Summary of the World Bank’s Private Sector Development …



Summary of the World Bank’s Private Sector Development-Forum Washington, April 4 -6, 2006



I. INTRODUCTION

The bi-annual World Bank Forum on Private Sector Development took place in Washington from April 4to 6, 2006. The PSD Forum is mainly an internal conference with PSD practitioners from within the World Bank Group (WB, FIAS, IFC, MIGA etc.) in Headquarters and in the field. Already in 2004 and even more so this year, the World Bank has invited a large number of non World Bank participants to the PSD Forum, representing other donors and development agencies as well as developing countries’ government, private sector and civil society representatives.[1]

The four major thematic areas of the three-day PSD Forum 2006 were

o Conflict, Corruption, Informality

o Business Enabling Environment, business regulation at national and sub-national level, advocacy for reform, empowerment of the poor

o South-South FDI, Latin American competitiveness, China vs India’s PSD, Africa’s export potential

o Role of the State in PSD, state-owned enterprises, privatisation

II. PSD PRESENTATIONS AND DISCUSSION

Informality

Informality was not only the topic of one session, but also of an additional half-day workshop – an indication of the importance attributed to the topic by the WB. The presentation by Jaana Remes of the McKinsey Global Institute pointed to 3 elements of informality:

• tax-related: underreporting of VAT and income taxes;

• labour market related way: underreporting of social security obligations and non-compliance with minimum wage regulations;

• product market related: evasion of product quality, property rights and/or hygiene standards.

This makes informality much more wide-spread than normally assumed. The presentation showed how informality can become a major barrier to overall economic growth (through unfair competition based on the cost-advantage of informal companies). Lack of enforcement can lead to a vicious circle: Higher and higher tax rates will be applied to an always smaller number of formal enterprises. It demonstrated how enforcement of regulations and a higher compliance can lead to an overall improvement of the business climate, higher productivity and competitiveness. E.g. enforcement of tax laws can lead to an overall reduction of the tax rate.

PSD and Conflict

Major issues presented by the different speakers were the

• high level of private sector activity before, during and after conflicts, the phenomenon of rising informality and the respective role of economic policy reform in the reconstruction process (Richard Stern, IFC)

• importance of assessing the laws of a conflict-affected countries, as laws are sometimes bad (not up-to-date; responsible for unequal treatment), unknown or not enforced so that the private sectoroperates in a vacuum. To reform the legal environment in a post-conflict country, advisory services have to be action-oriented, focussing on core legislation and sequencing so as to allow for ‘quick wins’. (Marc Reichel, consultant)

• experiences of the FIAS/DFID PSD programme in post-conflict Sierra Leone and the importance of ‘soft programme inputs’ in public private dialogue, process facilitation and counselling. The programme works on reforming administrative barriers to investment, on elaborating a national PSD strategy, on supporting privatisation and on implementing selected investment climate activities. Of particular relevance is the role that the diaspora is playing in terms of investing financially and politically in their home country. (Lisa Curtis, DFID).

Corruption and the private sector

The Chairmen of the CELTEL company provided an insight into the corporate governance code of his Africa-based company with regard to corruption (‘not a penny’!). He highlighted the importance of a high-level and international board of directors. Main messages were that it is possible to do good business in Africa without bribing; there is progress alltogether because politicians accepting bribes are increasingly put to jail and ‘it needs two to bribe’, blaming industrialised countries for their bribe-accepting business practices and tax systems.

Next generation of reform: Business Enabling Environment (BEE)

In this session former and present Finance Ministers of selected countries presented their experiences in reforming the business enabling environment:

• Pedro Malan from Brasil explained how the country transformed from a classical Latin American system of protection and public sector investment to a liberalised trade and private sector investment regime. He highlighted the importance of simultaneous reform in macro-economic (fiscal policy, exchange rate), in non-macroeconomic (institutions, regulations, labour relations) and social conditions.

• Mahmoud Mohieldin from Egypt raised the question of whether sequencing of reform steps or a complete turn around was more promising. In Egypt, the new government team for macro-economic reform since 2004 has opted for much of a turn around approach, working on customs and tax regime, implementing a competition law, reforming institutions (privatising banks, improving investment agency), introducing a corporate government code. He highlighted the difficulty in Egypt of gaining political support for privatisation and the importance of actively communicating reform.

• Mr.Tarrin from Thailand referred to the Asian crisis of 1999 which according to him was an opportunity for change towards a more equitable and sustainable economic system within a liberal democracy, aiming at reducing the income gap within the country. Post-crisis reform therefore included new regulations on ethical risk management (anti-fraud act, credit-card act, leasing act, social security act etc.), new government standards (anti-corruption) and new checks and balance institutions (election commission, anti-fraud institution, constitutional court) which are outside the government and responsible to parliament only. The latest elections in Thailand brought political change with populist attitudes towards poverty reduction. While the Asian crisis of 1999 was a crisis of the rich, Mr. Tarrin fears that the next crisis will be the financial crisis of the poor as household endebtedness of the poor is rapidly increasing.

• Ashraf Ghani, former finance minister of Afghanistan, raised the issue of market failure conditions that prevent PSD, unless the public sector thrives for reform. He was complaining about advice given by the International Finance Institutions including the World Bank: while market failure is the problem, ‘more market’ cannot be the solution. As a former World Bank staff, he complained that the IFI are good in convincing governments to reform, but are not able to seriously advice reform-oriented governments like the one in Afghanistan.

Business regulation strategies

This session stated the important role of better regulation for growth and productivity. Statistical evidence indicates that excessive regulation is directly associated with lower productivity and a higher level of informality. The presentation by Peter Ladegaard (FIAS) outlined the key tasks for good maintenance of the “regulatory swimming pool”: Clean the water in the pool (the regulatory stock), filter new water coming in (the regulatory flow), supervise water quality (the regulatory institutions), make sure guests are served according to good and well-known standards (the regulatory policy).

The Regulatory Governance Toolbox outlined refers to policies and principles, institutions and process, tools and techniques, and training and M&E. An interesting presentation from Mexico summarized the process and the factors for success in implementing a major regulatory reform process, drawing from the regulatory toolbox.

South-South Foreign Direct Investment (S-S FDI)

Major messages of the session were that S-S FDI represent an opportunity for poorer countries in which North South FDI does not reach and that S-S FDI may have larger spill-over effects due to lower technology gaps. But there is not yet enough information on Southern Multinational Corporations in terms of transparency and social and environmental standards.

Major drivers of S-S FDI into Africa are reported to be access to natural ressources (oil, minerals) for growth in Asia; low wage labour and OECD market access (textiles within AGOA) and market liberalisation in African countries (SA and Indian investors in tourism, ICT, infrastructure, mining).

China’s FDI are distributed almost equally among Western Europe, North America, African countries, East Asia and South-East Asia. The main challenges for Chinese investors in international operations are culture conflicts, reacting to changes in the local market, capital shortage, labour cost and image building.

‘CHINDIA’ - China vs India’s development path

A number of presentations outlined key features and challenges of the fast development track of China and India. While all agreed on the significant role that the two countries assume already now and will even more in the future, they also highlighted the very different development path of both countries. This refers to their very different economic patterns and strengths, and also to very different political and social development trends. Interestingly, with their growing economic role, China and India are currently just resuming a predominant position in the world economy, they had already 2 centuries ago: In 1820, China had a share of 33% and India of 16 % of world GDP.

Africa’s Export Potential

• Alan Gelb (Development Economist World Bank) presented analysis on African countries’ growth performance over the past 10 years. The group of countries with relatively high growth rates – the so-called G 11 - are relatively poor countries with high aid levels (Benin, Burkina, Ethiopia, Ghana, Mali, Ruanda, Senegal, Mauritania, Mozambique, Tanzania, Uganda etc.). However, not all receivers of high aid levels are well-performers (i.e. Burkina, Zambia etc.). The fast growing countries have often combined good policies with aid. Other correllations are ‘Low aid-high growth countries often have oil’ and ‘high aid-low growth countries’ often have conflicts. In order to determine comparative advantages of African countries Gelb cited the following

o factor endowment: Africa is land rich and skills scarce (Wood and Mayer)

o cost of non-traded inputs and transaction costs are high and crowdout transaction intensive economic activities (Collier)

o dynamic scale economies and cluster effects hardly existent (Krugmann).

The surprising result of the analysis is that labour unit costs in some African countries are not higher than the ones in China. The difference is the level of indirect costs whih are due to the quality of infrastructure and business climate as well as to business sector segmentation and lack of competitiveness. It is recommended to work on reducing these indirect costs (i.e. benchmarking) rather than looking at labour regulations.

• Maggie Kigozi of the Uganda Investment Authority presented success stories of African global businesses (Kenya Airways, Botswana Meat, Uganda Lake Victoria fish, Kenyan Flowers etc.). According to her, the environment for businesses in African countries has changed considerably in terms of political stability and security, macro-economic stability, infrastructure improvements incl. ICT, improvement in labour productivity and a liberalising financial system. Main constraints are to be found in the BusinessEnabling Environment, in the field of entrepreneurship and in corporate governance.

Advocacy for reform

Representatives of institutions from developing countries presented their cases of advocacy for business environment reform:

• Ciudadanos al Dia: a civil society organisation (CSO) in Peru shows how analysis of particular problems in the business environment can be used to mass-media and pressure policy makers for change. The example given was the case of a state-owned enterprise with excessive costs for public sector managers. Those cost figures as well as the potential for savings was published in the country’s newspapers and political pressure led to cost reduction and renewed discussion about privatisation of SOE. Lessons learnt by the CSO were the importance of reliable economic research and data; good PR, marketing and info dissemination; creating incentives for reforming the BEE; taking a ‘small-bite’ approach and creating competitiion among government agencies to serve the citizens.

• The president of the Bangladesh Enterprise Institute presented a Public Private Dialogue (PPD) approach to reforming the BEE, facilitated by his organisation. In Bangladesh, a PSD task force was formed, adviced by a private sector consultative group of business people and a PSD core group of about 35 government officials who underwent a PSD training of about 1 year so as to become the drivers of change in government. A private sector forum has been formed as a perment mechanism for PPD.

• A third example was the private sector Nigeria Economic Summit (NES) and the 8 policy commissions for reform that it forms with the Nigerian government/adminitration.

Monitoring and impact measurement

• In this session, examples of objective measurement of results were introduced from the Millennium Challenge Corporation (MCC) and from EBRD. MCC’s main criteria are that outcome must be higher than investment. Erik Berglöf from EBRD introduced the transition impact methodoloy which aims at measuring objective verifiable results, however, also depends on value judgements. An essential element of the constitutional set-up is the independence of the Chief Economist’s Office, in charge of evaluation. At the end of the session, Michael Klein offered a very (self)-critical view of possibilities of making result measurement objective, as most agencies claim a very similar success rate of about 75% for TA programmes. WB has made impact measurement a top priority, and IFC will organize a Monitoring and Evaluation Workshop on “Results Measurement for Technical Assistance” in May.

III. WHERE IS THE WORLD BANK GOING?

Private Sector Development is an issue of overriding importance across the World Bank Group, the topic is represented at Vice Presidency level (Michael Klein).

A full 4 hour session was devoted to a critical self-reflection within the World Bank Group. The two main areas for improvement raised by the participants were:

• to move from diagnostics to implementation, as a lot of research is never applied in policy advice, and

o It was emphasized that the World Bank may know good and bad practice in regulatory reform (“we know what heaven looks like, and what hell looks like”), but know how to implement reforms (“how to get from hell to heaven”) is lacking. There is need for better knowledge of the binding constraints and for identifying areas where partial reforms lead to results.

• to better coordinate, mainly within the WB group but also with other donors.

o “We advocate a one-stop shop - and we offer a shopping mall.” Discussions underlined the significant deficiencies related to internal coordination, as different institutions within the WB Group (IFC, FIAS, MIGA, WB, Poverty Reduction Section) deal with the topic of PSD and intervene – differently, subsequently and not coordinated - in the same countries. The extent of internal competition was raised as well as the burden this represents for partner countries in terms of coordination. Proposals for improvement included practical examples of WB coordination at country level, better branding (the WB “BEE Squad” instead of the FIAS team, the IFC team etc.), more decentralisation and adjustments of the organizational structure.

o The significant importance given to the coordination with other donors was also reflected in the high number of other donors had been invited to the forum, as well as in the fact that the Coordinator of the Donor Committee on Enterprise Development had been invited to the panel in the session on “Where is the World Bank going?” Jim Tanburn emphasized that knowledge management and information may sometimes be even easier among peers than within one organization, and emphasized the common standards defined by the guiding principles.

On the positive side, it was appreciated that macro-economic reforms had been successfully implemented worldwide over the past 20 years and that

• there is a next generation of reform aiming at improving the business enabling environment (BEE). To do so, there was agreement that governments and donor support should focus on

o selected areas for BEE reform based on opportunities for change

o combining economy wide reform with selected sector reform

o the World Bank is in the process of preparing a Business Environment Country Profile (BECP) which involves the development and maintenance of a web-enabled database of country-level business environment profiles. The key objective is to facilitate coordination, and the monitoring of reform efforts and their results over time. A BECP shall include i) indicators measuring the current business environment in the country; ii) results of the business environment reforms implemented so far; and iii) data on planned and ongoing WBG business environment activities (this section could potentially include other donor activities).

• Benchmarking countries’ performance (like in the ‘doing business’ reports) as compared to conditionality of former World Bank-led reform processes is presently leading to a worldwide explosion of change.

IV. FOLLOW UP with BMZ/GTZ

• The sector project ‘Innovative Tools for PSD’ has agreed with the WB’s rural development department (rural finance advisor) to jointly work on the issue of ‘PSD in rural areas’.

• The sector project is planning to organise a joint BMZ/GTZ/DFID conference with International Alert on ‘PSD and conflict’ on 14 and 15 September 2006 in Berlin. The conference topic, location and timing has been discussed during the conference with several donor representatives. There is large interest in participating and contributing by all the major donors.

• GTZ representative to attend IFC Monitoring and Evaluation Workshop on “Results Measurement for Technical Assistance”.

Corinna Küsel, Sabine Becker

Eschborn, April 2006

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[1] Similar World Bank events take place at regional level, e.g. in Bangkok for the Asian region. In 2005, a small number of participants from other agencies, among them GTZ, were invited. This year the number of non World Bank participants has been further extended.

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