We shouldn’t trust the entrepreneurs too much, says Jacques Morisset
Allow me to illustrate. According to the entrepreneurs operating In Tanzania, electricity is their major constraint (85 per cent) followed by access to finance (52 per cent), taxes (37 per cent), and administrative red tape (25 per cent).Surprisingly, labor and transports costs are only at the bottom of their concerns (less than 10 per cent). According to this ranking, the priority should be therefore given to reducing electricity costs, increasing access to finance and reducing taxation.
A closer look at the firms’ financial balance sheets provides a different picture. In reality, electricity counts for a marginal share of firms’ operating costs in Tanzania (see Figure). For example, it is equivalent to only 3 per cent for a standard firm operating in the apparel sector. In other words, a decline, say, of 50 per cent in electricity prices would only reduce its costs by 1.5 per cent – hardly a high number for such a big effort. By contrast, transport and labor costs are equivalent to 41 per cent and 38 per cent of its total operating costs. This means that reducing transport costs by only 4 per cent would achieve the same gains for the enterprise than cutting by half its energy costs.
I have just one remark. My impression is that the problem with electricity is not much the costs but the frequent power cuts –a huge problem in Tanzania, and also in Kenya – which can disrupt production and provoke considerable losses to the income of the firms.
Having said that, I agree on the idea that policymakers should take the results of these surveys with a grain of salt. In my experience with firms’ surveys I noticed a number of recurrent problems with the instrument I was using. First, entrepreneurs have a tendency to give more weight to their “most recent” problem rather than the “most important” ones they face over the course of the year. Second, both the (i) sequencing of the questions and the (ii) overall topic of the questionnaire has an effect on the answers. If you are dealing with access to finance in a questionnaire, and you have talked about loans and credit for the 30 minutes preceding the your “main obstacle” question, the chances that the entrepreneur will indicate “access to credit” as their main obstacle are very high. If your questionnaire deals with electricity, the dynamic will be the same. Finally, and this is more of a general critique, I believe that both researchers and policymakers should understand better the difference between perceived and actual constraints in an economy. Policymakers should listen to their entrepreneurs (and to the surveys) in order to identify the underlying causes of slow growth in certain parts of the economy. But in most cases the dynamic is different: usually a team of experts is hired to identify these “main problems”, and then survey questionnaires are used to confirm these pre-formatted ideas.
Hello. This is an interesting post that confirms my own suspicions. A large part of my work is to conduct industry diagnosis. I like to use an evidence based approach. So if a firm complains about electricity costs, I immediately ask them to show me evidence that they have tried to do something about it. If this is not important enough to deserve some action then this tells me something.
Furthermore, after the official interview with the business I always ask for a tour of the business. This is where most of the interesting information comes from. Even firms that claim that they are facing too many hardships to innovate are in fact innovating, even when they report that they don’t have time or funds to do innovation.
Best wishes,
Shawn
These are all good points Shawn. The thing is that most firms’ surveys have to turn into datasets where you either have a large N or you forget about empirical models and statistical significance. That’s probably why many researchers prefer quantity of respondents instead of a deeper understanding of how the businesses work. I guess this all comes down to the debate on qualitative vs quantitative research – the eternal (and unresolved) debate in the social sciences. But I’m totally on your side, I also always try to visit the businesses I interview, at least when they allow me to do that. That’s actually the most interesting part!