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MORE AND BETTER JOBS IN SOUTH ASIA
fi rms. A quarter of the fi rms that did not subcontract cited difficulties in ensuring quality control; another quarter cited lack of predictability and reliability of supply (World Bank 2008c). Low market demand does not necessarily reflect market failure. It is affected by the firms’ characteristics (a poor-performing fi rm that does not make goods suitable for the market will face low demand). Endogeniety issues make it difficult to interpret high reported severity as a business environment constraint to firms. Low market demand is consistent with fi rms citing transport (road conditions and accessibility of roads) as one of their top four constraints. Nonmetropolitan enterprises in Bangladesh identify inaccessibility of roads during certain seasons as a major or severe constraint. Regression analysis shows that the greater the distance to the nearest mediumsize city (a city with a population of 100,000 or more), the greater the likelihood that a nonmetropolitan manufacturer will identify low demand as a major or severe constraint. In Pakistan, 16 percent of rural enterprises surveyed (far more than small town enterprises) cite road quality and 14 percent cite availability of transport as a major or severe constraint. In Sri Lanka, nearly a third of rural enterprises (versus 20 percent of urban enterprises) cite transport as a major or severe obstacle to operation or growth of business. Among fi rms that describe transport as an obstacle, 35 percent cite road quality, 33 percent cite lack of access to roads, and 32 percent cite lack of available transport as the underlying issue. These results are not surprising, as poor transport limits access to larger, urban markets. Good-quality transport infrastructure is critical for facilitating urban-rural nonfarm sector linkages. The India poverty assessment (World Bank 2011b) uses the variation in the nonfarm sector across India to explore the determinants of rural nonfarm growth. It fi nds that the expansion of employment in the nonfarm sector is more closely linked to urban than agricultural growth. A simple multivariate regression
analysis using Nepal census data also shows that rural nonfarm employment has a statistical and practical positive association with income growth in nearby urban centers.16A one percentage point decline in urban poverty is associated with a 0.1–0.2 percentage point increase in the rural nonfarm employment rate. Urban growth can increase the demand for goods and services produced by the rural nonfarm sector, which otherwise might be limited by the small size of their local markets. The rural nonfarm sector can produce goods to be directly consumed by urban consumers or by urban firms through backward contracting arrangements. Linkages to urban markets are hindered by weak transport infrastructure connecting rural areas to urban areas (as well as lack of market information and the inability of rural nonfarm firms to produce goods demanded in the urban areas). Assessments of rural transport in South Asia would help policy makers develop specific options. Rural firms are much less concerned than urban firms with corruption, taxes, and labor regulations. This finding is consistent with the fact that rural fi rms report less engagement with officials than urban fi rms (inspections and management time) and that about half of rural firms are informal (just 40 percent of rural fi rms in Bangladesh and 53 percent in Sri Lanka were registered).
Informal urban sector Figure 4.11 and table 4.5 contrast the ranking and severity of constraints reported by micro benchmark fi rms in the formal and informal sectors of urban areas of India. Like formal firms, informal firms rank electricity as one of their top constraints and report similar levels of power outages. Formal fi rms in India cite power as their greatest constraint; informal fi rms cite it as their second-greatest constraint (after access to fi nance). Power outages and loss of sales as a result of outages are very high for informal firms (11.3 percent of annual sales lost to power outages).