A G R I C U LT U R E A N D R U R A L D E V E L O P M E N T D I S C U S S I O N PA P E R 5 1 67842 IMPROVING THE RURAL INVESTMENT CLIMATE FOR BUSINESSES: Key to Rural Income Generation NA OTA K A S AWA D A FEBRUARY 2012 A G R I C U LT U R E A N D R U R A L D E V E L O P M E N T D I S C U S S I O N PA P E R 5 1 IMPROVING THE RURAL INVESTMENT CLIMATE FOR BUSINESSES Key to Rural Income Generation NAOTAKA SAWADA © 2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover Photos: Naotaka Sawada CONTENTS iii Table of CONTENTS List of Figures v List of Tables vii Acknowledgments ix Acronyms and Abbreviations xi Executive Summary xiii Chapter 1: Introduction 1 Chapter 2: Rural Investment Climate Assessments 3 2.1 Obstacles Perceived by Rural Entrepreneurs 4 2.2 RIC Indicators 4 2.3 Overall Assessments and Recommendations 6 Chapter 3: Improvement in Rural Investment Climate 9 3.1 Market Demand 9 3.2 Access to Markets 11 3.3 Access to Finance 13 3.4 Business/Agriculture Extension Services 16 Chapter 4: Conclusion 23 References 25 Appendix A: Policy Recommendations of Six Pilot RICA Projects . . . . . . . . . . . . . . . . . . . 27 Appendix B: Characteristics: Enterprises, Households, and Communities . . . . . . . . . . . . . . 31 B.1 Enterprise Characteristics 31 B.2 Household Characteristics 32 B.3 Community Characteristics 32 Appendix C: Obstacles Perceived by Entrepreneurs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 C.1 Gender Comparison of Perceived Obstacles 37 C.2 Rural and Urban Comparison of Perceived Obstacles 38 Appendix D: RICA by Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 D.1 Definitions 39 D.2 Percentile Ranking of RIC Indicators 40 A G R i C U LT U R E AND RURAL DEVELOPMENT D i SCU SS iON PAPER 51 iV C ONTENTS Appendix E: Enterprise Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 E.1 Enterprise Entry 43 E.2 Enterprise Exit 44 E.3 Enterprise Performance 46 Appendix F: Income Simulations by RIC Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Appendix G: Government-Related RIC 51 G.1 Security and Legal System 51 G.2 Payment Dispute 51 G.3 Licenses and Permits 52 G.4 Tax System 52 G.5 Corruption 53 G.6 Disaster Management 53 G.7 Health 53 G.8 Education 54 G.9 Economic and Political Stability 54 G.10 Electricity 55 G.11 Water and Sewage Systems 57 G.12 Garbage Collection, Biogas, and Cylinder Gas 57 iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES F i GU R E S V List of FIGURES Figure 1.1: Poverty Below the National Poverty Line 2 Figure 2.1: RiC Framework 4 Figure 2.2: Farm and Nonfarm Comparison of Perceived Obstacles (% enterprises) 5 Figure 2.3: RiCA: Farm Enterprises 5 Figure 2.4: RiCA: Nonfarm Enterprises 6 Figure 2.5: Rates of Try-to-Enter; Entry Success; and Exit of Nonfarm Businesses (% of households) 6 Figure 2.6: income increase (%) by 5% improvement Each 7 Figure 3.1: Weak Demand/Too Many Competitors 10 Figure 3.2: Average Number of Competitors 10 Figure 3.3: Market Availability 10 Figure 3.4: Community Customers 10 Figure 3.5: Community Project 10 Figure 3.6: Dirt Roads 11 Figure 3.7: Roads as Obstacles 11 Figure 3.8: New Road/Bridge 11 Figure 3.9: Obstacle: Transport 12 Figure 3.10: Car/Bus/Truck as Means of Transport 12 Figure 3.11: Transport improvement 12 Figure 3.12: Transport Cost as a Percentage of Wholesale Prices (%) 13 Figure 3.13: Market Opportunity/Knowledge (% of enterprises or households) 14 Figure 3.14: Available institutions in the Community (% of communities) 14 Figure 3.15: A Loan or a Line of Credit 15 Figure 3.16: Didn’t Apply for a Loan 15 Figure 3.17: Reasons Why Entrepreneurs Did Not Apply for Loans Though Needed 15 Figure 3.18: Access to Finance 16 Figure 3.19: Having a Bank Account 17 AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 Vi Fi G U R E S Figure 3.20: Business Services: Availability and Service Used 17 Figure 3.21: iT Service Availability and Use; Use of Computer 18 Figure 3.22: Use of Phones 18 Figure 3.23: Motive: Skills Obtained 19 Figure 3.24: Managers Receiving Training 19 Figure 3.25: Product/Process innovation/improvement 20 Figure 3.26: Location of input Purchase and Access to inputs as an Obstacle 20 Figure 3.27: Percentages of Paid Workers 21 Figure 3.28: Seasonal Fluctuation of Sales in Farm and Nonfarm Enterprises 21 Figure B2.1: Nonfarm Business Entry and Closure 32 Figure C1.1: Gender Comparison of Perceived Obstacles 37 Figure C2.1: Rural Versus Urban Small Enterprises 38 Figure G1.1: Community Leadership, Crimes, and Security Expenses 51 Figure G2.1: Payment Disputes, Never Solved, Not Even Tried to Solve (%) 52 Figure G3.1: Registrations and Licenses 52 Figure G4.1: Tax System–Perceived Obstacles 52 Figure G5.1: Corruption 53 Figure G6.1: Disasters in Each Country 53 Figure G7.1: Health Facilities 54 Figure G8.1: School and Education 54 Figure G9.1: GDP Per Capita Growth Rate (%) 55 Figure G9.2: Political Risk Rating 55 Figure G9.3: Economic Risk Rating 56 Figure G10.1: Electrification and Use of Electricity 56 Figure G11.1: Water: Use and Sufficient Supply? 56 Figure G12.1: Garbage Collection, Biogas, and Cylinder Gas 57 iMPROV iNG THE RURAL iNVESTMENT CL i MATE F O R B U Si N E S S E S TAB L E S V ii List of TABLES Table 3.1: Average Wholesale Price, Distance, and Transport Cost 13 Table A1.1: Policy Recommendations of Six Pilot RiCA Projects 27 Table B1.1: Establishment of Farm and Nonfarm Enterprises 31 Table B1.2: Enterprise Size, Age, and Manager’s Characteristics 31 Table B1.3: Workforce Composition 32 Table B2.1: Household Characteristics 32 Table B3.1: Community Characteristics 33 Table B3.2: institutions Available in the Community 33 Table B3.3: infrastructure in the Community 34 Table B3.4: Business/Agriculture Services Available in the Community 34 Table D2.1: Percentile Ranking of RiC indicators: Farm Enterprises 40 Table D2.2: Percentile Ranking of RiC indicators: Nonfarm Enterprises 41 Table E1.1: Motives to Start Business (% of Enterprises) 43 Table E1.2: Obstacles to Start Business (% of Enterprises) 44 Table E1.3: Reasons Not Tried to Start Nonfarm Business (% of Households) 44 Table E2.1: Reasons to Close Nonfarm Business (% of Households Started Business) 45 Table E2.2: Determinants of Enterprise Dynamics: Entry and Closure 45 Table E3.1: Obstacles to Maintain or Grow (% of Households Started Business) 46 Table E3.2: Determinants of Enterprise Performance: Revenues 47 Table F1.1: income increase of Household Enterprises by RiC improvement 50 AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 ACK N O W L E D G ME NT S ix ACKNOWLEDGMENTS For grants funding this study, the author thanks the Bank Netherlands Partnership Program (BNPP) and Japan Policy and Human Resource Development (PHRD). The overall project was guided by John Lamb (ARD) and at the later stage by Grahame Dixie (ARD). Valuable support was provided by consultants Jian Zhang, François Kabore, and Ehui Adovor. The data on which the report is based were obtained through a survey of the rural investment climate in four countries: Yemen, Burkina Faso, Nigeria, and Mozambique. This study was peer reviewed with comments by Stephen Mink (AFTSN), Kathleen Beegle (DECPI), and Josef Loening (AFTAR) at the concept note and decision stage. It was also reviewed with comments by ARD Core Management Committee (CMC) members at the concept note stage. Heartfelt thanks go to the specialists who willingly contributed to this review. Many considered the task important enough to donate many hours of their scarce time. It has been a pleasure to incorporate their views and comments into the review. We would like to express our thanks for the information and encouragement we received from the country team before, during, and after the rural investment climate surveys. Julie G. Villoria-Williams (Yemen, MNSAR), Pierre Rondot (Yemen, MNSAR), Abdoulaye Toure (Burkina Faso, AFTAR), Kofi Nouve (Burkina Faso, AFTAR), Lucas Akapa (Nigeria, AFTAR), Abimbola Adubi (Nigeria, AFTAR), Patrick Verissimo (Mozambique, AFTAR), and Daniel Sousa (Mozambique, AFTAR) supported and cooperated in the successful rural investment climate assessments of their respective countries. In addition, Juergen Voegele (Sector Director, ARD) and Mark Cackler (Sector Manager, ARD) provided guidance and encour- agement throughout the project. Karen Brooks (Sector Manager, AFTAR), Martien Van Nieuwkoop (Program Coordinator, AFTAR), and Michael Morris (Program Coordinator, AFTAR) provided cooperation and support during the project. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 ACR O N Y MS A N D A BBRE ViAT iONS xi ACRONYMS AND ABBREVIATIONS ARD Agriculture and Rural Development MZ Mozambique AFTAR Africa Region: Agriculture and Rural NG Nigeria Development NGOs nongovernmental organizations AFTSN Africa Region: Sustainable Development Front NF nonfarm Office OECD Organization for Economic Cooperation and BF Burkina Faso Development BNPP Bank Netherlands Partnership Program PHRD Policy and Human Resource Development CFED Corporation for Enterprise Development PRS Political Risk Services CMC Core Management Committee RIC rural investment climate DECPI Development Research Group: Poverty and RICA Rural Investment Climate Assessment Inequality RNFEs rural nonfarm enterprises EASPR East Asia and Pacific Region: Poverty Reduction and Economic Management RUPRI Rural Policy Research Institute GDPs gross domestic products UN United Nations HH household UNIDO United Nations Industrial Development Organization HNB Hatton National Bank US$ U.S. dollars IT information technology WDR World Development Report LCSAR Latin America and the Caribbean Region: Agriculture and Rural Development YM Yemen MNSAR Middle East and North Africa Region: Agriculture and Rural Development AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 E x E C U T iV E S U MMARY x iii EXECUTIVE SUMMARY An appropriate rural investment climate (RIC) is essential for rural businesses to be successful and generate employment and income in their communities. Improving the investment climate could facilitate income-generation activities in both farm and nonfarm sectors, thus reducing rural poverty. Nonfarm sector–focused growth, combined with agricultural growth, has been shown by Delgado et al. (1998) to have a significant impact on the local economy through the generation of employment and income. This study is the first to focus on both farm and nonfarm enterprises in its 2010 surveys of RIC in Yemen, Burkina Faso, Nigeria, and Mozambique—unlike six previous RIC assessment (RICA) pilot projects that focused only on nonfarm enterprises. This report assesses the weaknesses and strengths of all RIC components in farm and nonfarm enterprises of the four countries surveyed, and recommends measures to address the weaknesses. The report identifies similar business obstacles for farm and nonfarm enterprises and four critical areas of the RIC to be improved. The results of the RICA are based on analyses of obstacles perceived by rural entrepreneurs and on assessments by RIC indicators, enterprise entry and exit, and enterprise performance. To have maximum synergy effects, farm and nonfarm enterprises should be promoted together. RIC FRAMEWORK Based on the recommendations of the six previous projects, a framework was developed to assess the RIC. The frame- work divides RIC components into the following categories—market development, access to markets, market information, women’s policy, access to finance, access to inputs, management services, agriculture extension services, government regulations, infrastructure, and other government-related RIC components (political and economic stability, health, security and safety, education, disaster management, etc.). SUGGESTIONS OF THE INTERVENTIONS BASED ON RICAs By consolidating the findings of the RICAs (including perceived obstacles, assessment by RIC indicators, enterprise entry and exit, and enterprise performance), four areas were identified as in need of improvement: (1) market demand, (2) access to markets, (3) access to finance, and (4) business services. (1) Market Demand KEY FINDINGS SUGGESTIONS OF THE INTERVENTIONS 1-1. Weak demand caused by limited markets 1-1. Increase market demand by: (a) Upgrading or developing rural marketplaces with required amenities man- aged by the local people (b) Improving roads and transports to connect customers to markets (c) Exploring new markets by differentiating products/services and by forming a group of entrepreneurs with similar products/services (practice econo- mies of scale) (d) Providing market information to customers AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 xi V Ex EC UTiV E S UM M A RY (2) Access to Markets KEY FINDINGS SUGGESTIONS OF THE INTERVENTIONS 2-1. Poor quality roads, such as dirt roads 2-1. Improve roads to connect entrepreneurs and customers to marketplaces 2-2. High transportation cost 2-2. Develop an affordable public transportation system after a feasibility study 2-3. Limited market knowledge or information 2-3. Develop a mechanism to deliver market and price information for selected products and services, e.g., mobile phones (3) Access to Finance KEY FINDINGS SUGGESTIONS OF THE INTERVENTIONS 3-1. Limited availability of financial institutions 3-1. Increase the availability of microfinance institutions to serve rural areas and 3-2. Entrepreneurs’ reluctance to apply for loans improve the government regulatory structure of microfinance institutions 3-3. Limited capital/funds and lack of working 3-2. Increase the availability of microfinance and the capacity of entrepreneurs to capital borrow (their financial literacy) 3-4. Low level of formal banking or not having a 3-3. Establish a perpetual fund for rural entrepreneurs and establish or strengthen a checking or savings account credit guarantee scheme with the support of small business agencies 3-4. Promote the habit of saving by requiring entrepreneurs to have some money set aside for business operations, e.g., for working capital and fixed asset investment (4) Business Services KEY FINDINGS SUGGESTIONS OF THE INTERVENTIONS 4-1. No or limited business services for rural 4-1. Establish or expand business management services to rural areas entrepreneurs 4-2. Improve access to market information by improving access to cell phones 4-2. Limited availability of information technol- 4-3. Identify the skills and managerial expertise needed by local businesses and ogy (IT) and cell phones establish vocational and management training programs 4-3. Limited skills and management training 4-4. Establish essential business management services, including services to available increase quality and productivity and provide appropriate technology 4-4. Limited improvement or innovation in 4-5. Secure inputs locally—review and identify business opportunities that use productivity/management local inputs 4-5. Limited access to inputs 4-6. Teach entrepreneurs to set aside money equivalent to their wages for running 4-6. Low percentage of paid workers, including their businesses managers 4-7. Overcome seasonality: (i) promote farm and nonfarm enterprises together, 4-7. Seasonality of farm and nonfarm economic (ii) increase processing of agricultural products for storage, and (iii) diversify activities economic activities In addition, two other areas stood out—infrastructure (electricity and water) and government regulations (labor, tax rates, tax administration, licenses, permits, registration, and anticorruption measures). Although RICAs showed that government regulations ranked low as perceived obstacles, they will become more significant as more rural enterprises become active and formalized. For example, government regulations may hinder the expansion and operation of businesses in rural areas. The government needs to streamline government regulations in the near future to pave the way for future growth. CONCLUSION Rural businesses, both farm and nonfarm, are becoming an increasingly important source of livelihood in rural areas, but to succeed, they must have a more supportive RIC. Rural entrepreneurs need better access to markets, loans, and manage- ment services if they are to successfully expand their income-generation activities. To accommodate that expansion, market demand has to increase; therefore, any effort to improve the RIC must seek to stimulate demand as well. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 1 — iN T RODUCT i ON 1 Chapter 1: INTRODUCTION An appropriate rural investment climate (RIC) is essential A recent Ethiopia RIC Assessment (RICA) report identified for rural businesses to be successful and to generate em- nonfarm enterprises as being more often complementary to ployment and income in poverty-stricken areas. Improving than substitutes for farm enterprises (World Bank 2009b). the investment climate would facilitate income-generation This finding confirms farm and nonfarm growth linkages activities in farm and nonfarm sectors, thereby reducing identified by Delgado et al. (1998) as contributing positive rural poverty.1 The urgency of this task is great in the four multiplier effects to the local economy in selected Sub- countries of Yemen, Burkina Faso, Nigeria, and Mozambique, Saharan African countries. Delgado et al. (1998) showed that where the rural poverty rate is much higher than the urban nonfarm sector–focused growth, combined with agricultural rate and has remained stagnant in the last decade, as shown growth, has a significant impact on the local economy by in figure 1.1. generating employment and income. Most nonfarm activi- ties produce goods and services that are linked to agriculture Historically, the primary focus for the rural sector has been through forward, backward, and consumer-demand linkages on agriculture, particularly commercial agriculture and agri- (Hazell and Haggblade 1993). Often the condition of prevail- business, which were perceived to be the main drivers of ing low wages obscures the advantages and merits of rural rural growth. There was not much interest in other rural industrialization; therefore, agriculture often remains the sin- enterprises since they were thought to be almost fully de- gle driver of nonfarm sector growth in rural areas (Reardon pendent on agriculture and unimportant to the dynamics of 1997). rural economies. This changed in the 1990s, however, as donors focused more on poverty reduction. Household sur- This report focuses on both farm and nonfarm enterprises veys designed to gather new information on the sources of in the four countries shown in figure 1.1: Yemen, Burkina rural household income were conducted, and as the results Faso, Nigeria, and Mozambique. In this, it departs from six came in, more attention was given to the importance of rural previous RIC pilot projects in Nicaragua, Sri Lanka, Tanzania, nonfarm enterprises (RNFEs) in rural livelihoods.2 Work by Indonesia, Benin, and Ethiopia, which focused solely on non- Reardon et al. (2001) initiated a stream of research efforts farm enterprises. The RIC team revised the RIC question- recently summarized in a major study led by the International naires of communities, households, and enterprises. It also Food Policy Research Institute (Haggblade et al. 2007). revised the methodological guidelines for conducting a sur- Within the World Bank, the 2003 rural strategy “Reaching vey and the survey training manual (Sawada 2010a; 2010b). the Rural Poor� realized the importance of RNFEs, and the The questionnaires and guidelines were developed during 2008 World Development Report (WDR) “Agriculture for the preparation and implementation of the surveys in Yemen Development� embraced the view that a sound RIC and a and Burkina Faso. The same questionnaires were used for rapidly growing agriculture sector are basic ingredients for a both farm and nonfarm enterprises, with special emphasis dynamic rural economy. on household enterprises.3 The objectives of this report are to assess the weaknesses and strengths of all RIC components in farm and nonfarm 1 Refer to N. Sawada (2010a) “Methodological Guidelines: Rural Investment Climate Survey� and N. Sawada (2010b) “Training enterprises in four countries and to recommend measures to Manual: Rural Investment Climate Survey� for more in detail on the RIC surveys. The Rural Investment Climate Survey consists of community, households, and enterprises questionnaires. 3 The survey data are not representative of each country, but rather 2 Nonfarm enterprise activities include all farm and nonfarm value representative of each province, state, governorate, and district, addition activities (e.g., postharvest value addition or food pro- respectively, in Burkina Faso, Nigeria, Yemen, and Mozambique cessing, manufacturing, services, etc.). due to budget constraints. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 2 CH A PTER 1 — iNTR OD UC Ti ON FIGURE 1.1: Poverty Below the National Poverty Line Yemen Burkina Faso Rural Urban Rural Urban 100 100 80 80 51.1 50.7 52.3 60 42.5 40.1 60 40 40 20 32.3 20 20.7 15.9 19.2 0 0 10.4 1998 2005 1994 1998 2003 Nigeria Mozambique Rural Urban Rural Urban 100 100 69.8 71.3 80 63.8 80 55.3 56.9 60 60 36.4 62 40 59.2 40 51.5 43.1 20 30.4 20 20.7 0 0 1992 1996 2004 1996 2003 2008 Source: The United Nations MDGs Report. (http://mdgs.un.org/unsd/mdg/Default.aspx?q=poverty). improve the RIC. The following topics were excluded from the basis for the RICA, which is presented in Chapter 2.5 the detailed analysis because they are outside the scope of Recommendations to provide practical solutions and direc- this study: tion for policy makers and project designers of rural income generation activities are presented in Chapter 3. These recom- 1. Urban versus rural investment climate mendations focus on the four RIC areas identified as critical. 2. Gender analysis (male versus female entrepreneurs) Appendix A states the summary of policy recommendations in 3. Development of rural “Doing Business� indicators the previous six pilot RIC projects. A comparison of character- istics of communities, households, and enterprises is summa- The RIC survey data of the four countries in this study can rized in Appendix B. Obstacles perceived by rural entrepreneurs be extended for use in researching these additional topics if are assessed in Appendix C. Appendix D includes a definition additional funds are available. of RIC indicators and an assessment by percentile rankings of This report identifies similar business obstacles for farm and RIC indicators. An analysis of enterprise dynamics is shown nonfarm enterprises and proposes improvements in four criti- in Appendix E for entry, exit, and performance. Appendix F cal areas of the RIC.4 Analyses of the obstacles perceived by shows income simulation results of improvement in the RIC. rural entrepreneurs and assessments by RIC indicators provide Appendix G shows findings of other RIC components. 4 Refer to Appendix G for other government-related RIC compo- 5 RIC indicators represent major RIC components, along with their nents. Currently, these components (except infrastructure) are respective subcomponents. Refer to Appendix D for more de- irrelevant, but as more business activities are formalized in rural tailed definitions and percentile ranking data for each RIC com- areas, government-related components may become more rel- ponent and subcomponent. Refer to Appendix B for obstacles evant and, hence, worth improving in the near future. perceived by entrepreneurs. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 2 — R U R AL iNVE ST ME NT CL i MAT E ASSE S S MENTS 3 Chapter 2: RURAL INVESTMENT CLIMATE ASSESSMENTS In conducting its RICAs, this study reviewed the findings and access to markets, both of which are instrumental in and recommendations of six pilot RIC projects conducted in stimulating the supply side. The development of rural mar- Sri Lanka (World Bank 2004), Tanzania (World Bank 2007a), ketplaces expands the participation of both customers and Nicaragua (World Bank 2007b), Indonesia (World Bank 2006a), entrepreneurs. That is, increasing demand provides opportu- Benin (World Bank 2009a), and Ethiopia (World Bank 2009b). nities for the supply side to grow. Access to markets includes Based on those reviews, a framework for a sustainable RIC transportation as well as roads to connect customers and was formulated (figure 2.1)6 and essential RIC components entrepreneurs to markets. In addition, having current market for the demand and supply sides were identified: market de- information further enhances customers’ and entrepreneurs’ velopment, access to markets, market information, access ability to participate in the markets. to finance, access to inputs, government regulations, finance policy, and management/agriculture extension services. The supply side for rural entrepreneurs includes access to finance, access to inputs, and availability of management and Women’s policy is included in the framework as well be- agriculture services. It also includes government regulations cause of the importance of gender equality, even though (labor, tax, license, permits, registration, and anticorruption) gender analysis was excluded from the scope of this re- and other government-related RIC components such as infra- port. Because most agricultural land is owned by men, rural structure (electricity, water, and telecommunication), security, women seek alternative employment mostly in nonfarm health, education, disaster management, political stability, sectors. Studies show that women have the potential to and economic stability. Access to finance is defined as the be successful entrepreneurs (Reardon 1997; Barrett et al. availability of loans to entrepreneurs for start-up capital and 2001). However, women entrepreneurs in rural areas have working capital. The availability of a loan may be improved limited education, resources, and support for their pursuit through management services to entrepreneurs to make their of nonfarm enterprise activities; consequently, they have business more profitable. Appropriate training in job skills and little choice but to engage in a limited selection of low-profit management further enhances the capability of entrepreneurs nonfarm activities rather than exploit more advantageous to increase their profits. Gaining knowledge of management market opportunities (World Bank 2009b; Sawada and practices may especially help entrepreneurs to determine the Harishchandra 2011). Increasingly, RNFEs are run by women. appropriate skills and technology required to conduct their operations successfully. Management knowledge may also The framework also includes a second tier of government- help entrepreneurs to improve access to inputs. related RIC components comprising infrastructure, health, education, security, disaster management, and political and For this chapter, the RICs of Yemen, Burkina Faso, Nigeria, economic stability. All these components are interrelated and and Mozambique were analyzed (Sawada and Adovor 2011a; interact to support rural farm and nonfarm businesses. 2011b; 2011c; and 2011d) to determine which RIC components affect the entry, exit, and performance of rural businesses.7 RIC components may be further categorized into demand Among the key components in the RIC framework, the analysis and supply sides; to promote the supply side of rural en- identified four critical areas: market demand, access to markets trepreneurs’ economic activities, it is important to improve (roads and transport), access to finance, and availability of man- the demand side of the investment climate. The demand agement/agriculture extension services (including technology side at the community level includes market development and job training in the skills required to run a business). 6 Refer to Appendix A for a detailed summary of recommenda- 7 For more detailed analyses of the data, refer to Appendix E: tions from the six pilot projects. Enterprise Dynamics. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 4 C H A PTER 2 — R URA L iNVES TMENT C Li MATE A S S ES S M ENTS FIGURE 2.1: RiC Framework Women’s Policy Market Development Finance Policy Equality Larger Markets Loans; Savings Awareness Microfinance Rural Markets (Facilities, Electricity, Water, Transports) Market Information Access to Market (Telecommunication) (Roads; Transport) Government Access to Inputs Rural Businesses Regulations Supplies; Raw Materials; Farm & Nonfarm Labor; Tax; License; Permit; Merchandise for trade Registration; Anticorruption Management Services Agriculture Extension Services Skill, Technology, and Management Skill, Technology, and Management SME Promotion Policy Agriculture Policy Infrastructure: Electricity; Water; Telecommunication; Transport/Delivery Service Government-Related RIC Political & Economic Health Security & Safety Education Food Disaster Stability Price Mgt. Source: Diagram developed by author. The RIC is assessed here based on perceived obstacles and obstacles. This fact reflects the informality of rural enterpris- RIC indicators. Perceived obstacles are defined as obstacles es. As those enterprises develop and expand, government that entrepreneurs perceived as major or very severe in RIC regulations may well become as important for them as they survey questions. The objective of this assessment, which are for urban enterprises (see Appendix C). compares farm and nonfarm enterprises, is to determine the strengths and weaknesses of the RIC components and iden- Male- and female-managed enterprises have similar per- tify what needs to be improved. ceived obstacles, but those obstacles are generally per- ceived by higher percentages of female entrepreneurs. In Mozambique, telecommunication, transport, electricity, tech- 2.1 OBSTACLES PERCEIVED BY RURAL nology, and postal/delivery services are perceived as greater ENTREPRENEURS obstacles by male entrepreneurs (see Appendix C). Farm and nonfarm enterprises alike face three similar perceived obstacles in all four countries: limited access to 2.2 RIC INDICATORS finance, limited access to markets, and poor transportation RIC indicators were used to assess the RIC in various coun- (figure 2.2). In Mozambique, the obstacles also include poor tries as well as regions within a country.8 These assessments telecommunication services and limited technology, whereas reveal the strengths and weaknesses of RIC components. in Yemen they include scarcity of electricity for nonfarm The methodology applied in these assessments is the es- enterprises and water for farm enterprises. Availability of tablished methodology of “Doing Business,� using percentile business services (agriculture for farm enterprises) was not ranking and the simple averaging method.9 perceived as a major or very severe obstacle by a majority of entrepreneurs. 8 For each regional comparison within the country of RIC indicators, Government regulations are generally ranked low as obsta- refer to Sawada and Adovor (2011a, 2011b, 2011c, and 2011d) for Yemen, Burkina Faso, Nigeria, and Mozambique, respectively. cles. Courts, labor regulations, tax rates, tax administration, 9 To calculate the percentile rankings, the lowest level and the licenses and permits, security, land-use policy, and labor and highest level of RIC indicators were selected from the average education levels are not perceived as major or very severe data for communities in each of the four countries. The country iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 2 — R U R AL iNVE ST ME NT CL i MAT E ASSE S S MENTS 5 FIGURE 2.2: Farm and Nonfarm Comparison of Perceived Obstacles (% enterprises) Burkina Faso Nigeria Farm Farm Nonfarm Nonfarm Court Court Financing Corruption Financing Corruption Market Labor reg Market Labor reg Transportation Land use Transportation Land use Telecom Tax admin Telecom Tax admin Electricity Postal/delivery Electricity Postal/delivery Technology Security Technology Security Water Licenses Water Licenses Business services Customs Business services Customs Labor edu Tax rate Labor edu Tax rate Mozambique Yemen Farm Farm Nonfarm Court Court Financing Corruption Nonfarm Financing Corruption Market Labor reg Market Labor reg Transportation Land use Transportation Land use Telecom Tax admin Telecom Tax admin Electricity Postal/delivery Electricity Postal/delivery Technology Security Technology Security Water Licenses Water Licenses Business services Customs Business services Exports Labor edu Tax rate Labor edu Tax rate Source: 2010 RIC Surveys. The findings of the RIC indicators were interesting because they differed from the findings of perceived obstacles. For example, the RIC components commonly identified as needing to be improved were management (including inno- FIGURE 2.3: RiCA: Farm Enterprises vation/improvement), technology, and business/agriculture Yemen BF services, none of which was identified as significant in the NG MZ analysis of perceived obstacles. The perception of business Corruption or agriculture services, management innovation/improve- ment, and technology as low-level obstacles may mean that Management Security entrepreneurs did not recognize their importance because Telecommunication Water they were not familiar with them. Instead, they focused on the immediate problems they encountered in their business Technology Transportation operations (figures 2.3 and 2.4). Labor Electricity average data were compared with the selected lowest and high- est community data to calculate the percentile rankings of each Agriculture service Market subindicator, and then simple averaging of subindicators was ap- Finance Government plied to derive percentile rankings of the main RIC indicators. Refer to Appendix D for definitions and percentile rankings of Source: 2010 RIC Surveys. RIC indicators. Note: 100 is the worst level; 0 is the best. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 6 C H A PTER 2 — R URA L iNVES TMENT C Li MATE A S S ES S M ENTS FIGURE 2.4: RiCA: Nonfarm Enterprises FIGURE 2.5: Rates of Try-to-Enter; Entry Success; and Exit of Nonfarm Businesses Yemen BF NG MZ (% of households) Corruption Tried to start nonfarm business Management Successful to start Security Closed within 3 years 100 90.2 87.8 Telecommunication Water 76.6 80 65.1 Technology Transportation 60 52.5 43.8 47.1 41.9 40 Labor Electricity 38.5 20 17.0 Business service Market 0 9.0 4.3 Finance Government YM BF NG MZ Source: 2010 RIC Surveys. Source: 2010 RIC Surveys. Note: 100 is the worst level; 0 is the best. Telecommunication and labor issues were identified at level limited access to finance and inputs as their top two rea- 50 or worse for three African countries. Telecommunication sons for not having started a nonfarm business. The avail- includes cell phone and computer use; labor issues include ability of inputs was cited as a key element for starting a new years of managerial experience and skills obtained. Another business. important finding is that government-related indicators ranked slightly higher than the mid-level obstacles, exclud- About half of households tried to start nonfarm businesses, ing corruption. The level of these indicators (licenses and but the success rates may vary from country to country. The permits, tax system, registration, etc.) is enough to warrant percentages of households that tried to start nonfarm busi- attention now, even though many enterprises are informal, nesses are in the range of 41.9 to 52.5 percent. The lowest so that steps to improve government regulations and pro- success rate is 65.1 percent in Burkina Faso, whereas the cedures are already underway as those rural enterprises highest rate is 90.2 percent in Nigeria, as shown in figure 2.5. become formalized. 2.3.2 Motives for Starting a Business A desire for social independence was the top motive given 2.3 OVERALL ASSESSMENTS AND RECOMMENDATIONS in Burkina Faso and Nigeria for starting farm and nonfarm enterprises, whereas it was sixth for nonfarm enterprises By combining perceived obstacles and RIC indicator assess- and fifth for farm enterprises in Yemen and Mozambique. ments, the following areas were identified as ripe for improve- Market opportunity was the top motive for Yemeni nonfarm ment: market demand, access to markets (transport), access enterprises and the second for Nigerian farm enterprises. to finance, business/agriculture services, management, and Obtained skill was the top motive for farm enterprises in technology. Labor and telecommunication could be added to Mozambique, the second for farm and nonfarm enter- the list. Improving these areas would lessen the obstacles to prises in Yemen, and the second for nonfarm enterprises in starting a business and the reasons for closing it and would Nigeria.10 Individuals having obtained management knowl- improve business performance. It could also boost the popu- edge are in a good position to exploit market opportunities. lation of the rural communities, as described below. Skills may be acquired through vocational training. In gen- eral, two main reasons, like perceived market opportunities 2.3.1 Obstacles to Starting a Business and lack of options from farming, motivate people to start Limited access to finance (start-up capital and loans for businesses. fixed assets), access to inputs, and market knowledge were identified by farm and nonfarm entrepreneurs as the main 10 See Table E1.1 of Appendix E for detailed percentages of each obstacles to start-ups (Appendix E). Similarly, they identified motive. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 2 — R U R AL iNVE ST ME NT CL i MAT E ASSE S S MENTS 7 2.3.3 Reasons to Close a Business FIGURE 2.6: income increase (%) by 5% Lack of working capital and unprofitable operations were cit- improvement Each ed as the two top reasons for nonfarm enterprises to close, Farm Nonfarm as shown in Appendix E. Lack of working capital reflects lim- 40 ited access to finance and lack of management knowledge. Unprofitable operations may be caused by weak demand, 30 27 25 23 the high cost of inputs and transport, and low productivity. The death rates may vary from country to country. The high- 20 24 18 est death rate after starting nonfarm businesses was 38.5 7.2 7.1 10 percent in Mozambique, whereas the lowest was 4.3 per- cent in Nigeria, as shown in figure 2.5. 0 3.6 YM BF NG MZ 2.3.4 Performance Source: Own calculation based on regression results of Appendix E. Regressions of enterprise performance show that access to finance, cell phone use, innovations/improvements, busi- ness/agriculture extension services, and transportation are more or less positively correlated with performance, some- for transportation, management innovation/improvement, times significantly so, as shown in Appendix E. However, business services, use of a cell phone, use of electricity, some opposite signs were identified for business/agriculture and use of water) leads to an income increase of 7.1 to 24 extension services for farm enterprises in Burkina Faso and percent for nonfarm enterprises and 3.6 to 27 percent for Nigeria and nonfarm enterprises in Mozambique. farm enterprises (figure 2.6). These figures may be under- estimated because of the exclusion of opposite signs. Since Improving the RIC may significantly increase income genera- regression reflects correlation instead of causation, under tion.11 A 5-percent improvement in each of 8 RIC variables certain circumstances the signs may signal the opposite of (having a bank account, having a loan, use of car/bus/truck the expected causation directions. 11 Refer to Appendix F for more detailed simulation results. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 9 Chapter 3: IMPROVEMENT IN RURAL INVESTMENT CLIMATE This chapter examines four areas critical to the RIC (market obstacles is similar in both types of enterprises (figures 3.1 demand, access to markets, access to finance, and business/ and 3.2). For nonfarm enterprises, the number of competitors agriculture extension services) and recommends measures correlates with entrepreneurs’ perception of weak demand to improve them and better support rural farm and nonfarm and too many competitors as obstacles. For farm enterprises, entrepreneurs. Increasing market demand is essential for the perceptions of weak demand and too many competitors existing rural businesses to expand without a loss of market are not closely correlated. In Nigeria, the average number share. Improving access to markets helps increase market of competitors (19) is smaller than that in Burkina Faso and demand by increasing the number of customers. Improving Yemen, but it is perceived as an obstacle by 44 percent of access to finance provides entrepreneurs with more funds Nigerian entrepreneurs, the highest of the three countries. to start a business or to use as working capital. Business/ This is higher even than in Yemen, where the average num- agriculture extension services provide farm and nonfarm ber of competitors in farm enterprises is 42 and is consid- entrepreneurs with basic business management knowledge, ered a major or very severe obstacle by 43 percent of farm including identifying the technology and skills needed to op- entrepreneurs. erate a productive and profitable enterprise. In addition, they provide farm enterprises with agriculture-related services Markets are available at almost all district levels, but the avail- such as agricultural technology, seeds, and fertilizers. ability at the community level is relatively low, with the excep- tion of Yemen. In Burkina Faso, Nigeria, and Mozambique, 65 to 72 percent of communities have a market, whereas 94 3.1 MARKET DEMAND percent have one in Yemen (figure 3.3). The main custom- It is vital to increase market demand in rural areas if rural ers of nonfarm enterprises are located within the community businesses are to grow. If market demand stays the same in all four countries (67 to 78 percent), whereas the main while the number of entrepreneurs increases or existing customers of farm enterprises are located outside of the businesses expand, profitability may decrease due to the community in Yemen and Mozambique and within the com- limited number of customers. munity in Burkina Faso and Nigeria (figure 3.4). 3.1.1 Market Demand and Competitors Increasing Market Demand Weak demand correlates with too many competitors. Market demand can be increased (i) by developing or upgrad- If there are too many competitors relative to the existing ing rural marketplaces; (ii) by improving access to markets, demand, then demand may weaken. If there are too few roads, and transport (refer to section 3.2); (iii) by using mar- competitors, demand may exceed the supply, giving en- keting techniques to identify new customers; and (iv) by trepreneurs a chance to expand their businesses to meet providing market information (refer to section 3.4). the excess demand. As shown in figure 3.1, too many The construction of a new market in the community stimu- competitors and too little demand for goods and services lates local demand for goods and services and provides are perceived as major or very severe obstacles by 37 to 44 opportunities for more transactions. The percentage of percent of nonfarm entrepreneurs and 27 to 44 percent of households benefitting from the new markets is generally farm entrepreneurs. quite high (figure 3.5). Whether new or upgraded, rural mar- The number of competitors is less in nonfarm enterprises ketplaces should include such necessary amenities as work than farm enterprises, but the perception of competitors as premises, electrical connections, and a water supply. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 10 C H A PTER 3 — iMPR OVEMENT iN R URA L iNVES TMENT C Li M ATE FIGURE 3.1: Weak Demand/Too Many Competitors FIGURE 3.2: Average Number of Competitors A Major or Very Severe Obstacle (%) A Major or Very Severe Obstacle (%) Farm Nonfarm Farm Nonfarm 50 44 50 43 42 38 39 40 40 44 37 30 34 30 20 19 20 27 20 14 10 10 11 12 6 9 0 0 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. Source: 2010 RIC Surveys. FIGURE 3.3: Market Availability FIGURE 3.4: Community Customers Community markets Farm District markets Nonfarm 100 100 98 97 100 100 77 74 76 80 94 80 67 78 60 72 70 60 67 65 40 40 47 36 20 20 0 0 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. Source: 2010 RIC Surveys. FIGURE 3.5: Community Project A community-driven approach may be the most effective and New market construction efficient way to develop a new market or upgrade an exist- % HH affected ing one. This approach should include a study of the exist- 100 ing marketplaces at the outset; the markets would then be 100 90 upgraded accordingly. The marketplaces should be managed 79 80 67 and maintained by the local community. Narayan et al. (2009) stress that it is important to transform markets into ones that 60 poor people can access and participate in fairly because of- 40 ten poor people do not have that privilege. The solution is to 22 expand access to marketplaces in an equitable way. 20 8 9 3 Other approaches go beyond the community level. One is to 0 increase demand by improving roads to connect more cus- YM BF NG MZ tomers to markets and by improving transport to the markets Source: 2010 RIC Surveys. (see section 3.2). Another is to use marketing techniques to iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 11 identify new customers. For example, entrepreneurs can FIGURE 3.6: Dirt Roads differentiate their products/services to meet the needs of Within the community a specific segment of the market identified through market Intercommunity research. Or they may use economies of scale to target a larger market by forming a group of entrepreneurs with 95 95 similar products/services. A related approach is to provide 100 81 market information to customers as well as entrepreneurs 90 80 (see section 3.4). These three approaches are discussed in 90 the sections that follow. 60 60 40 28 3.2 ACCESS TO MARKETS Access to markets encompasses physical infrastructure, 20 access to products or services, and availability of market 0 13 information to rural entrepreneurs. Physical infrastructure includes feeder or access roads and transportation connect- YM BF NG MZ Source: 2010 RIC Surveys. ing to primary and secondary markets. Access to products or services includes availability of and access to input and FIGURE 3.7: Roads as Obstacles output markets. Market information may vary depending Farm on the specific products or services available. As previously noted, improving access to markets benefits both customers Nonfarm and entrepreneurs. 100 3.2.1 Roads 80 The condition of existing roads is not ideal for accessing existing markets. Most roads connecting communities and 60 49 within communities are dirt roads in three of the African 40 countries surveyed; only in Yemen are most road surfaces 40 25 25 43 made of gravel and asphalt (figure 3.6). Farm and nonfarm 20 30 31 entrepreneurs had a similar perception of roads as a major or 21 very severe obstacle in all the countries except Mozambique, 0 where nonfarm entrepreneurs’ perception was 18 percent YM BF NG MZ higher than farm entrepreneurs’ (figure 3.7). Source: 2010 RIC Surveys. FIGURE 3.8: New Road/Bridge Improving Roads The World Bank (2009c) emphasizes that roads connect New road-bridge construction people not only to markets, but also to essential services like % HH affected in the community health services and schools. New road or bridge construction 100 84 improves market access for both suppliers and customers, thus increasing market demand and enabling entrepreneurs 80 83 to transport more supplies to meet that increased demand. 61 56 The number of households benefitting from new road/bridge 60 construction is generally quite high—56 to 84 percent of the 33 40 community households surveyed (figure 3.8). For example, 39 in rural Bhutan, eight feeder roads were constructed (a total 32 20 length of 129 kilometers) in five districts where isolated rural 20 communities had to walk one to three days to reach markets 0 or other services. Both travel time and transport costs de- YM BF NG MZ clined by about 75 percent (World Bank 2009c). Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 12 C H A PTER 3 — iMPR OVEMENT iN R URA L iNVES TMENT C Li M ATE 3.2.2 Transportation FIGURE 3.9: Obstacle: Transport The poor quality and high cost of transportation is an extra Farm burden that diminishes the profitability of small rural busi- Nonfarm ness operations. Many entrepreneurs perceived transporta- 100 tion as one of the top four obstacles (see Appendix C for other obstacles). Cost may be a related factor, along with 80 the means of transport and quality of roads. In Burkina Faso, entrepreneurs do not perceive the cost of transport as a ma- 60 39 jor obstacle because their businesses rely on foot transport 40 40 40 (farm, 28 percent; nonfarm, 34 percent) or bicycle (farm, 33 25 percent; nonfarm, 33 percent) instead of motorized vehicles. 31 37 20 29 However, in the other three countries, where cars are used 18 for transport more than in Burkina Faso, more entrepreneurs 0 regard transportation as a major obstacle (farm, 29 to 39 per- YM BF NG MZ cent; nonfarm, 31 to 40 percent) (figure 3.9). Source: 2010 RIC Surveys. Countries vary greatly in their use of motorized vehicles (cars, trucks, and buses) as a means of transport. In Yemen FIGURE 3.10: Car/Bus/Truck as Means and Nigeria, 62 to 77 percent of entrepreneurs use motorized of Transport vehicles, whereas in Burkina Faso, as we have seen, only Farm a small fraction does so. Similarly, in Mozambique, only 30 Nonfarm percent of farm entrepreneurs and 50 percent of nonfarm 100 entrepreneurs use motorized vehicles (figure 3.10). 77 80 66 Only a relatively small percentage of entrepreneurs managed to improve their mode of transport. Nigeria is the highest 60 50 62 64 with about 10 percent of entrepreneurs reporting improve- ment during the last year (figure 3.11). A low level of im- 40 provement was reported by farm and nonfarm entrepreneurs in Burkina Faso, farm entrepreneurs in Yemen, and nonfarm 20 30 7.6 entrepreneurs in Mozambique. 2.5 0 If transport costs are too high, that reduces the profits of YM BF NG MZ entrepreneurs. The patterns of transport costs to district Source: 2010 RIC Surveys. and provincial markets are similar for the four countries. For example, the percentage of transport costs appears to be the highest in Mozambique, where that of rice is 4.3 times FIGURE 3.11: Transport improvement that in Yemen, 3.1 times that in Nigeria, and 2.7 times that New Mode of Transport in Burkina Faso (figure 3.12). (The percentages of transport costs were calculated based on the cost of transporting a 50- Farm Nonfarm kg bag to district and provincial markets and the wholesale 15 price of a 50-kg bag of rice and maize (table 3.1). 10 Improving Transportation 10 To reduce the cost of transportation, an affordable transpor- 7.2 6 tation system must be developed. Constructing new access 9.8 roads is not sufficient. Ellis and Hine (1998) state that de- 5 spite large investments in rural road building, the expected 2.1 3.5 2 increases in traffic and economic activity have not always materialized. For example, this could be a good private sec- 0 0 tor option to invest in buying a used minibus and operating it YM BF NG MZ after conducting a feasibility study. Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 13 FIGURE 3.12: Transport Cost as a Percentage of Wholesale Prices (%) Rice 50 kg to district Rice 50 kg to province Maize 50 kg to district Maize 50 kg to province 16 16 15.3 12 12 10.1 8.7 12.3 7.2 8 8 3.7 8.1 7.3 3.3 3.3 5.7 4 2.3 4 4.5 2.7 0 2.0 0 1.4 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. Note: BF wholesale price of maize was based on a 100-kg bag, so this was set to one-half for 50 kg. TABLE 3.1: Average Wholesale Price, Distance, The lack of market knowledge was also considered a major and Transport Cost obstacle to operating a nonfarm business once it was start- YM BF NG MZ ed, and it was one of the reasons given for not even trying Wholesale price rice 50 kg (US$) 43 14 39 25 to start a new nonfarm business. The percentages of house- holds that did not even try to start a business were especially Wholesale price maize 50 kg (US$) 26 17 31 20 high in Nigeria and Mozambique; furthermore, about 16 to Distance (km) to district market 36 58 22 28 17 percent of households that did start a nonfarm business Distance (km) to provincial market 89 141 53 35 perceived the lack of market opportunity/knowledge as an Transport cost to district market (US$) 0.58 0.62 1.04 2.00 obstacle to operating (figure 3.13). Transport cost to provincial market (US$) 0.86 1.21 2.24 3.04 Source: 2010 RIC Surveys. Providing Market Information The first step in providing market information is to determine how to deliver market and price information for selected products or services in each local area. A small market study should be conducted to identify what information about prod- 3.2.3 Market Information ucts and services is important in the area. The proliferation Having access to market information enables existing or po- of cell phones in rural areas may be the answer to finding tential entrepreneurs and customers to broaden their knowl- a delivery mechanism. Narayan et al. (2009) conclude that edge of the market, take advantage of market opportunities, connections to market information and market know-how are and start new businesses. Market knowledge was cited vital for rural entrepreneurs to be successful. by entrepreneurs as one of their top motives for starting a business. Excluding income-related motives and social inde- 3.3 ACCESS TO FINANCE pendence, which were the top motives for starting a new business in Burkina Faso and Nigeria, market opportunity and Access to finance is one of the most important assets for a obtained skill were the other top two motives. They were ei- business to be successful, especially for the rural poor who ther the second (MZ, NG nonfarm, BF nonfarm) or third (YM, require collateral. To improve entrepreneurs’ access to fi- NG farm, BF farm) motive, whereas start-up capital was the nance, we recommend increasing the availability of financial top motive in all four countries. Access to inputs was either institutions, improving the financial literacy of entrepreneurs, ranked as second (YM nonfarm, BF farm, and NG farm) or increasing available funds with a credit guarantee scheme, third (BF nonfarm, NG nonfarm, and MZ farm) (figure 3.13). and promoting savings. The limited availability of much- The exception was water, which was ranked the second needed loans remains a principal constraint among rural motive in Yemen farm enterprises, reflecting serious water entrepreneurs because they need loans to start and expand issues. their businesses (Islam 1997). AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 14 C H A PTER 3 — iMPR OVEMENT iN R URA L iNVES TMENT C Li M ATE FIGURE 3.13: Market Opportunity/Knowledge (% of enterprises or households) Motive to Start Business Obstacle to Start Business Reason Not Tried to Start & Farm Nonfarm Farm Nonfarm Obstacle to Operate Nonfarm 60 60 60 Not even tried Obstacle to operate 44 38 36 40 40 40 29 29 29 27 20 20 33 17 17 20 16 20 20 19 18 20 21 18 19 16 16 15 9 9 0 0 0 YM BF NG MZ YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. Note: Refer to table F1.1 in Appendix F. 3.3.1 Available Financial Institutions and South Africa) only banks are allowed to act as money In rural areas, the availability of formal financial institutions, transfer operators, so the microfinance institutions can only including microfinance institutions, is limited. Particularly in partner with a bank. Nigeria and Mozambique, there are no or few formal financial institutions in rural areas. In Burkina Faso, although the avail- 3.3.2 Reluctance to Apply for Loans ability of formal financial institutions is as high as 78 percent, Not many entrepreneurs have a loan or a line of credit. The access to finance is quite low, as shown in the following sec- highest percentage (9 percent) is farm entrepreneurs in tion (figure 3.14). Mozambique; the second (7.6 percent) is farm entrepreneurs in Burkina Faso. The availability of formal financial institu- Increasing the Availability of Microfinance tions in the community is quite high, especially in Burkina It is important not only to strengthen and increase the num- Faso, but even there only 6.3 percent of nonfarm entrepre- ber of microfinance institutions in rural areas, but also to neurs and 7.6 percent of farm entrepreneurs have a loan increase public awareness of them. Marlar (2010) indicated (figure 3.15). that 43 percent of Sub-Saharan Africans are not aware that The reasons entrepreneurs gave for not applying for a loan local microfinance options exist. In addition, governments were complex procedures, unfavorable interest rates, insuf- should improve the regulatory structure of microfinance in- ficient loan amount and maturity, fear of not being approved, stitutions. Currently, in most African countries (except Kenya no expectancy of approval, and inability to meet the collateral requirement. In Nigeria, the percentage of entrepreneurs who needed a loan but did not apply for it was slightly below FIGURE 3.14: Available institutions in the 40 percent, but in other countries, the percentages were Community (% of communities) much higher (figure 3.16). If we can reach out to those en- Financial Institution trepreneurs, the economic impact may be significant for rural Insurance Institution income generation activities. 78 80 Some variation exists across countries, but the three main 60 reasons given for not applying for a loan were complex proce- dures, fear of not being able to repay the loan, and not expect- 40 ing to be approved. In Burkina Faso, about 70 percent of entre- 31 13 preneurs did not apply for a loan due to these three reasons. 20 0 5 Fear of not being able to repay was quite high in Burkina Faso 0 0 0 at 41 percent and 42 percent of farm and nonfarm entrepre- 0 YM BF NG MZ neurs, respectively. Nigeria may be the exception: Fear of not Source: 2010 RIC Surveys. repaying and not expecting to be approved were given as the iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 15 FIGURE 3.15: A Loan or a Line of Credit FIGURE 3.16: Didn’t Apply for a Loan Having a loan Needed but not applied for Farm Nonfarm Farm Nonfarm 10 9 100 86 7.6 74 80 60 60 71 38 76 5 6.3 40 49 1.7 33 2.2 4 20 0 1.4 0 YM BF NG MZ 0 YM BF NG MZ Source: 2010 RIC Surveys. Source: 2010 RIC Surveys. main reasons by only 2.9 percent and 0 percent, respectively, apply for them. One of the reasons given, fear of not be- for farm enterprises and 2.7 percent and 1 percent, respec- ing able to repay the loan, can be overcome with appropri- tively, for nonfarm enterprises. Instead, complex procedures ate business planning and financing. Entrepreneurs can be was the main reason given, insufficient amount was second, trained in those areas through the kinds of business services and high interest rates was third (figure 3.17). described in the next section. For example, in Sri Lanka, the Hatton National Bank (HNB) developed a customer aware- ness program to develop customers’ entrepreneurial skills Improving the Financial Literacy of Entrepreneurs including financial literacy, technology transfer, personal de- Financial literacy is an important ingredient in the success velopment, and health education. It has successfully reached of rural entrepreneurs (Stark and Markley 2008). As noted out to more than 3,000 micro-entrepreneurs since 2009 above, many entrepreneurs who need loans do not even (HNB 2011). FIGURE 3.17: Reasons Why Entrepreneurs Did Not Apply for Loans Though Needed Farm Complex procedure High interest rate High collateral requirement Insufficient amount & maturity Not expected to be approved Fear of not repaying MZ 20 8 5 1 16 21 NG 19 4.7 4.1 8.2 2.9 BF 15 1 13 41 YM 15 8.6 8.6 12 4.8 0 10 20 30 40 50 60 70 80 Nonfarm Complex procedure High interest rate High collateral requirement Insufficient amount & maturity Not expected to be approved Fear of not repaying MZ 27 5 5 2 13 13 NG 15 4 4 7 1 3 BF 9 1 4 1 18 42 YM 15 11 9 1 13 8 0 10 20 30 40 50 60 70 80 Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 16 C H A PTER 3 — iMPR OVEMENT iN R URA L iNVES TMENT C Li M ATE 3.3.3 Limited Capital 3.3.4 Limited Bank Accounts Limited capital hinders entrepreneurs from starting, main- Few rural entrepreneurs have bank accounts (savings or taining, and growing their businesses. Insufficient start-up checking) and other formal financial services. The regressions capital seems to be the prime obstacle for new businesses. for performance (Appendix E3) show that when the variable Start-up capital includes both fixed assets investment and “having a bank account� is used as a proxy for financial ser- working capital, and an additional capital for business expan- vices, the results are statistically quite significant. This may sion also includes both. Insufficient capital and lack of access reflect that the entrepreneurs do not have a habit of saving to loans are the two major reasons given for not trying to part of their earnings for future use as working capital and start a nonfarm business. Lack of working capital was the for expansion. In three of the countries surveyed, 14 to 17 second reason given for business closure. Entrepreneurs percent of rural entrepreneurs have bank accounts, whereas need working capital as well as investment capital to acquire in Yemen, only 6.7 percent of nonfarm entrepreneurs and fixed assets. Although our survey showed some slight varia- 1.0 percent of farm entrepreneurs have them (figure 3.19). tion across countries, we can conclude that lack of capital is Having a bank account does not in itself improve businesses, the main deterrent to the development and success of rural but rather it implies that having an account represents the businesses (figure 3.18). use of formal financial services. Improving the Availability of Funds with Promoting Saving a Credit Guarantee Scheme When entrepreneurs expand their businesses, they require As entrepreneurs gain a greater understanding of business working capital in addition to capital for fixed assets; there- and financial planning, the funds available to them should fore, they need to be in the habit of saving. Part of their be increased, such as by establishing rural perpetual funds earnings should be retained within their business operations for rural entrepreneurs. These funds would provide loans or to meet the need for working capital and future expansion. matching grants for individual entrepreneurs or a group of en- Entrepreneurs need to learn how much money to keep on trepreneurs who have demonstrated appropriate knowledge hand. Brune et al. (2011) found that a commitment of sav- or who have been trained in financial management. ings had large positive effects on economic activities of farm enterprises in Malawi. They also state that a low savings ac- In addition to increasing the availability of funds, a small busi- count rate reflects financial illiteracy. Therefore, the habit of ness promotion agency may establish a partial credit guaran- saving should be promoted among entrepreneurs to prepare tee scheme to support entrepreneurs in properly managing for future borrowing. the money they borrow. In Ethiopia, for example, the Micro and Small Enterprise Development Agency provides a par- tial credit guarantee scheme in urban areas. Such a credit 3.4 BUSINESS/AGRICULTURE EXTENSION SERVICES guarantee scheme should be a part of the business services offered to rural entrepreneurs by small business promotion Good business management is vital to rural entrepreneurs agencies (see section 3.4). who typically have little knowledge of business practices. As FIGURE 3.18: Access to Finance Obstacle: Start-up capital Reason not tried to start Reason for closure Farm Nonfarm Insufficient capital Lack of working capital 100 83 Lack of access to loan Not profitable operations 76 80 100 100 80 71 81 80 80 59 58 62 60 77 58 65 53 60 58 60 44 40 40 51 30 40 56 57 40 20 17 16 20 20 30 3 29 0 0 0 YM BF NG MZ YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 17 FIGURE 3.19: Having a Bank Account 3.4.1 Availability of Business Services Since rural entrepreneurs have limited education and re- Farm Nonfarm 20 sources, appropriate business services are required for their 16 17 business activities to be successful. However, only limited 15 15 business services are available in the countries surveyed, 16 although the availability of such services as marketing and 14 14 10 management consulting has increased during the last three 6.7 years. Except in Mozambique, where business services 5 barely exist, there is a big difference between the availability of the services and the number of people who use them. 0 1.0 Access to business services is extremely limited because of YM BF NG MZ their high cost or entrepreneurs’ lack of knowledge about Source: 2010 RIC Surveys. them, even though the services are available in the commu- nity (figure 3.20). Providing Business Services Business services that exist in urban areas should be ex- Sawada and Harishchandra (2011) identified in rural Ethiopia, panded to rural areas or those services should be established rural entrepreneurs can easily improve their productivity and in rural areas through small business promotion agencies or profitability by learning the fundamentals of business man- local nongovernmental organizations (NGOs). Markley (2006) agement. Markley (2006) states that providing technical as- emphasizes the importance of business support services for sistance, training, and networking is essential to a rural eco- rural entrepreneurs. nomic development strategy. The management knowledge required for small-scale operations may include preparing a business plan and a marketing plan, conducting quality con- 3.4.2 Information Technology (IT) trol, and managing operations. Management knowledge can The availability of IT may be increasing, according to the RIC enable rural entrepreneurs to identify the appropriate levels survey data, but the actual services received by entrepre- of technology and skills for a business to be profitable and neurs remain extremely limited. Given the limited availability successful. In other words, business/agriculture extension of electricity, the use of IT or computers may not increase services, especially business management, are essential for much until electricity or other sources of energy become a RIC to support sustainable and successful rural businesses. more widely available. However, with the growing use of FIGURE 3.20: Business Services: Availability and Service Used Business Service Available in the Community Business Service (Consulting, Marketing, and Accounting) Used Marketing Management consulting Farm Nonfarm 50 50 44 40 40 40 30 30 25 20 20 14 20 20 5.8 10 10 2.5 12 9 3 1.7 0 0 4.1 0 1.0 0.5 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 18 C H A PTER 3 — iMPR OVEMENT iN R URA L iNVES TMENT C Li M ATE FIGURE 3.21: iT Service Availability and Use; Use of Computer IT Service Available IT Service Used by Farm Use of Computer 40 39 IT Service Used by Nonfarm Farm Nonfarm 35 10 10 9.3 30 20 5.2 5 5 16 10 2.2 1.1 1.3 0.6 1.2 7.5 0.2 0 0 0 1.0 1.1 1 0.5 0 0 0 YM BF NG MZ YM BF NG MZ 0 Source: 2010 RIC Surveys. YM BF NG MZ FIGURE 3.22: Use of Phones cell phones, computers may be replaced by smart phones, Cell Phone Use which offer almost the same access to information through Farm Nonfarm the internet. 100 79 The use of computers is limited in rural areas, especially in 80 those without available public electricity. Computer use is min- 74 52 60 imal in Burkina Faso, Nigeria, and Mozambique (figure 3.21). 43 In Mozambique, 35 percent of all communities have access 40 26 40 to IT services, but only 0.2 percent of nonfarm entrepreneurs 20 33 and no farm entrepreneurs have used IT services. The use 21 0 of computers is about 1 percent in Nigeria and Mozambique. YM BF NG MZ Yemen has more use of computers, but less than 10 percent of rural nonfarm entrepreneurs use them, whereas no rural Fixed Line Phone Use entrepreneurs use computers in Burkina Faso. Farm Nonfarm 40 Construction of fixed telephone lines is expensive and does 32 not penetrate to rural areas, whereas cell phones have much 30 better penetration there. The trend toward cell phones will further accelerate because it is a private sector initiative, 20 whereas fixed line phones are regulated by the government (figure 3.22). 10 14 0.7 0.5 0.8 0 0.1 1.1 0.5 Improving Access to Market Information by Cell Phone YM BF NG MZ Access to cell phones is important for entrepreneurs to re- Source: 2010 RIC Surveys. ceive market information. Using cell phones to get informa- tion on markets and inputs is more practical and feasible than 3.4.3 Skill and Training using computers for processing or quality control. In Uganda, Along with access to financing and market information, en- the cell phone has proved to be a very handy tool for access- trepreneurs need training to obtain the skills and manage- ing commodity prices due to its flexibility of function, yet it ment knowledge they need to start and successfully operate does not require special skills to operate (Conversations for a business. A skill obtained was identified as an important a Better World, 2010). motive for starting a business (figure 3.23). However, once iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 19 FIGURE 3.23: Motive: Skills Obtained FIGURE 3.24: Managers Receiving Training Skill Obtained: Motive Managers' Training Received to Start Business Farm Nonfarm Farm Nonfarm 50 50 37 39 40 40 36 34 30 24 30 34 33 18 18 29 20 25 20 19 19 12 10 10 8.2 0 0 5 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. Source: 2010 RIC Surveys. the business has been started, little training in managerial top reason, as shown in figure 3.18. Based on the field obser- skills is offered (figure 3.24). vations of rural Ethiopia (Sawada and Harishchandra 2011), the profitability of rural enterprises may be easily improved by applying simple business management knowledge. Providing Skills and Management Training Given the limited availability of skills training, it is essential Lack of management knowledge affects not only the prof- that the specific skills needed by local farm and nonfarm itability of a business, but also the level of innovation and businesses be accurately identified and vocational train- improvement shown. Few entrepreneurs have improved ing programs be established to teach the requisite skills. an existing product/service or created a new one. For farm For example, if bamboo furniture is identified as a potential and nonfarm enterprises, Nigeria ranked highest of the four business for an area in which bamboo is plentiful, training countries with 15 percent and 16 percent of entrepreneurs in handicraft skills may be needed to train entrepreneurs to having innovated or improved a product and process, respec- make and sell quality bamboo furniture. tively. Burkina Faso ranked the lowest of the four countries in product and process improvement for both farm and nonfarm Management training should also be included among busi- enterprises (figure 3.25). ness/agriculture extension services. Most of the knowledge that managers need can be acquired through training; how- ever, for practical application, on-the-spot advice may be Improving Management Improvement/Innovation required after training. Management training is required for With appropriate management knowledge, unprofitable farm as well as nonfarm entrepreneurs. McElwee (2005) sur- operations can be turned into profitable ones. Profitability veyed literature on entrepreneurship in agriculture to identify is determined by prices and quantity of sales and also by what is needed for a more entrepreneurial culture to take the productivity of business operations. Productivity can be hold in rural areas, and he found the development of farm- improved through product innovation/improvement, process ers’ entrepreneurial skills to be a significant issue. The Rural innovation/improvement, setting higher sales prices when and Women Entrepreneurship Unit of the United Nations selling at a new location, changing the mode of transport, Industrial Development Organization (UNIDO) has been fo- and streamlining operations. cusing on improving the entrepreneurial and technical skills of women entrepreneurs by strengthening the relevant insti- tutions and service providers (UNIDO 2011). 3.4.5 Access to Inputs Business operations require raw materials and supplies or merchandise for traders. Lack of access to these inputs is rec- 3.4.4 Management Innovation/Improvement ognized as the second major obstacle to starting a new busi- As noted in the previous section, management knowledge and ness next to start-up capital (see table E2.1 in Appendix E). the training needed to acquire it are key factors in the success After a business is started, it is still necessary to keep pro- of rural entrepreneurs. Among the reasons given for closing a curing raw materials and supplies. In other words, access to nonfarm business, a lack of profitability was identified as the inputs is critical for any business at any stage. The best way AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 20 C H A PTER 3 — iMPR OVEMENT iN R URA L iNVES TMENT C Li M ATE FIGURE 3.25: Product/Process innovation/improvement Product Process Innovation/Improvement Innovation/Improvement Farm Nonfarm Farm Nonfarm 20 20 16 15 13 11 10 10 8.4 12 7 3.9 9 8 2.7 5.6 5 3.7 0 0.8 0 1.5 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. to meet that need is to procure the inputs locally, but our 3.4.6 Labor survey found that more than half of all inputs are purchased Rural businesses are generally family-based operations, and from outside of the community except in Burkina Faso (figure most of their workers are not paid wages. The percentage of 3.26). Even in Burkina Faso, though, 32 percent and 44 per- paid workers, including managers, is still a small fraction of the cent of inputs for farm and nonfarm enterprises, respectively, total (figure 3.27) and reflects the fact that most rural enter- were procured outside of the community. prises are small and informal. Business surpluses may be used for household expenses but, nonetheless, should be managed Securing Inputs Locally well to make sure the need for working capital is met. Inputs should be procured locally whenever available to eliminate paying the additional cost of transportation and Managing Wage Money intermediation for goods procured outside the area. Keeping Managing expenses or wages is an important part of running the cost of inputs low leaves more room for profits. If in- a business. Even if no formal wages are paid, entrepreneurs puts are needed to modify or differentiate existing products/ should make sure to set aside an amount equivalent to wage services, these too should be procured locally whenever money to run their businesses. Keeping extra money on possible. hand may avert bankruptcy or closure of business operations FIGURE 3.26: Location of input Purchase and Access to inputs as an Obstacle Input Purchase within the Community Input Purchase from District The Second Obstacle to Start: Access to Inputs Farm Nonfarm Farm Nonfarm Farm Nonfarm 80 80 68 80 60 60 46 60 56 40 45 40 36 31 40 32 23 20 20 22 23 20 17 29 20 12 21 19 20 20 22 22 13 5.7 16 0 0 9 0 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. YM BF NG MZ iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES C H A P T E R 3 — iM P ROVE ME NT i N RURAL i NVE ST MENT CLi MATE 21 FIGURE 3.27: Percentages of Paid Workers % of Workers Paid # of Workers Farm Nonfarm Farm Nonfarm 40 10 33 28 30 27 20 6.0 4.3 4.2 20 5 19 3.8 17 10 3.0 8.9 9.3 2.5 1.5 2.0 0 0 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. FIGURE 3.28: Seasonal Fluctuation of Sales in Farm and Nonfarm Enterprises YM Sales of Farm and Nonfarm BF Sales of Farm and Nonfarm Farm Nonfarm Farm Nonfarm 4 4 3 3 2 2 1 1 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 NG: Sales of Farm and Nonfarm MZ Sales of Farm and Nonfarm Farm Nonfarm Farm Nonfarm 4 4 3 3 2 2 1 1 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Source: 2010 RIC Surveys. because of the lack of working capital. In this way, informal low, nonfarm activities are also low, and households may not enterprises can prepare to grow and become successful, have enough income during that season. formal enterprises. Overcoming Seasonality It is important to break this cycle of seasonality and/or help 3.4.7 Seasonality of Farm and Nonfarm Activities rural entrepreneurs to better absorb it. One approach is to Seasonality causes fluctuations in income for both farm and start processing farm products, thus adding to their value, nonfarm activities, with similar effects on the business and and store the processed products as inventory to be sold or livelihoods of entrepreneurs when sales are too low. In all further processed during the rest of the year. Not only does four countries, farm and nonfarm activities are complementa- processing agriculture products reduce the postharvest loss, ry—the seasonal fluctuation in sales shows a similar trend for but it also improves the productivity and profitability of busi- both types of activities (figure 3.28). The Ethiopia RIC Report ness operations. Another approach to overcoming season- also identified these activities as complementary (World ality is to diversify rural businesses so that they are better Bank 2009b). This means that when agriculture production is positioned to absorb it. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 C H A P T E R 4 — C O NCL USiON 23 Chapter 4: CONCLUSION There is an urgent need to reduce rural poverty through by using RIC indicators was applied. By overall assessment income-generation activities. An appropriate investment of RIC components (including analysis of business dynam- climate is important for the success of the rural busi- ics), four critical components were prioritized, as mentioned nesses. Business entrepreneurship provides alternative above. Amongst others, the availability of business manage- livelihood options in the rural areas where opportunities are ment knowledge to maximize the profit is the key to rural otherwise limited. Therefore, this report identifies critical income-generation activities. components and provides direction based on the careful assessment. This report will provide directions on how to support rural entrepreneurs by improving the RIC. However, the objective Critical components were identified for both farm and non- of this report is not to provide ready-made solutions; rather, farm businesses as increasing market demand, improving the purpose is to provide directions to allow a custom-made access to market, increasing access to finance, and provid- approach based on a particular country’s situation. Proposed ing business services. Assessing the RIC requirement based recommendations could be used as guidelines for forming a on the perceived needs of rural entrepreneurs may not be necessary support system to foster rural businesses as key comprehensive; therefore, a more comprehensive approach to sustainable income-generation activities. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 REFERENCES 25 REFERENCES Alesina, A., S. Ozler, N. Roubini, and P. Swagel. 1998. Political insta- Markley, D. 2006. A framework for developing rural entrepreneur- bility and economic growth. 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Bank, Washington, DC. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x A — P O L iCY RE COMME NDAT i ONS OF Six P iLOT R iC A PROJECTS 27 Appendix A: POLICY RECOMMENDATIONS OF SIX PILOT RICA PROJECTS TABLE A1.1: Policy Recommendations of Six Pilot RiCA Projects ISSUE COUNTRY POLICY DESCRIPTION Overall Strategy in Macroeconomics Sri Lanka Improving policy certainty and macroeconomic stability (Capitalize on the complementarities with agriculture) Tanzania Policy and investment to meet the government’s agricultural targets are fundamental for the nonfarm enterprise sector Nicaragua Focus the nonfarm investment strategy in high-density and high-potential areas Rural Market Town Development Ethiopia Stakeholder consultation and consensus on a regional pilot program to stimulate small market Small enterprises in towns exhibit significant town development, private enterprise growth, and rural urban linkages productivity potential with beneficial linkages Sri Lanka Improving access to major markets for rural enterprises to the agricultural output and input markets Tanzania Assessment of the role of larger enterprises and their economic linkages with small rural market towns Benin 1) Adopt a constructive approach to integrate the nonfarm rural private sector in the private sector as a whole 2) Promote an integrated value chain approach 3) Promote the subsector of agro-processing businesses 4) Establish a platform for dialogue and exchange Access to Rural Finance Ethiopia 1) Review current efforts to improve access to credit in rural areas focusing on the need to increase coverage and flexible product lines 2) Feasibility analysis for market potential of urban and semi-urban/rural mobile banking taking into consideration infrastructure and regulatory constraints Sri Lanka Reducing the cost of finance and improving access to it Indonesia 1) Support procompetition policies and reinforce competitive behavior at the microlevel 2) Make commercial banks more transparent 3) Support for one or more outreach initiatives aimed at connecting new microborrowers to the financial system Tanzania 1) Promoting rural savings schemes could be a priority 2) Greater linkage between commercial banks could be made to improve access to credit 3) Private sector guarantee schemes to offset risks could be promoted Nicaragua Strengthen financial markets to improve access to and reduce the cost of finance Benin 1) Support a capacity building program to accompany, at their demand, enterprises in formulating their business plans and loan applications; advise them on the appropriate financial structuring of their plans; manage their outstanding loans; etc. 2) Extend the reach and penetration rate of microfinance institutions in the rural areas 3) Promote a durable partnership between microfinance institutions and commercial banks 4) Introduce or improve innovative financial products such as agro-leasing, equipment credit, and inventory credit 5) Facilitate access to titled land and accelerate land reform Governance and Institutional Support Ethiopia 1) Review of strengths and weaknesses and measures implemented by the ministries and regional governments 2) Consider extending the scope of extension services to include nonfarm enterprise Indonesia Remove regulations and policies that drive a wedge between the prices and costs of service provision (continued) AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 28 A PPEND ix A — POLiC Y REC OMMEND ATiONS OF Six PiLOT R iCA PR OJEC TS TABLE A1.1: Policy Recommendations of Six Pilot RiCA Projects (continued) ISSUE COUNTRY POLICY DESCRIPTION Tanzania 1) Identify entry or mobility barriers to high-return niches within the dynamic part of the nonfarm economy 2) Reduce costs of doing business, continuation of business registration reform, and effective implementation of reduction or abolition of licensing fees or various taxes at the local level Nicaragua 1) Improve institutional conditions by reducing bureaucratic red tape and corruption 2) Take steps to increase the rates of formality among rural nonfarm businesses 3) Strengthen land markets and land-related property rights Benin 1) Simplify the procedures for registering a business and obtaining licenses and permits 2) Ensure the effective implementation of the anticorruption campaign 3) Adopt a fiscal policy that is less restrictive by increasing the tax base 4) Simplify administrative tax procedures 5) Carry forward the reform of the judiciary and the regulatory environment 6) Revise the ongoing decentralization process in order to give local institutions the effective means to formulate and implement local development and land settlement policies Labor Market Indonesia 1) Review and revise national labor laws 2) Remove barriers preventing the free movement of labor throughout Indonesia 3) Improve rural schools to better prepare workers Nicaragua 1) Invest in human capital by improving rural education and health care systems 2) Enhance the flexibility of labor markets through training in technology and investing in other important skills Technology Transfer and Diffusion Indonesia 1) Promote commercial interaction with providers outside the local economy 2) Promote private sector–driven technological learning 3) Create a culture of innovation in the educational system 4) Improve the capabilities of research and development institutions and universities, making them more demand driven by promoting links between enterprises and institutions Nicaragua Provide better information about nonfarm business opportunities and technical assistance to business owners Infrastructure Sri Lanka Improve access to and the quality of energy and transport Indonesia 1) Encourage competitive provision of electricity and telecom services and the supply and mainte- nance of rural roads 2) The government is moving toward increased competitive provision of electricity and telecom- munications services Tanzania 1) Reduce transaction costs of maintenance and rehabilitation of the existing road network 2) Cell phone usage can reduce transaction costs and improve information flows Nicaragua Reduce bottlenecks in productive infrastructure Benin 1) Develop an action plan to effectively implement the national rural roads strategy 2) Promote a rural infrastructure policy that could stimulate rural economies 3) Accelerate reforms in the energy sector 4) Develop and implement an action plan to support the short-term objectives of the government to improve rural electrification in areas with high growth potential Capacity Building Ethiopia 1) Review of experiences by NGOs and public service delivery systems, including cost-benefit analysis of interventions 2) Identification of groups of businesses with market potential and collective constraints 3) Development of a nationally representative database on rural and semirural income diversifica- tion patterns with the ability to monitor trends and programs 4) Refinement of rural/urban classification in multiple surveys conducted by the Central Statistical Agency 5) Consultation with stakeholders on knowledge gaps Indonesia Targeting subsidies where they will have the most impact Tanzania 1) For cost-effective interventions, analysis of a handful of specific subsectors, and supply chains within them, that hold the potential for growth 2) Supply-side constraints are more important than demand-side constraints 3) Trade policies are of utmost importance in determining enterprise performance (continued) iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x A — P O L iCY RE COMME NDAT i ONS OF Six P iLOT R iC A PROJECTS 29 TABLE A1.1: Policy Recommendations of Six Pilot RiCA Projects (continued) ISSUE COUNTRY POLICY DESCRIPTION Benin 1) Improve technical and management expertise targeting rural entrepreneurs and put in place support services to develop rural enterprise 2) Establish mechanisms to promote durable business linkages between rural and urban, formal and informal, public and private enterprises in the context of competitive value chain 3) Avoid adopting a policy to promote entrepreneurship ex-nihilo, which would consist of provid- ing selected beneficiaries with turnkey businesses 4) Support a program to correlate the existing offer of business support services with the demand from rural entrepreneurs 5) Revise the institutional base, sources of financing, and governance and management structures Gender Issue Ethiopia Investment climate and enterprise development policies should be mindful of the different needs and constraints experienced by women entrepreneurs, especially in the areas such as access to finance, supply chain reviews, and skills development Food Insecurity Ethiopia 1) Consider the potential contribution of the rural nonfarm enterprise sector to food security 2) Study the interaction and contribution of labor-based safety nets and engagement in nonfarm enterprises; even low-return nonfarm activities may be important from a welfare point of view AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 AP P E N D i x B — C H A RACT E RiST i CS: E NT E RP Ri SE S, H OUSEH OLD S, A ND C OMMUNiTiES 31 Appendix B: CHARACTERISTICS: ENTERPRISES, HOUSEHOLDS, AND COMMUNITIES B.1 ENTERPRISE CHARACTERISTICS enterprises have been in existence for an average of 15.3 Rural enterprises are classified as farm and nonfarm enter- years (table B1.2). Enterprises are operated by the manager, prises. Farm enterprises are defined as enterprises whose who in many cases is also the owner. Managers of nonfarm primary activity is farming. Some farm enterprises include enterprises are younger, at an average age of 36.4 years, vegetable and fruit crop farming, tree crop farming, fishing whereas managers of farm enterprises are older (an aver- and aquaculture, and livestock farming. Rural nonfarm enter- age of 44 years). Prior to starting the business, managers prises are enterprises involved in nonagricultural activities. reported 5.1 years of experience for farm enterprises and 3.9 Examples include food processing, dressmaking and tailor- years for nonfarm enterprises. About 17.4 percent of farm ing, pottery, handicrafts, retail shops and trading, repair and managers and 25.3 percent of nonfarm managers had also maintenance, and restaurants. received training for their businesses. Farm and nonfarm enterprises share some similar charac- Rural enterprises serve as a source of employment to other teristics in their size, age, ownership structure, and man- people apart from the owners. The survey finds that farm agement styles. However, specific country differences enterprises employ about 3.8 workers per enterprise, while exist within the categories specified. Differences are also observed between enterprises managed by males and fe- males. Results from the survey show that a large number TABLE B1.1: Establishment of Farm and Nonfarm of both farm and nonfarm enterprises were established by Enterprises the enterprise owner. On average, about 90.5 percent of ESTABLISHED BY OWNER INHERITED nonfarm enterprises were started by the enterprise owner, FARM NONFARM FARM NONFARM whereas 68.5 percent of farm enterprises were established YM 30 89 64 4.4 by the owners (table B1.1). The exception is Yemen, where BF 79 89 20 9.2 more farm enterprises are inherited rather than established NG 72 90 26 8.8 by the owner. MZ 93 94 1.9 3.6 Nonfarm enterprises are younger than farm enterprises. Average 68.5 90.5 28.0 6.5 They have been in existence for about 8.5 years, while farm Source: 2010 RIC Surveys. TABLE B1.2: Enterprise Size, Age, and Manager’s Characteristics MANAGER’S ENTERPRISE SIZE ENTERPRISE AGE MANAGER’S AGE BUSINESS MANAGER’S (INCLUDING OWNER) (YEARS) (YEARS) EXPERIENCE (YEARS) TRAINING (% YES) FARM NONFARM FARM NONFARM FARM NONFARM FARM NONFARM FARM NONFARM YM 6.0 2.9 19.4 9.0 43.1 35.4 10.3 5.4 18.8 35.5 BF 4.1 1.8 13.6 8.7 44.1 37.4 3.5 3.0 24.3 24.5 NG 4.6 1.6 16.5 10.2 45.3 38.5 3.5 2.8 18.2 29.1 MZ 4.5 3.1 8.2 5.9 43.5 34.1 3.0 4.5 8.2 12.0 Average 4.8 2.4 15.3 8.5 44.0 36.4 5.1 3.9 17.4 25.3 Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 32 AP P E NDix B — CH A R A C TER iS TiCS : ENTERPR iSES , H OUS EH OLD S, A ND C OM M UNi T iES TABLE B1.3: Workforce Composition are about 56 percent, with Nigeria having the highest literacy FARM NONFARM rate of 75 percent and Burkina Faso having the lowest at 9 percent (table B2.1). MALE FEMALE MALE FEMALE WORKERS WORKERS WORKERS WORKERS About 50 percent of household nonfarm enterprises tried to YM 5.0 1.0 2.7 0.3 start a business in all four countries surveyed. An average BF 2.5 1.8 0.6 0.9 of 70 percent of them succeeded, with the highest nonfarm NG 3.0 0.8 1.0 1.0 entry success in Nigeria (90 percent) and Mozambique (88 MZ 2.5 1.7 1.9 0.6 percent). Success in entry was low in Burkina Faso, with only Average 3.25 1.33 1.55 0.70 27 percent of the enterprises succeeding that tried to enter. Source: 2010 RIC Surveys. Some of the businesses started had to close. An average of 17 percent of businesses in Burkina Faso, Mozambique, Nigeria, and Yemen had to close, with more nonfarm enterprises in nonfarm enterprises employ on average 1.4 workers. More Mozambique and Burkina Faso (39 percent and 17 percent, re- male workers are employed in all the enterprises surveyed spectively) closing than the other two countries (figure B2.1). than female workers (table B1.3); however, more female workers were employed in nonfarm enterprises in Burkina Faso (0.9). B.3 COMMUNITY CHARACTERISTICS Communities provide the social and economic infrastruc- ture that helps businesses to grow and thrive. Surveys of B.2 HOUSEHOLD CHARACTERISTICS the communities in Burkina Faso, Mozambique, Nigeria, The average size of households is about 7.7 persons per and Yemen provide insight into the general characteristics, household, with the largest size of household reported in infrastructure projects, and services that the communi- Mozambique (10.7). Literacy rates across the four countries ties provide. A total of 160 communities were surveyed in TABLE B2.1: Household Characteristics AVERAGE AVERAGE LITERACY RATE OF EDUCATION OF HOUSEHOLD SIZE HEADS (%) HEADS (YEARS) INCOME (US$) EXPENSES (US$) ASSETS (US$) YM 9.1 69 5.4 $9.49 $1.17 $127.80 BF 10.7 9 0.8 $1.17 $0.26 $7.18 NG 5.2 75 7.8 $1.13 $0.17 $13.20 MZ 6.1 72 5.2 $0.44 $1.50 $1.35 Average 7.8 56.3 4.8 $3.06 $0.78 $37.38 Source: 2010 RIC Surveys. FIGURE B2.1: Nonfarm Business Entry and Closure 100 88 90 77 80 65 52 Tried to enter 60 47 42 44 Success to enter 39 40 Business closure 17 20 9.0 4.3 0 Burkina Faso Mozambique Nigeria Yemen Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x B — C H A RACT E RiST i CS: E NT E RP Ri SE S, H OUSEH OLD S, A ND C OMMUNiTiES 33 Burkina Faso, Mozambique, Nigeria, and Yemen. Most of the Institutions communities rely on farming and fishing as the major source Educational, health, and other social infrastructure exist of employment. In Burkina Faso, Nigeria, and Mozambique, within all the communities with varying degrees. Table B3.2 over 90 percent of the communities listed agriculture as the shows the existence of institutions in the four countries. most important source of employment. Women in almost all of the communities surveyed earned less than men, except A fairly large number of communities surveyed reported in the Enugu State of Nigeria, where women earned more having primary education facilities. In Burkina Faso, Nigeria, than men in the areas of farming and public works. and Yemen, about 90 percent of the communities reported having primary schools and 65 percent have middle schools. Good, strong leadership is important for most communities. Communities in Mozambique and Burkina Faso had the low- Of the communities surveyed, about 79 percent reported est percentage of primary and middle schools—83 percent having a village council that provides leadership in the com- and 28 percent, respectively. munity. The number is smaller in Yemen, where 39 percent of the communities have village councils. Over 90 of the The quality of health services that exist in communities communities also have a traditional chief (table B3.1). also varies with the type of health facilities and the country. Communities in Burkina Faso, Mozambique, Nigeria, and Many of the communities also seem to live in relative har- Yemen reported having a higher percentage (81 percent) of mony. Communities in Yemen, Burkina Faso, and Yemen are traditional healers than pharmacies (47 percent), health cen- harmonious (over 90 percent), meaning they experience very ters (57 percent), and clinics (34 percent) (table B3.2). little to any problems with other people in the community. Communities in Yemen reported a lower level of harmony, Very few communities reported the existence of financial at 69 percent. Despite the level of harmony in the communi- institutions in their communities. Only 13 percent of com- ties, disputes occur. Nigeria and Mozambique had the high- munities in Burkina Faso reported having an insurance est percentage of disputes at 23 percent, while Yemen and institution. The existence of other financial facilities is also Burkina Faso had relatively lower dispute levels of 2 percent low. Seventy-eight percent and 31 percent of communities and 3 percent, respectively. in Burkina Faso and Yemen have financial services, with 5 TABLE B3.1: Community Characteristics POPULATION POPULATION AGRICULTURE AS A DECREASE INCREASE MAJOR EMPLOYMENT COMMUNITIES COMMUNITIES VILLAGE COUNCIL TRADITIONAL CHIEF YM 72% 39% 28% 39% 100% BF 93% 58% 20% 100% 90% NG 95% 2.3% 93% 98% 100% MZ 95% 2.4% 97.6% 80% 85% Average 88.8% 25.4% 59.7% 79.3% 93.8% Source: 2010 RIC Surveys. TABLE B3.2: institutions Available in the Community FINANCIAL INSTITUTIONS HEALTH FACILITIES SCHOOLS HEALTH TRADITIONAL PRIMARY MIDDLE FINANCIAL INSURANCE PHARMACY CENTER CLINIC HEALER SCHOOL SCHOOL YM 31% 0% 61% 69% 56% 39% 97% 92% BF 78% 13% 60% 50% 18% 88% 95% 28% NG 0% 0% 47% 47% 58% 100% 93% 67% MZ 5% 0% 20% 63% 5% 95% 83% 76% Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 34 AP P E NDix B — CH A R A C TER iS TiCS : ENTERPR iSES , H OUS EH OLD S, A ND C OM M UNi T iES TABLE B3.3: infrastructure in the Community GARBAGE ELECTRICITY POTABLE WATER SEWAGE COLLECTION BIOGAS CYLINDER GAS YM 78% 27% 0% 6% 0% 78% BF 31% 44% 10% 18% 5% 6% NG 91% 43% 2.3% 14% 0% 0.8% MZ 6.5% 18% 27.5% 2.5% 3% 37% Source: 2010 RIC Surveys. percent in Mozambique. Communities in Nigeria reported popular, with about 83 percent of the communities within having no financial or insurance institutions. the communities reporting using bicycles. Most of the communities have access to electricity and run- Infrastructure and Social Amenities ning water, but Mozambique and Burkina Faso had the low- The most common road surface within communities also est percentage of communities electrified (6.5 percent and varies. In Yemen, 39 percent of the roads within the com- 31 percent of communities, respectively). Only 33 percent munities and intercommunities are gravel roads. In Burkina of communities across all countries have access to potable Faso, Nigeria, and Mozambique, 85 percent of the roads water (table B3.3). within the communities and intercommunities are dirt roads. Community Projects Markets are important for enterprises that wish to trade New infrastructure projects tend to have impacts on the goods and also buy other goods and services from other en- community. Of the countries surveyed, some of the new trepreneurs. About 70 percent of the communities in Burkina infrastructure projects being undertaken include the con- Faso, Mozambique, Nigeria, and Yemen have markets within struction of new roads, bridges, and expansion of cell phone their communities. Not only are markets important, but the networks. New markets appear to have the largest impact ease with which entrepreneurs can access markets is also a on the community in Burkina Faso, Mozambique, Nigeria, significant factor. The average distance to a district market in and Yemen. In Yemen, the construction of new markets af- the communities surveyed is 12 km, and the average time it fected 100 percent of the communities; in Burkina Faso, the takes to reach the district market is 41 minutes. construction of 8 markets affected 90 percent of the commu- nity, 9 new markets affected 79 percent of the community The means of transportation within communities also var- in Nigeria, and 22 new markets affected 69 percent of the ies. In Yemen and Nigeria, respectively, 100 percent and 81 community in Mozambique. Cell phones also had a large im- percent of the communities use cars within the community. pact on community households. On average, 54 percent of In Burkina Faso and Mozambique, the use of bicycles is communities in all four countries surveyed expanded cellular TABLE B3.4: Business/Agriculture Services Available in the Community EXTENSION MANAGEMENT SERVICES ENGINEERING MARKETING CONSULTING IT LEGAL NEW NEW NEW NEW NEW NEW WITHIN WITHIN WITHIN WITHIN WITHIN WITHIN AVAILABLE 3 YEARS AVAILABLE 3 YEARS AVAILABLE 3 YEARS AVAILABLE 3 YEARS AVAILABLE 3 YEARS AVAILABLE 3 YEARS (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) YM n/a n/a 50 61 20 61 25 75 39 75 33 69 BF n/a n/a 12.5 0 40 75 20 14 7.5 0 12.5 40 NG 16 84 65 40 44 58 9 91 26 76 16 81 MZ 97 15 3 98 0 0 3 98 35 71 82 29 Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x B — C H A RACT E RiST i CS: E NT E RP Ri SE S, H OUSEH OLD S, A ND C OMMUNiTiES 35 phone networks, with a corresponding 67 percent of com- Natural Disasters munities affected. Natural disasters such as floods, drought, epidemics, and crop diseases sometimes occur and disrupt farm and non- Business/Agricultural Services farm activities. In the communities surveyed, drought oc- Agricultural and business services provide technical and curred most frequently across all the communities, affecting management support that could help an enterprise to grow. an average of 52 percent of the communities, with com- Agricultural extension services are not available in communi- munities in Yemen most highly affected (78 percent). Other ties in Yemen and Burkina Faso. Extension services exist in disasters were country specific. In Yemen, cold weather 97 percent of the communities in Mozambique and 16 per- affected about 51 percent of the communities, while in cent of the communities in Nigeria. Information technology Nigeria and Mozambique, famine affected about 78 percent services exist in only 27 percent of the communities, and of the communities. Burkina Faso had more floods than management consulting services exist in only 14 percent of other natural disasters, and this affected 18 percent of the the communities (table B3.4). communities. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 AP P E N D i x C — O B STACL E S P E RCE i VE D BY E NT RE PR ENEUR S 37 Appendix C: OBSTACLES PERCEIVED BY ENTREPRENEURS C.1 GENDER COMPARISON OF PERCEIVED managers have slightly higher perceived obstacles than OBSTACLES (FIGURE C1.1) female managers. Female managers have higher perceived Similar Pattern obstacles in access to finance and market for all four coun- Male and female managers have similar perceived obstacles. tries, whereas transport and electricity are higher in Burkina Faso, Nigeria, and Mozambique. On the contrary, male man- agers have slightly higher perceived obstacles for technology Some Trend and information technology for Burkina Faso, Nigeria, and Female managers have generally higher levels of perceived Mozambique, and for telecommunication, transport, and business obstacles, except in Mozambique, where male electricity for Mozambique. FIGURE C1.1: Gender Comparison of Perceived Obstacles Burkina Faso Nigeria Male Male Female Female Financing Court Court Labor reg Financing Labor regulations Market Land use Market Land use Transportation Corruption Transportation Corruption Telecom Postal/delivery Telecom Postal/delivery Electricity Licenses Electricity Licenses Water Customs Water Customs Technology Tax admin Technology Tax admin Business services Security Business services Security Labor edu Tax rate Labor edu Tax rate Mozambique Yemen Male Male Female Labor regulations Court Financing 100 Land use Female Financing Labor regulations Market 80 Corruption Market Land use 60 Transportation Postal/delivery Transportation Corruption 40 Telecom Postal/delivery Telecom 20 Licenses 0 Electricity Licenses Electricity Customs Water Customs Water Tax admin Technology Tax admin Technology Security Business services Security Business services Tax rate Labor edu Tax rate Labor edu Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 38 APPENDIX C — OBSTACLES PERCEIVED BY E N T R E P R E N E U R S Security Telecommunication: This may represent penetration of cell Female managers perceived higher (40 percent) obstacles in phones in rural and urban areas. Yemen. Electricity: Rural access to electricity is lower in Burkina Faso and Nigeria, but higher in Mozambique and Yemen. C.2 RURAL AND URBAN COMPARISON OF Some Common Obstacles PERCEIVED OBSTACLES (FIGURE C2.1) Access to finance, market, transport, telecommunication, Different Pattern and electricity. Government-Related Obstacles: Urban small enterprises seem to have higher perceived obstacles (tax rate, tax Note: Business service was not included in urban, but was administration, corruption) because of more informal included in rural. enterprises in rural areas. However, land-use policy and licenses and permits obstacles are lower for urban in Mozambique and Yemen than for rural. FIGURE C2.1: Rural Versus Urban Small Enterprises Burkina Faso Nigeria Rural Rural Court Urban small Court Urban small Financing Financing Corruption Corruption Market Labor Market Labor regulations regulations Transportation Land use Transportation Land use Telecom Tax admin Telecom Tax admin Security Electricity Security Electricity Labor edu Licenses Labor edu Licenses Tax rate Customs Tax rate Customs Mozambique Yemen Rural Rural Court Urban small Court Urban small Financing Financing Corruption Corruption Market Labor regulations Market Labor regulations Transportation Land use Transportation Land use Telecom Tax admin Telecom Tax Admin Electricity Security Electricity Security Labor edu Licenses Labor edu Licenses Tax rate Customs Tax rate Customs Source: ICS 2007 RICS 2010. IMPROVING THE RURAL INVESTMENT CLIMATE F O R B U S I N E S S E S AP P E N D i x D — R iCA BY i NDi CAT ORS 39 Appendix D: RICA BY INDICATORS D.1 DEFINITIONS Note: These indicators are taken at the community level on average in order to determine the minimum and maximum levels to calculate percentile ranking using the “Doing Business� methodology. Main RIC Component 1: Access to Finance Main RIC Component 8: Technology Bank accounts: % of enterprises having a bank account Improvement: % of enterprises improved the technology Money transfer: % of enterprises using money transfer service Improvement by own idea: % of enterprise improved by own idea Informal financing: % of enterprises using informal financing Improvement by own support: % of enterprises improved by own support Loan: % of enterprises having loans or line of credit Interest rate: Annual interest rate of recent loans (%) Main RIC Component 9: Electricity Collateral required: Collateral required/loan amount (%) Use: % of enterprises using electricity for their businesses Sufficient: % of enterprises having sufficient electricity Main RIC Component 2: Security and Safety Outage: Average hours of outage per enterprise Security expenses: Security expense/total expense (%) Generator use: % of enterprises own/share a generator Payment dispute: % of enterprises with payment dispute Theft loss: Theft loss/total revenue (%) Main RIC Component 10: Water Sufficient water: % of enterprises having sufficient water Main RIC Component 3: Labor Securing drinkable water: % of enterprises with secure drinkable water Primary completed: % labor completed primary school Manager’s years of education: Manager’s average education (years) Main RIC Component 11: Telecommunication Manager’s years of experience: Manager’s experience before started (years) Fixed phone: % of enterprises using a fixed phone Obtained skill was motive: % of enterprises started with obtained skill as a motive Cell phone: % of enterprises using a cell phone % labor paid: % of workers paid Computer: % of enterprises using a computer Main RIC Component 4: Government Main RIC Component 12: Transport Total wait days: Total wait days of license, registration, water, Use: % of enterprises using transportation fixed phone Own: % of enterprises own transportation License: % of enterprises having an operating license Delivery service: % of enterprises using delivery services Government contract: % of enterprises had government contract Availability: % of enterprise having no available transport Registration: % of enterprises registered services Main RIC Component 5: Corruption Main RIC Component 13: Market Requested unofficial payment: % of enterprises requested unofficial payments Market opportunity as motive: % of enterprises with a starting motive of market opportunity Community market: % of enterprises having main market in the Main RIC Component 6: Business/Agriculture Service community Association membership: % of enterprise being member of any Community purchase of input: % of enterprises purchasing main inputs in the association community Management services received: % of enterprises received management Competitors: The number of competitors of each enterprise services Other service received: % of enterprises received other services than management Main RIC Component 7: Management Innovation/Improvement Improved: % of enterprises improved in management practice By own idea: % of enterprises improved by only own ideas By own source: % of enterprises improved by only own sources AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 40 A PPEND ix D — RiC A BY iND i C ATOR S D.2 PERCENTILE RANKING OF RIC INDICATORS TABLE D2.1: Percentile Ranking of RiC indicators: Farm Enterprises RIC INDICATORS PERCENTILE RANKING DESCRIPTION YM BF NG MZ Finance % Bank account + 0 18 20 22 % Money transfer + 24 0 4.2 18 % Informal financing + 0 9 17 10 % Loan + 1.3 10 2.1 17 % Annual interest rate - 100 99 73 % Collateral required/loan - 90 88 82 % Firms did not apply but wanted - 50 31 62 17 Security and Safety % Security expense/total expense - 97 88 97 98 % Firm with payment dispute - 46 88 91 88 % Theft loss/revenue - 99 99 99 97 Labor % Primary completed labor + 49 8 73 32 Manager’s years of education + 55 8 68 47 Years of manager’s experience + 36 13 58 10 Motive obtained skill + 48 5 27 28 % Labor paid + 44 20 45 26 Government Total wait days - 81 100 99 91 % Having a license + 50 50 74 83 % Had government contract + 0 5 1 2 % Firm registered + 9 1 2 7 Corruption % Firm requested unofficial payment - 82 93 97 94 Business Services% Member of association + 5 24 27 11 % Received management services + 2 17 7 2 % Received other services + 1 10 1 100 Improvement % Firm improved in management + 17 9 34 100 % Improved by own idea - 6 18 6 18 % Improved by own sources - 0 0 32 14 Technology % Firm technology improvement + 3 3 12 18 % Firm technology improvement by own idea - 0 25 7 6 % Own technical support - 33 0 31 0 Electricity % Use electricity + 24 0 36 14 % Sufficient electricity + 55 0 23 82 Hours of outage - 100 74 90 % Use own/shared generator - 55 100 45 71 Water % Sufficient water + 48 99 73 67 % Secure drinkable water source + 50 47 53 27 Telecommunication % Use a fixed phone + 30 2 2 2 % Use a cell phone + 71 25 42 32 % Use a computer + 38 0 7 6 Transport % Use transport + 88 83 77 59 % Use own transport + 41 48 31 34 % Use postal/delivery services + 0 5 3 16 % No delivery service available - 92 100 88 39 Market % Motive market opportunity + 19 18 37 28 % Main market is in the community - 52 29 33 64 % Input purchase in the community - 67 44 54 82 Number of competitors - 71 86 87 91 Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x D — R iCA BY i NDi CAT ORS 41 TABLE D2.2: Percentile Ranking of RiC indicators: Nonfarm Enterprises RIC INDICATORS PERCENTILE RANKING DESCRIPTION YM BF NG MZ Finance % Bank account + 10 29 30 28 % Money transfer + 36 0 6 11 % Informal financing + 14 30 34 12 % Loan + 13 15 4 12 % Annual interest rate - 99 100 85 95 % Collateral required/loan - 93 94 74 90 % Firms did not apply but wanted - 43 25 66 28 Security and Safety % Security expense/total expense - 93 92 93 93 % Firm with payment dispute - 68 84 93 82 % Theft loss/revenue - 100 99 99 48 Labor % Primary completed labor + 62 6 77 45 Manager’s years of education + 59 5 56 51 Years of manager’s experience + 32 16 60 27 Motive obtained skill + 28 10 24 17 % Labor paid + 24 23 10 24 Government Total wait days - 91 99.9 99.7 99 % Having a license + 75 56 59 57 % Had government contract + 11 10 7 0 % Firm registered + 19 5 1 31 Corruption % Firm requested unofficial payment - 75 92 98 66 Business Services % Member of association + 2 10 25 4 % Received management services + 5 25 10 1 % Received other services + 2 5 2 100 Improvement % Firm improved in management + 23 20 38 100 % Improved by own idea - 11 14 4 7 % Improved by own sources - 4 11 27 6 Technology % Firm technology improvement + 7 14 23 15 % Firm tech improvement by own idea - 36 6 7 3 % Own technical support - 0 0 37 3 Electricity % Use electricity + 82 4 35 12 % Sufficient electricity + 53 64 18 87 Hours of outage - 49 100 100 100 % Use own/shared generator - 41 0 42 67 Water % Sufficient water + 72 100 68 84 % Secure drinkable water source + 53 94 82 84 Telecommunication % Use fixed phone + 39 0 1 1 % Use cell phone + 77 24 41 52 % Use computer + 26 0 3 5 Transport % Use transport + 88 86 66 75 % Use own transport + 77 87 70 72 % Use postal/delivery services + 8 0 10 9 % No delivery service available - 82 100 87 23 Market % Motive market opportunity + 44 23 37 21 % Main market is in the community - 24 27 26 23 % Input purchase in the community - 80 48 55 80 Number of competitors - 96 93 92 91 Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 AP P E N D i x E — E N TE RP RiSE DYNAMi CS 43 Appendix E: ENTERPRISE DYNAMICS E.1 ENTERPRISE ENTRY by improving market opportunities and skills obtained, more Reardon et al. (2000) conclude the following: (1) poor peo- entry of businesses can be expected (table E1.1). ple’s inability to overcome important entry barriers to many nonfarm activities leads to rural income inequality, (2) the Obstacles to Start main determinants of unequal access to nonfarm activities Start-up capital is the top obstacle to start both farm and non- are the distribution of capacity to make investments in non- farm enterprises in all four countries. This finding matches farm assets and the relative scarcity of low capital entry bar- the other findings of the studies. Limited availability of much- rier activities, and (3) the inequality in both farm and nonfarm needed finance remains a principal constraint among the sectors needs to be analyzed. Therefore, it is important to rural entrepreneurs. Lack of sufficient start-up capital limits understand entry barriers and business constraints of both the scope of the activity and expansion opportunities. Access rural small farm and nonfarm enterprises to know causes of to credit is one of the most important business assets in both rural income inequality. rural and urban areas, especially for the poor who require col- laterals. Rural entrepreneurs need an initial infusion as well Motives to Start as working capital to start and stay in business (Islam 1997). In Burkina Faso and Nigeria, the top motive to start farm The following obstacles are access to inputs and market and nonfarm businesses was social independence. Market knowledge for most of farm and nonfarm enterprises, except opportunity was the top motive for nonfarm business in farm enterprises in Yemen, where water is the second ob- Yemen, whereas no other income was for farm business. For stacle to start farm enterprises due to country-specific water Mozambique, low agriculture income was the top motive for problems (table E1.2). nonfarm business, and obtained skill was the top motive for farm business. Reasons Not to Start Market opportunity and skill obtained to start business be- Insufficient capital is the top reason not to start farm and come controllable factors to start businesses, whereas other nonfarm enterprises. Lack of access to loans is the second, income-related motives may not be controllable. Therefore, except for Nigeria, where market knowledge is the second TABLE E1.1: Motives to Start Business (% of Enterprises) YM BF NG MZ MOTIVES TO START NF FARM NF FARM NF FARM NF FARM Social independence 7 8 69 66 53 51 15 35 Low agriculture income 15 4 51 47 11 9 44 14 Market opportunities 44 18 20 19 18 38 20 29 Obtained skill 33 34 18 5 37 34 29 39 Lost income 27 28 2 3 9 34 37 36 No other income 18 39 25 31 37 22 33 29 Source: 2010 RIC Surveys. Note: NF denotes nonfarm enterprises. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 44 A PPEND ix E — ENTER PR iSE D Y NA M i C S TABLE E1.2: Obstacle to Start Business (% of Enterprises) YM BF NG MZ OBSTACLES TO START NF FARM NF FARM NF FARM NF FARM Start-up capital 71 51 76 58 80 77 83 65 Access to inputs 20 9 16 22 22 23 20 32 Market knowledge 17 19 20 15 27 21 36 33 Availability of loans 2 3 14 9 12 15 27 14 Availability of water 2 29 2 7 4 7 0 0 Roads and transport 11 10 5 2 9 11 2 2 Availability of skilled labor 8 10 5 5 8 13 3 7 Availability of electricity 12 1 5 1 5 2 3 1 Social reasons (gender, etc.) 3 4 3 3 9 9 6 13 Availability of cell phone 1 1 4 5 0 0 2 1 Source: 2010 RIC Surveys. Note: NF denotes nonfarm enterprises. TABLE E1.3: Reasons Not Tried to Start Nonfarm Business (% of Households) REASONS NOT TRIED YM BF NG MZ Insufficient capital 81 53 44 58 Lack of access to loans 17 16 3 30 Lack of access to inputs 15 11 13 23 Social reasons (gender, etc.) 12 1.4 6 13 Market knowledge 9 9 29 29 No cell phone 0 9 1 0 Lack of access to electricity 8 1 3 3.4 Unavailable skills 8 5 11 9 Corruption 5 0 1 3 Crime 4 0 1 0 Lack of access to water 3 6 1 0 Lack of roads and transport 3 3 6 0 License and permit 0 0 2 3 Source: 2010 RIC Surveys. reason. Lack of access to inputs is relatively high in all started (table E2.1). Not profitable operations can be caused four countries. As far as market knowledge is concerned, by weak demand, high cost of input and transport, and low Mozambique and Nigeria are high, whereas Yemen and productivity. It can be overcome by developing market, im- Burkina Faso are relatively low (table E1.3). proving roads and transport for access to inputs, and provid- ing appropriate management services to improve productiv- ity. Therefore, we can conclude that management services E.2 ENTERPRISE EXIT are one of the most critical RIC components for successful Not profitable operations and lack of working capital are the rural nonfarm businesses. Table E2.2 shows Probit regres- top reasons for a nonfarm enterprise to close once it has sion results for entry and exit of the enterprises. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x E — E N TE RP RiSE DYNAMi CS 45 TABLE E2.1: Reasons to Close Nonfarm Business (% of Households Started Business) REASONS NOT TRIED YM BF NG MZ Not profitable 40 59 58 62 Lack of working capital 30 56 29 57 Ill or death 5 21 26 24 Moved out 5 3 23 14 Found a wage job 0 0 3 8 Source: 2010 RIC Surveys. TABLE E2.2: Determinants of Enterprise Dynamics: Entry and Closure YM YM BF BF NG NG MZ MZ ENTRY EXIT ENTRY EXIT ENTRY EXIT ENTRY EXIT PROBIT MODEL VARIABLES ln (# HH members) 0.407*** 1.534*** -0.103 0.188 -0.384** -0.467*** 0.136 -0.093 [0.157] [0.581] [0.235] [0.348] [0.183] [0.176] [0.128] [0.212] ln (total agriculture income) 0.007 -0.072** 0.007 -0.124 -0.004 0.015 0.008 -0.007 [0.010] [0.031] [0.030] [0.132] [0.013] [0.017] [0.012] [0.020] ln (other income) -0.036*** -0.035 0.018 0.006 0.008 -0.036** 0.054*** -0.007 [0.011] [0.028] [0.018] [0.025] [0.013] [0.018] [0.013] [0.020] COMMUNITY VARIABLES ln (km to district market) 0.111 0.377 0.609 1.007** -0.060 -0.069 0.122 0.225 [0.132] [0.259] [0.381] [0.488] [0.132] [0.167] [0.142] [0.297] ln (% HH electrified) 0.048 -0.358** -0.121 -1.613*** 0.384 -0.643 0.165*** 0.101 [0.045] [0.145] [0.150] [0.615] [0.349] [0.491] [0.061] [0.117] ln (% HH secured water) 0.046 0.096 0.035 1.296*** -0.048 -0.007 0.238*** -0.289*** [0.051] [0.122] [0.071] [0.408] [0.112] [0.161] [0.038] [0.068] ln (% high school completed) -0.171 0.933* 0.142 1.411 0.009 1.198*** 0.299*** 0.370* [0.134] [0.522] [0.322] [1.136] [0.207] [0.347] [0.092] [0.208] Physician available -0.180 0.387 -0.056 -2.548*** 0.328* 0.168 1.0 1.0 [0.169] [0.480] [0.235] [0.690] [0.175] [0.229] Business services available -0.767* -3.964*** 0.035 1.222** 0.368* 0.432 1.0 1.0 [0.437] [0.542] [0.185] [0.485] [0.207] [0.385] Engineer service available 0.465 3.376 -0.135 1.114** 0.364* -0.116 1.0 1.0 [0.457] [0.000] [0.221] [0.518] [0.211] [0.295] Formal financial institution -0.193 1.809*** -0.268 -4.919*** 0.227 0.269 1.0 1.0 [0.189] [0.582] [0.298] [1.178] [0.201] [0.267] No theft -0.158 -0.317 -0.267* 0.692 -0.017 1.191** -0.213 1.554*** [0.197] [0.580] [0.156] [0.471] [0.322] [0.473] [0.236] [0.545] Disaster -0.570* 2.119** 0.231 -2.464*** 0.092 -0.362** 0.645** -0.982 [0.292] [0.943] [0.209] [0.905] [0.103] [0.155] [0.277] [0.607] ln (hours to district market) -0.156 -1.442 0.609 -3.418*** 0.333 -0.322 -0.071 -0.381 [0.460] [1.137] [0.381] [1.295] [0.363] [0.370] [0.092] [0.238] ln (years of financial services) 0.064 -0.075 [0.094] [0.352] Observations 536 197 629 164 790 710 884 371 Source: 2010 RIC Surveys. Note: Colinearity is shown by 1.0; Sampling weights are applied; Standard errors in brackets; *** p < 0.01, ** p < 0.05, * p < 0.1. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 46 A PPEND ix E — ENTER PR iSE D Y NA M i C S TABLE E3.1: Obstacles to Maintain or Grow (% of Households Started Business) YM BF NG MZ Insufficient capital 75 82 75 60 Lack of access to inputs 21 15 22 22 Lack of access to electricity 16 2 16 1 Market knowledge 16 17 16 16 Lack of roads and 16 4 16 2 transportation Lack of access to loans 14 13 14 19 Social reasons (gender, etc.) 10 2 11 4 Unavailable skill 5 4 5 8 Lack of access to water 5 1 5 1 License and permit 4 2 4 2 requirements Crime 3 2 3 2 Corruption 3 0 3 0.2 Unavailability of cell phone 2 7 2 0.4 Lack of access to technology 1 0.3 1 0 Source: 2010 RIC Surveys. E.3 ENTERPRISE PERFORMANCE Several major obstacles were perceived by the household to access to loans. Market knowledge and lack of access to entrepreneurs, such as insufficient capital, lack of access inputs are common obstacles, which are similar to obstacles to inputs, market knowledge, and lack of access to loans. to starting a business (table E3.1). Table E3.2 shows regres- Insufficient capital is the top obstacle for operations of non- sion results of the four countries, indicating the correlation of farm enterprises once they are started. This may be related performance and RIC variables. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x E — E N TE RP RiSE DYNAMi CS 47 TABLE E3.2: Determinants of Enterprise Performance: Revenues YEMEN YEMEN BF BF NG NG MZ MZ REVENUES NONFARM FARM NONFARM FARM NONFARM FARM NONFARM FARM VARIABLES LNREVPERFUL LNREVPERFUL LNREVPERFUL LNREVPERFUL LNREVPERFUL LNREVPERFUL LNREVPERFUL LNREVPERFUL ln (firm age) 0.061 -0.852 0.088 0.784 0.066 0.001 -0.097 -0.197 [0.118] [0.622] [0.118] [0.687] [0.059] [0.069] [0.237] [0.530] Female manager 1.222*** 0.531 0.662*** 0.605 -0.355*** -0.374*** -0.907 -2.404*** [0.274] [1.039] [0.226] [0.591] [0.114] [0.127] [0.849] [0.838] Founded by own -0.007 1.441** 0.043 0.053 -0.035 0.037 0.036 -0.713 [0.305] [0.682] [0.322] [0.424] [0.137] [0.111] [0.416] [0.969] ln (manager education years) -0.099 -0.351 -0.255 0.492** 0.039 -0.029 0.312* 0.192 [0.084] [0.288] [0.165] [0.234] [0.052] [0.059] [0.189] [0.390] Having bank account 1.737*** 0.000 0.302 0.812** 0.216 0.379** 0.267 -1.610 [0.381] [0.000] [0.275] [0.389] [0.138] [0.168] [0.441] [1.291] Having a loan 0.245 0.000 0.263 0.853 0.224 -0.083 1.305 0.519 [0.922] [0.000] [0.322] [0.641] [0.348] [0.260] [1.173] [1.571] Having payment dispute 0.376* -0.722 -0.043 0.920 0.275 0.038 0.355 0.000 [0.204] [0.611] [0.257] [1.137] [0.229] [0.268] [0.404] [0.000] Having corruption 0.002 0.370 -0.122 1.408 0.145 0.231 0.165 0.123 [0.002] [0.506] [0.397] [0.906] [0.246] [0.210] [0.359] [0.804] Use water 0.185 3.572* -0.158 0.547 0.198** -0.110 0.348 0.843 [0.185] [2.021] [0.226] [0.385] [0.100] [0.126] [0.441] [0.608] Use electricity 0.874*** 0.753 0.014*** 0.000 -0.138 0.254* 0.265 1.166 [0.247] [1.260] [0.004] [0.000] [0.094] [0.152] [0.548] [1.721] Use cell phone 0.133 -0.106 0.120 0.144 0.323*** -0.088 0.068 -0.252 [0.246] [0.578] [0.252] [0.403] [0.113] [0.130] [0.327] [0.539] Innovation/improvement -0.194 0.379 0.140 1.336 0.037 0.073** 0.018 1.192*** [0.205] [0.521] [0.389] [0.847] [0.037] [0.035] [0.156] [0.262] Business service 0.054 0.000 0.171 -1.166 0.169 -0.079 -2.313*** 0.467 [0.259] [0.000] [0.265] [0.751] [0.180] [0.166] [0.527] [0.821] Use auto 1.076*** -1.317* 0.384 0.718 0.196** -0.167 0.967** 0.015 [0.272] [0.726] [0.361] [0.561] [0.100] [0.118] [0.375] [0.656] -0.068 -0.015 -0.006 0.186* -0.014 0.027 -0.096 -0.245 ln (km to district market) [0.073] [0.201] [0.095] [0.107] [0.046] [0.058] [0.174] [0.217] Observations 262 55 230 104 503 469 186 73 R-squared 0.349 0.286 0.307 0.213 0.139 0.091 0.118 0.324 Source: 2010 RIC Surveys. Note: Sampling weights are applied; Standard errors in brackets; significant level: *** p < 0.01, ** p < 0.05, * p < 0.1. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 AP P E N D i x F — iN C OME Si MUL AT i ONS BY Ri C i MP R OVEMENT 49 Appendix F: INCOME SIMULATIONS BY RIC IMPROVEMENT The impacts on performance, especially income, are remark- respectively, on RIC improvement in access to finance, trans- able when major RIC components are improved. Simulation port, business services, cell phone, electricity, and water as results of income increase by 5 percent and 10 percent, shown in table F1.1.12 12 This simulation has weakness, which is correlation based on coef- ficients instead of causation. Five percent improvement has an in- crease of (exp (coefficient*0.05)-1)*100; Bold numbers represent wrong signed coefficients. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 50 A PPEND ix F — iNC OME S iMULATiONS BY RiC iMPR OV EM ENT TABLE F1.1: income increase of Household Enterprises by RiC improvement NONFARM FARM AVERAGE% COEFFICIENT 5% 10% AVERAGE% COEFFICIENT 5% 10% Having a bank account 6.7 1.737 9.07 18.97 1.0 dropped 0.00 0.00 Having a loan 2.2 0.245 1.23 2.48 0 dropped 0.00 0.00 Use car/bus/truck (transport) 62 1.076 5.53 11.36 77 -1.317 -6.37 -12.34 Innovation/improvement 24.1 -0.194 -0.97 -1.92 20.6 0.379 1.91 3.86 YEMEN Business services (any) 13.5 0.054 0.27 0.54 1.2 dropped 0.00 0.00 Use cell phone 79 0.133 0.67 1.34 74 -0.106 -0.53 -1.05 Use electricity 83 0.873 4.46 9.12 12 0.753 3.84 7.82 Use water 42 0.185 0.93 1.87 93 3.572 19.55 42.93 All improved except wrong signs 24.00 53.77 26.52 60.06 Having a bank account 15 0.302 1.52 3.07 14 0.812 4.14 8.46 Having a loan 6.3 0.263 1.32 2.66 7.6 0.853 4.36 8.90 Use car/bus/truck (transport) 7.6 0.384 1.94 3.91 2.5 0.718 3.66 7.44 BURKINA FASO Innovation/improvement 21.8 0.140 0.70 1.41 10.8 1.336 6.91 14.29 Business services (any) 15.2 0.171 0.86 1.72 21.7 -1.166 -5.66 -11.01 Use cell phone 21 0.120 0.60 1.21 26 0.144 0.72 1.45 Use electricity 5.4 0.014 0.07 0.14 1.7 dropped 0.00 0.00 Use water 73 -0.158 -0.79 -1.57 87 0.547 2.77 5.62 All improved except wrong signs 7.22 14.96 24.67 55.43 Having a bank account 16 0.216 1.09 2.18 16 0.379 1.91 3.86 Having a loan 1.7 0.224 1.13 2.27 1.4 -0.083 -0.41 -0.83 Use car/bus/truck (transport) 64 0.196 0.98 1.98 66 -0.167 -0.83 -1.66 Innovation/improvement 41.4 0.037 0.19 0.37 35.1 0.073 0.37 0.73 NIGERIA Business services (any) 9.8 0.169 0.85 1.70 6.98 -0.079 -0.39 -0.79 Use cell phone 40 0.323 1.63 3.28 43 -0.088 -0.44 -0.88 Use electricity 35 -0.138 -0.69 -1.37 16 0.254 1.28 2.57 Use water 53 0.198 0.99 2.00 78 -0.110 -0.55 -1.09 All improved except wrong signs 7.05 14.60 3.59 7.32 Having a bank account 14 0.267 1.34 2.71 17 -1.610 -7.73 -14.87 Having a loan 4.0 1.305 6.74 13.94 9.0 0.519 2.63 5.33 Use car/bus/truck (transport) 50 0.967 4.95 10.15 30 0.015 0.08 0.15 MOZAMBIQUE Innovation/improvement 22.8 0.018 0.09 0.18 45.4 1.192 6.14 12.66 Business services (any) 2.8 -2.313 -10.92 -20.65 5.8 0.467 2.36 4.78 Use cell phone 52 0.068 0.34 0.68 33 -0.252 -1.25 -2.49 Use electricity 12 0.265 1.33 2.69 7 1.166 6.00 12.37 Use water 22 0.348 1.76 3.54 66 0.843 4.31 8.80 All improved except wrong signs 17.57 38.24 23.38 52.23 Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x G — G OVE RNME NT- RE L AT E D RiC 51 Appendix G: GOVERNMENT-RELATED RIC At this moment, government-related RIC may be expected Security expenses include preventive expenses and cost to become more important as rural enterprises become incurred after damage. Security expenses are as low as 1 formalized. They include security, legal system, licenses percent, except in Burkina Faso, where for farm enterpris- and permits, tax system, corruption, disaster management, es security expenses are 4.6 percent. This is caused by a health, education, and economic and political stability. few farm enterprises spending a lot of money for security, whereas more than 85 percent of farm enterprises spend no money for security (figure G1.1). G.1 SECURITY AND LEGAL SYSTEM The 2011 WDR (World Bank 2011) indicates that sustainable prosperity cannot be attained if citizens are not adequately G.2 PAYMENT DISPUTES protected from corruption, injustice, unemployment, and The more transactions occur in the community, the more pay- social unrest. Therefore, it is important to have security and ment disputes exist, unless proper settlement mechanism justice where businesses are to grow and thrive. is established. More disputes occur for nonfarm enterprises than for farm enterprises. In Yemen, disputes are as high as In countries where traditional chiefs exist, their role is impor- 22 percent for nonfarm enterprises, with 18 percent for farm tant in maintaining peace and stability in their communities enterprises. In Nigeria, payment disputes are the lowest of through decision making. Traditional chiefs have influence on the four countries. Court or police are less involved in dissolv- community decisions, especially in Yemen. Village councils ing payment disputes. These numbers reflect the percentage are organized almost 100 percent in Burkina Faso and Nigeria, of police or court involvement for solving payment disputes. with 39 percent in Yemen and 80 percent in Mozambique. A high percentage of payment disputes are not solved by Rural communities are relatively harmonious, except in means of discussion, friend, community leaders, police, or Yemen. Nigeria and Mozambique have relatively more dis- court (16 to 46 percent), with Nigeria for nonfarm as low as putes within the community than Yemen and Burkina Faso. 3 percent (figure G2.1). Crimes like assault and rape rarely occur, except in Nigeria (30 percent) (figure G1.1). FIGURE G1.1: Community Leadership, Crimes, and Security Expenses Community Leadership Harmonious community Security Expense % Total Village council Disputes (limited to large) Traditional chief Farm Nonfarm Assault, rape (limited to large) 100 100 95 98 10 100 100 95 100 85 90 80 80 98 69 80 60 4.6 60 5 40 30 23 40 5 20 23 0.8 0.9 1.0 0.8 2 39 20 0 2 0.8 1.5 3 0 0.7 0.7 YM BF NG MZ YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 52 A PPEND ix G — GOV ER NMENT-RELATED R i C FIGURE G2.1: Payment Disputes, Never Solved, Not Even Tried to Solve (%) Payment Disputes Payment Dispute Not Solved Court or Police to Solve Farm Nonfarm Farm Nonfarm Farm Nonfarm 30 46 30 50 25 22 40 20 20 30 26 11 12 11 18 20 16 27 8.0 10 20 26 10 4.7 21 16 10 10 0.2 6.7 5.1 3.0 4.2 3.0 0 0 0 0 YM BF NG MZ YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. G.3 LICENSES AND PERMITS G.4 TAX SYSTEM Businesses register their companies to operate formally. If the enterprises are formally operated, they have to pay tax. However, in rural areas, registration of enterprises is quite However, many rural enterprises are not paying taxes. The low, except for nonfarm enterprises of Yemen (16 percent) shape of graphs for tax systems looks similar to the registra- and Mozambique (25 percent). For operating licenses, gener- tions and operating licenses of figure G4.1. The perception of ally less than 7.6 percent possess operating licenses, where- tax rate or tax administration as a major obstacle is expected as Yemen has 18 percent and Mozambique has 15 percent to increase as registrations and operating licenses increase. (figure G3.1). FIGURE G3.1: Registrations and Licenses FIGURE G4.1: Tax System–Perceived Obstacles Registration Perceived Obstacle Tax Rate Farm Nonfarm Farm Nonfarm 30 20 25 17 12 20 16 14 10 7.0 10 10 3.7 3.4 1.8 7.0 5.6 0 0 1.4 0.8 0.6 1.0 YM BF NG MZ YM BF NG MZ Operating License Perceived Obstacle Tax Admin Farm Nonfarm Farm Nonfarm 30 40 33 20 18 15 25 20 17 10 6.8 3.7 7.6 3.0 2.7 2.8 6.8 0 1.0 0 0.8 1.0 1.7 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x G — G OVE RNME NT- RE L AT E D RiC 53 FIGURE G5.1: Corruption Corruption Major Perceived Unofficial Payment in US$ Obstacle Farm Nonfarm Farm Nonfarm 1000 919 60 51 800 47 40 600 400 330 20 150 261 0.5 4.0 13 200 0.6 165 0 2.8 6.0 0 0 0 0 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. G.5 CORRUPTION come. An effective disaster risk reduction strategy may be Corruption represents unofficial payments that are requested required to save lives, protect livelihoods, and reduce the loss from or paid by entrepreneurs. In fact, many enterprises are of properties (EC 2011). The effects from disasters on com- informal and not registered. Therefore, corruption may not munities or businesses will be compelling. Disasters may exist for informal enterprises. Figure G5.1 shows corruption include those that are manmade, like social unrest and con- perceived as a major or very severe obstacle. The amount of flicts. Figure G6.1 shows major disasters that have occurred official payment is in US dollars. and percentages of households affected by that disaster. G.6 DISASTER MANAGEMENT G.7 HEALTH In recent years, the frequency and severity of disasters have Health is considered a crucial economic asset. The Millennium increased, and this trend is likely to worsen in the years to Development Goals list health as fundamental to eradicating FIGURE G6.1: Disasters in Each Country Yemen Disasters Nigeria Disasters % Communities % HH Affected % Communities % HH Affected 100 100 80 80 80 77 69 80 51 59 60 50 60 51 40 58 25 40 47 20 20 10 25 19 17 21 12 0 0 145 5 Drought Cold Crop Civil Epidemic Drought Cold Crop Famine Flood Weather Disease Unrest Weather Disease Burkina Faso Disasters Mozambique Disasters % Communities % HH Affected % Communities % HH Affected 100 100 83 76 78 74 80 71 67 80 63 60 76 69 60 40 49 28 40 23 41 20 27 20 8 4 27 22 18 0 0 9 1 1 Epidemic Famine Drought Fire Cold Crop Flood Flood Drought Fire Epidemic Weather Disease Source: 2010 RIC Surveys. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 54 A PPEND ix G — GOV ER NMENT-RELATED R i C FIGURE G7.1: Health Facilities FIGURE G8.1: School and Education Health Facilities in the Community Schools in the Community Primary school Middle school Health center Clinic 80 69 95 63 97 93 100 83 50 58 60 80 92 56 76 40 47 60 67 40 20 18 20 5 28 0 0 YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. % Worker Completed extreme poverty. The benefits of good health are important Primary School Farm Nonfarm for the poor, as they have fewer resources for education and 77 80 health. Healthy adults are more likely to have more resources 60 to invest in the health and education of their children (OECD 60 72 40 2003). 40 53 The availability of health facilities represents the level of avail- 33 8.0 able health services in the community. Except for Nigeria, 20 there are more health centers than clinics in the communi- 7.1 0 ties. The level of availability of clinics in Burkina Faso and YM BF NG MZ Mozambique are very low at 18 percent and 5 percent, re- Source: 2010 RIC Surveys. spectively (figure G7.1). G.8 EDUCATION Therefore, we may be able to conclude that political stability Education is important to develop the economy of the country. is one of the keys to economic stability, though it is not the Schools are necessary to enable students to obtain required only component. Gross domestic products (GDPs) per capita education. We need to not only increase the availability of growth rates of the three African countries increased in 2010 schools for children, but also to encourage students to com- (figure G9.1). plete their education. Many children have not enrolled even The Political Risk Service (PRS) Group is rating political risk though it is free, and even if they are enrolled, many have not as shown below.13 Nigeria stays at the range of very high completed the minimum requirements to become permanent- political risk at least for the last six years, whereas Yemen and ly literate, even though progress has been notable in develop- Burkina Faso turned from moderate risk to high or very high ing countries, including throughout Africa (Chimombo 2005). risk, and Mozambique stayed almost within moderate risk A primary school exists in most communities, yet in some range, except in 2010 when it improved to the low risk range. communities, no primary school is available. There are fewer Two countries are stable at the higher risk range in Nigeria middle schools in Burkina Faso than the other three coun- and the moderate risk range in Mozambique (figure G9.2). tries. The lowest percentage of workers who completed pri- Based on the economic risk rating of the PRS Group, in mary school is in Burkina Faso at 8.0 percent and 7.1 percent June 2011, Yemen had a high risk of economic stability, for farm and nonfarm enterprises, respectively (figure G8.1). 13 The PRS Group calculates political rating based on the following G.9 ECONOMIC AND POLITICAL STABILITY indicators: Government stability (12); Socioeconomic conditions Political instability leads to economic instability (Saeed 1986; (12); Investment profile (12); Internal conflict (12); External con- flict (12); Corruption (6); Military in politics (6); Religious tensions Nelson 1998; Alesina et al. 1998). Nelson (1998) states (6); Law and order (6); Ethnic tensions (6); Democratic account- that economic growth is associated with reduced poverty. ability (6); and Bureaucracy quality (4). iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x G — G OVE RNME NT- RE L AT E D RiC 55 FIGURE G9.1: GDP Per Capita Growth Rate (%) GDP Per Capita Annual Growth Rate (%) YM BF NG MZ 10 8.0 8 6.0 5.7 5.7 6 5.1 4.8 4.6 5.4 4.4 3.7 4 4.9 2.9 4.1 2.8 4.0 2.0 3.6 1.2 2 2.6 1.5 0.8 0.4 1.0 0 0.7 0.3 0.1 0.1 -2 2004 2005 2006 2007 2008 2009 2010 Source: The World Bank (WDI). FIGURE G9.2: Political Risk Rating Political Risk Rating (PRS) June 0-49.9 Very High Risk; 50 - 59.9 High Risk; 60-69.9 Moderate Risk; 70 -79.9 Low Risk YM BF NG MZ 80 69 69 69.5 69.5 70.5 67 63 62.5 61.5 60.5 60 60 62 62 60.5 53 57.5 56.5 49.5 40 46.5 45.5 45.5 46 43 43 20 2006 2007 2008 2009 2010 2011 Source: The PRS Group. whereas Mozambique and Burkina Faso had moderate risk, land preparation, fertilization, irrigation, agro-processing, and and Nigeria had low risk.14 However, economic risk ratings conservation, as well as nonfarm economic activities, espe- have been fluctuating, especially for Yemen, Nigeria, and cially value-addition processing. In many rural areas, energy Mozambique (figure G9.3). needs are, at present, predominantly supplied in the form of traditional biomass fuels and human and animal labor. Figure G10.1 shows percentages of households electrified, per- G.10 ELECTRICITY centages of enterprises using electricity, and percentages of enterprises using a generator for their businesses. Electricity is important for both farm and nonfarm activities. The availability of electricity enhances farm production through Although energy is not considered a basic human need, it is required to meet all of the basic needs for food and health. In 14 The PRS Group provides the ratings monthly, but June in each this context, energy is also required in agriculture, education, year was chosen to compare. Economic risk rating is calculated information, and other infrastructures. Rehling et al. (2004) based on the following indicators (points): GDP per head (5); Real show that energy has a clear correlation with the Human GDP growth (10); Annual inflation rate (10); Budget balance as a percentage of GDP; and Current account as a percentage of Development Index, which represents this basic human GDP (15). need. AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 56 A PPEND ix G — GOV ER NMENT-RELATED R i C FIGURE G9.3: Economic Risk Rating Economic Risk Rating (PRS) June 25-29.9 High risk; 30-34.9 Moderate risk; 35-39.9 Low risk YM BF NG MZ 39.5 39.5 40 38 37 36 35 33.5 33.5 34.5 32.5 32.5 31.5 32 32.5 31.5 30 31 31 31 29.5 25.5 26.5 25.5 25.5 24 20 2006 2007 2008 2009 2010 2011 Source: The PRS Group. FIGURE G10.1: Electrification and Use of Electricity % of Communities Use Electricity Use or Share a Generator Electrified Farm Nonfarm Farm Nonfarm 100 91 100 100 83 78 80 80 80 59 59 60 60 60 35 53 33 40 40 40 33 20 20 12 29 20 18 5.4 22 15 0 6.5 0 16 7 12 1.7 0 YM BF NG MZ YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. FIGURE G11.1: Water: Use and Sufficient Supply Water in the Community Use Water Sufficient Water Farm Nonfarm Farm Nonfarm Potable water Sewage 93 100 100 100 87 100 83 78 75 73 99 80 80 66 80 60 43 60 73 60 69 66 40 28 40 53 40 47 44 42 20 27 20 20 18 22 0 10 0 0 0 2.3 YM BF NG MZ YM BF NG MZ YM BF NG MZ Source: 2010 RIC Surveys. iMPR OViNG TH E RURA L iNVES TMENT C LiMATE FOR BUS iNES S ES AP P E N D i x G — G OVE RNME NT- RE L AT E D RiC 57 G.11 WATER AND SEWAGE SYSTEMS FIGURE G12.1: Garbage Collection, Biogas, and Water is vital for farming activities and some nonfarm Cylinder Gas activities. In the nonfarm sector, some food processing Other Infrastructure activities require water for their business. Secured water Garbage collection Biogas sources are still available in less than half of the communi- Cylinder gas ties. Mozambique has an especially low rate of 18 percent 100 available secured water sources. The availability of a sew- 78 80 age system in the community is below the level of secured water, except in Mozambique, where sewage availability is 60 39 slightly better than the percentage of secured water in the 40 18 14 communities (figure G11.1). 20 3 6 6 0.8 0 0 5 0 2.5 YM BF NG MZ G.12 GARBAGE COLLECTION, BIOGAS, AND Source: 2010 RIC Surveys. CYLINDER GAS In addition to electricity and water, other infrastructure in- cludes garbage collection, the use of biogas, and the use of Nigeria and Burkina Faso are 0.8 percent and 6 percent, re- cylinder gas. The use of biogas is quite limited, as shown spectively. Garbage collection is not well penetrated in the in less than 5 percent of households in the communities. communities; the highest is 18 percent in Burkina Faso, the Cylinder gas is penetrating well in Yemen, but not in other second is 14 percent in Nigeria, with 6 percent and 3 percent countries. Mozambique has 39 percent cylinder gas, whereas in Yemen and Mozambique, respectively (figure G12.1). AGR i C U LT U R E A N D RURAL DE VE L OP ME NT Di SCUS S iON PA PER 51 Agriculture and Rural Development (ARD) 1818 H Street, NW Washington, D.C. 20433 USA Telephone: 202-477-1000 ARD AGRICULTURE AND RURAL DEVELOPMENT Internet: www.worldbank.org/ard