PSD Blog - World Bank Group

Going green as an strategic risk

A new report by Ernst & Yong ranks a growing "greening" concern as one of the top 10 strategic risks businesses face. The top three risks are: regulatory and compliance risk, global financial shocks, and aging consumers and workforce.

The report calls this increasing concern about the enviroment "radical greening" and states that going green is expensive at first, but it could be worthwhile if consumer tastes and the regulatory enviroment start to demand it; ok, perhaps that wasn't a jaw-dropping discovery, but the entire report still makes for a good reading.

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.

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!

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.

Starting a business: help from Harvard Business School

Harvard University's Working Knowledge compiled resources for those thinking about starting up their own business. Topics include legal issues associated with new enterprises, managing resources, product development, and keeping owner control.

As a bonus here's other useful information for entrepreneurs on the ease of doing business across 178 economies.

Recession intervention: more Valentine's Days

Arguably more efficient than the U.S. government's stimulus package, Valentine's Day will inject $17 billion into the economy. However, Cupid is not so economically powerful everywhere lovebirds celebrate the holiday.

Privatization in 2006 - the year of Chinese IPOs

Our privatization database – listing transactions of at least $1 million from 2000 to 2006 - has been updated again.  In 2006, 48 developing countries carried out 249 privatizations for a total value of $105 billion – a figure comparable to the record year 1997.

The graph below depicts the value of privatization transactions in developing countries between 1990 and 2006. The figure excludes the two IPOs of the Industrial and Commercial Bank of China and the Bank of China, which combined accounted for $35 billion - one-third of all proceeds in 2006:

Russia and Turkey followed China into the second and third place, while Poland bucked the general trend toward privatization that year.

Our interactive map has the full picture.

Doing Business in China

The Economist reviews 5 books on doing business in China.  We supplement it with 10 indicators that measure the ease of running one.

Outsourcing too expensive

A new study by the Boston Consulting Group finds that outsourcing to China and India did little or nothing to save costs for many of the original equipment manufacturers (OEMs).

About two-thirds of the manufacturers in the survey reported unit costs in China equal to or higher than those in their home countries. The authors point to diseconomies of scale and higher quality control costs as main causes.

The business of carnival

Rio de Janeiro is the home of Brazil's best 14 samba schools, some with individual budgets of up to $2.5 million.  As the floats get bigger and bigger requiring the work of more and more artists, Rio's Department of Labor recognized the business potential of the famous street party. 

Nassim Mehedff, the subsecretary of the Labor Department, explains why the city began providing free classes that teach people how to make costumes:

Now [the carnival] is becoming an industry, entertainment industry. They provide jobs and income for people during the whole year, not only a kind of two or three day festivity

Sachs on private sector development in poor areas

In an interview with the Ivey Business Journal, Jeffrey Sachs talks about "clinical economics," corruption, business environment, social responsibility and natural resources in Africa:

[…] there are lessons about operations in very low-income settings. These things are typically very standardized. They depend often on mass production according to relatively straightforward technologies.

[…] Countries have learned, especially in the Asian experience, how to economize on infrastructure, for example, by concentrating industrial activities in industrial parks or export zones where basic infrastructure is guaranteed even when, at a country scale, it's far from adequate. So there are methods that have been developed very successfully to economize on the lack of economy-wide skills or economy-wide management or economy-wide infrastructure and those same lessons will surely apply in the African context

Doing Business across Colombia

Based on surveys from Bogotá, Colombia took a 66th position out of 178 in the Doing Business 2008 report and became this year's top reformer. But as the subnational report (en español) released today shows, there are vast discrepancies on the ease of doing business among the county's 12 main cities.

Municipal requirements make up 7 of the 19 procedures required to start a business in Neiva, but only 1 of 13 in Villavicencio—the city with the fewest start-up procedures.

The graph below shows the time required to enforce contracts across 12 Colombian cities:

You know it, when you see it

Social entrepreneurship may be hard to define, but has managed to carve out a space for itself in business thinking.

At Davos, Bill Gates spoke of creative capitalism calling on the private sector to channel market forces to better address the needs of the poor, even if it sounds unreasonable to some.

Is there life after oil?

In light of a record labor force growth in parts of the Middle East, some question the ability of Arab countries to accommodate this demographic bulge and create enough jobs for the population.

Haward Pack and Marcus Noland – the authors of "The Arab Economies in a Changing World" - argue that relying oil hefty revenues alone won't solve the problem.

Becoming more globally competitive is the way for the future, they say, but it won't be easy given China's established dominance in the manufacturing and India's in the services industry and the region's overall difficult business climate.

New micro and small business tax toolkit

Though most agree that taxes are important and necessary, the question: "how to best design them?" remains.

Rapid Response has added a SME tax toolkit with advice for policymakers on how to bring and keep small business in the formal economy.

When do enterprises prefer informal credit?

Could enterprises voluntarily choose to tap informal credit markets to avoid the additional scrutiny or even harassment that engaging with formal financial institutions might invite?

A recent paper, using firm-survey data for 29 countries, suggests so. Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase.

The missing extinguisher

Imagine yourself shopping for a simple product such as a fire-extinguisher. Would you check, before buying it, whether it is certified? Most people I polled said "no"; if it is on the shelf, it means that it satisfies the (sophisticated) rules and regulations set for its production.

Well, this assumption has been challenged during our recent work with the Tajikistan Fire Fighting Service.

While drafting together fire safety checklists to be used during inspections of small and medium enterprises, we came across this requirement: "the fire extinguisher needs to be certified."

No problem, at first we agreed with the need to provide consumers with the highest possible safety standards. But after digging a bit more into the issue, we discovered a couple of interesting facts:

• Unfortunately no existing company in Tajikistan produces or sells "certified" extinguishers; and
• None of those on the market have the required certificate.

Attention friends of women entrepreneurs

If you know any businesswomen, the Doing Business team would like to hear about them.

They are particularly interested in any legal, regulatory and practical barriers that made it difficult for women to do business. The Doing Business project is credited with inspiring 115 reforms to date, and there's a good chance that the spotlight from the upcoming publication will "inspire" lawmakers to take a second look at some of the laws.

Email Sushmitha Narsiah snarsiah@worldbank.org ASAP with questions and nominations.

Foreign bank entry and outreach

What is the impact of foreign bank entry on banking sector outreach? A recent paper on the Mexican experience shows contrasting patterns: the number of municipalities with bank presence increased, but the number of loan and deposit accounts decreased.

While only rich and urban areas benefited from more bank presence, the decline in loan and deposit accounts was more pronounced in rural and poorer areas.

Reaction to pre-crisis inefficiencies? A deliberate strategy of foreign banks to focus on the upper end of the market? Or a response to demand or regulatory changes?

Microfinance regulation according to Yunus

The Nobel Peace Prize laureate and the father of Grameen Bank, Mohammad Yunus, on microlending regulation:

The existing regulations are designed with commercial banking in mind, but microfinance requires a dedicated regulator and a relevant set of rules. Commercial banking is like a super tanker whereas microfinance is like a dinghy boat with which you can reach small corners. If you design a dinghy boat with the architecture of a supertanker, it is sure to fail

Smaller firms seek links up the chain

SME representatives came together in Kampala last month for a workshop hosted by the World Bank Institute and its partners, including the Africa Capacity Building Foundation and Enterprise Uganda. The focus was managing company social and environmental impacts.

While receptive to the importance of sustainable approaches, one of the key requests from the participating companies was to hear less from international experts and more from big business counterparts. In particular, the firms are seeking stronger linkages, even twinning, with the large local firms and multinationals operating in their sector.

As governments and development institutions are increasingly recognizing, such business linkages programs can be an effective instrument to encourage economic growth and improve living conditions in many countries. Supply-chain linkages provide a natural conduit for technology transfer, improved access to finance and broader production networks, and to encourage better adherence to international environmental, health and safety, labor, and quality standards.

China and Pakistan do business

Last month, China announced it would increase by 2012 investment in Pakistan from $1 billion to $15 billion and hoped to triple the trade volume between the two countries to $15billion by that date.

Pakistan, in turn, will create industrial zones across Punjab province in an effort to make doing business easier for Chinese investors.

Though over 100 Chinese companies operate in Pakistan, the safety of nearly 3,000 Chinese workers currently in Pakistan remains a constraint for a future investment.

Democratizing entry

Who benefits most from financial liberalization - incumbents or new entrants? A recent study of the U.S. branching deregulation from the mid-70s to the mid-90s suggests a differentiated answer.

Consistent with the hypothesis that small firms were the ones that benefited most from financial liberalization, branch deregulation fostered entry of start-ups more than the expansion of existing enterprises, especially among establishments with fewer than 20 employees.  However, there was also a significant increase in business failures, again concentrated among small start-ups.

Liberalization seemed to have increased churning and creative destruction – and many entrants did not survive to challenge the incumbents.

Is Peru on its way up?

The center of Lima, notoriously crime-ridden and dirty, has become safe and attractive. […] Consumer goods and services—cell phones, household appliances, and private education, for example—previously unavailable or in short supply have proliferated and serve all markets, rich and poor.

[…] The quality of service and attention to detail seems to have improved among Peruvian workers and management across a broad array of businesses. Peruvian writer Mario Vargas Llosa recently noted that he was now much more hopeful about Peru, not because of Peru's positive economic indicators, but rather because 'something profound seems to have changed in the culture of the country. One would have to be blind not to see that.'

That's from Ian Vásquez at the Cato Institute. The Doing Business report ranked Peru 58 in the world and 7 in the region on the ease of doing business. The Enterprise Surveys has a snapshot of Peru's business environment, including the number of power and water outages in a typical month: 1.14 and 0.73, respectively.

Bright but jobless

Though today's 15-to-24-year-olds are overall the best educated generation of youth in history, they often have to struggle the most in the job market, finds the World Youth Report 2007.

This age group which makes up 25 percent of the global working-age population also accounts for nearly 44 percent of the unemployed.

More on the subject: four new working papers on youth and employment in the Middle East.

World's largest untapped consumer segment

With a monthly income varing from $63 and $700, many of them use "branded shampoos and detergents regularly, and they sometimes indulge in a bar of chocolate or bottle of perfume.  A good number own televisions, refrigerators, and DVD players." 

Known as the "next billion," these consumers - who spend over $1 trillion a year - can't "afford to make mistakes" and will "carefully compare [products] functional, technical, and emotional benefits."

BCG has five tips for companies on how to reach this group:

Microloans get bad credit

According to David Satterthwaite, the editor of MicroCapital Monitor, in South Asia alone microlenders have reached so far only about 2 percent of potential customers. As needs and opportunities for access to finance continue to grow, so does the debate on the social and commercial aspects of microlending.

Most recently on the "con" side BusinessWeek has published a special on the problems that some poor borrowers in Mexico encounter.

The FT and Nextbillion have the other side of the story.

IPOs anyone?

What role, if any, have public equity markets for small, young firms in emerging markets? A recent study shows that firms going public, after the liberalization of the Indian IPO market in 1992, are smaller, younger and are less likely to be affiliated with a business group than other private firms.

These same firms, however, also suffered after the market collapse in 1997.  Profitability and sales growth fell and bankruptcy rates went up, most likely due to a lack of continued financing. These results might not hold for other developing countries with small and illiquid stock markets, but they will certainly foster debate.

New planet in the World Bank universe

Our most requested databases: the Doing Business, Enterprise Surveys, Financial Indicators, Private Investment in Infrastructure Projects and the Privatization Database, can all now be browsed from a one convenient location - the Business Planet.

The filters allow for exploration by topic, region or a country.

Business counting on Bali agreement

The ongoing UN Climate Change Conference is being closely monitored not just by environmental groups, governments and the media, but by those in boardrooms around the world.

Climate change has been focusing the mind of business as never before, as highlighted at the recent Business Forum at the Bank. Now the past week has seen the unusual sight of big name multinationals actively calling for more regulation. The Bali communiqué signed by 150 business heads, including from the US and China, calls for a legally binding UN framework to tackle climate change.

A new survey by law firm Clifford Chance finds that 4 out of 5 firms worldwide want more regulation. As reported in the Washington Post, James Smith, chairman of Shell UK, spoke for the UK and EU Corporate Leaders Group on Climate Change in arguing that enforceable standards will give business the confidence to make long-term investments in lower-carbon technologies. Big business believes it cannot afford to ignore climate change. Michael Porter and Forest Reinhardt, writing in a special report on the topic for Harvard Business Review agree that climate impacts on companies' operations are

now so tangible and certain that the issue is best addressed with the tools of the strategist, not the philanthropist.

Big bang or gradualism - which way to reform?

Oleh Havrylyshyn, former deputy minister of finance of Ukraine, looks back at the transition experience of post-communist countries from centrally planned to the market economy. The author contrasts the two opposite reform approaches: big bang, also known as the "shock therapy," with gradualism.

The study finds that the main motivation behind pursuing gradualism – the fear of a rise in inequality – was unsupported. And though the early and rapid reformers did not avoid an increase in poverty altogether, they suffered less of it and more than fully recovered by 2000.

Based on the initial speed and scope of reforms, Georgia was classified as a gradualist but for the last two years managed to become the top-reformer in the Doing Business report.

Lastly, a word from Mr. Havrylyshyn:

Statements about the need for transparency, a level playing field for SMEs and better rule of law, have more effect when they come from a CEO of a leading multinational, rather than when they come from World Bank or IMF officials

Improve the practice of business environment reform - be a (constructive) critic

Informally existing since 1978, the Donor Committee for Enterprise Development (DCED) is a group of donors and inter-governmental agencies who share our mantra: sustainable poverty alleviation through development of the private sector. IFC co-chairs this 45-member-strong Committee.

Throughout last year, the Committee has been working on the "Donor Guidance on Supporting Business Environment Reform" – a practical guide for staff of development agencies to help them do a better job improving business environment around the world.

Now that's the 30-pager is almost ready, the Committee counts on you for constructive feedback before sending it to the publisher. Bring out the Bill Easterly in you and email your comments about the content and usefulness of this guide to Simon White (simon@blueprintgoup.co.za) and Andrei Mikhnev (amikhnev@worldbank.org) by December 21, 2007. More info on their blog.

It's a report, it's a ranking, it's a blog

The makers of the World Bank's flagship report ranking 178 countries on their business environment, the Doing Business team, enter today a new realm – the blogosphere.

Meet the Doing Business Blog and the personalities behind the ten indicators, credited with inspiring 115 reforms worldwide.

We are looking for experimental research in entrepreneurship

The 2007 World Bank Entrepreneuship Database finds significant relationships between entrepreneurial activity and the quality of the enabling environment. The bank and the Kauffman Foundation are now jointly offering funding of up to $35,000 for research projects that will study what contributes to greater entrepreneurship and formal sector participation.

Research proposals are due by January 15, 2008. A pre-conference is scheduled for fall 2008 and the main conference for 2009. Detailis are here.

PWC and World Bank did it again

The World Bank – IFC and the global accountancy firm PriceWaterhouseCoopers jointly published Paying Taxes 2008, their second report. The study, which compares tax systems of 178 countries, uses the total tax rate indicator (TTR) as a measure of the amount of all taxes and mandatory contributions borne by the business in the second year of operation, and expressed as a percentage of firms' profits.

Overall, while 31 countries have improved their business tax systems, 7 of the bottom 10 countries still force their businesses to pay taxes at least once a week and to spend at least 65 days per year in the process. Burundi and Gambia require businesses to pay respectively 278 and 286 percent of their profits, according to the report.

Private sector in Latin America

Former heads of state from Mexico, Peru, and Spain, along with international business leaders, will discuss the role that private sector plays in adding to the competitiveness of the region.

The event will take place on November 27, 2007 in Washington, DC at Georgetown University. RSVP is required.

High interest rates still better than no access

Charge 80% per year on a loan in the U.S. and you're called a usurer. Charge 80% per year on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

Dean Karlan, president of Innovations for Poverty Action, and Jonathan Zinman from Dartmouth College set out to find out if consumers can be made better off even when borrowing at "excessive" rates from regulated financial institutions:

[We] tested this proposition. We worked with a successful finance company in South Africa to randomly choose some just-below-the-normal-approval-bar applicants to receive a four-month installment loan. The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy.

New Islamic bonds index open

HSBC together with the Dubai International Financial Exchange (DIFX) launched a group of indices that track Islamic bonds. "There are concerns about the perceived lack of liquidity and transparency in this market. These indexes will cover that missing link," said James Milligan, HSBC's head of fixed income trading in the Middle East.

The new indices, housed in Dubai, cover almost $14 billion of listed sukuks and are a competitor to London, Malaysia and Bahrain – all hoping to become a leader in Islamic finance.

See also GEMLOC, the brand new World Bank – IFC initiative for local currency bond market development.

Picking your favorite FDI

China's National Development and Reform Commission (NDRC) and the Commerce Ministry released on Wednesday a new set of prescriptions for desirable foreign direct investment. The recommendations will take effect in December 1:

Foreign firms will now be banned from building or managing golf courses; in the past, they fell into the restricted category. The [NDRC] set out a very specific shopping list for investment in a range of sectors, from automobiles to printing machinery to electronics. For example, only investment in high-performance digital cameras with a resolution of 6 megapixels or above will be encouraged.

Why Africa won't be the new Norway

Norway, the world's third largest oil exporter, passively invests a large portion of proceeds into a national pension fund.  "The future-generations fund," which is now worth $300 billion, invests into foreign assets only as a way to remove the temptation for politicians to spend money on pork-barrel projects. Can oil-rich African countries follow the Scandinavian path or are they destined to suffer under the resource course?

John Ghazvinian, the author of "Untapped: The Scramble for Africa's Oil," is pessimistic: "Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil."