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?"

One issue of concern is the inability of central banks and governments to control capital inflows. Brazil's recent attempts are failing. The same is true for India. If commodity prices continue their strong rebound, we may see a renewed enthusiasm for Russia and the Gulf (property prices in Dubai are beginning to recover; Russia spent $700m yesterday selling roubles). World Bank President Robert Zoellick today expressed concern of overheating in East Asia.

Yet, there may be little that governments can do to control these events, particularly if the investment prospects in other markets remain dim. Thus, we are left with a situation where we are faced with irrational investor exuberance coupled with clipped government wings.

This may not be the recovery we had been hoping for.

Is transport infrastructure the most important aspect of urban evolution?

The Treasury's courtship of the blogosphere.

Is China's changing worldview bad for business?

America's largest retailer: it's not Wal-Mart.

Why are some marathons more volatile than others?

The EU's role in reducing state fragility in Sub-Saharan Africa.

Thoughts on migration: Kosovo edition.

Unemployment

What America can learn from Europe about unemployment.

Other difficulties that arise from high unemployment.

Plus, unemployment charts galore from Calculated Risk.

A less pessimistic take on today's numbers (it's still ugly).

Why employment is down and GDP up? It's all about productivity.

The recently-released enterprise surveys country note on Running a Business in Armenia shows that these reforms have indeed resulted in improved access to credit, which in turn is making it easier for Armenian firms to operate efficiently.

Both prepaid sales and sales on credit nearly doubled in recent years, from 15 to 16 percent in 2005 to 30 percent in 2009. Furthermore, the figure below shows that the value of collateral (expressed as a percentage of the loan amount) necessary to secure a loan has decreased substantially across all sectors of the economy.

The Armenian business climate, however, is still hampered by several serious problems. The Enterprise note goes on to say:

Corruption remains a problem, and Armenia ranks at the bottom in firms having their financial statements reviewed by an external auditor. Armenian firms also face challenges in making use of all of their potential capital, both human and physical. Female participation in management and in the labor force as well as capacity utilization are below regional averages.

Highlighting the accomplishments of a country is important so that other countries with similar problems can find successful models of reform. Highlighting the remaining problems is important because it sets the stage for future reforms. This country note does both.

Just to get a taste of how the tool works, I looked at the number of internet users per 100 people (Y-axis) compared to GNI per capita (X-axis) and got the chart below. Each of the colored blobs represents a country, and the size of the blob represents total population. On casual observation, it looks like a lot of countries that are more wired than their income levels would predict are in eastern Europe.

For those who really want to get crazy, the tool also allows you to "play" the statistics over time. If you want to learn more about how not to bore your audience to death during your next Powerpoint presentation, check out this video tutorial. (Highly recommended for all development professionals.)

Update: A colleague wrote me to ask clarification on the chart above. I forgot to mention that each of the colors corresponds to a World Bank region. (The colors can also be modified to correspond to income or lending group or customized on a country-by-country basis by the user.) The color legend below gives the details (eastern Europe actually falls into three categories based on the default regional color scheme).

Comparing the firm-level data obtained in Belarus to similar Enterprise Survey data in 28 other Eastern Europe and Central Asia (ECA) countries yields two interesting statistics as discussed in the Note:

1. Belarusian firms have the highest proportion of government or state ownership in private firms, on average 10 percent.
2. Belarus stands out in the region as having high percentages of female participation in both firm ownership (53%) and in the labor force

However, despite observed progress in the business environment over time, Belarus lags ECA countries in many investment climate indicators. Firms identify tax rates and compliance with government regulations as the biggest obstacles to their performance. Streamlining regulatory requirements could further diminish opportunities for bribe collection. Overcoming these constraints, along with increasing firms’ use and workforce knowledge of technology, are reforms that could reduce the gap between Belarus and its neighbors.

In the meantime, governments in many countries are in the middle of procuring large PPPs and therefore in need of solutions to the temporary dislocation in credit markets. More and more governments have been turning to public sector guarantees of private sector loans for PPP projects as a way to overcome shortfalls in available financing.

The question is: Is this solving the problem? There are voices that say this doesn’t make sense, why should the public sector guarantee a loan by the private sector? Isn’t the rationale behind PPPs to get the private sector to put its own capital at risk?

I would say that such a guarantee does make sense. First of all, the public sector doesn’t engage in PPPs primarily to secure financing. If the public sector is doing PPPs for the right reason, then it is for the expertise, innovation and motivation that the private sector can deliver. Private financing has never been cheaper and was never the source of the value in PPP projects.

But then, when we talk about moving some key risks to private sector, are we being honest? With a guarantee, aren't we failing to transfer risks to the private sector? The answer is that private sector participants in PPPs continue to invest equity—which is still at stake—while the debt is the risk of the banks that finance the project.

During the current financial crisis, the banks have not been forthcoming with loans for PPPs, or they require additional security in the form of guarantees of their loans. The only party that can provide such a guarantee on the market today is the government. A few examples of this kind of guarantee:

• The French government has been "allowed to guarantee loans on priority projects implemented through PPPs entered into before 31 December 2010, up to a global ceiling of €10bn."
• The Spanish ministry of infrastructure initiated special financial guarantees for PPP projects (mainly for high speed trains) for an estimated amount of 15.000 M€
• In Australia, the main problem is the unavailability of long tenor debt, with recent projects being financed using 5-year mini-perm structures. Governments have proved willing to share in the refinancing risk at the maturity of these financings. The State Government of Victoria has underwritten the senior debt syndication of its A$5 billion desalination project, in the expectation, that the bank club supporting the winning bidder will be able to sell down to members of the bank club that supported the losing bidder.
• The Portuguese government is reportedly providing a Euro 800 mil. guarantee to the Litoral Centro highway concession and will also guarantee the Pinhol Interior concession project.
• Even prior to the financial crisis, Kazakhstan used debt instruments guaranteed by the government to finance PPPs with the goal of “encourag[ing] participation of pension funds in the system”. Currently, the law enables the government to provide guarantees both to the concessionaire for infrastructure bonds within the limits of the concession agreements and to loans attracted to finance concession projects. According to the professionals participating in the PPP process, the government’s accounting process in the fiscal budget will include subsidies or co-funding as state investments, while the guarantee will be considered as a public debt.

Will taxpayers get their money’s worth from these guarantees? One past example suggests the answer is “yes.” In 1994 Korea launched the Infrastructure Credit Guarantee Fund (KICGF) to facilitate private participation in infrastructure. In response to the Asian financial crisis in 1998 Korea provided even more support for its PPP policy, and one of world’s largest and most successful PPP programs was launched as a result.

According to the IMF:

The [Korean] government announced a fiscal stimulus package in response to the financial crisis with more than 15 percent of the envisaged investment to be carried out through PPPs. The package is accompanied by measures to reduce financial burdens on PPPs, smooth interest rate changes, and shorten project implementation. The measures introduce: (i) lower equity capital requirements on concessionaires (5–10 percent); (ii) for large-scale projects, higher ceilings on guarantees provided by the Infrastructure Credit Guarantee Fund (50 percent); (iii) help in changing equity investors for some projects; (iv) compensation for the preparation of proposals to encourage more vigorous competition during bidding; (v) sharing of interest rate risks with concessionaires; (vi) compensation for the excess changes in base interest rates through grading of risks at the time of the concession agreement; and (vi) shorter periods for readjusting benchmark bond yields.

And it seems that Korea was quite happy about using this type of instrument even in financially difficult times.

Recent supercharged high-flyers Russia, Ukraine and Kazakhstan have now found themselves at the epicentre of the ongoing crisis in the region…Uzbekistan, the fourth largest economy in the CIS, is in better shape because of government policies which at the time were considered to be too rigid and less pro-market. There is still a question of whether this policy will be better for the economy in the long term but, in the current environment, the conservative approach will benefit Uzbekistan. We believe the long-term investment story for Uzbekistan is intact.

While Djumanov may be correct that certain sectors in Uzbekistan have good prospects, there is another side to this story. Hard data on the private sector suggest that most firms in Uzbekistan face pretty substantial hurdles. The latest results from Enterprise Surveys paint a sad picture:

• An alarming 56% of firms report that informal payments are expected to be paid to public officials in order to get things done. This is the highest percentage in all of Eastern Europe and Central Asia.
• Electrical infrastructure is lacking. Uzbekistan is the country with the longest power outages in the region.
• Among Uzbek firms, external financing is the exception, not the rule. Uzbekistan is the country with both the highest level of internal financing for investments and the lowest level of bank financing in the region.

However, there is one bright spot that Djumanov should be happy to hear about—the multi-year data reveal an improved business environment regarding tax regulations. Both the visits from tax inspectors and related informal payments became less frequent between 2005 and 2008.  A likely result of reforms centered on business taxes.

Many countries are experiencing a big infrastructure gap, and Russia is no exception. The Russian government is well aware of the problem, and it has announced that it will invest about US$1 trillion over the next 10 years in improving infrastructure. But how can the government raise that kind of capital? The expectation is that the private sector will contribute most of the financing though a Public Private Partnership (PPP).

While Russia does have some experience with PPPs, the track record so far has been spotty. We might mention in this regard one project that is sometimes considered to be the first PPP in Russia—the South-West Wastewater Treatment plant of St. Petersburg. The project was agreed upon by the Russian, Finnish and Swedish governments all the way back in 1986, but due to a lack of public financing the project was stopped. It was resurrected as a PPP in 2002 and formally procured as a 12-year BLT (Build-Lease-Transfer) contract.

The financial crisis has also thrown a wrench in the works. St. Petersburg has taken a lead in developing PPPs in Russia, but shaky credit markets have meant many projects have been put on hold.

The first PPP project launched by the government of St. Petersburg was a toll road called the Western High Speed Diameter (WHSD). The WHSD was enacted under the Federal Law on Concession agreements, which has been in force since 2005. Since the city government didn’t have the experience and proper skills to procure PPP projects, the WHSD met a lot of difficulties, including legal problems and issues with a feasibility study. In 2006 new regional legislation on PPPs was introduced in St. Petersburg that allowed the government to attract private sector interest and prompt PPP development. The value of the WHSD project is estimated at US$5-6 billion, which makes it difficult to procure in the current circumstances due to the high costs of capital and limited available funding. (Not to mention that the overall downturn of the economy has affected traffic forecasts.) Although a tender has passed and a bidder was chosen, the instability in financial markets has meant that the project had to be rescheduled. Investors need more time to redesign their financial models to meet the challenges of the financial crisis.

Two other projects sponsored by the government of St. Petersburg have also been postponed: Nadzemny Express and the Orlovsky Tunnel. Both were announced around the same time as the WHSD project. Unfortunately, due to their size it is difficult for potential investors to find lending now and at the same time demonstrate the ability of these projects to generate sufficient revenues. Both projects have been rescheduled for 2011.

There is one bright spot, however. A PPP agreement for Pulkovo airport is scheduled to be signed on the 2nd of November. The winner of the tender is Fraport (along with VTB bank), and they will have a 30-year BOOT (Build-Own-Operate-Transfer) contract on the redevelopment of Pulkovo airport. Pulkovo appears to be the one and only PPP project that seems to be able to generate revenues and ensure its economic viability under the present circumstances.

The problems generated by the financial crisis are further compounded by the legal environment for PPPs. Unfortunately, the current federal concession law limits the types of PPPs that can be applied in the Russian market. For instance, it is impossible to use the BOOT (Build-Own-Operate-Transfer) or DBOO (Design-Build-Own-Operate) models. Among the limitations of the current legislation, there is a necessity to use standard PPP agreements affirmed by the Federal government. It confines investors and the government in designing the concession agreement. Federal law also doesn’t provide flexibility in the design of the bidding process, potentially leading to an inefficient choice of the winning bidder. (One exception is St. Petersburg—the regional law on PPPs passed in 2006 also extended the PPP models that can be implemented in the region. This creates favorable conditions for PPP project realization in St. Petersburg.)
 
Despite the difficulties seen with PPPs in Russia so far, we still have a positive outlook for their future. Why? We see two reasons to be optimistic: (1) The Russian PPP market is potentially enormous, and (2) The government understands the benefits PPPs can bring. The government is seeking new spheres in which to implement PPPs, moving away from huge PPP projects in the transport sector to more feasible projects in the healthcare and waste treatment subsectors. There are several PPP hospital projects that are currently in the preparation stage now and one waste treatment plant project (Yanino), which has a tender scheduled for autumn 2009.

In short: expect a lot more activity in the PPP space in Russia over the next few years.

Figure 1 shows that the above story may be true for the Eastern Europe and Central Asia region (ECA). The percentage of firms that use email to communicate with clients and suppliers (from Enterprise Surveys, 2009) is significantly higher in countries with stricter labor laws, and this holds even when we account for differences across countries in firm-size, GDP per capita and other firm/country characteristics.

In sharp contrast, aspects of the business environment other than labor laws that increase firms’ cost of doing business tend to reduce email usage (figure 2). This is not surprising since a higher cost of doing business discourages investment in modern technology. But a rigorous analysis to ascertain or reject the internet-labor laws relationship is still required to properly understand how labor laws affect the choice of technology, employment and wages.

Source: Enterprise Surveys (2009) and Heritage Foundation. For labor laws, Figure 1 uses the Labor Freedom index (2005-08 averages). Quality of the overall business climate in Figure 2 is the average of all sub-indices of Index of Economic Freedom excluding labor regulation (2005-08 averages). Both of these variables are taken from Heritage Foundation’s Index of Economic Freedom.

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:

I am an investor looking to expand my enterprise and venture beyond the borders of my country.  All my buddies are telling me that China and India are the places to go, but before I follow their advice I decide to snoop around the Internet and see what other folks are saying.  As I expect, information abounds so I decide to restrict my search and only check out various lists of countries which rank the world markets based on their business attractiveness.  Still, there are too many so I zero in on the following six lists which seem to come up most often in my search:

• Global Competitiveness Index from the World Economic Forum
• Ease of Doing Business Index from the Doing Business project at the World Bank Group
• Index of Economic Freedom from the Heritage Foundation
• Business Environment Rankings of the Economist Intelligence Unit
• FDI Confidence Index from A.T. Kearney
• World Competitiveness Yearbook by IMD

I am curious how China and India compare on these rankings, and I will throw in Brazil and Russia to cover all four BRICs.  As a busy businessman I don’t have the time to correlate or standardize the data, so I am just going to create a simple table showing the position of the countries on each of the ranks.

What do I see?  Well, a rather confusing picture.  On one hand, the FDI Confidence Index tells me that there is no better place in the world to go than China.  On the other hand China is towards the bottom of the Index of Economic Freedom, and Doing Business puts it somewhere in the middle of their distribution.  Russia is a clear loser on most of these ranks with the exception of Doing Business, which places it above both India and Brazil.  India scores worst on the Doing Business rank, yet all other ranks think it’s the second best BRIC country to go right after China.  In several of the rankings China is at the top and Russia at the bottom.  In EIU’s Business Environment rankings, these two countries are in the middle and Brazil is the best and India the worst performer of the four countries.

So who is wrong and who is right?  They are all right in their own way.  The thing is that we are sort of comparing apples and oranges.  While our six ranks all measure some aspect of business attractiveness, they all come at it from a different angle and it’s these differences in methodology that are really key in interpreting results.  Some focus specifically on foreign investment while others examine the quality of business conditions for all enterprises.  More specifically,

• Global Competitiveness Index is the most comprehensive of our indices and includes hard data as well as business opinions on a range of issues including institutions, labor, infrastructure and health. It does not have a specific business focus, but rather it assesses the ability of countries to provide high levels of prosperity to their citizens.
• Ease of Doing Business Index measures the quality of regulations and efficiency of business-government transactions for domestically owned small and medium-size enterprises (SMEs). It does not measure macroeconomic conditions, corruption, cost of labor and capital, or other factors which affect the likely profitability of new business ventures.
• Index of Economic Freedom covers ten areas including trade freedom, business freedom, investment freedom, and property rights. It relies on secondary sources of information rather than business interviews.
• Business Environment rankings examine ten separate criteria covering the political environment, macroeconomic environment, market opportunities, policy towards free enterprise and competition, and others.
• FDI Confidence Index is based on a survey of top executives who are asked about the future prospects for foreign direct investment (FDI) in each of the measured countries.
• World Competitiveness Yearbook looks at five main areas of economic performance, government efficiency, business efficiency and infrastructure.

So what are we learning from all this?  One key lesson surely is that we should not blindly trust any set of indicators and country rankings that might result from them.  Indicators are exactly what their name says they are—data which are only indicative, rather than definitive in measuring a particular issue.  Each of the six indices we looked at has its own unique methodology and target audience, and conflating all of them together will usually muddle the picture instead of adding clarity.  Business people, governments and academics should be prudent in using these numbers beyond their intended purpose and in extrapolating far-reaching conclusions about how countries actually compare to one another. 

So is China still the place for my business?  I might have to do a little more research on that.

Each note is 5-6 pages long and highlights the important differences in the investment climate between various firm subgroups such as exporters vs. non-exporters, business sectors, and different geographic locations within a country. There are currently six notes available and many more on the way. For now we are concentrating on the Eastern Europe and Central Asia (ECA) region, but over time we will cover most emerging markets.

One of the first notes to be published is on Georgia, which has been an active reformer as measured by Doing Business. This country note, based on data recently released by the Enterprise Surveys team, shows that these reforms have generated tangible benefits for firms.

The improved regulatory environment is reflected in the Enterprise Surveys data in two important ways. First, senior managers in Georgia spend less time dealing with government regulation than in any other country in ECA. Second, as shown in the figure below, the number of visits or required meetings with tax inspectors has fallen sharply since 2005.

  
Source: Enterprise Surveys

There are still, however, challenges for the Georgian economy. One of these challenges is to improve in the area of crime and security. As the figure below shows, Georgian firms both pay a lot for security and face high losses due to theft, robbery, vandalism, and arson.

Source: Enterprise Surveys

Apart from security, the note identifies several areas that policymakers may wish to target in order to improve the business environment. In particular:

…the business environment goes beyond regulation and there is room for improvement in areas outside of business regulation. For instance, loans to Georgian firms require extremely high levels of collateral. Also internet usage by businesses is quite low, as are capacity utilization and export rates. Policymakers can focus future reform efforts in these areas.

One other headline from the report caught my attention. More governments reformed this year than in any year since 2004 (the first year of Doing Business). And much of this reform occurred in low- and lower-middle income economies. The financial crisis and its impact on the global economy clearly haven't reduced the commitment of governments in the developing world to improving their business environments. 

Here are a few more highlights from the report:

Since 2004 Doing Business has been tracking regulatory reforms aimed at improving the ease of doing business. Despite the challenges presented by the financial crisis, the number of reforms hit a record level this year. Between June 2008 and May 2009, 287 reforms were recorded in 131 economies, 20% more than the year before. Reformers focused on making it easier to start and operate a business, strengthening property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures.

Two regions were particularly active this year: Eastern Europe and Central Asia and the Middle East and North Africa. In Eastern Europe and Central Asia, 26 of the region’s 27 economies reformed business regulation in at least one area covered by Doing Business. Governments in the Middle East and North Africa are reforming at a similar rate, with 17 of 19 reforming in 2008/09. In both cases, competition among neighbors helped inspire widespread reform.

Here is an overview of the report. Here are the complete rankings of all 183 economies. And for fellow bloggers out there, here is a page with the most important figures from the report that can be freely copied. 

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.

The key question is how widespread is the productive role of BAs? I provide some evidence on this issue using data from Business Environment and Enterprise Performance Survey (Enterprise Surveys – BEEPS, 2005). The survey was conducted in 27 countries in Eastern Europe and Central Asia covering close to 10,000 firms. The survey asked firms if they were a member of a BA and if so, what benefit they derived from the BAs.

Over 40 percent of the firms surveyed belonged to one or more BAs. The figure below shows how these firms benefit from being a member of a BA. Close to 52 percent of the members benefit from lobbying activities of the BAs. This is an upper end estimate of the rent seeking activity of the BAs since not all lobbying need be unproductive or distributive (consider lobbying for customs reforms, etc.). Even so, a much larger percentage of members benefit from clearly productive activities of the BA such as supply of information on domestic markets (77 percent) and government regulations (75 percent). In a nutshell, BAs appear to be a mixed bag, at least in Eastern Europe and Central Asia.

Source: Enterprise Surveys (BEEPS, 2005)

In conversations about Africa, corruption often takes center stage. Even Barack Obama—who has relatives in Kenya—was recently quoted on the issue during the G8 summit earlier this month: "my cousin in Kenya can’t find a job without paying a bribe." But the data suggest crime and security should be as much a cause for concern as corruption. The Enterprise Surveys reveal that bribes paid and crime-related losses are roughly similar, (3.1% vs. 2.7%) although there is some variation among individual countries (see the figure below).

Perhaps a closer look at the crime and security situation of enterprises is warranted.

Source: Enterprise Surveys. Crime and security losses above include losses to firms due to crime and their expenses on security (averaged over all firms surveyed). Surveys for the various countries were conducted at different points of time between 2005 and 2007.

However, the Business Environment and Enterprise Performance Survey (Enterprise Surveys – BEEPS 2009), a firm-level survey conducted in 29 countries in Eastern Europe and Central Asia, suggests that there is no correlation between crime and income levels. The percentage of firms that experienced one or more incident of crime during the survey year (2008-09) equaled 19% in the poorest 50% of the countries and 22.3% in the rest. Similarly, the percentage of firms that spent on security equaled 57.7% in the low-income countries and 55% in the high-income countries. These differences are not statistically significant.

The figure below shows similar findings for losses to firms from crime and their expenses on security (as % of their annual sales and averaged over all firms in the country). There is a negative relationship between security expenses and income level, but this relationship is weak and entirely driven by two countries, Kyrgyz Republic (KGZ) and the former Yugoslav Republic of Macedonia (MKD). Losses due to crime are positively correlated with income levels, although this relationship is too weak to make any inference with a reasonable degree of confidence.

In short, explaining the differences across countries in terms of crime and security for firms requires going beyond overall development measures such as per capita income.

Findings from the Business Environment and Enterprise Performance Survey (Enterprise Surveys – BEEPS, 2009) for 29 countries in Eastern Europe and Central Asia (ECA) reveal a similar picture although the level of crime in ECA is lower. Figure 1 shows that the crime related losses (losses due to crime and expenses on security incurred by firms during 2008-09) as % of firms’ annuals sales equal 1.9% when averages over all firms in the region (compared with 2.7% in LAC). This is about 8 times what firms spend on R&D, 1.8 times the reported levels of bribe and 1.3 times losses due to power outages.

In short, crime may not be as big a problem in ECA as in LAC, but it cannot be neglected either.

One feature of the data that stands out is the high level of crime in the construction industry. Table 1 (below the jump) shows that close to 30% of the firms in construction faced at least one incident of crime during the survey year (2008-09). The figure is much lower for service firms (21.3%) and manufacturing firms (13.8%). Losses due to crime as a percentage of firm’s annual sales are also higher in construction (0.62%) relative to manufacturing (0.34%) and also service firms (0.51%). The difference in losses from crime between service and construction firms does not appear to be that big in Table 1, but this is largely due to 3-4 service firms that report very high levels of losses due to crime.

Looking at individual countries, Figure 1 reveals that in 19 out of the 29 countries, the incidence of crime is highest for the construction industry. For example, in the Czech Republic, 68% of the construction firms were victims of crime compared with 38% of service and 23% of manufacturing firms. Losses due to crime as a percentage of annual sales are highest in the construction sector for 15 out of 29 countries, for manufacturing in 4 countries and in 10 countries for service firms (Figure 2).

Interestingly, there is not much difference in the percentage of firms spending on security across the three industries (Table 1). Also, such expenses (as a percentage of of firms’ annual sales) are least for construction firms (Table 1). It might be tempting to conclude that construction firms face more crime because they spend less on security, but such a conclusion must await a rigorous analysis of the security-crime relationship. For one, the negative security-crime relationship is not supported by the comparison between manufacturing and service firms (Table 1). Further, construction sites are usually in public areas, which might be easy targets for criminals.

One of the unique elements of Enterprise Surveys is that firms are asked for the percent of time that senior management spends dealing with government regulations. Doing Business, among other things, measures how burdensome it is for firms to comply with government regulations. The two sources of information are collected independently using entirely different methodologies. Nevertheless, the figure below (after the jump) shows that there is a strong correlation across countries between time spent dealing with regulations and the Doing Business rank.

The bars show the average time spent by senior management dealing with government regulations. The line shows the ranking from the Doing Business 2009 report. Senior managers in Georgia spend the least amount of time dealing with government regulations in the region. Georgia is also the best-ranked country in ECA according to Doing Business.

Georgia is just one example of a general pattern. Senior managers generally spend less time dealing with government regulations in countries with better ranks in Doing Business. (A spearman rank-order correlation model yields a result that is statistically significant at the 0.01 level).

Each hour spent dealing with government regulations is an hour not devoted to making the business more productive. The chart is one more example that shows the costs of business regulation vary substantially across countries.

What is the benefit of this time spent dealing with government regulations? It might help keep consumers safe, protect the environment, or have some other benefit. I’ll address this question in a future post.

It turns out that getting to the bottom of this question requires drawing a careful distinction between two concepts: the incidence and burden of crime.

Typically, studies of crime are based on the incidence of crime as measured by the percentage of agents (households, firms, etc.) in a country/city that suffer one or more incidents of crime. In a previous post, I argued that the incidence of crime can be very different from the burden of crime as measured by losses due to crime. Specifically, for the LAC region and compared with large firms, small firms show a smaller probability of being a victim of crime but losses from crime as a percentage of firms’ annual sales were much bigger from small vis-à-vis large firms. This holds even when we average out the losses across all (victims and non-victims) small and large firms.

Using data from the Business Environment and Enterprise Performance dataset (BEEPS, 2009), a similar pattern is found for twenty nine countries in Eastern Europe and Central Asia. Averaged across all twenty nine countries, the incidence of crime equals 18.3% for small firms and 27% for large firms (medium firms lie in between with a rate of 22.4%). However, the burden of crime (averaged over victims and non-victims of crime) is much higher for small firms than for large firms (0.52% for small, 0.28% for large; medium firms show losses of 0.41%). The pattern is found to hold for most individual countries as well, although there are some exceptions (Figures 1 and 2).

Apart from the mismatch between the incidence and burden of crime, these results also caution against thinking of crime as a problem for relatively large firms alone. The burden of crime is greater on the smaller firms.

…even within the narrow confines of regulatory regime, some policy dimensions emphasised by the index are of questionable value. For instance, the index attaches great importance to the costs incurred and time taken in starting a business. But when firms are entering a market with a horizon of several decades, does it matter whether it costs $500 rather than $5,000 and takes 20 rather than 200 days to start the business?

My question is whether or not the time horizon for a potential start-up firm is really one of several decades. Eric Bartelsman, John Haltiwanger and Stefano Scarpetta study firm survival rates (and a lot more) in this article. Figure 4 gives the probability that a new firm survives two, four, and seven years for several countries.

On one end of the spectrum is Mexico, where a new manufacturing firm only has about a 30% chance of surviving seven years. At the other end of the spectrum is Slovenia, where a new manufacturing firm has about a 70% chance of surviving seven years.

Given the observed time horizons for new firms, at least in some countries, the monetary and time costs of initial registration may be quite important.

Safavian and Sharma (2007) go one step further by explicitly incorporating enforcement of creditor rights where enforcement is proxied by court efficiency. Using data on firms in 27 countries in Eastern Europe and Central Asia collected by the World Bank’s Enterprise Surveys and EBRD (BEEPS, 2002, 2005), the study finds that laws that improve creditor rights have a much larger positive effect on the availability of credit when enforcement is also good. They conclude that creditor-friendly laws and efficient courts are strong compliments for credit.

Another study based on Enterprise Surveys, Almeida and Carneiro (2009), measures enforcement of labor laws by the distance between the firm’s location and surrounding enforcement offices. Focusing on Brazil, the study finds independent effects of stricter enforcement – smaller sized firms and less employment.
 
These studies suggest that laws on the books can show very different effects when considered in conjunction with the quality of enforcement. Since enforcement is likely to depend on firms’ location, size and other observable firm-characteristics, use of micro datasets like the Enterprise Surveys is perhaps the most useful way forward.

(Thanks to Giulio Quaggiotto for the pointer.) 

OAO United Aircraft Corp. will help its Finance Leasing Co. unit repay $250 million to bondholders after it became the first state-run Russian company in more than a decade to default on a foreign-currency coupon payment, Deputy Prime Minister Sergei Ivanov said.

Bloomberg also reports that Russian companies owe some $100 billion in foreign-currency debt due in 2009. Estimates for all emerging market corporations in 2009 range from $1.25 to $2 trillion.

...financial institutions across Asia are awash with liquidity. This is a situation that evokes an underlying problem—the absence of investor confidence. The absence of investor confidence continues to ail most developing economies, as investors remain wary of risks that abound across the region. This is where the strategic role of ADB lies.

They have their work cut out for them. The Institute of International Finance has some harrowing predictions for private capital flows to emerging Asia - a falloff to $64.9 billion in 2009 from $314.8 billion in 2007, a drop of nearly 80% in two years. This places it behind only emerging Europe in percentage terms.

A new paper from John Earle, a Professor of Economics at the Central European University and a Senior Economist at the Upjohn Institute, extends the rebuttal much further. Earle points out that a very basic link in the chain of reasoning of the Lancet authors is missing - namely, mass privatization did not lead to substantial job loss. In fact, the effects on employment were typically neutral or positive (click on Figure 1 below). For the full argument, check out Mass Privatization and Mortality: Is Job Loss the Link? It's quick but well worth the read.

On the back of each check is an eight-digit number which ends with an Armenian letter. Apparently at some time in the near future these numbers will be called, like in a lottery, and if the number called matches the one on your receipt you can win money–up to $16,000 if you're lucky enough… I am not ashamed to admit that I am indeed saving all the receipts that I receive, in case I happen to win enough cash to put down towards the payment of an apartment. You never know...What's the excuse of thousands of citizens who make money but refuse to pay [taxes]?

(Hat tip: Global Voices Online)

Moldova has been ranked fifth, well ahead of powerhouses like Japan and the United States, in an index compiled by London-based magazine The Banker that rated countries on how well-protected they are from the slowdown.
 
The index concluded that the very reasons that have made Moldova an economic laggard — a primitive financial system, low levels of lending and an economy based on farming — now make it well-placed to withstand the slump.

(Hat tip: Eternal Remont) 

“Salary progression”—the difference in salary between junior and senior professors—in general appears modest compared to the situation in the professions outside academe. According to our research, for most of the 15 countries in the study, salaries seldom doubled between entry level and senior ranks. The major industrialized countries (including Germany, France, Canada, the United States, and the United Kingdom) stood at the bottom, in terms of variations between junior and senior ranks, and the developing countries (such as China, South Africa, Argentina, and others) at the top. India ranks poorly on both progression and on basic salary. The lack of possibilities for improved salaries is a problem for the profession in general, but it is particularly damaging for the most productive academics. The latter are the most likely to leave academe or to go to countries with higher salaries.

That is from a new article by Philip Altbach, Director of the Center for International Higher Education, called The Intricacies of Academic Remuneration. Of course, we must take into account the many types of non-income remuneration that academics receive. But still I wonder - what are the chances that the professiorate (or Ministries of Education) would permit the kind of income dispersion that is normally seen in the (purely) private sector? I'm not holding my breath. 

And for those of us suffering through the financial crisis, Sterligov offers a bit of peasant wisdom: "Not just for my oligarch friends but for everyone in this crisis - buy products, flour and salt and sugar. All of you. You will need them."

(Hat tip: Eternal Remont)