Gaps, cracks and lacunae: The finance and growth nexus in low-income countries

Nauro F Campos, Stefan Dercon 01 March 2014

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Are quantitative and qualitative improvements in financial markets, institutions, instruments, and intermediaries positively and closely associated to the processes of economic growth and development? Does finance cause growth? Once upon a time, economists were deeply divided on these issues. Until about 1990, when endogenous growth gained prominence, there were few economists (notably Joseph Schumpeter) that believed financial development drove growth. The Schumpeterian view is that growth is driven by innovation and innovation is driven by credit. Without finance there is no growth.

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Topics:  Development

Tags:  growth, Low-income countries, Finance

Constraints to growth in Sri Lanka and private enterprise development in low-income countries

Christopher Woodruff interviewed by Viv Davies,

Date Published

Fri, 01/27/2012

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See Also

Read the transcript here.

See also:

Private Enterprise Development in Low-Income Countries (PEDL) (www.pedl.cepr.org)

Transcript

View Transcript

<p><strong><a name="ts"></a>Viv Davies</strong>: Hello and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I'm Viv Davies from the Centre for Economic Policy Research. It's the 26th of January, 2012 and I'm speaking to Professor Christopher Woodruff of Warwick University about his recent research in Sri Lanka that looks at the constraints to growth of micro enterprises and how to generate job creation. Woodruff highlights the effects of wage subsidies, savings programmes, and entrepreneurship training in generating employment, firm registration, and the transition from small informal firms to more dynamic enterprises. We also discuss a new five year competitive major research grants program directed by Professor Woodruff and coordinated by the Centre for Economic Policy Research in partnership with the Department for International Development. Its focus is on private enterprise development in low income countries.</p>
<p>I began the interview by asking Chris to outline his current research on micro enterprises and growth in Sri Lanka.</p>
<p><strong>Christopher Woodruff:</strong> We have several projects, mostly based in Sri Lanka, that are asking the questions: What are the constraints to growth of micro enterprises and how do we generate job creation? If I step back one step, previous research which I've done with David McKenzie and Suresh de Mel shows that at least among enterprises owned by males, that capital injections lead to large increases in the profitability of the enterprises, and that it's possible to increase the incomes of the self employed, very small scale self employed, with capital alone. But what we didn't see from that project was any generation of employment or any growth, sustained growth, of the enterprise. So we began to think about what are the other constraints that these businesses, these micro enterprises, might face in terms of growth. We have two projects which are aimed at unpacking that.</p>
<p>One which is a project which provides not only funding for capital injection, this time in the form of a matched savings program, but also a temporary incentive to hire an additional worker and enterprise training, so entrepreneurship training. Firms receive sometimes two of those interventions, sometimes one. Then there's a control group - it's a randomised control trial, here's a control group that doesn't receive any of them.</p>
<p>The wage subsidy is offered for a six month period, and what we find is that even a year after the wage subsidy is removed, about one in ten enterprises who received the wage subsidy, in addition to any growth in the control group, hires a worker. That may not sound like a big effect but these are enterprises which are massive in number in most low income countries. That work is ongoing in the sense that we're still gathering data. If that effect holds up that suggests that for a relatively modest injection of money in the form of a wage subsidy, we generate pretty significant employment effects from these enterprises.</p>
<p>Interestingly, the savings program generates something almost like a similar effect. About one in 12 enterprises that were participating in the savings program have an additional employee a year and a half after the savings program was completed. That's at least some suggestion that maybe it's possible to generate employment with these kinds of enterprises.</p>
<p>A second project that we've undertaken in Sri Lanka looks at the constraint of formality, or rather informality, among these enterprises. There, we start with a sample of firms that have three to eight workers, three to nine workers, who are currently unregistered at the time of the baseline survey. We give them incentives to register the firm formally. We find with a fairly modest incentive of about 40% of one month's income of the median firm that 20% of the firms offered this incentive choose to register. With an incentive about four times that amount &ndash; that is a month and a half or two months worth of income &ndash; about 40% of the firms registered.</p>
<p>When we looked, two years after registration, at whether a registration has an effect on the growth of the firms what we find is nothing at the median. For the median firm being registered, being unregistered, doesn't seem to make any difference. But there are some interesting effects in the upper tail among the top, the fastest growing 10% of the firms, where it does look like registration led these firms to grow much more dynamically.</p>
<p><strong>Viv</strong>: Yes. I was going to ask you just that, the extent to which informal firms are a potential source of dynamic enterprises.</p>
<p><strong>Christopher</strong>: If you look at somewhat larger enterprises, I'm not talking about firms that have 10,000 workers or 5,000 workers, but firms that have 20, 30, 40 workers. Some portion of those &ndash; it's going to vary by country, in Sri Lanka it seems to be about one in 10 &ndash; started as non employers. They started as people who were working by themselves and grew to a size of 20 or 30 workers. Interestingly, you see something similar in the United States. Work with the Integrated Longitudinal Business Database and the U.S. suggests that roughly almost 30 percent of employers start as non employers. The probability that a non employer ever hires an employee is very small, but there's such a massive number of non employers that their contribution to employment generation and the startup of small firms is not, by any means, trivial.</p>
<p><strong>Viv</strong>: How are dynamic entrepreneurs made? Are there policies in place to encourage this kind of entrepreneurship?</p>
<p><strong>Christopher</strong>: In the context of low income countries, one of the questions we're interested in is there are certainly lots of policies aimed at micro enterprises and small scale enterprises. What we tend to see is policies that are undifferentiated. That is, everybody in the sector is offered the same policy, training, and often its entrepreneurship training. But they're offered the same policy. I think what we would like to be able to do is to think about differentiated policies where micro entrepreneurs who really don't have the aspirations to grow, who really are in business just to generate a bit of maybe extra income to supplement earnings of other members of the household, might receive one set of policies and those who have aspirations to grow and may, as a result, face different constraints and have different needs, receive a different set of policies.<br />
I think at the end of the day, that's what we would hope to be able to do in this research program is to suggest not only differentiated policies but also ways of differentiating these two types of entrepreneurs.</p>
<p><strong>Viv</strong>: You've just started a new major research program under the partnership arrangement between the Department for International Development in the UK and the Centre for Economic Policy Research on private enterprise development in low income countries. Could you tell us a little bit more specifically about the objectives of that research project?</p>
<p><strong>Christopher</strong>: Yes. That project&hellip; I think the sorts of questions we've been talking about, the issues we've been talking about, the role of the informal sector in generating employment but in generating competition and generating more competitive markets, is a part of that, is one of the issues the Private Enterprise Development Research Program will address. I think, from a research perspective we want to understand more about how markets in low income countries work. In particular, we know that there are many more frictions in the markets in low income countries than there are in higher income countries. We know that the force of competition is not as strong in low income countries as it is in high income countries. Particularly, we know that there's quite a lot more productivity dispersion among firms in low income countries than among firms in the U.S. and in Europe. We want to understand where that dispersion comes from, in a sense, or what it is about the market that allows firms that are relatively unproductive, that are relatively inefficient, to survive.</p>
<p>So that, I think, from a research perspective is one of the main goals. There's a piece of that, if we look in most low income countries that have an export sector, the export sector is often much more dynamic. There's a question about the role of the export sector, whether the efficiency of those export firms spill over to the rest of the economy, whether by themselves the export firms are enough to generate a dynamic in the low income countries that leads to a more competitive market.</p>
<p>We're also looking&hellip; and I should say this is a program that will have a competitive call. There'll be a call for proposals. There'll be a grants competition. We'll award grants to the best proposals in the program. The proposals need to address an issue which is policy relevant for low income countries.</p>
<p><strong>Viv</strong>: Yes. I was going to ask you about that. There is a significant policy dimension to this research, right?</p>
<p><strong>Christopher</strong>: Yes. The idea is that this research will have a policy impact, a serious policy impact. We'll ask researchers to demonstrate that they have a plan to dialogue with policy makers in low income countries and to demonstrate how the research can and would affect policies in these countries.</p>
<p><strong>Viv</strong>: So you're not looking to attract researchers from low income countries necessarily, but you're also looking for researchers with toolsets that can be applied to low income countries?</p>
<p><strong>Christopher</strong>: Right. I think we're actually looking for both. We would like to see engagement of researchers from low income countries either on their own or collaboratively with researchers from higher income countries. But we are also interested in reaching out to researchers who may not currently be working on low income countries but who have a set of tools that may be applicable to the context in low income countries.</p>
<p><strong>Viv</strong>: How would you attract these researchers?</p>
<p><strong>Christopher</strong>: There are two grants programs. There's a Large Grants Program. There'll be a call that comes out early in February that'll be the first call for the Large Grants Program. That'll be an annual&hellip; there'll be an annual call for that program. There we expect to fund projects on the order of &pound;300,000 on average, so fairly large scale projects. There's no upper limit, so if somebody comes up with a very compelling case for a much larger project, that can be considered as well. Secondly, and in my mind it's some ways maybe more interestingly, we have what we call the Exploratory Grants Program. That program is open now. The first set of proposals will be reviewed at the end of January and then we'll have a review every two months, so there'll be a rolling review of the proposals that come in for the Exploratory Grants Program. That program will fund grants up to &pound;35,000 for research that I think of as perhaps falling into two or three categories.</p>
<p>One category is people who have an idea that they need to do some exploratory work on, some initial work on, in order to develop a large scale project. The second is young researchers, in particular PhD students. We would like to encourage... let's put it this way &ndash; if this program is going to be successful in the long run it's going to be successful because we induced more researchers to work on the issues of private enterprise development in low income countries.</p>
<p>Finally, the Exploratory Grants Program is maybe particularly appropriate for young researchers in low income countries who have recent PhDs, who have either finished at universities in those countries or gone back, PhDs in Europe or other places, to again begin to work on issues related to private enterprise development in those countries.</p>
<p><strong>Viv</strong>: So the exploratory grants call is open and the major grants is about to open in a week or so?</p>
<p><strong>Christopher</strong>: That's correct. The exploratory grants call will remain open for the next four years, roughly, with reviews every two months on a rolling basis. Again, the large grants calls we expect to be annual calls so the beginning of each of the next four years, including this one, will have calls for proposals under that program.</p>
<p><strong>Viv</strong>: OK. I wish you all the very best for the program.</p>
<p><strong>Christopher</strong>: Thank you very much.</p>
<p><strong>Viv</strong>: Chris Woodruff thanks a lot. <br />
&nbsp;</p>

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Topics

Development
Tags
Low-income countries, PEDL, Sri Lanka

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January 2012

Poor countries or poor people? Development assistance and the new geography of global poverty

Ravi Kanbur, Andy Sumner 08 November 2011

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In 1990, 93% of the world’s poor lived in low-income countries (LICs). Now, more than 70% – up to a billion of the world’s poorest people or a “new bottom billion”– live in middle-income countries (MICs) and most of them in stable, non-fragile middle-income countries (see Institute of Development Studies for discussion).  

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Topics:  Poverty and income inequality

Tags:  development assistance, foreign aid, Low-income countries, middle-income countries

The impact of the global financial crisis on low-income countries

Nikola Spatafora, Andrew Berg 24 May 2011

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The existing research on the impact of the global financial crisis has tended to focus mainly on advanced countries and emerging markets (see for instance, Berkmen et al. 2009; Blanchard et al. 2010; IMF 2010; Lane and Milesi-Ferretti 2010; and Rose and Spiegel 2009). But the global financial crisis that started in 2007 raises several important questions for low-income countries (LICs).

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Topics:  Development Global crisis

Tags:  global crisis, Low-income countries

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