91226 Finance & PSD Impact SEPT 2014 The Lessons from DECFP Impact Evaluations ISSUE 29 Our latest note examines the extent to which lack of financial capital and lack of managerial capital inhibit the growth of small firms in rural Pakistan. Barriers to Entrepreneurship in Rural Pakistan Xavier Giné and Ghazala Mansuri Self-employment accounts for as where eligible clients can borrow up to 7 much as 70 percent of employment in times the average loan size. developing countries, especially among low We randomly offered the training to income households. The majority of self- half of 747 groups of borrowers from 5 employed individuals, however, operate different branches in three districts. Training enterprises that are typically small, without sessions focused on business planning, paid employees, and often poorly run. marketing and financial management. After Donors, financial institutions and training sessions, the lottery was introduced: governments devote considerable resources loan requests were subject to the usual trying to improve their efficiency but screening and amounts approved above the programs are met with differing degree of usual cycle limit were forwarded to success. These programs typically target two headquarters, where the results of the lottery main barriers: finance and managerial were maintained. Lottery winners could capital. borrow the approved amount, while those Access to credit is critical for who lost the lottery could borrow up to their business creation and survival, and lack of maximum loan size, which depended on the credit can reinforce poverty if the production number of loans they had previously repaid technology is non-convex, featuring a region successfully. The offers of training and with returns that quickly taper off at low larger loans were implemented with a 2x2 levels of investment and another region with design, assigning clients to one of four higher returns at levels of investment above groups: (i) offered business training (BT) some threshold. Removing borrowing and assigned to be a lottery winner (LW), constraints could then allow liquidity- (ii) BT but no LW, (iii) no BT but LW and constrained individuals to access the more (iv) no BT nor LW. By virtue of the design, productive technology, increasing their we can thus test whether BT and LW had income and reducing the level of poverty. reinforcing effects. An alternative view suggests that business skills, or managerial capital more Results generally, are missing in poor countries. We find that offering business training leads to: The Intervention  An increase in household This project reports on a field expenditures of about 6% or 46 USD experiment that takes both barriers seriously per year by offering rural clients from the National  An increase of 0.07 of a standard Rural Support Program, the largest partner deviation in the business knowledge organization of the Pakistan Poverty index Alleviation Fund, an eight day business  An increase of half of a business training course and access to a loan lottery practice out of four studied. Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org)  But no significant increases in sales Finally, business training improved or profits financial decision-making and labor allocation. In particular, among men offered In addition, the increase in household business training, those with low expenditures is concentrated among self- entrepreneurial ability were less likely to employed households who can put the borrow during the lottery and devoted less training into practice. Business training also time to the business. This suggests that enhances group cohesion and improves the attending business training helped general outlook on life. individuals realize how (un)successful they These effects are mainly concentrated really were as entrepreneurs, consistent with among male clients, however. Among men, the practice of many programs around the business training also leads to a 6% world that use training as a screening device reduction in business failure. Unlike men, to later provide additional services, such as women increase business knowledge but credit or mentoring. show no improvements in any other outcomes. As it turns out, some 40 percent Policy Implications of female entrepreneurs report that their (male) spouses are responsible for all of the Despite the limited welfare impact of business decisions, and, indeed women the larger loans, these were profitable to the involved in business spend less time in lender because we find neither an increase in managerial decisions than their male default nor in the workload of credit officers counterparts. This suggests low decision- handling them. making power among women business In addition, the business training owners. program does not increase disbursement or We also find little evidence of a repayment significantly and thus it is not technology-based poverty trap insofar as cost-effective from the perspective of lottery winners showed no significant microfinance institution despite increasing improvements in household welfare from household expenditures for (male) clients by the extra credit received, suggesting perhaps more than the cost of training. This may that the limit on the current loan size already help explain why few lenders offer such meets the demands of most borrowers. business training programs voluntarily (see McKenzie and Woodruff, 2014 for a review). For further reading see: Giné, X., & Mansuri, G. (2014) “Money or ideas? A field experiment on constraints to entrepreneurship in rural Pakistan” World Bank Policy Research Working Paper No. 6959 McKenzie, D and C. Woodruff (2014) “What are we learning from business training evaluations around the developing world?”, World Bank Research Observer, 29(1): 48-82 Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact