Transcript Business Climate, Productivity, and Competitiveness in

Armenia
Lake
Sevan
Business
Climate,
Productivity,
and
Competitiveness
in Armenia,
2002-2005
Giuseppe Iarossi, World Bank
Federica Saliola, World Bank and University of Rome III
Giovanni Tanzillo, World Bank
1
Investment climate
“location-specific factors shaping
the opportunities and incentives
for firms to invest productively,
create jobs, and expand”
World Development Report 2005
2
Business Climate Index (BCI)
1. Combines 93 variables
(macro and micro)
2. Geometric Aggregation Method
3
Variables in the BCI
4 categories, 2 dimensions
MACRO
Cost (6)
Quality (17)
INPUTS
Cost (10)
Quality (14)
INFRASTRUCTURE
Cost (4)
Quality (5)
INSTITUTIONS
Cost (10)
Quality (27)
4
First step in the BCI construction
VARIABLES
Inflation variability
Exchange rate variability
Real interest rate
variability
Capital flows
Macro instability
Corruption index
Procedures to start
a business
Cost to start a business
Minimum capital to start
a business
Credit information index
Private bureau coverage
Procedures to enforce
contracts
Time to enforce contracts
Cost to enforce contracts
FACTOR
ANALYSIS
Factor1
Factor2
Factor3
Factor4
AGGREGATION
W1
W2
INDEX
W3
W4
(Factor1)  (Factor2)  (Factor3)  (Factor4) = MacroQI
5
Second and third steps in the BCI
construction
FACTOR
VARIABLES ANALYSIS
MacroCI
MacroQI
AGGREGATION
INDEX
Factor1 (Factor1)W  (Factor2) W
Factor2
1
FACTOR
ANALYSIS
AGGREGATION
INDEX
2
Macro Index
Factor1
Factor2 F1W  F2W  F3W
InfraCI
InfraQI
Factor1
W2
W1
Factor2 (Factor1)  (Factor2)
Infrastructure
Index
InputCI
InputQI
W2
W1
Factor1
Factor2 (Factor1)  (Factor2)
Input Index
InstitutionsCI
InstitutionsQI
Factor1
W2
W1
Factor2 (Factor1)  (Factor2)
Institutions
Index
Factor3
BCI
Business
Climate
Index
6
Characteristic:
Geometric aggregation method
wp
w
wf
wt
BCI = ( MACROindex) * ( INPUTindex) * ( INFRASTindex) * ( INSTITindex)
m
Feature:
Rewards more countries that improve the dimension
where they perform the worst
7
Country
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Albania
Armenia
Azerbaijan
Belarus
Bosnia-Herz.
Bulgaria
Croatia
Czech Rep.
Estonia
Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyzstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovakia
Slovenia
Turkey
Ukraine
2002
2005
170
171
170
250
182
250
187
268
170
170
174
250
250
173
176
200
174
500
255
506
170
188
514
463
204
351
350
325
200
300
236
343
219
200
200
610
585
202
205
205
350
975
600
601
220
223
557
594
Sample
composition of
micro data
8
Business Climate Index and GDP
growth in ECA, 2002-05
GDP growth (average 2002-04)
10
Armenia
Albania
8
Kazakhstan
BiH
Latvia
Lithuania
6 Georgia
Russia
Kyrgyzstan Bulgaria
Slovenia
Poland
Turkey
Romania
4
2
0
2
Belarus
Ukraine
Estonia
Hungary
Slovakia
Croatia
Moldova
Czech Rep.
3
4
BCI index 2002
5
9
Business Climate Index and total factor
productivity in Armenia, 2002-05
2
TFP - 2005
1
0
15
16
17
18
-1
-2
BCI - 2002
10
Change in business climate 2002-05
Better
Business
Climate
IV Turkey
I
Good
BCI 2005
Improving
Azerbaijan
Poland
Estonia
Albania
BiH
Slovenia
Croatia
Lithuania
Slovakia
Latvia
Hungary
Bulgaria
MoldovaBad Romania
Ukraine Kazakhstan
Czech
Russia
Rep. Belarus
Kyrgyzstan
Georgia
Armenia
BCI 2002
II
Deteriorating
FYROM
11
BCI Index and ranking of ECA
countries, 2002-05
Country
Rank 2002
FYROM
1
Azerbaijan
2
Albania
3
Georgia
4
Poland
5
Kyrgyzstan
6
Russia
7
Kazakhstan
8
Armenia
9
Lithuania
10
Turkey
11
Slovenia
12
Latvia
13
Romania
14
Estonia
15
Belarus
16
BiH
17
Bulgaria
18
Croatia
19
Slovakia
20
Hungary
21
Ukraine
22
Moldova
23
Czech Rep.
24
Country Rank 2005
Turkey
1
Azerbaijan
2
Poland
3
Albania
4
Estonia
5
Kyrgyzstan
6
Croatia
7
BiH
8
Slovenia
9
Lithuania
10
Slovakia
11
Latvia
12
Hungary
13
Bulgaria
14
Georgia
15
Romania
16
FYROM
17
Ukraine
18
Moldova
19
Russia
20
Kazakhstan
21
Belarus
22
Czech Rep.
23
Armenia
24
12
Change in ranking 2002-05
15
10
Turkey
5
Azerbaijan
0
-5
Georgia
-10
-15
-20
Armenia
13
Components of BCI, 2002-05
1
2002
2005
0.5
0
Macro
index
Infrastructure
index
Inputs
index
Institutions
index
14
Azerbaijan
Inputs index 2005
Turkey
Estonia
Latvia
Croatia
Slovakia
BiH
Inputs
Market
Index,
2002-05
Lithuania
Slovenia
Albania
Romania
Bulgaria
Georgia
Moldova
Armenia
Kazakhstan
Poland Hungary
Kyrgyzstan
Czech Rep.
Ukraine Belarus
Russia
Inputs index 2002
FYROM
15
Turkey
Institutions Index 2005
Albania
Institutions
Index,
2002-05
Kyrgyzstan Slovenia
Ukraine
Bulgaria
Belarus
Russia Croatia Poland
Hungary
Latvia Estonia Lithuania
FYROM Czech
Georgia
BiH
Slovakia
Kazakhstan Romania
Moldova
Armenia
Institutions Index 2002
Azerbaijan
16
Dimensions of institutions and
inputs indices in Armenia, 2002-05
1
2005
2002
0.5
0
Quality
Costs
INSTITUTIONS INDICES
Quality
Costs
INPUTS INDICES
17
First step in the BCI construction
VARIABLES
Excess labor
Cost of finance
Proximity to raw
materials
Access to foreign inputs
Access to foreign
customers
Technology
Education of workforce
Access to finance
Trade credit
Availability of skilled
workers
Availability of managers
Informality of supplier
network
Loan duration
FACTOR
ANALYSIS
Factor1
Factor2
Factor3
Factor4
AGGREGATION
W1
W2
INDEX
W3
W4
(Factor1)  (Factor2)  (Factor3)  (Factor4) = InputsQI
18
Principle component factors in the
Inputs Quality Index
0.5
Factor 1
Weight
0.4
0.3
Factor 2
Factor 3
0.2
Factor 4
-0.6
-0.4
-0.2
0.1
0
0.2
Change 2002-05
19
Main variables underlying Factors 1
and 3 of the Inputs Quality Index
1
0.8
0.6
pavapro
Cost of finance
Access to finance
Suppliers network
0.4
Load
0.2
-0.6
-0.4
-0.2
0
-0.2
0.2
-0.4
Availability
of managers
-0.6
Availability
of skilled
workers
-0.8
ptimloa
-1
Percentage change in variable, 2002-05
20
Principle component factors in the
Institutions Quality Index
0.4
Factor 1
Weight
0.3
Factor 2
0.2
Factor 5
Factor 4
0.1
-0.1
0
0.1
0.2
0.3
Change 2002-05
0.4
0.5
21
Main variables underlying Factors 1
and 2 of the Institutions Quality Index
1.0
0.8
Political
influence
Load
0.6
0.4
0.2
-1
0
1
2
3
Percentage change in variable, 2002-05
4
5
22
Main variables underlying Factors 1
and 2 of the Institutions Cost Index
Corruption
1.0
Load
0.8
Functioning of
the judiciary
Mafia
Crime
Red tape
0.6
Regulation
uncertainty
0.4
0.2
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
Percentage change in variable, 2002-05
23
Principle component factors in the
Institutions Cost Index
0.5
Factor 1
Weight
0.4
Factor 2
0.2
Factor 3
-0.2
0.3
-0.1
0.1
Factor 4
0
0.1
0.2
0.3
Change 2002-05
24
Main variables underlying Factors 1
and 2 of the Institutions Cost Index
1
Load
Protection
payments
0
-4
-3
-2
Bribes on
government
contracts
Bribes
-1
0
1
2
3
4
Excess
labor
-1
Percentage change in variable, 2002-05
25
Conclusions
• Institutions:
both perceptions and costs have
contributed to the deterioration of the
business climate in Armenia in the
last three years
– More specifically, political influence,
corruption, security, red tape, judicial
inefficiency
– To a lesser extent, also access and cost
of credit
26
Armenia’s perception of
investment climate constraints
Tax administration
Macroeconomic instability
Tax rates
Cost of finance
Access to finance
Anti-competitive/informal practices
Customs and trade regulations
Corruption
Economic & regulatory policy uncertainty
Licensing and operating permits
Access to land
Legal system/conflict resolution
Transport
Telecommunications
Skills of available workers
Labor regulations
Electricity
Crime, theft,disorder
0
20
40
60
Percentage of firms rating each constraint a major obstacle
Source: BEEPS 2005
80
27
Tax rates
Percent of tax on gross profit
50%
40%
30%
Armenia Azerbaijan
Source: Doing Business
Georgia
Turkey
28
Tax administration:
number of tax payments and
time to comply with tax requirements
Payments
Time to comply
1200
50
1000
40
800
30
600
20
400
10
200
0
Hours
Number
60
0
Armenia
Source: Doing Business
Azerbaijan Georgia
Turkey
29
Tax collection
Tax revenues as a share of GDP
18%
16%
14%
12%
10%
Armenia
Source: Davoodi and Grigorian (2005)
CIS
Lower middleincome countries
30
Linear model between tax evasion
and number of inspections
Evasioni = b 0 + b1 Inspectionsi + e
31
Probability of perceiving corruption
as a constraint
Probability
100%
80%
60%
0
10
Number of inspections by
tax officials
20
32
Linear model between tax evasion
and number of inspections
Evasioni = b 0 + b1 Inspectionsi + e
Evasion / Inspection = b1
b1 = a 0 + a 1 * Gifttax + u
Evasioni = b 0 + a 0 Inspections + a 1 * Gifttax * Inspections + e
33
Impact of corruption on tax evasion
Rate of tax evasion
0.4
0.2
0
-0.2
Inspections
Inspections
+ bribes
-0.4
-0.6
-0.8
34
Cost of finance:
Real interest rate in Armenia
30%
20%
10%
0%
2000
2001
Source: IMF, International Financial Statistics
2002
2003
2004
35
Nominal interest rate on firm loans
25
20
15
10
5
0
Armenia Azerbaijan
Source: BEEPS 2005
Georgia
Turkey
36
Access to finance:
Share of firms with access
to bank financing
Long term financing
Short term financing
with
access
with
access
without
access
Source: BEEPS 2005
without
access
37
Amount of collateral on loans
200%
150%
100%
50%
0%
Armenia Azerbaijan
Source: BEEPS 2005
Georgia
Turkey
38
Legal Rights Index
8
6
4
2
0
Armenia Azerbaijan
Source: Doing Business
Georgia
Turkey
39
Credit provided by the banking sector
Percent of GDP
80
Low & middle income countries
60
40
ECA countries
20
Armenia
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
40
Conclusions
• Access to finance, red tape, and
corruption are the 3 most important
investment climate constraints for
firms in Armenia
41
Escribano-augmented
Cobb-Douglas production function
n -1
ln(VAi ) = b 0 + b l ln(Li )+ b k ln(K i )+ b e Escri +  b n Dn + e i
n =1
TFPi = a 0 + a 1 ICi + a 2 FCi + h i
42
Firm productivity
Impact on firm productivity
10%
Red tape
0
Corruption
Bank loan
Finance index
-10%
-20%
43
Priority of reforms
Marginal impact on firm productivity
16
12
Red tape
Finance
8
4
Corruption
0
0
10
20
30
40
50
60
Share of TFP
44
Armenia’s productivity gap with
selected countries, 2005
200%
150%
100%
Turkey
50%
Kazakhstan
0%
Tajikistan
Georgia
Estonia Latvia Lithuania
Uzbekistan
-50%
Kyrgyzstan
Moldova
-100%
45
Estimating the productivity gap
TFPi =  0 +  1 * ICi +  2 * CountryDi +  3 * ICi * CountryD+ e
46
Impact of Investment Climate
variables on Armenia’s
competitiveness compared to Turkey
Armenia (dummy)
Red tape
Armenia*Red tape
Loan
Armenia*loan
Corruption
Armenia*Corrupt
TFP
(1)
TFP
(2)
TFP
(3)
-0.698
(1.70)*
-0.005
(0.06)
0.030
(0.40)
- 0.795
(1.09)
-0.622
(2.29)**
-0.760
(1.05)
0.394
(0.51)
-0.097
(0.94)
0.047
(0.44)
47
Incremental impact on Armenia’s
productivity, over Turkey’s
6%
5.3%
4.4%
4%
1.7%
2%
0%
0.0
Banks,
short term
Banks,
long term
Trade credit,
short term
Trade credit,
long term
48
Conclusions
• Political influence in economic activity is the
main factor driving the deterioration of the
business climate in Armenia in the last 3 years.
• Red tape, access to finance and corruption are
the major business obstacles to private sector
development in Armenia.
• Red tape is the top Investment Climate
constraint affecting firm performance in Armenia.
• Better access to long term finance, both in terms
of bank lending and trade credit, would help
bridge the 40% productivity gap with Turkey.
49