Impact of investment climate reforms for private sector growth: what do we know? What - PowerPoint Presentation

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Impact of investment climate reforms for private sector growth: what do we know? What should we learn?

DIME Workshop, Business Environment Panel

Marialisa

Motta,

Director, Financial and Private Sector Development, Latin America & Caribbean Region

Co-Director, Investment Climate Practice; Financial and Private Sector Development Network

Rio de Janeiro, Brazil. June 6, 2011

Outline

Financial and private sector development: objectives and pillars

Context and challenges in developing economies

Example of investment climate reforms and their impactWhat do we need to learn?

2

Financial and private sector development: strategic objectives and pillars

3

Competitive Industries

Provides targeted support to help strengthen the competitiveness of specific industries.

Innovation, Technology & Entrepreneurship

Promotes generation and adoption of knowledge that contributes to firm creation, growth and higher value employment opportunities.

Investment Climate

Business regulation; trade & investment; private participation in infrastructure and social sectors.

Capital Markets

Help clients develop capital markets and non-banking financial services, and improve corporate governance.

Financial Inclusion

Helps clients broaden and deepen financial markets to sustainably increase access for the underserved smaller firms and low income households.

Financial Systems

Helps clients build policy framework and institutional capacity for effective prudential oversight, and prepare and respond to financial crises.

Create investments and jobs through a more

efficient, competitive, and innovative private sector.

Private sector development requires safe, deep and broad financial markets.

Firms in developing economies have a harder time…

DB Rank

1

Each

vertical line

shows the rank of one economy in the

region

Doing Business (DB) 2011

rankings on the ease of doing

business

$1,138

$1,040

$7,220

$5,745

$6,468

$22,181

$38,580

OECD high income

East Asia

&

Pacific

Middle East and North Africa

Latin America

&

Caribbean

South Asia

Sub-Saharan

Africa

Europe

& Central Asia

87

117

96

137

96

72

30

Avg. GDP per capita (US$, 2009)

Average DB Rank

DB Rank 183

Source: “Doing Business 2011” Report,

WDI

Indicators

4

5

1

The number of

MSMEs unserved or underserved is calculated based on MSMEs’ access to bank loans and overdrafts (i.e., not including MSMEs’ access to trade financing, leasing, factoring, and other forms of credit. However, the value of the credit gap in dollars takes into consideration credit available through loans, overdrafts, leasing, factoring, trade finance and other forms of formal credit. And lower access to finance than firms in high income countries

Source: International Finance Corporation and McKinsey & Company (2010).

MSMEs’ use of financial-institution loans or overdrafts

1

6

The impact of business start up reforms

Increases new firms registered

India:

6% increase in registered firms due to reduction of entry procedures

1

Colombia:

5.8% in newly registered firms due to One-Stop

Shop

2

Mexico: 5% new registered firms and 2.8% jobs created due to a One-Stop Shop3

Entry reforms in Indian states with more flexible labor regulations led to increase in real output gains 18% larger than in states with less flexible labor regulations.

5 procedures, 20

days, and US$ 88

Reduction in time

Reducing time to register a business by at least 40%

Reduce time and cost of business start up by introducing standard articles of incorporation, eliminating the minimum capital requirement, introducing electronic registration.

30+ countries, including Belarus, Colombia, Tonga, Tajikistan.

12 procedures, 99 days, and US$ 630

Source:

1

Aghion

et al. (2008),

2

Cárdenas

and

Rozo

(2007),

3

Bruhn

(2008). Graph source: Doing Business 2008, 2009, and 2010.

Liberia example

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The impact of trade logistics reforms

Increases Exports* in:

Sub-Saharan Africa by over 6% Latin America by 3.5%

Improves Total Factor Productivity (TFP)**:

Reducing customs clearance by 1 day in China generated a 7% increase in TFP for the consumer goods sector.

Generates Private Sector Cost Savings:

Trade logistics reforms would enable Colombian exporting firms to save US$ 20 million annually (from reduction in fees; projected).

Reduction of number of documents for import and export; introduction of risk-based inspection and introduction of an electronic filing systems; and unification of custom operations at the borders. 10+ countries, including Rwanda, Colombia, Liberia.

Source: Subramanian, Anderson and Lee (2011*, 2005**)

Reducing time to trade by 10% or more

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The impact of business exit reforms

Improvement to the insolvency legal framework, introduction of out of court workouts and capacity building for insolvency administrators. 5+ countries.

Example:

Multicreditor

agreement restructured US$ 4.9 million in debt of

Sportland

International, an Estonian sporting goods company with operations in Latvia and Lithuania /1. 986 jobs were preserved.

Debt recovery tribunals in

India

led to

Creditor friendly rules in

Brazil resulted in

A new reorganization Code in

Colombia led to

Increase in timely payments by 28%.

Cost of debt reducing by 22%.

Repayment time reduced from 49 to 33 months.

1

Baltic News Service reported (January 28, 2010) that

Sportland

defaulted on its debt issue of EEK 57 million (US$ 4.9 million).

2

Sources:

Visaria

, 2009;

Funchal

, 2008; and

Gine

& Love, 2008.

What do we need to learn?

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Entry

: effects on entry of new firms in low income countries; effects on informality; do firms that enter because of a reduction in registration time and cost survive and grow?

The

Malawi and Minas

Gerais

cases

will address some of these questions.

Trade

: effects on foreign direct investment and on corruption; effects of trade policies versus trade logistic reforms; effects of reducing number of documents versus introducing risk-based inspections or streamlining custom procedures.Exit: effect of legal reforms, versus introduction of out of court mechanisms or strengthening capacity of insolvency administrators; impact of communication of reforms to banks and firms. The

Romania case will address some of these issues.Other investment climate topics

: best policies to increase market competition; effects of reducing: number of licenses, time and cost of paying taxes or resolving a case in court; effects of introducing alternative dispute resolution mechanisms to resolve commercial disputes. The Senegal case will address some of these issues.

For all topics: the relative effect of reforms on different industries (e.g., perishable, construction, information and communication technologies) and on firms of different sizes; effects of combined reforms; sequencing of reforms; effect of investment climate reforms on corruption and transparency.

Background

Background information

10

11

Source: International Finance Corporation and McKinsey & Company (2010)

Credit gap relative to current outstanding SME credit by region

2,000-2,500

25-30

180-230

600-700

95-115

80-100

11,000-13,500

14,000-17,000

3,000-3,700

250-310

80-100

125-155

105-130

30-40

110-140

700-850

600-700

1,300-1,600

11%-14%

300%-360%

60%-75%

16%-20%

29%-35%

125%-150%

21%-26%

5%-6%

8%-10%

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Improving Transparency and Fostering Competition

WBG played a key role in opening up these markets:

New sector policy

Regulatory framework

Award of new licenses

Privatization of incumbents

The

number of mobile cellular subscribers

jumped from

US$ 4

million to

US$ 259 million between 1998 and 2008

Businesses need reliable information and a predictable regulatory environment, yet legal processes and regulations are often obscure.

Smaller, less connected businesses do not have access to lawyers and agents to navigate the labyrinth of regulations and procedures

Increased uncertainty, risk, rent-seeking

Competition in Telecom Sector in Africa

Source: World Bank 2010