Real GDP growth in Malaysia has slowed considerably over the past decade and domestic investment, measured as a percentage of GDP, has also decreased. These trends raise doubts about whether Malaysia can attain its goal of reaching developed nation status by the year 2020 and suggest it may linger in a “middle-income trap” for years to come. In 2010, the Malaysian government launched comprehensive economic and government transformation programs designed to stimulate growth and development. The Tenth Malaysia Plan seeks to develop small- and medium-sized enterprises as powerful engines of growth.

Malaysia's government recognizes that small- and medium-sized enterprises are critical to growth, but according to the new Business Environment Index, some issues such as infrastructure and informal charges remain a challenge. Photo: Amir Shariff.

On May 8, The Asia Foundation, Monash University Sunway, and RAM Holdings launched Malaysia’s first-ever Business Environment Index (BEI), a new knowledge product that supports both the public and private sectors to improve business conditions at the local level.

“Malaysia’s success in overcoming the middle-income trap hinges critically on the ability to unleash its entrepreneurial talents and innovation capabilities. High-level initiatives designed to foster a business-friendly environment like the Economic Transformation Programme (ETP) and the Government Transformation Programme (GTP) have laid the right track; what is needed now is an enabling environment, said Dr. Yeah Kim Leng, chief economist of RAM Holdings at the launch. “We see the BEI as a tool to bridge the remaining gaps in information, perception, and performance on the ground.”

The BEI ranks the performance of 11 districts and municipalities across six states in Malaysia using nine sub-indices such as entry costs, regulatory costs, informal charges, crime and security, and land access – all critical to growth and a healthy business environment in Malaysia. In partnership with government ministries, national and local chambers of commerce and industry, universities, and research institutes, The Asia Foundation has developed similar tools in Cambodia, Indonesia, the Philippines, Sri Lanka, Vietnam, Bangladesh, and now, Malaysia.

We surveyed 635 business owners face-to-face about their experiences doing business in their localities and their perceptions of local conditions and then compiled information to construct the BEI’s constituent sub-indices. A typical respondent firm – from a batik seller in Kuala Terengganu, to a hardware retailer in Petaling Jaya – is a sole proprietorship and small trading enterprise, and is likely to have five or fewer full-time employees and to operate exclusively within the state in which it is located.

Kemaman in the northeastern state of Terengganu ranks highest in business-friendliness overall. Sepang and Kuala Terengganu are close behind in second and third place, respectively. The poorest performing districts are Ampang Jaya and Petaling Jaya, both in Selangor. In general, the study reveals that districts tend to cluster at several performance levels, that districts in the same state are more similar than those in different states, and that high performers fare consistently well across all sub-indices while low performers rank poorly across many areas. View our interactive data visualization site for a full comparison of districts.

The BEI reveals that entry and regulatory costs are well-managed across the areas surveyed and do not represent substantial hurdles to businesses in peninsular Malaysia. In fact, 90 percent of surveyed firms had both a business registration and a business license – a remarkably high proportion among comparable economies. Maintaining a reliable listing of active businesses allows local government to better understand the local business community and therefore respond to its needs.

Another finding suggests that improvements can be made in the areas of infrastructure (both “hard” – i.e., roads, electricity, and water, and “soft” – i.e., support services). While infrastructure in Malaysia is considered to be among the best in Southeast Asia, electricity supply is still a major obstacle for 27 percent of the firms surveyed. And, access to quality roads and reliable water supplies varies greatly by district. High standards in infrastructure across districts would enhance business owners’ access to broader markets and a wider range of supplies and labor.

Crime and security, informal charges, and transparency registered as the areas of most concern in the BEI. Thirteen percent of business owners reported direct losses from crime in the previous year, including 27 percent in Petaling Jaya. In the face of this risk, many respondents indicated that firms in their line of work find it necessary to hire security services. In two districts, Ampang Jaya and Timur Laut, Penang, this figure stood near 25 percent – a particularly high proportion among very small firms with limited resources.

The threat of informal charges and unfair practices related to government procurement also registered with business owners. Over 80 percent of respondents felt that personal connections to officials or political party backing was important for winning public contracts and, in one district, 35 percent of respondents said that it is sometimes necessary in their line of work to make informal payments.

The survey also revealed that 56 percent of firms do not use computers. Consequently it is not surprising that one-third find it difficult or impossible to access information on government policies and regulations relevant to their sector. Of those that did use computers, only 17 percent use e-government services. This suggests that the current channels employed by the government to provide information and services to the private sector and to receive their feedback are not reaching the majority of SMEs in Malaysia.

As Malaysia mobilizes to achieve its 2020 goal of surpassing middle-income status, we hope that the Business Environment Index will provide a useful metric which illuminates challenges to local business growth and informs efforts to address them.

Reid Hamel is a program associate with The Asia Foundation’s Economic Development Program and Anthea Mulakala is the Foundation’s country representative in Malaysia. They can be reached at rhamel@asiafound.org and amulakala@asiafound.org, respectively. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

In January, I took a break from research for the just-released Malaysia Business Environment Index (BEI), which measures perceptions of district-level firms on their business environments, to get a broader perspective from two other rapidly growing Asian nations: China and India.

I led a group of graduate business students from Monash University Sunway Campus in Malaysia to China and India for a 17-day field trip, which provided an up-close opportunity to compare the outcomes of the economic development models of the two big emerging economies. We visited government-run and private-run business parks and met with managers of leading companies in both countries. While I was eager to get a feel of what the two economies had achieved, in the back of my mind I was wondering how these two fast-growing countries dealt with the common public policy issues we had been investigating in Malaysia – such as crime and security, government’s proactivity, and business development services. As expected, it was truly a great learning experience, but it also strengthened my belief that local governance is critical in shaping the local business environment.

Based on our visits to Hefei, in central China, and Suzhou, Hangzhou, and Shanghai on the east coast, we came away with the impression that Chinese local officials behave a lot like entrepreneurs. The municipal government leaders we met with behaved like businessmen. They were more well-versed in economic development models and strategy than stereotypical government officers concerned primarily with laws and regulations. The Chinese local governments not only provide basic public amenities and business development services, but also actively participate in running businesses themselves. (The major contribution to GDP by the government-controlled enterprises is a sign of how much government-run businesses contribute to the nation’s overall economy: according to a 2009 report published by the Australian National University, state-owned enterprises made up half of the largest 500 manufacturing firms and 61 percent of the top 500 service firms in China.) While the role of government-controlled enterprises remains controversial, I found that the Chinese local governments are eager to make their cities attractive places for investors by providing quality public services. Their efforts in cleaning up the cities are commendable.

In contrast to the BEI findings, some local authorities do not seem to show the same level of enthusiasm in providing some basic services in Malaysia: 15 percent of firms reported that road quality is a major obstacle to doing business, while 12 percent of firms cited water supply as a major obstacle. Given the relatively advanced development of Malaysia, it’s surprising that the infrastructure in many districts is still unsatisfactory.

In fact, “clean” was not a term used at all to describe Chinese cities 20 years ago. Those who have not visited China since the beginning of the reforms would have a hard time recognizing major cities today. In Hangzhou, for example, we saw road-cleaning trucks sprinkling water and washing busy roads at odd hours, and in Suzhou, a water city also known as the “Venice of the Orient,” we saw a woman picking up trash while rowing a boat along the narrow canals. The city cleaning services were certainly well provided.

In India, we visited Delhi in the north and Bangalore in the south, and talked to managers of several leading companies in each city. Both Delhi and Bangalore are iconic Indian cities, but they provided very different impressions. While poverty and security are major public issues in India, it appears that Bangalore is more successful in re-settling the homeless and providing security to its residents, especially women. In Delhi, poverty is much more visible, with families living under flyovers without basic utilities and sanitation. Moreover, we were informed that some women were deterred from joining the work force because of the threat of crime. If our trip only covered Delhi, we would have had more serious doubts about the ability of India to sustain its current pace of economic development. Fortunately, our experience in Bangalore restored some of our confidence about the prospects for India’s economy.

Comparing cities on the basis of such a short visit and using first impressions to make generalizations is not scientific. But recalling the pro-active image of the city and township officials in China and the contrast between Delhi and Bangalore, we are tempted to conclude that local officials can make a significant difference if they are empowered to play a pro-active role. Providing important services such as homes to the homeless, waste management, and security to woman workers is a very basic responsibility of local authorities. Malaysia’s business environment is the product of collaboration between governments at all levels, but local governments are crucial to problem diagnosis, law enforcement, and policy implementation. How they perform their duties have a direct impact on local business-friendliness. The high corruption incidence and high crime rate in some districts as revealed in the BEI suggest that the local authorities are actually the source of unfriendly business environment. If the local officials take a proactive role to combat corruption and crime, the local environment would have substantial improvement. In Malaysia, the federal government has more influence on local resources but the district governments are at the forefront of understanding the difficulties in implementing policies as well as the concern and the constraints that bind local development. With local knowledge, local authorities are in a position to diagnose the problems and prepare innovative solutions. Their proactive role in managing local affairs is indispensable.

Jane Terpstra Tong is a faculty member at Monash University Sunway Campus in Malaysia, and co-author of the Malaysia Business Environment Index 2012. She can be reached at jane.tong@monash.edu. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

Since the 1980s, microfinance institutions in Bangladesh, such as the Grameen Bank, have touted the success of women microentrepreneurs in starting and operating thousands of microenterprises throughout the country. While this is certainly an achievement, Bangladeshi women have not achieved the same level of success in the small and medium-sized enterprises (SME) sector.

In Bangladesh, male small business owners far outnumber female business owners, despite some recent progress. A business owner in Bogra, northern Bangladesh. Photo by Geoffrey Hiller.

The importance of SMEs to overall growth in an economy is well-known. Although the exact definition of SMEs varies from country-to-country, they are generally much larger – in terms of both assets and number of employees – than microenterprises. SMEs are often lifelines for larger firms – including foreign-owned firms – supplying them with raw materials, parts, and services. They are also more productive than microenterprises, driving employment and competition.

On an individual level, starting and operating an SME requires not only entrepreneurial spirit and start-up capital (which many microentrepreneurs have), but also managerial and logistical expertise. In addition, in cumbersome business environments like Bangladesh, starting and operating an SME often requires a business person to be well connected to bureaucrats or at least to networks who can access them. Women entrepreneurs in countries like Bangladesh frequently lack access to such expertise and networks, limiting their ability to become SME entrepreneurs. Moreover, expectations of women’s role in the family as wives, mothers, and homemakers may limit their ability to pursue economic opportunities outside of the home.

In order to understand these issues more deeply, The Asia Foundation has begun to closely examine the gender disaggregated data of its Economic Governance Indices (EGI) in Bangladesh and other countries. EGIs are composite indexes, based on a 100-point scale that scores the economic governance of each sub-national unit in a country. The data to construct each of the EGIs comes from a comprehensive, representative SME survey. By examining the gender-disaggregated raw data, we can determine systematic differences between men and women entrepreneurs to better understand the complex challenges that women entrepreneurs face.

So far, we have just begun to examine the data in Bangladesh and Indonesia, focusing mostly on firm-level and household-level demographic data. Most of these preliminary results are in line with what we expected. For example, it is no surprise that in Bangladesh, male SME entrepreneurs far outnumber female SME entrepreneurs. According to the 2010 Bangladesh EGI data (see Figure below), only 69 of the 3,800 firms in the sample have at least one female owner. This means that less than two percent of firm owners in the country are women. According to leading experts, most SMEs in the country are sole proprietorships or partnerships formed around family businesses. Tradition dictates that the male head of the household owns most of the family assets, including family businesses.

Similarly, as the next figure shows, female SME ownership across districts is very uneven, with smaller districts like Barisal and Jessore having a higher proportion of female owner than large cities such as Dhaka, Chittagong, and Khulna. While we do not know for sure why this is the case, one hypothesis is that women face additional barriers to entrepreneurship in Bangladesh’s mega cities – such as the high price of land, weak urban governance, and limited access to effective networks.

Additionally, on average women-owned firms are younger than male-owned firms, at approximately 11 years and 13 years respectively. Although the sample size for the female firms is small, the evidence suggests that this is a statistically significant difference. This reflects the relatively recent rise of female entrepreneurship in the country. According to the Strategic Foresight Group, an India-based think tank, women’s formal labor force participation in Bangladesh has increased 2 percent since 2005, adding over 1 million women to the labor force. This increase in labor force participation is due primarily to the absorption of women workers into traditionally male-dominated fields such as frozen shrimp enterprises. However, there has also been a rise in the number of women entrepreneurs, according to the Bangladesh Women’s Chamber of Commerce and Industry. In fact, a recent study by the group finds that women entrepreneurs are more likely to hire other women, thereby increasing employment opportunities. Our own data bears this out. According to our analysis, not only do women entrepreneurs on average have one more employee than men entrepreneurs, but they are much are more likely to hire female employees. On average, women entrepreneurs have 1.3 female employees while men have only 0.12 female employees. This significant difference gives credence to the notion that women entrepreneurship not only empowers women owners, but expands opportunities for all women.

Surprisingly, the data did not support the notion that women entrepreneurs are involved in different sectors than men. For example, women in the sample were just as likely to be involved in manufacturing as men, in contrast to the widely-held notion that women are more likely to be involved in services or retail than men. There was, however, large and significant difference in revenue generation. As the next figure shows, average sales per worker at all male-owned firms in 2010 was more than 1 million Taka, while at firms with at least one female owner it was around 600,000 Taka. This finding corroborates evidence from a 2008 report by the Bangladesh Women’s Chamber of Commerce, which found that most women entrepreneurs only sell their products locally and that 43 percent sell their products at lower prices than their male counterparts in order to compete effectively. This not only highlights the fact that women are not well connected to either markets or networks to advance their businesses, but that they tend to compete in a narrower range of commercial enterprises – such as handicrafts, dress-making, and fish-drying – which produces products that have less value-added, so it is difficult for them to sell beyond local markets.

Lastly, the data shows that there are surprisingly few demographic differences between men and women entrepreneurs. For example, women and men entrepreneurs are equally as likely to be married, have similar household sizes, and similar household income. The only significant and important difference is in the highest level of educational achievement attained. As this figure shows, 83 percent of women entrepreneurs have at least a junior secondary education or higher compared to 65 percent of men entrepreneurs. This indicates that education may play a greater role in women’s entry into SME sector than for men.

Interestingly the data also show that women entrepreneurs have better educated fathers on average than their male entrepreneurs, with 54 percent of women entrepreneurs’ fathers completing at least junior secondary school, compared with 34 percent of men entrepreneurs’ fathers. These findings indicate that successful women entrepreneurs may have greater support from male family members, who through education, support women’s economic empowerment.

While these findings are preliminary, they are useful in painting a picture of women’s SME entrepreneurship in Bangladesh. As we continue with our analysis, we hope to have a deeper understanding, not just of the demographic and firm-level differences between men and women entrepreneurs, but also how they each experience the business environment. This will help us better understand what policy-makers and institutions can do to help improve and expand entrepreneurship and economic opportunities for women throughout Bangladesh.

Nina Merchant-Vega is The Asia Foundation’s assistant director for the Economic Reform and Development program. She is a co-author of the new book, “Innovations in Strengthening Local Economic Governance in Asia,” published by The Asia Foundation. She can be reached at nmerchant@asiafound.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

In a recently released report on Asia in 2050, the Asian Development Bank (ADB) predicted that seven Asian economies – China, India, Indonesia, Japan, South Korea, Thailand, and Malaysia – would be the drivers of Asia’s rise over the coming decades and that the region could account for more than 50 percent of global GDP in the next 40 years. The report warned, however, that these economies need to avoid falling into the “middle-income trap” – countries that stagnate at middle-income status and are not able to take the next leap to developed nation status – to enjoy such continued regional prosperity.

In fact, the middle income trap is already a serious concern for Malaysia. According to World Bank data, real GDP growth has slowed considerably, from an average of over 9 percent between 1990 and 1997 to around 5.5 percent between 1997 and 2008. In addition, domestic investment measured by gross capital formation as a percentage of GDP has also decreased drastically, from above 40 percent in the mid-late 1990s to below 20 percent in recent years.

Such large decreases in investment and growth rates in the last decade raise serious doubts about whether Malaysia can attain its goal of reaching developed nation status by the year 2020. In light of this, the Government of Malaysia has acknowledged the important link between good business environments to encourage private sector investment and favorable economic outcomes such as long-term growth and international competitiveness. To this end, the government has undertaken several initiatives to improve the business environment and encourage economic transformation.

One extremely important initiative has been the Special Taskforce to Facilitate Business or PEMUDAH (taken from its Malay name Pasukan Petugas Khas Pemudahcara Perniagaan), a national-level, public-private taskforce charged with improving the operating environment for the private sector. Established in 2007 by the prime minister, PEMUDAH uses the World Bank’s annual Doing Business report as an annual success benchmark and recommends improvements to Malaysia’s public services delivery system for the private sector.

Since its establishment, PEMUDAH has worked to enhance efficiency within the bureaucracy at the national level. For example, PEMUDAH launched One-Stop Centers (OSCs) that offer public access to information on development issues in local authorities across the country. Moreover, since 2007, Malaysia’s ranking in terms of ease of doing business has risen from 25th to 21st, indicating some tangible improvements in national competitiveness.

In addition to PEMUDAH, Malaysia’s government has established several other high-level national initiatives, including the Government Transformation Programme GTP) and Economic Transformation Programme (ETP),  to improve public service delivery and help move the economy up the value chain. The government envisions that the GTP will play an important role in improving the effectiveness of the Malaysian government, while the ETP will propel Malaysia’s economy into high-income status by revitalizing the private sector.

Taken together, these initiatives highlight how serious the government is about improving public service delivery and the business environment. Moreover, in the current economic climate, in which Malaysia is seeing its first major growth challenges since 1997, the government has recognized the need to continue down the path of improved public service delivery for private sector development.

It is against this background of public commitment that The Asia Foundation is working to complement the government’s initiatives with its pilot Malaysia Business Environment Index (BEI). The BEI is a Malaysia-specific diagnostic tool to benchmark and rank localities on various aspects of their local business environments. It is envisioned that the tool will also act as a local-level complement to the World Bank’s Doing Business report, which will provide the government with a local-level benchmarking to work in combination with its national benchmark.

The first of its kind in Malaysia, the pilot BEI is currently being implemented across six states and 11 localities in partnership with Monash University School of Business and Ratings Agency Malaysia (RAM), Inc. The BEI is the latest iteration of the Foundation’s efforts to assess local business environments through its Economic Governance Index (EGI) initiative. So far, we’ve conducted a series of EGIs in countries throughout South and Southeast Asia including Cambodia, Indonesia, Vietnam, Sri Lanka, and Bangladesh. The overall rationale for creating the EGI stems from the idea that economic governance and public service delivery impacts private sector development, independent of structural endowments such as location, infrastructure, and human capital. Therefore, good economic governance practices and efficient public service delivery explain why some sub-national units outperform others despite having similar initial endowments.

EGIs are composite indexes, based on a 100-point scale that scores the economic governance of each sub-national unit in a country. Sub-indices, such as entry costs, transparency and access to information, informal charges, and pro-activity of local leadership, for example, capture the key elements of the local business environment that can be influenced by provincial laws and public service delivery.
Each of these sub-indices is broken down into a series of indicators derived from a comprehensive, empirical firm-level perceptions survey and “hard data” from various published sources. The indicators are then scored, scaled, and aggregated to create composite scores for each sub-national unit.

EGIs support reform efforts by providing relevant economic governance information to three important groups: policy-makers, firms, and citizens. The aim of the EGI is to link these important groups to valid evidence in order to better diagnose problems, target prescriptions, and isolate the impact of policies and programs. Such evidence is crucial for implementing policies that improve the business environment.

In the Malaysia context, tools that measure institutional effectiveness like the new Business Environment Index are essential to maintain the country’s current momentum. In order to reach developed country status, middle-income countries have to strengthen institutions and public service delivery while encouraging entrepreneurship and innovation.

As the ADB report points out, local and national policy initiatives aimed at improving the business environment will have larger regional and global economic impacts. Thus, by improving the business environment at home and reaching its development goals, Malaysia will not only realize its own potential, but will also help the entire region realize a prosperous Asian century.

Nina Merchant-Vega is The Asia Foundation’s assistant director for the Economic Reform and Development program. She is a co-author of the new book, “Innovations in Strengthening Local Economic Governance in Asia,” published by The Asia Foundation. She can be reached at nmerchant@asiafound.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

In Bangladesh, where the 2010 Economic Governance Index – which measures and ranks business environments across 19 districts – was just released, the capital city of Dhaka did not perform among the top districts. Of course, in terms of business performance and investment, Dhaka remains Bangladesh’s single most important city.

Bangladesh's capital and financial center, Dhaka, above, is home to both international and domestic banks, as well as the Dhaka Stock Exchange. Yet, it struggles with rapid urbanization - each day, nearly 5,000 new people move to Dhaka, the world's 10th most polluted city. Photo by Sanchita Saxena.

With nearly 10 percent of the country’s population of 150 million, Dhaka is the 9th most populous city in the world. With 15 percent of the national GDP, the city is the heart of Bangladesh’s financial sector, home to both international and domestic banks, as well as the Dhaka Stock Exchange. Thus, a paradox emerges. Although the city is the center of business activity, attracting both foreign and domestic investment, it is perceived by the private sector as having only the 10th best business environment in the country, out of 19 measured.

The situation in Cambodia’s capital, Phnom Penh, is even more grim. In both the 2006 and 2009 Provincial Business Environment Scorecards (PBES) – which similarly rank provinces according to the quality of their business environments – Phnom Penh came in last among all provinces. Like Dhaka, this result is puzzling. Phnom Penh is by far Cambodia’s most economically active and modern area, and along with the tourist city of Siem Reap, is crucial to national and foreign investment. From 1994 to 2004, Phnom Penh contained 77 percent of fixed FDI stock in the country, while Sihanoukville (the harbor) and Kandal (the nearby province with many garment factories) came in second and third with only 8 and 5 percent, respectively. Phnom Penh contained approximately 45 percent of all businesses in the country. Thus, to the casual observer, it is difficult to understand why this economically active city fairs so badly on the PBES index.

Unraveling why both of these capital cities rank so poorly requires delving deeper into the data. “Informal charges” (or bribes) for example, appear to be a major obstacle to doing business in both Dhaka and Phnom Penh. As the figure below shows,  Dhaka ranks second to last for informal charges – approximately 76 percent of firms in Dhaka, the most of any district, reported having to pay bribes in their line of work.

2010 Bangladesh EGI Informal Charges Sub-Index

Data for Phnom Penh shows that, like Dhaka, its business owners are far more likely than other provinces to pay small bribes to local officials.

Both cities also did poorly on areas related to service delivery. Dhaka received a low EGI ranking for infrastructure, one of the most highly weighted sub-indices on the overall index. For Dhaka, both the scores for quality and availability of local infrastructure were poor and the city had the lowest percentage of paved roads out of total roads (60 percent) among all districts.

Service delivery was similarly poor in Phnom Penh. The capital ranked among the last on tax burdens for businesses and on efficiency and ease of the tax administration. In Phnom Penh, 66 percent of firms said that “negotiations with the tax authority were a normal part of doing business.”

Thus, are capital cities victims of their own success?

Given these results, it becomes clear why these capital cities are underperforming. For example, growth has brought more opportunities for rent-seeking, explaining the higher rates of informal fees in the capital cities. There are obviously also challenges of urbanization and population density, although to different extents for overpopulated Dhaka and the still relatively “provincial” Phnom Penh. In both cases, however, the administrative system and the capacity of public services have not been able to keep pace with the rapid population growth and private enterprise development.

The correlation between high population and low EGI index is illustrated by the examples of Bangladesh’s two largest cities, Dhaka and Chittagong. In both cases, data demonstrate the considerable governance challenges stemming from urbanization and overpopulation that mega cities have to deal with.

With growth, there is a natural Catch 22 – growth brings increasing demand from the private sector, which is then limited by an overstretched public sector with meager financial resources and human capacity. It also reveals the limits of an administrative system that badly needs reform and reorganization. One-Stop Shops for registration and licenses, public sector capacity building, and other efforts to streamline administrative procedures are then badly needed to improve economic governance in a significant way.

However, urbanization and overcrowding alone cannot explain away low EGI scores. For example, in Phnom Penh, entrepreneurs clearly blame the government for not being supportive enough, as only 32 percent rated officials’ attitudes as positive. In addition, only 18 percent believe that local institutions will protect their property rights. Of yet more concern, in the capital, poor governance has also affected the attitudes of local entrepreneurs toward their own business growth. Whereas 60 percent of entrepreneurs elsewhere in the country plan to expand operations over the next two years, just 45 percent of businesses in the capital have such plans. In fact, 3.6 percent of Phnom Penh firms are planning to close down in the next two years, compared to only 1 percent of firms in the rest of the country. Such findings reveal that poor governance contributes significantly to poor index rankings and poor economic performance.

Improving economic governance and business environments in Dhaka and Phnom Penh is all the more important, because for the foreseeable future, both cities will remain the mainstays of their respective economies, with the most investment activity, the largest share of business activity, and the most educated populations. Dhaka and Phnom Penh will still remain attractive to large-scale investors because of the big infrastructure hubs like airports and ports, as well as their proximity to markets, services, and public administrations. However, many other elements are making the choice of investing in capital cities much less attractive – cost of land and property, traffic jams, and higher administrative costs all make it difficult and costly to do business in these cities. If rapidly growing capital cities want to remain competitive and continue to offer opportunities and services to their ever-growing populations, they would be wise to look closely at these results and consider the improvement of economic governance and public services as extremely important priorities for their future well-being. Making such improvements will help them play a more dynamic role in economic growth and enable them to take full advantage of their positions as leading cities.

Véronique Salze-Lozac’h is The Asia Foundation’s regional director for Economic programs in Cambodia and Nina Merchant-Vega is the Foundation’s assistant director for the Economic Reform and Development program in San Francisco. They can be reached at VSalze-Lozach@asiafound.org and nmerchant@asiafound.org, respectively.

Any casual observer walking through the heart of a district capital like Bangladesh’s northeastern city of Sylhet or Rangpur, further north, would be impressed by the bustling economic activity. In the early morning, streets are filled with colorful trucks honking their way toward the market place. Their paths are crossed by overloaded rickshaws delivering raw materials to nearby tailors and small manufacturers. Despite such signs of a vibrant economy, doing business in Bangladesh is far from easy.

In Bangladesh, business people, such as this shop worker, face basic challenges that stunt their growth potential, including cumbersome administrative procedures and lack of transparency from authorities.

In Bangladesh, where The Asia Foundation works with micro, small, and medium enterprises (MSMEs) at the district level, business people often complain about cumbersome administrative procedures, unfair tax administrations, obsolete regulations, and an overall lack of transparency from authorities. As a poultry farmer in Rajshahi recently expressed, “If the government offices do not have copies of laws, regulations, or circulars, then how will they help us? And where would we seek help in solving our problems?”

Often, the first interaction local MSMEs have with the public sector is at the local level. Thus, the role of local public authorities and public officials is key to providing a business environment that favors business development. However, local authorities are often perceived as being unaware of the difficulties faced by local enterprises.

For the first time in Bangladesh, business people from 19 districts across the country were asked to express their opinions on their local business environments. The results –complemented with data from published sources – were combined into the just-released 2010 Bangladesh Economic Governance Index (EGI) which ranks the districts according to the quality of their business enabling environment.

The EGI assesses and ranks localities on specific aspects of their regulatory environments. Using a rigorous methodology pioneered by The Asia Foundation, the 2010 EGI is comprised of 10 sub-indices – such as entry costs, transparency, and informal charges – that are relevant to Bangladesh’s local business environment. The Asia Foundation worked with a local research institute, Data International, based in Bangladesh, which interviewed more than 3,800 firms of all sizes and all sectors to collect the data needed to construct the indices and sub-indices.

The survey respondents were selected randomly from a listing of 55,736 formal and informal enterprises, from the 19 districts. This listing, conducted by Data International prior to the survey, shows that Bangladesh’s economy is dominated by micro-enterprises. More than 97 percent of these firms employ less than 10 workers and less than 1 percent of firms have 20 or more employees. Seventy percent are in wholesale and retail trade activities, while the remaining firms are engaged in manufacturing services. The listing also confirms that the private sector in Bangladesh is dominated by men, with less than half of one percent of firms owned by women.

The survey reveals that the overall ranking of the 19 districts in the EGI indicates clear “high” performers (Faridpur, Dinajpur, and Kushtia) and “low” performers (Tangail, Chittagong, Barisal, and Rajshahi). However, about 42 percent of the districts are clustered in the “medium” category, indicating that with some effort, these districts could easily climb up the rankings.

The EGI also provides specific information on each of the sub-indices in the composite index. For example, the entry cost sub-index (covering both time and monetary costs), shows a huge difference in performance between the top district of Patuakhali (reaching 8.47 on a scale of 10), and the capital city of Dhaka (lagging behind with a score of just over 3 points). In Patuakhali, firms never wait more than three days to obtain a trade license or a VAT certificate, while it can take up to 20 days for the low-performing districts.

Another example shows how implementation of reforms can improve districts’ performance in the area of transparency and access to information. On the transparency sub-index, the western district of Kushtia scores very high with almost eight points, indicating that it provides easy access to documents to its business community. On the other hand, the bottom seven districts all scored four points or lower, revealing that many districts have problems with transparency-related issues. With targeted reform efforts, these districts could improve their ranking with little effort.

These examples show how the EGI provides an opportunity for the private sector and the national and local authorities to better understand the strengths and weaknesses of each district and to identify good practices across districts. Using the EGI, government officials, businesses, and other stakeholders will be better positioned to build strategic public-private partnerships to address weak links and advocate for priority reforms. For business owners, like the poultry farmer in Rajshahi, these reforms will be key to building a healthier business environment.

The Bangladesh EGI is part of the Local Economic Governance Program – Enhancing the Sustainability and Stakeholder Ownership of Investment Climate Reforms in Bangladesh – implemented by The Asia Foundation with BICF funding. BICF is managed by IFC, in partnership with the United Kingdom’s Department for International Development and the European Union.

Véronique Salze-Lozac’h is The Asia Foundation’s Regional Director for Economic Programs in Cambodia, Nina Merchant-Vega is Assistant Director of the Economic Reform and Development Program in San Francisco, and Syed Al-Muti is the Project Director for the Local Economic Governance Program in Bangladesh. They can be reached at vsalze-lozach@asiafound.org, nmerchant@asiafound.org, and salmuti@asiafound.org, respectively.

Vietnam has garnered international attention over the past two decades with its remarkable economic growth and strong poverty alleviation record. The adoption of the doi moi (renovation) policy in late 1986, marked by a shift to market-oriented development and international integration, has transformed this country of 86 million. Crucial legal reforms embodied in such laws as the Enterprise Law, the Land Law, and the Investment Law have further spurred economic development, encouraging the emergence and growth of market activities, the private sector, and foreign investment in a country long governed by central planning. The private sector in particular is playing an increasingly significant role in the economy. According to the World Bank, in 2007 the domestic private sector contributed 46 percent of the GDP, and private sector investment in the economy grew steadily from 23 percent in 2000 to 38 percent in 2006. With some 1.5 million new entrants into the labor market each year, the domestic private sector is critical to employment generation.

There is no doubt that Vietnam’s government recognizes the importance of the private sector and has been supportive of efforts to generate a more conducive business environment. Benchmarking indices from the World Bank and the annual Provincial Competitiveness Index note improvements in such areas as business registration and access to land and credit. After joining the World Trade Organization in late 2006, however, Vietnam now faces a more competitive global environment, which has become more uncertain in the wake of the global economic crisis. Weak export and high inflation are slowing down overall growth, undermining gains in poverty alleviation, while falling incomes and job loss are affecting many.

Responding effectively in a time of economic crisis requires reliable data, and in this regard, the Vietnamese government has had challenges formulating the most productive policies to stabilize shocks, control inflation, and help businesses to sustain operations. As Vietnam feels more strongly the impact of the global economic crisis, it became clear that there was no system in place for the government to rapidly assess the challenges facing the business community to determine what policies should be implemented, and how.

Responding to this critical information gap, The Asia Foundation and the Vietnam Chamber of Commerce and Industry (VCCI) along with experts from Vietnam’s General Statistics Office (GSO) and the Lee Kwan Yew School of Public Policy’s Asia Competitiveness Institute recently launched the Vietnam Business Insight Survey (VBIS) website, aimed at gathering information on the business environment through quarterly online surveys.

The surveys will ask businesses about the conditions of their operations, their business plans and expectations, their views on government regulations and policies, and other specific concerns. For example, the effectiveness of the government’s stimulus package on the private sector was difficult to assess, and a rapid survey mechanism such as VBIS would have been very helpful to provide the government with concrete data for timely policy adjustments. In the initial phase, VBIS will cover around 500 enterprises in the manufacturing sector. As VBIS becomes more established and better known in the business community, we expect that more businesses will participate. Future surveys aim to include the construction, service, and agriculture sectors as well.

Businesses register online to participate in the survey, designed to take only 10 to 15 minutes. Results will be publicly available online and the information gathered will not only be helpful to policymakers, but will also allow businesses to compare performance and challenges with each other to better respond to the changing environment and new government policies. As results come in, we hope that this initiative can help grow the public-private dialogue in Vietnam.

Kim N. B. Ninh is The Asia Foundation’s Country Representative in Vietnam. She can be reached at kninh@asiafound.org.

After a global economic slump in 2009, Cambodia welcomed World Bank forecasts that projected its economy would grow in 2010. However, despite an auspicious start to the New Year, the imbalanced growth between Phnom Penh and the provincial areas are major concerns for improved and sustainable economic development. The private sector in Cambodia, particularly the micro, small, and medium enterprise (MSME) sector that constitutes the bulk of the country’s economy, has been inhibited in its ability to grow and create jobs because of a wide spectrum of institutional barriers and development constraints.

Small- and medium-sized businesses, such as this pottery wholesale shop, are particularly hard-hit by development constraints in Cambodia. Photo By Karl Grobl.

In order to better understand such impediments to growth and to better understand how provinces are contributing to or preventing business growth, The Asia Foundation and the International Finance Corporation collaborated to develop the Provincial Business Environment Scorecard (PBES) in Cambodia.

The scorecard measures the quality of business environments at sub-national levels by ranking provinces against each other based on 10 sub-indices, such as entry procedures, property rights, transparency, informal charges/bribes, and more. First conducted in 2006, the 2009 survey involves comprehensive interviews with 1,234 firms in all 24 provinces of Cambodia. By measuring and ranking Cambodia’s provinces against each other in terms of the quality of their business environment, the PBES provides an opportunity for the private sector and the national and local authorities to express their opinion on things that are working well or not in a given province. It also offers an opportunity to exchange best practices across provinces, an incentive to improve, and a tool for targeted policy reforms.

Although some findings indicate that certain areas of the business environment have improved since 2006, there are some areas where further reforms are much needed. The table below summarizes the change in sub-indices performance between 2006 and 2009. Upward arrows represent positive changes, downward negative, and sideways arrows represent ambiguous developments.

Nearly 96 percent of Cambodian enterprises are micro enterprises with less than 10 employees, and 90 percent of these micro enterprises operate only within their home province. Those Micro Small and Medium Enterprises (MSMEs) face a wide range of constrains. Informal fees, for example, were mentioned by 75 percent of the businesses as a major obstacle for business operation.

A medium-sized car garage owner in Phnom Penh said that “We cannot avoid informal charges when dealing with government officials. We have to spend more or less depending on the case and person. I’ve paid informal charges even to obtain licenses or to negotiate tax payment, fire inspection, and inspection by the economic police. I think the officials’ low salary and the heavy bureaucratic and ineffective procedures are the main cause of corruption. Thus, without informal fee payments, we can’t get things done as we want to.”

Another major constrain for business operation is dispute resolution. The study finds that only 22 percent of firms in the median province believe that the legal system will protect their property rights. Correspondingly, only 41 percent of respondents were satisfied with resolution of their contractual disputes over the past year, and 65 percent of businesses were not successful in recovering payments owed to them by delinquent clients. The lack of confidence in formal means of dispute resolution raises the risk of doing business and has the potential to limit business expansion and growth.

In remarks by H.E. Cham Prasidh, senior minister of the Ministry of Commerce, at the PBES launch earlier last year, he acknowledged that “The PBES is a good indicator of where efforts should be concentrated to improve specific areas of the business environment. It can also indicate over time where reforms have been successful and tangible improvements have been achieved,” while remarks by provincial governors at the provincial dissemination workshops recognized that “The PBES report has provided us with useful information related to our strengths and weaknesses in terms of quality of business environment. As a result, we can identify and prioritize areas where improvements are required for making policy reforms to improve the business environment of MSME.”

Improved local-level business environments will help these communities reduce their costs, improve their access to markets and other business development services, and facilitate their economic activities. Such studies as this raise awareness on the myriad of constraints faced by the private sector and help create a culture of dialogue among the different actors for a more efficient way of doing business.

Véronique Salze-Lozac’h is The Asia Foundation’s Regional Director for Economic Programs in Cambodia. Khut Inserey is a Senior Program Officer and Ratha Kim is a Program Officer, both in the Foundation’s Cambodia office. The can be reached at VSalze-Lozach@asiafound.org, ikhut@asisfound.org, and rkhim@asiafound.org, respectively.

The recent release of two reports – one from the World Bank/IFC and the other from the IFC/Asia Foundation – compelled more than 200 Cambodians to gather on May 25th in a conference room overseeing the Tonle Sap river. They were business owners, public officials, and development organizations, all keen to discuss ways to make the life of business owners in Cambodia easier and more productive.

The lack of information on regulations, time-consuming procedures, unofficial charges, and the poor delivery of essential public services hamper business growth.   Making it easier, cheaper, and more transparent to start and operate a business could significantly help Cambodia compete in both the international and domestic markets, according to the World Bank/IFC Second Investment Climate Assessment (ICA) and the Provincial Business Environment Scorecard (PBES), published by IFC and The Asia Foundation.  At a time of unprecedented global financial and economic crisis, the issue is not anecdotal. Cambodia urgently needs to improve its business environment at the national and provincial level if it wants to mitigate the shock of the international crisis.

Speaking at the launch, H.E. Cham Prasidh, Senior Minister and Minister of Commerce, insisted on the urgent need to take concrete measures at both the national and local level to facilitate the development of all enterprises. He said, “As these two publications show, Cambodia has made great economic progress in just a few short years, but we still face important challenges. It is the responsibility of all Ministries to reduce procedures and improve the business environment to help businesses develop in Cambodia.”

At both the national level and sub-national level, improved governance is a priority

The Second ICA survey — which was conducted with 500 entrepreneurs in Phnom Penh, Siem Reap, Sihanoukville, Battambang, and Kampong Cham — shows that corruption was the top concern of entrepreneurs, as it was for the first ICA in 2003. The second highest concern was macro-economic uncertainty. Because of deteriorating conditions in the global economy, this ranked higher than in 2003. Entrepreneurs’ third-highest concern was anti-competitive practices; fourth was economic and regulatory uncertainty. Private companies, and especially small and medium enterprises, need better access to finance, information on regulations and procedures, export opportunities, reliable dispute resolution mechanisms, and access to efficient and transparent government services. Similar issues are raised by smaller enterprises at the local level. Informal fees, for instance, are also mentioned by 75 percent of the MSMEs surveyed in the PBES as a major obstacle to their development.

Some Cambodian provinces are more business-friendly than others, but all have progress to make

At the local level, Micro Small and Medium enterprises (MSMEs) face a myriad of constrains that vary in intensity from province to province. Although policies are designed and decided at the national level, how they are implemented at the local level is what matters for Cambodian enterprises, 96 percent of which are micro-enterprises with less than 10 employees. 90 percent of these micro-enterprises operate only within their own province.

The Provincial Business Environment Scorecard (PBES) measures this difference in business environments at the sub-national level by ranking provinces against each other, according to their quality of economic governance. The 2006 PBES, which was the first PBES study conducted in Cambodia, interviewed 500 company owners or managers in Cambodia’s ten most-economically active provinces. The 2009 PBES conducted in-depth interviews of 1,234 business owners from the formal and informal sector in all 24 of Cambodia’s provinces. Although completed by data and information collected from published sources or self-observation, the PBES is, in large part, the voice of local MSMEs.

A car garage owner in Phnom Penh said, “The process of registering a business is complicated and time-consuming for business people, unless we know all the required documents. Moreover, we have to visit the ministries many times to get the document signed depending on officials in charge’s availability.” He addressed one of the ten areas of economic governance investigated by the survey: time and costs of starting a business; property rights; transparency of regulations; the time required to comply with regulations; informal charges; participation of the private sector in policy making; crime prevention; the time and required procedures to pay taxes; how effectively local officials help the private sector; and dispute resolution.

According to these ten criteria, or sub-indexes, Kampong Cham is the top-ranking Province in 2009, as was the case in the 2006 PBES, while the capital city of Phnom Penh remains at the bottom. The 2009 PBES also demonstrates that rapid progress can be expected when concrete measures are taken by local authorities. This is proved by the example of Sihanoukville and Siem Reap, which both moved up from near the bottom in 2006 to the higher ranks on the 2009 PBES by making significant advances in four out of the ten areas. Nationwide, indicators showing the most improvement were made in the cost of starting a business and the time spent complying with government regulations and tax administration. The indicators which deteriorated on the 2009 PBES, in comparison with the 2006 PBES, are property rights, informal charges, transparency, and dispute resolution.

PBES as a tool to prioritize efforts and reforms

An important outcome of the May 25 conference is the strong commitment of the Government’s representatives to use the PBES as a tool to identify priorities for reform and to monitor progress over time.  In his concluding remarks, H.E. Phork Sovanirth, Secretary of State of the Ministry of Industry, Mine and Energy, urged the audience to use the information from the two reports as “they will be instrumental in designing reforms and program activities to improve the business and investment environment and enhance the effectiveness of dialogues between the pubic and the private sector at the provincial level as well as at the national level.”

Addressing the representatives of the line ministries working at the provincial level as well as the Province’s Governors, Senior Minister Cham Prasidh declared, “Using the PBES, provincial governors and the line ministries can set priorities for action. The 2009 PBES will serve as a base-line for your performance. There is a need to come back to measure the same provinces again in a few years to see whether there have been any improvement or regression and why.”

A tool for action and dialogue between the public and the private sector; this is exactly what these reports aimed to be, a starting point for reforms and improved business environments that will spur business activity, job creation, and economic growth for the benefit of Cambodia’s people.

Véronique Salze-Lozac’h is The Asia Foundation’s Regional Director for Economic Programs and is based in Cambodia. She can be reached at vsalze-lozach@asiafound.org. Last week, The Asia Foundation’s Cambodia office released the second Provincial Business Environment Scorecard (PBES) survey, which ranks all 24 provinces on the quality of their economic governance. Findings from the report have been cited in articles in Agence France-Press, Voice of America, and two articles in The Phnom Penh Post (one here, the other here).

Investors use the Index as a reference for their investment decision-making, and PCI results have been cited by Vietnam’s Prime Ministers and in more than 500 investigative and news articles. Each year, PCI gauges the progress of economic and administrative reforms and provides guidance to Vietnam’s policymakers, business leaders, and entrepreneurs. Looming as Asia’s next tiger economy, Vietnam is growing at an average of 8% per annum. This year’s progress report details aspects important to Vietnam’s continued success ” from reduced waiting periods for business registration to increased transparency of information. Two new report features are also unveiled. The PCI Infrastructure Index ranks aspects of the country’s infrastructure, such as industrial zone quality and major infrastructure like ports and airports. The Information and Communications Technology (ICT) sub-index shows levels of ICT penetration including the number of household and business computer users, internet subscribers, and broadband services.

The report was developed and implemented by The Asia Foundation and the Vietnam Chamber of Commerce and Industry, with funding from the United States Agency for International Development’s Vietnam Competitiveness Initiative (VNCI).

Read a blog entry written by The Asia Foundation’s Assistant Director of Economic Programs as she and a team of researchers culled the report’s data earlier this year.