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close this bookPrivate Sector Development in Low-Income Countries - Development in Practice (WB, 1996, 188 p.)
close this folderChapter 2-Establishing an attractive business environment agile firms, agile institutions
View the document(introduction...)
View the documentThe private sector's assessment of the business environment
View the documentFoundations of a dynamic private sector
View the documentSecure, flexible transactions
View the documentCompetition-and simplified regulation
View the documentEnterprise development
View the documentEfficient infrastructure
View the documentThe agenda for developing an attractive yet competitive business environment

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 market conditions.


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 risks—including currency transfer, expropriation, and war and civil disturbance—MIGA 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 responsible for:

· 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

· Support technological development—universities, 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.

Building partnerships

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-making—and 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 accessible—reducing 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 uncertainty—if implemented in collaboration with the private sector through producers associations and chambers of commerce.