Yesterday I attended the World Bank's book launch of Bringing Finance to Pakistan's Poor: Access to Finance for Small Enterprises and the Underserved. The authors, Tatiana Nenova and Ceclie Thioro Niang, interviewed 10,000 households from across Pakistan's geographic and socio-economic landscape, including both men and women.

In general, Pakistanis are underserved by both formal and informal channels of finance. Only 14 percent of the total population has formal access, while just over 59 percent have access to either formal or informal finance. As the chart above illustrates, this is quite low compared to Bangladesh (32% formal access), India (48%) and Sri Lanka (59%). Small and medium enterprises, which account for 30% of GDP and 78% of jobs, only account for 16% of the country's overall credit.

What explains this gap? The authors argue:

Major constraints to financial access, in spite of policy reforms, arise from the high levels of poverty, combined with low awareness of and information about available financial services, as well as gender bias.

Three things in particular stick out to me: Women, savings and microfinance.

First, 80 percent of Pakistani women have no access to finance. However, this gender bias is eliminated at the formal level.

Second, the microfinance sector is very small, reaching only 2 percent of the poor. As a comparison, there are 82m cell phones users versus 3m microfinance clients. The authors point out that Pakistani microfinance institutions are not yet commercially viable, but have huge growth potential (10-20m estimated borrowers). Unlike most other countries, Pakistan's small microfinance industry is male-dominated, reaching few women.

Third, the survey finds that most Pakistanis have a strong aversion to debt, and are seeking financial channels to store their savings, rather than for borrowing. This is largely due to low levels of financial literacy, but also because formal borrowing has very high interest rates (19%), especially when compared to informal borrowing (23%).

This report is a pioneering survey, and the authors have been scrupulous in their methodology. It will serve well in closing Pakistan's financial information gap.

The Halo Effect, explained.

Mongolia is in the news this week.

A societal preference for boys has become an unlikely source of power for Indian women.

Consumption versus Income Inequality.

So how do firms feel about the difficulty of finding a trustworthy employee compared to finding skilled workers or dealing with labor laws? Somewhat surprisingly, data from a survey of about 2000 firms conducted by Enterprise Surveys in 2005 suggests that in contracting labor, trust is the most common problem for firms, followed by skill shortage and then labor laws. Close to 34 percent of firms feel constrained in hiring workers because it takes too long to find a trustworthy employee, 24 percent report hiring problems because the type of skills needed are not available and 20 percent report hiring problems due to labor laws that include cost/restriction of dismissal, restrictions on hiring casual or temporary labor.

While these figures only tell us how often these issues come up and not their relative importance for affected firms, they do suggest that a more serious look at the somewhat neglected issue of finding trustworthy employees is needed.

Source: Enterprise Surveys (2005).

Labor market reform is a contentious and politically sensitive issue in India and its mere mention in the Economic Survey suggests that we might see some action this time around. A few weeks ago, the government exempted the IT and software establishments from the Industrial Employment (Standing Orders) Act 1946 (Central Act 20 of 1946). These laws are strict in the way they classify workers, their working hours and shifts, and the wages payable, besides other archaic rules on leave and attendance.

The Head of Human Resources in Infosys Technologies, one of the biggest IT companies in India, has this to say about the reform:

We have antiquated labour regulations, which do not fit the requirement of the knowledge-based industry. This reform is necessary. We do not want inspector raj here, what we want is more such reforms across industries. (Times of India, 8/31/2009; online edition).

The exemption to the IT industry is valid only for a period of two years—to help the industry fight the global slowdown. Nevertheless, the experiment could help break the status quo and pave the way for more lasting labor reforms in the near future.

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.

In the midst of all this flurry—mostly focused on advanced features—my personal favourite, however, has to be an article from SocialBrite that brings us back to basics: namely, voice-based services. As the author notes:

Voice transmission has a singular advantage over SMS and data transmissions—it channels human, spoken language directly. Users of many literacy levels can use voice technology with keypad and voice navigation, and applications can be run in local languages. Users can issue commands and requests in their natural language, and thus communicate more accurately.

It was fascinating to learn about Avaaj Otalo, a “voice-based community forum" for famers in Gujarat, or the experience of Mobiled, a service that delivered Wikipedia over mobile phones to schools in South Africa through a speech synthesizer. Apparently, audio-wikis” and the spoken web (a voice-driven ecosystem parallel to the world wide web targeting underserved populations in emerging markets) are next in line. Cost, however—as the author of the article notes—is still the major hurdle: once again, sustainability of business models is the key question for development 2.0.

Not a stunning revelation perhaps, but it certainly made him unique for his place and time. He was a Pakistani Muslim born early last century, with two wives, 10 children, and very little money. And he believed it was more important for his six daughters to gain an education than his four sons. His sons, he felt, would eventually find their way in the world, but his girls might need a little extra help to level the playing field.

In the New York Times Magazine last week, Nicholas Kristof and Sheryl WuDunn write about much the same thing my grandfather realized so many years ago. In an article called The Women’s Crusade, they discuss the development impact of educating and empowering women. Calling uneducated women the greatest unexploited resource in many poor countries, they go on to point out that these very women, if given an education and a little bit of help starting a business, “represent perhaps the best hope for fighting global poverty.”

The first example they cite is of a poor Pakistani woman named Saima Muhammad who started her own business with help from a microfinance loan. Today she is doing so well she has become the main breadwinner in her extended family. This success has enabled her to send her three children, all daughters, to school. She hopes to send them onto college one day. My grandfather would have approved.

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)

The curious question is why, considering that employment of migrants in many recipient countries has been hit hard. The Economist offers an explanation:

...returns do matter. For example, the combination of a weak rupee and higher interest rates in India compared with rich countries, may go a long way towards explaining last year’s vastly increased flow of remittances from Indians abroad.

In other words, migrants are also amateur currency speculators. However, it looks like the Economist didn't quite come up with this conclusion on its own. Compare the explanation provided in the Migration and Development Brief:

...flows to some South Asian and East Asian countries increased sharply in 2008 partly because depreciating currencies against the US dollar made assets in the home country more attractive, with a “sale effect” resulting in a shift in remittances being sent for consumption motives to investment motives.

(On a side note, I have started to wonder how much of the Economist is just a Cliffs Notes version of reports put out by the World Bank, IMF, etc.) The explanation proffered by the Bank (and the Economist) is clearly plausible, but it relies on an implicit theory rather than empirical evidence. The theoretical assumption is that the supply of remittances is elastic with respect to exchange rates because migrants are trying to maximize the value of their money - in plain English, they think like currency traders. But other factors may be at play.

Foremost among these is the possiblity that the recipients of remittances in developing countries have suffered an even worse blow to their income than the sender of remittances. This seems to me at least as likely as currency speculation, though I don't know of any evidence to back this up. (Of course, both factors may be at play.)

Another possibility, considered only tangentially in both the Economist and in the Brief, is that some part of the migrant population is liquidating its accumulated savings prior to returning home. Rising anti-immigration sentiment could make this a real possibility. What a shame it would be for developed and developing countries alike.

Update: On another side note, anyone thinking about sending remittances to a developing country may want to check first with the handy World Bank Remittance Prices database. The website allows you to compare the cost charged by a range of companies to send $200 or $500 to a number of developing countries.

However, I had cautioned that to properly understand the rate of return on investments to improve power supply across regions, we should look at which states (leading vs. lagging) benefit more from an hour’s reduction in power outages. It is possible that this marginal benefit could be higher in the leading states even though they face much fewer power outages.

The figure below shows that losses as a % of annual sales to retail stores per hour of power outage are much higher in the initial hours of power outage. In other words, as stores face more and more hours of power outage, the additional negative impact becomes smaller and smaller.

Now add two more facts to the figure. First, stores in leading states face fewer hours of power outages than stores in the lagging states (47.6 vs. 126.3 hours per month). So this implies losses of about 0.245% per hour of power outages to stores in the leading states compared with 0.203% in the lagging states. Second, annual sales of stores in the leading states are about 1.6 times that in the lagging states. Putting all this together, the absolute benefit (in USD) from an hour’s reduction in power outage in the leading states is about 1.6 times the same in the lagging states.

In short, assuming that the cost of increasing power supply is the same across leading and lagging states, the leading states offer a better return to improvement in power supply than the lagging states. This finding must be balanced against concerns about regional equality, but this is separate from the issue of the efficiency of an investment. More broadly, we should be careful in highlighting the worst performing states or countries as in dire need of reforms. A proper impact analysis or marginal cost-benefit calculations are important.

Source: Enterprise Surveys. The figure is a partial scatter plot controlling for store-type fixed effects (traditional store, consumer durable store and modern format store), city fixed effects and floor area of the shop. The strong negative relationship shown does not depend on the stated controls.

Lack of reliable data is a major problem for studying retailing in developing countries such as India. In 2005, the Enterprise Surveys conducted a survey of 1,948 stores in 41 large cities of India. The survey provides information on various store characteristics and the obstacles they face in doing business. The picture below provides a sense of what policy makers should worry about the most. As experienced by retailers, inadequate power supply and access to finance, high tax rates and corruption and land related problems are the five most serious obstacles. I plan to elaborate on the nature and magnitude of these problems in future posts.

Source: Enterprise Surveys. The figure contains the full list of obstacles from which the respondents could choose.

The Economic Survey of India (2008-09)—an annual publication of the Ministry of Finance, Government of India—was recently tabled in the Indian Parliament. The Survey discusses at length the need for greater public-private partnership in key areas such as infrastructure but also cautions against a number of problems confronting the PPPs. In particular, the Survey notes the following 6 key hurdles faced by PPPs:

• Policy and regulatory gaps, specially relating to specific sector policies and regulations.
• Inadequate availability of long-term finance (10 year plus tenor)—both equity and debt.
• Inadequate capacity in public institutions and public officials to manage PPP processes.
• Inadequate capacity in the private sector—both in the form of developer/investor and technical manpower.
• Inadequate shelf of bankable infrastructure projects that can be bid out to the private sector.
• Inadequate advocacy to create greater acceptance of PPPs by the stakeholders.

Much like EPEC, the Government of India has initiated a number of measures to address the above problems. I hope to discuss these measures and related issues in a future post.

What caught my attention this year was the discussion on labor issues: labor laws and the emerging skill shortage. Taking note of the global crisis and the impact on the Indian economy, the Survey highlights the urgent need to create more employment by reviewing labor laws. It notes that:

Further, there is an imperative need to facilitate the growth of labour-intensive industries, especially by reviewing labour laws and labour market regulations. This is particularly important in reversing the current, not-so-encouraging manufacturing employment trends.” (Economic Survey, page 223)

Some of the specific measures recommended include the following:

• Retrenchment of workers: At present prior permission of Government as per Chapter V-B of Industrial Dispute Act is needed for this purpose. The Survey recommends abolishing this procedure with simultaneous increase in compensation from the present 15 days wages for every year of service.
  
• Contract Law: The Survey recommends amendment of the Contract Law to allow use of contract labour in non-core activities or when the activity is of intermittent nature during the year.
  
• Working hours: Amendment of the Factories Act is recommended to increase workweek to 60 hours (from 48 hours) and daily limit to 12 hours to meet seasonal demand through overtime.

The above recommendations suggest a modest and cautious start towards the contentious and politically sensitive issue of labor reforms in India. While actual implementation is a different issue, the hope is that a consensus among policy makers to take another look at the labor laws in India is around the corner.

While the annual Doing Business report ranks countries around the globe on the ease of doing business, the great variation within countries—especially large countries with a federal structure—means that it's also useful to rank the business environment of cities within a country. The Doing Business team started a separate line of subnational reports in 2006 that adapts DB methodology to the ranking of cities within a country. The Doing Business in India 2009 report pares back DB's standard line-up of 10 indicators to 7 to produce the ranking of cities shown above.

Here are a few more highlights from the report:

• Substantial variation between cities in the cost of opening a business: "In Patna, Kolkata, and Bhubaneshwar, entrepreneurs spend less than 40% of income per capita to open a business; for those in Mumbai, the cost is almost double."
• Big differences in registering property: "In Gurgaon, it takes only 26 days and 7.7% of the property value to register property, easier than in Guwahati, where it takes 84 days and 15.4% of the property value to do so."
• A very high number of yearly tax payments in all cities (compared to China, Brazil, or the average for South Asia): "...the number of yearly payments varies from 59 in Ludhiana, Noida, Bengaluru, and Mumbai to 76 in Kochi and 78 in Hyderabad."

Update: David Kaplan reminds me in the comments that DB does not capture all the elements of the business environment. Let me make it explicit by quoting directly from the report:

Doing Business in India does not measure all aspects of the business environment that matter to companies or investors, nor all of the factors that affect competitiveness. It does not, for example, measure security, macroeconomic stability, corruption, labor skills, the underlying strength of institutions or the quality of infrastructure. Nor does it focus on regulations specific to foreign investment.

...The pace of expansion in the new few years may well turn out to be frenetic. The most serious problem that this sudden expansion will entail is finding faculty of appropriate quality in the public higher education system. Therefore, an initiative to be seriously considered involves giving greater financial autonomy to universities, to enable them to mobilize resources from sources other than the government—partly to attract Indian academics teaching abroad back to India. Salaries have risen sharply recently, thanks to the Sixth Pay Commission’s recommendations to make returning home attractive for nonresident Indians. However, the requisite autonomy of universities is also needed to encourage them to attract faculty back to India.

How has the financial crisis affected the Chinese and Indian market?

Both countries are oriented towards the exports market. Export of IT has taken a hit, so exports are not going to recover quickly. The challenge is to direct these industries to serve the domestic market. There is a fairly low penetration of computerisation in the Indian domestic market. So there is a lot of potential for the Indian companies to serve the domestic market. The same goes for China, where the companies should focus more on the development of domestic market. There has to be some reorientation in terms of exports.

For extra credit, you can watch a short clip of Neil on his recent visit to India on Youtube.

...microcredit does have important effects on business outcomes and the composition of household expenditure. Moreover, these effects differ for different households, in a way consistent with the fact that a household wishing to start a new business must pay a fixed cost to do so. Existing business owners appear to use microcredit to expand their businesses: durables spending (i.e. investment) and business profits increase...

...While microcredit succeeds in affecting household expenditure and creating and expanding businesses, it appears to have no discernible effect on education, health, or womens' empowerment. Of course, after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households, it is possible that impacts on education, health, or womens' empowerment would emerge. However, at least in the short-term (within 15-18 months), microcredit does not appear to be a recipe for changing education, health, or womens' decision-making.

I have no doubt these findings will provoke strong reactions in the microfinance community - I expect a deluge of rebuttals. There's one thing that's worth noting right now, though. Unfortunately, this particular trial may not go that far in ending the debate around microfinance.

As the authors note, the impact of microfinance in education, health, etc. may not appear for quite some time. In normal times, we would just wait another year or so and take another survey. However, the financial crisis means these are not normal times. If, in a year or two, a new set of results appears to indicate no impact on human development, the randomistas could claim this as a failure of microfinance. In turn, the microfinance proponents will claim that the financial crisis invalidates the findings, arguing that the ROI for small-scale entrepreneurs was abnormally low due to the crisis. Unfortunately, we'll simply have no way to know for sure who's right.

Update: I wanted to respond to the criticism I've received regarding the the title I used for this post. In fact, I contradict the notion that the "verdict is in" in my own discussion of the findings: "Unfortunately, this particular trial may not go that far in ending the debate around microfinance." I was gently poking fun at the randomistas who authored this study - although they do include provisos, there is a bit of triumphalism in places: "Randomized trials, by deliberately effacing all ex-ante differences between the treated and non-treated group, make it possible to compare like with like and extract the true impact of microcredit." Surely, it will take more than one trial to figure out "the true impact of microcredit" - for the reasons I gave, and the many reasons offered by the smart readers of the PSD blog.

Update II: The Economist has just come out with its own review of The Miracle of Microfinance? Overall, the magazine takes away a positive view from the microfinance study. Money quote:

Tiny loans are unlikely to be enough to allow these businesses to grow to an efficient scale, of course. But the role of microcredit in allowing people to signal their creditworthiness is valuable, especially if their success makes banks more willing to lend them larger sums and leads to even more economic activity. By being willing to take a risk on entrepreneurial sorts who lack any other way to start a business, microcredit may help reduce poverty in the long run, even if its short-run effects are negligible.

A recent study by Matthieu Chemin (2009, Journal of Public Economics) finds that in the year following the reform and in the affected districts, the legal situation improved substantially with judges disposing of 25% more cases; also, investors reported being much more confident of obtaining bank loans. As a consequence, the proportion of the unemployed applying for permits or seeking land, buildings or machinery to establish enterprises tripled. This led to a 30% increase in the transition from being unemployed to being an employer or self-employed. A similar increase occurred from being an employee to being an employer or self-employed.

The study concludes that the reform was worth the effort: it cost $350 million or 0.1% of Pakistan’s 2002 GDP and the estimated economic benefit was equal to 0.5% of GDP. While there is no certainty that what worked in Pakistan will work elsewhere too, I think the the study makes it clear that it would be worth a try.

...the overriding importance of rules and management practices emerging from our data suggests that...even groups comprised of very poor borrowers in high risk conditions can achieve high repayment rates if proper rules and management practices are adopted.

That is the conclusion of a recent paper on the Determinants of Repayment Performance in Indian Micro-Credit Groups. I think the most fasinating finding in the paper is that the optimal number of members of micro-credit groups is exactly 14. If a group is larger or smaller than this number, the probability of repayment is lower. Is this number specific to conditions in India, or could it be similar to the Dunbar number in the sense that it reflects some inherent and universal feature of human social networks? 

Paro International Airport

The term “Dutch Disease” first appeared in the Economist as a reference to the Netherlands, when the discovery and subsequent national profits from a large natural gas field displaced the manufacturing sector. Why would sudden natural resource wealth be a bad thing? The easy, profitable exploitation of a natural resource displaced the competitiveness and growth potential from other sectors of the economy.  In the Himalayan context, Bhutan’s dependency on hydropower projects (exporting electricity to energy-hungry India) contributed to jobless growth over the past few decades. Are potential moral decline and other similar problems in countries experiencing the resource curse phenomenon on a collision course with Bhutan’s desire for Gross National Happiness?

Ministry of Economic Affairs (!), Thimphu

As Bhutan slowly opens its doors and economy to outsiders, the World Bank hopes to engage the Royal Government of Bhutan in a constructive dialogue on reforms that will promote employment growth. An Enterprise Survey along with a Workers’ Survey are currently in fieldwork with data expected to be available by August 2009. By interviewing firms on the current business environment and benchmarking indicators to similar economies, the data will suggest ways to encourage private sector growth. Ripe candidates for reform include the difficulty in obtaining credit, rigid banking policies, and inadequate transportation facilities which inhibit niche markets such as agribusiness exports.

The primary challenge for Bhutan will be the balancing act between economic liberalization to create jobs and protecting and maintaining their cultural values. The Bhutanese are deeply proud of their traditions and extremely protective of the environment. “Sustainable” is not a cynical catchword in Bhutan - rather it is an integral component to their philosophy of Happiness.   

Punakha Dzong

A few studies that attempt to address this question suggest that the picture at the aggregate and micro level can be very different. For example, in a study on labor laws in India’s manufacturing sector, Ahsan and Pages (2009) find that employment protection legislation and dispute resolution legislation have very different effects. For instance, labor intensive industries are hardest hit by stringent employment protection legislation, while capital intensive industries are hardest hit by dispute resolution legislation.

In another study, Amin and Haidar (2008) look at the determinants of the cost of registering property in over 120 countries using data from the Doing Business project. Distinguishing between notary and non-notary costs of property registration, they find little overlap between their determinants. For example, a 1% increase in GDP per capita is associated with a 0.3% decrease in non-notary costs but a 0.13% increase in notary costs; Catholic and Protestant countries relative to others and Presidential as opposed to Parliamentary systems show significantly lower non-notary costs but none whatsoever for notary costs. These findings suggest that looking at micro-regulatory measures can significantly improve our understanding of the causes and effects of regulation.

Amin (2009) tests this hypothesis on 1,948 retail stores in India using data from Enterprise Surveys, a regular World Bank survey on firm performance, firm characteristics and the business climate. These data are ideally suited for answering the question at hand. The study finds that the percentage of retail stores that use computers rises by 6.2 percentage points as we move from the state with the least to the median level of rigid labor laws. This is a large effect given that only 19% of the stores in the sample use computers. The theoretical predictions mentioned above are therefore confirmed.

Why is this relationship between computers and labor regulation important? One can think of at least three reasons. First, the negative effect of labor laws on employment found in a number of studies could be magnified if firms are easily able to substitute labor with computers (Card et al. 1999). Second, it is easier to substitute labor with computers in jobs that can be automated. These are the relatively low paying and unskilled jobs. Thus, stricter labor laws may lead to a more perverse distribution of income when cheap computers are at hand.

And third, if stricter labor laws are driving greater computer usage then the predicted relationship between efficiency and computer usage (subject of much debate) may not hold in the aggregate. That is, to properly understand the computers/productivity relationship one needs to distinguish between the motive of saving labor because of labor regulations and the motive of enhancing efficiency through computer usage. To what extent these effects hold remains to be empirically ascertained - an important task given that the use of computers and other modern devices is fast spreading across the globe.

(Disclosure for the methodologically inclined: The retailing study is based on firm-level data on 1,948 retail stores in 41 large cities of India collected in 2005 by the World Bank’s Enterprise Surveys, which gathers data on business climate, firm performance, and the like. Data on adult non-workers per household (averaged at the city level) are taken from the Census of India where adult non-workers are defined as those above 7 years of age and who voluntarily opt out of the labor market (neither working nor searching for a job).)

The underlying motivation for the study is that competition in the retail sector depends on how intensively consumer-households search for the best prices and deals. Consumers look at the benefit and cost of time spent shopping and decide how much time to spend searching. Add to this the fact that internet shopping is still rudimentary in developing countries, and we’re quickly talking about a significant amount of time spent on comparison shopping.

As more people join the workforce as opposed to staying home, the opportunity cost of time spent shopping increases. This leads to a less intense search for best prices and therefore less competition between retailers. At the time of the data collection, the proportion of non-workers in Indian cities was fast dwindling due to an ongoing economic boom, suggesting some corrective measures were needed (and may be needed once the global economy revives). These could include promoting e-commerce, increasing store hours and lowering entry barriers.

This study of retailing falls within a broader literature that suggests that in consumer industries such as retailing, increasing the number of firms, preventing collusive behavior between firms and banning predatory pricing may not boost competition unless consumers are willing and able to search intensively for best prices and deals. This literature calls for competition policies that focus on consumer-behavior rather than firm-behavior (see Waterson, 2003).

A stunning example of this is a study by Giulietti et al. (2005), which shows that the recent deregulation of the U.K. natural gas supply market (from a monopoly to free entry) had little effect on market competition and that the net benefit from deregulation so far has been negative. Reason for the failure of the deregulation effort, according to the study, is the perception among consumers that the cost of searching and switching to a new supplier would be higher than the accompanying benefit. Interestingly, the study notes that this perception was incorrect and calls for a subsidy to improve the dissemination of information.

...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.

From the description:

This book represents the first rigorous comparison of China and India's new growth sectors. It compares the emergence of India and China as global leaders in hardware and software production as well as the growth performance of private enterprise in the IT manufacturing and IT services sectors in China and India. It examines the economic context and the business environment for private enterprise in China and India, and considers how far differences in economic policies or the business environment explain the observed differences in growth performance. The book concludes by evaluating explanations for the growth performance of each sector in each country and by drawing conclusions for future economic policies and business strategies.

So, will this be the century of Chindia? I'll get back to you after I've read the book...  

The European Nano will be rolled out within two years and the US Nano within three. "Given the present indications of the buying preferences in the US, we felt that we could further develop the European Nano to meet the requirements of the US," he said.

Speaking to the Guardian, Tata said he had the Indian family in mind when he designed this car. "Here in India we see four people travelling by motorbike ... I thought they could travel more safely by car," he said. "However, in the United States it could be for younger [people] who want a low-cost car."

Where do I sign up?

(Hat tip: Chris Blattman)

Update: A paean to the Nano in Forbes: "The brilliance of the Nano lies in its finely judged balance of skimping where it doesn't matter and pampering owners where it does."

Throughout the financial crisis, new private activity has continued to take place in developing countries with projects being tendered and brought to financial closure. In the first months of the full-scale of the financial crisis (Aug—Nov 2008), the rate of project closure was 26% lower than in the same period in 2007. However, since then private activity recovered and the project closure rate in Aug—Dec 2008 was just 15% lower than in the same period in the previous year.

What might explain this modest recovery? At least in two cases, governments and public sector banks have stepped in with additional financing. Brazil's government provided $US 42.6 billion for the national development bank BNDES to finance infrastructure projects, and India has likwise upped public support for infrastructure through IIFCL, a public infrastructure finance company.

However, a new newsletter called FPD Impact promises to rectify this oversight. And it looks like new evaluation work on private sector development is bringing to light some very provocative findings. The first edition looks at Which Microenterprises have High Returns to Capital?. David McKenzie, the author, examines experiments where microenterprises in Sri Lanka and Mexico were randomly selected to receive grants of between US$100 to $200:

• Real returns per month averaged 5.7 percent in Sri Lanka and between 20 to 33 percent in Mexico - higher than market interest rates. 
• In Sri Lanka, "the average male-owned enterprise has very high returns to capital, on average female-owned enterprises saw no gain in profit from the grants." This will surely raise eyebrows, as much of the microfinance world has focused on women, in part because they were assumed to be more credit constrained. McKenzie suggests that more focus should be given to poor urban males.
• Perhaps most interesting - and hopeful - of all, microenterprises are not poverty traps: "Our results suggest high returns from relatively small amounts. Firms can therefore start small and grow." This seems to run at least partly contrary to the views of Abhijit Banerjee, one of the heavyweights in the world of randomized evaluation.

>> Download a copy of FPD Impact.