PSD Blog - The World Bank Group

The BRIC Temptation

My final posts on Crisis Talk addressed issues concerning capital flows and emerging markets (see here and here). As most of the world emerges from the crisis, the demand for 'safe' investments, such as American and European government bonds, has diminished. This has been exacerbated by negligible interest rates in mature economies, which generate low investment yields and inexpensive lending. As Nouriel Roubini observed, this is the perfect recipe for borrowing cheaply in dollars, and investing outside the United States, primarily in emerging markets. This is likely to go on for some time: dollar depreciation continues to look like a one-way bet, and the Fed has indicated that low interest rates are here to stay.

Meanwhile, emerging markets have gone from strength to strength. China is leading the world out of the worst financial crisis since the Great Depression. Brazil is increasingly feted as one of the Western Hemisphere's most dynamic economies, with a diverse economic base ranging from aircraft production to vast hydrocarbon reserves. India has emerged from the crisis relatively unscathed. Even Russia, long considered by many as the black sheep of the BRICs, is looking up. Oil prices are on the rise (and may get much higher), while the rouble has been the best performing major currency against the dollar since the start of September.

Yet, I can't help wondering if this is all too good to be true. To me, the question isn't, "are emerging markets overheating?" Rather, I tend to ask myself, "to what degree are they overheating, and what risk (if any) does this exceptional growth pose to the global economy, particularly as it emerges from the crisis?"

IFC doubles down on India, entrepreneurship

IFC chief executive Lars Thunell is in Delhi this week, attending the World Economic Forum's India Economic Summit. Thunell is looking to boost the IFC's capital base by $2.4bn, much of which will be dedicated to the world's poorest countries and regions, including India. 

India has surpassed Russia as IFC's largest investment portfolio. The FT explains this trend:

The IFC decision to increase India's exposure, which was worth $3.4bn last year or 10 per cent of its global portfolio, comes as it is trying to boost support for entrepreneurial companies working with the world's poorest people.

"One of the very positive things coming out of the new government here is their high focus on inclusiveness," said Lars Thunell, chief executive officer of IFC, referring to the India's Congress-party-led government, which was re-elected in May. "That's why we are here."

The article notes that India's seven poorest states contain 40 per cent of the national population, yet only attract 1 per cent of the country's FDI.

Bringing Finance to Pakistan's Poor

Yesterday I attended the World Bank's book launch of Bringing Finance to Pakistan's Poor: Access to Finance for Small Enterprises and the Underserved. The authors, Tatiana Nenova and Ceclie Thioro Niang, interviewed 10,000 households from across Pakistan's geographic and socio-economic landscape, including both men and women.

In general, Pakistanis are underserved by both formal and informal channels of finance. Only 14 percent of the total population has formal access, while just over 59 percent have access to either formal or informal finance. As the chart above illustrates, this is quite low compared to Bangladesh (32% formal access), India (48%) and Sri Lanka (59%). Small and medium enterprises, which account for 30% of GDP and 78% of jobs, only account for 16% of the country's overall credit.

Weekend Links

A new look at the tragedy of the commons.

The Halo Effect, explained.

Mongolia is in the news this week.

A societal preference for boys has become an unlikely source of power for Indian women.

Consumption versus Income Inequality.

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.

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.

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:

Mobile phones for development: don’t forget about the voice!

Mobile phones heated up once again the development 2.0 summer debate: from the NYT on the uses of mobile phones for safe water distribution, to the upcoming World Bank study on mobile phones for education; from CTA’s overview of the uses of mobile phones for agricultural development to Chris’ foray into sensors and micro-voluntarism. And if you are interested in mobile banking for the unbanked, don’t miss Jim’s summer round-up.

In the midst of all this flurry—mostly focused on advanced features—my personal favourite, however, has to be an article from SocialBrite that brings us back to basics: namely, voice-based services. As the author notes:

The greatest unexploited resource

When I was growing up I heard a lot of stories about my grandfather. He died when I was a child so my recollection of him is a little hazy, but one thing sticks out very clearly in my mind: he believed in educating his daughters.

Not a stunning revelation perhaps, but it certainly made him unique for his place and time. He was a Pakistani Muslim born early last century, with two wives, 10 children, and very little money. And he believed it was more important for his six daughters to gain an education than his four sons. His sons, he felt, would eventually find their way in the world, but his girls might need a little extra help to level the playing field.

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.