The Hindu Business Line : World Development Report — An agenda for peace and prosperity

AS ECONOMIC growth is the only sustainable way to raise a society's standard of living, the wherewithal to achieve this assumes overarching priority in any development strategy. Pertinently, this year's World Development Report (WDR), the annual World Bank publication, focusses on how to ensure a better investment climate that benefits society as a whole, not just firms, and also one that embraces all firms, not just large or politically savvy or connected ones.

Predicating its premise on how a good investment climate spawns opportunities and incentives for firms — from micro-enterprises to multinationals — to invest productively, create jobs and expand, the WDR contends that improving the investment climate is critical for the developing world, where 1.2 billion people survive on less than a dollar a day and where the unemployment rate is rampant. While looking at what governments at all levels can do to foster a better investment milieu, the WDR concedes that they have limited say on such factors as geography, but have a decisive influence on the security of property rights, approaches to regulation and taxation (both at and within the border), the provision of infrastructure, the functioning of finance and labour markets and the broader governance features such as corruption. Hence, improving government policies and behaviours that shape the investment climate drives growth and reduces poverty.

As a salutary investment climate encourages firms to invest by removing unjustified costs, risks and barriers to competition, the WDR argues that following investment climate improvements in the 1980s and the 1990s, private investment as a share of GDP nearly doubled in China and India. The World Bank President, Mr James D. Wolfensohn, in a foreword to the 270-page WDR, singled out China and India as providing "compelling examples" where investment climate improvements have driven growth and "the most dramatic reductions in poverty in history". Yet, the WDR concedes, it is not just the volume of investment that matters for growth, adding that it is the resultant productivity gains. Hence, a good investment climate encourages higher productivity by providing opportunities to firms to develop, adapt and adopt better ways of doing things — not just innovations that gain a patent but also better ways to organise a production process, distribute goods and respond to consumers.

To accomplish this, required are low barriers to the diffusion of new ideas, including barriers to importing modern equipment and adjusting the way work is organised. An environment that fosters the competitive processes, which the celebrated development economist Joseph Schumpeter christened "creative destruction"— an environment in which firms have opportunities and incentives to test their ideas, strive for success and prosper or fail. In essence, the Bank contends that a good investment climate makes it easier for firms to enter and exit markets in a process that contributes to higher productivity and faster growth. The Bank unequivocally underscores the point that successful reforms remove unjustified burdens and streamline procedures. They reduce regulatory uncertainty and risk by curbing discretion and expanding consultation. And they remove unjustified barriers to competition by reducing regulatory barriers to entry and exit and by tackling anticompetitive behaviour by firms.

Lest this advocacy of removal of labour market rigidities that characterise the economies of developing countries including India should draw flak from entrenched vested interests which are opposed to ending entry and exit barriers in the labour market, the WDR has espoused the cause of the micro-entrepreneurs who dot the developing world job landscape.

According to the WDR, hundreds of millions of poor people in developing countries make their living as micro-entrepreneurs — as farmers, street vendors, home-workers and in a range of other vocations. They often operate in the informal economy and face many of the constraints as other firms including insecure property rights, corruption, policy unpredictability and limited access to finance and public services. Instances abound of roadside vendors being harassed by the law machinery or of the fleecing of self-employed by mandarins of local bodies. Hence, the WDR thinks that easing these constraints would increase incomes for entrepreneurs and allow them to expand their activities. A good investment climate also acts as an incentive to become part of the formal economy by these informal agents.

The Left parties, supporting the United Progressive Alliance (UPA) Government, should derive comfort from the latest WDR replete as it is with measures focusing on poor people and marginal entrepreneurs or street vendors that could vastly improve the investment climate, even as the Washington Consensus or policy-based lending prescribed by the World Bank still remain anathema to the Left. The Bank said improving infrastructure, property rights and finance can deliver benefits across the community. Building rural roads helps firms get goods to market and in Morocco also increased primary school enrolment from 28 per cent to 68 per cent.

Providing more secure rights to land encourages farmers and other firms to invest and could ease their access to finance. Improving the functioning of finance markets helps firms take advantage of promising investment opportunities and also helps poor people weather family emergencies, educate their children and improve their homes. The WDR, in a refreshing departure from its harsh pabulums of the past, maintains that governments could design those investment climate improvements to be even more "pro-poor" by targeting constraints where poor people live and constraints to activities poor people benefit from, including in their capacities as employees, entrepreneurs and consumers. This means, the WDR avers, that pro-poor approaches are not confined to efforts that focus on constraints that confront only small firms.

As countries remain content with one burst of reforms with countries considering early rounds of economic reform as one-off events. But investment climate improvements entail an ongoing process of policy adjustment and fine-tuning across a wide domain, the Bank said citing management guru Michael Porter who suggested that reforms in this area are a marathon, not a sprint. Noting that even this assessment might understate the task on hand, the Bank states that global experience provides insights abut the essential elements of reform processes in this area: setting priorities, managing individual reforms, maintaining momentum and reinforcing government capabilities.

The WDR also takes a dig at selective intervention by governments the world over with some conferring special policy privileges on targeted firms or activities. Those privileges take many forms: Market restrictions, tax breaks, access to subsidised credit and a range of other measures. The Bank cautions that selective interventions should not be viewed as a substitute for broader investment climate improvements. It said the hazards of selective interventions could be alleviated at least by ensuring that "schemes have a clear objective and rationale, focus on the sources of problems rather than symptoms, match the instrument to the rationale, impose discipline on their beneficiaries, are administered transparently and are reviewed regularly".

Beyond suggestions for improveming the investment climate in developing countries, the Bank wants the global community help developing countries in mainly three ways: By removing distortions in developed countries that harm the investment climates of developing countries; by providing more and effective assistance; and by tackling the substantial knowledge agenda. The trade and market distortions created by policies in developed countries impose large costs on their own economies besides undermining opportunities for firms to invest in developing countries.

It is estimated that removing trade protection and related distortions in developed countries could provide gains to developing countries of $85 billion by 2015 or more than four times the assistance currently doled out for investment climate improvement by these countries.

As ameliorating the lot of the poor has much to do with ensuring high economic growth, improving the investment climate holds the key and in this respect all the stakeholders of the global economy — the developed and developing countries — have a moral responsibility to ensure that they all do help themselves to help the world secure peace and prosperity. That is the nub of this year's development report, which painstakingly marshals facts and arguments to make this point plain and ring plausible.