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Better Institutions Key to Poverty Reduction in Africa and Around the Globe

Press Release No:2002/074/S

Ana E. Luna (202) 473 2907
Miriam Razaq (202) 458 2931
Cynthia Case McMahon (TV/Radio) (202) 473-2243

WASHINGTON, September 11, 2001--Weak institutions – tangled laws, corrupt courts, deeply biased credit systems, and elaborate business registration requirements – hurt poor people and hinder development, according to the World Development Report 2002: Building Institutions for Markets. The new World Bank report says that countries which systematically address such problems and create new institutions suited to local needs can dramatically increase incomes and reduce poverty.

"Without effective institutions, poor people and poor countries are excluded from the benefits of markets," says World Bank Chief Economist and Senior Vice President Nicholas Stern, who oversaw preparation of the report. "This report offers principles for reform based on the experience of people around the world who are grappling with the challenge of building more effective institutions."

Complex, Inefficient Institutions a Common Problem

Complex and inefficient institutions are a common problem, especially for poor people in poor countries. Many African countries have extremely complex and time consuming business entry procedures which can lead to higher corruption and larger unofficial economies. In Mozambique, for example, registering a new business requires 19 steps and five months, and costs more than the average annual income. By contrast in Zimbabwe it takes 5 steps, 47 days and costs 13 percent of the average annual income.

"Overly complex regulations are especially problematic in poor countries," says Roumeen Islam, director or the World Development Report 2002. "Despite some successful reforms in the Africa region, many countries are left out of market opportunities because of overly complex rules and regulations. For markets to work for everyone, further simplification of institutions and more emphasis on innovative programs that complement existing informal systems are needed."

The report finds that simplifying judicial procedures can increase efficiency without sacrificing fairness. Alternative conflict resolution systems, such as those based on social norms, also can improve poor people's access to legal services. For example, in Senegal it takes 450 days to enforce a judgement on debt collection, in Ghana it takes only 18 days.

"To settle disputes that arise out of normal business transactions, people need access to efficient courts and judges that are accountable," says Islam.

Learning from Success

The report presents an analytical framework based upon careful analysis of the details of institutional design at the micro level. These include new surveys of legal systems, business regulations, and media ownership in around 100 countries.

Based on this research, the report argues that all market-supporting institutions perform one or more of three functions: they ease or restrict the flow of information; define and enforce property rights and contracts; and increase or decrease competition. It finds that reforms and innovations have been most effective when they address these needs in ways that are compatible with country conditions and increase access for the poor. For example:

In many countries, legal systems do not serve the needs of poor people, who are unable to pay legal fees or read complex judicial documents. The simplified steps in a specialized commercial court in Tanzania cut the average time to disposition from 22 months to 3 months. South Africa, Zimbabwe, Zambia, Nigeria and Uganda along have established small claims courts that rely on simplified, sometimes merely spoken, procedures. The simpler procedures resolve disputes faster and at lower cost than the regular courts.

Land titling procedures are often too costly and complex for the poor to access. Yet without clear title to their land, poor farmers are unable to offer it as collateral and may be discouraged from investing in improvements, such as better drainage or irrigation. Although land titling can improve access to credit, this is not sufficient without the existence of complimentary institutions. In Kenya, for instance where banks were prevented from foreclosure, loans to farmers were not made despite the existence of formal titles.

Infrastructure standards and regulations typically exclude small entrepreneurs who lack the capital or technology required. Yet it is precisely these business that are likely to offer the lower cost services for the poor. In Senegal, small private enterprises rent telephone lines from the national operator and run telecenters for local households.

The report points out that whether a particular institution is appropriate in a country depends on supporting institutions, available technology and skills, the level of corruption, and the costs of accessing and maintaining the institution.

It also found that open information flows increased public demand for more effective institutions, thus improving governance and social and economic outcomes. Analysis of ownership structures in 97 countries found that state owned media tend to be less effective than private media in monitoring government. Countries with more prevalent state ownership of print and broadcast news outlets tended to have fewer political rights, higher corruption, inferior economic governance, less developed financial markets, and worse education and health (see figure).

Countries that have reduced government ownership of the media have often experienced rapid improvements in the amount and quality of coverage. State ownership of the media in Africa is very high compared with other regions – on average 3 out of the top 5 newspapers and 4 out of the 5 top television stations are controlled by the state in the region. Many African countries have tight regulations on the press, such as insult laws and restrictive licensing regulations. However some governments are taking steps to abolish the more restrictive media regulations. For example, in Kenya, investigative journalists from a privately owned newspaper uncovered evidence of corruption in Kenya's Ministry of Health. The press revealed these findings which eventually led to the dismissal of the minister. In Ghana, introduction of a new privately owned television station in 1997 led to more information being reported on government activities as well as a more open evaluation of government performance.

One Size Doesn't Fit All

Learning from the success and failures of other country's experiences in institution building can provide valuable guidance. But copying institutional models without considering whether they are needed by those they are supposed to serve, and the capabilities of governments and citizens, can waste scarce resources, the report says.

For example, in the early and mid-1990s, Gambia and Zambia tried to establish stock markets by building stock exchanges and training people to staff them. However, there were so few listed companies and so little trading that the exchanges could not generate the fees to be self-sustaining. With hindsight, it is clear that conditions were not yet ripe for the creation of stock markets and the effort would have been better spent on other needs, such as improving accounting and information systems.

"In the development business there is a tendency to label approaches that have worked well in one or more countries as "best practice" and then try to transplant these to other countries," Islam says. "When it comes to institutions, one size doesn't fit all."

The report summarized its recommendations in four principles to guide policymakers in building more effective institutions:

· Complement what exists: The design of any single institution should take into account the nature of the supporting institutions, skills, technology and corruption. Costs of building and maintaining the institution must be commensurate with per capita income levels to ensure access and use.

· Innovate: Institutions are not immutable. Be prepared to experiment with new institutional arrangements and to modify or abandon those that fail.

· Connect: Connect communities through open information flows and open trade. In particular, the exchange of information through open debate creates demand for institutional change.

· Promote competition: Foster competition between jurisdiction, firms and individuals. Competition creates demand for new institutions, changes behavior, brings flexibility in markets and leads to new solutions.

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