The (mis)use of ICAs

If the term ICA does not mean anything to you, you have not been paying much attention to development policy in recent years. The acronym refers to Investment Climate Assessment, and it has been the latest rage at the World Bank. It is essentially a survey of enterprises that asks a host of detailed questions about both the characteristics of their operation and the main constraints they face. The Bank now has a new Investment Climate Unit that maintains and analyzes these surveys, which have been carried out in more than 30 countries.

In the words of the Bank:

Work to improve the investment climate is recognized as a key pillar of World Bank Group efforts to promote economic growth and poverty alleviation in developing countries. ICAs provide a standardized way of measuring and comparing investment climate conditions in a country; replacing a number of varying and sometimes ad hoc methodologies of the past. They are envisioned by the World Bank Group’s Private Sector Development Strategy as a systematic means to “allow i) better identification of the features of the investment climate that matter most for productivity and hence income growth, especially for poor men and women, ii) tracking of changes in the investment climate within a country, and iii) comparison of countries or Regions within countries.”

As the quote makes clear, these surveys are used increasingly to diagnose the main constraints facing firms and to identify policy reform priorities. If, for example, firms in country A complain most about the cost of finance while in B they complain about a skill shortage, this is taken as an indication country is constrained by poor access to finance while country B is constrained by poor human capital.

Sounds reasonable enough, right? Unfortunately, it’s not so straightforward. Inferences of this kind are quite likely to be wrong, and policy priorities based on what an existing sample of firms reports as major headaches are almost certainly biased.

To see why, you need to think in general-equilibrium terms and understand that the type of firms and operations that exist in an economy already reflects that economy’s constraints. In particular, the more binding the constraint with respect to a certain trait, the less likely it is that firms that depend on that trait will survive and prosper. And those firms that populate the sample will be those that either do not depend on that trait or have found some special way of getting around it. If I have little need for, say, public infrastructure, I am unlikely to report that its sorry state is a big deal for me. After all, if I depended on public infrastructure, I would not have lasted long. And this even if public infrastructure is the true binding constraint for the economy in the sense that a major improvement would unleash significant new entry and investment.

Or think of it this way. Whether the lack of X is a big headache for firms depends both on the severity of the constraint associated with X in general and on the importance of X to existing firms. As the constraint becomes more severe, the first factor becomes more important while the second becomes less. The net effect is ambiguous.

You may think this is all academic hairsplitting, but it’s not. Consider South Africa for example. A lot of people think that one of the most severe constraints that the economy faces is the high cost of labor (in dollar terms). This constraint finds reflection in a very high unemployment level and the weakness of the non-resource based tradables sector. Yet when the World Bank carried out an ICA recently, it found that firms complained mostly about lack of skills and about macroeconomic instability.

I think the explanation is that the structure of South Africa’s private sector already reflects the fact that one does not make money by operating a labor-intensive activity. So instead what you have is a bunch of skill- and capital-intensive enterprises in finance and other service industries, as well as in manufacturing, complaining about what matters not to the economy as a whole but to them specifically.

The bottom line? Surveys can be immensely useful if used intelligently, but identifying binding constraints requires a lot more than just asking firms.

Comments

[catkins]

Dani,

I enjoyed this post very much. It seems to me that survey results are likely to reflect what is concerning firms at the margin. This contrasts with your assertion that the binding constraint is that facing the economy in general and firms in total (as opposed to marginal; the lexicon here is not clear to me).

From here though I would turn the table back to you: Is it at the firm or economy-wide level the World Bank should operate? Is it at the marginal or total level?

I think this is a complex question as the solution invariably depends upon the political climate, nature of the constraints, and the institutional capacity to change. I would instinctively suggest that more success would be found at the margin and for this reason the ICA's might indeed by very useful.

[Dani Rodrik]

catkins --

there is nothing very complicated about this in principle. the reforms should seek to have the maximum impact AT THE MARGIN for the economy as a whole. The point is that you cannot tell how much the desert will benefit from water by asking camels.

[catkins]

Dani,

Thanks for your response. I understand your argument. I am interested in how the value of the information should be decided. I believe that this value is created by its purpose. Therefore, I am interested in the types of reforms the World Bank is seeking to perform.

For instance, in South Africa, should labour market reform (through reform of labour laws, seeking to reduce the influence of COSATU et al) be the priority or should skills development be put first. Should the binding constraint be addressed, a move that is likely costly, difficult and in which success may be less certain. Or should the marginal complaint be addressed, a area in which there may be 'quick wins' available?

Perhaps this is too far a digression from the post. Hopefully, my stocking will contain a copy of your recent book to develop my understanding of this.

Thanks,

[Abdi Hassan]

You get more useful information from people wishing to start enterprises (entrepreneurs)than the pre-existing firms which are bound to act in their self interest.

[Dominic]

Catkins,

You're confounding the issue. The binding constraint is the one which, upon removal presents the largest marginal gain at lowest marginal cost.

You seem to be seperating the idea of marginal constraint from binding constraint, but you should think of these as the same thing.

What you should think of as different, is that the binding constraint for a particular firm may be different to the binding constraint for an economy.

The firms management is responsible for solving its own binding constraints. Government is responsible for removing binding constraints of the economy.

In the example given, Dani's point is that the firms which exist in S.Africa think the binding constraint is skills, because those firms which have survived in S.Africa are not producing labour intensive products. But, according to this example, reducing the cost of labour would have greater effects in S.Africa than increasing the supply of skills. The difference is because the firms sampled have been selected as only those firms which have survived in a high labour cost environment. Reducing the cost of labour would lead to the entry of new economic activities, but that can't show up in a survey of existing firms.

[Chandan]

Nice post...true, very true...but what can be done to make sure that such surveys reflect true binding constranits of the economy? or are these kinds of surveys the best option among the worst?

[Robert]

Dani,

You bring up a good point, but I would have to say you are critizing a "second best" solution.

Do you work on what is binding a country's existing industries or do you work on those constraints that are keeping new industries from emerging in the first place?

As a person, do you focus on your strengths or do you focus on your weaknesses?

The answer is there is no right answer. It depends on the person. It depends on the country.

These surveys are good start and very valuable, but as you point out they are missing a whole set of constraints which may be essential. A truly optimal decision would require more than these surveys provide.

The problem is we can easily identify those constraints on our strengths and we are comfortable dealing with those more so than we are our weaknesses. A second best effort focuses on identifying what is easy. A first best effort looks at the whole picture..., but that is exponentially harder...

[inthemachine]

I wonder if there are some relevant lessons from research on availability bias.

[Per Kurowski]

Rodrik: “Surveys can be immensely useful if used intelligently, but identifying binding constraints requires a lot more than just asking firms.”

Rodrik is absolutely right! Especially when some of the most severe binding constraints are hard to confess… such as an ingrained cultural trait like the lack of trust and of the owners not wanting to give up any sort of control, keep the enterprises from developing their full potential.

[paine]

by passing
the general point
well made as usual
and off tracking on the example

are you suggesting
south africa oughta lower its forex rate
like them asians done

[paine]

"survey of enterprises "

are these "enterprises"
local outfits
or are they more often
TNC tie ins of some sort ??

if as i conjecture
IMFers are concerned
about what makes a place useful to the TNCers
then its strickly
cherry picking anyway

[Vijaya Ramachandran]

I see your point--it is certainly the case that existing firms endogenize some of the constraints. But if this is always the case, the complaints would not correlate with external, objective measures of the business environment (or the investment climate, as the Bank calls it). One can test this...and we have tried. My paper ("What Matters to African Firms? The Relevance of Perceptions Data," with Alan Gelb, Manju Shah and Ginger Turner) finds that perceptions are helpful and even camels might sometimes complain about the lack of water in the desert....

http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2007/12/14/000158349_20071214152644/Rendered/PDF/wps4446.pdf

We'd love to hear what you think! Regards, Vijaya

[paine]

the world bank
is
tiny tim
as played
by the imf scrooge

[tutti-frutti]

These and related issues were acknowledged, reviewed and assessed by the WB itself some years ago in its World Development Report on the investment climate (2004?). What's new?

[aion kinah]

I am unlikely to report that its sorry state is a big deal for me. After all, if I depended on public infrastructure.

[Supra Skytop Black Red]

there is nothing very complicated about this in principle. the reforms should seek to have the maximum impact AT THE MARGIN for the economy as a whole. The point is that you cannot tell how much the desert will benefit from water by asking camels.

[buy viagra]

Looks like the "post a comment" disappeared in your last post Public Service Announcement.
Typepad is a bit lousy sometimes. Regularly get some problems. Luckily not that often.

[rolex watches]

People usually say :"Seeing is believing." http://www.tt88times.com
Each attempt has a corresponding gain, in part or obvious, or vague. At least we have the kind of satisfaction After I bought this watch ,in a sense,it means a great deal to me. http://www.fashionhairfu.com

[severe hypertension]

Why do people live in the desert? If the conditions are so harsh
(heat, drought, famine), why not leave the desert for better areas to
live? (Details would be appreciated about different reasons. Also nice
would be authoritative sources that address this issue.)

[sildenafil citrate]

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1] Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.

[Viagra Online]

The estimates for the four countries show how relevant the investment climate variables are to explain the average level of productivity. IC variables in several categories (red tape, corruption and crime, infrastructure and, quality and innovation) account for over 30 percent of average productivity. The policy implications are clear: investment climate matters and the relative impact of the various investment climate variables indicate where reform efforts should be directed in each country.

[Kamagra]

It is argued that this methodology can be used as a benchmark to assess productivity effects in other ICA surveys.

[gucci sneakers]

thank you for your provided information, which are useful for me. Do you interested in gucci sneakers? and then gucci outlet will satisfy any of your needs,such as the gucci men shoes|women gucci boots as well as cheap gucci handbags on gucci handbags sale.

[MBT Shoes]

Thank you for introducing me the useful information.And .....Totally boring. can you tell me where is the red and gold colors...? I predict a very low seller....I look forward your answer.thank you!

[Nike Air Jordan]

The good news, thank you!

[replica rolex paypal]

私はアメリカではないので、ブログの記事は、よく書かれて、私はとても好き読み取り、すべての単語の私は非常に理解、ほとんどまだ読んでいないが、私はあなたの資料では、知識を学ぶことを望んでまた、我々は良い友達になることを願って。ありがとうございました！ ！

[who called me]

In general the developed states want natural resources from the less developed states at favorable prices. The developing states want trade policies that encourage local business and nobody cares what the undeveloped states want since they have no clout.

[cheap fashion handbags]

For me, I live out of my car… which means I live out of my cheap fashion handbags, too. I need one with a lot of size, tons of pockets and that will last. Make sure to check the stitching and handle joints. And when you’re not using them, make sure to keep them in a cheap Brand wallets. Good quality items should last, and they will if you care for them properly. http:///www.freewholesale.net

[timberland 6 inch boots]

There were timberland 6 inch sensitivity and a beauty to her that have nothing to do with timberland 6 inch boots looks. She was one to be listened to, whose words were so easy to take to timberland boots sale heart.I used to find notes left in the collection basket, beautiful timberland boots outlet notes about my homilies and about the writer's black timberland boots thoughts on the daily scriptural readings. The person who penned the notes mens timberland boots would add reflections to my thoughts and would always include some timberland pro boots quotes from poets and mystics he or she had white timberland boots read and remembered and loved. The notes fascinated black timberland shoes uk me. Here was someone immersed in a search for truth and beauty. Words had been cheap timberland boots treasured, words that were beautiful. And I felt as if the words timberland waterproof boots somehow delighted in being discovered, for they were obviously very generous to the as yet anonymous timberland work boots writer of the notes. And now this person was in turn learning the secret of sharing them. Beauty so shines when given away. The only truth that exists timberland hiking boots is, in that sense, free. http://www.timberland6inch.com/

[timberland 6 inch]

There were timberland 6 inch sensitivity and a beauty to her that have nothing to do with timberland 6 inch boots looks. She was one to be listened to, whose words were so easy to take to timberland boots sale heart.I used to find notes left in the collection basket, beautiful timberland boots outlet notes about my homilies and about the writer's black timberland boots thoughts on the daily scriptural readings. The person who penned the notes mens timberland boots would add reflections to my thoughts and would always include some timberland pro boots quotes from poets and mystics he or she had white timberland boots read and remembered and loved. The notes fascinated black timberland shoes uk me. Here was someone immersed in a search for truth and beauty. Words had been cheap timberland boots treasured, words that were beautiful. And I felt as if the words timberland waterproof boots somehow delighted in being discovered, for they were obviously very generous to the as yet anonymous timberland work boots writer of the notes. And now this person was in turn learning the secret of sharing them. Beauty so shines when given away. The only truth that exists timberland hiking boots is, in that sense, free. http://www.timberland6inch.com/

[certified cna classes in michigan]

oh interesting! that's quite an information there and i think it IS a site that is to be reckoned with if you own a small business and you need to be on top of what people are

saying about you now

[Navel Rings]

I really like this write! I enjoy it so much! thanks for give me a good reading moment!

[lachou]

I like these articles , democratic countries formulate policies are both team and the interests of the people of power, but the undemocratic countries rarely for the interests of the people, http://www.jerseysky.com it is the sorrow of many democracy, I like the western and northern state policy.
http://www.cheapsaleing.com
http://www.nikeairmaxshoe.ocm

[generic levitra online]

Hi Dani,
Really you are doing great work... your blog is really very informative and interesting. Thanks very much for sharing this post keep posting.

[louis vuitton messenger]

http://www.louisvuitton4love.com/louis-vuitton-messenger-m40370-p-12.html
you HATE Paul Krugman. Not only has he a Nobel prise (and you don't), he is almost always right!

http://www.louisvuitton4love.com/louis-vuitton-couguar-black-m93085-p-1033.htm

http://www.louisvuitton4love.com/louis-vuitton-sac-plat-n51140-p-464.html

http://www.louisvuitton4love.com/louis-vuitton-sarah-wallet-fleuri-m60232-p-537.html
79907804

[louis vuitton messenger]

http://www.louisvuitton4love.com/louis-vuitton-messenger-m40370-p-12.html
you HATE Paul Krugman. Not only has he a Nobel prise (and you don't), he is almost always right!

http://www.louisvuitton4love.com/louis-vuitton-couguar-black-m93085-p-1033.htm

http://www.louisvuitton4love.com/louis-vuitton-sac-plat-n51140-p-464.html

http://www.louisvuitton4love.com/louis-vuitton-sarah-wallet-fleuri-m60232-p-537.html
7990780

[jordan shoes]

Thanks for sharing your article. I really enjoyed it. I put a link to my site to here so other people can read it. Came across your blog when I was searching bing I have found the bit of info that
I found to be quite useful.

[cheap jordans]

I think this is a great post. One thing that I find the most helpful is number five. Sometimes when I write, I just let the flow of the words and information come out so much that I loose the purpose. It’s only after editing when I realize what I’ve done. There’s defiantly a lot of great tips here I’m going to try to be more aware of.

[jordan shoes]

It's good to see this information in your post, i was looking the same but there was not any proper resource, than now i have the link which i was looking for my research.

[NFL Football Jerseys]

If I speak in the Cheap Authentic NFL Jerseys tongues of men and of angels, but have not love, I am only a resounding gong or a clanging cymbal. If I have the gift of prophecy and can fathom all mysteries and all Official NFL Jerseys knowledge, and if I have a faith that can move mountains, but have not love, I am nothing. If I give all I possess to the poor and surrender my USA Jerseys Shop body to the flames,but have not love, I gain nothing.Love is patient, NFL Jerseys love is kind. It does not envy, it does not boast, it is not proud. It is not rude, it is not self-seeking, it is not easily angered, it NHL Jerseys keeps no record of wrongs. Love does not delight in evil but rejoices with the truth. It always protects, always trusts, always MLB Jerseys hopes, always perseveres.Love never NHL Hockey Jerseys fails. But where there are prophecies, they will cease; where there are tongues, they will be stilled; where there is knowledge, it will pass away. For we know in part and we prophesy in MLB Baseball Jerseys part, but when perfection comes, the imperfect disappea. When I was a child, I talked like a child, I thought like a child, I reasoned like a child. When I became NBA Basketball Jerseys man, I put childish ways behind me. Now we see but a poor reflection as in a mirror; then we shall see face to face. Now I know in part; then I shall know fully, even as I am fully known.And now these three remain: faith, hope and NFL Football Jerseys love. But the greatest of these is love. http://www.jersey-usa.com/sitemap.html LIJ

[nfl jerseys wholesale]

As the quote makes clear, these surveys are used increasingly to diagnose the main constraints facing firms and to identify policy reform priorities

[discount ugg boots]

i agree with you!your sayiing is right!

[wholesale replica handbags]

I was extremely pleased to find this website.I wanted to thank you for this good understand I definitely enjoying every single small bit of it and We've you bookmarked to check out new stuff you post.

[pandora bracelets]

Thanks for sharing the information there would be some apprehensions from segment but I am up for it.

[thomas sabo 2010]

Es ist wirklich eine sehr gute Website, um eine lange Zeit zu finden, sollten Sie bei Sammlungen sehen

[coach handbag]

The common dream of all women is that they want to dress up themselves to be the most focus one in what kind of occasions. And the discount Coach Handbags on sale for women are able to perfectly help you to make the dream come true. All discount coach bags outlet on sale for women are finished with fashionable and popular design at cheap coach outlet store. The rich colors and styles of coach handbags sale from clearance coach handbags outlet let you really appreciate the happiness of enjoying life. Don't hesitate! Buy it!

[Tiffany bracelet]

yes,Great site. This could probably have the refactoring tag added t it.

[Emu Boots]

Then fill up your propane tank and load it in your car. Take your time, you've been rushing all day. Look over the magazine rack and select something with current events to help you catch up with society, since you've been so consumed with your work all day.

[viagra online]

I played this game often, but for me, our creativity never stretched past trying to figure out what animal we would be. I'm still un-decided on the matter.

[Account Deleted]

raf

Thanks for article.

[3Dhomemovies]

Even if I don't always agree with your posts, I always appreciate reading them. Columbus Hotels

[Ning Asics]

Hence, CaoMingHua new book, life science journal ", a considerable number of content, and her medical professional and relevant. She from biological molecules, gene level, the analysis of many human emotional and psychological state,
http://www.mbt-usa.com/
MBT

[Account Deleted]

Raf
raf

I like it ... Thanks !!

[Account Deleted]

Hi!..Your explanation is superb. Thanks for sharing such a great piece.

Forex brokers review

[Account Deleted]

Raf
raf

Thanks to you !!!

[Account Deleted]

Raf
raf

Thanks for comment ...

[Account Deleted]

Many places and centers offer business and trade promotions to both buyers and supplier.What about the differences in skill intensities across industries? The job losses in the relatively unskilled-labor intensive battery industry should have little effect on the relatively skilled-labor intensive machinery
sexshop
sexyshop
sexshop online

[Account Deleted]

Many places and centers offer business and trade promotions to both buyers and supplier.What about the differences in skill intensities across industries? The job losses in the relatively unskilled-labor intensive battery industry should have little effect on the relatively skilled-labor intensive machinery
sexshop
sexyshop
sexshop online

[Account Deleted]

Thanks for the informative writing. Would mind updating some good tips about it. I still wait your next place. ;)

organic seo service