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Measuring business uncertainty in developing and emerging economies

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Uncertainty about business prospects is an inevitable fact of life for any business. When deciding whether to hire a new employee or invest in new technology, businesses do not know if this will lead to increased sales and profits due to factors beyond their control. Forecast highs (and other performance indicators) and take into account the uncertainty around those forecasts. They ponder situations where things can turn out worse than predicted, leaving too many workers and lazy investments, and vice versa if things turn out for the better. Only after considering these scenarios can a company decide whether to hire those workers or invest in its technology.

When faced with high uncertainty, companies usually also have the option of taking a wait-and-see approach to avoid making mistakes. This option is most attractive when the business environment is highly unpredictable and decisions are expensive to reverse, such as laying off employees or reselling machinery and equipment. target. But it also has a cost of its own. Waiting means delaying or canceling some projects that would have been profitable. theoretically, such delays can have significant economic consequences. A country’s productivity could decline if too many firms were to operate at suboptimal scales or with suboptimal technology. The problem can be exacerbated in developing and emerging economies, where poor business investment and technology adoption often drag down productivity and economic growth.

Uncertainty measurement

actuallyBut economists struggle to understand the impact of uncertainty on business and macroeconomics. Part of the reason is that standard measures of uncertainty, such as stock market volatility and predictor mismatch, do not capture uncertainty at the level of individual businesses.In other words, the business manager of uncertainty Perception Forecast future sales and performance. Only recently have researchers made considerable progress in directly measuring this. Subjective uncertainty at the firm levelThe state-of-the-art methodology uses surveys of business managers who draw out a series of scenarios about their company’s future outcomes and the probability of each scenario.This combination of scenarios and probabilities allows researchers to build scales for their business predict and business uncertainty As recognized by individual administrators.

So far, most efforts to measure subjective business predict When uncertainty But new data collected by the World Bank show that a simplified version of this state-of-the-art methodology works well in developing and emerging economies as well. This is an important development, as many researchers find it difficult to conduct this type of research in developing countries where companies and managers are less sophisticated. New World Bank data refutes these concerns and reveals systematic differences in how managers perceive uncertainty across countries with different income levels.

The data in question comes from the World Bank’s Business Pulse and Enterprise surveys, which were created to track the impact of the coronavirus pandemic on the private sector. Both studies include modules that elicit central, optimistic, and pessimistic scenarios for future self-sales, along with the probabilities of each scenario. Between April 2020 and March 2022, more than 23,000 companies participated in his 41 countries in Eastern Europe, Asia, Africa and Latin America. Eligible countries span a wide range of income levels, from Madagascar at the lowest to Poland at the highest.

stylized facts

Ultimately, as the stylized facts below show, business sales forecasts and uncertainty measures constructed from these World Bank data provide a wealth of information about business prospects that managers know. to capture

First, future sales forecast predicts actual future sales As reported in follow-up interviews (Figure 1). Second, managers who express high uncertainty when forecasting are more likely to make larger forecasting errors (Figure 2). This second fact is that research-based measures of business uncertainty capture the degree of unpredictability or volatility in a firm’s sales, and similar findings from research efforts in developed countries It shows that the result is reflected.

Figure 1. Sales forecast predicts actual sales

Note: Binned scatterplot of realized sales in follow-up interviews against next 6-month sales forecast (Forecast) on horizontal axis. Both realized and projected sales are expressed relative to 2019 levels.

Figure 2. Firms reporting higher uncertainty have larger forecast errorsFirms reporting higher uncertainty have larger forecast errorsNote: Binned scatter of absolute errors between sales projections (i.e., 6 months ahead forecast) and actual sales at follow-up interviews for subjective uncertainty about 6 months ahead sales. figure. Both realized and projected sales are expressed relative to 2019 levels.

Second, there are systematic differences in business uncertainty in countries with different levels of development.— new stylized facts. Firms in poorer countries, i.e. countries with lower levels of GDP per capita, tend to have higher levels of uncertainty on average (Figure 3). Previous research has shown that employment, sales and investment data are more volatile in low-income countries. However, it is clear that this is not due to poor quality or noisy data.Instead, business manager actually perceive uncertainty 3-6 times higher It is higher in low- and middle-income countries than in the US and UK, so high business uncertainty could distort investment and employment patterns in low-income countries. The findings lead researchers to believe that development and growth may fail because an unpredictable business environment causes companies to expect too much and wait and see, rather than invest in them to increase productivity. You’re one step closer to showing something.

Third, the negative relationship between uncertainty and GDP per capita is not easily explained. This does not appear to be due to differences in the composition of business sectors across countries. It is also not systematically related to exchange rate or business cycle volatility. These volatility are often higher in developing and emerging markets. Instead, there appears to be a strong relationship between economic development and the amount of risk and unpredictability (ie, uncertainty) that firms perceive in their economic environment.

Figure 3. Employment-weighted business uncertainty decreases with GDP per capita.

Employment-weighted business uncertainty decreases with GDP per capita.Note: This chart plots country employment-weighted subjective uncertainty averaged across the World Bank business pulse and business survey wave against 2019 GDP per capita on the horizontal axis. Weight companies by employment in each country. UK and US values ​​are averages for April 2020-December 2021 and April 2020-March 2022 respectively.

policy implications

The evidence from these World Bank studies has at least two policy implications. First, central banks and governments in low- and middle-income countries can adequately collect data on forecasts and uncertainties as part of regular business surveys, providing timely information on business prospects. Such data could be a boon to policy makers and researchers interested in macroeconomic volatility and firm dynamics in these countries. In addition, country-specific studies can also collect forecast and uncertainty data on prices, employment, or investment. These can help implement monetary, fiscal, and business development policies.

Second, addressing and mitigating the uncertainty that firms perceive through specific policy interventions can play an important role in supporting prudent investment and growth in It can have a positive effect on the economy. Also, the economic gains from making business uncertainty a higher policy priority could lead to greater stability in the political and social sphere, which is important for the business environment.