Download Introduction Most economists agree that sustained economic growth

1. Introduction
Most economists agree that sustained economic growth is the most critical factor in alleviating
poverty.1 There is also a general consensus among the development community that the private
sector is an engine of economic growth. Investment Climate (IC) reforms, which seek to improve
the overall and firm-level business enabling environment, are an essential component of private
sector development. They also contribute to productivity and investment, which are key
determinants of growth.2
Poverty definitions vary among scholars and institutions. Using the standard World Bank USD
1.25 a day measure,3 1.29 billion people classified as poor in 2008. According to the economic
bottom of the pyramid (BOP) concept, which refers to low-income markets where people have a
yearly income below USD 3,000,4 4 billion people classify as poor.5 BOP markets are present in
all developing regions. Most are poor, rural and poorly served. However, they constitute a USD
5 trillion global consumer market,6 presenting a business opportunity for local and foreign
businesses. Their operating and regulatory environments can be challenging, and as a result,
they are relatively inefficient, uncompetitive and dominated by informal economy.7
IC reforms address the needs of the poor by facilitating enterprise creation and growth, fostering
international trade and investment, promoting sustainable investments in key industries
(agribusiness, tourism) and encouraging private participation in infrastructure and social sectors
(ICT and health). IC reforms focus on micro, small and medium sized enterprises and reach the
poorest regions of the world.
As the chart below shows, the Investment Climate Department (CIC) invests 31% of its funding
in Sub-Saharan Africa, where 47.5% of the population classifies as poor by the USD 1.25 a day
measure8 and 95% of the population constitutes a BOP market. Sub-Saharan Africa is followed
by the Asian regions,9 which cumulatively receive 32% of CIC funding. Together with the Middle
East, Asia represents the largest, most growing and rural BOP market in the world.10
Chart 1: CIC FY12 projects and project expenditures by region11
Projects in regions (active/on hold)
World
LAC 8 EAP
23
17
SSA
45
SA
17
MENA
18
ECA
22
Project expenditures in regions
LAC
8%
World EAP
15% 11%
SSA
31%
SA
14%
MENA
7%
ECA
14%
1
Nallari R., Griffith B.. 2011. Understanding Growth and Poverty Theory, Policy, and Empirics. The World Bank.
World Development Report 2005. A Better Investment Climate for Everyone. The World Bank and Oxford University Press (WDR 2005).
3 Refers to international dollars (adjusted for purchasing power parity (PPP)) at 2005 international prices (Source: PovcalNet database,
World Bank Data, 2012).
4 In 2005 international dollars, adjusted for PPP (Source: The Next 4 Billion, 2007).
5 Hammond A., Kramer W. J., Tran J., Rob Katz, Walker C. 2007. The Next 4 Billion: Market Size and Business Strategy at the Base of the
Pyramid. World Resource Institute. (The Next 4 Billion, 2007)
6
Id.
7 The Next 4 Billion, 2007.
8 In 2005 international dollars, adjusted for PPP (Source: PovcalNet, World Bank Data, 2012).
9 Includes East Asia and Pacific (EAP), South Asia (SA) and Middle East and North Africa (MENA). The percentage would be even higher if
Asian countries from the Europe and Central Asia region were accounted for.
10 The Next 4 Billion, 2007.
11
Status as of March 31, 2012.
2
1
During the 2008-2011 strategy cycle, CIC-funded projects supported the implementation of 186
IC reforms (USD 119.8 million were spent on CIC-related activities)12. Business entry has been
the most frequent reform area, seeking to include the BOP in the formal economy in order to
spur their growth and wealth generation.
The following two sections will review the impact of IC reforms and their link with poverty
reduction. Findings include theoretical and empirical studies, country and cross-country studies
and descriptive reports.
2. The Impact of Investment Climate Reforms
Entrepreneurship is indispensable for sustaining the dynamism of the modern market economy,
and a greater entry rate of new businesses can foster competition and economic growth.13 In
order to facilitate a healthy process of creative destruction, a conducive business environment is
needed. First, firms should be able to enter the market easily. Second, the market should be
highly competitive, in order to inspire and encourage innovation. Third, business exit process
should be quick and efficient, to allow creditors to recover their assets and entrepreneurs to
pursue new opportunities.
Chart 2: IC Reforms and Poverty Reduction
IC Strategic
Priorities
IC Reform Areas
Business Regulations
Debt Resolution and
Fostering Enterprise
Creation and Growth
Business Taxation
Unlocking
Sustainable
Investment in Key
Sectors
Investment Policy
Productivity
Investment Generated
(domestic or FDI)
Jobs
Private Participation in
Health Sector
Private Sector Savings
- Competition Policy
- ICT
- Governance/Transparency
- Gender/Inclusion
- PPD
- Green Growth
Economic Growth
is Closely Associated with
Reductions in Poverty
Returns to Creditors
Consumer Savings
Cross-cutting Themes:
Encouraging Private
Participation in
Infrastructure and
Social sectors (Health
and ICT)
Aggregate Level
Firm Creation
Industry: Agribusiness and
Tourism
Private Participation in
Electricity Sector
Impact on Poverty
Reduction
Export
Business Exit
Trade Logistics
Facilitating
International Trade
and Investment
IC Impact Indicators
Direct
Improvements in
Lives of the Poor
Employees
Entrepreneurs
Consumers
Users of Infrastructure and
Finance
Improved Infrastructure
Reduction in Corruption
12
FY08-10: USD 89.5 million, FY11: USD 30.3 million (Source: 2011 Annual Review. FIAS: The Facility for Investment Climate Advisory
Services. The World Bank Group)
13 Klapper, L., Laeven L., Rajan R.. 2006. Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics 82 (3): 591– 629.
Djankov, S., La Porta R., Lopez- de- Silanes F., Shleifer A.. 2002. The regulation of entry. Quarterly Journal of Economics 117 (1): 1– 35.
2
IC reforms cover the following topics:

Business entry reforms have a positive impact on firm creation. Country-specific studies
from Colombia, Mexico and India, as well cross-country studies, show that easing of
business registration leads to higher firm creation. The average increase in the entry rate is
5% for selected country studies and 10.5% for cross-country studies.14 A large share of
newly registered firms tends to survive and grow, suggesting that business entry reforms
can have a substantial impact on the lives of the poor through employment generation.

More firms implies more competition, provided that effective competition policies and
enforcement mechanisms are in place. Findings from several studies document the
positive impact of sector-specific competition policies on productivity. In retail and services,
an empirical analysis of 1,948 retail stores located in 41 cities in India shows that procompetition reforms can improve productivity by 87%.15 Higher competition is also
associated with cost savings for the private sector. In the transport sector, for example,
breaking the Laos cartel and opening transit to all Thai truckers in 2004 reduced logistics
costs from Bangkok to Vientiane by 30%.16 The reverse applies if the market remains
concentrated in the hands of a few players. For example, the lack of telecommunication
competition in Mexico has led to inefficient telecommunications markets that impose
significant costs on the Mexican economy and burden the welfare of its population. The
resulting loss of benefit to the economy is estimated at USD 129.2 billion (2005-2009), or
1.8% GDP per annum.17

Easy international trade flows and smart investment regulations are critical for firms seeking
to expand internationally. Literature suggests that trade logistics reforms have a notable
impact on productivity and GDP. For example, a 1% reduction in the time to export
increases exports by 0.4%.18 Exporters are on average 28% more productive than nonexporters and have a higher rate of productivity growth.19 In addition, the impact of trade
logistics reforms is higher in the poorest countries. It is estimated that reducing time to
export by 1% could increase trade on average by 0.64% for Sub-Saharan African countries
and 0.61% for South Asia, while it is lower for countries in the Latin American and the
Caribbean region (0.37%).20

If firms run into difficulties, they should be given an opportunity to restructure or efficiently
conclude operations. The recent economic crisis has underlined the importance of solid
bankruptcy laws and effective dispute resolution mechanisms. Existing studies on
insolvency laws suggest that effective insolvency regimes reforms can lead to more timely
repayments and reduce the cost of credit and the failure rates among small and mediumsize enterprises (SMEs).21 Keeping businesses alive also increases returns to creditors, who
have a chance to recover a larger portion of credit.22 But these studies are limited to specific
14
Motta M., Oviedo A. M., Santini M.. 2010. An Open Door for Firms: The Impact of Business Entry Reforms. The World Bank Group.
Amin M. 2007.. Labor Productivity and Competition in India’s Retail Stores. Mimeograph; available at www.enterprisesurveys.org.
16 Arnold J.. 2005. Trade and Transport Facilitation in Laos. The World Bank.
17 OECD (2012), OECD Review of Telecommunication Policy and Regulation in Mexico, OECD Publishing.
http://dx.doi.org/10.1787/9789264060111-en.
18
Djankov S.,Freund C., Pham C. S. 2010.. Trading on Time. The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 166173, 05.
19 Van Biesebroeck J. 2005.. Exporting Raises Productivity in Sub-Saharan African Manufacturing Plants. Journal of International
Economics, Volume 67, Issue 2.
20 Subramanian U., Anderson W., Lee H. L.. Forthcoming.
21 Dewaelheyns, N., Van Hulle C.. 2006. Legal Reform and Aggregate Small and Micro Business Bankruptcy Rates: Evidence from the 1997
Belgian Bankruptcy Code. K.U. Leuven AFI.
22
Klapper L. 2011.. Saving Viable Businesses. The Effect of Insolvency Reform. Viewpoint. World Bank Group.
15
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reforms in a few countries and additional evidence is needed to identify the actual effects on
private sector.

Research estimates that the total costs incurred by firms that use alternative dispute
resolution (ADR) mechanisms range from 3 to 50% of the costs incurred by firms that go
through a court litigation process.23 The estimates vary substantially across countries and
studies, and additional empirical research is necessary. ADR can also increase the
effectiveness of courts, through unburdening the court system, and improve trust in the legal
system, which in turn may increase foreign investment.24

High tax rates and complex businesses regulations put a heavy financial and time burden on
all business, small ones in particular.25 Cross-country research studies on business
taxation suggest that lower effective tax rates are associated with higher foreign direct
investment (FDI), approximately 1.6-2.1% of GDP.26 The effect on domestic investment is
equivalent to 2% of GDP.27 While few studies suggest that simplifying taxes can increase
formal firm creation and firms’ sales, more research is required to confirm these links.

Some evidence suggests that investment promotion agencies (IPAs) can help countries
attract FDIs. In a cross-country study of 124 countries, researchers conclude that IPAs can
be an effective means of attracting FDIs, in particular in developing countries with higher
levels of information asymmetry and marked by significant levels of bureaucracy.28 Taking
into account the costs and benefits of investment promotion, the study concludes that a
dollar spent leads to USD 189 of FDI inflows from the United States. Targeted sector
promotion in agribusiness can also spur employment.29 However, this area also requires
further research.

Electricity sector reforms aimed at privatization and restructuring have led to significant
improvements in operating performance of energy enterprises in many countries. Although
cross-country evidence is scarce, reforms in Latin America show efficiency gains, such as
labor productivity, lower distributional losses, higher installed capacity and utilization, and in
some cases price decreases. In Argentina, which allowed for the development of one of the
most competitive wholesale electricity markets in the world, spot prices of electricity declined
by 60%, and investment in electricity generation and network expansion increased
substantially (installed capacity almost doubled, distributional losses halved).30

Advances in ICT reforms related to investment climate improvements, such as introducing
online business registration systems via e-government, can increase transparence and ease
compliance burdens on firms.31 In Singapore, introducing online business registration,
licensing procedures and a one stop online application system for certain special licenses
reduced the cost of business incorporation from USD 700-20,000, depending on the capital
of the company, to a flat fee of USD 175.32 A cross-country study of 85 countries has also
23
Love I.. 2011. Settling Out of Court: How Effective Is Alternative Dispute Resolution. Viewpoint. The World Bank Group.
Id.
25 Tax Compliance Cost Surveys - Using data to design targeted reforms, CIC InPractice Note, 2010.
26 Djankov S. and other. 2010, Van Parys and James, forthcoming.
27
Djankov, S., Ganser T., McLiesh C., Ramalho R, Shleifer A.. 2010. The Effect of Corporate Taxes on Investment and Entrepreneurship.
American Economic Journal: Macroeconomics 2 (3): 31–64.
28 Harding, T., Javorcik, B. Smarzynska.. 2011. Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows. The
Economic Journal, Vol. 121, Issue 557, pp. 1445-1476.
29 Poulin R.. 2004. Assessment of USAID's fertilizer market privatization program: Bangladesh. http://pdf.usaid.gov/pdf_docs/PNABU208.pdf
30 Edenor (2001); Rudnick and Solezzi (2001); (CAISE, 2002); Fischer, Gutierrez, and Serra (2003); Politt (2003).
31 WDR 2005.
32
Id.
24
4
found a strong positive correlation between Corruption Perception Index33 and Digital
Access to Information Index,34 suggesting that improved access to information through
digital means, such as those supported by ICT reforms, is associated with lower
corruption.35
3. Linkages between IC Reforms and Poverty Reduction
The linkages between IC reforms and poverty reduction are two-fold. First, IC reforms can
generate investment, increase the volume of trade and improve firms’ productivity, thereby
making a substantial contribution to economic growth. Growth in turn increases people’s
incomes and it reduces poverty. Second, IC reforms have a direct impact on the lives of the
poor, through business creation, employment, improved access to infrastructure and other
improvements driven by the reforms.
3.1 Economic Growth
As previously shown, IC reforms help generate investment. The volume of investment matters
for growth as it constitutes a fundamental part of GDP. Country evidence shows that economic
growth rates have been the highest if accompanied by high savings and investment rates, while
the opposite is true for low rates.36 A recent study in Africa examines the relationship between
FDI inflows and poverty reduction. Using FDI net inflows per capita and the United Nations
Development Program’s Human Development Index as the principal variables, the study
confirms the positive and significant relationship between FDI net inflows and poverty reduction
in Africa. In addition, FDI has a greater impact on welfare in poorer countries than it does in
wealthier countries in the region.37
IC reforms spur international trade. Most economists agree that trade is also positively
associated with economic growth.38 Dollar and Kraay (2001), for example, find a statistically
significant effect of trade on growth. If the share of trade to GDP increases by 20%, growth
increases by 0.5-1% per year.39 Trade promotes domestic competition, expands firms’ access to
foreign exchange and allows them to exploit economies of scale. As was shown earlier, trade
also spurs productivity of exporters, which in turn may induce positive spillover effects to other
firms in the local economy.
Investment, trade and competition policies increase productivity.40 Overall, there is growing
evidence supporting the claim that productivity affects growth more than the actual
accumulation of production inputs.41 For example, Hall and Jones (1999) found that the output
per worker, which is a measure of productivity, was more than 35 times higher in the United
States than in Niger. This means that in approximately 10 days, the average worker in the
33
The Corruption Perception Index or CPI (Transparency International, 2005) is selected as the means for measuring corruption, as it is the
most comprehensive quantitative indicator of cross country corruption available.
34 The Digital Access Index or DAI 2002 is used as a proxy for access to information. The DAI measures the overall ability of individuals
across 178 countries, to not only access but also use information and communication technology.
35 DiRienzo, C. E., Das, J., Cort, K. T., Burbridge, J., Jr.. 2007. Corruption and the role of information. Journal of International Business
Studies, 38(2), 320-332.
36 Nallari R., Griffith B.. 2011. Understanding Growth and Poverty Theory, Policy, and Empirics. The World Bank.
37 Goho G., Soumaré I.. 2011. Does Foreign Direct Investment Reduce Poverty in Africa and are There Regional Differences? African
Development Bank, Tunisia. Laval University, Quebec, Canada. World Development Vol. 40, No. 1, pp. 75–95.
38
Id.
39 Dollar, D., Kraay A.. 2001. Trade, Growth, and Poverty. Policy Research Working Paper 2615. World Bank, Washington, DC.
40 Productivity refers to two main concepts: labor productivity and Total Factor Productivity (TFP). Labor productivity refers to the valueadded produced by each unit of labor. TFP refers to the efficiency, with which physical and human capital, land, and natural resources are
used to produce outputs. Both are positively affected by IC reforms.
41 Nallari R, Griffith B.. 2011. Understanding Growth and Poverty Theory, Policy, and Empirics, The World Bank.
WDR 2005.
5
United States produced as much as an average worker in Niger produced in an entire year. The
majority of this difference can be explained by differences in productivity, and not production
inputs accumulation and education attainment.42 Early growth research emphasized
technological progress in explaining productivity but recent studies show that broader
environment, in which firms operate, matters as well.43 This can be understood in terms of
property rights, institutions, or the investment climate. Productivity is thus the key to growth and
investment climate reforms improve it.
A body of literature provides evidence that the poor benefit from economic growth. For example,
Kraay (2004) found that in the medium to long run, between 66-90% of the variation in changes
in poverty can be accounted for by the growth in average incomes.44
Chart 3 demonstrates the relationship between the incomes of the poor and average per capita
incomes in 137 countries. As we can observe, there is a strong positive correlation between the
two variables, suggesting that poverty trends track growth trends very closely.
Chart 3: Correlation of per capita incomes of the poor with average per capita income for
137 countries, 1950–99
Source: Dollar and Kraay (2002).45
3.2 Direct Improvements in the Lives of Poor People
IC reforms have positive effects on the poor in their various capacities:
Poor as Consumers
The poor pay higher prices for basic goods and services than wealthier consumers for the
same service or commodity. Often, these come at a lower quality.46 For example, evidence from
Mexico shows that the costs of unfair competition are not distributed equally across social
42
Hall, R. E., Jones, C. I.. 1999. Why Do Some Countries Produce So Much More Output Per Worker Than Others? Quarterly Journal of
Economics 114 (1), 83-116.
43 WDR 2005.
44 Kraay, A.. 2004. When Is Growth Pro-Poor? Cross-Country Evidence. Policy Research Working Paper 3225, World Bank, Washington,
DC.
45 Dollar, D., Kraay A.. 2002. Growth Is Good for the Poor. Journal of Economic Growth 7: 195–225.
46
The Next 4 Billion, 2007.
6
groups and regions. Welfare losses of poor households due to market power exerted by
companies on key goods were 20% higher (in relative terms) than the estimated welfare losses
imposed on the highest income households.47
Competition and trade also push prices down and increase the variety of goods and services,
including food, accessible to the poor. For example, lowering barriers to entry by 10%
decreased price markup by nearly 6%.48 IC improvements also lowered the price of food in
countries such as Ethiopia, Ghana, Kenya, Vietnam and Zambia.49
Poor as Users of Infrastructures
2.7 billon people worldwide rely on traditional biomass to cover basic energy needs. Overall,
36% of BOP households don’t have access to electricity and the lack of clean, affordable
energy is part of the poverty trap for economic and social reasons.50 Collecting wood for cooking
and purchasing kerosene for lighting is costly and translates into significant opportunity costs
(time could be spent for work or school). For example, 99% of Nigeria’s household energy
market classifies as BOP. Half of Nigeria’s population earn between USD 1-2 per day and
spend USD 0.40 per day on energy.51 In addition, the International Energy Agency estimates
that this leads to over 4,000 premature deaths per year (mostly due to indoor air pollution).52
Businesses are also heavily affected. The World Bank’s Enterprise Surveys in 89 economies
show that electricity access is one of the biggest constraints to business. Average electricity
outages per month are 6-times higher in low income countries than in upper middle income
countries.53 For micro-enterprises, this poses substantial costs as they often have to supply
energy from costly generators, while for more sophisticated SMEs, energy lack and outages
inhibit their graduation to higher-value-added activities that rely on electricity-based
technologies.54 Access to reliable electricity supply thus represents a significant opportunity to
spur small firms’ growth, productivity and competitiveness.
Poor as Employees
The private sector is responsible for around 90% of employment in the developing world (formal
and informal jobs).55 Formal and informal jobs are the main source of income for the poor. A
recent study of 99 countries worldwide (Ayyagari, Demirguc-Kunt, Maksimovic, 2011) shows
that while large firms have a significant employment share, small and mature firms (5-99
employees and older than 10 years) have the largest share of employment in developing
economies. These firms also have the largest share of new job creation on developing
countries.56 In addition, SMEs provide more opportunities for low-skilled workers than large
firms.57
47
Urzua C.. 2009. Distributive and Regional Effects of Monopoly Power, EGAP Working Paper -2009-04.
Hoekman, B., Kee H. L., Olarreaga M.. 2001. Markups, Entry Regulations, and Trade: Does Country Size Matter? Washington, D.C.:
World Bank Policy Research Working Paper Series 2662.
49 Minot, N., Goletti F. 2000. Rice Market Liberalization and Poverty in Vietnam. Washington, D.C.: International Food Policy Research
Institute, Research Report 114.
50 The Next 4 Billion, 2007.
51
Id.
52
Energy Poverty: How to make Modern Energy Access Universal? International Energy Agency. 2010.
53 Getting Electricity. A pilot indicator set from the Doing Business project. The World Bank Group. 2010.
54 Id.
55 WDR 2005.
56 Ayyagari M., Demirguc-Kunt A., Maksimovic M.. 2011. Small vs. Young Firms across the World: Contribution to Employment, Job
Creation, and Growth. The World Bank Development Research Group. Policy Research Working Paper 5631.
57
WDR 2005.
48
7
IC reforms aim to increase employment by large firms and MSMEs. However, evidence of the
impact of IC reforms on job creation (and firm survival) is very modest and requires more
rigorous research.58 Also, we have no evidence that formal employment creation (which may
result from IC reforms) benefits the poor as wage workers.
Poor as Entrepreneurs
A recent study suggests that between 22.5-34.5% of the global economic activity occurs in the
informal economy. In low income countries, the estimates range between 29-57%.59 IC reforms
seek to increase formality, which in turn improves access to finance, firms’ productivity and
profits.60 Burdensome regulations have the opposite effect. For example, an increase in entry
costs by 80% of income per capita is estimated to decrease productivity by 22%. 61 Relieving
these constraints on businesses can thus benefit the BOP businesses.
There is no conclusive evidence that entrepreneurs benefit from private sector savings brought
by IC reforms. Some studies suggest that the costs of doing business, such as obtaining a
license, or a permit, tend to impose a larger burden on small enterprise than on large ones. 62
Similarly, SMEs face higher cost when accessing financial services as they are perceived by
banks as risky, costly, and difficult to serve.63 Time and cost savings spurred by IC reforms may
serve as an extra ‘reserve’ for formal BOP businesses that can be used to avoid closures from
financial distress or for productive business purposes.64
IC reforms also benefit financial institutions who are creditors of BOP businesses. Many
developing countries face a high degree of financial exclusion and high barriers in access to
finance. Improving timely repayments, the returns for creditors and thereby the aggregate level
of credit can improve access to finance, which is critical in promoting growth and reducing
income inequality.65
At the same time, there is growing evidence that IC reforms, which focus mainly on the formal
sector, don’t have a sizeable impact on formalization. In fact, it seems that the great majority of
poor hope to get a wage job, and that being an entrepreneur may not be their primary goal.
Entrepreneurs benefit from lower corruption. Investment Climate surveys indicate that bribe
payments as a share of sales are 50% larger for small firms.66 A recent study in Uganda
examines the relationship between bribery payments, taxes and firm growth. The study finds
that a 1% increase in the bribery rate is associated with a reduction in firm growth of 3%, an
effect that is about three times greater than that of taxation.67 These findings suggest that
58
A simulation based on a recent study found that the introduction of a one stop shop for business registration in Guadalajara, Mexico, was
associated with the creation of 5,520 new firms and 18,768 new jobs one year after the reform. Motta M., Oviedo A. M., Santini M.. 2010. An
Open Door for Firms: The Impact of Business Entry Reforms. The World Bank Group.
59
La Porta, R., Shleifer A.. 2008. The Unofficial Economy and Economic Development. Tuck School of Business Working Paper No. 200957.
60 Data from Enterprise Surveys show that greater tax compliance is significantly associated with more access to credit. (Source: WDR
2005.)
61 Authors refer to TFP. The same increase in business entry costs also decreases output per worker by 29%. (Source: Barseghyan L. 2008.
Entry costs and cross-country differences in productivity and output. Journal of Economic Growth Volume 13, Number 2 (2008), 145-167,
DOI: 10.1007/s10887-008-9026).
62 WDR 2005.
63
Teima G. O., Ramsden N. P., Mirmulstein M. L.. 2010. IFC’s SME Banking Knowledge Guide. 2010. The World Bank.
64
For example, if ADR mechanisms are faster than court litigation, plaintiffs have a better chance of avoiding bankruptcy due to quicker
payment. However, this impact is more difficult to measure (because of the lack of counterfactuals), and almost no empirical evidence has
been found. Love I.. 2011. Settling Out of Court: How Effective Is Alternative Dispute Resolution. Viewpoint. The World Bank Group
65 Beck T., Demirgüç-Kunt A.. 2008. Access to Finance: An Unfinished Agenda. The World Bank Group Economic Review 3 (22): 383–396.
66 WDR 2005.
67 Fisman R., Svensson J.. 2005. Are corruption and taxation really harmful to growth? Firm level evidence. Journal of Development
Economics 83 (2007) 63–75.
8
corruption is detrimental to private sector development and to the growth of small enterprises in
particular.
4. Conclusion
Evidence from research suggests that investment climate matters for the poor. IC reforms aim
at increasing countries’ exports, productivity, investments, firm creation, and firm savings,
among other impact indicators.
IC project portfolio makes a significant contribution to the lives of the poor. Over a third of IC
projects and funding is located and spent in Sub-Saharan Africa. Also, IC reforms seek to
expand opportunities for all firms, not just large and influential ones, but also micro-enterprises
and SMEs from the BOP.
The relationship between investment climate and poverty reduction can be understood in two
ways. First, the impact of IC reforms can be seen on the aggregate level, through facilitating
investments, exports and improving productivity. These, in turn, spur economic growth, which
positively affects the poor through the improvements to their income. Second, IC reforms affect
people directly. The gains can be seen through the lenses of people capacities as employees,
entrepreneurs, consumers or users of infrastructures and finance. Entrepreneurs can capitalize
on increased productivity, private sector savings and access to finance if their businesses are
registered, trade logistics is made easier, insolvency regimes are improved and the overall
regulatory environment is more transparent and predictable.
Going forward, more country-specific and cross-country research is needed to better
understand and confirm the linkages between a better investment climate and poverty
reduction. While the effect of improved business entry regulations on firm creation has been well
documented, less is known about their impact on firm survival and employment. This applies to
the impact of business taxation, insolvency, ADR and other IC reform areas as well.
9