December 15, 2010

Do credit bureaus improve credit availability and if so, for whom?

The conventional wisdom is that the exchanging of information on an individual or firm will go a long way in determining credit worthiness, thereby improving credit availability. When a bank evaluates a request for credit, it can either collect information on the applicant first-hand, or it can source this information from other lenders that have already transacted with the applicant. Information exchange between lenders can occur voluntarily via “private credit bureaus” or it can be enforced by regulation via “public credit registries.”

The process that is used in a given economy is an important determinant of credit market performance. Information sharing may mitigate adverse selection in the credit market and reduce moral hazard by raising borrowers’ efforts to repay loans. It can also reduce excessive lending as borrowers may consult multiple banks. Perhaps for these reasons, collecting cross-country information on credit bureaus and credit registries is now becoming the focus of a number of initiatives such as the World Bank’s Doing Business project.

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December 07, 2010

From Deals to Development: A snapshot from Monrovia

Once a concession agreement or any large-scale public procurement contract is signed, who can ensure that the terms are met? How to turn commitments into development on the ground? This is the puzzle that a mix of around 70 government, business and civil society leaders from West Africa began to solve this past week. Facing many common challenges around procurement and the rapid scale-up of extractive industries, it was encouraging to see the comfort with which different stakeholders interacted and often found themselves on the same page, even on sensitive topics such as corruption.
Though hot and sunny in Monrovia, the pool remained deserted. As one observer put it, "You could see the sweat on the walls" from all the hard work in developing and refining concrete plans for improved contract monitoring in Ghana, Liberia, Nigeria and Sierra Leone, as well as two regional initiatives. These include engaging new players, better mechanisms to get relevant contract information to affected communities, and organizing a regional summit on transparency around extractives contracts.

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November 29, 2010

The “L” Word: Is lobbying actually a sign of progress in developing countries?

Conventional wisdom holds that bribery is the preferred means of influencing government policy in less developed countries, while lobbying is more common in developed countries. Perhaps due to this perceived compartmentalization of lobbying and bribery, very little is known about the relationship between lobbying and bribery, the extent and effectiveness of lobbying vs. bribery in less developed countries, and how this relationship changes as countries move up the development ladder.

The complexity of the issue makes for a challenging research agenda. Take for example the first point—the relationship between lobbying and bribery. One view is that lobbying is aimed at changing the law in to favor the lobbyists, thus decreasing bribery. However, another view is that lobbying is not done in order to change the rules favorably, thus making bribing unnecessary, but rather to persuade politicians to underinvest in law enforcement, thus making bribing easier. In this view, lobbying and bribery increase in tandem. Which of these two views is correct in a given situation and does the answer vary with the underlying political structure?

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November 22, 2010

Does efficient corruption pay?

Buying and selling a product or service involves a number of costs, including time spent searching for the best prices, negotiating for good discounts, researching product quality and writing contracts where applicable. Broadly, these are called the transaction costs of economic exchange, and part of the reason firms exist is to keep transaction costs at a minimum.

Recently, I came across an interesting paper by Fisman and Gatti which suggests that bribery also involves a transaction costs—it takes time to negotiate a bribe rate and the terms of the favor to be done, e.g. the number of regulations to be avoided. The interesting point here is that if a transaction cost is indeed present, then the greater the number of regulations a firm would like to avoid, the more time negotiations require. Further, we can expect the bribe amount to increase too with the number of regulations the firm wants to avoid. Now putting these results together gives us a couple of testable hypotheses:

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November 15, 2010

Quantifying informality in Latin America

In a series of earlier posts, I discussed a number of findings about informal (unregistered) firms in 6 African countries, including Burkina Faso, Cote d’Ivoire, Cape Verde, Cameroon, Madagascar and Mauritius. These findings were based on Informality Surveys collected by the Enterprise Analysis Unit to better understand the functioning of the informal sector—a large sector for which we have virtually no systematic data. Recent estimates suggest that for the world as a whole, between 22.5 and 34.5 percent of all economic activity occurs in the informal economy; for countries in the lowest quartile of GDP per capita, the estimates range between 29 and 57 percent (La Porta and Shleifer, 2008).

The Informality Surveys have now been expanded beyond Africa, covering the Latin American countries of Argentina and Peru. For data junkies like me, this is exciting for at least three reasons. First, comparing Africa and Latin America and the Caribbean (LAC) provides insights into how the structure, conduct and performance of informal businesses vary with the level of economic development. Of course, region-specific factors other than the level of economic development that may affect informal firms will need to be carefully weeded out.

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November 10, 2010

Regime Type: Do private firms have a preference?

One can reasonably expect that frequent and unpredictable changes in economic policy might adversely affect investment by the private sector and the overall growth of the economy. For all practical purposes, uncertainty about future economic policies is a step towards economic anarchy. But precisely what causes firms in some countries to have higher uncertainty about future economic policies than others? Does the underlying political structure matter? What elements of the political structure, if any, matter for the level of policy uncertainty as perceived by private agents?

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November 09, 2010

Looking for a place to invest?

Survey data suggest it might not be that easy for manufacturing multinationals to find information on suitable industrial investment sites in many countries around the world.

It will probably come as no surprise that FDI in the manufacturing sector is in decline. According to UNCTAD, the services and primary sectors continue to capture an increasing share of FDI as the years pass. Despite these trends, manufacturing still represents somewhere between 30 to 45% of total cross-border FDI inflows annually, and there have been more than 3,000 new manufacturing investment projects annually over the last decade.

Which raises the practical question: How do companies and their advisors locate suitable investment locations for their manufacturing projects when considering entry in new markets? The World Bank Group’s Investing Across Borders database suggests that it might not be that easy in most countries around the world. The database's index on Access to land information compares countries on the ease of access to land-related information through the countries’ land administration systems, including land registries, cadastres and land information systems and finds that globally of the 87 countries surveyed the average score is relatively low 41.4 out of 100 (Figure 1 below the jump; click on the image for a larger version).

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November 05, 2010

Friday links

1. Take a tax diet, the Brazilian way.

2. The Economist's take on Doing Business 2011.

3. Thomas Friedman predicts India will be the next juggernaut of technological innovation. They could probably get there faster if they cut more red tape -- India ranks a sad 135 in the Doing Business 2011 report.

4. Bulgarian Finance Minister (and former Chief Economist of Finance and Private Sector Development at the World Bank) thinks the Fed's quantitative easing policies will backfire.

5. On the other hand, there's good news on the job front: the U.S. added 151,000 jobs in October, mostly in the private sector.

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November 03, 2010

Doing Business 2011: 8 years, 11 indicators, and a new 5-year cumulative score

DB2011 The new Doing Business 2011: Making a Difference for Entrepreneurs report has just been published, the 8th in the Doing Business series. Let me quickly dispense with the most-watched metric, the 10 economies that have improved the most on the overall Ease of Doing Business index during the last year. This year it's Kazakhstan, Rwanda, Peru, Vietnam, Cape Verde, Tajikistan, Zambia, Hungary, Grenada, and Brunei Darussalam.

Of course, whether an economy manages to pull off a series of regulatory reforms in a single year requires a bit of luck. While policymakers can often cut the days to open a business with relative ease, it's rather more difficult (and more time consuming), say, to increase the percentage of the population covered by a credit bureau. So I was pleased to see that the Doing Business team has drawn on their longitudinal dataset to construct a measure of cumulative change for the past 5 years—the "DB change score". (Click on the figure below to see a bigger version.)

Db big

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October 29, 2010

Friday links

1. Output-Based Aid: Now with its own database and cool interactive map.

2. Bringing mobile phones to mobile (food cart) microentrepreneurs -- but will it make the food any tastier?

3. Capitalist prices vs. "fair" prices, Venezuela edition

4. Pro-poor tourism: Not a contradition in terms?

5. Newsflash: New findings that bureaucrats are humans too!

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