Promoting economic transformation through business environment reform Presentation to DCED BEWG Vienna, 11 th June 2019; draft study by Stephen Gelb, Alberto Lemma and Dirk Willem te Velde
Overview of presentation • Definitions of business environment (BE) and economic transformation (ET) • What do we know about the linkages between BE and ET • Donor experiences in using BE for ET • Building blocks for a Theory of Change on BE and ET and practical guidance • Conclusions and implications
Process • The Donor Committee for Enterprise Development (DCED) Business Environment Working Group (BEWG) has asked ODI to examine how donors can support Economic Transformation (ET) through Business Environment Reform (BER). (There is a separate study on market systems and ET) • Desk review and interviews with donor agencies such as GIZ, DFID, Sida, Gatsby, USAID, WB/IFC
Definition of ET • Economic transformation as the continuous process of (i) moving labour and other resources from lower- to higher-productivity sectors (structural change) and (ii) raising within-sector productivity growth by raising productivity at the sectoral level and at the firm level. (McMillan et al, 2017) • Transformation of production structures is central, traditionally thought of as sectoral changes in employment and output; but this can also be seen as changes in productivity increase within sectors, value chains, or firms. It is about doing differently, and about diversification.
Definition of BE • DCED (2008) defines Business Environment as a ‘complex of policy, legal, institutional, and regulatory conditions that govern business activities: • simplifying business registration and licensing procedures; • improving tax policies and administration; • improving labour laws and administration; • improving the overall quality of regulatory governance; improving land titles, registers and administration; • simplifying and speeding up access to commercial courts and to alternative dispute resolution mechanisms; • broadening public-private dialogue processes with a particular focus on including informal operators, especially women; • improving access to market information; and enabling better access to finance. • Above definition is wide-spread, but one could add: • strengthening competition policy • improving accounting, auditing and business transparency and • establishing standards (technical, social/labour, environmental).
What do we know about direct linkages BE and ET • WDR2005 • BE and firm-level productivity: some BE components work better than others. • Positive evidence on firm level productivity • Worker conditions, labour market regulations, employee engagement (OECD) • Innovation in the workplace (UK) • Access to finance, participation in trade and foreign investment, competition (developing countries) • Tax • Mixed evidence on firm level productivity • Entry, exit and firms dynamics (US)
Focusing BER on transformational sectors • Some sectors have greater transformation potential than others • No shortage of techniques and studies that can help to identify transformational activities. • RCA • Trade composition • Economic complexity • IO multipliers and SAMs • Productivity and labour analysis • Value chain analysis
Activities complementary to BER Page (2012) on Investment Climate ++: Infra, Inst, Fin Deep, Education IMF (2014) packages of policies: Key elements Selected interventions Structural change manufacturing share: power, credit, labour market and business regulation services: liberalisation of networks such as telecommunications Sector productivity agricultural productivity: tariffs, interest rate controls manufacturing productivity: capital account liberalisation and FDI, roads, education Export product diversification Higher level of education and institutional quality, deeper financial systems, proximity to markets, globalisation including south – south trade, trade liberalisation, agricultural reform and devaluation
McMillan et al. (2017) classify a range of public policies that can be used to support ET; 2*2 matrix Activities complementary to BER - General enabling vs targeted - Aimed at transformational vs BAU activities General enabling actions Targeted action Public business export push policies Actions to environment/investment exchange rate protection Support POLITICAL climate reforms (e.g. selective industrial policies Structural registration, land, tax, spatial industrial policies Change contracts) national development banks ECONOMY! financial sector development strengthening SBR Public building fundamentals management training Actions to (e.g. infrastructure, attracting FDI Support education) export diversification within- investments in basic developing GVCs sector production knowledge increasing agricultural Productivity managerial good practices productivity Growth as public goods agricultural innovations promoting competition
Examples of targeted transformation activities complementary to BER Trade promotion FDI promotion including building SEZs Promoting FDI spillovers
Practical guidance (i): develop theory of change
Donor views on term ET • Common understanding amongst donor agencies of definition of BE (most refer to DCED guidance) • Marked variability in donor agencies wrt definition of ET: • Gradual long-term process vs large immediate or disruptive change. • (Broad- based) productivity change vs ‘inclusive’ / ‘jobs - rich’ economic development • Structural change between sectors vs within-sector transformation. • Competitiveness vs productivity and diversification • Some agencies have ET as core objective implicitly and explicitly (eg DFID or GA), for other it is a core component (eg WB/IFC, USAID), eg in targeting competitiveness, but not same
Donor experiences in promoting ET (through BER) • Many projects (eg. by GIZ, USAID) implicitly include transformation objectives or have an impact on ET without acknowledging; but projects that explicitly targeting ET (eg DFID’s InvestAfrica). • But those that target ET have a rounded view, e.g. • “concentrate governance expertise on reducing critical market failures in transformational sectors, focusing on the minimum reforms needed” • “cross -cutting capabilities and development of checks and balances within and around governments to ensure markets function effectively”.. “greater capacity expected of governments” … “BER is useful but not sufficient” … “BE reform from a sector -specific perspective, where constraints to the sector- specific BE are restricting growth” … “focus on sector-specific political economy factors and coordinate actors around the sector • Full integration between BER and ET (few), overlapping and related BER and ET (some), distinct programming areas (several), or none at all (also some)
General donor challenges in implementing BE and ET • Lack of mandate to pursue ET as an objective • No definition of ET in use • Inadequate knowledge management systems on what works • Short-term programming cycles vs. the long-term processes • Lack of understanding the ToC on ET reaching the (poorest of the) poor • Failure to work effectively with government • Failure to address coordination failures and vested interests • Lack of iterative and portfolio approach to BER and ET
Overcoming constraints to donor challenges • To overcome lack of mandate or definitions , agencies can draft concept notes or White Papers. • Improve knowledge management around ET • Agencies can overcome coordination challenges and lack of flexibility within their own agencies . • Agencies can actively overcome coordination challenges and vested interests by working with staff on the ground.
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