Foundations of a dynamic private sector
The emerging consensus of these surveys is that agile firms,
which are necessary to compete in a rapidly changing environment, prosper when
there is political and economic stability, when entrepreneurship and learning
are rewarded, and when there is a commitment to shared growth. Creating this
attractive environment requires a systematic, time-bound program formulated and
implemented in collaboration with the private sector to put in place the
underpinnings of a dynamic and competitive private sector (figure 2.1):
· Secure and
flexible transactions, with the freedom, flexibility, and security to acquire,
use, and leverage property rights (real, tangible, and intellectual).
· Nonintrusive, efficient, and
respected public administration that sets widely understood rules for economic
activity, enforces them uniformly and universally in a predictable manner, and
changes them through transparent means.
· Competitive markets that
promote mobility of products, capital, labor, and knowledge through simple,
transparent, and uniformly applied incentive and regulatory systems.
· Efficient and responsive
social, physical, and technological infrastructure that increases the long-term
competitiveness of the economy and reduces transaction costs.
Building this structure is a difficult and time-consuming task.
It implies a fundamental change in the role of the government, from owner and
operator to policymaker and regulator working to develop a competitive,
outward-looking economy in close partnership with the private sector.
Fundamental to the success of this orientation is development of competent and
agile institutions to support the rapid response of agile firms to changing
BOX 2.2 POLITICAL RISK, FOREIGN DIRECT INVESTMENT, AND MIGA
The Multilateral Investment Guarantee Agency (MIGA) was created
to facilitate private foreign investment in developing member countries. By
providing long-term noncancelable investment guarantees (insurance) to foreign
investors against specified noncommercial risksincluding currency
transfer, expropriation, and war and civil disturbanceMIGA enables
commercially attractive projects to proceed in many lowincome countries. MIGA
complements national and private investment insurance programs through
coinsurance and reinsurance arrangements.
MlGA's guarantees, for investments as small as $150,000 and as
large as $50 million in the infrastructure, mining, and financial sectors, have
often been critical of the investor's decision to proceed with the project,
including participating in privatization projects. As of January 1, 1995, MlGA
has provided political risk insurance totaling $375 million in projects in eight
low-income countries-Bangladesh, Cameroon, China, Honduras, Madagascar,
Pakistan, Tanzania, and Uganda. Preliminary applications for MIGA guarantees
from potential investors in lowincome countries as of that date total 350. While
the vast majority of these prospective investments will not proceed for
commercial reasons, the sheer number of applications is indicative of the demand
for political risk insurance.
MIGA also offers technical and legal assistance to enhance the
institutional capacity of host country investment promotion agencies (IPAs).
Wherever possible, MIGA seeks to support promotion activities that can be
organized on a multicountry or sectoral basis. For example, MIGA has provided
extensive support to the promotion of foreign investment in the mining sector in
Africa, including the organization of a major mining conference in June 1994 at
which 18 Sub-Saharan countries showcased their mining investment opportunities
to about 300 prospective investors from North America, Europe, and Asia.
New initiatives for the dissemination of information on
investment opportunities in developing countries include a CD-ROM on mining
sector investment opportunities in Africa and IPAnet, a global electronic
information exchange and communications network on investment opportunities.
This network, to be carried over the Internet, will link IPAs, business
associations, financial institutions, and other intermediaries involved in the
promotion or facilitation of foreign investment.
After government institutions responsible for the central role
of macroeconomic management, the most important institutions are those
· Legal and regulatory systems.
· Public finance, notably the
tax and customs administrators that interact closely with the private sector.
· Trade and investment. No less
important are institutions that:
Figure 2.1 Foundations of a
competitive private sector
technological developmentuniversities, standards and metrology agencies,
productivity centers, agricultural extension services, and research and
development and labor training institutes.
· Facilitate flows of economic,
business, market, and technological information.
In fast-growing countries these institutions have worked closely
and regularly with business and labor associations and with other civic groups
to address and solve problems that affect the ability of firms to compete
internally and externally. Important objectives have also been to change the
attitude of the population, the media, and the administration at all levels
toward entrepreneurship and legitimate profit-makingand to change the
business culture from courting the government for privileges to courting
competitive markets for profits.
Governments in some low-income countries have forged
partnerships with their private sectors to sharpen the reform agenda and to
establish the credibility of the reform program with the business community. The
value of such partnerships has been demonstrated in Ghana and Senegal, where
private-public consultative mechanisms are helping to bridge the gap between
policymakers and the private sector in developing reform programs that enjoy
broad support (box 2.3).
An important element of this partnership is the availability of
timely and reliable information on economic and business activity. In most
low-income countries, this information is incomplete, outdated, and not
uniformly accessiblereducing transparency and accountability and
increasing the opportunity for corruption. This makes it difficult for
governments to formulate and monitor policies. And it limits the ability of
entrepreneurs, investors, and lenders to make reasonable judgments about
business opportunities and the viability of projects. Government investments in
improving the information infrastructure could pay large dividends in increased
transparency, greater accountability, and reduced uncertaintyif
implemented in collaboration with the private sector through producers
associations and chambers of