Measuring business uncertainty in developing and emerging economies

Uncertainty about business prospects is a fact of life for any business. When deciding whether to hire new workers or invest in a new technology, companies do not know whether it will increase sales and profits, due to factors beyond their control. Instead, they project future sales revenue (and other performance metrics) and take into account the uncertainty about those expectations. They think about situations where things might turn out to be worse than expected, leaving them with too many idle workers and investments – or vice versa when things go better. Only after evaluating these scenarios can companies decide whether to hire these workers or invest in this technology.

When faced with high uncertainty, companies also usually have the option of wait and see to avoid making mistakes. This option is most attractive when the business environment is highly unpredictable and the decision to the contrary is costly, such as when laying off workers or reselling machinery and equipment is costly. But it’s also costly in and of itself: waiting means delaying or canceling some projects that would have turned out to be profitable. theoreticallySuch delays could have significant economic consequences. A country’s productivity may be reduced if many firms end up operating at suboptimal scale or with suboptimal technology. This problem is likely to be more serious in developing and emerging economies, where insufficient business investment and technology adoption often lead to lower productivity and economic growth.

Uncertainty measurement

Doing excerciseHowever, economists struggle to understand how uncertainty affects business and the overall economy. Part of the reason is that standard measures of uncertainty such as stock market volatility and odds of forecasters do not capture uncertainty at the level of individual firms; That is, uncertainty business managers imagine feeling about their expectations for future sales and performance. Only recently have researchers made significant progress in directly measuring this Company-wide subjective uncertainty. The state-of-the-art methodology uses surveys of business managers that elicit a series of scenarios about a particular company’s future results and the probability of each scenario. This combination of scenarios and possibilities allows researchers to build business metrics Forecasting and work suspicion As seen by each manager individually.

So far, most efforts to measure self-business Forecasting And the suspicion It was limited to a few high-income countries such as the United States and the United Kingdom, but new data collected by the World Bank shows that a simplified version of this modern methodology also works well in developing and emerging economies. This is an important development because many researchers believe that it will be difficult to conduct this type of survey in developing countries, where companies and their managers can be less developed. New World Bank data refutes these concerns and reveals systemic differences in the way business managers view uncertainty across countries with different income levels.

The data in question comes from the World Bank’s Business and Project Pulse surveys, which were created to track the impact of the coronavirus pandemic on the private sector. Both questionnaires include a module that evokes an optimistic and a pessimistic central scenario for the company’s own sales in the future along with the probabilities for each scenario. More than 23,000 companies participated in 41 countries in Eastern Europe, Asia, Africa and Latin America between April 2020 and March 2022. The countries cover a wide range of income levels, from Madagascar at the low end to Poland at the high end.

bare facts

As it turns out, the measures of business sales forecasts and uncertainty generated from these World Bank data capture a lot of information about business expectations that managers are aware of, as the following simplified facts show.

First, future sales forecasts predict actual future sales As reported in follow-up survey interviews (Fig. 1). Second, managers who express greater uncertainty at the time of forecasting tend to make greater forecasting errors (Fig. 2). This second fact indicates that the survey-based measure of business uncertainty captures the degree of unpredictability or volatility in business sales, and reflects similar results from survey efforts in advanced economies.

Figure 1. Sales forecasts forecast actual sales

Notes: A neglected scatter plot of sales achieved in the follow-up interview versus sales forecast (forecasts) for the next six months on the horizontal axis. Realized and projected sales are expressed relative to 2019 levels.

Figure 2. Firms that report higher uncertainty make bigger prediction errorsFirms that report higher uncertainty make bigger prediction errorsNotes: Neglected scatter plot of absolute error between sales forecasts (eg, forecasts looking into the future six months) and sales achieved in the follow-up interview, versus subjective uncertainty about sales six months earlier. Realized and projected sales are expressed relative to 2019 levels.

Second, there are systematic differences in business uncertainty across countries at different levels of development– New stylized reality. Businesses in poorer countries, that is, those with lower levels of GDP per capita, tend to have higher levels of uncertainty on average (Fig. 3). Previous research has shown that employment, sales and investment data are more volatile in low-income countries. But it is now clear that this is not due to low quality or disturbing data. Instead, business managers actually realize uncertainty Three to six times higher in those low and middle income countries compared to the United States or the United Kingdom. Thus, high levels of trade uncertainty are likely to distort investment and employment patterns in low-income countries. This finding brings researchers one step closer to demonstrating that some countries may actually fail to develop and grow because the unpredictable business environment encourages companies to wait and see more, rather than invest and improve their productivity.

Third, the negative relationship between uncertainty and per capita GDP is not easily explained. It does not appear to come from differences in business composition across countries. Nor is it systematically related to fluctuations in exchange rates or business cycles, which are often higher in the developing and emerging world. 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 trade uncertainty decreases with per capita GDP.

Employment-weighted business uncertainty declines with per capita GDP.Notes: This figure plots each country’s employment-weighted personal uncertainty averaged across waves of the World Bank’s Business and Projects Pulse Surveys versus the country’s 2019 GDP per capita on the horizontal axis. We weigh companies by employment within each country. British and US values ​​were taken as averages for April 2020 – December 2021 and April 2020 – March 2022 respectively.

Policy Implications

Evidence from these World Bank surveys has at least two policy implications. First, central banks and governments in low- and middle-income countries can feasibly collect forecast and uncertainty data as part of routine business surveys, thus obtaining timely information about business expectations. Such data can be a boon to policy makers and researchers interested in macroeconomic fluctuations and corporate dynamics in these countries. Moreover, country-specific surveys can also collect forecasts and data of uncertainty about prices, employment or investment which can be useful for conducting monetary and fiscal policy and business development.

Second, addressing and reducing the amount of perceived uncertainty by companies through specific policy interventions can play an important role in supporting corporate investment and growth in developing countries, leading to positive macroeconomic effects. The economic gain from making business uncertainty a higher political priority can also lead to greater stability in the political and social spheres, which in turn is important to the business environment.

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