Promoting economic transformation through business environment - - PowerPoint PPT Presentation

Promoting economic transformation through business environment reform

Presentation to DCED BEWG Vienna, 11th 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

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

Page (2012) on Investment Climate ++: Infra, Inst, Fin Deep, Education IMF (2014) packages of policies:

General enabling actions Targeted action Public Actions to Support Structural Change

 business environment/investment climate reforms (e.g. registration, land, tax, contracts)  financial sector development  strengthening SBR  export push policies  exchange rate protection  selective industrial policies  spatial industrial policies  national development banks

Public Actions to Support within- sector Productivity Growth

 building fundamentals (e.g. infrastructure, education)  investments in basic production knowledge  managerial good practices as public goods  agricultural innovations  promoting competition  management training  attracting FDI  export diversification  developing GVCs  increasing agricultural productivity

POLITICAL ECONOMY!

Activities complementary to BER

McMillan et al. (2017) classify a range of public policies that can be used to support ET; 2*2 matrix

• General enabling vs targeted
• Aimed at transformational vs BAU activities

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
• wn agencies.
• Agencies can actively overcome coordination challenges and vested interests by

working with staff on the ground.

Practical guidance (ii)

Agencies need to go through a learning process to frame support for ET

• Consider importance of ET in development broadly, taking into account timeframes and different types of firms and households.
• Adopt a practical and commonly expressed definition of ET, which also indicates ET is a long-term process.
• Develop strategies and mandates inside development agencies to support ET

Agencies need to improve their understanding of the synergies between BE activities and ET

• Develop a theory of change around the role of BER in ET that considers
• lessons learnt from existing BE activities on the way BER already supports ET
• targeting transformative activities in specific contexts, by analysing which economic activities are expected to have the largest

transformational impact (e.g. Table 1)

• prioritisation of BE components that are crucial/binding constraints to ET in that context, based on evidence
• a mutually reinforcing role of BER, ET promoting and other complementary activities, including provision of finance, infrastructure,

capacity-building and other policies. Agencies need to follow a set of practical steps to implement BER in ways that also promote ET

• Consider the political economy upfront, by working with appropriate partners to build long-term coalitions for ET.
• Work with public officials, firms and other change actors in-country to prioritise action for ET.
• Help improve coordination across national and development agencies relevant to the specific context.
• Incorporate monitoring, evaluation and learning into BER support activities from the start to enable adaptive programming
• Support feedback loops from evidence to redesign and implementation.

Practical guidance (iii), possible questions for MEL

• Does the strategy have clear objectives in terms of ET?
• If the strategy includes clear objectives to promote structural change, within-sector

productivity growth and diversify production and trade, and are these translated into the results framework?

• Are pathways to ET a core element of the strategy (horizontal interventions such as BE,

education and training, new technology and innovation, high-value services and export manufacturing, value chains, trade facilitation, urbanisation and special economic zones)?

• Does the strategy prioritise moving to higher-wage or more productive employment as a

key motivation for ET?

Future research on BER and ET

Adapting McMillan et al. (2017a)’s analytical agenda:

• Understand how the country has transformed over time, and what the likely

transformational activities

• Understand main economic and political blockages to further ET, which includes an

understanding of the deep-rooted factors behind a weak BE.

• Analyse role of different combinations of policies given a specific political economy

(emphasising solving coordination challenges), involving BE activities and complementary factors.

• Analyse specific practical suggestions for implementation, including on BE activities.

Examples from SET research on complementarities BE and ET activities

• Kenyan manufacturing: Targeted BE reforms (construction permits, paying taxes and registering

property), and complementary activities (skills, finance and energy and targeted ET policy around exports, innovation and SEZs)

• Transformation in Tanzania: investment climate reform (targeted at energy governance, labour

and trade taxes, starting a business and developing a public–private partnership unit) and infrastructure corridors, technical and organisational skills development, tax reform and developing priority SEZs.

• Mozambique’s transformation needs to be supported by addressing constraints in the regulatory

framework (in investment policy, trade facilitation, financial sector reform and land policy) complemented by better transportation infrastructure, dialogue with business and targeted sectoral policies to make better use of mega deals.

Conclusions and next steps

• Different experiences in using ET, but this needs to be more wide spread given

importance.

• Donors to consider
• Definitions
• ToCs – how does BE fit in?
• Practical guidance on BE for ET
• Learning on BE for ET
• Toolkits

SOURCE:

What is happening?

Economic transformation diagnostics

How to make it happen

Practical policy advice

What should be done?

Economic policy analysis

SET APPROACH TO ECONOMIC TRANSFORMATION

Why is this happening?

Political economy analysis

• 1. What. Transformation potential (i) between sectors: (ii) within sectors; and (iii) within
• firms. Greater opportunities (differentials) at low incomes. Window of opportunity

(China / automation). Usually a consensus exists on promising sectors.

• 2. Why. Constraints to ET are often economic are political.
• 3. What next. Policy options consider general enabling and targeted, and distinguish

between more-of-the-same vs. transformational.

• 4. How. Functions, implementation, political economy Ansu et al. (2016b)
• Economic transformation as a shared nation-building project.
• Effective lead agency with sufficient autonomy, budgetary control and political

authorisation

• Institutional arrangements that coordinate a set of powerful public and private actors
• Discovery through explicit experimentation, good feedback and timely correction.

Lessons from SET work in 10 Asian and African countries