Impact of investment climate reforms for private sector growth: what do we know? What should we learn? DIME Workshop, Business Environment Panel Marialisa Motta, Director, Financial and Private Sector Development, Latin America & Caribbean Region Co-Director, Investment Climate Practice; Financial and Private Sector Development Network Rio de Janeiro, Brazil. June 6, 2011

Outline Financial and private sector development: objectives and pillars Context and challenges in developing economies Example of investment climate reforms and their impact What do we need to learn? 2

Financial and private sector development: strategic objectives and pillars 3 Competitive Industries Provides targeted support to help strengthen the competitiveness of specific industries. Innovation, Technology & Entrepreneurship Promotes generation and adoption of knowledge that contributes to firm creation, growth and higher value employment opportunities. Investment Climate Business regulation; trade & investment; private participation in infrastructure and social sectors. Capital Markets Help clients develop capital markets and non-banking financial services, and improve corporate governance. Financial Inclusion Helps clients broaden and deepen financial markets to sustainably increase access for the underserved smaller firms and low income households. Financial Systems Helps clients build policy framework and institutional capacity for effective prudential oversight, and prepare and respond to financial crises. Create investments and jobs through a more efficient, competitive, and innovative private sector. Private sector development requires safe, deep and broad financial markets.

Firms in developing economies have a harder time… DB Rank 1 DB Rank 1 Doing Business (DB) 2011 rankings on the ease of doing business $1,138 $1,040 $7,220 $5,745 $6,468 $22,181 $38,580 OECD high income East Asia & Pacific Middle East and North Africa Latin America & Caribbean South Asia Sub-Saharan Africa Europe & Central Asia Avg. GDP per capita (US$, 2009) Average DB Rank DB Rank 183 Source: “Doing Business 2011” Report, WDI Indicators 4

5 1 The number of MSMEs unserved or underserved is calculated based on MSMEs’ access to bank loans and overdrafts (i.e., not including MSMEs’ access to trade financing, leasing, factoring, and other forms of credit. However, the value of the credit gap in dollars takes into consideration credit available through loans, overdrafts, leasing, factoring, trade finance and other forms of formal credit. And lower access to finance than firms in high income countries Source: International Finance Corporation and McKinsey & Company (2010). MSMEs’ use of financial-institution loans or overdrafts 1

6 The impact of business start up reforms Increases new firms registered India: 6% increase in registered firms due to reduction of entry procedures 1 Colombia: 5.8% in newly registered firms due to One-Stop Shop 2 Mexico: 5% new registered firms and 2.8% jobs created due to a One-Stop Shop 3 Entry reforms in Indian states with more flexible labor regulations led to increase in real output gains 18% larger than in states with less flexible labor regulations. Increases new firms registered India: 6% increase in registered firms due to reduction of entry procedures 1 Colombia: 5.8% in newly registered firms due to One-Stop Shop 2 Mexico: 5% new registered firms and 2.8% jobs created due to a One-Stop Shop 3 Entry reforms in Indian states with more flexible labor regulations led to increase in real output gains 18% larger than in states with less flexible labor regulations. 5 procedures, 20 days, and US$ 88 Reduction in time Reducing time to register a business by at least 40% Reduce time and cost of business start up by introducing standard articles of incorporation, eliminating the minimum capital requirement, introducing electronic registration. 30+ countries, including Belarus, Colombia, Tonga, Tajikistan. 12 procedures, 99 days, and US$ 630 Source: 1 Aghion et al. (2008), 2 Cárdenas and Rozo (2007), 3 Bruhn (2008). Graph source: Doing Business 2008, 2009, and Liberia example

7 The impact of trade logistics reforms Increases Exports* in: Sub-Saharan Africa by over 6% Latin America by 3.5% Improves Total Factor Productivity (TFP)**: Reducing customs clearance by 1 day in China generated a 7% increase in TFP for the consumer goods sector. Generates Private Sector Cost Savings: Trade logistics reforms would enable Colombian exporting firms to save US$ 20 million annually (from reduction in fees; projected). Increases Exports* in: Sub-Saharan Africa by over 6% Latin America by 3.5% Improves Total Factor Productivity (TFP)**: Reducing customs clearance by 1 day in China generated a 7% increase in TFP for the consumer goods sector. Generates Private Sector Cost Savings: Trade logistics reforms would enable Colombian exporting firms to save US$ 20 million annually (from reduction in fees; projected). Reduction of number of documents for import and export; introduction of risk-based inspection and introduction of an electronic filing systems; and unification of custom operations at the borders. 10+ countries, including Rwanda, Colombia, Liberia. Source: Subramanian, Anderson and Lee (2011*, 2005**) Reducing time to trade by 10% or more

8 The impact of business exit reforms Improvement to the insolvency legal framework, introduction of out of court workouts and capacity building for insolvency administrators. 5+ countries. Example: Multicreditor agreement restructured US$ 4.9 million in debt of Sportland International, an Estonian sporting goods company with operations in Latvia and Lithuania / jobs were preserved. Debt recovery tribunals in India led to Creditor friendly rules in Brazil resulted in A new reorganization Code in Colombia led to Increase in timely payments by 28%. Cost of debt reducing by 22%. Repayment time reduced from 49 to 33 months. 1 Baltic News Service reported (January 28, 2010) that Sportland defaulted on its debt issue of EEK 57 million (US$ 4.9 million). 2 Sources: Visaria, 2009; Funchal, 2008; and Gine & Love, 2008.

What do we need to learn? 9 Entry: effects on entry of new firms in low income countries; effects on informality; do firms that enter because of a reduction in registration time and cost survive and grow? The Malawi and Minas Gerais cases will address some of these questions. Trade: effects on foreign direct investment and on corruption; effects of trade policies versus trade logistic reforms; effects of reducing number of documents versus introducing risk-based inspections or streamlining custom procedures. Exit: effect of legal reforms, versus introduction of out of court mechanisms or strengthening capacity of insolvency administrators; impact of communication of reforms to banks and firms. The Romania case will address some of these issues. Other investment climate topics: best policies to increase market competition; effects of reducing: number of licenses, time and cost of paying taxes or resolving a case in court; effects of introducing alternative dispute resolution mechanisms to resolve commercial disputes. The Senegal case will address some of these issues. For all topics: the relative effect of reforms on different industries (e.g., perishable, construction, information and communication technologies) and on firms of different sizes; effects of combined reforms; sequencing of reforms; effect of investment climate reforms on corruption and transparency.

Background Background information 10

11 Source: International Finance Corporation and McKinsey & Company (2010) Credit gap relative to current outstanding SME credit by region 2,000-2, ,000-13,500 14,000-17,000 3,000-3, ,300-1,600 11%-14% 300%-360% 60%-75% 16%-20% 29%-35% 125%-150% 21%-26% 5%-6% 8%-10%

12 Improving Transparency and Fostering Competition WBG played a key role in opening up these markets: New sector policy Regulatory framework Award of new licenses Privatization of incumbents The number of mobile cellular subscribers jumped from US$ 4 million to US$ 259 million between 1998 and 2008 WBG played a key role in opening up these markets: New sector policy Regulatory framework Award of new licenses Privatization of incumbents The number of mobile cellular subscribers jumped from US$ 4 million to US$ 259 million between 1998 and 2008 Businesses need reliable information and a predictable regulatory environment, yet legal processes and regulations are often obscure. Smaller, less connected businesses do not have access to lawyers and agents to navigate the labyrinth of regulations and procedures Increased uncertainty, risk, rent-seeking Competition in Telecom Sector in Africa Source: World Bank 2010