An equation for prosperity

Standard assumptions

• Knowledge is power

• Time is money

• Work=power*time

Therefore

• Money= work/knowledge

Hence

The less you know, the more you make

or

“Die duemmsten Bauern ernten die dicksten Kartoffeln.”

(“Fortune favors fools”)

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Ways out of povertySupport for promising SMEs

DEG Atrium Dialogues:

SME – entrepreneurship at its best

Michael Klein

Cologne, November 16, 2010

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More hope than ever for a world free from extreme poverty

Chart Title

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1820

1825

1830

1835

1840

1845

1850

1855

1860

1865

1870

1875

1880

1885

1890

1895

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Poor/Total (W orld) Poly. (Poor/Total (W orld))

Source: David Dollar, Frank Lysy and Guy Pfeffermann.

Share of world population living in extreme poverty, 1820-2000

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The way out of poverty: Income

growth from productive enterprise

0.0

50.0

100.0

150.0

200.0

250.0

1960 1965 1970 1975 1980 1985 1990 1995 2000

Con

stan

t 198

5 U

S$ (

billi

ons)

Korea, M anufacturing Value Added

Official Net Resource Flows to Dev. Countries

Total Grants to Dev. Countries, Excl. Tech. Coop.

Source: World Bank WDI Database.4

Business does the heavy lifting in the fight against poverty

Informal labor market in ChinaSource: Wang Qiang

Waiting for Work in Bhutan Source: Bhutan Observer, March 28, 2010

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Not any job will do

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"We have to end forever the

notion that Cuba is the only

country in the world where

you can live without working.“

Raul Castro

BBC September 14, 2010

Productive jobs are needed

Ohorongo (Namibia):

cheaper cement, efficient

energy useAsian Bamboo (China):

Improved Bamboo

plantations

Tiscan (Tanzania):

efficient container trade

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Go for “promise”, not “size”

Most value from allowing promising firms to emerge and grow…

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Stunted ecologies of firms:

Barriers to entry and growth

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8.1

3.3

-2.2-5

0

5

10

15

20

25

1 to 10 11 to 50 51 to 200 200 +

%

Firm's Number of Employees in Baseline Period

Employment Growth Rates by Firm Size

Source: Aterido, Hallward-Driemeier and Pagés (2009)

Affiliated Computer Services (ACS) employees in Ghana: Keying in US healthcare records

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Accra

10

License to sell

2,6%

-1,0%

-3,5%

formal jobs prices revenue of old firms

Effects of business registration

reform in Mexico

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Credit Information; Creditor Rights

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SME support: The first line of defense:

The business environment

• SMEs get funding when the environment is ok – Latin America

– 45 emerging markets

• Business models for SME finance emerge– Special departments

– Service offerings

– Assessment methods (e.g. scoring)

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SME support: The second line of defense

The large firm

• Large firms are typically not large because technology requires gigantic scale, but because size helps solve reputation, commitment and financing problems

• Large firms are often like collections of small firms and operate an internal market for corporate control

• Large firms may provide funding along the supply chain for SMEs

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15

Market failure?

Market failure?

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• Failure means: good deals left on the table– Know-how– Finance

• The likelihood of market failure– 2/3 of SME finance gap for

companies with bank accounts; 2/3 of major cost due to loss given default

– Who knows best: borrower or lender?

SME support: The third line of defense

Government support programs

Can government do better?Evidence

– Less than a dozen impact evaluations worldwide

– Many schemes are ineffective or plagued by corruption

– Some schemes work, but impact evaluations do not say why and typically no evaluation of costs and benefits

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Entrepreneurship and a public push

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Public Support for SMEs

Public finance is just a small piece of the equation

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True “leverage”

Support good examples

AND

Drive policy reform

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Public Support for SMEs

• Expect less and you are more easily satisfied (e.g. “SMEs reached” and “money out the door”)

Market failure means good deals are left on the table – not bad ones, therefore:

As demanding a measure as for business:

profit as high as the risk-adjusted cost of capital

- a measure of success not just a necessary evil

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Measures of success

“Business model” for public SME

support– Allow for failures:

• a broad portfolio

– Measure of success: • profit for the portfolio as a whole

• profit for partners

(no demonstration effect without profit;

no first loss with taxpayer)

– Subsidy and special engagement:• for “public” goods

(business environment, social and environmental concerns)

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SMEs and the way out of poverty

• The way out of poverty– Productive jobs through enterprise

• The engine of growth– Developing productive firms

• Help from government– Competition on the basis of rules: the business environment

– Supporting examples: finance and training

• The business model for SME support– Allow for failures: portfolio approach

– Measure of success: profitable portfolio

– Subsidy and special engagement for “public” goods (business environment, social and environmental concerns)

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