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Document Sample
Business
Armenia
Climate,
Lake
Sevan 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
FACTOR
VARIABLES ANALYSIS AGGREGATION INDEX
Inflation variability
Exchange rate variability
Real interest rate Factor1
variability Factor2 W1 W2 W3 W4
(Factor1) (Factor2) (Factor3) (Factor4) = MacroQI
Capital flows Factor3
Macro instability Factor4
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
5
Second and third steps in the BCI
construction
FACTOR FACTOR
VARIABLES ANALYSIS AGGREGATION INDEX ANALYSIS AGGREGATION INDEX
MacroCI Factor1 (Factor1)W (Factor2) W
1 2
MacroQI Factor2 Macro Index Factor1
BCI
Factor2 F1W F2W F3W Business
InfraCI Factor1 W1 W2 Infrastructure Factor3 Climate
InfraQI Factor2 (Factor1) (Factor2) Index Index
InputCI Factor1 W1 W2
InputQI Factor2 (Factor1) (Factor2) Input Index
InstitutionsCI Factor1 W1 W2 Institutions
InstitutionsQI Factor2 (Factor1) (Factor2) Index
6
Characteristic:
Geometric aggregation method
w wp wf wt
BCI = ( MACROindex) * ( INPUTindex) * ( INFRASTind ) * ( INSTITinde )
m
ex x
Feature:
Rewards more countries that improve the dimension
where they perform the worst
7
Country 2002 2005
1 Albania 170 204
2
3
Armenia
Azerbaijan
171
170
351
350
Sample
4
5
Belarus
Bosnia-Herz.
250
182
325
200
composition of
6
7
Bulgaria
Croatia
250
187
300
236
micro data
8 Czech Rep. 268 343
9 Estonia 170 219
10 Macedonia 170 200
11 Georgia 174 200
12 Hungary 250 610
13 Kazakhstan 250 585
14 Kyrgyzstan 173 202
15 Latvia 176 205
16 Lithuania 200 205
17 Moldova 174 350
18 Poland 500 975
19 Romania 255 600
20 Russia 506 601
21 Slovakia 170 220
22 Slovenia 188 223
23 Turkey 514 557
24 Ukraine 463 594
8
Business Climate Index and GDP
growth in ECA, 2002-05
GDP growth (average 2002-04)
10
Armenia
Albania Kazakhstan
8
BiH
Latvia
Belarus
6 Georgia Lithuania
Russia Ukraine
Estonia
Kyrgyzstan Bulgaria
4 Hungary
Slovenia Slovakia
Poland Turkey Croatia
Moldova
Romania Czech Rep.
2
0
2 3 4 5 9
BCI index 2002
Business Climate Index and total factor
productivity in Armenia, 2002-05
2
1
TFP - 2005
0
15 16 17 18
-1
-2
BCI - 2002 10
Change in business climate 2002-05
Better
Business
Climate
IV Turkey
I
Improving Good
BCI 2005
Poland Azerbaijan
Albania
Estonia
BiH
Kyrgyzstan
Croatia Slovenia
Lithuania
Slovakia Latvia
Hungary Bulgaria
Georgia II
MoldovaBad Romania
Ukraine Kazakhstan Deteriorating
FYROM
Czech Russia
Armenia
Rep. Belarus
BCI 2002 11
BCI Index and ranking of ECA
countries, 2002-05
Country Rank 2002 Country Rank 2005
FYROM 1 Turkey 1
Azerbaijan 2 Azerbaijan 2
Albania 3 Poland 3
Georgia 4 Albania 4
Poland 5 Estonia 5
Kyrgyzstan 6 Kyrgyzstan 6
Russia 7 Croatia 7
Kazakhstan 8 BiH 8
Armenia 9 Slovenia 9
Lithuania 10 Lithuania 10
Turkey 11 Slovakia 11
Slovenia 12 Latvia 12
Latvia 13 Hungary 13
Romania 14 Bulgaria 14
Estonia 15 Georgia 15
Belarus 16 Romania 16
BiH 17 FYROM 17
Bulgaria 18 Ukraine 18
Croatia 19 Moldova 19
Slovakia 20 Russia 20
Hungary 21 Kazakhstan 21
Ukraine 22 Belarus 22
Moldova 23 Czech Rep. 23 12
Czech Rep. 24 Armenia 24
Change in ranking 2002-05
15
Turkey
10
5
Azerbaijan
0
-5
-10 Georgia
-15 Armenia
-20 13
Components of BCI, 2002-05
1
2002
2005
0.5
0
Macro Infrastructure Inputs Institutions
index index index index
14
Azerbaijan
Turkey
Inputs
Inputs index 2005
Market
Estonia
Croatia Latvia Index,
Lithuania
Slovakia
BiH Slovenia
2002-05
Romania Albania
Bulgaria
Moldova Georgia
Armenia FYROM
Kazakhstan
Poland Hungary
Kyrgyzstan
Czech Rep. Ukraine Belarus
Russia
Inputs index 2002 15
Turkey
Albania
Institutions
Institutions Index 2005
Index,
2002-05
Kyrgyzstan Slovenia
Ukraine
Belarus Bulgaria
Russia Croatia Poland
Hungary
Latvia Estonia Lithuania
FYROM Czech Georgia
BiH Slovakia
Kazakhstan Romania
Moldova
Armenia Azerbaijan
Institutions Index 2002 16
Dimensions of institutions and
inputs indices in Armenia, 2002-05
1
2005
2002
0.5
0
Quality Costs Quality Costs
INSTITUTIONS INDICES INPUTS INDICES
17
First step in the BCI construction
FACTOR
VARIABLES ANALYSIS AGGREGATION INDEX
Excess labor
Cost of finance
Proximity to raw Factor1
materials Factor2 W1 W2 W3 W4
(Factor1) (Factor2) (Factor3) (Factor4) = InputsQI
Access to foreign inputs Factor3
Access to foreign Factor4
customers
Technology
Education of workforce
Access to finance
Trade credit
Availability of skilled
workers
Availability of managers
Informality of supplier
network
Loan duration
18
Principle component factors in the
Inputs Quality Index
0.5
0.4 Factor 1
Weight
0.3
Factor 2
Factor 3 0.2
Factor 4 0.1
-0.6 -0.4 -0.2 0 0.2
Change 2002-05
19
Main variables underlying Factors 1
and 3 of the Inputs Quality Index
1 Cost of finance
0.8 Access to finance
pavapro 0.6 Suppliers network
0.4
0.2
Load
-0.6 -0.4 -0.2 0 0.2
-0.2
-0.4
Availability -0.6
of managers
Availability -0.8
of skilled ptimloa
workers -1
Percentage change in variable, 2002-05 20
Principle component factors in the
Institutions Quality Index
0.4
Factor 1
0.3
Factor 2
Weight
0.2
Factor 5
0.1 Factor 4
-0.1 0 0.1 0.2 0.3 0.4 0.5
Change 2002-05 21
Main variables underlying Factors 1
and 2 of the Institutions Quality Index
1.0
0.8 Political
influence
0.6
Load
0.4
0.2
-1 0 1 2 3 4 5
Percentage change in variable, 2002-05
22
Main variables underlying Factors 1
and 2 of the Institutions Cost Index
1.0 Corruption
0.8 Functioning of Mafia
the judiciary Crime
0.6 Red tape
Load
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
0.4
Factor 2 0.3
Weight
0.2
Factor 3 0.1
Factor 4
-0.2 -0.1 0 0.1 0.2 0.3
Change 2002-05
24
Main variables underlying Factors 1
and 2 of the Institutions Cost Index
1
Bribes on
Bribes government
Protection
payments contracts
Load
0
-4 -3 -2 -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 80
Percentage of firms rating each constraint a major obstacle 27
Source: BEEPS 2005
Tax rates
Percent of tax on gross profit
50%
40%
30%
Armenia Azerbaijan Georgia Turkey
28
Source: Doing Business
Tax administration:
number of tax payments and
time to comply with tax requirements
60 Payments 1200
Time to comply
50 1000
40 800
Number
Hours
30 600
20 400
10 200
0 0
Armenia Azerbaijan Georgia Turkey
29
Source: Doing Business
Tax collection
Tax revenues as a share of GDP
18%
16%
14%
12%
10%
Armenia CIS Lower middle-
income countries
30
Source: Davoodi and Grigorian (2005)
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 20
Number of inspections by
tax officials
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
Inspections
0
Inspections
-0.2 + bribes
-0.4
-0.6
-0.8
34
Cost of finance:
Real interest rate in Armenia
30%
20%
10%
0%
2000 2001 2002 2003 2004
35
Source: IMF, International Financial Statistics
Nominal interest rate on firm loans
25
20
15
10
5
0
Armenia Azerbaijan Georgia Turkey
36
Source: BEEPS 2005
Access to finance:
Share of firms with access
to bank financing
Short term financing Long term financing
with
access
with
access
without
without access
access
37
Source: BEEPS 2005
Amount of collateral on loans
200%
150%
100%
50%
0%
Armenia Azerbaijan Georgia Turkey
38
Source: BEEPS 2005
Legal Rights Index
8
6
4
2
0
Armenia Azerbaijan Georgia Turkey
39
Source: Doing Business
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( i ) = b 0 + b l ln(Li )+ b k ln(K i )+ b e Escri + b n Dn + e i
VA
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%
50% Turkey
Kazakhstan Tajikistan
0%
Georgia Estonia Latvia Lithuania
-50% Uzbekistan
Kyrgyzstan Moldova
-100%
45
Estimating the productivity gap
TFPi = 0 + 1 * IC i + 2 * CountryDi + 3 * IC i * CountryD + e
46
Impact of Investment Climate
variables on Armenia’s
competitiveness compared to Turkey
TFP TFP TFP
(1) (2) (3)
Armenia (dummy) -0.698 - 0.795 -0.622
(1.70)* (1.09) (2.29)**
Red tape -0.005
(0.06)
Armenia*Red tape 0.030
(0.40)
Loan -0.760
(1.05)
Armenia*loan 0.394
(0.51)
Corruption -0.097
(0.94)
Armenia*Corrupt 0.047
(0.44) 47
Incremental impact on Armenia’s
productivity, over Turkey’s
6%
5.3%
4.4%
4%
2% 1.7%
0.0
0%
Banks, Banks, Trade credit, Trade credit,
short term long term short term 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
