Chapter

Chapter 18: Impediments to Developing the Private Sector

Author(s):
Alfred Schipke, Aliona Cebotari, and Nita Thacker
Published Date:
April 2013
Share
  • ShareShare
Show Summary Details
Author(s)
Sarwat Jahan and Sumiko Ogawa 

A vigorous private sector is an important driver of growth and poverty reduction. The development of the private sector is particularly urgent in the Eastern Caribbean Economic and Currency Union (OECS/ECCU), given the constraints on the future role of the public sector caused by high public debt levels (see Chapter 5 on Public Debt). The region’s growth model will increasingly have to shift either to the private sector or to public-private partnerships. Enabling the private sector to flourish requires an understanding of potential obstacles; therefore, this chapter looks into the level of financial sector development in the OECS/ECCU and whether the private sector has sufficient access to finance or is otherwise faced with impediments.

Although the role of finance in fostering development is not without controversy, an increasing empirical literature points to a strong and independent causal role of the sector in promoting growth (Caprio and Honohan, 2001; Demirgüç-Kunt and Maksimovic, 1998; Rajan and Zingales, 1998; and King and Levine, 1993). Similarly, private sector development positively affects innovation, job creation, technology adoption, and productivity improvements, which are central to the growth process. Well-developed financial systems are also associated with faster growth in the incomes of the poor helping them catch up with the rest of the economy as it grows. Even at the same average income, economies with deeper financial systems have fewer poor people (Beck, Demirgüç-Kunt, and Levine, 2007; and Honohan, 2004).

Financial development may not be the only factor to encourage the development of the private sector. Nonfinancial factors can also significantly contribute to the enabling environment. Studies have shown that nonfinancial factors such as regulatory barriers to entry and exit, ranging from licenses and permits to bankruptcy laws, reduce competition and impose significant costs on firms (Klapper, Laeven, and Rajan, 2006). Conversely, firms that face greater competition are two-thirds more likely to innovate or introduce a new product (World Bank, 2005). Similarly, improvements in regulations have had significant economic effects such as reductions in consumer prices (Bruhn, 2008).

The purpose of this chapter is to analyze the key impediments to the development of the private sector in the OECS/ECCU. The next section focuses on whether financial development and access have been adequate. Financial depth alone, however, is not sufficient to ensure access; therefore, this chapters draws on the results of the IMF’s Financial Access Survey (FAS) and on the World Bank’s Enterprise Surveys conducted for the first time in 2011 for the six independent OECS/ECCU countries. The subsequent section of this chapter provides snapshots of nonfinancial factors that influence private sector development in the OECS/ECCU. Information for this section is synthesized from two World Bank surveys—the Doing Business Indicators, and the Enterprise Surveys. The final section summarizes the key points of the chapter and provides recommendations.

Financial Deepening and Access

This section assesses the financial development of the OECS/ECCU member countries along two dimensions: (1) financial deepening and (2) financial access. Both traditional financial indicators, as well as new benchmarking tools, are being used to gauge the depth of the financial system. Because the financial sector in the OECS/ECCU is dominated by the banking sector and this sector has better data coverage compared with other nonbank financial sectors, the new methods of benchmarking are applied to banking.

Financial Deepening

The banking sector in the union is well developed, with credit to the private sector reaching 84 percent of GDP on average in the six independent countries. Combined with credit to the public sector, total banking sector domestic credit amounts to more than 100 percent of GDP as of November 2011 compared with 56 percent on average in the Latin America and the Caribbean (LAC) region and 83 percent globally in 2010 (Table 18.1). Banking sector deposits as a share of GDP are also higher compared with LAC and with the rest of the world, reaching 117 percent in 2011. There is greater reliance on the banking sector for credit than on the equity and debt markets; the public sector is the dominant and most active participant in those markets.

Table 18.1Banking Sector Credit and Deposits(Percent of GDP)
IndicatorAntigua

and

Barbuda
DominicaGrenadaSt. Kitts

and Nevis
Saint

Lucia
St. Vincent and

the Grenadines
AverageWorldLatin

America

and the

Caribbean
Total credits98.567.195.4145.0133.561.1104.682.955.9
Private sector78.559.384.876.5120.554.584.2
Public sector20.07.810.668.413.06.620.4
Total deposits108.9109.2114.0186.3109.981.6116.7101.469.4
Private sector91.677.081.7108.078.557.483.0
Public sector10.016.012.747.720.713.919.2
Sources: Eastern Caribbean Central Bank; and IMF Financial Access Survey.Note: As of November 2011 for OECS/ECCU countries; 2010 for World and Latin America and the Caribbean.
Sources: Eastern Caribbean Central Bank; and IMF Financial Access Survey.Note: As of November 2011 for OECS/ECCU countries; 2010 for World and Latin America and the Caribbean.

How does the depth of the banking sector in the OECS/ECCU compare with that in countries in LAC or similar income groups? Two traditional measures of banking sector depth, the ratio of private credit to GDP and the ratio of domestic bank deposits to GDP, show that all the OECS/ECCU countries have relatively deep banking sectors. Both ratios are well above the regional and income group medians (Figure 18.1). This trend has been observed throughout the past 10 years although some country-specific differences are evident. St. Vincent and the Grenadines, for example, performed the worst among the OCES/ECCU countries on these two indicators. St. Kitts and Nevis performed particularly well with respect to the ratio of domestic bank deposits to GDP, and Saint Lucia scored high on the ratio of private credit to GDP, particularly in more recent years.

Figure 18.1Banking Sector Depth, 2001–10

Source: FinStats, World Bank.

Note: LAC = Latin America and the Caribbean.

Yet, the use of quantitative benchmarks for financial development (based on statistical means and medians of regional or income groups) may provide an incomplete cross-country picture of the actual level of financial development. Countries are often at very different stages of economic development, or have very different structural characteristics, than their comparator countries. Thus, those factors must be taken into account when benchmarking financial development. Because structural differences affect financial development, financial indicators cannot simply be compared across countries. To address this, the World Bank developed a panel regression framework that produces statistical benchmarks taking these structural factors into account, thus somewhat leveling the playing field. The benchmarks are therefore predicted values from a quintile regression analysis1 that accounts for economic development, population, demographic variables, special country-specific circumstances, and time (Figure 18.2). The difference between the predicted and actual values gives “the financial gap.”

Figure 18.2Variables That Impact Financial Indicators

This methodology has been applied to a select number of countries for which adequate data were available.2 Among the OECS/ECCU countries, the exercise was conducted for Grenada, Saint Lucia, and St. Vincent and the Grenadines (Figure 18.3). The estimates show that even after controlling for economic development and structural characteristics, the banking sector in the OECS/ECCU performed relatively well although there is some variation across countries. Neither Grenada nor Saint Lucia has a gap (the actual value is higher than the predicted value) and both have performed better than almost all other comparators. Although St. Vincent and the Grenadines shows a “gap,” it is still ahead of the average for the LAC region.

Figure 18.3Banking Sector Development across Countries

Source: FinStats, World Bank.

Note: EM = emerging markets; LAC = Latin America and the Caribbean; LIC = low-income countries. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

This exercise was also conducted for the three OECS/ECCU countries over time to capture the evolution of banking sector development (Figure 18.4). Grenada and Saint Lucia seem to have no financial gap over time (better-than-predicted performance equates to no gap); St. Vincent and the Grenadines, however, switched from having no gap in 2000 to a positive gap in 2009.

Figure 18.4Banking Sector Development over Time

Source: FinStats, World Bank.

The benchmarking exercise reveals that both traditional benchmarks (medians of regional and income-group comparators) and the newly developed benchmarking tools indicate that financial deepening has occurred in the OECS/ECCU countries. At the same time, the banking system may not be efficient. The traditional indicator of efficiency, the spread between interest rates paid on deposits and those charged for lending, shows that most of the OECS/ECCU countries—with the exception of St. Kitts and Nevis—are relatively inefficient (Figure 18.5). Between 2000 and 2009, the spreads fell in all OECS/ECCU countries, but they still remain relatively high. Grenada and Saint Lucia have the highest spreads, exceeding 7 percentage points, higher than all comparator averages (LAC at 6.9 percent, other small states at 6.4 percent, low-income countries at 5.5 percent, and emerging markets at 5.2 percent). Currently, St. Kitts and Nevis has the lowest spread among the OECS/ECCU countries, and it is below other emerging markets. The spreads for the remaining OECS/ECCU countries range between the average of the LAC region and the other small states, but are still higher than the emerging-market average.

Figure 18.5Lending-Deposit Spread

Source: Financial Development and Structure Database, World Bank.

Note: EM = emerging markets; LAC = Latin America and the Caribbean; LIC = low-income countries. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

With respect to the determinants of interest rate spreads in the union, a study conducted by the Eastern Caribbean Central Bank (Grenade, 2005) shows that regulatory and bank-specific factors contribute to increasing banks’ spreads. The minimum rate on savings deposits, at 3 percent as of end-2011, was found to exert upward pressure on interest rate spreads by more than 1 percentage point. Similarly, bank operating costs appear to be a key determinant of observed interest rate spreads (Randall, 1998; and World Bank, 2007), giving rise to the policy recommendation that efforts to expand the market size of efficient banks may help pave the way for greater efficiency.

In addition to a deep banking sector, the OECS/ECCU has a well-developed system of credit unions (World Bank and IMF, 2004). The sector’s assets expanded by 12 percent per year between 2005 and 2010, a pace exceeding the growth of commercial bank assets. The 57 credit unions had total assets of US$700 million in 2010, or 13 percent of regional GDP, equivalent to about 8 percent of commercial banks’ assets. Credit unions’ private sector loans and deposits account for about 10 percent and 12 percent, respectively, of those of all deposit-taking institutions. Credit unions have an especially high share of private sector loans in Montserrat (equivalent to 45 percent of commercial bank loans) and Dominica (32 percent), suggesting that they are strongly competitive and provide an additional source of finance to the private sector (see Chapter 11 on Credit Unions).

Almost all countries in the region also have development banks, but these banks have proved to be of limited efficacy in financing investment and growth. The incentives for these banks are usually different from those for commercial lenders. Development banks are often mandated to lend to certain sectors or groups without significant regard for commercial criteria, with the result that losses are invariably higher than those in commercial banks (Holden and Howell, 2009).

The OECS/ECCU even has capital markets, including the regional Eastern Caribbean Securities Exchange (ECSE), that provide a platform for enterprises to raise capital from an integrated regional financial space (see Chapter 13 on Capital Markets). However, the size of the market is still limited (Table 18.2). Although 53 debt securities are listed on the ECSE, sovereign debt predominates, both in number of issuers and amounts raised: the OECS/ECCU governments account for 86 percent of the primary market issue. There are only two corporate issuers (Grenada Electricity Services Ltd, and Eastern Caribbean Home Mortgage Bank), which have issued a total of seven bonds. The ECSE lists only 13 equities, all issued by companies incorporated in the OECS/ECCU except one each from Barbados and Trinidad and Tobago (Table 18.3). The market capitalization (excluding three inactive stocks) amounts to EC$1.6 billion, or 11 percent of OECS/ECCU regional GDP, based on the prices quoted at the latest transactions. This compares with 67 percent in Trinidad and Tobago and 125 percent in Barbados.

Table 18.2Eastern Caribbean Securities Exchange: Debt Issued
Amount

(EC$ millions)
Share

(Percent)
Number of

instruments issued
Issuer
Government of Antigua and Barbuda104.46.24
Government of Dominica142.58.43
Government of Grenada79.64.75
Government of St. Kitts and Nevis95.05.62
Government of Saint Lucia807.647.923
Government of St. Vincent and the Grenadines219.613.09
Corporate238.314.17
Total1,687.0100.053
Maturity
Less than 1 year207.312.311
1–5 years441.426.213
More than 5 years1,038.361.529
Source: Eastern Caribbean Securities Exchange.
Source: Eastern Caribbean Securities Exchange.
Table 18.3Eastern Caribbean Securities Exchange: Historical Trade Data
CompanyCountryCodeShares issued

(Million)
Latest price

(ECS)
Market capitalization

(ECS million)
Number of trades
2008200920102011
First Caribbean International Bank LtdBarbadosFCI1,525.2$5.508,3880180
Dominica Electricity Services LtdDominicaDES10.4$3.003119212527
Grenada Electricity Services LtdGrenadaGESL19.0$11.0020919151813
Grenada Property Corporation LtdGrenadaGPCL7.7$5.404145410
Republic Bank (Grenada) LtdGrenadaRBGL1.5$55.00831514248
The Bank of Nevis LtdSt. Kitts and NevisBON9.3$5.755434435635
Cable & Wireless St Kitts & Nevis LtdSt. Kitts and NevisCWKN33.1$5.5818549535247
St. Kitts-Nevis-Anguilla National Bank LtdSt. Kitts and NevisSKNB135.0$2.4533190706652
St. Kitts-Nevis-Anguilla Trading & Development Company LtdSt. Kitts and NevisTDC52.0$1.558181583846
S L Horsford & Company LtdSt. Kitts and NevisSLH30.1$1.8054154118
East Caribbean Financial Holding Co LtdSaint LuciaECFH24.0$11.3027111212311666
St. Lucia Electricity Services LtdSaint LuciaSLES22.4$12.50280411234
Trinidad Cement LtdTrinidadTCL249.8$3.408495310
Average37.531.532.925.8
Source: Eastern Caribbean Securities Exchange.
Source: Eastern Caribbean Securities Exchange.

Financial Access

Financial deepening will not be particularly effective in the development of the private sector if financial services are available to only a few firms or households. Access to finance is as pivotal as the depth of the financial system. Two new surveys on access, one conducted by the IMF (Financial Access Survey, or FAS) and the other conducted by the World Bank (Enterprise Surveys), are used to gauge access to finance.

Based on data from the IMF FAS, financial access in the OECS/ECCU countries is comparable to that in LAC, and has improved since the early 2000s (Table 18.4). The number of commercial bank branches was 21 per 100,000 adults on average in 2010, compared with 20 in LAC and 26 globally. All the countries have seen sharp increases since 2004—the number of branches tripled in Antigua and Barbuda and Dominica, and nearly doubled in Saint Lucia and St. Vincent and the Grenadines. Commercial banks’ outstanding loans and deposits relative to GDP are twice the LAC average, and comparable to the advanced economies. However, this partly reflects some OECS/ECCU countries’ high exposures to the public sector and deposits from national insurance schemes.

Table 18.4Financial Access: Geographical Reach and Use of Financial Services
IndicatorAntigua and

Barbuda
DominicaGrenadaSt. Kitts and

Nevis
Saint LuciaSt. Vincent and

the Grenadines
WorldLatin America

and the

Caribbean
Number of branches of commercial banks (per 100,000 adults)
201028.8616.3113.3248.399.4610.0226.2420.14
20049.715.607.0846.825.225.2021.9012.17
Number of ATMs (per 100,000 adults)
201051.9436.6959.9554.4446.5026.3063.2245.59
2004137.6115.3935.3947.1430.4520.7837.0032.89
Outstanding loans from commercial banks (% of GDP)99.9682.48117.24171.97151.0871.5182.8655.91
Outstanding deposits with commercial banks (% of GDP)112.92129.72140.23220.13130.4995.00101.4269.41
Source: IMF Financial Access Survey.

2007 for St. Kitts and Nevis.

Source: IMF Financial Access Survey.

2007 for St. Kitts and Nevis.

Despite improved availability of branches and ATMs and use of financial services, firms still face obstacles in accessing finance based on the World Bank Enterprise Surveys, which were conducted for firms in the OECS/ECCU for the first time in 2011. According to the survey, 48 percent of firms use banks to finance investments and working capital, in line with LAC (Figure 18.6). The proportion of investment financed by banks reached 28 percent on average, higher than 20 percent in LAC and 17 percent globally. A relatively high proportion of loans (83 percent, on average) require collateral. The value of collateral required is close to 200 percent of the loan amount, which is similar to some of the other Caribbean countries, such as The Bahamas and Jamaica, but more than the global average of 162 percent. Roughly one-quarter of firms rank access to finance as the biggest obstacle in conducting business, with the percentage especially high in Dominica (44 percent) and Saint Lucia (35 percent), compared with 15 percent in LAC. This result is similar to a previous survey of 125 Caribbean small and medium enterprises conducted for the Commonwealth Secretariat (Brewster, 2006) that found that more than 28 percent of firms considered lack of collateral to be the main cause of their inability to access long-term loans.

Figure 18.6Enterprise Surveys: Access to Finance

Source: World Bank Enterprise Surveys.

Note: ATG = Antigua and Barbuda; BHS = The Bahamas; BRB = Barbados; DMA = Dominica; GRD = Grenada; JAM = Jamaica; KNA = St. Kitts and Nevis; LCA = Saint Lucia; TTO = Trinidad and Tobago; VCT = St. Vincent and the Grenadines.

Nonfinancial Impediments

Although access to finance is a formidable obstacle to the development of the private sector, it may not be the only constraint. To analyze whether structural factors are hindering the development of the private sector in the OECS/ECCU, two surveys, both conducted by the World Bank—the Doing Business Indicators and the 2012 Enterprise Surveys—are examined in the following discussion.

Doing Business Indicators

The doing business ranking in all OECS/ECCU countries has worsened in recent years, although some recorded modest improvements in 2011 (Figure 18.7). Although the overall ranking remains better than the average for the LAC region, the average ranking of the OECS/ECCU countries declined from 32 percent in 2007 to 38 percent on average among all the countries surveyed in 2011. The deterioration was most significant in St. Kitts and Nevis, which dropped 17 percentage points over the five-year period to fall out of the top half, followed by Saint Lucia (a drop of 9 percentage points) and Antigua and Barbuda (9 percentage points). Conversely, Dominica (3 percentage points) and Grenada (1 percentage point) both saw a moderate improvement. The union ranks particularly weak on registering property (cost and the number of procedures), enforcing contracts (the number of procedures), and resolving insolvency (the lack of resolution practices in some countries), and is challenged by limited credit information. However, dealing with construction permits and protecting investors rank high, a consequence of the countries’ dependence on foreign-investment-related activities and construction for growth.

Figure 18.7OECS/ECCU: Doing Business Indicators

Sources: World Bank, 2011; and IMF staff calculations.

Note: Smaller numbers represent greater ease of doing business. The 2012 rankings are for 183 countries; rankings for all economies are benchmarked to June 2011.

ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; VCT = St. Vincent and the Grenadines. See Appendix 18A for the composition of the EM and LAC country groups.

Registering Property

The OECS/ECCU countries averaged 136th in the ease of registering property among the 183 countries surveyed in 2011. The cost of registering property is relatively high—equivalent to 10.7 percent of property value on average, compared with 6.0 percent for all the countries surveyed and 7.9 percent among small states (Figure 18.8). Although there are more procedures (6.8 vs. 5.9 on average for all countries surveyed, and 5.7 for small states), the fact that less time is required (42 days vs. 55 days for all countries, and 91 days for small states) suggests that the processes are relatively expeditious. The cost to register property is notably high in St. Kitts and Nevis and Dominica, equivalent to 13 percent of the property value. Time to register property is lengthy in St. Kitts and Nevis, taking 81 days in total or 13.5 days on average per procedure.

Figure 18.8Doing Business Indicators: Registering Property

Sources: World Bank, 2011; and IMF staff calculations.

Note: ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; VCT = St. Vincent and the Grenadines. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

Enforcing Contracts

The OECS/ECCU countries average 130th on the ease of enforcing contracts, primarily reflecting the higher number of procedures involved, leading to a lengthier process (Figure 18.9). The cost of enforcing contracts averages 29.9 percent of claims, lower than the average of all the countries (34.7 percent) and small states (42.2 percent). Nevertheless, the large number of procedures (45–47) appears to drive the low rank. Among the OECS/ECCU countries, the cost of enforcing contracts is greater in Saint Lucia and Dominica, whereas the process takes longer in Grenada and Dominica. Antigua and Barbuda, St. Vincent and the Grenadines, and St. Kitts and Nevis, which show relatively short time per procedure and less costly processes, rank better at 70, 101, and 114, respectively, compared with the other three (which rank in the 160s).

Figure 18.9Doing Business Indicators: Enforcing Contracts

Sources: World Bank, 2011; and IMF staff calculations.

Note: ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; JAM = Jamaica; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; LIC = low-income countries; VCT = St. Vincent and the Grenadines. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

Resolving Insolvency

The weak average ranking (120 of 183) in the ease of resolving insolvency is driven largely by the lack of established practice in two of the six OECS/ECCU countries (St. Kitts and Nevis and St. Vincent and the Grenadines). Excluding these two, the four OECS/ECCU countries rank near the middle of all the countries surveyed, at 89 on average (Figure 18.10). The low recovery rate, 21.3 percent, again heavily influenced by the lack of resolution practices in two countries, appears to drive the low ranking. The cost of resolving insolvency (12.8 percent of estate) is less and the time required (three years) in line with the overall average (16.3 percent and 2.9 years, respectively). Within the OECS/ECCU countries, Grenada has the lowest recovery rate along with the highest cost of resolving insolvency.

Figure 18.10Doing Business Indicators: Resolving Insolvency

Sources: World Bank, 2011; and IMF staff calculations.

Note: Neither St. Kitts and Nevis nor St. Vincent and the Grenadines has established practices for resolving insolvency.

ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; LAC = Latin America and the Caribbean; LCA = Saint Lucia; LIC = low-income countries. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

Getting Credit

Difficulties in obtaining credit information and the lack of centralized sources of information are the major challenges preventing firms from getting credit; legal rights are generally strong (7 to 9 out of an index of 0–10). St. Kitts and Nevis and St. Vincent and the Grenadines rank the worst within the OECS/ECCU countries at 126, due to a lower score on the index on the strength of legal rights; Dominica scored best at 78. The absence of credit information bureaus is a common shortcoming, not only in the OECS/ECCU countries but in the Caribbean overall. Only Haiti and Trinidad and Tobago have public or private credit information bureaus.

Paying Taxes

OECS/ECCU countries rank close to the middle, at 93 on average, in the ease of paying taxes (Figure 18.11). The time required to pay taxes is relatively short, despite a greater number of payments per year on average compared with all countries and the average of the small states. Total tax rates, measured as tax paid as a percentage of profit before taxes, average 41.7 percent, varying from 34.4 percent in Saint Lucia to 52.7 percent in St. Kitts and Nevis. Taxes on profits account for about two-thirds of total tax rates in OECS/ECCU countries, significantly higher than in other small states (about 43 percent), whereas labor taxes and contributions play a smaller role (7.5 percent of overall tax rate as compared with 20.2 percent in small states). See Chapter 6 on Enhancing Fiscal Revenue for an analysis of the composition of tax revenue.

Figure 18.11Doing Business Indicators: Paying Taxes

Sources: World Bank, 2011; and IMF staff calculations.

Note: ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; LIC = low-income countries; VCT = St. Vincent and the Grenadines. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

Enterprise Surveys

Enterprise Surveys, a firm-level survey conducted by the World Bank, examine the business environment and practices in seven key areas (corruption, crime, finance, infrastructure, regulations and taxes, trade, and workforce) to identify the major obstacles firms face. The surveys have been conducted for 136 countries, and the data allow analyses to be conducted based on firm characteristics, such as average age of firms, ownership, legal status, female participation in ownership and management, formality, and use of innovation and technology. The survey was conducted for the six OECS/ECCU countries for the first time in 2011, with roughly 150 enterprises from each country participating. Of the enterprises surveyed in the union, most were small and operating in the services industry—about three-quarters of the companies surveyed operate in the services sector, reflecting the significance of construction and tourism-related industries in those economies (Figure 18.12 and Table 18.5). Roughly two-thirds of them have fewer than 20 employees. The notable exception is Saint Lucia, which has a relatively large manufacturing sector (42 percent of the firms surveyed) and a higher proportion of large firms (10.7 percent).

Figure 18.12OECS/ECCU: Average Characteristics of Firms Participating in World Bank Enterprise Surveys

Source: World Bank Enterprise Surveys.

Table 18.5Enterprise Surveys: Characteristics of Firms Surveyed
IndicatorAntigua

and

Barbuda
DominicaGrenadaSt. Kitts

and Nevis
Saint

Lucia
St. Vincent

and the

Grenadines
Survey conducted (2011)May–OctAug–NovApr–JulApr–SepAug–NovMay–Sep
Number of firms surveyed151150153150150154
Characteristics of firms surveyed (percent)
Business sector
Manufacturing22.518.716.319.342.031.8
Services77.581.383.780.758.068.2
Firm size (number of employees)
Small (5–19)62.368.764.754.752.771.4
Medium (20–99)33.828.726.840.036.724.7
Large (100+)4.02.78.55.310.73.9
Source: World Bank Enterprise Surveys.
Source: World Bank Enterprise Surveys.

The survey results show that 24.8 percent of the firms see access to finance as the biggest obstacle, on average, for the six OECS/ECCU countries, above the average for LAC (15 percent) and the world (16.2 percent), followed by electricity and taxes (Figure 18.13). Trade and transportation are identified as the biggest obstacles by more companies than in LAC. However, political instability and official procedures (courts, tax administration and licensing, corruption) are not considered to be significant constraints. See Figure 18.14 for a breakdown of these categories by OECS/ECCU country.

Figure 18.13Biggest Obstacles to Conducting Business

Source: World Bank Enterprise Surveys.

Note: LAC = Latin America and the Caribbean.

Figure 18.14Major Constraints on Firms

Source: World Bank Enterprise Surveys.

Note: Percent of firms identifying each factor as a major constraint to conducting business. ATG = Antigua and Barbuda; DMA = Dominica; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; VCT = St. Vincent and the Grenadines.

The following paragraphs summarize the key findings of the surveys in the four areas identified as major obstacles to conducting businesses in the region—infrastructure, taxes, crime, and workforce (for access to finance, see the previous section).

Infrastructure

An average of 45.5 percent of the companies in the six OECS/ECCU countries view electricity as a major constraint (Figure 18.15). There is little difference between the manufacturing and services sectors (48.7 percent and 44.9 percent, respectively). More companies in small to medium groups identify electricity as a major constraint (45–47 percent) compared with large firms (36 percent). The ratio is higher than the average for all countries and for small states (39.3 percent and 32.8 percent, respectively), despite the relatively small number of electrical outages per month (ranging from 1.2 in Grenada to 4.4 in St. Kitts and Nevis, vs. 9.1 for all surveyed countries and 5.3 for small states) and duration (2.2 hours, on average, vs. 4.4 hours for all and 2.6 hours for small states). Getting an electrical connection takes 11.1 days on average following application, about half the time in small states and LAC, and about one-third of the average for all countries. The smaller share of firms having access to a generator and the electricity from such a generator in OECS/ECCU countries indicates their greater reliance on public utilities, which may be part of the reason for the higher share of firms identifying electricity as a major constraint despite the smaller number of outages. Cost of electricity, which is not covered in the survey, may also be contributing to the firms’ views of electricity as a constraint.

Figure 18.15Enterprise Surveys: Electricity

Source: World Bank Enterprise Surveys.

Note: ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; LIC = low-income countries; VCT = St. Vincent and the Grenadines. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

The share of firms in the union viewing transportation as a major constraint (19.2 percent on average) is in line with the average of all countries (21.8 percent) and the average of emerging market economies (20.8 percent).

Regulations and Taxes

In the OECS/ECCU countries, 44.7 percent of firms consider tax rates to be a major constraint, whereas a smaller share of firms (22.7 percent) consider tax administration to be an obstacle (Figure 18.16). The shares are relatively high in Antigua and Barbuda (73.5 percent for tax rates and 42 percent for tax administration) and St. Kitts and Nevis (66.3 percent and 39.3 percent, respectively), but lower in Dominica (22.7 percent and 0.4 percent) and Saint Lucia (30.5 percent and 7.9 percent). The results by firm size indicate that a greater share of small and medium firms view tax rates as a challenge compared with large firms, a contrast to the average based on the latest worldwide survey results that show similar levels across firm size.3

Figure 18.16Enterprise Surveys: Tax

Source: World Bank Enterprise Surveys.

Note: ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; LIC = low-income countries; VCT = St. Vincent and the Grenadines. S, M, and L, = small, medium, and large, respectively. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

The share of firms viewing business licensing and permits as a major constraint (7.0 percent on average) is less than half of the worldwide average (15.7 percent) and the average of emerging market economies (18.3 percent). Among the OECS/ECCU countries, the share is relatively high in Antigua and Barbuda (16.6 percent) and St. Vincent and the Grenadines (9.0 percent), but lower in Grenada (4.8 percent) despite the relatively long time to obtain construction-related permits (22.2 days vs. 6.5 days on average for the OECS/ECCU) and operating licenses (161.7 days vs. 155.3 days in St. Vincent and the Grenadines and 27.8 days in St. Kitts and Nevis).

Crime

Crime is identified as a major obstacle to business by 28.2 percent of firms in the OECS/ECCU. This is the fourth largest obstacle to business, although the share is largely in line with the average for all countries (26.5 percent) and lower than in LAC (34.5 percent) and other small states (30.5 percent). Within the OECS/ECCU region, larger shares of firms in St. Kitts and Nevis (46.6 percent) and in Antigua and Barbuda (38.9 percent) identify crime as a constraint.

Workforce

A much larger share of firms in OECS/ECCU countries view an inadequately educated workforce as a major constraint when compared with labor regulation, except in Antigua and Barbuda (Figure 18.17). An inadequately educated workforce is an issue despite the higher share of firms offering formal training (Grenada, St. Kitts and Nevis, and St. Vincent and the Grenadines) and higher ratios of permanent full-time to temporary workers (Antigua and Barbuda, Dominica, and Saint Lucia). The constraint is common across firm size and sectors.

Figure 18.17Enterprise Surveys: Workforce

Source: World Bank Enterprise Surveys.

Note: ATG = Antigua and Barbuda; DMA = Dominica; EM = emerging markets; GRD = Grenada; KNA = St. Kitts and Nevis; LAC = Latin America and the Caribbean; LCA = Saint Lucia; LIC = low-income countries; VCT = St. Vincent and the Grenadines. See Appendix 18A for the composition of the EM, LAC, LIC, and small states country groups.

Conclusion

Private sector development is important to fostering overall economic growth; however, both financial and nonfinancial impediments can constrain the growth of the sector. To analyze whether the OECS/ECCU is subject to these factors, this chapter assesses the level of financial deepening and access to finance, and identifies other structural impediments. The analysis reveals that the banking sector is deep, as measured by traditional variables and new benchmarking tools, but needs to improve in efficiency.

Despite the well-developed banking sector, which is augmented by a large number of credit unions, access to finance remains the most often cited constraint faced by firms as revealed by the 2011 World Bank Enterprise Surveys. One critical barrier appears to be the high proportion of required collateral as well as its value relative to the value of the loan, both of which are above global averages. In the absence of creditor information, banks require higher levels of collateral. Depending on the law, different assets could be used as collateral. Generally, countries that allow a broader range of assets to serve as collateral and that have dedicated collateral registries where all security interests are recorded have shown higher levels of private credit to GDP (World Bank, 2007). Both improvements could be options for the OECS/ECCU.

Because bank operating costs appear to be a key determinant of observed interest rate spreads (Randall, 1998; and World Bank, 2007), regional consolidation of the banking sector and taking advantage of scale economies could increase efficiency and reduce operating costs. Furthermore, eliminating the mandatory interest rate on deposits of 3 percent could lead to lower interest rates for lending (see Chapter 10 on the Banking Sector and Chapter 15 on the Role of the Eastern Caribbean Central Bank).

In addition to lack of access to finance, a number of nonfinancial factors inhibit the development of the private sector. The Enterprise Surveys suggest that, other than finance, the top five constraints faced by enterprises in the OECS/ECCU include electricity, tax rates, crime, an inadequately educated workforce, and trade regulations. Overcoming these challenges will take time. For example, the shortage of skilled labor impedes competitiveness, and skill deficiencies are exacerbated by high emigration rates in the OECS/ECCU. Nonetheless, governments could adopt measures to encourage return migration, similar to those initiated in Dominica (Fontaine, 2006). The Doing Business Survey reveals that the region also ranks particularly low on registering property, enforcing contracts, and resolving insolvency, and is challenged by limited credit information. Hence, reforming the regulatory framework, as well as improving governance, will be paramount.

Appendix 18A. Composition of Country Groups
Emerging Markets
Entire sampleDoing business coverageEnterprise survey coverage
777463
Albaniaxx
Algeriaxx
Angolaxx
Antigua and Barbudaxx
Argentinaxx
Azerbaijanxx
Bahamas, Thexx
Bahrainx
Barbadosx
Belarusxx
Belizexx
Bosnia and Herzegovinaxx
Botswanaxx
Brazilxx
Brunei Darussalamx
Bulgariaxx
Chilexx
Chinax
Colombiaxx
Costa Ricaxx
Croatiaxx
Dominican Republicxx
Ecuadorxx
Egyptxx
El Salvadorxx
Equatorial Guineax
Estoniaxx
Fijixx
Gabonxx
Guatemalaxx
Hungaryxx
Indiaxx
Indonesiaxx
Iran, Islamic Rep.x
Jamaicaxx
Jordanxx
Kazakhstanxx
Kuwaitx
Latviaxx
Lebanonxx
Libya
Lithuaniaxx
Macedonia, FYRxx
Malaysiaxx
Mauritiusxx
Mexicoxx
Moroccoxx
Namibiaxx
Omanx
Pakistanxx
Panamaxx
Paraguayxx
Peruxx
Philippinesxx
Polandxx
Qatarx
Romaniaxx
Russian Federationxx
Saudi Arabiax
Serbiaxx
Seychellesx
South Africaxx
Sri Lankaxx
St. Kitts and Nevisxx
Surinamexx
Swazilandxx
Syriaxx
Thailandxx
Timor-Lestexx
Trinidad and Tobagoxx
Tunisiax
Turkeyxx
Turkmenistan
Ukrainexx
United Arab Emiratesx
Uruguayxx
Venezuelaxx
Latin America and the Caribbean
Entire sampleDoing business coverageEnterprise survey coverage
313030
Antigua and Barbudaxx
Argentinaxx
Bahamas, Thexx
Barbadosx
Belizexx
Boliviaxx
Brazilxx
Chilexx
Colombiaxx
Costa Ricaxx
Dominicaxx
Dominican Republicxx
Ecuadorxx
El Salvadorxx
Grenadaxx
Guatemalaxx
Guyanaxx
Haitix
Hondurasxx
Jamaicaxx
Nicaraguaxx
Panamaxx
Paraguayxx
Peruxx
St. Kitts and Nevisxx
Saint Luciaxx
St. Vincent and thexx
Grenadines
Surinamexx
Trinidad and Tobagoxx
Uruguayxx
Venezuelaxx
Low-Income Countries
Entire sampleDoing business coverageEnterprise survey coverage
686757
Armeniaxx
Bangladeshxx
Beninxx
Bhutanxx
Boliviaxx
Burkina Fasoxx
Burundixx
Cambodiaxx
Cameroonxx
Cape Verdexx
Central African Republicxx
Chadxx
Comorosx
Congo, Dem. Rep.xx
Congo, Rep.xx
Côte d’Ivoirexx
Djiboutix
Dominicaxx
Eritreax
Ethiopiaxx
Gambia, Thexx
Georgiaxx
Ghanaxx
Grenadaxx
Guineaxx
Guinea-Bissauxx
Guyanaxx
Haitix
Hondurasxx
Kenyaxx
Kiribatix
Kyrgyz Republicxx
Lao PDRxx
Lesothoxx
Liberiaxx
Madagascarxx
Malawixx
Maldivesx
Malixx
Mauritaniaxx
Moldovaxx
Mongoliaxx
Mozambiquexx
Myanmar
Nepalxx
Nicaraguaxx
Nigerxx
Nigeriaxx
Papua New Guineax
Rwandaxx
Samoaxx
São Tomé and Príncipex
Senegalxx
Sierra Leonexx
Solomon Islandsx
Saint Luciaxx
St. Vincent and the Grenadinesxx
Sudanx
Tajikistanxx
Tanzaniaxx
Togoxx
Tongaxx
Ugandaxx
Uzbekistanxx
Vanuatuxx
Vietnamxx
Yemenxx
Zambiaxx
Small States
Entire sampleDoing business coverageEnterprise survey coverage
323018
Aruba
Bahamas, Thexx
Barbadosx
Belizexx
Bhutanxx
Cape Verdexx
Comorosx
Cyprusx
Djiboutix
Dominican Republicxx
Equatorial Guineax
Fijixx
Guyanaxx
Haitix
Jamaicaxx
Kiribatix
Maldivesx
Marshall Islandsx
Mauritiusxx
Micronesiaxx
Palaux
Papua New Guineax
Samoaxx
São Tomé and Príncipex
Seychellesx
Solomon Islandsx
Surinamexx
Swazilandxx
Timor-Lestexx
Tongaxx
Trinidad and Tobagoxx
Vanuatuxx
Source: Authors’ compilation.Note: The sample of small states excludes high-income small states.
Source: Authors’ compilation.Note: The sample of small states excludes high-income small states.
References

    BeckT.A.Demirgüç-Kunt and R.Levine2007Finance, Inequality and the Poor,Journal of Economic Growth Vol. 12 No. 1 pp. 2749.

    • Search Google Scholar
    • Export Citation

    BeckT.E.FeyenA.Ize and F.Moizeszowicz2008Benchmarking Financial Development,Policy Research Working Paper No. 4638 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation

    BrewsterE.2006“Finance for Small and Medium-Sized Enterprises in the Caribbean”Economic Paper 76 (London: Commonwealth Secretariat).

    • Search Google Scholar
    • Export Citation

    BruhnM.2008License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico,Policy Research Working Paper No. 4538 (Washington: World Bank).

    • Search Google Scholar
    • Export Citation

    CaprioG. and P.Honohan2001Finance for Growth: Policy Choices in a Volatile WorldPolicy Research Report (Washington: World Bank and Oxford University Press).

    • Search Google Scholar
    • Export Citation

    Demirgüç-KuntA. and V.Maksimovic1998Law, Finance, and Firm Growth,Journal of Finance Vol. 53 No. 6 pp. 210737.

    FontaineT.2006“Tracing the Diaspora’s Involvement in the Development of a Nation: The Case of Dominica” prepared for George Washington University’s Research Workshop on the “Role of Diasporas in Developing the Homeland”Washington, DCJune6.

    • Search Google Scholar
    • Export Citation

    GrenadeK.2005Determinants of Commercial Bank Interest Rate Spreads: Some Empirical Evidence from the Eastern Caribbean Currency Union,ECCB Working Paper (St. Kitts and Nevis: Eastern Caribbean Central Bank).

    • Search Google Scholar
    • Export Citation

    HoldenP. and H.Howell2009Enhancing Access to Finance in the Caribbean,Discussion Paper No. 164 (Washington: Inter-American Development Bank).

    • Search Google Scholar
    • Export Citation

    HonohanP.2004. Financial Sector Policy and the Poor: Selected Findings and Issues (Washington: World Bank).

    KingR. and R.Levine1993Finance and Growth: Schumpeter Might Be Right,Quarterly Journal of Economics Vol. 108 No. 3 pp. 71738.

    • Search Google Scholar
    • Export Citation

    KlapperL.L.Laeven and R.Rajan2006Business Environment and Firm Entry: Evidence from International Data,Journal of Financial Economics Vol. 82 No. 3 pp. 591629.

    • Search Google Scholar
    • Export Citation

    RajanR. and L.Zingales1998Financial Dependence and Growth,“American Economic Review Vol. 88 No. 3 pp. 55987.

    RandallR.1998Interest Rate Spreads in the Eastern Caribbean,IMF Working Paper 98/59 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation

    World Bank2005World Development Report 2005: A Better Investment Climate for Everyone (Washington: World Bank).

    World Bank2007“OECS—Private Sector Financing: Bridging the Supply-Demand Gap” (Washington).

    World Bank2011Doing Business 2012: Doing Business in a More Transparent World (Washington).

    World Bank and IMF2004“Eastern Caribbean Currency Union–Financial Sector Assessment” (Washington).

1For details on the methodology and results of the regressions, see Beck and others (2008).
2The data can be accessed through the World Bank FinStats Database.
3This is the simple average of 136 countries surveyed. The average does not take into account different numbers of firms in each category for the countries.

    Other Resources Citing This Publication