Investment climate (IC) reforms are regulatory reforms that promote private sector growth by reducing bureaucratic obstacles, costs and time constraints to doing business and improving the efficiency of legal institutions (World Bank 2015). IC reforms may be particularly beneficial for small firms, which face the highest costs of doing business relative to their sales (World Bank 2015).
The evidence on whether IC reforms lead to private sector development and more effective state-business relations is weak and contested (Cox 2008, Aboal et al. 2012, Booth 2014). For example, Bah and Fang (2015) use a model-based approach to show that businesses in Africa lose large shares of their sales due to government regulations, poor infrastructure, corruption and crime, leading to lower output and productivity growth. On the other hand, Altenburg and von Drachenfels (2006) argue that IC reform is based on unrealistic assumptions and is not backed by sufficient empirical evidence. An important but under-studied aspect of investment climate reform is the integration of gender issues into the investment climate agenda. This can reduce gender barriers, unleash the untapped productive potential of women, and broaden both the economic impact and sustainability of policy interventions (Simavi and Manuel, 2010).
Moore and Schmitz (2008) argue that traditional IC reforms are undertaken with the assumption that there are impersonal arms-length relationships between state and business actors. In reality, in most low income countries, synergistic state-business relations tend to be personalised and “hand-in-hand”. They argue that reconstructing the relationship between investors and government, through interaction and experiential learning, rather than reforms of formal rules and regulations, are likely to yield higher returns in low income countries, as was witnessed in China in the 1980s, where informal institutional change preceded formal institutional reform.
The evidence on what works best in IC reform is limited, especially in fragile and conflict-affected states which are characterised by institutional and regulatory vacuums and/or extremely weak business environments. The evidence on donor-supported IC reforms is mixed and qualified (Manuel 2015). The evidence suggests that IC reform is not sufficient for growth but is broadly necessary, and reforms need to target genuinely binding constraints to have an impact (Besley 2015). This may be due to “isomorphic mimicry” where donors drive through institutional reforms that produce systems with the appearance of “best practice” solutions but without the underlying institutional reform that produces real improvements in capacity (Andrews 2013).
There is not sufficient evidence that alternate approaches to IC reforms such as “Doing Development Differently” (The DDD Manifesto 2014) have had greater success in private sector development and in contributing to the emergence of effective state-business relations. More evidence is needed on how IC reforms can contribute to effective state-business reforms, which reforms work best, and which parts of the private sector benefit most.
New approaches to designing IC reforms and commercial justice programmes
Uganda: The DFID Legal Assistance for Reform (LASER) programme attempted a set of reforms in Uganda’s commercial justice system. The entry point for engagement with the government was not large-scale institutional reform, but through a key initiative identified through purposive muddling: the Judiciary’s piloting of small claims procedures. This initiative had the potential to significantly improve access to commercial dispute resolution for micro, small and medium size enterprises. LASER personnel on the ground are working incrementally – first helping the judiciary to develop an M&E system for this initiative; then using this as a platform to work iteratively with local stakeholders to identify commercial justice problems for businesses and potential solutions; and then eventually, and if appropriate, to suggest a role for DFID Uganda to invest funds.
Mozambique: During an eight-month process, a small team from Harvard University facilitated a local justice sector stakeholder reform group to pinpoint and close gaps in capacity. Inter-agency tensions in the justice sector that had undermined the previous donor-supported project became identifiable and were, in some cases, addressed. Major data gaps and steps to close them were also identified, including ‘unlocking’ significant donor funds. Challenges experienced reinforced the importance of doing reforms step by step and constantly paying attention to legitimacy and authority issues. The result was to yield more potential functionality than had been achieved through five years in the preceding donor-supported project.
Source: Manuel (2015)
- The core principles of the “Doing Development Differently” approach are a) locally identified and defined problems provide the entry point (not large scale institutional reform), b) solutions and results are not “locked in” at the beginning of the programme, but instead are based on continuing, strategic political economy and context analysis, c) solutions are developed iteratively which can be adapted (or abandoned if unsuccessful), and d) solutions are not based on “best practice” from developed countries but instead “best fit” for the country context.
- Aboal, D., Noya, N. & Rius, A. (2012). The evidence of the impact on investment rates of changes in the enforcement of contracts. A systematic review. London: EPPI-Centre. See document online
- Altenburg, T., & von Drachenfels, C. (2006). The new minimalist state approach to private sector development: A critical assessment. Development Policy Review, 24(4), 387-411. See document online
- Andrews, M. (2013). The limits of institutional reform in development: Changing rules for realistic solutions. Cambridge: Cambridge University Press. See document online
- Bah, E., & Fang, L. (2015). Impact of the business environment on output and productivity in Africa. Journal of Development Economics, 114, 159-171. See document online
- Besley, T. (2015). Law, regulation, and the business climate: The nature and influence of the World Bank Doing Business project. Journal of Economic Perspectives, 29(3), 99-120. See document online
- Booth, D. (2014). Aiding institutional reform in developing countries: Lessons from the Philippines on what works, what doesn’t and why. London: ODI. See document online
- Cox, M. (2008). Security and justice: measuring the development returns – a review of knowledge. London. Agulhas Development Consultants. See document online
- The DDD Manifesto. (2014). Cambridge, MA: Building State Capacity. See document online
- Manuel, C. (2015). Investment climate reform doing it differently: What, why, and how. London: Legal Assistance for Economic Reform. See document online
- Moore, M., & Schmitz, H. (2008). Idealism, realism and the investment climate in developing countries (IDS Research Summary No. 307). Brighton: IDS. See document online
- Simavi, S., & Manuel, C. (2010). Gender dimensions for investment climate reform: A guide for policy makers and practitioners. Washington DC: World Bank. See document online
- World Bank. (2015). Doing business 2015: Going beyond efficiency. Washington, DC: World Bank. See document online