By: The Enterprise Research Institute
Commissioned by the Asian Development Bank and Conducted in conjunction with CEAL. 2004

The ADB approved a small-scale technical assistance (SSTA) for a diagnostic study to improve access to affordable credit in Vanuatu. The SSTA's purpose was to prepare a sound integrated reform package, including a detailed implementation plan, to assist the Government in preparing a comprehensive reform plan for the development of a secured transactions framework. The aim - to improve access to affordable credit in Vanuatu. Vanuatu's private sector has developed to date at a disappointingly slow rate, partly because financial underdevelopment hinders adequate financing of the private sector. Vanuatu's domestic financial sector provides only a minimal range of banking services, access to credit for Ni-Vanuatu entrepreneurs is limited, and interest rate spreads are high reflecting high transaction costs and risk premiums and inefficiencies in financial intermediation. The underdevelopment of the financial sector is, among other factors, connected to two important and related, underlying issues: the lack of a secured transactions framework (i.e., the legal framework that governs collateral for loans), and adverse implications of the customary land tenure system. These elements effectively prevent the use of collateral to bridge the gap between credit supply and demand, thereby impeding access to affordable credit especially for the Ni-Vanuatu. This SSTA aimed at establishing the necessary program to allow for reform of Vanuatu's secured transactions system in the future. By allowing Ni-Vanuatu to leverage movable property as collateral lending to business borrowers will be encouraged and permit farmers, consumers, and businesses to use movable property as collateral for loans thus promoting growth and poverty reduction.

By: Paul Holden
For: The Center for International Private Enterprise, 2004

Over the past few years, opposition to reform has been growing in many developing countries. In particular, in Latin America, a series of crises has led to disillusionment regarding the ability of reform programs to bring prosperity. The Argentina crisis is only the most recent example of an early reformer experiencing severe crisis and halting or reversing earlier efforts. The policies associated with the "Washington Consensus", which involved privatization, trade reform and macroeconomic stability, is now viewed in many developing countries, as well as among many "activists" as having added to poverty in the countries where it was implemented. In some quarters, globalization is considered to be anathema - promoting the worst evils of capitalism. The proponents of such views claim that it has destroyed jobs in the industrial countries and has led to the exploitation of low paid workers in developing countries.

These views, however, are misguided and ignore the facts. Countries where there has been genuine reform have, in general, performed well. For example, per capita income growth in Chile, one of the deepest reformers among developing countries, was among the top four worldwide in the 1985 - 2000 period. In many cases, the countries that have experienced the greatest problems, and that are held up as examples of the failure of market oriented economic systems, are those where reform was incomplete, and there was a failure to follow through on initial reform efforts involving privatization and trade liberalization to ensure that markets worked effectively to allocate resources efficiently. Governance in the vital realm of economic activity failed to support market oriented reform, thus diminishing the impact of reform efforts and, in several cases, dooming it them to failure.

The theme of this note is that when governance is weak, the costs of transacting (in other words, the costs of doing business) rise. Without governance reform to promote private sector development, growth and prosperity will continue to elude most developing countries. The note commences with a discussion of transactions costs and the impact they have on the private sector. It outlines ways in which weak governance contributes to high transactions costs. It then discusses in some detail issues related to the reform of governance as it pertains to promoting private sector development. It gives two examples of successful governance reform that have had a strong impact on promoting growth and alleviating poverty in the countries where they occurred. It concludes that similar reform is the only option available for governments intent on promoting growth and development.

By: Paul Holden, Malcolm Bale, and Sarah Holden
Report Prepared By ERI For The Asian Development Bank Under: RETA 6037: Private Sector Development Strategy For The Pacific, 2004

This report assessed conditions for private sector development in the Pacific region member countries of the Asian Development Bank. It aimed to provide an overall private sector assessment of the region that laid out an analytical foundation for strategies to assist Pacific developing member countries (PDMCs) promote their private sectors. It is organized along the following lines:

Chapter 2 outlines briefly the methodology used to assess the private sector business environment in the Pacific region. It draws on empirical research that measures the impact of various factors traditionally thought to generate growth. The result of this work is overwhelmingly that over the long run, the main determinants of private sector growth are the institutions that provide the basis for private sector activity and the transactions costs imposed upon businesses.

Chapter 3 describes the characteristics of the Pacific Island economies. It describes the effects of factors such as size, distance, and vulnerability on private sector development in the region. It examines the impact of remittances and aid and describes the pervasive presence of the State in many of these economies.

Chapter 4 describes the main issues faced by the private sector in the region. Among these are: small market size, the high costs of doing business, and the interaction and role of the public and private sectors.

Chapter 5 examines financial markets in the Pacific region. While levels of financial development vary among the countries, overall they have underdeveloped financial systems, which rely heavily on bank financing. Interest rates are characterized by fairly large spreads but interest rate levels are low compared with many developing countries. This chapter describes briefly some of the regional financing schemes, and the pros and cons of their further expansion. A theme of this chapter is that property rights issues, both for land and movable property, combine to exclude the local population, particularly those in agricultural areas, from access to finance.

Chapter 6 focuses on land issues and their impact on private sector development. Land-related property rights is one of the most difficult issues in the Pacific. The report points out that the current pervasive uncertainty and the inability of investors to enter into secure contracts to use land is harming private sector development in the region.

Chapter 7 examines briefly some sectoral issues, although the report and analysis do not take a sectoral perspective. There are some fundamental issues related to tourism development, agricultural policies, and management of fisheries that have a profound impact on private sector development in the region.

Chapter 8 looks at the interface between the role of the State in the Pacific region and how it affects private sector development. It challenges the notion that characteristics of the region imply a large and pervasive state presence and identifies how this attitude has damaged private sector development in the past.

Finally, there follows several short appendices outlining the results of the four country private sector assessments and some more detailed discussion of issues relating to secured transactions reform.

For a copy see:
Swimming Against the Tide Report

By: The Enterprise Research Institute
For the World Bank, 2004

The purpose of this evaluation was to assess the World Bank's investment climate strategy and its implementation in Peru over the past ten years. The paper focused on whether the investment climate strategy correctly identified priorities, whether such identification translated into appropriate projects and sector work, and how well the strategy was implemented. The paper begins with a discussion of the factors relevant to the investment climate in Peru at the start of the period in order to establish a baseline. It then tracks these factors over the course of the study period. The paper also reviews the perceptions of Peruvian businesses regarding the investment climate in order to provide a cross check of the other indicators that were used. It concludes with a discussion of lessons learned for the World Bank for future IC interventions in Peru.

By: Paul Holden.
Written under ADB RETA 6075; Contract number COCS/03-472. 2004

Most countries as well as international and bilateral aid agencies have specific policies to assist small and medium sized enterprises (SMEs). They are viewed as creators of jobs, a fount of entrepreneurship, and an essential part of the growth equation. A substantial amount of resources go to promoting and assisting SMEs. Special agencies exist in many countries for the sole purpose of promoting and assisting small businesses. In many countries, they receive special policy treatment, in forms such as tax breaks, preferential financing, assistance schemes, and export promotion support. More recently, business registration and business development services have become common. Many countries are also trying other programs in the areas of technology. But is this attention warranted? Could it be that some governments, through SME assistance, are attempting to compensate for the very imperfections they create? Are aid agencies focusing on SME policies because they are easier to implement than more general systemic reform? And if special assistance is warranted, how should such policies be structured and under what circumstances are SMEs best served by policies directed specifically at them?

The first part of the Handbook, discusses systematically and analytically the answers to these questions. As it is important for those involved in the application of these policies to have some idea of where their efforts might best be focused and where more general policies could be more effective. Examining the problems of small businesses provides insight into larger problems faced by the private sector. In economies where entrepreneurship is rewarded, firms grow from small to medium to large. In economies where the business environment is deficient, small firms tend not to grow and there are very few small formal firms. Such economies are usually characterized by large informal sectors at one end of the firm size spectrum, and a small number of dominant large firms at the other. In many, there is a “missing middle” of small and medium sized enterprises. The aim of this Handbook is to assist SME policy makers develop and implement policies that encourage SMEs as well as improve the business environment more generally.

By: The Enterprise Research Institute
Paper commissioned by the Inter-American Development Bank for the Public-Private Summit on Investment Climate, December 4th, 2003

Dissatisfaction with the recent economic record of many countries in the Latin America region has led to a reassessment of the role of the private sector in promoting the growth necessary to reduce the still all to prevalent poverty. While the significant reforms of the previous decade are being questioned, there is an increasing recognition that unless those reforms are maintained and supplemented, large and small companies in the region will be unable to expand and thrive, and prosperity will remain elusive. In the chapters of this paper, some issues that appear central to promoting private sector development are discussed from the perspective of how to improve the investment climate in order to support private sector growth. The themes are presented not to define solutions, but rather to promote debate and discussion regarding the appropriate role of policies towards the private sector, how to achieve reform of the investment climate, how to sequence reforms, and how to ensure that investors view reform programs credibly. The first chapter discusses the importance of the private sector for Economic Growth. The second chapter examines the appropriate role of the private sector, governments and donors in efforts to improve the investment climate. The third chapter looks at the issues of implementation when attempting to improve the investment climate and the fourth chapter examines the political economy of reform of the investment climate.

Report Prepared by ERI
For the InterAmerican Development Bank, 2003

This report provides recommendations for the articulation of the IDB's strategy for private sector development in the LAC region. To summarize, the strategy should aim to enhance the impact, coordination, effectiveness, and quality of the IDBs interventions in the private sectors of its clients. The private sector development strategy should reinforce the Bank’s goal of promoting development through private sector activities to maximize the impact on sustainable economic growth and poverty reduction. Although the goal of assisting countries in promoting the efficiency of markets while at the same time compensating for market failure is complex operationally, if successful, it could greatly enhance the effectiveness of the Bank as a development institution. In another sense, however, this document should not be a viewed as a "strategy" at all. Rather it aims to provide guidelines for the regional departments, together with the functional departments and the other organizations in the IDB Group, to work together to formulate and implement private sector strategies in Group borrowing member countries. To call this a "private sector development strategy" for the Bank Group is a misnomer. A private sector strategy is only meaningful at the country level. While the issues raised in this document are common to all in the region, the details and priorities vary greatly from country to country. The essence of a private sector strategy or program is that it takes place at the country level, and within countries, at the local level. An underlying theme of this document is that what is required is not a strategy but rather a process that starts out with a statement of issues and aims but then focuses on the individual countries and evolves along with an identification of the problems and issues in the countries themselves. This paper calls for the IDB Group to make a commitment to a new way of approaching private sector issues, making it a core element of their country programs, and changing the way in which the staff approaches private sector development.

By: The Enterprise Research Institute
For: The World Bank, 2003

Over the last decade, the Former Yugoslav Republic of Macedonia (FYR Macedonia) has seen turmoil and upheaval. It experienced recession, political embargo and border closures, disruptions from the Kosovo conflict, two severe winters and a drought, and internal conflicts in 2001. Not surprisingly, FYR Macedonia has struggled to stimulate economic growth. The insecurity created by these events together with the uncertainty generated by confusing and conflicting domestic policies has added to the difficulty of doing business in the country and has had a strong negative impact on business. However, the new government that came to power in November 2002 has made a strong commitment to improving the investment climate. Several new initiatives have been launched and the initial reaction from the business community has been positive. These are welcome steps - sustainable economic growth can only come from the private sector and issues related to the business environment (investment climate) are central to putting the country on the road to long term prosperity. This paper examines the factors that affect business activity in FYR Macedonia and identifies some of the key constraints to businesses. The paper concludes with suggestions for further investigation together with recommendations that could help improve the investment climate.

By: The Enterprise Research Institute
For: The Asian Development Bank Under: RETA 6037: Private Sector Development Strategy For The Pacific, 2003

The Asian Development Bank (ADB,) as part of its support to the countries of the Pacific is articulating and developing a strategy for the private sector in the region. Support for the private sector is an integral part of the Poverty Reduction Strategy recently adopted by ADB. Recognizing the link between private sector performance and poverty reduction provides motivation for a coherent approach toward ADB’s assistance to the private sector in the region. This report provides a first step by proposing a strategic approach toward the private sector in the Pacific Islands based on selectivity of major impediments to growth of the private sector. It draws on four country private sector assessments undertaken by the authors and on several other country assessments undertaken by others. Some recommendations in the report may be controversial as they come from findings that have not been widely identified or recognized in past work but they are based on the importance of providing the appropriate operating environment to stimulate private sector growth. This document outlines strategies for the countries themselves, the donor community, and ADB that are designed to improve the business environment in the region. It is based on the premise of the regional PSA - that without the development of the private sector, reduction in poverty cannot be achieved. While this is an uncontroversial standpoint in many places, it is less so in the Pacific region, which has traditionally had a strong collectivist mindset. A premise of this document, however, is that the collectivist nature of Pacific society is not necessarily inimical to private sector development. Indeed, visits to the countries in the Pacific region revealed anecdotal evidence of community based entrepreneurship that supports observations of others who have documented examples of entrepreneurial community activity in several countries in the region. Entrepreneurship at both the community and individual level should not be discounted. However, incentives that exist in many countries are not supportive of entrepreneurial endeavor and it is not surprising, therefore, that private sector activity is limited.

From the donor perspective, actions to support private sector activity have taken place at the specific project level, without having a more general private sector development framework within which to assess priorities. This report argues that while detailed interventions might be necessary at a micro level, unless they are based on an overall assessment of the problems facing the private sector, they are bound to be less effective than they otherwise could be. The main theme of the recommendations is that if policies to assist the private sector to grow are to be effective, a country strategy must center on the measures necessary to improve the environment for doing business. It must start from a “top down” approach to private sector development that begins with an assessment of the problems that leads to deciding on priorities and designing solutions. Only then will detailed “bottom up” interventions have the potential to realize lasting benefits.

By: The Enterprise Research Institute
For: The Asian Development Bank Under: RETA 6037: Private Sector Development Strategy For The Pacific, 2003

The Republic of the Marshall Islands (RMI) economy has registered many years of low or negative growth and per capita income is now 20 percent below what it was at independence. The government has announced that future growth depends on a thriving private sector and is interested in promoting private sector friendly policies within a sustainable development framework. This private sector assessment (PSA) examines the environment for doing business in RMI. Based on numerous interviews with private sector business people, it concludes that although the government has taken the important first step of committing to improving the private sector environment, several important steps are necessary to improve the prospects for higher private sector growth. The PSA suggests policy initiatives to promote private sector growth by making it more competitive, changing some aspects of the role of the state in the economy and undertaking institutional reform that will promote private contracting and encourage financial market growth. The report concludes that the time is ripe for a national debate regarding the role of the state, the role of business and how reform should proceed.

By: The Enterprise Research Institute
For: The Asian Development Bank Under: RETA 6037: Private Sector Development Strategy For The Pacific, 2003

The Samoan economy is one of the few bright spots in the Pacific region. Following reform in the mid to late 1990s, the economy has been growing at rates that have substantially exceeded other island states. Nevertheless, per capita income remains low by the standards not only of the developed world but also compared with middle income developing countries. The government is committed to maintaining growth and reducing poverty and sees higher private sector growth as a key element in achieving its goals. Recent poverty surveys also show that the poorer communities identify the development of markets, jobs and finance, as the main factors that would reduce the level of hardship in Samoa, which also implies an expansion of private sector activity. This report analyzes the issues that influence private sector development in Samoa. Rather than present a long list of proposals for change, this report takes a “first things first” approach and highlights five major issues that inhibit the development of the private sector in Samoa. In the opinion of the authors, removing the impediments that arise through these five issues would make a significant difference to investment, and the rate of development of the private sector, job creation, and wealth in Samoa. It looks at the incentives and constraints that affect investment, entrepreneurship, and businesses and makes some recommendations regarding how economic growth can be promoted.

By: The Enterprise Research Institute
For: The Asian Development Bank Under: RETA 6037: Private Sector Development Strategy For The Pacific, 2003

Social and economic transformation in Papua New Guinea is a long-term endeavor that seeks to develop the interface between the traditional and modern sectors, and proceeds at a pace that local communities can control and absorb. Papua New Guinea has tremendous potential to harness the benefits of a resilient civil society with strong social capital based on enduring cultural and social traditions, and drawing on bountiful natural resources. Yet, the country remains significantly underdeveloped and faces considerable challenges in achieving these ends. It is largely a rural society and many of the country’s residents do not enjoy access to basic services. Rather, they face great economic and social hardship and are offered few opportunities to improve their own situation. The approach for private sector development outlined in this report identifies areas where the government and donor community could take steps toward addressing private sector development priorities including: strengthening economic policies, lowering business costs, integrating local markets, developing skills and technology, prioritizing rural development, and coordinating Donor support. For ADB we suggest a strategy that focuses on rural development (to lift the subsistence sector) and improving infrastructure and regulation for commercial business development. But it is also important to note that Papua New Guinea exhibits characteristics of a failing state as well as donor fatigue and frustration. Governments are unstable and short-lived, they fail to deliver any meaningful services to constituents, official corruption is a significant problem, and serious and violent crime is endemic. Donors advise and cajole, evaluate, and redesign failed interventions, but have been unable to find a workable and durable formula for success in Papua New Guinea. Yet, donor funds continue to flow and projects and programs continue to fail - Papua New Guinea represents an extreme challenge for all donors.

By: The Enterprise Research Institute
For: The World Bank, 2003

The purpose of this evaluation was to assess the World Bank Investment climate strategy in Romania over the past ten years. It does not evaluate individual World Bank projects in detail, but rather the overall approach to improving the investment climate (or business environment) in Romania. The paper begins with a discussion of the factors relevant to the investment climate in Romania at the start of the period in order to establish a baseline. It then tracks these factors over the course of the study period. The paper also reviews the perceptions of Romanian businesses regarding the investment climate in order to provide a cross check of the other indicators that were used. It concludes with a discussion of lessons learned for future IC interventions in Romania as well as for other countries in transition that are attempting to improve their investment climate. Among the most important of the conclusions is that donor coordination has played a significant role in assisting Romania improve the environment for business, that conditionality has been important in helping successive governments maintain consistent IC policies, that consultation with the private sector is of major importance in setting policies and priorities, and that rapid change can be confusing and in the short run have a negative impact. Furthermore, when projects have been based on sound sector work, they appear to have been more successful.

By: The Enterprise Research Institute
For: the Asian Development Bank Under: RETA 6037: Private Sector Development Strategy for the Pacific, 2003

References to the islands of the Pacific usually conjure up images of deep blue seas, sandy beaches lined with waving palm fronds, and natives in grass skirts – a picture evocative of paradise where one can languish in the beauty of pristine, unspoiled nature, away from the stresses of modern urban society. Unfortunately, this image of the slumberous South Seas, if it ever were true, is disappearing. Behind the façade of serenity, are societies – small island nations – struggling to find their place in a growing and globalizing world. The islands of the Pacific are a conglomerate of fledgling nations most so small that they have been described as “the confetti of the Commonwealth.” Statehood for many is less than thirty years. Before they have had time to find their feet they have been forced to confront global forces even as they attempt to establish the basic building blocks of a sovereign state. This harsh reality is often in sharp conflict with the traditional values and cultural norms that define the Pacific way of life. As a result, especially in the more culturally diverse Melanesian societies, internal conflict has recently become more prevalent. Much of this conflict is generated by competition for scarce resources, lack of employment opportunities, and poor governance. It is within this context that Vanuatu, and more importantly for this report, the Vanuatu private sector has developed. The first part of the report is devoted to a broad overview of the Vanuatu economy. It then goes on to discuss the major issues that face the private sector and the issues that determine the cost of doing business in Vanuatu and concludes with recommendations that would improve the business environment in the country.

By: The Enterprise Research Institute
Paper commissioned by the Inter-American Development Bank for the Public-Private Summit on Investment Climate, December 4th, 2003

Dissatisfaction with the recent economic record of many countries in the Latin America region has led to a reassessment of the role of the private sector in promoting the growth necessary to reduce the still all to prevalent poverty. While the significant reforms of the previous decade are being questioned, there is an increasing recognition that unless those reforms are maintained and supplemented, large and small companies in the region will be unable to expand and thrive, and prosperity will remain elusive. In the chapters of this paper, some issues that appear central to promoting private sector development are discussed from the perspective of how to improve the investment climate in order to support private sector growth. The themes are presented not to define solutions, but rather to promote debate and discussion regarding the appropriate role of policies towards the private sector, how to achieve reform of the investment climate, how to sequence reforms, and how to ensure that investors view reform programs credibly. The first chapter discusses the importance of the private sector for Economic Growth. The second chapter examines the appropriate role of the private sector, governments and donors in efforts to improve the investment climate. The third chapter looks at the issues of implementation when attempting to improve the investment climate and the fourth chapter examines the political economy of reform of the investment climate.

By: Paul Holden, Enterprise Research Institute, Vassili Prokopenko, International Monetary Fund
For: The South African Reserve Bank , 2002

This article highlights some of the issues and survey the current state of thinking on the relationship between financial development and poverty alleviation. It is based on the authors’ “Financial Development and Poverty Alleviation: Issues and Policy Implications for Developing and Transition Countries” IMF Working Paper 01/160 (Washington: International Monetary Fund, 2001).

By: Paul Holden, The Enterprise Research Institute
For: The InterAmerican Development Bank, 2002

Financial markets in most countries in Latin America are undeveloped. Financial institutions do not effectively intermediate between savers and lenders. As a result financing for all but the largest borrowers is hard to obtain, interest rates are high and the margins between borrowing and lending are usually large. Many types of financing that are routinely available to businesses of all sizes in the industrial countries do not exist in much of Latin America. Since equity finance in the region is also almost universally underdeveloped, many businesses are frequently forced to rely on internally generated funding which in many cases severely hampers their ability to expand.

There are numerous reasons why financial markets are undeveloped, including the region’s history of macroeconomic instability . However, many observers have pinpointed the weak institutions that support financial markets as one of the most important reasons for the poor functioning of the financial sector, a contention that is supported by the fact that achieving price stability has not resulted in substantial financial market development in most countries. This paper focuses on movable property as a basis for securing business loans. It highlights the advantages of being able to pledge effectively movable property as collateral for business borrowing. It describes how the secured transactions framework, which is a shorthand term for the use of movable property as security for loans, operates in the industrial countries. It points out the consequences of not being able to use movable assets as security and shows how this limits firms financing options and biases assets holdings of companies and individuals. It points out that weakly protected moveable property rights especially harms farmers and the rural areas and contributes to rural-urban migration.

By: Paul Holden, The Enterprise Research Institute
For: The InterAmerican Development Bank, 2002

This paper examines how financial markets in Venezuela have the potential to contribute to poverty alleviation. It describes the structure of the financial system in Venezuela and events in Venezuelan financial markets over the past few years in order to assess its current capacity to promote the growth of the economy. It focuses particularly on developments and institutions that relate to the poorer sections of the community. The paper describes the institutional foundations of the financial system as they relate to the poor, including property rights and the land tenure system. It examines the system of collateralizing movable property and provides some insights into why it is not functioning effectively. The paper then examines how poverty could be reduced more directly through the provision of financial services to the poor including access to loans, access to deposit taking institutions and access to other financial services within the context of the provision of microfinance. It discusses the issues regarding microcredit and poverty and questions whether credit is the main financial product that the poor require. The paper assesses how developments in Venezuela accord with ways that financial markets can assist the poor and places the analysis of Venezuela within the context of policies and developments in other countries. The paper concludes that many of the current initiatives contained in recently passed laws will be counterproductive and damage the development of the financial system in Venezuela without helping the poor or promoting development. The paper does not argue, however that there is no role for the state in financial market development. It suggests that urgent government action is needed to strengthen institutions that are the foundation of financial markets. It also suggests ways in which the state could intervene directly through market oriented initiatives that do not distort the allocation of credit and the structure of interest rates, giving examples of initiatives in other countries. The paper concludes by identifying issues for further more detailed investigation.

By: Daniel C. Hardy, International Monetary Fund, Paul Holden, Enterprise Research Institute, and Vassili Prokopenko, International Monetary Fund,
IMF Working Paper 02/159, 2002

Many governments and nongovernmental organizations have adopted policies to promote the growth of microfinance institutions (MFIs). The appropriate level and form of support for MFIs are discussed in this paper on the basis of a review of key MFI characteristics. Governments are also responsible for the regulation of MFIs; here, some principles concerning the extent and coverage of MFI regulation and supervision are developed. The paper addresses some of the public policy issues connected with the growth of the MFI sector. Further expansion in the numbers of MFIs and their financial importance seems likely, and they continue to attract financial and technical support from numerous sources. Meanwhile, the multiplication and growth of MFIs has prompted many countries to reconsider how, if at all, they should be regulated, and the relationship between the MFI sector and the rest of the financial system and, in particular, commercial banking. These developments give rise to several public policy questions, such as whether MFIs merit assistance from either official or nonofficial sources, and, if so, how such assistance can be deployed most efficiently. At the same time, the principles for the prudential and non-prudential regulation and supervision of MFIs are worth reviewing. Section II of this paper defines the main characteristics of MFIs and provides some indicators of their performance in different countries. Section III lays out the arguments for and against providing support to MFIs and discusses how negative side effects of such support can be reduced. Section IV considers the issues of why and how MFIs should be regulated and supervised. Section V concludes.

By: Paul Holden, ERI
For: The World Bank, 2002.

Well defined property rights are the foundation of sound economic systems. In particular, secure registered titles for fixed property encourage investment in land and buildings, support financial market development and promote more equal distribution of wealth. In many developing and transitional economies, property rights are insecure, often held by tradition or occupational right, and do not allow borrowing using property titles as security. In this, Romania is no exception. The current system of titling and registration used in much of Romania is working poorly and the institutions which underlie the system are similarly not performing well. This report evaluates the proposal of the Ministry to reorganize titling and registration of immovable property in Romania. Its purpose is both to provide an overview of the system currently operating as well as to analyze the proposal from an institutional, economic, legal and technical perspective. It focuses on the costs of titling and registration and whether the system promotes a well functioning land market. Its approach will be to look at issues such as; the effectiveness of the government institutions that are involved in titling and registration; the degree to which the system has backlogs; whether there are opportunities for corruption; the cost and time it takes to exchange property and register it; and how well disputes are resolved and the amount of time it takes to do so.

The paper evaluates the economic and institutional implications of the current system. Overall the purpose of this paper is to come to a judgment on the costs and effectiveness of the existing system. It evaluates the current proposals for change and recommends modifications to the draft law that should assist in establishing an effective, low cost system of titling and registration that provides the foundation for secure rights for immovable property and the foundations for the development of the financial system. The paper starts with a review of the way in which titling and registration now occurs in Romania. It analyzes the shortcomings of the system and identifies some of the costs that these incur. It also discusses some of the institutional characteristics of the system of property titling, because these determine the feasible options for reform. It describes how the World Bank supported project on titling and registration is addressing these issues. A discussion of the economic and institutional issues involved in the privatization of the notaries then follows, since this experience should provide some guide to the effects of privatizing the registries in Romania. The paper then looks at some of the economic and institutional implications of the main features of the Draft Law on the privatization of the Registries. In order to draw lessons from other countries’ experiences, the paper then describes the systems of titling and registration in; Spain which has a system of private registries; Peru, which has recently undertaken a successful and unconventional property titling and registration program; the United Kingdom; Norway; and Ontario, Canada. Lessons for Romania from the experience of these countries will be highlighted and analyzed. The paper goes on to look at alternative models of systemic reform, which might have applicability for Romania, and points out the advantages and disadvantages of each. It summarizes the issues and alternatives for Romania as it proceeds with the reform and strengthening of rights over immovable property. The paper summarizes the debate and the conclusions of the expert group that examined the draft law during June 1999, which were discussed at a workshop held in the outskirts of Bucharest. It concludes with a series of recommendations that were regarded as the minimum that must be implemented if the draft law is to have any chance of being successful in its aim to improve the land registration system in Romania.

By: Paul Holden. The Enterprise Research Institute, 2002.

The purpose of this note is to discuss the main questions related to property rights and real estate financing in Ukraine. There is now substantial evidence that the evolution of clearly defined property rights in land is a necessary condition for long term economic development. Looking at the industrial countries, it is difficult to argue against this claim. Most countries in this group have strongly protected property rights, particularly for immovable property, and well functioning land markets. Financial markets that support the purchase and improvement of property exist in virtually all the industrial countries and constitute a major portion of the assets of their financial systems. Secure property rights for fixed property encourage investment in land and buildings, support financial market development and promote more equal distribution of wealth. By contrast, in many developing and transitional economies, property rights are insecure, often held by tradition or occupational right, and do not allow borrowing using property as security. In this, Ukraine is no exception. The current system of titling and registration used in Ukraine, which has evolved from the land distribution program, is not yet working efficiently and the institutions that underlie the system are similarly not yet performing well.

By: The Enterprise Research Institute
For: the InterAmerican Development Bank, 2002

This report reviews the key features of Bolivia’s private sector which, it finds, has developed at a disappointingly slow rate – barely enough to keep pace with the industrial countries and certainly not enough to begin to close the gap. The report begins by examining the key factors of production: land, labor and capital. It finds that land – natural resources on the whole – is somewhat above the world’s endowment and that development of human capital has been below the standard of the rest of Latin America or of the industrial countries. However, it sets out as a tentative conclusion that the real problem has arisen from Bolivia’s slow rate of capital accumulation. It tentatively explains this phenomenon as arising not from ignorance of private technical options or a lack of investment opportunities; but rather to a variety of environmental, legal, and regulatory issues that reduce profitability as well as a profound lack of access to credit that makes it difficult to finance good investment opportunities. This conclusion to some extent runs counter to the popular image of Bolivia as a country where reform has been fully implemented and has failed. However, a central theme of the report is that while Bolivia has implemented trade reform, macroeconomic stability and privatization, it has failed completely to implement meaningful change in the institutions, which underlie private sector development. Finally, the paper turns to policy recommendations. These recommendations focus on improving access to credit by passing a law on secured transactions, and tightening bank supervision and regulations. It focuses on improving infrastructure by investigating a series of changes that would expand privatization and competitive supply. It recommends, for a variety of reasons tied to the institutional nature of the International Finance Institutions (IFIs), that legal, regulatory and institutional reform be an integrated part of most projects and that such reforms be “stockpiled” until they can be attached as conditions to larger policy based loans for the BID, World Bank, and IMF.

By: The Enterprise Research Institute
For: The InterAmerican Development Bank, 2002

This paper analyzes the environment for private business in Peru and identifies the main constraints for the private sector based on an analysis of current conditions and interviews undertaken during recent visits to Peru. It evaluates progress to date in developing a business friendly environment and identifies priorities for further reforms that would promote private sector development. The paper also presents a preliminary and impressionistic assessment of the effectiveness of interventions by the IDB Group to support the private sector. There have been loans to improve infrastructure, help capital markets develop, and assist small businesses and micro enterprises. Legal reform has been pursued and there have been some attempts to strengthen property rights and other institutions in the region. Technical cooperation has also been undertaken to improve some institutions. The paper presents a brief description and analysis of the IDB Group’s support for the private sector in Peru and includes an assessment of the strategy underlying private sector assistance as well as a more detailed look at three specific projects.

By: The Enterprise Research Institute
For: The World Bank, 2002

This paper examines the effect of the Armenian business environment on the traded goods sector and in particular, foreign trade. Because of Armenia’s small economy and the large share of foreign trade relative to GDP, in most cases the factors that impact firms engaged in foreign trade impact the private sector more generally. As a result, many of the foreign trade issues raised are virtually indistinguishable from those that arise from the more general business environment. The first section of the paper looks at some of the economy’s characteristics and outlines issues arising from privatization. It then puts issues of market size into perspective and examines the trade structure implications of high transport costs and other transportation difficulties. The paper also analyzes the institutions that underlie the private sector including the financial system and property rights for movable, fixed and intellectual property. By examining the legal basis for contracting the implications for the conduct of business, especially foreign trade, are revealed. Finally, the relationship between the private sector and the state is considered, with a focus on such issues as regulation, tax collection and customs procedures and tentative recommendations regarding promotion of the private sector generally and foreign trade in particular are made. In the appendix, an analysis of the most promising Armenian industries is presented along with summaries of each of those industries and a recommendation of industries for future focus and expansion.

By: The Enterprise Research Institute
For: The World Bank, 2002

The working principle underlying this study is that many incentives and disincentives to the creation and success of rural business exist but only a small number are critical to the immediate performance of rural businesses. Accordingly, the intent of this report is to identify and describe in some detail only the most important constraints facing rural business and suggest ways in which these constraints can be overcome. The report is intended to have immediate, practical value for the policy discussion on rural development. The report begins by providing an overview of the Philippine economy – both the national and rural economy. In addition, it discusses the relationship between the rural sector and the government and provides some initial insight into some of the constraints that are faced by the rural economy in the Philippines and the environment that is necessary for this sector to thrive. Once this context is established, the paper reviews property rights – a critical component of rural development. The land reform program in the Philippines is discussed to determine whether it has supported or undermined those rights. The infrastructure sector of the Philippines is reviewed then the impact of the capital markets, particularly access to credit and the impact of interest rates. Finally, an examination of the World Bank’s activities in the Philippines is conducted with the ultimate aim of providing policy and future project recommendations that will support enabling the rural economy.

By: The Enterprise Research Institute
For: The World Bank, 2002

The CIS7 countries are among the new sovereign states, formerly part of the Soviet Union, that are attempting to formulate and implement policies to encourage growth and prosperity under a system far removed from the central planning that characterized their former existence. With the coming of peace and macroeconomic stability being restored in most of the countries, hopes initially were high for substantial rates of economic growth. It was thought that if prices were liberalized, if the foreign trade regimes were reformed and if there was widespread privatization, the high levels of human capital that exist in most of this group of countries, plus the natural resources that several possess would lead quickly to prosperity. Many of the countries passed legislation that was thought to be friendly to foreign investors and made progress in other areas such as legal reform. These hopes, however, were not realized. For various reasons, the results of the privatizations were disappointing and the high levels of human capital and natural resource endowments did not lead to economic success. Trade reform has occurred but exports are disappointing. Collectively, the CIS7 group continues to be challenged by the small size of their economies, the geographical isolation and high costs of transport and very unfavorable business environments and underdeveloped or virtually non-existent financial markets. In spite of widespread donor assistance and substantial amounts of aid, both in the form of grants as well as loans, growth rates are much lower than had been expected and on the basis of per capita income, this group of countries is among the poorest in the world. This paper reviews the most important topics and policy issues for developing the private sector in the CIS7 countries. It identifies themes that affect private economic activity, which appear to be common to most of the countries in the group. It looks at financial sector development and discusses reasons for the continued financial repression. It identifies the most important institutions that underpin private sector development and examines how they function. It also looks at the cost of transacting in these countries in order to ascertain the effect that transaction costs have on the structure and nature of the private sector. The approach is based on an overview of the common issues across the countries in the CIS7 group, which are illustrated by examples in the individual countries. The paper concludes by identifying issues that are amenable to policy interventions and point out areas where knowledge needs to be augmented by further investigation in order to make clear policy recommendations.

By: Paul Holden, Enterprise Research Institute, 2001

The private sector in Venezuela has gone through prolonged trauma over the past 10 years. The economy has stagnated while at the same time experiencing the highest rate of inflation in Latin America. The dependency of the economy on oil, the price of which collapsed in the mid-90s and then soared over the past 18 months, has led to large budget deficits, swings in government expenditure and lack of fiscal discipline. These problems have been compounded by the floods that occurred in late 1999, which have resulted in many thousands of deaths, hundreds of thousands being made homeless and the total destruction of the local economy in several areas. Reform episodes have been followed by reversals. There has been extreme political uncertainty characterized by attempted coups, governments of widely different political leanings, and most recently a new constitution, many of the enabling laws for which have yet to be written. Presidential elections are scheduled soon and while the ultimate outcome will probably favor President Chavez, his less than market friendly views raises additional uncertainties for business.

The current environment for micro and small businesses appears to be especially unfavorable. Informality has increased to the point where it is estimated that over half the labor force is now engaged in informal activity, a number, which has risen over the past several years. Incentives to become formal are weak and the processes for establishing small businesses are time-consuming and costly. In addition, the interpretation of labor law in the new constitution threatens large numbers of existing small formal businesses. The main themes are similar to virtually all other countries in the Region. Unfortunately, real reform that helps small business is still all too uncommon. Consequently, this report highlights the structure, composition, and patterns in the SME sector as a first step towards developing a Bank assistance strategy. It commences with a brief overview of recent economic developments in the Venezuelan economy which describes the macroeconomic issues that businesses in Venezuela face. It then goes on to discuss in more detail various aspects of the environment for doing business with an emphasis on the problems that micro and small businesses encounter. Finally some recommendations for further analysis conclude the report.

By: Paul Holden, The Enterprise Research Institute
For: The International Finance Corporation, 2001

There is increasingly powerful evidence that well developed financial systems are a key element in promoting economic growth that is the only hope for the vast numbers of poor who characterize many developing countries. Yet financial markets in these countries are shallow and dominated by commercial banks who rarely lend to any but the most secure borrowers. This failure of financial markets in developing countries is primarily the result of weak institutions that underlie their financial systems. The deficiencies run the gamut from lack of information on potential borrowers, to inefficient or non existent deposit taking institutions in poorer areas, to weakly defined property rights for both movable and fixed property and to legal systems which make it extremely difficult to repossess pledged assets in the event of default.

First, the paper examines some characteristics of financial markets in developing countries. Because informality is such a pervasive phenomenon it then looks in some detail at informal sectors, how informality is measured and some of the implications of informality for economic development. It examines some features of the microcredit phenomenon, which serves as a source of finance for the informal sector. It then looks at the small business sector and some of the issues in small business finance. A theme of the paper is that inadequate institutions are at the root of much financial underdevelopment. The next section examines the weak property rights for both fixed and movable property that are a feature of most developing countries and transitional economies and how this leads to financial underdevelopment. The following section relates these issues to risk structures and discusses how regulation of financial institutions impact the provision of financial services. The paper then outlines some types of services that might be needed by MSRBs. Finally it discusses some examples of financial service provision in various countries. In addition, there is an appendix which surveys the issues related to financial markets and poverty reduction.

By: Paul Holden, The Enterprise Research Institute, 2001

The paper focuses on issues of particular importance to small business and examines and reviews the contribution of MIF in each area. It looks at factors that affect the formation of small formal businesses, factors that promote small business growth, how these factors relate to the private sector more generally, and the role of the MIF in helping small businesses in Latin America and the Caribbean. The paper starts with a discussion of why small businesses are important. It then reviews the factors that are important in the establishment and growth of small businesses. While many of the issues are important to the private sector more generally, the paper focuses specifically on issues that are important to small business because this group has the greatest potential to generate employment and alleviate poverty in the region. The paper then identifies some of the areas in which the MIF has been active in assisting small business in Latin America and the Caribbean, pointing out some of the strengths and weaknesses of what has been done. Finally, it suggests some areas where the MIF can effectively focus to maximize its contribution towards assisting small business in the region. It also makes some suggestions regarding how the MIF can best implement small business projects.

By: Paul Holden, The Enterprise Research Institute
For: The InterAmerican Development Bank, 2001

The closer focus by the International Financial Institutions on poverty alleviation has led to a search for broader instruments with which to alleviate the lot of the poor. While social programs still command the most attention, other areas not traditionally associated with reducing poverty are receiving closer scrutiny. Financial market operations (with the exception of micro credit programs) have generally ignored the impact, either positive or negative, on lower income groups. However, there is increasing recognition that financial systems can have a substantial impact on poverty. The most significant of these is inflation resulting from the monetization of fiscal deficits – rapidly rising prices can have a devastating impact on the poor. In addition, there are many other potential effects which have less obvious immediate effects but which, over the longer term, can have powerful influence on poverty. These include such factors as; the access of the poor to financial services, the provision of risk and insurance mechanisms for the poor; the structure of interest rates; and the ability of the poor to borrow. In addition, new empirical evidence of the relationship between growth and financial development highlights the potential for financial markets to raise economic growth rates, which in turn reduces the incidence of poverty.

This note examines the most important influences that financial markets have on growth and poverty alleviation. It first sets out the issues and surveys the literature on the links between financial markets and economic growth as well as their effects on poverty and income distribution. It then looks at some possible links between financial markets and poverty, suggesting areas where reforms could most benefit the poorer sections of the community.

By: Paul Holden, The Enterprise Research Institute and Vassili Prokopenko, International Monetary Fund
IMF Working Paper Working Paper No. 01/160, October 2001

This paper highlights some of the issues and surveys the current state of thinking on the relationship between financial markets and poverty alleviation. Given the current prominence of the issue, the paucity of the literature, both theoretical and empirical is surprising. The paper first approaches the problem indirectly by identifying the issues and surveying the literature on the links between financial markets and economic growth, under the assumption that higher growth reduces poverty. Because many who are critical of the international finance institutions have rejected the notion that growth helps the poor, the paper examines the evidence regarding the impact of economic expansion on the poor and the role that financial markets play in encouraging more rapid growth. It then examines the evidence regarding the effects of financial markets on poverty and income distribution more directly. It pays particular attention to the microfinance phenomenon and discusses the issues regarding microcredit and poverty. It looks at some of the policy implications of the analysis, including how the access of the poor to financial services, bank regulation and other financial market instruments influence poverty alleviation. Two appendices are included, the first of which discusses some of the elements of the unfinished reform agenda, while the second sets out ways in which inflation harms the poor.

By: The Enterprise Research Institute
For: The World Bank, 2001

This paper analyzes from a secured transactions perspective, the financial sector of Bulgaria as it relates to the provision of agricultural finance. It concludes that the secured transactions framework in Bulgaria has been greatly improved and, with the further changes that are envisaged, should provide an adequate foundation for secured lending. While in the longer term a well-functioning secured transactions framework is an essential part of the foundation of financial sector development and evolution, the paper suggests that the recent reforms of secured transactions will do little in the shorter term to improve the flow of finance to agriculture because of other institutional and sectoral deficiencies. Chief among these is the embryonic state of the land market, which so far has kept potentially efficient farmers from purchasing land from low productivity producers. The problems of agricultural finance are compounded by low world prices for agricultural products and the effects of the forthcoming privatization on bank lending behavior.

Besides examining the secured transactions framework, the paper discusses more generally issues involved in the establishment of a financial sector that effectively channels funds from savers to productive investors. It commences with a brief review of recent economic developments in Bulgaria focusing on what has happened to agriculture over the past few years. It then describes the role of the financial sector in promoting agriculture as a whole and looks more closely at rural finance. It discusses how institutional failure results in financial market underdevelopment and points out how the secured transactions framework is an important foundation for the growth of bank lending, particularly to smaller agricultural producers and to small and medium sized enterprises in general. It then describes some of the essential elements of a viable system of secured transactions, emphasizing that there are several components that must function efficiently in order for the system to provide a good basis for secured lending, namely the law, the registries and the legal system. The paper reviews the current state of secured transactions reform in Bulgaria with regard to each of these components. It identifies problems that remain and suggests measures to deal with them. It concludes with a brief discussion of other important issues for the long term development of the financial sector in Bulgaria.

By: The Enterprise Research Institute
For: The InterAmerican Development Bank, 2000

It has become abundantly clear that SMEs play a vital role in any economy and can be dynamic entities capable of generating new growth and injecting vitality into the economic base of a country or sector. Consequently, most countries are increasingly evaluating the policies that they have in place which impact small businesses and many are fostering legislation and programs that targets small business development and attempts to ensure its viability as a way to boost economic stability and growth.

This paper aims to examine in some detail the non-financial instruments, i.e., laws, programs and services utilized in Japan, Canada and the US to promote the activities and bring about growth of SMEs. The purpose for examining these three countries is that between them they provide a brought array of Small business assistance programs. In addition there are significant contrasts in the way assistance is delivered to SMEs both in terms of the agencies that provide help and in the way that they are funded.

By: Paul Holden, The Enterprise Research Institute
For: The InterAmerican Development Bank, 2000

Poverty in rural areas in Latin America and the Caribbean is substantially more widespread and deeper than it is in urban areas. At the same time, in most countries in the region, the share of agriculture in GDP and the proportion of the workforce employed in rural areas is small compared with developing countries in other parts of the world. If agriculture is to modernize and become more efficient, rural agricultural employment will continue to fall. A key finding of the paper is the importance of promoting non-farm rural enterprises as an instrument of rural poverty alleviation. Solving the problem of rural poverty will require that non-farm rural enterprises grow and provide alternative employment. This is hampered, among other factors, by the deficiency of rural credit markets. The paucity of rural credit is not due to the closing of state-owned agricultural banks in many countries – they did little to alleviate poverty in the past. However, the lack of private lenders has serious consequences for rural poverty. The issue, though, is not a uniquely rural phenomenon. The paucity of rural lending is another manifestation of the general underdevelopment of credit markets in Latin America.

By: Paul Holden and Jennifer Sobotka
For: The Center for Institutional Reform and the Informal Sector (IRIS) for the U.S. Agency for International Development, 1999

Financial markets in developing and transitional economies are largely underdeveloped. Ratios of credit to the private sector to GDP tend to be low, most financial intermediation is undertaken by commercial banks, only large businesses have access to credit, and consumer credit is generally restricted to the privileged few. Some observers have pointed to shortcomings in the institutional foundations in these countries to explain the lack of financial market development. Inadequate property rights for both fixed and movable property, poorly functioning legal systems, and the lack of good credit and borrower information have all been identified as explaining this phenomenon. There has been, however, little discussion of the ways in which governments can and should act to strengthen existing markets or provide a solid foundation from which a nascent financial system can grow and prosper. Financial markets need a strong institutional foundation to function effectively and intermediate between savers and investors. Governments have a role in promoting effective institutions. This paper explores some ways in which they could do this and identifies some examples of how financial market development has been promoted in developing countries through effective reform as well as some cases where reforms have not had the desired effect. The paper focuses mainly on Latin America but also refers to examples from the transition economies of Eastern Europe and the Former Soviet Union. Latin America illustrates how government policy options can be limited by weak institutions while countries in the Former Soviet Union bear witness to the problems that can occur if markets are freed where there are no institutions in place to underpin transactions.

By: The Enterprise Research Institute
For: FUSADES and SIAPE, 1999

For most of the 1990s, El Salvador strove to transform itself from a highly-divided society torn by civil war, to one with greater economic and social participation based on a market economy. In one sense, this transition has been extremely successful. Peace has been restored, fiscal stability has been imposed and the country is beginning to repair the wounds caused by the Civil War. Economic reform has been implemented in several areas and the economy has registered positive, if not impressive growth. By most measures, the country has made enormous progress. Yet there is both a sense of disappointment and of frustration in El Salvador. There is a feeling that the potential of the country is still far above what has been achieved so far and there is a desire to move things forward more rapidly. One area where many observers feel that there is still much to be done is the small business sector, where growth has been especially disappointing. In spite of several initiatives, the sector lags behind in modernization and competitiveness.

This report examines some of the factors that are preventing SMEs in El Salvador from fulfilling their potential. An important message is that there is no magic wand or single policy which, once applied, can dramatically transform the small and medium sized enterprise sector onto a high growth path. Nevertheless, there is much that can be accomplished to assist both the SME sector as well as the economy as a whole to raise long run potential growth. A second message is that the SME sector is not unique in that it requires policies that are different from those that apply to either microenterprise or to larger businesses. Measures that help the SME sector will also help both microenterprises and larger businesses. For all businesses to flourish, the business environment must be enabling – it must promote the formation and growth of companies from the smallest to the largest so that all have the potential to do well. Promoting business formation will help small businesses while keeping trade tariffs low will promote competition and ensure that large businesses do not become oligopolies or monopolies.

By: Paul Holden and Jennifer Sobotka, The Enterprise Research Institute, 1999

This paper outlines some of the issues that affect small and medium sized enterprises (SMEs) in three areas; regulation, procurement, and dispute resolution. There are obviously many other factors which also influence the ability of entrepreneurs to establish and expand small businesses. Financial sector issues, education, training, information dissemination, property rights, infrastructure, technology and export issues all have an important impact on SMEs. This paper is the first step of a more comprehensive review of how Inter-American Development Bank loans, programs and policies affect small businesses over a broad range of issues.

The paper commences with a brief rationale for focusing on SME issues followed by sections on regulation, procurement and dispute resolution. The conclusion summarizes briefly the main points of the paper and highlights the need for an integrated approach if SMEs are to be helped effectively. Where appropriate, it adopts a transactions costs approach by examining how these issues affect the cost of doing business. A review of recent Bank loans reveals that many involve themes that potentially affect SMEs. As a result, there is the potential to incorporate explicitly small business issues in many projects. Therefore, at the end of each section there is a checklist of topics that could be addressed by those interested in incorporating SME components into Bank loans. Integrating the topics on the checklists into future Bank projects and obtaining more data on SME specific questions will go a long way toward incorporating the needs of SMEs into the Bank’s body of work.

By: Paul Holden, The Enterprise Research Institute
Published in G. Maasdorp (ed.) Can South and Southern Africa Become Globally Competitive Economies? Macmillan, London. 1999

This paper addresses the question of whether the business environment in South Africa is sufficiently conducive to private sector activity. Activity that is necessary to promote investment and the resulting growth rates to begin to eradicate the poverty in which a large section of the population lives. If it is not, then the consequences are serious because there is substantial experience that the state cannot replace the private sector in bringing prosperity to its citizens. State ownership of resources or of productive units has invariably been associated with low productivity and high cost which has harmed rather than helped economic activity. Furthermore, the possibility of aiding the less fortunate through wholesale redistribution of wealth is not a sustainable option- there is ample evidence that while the state can confiscate wealth, it cannot redistribute it. Therefore, the private sector which is made up of firms and markets, has to be the engine for growth. This paper examines the business environment in South Africa through the perspective of the experience in Latin America ov

By: Paul Holden and Jennifer Sobotka, The Enterprise Research Institute
For: The World Bank, 1998

This paper discusses the current conditions in the Republic of Georgia. It examines how few elements exist in the country that would foster the growth of the private sector. It also provides a brief overview of recent economic developments and a discussion of the structure of the economy and the sources of the rapid growth over the past 2 - 3 years. In section 3 there is an analysis of the privatization program and its shortcomings. Section 4 examines the main factors and constraints that affect the environment for doing business and discusses the growth of the enterprise sector in some detail. In conclusion, some observations are made regarding the appropriate direction of future policy.

By: Paul Holden, Jennifer Sobotka and Lawrence Locklin, The Enterprise Research Institute
For The Inter-American Development Bank, 1998

This paper presents efforts to develop new approaches and instruments to strengthen the IDB's role as a major development partner with the SME sector that is such an important engine of growth in the Latin American and Caribbean region. It focuses on nonfinancial issues, which have seldom been addressed systematically in the debate on the constraints hindering SMEs. Section I analyzes the effect of regulations on SMEs within a transaction-cost framework considering such issues as taxes, labor, trade, and corruption. The second section considers the possibility of using procurement as an aid to SME development. The final section looks at the effect on SMEs of inadequate dispute resolution procedures.

By: Paul Holden
For: The Wall Street Journal, 1998

An Argentine merchant sits alone in his small appliance shop in a middle-class Buenos Aires suburb. He is anxious, angry and bitter. Before the market reforms of the 1990s, there used to be a steady stream of customers through his door. Protected from competition by cozy distribution arrangements, he made a living that was good enough to send one of his sons to college in the U.S. Today he is an uncompetitive player in a fast-paced, changing economy.

The combination of trade reform and stringent macroeconomic policy wiped out many small Argentine businesses, such as retailers, agricultural producers and manufacturers, that had flourished under protectionism. While high growth rates are back for the economy as a whole, there are few signs of recovery in the small-business sector. This has cost the government substantial political support and there is growing concern about a potential backlash against the market-oriented reforms.

While populists blame the reforms for the 14% unemployment rate and wealth disparities, the real problem is the fact that the second generation reforms--changes in Argentina's institutional and legal systems that relate to business--are yet to be tackled. These reforms are critical to grass-roots economic growth, a prerequisite for employment expansion. As large multinational companies become more productive, their work forces become leaner. Meaningful job growth will primarily come from a robust small-business sector.

Although the problems of the small-business sector have largely been attributed to a failure of the government to assist struggling enterprises, there is currently no shortage of small-business programs in Argentina. An audit by the newly created Secretariat for Small and Medium Sized Enterprises unearthed over 50 financial guarantee programs that have small-business components and another review of small-business programs by the Ministry of the Economy identified several hundred aimed at assisting small businesses. However, nearly all are ineffectual. Few small businesses even know about them. Both the Inter-American Development Bank and the World Bank have loan programs amounting to hundreds of millions of dollars that are supposed to assist the SME sector. In the meantime small businesses fail at unprecedented rates.

Apparently the government recognizes that additional small-business assistance programs are not necessarily the answer. Undersecretary of the Interior Dr. Rodolfo Vacchiano is in charge of coordinating small-business programs with the 24 provinces. He is working to ensure that decentralization does not lead to a mushrooming of uncoordinated and fiscally irresponsible local small-business assistance initiatives.

Yet, the small-business sector faces additional problems beyond ineffectual or uncoordinated assistance programs. Many small businesses in Argentina are simply unequipped to compete in the increasingly globalized business environment. Accustomed to being insulated by high tariff barriers and regulation that protected the inefficient, they now find themselves exposed to powerful competition, not only from imports but also from larger, modernized Argentine companies. The retail sector, for example, is going through a process of consolidation, with new shopping centers and supermarkets forcing smaller retailers out of business. This phenomenon is an inevitable part of Argentina's transition from a high-cost, inefficient, inward-orientated economy to one that can compete effectively in international markets. That this transition is being successfully made is evidenced by the sharp increase in exports over the past few years.

Small businesses' problems are compounded by the fact that the financial markets are effectively unavailable to them. Carlos Srebrow, a prominent small-business consultant in Buenos Aires, observes that he has been overwhelmed with requests for help in restructuring businesses since the advent of economic reform. Once he has improved their operating efficiency, however, the owners ask him to help them find financing to take advantage of the new opportunities. At that point he feels helpless. "Taking a client to a bank to obtain a loan is extremely difficult," he says. Underlying this problem is not an absence of guarantee programs or directed-credit programs for small businesses but rather an institutional inadequacy which makes it risky to lend to any but large companies or those with large real estate holdings. Long term growth for successful businesses is also limited by the absence of structured venture capital markets.

The legal framework for the pledging of business assets to secure loans is insufficient. As a result, accounts receivable, capital equipment and inventory cannot be used as collateral for business loans. Since owner equity of many small and medium- size businesses has been eroded as they struggled to survive in the newly competitive business environment of Argentina, it is no wonder that there have been record numbers of small business failures.

There are some stirrings of a revival in the small-business sector. Foreign banks, with more sophisticated lending technology, have entered Argentina and are more willing than the domestic banks to make loans to small businesses. Some progressive government officials recognize the need for institutional reform and are attempting to persuade a reluctant Congress to change the legal framework. But progress is slow. Laws to reform the secured transactions framework have been drafted but they are languishing between the bureaucracy and the legislature. The World Bank is implementing a judicial-reform project, but it is not clear that there is political will for such changes. Labor laws are still very restrictive by international standards although they have been relaxed for small companies. High payroll taxes and the cost of firing workers place heavy burdens on small businesses.

When the barriers to establishing new businesses are minimized and the constraints to small business growth are eliminated, this sector appears set to create countless jobs. More special assistance programs are not needed. Rather, the government should eliminate regulatory and legal constraints that hurt the small-business sector. It is an effort that will take several years but the reward should be a vibrant small-business sector in Argentina.

Mr. Holden is the director of the Enterprise Research Institute for Latin America, a Washington-based think tank.

Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.

By: The Enterprise Research Institute
For: The Inter-American Development Bank, 1997

Guyana's return to free market policies after more than two decades of state domination of the economy has produced an annual growth rate of seven percent over the past seven years, the highest in Latin America and the Caribbean. But Guyana is now entering a delicate adjustment phase. High growth rates are projected to level off in the near future and unemployment will increase as public sector jobs disappear and EU preferences on sugar and rice are eliminated. If reform is to be sustainable, the private sector, and small businesses in particular, will need to expand at a faster rate than in the recent past. Furthermore, current high levels of migration must not only be arrested but remigration must occur if Guyana is to quickly add to the human capital that will be necessary to support continued growth. Guyana is a predominately agricultural economy that is slowly moving away from central planning and domination by state-owned enterprises. The micro, small, and medium sized enterprises (MSMEs) primarily operate in the retail sector of the economy, although services and agriculture are also well represented. Set apart from other MSMEs in the region by their comparative longevity and income levels, they have the potential to become an engine of growth for Guyana once certain constraints are removed.

This paper provides an overview of the Guyanan economy, examines the types of MSMEs that exist in the country and the most important constraints faced by the MSME sector. The paper focuses, in particular, on the policy issues that must be addressed to encourage and stimulate the MSME sector in Guyana. It also makes suggestions for further research to broaden the knowledge on other issues such as financial markets and land titling.

By: The Enterprise Research Institute
For: UNCTAD Workshop on Procurement, November 5-6, 1998

This paper examines the role of the International Financial Institutions in procurement programs and considers whether that role should become more activist in order to encourage SME development. The paper looks at general procurement policies in OECD and developing countries, as well as programs designed to funnel contracts to SMEs. It examines policy options for governments interested in increasing the percentage of government contracts for SMEs. It also discusses different International Financial Institution operations that could further this goal and discusses the extent to which International Financial Institutions can or should influence government procurement policies. The paper concludes with a checklist of issues that International Financial Institutions might address should they be interested in incorporating SME components into future procurement operations.

By: Paul Holden, Jennifer Sobotka and Carlo Dade, Enterprise Research Foundation, 1997

Latin America stands at a critical juncture in its history. Wide-ranging economic reforms of the past 10 years are taking firm, and potentially irrevocable, root in the region. These reforms present the chance for the sort of sustainable development that can alleviate much of the endemic poverty in Latin America. Institutions that deliver social services are critical to realizing the promise of these reforms but they are functioning inefficiently. Among the most critical of these services are education, health, housing, and security. Without adequate levels of investment here recent reforms will neither fulfill their promise nor will the benefits accrue to most of society. Chapter 1 continues to define the problem and defines the solution of increased business participation and investment in social services. Chapter 2 discusses the importance of providing social services and their relationship to sustainable development. Chapter 3 demonstrated how Latin America falls short of various measures of economic development in the region. The role of business versus other private sector actors and the means by which it may become more involved as well as the potential obstacles are discussed in Chapter 4. Specific sector case studies covering education, health, social security, security, and housing and property rights are presented in Chapter 5. Conclusions are presented in Chapter 6.

By: Sarath Rajapatirana
For The Enterprise Research Institute, 1997

This paper discusses the phenomenon of greater participation of small and medium sized enterprises (SMEs) in world trade and production, what they are and what they do, the opportunities for SMEs for greater participation in world trade, and the constraints that these enterprises face to making use of the new opportunities. It examines the analytical issues arising from the experiences of different countries and reaches conclusions. The main conclusion is that removing constraints to SME development through general policy reforms will allow better opportunities for participation in global trade and production. The paper is divided into six sections. Following the introduction, Section II describes what SMEs are, what they do and why policy makers should worry about them. Section III analyzes the opportunities that SMEs face to increase their participation in the global market. Section IV examines the constraints they face in entering the global market; Section V analyzes ways to address constraints on SMEs-how and by whom; and Section VI gives the conclusions.

By: Paul Holden, The Enterprise Research Foundation, and Sarath Rajapatirana, The World Bank, 1997

Starting with Chile in 1973 and then with many other countries in the decade from the mid-1980s, most countries in Latin American embarked on episodes of economic reform that in many cases were quite radical. Inflationary, inward looking and distortionary policies were, in the most part, abandoned. They were replaced by fiscal probity that reduced the chronically high inflation rates that were a characteristic of the region. Trade reforms removed quantitative restrictions and lowered and simplified tariffs. Financial reform removed financial repression. Exchange rate restrictions were replaced by policies that often included full convertibility and large scale privatizations reduced state ownership in most countries. Elsewhere we have characterized reform programs. Those that involve changes in macroeconomic variables, we described as first generation reform. They prepare the ground work for creating the conditions for second generation reforms, or reforms at the microeconomic level which are needed to make the changes brought about by the first generation reforms sustainable.

Second generation issues focus on removing impediments to the shifting of resources in response to improved incentives. They increase an economy’s ability to withstand external shocks. They more strongly define property rights. They reform institutions by making their role more automatic than discretionary in order to reduce the probability of disequilibrium induced by policy reversals or other endogenous developments. The second generation agenda also relates to increased concerns regarding income distribution, small and medium sized enterprises and decentralization and power sharing between the central government, provinces and municipalities.

The paper is divided in into six sections. Following the introduction, Section II recounts the host of policy reforms undertaken under the first generation agenda and the outcomes of these reforms. Section III describes the unfinished elements of the first generation agenda. Section IV places second generation issues within an overall reform strategy, while Section V develops some specific elements of the second generation agenda. Section VI gives conclusions.

A Seminar organized by The Enterprise Research Foundation
For the AVINA Institute, April 1997

While examining small business and sustainable development issues it becomes apparent that property rights in general—and land titling in particular—are crucial building blocks for sustainable growth and encouraging the growth of small enterprises. Furthermore, the number of different titling methodologies as well as the frequent failure of titling practitioners to communicate with each other is striking. Hence, ERF organized a seminar to gather information on the various titling programs across the world with concentration on Latin America. One of the primary goals was to learn how far we have progressed in this field and what the next steps should be as well as providing a forum for an exchange of views.

To that end, the seminar addressed the following questions:

1) Are particular methods of titling and registration suitable in a wide variety of initial conditions? If not, are there any rules that emerge regarding choices?
2) What are the generic problems that all titling programs face and are there common solutions?
3) What important institutional issues need to be resolved and are there any guidelines on how this should be done?
5) What rates of return do titling programs produce?
6) Can we overcome opposition from entrenched interests—particularly notaries and the legal community?
7) Have titling programs led to greater access to mortgages as well as generally improved financial systems?
8) Are there any lessons for people trying to reform the secure transactions framework?

In addition to general discussion, we benefited from particular experiences of land titling experts with presentations on:

Peru: Geoffrey Shepherd (World Bank) and Victor Endo (Cofopri);
Central America: Cora Shaw (World Bank);
Brazil: Jay McKenna (World Bank);
Thailand: Wael Zakout (World Bank);
Rates of Return: Alberto Valdes (World Bank);
Final Remarks: John McLaughlin (University of New Brunswick).

By: Jennifer Sobotka, The Enterprise Research Institute, 1996

After several futile stabilization attempts in the 1980s, Argentina finally implemented one of the most successful reform programs in Latin America. Inflation dropped dramatically, growth increased, and investors both foreign and domestic returned in droves. The Mexico crisis, however, had an enormous negative impact on the economy; since the beginning of 1995, growth has been negative, unemployment has soared and the budget turned sharply from surplus to deficit. Positive signs that growth might be resuming only reappeared in the second quarter of 1996.

This paper first looks at the early economic history of Argentina. We believe that the history and early patterns of a country’s political and economic development reveal much about those institutions on which sustained future progress depend. The paper then examines the reasons behind Argentina’s initial success, and describes the subsequent collapse that began with the Great Depression and continued into the latter part of the 20th century. Finally, it describes the results of the Convertibility Plan that broke the inflation cycle and analyzes some of the current issues that determine the outlook for Argentina’s future. The paper identifies policies and variables that are important indicators of the government’s resolve and discusses in some detail aspects of the economy that we believe are crucial for the continuing success of the reform program.

By: Sarath Rajapatirana
For The Enterprise Research Foundation, 1996

The successful completion of the Uruguay Round of multilateral trade negotiations is an important development in the world trading system, marking increased market liberalization in manufactures, agriculture and services. It also establishes the World Trade Organization, replacing the General Agreement on Trade and Tariffs, and sets forth rules on dispute settlement, antidumping, subsidies, countervailing duties and safeguards to provide for a smoother, more efficient trading environment. The benefits of increased trade have been well-established. From the 1987 World Development Report to more recent work empirical studies confirm the importance of trade for growth. Removing the distortions in the world trading system changes the incentive mechanism facing all countries and forces domestic restructuring to accord with changing comparative advantage. This paper analyzes the opportunities and challenges facing small developing economies (SDEs) as a result of the UR, and how these countries may best address them. Section II discusses characteristics of SDEs. Section III looks at the opportunities opened by the UR, while section IV analyzes the challenges arising from UR. Section V addresses basic domestic policy responses and concludes the study.

By: Paul Holden, The Enterprise Research Institute and Mateen Thobani, The World Bank
A World Bank Publication, 1996

In most countries, the state owns the water and hydraulic infrastructure, and public officials decide who gets water rights, how the water is to be used, and how much will be charged for its use. The authors of this paper compare administered systems of water allocation with a system of tradable water rights, and argue that water allocation by administrative edict has resulted in costly, large-scale inefficiencies in the supply and use of water, even with an adequate institutional framework. Secure property rights, on the other hand, have been shown to have a powerful positive effect on investment and efficiency, although only a few countries have tried to take advantage of the allocative efficiencies of a market to assign water resources among users. The authors argue that in order to ensure implementation of an effective water market system, attention should be paid to: (i) ensuring stakeholder participation in designing and implementing the new legislation; (ii) deciding on new rules for the initial allocation of rights and for how new rights should be allocated; (iii) establishing a public registry and block titling; (iv) setting up or strengthening water user associations; (v) protecting against the development of potential monopolies; (vi) ensuring that trades do not infringe on the water rights of existing users; and (vii) establishing appropriate environmental laws.

For a copy see:

Tradable Water Rights

The Enterprise Research Foundation, 1996

Relations between the private sector and nongovernmental organizations (NGOs) in Chile are growing and improving as a result of the recent democratization of Chilean society and accelerating global integration of its economy. Both groups are just now coming to terms with these changes and are seeking to adjust their relations with each other and this new society. Yet, historic distrust and antipathy between the two groups remains a significant problem. A culture of distrust and disinterest among the Chilean private sector toward nonprofit work and volunteerism is another factor from the past that continues to affect relations. Although the situation is starting to change, at present, historical animosities remain strong.
The report identifies and discusses the most important characteristics of the NGO and business communities in Chile. It then discusses NGO funding issues and concludes with an analysis of future prospects. Included are two case studies that illustrate these. Annexes contain a list of prominent NGOs and sections of the Basic Law on the Environment dealing with citizen participation in environmental assessments.

By: Paul Holden and Jennifer Sobotka, Enterprise Research Foundation
Paper presented at the XIIIth International Congress of the International Society of Social Defence, Lecce, Italy, November 28-30, 1996

Corruption comes in many shapes and forms. It is difficult to define and sometimes difficult to identify. In its most general sense, corruption is the violation of the arms length relationships in transacting between any pair or group of agents. Rather than addressing every aspect of corruption, however, this paper focuses on what we believe to be the most damaging form of corruption, namely the sale for personal gain by government officials of government property in the most general sense. This includes licenses, permits, contracts, documents such as passports and visas, tax incentives or dispensations, and so on. Clearly, it also could be specific physical property, but the paper uses a more extensive definition since corruption is not limited to physical asset sales. Usually what is sold is not needed for its own sake but rather because it enables private agents to earn economic rents on their activities. The paper presents: (1) a framework for analyzing corruption, (2) the circumstances under which it occurs, (3) different ways in which it can be organized, (4) the consequences for the economy, and (5) the economic, legal or other steps that we can take to inhibit or prevent it.

Authors: Paul Holden and Sarath Rajapatirana
Produced for the World Bank, 1995

During the past decade, many countries in Latin America and the Caribbean that were plagued by high inflation, a large debt burden, and low growth have transformed themselves into stable, capital-receiving, and growing economies. This study examines evidence from a number of recent reports of the private sector in Latin America and the Caribbean and finds that the economic transformation that has taken place is not a simple story but the product of complex interactions among macroeconomic stabilization, incentive reforms, and institutional adaption. No one element would have produced the results that have been achieved. For example, fiscal stability and better incentive structures give the correct signals for a shift of resources to more productive uses, but they do not address the barriers that hinder resource movement. Likewise, the traditional package of adjustment measures may be necessary to lay the foundation for rapid growth, but it is not sufficient to elicit a strong response from the private sector. There is a second generation of issues that strongly influence development of the private sector. Among these are the need to reduce the amount of discretion in policy regimes, the burden of regulation on businesses; the need for incentive reforms in new areas such as competition policy; the inability of the financial system to secure collateral; the cost of uncertainty of contracts under current legal systems; and issues related to property rights.

To purchase a copy:

Unshackling the Private Sector

Authors: Paul Holden and Geoffrey Shepherd
Produced for the World Bank, 1994

This report examines the environment for doing business in Peru following the far-reaching reform program instituted in 1990. It has never been easy to do business in Peru. This is a powerful reason why, amid such potential, Peru remains a poor and divided country. For business to flourish a country must enjoy conditions of continuity, stability, and evenhanded policy in which business trust and habits of competition can grow. Historical forces in Peru have done little to create these conditions. Overall, the government has made enormous progress in reforming the economy. The environment for business is incomparably more promising than it was in 1990. How far does the reform process still need to go? It is possible to identify many areas where action is needed to create stable business conditions and further improve the way markets work, but there is no doubt that the Government is aware of what needs to be done. What is most important is to create the conditions that will allow the momentum of reform to continue. This involves two issues, political credibility and the rebuilding of government.

For a copy of the report:

Peru PSA Report

Authors: Paul Holden and Geoffrey Shepherd
Produced for the World Bank, 1994

This report describes the current environment for doing business in Brazil and analyzes the ways in which public policies have affected the private sector ' s ability to develop in an economically efficient way. There has in the past been much to commend these policies. There is now much that is wrong, and this assessment suggests priority areas for government action. The policy framework has changed in the last four decades, and the report takes a partial historical perspective in order to show the cumulative weight of past policies in explaining the current business environment. The progressive development of macroeconomic instability over almost two decades and its debilitating effect on today ' s business environment is this report ' s central theme. The analysis also emphasizes the institutions (in particular the legal system) that underpin economic activity in Brazil and the way the financial intermediation has collapsed under the pressure of inflation. The report further looks at the regulatory regime for industrial activities. The choice of topics is selective, reflecting the apparent priorities revealed from discussions and surveys in Brazil. Detailed treatments of the private sector in agriculture and more generally in the poorer regions of Brazil are notable omissions.

For copies of the report:

Brazil PSA Vol. 1

Brazil PSA Vol. 2

By: Paul Holden, The Enterprise Research Institute
For: The Cato Institute

The recent meetings of the World Bank and the International Monetary Fund highlighted the extent to which the so called Washington Consensus has fallen into disfavor. The term is shorthand for a set of economic policy prescriptions that include fiscal and monetary orthodoxy, trade reform and privatization. Most of the current criticism centers around the perception that the IMF, in particular, automatically instructs countries in balance of payments difficulties to implement harsh deflationary programs without taking into account whether the underlying fundamentals warrant such steps. In addition, frustration with the failure of the Russian economy to perform better has focused a spotlight on the limitations of what has become know as first generation reform. Countries in Latin America are also questioning the efficacy of reform to date.

While conventional orthodoxy attempts to improve relative price signals that are distorted by protectionist trade policies and high inflation, second generation reforms focus on removing impediments to the shifting of resources in response to improved incentives. They more strongly define property rights. They reform institutions by making their role more automatic than discretionary in order to reduce the probability of disequilibrium induced by policy reversals or other endogenous developments. They increase an economy’s ability to withstand external shocks. The second generation agenda also relates to increased concerns regarding income distribution, small and medium sized enterprises and decentralization and power sharing between the central government, provinces and municipalities.

A second generation reform agenda also sets out to address a focus of criticism arising from Washington Consensus type reform, namely that the benefits of the process only accrue to relatively small numbers of the ‘power elite’. Whether or not this perception is in accordance with the facts, there is no doubt that institutions in Latin America do not adequately support many activities that function as a matter of course in the more developed world. Insecure property rights, inadequate dispute resolution mechanisms, stifling regulation, and poorly functioning legal systems conspire to stack the deck against upward mobility and the diffusion of wealth and power. Simple political economy considerations dictate that the present value of the gains to reform needs to be larger than the present value of income from existing policies and that these gains are so distributed that wide and enduring support for the policies that have been put in place can be sustained. This implies the need to assure that the gains from reforms are widely distributed, that the gainers are made sufficiently strong to support continuing reform and the vulnerable groups in society are protected during the reforms.