March 24, 2011

FDI is a global force, but is it a force for good?

Over the past decade foreign direct investment (FDI) has become a major force in developing and transition economies. In 2010 the volume of FDI to developing and transition economies for the first time exceeded the FDI to rich economies. In a speech on Democratizing Development Economics delivered at Georgetown University last September, World Bank President Robert Zoellick pointed out that “In the 2000s, Foreign Direct Investment (FDI) inflows were the single biggest source of capital for developing countries and a critical input for technology transfer in developing country firms.”

Figure 1: Comparison of Outbound FDI vs. Official Development Assistance (ODA) from Development Assistance Committee (DAC) countries in 2009 (US$ billions)

Outbound fdi


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March 22, 2011

Making a Splash on World Water Day

The United Nations seems to have a day for everything, from poetry (March 20) to families (May 15) to statistics (October 20). They even have a day for mountains (December 11). Most of these days come and go without much fuss or attention.

But World Water Day is different. IFC chose it to launch its new quarterly journal, Handshake, which explores how the private sector can help improve infrastructure in developing countries. The first issue, Tapped Out, focuses on water scarcity and how public-private partnerships (PPPs) can tackle the problem. It includes features on small-scale water supply in Africa, irrigation in Brazil and India, an interview with the chairman of Mozambique's public water company, and many other water-related issues.

The First Issue of Handshake, IFC's New Quarterly Journal on PPPs


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February 21, 2011

Mobile money in 2006 and 2016

Editor’s Note: Michael Klein is the former Vice President of Financial and Private Sector Development of the World Bank Group and is currently Visiting Professor at Harvard and Johns Hopkins University.

Nairobi 2006. Making Finance Work for Africa is the topic. Bankers, officials of monetary authorities, regulators, representatives of the IMF and multilateral development banks crowded in the conference room of the Serena hotel to launch the new Making Finance Work for Africa report. When I arrived at the airport, it was hard not to notice the omnipresent Safaricom ads: “Roam with the largest herd”. Luckily, I had chosen to present at the conference on the potential for mobile money, branchless banking and the like. Just a few months later in March 2007 Safaricom launched its M-PESA service. Today—less than 4 years later—M-PESA helps some 60 per cent of all adult Kenyans with payment services and is all the rage in the world of microfinance, in Kenya and beyond.

M-PESA reaches all over Kenya. 23,000 shops, often within just a few meters from each other, proliferate in slums and villages. Changing money at these cash merchants is pretty much like buying any other product in a shop; consumers face no or few lines, take advantage of opening hours from early till late, and can find cash merchants close to places of business or residence. The benefits are numerous: life is easier and safer; money is harder to steal or lose; waiting at the bank is over. Mobile phones make it possible. The herd of roamers comprises most adults in Kenya. And they have voted with their feet and money: payment services are what they want from financial inclusion.

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January 20, 2011

Unofficial payments, barriers to trade, and other obstacles to running a business in Azerbaijan

Editor's Note: The following post was submitted jointly by Mohammad Amin and Arvind Jain, both of the World Bank Group's Enterprise Analysis Unit.

The Enterprise Analysis Unit at the World Bank recently put out a short Country Note on the current state of the business climate in Azerbaijan. The note is based on newly collected firm-level data on various aspects of the business climate and experiences of a statistically representative sample of firms (Enterprise Surveys). The data also contain information on various measures of performance and the structure of the firms. Some of the important findings discussed in the note are summarized below.

Between 2005 and 2009, there were significant improvements in Azerbaijan’s business environment, particularly in terms of increased access to finance and reductions in tax payment-related bribery. Firms interviewed in 2005 and 2009 reported increased use of credit-financed investments and increased sales on credit. Nevertheless, firms faced many severe constraints, including corruption and a business environment that was not conducive to international trade. For example, 32 percent of the firms in Azerbaijan reported unofficial payments to public officials to get things done compared with an average of 17 percent in Eastern European and Central Asian (ECA) countries. Female participation in ownership was the lowest in the ECA region (figure 1). Firms in Azerbaijan were also less likely to export their products, have their own website, and use email to communicate with their clients than firms in the rest of ECA region.

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January 18, 2011

What is so special about onions in India?

You might find it hard to believe, but high prices of onions can trigger the fall of the government in India. In 1998, a supply side shock led to a sharp increase in onion prices in the country and most notably, in the state of Delhi. In the following elections, the ruling party was routed in large part due to its failure to control the price of onions in the capital state. Today, onion prices in India are up again, rising by over 100% in just three weeks in December. On December 20th and 21st onion prices had skyrocketed to Rs 70-85/kg in major cities of India from Rs 30-35 in early December, due to crop damage caused by abnormal rainfall in the key growing states of Maharashtra and Karnataka.

Realizing the possible political fallout as a result of the price increase, the government has moved swiftly this time to bring prices down. Apart from cracking down on hoarders, the government has lowered import duties on onions, ordered state-run trading agencies to import more onions from neighboring countries and banned the export of onions (some exceptions apply to the export ban).

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January 13, 2011

Outbound FDI: The emergence of Chinese companies on the global scene

Few would dispute China’s importance to the world economy today; from small villages to large cities, its presence is now felt almost everywhere. The Economist recently went so far as to call China “the indispensable economy,” reporting that more and more multinational companies are realizing an increased share of their revenues from inside Chinese borders. China has also become the largest export destination for many countries in the northern and southern hemispheres.  Yet with this focus on China’s large market size, economic growth, and ability to attract inbound trade and investment, less attention is being paid to the role of its private sector and outbound foreign direct investment (FDI).

The Chinese private sector is increasingly also playing an important role in the world today.  In nearly any country you travel to these days you can feel the presence of Chinese business. New data backs up this story.  Though China still trails the United States (a whooping 5,450 new outbound FDI projects in 2010) and other traditional outbound FDI leaders (UK, Germany and Japan) by a long distance in absolute numbers (Figure 1), according to the Financial Times fDi Markets database, it reported the fastest year-on-year growth for the last five years in outbound FDI projects (23% compound annual growth rate (CAGR)) of any major industrialized economy.

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January 10, 2011

Measuring transaction costs one charitable donation at a time

A concerted effort is being made by institutions like the World Bank to quantify various types of transaction costs incurred by businesses (Doing Business, Enterprise Surveys). The rationale for focusing on transaction costs (and reducing them) is usually couched in mainstream economic concerns. That is, in an attempt to increase growth rate of GDP per capita, create jobs, reduce poverty, and so on.

However, there are many social activities containing costs that are not being accounted for in these surveys. Charitable giving, not the favorite of mainstream economists, is one such transaction. The role charitable donations play in alleviating poverty and helping the economically distressed should not be overlooked. For those of us closely associated with the task of building indicators, the key question is whether the costs associated with a given non-mainstream exchange like charitable donations are significant enough to warrant a closer look.

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January 04, 2011

Technophiles, beware

In an article last month in the Boston Review, Kentaro Toyama, a former computer scientist for Microsoft turned ICT4D promoter, confronts the limits of technological solutions to development problems:

But the value of a technology remains contingent on the motivations and abilities of organizations applying it—villagers must be organized, content must be produced, and instructors must be trained. The limiting factor in spreading Digital Green’s impact is not how many camcorders its organizers can purchase or how many videos they can shoot, but how many groups are performing good agriculture extension in the first place. Where such organizations are few, building institutional capacity is the more difficult, but necessary, condition for Digital Green’s technology to have value. In other words, disseminating technology is easy; nurturing human capacity and human institutions that put it to good use is the crux.

Of course, the same criticism could be applied to most development interventions—institutions nearly always return as the limiting or enabling factor for every development program. 

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Facebook: A powerful tool to increase public access to government officials

Most of the attention on governance in developing countries is on developing efficient rules and regulations. That is, given the social and economic priorities of a country, rules and regulations should work towards achieving priorities in the least costly way. However, another dimension of governance that must be discussed is accessibility of government officials to the public. Arguably, better access would increase transparency and help citizens and businesses voice their ideas and concerns, thereby allowing for more effective implementation of laws. What are some innovative ways of improving accessibility to government officials?

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December 17, 2010

Has economic analysis improved regulatory decisions?

For all of us working towards providing a better business and regulatory environment, it is important to know whether economic analysis has improved the quality of regulatory decisions. A proper analysis of the costs and benefits associated with regulations (government rules that govern private activity) is critical in determining which regulations to administer and in what capacity. However, quantifying the effectiveness of a regulatory environment (e.g., Doing Business, Enterprise Surveys) is only half the job; an analysis is only truly successful when it shows us the impact of the given regulation on the affected business environment.

A recent paper by Hahn and Tetlock (2008) in the Journal of Economic Perspectives attempts to provide some preliminary evidence on whether formal economic analysis has in fact improved regulatory decisions. The study focuses on relatively richer countries (USA and Western Europe) where economic analysis is likely to play more of an important role in regulatory decisions (than in developing countries). However, even in these richer countries, the study finds that the quality of government analyses falls far short of basic standards of economic research, and that the quality of these analyses has not been improving over time. For example, the aforementioned study states that the Airport Noise and Capacity Act of 1990 was designed without proper analysis of the costs and benefits involved. As later research showed, the estimated benefit from the Act was USD 5 billion, yet the cost was much higher (about USD 10 billion).

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