Rebuilding Sri Lankan Microenterprises after the Tsunami

University Of California-San Diego, La Jolla CA

Investigators

Abstract

Proposal No: 0617424 Institution: U of Cal San Diego NSF Program: ECONOMICS Principal Investigator: Woodruff, Christopher Title: Rebuilding Sri Lankan Microenterprises after the Tsunami ABSTRACT Microenterprises form the backbone of employment and economic activity in low income countries. Surprisingly very little serious work has been done to explore this important sector, such as the productivity of capital and labor and the development of entrepreneurship. Part of the reason for this might the lack of micro data that will allow for credible identification since the factors that may affect the productivity of capital in a microenterprise may also affect the quantity of capital owned by the microenterprise. This research will extend work on a project designed to study the processes by which microenterprises in Sri Lanka recover from the December 26, 2004 tsunami. With the SGER funding, the PIs have 622 microenterprises in Sri Lanka to measure the importance of access to capital in the recovery process of micro enterprises as well as measure returns to capital both among recovering firms and among firms located outside the impact zone. A unique aspect of this research is the administration of treatments to randomly selected firms with half of the treatments given cash and half given equipment purchased for the enterprise. The capital treatment generates changes in capital stock which are not correlated with entrepreneurial ability, against which changes in the performance of the enterprise can be compared. This research will conduct additional surveys and use the panel data to estimate returns to capital as well as study the process by which microenterprises recover from a natural disaster. Although the tsunami provides the backdrop for this research project, the contribution to economic science and broader impact goes far beyond the natural disaster or Sri Lanka. The surveys create the only panel of urban microenterprises that is available, allowing for unbiased estimates of returns to capital in such enterprises. The longer panel will allow for a more efficient examination a larger part of the recovery process. The random treatments allow the researchers to generate changes in capital stock that are uncorrelated with ability. This research will also illuminate two important issues: (i) should micro enterprise owners be viewed as entrepreneurs or simply workers who are unable to find wage work, and (ii) what are the methodological questions related to gathering data from micro enterprises. Finally, the methodology pioneered in this study will be applicable to a large number of issues in developing countries. The results of this research have large policy implications for recovery projects after disasters and for the operation of micro lending programs. The project will provide scientific evidence on the respective merits of cash and in-kind transfers in growth and rebuilding efforts in this sector. In addition, the panel dataset created of microenterprises will be the largest anywhere in the developing world and will be made available to other researchers.