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“Achievements in less than perfect conditions”
– by Michael Klein
Patronage, corruption and political machinations in the public sector are part of everyday life in many countries. How can businesses operate in such environments?
Well, private-sector companies tend to avoid such environments. We support both domestic businesses and foreign investors, and our experience shows that growth depends on sound regulation and decreasing levels of corruption. A country’s desire to be competitive is a crucial driver of reform. Ultimately, it is in the governments’ interest to demonstrate to domestic and foreign businesses that investments are safe.
What are the most essential matters the public sector should take care of?
First of all, we need peace, so that people feel reasonably safe and are in a position to take some economic initiative. Second, we need a relatively stable macro-economic setting with low inflation, enabling business to make plans. Inflation taxes people, and the poor are always the hardest hit, because the affluent have options of investing their money abroad in places like Miami. Moreover, a reasonably sound environment must be established for the private sector. The administration should not act too arbitrarily, and the legal system should function to some extent. In the poorest countries, even small steps in these directions can trigger relatively high growth rates – of five to eight percent per year in the case of most African economies. Such rates do not result from particularly complex reforms, but from peace, macro-stability and a reasonably sound investment climate.
Civil-service reforms often lag behind growth, so perhaps they do not really matter that much?
Not so fast. One of the greatest wonders of economic history is that we have left medieval corruption behind us and moved on into the modern era. Apparently, development does occur even if a public administration is not yet functioning perfectly. Modernisation is a result of the interplay of economic dynamism and reform of the state apparatus. If we had had to wait for democratic and legislative perfection, the world would never have made any progress at all.
But the gap between rich and poor is widening ...
And that means that we need private enterprise, because it provides jobs. Jobs are the best social security system there is. What matters most, after all, is that people have something to eat – in other words, an income. A dynamic private sector is essential here. A few years ago we published the study entitled “Voices of the poor.” In response to the question, “what do you need most to help you break out of poverty?” the two most common replies were, “jobs” and “the opportunity to set up a business”. To agonise about inequality is, relatively speaking, something of a luxury problem.
But you cannot deny that the governments of countries such as North Korea and Zimbabwe are obstructing growth.
All the same, a rudimentary kind of development is often possible. It is not as if governments are monolithic organisations, but there are different interests to consider. For instance, countries in general are interested in being competitive and increasing income levels. And if this is what they want, they have to implement public reforms. And that raises a question that always surfaces when reforms are at stake: does the political setting in that country allow such reforms? This is where government agents, who have so far
enjoyed control over public funds, may become a real problem.
How should donors act?
They must know who the various interest groups are and what it is that they want. And donors must explain the benefits of reform.
How important are lobby groups such as trade unions or non-governmental organisations for private sector development?
To listen to civil society and give it an opportunity – through elections, for instance – to represent its interests is clearly a good thing. Nobody knows exactly where the world is going to or what is best. Even in purely economic terms, democracy has three essential efficiency characteristics. First of all, it allows for experiments or “government by trial and error”, so to speak. Experiments are not entirely avoidable anyway. At the same time, democracy allows for political competition, so that failed experiments are discontinued. The third point is that the world is becoming increasingly complex, and democracy is one method of legitimising decisions. Ultimately, the combination of these three characteristics speaks in favour of a democracy, but it is obviously not an essential precondition for economic development to begin at all.
Does global competition motivate states to press ahead with public-administration reform?
There is indeed competition between countries. On average, states which have reformed their bureaucracy by introducing clear rules and transparency, and thus made it easy for businesses to operate, generate higher incomes.
The IFC has been publishing “Doing Business” reports since 2003, assessing national investment climates. Can you deduce a desirable sequence of reforms from this wealth of knowledge?
There is no magic formula for success. In each case you have to think about what is possible, and what makes political sense under the given circumstances. Sound property rights are essential. But are they needed from the outset? In some countries where the people have no confidence in the government, this may be so. But China is an example of how things can also work differently. China’s fundamental private-property law only came into effect last year. For years, however, business people had been acting as if such a law already existed – because the government itself had credibly established the expectation that it would move in that direction.
With Africa in mind, the G8 emphasise the need for strong political determination as well as institutional capacities for development. Does it make sense to invest in countries which have neither?
Almost everywhere there is some political will to change. I would suggest that the countries where that is completely lacking are currently North Korea, Cuba, Zimbabwe and Venezuela. But even in North Korea and Cuba there are signs of change, whereas Zimbabwe and Venezuela are making things harder for the private sector every year. But to state that there was absolutely no political wish for change in any given country would be drawing the picture only in black and white. And wherever you go, some capacities for taking the next step are always in place.
Nonetheless, there is often a lack of political leadership.
If the extraction of oil, diamonds and other mineral resources are at stake, private companies will take interest, even if there is not much in the way of leadership or institutional capacities. Private actors will get involved in anything with high profit margins, even arms deals or the trade in illegal drugs. But if you consider sectors of the economy with lower margins, political leadership and an appropriate business environment matter more. As an increasing number of countries is proving, however, quite a bit can be achieved even in less than perfect conditions.
Questions by Sarah Schmitz.