Improving the business climate in developing countries: A realistic goal or another holy grail?

This blog was originally posted by Platform OiO (Ondernemen in Ontwikkelingslanden), a digital platform that provides information about doing business in new markets to Dutch entrepreneurs. This article by Paul Engel and Bruce Byiers is the first in a series of four guest blogs by external people on the 'Ondernemen in Ontwikkelingslanden' website.  The Dutch policy in support of private sector development in developing countries puts the private sector where it ought to be: at the Centre. But it also demands that businesses take responsibility beyond their own development. It does so in three ways: i) it strongly qualifies ‘growth’, ii) it builds on broad partnerships between private sector, governmental and non-governmental organizations and, iii) it makes improving the business climate in developing countries a first priority. By qualifying growth, it recognizes that not all growth translates into development, that is, more opportunities for poor and vulnerable people to build a decent life for themselves. By insisting on broad partnerships between private, public and non-governmental partners the policy brings together the finance, knowledge, capacity and networks needed to achieve sustainable and inclusive business transformation. It turns ‘business as usual’ into ‘business for development’. A ‘sound business case’ then includes turning a profit, eventually, but not without contributing to the achievement of well-specified (local) development objectives. In this sense the Dutch policy clearly anticipates the emerging Sustainable Development Goals agenda. ‘Good’ means aiming at creating more and better jobs, with more value added in developing countries, with more sustainable production, distribution and consumption, all at the same time. Rightfully, it puts strong emphasis on improving the business climate, in order to eliminate (some) of the ‘institutional imperfections’ (including market imperfections) and ‘externalities’ that for so long have stood in the way of sustainable, locally owned and locally rooted economic development. Particularly for small and medium-size companies the business climate is the public space in which they have to operate: if it isn't safe and conducive to doing business, there is nowhere else to go. Cf. World Bank’s ‘Ease-of-doing-business’ index: “Ultimately, Doing Business is about smart regulations that only a well-functioning state can provide. The secret of success is to have the essential rules and regulations in place—but more importantly to have a good system of clearing decisions quickly and predictably, so that small and ordinary businesses do not feel harassed.” [1] All this said, putting this Dutch private sector development policy into practice is a formidable challenge, exactly because it intends to tackle the institutional and market imperfections that have put the brakes on pro-poor economic development for so long. In every country, some firms benefit from the existing imperfections, and they will defend their privileges. And many consider social and environmental costs as ‘externalities’ for a reason: to take them into account may increase costs of production, distribution and/or the risks one takes; there are those who resist that as well. Besides, the political economy of development never produces only winners; there will always be losers too. Even if we speak of achieving win-win situations, somewhere along the line somebody will lose, particularly among those who benefitted in the past and are as yet unwilling or unable to be stakeholders of a more inclusive and sustainable future. The Abidjan-Ouagadougou Corridor: reforms create winners and losers. In order to improve the performance of the Abidjan-Ouagadougou Corridor, the World Bank proposed transport sector reforms. These reforms essentially aimed at formalizing ('professionalizing') the transport sector, through making higher demands on transporters in terms of regulatory compliance and an electronic system to distribute merchandise out of ports, to replace the syndicated first-come-first-served system currently in place. ECDPM was asked to study the political economy behind the reform in order to identify whom the winners and losers would be, and what kind of power they had. One obvious group of losers was the informal transporters who are in fact organized in syndicates that work closely with Shippers Associations to manage the link from port to road transport. Therefore, any reforms along the lines of those proposed by the World Bank needed to be adapted, either to somehow include these informal operators in future operations - by facilitating access, driving instruction, licenses, credit for acquiring better trucks, or by some other way of compensating or offsetting the potential political risk of many thousands of upset truckers who make their livelihood in this way. [2] The need to deal with winners and losers introduces a distinctly political dimension to international cooperation on trade and development. It means that partnerships aiming at improving the business climate necessarily relate to the political power struggles behind the local and/or national transformations they are pursuing. Is Dutch policy equipped for that? Is regular political dialogue between the Netherlands and partner country governments foreseen to agree on joint objectives, coordinate specific measures to be taken, and if necessary, to resolve political differences? A robust system of political dialogue in support of the more transformative actions foreseen in the private sector development policy seems to be missing. So then it is up to the partnerships themselves. Are our partnerships equipped for dealing with the political dimensions of private sector development? Are local partners well enough integrated and strong enough to help resolve such situations? Can partnerships achieve solutions that are sustainable and inclusive under pressure from different interest groups? And are they able to mobilize the necessary political support for such solutions? This underlines an essential element of putting Dutch private sector development policy into practice: if necessary, is the Netherlands willing and able to provide political backing to the partnerships when they run into institutional and market ‘imperfections’ they can’t deal with on their own? And how strong a political support will the Netherlands, with its partners, be willing and able to muster? In summary, the Dutch private sector development policy provides a promising framework for combining sustainable and inclusive development with success of Dutch companies. It invests in broad partnerships with local and national organizations to mobilize the relevant knowledge and know-how to design and implement adequate business solutions and aims at improving the overall business climate. However, it risks underestimating the political dimensions of what it asks its partnerships to engage in. For transformations to be achieved in practice, more attention to the political economy of change, a more robust system for political dialogue and, greater awareness of the need for occasional political backing of the partnerships seems necessary. [1] Kaushik Basu, Senior Vice President and Chief Economist, The World Bank, Washington, DC: In his Foreword to Doing Business 2015: Going Beyond Efficiency [2] Byiers & Vanheukelom (2014), mimeo The Political Economy Road Transport Reforms along the Abidjan-Ouagadougou Corridor. ECDPM, Maastricht The views expressed here are those of the author, and not necessarily those of ECDPM.