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December 2010

Do Rigidities in Employment Protection Stifle Entry into Export Markets?

Murat Seker's picture

Editor's Note: Murat Seker recently presented the findings of the paper discussed in the following blog post at a session of the FPD Academy. Please see the FPD Academy page on the All About Finance blog for more information on this monthly World Bank event series.

Many studies point to the importance of firms that export to economic growth and development. These firms tend to be larger, more productive, and grow faster than non-exporting firms. These findings have focused policymakers’ attention on the importance of international trade for economic growth. From the 1980s to the 2000s traditional trade policies have improved significantly—applied tariff rates across a wide range of countries with varying levels of income have decreased from around 25 percent to 10 percent. However, improvements in trade policies are often not enough to reap the full benefits of international trade. To be fully effective, they require complementary reforms that improve the business environment for firms. In a recent paper on Rigidities in Employment Protection and Exporting, I focus on a particular aspect of the business environment, namely employment protection legislation (EPL), and show how these regulations relate to the decisions of firms to enter export markets.1

Evidence shows that export market entry is associated with significant changes and adjustments in firm performance around the time at which exporting begins. In data collected via the Enterprise Surveys project, the employment levels of firms that subsequently enter export markets ("future-exporters") grow by 13%, four times higher than the growth rate of firms that don’t enter export markets.2 Bernard and Jensen (1999) find that the growth premium for these future-exporters as compared to non-exporters in the U.S. is 1.4% per year for employment and 2.4% for shipments.

Bank Capital Regulations: Learning the Right Lessons from the Crisis

Asli Demirgüç-Kunt's picture

The recent financial crisis demonstrated that existing capital regulations—in design, implementation, or some combination of the two—were completely inadequate to prevent a panic in the financial sector. Needless to say, policymakers and pundits have been making widespread calls to reform bank regulation and supervision. But how best to redesign capital standards? Before joining the calls for reform, it’s important to look at how financial institutions performed through the crisis to see if we’re learning the right lessons from the crisis. Is capital regulation justified? What type of capital should banks hold to ensure that they can better withstand periods of stress? Should a simple leverage ratio be introduced to reduce regulatory arbitrage and improve transparency? These are some of the questions addressed in a recent paper I wrote with Enrica Detragiache and Ouarda Merrouche.

 

Since the first Basel capital accord in 1988, the prevailing approach to bank regulation has put capital front and center: banks that hold more capital should be better able to absorb losses with their own resources, without becoming insolvent or necessitating a bailout with public funds. In addition, by forcing bank owners to have some “skin in the game,” minimum capital requirements help counterbalance incentives for excessive risk-taking created by limited liability and amplified by deposit insurance and bailout expectations. However, many of the banks that were rescued in the latest turmoil appeared to be in compliance with minimum capital requirements shortly before and even during the crisis. In the ensuing debate over how to strengthen regulation, capital continues to play an important role. A consensus is being forged around a new set of capital standards (Basel III), with the goal of making capital requirements more stringent.  

Measuring Bank Competition: How Should We Do It?

Maria Soledad Martinez Peria's picture

Lack of competition in the banking sector has detrimental effects. Studies have found that it can result in higher prices for financial products and less access to finance, especially for smaller firms. Others have shown that it can lead to the entry of fewer new firms, less growth for younger firms, and delayed exit for older firms. Moreover, while a debate is still under way, new evidence suggests that lack of competition can undermine the stability of the banking sector, especially if some banks become too big to fail.

How to measure bank competition? In a recent paper Asli Demirgüç-Kunt and I propose a multipronged approach. While we apply this framework to Jordan, it can be used to analyze bank competition in any country. In fact, the approach developed in this paper has been used to analyze competition in China, the Middle East and North Africa, and Russia.

The Most Effective Development Intervention We Have Evidence For?

David McKenzie's picture

Ask most people to name the most effective means of raising incomes of people in poor countries, and what would they say?

Microfinance? Perhaps not after the recent experimental assessments.

Deworming? It increased primary school participation and improved health, but in the short-term at least seems unlikely to raise household income.

Conditional cash transfers? This might be a popular answer, with evidence from a number of countries that they have increased household expenditure , schooling, and health outcomes. But even though Governments devote significant resources to such programs, the absolute annual increases in household income and expenditure are still at most US$20-40 per capita for participating households.

I bet that facilitating international migration is not very high up the list of interventions people think of. But it should be. In a new working paper, John Gibson and I evaluate the development impacts of New Zealand’s new seasonal worker program, the RSE. The figure below compares the per-capita income gain we estimate to those from microfinance, CCTs, and from my previous research giving grants of $100-200 to microenterprises. It is simply no contest!

Business Environment Reforms: Distinguishing Tokenism from the Real Thing

Inessa Love's picture

To promote the registration of new firms, many countries have been undertaking reforms to reduce the costs, days or procedures required to register a business. For example, the World Bank Doing Business report each year identifies the 10 most improved countries on the overall Doing Business index (comprised of 9 subindicators). One of these subindicators measures reforms related to starting a business, with 30-65 countries reforming in this area each year. A still unanswered question is whether some reforms are more important than others. A priori, it is not clear what magnitude of reduction in costs (or days or procedures) is necessary to create a significant impact on firm registration. In other words, what exactly constitutes a reform? Is a 20% reduction in the costs of registration sufficient, or is a 50% reduction necessary to get a substantial number of firms to register?

In a recent paper Leora Klapper and I empirically investigate the magnitude of reform required for a significant impact on the number of new registrations. We use a new dataset that is uniquely suited for this purpose: the World Bank Group Entrepreneurship Snapshots (WBGES), a cross-country, time-series panel dataset on the number of newly registered companies. We supplement it with data from Doing Business reports that contain the cost, time and procedures required for registration of new companies. Importantly, both datasets focus on limited liability companies. In an earlier paper, we used the same dataset to investigate the impact of the global financial crisis on new firm registrations