Economic growth is essential to reducing poverty in developing countries. An efficient, dynamic and growing private sector is the only way to achieve this. But what can governments in developing countries do to help the private sector flourish? Drawing on examples from across the globe, this book argues that government policies can often be the problem rather than the solution. In many cases the best governments can do is just get out of the way.
State-owned enterprises are often chronically mismanaged in developing countries. Private markets also have weaknesses that governments in developing countries are often unable to deal with. International experts tend to recommend sophisticated policies to promote privatisation and address market failures that governments in poor countries cannot implement. This book recommends policies to improve the business environment that governments in poor countries are more likely to implement successfully.
The link between the development of the private sector and poverty reduction is obvious and indisputable, yet much debate plays down this role. Most importantly, competition in open markets ensures firms are well-managed, efficient and produce quality products at reasonable prices. In addition:
- International aid is increasingly conditional on economic policies advocated by international institutions. Yet receiving governments are often fundamentally incapable of implementing these policies.
- Corruption, incompetence and the pressure of special interest groups are primary obstacles to effective aid dissemination and economic policy implementation.
- Focusing on goals of transparency, accountability and social responsibility for large companies is misguided. This is asking companies to behave like the previous failing state-owned enterprises.
- Economic growth may benefit the rich most, but the poor benefit proportionally. Growth has already reduced world poverty. Equal poverty is not preferable to unequal poverty.
The real issue for governments is to create an effective business environment. Any privatisation of state-owned enterprises is generally better than none, and quick privatisation with minimal government influence is often the best approach in poor countries. The following economic policies may be successfully implemented:
- The objectives for privatisation are often many and confused. The first objective of privatisation must be economic efficiency and development of the economy.
- Best practice for privatisation is to sell 100 per cent of each company in an entirely open auction to the highest cash bidder. There should be no restriction on how bidders would operate the company (within the law).
- State owned banks are often badly mismanaged and must be quickly privatised or shut down. However, there will be obstacles from politicians, business groups connected to politicians and labour unions.
- Governments must still regulate private banking systems. They should encourage foreign banks and introduce information disclosure about banking practice but should not introduce government guarantees or deposit insurance.
- Rich countries provide a range of responses to bankruptcy. Yet poor governments are likely to do a bad job of restructuring companies and should restrict their input to swift liquidation of bankrupt companies.
- A government priority must be to reduce the obstacles to competition, which primarily come from within government. Competition laws and agencies are likely to be counter-productive in weak states and should be avoided.
