The Private Sector Holds the Key to Prosperity: A Well-Regulated and Open Market Economy Is a Powerful Engine for Growth and Poverty Alleviation in the Developing World. but Bureaucratic and Other Hurdles Are Getting in the Way. Is There a Way Out?

Article excerpt

The World Bank, in its 2005 World Development Report, says that governments across the developing world are discouraging entrepreneurial activities because they are failing to address excessive red tape as well as corruption and other crimes.

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These constraints are undermining the investment climate in many developing countries, and consequently stifling their full growth potential.

Francois Bourguignon, the World Bank's chief economist, says: "A good investment climate is central to growth and poverty reduction. But too often, governments stunt the size of those contributions by creating unjustified risks, costs and barriers to competition."

The World Bank report's core theme is how to make market economies work more smoothly for everyone. It draws on data and other new evidence from two research projects: Investment Climate Surveys covering 26,000 firms in 53 developing countries, and Doing Business Project which benchmarks regulatory regimes in 130 countries. The results provide useful insights into obstacles facing private companies, from farmers and micro-entrepreneurs to small and medium-sized enterprises (SMEs) and multinational corporations.

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The World Bank urges governments to pursue pro-business policies in order to foster faster economic growth in the developing world, where 1.2bn people currently barely survive on less than $1 daily income.

SECURE ENVIRONMENTS

The World Bank rightly notes: "With rising populations, economic growth is the only sustainable mechanism for increasing a society's standard of living." Improving the investment climate is seen as vital for encouraging private firms to undertake investment, create jobs and increase prosperity.

New fixed investment, in turn, raises future growth capacity by injecting more inputs (capital, technology and labour) into the production process. While foreign direct investment (FDI) is important to developing countries, the bulk of private investment remains domestic. In 2003, domestic capital formation accounted for 17% of GDP in 92 developing economies, according to the World Bank. The share of FDI relative to GDP was about 4%.

A good economic climate also spurs productivity by providing incentives for businesses to develop and improve production techniques. This, in turn, expands the variety of goods and services being offered, as well as reducing their cost, thereby benefiting consumers.

Firms facing aggressive competition are 50% more likely to innovate than those operating in a restrictive market dominated by giant companies enjoying near monopolistic powers. Finally, a better economic climate can increase resources to fund important public services, such as health care and education, as well as provide a social safety-net for vulnerable members of society.

HIGHER TAX REVENUES

Buoyant private sector-led growth provides higher tax receipts for government. As the World Bank report notes: "[Investment] is a central issue in terms of promoting growth and generating the tax revenues for social spending."

However, economic growth is not measured just by higher national income. Higher human development indicators--such as lower infant mortality, longer life expectancy and the provision of education--are equally important results of growth.

The report shows that China, India and Uganda have greatly reduced poverty and improved human development indicators in recent years--thanks largely to sound investment policies.

During the early 1980s, China introduced rudimentary systems of property rights, encouraged private enterprises across special economic zones, and liberalised FDI and trade regimes.

Consequently, annual GDP growth has averaged 8% and 400m people have been lifted out of poverty over the past two decades.

Similarly, Uganda's liberalisation programme that began in the early 1990s included reforms restoring macroeconomic stability; improving tax and court systems; reducing trade barriers; deregulating the telecoms sector and reversing the expropriations of private property by previous governments. …