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Better Institutions Key To Poverty Reduction In East Asia And Around The World

Press Release No:2000/074/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 countries that systematically deal with such problems and create new institutions suited to local needs can dramatically increase incomes and reduce poverty. These institutions range from unwritten customs and traditions to complex legal codes that regulate international commerce.

"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 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. In Vietnam, for example, registering a new business requires 16 steps and 112 days, and costs 112% of average annual income. In the Philippines, it takes 14 steps, 46 days and costs 19% of average annual income. By contrast entrepreneurs in Hong Kong can register their business in 5 steps, 15 days, at 3% of average annual income, while registering a new business in Australia requires only two steps, two days, and two percent of the average annual income per capita. In Thailand, resolving a dispute over a returned check can take over 210 business days; in Singapore it takes just 35 days.

"Overly complex regulations are especially problematic in poor countries," says Roumeen Islam, director of the World Development Report 2002. "Rather than protecting consumers and businesses, these regulations lead to higher corruption, a diversion of energy, and lower productivity."

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 Bangladesh a non-governmental organization offers women free mediation services that settle most village disputes in under two months, compared to three years for a similar case in court.

"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 meet these needs in ways that are compatible with country conditions and increase access for the poor. For example:

In many countries, legal systems fail to serve the needs of poor people, who are unable to pay legal fees or read complex judicial documents. El Salvador, Thailand and Uganda have established small claims courts that rely on simplified, sometimes merely spoken, procedures. Small claims courts are also popular in Japan and in Hong Kong (where it only takes 4 weeks from filing a case to its first hearing).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. In Thailand, for example, 35,000 squatter families living on encroached forest reserve land were provided with occupancy certificates that could be upgraded to full land titles, through a land reform project in the 1980s. Studies have found that these efforts have encouraged significant productivity-increasing investments and greater access to credit.

Corporate governance is difficult in poorer countries because of weak legal systems and the lack of private intermediaries. In this situation, concentrated ownership structures and business groups and associations (such as the Korean chaebol, Japanese keiretsu) may provide more effective corporate oversight than dispersed ownership structures (while legal systems and information intermediaries are developed). Business groups, however, can have costs. Experience, including in East Asia, has shown that the benefits of business groups are maximized when there is domestic competition, open trade and capital markets.

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.

The authors 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. Ownership structures vary dramatically in East Asia, ranging from diverse private media in the Philippines (with a history of exposing corruption), to full state control in Myanmar and North Korea.

A successful example of a government in Asia creating an "enabling environment" for the media is the introduction of the Official Information Act in Thailand, triggered in part by the Asian financial crisis, and guaranteeing people's rights to gain access to all information held by the government. In other EAP countries, the legal framework is less conducive to a free press, with official secrets acts in Malaysia and Singapore, and insult laws.

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. In 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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