A year ago, Farzana had no idea that an online business would so drastically change her life. She was drowning in debt with no way of repaying, worrying about her family’s financial future. Reaching for a lifeline, she joined GharPar, a women-founded, women-led social enterprise that connects beauticians with clients seeking at-home salon services through an Uber-like digital platform.
The Picard leather goods factory in Dhaka, Bangladesh produces bags, purses and wallets that are sold in upmarket stores throughout the developed world under various well-known brand names, and in their own chain of stores in Germany. The factory is clean, efficient and goods are produced under all the relevant international standards.
But Picard are a rarity, and most Bangladeshi manufacturing looks just like it did 50 years ago. They produce cheap goods for the local market, but are a huge distance from producing at global standards. Unfortunately, this is also the case with most manufacturers in emerging economies. And all manufacturing is being changed by a range of new technologies known as Industry 4.0, with manufacturing becoming more global, more automated, more highly skilled, more infused with technology and more integrated with services. Whole manufacturing sectors, but in particular Small and Medium Enterprises (SMEs) face real challenges if they are to adapt rather than be left behind.
This Saturday, June 16, we celebrate International Day of Family Remittances to recognize “the significant financial contribution migrant workers make to the wellbeing of their families back home and to the sustainable development of their countries of origin.”
Which is why
In recent years, the international remittance services industry has been subject to the so-called “de-risking” phenomenon. Banks believe that anti-money laundering and counter financing of terrorism (AML/CFT) regulations and enforcement practices have made serving money transfer operators (MTOs) too risky from a legal and reputational perspective. For banks, the profit of serving MTOs is not considered sufficient to justify the level of effort required to manage these increased risks.
In November 2016, we published the “Practical Guide for Measuring Retail Payment Costs”, an innovative methodology that can be customized to country needs and circumstances, without losing the international comparative dimension.
The guide enables countries to measure the costs associated with retail payment instruments, based on survey data, for the payment end users, payment service/infrastructure providers, and the total economy. The guide also enables countries to derive projected savings in shifting from the more costly to the less costly payment instruments.
A slew of programs announced in recent years have fostered a more favorable business environment for financial technology – or fintech – models to emerge in the MSME lending space – in India.
“200 pieces of Selfie are ready, please call them to collect,” Nurjahan, an entrepreneur selling a local brand “Selfie” shoes, tells her husband to call a local shop owner to pick up his order.
We recently visited Bhairab to get a first-hand look at one of the important industrial clusters in Bangladesh, where Nurjahan’s shoe microenterprise is located.
Bhairab is about 85-kilometer from the capital Dhaka, and its shoe cluster is well organized into around 7,000 factories of which 40 percent are micro factories (employing between two to seven workers). They are mostly family-run, producing low-cost shoes, mostly for the local market at prices as low as just Tk100 – or around $1.25 a pair. Virtually none of these factories have access to bank financing, although some access credit from NGOs. In Nurjahan’s shoe factory, about 45 women and 12 men work in five sheds. Over the last 30 years, her micro business has grown into a small enterprise.
For decades, various governments around the world have used trade-distorting policies (tariff and non-tariff barriers) to support the development of local automotive industries that would not have otherwise been economically viable. However, to what extent are these policies, which once helped attract market-seeking automakers (or Original Equipment Manufacturers: OEMs), still serving the interests of these countries is uncertain.
In fact, for India and Pakistan, two of the biggest South Asian automotive producers, a recent World Bank Group report highlights that such polices might be reducing competitiveness and slowing down the spread of world-class good practices in the value chain. These effects need to considered carefully. A process of reform via gradual reduction of import tariffs and convergence with international environmental and safety standards is recommended to enhance competitiveness of this sector.
In the automotive sector, India is the world’s sixth-largest auto producer by volume, but it owns less than 1 percent of global export markets compared with more than 3 percent for China, 4.5 percent for Korea and 7 percent for Mexico. The average auto firm in India exported only 5 percent of its total sales, compared to 16 percent in China. Productivity levels in India are one-third the levels in China, and this gap persists for OEMs that are sub-scale, with below-average investment in innovation and skills, and with low participation in global value chains (GVCs). All these factors were discussed in a previous Private Sector Development blog post. The situation is worse in Pakistan, with lower levels of exports and productivity, and with similar factors driving it.
Trade policies, through tariff and non-tariff barriers, play an important role in shaping the external environment, which in turn influences a firm’s incentive to become more productive (or not). Firms facing greater competition in their product markets are inclined to raise the minimum productivity threshold to operate profitably and reduce inefficiencies. They do this both through investing in productivity-enhancing activities and through reducing costs, which in turn helps them capture greater market shares. Competition also helps reallocate resources from the less-productive to the more-productive firms, increasing the incentives for all firms to invest in the within-firm productivity levers such as innovation and skills.
For several decades, manufacturing in the automotive sector has made a strong contribution to spurring national growth, to promoting technology acquisition, and to raising incomes for workers across skill levels in developing economies as well as in developed nations. In India – the world’s sixth-largest producer of cars, where the automotive sector has been growing but at well below its tremendous potential – productivity levels would need to increase rapidly. A wave of autonomous functionality in vehicles and other technology-driven disruptions are not far away with the involvement of tech giants like Google, Tesla, and Uber. This makes the need to improve productivity in order to respond quickly to changing environments even more critical for traditional automakers.
Some long-awaited reforms in India to improve automotive manufacturing performance came through this year. In July, the Government of India implemented a unified Goods and Services Tax (GST) regime to replace the multiple taxes that had been levied, in the past, by the state and central governments. This makes for a more integrated market, with uniformity in tax rates where automakers will be helped by easier compliance, the removal of cascading effect of taxes and the reduction of the costs of doing business. Reinforcing this, the union budget allocation in February allows for more investments in roads and highways, farm-friendly policies and income-tax reform for the middle class. Those steps will increase demand for small passenger vehicles and for the farm-equipment segment. This is all good news for the automakers in India.
Still, much more needs to be done to increase overall productivity in this job-creating and technology-rich sector. According to a recently published report by the World Bank Group, entitled “Automotive in South Asia: From Fringe to Global,” productivity (measured by value added per worker) in India’s auto sector remains less than one-third the level of China. From 1993 to 2004, the growth rate of Total Factor Productivity in China’s automotive sector was 6.1 percent per year, compared to only 1.1 percent in India. The growth rate of labor productivity was 9.8 percent per year in China, compared to 3.1 percent in India. Even though India has been increasing production of units at 11 percent to 15 percent per year (from 2005 through 2015) , it could do much better on improving productivity levels.
Yet despite these difficulties, the country rebounded strongly with growth at 7.5 percent in Fiscal Year 2017 and was able to achieve significant progress in business through a series of seemingly modest yet important steps.
Over the course of four years, Nepal’s Ministry of Industry, the country's Office of the Company Registrar (OCR) and IFC’s Investment Climate Team implemented a series of reforms to encourage business registration online. In 2013, a new mandatory online registration service was launched. Help desks in the Kathmandu OCR office, extensive training for business owners, a media campaign, and an enabling legal directive eased the speed and efficiency of the registration process for businesses.
Within a short period of time, almost 100 percent of companies – as opposed to 10 percent during the initial phase of launch – were registered online. Registration became simpler, saving money for both businesses and the government. Online registration also addressed the challenges of the government's limited capacity and poor technology readiness through extensive training and peer-to-peer learning. The processes became more transparent with online file tracking.
In the year following the launch of the online registration system, Nepal’s ranking for "Starting a Business" in the World Bank Group’s 2014 Doing Business Report rose by 6 places. The number of days it took to start a business dropped by 45 percent and led to a 24-percent increase in the number of new companies registered annually.
In Nepal, an employee of the Trade and Export Promotion Centre works on the Nepal Trade Information Portal. The portal, financed under the Nepal-India Regional Trade and Transport Project, provides information that traders need to import and export goods, including information on permits, laws and taxes. Photo Credit: Peter Kapuscinski / The World Bank
These successes produced broader lessons for Nepal and others facing similar challenges. These include:
- Make change compulsory, easy and durable. People adapt to new circumstances only if they feel compelled to do so, and only if they fel that the change is not going to disrupt their businesses.
- Ensure coordination between government offices in supporting initiatives. There must be "buy-in" from all government agencies involved at all levels. ICT changes must be fully coordinated with business staff.
- Nurture trust and cooperation between the WBG and government teams. Study and learn about previous experiences, communicate how the current project will be carried out, and keep talking to partners in government.
Surrounded by hardened fan manufacturers in the city of Gujranwala, 70 kilometers north of Lahore, the task facing our World Bank Group team was to convince them that more efficient fans, to be promoted through an energy-efficiency labeling program by Pakistan’s government, would be beneficial to the sector as a whole. Questions abounded about how regulations can help competitiveness, and about whether small and lower-tier manufacturers might be left out of the equation. How would labeling be enforced, and how would forgeries be kept off the market?
Fast-forward 12 months to an IFC advisory project, which the government has set up for the procurement of 20,000 Pakistan Energy Label (PEL) energy-efficient fans in public buildings. Those fans will save the country an estimated 800,000 kilowatt hours – the equivalent of the annual energy use of about 600 domestic refrigerators – translating to about 400 tons of greenhouse gas (GHG) emissions reduction per year.
The project has created a new market segment for manufacturers of more efficient fans, nine of whom have received certification for the PEL from the National Energy Efficiency and Conservation Authority (NEECA). The fact that four fan manufacturers out of these nine are from the small and medium-sized enterprise (SME) sector is a positive indication of wider acceptance of this standards and labeling initiative.
Photo by Etiennne Kechichian
In time for the region’s next hot season, the request for more information and knowledge about energy-efficient fans has increased. The government of Punjab, as well as NEECA, has launched a comprehensive marketing campaign to promote these PEL fans and to improve the public’s knowledge about their benefits. In a market where heavy, inefficient cast-iron fans are considered good quality, changing perceptions requires coordination with technicians, real estate developers, retailers in the streets of Lahore and the countryside, and a deep understanding of the market.
The concept of market transformation is at times abstract – but we’ve seen signs in this relatively small project, implemented by the Trade & Competitiveness (T&C) Global Practice of the World Bank Group, that targeted and client-based interventions can have a significant impact on the competitiveness of an industry.