This approach seeks through a downward enquiry to establish whether an issue actually is something worth prioritising. Take the two following examples.
Business in a given country reports difficulties in finding highly skilled workers. A cursory examination of the education infrastructure and its poor shape and consequent poor outcomes may suggest this is an area of policy focus for the EO. However, a more detailed examination finds that while education may be poor, other negative factors (e.g. a culture of corruption and cronyism, crime, etc.) are driving the few high-skilled individuals into more lucrative migration paths. This may in fact be the area of policy focus where time and resources should be devoted in seeking change.
Access to finance is seen as a problem. On examination, the banking system is small, but banks are full of liquidity and desperate to find customers to lend money to at very sensible interest rates. Why are there so few takers may be the question to ask. Alternatively, credit may be low because banks do not have enough resources to lend or because firms do not want to borrow.
The downward enquiry approach is predicated on confirming an issue as a constraint on business through a series of questions, and arriving at a point where the EO could say that this constraint – or an element of it – is a significant barrier to enterprise development and, even more significantly, that if corrective action was taken, it would result in favourable policy outcomes.
The downward enquiry approach is predicated on a model which seeks to drill down on an issue, and identify which point is the most problematic and which area that the EO should focus on.
2.1 Types of questions to ask
The facilitator will put the issues identified by the EO to the group and initiate a downward enquiry on the possible constraint. Types of questions could be:
- Is the constraint new?
- What connected signals are there?
- What are the cost implications?
- Are there wider policy ramifications to the constraint?
- Does the constraint impact differently on enterprises of different sizes? Does it impact differently on women-owned SMEs?
- Is the constraint geographically or sectoral specific?
- Can the EO realistically effect change?
A step-by-step questioning process will help narrow the focus down to the specific issue and identify it as a confirmed issue – a key constraint on business that requires national advocacy action by the EO, and also as an issue that can be realistically tackled.
The process outlined here, will unearth a whole host of issues that are hindering the growth of enterprise. But the central question is – the very basis of this approach: is that issue a major constraint? If for instance bankruptcy laws are ranked hopelessly inadequate by business, this may indeed be a constraint, and if removed would significantly assist enterprise growth. But there may well be a modus operandi that has been developed – perhaps informally – which makes the existing system, while imperfect, workable and is therefore not a major binding constraint. The facilitator needs to keep this principle to the forefront of the discussion.
Upon completion of this exercise potential issues can be confirmed or discarded as key constraints on enterprises requiring priority action by the EO.
2.1.1 Is the constraint new?
Ascertaining whether a constraint is new, long-existing, or has become more of a hindrance to business needs to be determined at the outset of the testing enquiry.
- Is the constraint the result of new legislation?
- Is it the result of changes to existing legislation or interpretation of existing legislation?
- Why are enterprises reporting this issue now?
- Has the constraint been aggravated by other 'new' factors?
Perhaps it is a new issue but seems to be less prevalent than first reported. This might suggest that the constraint is linked to recent regulatory changes and some teething problems in interpreting the new legislation, which seems to be sorting itself out. It can then be ruled out as a binding constraint.
2.1.2 What connected signals are there?
Ancillary information can be taken from existing research and national plans and assist in the downward enquiry. This is useful, but equally important is reconciling into the EO's inquiry 'connected signals' that can be gathered from anecdotal information and observations. Take the following examples:
|Enterprises investing heavily in self-generation of electricity because of frequent outages on the public grid.|
|Contract enforcement:||Existence of extra-legal contract enforcement mechanisms.(1)|
|Crime and security:||Large outlays for private security guards.|
|Uncertainty of monetary stability:||Dollarization, use of inflation indexed contracts.|
Uncompetitive political system:
Lack of political actors raising potentially popular issues of poor delivery of public goods, i.e. law and order, infrastructure.
High taxation policy:
Discourages investment leading to low investment demand. In this scenario, lending interest rates should be low reflecting the low marginal returns of additional investments.
Access to finance:
Scarce supply relative to demand coupled with high interest rates.
Labour market regulations:
Higher than normal levels of informal employment.
Disproportionate use of e-trade and air-freight; clustered markets.
This approach may or may not lead to identifying a significant constraint on enterprise, but what it can do, much like a detective investigating a case, is help the EO either dismiss an issue as not urgently important as a pervasive problem for the wider business community or, conversely, further investigate.
An array of service providers are heavily promoting their services in this policy area. The question to ask is whether this new activity directly linked to the new legislation? A direct link would suggest it could be a binding constraint; an indirect link might suggest something else – for example it might have coincided with changes to corporate taxation that have resulted in an influx of new manufacturing enterprises that need assistance in establishing systems in compliance with the law.
2.1.3 What are the cost implications?
The EO's research needs to identify the level of both the policy cost and the administrative cost (Methodologies to do this are covered in Part II Advocacy Tool 2 Costing proposals). It needs to be able to quantify the number of enterprises (not just its members) already affected, or which might be affected, by a specific proposal. Although the more businesses that are affected, the more serious the problem, it is important not to over-exaggerate. The integrity of the EO's case rests on factual presentation. If an EO moves away from this premise then it risks harming its credibility as a policy actor and its effectiveness in the eyes of its members.
Governments tend to treat the business costs of responding to government demands and of waiting for decisions as a free good, with zero opportunity cost.
Compliance with legislation, some of which can consist of different layers of highly detailed regulatory frameworks (e.g. local, state, and federal) can place a huge burden on enterprises without adding anything positive to the business environment.
In addition, there may be an administrative burden imposed on businesses – for example, businesses have to set up systems and processes to demonstrate compliance, or deduct income tax before staff receive their wages (effectively an administrative task for the government), or put in extra effort to gather data and report to the government.
While some regulations have no administrative costs, businesses may still have to make an effort to keep up to date with the law, others may merely require businesses to operate in a specific way without imposing a policy cost; however, many do have ongoing costs. Costs can have a time dimension (i.e. the time taken to get goods cleared through customs in physical terms, and the amount of time staff need to spend dealing with officials). These need to be considered and included in the 'total costs' to enterprises of a constraint.(2)
2.1.4 Are there wider policy ramifications to the constraint?
The facilitator should probe for unintended consequences of the identified constraint.
- What other impacts will occur?
- Will businesses reduce the level of their investment?
- Will they employ fewer people? Or at least not create as many jobs as they might otherwise have created? Or as a result of the constraint be discouraged from the hiring of female workers?
- Will they export less? Or import more?
These are important questions to address in developing a holistic narrative for the advocacy phase.
What other polices are connected to the constraint?
For example, registering property has enormous potential but it needs to be accompanied by improvements in the land registry, collateral registry and the courts. Additionally, if the formal cost of selling a property remains high, titles will lapse back into informality.
2.1.5 Does the constraint impact differently on enterprises of different sizes?
The facilitator needs to ascertain the impact of a constraint on small and large enterprises. Policies and regulations are sometimes based on a size exemption (or size-based compliance threshold)(3). Such exemptions can lead to:
- Size traps that inhibit enterprises from growing beyond a certain threshold;
- unfair competition with enterprises that must comply; and,
- negative externalities (e.g. environment).
The business environment may be biased against smaller firms due to created disadvantages (by policy-makers) or due to natural disadvantages (lack of capacity and skilled personnel to deal with complex regulations, etc.).
Sometimes, it is the financial cost imposed by a policy measure designed to stimulate a change in behaviour (for example, the requirement to pay tax or some sort of levy),. Sometimes, little thought is put into the administrative burden (for example, preparing the paperwork to demonstrate compliance). Inevitably, these burdens are felt disproportionately by smaller businesses. Large businesses can afford to employ people – who then build up expertise – specifically to ensure compliance. In the smallest business it is usually the entrepreneur who has to do the work – on top of everything else already required to generate sales and make a profit.
Weak legal and financial systems affect the growth of small enterprises more than large firms. A World Bank study(4) found that micro and small firms in Africa face significantly greater interruptions in infrastructure services, have less access to formal finance, and pay more in bribes - as percentage of sales - than larger enterprises do. On the other hand, larger enterprises spend significantly more time dealing with officials and red tape. Thus, the differences in the underlying objective conditions faced by enterprises, even within the same country, can be substantial.
There may be constraints that impact more seriously on enterprises owned by women. For example, if the constraint is access to finance, female SME owners may have more difficulty because banks require that their husband, father, or brother co-signs the loan. Or they may be charged higher interest rates because banks perceive a higher risk in lending to women, while in fact evidence may exist that women have very low loan default rates. In some countries, women's property rights may not be well protected presenting more difficulty for them in offering collateral for loans.
2.1.6 Is the constraint geographically or sectoral specific?
The constraint may be confined to a certain sector or geographical region. This could be due to local interpretation by provincial authorities.
2.1.7 Can the EO realistically effect change?
Some constraints can't be changed, such as geography or war. Others can present almost insurmountable obstacles; for instance, crime and violence. Increased security and law and order polices can certainly help, but progress may not be easy to achieve.
|STEP 2: ASSESSMENT SUMMARY|
|The issue being presented has emerged from the EO’s survey work?||Yes / No|
|Further research has been done through an analysis of existing data and information?||Yes / No|
|Further research has been done through policy orientated enquiries (other stakeholders such as government have been consulted in terms of their view on the impact of the issue)?||Yes / No|
|The facilitator is absolutely clear on the issue that needs to be analysed and has outlined the steps to achieve this? (see example next page)||Yes / No|
|The facilitator has all the available information to proceed?||Yes / No|
|The main objective of the exercise is to arrive at ‘policy solutions’. Is this objective driving the discussion?||Yes / No|
Survey findings: As reported to the EO in the surveys, members are reporting low quality labour market entrants. They are experiencing difficulties filling many skilled positions, in particular in a number of growth sectors, despite an abundance of available labour.
Connected Evidence: The National Development Plan identifies investment in education at all levelsas a priority. The World Bank in its analysis outlines education being particularly weak at the secondary level with poor infrastructure and low quality.
Connected signals reported: Anecdotal evidence of significant investment in and high prices for non-state training academies and technical schools would support the above analysis.
(1) These concepts are explained in Contracts without Government Peter T. Leeson, Department of Economics, George Mason University, http://www.peterleeson.com/Contracts_Link.pdf
(2) "Poverty Reduction Strategy Papers (PRSPs) – A guide for employers' organizations", ACT/EMP 2006.
(3) See Vandenberg: The relevance of firm size when reforming the business environment http://www.businessenvironment.org/dyn/be/docs/5/DebatebackgroundVandenberg.pdf
(4) Impact of Access to Finance, Corruption and Infrastructure on Employment Growth: Putting Africa in a Global Context (World Bank, 2007).