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Private Sector Development

Unpacking the bond surge and slump in Emerging Markets

Erik Feyen's picture

The volatility that’s now shaking the global financial system seems likely to have some of its most profound effects on the world’s emerging markets and developing economies (EMDEs). As policymakers seek to ride out the late-summer storm, it’s more vital than ever for economists and investors to understand how and why those economies got into today’s predicament.  

In the wake of the global financial crisis that began in 2007, the extraordinary monetary policies (EMPs) pursued by the world’s developed economies – its wealthier nations – triggered a buying spree in emerging and developing economies (EMDEs). Those countries experienced an unparalleled surge in total gross capital inflows from an annual average of $0.5 trillion from 2000 to 2007 to $1.1 trillion from 2010 to 2013. EMDE external bond issuance, which had been increasing steadily before the crisis, accelerated rapidly post-crisis and has now reached unprecedented levels.

From 2009 to 2014, EMDE corporates and sovereigns cumulatively issued $1.5 trillion in external bonds – almost a tripling from $520 billion in the period from 2002 to 2007. The recent surge in issuance is driven by corporates, which issued a total of about $300 billion in 2014 compared to $14 billion in 2000 (Figure 1). Most of that issuance is denominated in foreign currencies (Figure 2). Cumulative post-crisis issuance of bonds relative to the size of the economy has risen to unprecedented levels – a phenomenon that is widespread and not driven by a single country or region (Figure 3).
 

Activist strategies to sharpen economies' competitive edge: When Bernanke & Company speaks, policymakers listen

Christopher Colford's picture

So much for the myth that Washington empties out during the month of August. A standing-room-only throng flocked to a Monday-morning Brookings Institution seminar this week featuring a relative newcomer to the think-tank communityBen S. Bernanke, the former chairman of the U.S. Federal Reserve System. His wide-ranging and nuanced analysis – with all the gravitas that he once brought to his graduate economics seminars at Princeton – explored not just Brookings’ main topic of the day (“The Defense Economy and American Prosperity”) but also such subjects as macroeconomic management, the gradual recovery from the Great Recession, and lawmakers’ need to avoid hasty budget-cutting that would damage vital investment in long-term priorities. Offering some of the wit of his new blog for Brookings, Bernanke’s whirlwind analysis whetted Washingtonians’ appetite for the October 4 publication of his latest book, “The Courage To Act.”

The economic impact of U.S. military spending was the focus of Monday’s seminar, chaired by Brookings defense-policy scholar Michael O’Hanlon – but an additional, broader theme was unmistakable throughout the discussion. The competitiveness of every economy is shaped by its ability to make sustained investments in productivity-enhancing technologies – and, as the panelists explored within the context of the U.S. economy, R&D-intensive industries (whether military or civilian) have been on the leading edge of innovation, patenting, productivity growth and job creation.

Competitiveness is the holy grail of economic policymakers everywhere – and activist strategies can help every economy hone its competitive edge. For both theorists and practitioners in development, working with economies large or small, the Brookings panel’s focus on pursuing far-sighted and pro-active investment strategies holds implications for every country’s competitive positioning.

Tourism ecosystems: A way to think about challenges and solutions to tourism development

Shaun Mann's picture

Ecosystem: A complex of living organisms, their physical environment, and all their interrelationships in a particular unit of space.
Tourism: A social, cultural and economic phenomenon that entails the movement of people to countries or places outside their usual environment for personal, business or professional purposes.

I was part of a tourism ecosystem, once, when I built and operated a small lodge on the banks of the Nile in Uganda. While I was living in a tent in the bush building the lodge, life was simple: My little ecosystem was the land around the lodge and the tribulations of fending off monkeys and snakes by day and leopards, hippos, elephants and mosquitoes at night. The sun and rain beat down hard, and tools and workers broke down regularly. The generator was a particular pain in the neck.

Apart from supplies coming in, I was not really connected to the outside world. Money ran out for awhile and I had to rush to Kampala and persuade the bank give me a bigger overdraft (at 26 percent interest – thieves!).
 
Once the lodge was finished, I had to join another ecosystem: the world of registering the company, getting licenses, drawing up employment contracts, getting a bank overdraft, getting a tax ID number – all the elements of the enabling environment for me to do business. Then I had to join another one: I needed bums on beds, and I had to link my wonderful product to local markets; I had to develop promotional materials and packages; I had to interact and contract with tour operators and local travel agents to supply me business; I needed market access. 



Nile Safari Camp: home for two years

Then, guess what? My business plan wasn’t panning out. I didn’t get the occupancies or the rates that I projected from the local market. I had to step into yet another ecosystem: the world of international long-haul travel. I needed more and better-paying customers. I had to understand how the big international tour operators sold their product, what they were looking for in new product and how they contracted. I had to join another ecosystem to make that happen. Turns out my little product wasn’t enough to attract international customers on its own, I had to team up with other lodges and offer a fuller package; we had to cluster our products. I had to diversify and innovate and find ways to add value to my accommodation offer – birdwatching, fishing, guided walks, weddings and honeymoons, meetings and workshops. . . . Well, there are whole ecosystems around each of those market segments. You need to understand them before you can do business with them.        

Cecil the lion: Is there a golden lining?

Hermione Nevill's picture



Cecil the Lion at Hwange National Park in Zimbabwe.

We all know about the story that broke the Internet: the story of Cecil the lion and the Minnesota dentist who killed him. What you may not know is that you can now buy a gold-plated iPhone case with Cecil etched on the back for about US$1,000.

The world has reacted in different ways to the news of this black-maned martyr. For various reasons, the media has gone into overdrive, the public has been outraged, and enterprising phone-case companies have gotten creative. So what does it mean for us in the field of tourism, conservation and development?

The global spotlight has been a good thing.  First of all, it has raised the temperature of the debate around conservation. People have flooded the dentist’s business page with negative online reviews (“murderer!”), called for his extradition to Zimbabwe, signed petitions, made donations, retweeted celebrities and forced three US airlines to ban wildlife trophy transport.

Publicity like this can have a lasting effect on consumer demand by stimulating more responsible behavior. For example, media exposs on sex tourism and child abuse in Thailand and Madagascar caused the tourism industry (more than 1,000 travel and hospitality companies) to adopt a global code of ethics. Public backlash against the negative impacts of orphanage tourism (volunteering) in Cambodia – following a 2012 investigation by Al Jazeera – meant that most large travel agents removed the product from their books, not only in Cambodia but globally. There is an opportunity here for all tourists, hunters and operators to reflect on and improve the way they behave and interact with wildlife.

More crucially, Cecil’s publicity has revealed the divisiveness of the issue. While everyone condemns the illegality of what happened, conservationists, columnists, academics and others cannot definitively agree on bigger questions. Does trophy hunting really contribute to conservation? Or should it be banned? Is photographic tourism a better alternative? Do we actually know?

For those of us concerned with such development goals as natural-resource management, job creation or local community empowerment, this lack of a global consensus poses a policy challenge. Indeed, the last few days have highlighted that indeed both consumptive (hunting) and non-consumptive (safari) tourism can demonstrate positive impacts.

So perhaps the question is not “Which is the better alternative” but “How can we better capture the value and benefits of each?” One way is to look at the policy framework and its role in regulating the supply side of the equation.

For success and sustainability, seek broad social ‘well-being’; Good governance promotes a ‘virtuous cycle’ of growth

Christopher Colford's picture

Beyond the cold calculus of GDP and TFP and FDI, development is about promoting strong societies as well as propelling powerful economies. But how can we measure societies’ progress toward success? Some may try to calculate “Gross National Happiness” as a yardstick, and some may envision “getting to Denmark” as the ideal end-of-history destiny of development – but are there patterns that reveal how societies can flourish?

Two recent Washington seminars suggest that – by pursuing innovation and inclusion, and by focusing on broad-scale social “well-being” – policymakers can define realistic paths toward development success.

The methodologies used by Harvard economist Philippe Aghion at an International Monetary Fund forum and by former World Bank strategist Enrique Rueda-Sabater at a Center for Global Development discussion may have been different, but their conclusions were in harmony: Societies thrive – in a sustainable way – when inclusion and innovation help expand the circle of opportunity, and when strong governance standards lead to sound civic decision-making.

Taken together, the two seminars’ insights should help inform policymakers’ debate about the Sustainable Development Goals, which are due to be approved in September at the opening of the United Nations General Assembly.

Aghion, at an IMF seminar (sponsored by its Low-Income Countries Strategy Unit) on June 30, approached the topic of “Making Growth Inclusive” by imagining “how to enhance productivity growth while promoting social mobility.” Presenting data from a recent paper on “Innovation and Top-Income Inequality,” which he recently co-authored with an all-star team of economists, Aghion outlined the way that income and wealth inequality have drastically soared in developed countries since the mid-1970s – analyzing trends that by now are sadly familiar to the squeezed middle class, as calculated in the esteemed work of Thomas Piketty, “Capital in the Twenty-First Century.”

Building on that data, Aghion took the inequality-and-inclusion logic several steps further. He lamented the way that “skill-biased technological change” has (in the absence of policy safeguards) provoked societies to stratify along the lines of wealth, income, education and connections. Yet “creative destruction” is inevitable in “a Schumpeterian world,” reasoned Aghion: A significant factor expanding the wealth gap is the same process of continuous economic renewal that helps economies advance. “There is a big [economic] premium to being a superstar innovator,” he asserted, noting that “you can become rich by innovating” – and thus “innovation is a big part of top-1-percent income inequality.”



Philippe Aghion

“Creative destruction is good for social mobility” and broader inclusion, in the long run, because it causes a steady procession of “new innovators to replace old incumbents.” The effect of each wave of innovation is fleeting, especially in a hyperspeed economy: “You get temporary ‘rents’ when you innovate. You don’t get them forever,” because the relentless Schumpeterian process will eventually cause yesterday’s innovators to become, in turn, tomorrow’s has-beens.

The darker danger of entrenched inequality occurs, said Aghion, when incumbent interests use their political power to lobby for the protection of their advantages – whether by pleading for tax-code favors, seeking government-imposed barriers to the entry of new competitors, or purchasing influence with pliant politicians through campaign donations. (In an aside on U.S. politics, Aghion pointed to his paper’s data linking a state’s representation on the congressional Appropriations Committees with its amount of federal favors – a shrewd quantification of the pork-barrel compulsions of Capitol Hill.)

Because innovation promotes social mobility and thus greater inclusiveness, Aghion contended that “innovation is a good guy; lobbying is a bad guy.” So “if you’re for inclusive growth, then you will be against lobbying and [the creation of] entry barriers.”

Focusing simply on present-day inequality is less informative than focusing on social mobility, he asserted. There’s nothing wrong with an economy that bestows ample financial rewards upon genuine innovators who create new products and processes. There is, however, something deeply wrong – and economically growth-inhibiting – with governments that allow no-longer-innovative incumbents to use their political connections to suppress potential competitors.

The IMF panel’s respondents amplified Aghion’s analysis. World Bank economist Daniel Lederman noted that it would be wise to use “the lexicon of ‘inequality of opportunity’,” because some degree of wealth inequality is inevitable (and perhaps even desirable) when individuals’ talent and effort are rewarded with rising incomes. IMF economist Benedict Clements – deploring the “great degree of disparity in ‘equality of opportunity’ ” that now prevails in advanced economies, including the United States – noted that there need be “no conflict between equity and efficiency if you design your policies right.”

Getting policies right – by upholding strong standards of governance – was also one of the underlying themes at a July 21 seminar at the Center for Global Development led by Rueda-Sabater, who is now a senior advisor to the Boston Consulting Group and a visiting fellow among CGD’s strong lineup of scholars. Rueda-Sabater is well remembered at the World Bank for leading a research team’s detailed “scenario planninganalyses that, in 2009, discerned the contours of three possible scenarios for the world in the year 2020.

Presenting a recent BCG report, “Why Well-Being Should Drive Growth Strategies,” Rueda-Sabater outlined an imaginative BCG diagnostic tool: the “Sustainable Economic Development Assessment” (SEDA), which measures the relative well-being of 149 countries by gauging their success in converting wealth into well-being – that is to say, in effectively translating their potential into tangible progress.


 

How to Make Zones Work Better in Africa?

Cecile Fruman's picture

Sub-Saharan Arica has launched a new wave of “special economic zones” (SEZs), with more and more countries establishing or planning to establish SEZs or industrial parks. However, can Africa overcome the past stigma and make the zone programs truly successful?

This was one of the hot topics during the China-Africa “Investing in Africa Forum,” held in Addis Ababa, Ethiopia, from June 30 to July 1, organized by the World Bank Group with the government of Ethiopia, the government of China, the China Development Bank and UNIDO.
 
Why did the the African zones fail, in the past, to attract many investors? My answer was they were not truly “special” in terms of business environment and infrastructure provisions, and many constraints were not significantly improved inside the zones. This analysis was supported by another panelist, His Excellency Dr. Arkebe Oqubay, Senior Advisor to the Prime Minister of Ethiopia. According to Dr. Oqubay, past zones in Africa were “missing the ‘basics’ such as power, water and one-stop services, and were not aligned with national development strategy.”

That viewpoint was shared by almost all the other panelists, which included senior African and Chinese officials and international experts at the SEZ session, which was characterized with candid discussions and greatly benefited from the background paper prepared by Douglas Zeng of the World Bank Group’s Trade and Competitiveness Global Practice.

From Tirole to the WBG Twin Goals: Scaling up competition policies to reduce poverty and boost shared prosperity

Anabel Gonzalez's picture
The role of policies that ensure and promote competition in the marketplace have moved to the forefront of economics and the development agenda. The Australian G20 presidency highlighted competition as one of the four policy areas for the growth agenda. India’s prime-minister Modi has placed competition on his transformational reform agenda, and The Economist recently emphasized the lack of competition as a source of low productivity among Latin American firms. Jean Tirole, who won the latest Nobel Prize for his analysis of market power and regulation, demonstrated how competition policies can spur powerful firms to become more productive and can give smaller firms more opportunity to thrive.

To respond to client demand at this crucial moment for economic development, the World Bank Group is generating knowledge to better understand the links among competition, growth and shared prosperity, and to develop policies that promote competition. Last week, at a Bank Group event, held jointly with the Organization for Economic Cooperation and Development (OECD), experts and practitioners discussed the growing body of empirical evidence on these matters. Representatives from the WBG’s client countries, in turn, shared how WBG competition policy tools are leveraging their development impact.

Competition in the marketplace matters for economic growth and household welfare for two reasons:
 
  • First, it fosters more productive firms and industries, allowing domestic firms to become more competitive abroad and to export more. A WBG study shows that substantially increasing competition in Tunisia would boost labor productivity growth by 5 percent.
  • Second, it protects poorer households from paying too much for consumer goods, and from missing out on the benefits of trade liberalization. In Mexico, lack of competition costs the poorest households 20 percent more than richest households. In Kenya, poverty could fall by 2 percent if competition was more intense in the maize and sugar markets.


Competition is restricted by businesses practices that undermine competitive dynamics. When firms agree to fix prices, empirical evidence reveals that consumers pay on average 49 percent more, and 80 percent more when cartels are strongest. Developing economies are still frequently marked by regulations that restrict the number of firms or limit private investment; rules that increase business risks and facilitate agreements among competitors; and rules that discriminate against certain competitors or affect competitive neutrality. When new retail firms are allowed to enter the market, real household income increases by 6.2 percent.

'Model Law for Best Practice in Financial Consumer Protection': An important driver for Universal Financial Access

Ros Grady's picture

The Client Protection Principles: Model Law and Commentary for Financial Consumer Protection (the "Model Law"), recently launched by the Microfinance CEO Working Group, has the potential to be a useful resource for the many developing and emerging economies that are seeking to design and implement international best practices in financial consumer protection, having recognized that consumer protection is a critical element in building and maintaining trust in the financial sector and achieving financial inclusion targets.

The Model Law was prepared on a pro-bono basis by the international law firm DLA Piper on the basis of the 7 Client Protection Principles of the Smart Campaign. The project, which took place over a 15-month period and was managed by Accion on behalf of the Council of Microfinance Counsels, included consultations with financial inclusion stakeholders and legal experts, who undertook a review of existing legal frameworks in various countries. Reference was also made to international best practices and principles such as the World Bank’s Good Practices on Financial Consumer Protection and the G20 High Level Principles on Financial Consumer Protection.
 
The Model Law is a high-level, activities-based law that is intended to apply equally to all financial-services providers. This includes “banks, credit unions, microfinance institutions, money lenders and digital financial-service providers.” The apparent aim is to ensure an equal level of protection for all consumers and a level playing field. The consumers concerned may be an individual or a micro-, small or medium-sized business, and so the law will apply equally to consumption and small-business facilities. Many of the provisions are framed in terms of principles, the detail of which would need to be filled out in related legislation.


 
The framework of the Model Law follows the Smart Campaign’s 7 Client Protection Principles, and so it covers the topics of appropriate product design and delivery; prevention of overindebtedness; transparency; responsible pricing; fair and respectful treatment of clients; privacy of client data; and mechanisms for complaint resolution. There is also a section covering the establishment of a dedicated supervisory authority with broad functions relating to the regulation, supervision and registration of financial-services providers, market monitoring and enforcement.

'Business unusual' can still work

Cecile Fruman's picture

I recently spent three days in Hargeisa, Somaliland. An eye-opening experience, as much as one that strengthens my conviction that World Bank Group is doing the right thing by engaging in this fragile country.

Somaliland is business unusual. Imagine among others, sitting in a mandatory security brief and specifying your blood type straight off the plane, going to meetings in armored cars, wearing the hijab  – a veil worn by Muslim women in the presence of adult males – scheduling meetings around prayers and the time of Iftar, the evening meal when Muslims end their daily fast during Ramadan.

The business environment in Somaliland is characterized by a fragile state, poor public service delivery, a weak legal and regulatory regime, inefficient and costly trade logistics, and a fragmented private sector with limited structured engagement with the government. Although the private sector accounts for more than 90 percent of GDP (an anomaly in Africa), it has poor access to finance and lacks an organized voice.



Meeting with the President of the Republic of Somaliland.
 
During my mission, I met with key Ministers, entrepreneurs and development partners and discussed the challenges and opportunities linked to the ongoing economic development agenda, notably the development of infrastructure and the energy sector. The exchanges highlighted how the World Bank Group's program in Somaliland is laying a foundation to create job opportunities and to accelerate the pace of economic development by fostering business reforms and SME engagement. In this light, the set-up of a high-level taskforce – reporting directly to the President – to implement Doing Business reforms compiled in a Doing Business memo, is a milestone and a strong sign of client buy-in. That is always crucial for the World Bank Group's programs to reach their objectives.  

Last, I participated in the presentation of the pilot Reform Champion Program, which aims to develop the capacity of government officials and some representatives of the private sector to implement key reforms that will address constraints to economic growth and development. The project is expected to help trained reform champions implement at least five reforms to improve government-to-business services by July 2016.

The World Bank’s Caribbean Entrepreneurship Program: One Woman’s Story of Growth

Michael Grant's picture

After managing businesses in television and tourism, Shirley Lindo returned to Jamaica with a desire to create a community-enriching enterprise. As the daughter of a St. Ann farmer, she chose natural products, free of additives, that could be grown on her "Outa Earth" plot in the old Bernard Lodge sugar lands.

Since castor beans grow fairly easily on Jamaica’s plains, she settled on the production of castor oil, a versatile commodity valued as a food additive, manufacturing element, cosmetic ingredient and healing agent. As a testament to the oil’s quality, it has won blue ribbons at the Denbigh Agricultural show, Jamaica’s largest, three years running.
 
Shirley discovered, after a few years of producing the oil using a laborious traditional process and selling to local and American customers, that her product generated large quantities of waste. Rising everywhere were piles of bean shells and leftover bean pulp, plus the leftover trash from another crop, the moringa seeds that were becoming a popular health food on the island.

After doing some research on uses for these agricultural byproducts, Shirley applied for a grant to use them to develop a sustainable soil conditioner and low-smoke briquettes.

From 300 entrants, Shirley was one of 11 winners selected from across the CARICOM (Caribbean Community and Common Market) region, and one of four women in that group. Her initial progress was slow, as she grappled with the cost of scaling up castor oil production in order to create the critical mass required for producing the newer products more efficiently.
 

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