PSD Blog - World Bank Group

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."

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.

   

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.

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.

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.

Déjà vu from the East?

ICBC's $5.5 billion deal with South Africa's Standard Bank is China's biggest investment to date in any foreign market.  It adds to over nine-hundred Chinese companies already present on the continent. From the International Herald Tribune:

The fact that a top Chinese banker brackets Africa with Asia is one more sign that the Asians themselves see what is happening in Africa as a repeat of what happened to them 20 and 30 years ago.

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."

FDI in 2011

The Economist Intelligence Unit together with the Columbia Program on International Investment released the World Investment Prospects to 2011 which forecasts FDI flows for 82 countries over the next five years. Eight out of top twenty recipient countries will be in emerging-markets.

The report focuses on political risk, and Jeffrey Sachs analyzes ways to address growing risks in the energy sector.

The graph shows predicted inflows to Asia + China:

Everyone's doing it - stock market in Kenya

What promises the excitement of gambling without the adverse social consequences? For a growing number of Kenyans it's the Nairobi Stock Exchange (NSE).

The NSE has come a long way since 2002. The paper system which required up to three days just entering trading orders, is finally gone. The number of investors grew to 750,000 from 50,000 and the market capitalization is at $12 billion.

Can Africa attract more investment? So far the NSE has drawn Goldman Sachs.

Higher returns or creative accounting?

U.S. investors have been earning a considerably higher rate of return on their foreign investment than foreigners investing in the United States.

In a new paper, Barry Bosworth, Susan Collins and Gabriel Chodorow-Reich investigate if U.S. firms indeed allocate capital more efficiently – as the graph would suggest – or whether other factors play a role.

FDI and entrepreneurship: friends or foes?

Some worry that capital market liberalization, and FDI in particular, crowds out local efforts and undermines the development of domestic entrepreneurs.

Laura Alfaro and Andrew Charlton at Harvard took 24 million observations of listed and unlisted private firms in 98 developed and developing countries in 1999 and 2004 to study the nature of this relationship.

FDI in the Balkans - lessons from Ireland

"There's no silver bullet for this business" says Dermot Coffey, a World Bank staffer with 30 years of experience promoting FDI in Ireland; instead start with a question: why is a country incapable of generating employment for its people?

Last year the FDI inflows/GDP ratio in the Balkans exceeded 10%. But the trend is likely to decline as privatization opportunities are running out, leaving countries to have to work extra hard to attract investment. Coffey, in less than 10 minutes, explains how to do it.

Who's keeping Africa down: politicians or unfair trade structures?

Listen to four experts spar on what presents the biggest impediment to African development: poor governance or trade barriers.

Richard Cockett, the Economist's Africa Editor, quoting the Nigerian experience, said that political reform, not aid nor trade, is key to growth in the continent that is more deeply corrupt than any other part of the world.

Mike Gidney, from Fairtrade Foundation disagrees. He argues that corruption is not limited to Africa and pointing fingers at politicians has limited effectiveness: "politicians can't possibly generate the development impact that could be achieved through an increase in trade."

The debate, which included Kenyan filmmaker and activist June Arunga and professor Tunde Zack-Williams, took place on June 2 and was a part of the Hay Festival dubbed the 'Woodstock of the mind.'

Who needs the World Bank?

The Global Development Finance report, released on Tuesday, shows that net private capital flows to developing countries reached a record $647 billion in 2006 – a 17 percent increase from the year before. The study notes, however, that only about 8 percent of that capital flowed to the poorest 51 countries.

The Wall Street Journal (subscription required) views the report as a demise of the bank:

[in the report] the bank itself describes how record private-capital flows into the developing world are advancing economic growth. The trend clearly is diminishing the need for organizations like the bank.

The most disconcerting news for World Bank fans are the sections on private credit markets. Developing countries are borrowing from markets instead of from multilateral institutions.

[…]. On current track, the private sector over time will reduce the bank's role to irrelevance.

Is there more to the bank than just lending? Here are some ideas.

Investing in China - too much or too little?

Why does China receive so much foreign direct investment (FDI) if its formal institutions are so poorly developed by international standards?

Recent research shows that it is actually not that much, if you consider FDI per capita rather than relative to GDP and compare it to other countries at the same level of economic development. It might be China's special circumstances (sustained growth and relatively good infrastructure in some provinces) that explain foreign investors' appetite for China rather than a unique model of Chinese development.

When it comes to FDI, it's quality over quantity

The common belief in the positive relationship between economic growth and FDI led to the creation of over 160 investment promotion agencies around the world. A new paper, using comprehensive industry data over 15 years from 29 OECD countries, finds that not all FDI is equal.

Which kind of FDI is your country getting?

Tool for tracking FDI

LOCOmonitor provides a snapshot of Foreign Direct Investment from over 20,000 companies in 170 countries. The database, going back to 2002, includes only new (greenfield) investments.

Country image building do's & don'ts

The most interesting meeting I've attended so far in 2007 took place last week. My colleague, Edie Wilson, put it together. She wrote up some of her impressions and has agreed to let me share them here. Edie is a senior communications advisor at the World Bank and spent a decade working at public relations firm Burson-Marsteller. Her words follow:

FIAS invited a dozen of the world's best international public relations agencies in for a closed door chat about what happens when developing countries engage in image making. The communications companies were stunned that the World Bank Group would actually listen to them – "very therapeutic," was one comment. And we got an earful.

It's a peculiar situation actually. Compared to twenty years ago, the public relations industry is far more sophisticated, international in capacity and focus, and diversified – branding, marketing, crisis communications, public affairs, opinion research, you name it, they do it, and many do it very well. But FIAS, looking at many bids for foreign direct investment promotion, noticed that the best firms with international capability weren't showing up. Hence the get-together.

The marketplace has never been more competitive for countries trying to attract investment, tourists, and trade. FutureBrand produces a slick Country Brand Index, and there's the Anholt Nation Brands Index, to further stir competitive juices.

Some countries have turned themselves into expert marketeers – think Ireland, Scotland, South Africa. Others have, in many cases, spent lots of money very badly, or spent very little money on quickie programs thinking this was an easy game to play. (As one of those present said recently to a quite big country - proud to have rounded up $2 million to spend on a one-time country-branding effort, "Well, that's nice, but I can name Caribbean nations that spend $20 million each year. Do you want to get serious?")

Let's cut to the chase. What are the absolute worst things countries can do as they build their image?

Islamic finance blog

Thanks to the magic of our blog statistics, I just noticed a fantastic blog on Islamic finance. It doesn't quite fit on our blogroll (not really PSD), but I wanted to share anyway.

Invest Halal is written by Blake Gould, Executive Director of the Institute of Halal Investing, a non-profit think-tank "devoted to the demystification of Islamic banking, finance & investing." The Institute is launching a newsletter this month - I'm sure it will be a great read.

Size matters – but what about ownership?

Think you know the world’s largest and most powerful companies? A new list in the Financial Times might make you think again.

The FT Non-Public 150, based on McKinsey research, provides an interesting insight into the shadowy world of private and state ownership, ranking the firms by estimated market value. Not surprisingly state-owned oil companies dominate the top of the list – only Japan Post breaks their hold on the top ten. So, who tops them all? Saudi Aramco - worth an estimated $781bn. Compare that to the paltry $454bn market capitalisation of ExxonMobil, which sits atop lists of publicly traded firms.

The exercise makes for fun headlines, but also raises crucial issues over the relative merits of different forms of ownership and the implications for ensuring good corporate governance and maximizing value. Non-public firms are increasingly influential – see the presence of 6 buy-out firms in the top 30 of this list - but it does not mean they necessarily offer better value. See the accompanying FT article for more.

Update on Rwanda's privatization campaign

Rwanda's privatization drive of the last decade is showing signs of success. From an FT article:

• Telecommunications. After the October 2005 sale of the state telecom to Terracom for $20m, high-speed internet connections are up, hundreds of miles of fiber-optic cable have been laid, and connection prices are 10% of 2003 prices. All this helps Rwanda in its battle with Kenya and Tanzania as the technology hub for East Africa.
• Banking. The Banque Commerciale du Rwanda was no longer lending in 2003, but thanks to a $6m deal with Actis, it's now the country's second largest commercial bank.

Unfortunately, the energy sector's key privatization, of Electrogaz, has been a failure by virtually any account.

Privatization has fallen out of favor among many politicians, but Rwanda illustrates the benefits it can bring. In particular, the deals above increased government revenue and freed up resources. BUT much more importantly, the private sector firms made huge investments of capital and technical know-how that directly benefit Rwandan customers.

The magical land of Chindia

According to travel guides, Chindia is a place in Romania where Vlad the Impaler, a bloodthirsty 15th-century monarch who inspired the fictional Count Dracula, watched his victims put to death. But in the argot of today's financial markets, Chindia is a magical land where China's and India's economies supposedly combine to produce untold riches…[It] is no more useful to bracket China with India than with King Vlad, who, when not ruthlessly suppressing dissent, shared Beijing's concern with improving the roads, reining in renegade provinces and periodically purging corruption.

Guy de Jonquieres deconstructs the myth of Chindia in an action-packed article from The Australian.

Export promotion agencies do increase exports

Many thanks to Pablo for pointing me to an excellent note (PDF) from the World Bank on export promotion agencies (EPAs). It's the first cross-country statistical analysis of the impact of these agencies on exports, and it covers 119 countries. The main message (via Jonathan Dingel):

For each $1 of export promotion, we estimate a $300 increase in exports for the median EPA. However, there is heterogeneity across regions, levels of development and types of instruments. Furthermore, there are strong diminishing returns, suggesting that as far as EPAs are concerned small is beautiful.

After a brief summary of the economic debates to date around these agencies, the authors give specific recommendations based on the data:

Kremlin Inc.?

There is a strong lobby within the [Russian] government to subject all foreign investors seeking minority stakes in certain industries to an approval process controlled by the FSB, the domestic successor of the KGB.

A little scary. From a WashPost story on renationalization, Russian-style.

Meanwhile, in Bolivia traditional nationalization is largely complete on paper, but continues to move slowly in practice. See excellent discussion on the topic from our PSD Blog commenters.

New resources on FDI, political risk

MIGA launched two new websites yesterday that should delight foreign investors considering new markets. Both free, FDI.net and PRI-Center combine World Bank Group analysis with public resources on foreign direct investment and political risk insurance (PRI). The main thing I'd like to see, but don't, is more hard data presented on FDI flows. Perhaps there's a site enhancement in the works.

Freshly delivered information on FDI

UNCTAD's World Investment Report 2006 is out, and it shows that 2005 was a banner year for foreign direct investment. Notable inflows went to:

• the United Kingdom - the single largest recipient with an eye-popping $165 billion
• the European Union - with almost half the world total and 141 mega-deals over $1 billion
• Sub-Saharan Africa - with a record (but still meager) $11 billion, mostly in natural resources thanks to the commodity boom
• the Middle East and North Africa - where investment jumped 74% over 2004 numbers

See Global Insight for an executive summary of the report. (Good tip, RGE Monitor.) Also, Bill Jamieson in London takes a more nuanced look at the big numbers and tells us to take them with the appropriate dash of salt.

Bollywood and the investment climate

Bollywood needs a better regulatory and corporate governance environment to attract more foreign investment, according to delegates at last week's India Media and Entertainment Forum in London.

The Indian Industry stands at $4.5 bn today and is expected to grow in high double digits at 18% per annum compounded annually over the next five years, to reach over $10bn by 2009. The largest contributor to this growth will be the television segment followed closely by the film segment.

No word in the press release on whether the 200 delegates performed an intricate dance routine in vibrant colors.

Special economic zone or land grab?

The Indian government has approved proposals for 170 special economic zones (SEZs) and counting. SEZs can invite foreign direct investment, provide jobs, and promote the development of secondary industries to service firms. Why, then, the spirited outcry over India’s recent moves in this direction? For one thing, many of the approved sites are located on prime agricultural land – leading to complaints that the SEZs are more of a coordinated land grab by the rich than coordinated economic development.

Creating so many SEZs would seem to exacerbate widening inequality in India – both in terms of individual income and national infrastructure. We’ve already seen the results of the technology revolution emanating from Bangalore: isolated areas of development with limited benefit to the broader economy. Destroying valuable agricultural plots seems especially ill-conceived, as farmers are not likely to make an easy transition to the jobs on offer at these SEZs.

India isn’t having too much trouble attracting foreign investment as it is. Okay, so maybe the government hasn’t hit the $10 billion a year target, and India lags China. But most observers expect FDI to India to continue to rise. In the next two years, Goldman Sachs plans to invest $1 billion in real estate and infrastructure. The Indian government would do better to focus on the real barriers to its foreign investment goals – namely inflexible labor laws and poor roads and other infrastructure.

See the recent World investment prospects to 2010: Boom or backlash? for more FDI predictions. Also, a while back we held an online discussion on whether the benefits of SEZs outweigh their costs. Finally, I highly recommend Goldman Sachs' slick new video projecting fantastic growth to 1950 for the BRICs (Brazil, Russia, India and China), if only for its beautiful presentation style.

Tanzania: East Africa's best hope?

The Economist this week says Tanzania is an "African country that deserves the money it gets". While still very poor, Tanzania is set for 5.8% GDP growth this year and perhaps 6.7% next. A popular president, former foreign minister Jakaya Kikwete, hopes to build up the country's sparse infrastructure, expand access to drinking water, and improve agricultural productivity. What’s so different about a president who makes big plans? Just this:

Mr Kikwete travels with minimal security. He scrolls through several hundred text messages on his mobile phone each day, most of them from ordinary citizens who have somehow obtained his number. Sometimes he texts back.

Suggestions for further reading...Pienso shares a snippet from Business in Africa on the over 350 state-owned enterprises privatized in Tanzania in less than 15 years. One of the promising results from the privatization drive is the tourism sector, as shown in MIGA's case study of the Kilimanjaro Hotel.

Also don't miss Heliotropic on why this renewable energy guru is both hopeful and frustrated by Tanzania's prospects for sustainable energy.

Friday short stories

News items of varying interest for your perusal...

• Transparency International will report on Wednesday that companies from Brazil, Russia, India, and China are most prone to paying bribes. (via FT)
• Rupert Murdoch to make News Corp carbon neutral. (via FastCompany)
• Increased labor mobility would bring greater benefit than full trade liberalization, foreign aid and debt relief combined, according to new CGD book by Lant Pritchett.
• Action for Enterprise has a website that allows wholesale buyers around the world to view handicrafts available for export from Mali. My pick: the textiles. (via Timbuktu Chronicles)
• Rwandan government hopes coffee plantations will ease ethnic tensions. (via Stationary Bandit)
• Two notes on India: 4 government-owned insurers will begin offering microinsurance, and remittances to India could hit $27 billion by 2007 (up from about $23 billion today).
• The Economist on why emerging economies "will provide the biggest boost to the world economy since the industrial revolution".

Capturing Value contest winners

Through this seed funding we are hoping to break a chicken-and-egg situation where investors will not invest in emerging markets for lack of information, and research providers will not enter the market for lack of demand. The object of the competition is to lead the market and to provide tools to a mainstream investment audience.

That's PSD Blogger Rachel Kyte on the IFC's research competition Capturing Value. Winners were announced last night in Zurich. Congratulations to both winning teams - CRISIL, Standard & Poor's and KLD; and Trucost and CLSA - who will split a $500,000 grant to study environmental, social and corporate governance data for emerging market equity investors. For details, see the press release.

Mexico's favorable investment climate

Forbes publisher Rich Karlgaard thinks it's time to invest in Mexico. He cites its solid economic performance (3.5% growth this year), favorable demographics (lots of brand-new workers), consumer credit growth of 400% since 2000 (signaling a healthy middle class, and room to grow in the stock market (currently trading at just 37% of GDP).

On top of all that, Mexico was ranked the 3rd best reformer in the recent Doing Business report. Why? Reforms in business entry, protecting investors and paying taxes. The corporate income tax rate is down to 29%, and a new securities law clarifies the obligations of company directors. For more, see my previous post or an online discussion on the report.

Fight poverty by shopping at Wal-Mart?

Even without considering the $263 billion in consumer savings that Wal-Mart provides for low-income Americans, or the millions lifted out of poverty by Wal-Mart in other developing nations, it is unlikely that there is any single organization on the planet that alleviates poverty so effectively for so many people.

That's FLOW co-founder Michael Strong in TCS Daily, casting Wal-Mart as an unintentional development agency. I've always been stridently anti-Wal-Mart, but maybe it's time to recognize the positives. Yes, big box stores and chains of all sizes give suburban American a disturbingly homogenous feel and accelerate sprawl. At the same time, global brands compete on reputation - for their working conditions and environmental impact in every country - in a way that other firms do not. From Fortune: "a McKinsey & Co. study leaked to the press by walmartwatch.com found that up to 8% of shoppers had stopped patronizing the chain because of its reputation." So these chain stores face much greater incentives to exhibit socially responsible behavior.

If Wal-Mart follows through on plans for energy efficiency and organic cotton, I'll continue to soften my stance. If a vibrant union of Wal-Mart workers stateside emerges, I might even shop there. More from Strong's article:

An unreflective passion for social justice may be one of the biggest obstacles to creating peace and prosperity in the 21^st century. While there are most certainly factory owners in China whom we would rightly regard as criminal in their treatment of their workers, it is very important not to confuse these incidents with the phenomenon of globalization.

P.S. FLOW is kicking off a national series of Peace through Commerce events on September 30 in D.C.

Which rich countries help poor ones?

On Monday the Center for Global Development released its updated Commitment to Development Index, ranking 21 rich countries' policies on aid, trade, migration and more.

This year, the Netherlands moved into first, mainly because a conservative government in the formerly number-one Denmark has cut aid spending. Japan remains in last place as the country whose government is least engaged with developing countries. As in the past, the G-7 "leading industrial nations" have not led on the CDI; Germany, top among them, is in 9th place overall.

While we're talking about brave attempts to use indicators to describe complex phenomena...check out Citigroup's Geo-Political Risk Index.

Costa Rica wins big with Intel

Intel's investment and presence have had an overwhelmingly positive impact on Costa Rica, generating both direct and multiplier effects on the country's economy, industry, educational institutions and business culture. Intel's requirements served as an important motive for the country to immediately upgrade its infrastructure and enhance the investment climate to the benefit of all investors. The process of attracting Intel to Costa Rica helped shape the country's investment promotion strategy.

From a World Bank Group case study on the impact of Intel in Costa Rica (you may have guessed that one), after the company's 1996 decision to locate a $300 million semiconductor assembly and test plant there.

South-South foreign bank entry

Banks from London and New York are not the only players getting into developing country banking markets. A little-known fact is that banks from 48 developing countries have already invested in the banking sector of other developing countries. Good news, because these banks are well-suited to offer inclusive financial services to the poor.

In a recent paper on Foreign banking in developing countries, Neeltje van Horen shows that 27% of foreign banks in developing countries are owned by a bank from another developing country. She finds the South-South foreign banking trend to be especially pronounced in low-income countries.

China’s first SRI fund

The Bank of China has launched the first responsible investment fund. According to the fund managers, the Sustainable Growth Equity Fund aims to capture investment opportunities by assessing companies’ growth potential as well as the sustainability and prudence of their business model. The focus will be on companies that possess core competence, good corporate governance, innovative capabilities as well as a sense of social responsibility.

Given the continued debate about the returns on long established responsible investment funds in the US and Europe, no doubt this fund’s success will be watched with great interest.