States and Markets

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E ffective governments improve people’s standard of living by ensuring access to essential services, such as health, education, water and sanitation, electricity, and transport, and the opportunity to live and work in peace and security. Countries confront different development challenges and face unique constraints. The main elements to get right are economic management, regulation, and taxation; efficient financial and labor markets; public safety and security; and the building and maintenance of infrastructure. Together, they provide an environment of incentives and opportunities in which firms and individuals can invest and work productively. This section brings together indicators that measure the actions of governments and the responses of markets through three cross-cutting development themes: managing the public sector, developing the private sector, and providing infrastructure.
 
Without good governance, other reforms have limited impact
In successful, high-growth economies such as Botswana, China, India, the Republic of Korea, Mauritius, and Singapore, the state has played an important role in attracting investment; improving productivity, technology, and competitiveness; and promoting property rights, contract enforcement, and economic and political stability. Institutions differ in each of these countries, as do the choices of legal regimes, balance between regulation and competition, size of the public sector, and flexibility of fiscal and monetary policies. Solutions that work in one place may not work in another. And while an accountable and capable state with strong institutions has come to be recognized as fundamental to economic and social development, it is still difficult to quantify what is meant by good governance or to measure the quality of institutions. More research is needed to understand the role of institutions and how to improve them in countries with weak institutions.
 
Many African leaders recognize that building strong institutions and improving public sector management are needed to encourage investment and economic growth and that poverty reduction is impossible without that. Improving public revenue and expenditure management is on the agenda of several African countries and is also a priority of the New Partnership for Africa’s Development.
 
Many countries are using public expenditure tracking surveys to identify shortcomings in the delivery of public services, including Cameron, Ghana, Madagascar, Mozambique, Rwanda, Senegal, Tanzania, Uganda, and Zambia. Expenditure transactions can be complex, with leakages and diversions common in a range of processes, including procurement. Such surveys map and track specific expenditure flows from allocation through intended use. In Uganda a survey conducted in 1996–99 increased intended resources arriving at a school from an average of 13 percent to 78 percent (World Bank 2005c). Although such surveys are not a substitute for broad strengthening of public sector financial management, they can help in understanding weaknesses in public financial management capacity and accountability mechanisms at various levels.
 
Improving the investment climate for increased private sector investment, growth, and poverty reduction
Better policies, institutions, physical infrastructure, and human resources are needed to attract domestic and foreign investors and to improve the efficiency of firms. But the goal is an investment climate that benefits society, not just firms.
 
What can governments do to attract the investment needed for its citizens? They can create stability. Combat corruption by public officials, firms, and other interest groups. Foster trust and legitimacy through participatory policymaking and transparency. And develop policies that address current economic and business conditions. Investment climate surveys draw data directly from firms and cover both objective and subjective indicators. Investment climate indicators cover eight factors that influence investment decisions, from policy uncertainty and corruption to reliability of electricity and the availability of skilled labor and labor regulations (table 5.2).
 
In investment climate surveys senior managers ranked policy uncertainty as the main business constraint. These surveys tell us that, compared with other developing country regions, Sub-Saharan Africa is a high-cost, high-risk place to do business, resulting in less investment, less employment, lower incomes, less growth and competitiveness, and higher poverty. Overall, doing business in Africa costs about 20–40 percent more than in other developing country regions. Costs are higher because of burdensome regulations, difficulty securing property rights, ineffective courts, weak infrastructure, and uncompetitive services. Because 80 percent of investment is from domestic sources, institutions and policies in Africa need to focus on the domestic investment climate, especially for agriculture and in rural areas. In 14 African countries with investment climate surveys, the high cost of financing for firms is the number one complaint.
 
New studies of business regulations and their enforcement have been conducted in 155 countries jointly by the International Finance Corporation and World Bank through the Doing Business survey program. The Doing Business findings are based on responses to objective questions using standardized surveys of experts, usually lawyers and accountants. These surveys complement the investment climate surveys by comparing the ease of doing business in 10 areas ranging from starting a business and dealing with licenses to hiring and firing, protecting investors, trading across borders, enforcing contracts, and closing a business. Data on most of these dimensions of doing business are presented in tables 5.3 and 5.6 .
 
Doing Business surveys have been conducted in 33 African countries. One conclusion of the Doing Business 2006 report: more reform is needed in Africa (figure 5a). Entrepreneurs face greater regulatory obstacles in Africa than in any other region. Of the 16 countries surveyed in West Africa just 2 carried out business regulation reforms. In the region as a whole for every three countries that improved regulation, one made it more burdensome.
 
5a
Africa had the lowest business environment reform intensity in 2004
Average number of reforms

Source: Doing Business database.
 

 
But in some African countries, like Rwanda, reforms are paying off. In 2001 Rwanda introduced new company and labor laws. Land titling reforms followed in 2002. In 2004 Rwanda was among the top reformers: it streamlined customs procedures, improved credit registries, and simplified judicial procedures. Since initiating reform, Rwanda has had economic growth averaging 3.6 percent a year—among the highest for non-oil-producing states in Africa. Uganda has also benefited from an improved investment climate, posting GDP growth of about 7 percent a year during 1993–2002 and reducing poverty measured by a national poverty line from 55 percent in 1993 to 37.7 percent in 2000. Other African countries that have made progress in business reform include Mauritius, Namibia, Nigeria, and South Africa.
 
Infrastructure for development
Infrastructure services affect people in many ways—what they consume and produce; how they heat and light their homes; how they travel to work, to school, or to visit friends and family; and how they communicate, share information, and learn at home, school, and work. And the profitability and competitiveness of businesses depend on the cost and availability of infrastructure services such as the power and fuel used to operate machines or the transportation services needed to deliver raw materials to factories and finished products to market.
 
Physical isolation is a strong contributor to poverty. Populations without reliable access to social and economic services are poorer than those with reliable access. Problems of access are particularly severe in rural areas far from roads used regularly for motorized transport services. An estimated 900 million rural dwellers in developing countries, most of them poor, are without reliable access.
 
In many developing countries increasing agricultural productivity is central to rural development and poverty reduction strategies. Improved rural transport makes it easier for farmers to obtain inputs and advice at reasonable cost and to sell their products at good prices. Farmers with difficult access to local markets earn less for their products than farmers with easier access, and increases in output are associated with agricultural areas with improved roads.
 
An indicator has been developed to measure rural transport access based on the proportion of the rural populations that lives within 2 kilometers of an all-season road (a road that can be used all year by the prevailing means of rural transport, often a pick-up or other truck without four-wheel drive). Predictable interruptions of short duration during inclement weather (for example, heavy rainfall) are accepted, particularly on low-volume roads. The rural access index, calculated from representative household surveys, is shown for selected International Development Association (IDA)–eligible countries, in table 5b.
 
5b
Rural access index for selected low-income countries (% of rural population)
Country Index Country Index
 Albania 31 Kenya 44
 Azerbaijan 67 Lao PDRa 59
 Bangladesh 37 Madagascar 25
 Benin 32 Malawi 38
 Burkina Faso 25 Mongolia 36
 Burundi 19 Nicaragua 28
 Cambodiaa 87 Niger 37
 Cameroon 20 Nigeria 47
 Chad 5 Pakistan 77
 Congo, Dem. Rep 26 Papua New Guinea 68
 Ethiopia 17 Tajikistan 74
 Gambia, Theb 77 Tanzania 38
 Ghana 34 Uzbekistan 57
 Guineac 22 Vietnam 73
 India 60 Yemen, Rep. 21
 Indonesia 94
 
 
Note: Based on surveys between 1997 and 2003.
a. Nonstandard measurement process resulting in a higher index value.
b. Survey conducted during 1994–96.
c. Survey conducted in 2004.
Source: World Bank Transport Technical Paper based on household surveys.
 

 
Values of the rural access index were also calculated on the basis of rural population, road length, and arable land area for more that 30 other countries (mainly non-IDA recipients) for which there are no suitable household survey results. The values for 64 countries (representing 85 percent of the world’s rural population) show that 57 percent of rural inhabitants in IDA countries enjoy adequate access compared with 87 percent in non-IDA countries. Among developing country regions, Sub-Saharan Africa had the lowest level of rural access (30 percent), followed by Middle East and North Africa (34 percent), Latin America and the Caribbean (54 percent), South Asia (58 percent), Europe and Central Asia (75 percent), and East Asia (94 percent).
 
Improvements in roads and transport services generally have significant positive effects on school attendance. In Morocco in the early 1990s a paved road in the community more than doubled girls’ school attendance rates from 21 percent to 48 percent and raised boys’ attendance rates from 58 percent to 76 percent, according to survey findings. In health, transport services play several important roles: ensuring adequate and reliable availability of food, providing medical supplies, transporting health personnel to facilities, and the most difficult role, bringing people to medical stations, whether for urgent care or regular treatment.
 
Information and communication technology has the potential for reducing poverty and fostering growth in developing countries. Mobile phones provide market information for farmers and businesspeople, the Internet delivers information to schools and hospitals, and computers improve public and private services and increase productivity and participation. Firms that use information and communication technology grow faster, invest more, and are more productive and profitable than those that do not. A survey of firms in developing countries found that sales growth is 3.4 percentage points higher and value added per employee is $3,400 higher in firms that use email to do business with clients and suppliers. And by making information accessible to more people, information and communication technology enhances social inclusion and promotes more effective, accountable governments.
 
Africa lags behind other regions in most infrastructure indicators. The high cost and poor quality of infrastructure services—transport, energy, water and sanitation, and information and communication technology—have limited growth potential. For Africa to reach the Millennium Development Goal of halving poverty by 2015, average growth rates need to reach 7 percent a year. That will require annual investment of $20 billion in infrastructure, about twice as much as Africa has historically invested. About 40 percent of that needs to go into roads and 20 percent each into energy and water (World Bank 2005c).
 
Financing these infrastructure needs in Africa will require a concerted effort from all funding sources, public and private. Led by the African Union and the New Partnership for Africa’s Development, and including the African Development Bank and the World Bank, the Africa Infrastructure Consortium is working to mobilize and allocate infrastructure resources to support country and regional projects. The goal is to improve infrastructure, whether services are delivered by public or private providers or jointly. Reformers need to consider multiple factors—the strength of institutions, regulatory rules, fiscal health, investor interest, the competitiveness of markets, and other specific characteristics that influence the performance of public and private operators.
 

 
5a Africa had the lowest business environment reform intensity in 2004
 

   
5b Rural access index for selected low-income countries (% of rural population)