Competitiveness: Analytic Tools and Approaches Norwegian Trust Fund Meetings June 2005 Investment Climate Unit The World Bank Washington DC

1 Development Objective Red Tape Poor Productivity Costly and unreliable Utilities Logistics Competitiveness Labor Cost Corruption Catalyze reform through addressing concrete issues affecting competitiveness Competitiveness = f (Input Costs, Transactions Costs, Productivity)

2 Focus on Two Products 1. Global Logistics Indicators Benchmarking across 137 countries (Doing Business 2006) 2. Value Chain Analysis Process mapping of strategic products in terms of time, cost and value added to get at underlying factor and product market constraints

3 1Packing of consignment in factory 52 2Loading onto 1 Nepalese truck 2 3Trucking from factory to Birgunj over distance of 165 km 24 4Customs clearance and containerization at Birgunj 84 5Trucking to Indian border at Raxaul 8 6Overnight wait to cross over to Indian Customs at Raxaul 10 7Customs clearance at Raxaul (fees, informal payments, etc. 5 8Line haul trucking to Calcutta 220 9Waiting to enter Calcutta Port 96 10Unloading at Port 1 11Customs inspection, tech clearance, terminal handling Other terminal charges (river dues, labor fund contr., etc Liner shipping from Calcutta Port to Bremen Port 528 Points of inefficiency: Border crossing procedures Customs Port and terminal inefficiency Process 1 Time (hours) Process 2 Process 3 Process 4 Process 5 Example: Carpet exports from Nepal to Germany 1. Global Logistics Indicators

4 A Streamlined Framework Process 1 Process 14 Process 2 Process 3 Process 4 Process 5 PORTS CUSTOMS BUREAUCRACY/ REGULATIONS Pre-Arrival or Shipment Activity Inland Transportation Border Clearance Port &Term Handling Activity

5 Key Metrics TIME COST TIME RELIABILITY TIME RELIABILITY Logistics Indicators INFORMATION COMMUNICATION TECHNOLOGY

6 Key Indicators PORT PERFORMANCE CUSTOMS PERFORMANCE BUREAUCRACY/ REGULATIONS BUREAUCRACY/ REGULATIONS Customs clearance time and cost (aver. & max) Technical control time and cost (aver. & max) Percent of containers inspected Level of inspection (comprehensive; risk analysis based) Customs clearance time and cost (aver. & max) Technical control time and cost (aver. & max) Percent of containers inspected Level of inspection (comprehensive; risk analysis based) Time for processing a typical trade order Cost for processing a typical trade order Number of signatures; Number of documents Number of Agencies Time for processing a typical trade order Cost for processing a typical trade order Number of signatures; Number of documents Number of Agencies Vessel turn-around time Port and Terminal charges Number of Days the Port did not function Costs and time to comply with additional security measures Vessel turn-around time Port and Terminal charges Number of Days the Port did not function Costs and time to comply with additional security measures Focus AreasExamples of Indicators

7 InfrastructurePolicyInstitutions Deliver Make Source Yarn Deliver Make Source Apparel Deliver Make Source Deliver Make Source Textile Deliver Make Cotton Source 2. Value Chain Analysis

8 Value Chain Analysis: Elements Recommendations WB policy advocacy/ lending IFC investments/ technical assistance Public-private dialogue Value Chains/ Sectors Selection Measure Performance and Benchmark Overview of Industry Structure Size Growth Potential Poverty Gender Policy relevance Linkages Market share /trends Price trends Competition levels Links to global value chains Technological trends Global policy trends(Trade; CSR) Government failures Market failures Explain Performance Gaps Factor costs Transaction costs Value added Productivity  Tariffs (e.g. import duties)  Non-tariff barriers  Infrastructure/ utilities service quality, price  Regulatory barriers and enforcement  Administrative barriers  Market structure and Competition policy  Factor market rigidities  Price restrictions / Subsidies  Product quality and standards  CSR (environmental and social standards)

9 Example: Honduran Apparel Industry - US $2.5 billion exports - 16 % growth rate in > 120,000 jobs created ( 75-80% women) - Value added - US$ 500 mill. - Key drivers: CBI (89% of Honduran exports qualify) Proximity to US market - Regional : CAFTA - Global: MFA phaseout

10 Is Honduras Competitive? US $1.25 Mexico US $1.22 Honduras US $1.47China Production of a cotton T-shirt 4 days 10 days Order to Delivery: Lead Time

,2 0,4 0,6 0,8 1 1,2 1,4 1,6 MexicoHondurasChina Quota & Tariff Freight Margin Labor Cloth & Inputs US$ per unit US$1.25US$1.22 US$1.47 Source: E.Dussel2000, Interviews, ELCATEX, Interviews, Estimates 0.34 Cost Structure

12 Value Chain Distribution of Costs 40% 17% 5% 4% 30% Energy Raw Material LaborFreight DistribRetail Markup 100% One dozen T-shirts: FOB US $21 Imported yarn and fabric from US constitutes 60% of production cost Raw material costs on average are 30% higher than China LAC labor costs are three times as much as Asia

Indonesia Vietnam Bangladesh Pakistan India Kenya Sri Lanka China Bulgaria Rusia Filipinas Asian labor costs US$/ Hour Source:JassinO’Rourke Group LLC calibrated with Honduran industry experts from AHM 0,49 0,88 0,94 0,95 1,22 1,3 1,45 1,5 1,65 2,7 00,511,522,53 Haiti Nicaragua Colombia Bolivia Peru Ecuador Guatemala EL Salvador Honduras DominicanRep. Costa Rica LAC labor costs US$/Hour Comparative Labor Costs Average: US $0.40/hourAverage: US $1.3/hour

14 Value Chain Distribution of Costs 40% 17% 5% 4% 30% Energy Raw Material LaborFreight DistribRetail Markup 100% One dozen T-shirts: FOB US $21 Honduran Power costs >150 % of Chinese power costs & 130% as much as Columbia

15 Comparative Electricity Costs Mexico Guatemala Honduras Nicaragua Costa Rica India Colombia China Total Hours of Electricity CutsElectricity Cost US cents / kWh Honduras Nicaragua Peru Guatemala Ecuador Brazil Source: WB Study estimates; Investment Climate Survey data

16 Source: Gereffi (2005) Policy Implications: MFA Phase out…

Knit Cotton men Knit tops For women Cotton Pants men Cotton pants women Cotton Under wear Knit Manmade fiber tops Manmade fiber trousers for men Lingerie Total Honduras Nicaragua El Salvador Guatemala Mexico China World US$ per Square Meter Equivalent … Moving Up-market

18 KenyaAfrica PSD IFC-SME Dep. Growth & Competitiveness Strategy Econ. Recovery Strategy Support Credit MSME Project NigeriaAfrica PSD IFC-SME Dep. Country Assistance Strategy Country Economic Memorandum MSME Project PakistanS.Asia PSD/ PREM SEDF (PDF) Growth & Competitiveness Strategy NW Frontier Province Strategy Rural Development Project MozambiqueAfrica PSD IFC-SEATIP MIGA Growth & Competitiveness Strategy PSD Linkages Project (PODE) IFC investment potential MIGA Benchmarks CambodiaE.Asia PSD E.Asia Rural MPDF (PDF) Investment Climate Assessment Trade Facilitation Project Collaboration with Examples of Operational Applications Mainstreaming into Operations: Some Examples

Competitiveness: Analytic Tools and Approaches Norwegian Trust Fund Meetings June 2005 Investment Climate Unit The World Bank Washington DC