The Hindu Business Line : WDR 2005 advice to govts — Reduce policy risks, costs and barriers to competition

THE annual World Development Report for 2005 has come to the conclusion that in order to accelerate growth and reduce poverty, governments must reduce the policy risks, costs and barriers to competition for all — from small farmers, local manufacturers to multinationals.

"A good investment climate provides opportunities and incentives for firms...to invest productively, create jobs and expand. It thus plays a central role in growth and poverty reduction," the World Bank has said making the point that improving the investment climate is critical for governments in developing countries where 1.2 billion people survive on less than $1 a day.

"Expanding jobs and other opportunities for young people is essential to create a more inclusive, balanced and peaceful world," said the report, issued ahead of the annual meetings of the World Bank-International Monetary Fund.

The Report, titled "A Better Investment Climate for Every one," has drawn on a survey of over 30,000 firms in some 53 developing countries; and policy related risks dominate the concerns of firms in these nations.

Uncertainty about the content and implementation of government policies is the top concern; implementation of government policies attracts similar concern with other significant risks including macro-economic instability, arbitrary regulation and weak protection of property rights.

For example, the World Bank Report points out that nearly 90 per cent of the firms in Guatemala and more than 70 per cent in Belarus and Zambia find the interpretation of regulation as unpredictable; more than 80 per cent of the firms in Bangladesh lack confidence in courts to uphold property rights.

"Improving policy predictability alone can increase the likelihood of new investment by more than thirty per cent," the Report has found. "Improving government policies and behaviours that shape the investment climate drives growth and reduces poverty," the World Bank says.

The Bank's Doing Business in 2005 Report is also pointing to the kind of substantial costs that would have to be borne by firms as a result of outmoded or ill-conceived regulation; and makes the argument that unreliable infrastructure, crime and corruption could even be worse than that of regulation.

For instance, the costs associated with unreliable electricity supply is over 10 per cent of sales in India and Kenya, crime takes a toll of about ten per cent of sales in Armenia and Peru and bribes take its share of sales in Cambodia and Nicaragua.

"Barriers to competition are also pervasive and dull incentives for firms to innovate and increase their productivity," the Bank says pointing to the fact that the level of composition of risks, costs and barriers to competition vary widely not only across nations but within countries as well.

"This is true among states and provinces in Brazil, China and India but also across locations in smaller countries. National and sub-national governments each have important roles to play in improving the investment climate."

Both China and India, along with Uganda, have come in for special mention as lessons to be learnt from countries that have tackled a broad agenda including making investment climate improvements — the bottomline being one of persistence, not perfection.

The Report points to many things that governments ought to, and can, do in the realm of changing policies but there are some challenges that national governments need to address if investment climates are to improve: coming to terms with corruption; enforcement of laws; building public support for policy improvements; and ensuring that lessons from others are not mechanically transplanted without critically looking at suitability.

The international community, too, has a role in the process and one of the things it can help is by removing trade restrictions; providing effective assistance and provide guidance in the implementation of policies, it is pointed out.