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Public Infrastructure, Labor Force Skills, and Access to Finance key to unleashing private sector growth

July 5, 2011

New World Bank Report Highlights Challenges to Enterprise Performance

WASHINGTON, July 5, 2011 – Businesses in Eastern Europe and Central Asia say that constraints in financing, infrastructure, and labor quality inhibit doing business in the region, according to a new report released today by the World Bank.

“What we find, is that constraints in these markets have worsened over time. In addition, firms of different sizes face varying constraints. For example, large firms had better access to external funding during the crisis and were able to survive the economic crisis much better than smaller firms.” said Yvonne Tsikata, Sector Director for Poverty Reduction and Economic Management in the World Bank’s Europe and Central Asia Region.

The report – ‘Challenges to Enterprise Performance in the Face of the Financial Crisis’ – explores trends emerging from the 2008 Business Environment and Enterprise Performance Survey (BEEPS), carried out jointly with the EBRD. A triennial survey of businesses in the region, carried BEEPS captures private sector impressions of various aspects of the business environment.

The current report examines firms’ perceptions of the key drivers of enterprise sector performance: access to finance, infrastructure, and labor. Firms voiced their concerns about the primary obstacles they face:

Access to finance was a constraint highlighted across the region. According to respondents, access to finance was on average the easiest in 2005. At the onset of the crisis, firms reported that this access gradually tightened over time.

Infrastructure inadequacies were also highlighted as key obstacles to doing business in the region. Between 2005 and 2008, firms’ dissatisfaction with the quality of electricity, transport, and telecommunications infrastructure increased the most among all perceived obstacles to doing business.

Shortages of skilled labor rounded out the list of primary constraints identified by firms across the region. While firms found labor regulations to be less burdensome in 2008 than in 2005, there was a growing dissatisfaction among surveyed firms with the quality of labor. Further, this inability to find workers with adequate skills in some countries was accompanied by sharp increases in wages that outpaced labor productivity.

Interestingly, while concerns were voiced across all three areas, the impacts on firms varied across different types of firms. Smaller firms, for example, were less likely to complain about tighter access to credit in the financial crisis, as they had relatively lower access to credit than larger firms before the crisis.

Larger firms were more likely to complain about labor quality ― 80 percent of large firms surveyed were dissatisfied with labor force skills, compared with only two-thirds of smaller firms. However, larger firms were able to overcome this constraint by training their employees more extensively.

The challenges presented by infrastructure varied by the type of firm, the size of the firm, and where the firm was based. For firms in low- and lower middle-income countries, firms that innovate, and low-productivity firms, power outages were more costly. The survey also shows that increasing access to information and communication technologies may provide a comparatively higher productivity boost for smaller firms and firms operating in lower-income countries.

“One important finding regarding infrastructure was the impact of better governance on reducing losses due to service outages,” emphasized William Dorotinsky, Sector Manager for Poverty Reduction and Economic Management in the World Bank’s Europe and Central Asia Region. “This signals that these countries should focus not only on physical infrastructure investments to meet demand, but also have an eye toward governance reforms and anti-corruption efforts.”

The challenges identified by the firms surveyed existed before or at the onset of the financial crisis of 2008, and the dynamics on the ground may have changed during the recession affecting firms’ access to finance, energy use, and skilled labor. The report argues that as demand recovers, these constraints to doing business will be important.

While the prospects for future growth in the region are positive, firms in these countries will have to compete in export markets, for international financing, and external investment with firms in countries in other regions, such as Asia and Latin America. Policy measures to improve the business environment and promote job creation will be essential. This will mean finding ways to help firms deal with the constraints they face: making it easier for new firms to enter markets, continuing regulatory reforms in the labor market to foster job creation and to reduce labor costs for firms, and pairing investments in infrastructure with efforts to improve governance.

Policies that aim to ease constraints businesses face in their operations will increase the competitiveness of firms in the region, accelerating the pace at which countries in Europe and Central Asia recover from the financial crisis and helping them sustain high growth.

Challenges to Enterprise Performance in the Face of the Financial Crisis is based on the 2008 round of the Business Environment and Enterprise Performance Survey (BEEPS), administered to managers of 11,000 firms in 29 ECA countries. It is the second such report published by the World Bank based on the results of the 2008 survey. The first, ‘Trends in Corruption and Regulatory Burden in Eastern Europe and Central Asia’, looked at firms’ perceptions of administrative burden and corruption in their business environments. The BEEPS projects stands out from other private sector surveys done by the World Bank as the largest simultaneous survey of firms, virtually covering an entire region. The BEEPS has taken place every three years since 1999. The results from the next BEEPS will be available in 2012.

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