Doing Business in Vietnam vs. Spain:

After a recent trip to Vietnam, and given that I have never been in China, I was shocked to witness the growth potential from the region.

Comparing Vietnam with my experience in Cuba ten years ago, what I found was not as close to a communist country as I could have expected. Free market was open in any Vietnamese street in big cities and, surprisingly enough, The Financial Times and Warren Buffet’s biography could be easily found in local news agents. This used to be completely banned in Cuba at least ten years ago and I suspect that it may still be.

What I saw was a very young population eager to progress and able to combine their ancient traditions with the latest hi-tech gizmos and western style. But as usual, l will provide you with some fact-based analysis and will compare how easy or difficult it is doing business in Vietnam vs. Spain based on the Doing Business reports from The World Bank.

Doing Business sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations. It measures and tracks changes in regulations affecting 11 areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers. The numbers considered for the analysis are the ranking positions of each country out of a total of 185 economies from Afghanistan to Zimbabwe (for more data details, see www.doingbusiness.org).

As we will see, there is still as much room for improvement for one country as for the other.

A.      Doing Business in Vietnam:

In the following table , we compare how Vietnam performs in the aforementioned categories compared to the regional average (East Asia & Pacific). On average, we see how Vietnam underperforms by 14% compared to its peer countries. In fact, the biggest concern to any entrepreneur in Vietnam should be “investor’s protection” and “getting electricity”. Access to reliable corporate data and as access to reliable and affordable electricity is vital for businesses. However, Vietnam is outperforming its peers in important areas such as “dealing with construction permits” and “getting credit”.

B.      Doing business in Spain:

  

Following the same methodology as of Vietnam, we can see how Spain underperforms by a 27% compared to the regional average (OECD high income). It is extremely worrying to realize how difficult it is to start a business in Spain, as it ranks 136 out of 185 countries. “Enforcing contracts” and “protecting investors” are the next worse categories in which Spain should really focus to become an attractive economy to investors.

C.      Doing business in Vietnam vs. Spain:

The following comparison is not purely academic as it could be easily argued that we are comparing oranges and apples. However, the exercise is interesting as we can see how a rich country such as Spain underperforms Vietnam in as much as 5 categories out of 11. In other words, doing business in Vietnam it is easier than in Spain in 45% of the total categories considered to determine the ease of doing business in an economy.

Overall, we see how Spain’s average position is 61, compared to Vietnam’s average position 95. However, as stated above, Vietnam outperforms Spain in “starting a business”, “dealing with construction permits”, “registering property”, “getting credit” and “enforcing contracts”. Although the differences in these categories are not too significant, Spain should seriously consider making things easier to entrepreneurs and get rid of much of the red tape needed. Another striking fact is that it is easier to enforce contracts in a communist country such as Vietnam than not in Spain.

This is not a complete analysis as we are only considering the ranking positions and disregarding the causes of such differences, be them political, geographical or economical. However, it seems quite clear that today, Spain is not the best (or at least the easiest) place to start a business.  And in a time when unemployment is at historical records, it is a shame that households cannot access to credit, get rid of bureaucracy and start a business with enough assurance regarding their property and interest.

We do need big corporates such as Inditex or Telefonica. But right now, what Spain is in desperate need of is small and medium-sized successful enterprises able to boost employment and consumption.

Sources:

“Doing Business 2013: Smarter Regulations for Small and Medium-size Enterprises”

“A heavy load” The Economist August 31st 2013

www.doingbusiness.org

http://www.worldbank.org/

Are European Central Bank policies as effective as we assume?

When interest rates are high, savers are happy as the opportunity cost of holding a bond decreases since they are able to realise greater yields with investments that reflect the higher interest rate, for instance, government bonds, which will need to compensate for the loss of the purchasing power of future cash flows. When interest rates are low, borrowing is cheaper. Or is it?

There is an interesting article questioning the effectiveness of ECB policies on this week’s issue of “The Economist” (Broken Transmission, May 4^th 2013). The article points out how, historically, ECB’s policies have achieved their objectives. When the ECB lowered the interest rate by 0.5% in 2003, the interest rate at which firms borrowed fell by the same amount. The economy followed the same pattern when the ECB tightened its policy between 2005 and 2007, raising the interest by the same amount as the ECB did, 2%.

However, as The Economist puts it, the “transmission mechanism” seems to be broken.

Economic theory suggests that when price goes up, there is less demand. On the other hand, supply should rise as producing is now more profitable. Ben Bernanke and Mark Gertler observed the opposite when studying some interest rates patterns: “when interest rates rise, credit supply might fall”.

As said earlier, when central banks raise interest rates (higher inflation expectations), the return on government bonds rise too. Banks lose deposits as savers can achieve higher returns by buying bonds. Banks then need to find other sources of funding such as borrowing in wholesale markets, which is more costly for them. As a consequence, banks lend less money and/or lend it with higher interest rates.

This bank-lending channel is only relevant for banks that have a shortfall in customer deposits, as their extra funding needs come to a higher cost.  In countries where firms are highly dependent on bank borrowing, firms cannot borrow from capital markets.

These conditions can be applied to the euro area, as its banks usually lend more money than they collect as deposits, therefore, need to borrow in the wholesale markets. What is more, the IMF shows the gap between loans and deposits accounts for 40% of the total funding for peripheral countries. And it is precisely in these countries where small and medium-sized enterprises (SMEs) are more vital, as they account for between 60% and 80% of employment, according to the OECD.

What it is really interesting is to discover that in the economic crisis of 2008, the ECB lowered the interest rates from 4.25% to 1%, but as investors lost their confidence in banks (remember the stress tests?), the banks had to offer higher returns on their bonds to compensate the risk. That made firms to borrow less and ECB’s policy was offset. But more recently in 2010, the ECB’s influence was still further reduced in Italy and Spain when banks’ bond yields rose in line with their governments’ cost of borrowing. The conclusion is that the supply of loans contracted, credit supply is a big problem and consequence of a change that the ECB did not control.   

After that revelation, should we celebrate ECB’s recent interest reduction?

Source: The Economist, May 4^th 2013.

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Son las políticas del Banco Central Europeo tan eficaces como suponemos?

Cuando los tipos de interés son altos, los ahorradores están contentos ya que el coste de oportunidad de mantener bonos disminuye, ya que son capaces de obtener un mayor rendimiento con inversiones que reflejen el tipo de interés más alto, por ejemplo, los bonos del estado, que tendrán que compensar la pérdida de poder adquisitivo de los flujos de efectivo futuros. Cuando los tipos de interés son bajos, el endeudarse es más barato. Pero realmente es así?

En la edición de esta semana de "The Economist" (Broken Transmission 4 de mayo de 2013) hay un interesante artículo que pone en duda la eficacia de las políticas del BCE. El artículo señala cómo, históricamente, las políticas del BCE han logrado sus objetivos. Cuando el BCE bajó los tipos de interés en un 0,5% en 2003, el tipo de interés al que las empresas pedían prestado se redujo en la misma cantidad. La economía siguió el mismo patrón cuando el BCE endureció su política entre 2005 y 2007, aumentando el tipo de interés por el mismo importe que el BCE lo hizo, el 2%.

Sin embargo, como The Economist dice, el "mecanismo de transmisión" parece no estar funcionando.

La teoría económica sugiere que cuando el precio sube, hay menos demanda. Por otro lado, la oferta debe aumentar dado que la producción ahora es más rentable. Ben Bernanke y Mark Gertler observaron lo contrario en su estudio: "cuando los tipos de interés suben, la oferta de crédito puede caer".

Como decía al principio, cuando los bancos centrales elevan sus tipos de interés (las expectativas de inflación son más altas), el rendimiento de los bonos del Estado también se elevan. Los bancos pierden depósitos ya que los ahorradores pueden lograr rendimientos más altos por la compra de bonos. Los bancos entonces tienen que encontrar otras fuentes de financiación, como la financiación al por mayor, que es más costosa para ellos. En consecuencia, los bancos prestan menos dinero y/o prestan a un interés más alto.

El canal del crédito bancario sólo es relevante para los bancos que tienen un déficit en cuanto a depósitos de clientes, ya que sus necesidades de fondos adicionales tienen un mayor coste. En los países donde las empresas dependen en gran medida los préstamos bancarios, las empresas no pueden pedir prestado a los mercados de capitales.

Estas condiciones se pueden aplicar a la zona euro, ya que sus bancos suelen prestar más dinero de lo que recaudan los depósitos, por lo tanto, tienen que pedir prestado en los mercados mayoristas. Lo que es más, el FMI muestra que la diferencia entre los préstamos y depósitos representa el 40% de la financiación total de los países periféricos. Y es precisamente en estos países donde las pequeñas y medianas empresas (PYMEs) son más vitales, ya que representan entre el 60% y el 80% del empleo según la OCDE.

Lo que es realmente interesante es descubrir que en la crisis económica de 2008, el BCE bajó los tipos de interés del 4,25% al ​​1%, pero debido a que los inversores perdieron la confianza en los bancos (recordamos los stress test?), los bancos tenían que ofrecer mayor rendimiento de sus bonos para compensar el riesgo. Eso hizo que las empresas pidieran prestado menos y se compensó la política del BCE. Pero más recientemente, en 2010, la influencia del BCE se redujo aún más en Italia y en España, cuando los rendimientos de los bonos de los bancos subieron en línea con los costes de financiación de sus gobiernos. La conclusión es que la oferta de préstamos se contrajo, la oferta de crédito es un gran problema y se debe a un cambio que el BCE no controlaba.

Después de esta revelación, debemos celebrar la reciente reducción de tipo del BCE?

Fuente: The Economist, 04 de mayo 2013.