6/9/2011 5:11:58 AM By
E.J. Reedy
Formal is better; informal the scourge. While I still remain largely in that camp, I have to say that an
article in today's Financial Times gave me some pause on this question. Growing up in a middle class household in the U.S. Midwest left me with a world view that is intrinsically oriented to the formal economy - or at least I thought. My grandmother, may she rest in peace, was an amazing woman and indeed the main entrepreneur who I have had in my life and yet I doubt very much that she always reported all of her income. A highly ethical woman in my estimation, she was widowed with three children (one under 1) at about the age of 30 and went on to send all of them to college while living independently and only remarrying briefly. At the age of 88 she was still running her own seasonal business for most of the year and beating me handedly at any game that we engaged before her death. Just as she probably used a bit of creative accounting to get by at certain times, today's article points out some of the ways in which certain economies are likely surviving currently because of their informal economies.
I have spent a lot of time in Spain in the recent year which has brought me head long into contact with the informal economy. Indeed, when first here I have to say I nearly burst a blood vessel trying to deal with some of the things which could only be done in the informal economy which I was used to being formal. I had some of my most heated arguments and grandstanding trying to deal with people who by all appearances were part of the formal economy but apparently were not. As the article rightly points out, Spain's informal economy must be among the biggest in the developed world. And yet, with all of the economic pain and tumult in the Spanish economy,
by my reading of currently available data Spain is the hardest hit country anywhere in terms of pre-Crisis and post-Crisis impact on new business formation and the existing small business sector, the Spanish economy is still functioning. Yes, there have been some significant protests, but as I think the article correctly identifies if Spain didn't have some of this informal economy there is no way that it would not be in a revolutionary state. (I am not sure it won't reach that state but it's not there currently.) If the government wants to bring some of this informal economy into the formal economy, which seems necessary for longer-term growth potential, then it needs to face facts about the repressive regimes which remain in place for many formal business and other activities. That said, in my opinion, Spain has no choice but to live with its informal economy currently as the changes that it needs to make to much of its burdensome regulatory and other regimes will take time and seem deeply, deeply rooted in culture and society.
Well, that is all a bit of an aside probably for most of my readers. I offer it only in the way of saying, this topic of informal economy measurement is extremely important. Many of the data projects we have funded only focus on the formal economy because high-growth companies need to be operating formally (
OECD and
World Bank), but I am sure that this set of measurement issues is important and indeed will likely be incorporated by many scholars as a measure of institutions in different countries. The
Financial Times article is data driven, offering estimates from
Friedrich Schneider that appear to be the going standard in this area, but it also has a nice discussion of the dangers of measuring the informal economy over time. I would expect that we will see a lot more measurements of the informal economy as the markers of business and household activity (all the data we are leaving in our daily activities) explode in the coming years; it is these data or things like electrical consumption that seem most common bases for estimating the actual business activity in a country. Those interested in this area should check out the article or the longer journal article which I have been told by experts at the World Bank is where they currently draw from:
Schneider, F. and D. Enste, 2009. Shadow economies: Size, causes and consequences.
Journal of Economic Literature, 38(1): 77-114.
Here is a sneak peak at some of the data the
Financial Times presents:
2/8/2011 6:04:56 AM By
E.J. Reedy
I have spent a good deal of time over the last four years working on surveys asking individual companies about how their business activities are financed. It’s been amazing in that process to see how differently the topic must be discussed in Europe and the United States. Specifically, topics like credit card financing, which are a mainstay of U.S. surveys, don’t event make an extended pick-list of financing types used by most European small businesses. I bring this up to illustrate that international comparisons of financing mechanisms for small business are a tricky thing. And yet, we all yearn for more comparable data (or any data at all!). Today I wanted to describe a couple of fairly recent surveys focused on small business financing data internationally.
Asking the Firm about Financing
Completed every six months, the
European Central Bank Access to Finance of SMEs is a large-scale survey of establishments in the EU zone looking at changes in conditions but not gathering nominal values of loans. It has a nice
questionnaire that keeps things simple although the overall effort is a bit limited in that it's bypassing official statistical systems and doesn't have the ability, as I understand it, to link reported credit conditions to firm outcomes in later periods. It's most recent report summarized that “between March and September 2010 the proportion of SMEs reporting a worsening in access to bank loans, at 24%, almost halved compared to the previous survey, when it stood at 42%. At the same time, 12% of SMEs reported an improvement in access to bank loans, compared with 10% in the previous round.” This seems to show that the debt financing options for European SMEs are still getting worse but not as quickly. This is a good example of a survey gathering perceptions from businesses. The recently reviewed
NFIB survey also comes to mind here.
Asking the Regulator (or Bank) about Financing
The other route that can be followed in gathering data is to go to the providers of capital. In most cases, in small business financing this means looking to providers of debt capital. A new paper by the World Bank titled “
Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set” describes an aggregation of SME financing data of this types from multiple countries around the world. This arises from some of the efforts of the World Bank and G-20 to aggregate data from central banks and other administering agencies about the size and quantity of loans to small businesses in their country. Asking regulators about loans is quite different than the above described establishment surveys. The advantage of the second approach is that it’s much cheaper but as the authors outline, there are huge definitional differences across countries in how SMEs are defined.
From
table 2 of “Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set”
The above shows the U.S. definition which centers on loan size, not employees or revenues of the business; I find this to be highly unsatisfactory. So while I applaud this G-20/World Bank effort, I personal still don’t think it’s a full substitute for a quality establishment survey. That said, outlining some of these differences in definitions is the first step in pushing towards further agreement on appropriate definition and comparability. The authors have tried to make global estimates on the size of small business lending, finding that $10 trillion flows annually to small business loans but that this is disproportionately higher in developed economies. Additionally, they believe the differences in definitions are not driving the difference between developed and developing economy levels of small business financing.
A Gripe
While there is much to applaud in the ECB survey, they still have work to do in regard to their sample. Specifically, it does not appear to me that their sample is adequately covering new and young firms. While they have about 2 percent of firms responding that they are under 2 years of age, that is dwarfed by those firms age 2-4 years (8 percent of their sample). This would appear low by all estimates I can think of coming out of the OECD and other international sources. And indeed, in this turbulent time we have shown the importance of tracking new business finance separately as these are the firms most likely first effected by the downturn and any credit tightening. Take a look at Spain’s statistics on new business registrations, as an example, which have halved in the last year. The discussions about small business financings too often are portrayed as the same as new business financing. They are not and more effort needs to be made to have samples which allow for representative studies of credit conditions faced by new businesses.
A Compliment and A Call
But it’s great to be squabbling on the details of the ECB effort while the U.S. remains devoid of meaningful ongoing federal collections at the establishment level. Our own Kauffman Firm Survey is the only longitudinal effort collecting annual debt and equity injection information on U.S. businesses but it’s only one cohort. How we are not demanding more on business financing is baffling to me. Communities everywhere in the U.S. want to know what is happening with their small business credit conditions.
10/13/2010 5:25:42 AM By
E.J. Reedy
The World Bank Group has released two additional years of data as a part of its
Entrepreneurship Database. For most countries, data is now current through 2009, thus reporting some of the first international entrepreneurship statistics since the economic crisis began. With 112 countries, many with several years time-series, the World Bank Entrepreneurship Database is worth a look for many academics looking for other measures to test entrepreneurship patterns within countries. It’s a parallel effort to some of the popular
Doing Business research and reports different demographics about limited liability corporations within the countries covered.
I expect this chart covering new business entry density in different development classes of countries will get the most press coverage with the current release.
It shows a not so positive picture for new business entry in the developed economies and a relatively bright picture in many developing economies. While the developed economies continue to see higher entry rates, they also saw trend lines which were significantly more effected by the financial crisis.
10/7/2010 5:47:55 AM By
E.J. Reedy
11/30/2009 9:00:00 AM By
E.J. Reedy
After the crazy financial environment of the last year, consumer finance (or household financial usage) surveys appear to be increasing in popularity or frequency. The Federal Reserve Board of Governors made a really astute decision to refield their popular Survey of Consumer Finance, last done in 2007, but not to implement a new 2009 cohort but rather to go back to their respondents from 2007 and collected panel data on the finances of these households. And apparently, they have added in some logic to their questionnaire such that if a respondent was a business owner in 2007 but not in 2009 they will ask what happened to that business. This holds great potential in studing entrepreneurial households. Unfortunately, the sample sizes here are so small that it the utility of the data could be limited depending on incidence rates.
Additionally, the World Bank is considering some expanded work in this area that if approved could be quite exciting. Also from the World Bank, a recent paper highlights some methodological issues about collecting data on financial service usage:
11/3/2009 12:45:45 PM By
E.J. Reedy
Global Entrepreneurship Week 2009 is almost here so I wanted to take a minute to highlight some of the more common sources on international data about entrepreneurship.
Scott Shane had a nice posting on the NY Times blog last week using the World Bank Group Entrepreneurship Survey. Currently the last data from that project was collected at the beginning of 2008. The World Bank will be collecting two more years of data beginning in 2010. The data currently cover approximately one hundred countries. The data is not fully comparable across countries but it attempts to encourage comparability by looking at only one type of business registration, limited liability corporations, which the authors contend is the most consistent legal form across countries. Also
see upcoming event at the World Bank.
The
Organisation for Economic Co-operation and Development will be releasing data next week on 23 economies. Drawing official data from national statistical offices, the OECD tabulations are of most interest for the study of developed economies but get into many aspects of growth firms like gazelle firms and high-growth firms in the economy.
Last week, the Legatum Institute put out a new version of their
Prosperity Index (which has an entrepreneurship component). According to their most recent index, “Entrepreneurs at the micro level need good economic policies at the macro level. Innovation and entrepreneurship are more strongly related to economic fundamentals than any other factor in a society. Aspiring entrepreneurs will often hit a 'ceiling' limiting their success if a nation’s economy is not fundamentally strong.” There isn't anything there I would disagree with. I am having some trouble finding the data details in their current report but as I remember, for many of their items, they rely on data from the Gallup World Poll, but interestingly entrepreneurship is not one of those items. The Gallup World Poll does have some data available on entrepreneurship, although it is not as readily available as other sources. A
case study in what Gallup collects on many countries is included in this write-up on South Africa.
And lastly, the
Global Entrepreneurship Monitor (GEM) continues to collect data on nascent entrepreneurship and some other aspects of entrepreneurship. In our experience, countries must be aware of country-level quality issues related to the vendors which were used in collection but these data remain useful in some areas of cross-country study.
9/30/2009 10:23:42 AM By
E.J. Reedy
Immigrant entrepreneurs continue to be a hot topic for study (
see posting from February), but recently came across a survey in Mexico that I would like to highlight. According to the
Mexican Family Life Survey (MxFLS) website, "MxFLS is the first Mexican survey with national representation departing from a longitudinal design, tracking the Mexican population for long periods of time regardless of migration decisions with the objective of studying the dynamics of economy, demographics, epidemiology, and population migration throughout this panel study of at least, a 10-year span." The Mexican Family Life Survey has collected two waves of data on more than eight thousand households with a ninety percent rate of recontact between 2002 and 2005. Additionally, the survey appears to be agnostic to relocation decisions of the participating households, in particular, reporting to continue to follow households which relocate to the United States.
I applaud the organizers of this effort for their ambition and hope that the data collected can help to shed light on immigrant entrepreneurship. One of the common criticisms of research in this area is the inability to track previous job activities before immigration occurs and to compare that to later job activities. Tracking people across such long distances and for such a length of time should prove very interesting indeed.
Special thanks to a colleague, Cristina Fernandez, who helped with some research and translation on this post.
9/14/2009 7:42:38 AM By
E.J. Reedy
The World Bank's
Doing Business has published data for 2010. This effort "investigating the regulations that enhance business activity and those that constrain it" continues to be one of the most successful efforts to collect benchmark data and drive policy changes. Additionally, as
a recent Economist article notes, these indicators are now widely used in academic and policy research. Also perhaps of interest is a more in-depth report from late last year on
paying taxes across countries.
I would highlight an upcoming conference that Kauffman and the World Bank are sponsoring looking entrepreneurship and growth.
Conference on Entrepreneurship and Growth
November 19-20, 2009 - World Bank, Washington DC
Jointly sponsored by the Development Research Group and the
Investment Climate Advisory Services of the World Bank Group, and the
Ewing Marion Kauffman Foundation
Entrepreneurship is important for the continued dynamism of the modern economy and economic growth. The aim of this conference is to explore government regulations and reforms, private sector initiatives, and financial sector developments that affect the creation of new firms, the average size of firms, and the dynamism of incumbent firms.
Read the Agenda:
http://econ.worldbank.org/conferences/entrepreneurship
RSVP:
Email Agnes Yaptenco at the World Bank to arrange a visitor's pass. Please indicate which dates you plan to attend. Seating is limited.