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 impact

• What do we need to learn?

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Financial and private sector development: strategic objectives and pillars

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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 ClimateBusiness regulation; trade & investment; private participation in infrastructure and

social sectors.

Capital MarketsHelp clients develop capital markets and non-

banking financial services, and improve corporate governance.

Financial InclusionHelps clients broaden and deepen financial markets to sustainably increase access for

the underserved smaller firms and low income households.

Financial SystemsHelps 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

$38,580OECD 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

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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

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The impact of business start up reforms

Increases new firms registered• India: 6% increase in registered firms due to reduction of entry

procedures1

• Colombia: 5.8% in newly registered firms due to One-Stop Shop2

• 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: 1Aghion et al. (2008), 2Cárdenas and Rozo (2007), 3Bruhn (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

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

Credit gap relative to current outstanding SME credit by region

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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