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Private Sector Development

Dealing with de-risking: a tale of tenacity and creativity

Emile van der Does de Willebois's picture

In 2014, money transfer operators sending funds to Somalia were coming under increasing pressure. Western financial institutions, concerned about money possibly ending up in the hands of terrorists or persons on sanctions lists, decided the risk was too high and started pulling out. Although one channel remained open, the situation was so acute that the World Bank and the Somalia Multi-Partner Fund decided to take action and create a fallback position in case that last channel, too, should close. A scenario in which the Somali diaspora had no legitimate way to send money home to their families would have been devastating to Somalis who depend on these funds for their basic needs.
 

We know very little about what makes innovation policy work: Four areas for more learning

Xavier Cirera's picture


Photo Credit: Innovation Growth Lab.

Whether in Silicon Valley or Kenya’s furniture sector, innovation is a critical driver of job creation and economic growth. It could be a mobile app to connect farmers and buyers of agricultural products. Or perhaps an efficient and affordable solar roof tile. Innovation comes in many forms, from products and services to business models.

Yet despite the growing investment in policies to support innovation, we know surprisingly little about what makes these policies effective. To advance understanding of what works in innovation policy, Nesta, in collaboration with the Kauffman Foundation and the World Bank Group, organized the recent Innovation Growth Lab (IGL) Global Conference in London. The mission of IGL is to promote evidence-based innovation and entrepreneurship policies by funding randomized controlled trials (RCTs) and testing new policy approaches.
 
The conference was successful in discussing both research and policy challenges — a welcome change from typical innovation conferences, which often focus on either academia or policy.

The false debate: choosing between promoting FDI and domestic investment

Cecile Fruman's picture

Should we focus our efforts on foreign investment or domestic investment?” Policymakers in developing economies often ask this question when the World Bank Group advises them on how to improve their countries’ investment climate or investment promotion efforts. Our answer is: They do not need to choose one over the other. In order to grow and diversify, an economy needs both domestic investment and foreign direct investment (FDI).  The two forms of private investments can be strong complements.
 
Recognizing the Potential Benefits of FDI
 
The economic benefits of FDI were identified a long time ago. A Harvard Business School paper published 30 years ago summarized the benefits of FDI based on an extensive review of economic literature (Wint, 1986). In short: Benefits traditionally attributed to FDI include job creation, transfer of technology and know-how (including modern managerial and business practices), access to international markets, and access to international financing.

Granted, some of these benefits also occur thanks to domestic investment. For instance, domestic investments create jobs in a host economy – usually many more than FDI. However: What FDI does well is enhance or maximize some of the benefits already generated by domestic investments in a developing economy.
 
To stay with the example of job creation: Foreign firms might not create as many jobs as the domestic private sector, but they often create better-paid jobs that require higher skills. That helps elevate the skills level in host economies. The same can be said for other FDI benefits. For instance, more advanced technologies and managerial or marketing practices can be introduced in a developing economy through foreign investment, and at a much faster rate than would be the case if only domestic investment were allowed. Moreover, through partnerships with foreign investors who have existing distribution channels and commercial arrangements around the world, developing countries’ firms can benefit from increased market access.



In China, millions of rural residents each year migrate to cities to seek work. As they find jobs in modernizing industries, they gain the skills they need to earn higher incomes. In this photo, an employe in Chongqing is learning higher-level computer skills. Photo: Li Wenyong / The World Bank
 

'Winning the Tax Wars': Mobilizing Public Revenue, Preventing Tax Evasion

Christopher Colford's picture
"Winning The Tax Wars" conference


"When something such as the Panama Papers [disclosures on global tax avoidance] happens, we seem to be surprised. We should not be."
— Vito Tanzi, former leader of international tax policy at the International Monetary Fund; author of "Taxation in an Integrating World" (1995)

"Taxes are what we pay for civilized society," said the famed U.S. Supreme Court Justice Oliver Wendell Holmes Jr. So what does it say about society when it tolerates a skewed tax system that applauds tax avoidance, accommodates tax evasion, mocks the compliance of honest taxpayers and drags its feet on tax cooperation?

Those are some of the philosophical (and pointedly political) questions that are being debated this week at the World Bank, at a conference that has gathered some of the world's foremost authorities on international tax policy along with international advocates of fair and effective taxation.

If you can't make it in-person to the Bank's Preston Auditorium this week, many of the conference sessions are being livestreamed and the video will be archived at live.worldbank.org/winning-the-tax-wars

The livestreamed sessions include a pivotal speech by a determined tax-policy watchdog, former Sen. Carl Levin (D-Michigan) — the former chairman of the U.S. Senate's Permanent Subcommittee on Investigations — whose address on "Reducing Secrecy and Improving Tax Transparency" will be one of the highlights of the forum.

Coming just a week after a global conference in London on tax havens, tax shelters and abusive tax-dodging — a conference that highlighted some wealthy nations' lackadaisical approach to enforcing tax fairness —  this week's Bank conference, "Winning the Tax Wars: Protecting Developing Countries from Global Tax Base Erosion" will propel the fair-taxation momentum generated by the recent Panama Papers disclosures. That leaked data exposed the rampant financial engineering (by high-net-worth individuals and multinational corporations) to avoid or evade taxes.

Competition and poverty: How far have we come in understanding the connections?

Sara Nyman's picture


Women in a grain market in Kota, Rajasthan. 

Strengthening competition policy is an under-acknowledged but potentially cost-effective way to boost the incomes of the poor. Greater competition between firms has the potential to boost growth through its impact on productivity, and it is increasingly acknowledged as a driver of welfare in the long term.

Despite that fact, competition reforms are notoriously difficult to implement. One of the reasons is opposition from interested groups that stand to lose out from these reforms in the short term – and a frequent lack of evidence or voice on the side of those who could gain from the direct effects of more competition.
 
What is the evidence on the direct impact of competition on the poorest in society, and what do we still need to learn?

A recent review of the evidence by the World Bank Group (WBG) seeks to answer these questions. The review follows two basic ideas. First: Competition policy has the greatest impact on the poor when it is applied to sectors in which the poor are most engaged as consumers, producers and employees. Second: Competition policy should have a progressive impact on welfare distribution in sectors where less-well-off households are more engaged relative to richer households.

Several sectors stand out as being particularly important here. 
 
  • Food products and non-alcoholic beverages are by far the most important sector for poor consumers in terms of their share of the consumption basket. They also make up a relatively higher proportion of the consumption basket of the least-well-off households. (See Figure 1, below. Source: WBG computations based on household survey data.)
  • The retail sector is also important for consumers as the final segment of the food and beverages value chain. It is also a significant employer of the poor.
  • Services such as transport and telecommunications play an important dynamic role in combatting poverty and reducing inequality. Better informed and more mobile consumers are more able to switch suppliers, thus moderating suppliers' market power. Services are also an important input for entrepreneurs.
  • Other agri-inputs, such as fertilizer and seed, are key for the incomes of small agricultural producers. 

Why dialogue between government and the private sector is essential to fight climate change

Cecile Fruman's picture



The historic agreement reached in Paris at the 21st Conference of the Parties (COP21) last December sets out an ambitious plan for signatory countries to achieve specific targets for reduced greenhouse-gas (GHG) emissions. The Paris Agreement includes significant financial commitments and the establishment of structures and mechanisms by which countries will design and implement viable policies to meet agreed-upon goals.

COP21’s major message is one of collaboration: The Paris Agreement unites 177 nations in a single agreement to tackle climate change. Governments set the goal at COP21, but they will need action by the private sector to meet it. One cannot operate without the other.

Industries, which are responsible for 21 percent of direct GHGs worldwide, long resisted the idea of going green, fearing high costs. However, dramatic recent decreases in the cost of climate-friendly technologies, as well as the introduction of carbon pricing, has changed industry perspectives.

More and more businesses are now embracing climate-smart investments, and the driver of such change is, not least, self-interest. A recent study looked at a sample of 1,700 leading international firms and found that money put into reducing GHG emissions saw an internal rate of return of 27 percent – a clear indication that those investments are paying off.

The Science Based Targets initiative is one illustration of industry’s commitment to playing its part in decarbonizing the global economy. The initiative is a partnership between Driving Sustainable Economies, the UN Global Compact, the World Resources Institute and the World Wildlife Fund, helping companies determine how much they must cut emissions to prevent the worst impacts of climate change. So far, 155 companies have signed up for the initiative: Thirteen of them have successfully developed science-based targets which, by themselves, are projected to reduce emissions by 874 million tons of carbon dioxide – the equivalent of the yearly emissions of 250 coal-fired power plants.

'Making the case for trade': Winning voters’ trust by strengthening social safety nets

Christopher Colford's picture

Policy persuasion is most effective when it draws on the evidence base of all the social-science disciplines. Every strand of the social sciences – not just the mathematical precision of economics, but also the nuanced interpretations of history and the subtle trajectories of sociology – has a great deal to contribute as policymakers balance competing priorities.

That multidisciplinary approach – emphasized in such recent works as The History Manifesto, in which Harvard and Brown University historians call for policymakers’ greater reliance on the combined reasoning of all the social sciences – was thoroughly borne out in the recent Development Economics Series lecture by economist David Autor of MIT (who is a scholar at the National Bureau of Economic Research). Presenting a research paper on trade policy, and underscoring the importance of public opinion in shaping policymakers’ approach to it, Autor’s presentation used the logic of political science to highlight the electoral mood swings that help shape countries’ position on international trade.

Using the perspectives of political science – in the paper, “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure” (co-authored with colleagues from the University of Zurich; the University of California, San Diego; and Lund University) – was a valuable way to help remind Autor's economics-focused World Bank Group audience that policymaking does not occur in an academic vacuum. Even though the Bank’s economics-heavy analyses may try to distill policy options into quantifiable formulae, the policymakers whom the Bank advises get their political mandate from their countries’ volatile voters – who do not always follow homo economicus’ coldly rational approach to decision-making.

Amid the topsy-turvy 2016 electoral cycle in many countries – in which voters’ fears about job losses due to international trade have been inflamed amid an upsurge of populism and protectionism – you don’t have to be a public-opinion pollster to affirm Autor's assertion in his analysis of recent U.S. voting patterns: “We detect an ideological realignment that is centered in trade-exposed local labor markets and that commences prior to the divisive 2016 U.S. presidential election. Exploiting the exogenous component of rising trade with China and classifying legislator ideologies by their congressional voting record, we find strong evidence that congressional districts exposed to larger increases in import competition disproportionately removed moderate representatives from office in the 2000s.”

Translation: If you’re a pro-trade lawmaker in a district that has a high degree of imports from overseas, in a region that has endured what Autor calls “economic scarring,” then you’re likely to pay a heavy price at the ballot box – and, if you’re defeated, your successor just might be a strident protectionist. The Autor analysis shrewdly underscores the adjective “political” in the anodyne textbook phrase, “political economy.”

Disruptive innovations and new business models: The role of competition policy advocacy

Anabel Gonzalez's picture

Despite the persistent low-growth environment, the benefits of the digital era are within our grasp to help reignite the growth engine.

Digital trade is the fastest-growing component of trade, and 4.4 billion people globally are yet to come online. In the first quarter of 2015 and in major U.S. cities, an average of 46 percent of all total paid car rides were through Uber. In Kenya, the digital payment system creates additional income for more than 80,000 small business owners. The Chinese e-commerce sector has created 10 million jobs. The Internet of Things, self-driving cars and 3-D printing have now arrived as part of the so-called Fourth Industrial Revolution.
 
These benefits will materialize faster if competitive dynamics allow and drive innovation. Disruptive innovation has a great potential to shake up markets, increase productivity and bring benefits to consumers. And yet, if there are government-imposed rules that close markets and unjustifiably protect incumbents from such competing new solutions, these benefits do not materialize. Cities around the world have blocked Uber from offering services. The debate on President Obama’s Executive Order to boost competition has centered around a pending decision by the communications regulator on whether to open the market for TV cable set-top boxes to allow for competition.
 
Conscious of such challenges, forward-looking competition authorities around the world are advocating several measures that will allow consumers and businesses to benefit from disruptive innovations and new business models. A new World Bank Group publication on competition advocacy tools highlights examples of successful initiatives to promote pro-competitive regulatory reform in markets subject to disruptive innovations.

New G20 White Paper explores the fast-evolving role of standard-setting bodies for financial inclusion

Timothy Lyman's picture
Agent Banking in DRC


In just a few years since the G20’s Global Partnership for Financial Inclusion (GPFI) published its initial White Paper, the role that global financial standard-setting bodies (SSBs) have on “who gets access to what formal financial services at what cost” has been increasingly recognized.

Appreciation has also grown for the important role that digitization of financial services plays in reaching financially excluded and underserved customers, and the implications this development has had on the SSBs.

There is still far to go, but the advances are noteworthy.

The GPFI’s new White Paper, Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape documents this progress while flagging the disruptive forces that digital financial services represent for the formal financial system, as well as the opportunities and challenges they carry for the SSBs to develop standards that countries can apply.

The essentials of a manufacturing ecosystem

Aref Adamali's picture

Value addition through manufacturing has been a major focus of economic policymakers across the world, and at times with remarkable success, most famously in East Asia. Initial ‘Asian miracles’ in places like South Korea have since been eclipsed by the meteoric rise of manufacturing in China, which has grown its exports in manufactures by 18 percent a year over the past 10 years, compared to a global average of 7 percent (ITC Trade Map data).

'Flying geese'
 
Most countries generally seemed to follow a basic pattern, initially establishing manufacturing credentials in light manufacturing, such as in textile and apparel, but then in time moving on from such products to higher-value-added and more complex products. As they moved on and up, they opened space for other countries to move into the initial entry products, following the so-called ‘flying geese’ model of division of labor.





There have been noticeable absences though, with not all regions having moved into manufacturing. This is partially the case with Central and South America, but most strikingly with Sub-Saharan Africa.  
 
What can be done to support countries in their quest to deepen their manufacturing sectors, and extract the jobs and technological development that this can offer? How can they develop the kinds of deep and comprehensive manufacturing ecosystems that have enabled China to maintain investment despite fast-rising labor costs?

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