Competitiveness: Analytic Tools and Approaches Norwegian Trust Fund Meetings June 2005 Investment Climate Unit The World Bank Washington DC.

Competitiveness: Analytic Tools and Approaches

Norwegian Trust Fund Meetings

June 2005

Investment Climate UnitThe World BankWashington DC

2

Development Objective

Red TapePoor Productivity

Costly and

unreliable

UtilitiesLogistics

Competitiveness

Labor Cost

Corruption

Catalyze reform through addressing concrete issues affecting competitiveness

Competitiveness = f (Input Costs, Transactions Costs, Productivity)

3

Focus on Two Products

1. Global Logistics Indicators

Benchmarking across 137 countries (Doing Business 2006)

2. Value Chain Analysis

Process mapping of strategic products in terms of time, cost and value added to get at underlying factor and product market

constraints

4

1 Packing of consignment in factory 522 Loading onto 1 Nepalese truck 23 Trucking from factory to Birgunj over distance of 165 km 244 Customs clearance and containerization at Birgunj 845 Trucking to Indian border at Raxaul 8 6 Overnight wait to cross over to Indian Customs at Raxaul 10 7 Customs clearance at Raxaul (fees, informal payments, etc. 5 8 Line haul trucking to Calcutta 220

9 Waiting to enter Calcutta Port 9610 Unloading at Port 111 Customs inspection, tech clearance, terminal handling 20412 Other terminal charges (river dues, labor fund contr., etc. -14 Liner shipping from Calcutta Port to Bremen Port 528

Points of inefficiency:

Border crossing procedures

Customs

Port and terminal inefficiency

0 100 200 300 400 500

Process 1

Time (hours)

Process 2Process 3Process 4Process 5

Example: Carpet exports from Nepal to Germany

1. Global Logistics Indicators

5

A Streamlined Framework

Process 1

Process 14

Process 2Process 3Process 4Process 5

PORTS

CUSTOMS

BUREAUCRACY/ REGULATIONS

Pre-Arrival or Shipment Activity

Inland Transportation

Border Clearance

Port &Term Handling Activity

6

Key Metrics

TIMETIME

COSTCOST

TIMERELIABILITY

TIMERELIABILITY

Logistics Indicators Logistics Indicators

INFORMATION COMMUNICATION TECHNOLOGY

INFORMATION COMMUNICATION TECHNOLOGY

7

Key Indicators

PORT PERFORMANCE

PORT PERFORMANCE

CUSTOMS PERFORMANCE

CUSTOMS PERFORMANCE

BUREAUCRACY/REGULATIONS

BUREAUCRACY/REGULATIONS

Customs clearance time and cost (aver. & max)

Technical control time and cost (aver. & max)

Percent of containers inspected

Level of inspection (comprehensive; risk analysis based)

Customs clearance time and cost (aver. & max)

Technical control time and cost (aver. & max)

Percent of containers inspected

Level of inspection (comprehensive; risk analysis based)

Time for processing a typical trade order

Cost for processing a typical trade order

Number of signatures; Number of documents

Number of Agencies

Time for processing a typical trade order

Cost for processing a typical trade order

Number of signatures; Number of documents

Number of Agencies

Vessel turn-around time

Port and Terminal charges

Number of Days the Port did not function

Costs and time to comply with additional security measures

Vessel turn-around time

Port and Terminal charges

Number of Days the Port did not function

Costs and time to comply with additional security measures

Focus Areas Examples of Indicators

8

InfrastructurePolicy Institutions

DeliverMakeSource

Yarn

DeliverMakeSourceApparel

DeliverMakeSourceDeliverMakeSource

Textile

DeliverMake

CottonSource

2. Value Chain Analysis

9

Value Chain Analysis: Elements

RecommendationsRecommendations

WB policy advocacy/ lending

IFC investments/ technical assistance

Public-private dialogue

Value Chains/ Sectors

Selection

Value Chains/ Sectors

Selection

Measure Performance and

Benchmark

Measure Performance and

Benchmark

Overview of Industry Structure

Overview of Industry Structure

Size

Growth Potential

Poverty

Gender

Policy relevance

Linkages

Market share /trends

Price trends

Competition levels

Links to global value chains

Technological trends

Global policy trends(Trade; CSR)

Government failures

Market failures

Explain Performance

Gaps

Explain Performance

Gaps

Factor costs

Transaction costs

Value added

Productivity

Tariffs (e.g. import duties) Non-tariff barriers Infrastructure/ utilities service quality, price Regulatory barriers and enforcement Administrative barriers Market structure and Competition policy Factor market rigidities Price restrictions / Subsidies Product quality and standards CSR (environmental and social standards)

10

Example: Honduran Apparel Industry

- US $2.5 billion exports

- 16 % growth rate in 2003

- > 120,000 jobs created

( 75-80% women)

- Value added - US$ 500 mill.

- Key drivers:

CBI (89% of Honduran exports qualify)

Proximity to US market

- Regional : CAFTA

- Global: MFA phaseout

11

Is Honduras Competitive?

US $1.25Mexico

US $1.22Honduras

US $1.47China

Production of a cotton T-shirt

4 days

4 days

10 days

Order to Delivery: Lead Time

12

0.75 0.74 0.67

0.260.2

0.16

0.180.18

0.18

0.06 0.09

0.12

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

Mexico Honduras China

Quota & Tariff

Freight

Margin

Labor

Cloth & Inputs

US

$ p

er

un

it

US$1.25 US$1.22 US$1.47

Source: E. Dussel 2000, Interviews, ELCATEX, Interviews, Estimates

0.34

Cost Structure

13

Value Chain Distribution of Costs

40% 17% 5% 4% 4% 30%

Energy Raw Material Labor Freight Distrib Retail Markup

100%

One dozen T-shirts: FOB US $21

Imported yarn and fabric from US constitutes 60% of production cost

Raw material costs on average are 30% higher than China

LAC labor costs are three times as much as Asia

14

0.21

0.22

0.28

0.31

0.38

0.38

0.41

0.48

0.58

0.7

0.7

0 0.2 0.4 0.6 0.8

Indonesia

Vietnam

Bangladesh

Pakistan

India

Kenya

Sri Lanka

China

Bulgaria

Rusia

Filipinas

Asian labor costs

US$/ Hour

Source: Jassin O’Rourke Group LLC calibrated with Honduran industry experts from AHM

0,49

0,88

0,94

0,95

1,22

1,3

1,45

1,5

1,5

1,65

2,7

0 0,5 1 1,5 2 2,5 3

Haiti

Nicaragua

Colombia

Bolivia

Peru

Ecuador

Guatemala

EL Salvador

Honduras

DominicanRep.

Costa Rica

LAC labor costs

US$/Hour

Comparative Labor Costs

Average: US $0.40/hour Average: US $1.3/hour

15

Value Chain Distribution of Costs

40% 17% 5% 4% 4% 30%

Energy Raw Material Labor Freight Distrib Retail Markup

100%

One dozen T-shirts: FOB US $21

Honduran Power costs

>150 % of Chinese power costs

& 130% as much as Columbia

16

Comparative Electricity Costs

17

14

9

9

8.8

8

7

6

0 5 10 15 20

Mexico

Guatemala

Honduras

Nicaragua

Costa Rica

India

Colombia

China

Total Hours of Electricity CutsElectricity CostUS cents / kWh

-

127

129

67

60

32

28

Honduras

Nicaragua

Peru

Guatemala

Ecuador

Brazil

Source: WB Study estimates; Investment Climate Survey data

17

Major clothing exporters' share of the US market 2004

Other24%

China16%

Rest of Americas16%

Mexico10%

Hong Kong9%

EU5%

Taiwan4%

Philippines4%

Indonesia4%

India4%

Bangladesh4%

How U.S. market shares may rank after elimination of MFA quotas

Other12% Bangladesh

2%

Indonesia2%

Philippines2%

Thailand3%

India15%

China50%

Hong Kong6%

Rest of Americas5%

Mexico3%

Source: Gereffi (2005)

Policy Implications: MFA Phase out…

18

3

44

3

1 1

4

12

2

5

6

43

2

1

4

8

44 4

33

1

2

3

11

2

7

66

4

1

6

3

0

44 5

65

22

4

11

3

14

10

7

8

3

4

5

7

4

66

55

1

33

9

3

0

2

4

6

8

10

12

14

16

KnitCottonmen

Knit topsFor

women

Cotton Pantsmen

Cotton pantswomen

CottonUnderwear

Knit Manmade

fibertops

Manmadefiber

trousers for men

Lingerie Total

HondurasNicaraguaEl SalvadorGuatemalaMexicoChinaWorld

US

$ p

er

Sq

ua

re M

ete

r E

qu

iva

len

t… Moving Up-market

19

Kenya Africa PSD

IFC-SME Dep.

Growth & Competitiveness StrategyEcon. Recovery Strategy Support CreditMSME Project

Nigeria Africa PSD

IFC-SME Dep.

Country Assistance StrategyCountry Economic MemorandumMSME Project

Pakistan S.Asia PSD/ PREM

SEDF (PDF)

Growth & Competitiveness StrategyNW Frontier Province StrategyRural Development Project

Mozambique Africa PSD

IFC-SEATIPMIGA

Growth & Competitiveness Strategy PSD Linkages Project (PODE) IFC investment potentialMIGA Benchmarks

Cambodia E.Asia PSDE.Asia RuralMPDF (PDF)

Investment Climate AssessmentTrade Facilitation Project

Collaboration with Examples of Operational Applications

Mainstreaming into Operations: Some Examples

Competitiveness: Analytic Tools and Approaches

Norwegian Trust Fund Meetings

June 2005

Investment Climate UnitThe World BankWashington DC