Fresh Ideas About Business in Emerging Markets

The international market for green bonds—securities that raise capital for specific climate or environmental sustainability purposes—has experienced tremendous growth and could reach an annual market value of over $100 billion dollars this year. As part of this growth, new market tools, skills, and capital have been introduced into the green bond market to reduce greenhouse gas emissions and more broadly address the problem of climate change.

Bank de-risking is a reality. Increased capital requirements, coupled with rising Know-Your-Customer, Anti-Money-Laundering, and Combating-the-Financing-of-Terrorism compliance costs have resulted in the exit of several global banks from cross-border relationships with many emerging market clients and markets, particularly in the correspondent banking business. A subset of this business, trade finance, is also at risk, with potential consequences for segments of emerging market trade. Those involved in addressing the de-risking challenge must focus on compliance consistency and effective adaptation of technological innovations.

With the application of new storage capacity technologies, advances in the capabilities of energy networks promise to deliver not only efficiency and productivity gains but also business opportunities for remote areas in emerging countries.

Anti-money laundering/combating-the-financing-of-terrorism laws are grounded in reasonable national security concerns—preventing the cross-border flow of funds to terror or criminal groups. But these policies can have unintentional and costly consequences, in particular for people in poor countries. Those most affected are likely to include the families of migrant workers, small businesses that need to access working capital or trade finance, and recipients of life-saving aid in active-conflict, post-conflict or post-disaster situations.

Private sector investment is much needed in emerging markets to upgrade energy supplies, but too often power utilities in these markets are uncompetitive. In order to attract private investment, many aspects of how power utilities are operated need to be reformed. With their experience in helping to structure and finance successful infrastructure projects in emerging markets, development finance institutions are well positioned to support emerging market government efforts to translate power sector reforms into private investment.

Private sector financing is essential to bridging the infrastructure gap between emerging markets and developed countries. Given the risk profiles of many of these projects, however, private investors are reluctant to help finance important infrastructure investments. Now, new packages of financial and advisory products offered by development finance institutions are substantially improving these risk profiles, making them viable for private investment even in very challenging environments.

Mobile telecommunications has many benefits, from linking communities and citizens to mobile applications that bring financial services to the unbanked and help farmers improve crop yields. Yet at one time it looked as though Africa’s mobile sector might fare as poorly as its fixed line system did. Instead, an appropriate mix of regulation and competition, investment, and affordability allowed mobile phones and broadband access to flourish.

In the face of high and volatile fossil fuel prices the government of Jordan launched an aggressive national strategy to increase production of privately financed, commercial scale renewable energy. This pivot was initially met with skepticism from developers and financiers. Yet by aggregating seven small, individual solar power projects into a single, standardized financing structure—the Seven Sisters—the country was able spread costs, shorten timelines, and ultimately attract the necessary financing and developers to make the effort a reality.

Solar power is an increasingly affordable, quick-to-build solution for countries in need of additional electricity generation. Yet many emerging markets face challenges to developing photovoltaic projects, as small project sizes and lengthy negotiations increase costs and timelines. Scaling Solar, launched by the World Bank Group in 2015, addresses these issues by providing an easy-to-follow process to plan, procure, and launch grid-connected solar projects using private sector financing within two years of engagement. It offers governments the tools to quickly increase energy generation at stable low tariffs and allows developers to bid on well-structured, standardized projects through a competitive, transparent process that reduces risk and costs—making new markets easier to navigate.

In fragile settings the challenges of building a business are increased by a legacy of conflict, instability, and loss. Institutions struggle to provide basic services, let alone the complex reforms and public goods necessary for an enabling business environment. Despite these substantial obstacles, it is possible to create a sophisticated business in even the most challenging settings. The Congo Call Center is one such example—a formal services firm reliant on costly, imported technology that has grown and prospered in the Democratic Republic of Congo.

New technologies help firms in emerging markets make significant gains. But these firms often face barriers to successfully incorporating new technologies into their businesses. Emerging-market leaders, however, can take steps to help firms overcome these barriers, including strengthening regulatory frameworks, improving education, fostering trade, and increasing access to finance.

In emerging markets, climate change threatens infrastructure that is critical for development. Roads, airports, water systems, and power plants are vulnerable to weather changes. Severe storms and major droughts can disrupt economic activity. Because private companies and investors in emerging markets often manage infrastructure projects through public-private partnerships, they will now need to address climate change risks when planning and building these projects. The uncertainty of such risks has made incorporating them into project planning a challenge, but new tools and approaches, including insurance, are helping PPPs better respond to climate risks.

Emerging markets are especially vulnerable to threats from climate change. Storms, droughts, and floods jeopardize the livelihoods of farmers, while extreme temperatures limit the ability of workers to be outdoors. Insurance is one tool that can help emerging markets adapt to climate change by heading off threats before they become disasters. Some pilot projects around the world are showing promise in using insurance to help emerging markets reduce the impact of climate change.

Cities, which are home to half of the world’s population, are on the front lines of climate change. Extreme temperatures, storms, and floods have a higher impact in crowded urban areas. And cities in emerging economies will bear an even greater burden of climate change threats. Given their vulnerability, as well as their ability to affect change, cities will be key players in shaping efforts to lessen the impact of climate change. Now a number of new initiatives are helping urban leaders better assess and respond to climate risks.

Insurance plays a vital role in protecting people, businesses, and public institutions against shocks, allowing them to transfer risks and purchase security. Insurers in advanced economies even act as financial intermediaries. In many emerging economies, however, insurance is still in a nascent stage. Yet it has the potential to become a critical tool for businesses to build operations that are resilient to climate change while also providing a source of economic growth. For insurance in emerging economies to take off, the public and private sectors must first lay the necessary groundwork.

Climate change doesn’t just threaten the environment, it poses risks to a country’s businesses and economy. Understanding these risks can be complex, yet there are a growing number of tools that can help businesses analyze how their operations will be affected. In order to integrate climate risk into their overall risk management models, companies will need a thorough understanding of how climate change can affect them. With it, they can then take steps to build resilience into operations.

Severe storms, record heat waves, intense droughts, and floods—the impact of climate change rises every year and economic and financial losses rise with it. Insurance plays a major role in helping businesses in advanced economies mitigate the consequences of the changing climate and prepare for policy changes ahead. But insurance in emerging markets isn’t yet able to make the same contribution, despite the fact that natural disasters disproportionally affect people and firms in these countries. Recently, however, a number of new business and donor initiatives have begun to create innovative approaches to using insurance to address climate change.

Governments in advanced economies have historically helped spur commercial innovation, particularly as a result of spillovers from defense related research and development. In many emerging markets, however, government lacks the resources or capabilities to do so. In Africa, as in other emerging markets, this has created an opening for private firms to drive innovation. By applying advances in technologies, businesses are enhancing productivity and growth across the continent.

Over the last decade African advances in technology, especially in the home-grown mobile banking sector, have shown how innovation can contribute to economic development across the continent. By understanding how the application of changes in technologies take hold globally—from initial discovery to new commercial products, processes, or services—private firms in Africa can better deploy investment into successful innovations to propel the continent’s productivity and growth.

Mature-economy productivity levels remain almost five times higher than those of emerging countries despite a global productivity slowdown over the past five years. That provides ample catch-up opportunities for developing countries to generate growth and reduce poverty. Yet they will need to make good use of available business models and productivity-enhancing technologies to make it happen.

What are the current trends in emerging-market infrastructure spending? Emerging markets need twice the infrastructure investment they now receive. East Asia has the greatest needs, while Africa’s requirements are large in comparison to its economic size. Power generation accounts for more than half of needed investment. And institutional investors are becoming increasingly aware of the manifold benefits that infrastructure investments offer.

If the goal of moving development financing from billions to trillions of dollars is to be realized, the World Bank Group and other development banks will need to mobilize third-party money by leveraging their financial and advisory resources. A promising start to a large-scale infrastructure project in Colombia is evidence that it can be done.

Governments lack the fiscal space to fund the enormous investments required to reach the Sustainable Development Goals adopted by numerous countries in 2015. To meet those goals they are exploring how to ‘blend’ public aid money with private finance in order to make aid spending go further and crowd in more private investment.

How can businesses in emerging markets tap local capital markets to expand? A microfinance lender in Zambia did just that with assistance from multilateral development banks.

Domestic capital markets are a vital source of stable, sustainable finance, yet they are underdeveloped across the emerging market world, leading to illiquidity, elevated transaction costs, and other inefficiencies. Development banks can help foster stronger capital markets in various ways, from local bond issuances and partial credit guarantees to anchor investments and securitization assistance.