percent in 2009. Furthermore, the figure below shows that the value of collateral (expressed as a percentage of the loan amount) necessary to secure a loan has decreased substantially across all sectors of the economy.

 

Sometimes simple really is best

Editor's Note: Alan Johnson is a Senior Private Sector Advisor in the World Bank's Investment Climate Advisory Services Group

I’m always interested in situations where tools that are aimed at developing countries are applied to their high income counterparts. A recent post in the New York Times’ small business blog provides an excellent example. The author, Scott Shane, refers to the 2008 World Bank Group Entrepreneurship Survey, which gathers internationally comparable data on business creation, and applies it to the United States.

The results of the survey show that, after accounting for differences in per capita income, countries with easier and less expensive procedures for registering new businesses have higher rates of new business creation. This conclusion is reached by examining the relationship between the number of new business registrations (entry rate density) and the “ease of starting a business” indicator in the Doing Business report.

What triggers reforms?

A previous post by Pablo on the political cost of market reforms suggests that the incentive to reform depends on the impact of such reforms on the re-election chances of the incumbent government, and how much the president or party in power cares about re-election relative to other (enlightened) objectives.

While these are important factors, existing studies show that they are not the only ones as far as the incentive to reform is concerned. Below, I report the list of possible reform triggers compiled by Williamson (1994, The Political Economy of Policy Reform) and based on various case studies and anecdotal evidence. Note that the list is not the final word on the determinants of reforms. Rather, it is more in the nature of popular beliefs with some supporting evidence. Williamson himself rejects some of the listed factors as true determinants of reforms, beyond a few specific cases.

Belarusian Business Reform: Less Time with the Taxman

Has the regulatory burden for Belarusian businesses decreased?  According to a new World Bank Country Note on Running a Business in Belarus, progress has indeed been made over time. For example, the number of visits or required meetings with tax officials has significantly decreased from 2005 to 2008: from 3.2 to just 1 visit per year. Also, the percentage of firms reporting incidence of bribes with these tax officials decreased as well.

Comparing the firm-level data obtained in Belarus to similar Enterprise Survey data in 28 other Eastern Europe and Central Asia (ECA) countries yields two interesting statistics as discussed in the Note:

1. Belarusian firms have the highest proportion of government or state ownership in private firms, on average 10 percent.
2. Belarus stands out in the region as having high percentages of female participation in both firm ownership (53%) and in the labor force

How tough is it to find an employee you can trust?

As far as labor issues in India are concerned, labor regulation is the hot favorite among academics. Some policy makers also talk about an impending skill shortage that requires urgent attention. But discussion of other issues—for example, lack of trust between employers and employees—is virtually non-existent.

So how do firms feel about the difficulty of finding a trustworthy employee compared to finding skilled workers or dealing with labor laws? Somewhat surprisingly, data from a survey of about 2000 firms conducted by Enterprise Surveys in 2005 suggests that in contracting labor, trust is the most common problem for firms, followed by skill shortage and then labor laws. Close to 34 percent of firms feel constrained in hiring workers because it takes too long to find a trustworthy employee, 24 percent report hiring problems because the type of skills needed are not available and 20 percent report hiring problems due to labor laws that include cost/restriction of dismissal, restrictions on hiring casual or temporary labor.

Uzbekistan’s struggling private sector

Exactly one year ago, the Financial Times gave a positive gloss on Uzbekistan’s economic prospects. One of the sources for the FT’s take on Uzbekistan was Alisher Ali Djumanov, a managing partner at Eurasia Capital Management and (as the article points out) the only alumnus of Insead in the country. He had this to say:

Recent supercharged high-flyers Russia, Ukraine and Kazakhstan have now found themselves at the epicentre of the ongoing crisis in the region…Uzbekistan, the fourth largest economy in the CIS, is in better shape because of government policies which at the time were considered to be too rigid and less pro-market. There is still a question of whether this policy will be better for the economy in the long term but, in the current environment, the conservative approach will benefit Uzbekistan. We believe the long-term investment story for Uzbekistan is intact.

While Djumanov may be correct that certain sectors in Uzbekistan have good prospects, there is another side to this story. Hard data on the private sector suggest that most firms in Uzbekistan face pretty substantial hurdles. The latest results from Enterprise Surveys paint a sad picture:

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. 

Twittering the launch of Doing Business 2010

As I posted on the blog last week, the Doing Business 2010 report launched on September 9th. While the report itself always contains useful information, what is often equally interesting is the response in the countries and economies concerned. As part of the launch every year, members of the Doing Business team travel around the world to discuss the results, appearing at very well attended events like Poland's Economic Forum.

Up until now, there was no convenient place to share all the interesting feedback, questions, and commentary from these events. This year, we decided to get a few of the Doing Business team members to let us know what's going on during their travels via Twitter. We're capturing all of their Tweets @WorldBankPSD, so follow us if you'd like to hear what the world is saying about the record results from DB2010.

Here's our line-up of Twitter correspondents:

• @nfgregory: Neil Gregory, Senior Adviser to the Vice President of Financial and Private Sector Development
• @SuzanneSmith7: Suzanne Smith, Lead Knowledge Management Officer
• @sbagaudinova: Svetlana Bagaudinova, Senior Private Sector Development Specialist
• @KarimBelayachi: Karim Belayachi, Operations Analyst working on the Starting a Business indicator

Experimenting with labor reforms in India

In a previous post I discussed how the current global financial crisis seems to have forced policy makers in India to take another look at existing labor laws in the country. The Economic Survey (2008-09) of India released by the Ministry of Finance in early July this year clearly noted the imperative need to facilitate the growth of labor intensive industries, "especially by reviewing labor laws and labor market regulations."

Labor market reform is a contentious and politically sensitive issue in India and its mere mention in the Economic Survey suggests that we might see some action this time around. A few weeks ago, the government exempted the IT and software establishments from the Industrial Employment (Standing Orders) Act 1946 (Central Act 20 of 1946). These laws are strict in the way they classify workers, their working hours and shifts, and the wages payable, besides other archaic rules on leave and attendance.