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| REGULATORY REFORM AND POVERTY REDUCTION |
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Clients: World Bank, Asian Development Bank
Jacobs and Associates has worked to develop an understanding of how regulatory reform can best contribute to a strategy of poverty reduction in developing economies. Our work in Mauritania and Senegal in 2002 focused on ththe connection between regulatory practices and poverty reduction.
In a discussion note prepared for the Asian Development Bank, “The role of regulatory reform in poverty reduction”, Jacobs and Associates noted that poverty afflicts almost 900 million people in Asia, and considered how a program of market-oriented regulatory reform can promote broad-based economic growth in ways that improve the distribution of income and assets within a society and reduce the risks and costs of growth for the poor. We believe that a skillful use of regulation, deregulation, and institution building can boost the social benefits for the poor of any major development program involving structural adjustment.
We explained that regulatory reform in a developing economy is not essentially a deregulatory task, but a mix of new regulation, deregulation, and re-regulation, backed up by legal and institutional reforms, to support increasingly competitive markets. We asked how regulatory reform can contribute to higher incomes for the poor; to better access to vital services taking into account pricing, quality, and quantity; to more responsive and transparent governance; and to appropriate control and pricing of negative externalities.
Our discussion note identified several ways in which a regulatory reform program can contribute to a national poverty reduction strategy:
Stimulating economic growth and consumer income. |
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- Within the right institutional framework, regulatory reform can stimulate growth by enhancing market competition and thereby improving incentives, encouraging investment and innovation, and boosting productivity. But what kinds of regulations and institutions are likely to have the greatest impact on pro-poor growth in developing economies?
- Entrepreneurship and SME development programs are key to many developing economy strategies. Regulatory aspects can be critically important in encouraging the emergence of new business and employment opportunities.
- To create jobs for the poor, labor markets should be more flexible. Poor economies often suffer from rigid regulations in labor markets.
- Regulatory reform can improve the climate for foreign direct investment. The regulatory framework in the economy has to be attractive, especially with regard to transparency, predictability, and responsiveness.
- Regulatory reform can help pass-through the gains of growth to poor consumers by promoting healthy competition and transparency, thus reducing rents in the market and market abuses; by increasing producer responsiveness to consumer demands; and by stimulating investment and innovation. Changes in ownership through privatization are not enough, since producers or other groups can easily capture gains from market reforms if competition is weak.
- Regulatory reform can help manage economic downturns to minimize their impact on the poor. As the 1997 Asian financial crisis showed, economic crises mean sudden increases in poverty, and the effects are long lasting due to reduced investor and consumer confidence. Experience suggests that the direct and indirect effects of sectoral reforms increase flexibility in the product and labor markets. These effects allow economies to adapt more quickly to changes in technology and to external shocks, improve the trade-offs between inflation, growth, and unemployment, and reduce vulnerability to crisis.
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Regulatory reform and the informal sector |
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- Reducing the size of the informal sector is a policy goal in many economies, yet the role of regulatory reform must be carefully assessed. When government regulations are anti-competitive and inefficient, the informal sector may be the only feasible alternative to unemployment. In fact, governments may want to promote small informal family-owned shops that create jobs for the very poor. How can regulatory reform contribute to reducing the informal sector by making it easier and more profitable to enter the formal economy?
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Managing negative externalities from growth and filling gaps in regulatory protections |
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- Market-based measures can also make the poor worse off if negative externalities such as environmental degradation increase, or if the ending of subsidies leads to price increases for vital services such as water and energy. These legitimate concerns should be addressed within a comprehensive market liberalization program. Regulatory strategies for tariffs, USO financing, and environmental and labor standards can mitigate these negative effects.
- Regulatory reform can help build government capacities to ensure adequate levels of protection in competitive markets. Growth at any cost is no longer an acceptable development plan. Many economies suffer from too little regulation, poor enforcement, and under-institutionalization in many policy areas, including consumer protection, safety and health, environmental quality, and IPR.
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Improving access to basic services and releasing resources for social spending |
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- Regulatory reform can improve access to basic services such as education, health, water, communications, transport, energy, and housing. Yet creating efficient markets in the utility sectors in poor economies is harder than in developed economies, partly because the sheer magnitude of universal service obligations will distort competition and pricing.
- Regulatory reform can free up wasted resources for pro-poor services. Private investment in infrastructure projects that are properly regulated can relieve pressure on public budgets and, thus, enable governments to redirect more resources to social spending.
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Good governance: Improving the rule of law, transparency, and responsiveness in economic management |
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- Regulatory reform also involves questions of governance. Regulatory responsiveness and transparency can also support pass-through of the gains from growth to the poor.
- Improving transparency in regulatory decisions and application is a high priority because it helps to cure many of the reasons for regulatory failures -- capture and bias toward concentrated benefits, inadequate information in the public sector, rigidity, market uncertainty and inability to understand policy risk, and lack of accountability. Simplification can reduce opportunity.
- Regulatory reform is a core component of building up the rule of law. When checks and balances, such as an effective judiciary to ensure application of the rule of law and efficient dispute resolution procedures between the state and market entities, are weak, the capacity of outsiders to challenge market insiders is reduced.
- Regulatory reform can reduce corruption. Poor and inadequate regulatory structures permit abuses and corruption to flourish in emerging markets, undermine investor and consumer confidence, and destroy rather than create economic value. Regulatory reform that improves accountability and transparency and that reduces government intervention will reduce some forms of corruption.
- Regulatory reform, properly carried out, can help create allies for and speed up beneficial change.
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Regulatory Reform and Poverty Reduction in Senegal and Mauritania
Client: The World Bank
Both Mauritania and Senegal have enjoyed creditable growth and more stable political systems in recent years, but their progress in building a dynamic and innovative private sector that will lay the groundwork for sustainable growth is disappointing. Market liberalization and private sector growth have not yet produced many tangible benefits. The informal sectors are still dominant in both countries. In fact, poverty increased in Senegal even as the economy grew. The lack of private sector development is partly due to barriers in the business environment, to systemic market abuses, and to the weakness of the regulatory and institutional frameworks for market competition in those countries.
At the request of the Africa Region of the World Bank, Jacobs and Associates assembled a team of experts to work with the governments of Senegal and Mauritania on regulatory reform, market performance, and poverty reduction: |
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- We developed, in consultation with the governments, a framework for a broad-based review of structural and regulatory reforms, including the environment for SME formation and growth, the transition from the informal to the formal sector, the capacity of the governments for transparent rule-based governance of the private sector, the role of market openness and competition policies, and selected sectoral issues in energy, telecommunications, and transport;
- We reviewed the past reforms and their results, and current plans for private sector development as part of the overall poverty reduction strategy, and placed these reforms in the context of the macroeconomic history and government development priorities;
- We fielded teams on the ground in both countries, and conducted dozens of interviews with government officials, private sector representatives, and donors, including reviewing laws and regulations.
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After a broad review, we found "The legacy of interventionist and inefficient rules and practices inherited from previous economic policies is still prevalent, and many policies of the state continue to be captured by private interests. The domestic policy environment is hostile to private enterprise start-ups, investment, and innovation. The informal sector, where the country's entrepreneurial energies are emerging, faces daunting constraints on productivity growth for both capital and labor." |
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- We proposed a menu of targeted reform agendas to improve private sector development and promote each country's poverty reduction agenda;
- We reviewed key draft laws and regulations and advised on improvements from the perspective of private sector development.
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