|Eliminating World Poverty: Making Globalisation Work for the Poor - White Paper on International Development (DFID - The Stationery Office, 2000, 106 p.)|
|Chapter 2: Promoting Effective Governments and Efficient Markets|
51. Effective governments and efficient markets are both essential if developing countries are to reap the benefits of globalisation and to make that process work for poor people. While the market fundamentalism of the 1980s and early 1990s has been thoroughly discredited, it is now almost universally accepted that efficient markets are indispensable for effective development. But equally important are effective governments - which are both competent in carrying out their basic functions, and more accountable, responsive and democratic, with a bigger voice for poor people in the determination of government policy.
52. Globalisation gives added urgency to the task of strengthening government systems in developing countries. Private capital is highly mobile and will go to where business can be carried out safely and where it can make the best return. Weak and ineffective states, with problems of corruption, inadequate infrastructure and cumbersome bureaucratic procedures, are not an attractive destination for these flows.
53. By contrast, those countries that apply rules and policies predictably, ensure law and order, invest in human capital (particularly education and health) and protect property rights, are likely to attract higher levels of inward investment and trade and to generate faster economic growth.
54. A key function of governments is the provision of law and order. And this is also a priority for the poor. One of the findings of the World Bank's Voices of the Poor report was that poor people attach enormous importance to security - security from violence and security for their propertyvi. Without this, they find it impossible to improve their lives. The poor worldwide also tend to be very distrustful of existing police and criminal justice systems. Far from protecting people from violence, too often elements within the police and justice systems are themselves sources of violence and abuse.
PRIVATISATION IN TRANSITION ECONOMIES
At the onset of transition ten years ago, there was some consensus that the existing state dominated economic model was unsustainable. However, there was much less understanding about how market economies function effectively, and about the complementary social and political institutions that are needed to help them do this.
Some central and eastern European countries, Hungary and Poland in particular, followed a strategy of creating favourable conditions for bottom-up development of the private sector. Strengthening institutions and creating sound legal and regulatory frameworks to ensure security of private ownership and eliminate barriers to entry were the priorities. In addition, the consistent enforcement of bankruptcy and accounting laws led to profitable companies being bought by investors and loss making ones being forced into liquidation. The negative effect of rising unemployment on poverty levels was mitigated to some extent by social safety net provisions.
By contrast, in countries of the former Soviet Union there was no experience of alternative economic systems. In Russia, for instance, the transition to private ownership was based on the rapid elimination of some elements of state ownership. State assets were dispersed through voucher schemes only to end up concentrated in large investment funds owned by state-owned banks or with privileged businessmen. Private interest groups exercised huge influence on the government and opposed legal and regulatory reform. This process generated opportunities for corruption. Special privileges and exemptions granted to Russian oligarchs have distorted market-orientated institutions and crowded out new enterprises. Simultaneously, production levels have plummeted. Corporate government remains weak and enterprise restructuring has barely begun. With enterprises no longer providing a social safety net, a massive increase in hidden unemployment and poverty had accompanied the economic collapse.
This experience demonstrates conclusively that economic reform must be accompanied by the right political institutions and a transparent legal framework. Only then can new enterprises create sufficient employment to offset the loss of jobs resulting from public sector restructuring. More foreign direct investment will flow in, stimulate competition and contribute to economic growth. Supportive social policies have to be in place to ease the impact of transition and to train and equip the labour force for new employment opportunities.
55. Safety and security depend on the fair and effective enforcement of the rule of law - to protect the rights of individuals against each other and against the state, and to uphold contracts. The absence of an effective rule of law is a barrier to the proper functioning of a market economy, a deterrent to domestic and foreign investment, and a breeding ground for corruption. For example, many banks in developing countries will not provide loans for tractors, sewing machines or other investments in small enterprise, if there is no legal system to enforce the agreements made.
56. Effective governments are needed to build the legal, institutional and regulatory framework without which market reforms can go badly wrong, at great cost - particularly to the poor. Whilst excessive or cumbersome regulatory barriers stifle incentives and discourage investment, effective regulation remains essential - for instance to promote financial sector stability, to protect consumers, to safeguard the environment, and to promote and protect human rights, including core labour standards.
57. Effective governments are also needed to put in place good social policies. Only the state can ensure the provision of key public services. Of course, the state does not need to be involved in the direct provision of all public services. The commercial and voluntary sectors have an important contribution to make to service delivery. But the unique and indispensable role of government remains that of setting policies and priorities, ensuring that basic services are provided to all, and regulating to ensure quality and standards.
58. The way in which governments allocate public revenues - between different public services and between services and other spending priorities - has a major impact on the level of poverty reduction. It is vital that poor people should have a greater say over governments' spending decisions.
59. The UK Government, through its development effort and contributions to international development agencies, is working to help countries put in place political and legal reforms, reforms to the civil service and systems of public administration, and tax collection. We also support reforms to police and criminal justice systems, that make them more accessible and responsive to the needs of the poor.