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Interest Bearing Notes July 2015
  Jul 29, 2015

Interest Bearing Notes                                                                                   Vol. 18 No. 4
Contents

I What’s new on our website
Workshop on SME Growth

II World Bank research
Are access to finance and business skills barriers to microenterprise growth in rural Pakistan?
Capital market financing, firm growth, and firm size distribution
New findings on external bond issues from developing countries
Unbundling institutions for external finance
Hayek, local information, and the decentralization of state-owned enterprises in China

III “FYI”: Our eclectic guide to recent research of interest
New evidence on the (low) welfare gains from microfinance
The effect of edutainment on youth entrepreneurship and schooling in Tanzania
Sharing borrower information in a competitive credit market: Evidence from Bosnia/Herzegovina
Culture, institutions and democratization

IV Upcoming Events and Miscellanea
Call for papers


The next issue of Interest Bearing Notes will appear in September 2015 so please send comments, suggestions (such as your own or others’ interesting research), and requests to be added to our distribution list, to Paulina Sintim-Aboagye (mailto:psintimaboagye@worldbank.org) by September 11th.

IBN is a product of the Finance and Private Sector Development Team in the World Bank's Development Research Group. Our working papers and descriptions of research projects in progress can be found, along with a list of forthcoming seminars and conferences, on our web page (http://econ.worldbank.org/programs/finance).

I What’s new on our website
 
Workshop on SME Growth
On May 28th, our own David McKenzie organized a workshop designed to expand the range of policy instruments to foster small and medium enterprise growth and entrepreneurship. The Private Sector Development Policy Innovation Lab, a collaboration between the World Bank’s Development Research Group and the Innovation, Technology, and Entrepreneurship Practice, held a competition in which researchers from within and outside of the World Bank were asked to propose new ideas for policies in this area, motivated by economic theory and existing research findings. Fifteen finalists (selected from seventy overall submissions) presented their ideas and fielded questions at the workshop. Click here for the workshop agenda and summaries of the finalists’ ideas.

II World Bank research

Are access to finance and business skills barriers to microenterprise growth in rural Pakistan?
Our own Xavier Giné, together with Ghazala Mansuri, provide evidence on the relative importance of two potential barriers to microenterprise growth – finance and managerial capital – in rural Pakistan. The authors report on a randomized field experiment where microfinance clients were offered an eight day business training course and/or access to a loan lottery that allowed clients to borrow about double the amount they would otherwise be offered. Data from a follow-up survey, conducted 18 months after the business training, shows that business knowledge improved as a result of the training course. The training also led to an improvement in business practices, to a reduction in the business failure rate, and to an increase in household expenditures by up to 14%, but only among male clients. For female clients, the increased business knowledge may not have translated into better outcomes since 40% of female entrepreneurs report that their (male) spouses are responsible for all business decisions. The study finds no effect of access to larger loans on business outcomes, indicating that existing loan sizes may already meet the demand for credit for the clients in the study. An impact note posted here summarizes the study’s findings and policy implications in more detail.
http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-6959

Capital market financing, firm growth, and firm size distribution
Tatiana Didier, Ross Levine, and Sergio Schmukler have teamed up on a new study of the types of firms that issue equities and bonds across countries, and the effects of those issues on their growth. They rely on a new firm-level database of issuances of equities and bonds from 1991 to 2011. They can also match their capital raising variables with balance sheet data for 45,527 listed firms in 51 countries from 2003 to 2011. They document that the bulk of securities issues are from a small number of relatively large firms. In the median country, only about twenty firms issue securities in a year, and thus the rapid growth in securities offerings relative to GDP that began in the 1990s mainly reflects growth along the intensive margin. On average, issuers tend to be larger firms than non-issuers, and they also tend to grow faster in terms of assets, employment, and sales (both relative to non-issuers and to their own growth before issuing). But those average effects mask interesting variation along the firm size distribution. Smaller issuing firms grow at a faster rate than larger ones, so that the firm size distribution among issuing firms tightens over time. In contrast, larger non-issuing firms grow faster than smaller ones, and thus their firm size distribution has widened over time. The patterns suggest that issuing securities has strong effects on the growth dynamics of the firms that are able to undertake it, and thus firms do not issue securities merely to adjust their balance sheets (e.g., to take advantage of cheaper sources of finance). But extending those sources of financing to a wider range of firms remains a challenge.
http://documents.worldbank.org/curated/en/2015/07/24744318/capital-market-financing-firm-growth-firm-size-distribution

New findings on external bond issues from developing countries
Erik Feyen, Swati Ghosh, Katie Kibuuka, and Subika Farazi use new data on external bond issues to document the recent surge in issuances by emerging and developing economies (EMDEs). Since the financial crisis, the volume of bonds from those countries has tripled reaching $1.5 trillion in 2014. These are overwhelmingly denominated in foreign currencies and driven by corporate (rather than sovereign) issuances. Since the analysis is at the country or country-industry level, it is not possible to say much about the characteristics of those issuers. However, in the Didier et al. paper described above (which uses a somewhat less representative sample than the one here), the median firm that issued a bond was more than 36 times as large as the median non-issuing firm, so it’s safe to say that this form of debt finance is available to only a select group of EMDE firms. Issuance by such firms is also highly sensitive to global economic factors. For example, declines in the expected equity market volatility, corporate credit spreads, and interbank funding costs of the United States are associated with greater issuance volumes by EMDEs, for longer maturities and at lower yields. While the findings suggest strongly that a group of EMDE firms is able to benefit from looser international funding conditions, the authors are also quick to point out that the increased volumes and the funding in foreign currencies also pose vulnerability due to currency risks and as global financing conditions become tighter. 
http://documents.worldbank.org/curated/en/2015/07/24775841/global-liquidity-external-bond-issuance-emerging-markets-developing-economies

Much of the study’s underlying data come from FinDebt, a quarterly database summarizing the global provision of capital market debt finance. It is comprised of the Global Syndicated Loans database (covering lending volumes, pricing, and maturities from 182 countries since 2000) and the Global Bonds Database (covering the stock and issuance of bonds for 136 countries since 2000, including information on volumes, maturities, and yields). For readers within the World Bank those data can be downloaded at http://FinDebt.

Unbundling institutions for external finance
While it is widely understood that institutions matter for access to external financing, less is known about how various types of institutions matter differently for such access. Steve Knack and our own Colin Xu use worldwide firm-level data (from the World Bank Enterprise Survey) to try to unbundle institutions for external finance. They find that microenterprises have much less access to external finance than small and medium-sized firms. Also, general financial development and the quality of contracting institutions that facilitate transactions between private parties seem to exert little effect on firms’ access to external finance. On the other hand, property rights institutions that constrain political and economic elites exhibit a stronger positive association with access to external finance. Those property rights institutions also tend to level the playing field for access to external finance between large firms and smaller ones. The paper further offers evidence that measurement errors for institutions tend to lead to attenuation bias of their effects.
http://documents.worldbank.org/curated/en/2015/06/24578640/unbundling-institutions-external-finance-worldwide-firm-level-evidence?cid=DEC_PolicyResearchEN_D_INT

Hayek, local information, and the decentralization of state-owned enterprises in China
In one of the most famous papers in economics, Frederick Hayek argued that local knowledge plays a central role in understanding whether production should be decentralized or centralized. A recent paper by Zhagnkai Huang, Lixing Li, Guangrong Ma, and our own Colin Xu tests Hayek’s predictions by examining the Chinese government’s decision to decentralize state-owned enterprises, focusing on the role of local information. Since a government that is located closer to a state-owned enterprise has more information on that enterprise, greater distance between the government and the enterprise should lead to a higher likelihood of decentralization. Overall, the results indeed suggest that management of a state-owned enterprise is more likely to be decentralized if it is located far away from the overseeing government. Moreover, the effect of distance is more powerful when there is more uncertainty about the firm and when communication costs are higher. These findings suggest Hayek’s insight can be applied to our understanding of the efficiency of firms in general and economic systems in particular.
http://documents.worldbank.org/curated/en/2015/06/24680786/hayek-local-information-decentralization-state-owned-enterprises-china?cid=DEC_PolicyResearchEN_D_INT

III "FYI": Our eclectic guide to recent research of interest

New evidence on the (low) welfare gains from microfinance
A new paper by Abhijit Banerjee, Esther Duflo, and Richard Hornbeck suggests that the welfare gains from microfinance are low. The authors report on a randomized experiment in rural India in which microfinance clients in treatment villages became obliged to purchase an unpopular (but inexpensive) health insurance policy upon renewal of their microfinance loans. This requirement led to a 31% decline in loan renewal. The observed willingness of clients to forego loans implies that their valuation of microfinance is at most as large as the small fee they would have had to pay for the insurance. Most clients did also not return for another loan after the health insurance requirement was eliminated. The reduced loan take-up did substantially harm business activity. There was little impact on whether people continued to own an enterprise, but client businesses in treatment villages experienced large and significant declines in sales, profits, and the amounts spent on assets and workers. Decreased access to microfinance had few other impacts, such as impacts on household consumption. Overall, these results are strikingly consistent with previous research that has found some positive effects of microfinance on business outcomes, but no transformative and sustained effects on income and consumption. Interpreting these results in combination, a large fraction of microfinance clients seem to place little value on the financial improvements in their businesses that come as a result of access to microfinance. The authors argue that financial gains for these clients may be counterbalanced by unmeasured costs, such as the effort associated with running a business or the added stress from the new financial obligations.
http://economics.mit.edu/files/9879

The effect of edutainment on youth entrepreneurship and schooling in Tanzania
A recent paper by Kjetil Bjorvatn, Alexander Cappelen, Linda Helgesson Sekei, Erik Sørensen, and Bertil Tungodden studies the effects of an edutainment show for entrepreneurship, Ruka Juu (“Jump Up”) that was aired on national television in Tanzania in 2011. The authors conducted a randomized field experiment with 43 secondary schools in Dar es Salaam. The treatment group received a financial incentive to watch the edutainment show and the control group received the same incentive to watch a weekend movie instead. Data collected through a lab experiment a few weeks after the end of the edutainment show suggests that watching the show increased students’ entrepreneurial ambitions and their willingness to take risk. It did not, however, increase business knowledge. In the longer run, the show also caused an increase in the probability of starting a business. At the same time, the show had a negative impact on school performance: participants in the treatment group were less likely to pass the final school exam and less likely to continue studying than participants in the control group. The findings raise the question of whether it is advisable to encourage entrepreneurship among youth if this causes them to place less importance on education.
http://blogg.nhh.no/thechoicelab/wp-content/uploads/2015/03/mmruka_paper.pdf

Sharing borrower information in a competitive credit market: Evidence from Bosnia/Herzegovina
Rapid credit expansion can fuel economic growth, but it also exposes countries to vulnerabilities when boom turns to bust and borrowers are over-indebted. In Bosnia and Herzegovina, domestic credit has grown at a remarkable rate – from 23.4% of GDP in 2001 to 67.7% of GDP in 2013 – and thus, to help avoid over-indebtedness and improve loan quality, the authorities introduced a credit registry in which all lenders were required to share information. Jaap Bos, Ralph De Haas, and Matteo Millone use detailed data on the approved and rejected loan applications of one of the country’s largest lenders to small businesses to study how mandatory credit information sharing affects credit market dynamics. They find that rejection rates on loan applications increased after the introduction of the registry, especially in areas with strong credit market competition, and that rejections were based increasingly on ‘hard’ information about borrowers’ total indebtedness. The key impetus for these changes was the positive information provided by the registry about loans that were not in default. Increased rejections coincided with smaller, shorter, more expensive loans, but default rates on loans did decline, especially in highly competitive areas and for first-time borrowers. At first blush, these findings seem to be at odds with cross-country regression results that show a positive correlation between information sharing through credit registries and banking sector depth. However, by ameliorating adverse selection problems, the authors argue that information sharing improved the functioning of credit markets and set the stage for longer term credit expansion. And indeed their evidence also shows that well-behaved repeat borrowers were able to increase their borrowing limits and enjoyed better terms on their loans after the introduction of the registry.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2599993

Culture, institutions and democratization
Does culture affect institutions in general and democratization in particular? Yuriy Gorodnichenko and Gerard Roland argue that it does, by providing both a model and empirical evidence. They characterize culture by whether a country is individualistic or collectivist. Collective-culture countries are assumed to have stronger conformity and a stronger aversion to radical institutional innovation. Under such assumptions, the model shows that collectivist countries tend to persist in autocracy, while individualistic countries tend to transit into democracy. Moreover, collectivist countries tend to be in a state of a good autocracy (i.e., less predatory than a bad autocracy), which tends not to be overthrown by collectivist societies. The authors then test these implications with cross country data on culture, polity, and economic policies, and find support for their model. This paper suggests that collectivist countries are likely to be slow in transitioning into democracy, and that such transitions may require the occurrence of exceptional crises.
http://eml.berkeley.edu/~groland/pubs/gorrolpolculture03-05-2013.pdf

IV Upcoming events and miscellanea

Call for papers
The XXIV International Rome Conference on Money, Banking and Finance
will be held in Rome on December 3-4, 2015. The conference is organized in partnership with the Journal of Financial Stability and Economic Notes. Keynote speakers include former IBN co-editor Patrick Honohan. The deadline for submitting a paper is September 11, 2015. More details are posted here.

Happy reading!

Your editors Miriam Bruhn (mbruhn@worldbank.org), Bob Cull (rcull@worldbank.org), and Colin Xu (lxu1@worldbank.org)