Friday, July 01, 2005
Governance Reform to Reduce Transactions Costs and Promote Private Sector Development
By: Paul Holden
For: The Center for International Private Enterprise, 2004
Over the past few years, opposition to reform has been growing in many developing countries. In particular, in Latin America, a series of crises has led to disillusionment regarding the ability of reform programs to bring prosperity. The Argentina crisis is only the most recent example of an early reformer experiencing severe crisis and halting or reversing earlier efforts. The policies associated with the "Washington Consensus", which involved privatization, trade reform and macroeconomic stability, is now viewed in many developing countries, as well as among many "activists" as having added to poverty in the countries where it was implemented. In some quarters, globalization is considered to be anathema - promoting the worst evils of capitalism. The proponents of such views claim that it has destroyed jobs in the industrial countries and has led to the exploitation of low paid workers in developing countries.
These views, however, are misguided and ignore the facts. Countries where there has been genuine reform have, in general, performed well. For example, per capita income growth in Chile, one of the deepest reformers among developing countries, was among the top four worldwide in the 1985 - 2000 period. In many cases, the countries that have experienced the greatest problems, and that are held up as examples of the failure of market oriented economic systems, are those where reform was incomplete, and there was a failure to follow through on initial reform efforts involving privatization and trade liberalization to ensure that markets worked effectively to allocate resources efficiently. Governance in the vital realm of economic activity failed to support market oriented reform, thus diminishing the impact of reform efforts and, in several cases, dooming it them to failure.
The theme of this note is that when governance is weak, the costs of transacting (in other words, the costs of doing business) rise. Without governance reform to promote private sector development, growth and prosperity will continue to elude most developing countries. The note commences with a discussion of transactions costs and the impact they have on the private sector. It outlines ways in which weak governance contributes to high transactions costs. It then discusses in some detail issues related to the reform of governance as it pertains to promoting private sector development. It gives two examples of successful governance reform that have had a strong impact on promoting growth and alleviating poverty in the countries where they occurred. It concludes that similar reform is the only option available for governments intent on promoting growth and development.
For: The Center for International Private Enterprise, 2004
Over the past few years, opposition to reform has been growing in many developing countries. In particular, in Latin America, a series of crises has led to disillusionment regarding the ability of reform programs to bring prosperity. The Argentina crisis is only the most recent example of an early reformer experiencing severe crisis and halting or reversing earlier efforts. The policies associated with the "Washington Consensus", which involved privatization, trade reform and macroeconomic stability, is now viewed in many developing countries, as well as among many "activists" as having added to poverty in the countries where it was implemented. In some quarters, globalization is considered to be anathema - promoting the worst evils of capitalism. The proponents of such views claim that it has destroyed jobs in the industrial countries and has led to the exploitation of low paid workers in developing countries.
These views, however, are misguided and ignore the facts. Countries where there has been genuine reform have, in general, performed well. For example, per capita income growth in Chile, one of the deepest reformers among developing countries, was among the top four worldwide in the 1985 - 2000 period. In many cases, the countries that have experienced the greatest problems, and that are held up as examples of the failure of market oriented economic systems, are those where reform was incomplete, and there was a failure to follow through on initial reform efforts involving privatization and trade liberalization to ensure that markets worked effectively to allocate resources efficiently. Governance in the vital realm of economic activity failed to support market oriented reform, thus diminishing the impact of reform efforts and, in several cases, dooming it them to failure.
The theme of this note is that when governance is weak, the costs of transacting (in other words, the costs of doing business) rise. Without governance reform to promote private sector development, growth and prosperity will continue to elude most developing countries. The note commences with a discussion of transactions costs and the impact they have on the private sector. It outlines ways in which weak governance contributes to high transactions costs. It then discusses in some detail issues related to the reform of governance as it pertains to promoting private sector development. It gives two examples of successful governance reform that have had a strong impact on promoting growth and alleviating poverty in the countries where they occurred. It concludes that similar reform is the only option available for governments intent on promoting growth and development.