PSD Blog - The World Bank Group

Microfinance under the microscope

Last year I speculated about the potential impact of the financial crisis on the environment for microfinance. A report from the Economist Intelligence Unit (2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean) provided data on the microfinance premium—the difference between what mainstream banks and MFIs charge for a loan—in many countries in Latin America. How much would MFIs reliant on external funding get squeezed, and would they get squeezed worse than the banks?

The recently published 2009 Microscope (now expanded to 55 countries around the world with the assistance of IFC) gives a mixed answer. Of the 13 countries in Latin America for which there are data in both the 2009 and 2008 Microscope, seven saw their microfinance premiums rise while six saw their microfinance premiums fall (see image below the jump for the most recent premiums).

Resources 101

The World Bank's East Asia blog links to a fantastic graphic of the world's resources by country. There is a clear correlation between size and supply: the United States, Canada, Russia, China and Brazil dominate the list. In many categories, such as soy, uranium, rice, natural gas, cotton, and corn, over half of the world's supply is controlled by three countries or fewer.

Another interesting observation is that Brazil has almost 20 percent of the world's water resources (roughly on par with Saudi Arabia's share of oil reserves). Perhaps another reason to study Portuguese? 

Access to finance: Mexico edition

The World Bank has released its latest Finance and PSD Impact Newsletter. The paper looks at the impact of large-scale bank expansion in Mexico, evaluating the effects of increased access to finance for low-income borrowers.

The authors analyze the expansion of Banco Aztecta in 2002. The bank opened over 800 new branches inside the consumer goods retail stores of its parent company, Grupo Elektra. These new outlets catered primarily to low and middle income clients. The authors find a clear correlation between the bank's expansion and income growth among lower income groups.

The key findings to the report include:

1. Bank openings increased the proportion of working age adults who own informal business by 7.6 percent
2. The opening led to a higher proportion of women working as wage-earners
3. As a result of the expansion, female incomes increased by 9 percent and male incomes rose by 5 percent

The authors also note what the bank openings did not achieve: no effects on the establishment of formal businesses, and no increases in female-owned informal businesses.

Men benefit from greater financial access by starting more informal businesses; women seem to find more work, and earn higher wages. With respect to women, it would be interesting to know if these findings are the result of women borrowing less, or because they are using their borrowings to fund other (non-business) activities.

Getting privatization right in higher education

As I blogged about not too long ago, public universities around the world are facing serious pressures due to the financial crisis. Perhaps the moment is ripe for reform—when the fiscal situation gets tough, it can help make possible what only recently seemed unimaginable. Emerging economies would do well to take advantage of the moment and carry out reforms that address not only the immediate pressures arising from the financial crisis but the longer-term issues that have built up in higher education over the last two decades.

A publication by the Institute for Higher Education Policy (Full disclosure: I am a former employee of  IHEP) takes the bull by the horns on this one. Privatization in Higher Education: Cross-Country Analysis of Trends, Policies, Problems, and Solutions lays out the problems that many countries are grappling with:

The development of private higher education and the introduction of cost-sharing at state institutions in many countries have led to an unprecedented increase in the number of students who have to pay their own tuition, as well as other costs of higher education. About 50 percent of students in Ukraine, 73 percent of students in Brazil, and most students in Mongolia pay for their higher education. Student financial aid in these countries has been disproportionately granted to students studying at state institutions. These students are eligible for tuition waivers, state scholarships, grants, state-subsidized loans, and other types of support. Meanwhile, students in private institutions are often left on their own, irrespective of their academic abilities or ability to pay.

Why it's time to start studying Portuguese

First, there was speculation in the press that Brazil's President, Luiz Inácio Lula da Silva, might be the next President of the World Bank. Then Moody's upgraded Brazil's debt to investment grade, citing its resilience in the crisis and bright future growth prospects. And just last week the International Olympic Committee announced that the 2016 Olympic Games would be held in Rio de Janeiro, with Lula simply ebullient:

We are not a second-rate country, we are a first-rate country and this is what this victory means.

To top off my case that it's time to start studying Portuguese, the Brazilian city of Florianópolis (pictured) will be hosting one of the coolest conferences later this month. Between October 26-30 infoDev will be running the third Global Forum on Innovation & Entrepreneurship. On-line registration is open through the 18th. Lula explained after last week's announcement that Brazil would "sleep less, think more, and work much harder." The Global Forum would probably be a good place to start.

Update: Over at the World Bank's Growth and Crisis blog, Ihssane Loudiyi reports on a recently released annual socioeconomic survey conducted by the Brazilian government. The long and short of it: Brazil continues to improve along many measures of social and economic progress. (Although we must add a caveat that the results are for 2008, so some of the impact of the crisis may not yet be apparent.) Here is more info about the survey.  

(Photo Credit: Armando Vernaglia)    

Examples of Chile’s innovative approach to PPPs

As I discussed in my previous post, Patricio Mansilla of Chemonics International has explained to me that Chile has been at the forefront of innovation in the design of PPPs. The government has experimented with a bidding mechanism for PPPs based on the Least Present Value of Revenues (LPVR). The innovative feature of  the LPVR approach is that contracts always have a variable term date, in contrast to normal PPPs, which have an end date set in advance. Considering the number of comments generated by the previous post, I thought I would provide a bit more detail on the benefits of this approach, plus a few examples of how LPVR PPPs work in practice.

First, the advantages of this approach over fixed term bidding concessions, as I see them:

• The LPVR is concessionaire friendly, which allows for many bidders on each deal. Lack of bidders is a problem on some PPP deals in Latin America.
• Another advantage of the LPVR approach is that it is easy to enforce compared to normal fixed-term contracts, which are exposed to renegotiation risks that sometimes can threaten the solvency of the consortium and thus the project as a whole.
• The government’s only burden to enforce the concession is to closely monitor the concessionaire’s operational cash-flow revenue. There is still a need to verify solvency and overall performance and maintenance of the project itself, but those can be achieved under much less pressure. After all, these burdens are mitigated by the concessionaire’s interest in recovering its investment. There is no chance for extra profit, and delays only postpone revenue recognition.

China vs. India: Which is better for doing business?

Editor's Note: Peter Kusek is an Investment Policy Officer with the Investment Climate Advisory Services of the World Bank Group.

Doing Business has just published its seventh annual report for 2010.  As in the past, it includes its flagship Ease of Doing Business rank, which is once again led by high-income economies such as Singapore, New Zealand, Hong Kong (China) and the United States.  That’s not a surprise. 

What some of us might however not expect is to find countries such as Georgia, Saudi Arabia or Mauritius among the top 20.  Does this mean that these countries are amongst the world’s 20 most desirable and attractive business destinations?  Well, yes and no, depending on how you define attractiveness.  Let’s do the following quick business exercise together:

Latin America: From disappointment with privatization to innovation in PPP’s

Editor's Note: Bernardo Weaver is a Wharton MBA in Finance Candidate and a consultant at the World Bank working on Public Private Partnerships.

Privatizations in the 80’s and 90’s in Latin America proved to be disastrous by many accounts. The success of the Thatcher administration in the United Kingdom did not transfer well to the other side of the Atlantic, at least south of the US. Many Latin American politicians found an easy target in privatizations: The sale of state-owned assets at sub-par value.

Politicians also conveyed the idea that the state and the citizens are identical. As a result, the population thought that their assets were sold at fire sale prices to big international companies. These international companies—often connected with aggressive animals like sharks and lions (and even monsters)—became vilified. Governments did not respect clauses and tariff readjustments, and the famous instability of the region was again reconfirmed.

Business Associations: Good for businesses, bad for taxpayers and consumers?

In The Rise and Decline of Nations, Mancur Olson argued that interest groups like business associations (BAs) always pursue distributive objectives, seeking unproductive rents rather than benefitting the public. Subsequent work on collective action culminating in the New Institutional Economics continued to adopt this negative view of BAs.

Nevertheless, examples of BAs working toward more productive goals keep showing up in various studies. For example, Doner and Schneider (2000) point out that the Kuwait Chamber of Commerce and Industry played a key role in pushing for customs reforms during the 1980s; inter-industry associations in the state of Punjab, Pakistan, forced the state government to improve power supply and the Colombian Coffee association, Federacafe, helped provide better transportation infrastructure, port facilities and warehouses to its members.

Do marginal firms in Bolivia benefit from formalizing?

David McKenzie and Yaye Seynabou Sakho have written a great piece explaining both why some firms choose not to formalize and what the benefits of formalization might be. You can read a short version here and a longer version here.

The authors find that Bolivian firms that are located close to a tax office are more likely to formalize. This finding is further evidence that initial registration costs and/or lack of information affect firms’ decisions to formalize.