Client: FINDETER – by Sachiko Kureta
Our project was for the organization FINDETER, the Colombia government development bank, a second-tier bank in order to lend to public entities. Findeter aims to aid Colombian regional development by financing, planning, and providing technical advice on regional infrastructure. Findeter has financed almost all municipalities of every category (Colombia has categorisation of municipality from 1-6 and special category). However, category 6 municipalities, which are the poorest and least populated, have had fewer loans compared to other municipalities. Findeter has set a new goal to develop new products and services tailored to the poorest municipalities. It is important to accurately characterise municipalities category 6 to better determine their credit profiles. In this project named “targeting the poorest municipalities in Colombia”, we come up with a new sub-categorisation tool for Findeter to develop a new range of services and products better tailored to category 6 municipalities which could, in the long-term, increase socially efficient capital allocation to support infrastructure development across the country.
Our evaluation began with a literature review of how information asymmetries (adverse selection and moral hazard) become obstacles for Findeter. Based on a descriptive analysis of current Findeter loan disbursements to category 6 municipalities, we found the potential drivers of its under-provision within this category.
The first step towards achieving an accurate characterisation of this sub-sample of municipalities was to acknowledge that fiscal performance is an important determinant of indebtedness capacity, but not the only one with a determining effect. It is crucial to embrace a complex definition of indebtedness capacity as being jointly determined by financial, human capital, economic and socio-geographic variables. Consequently, we chose to combine financial data on Findeter’s disbursement patterns and socio-economic data on category 6 municipalities in order to build a unique time-series cross-section dataset.
We used a two-way fixed effects linear regression model, with clustered errors at the municipal level, to conduct our analysis. In line with our holistic approach, we complemented each regression stage by running a standard OLS to make sure that we did not miss out on other determinants of indebtedness capacity that the two-way fixed effects model tends to filter. Our analysis allowed us to identify current drivers of Findeter’s loan disbursements to category 6 municipalities that are both related and not related to the actual ability of such municipalities to sustain debt.
By associating each variable to a particular indicator based on research and existing credit-provision frameworks, we thus developed a new ranking and categorisation of category 6 municipalities based on indicators driving their ability to sustain debt. This new ranking system proves to be efficient in identifying new lending opportunities for Findeter, and tackles the initial challenge of asymmetric information, as it gives a measure of the municipality’s capacity to sustain debt based on financial, socio-geographic and human capital indicators of category 6 municipalities.
Finally, we proposed a series of policy recommendations which aim to support the intelligence role Findeter already started to embrace, as it is the most efficient way to mitigate the asymmetric information problem second-tier development banks could be facing. Furthermore, based on the municipality’s categorisation, we recommended business opportunities for Findeter to support category 6 municipalities in order to develop their fiscal and technical capabilities. By providing a new data-driven ranking, our tool and proposal will increase Findeter’s ability to target its loans and products, gain a better understanding of the municipality’s overall profile and characteristics and tackle the market failures it is currently facing.
Client: Bank of England – by Hassan Nasser
Our project was a quantitative study aimed at diagnosing the causes behind low productivity growth, a phenomenon experienced in the UK and other developed countries since the global financial crisis of 2007-9. The deliverable we produced aimed at answering three broad questions. First, has business dynamism declined in the UK? Second, if so, is this linked to the decline in aggregate productivity growth? Third, what are the policy implications of the answers to these two questions? We replicated some methodologies from the literature on declining business dynamism in the US using ORBIS Historical, a new and comprehensive panel database of the company accounts of all private and publicly listed UK firms. We found novel evidence that there has been a decline in business dynamism since 2000. Turning to the link between business dynamism and productivity growth, we developed and tested two hypotheses: (i) the prevalence of highly levered, unproductive “zombie” firms has held back productivity, and (ii) there has been a slowdown of knowledge diffusion from the productivity frontier to the rest of the economy. Both hypotheses found some support in the data, although the evidence is more robust in favour of the zombie firm hypothesis. These findings had wide-ranging policy implications, highlighting the relevance of monetary policy, banking regulation and measures to increase the entry of young high-productive firms.
Client: Unilever – by Orr Komissar
This study demonstrates the relationship between social mission and longevity of an organization using both a quantitative and qualitative approach. We begin by examining our independent variable of social mission and make the distinction between companies with “social purpose at the heart of the company mission” and those with “add on activities”, developing a framework that allows us to parse ‘proven’ from ‘stated’ social mission. Company annual reports served as the base for stated social mission and ESG scores became the counter measure to assess proven social mission. Next, we assessed our dependent variable of longevity. Typically, longevity refers to the lifespan of a firm. However, we believed using a proxy of health would be much more illustrative, as longevity on its own doesn’t inform us whether the company lived a healthy and successful life or whether it’s projected to in the future. To address this issue, we have used financial indicators of company health as a proxy for longevity. This allowed us to make prescriptive recommendations for the future, instead of simply looking backward.
We first conducted a simple OLS regression analysis to identify the relationship between firms’ social mission and their longevity, using company age and ESG and ES scores as proxies. We used data sourced from Refinitiv and selected a sample of 556 firms from the S&P 500 and FTSE 250 indices. By controlling for companies’ year of birth, social mission and life span were positively correlated and statistically significant. We estimated that on average, a 1 score improvement in social mission is correlated with 28 and 45 days extended life expectancy respectively. Nevertheless, this analysis illuminated many problems associated with quantitively answering a question this broad. Given this, we turned to qualitative comparative analysis to mitigate the qualitative complexities associated with our variables of interest.
Qualitative comparative analysis allowed us to examine such relationship using 20 firms from S&P 100 and FTSE 100 as case studies. This analysis confirmed several important points related to our research question. First, we found that overall, companies are claiming to have more social mission than they possess. Second, we found that firms’ proven social mission is, on average, mediocre. Finally, we found that less variation between claimed and proven social mission correlates with companies having better social mission scores overall. These strong, unambiguous social mission scores demonstrate a causal link with healthier performing firms. In short, having a coherent and genuine social mission positively affects company health and therefore longevity.
Client: Government of Senegal – by Helen Grace Shymanski
Over the past four years, Senegal has risen to become one of the fastest growing economies in Africa – it recorded a gross domestic product (GDP) growth rate of 6.76% in 2018, which was its fourth year of having GDP growth above 6% (World Bank, 2019). However, estimates suggest that Senegal’s informal sector remains quite large, with 90.44% of non-agricultural employment being informal as of 2015, compared to an African average of 66% (World Bank, 2019; ILO, 2015). This report aims to contribute to the knowledge on managing the Senegalese informal economy, while harnessing its potential, by investigating its size, causes, costs and benefits to Senegal’s economy.
To understand the potential causes and GDP contribution of the informal sector in Senegal, we use a multiple indicator multiple cause (MIMIC) model, and to understand the size of informal employment in Senegal, we use a predictive empirical model. These two methods complement each other, re-emphasizing the general trends in the informal sector. Combined, they help us understand the relative labour productivity of the sector measured as a ratio of its GDP contribution to its size. We also use an ordinary least squares (OLS) regression with country and time fixed effects to understand, cross-nationally: (1) the relationship between informality and potential causes identified in the literature and (2) the relationship between informality and GDP per capita, tax revenues, total investment and income per capita.
We estimate that in 2018, the GDP contribution of the informal sector was 53.2% and the size of informal employment was 84.3%. The predictive empirical model estimates that the average growth of informal employment over the past 5 years was 0.77% and the MIMIC model estimates that the most statistically significant factors associated with informality in Senegal are regulatory quality, tax burden and control of corruption. Combining the MIMIC and predictive empirical models, we find that the average ratio of GDP contribution to size of the informal sector has been 0.66 over the past five years. Our OLS analysis shows that for low and lower-middle income countries, a 10-percentage-point reduction in informality is associated with a 7% increase in GDP per capita and a 1-percentage-point reduction in informality is associated with a 10-percentage-point increase in tax revenues as a percentage of GDP. We undertook case studies of Rwanda, Mauritius and Mexico, finding that despite sharing certain commonalities, each country had slightly different reasons for informality, and this in turn influenced how the three countries responded to their informal economies. The causes of informality in the three countries included: growth of a particular sector, high urbanisation rate, low skilled and unequal labour force, structural unemployment, low access to finance, loss of manufacturing jobs, high tax burdens, inefficient business and tax administration, excessive regulation, and poor infrastructure and institutions. Policies targeting these issues included targeted skills and job training, national employment plans, improved tax and registration systems, financing of micro, small and medium enterprises (MSMEs), and targeting industries with high informality. Many of these issues are common to Senegal, and we have considered the feasibility and impact of the implemented solutions in our policy recommendations.
We focus on five policy areas for managing informality in Senegal: ease of doing business, social protection, taxation, capitalizing on the positives of informality, and education. We propose increasing the ease of doing business by creating a credit registry for microfinance institutions; enhancing social protection by increasing and improving the monitoring and evaluation of social protection programs; and, capitalising on the positives of informality by increasing town hall meetings that focus on informality and providing a small fund for community groups championing worker initiatives. With regards to taxation, we propose phasing out the corporate income tax requirement and providing business and tax registration at token fees for subsistence entrepreneurs; providing a one-stop shop for all tax requirements for micro and small enterprises; random inspection of tax and business registration; providing value added tax (VAT) receipts with lottery numbers to incentivise consumers to ask for accurate and reported VAT receipts; and ensuring a separate progressive corporate income tax regime for micro and small enterprises based on their turnover. Regarding education and training, we propose establishing career counselling and skills-matching centres.
Senegal’s informal sector, though large and of lower productivity than the formal sector, contributes to GDP significantly and acts as a social safety net. Thus, we have sought to provide a balanced understanding of its impact and economic and social characteristics, so that its potential can be harnessed, and its activities successfully managed for the economic and social development of Senegal.
Client: Center for Public Impact – by Lars Benson
In the twenty-first century, government in the UK has faced political, economic, and social headwinds that have damaged its legitimacy, capacity, and ability to maintain public trust. As of 2019, 72% of UK citizens now believe that their democracy requires “quite a lot” or “a great deal” of improvement, with frustration particularly directed at Parliament and mainstream political parties (Wearmouth, 2019). In an era of intense political cynicism, local authorities—consistently the most trusted units of government in the UK— have an opportunity to bridge the citizen-government gap by employing innovative new digital strategies that improve communication and sustain lasting dialogue with people. To the end of strengthening government institutions’ legitimacy and ability to meet citizens’ needs, it is important to understand how local governments in the UK are building relationships, having conversations, and making decisions together and inclusively with citizens, especially with traditionally difficult to reach groups such as the digitally excluded, minority groups, and the elderly. The CPI Capstone team examined the use of digital engagement as a means of building government legitimacy and achieving meaningful citizen participation, and distilled principles of meaningful engagement that can inform and improve future use of digital tools.
Using a case-study approach, eight local authorities across the UK were highlighted for their innovative use of digital tools to improve citizen engagement. Primary research was conducted by interviewing key experts and local government staff. Secondary research was carried out through analysis of academic, government, and civil-society literature, and review of online blog posts and conversation threads associated with various local engagement platforms. The evidence gathered was organised using an original lexicon of digital engagement approaches, which sorted government engagement programmes by their scope, methodology, and objectives. The framework’s categories were: 1) Informative Engagement, 2) Service-Based Engagement, 3) Participatory Engagement, and 4) Decisive Engagement. Through this lexicon, this report evaluates each local authority’s goals and objectives for engagement, and the level of responsibility and autonomy vested in citizens in each instance.
Case analyses were further divided into three sections based on the positionality of agenda-setting and decision-making power. Using the idea of power relations, three categories were established at various points along a spectrum between authority-centred and people-centred power structures, as represented below.
Based on case analyses, eight principles of successful engagement that improve legitimacy, yield increased public participation, and satisfy government stakeholders’ objectives were developed.
- A Sense of Ownership & Power. Meaningful engagement that devolves decision making power to citizens improves feelings of internal efficacy and general trust in government when effects are clearly communicated and relevant digital tools are tailored to the environment and co-designed with citizens.
- Government Buy-in. Political will, financial resources, and human capital are imperative in making engagement sustainable, though these investments tend to be accompanied by increased government control of processes—imposing a trade-off if this involvement is perceived as constraining participants’ autonomy.
- The Right Issues. Engagement efforts should carefully select and scope topics, ideally with participants’ input, that substantively affect citizens’ lives and provide meaningful choices.
- Deliberate Inclusion. Achieving inclusion and representativeness of minority communities requires actively collecting data on participants to determine whether these voices are appropriately included in engagement, and adjusting engagement approaches to the social context accordingly.
- Complementary Digital Tools. Though digital tools can expand the reach of engagement efforts, traditional engagement provides opportunities for high-quality conversations and audiences reached by digital and traditional methods are distinct— pointing to the importance of using digital tools to complement traditional engagement, not replace it.
- External Expertise and Guidance. Expert knowledge from community groups and civil society organisations should be leveraged throughout the planning, implementation, and evaluation stages of programmes to ensure the appropriate use of digital engagement platforms.
- Two-way Transparency. Transparency is vital to quality engagement, and can provide benefits for both participants and government. Citizens should be aware of how their input will be incorporated into the decision-making process, and governments should collect data on the communities they engage with.
- Perpetual Evaluation & Improvement. Governments should incorporate dedicated, planned, well-resourced, evaluation stages that carefully select and assess qualitative and quantitative metrics that are relevant to citizens and communicate to participants that their personal perceptions and experiences matter.
There is no “one-size-fits-all” solution to building trust in government. An overarching theme of meaningful, legitimacy-enhancing engagement is its context-dependent nature—hence the need for governments to communicate with citizens throughout planning, implementation, and evaluation stages. Building up local governments’ relationships with citizens cannot begin and end with one single initiative, policy or programme. To improve legitimacy, engagement requires an ongoing, evolving, and reflective process that should be approached as a conversation, not a checklist.