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Better Institutions Key to Poverty Reduction in Latin American and the Caribbean

Available in: Español
Press Release No:2002/074/S

Contacts:
Ana E. Luna (202) 473 2907
alunabarros@worldbank.org
Miriam Razaq (202) 458 2931
mrazaq@worldbank.org
Cynthia Case McMahon (TV/Radio) (202) 473-2243
Ccasemcmahon@worldbank.org

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. In Latin America and the Caribbean, these institutions range from land titling procedures and labor tribunals to complex procedural law.

"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 Latin America and the Caribbean there are very complex and time consuming business entry procedures, which can lead to higher corruption and larger unofficial economies. While registering a new business in Australia requires only two steps, two days and two percent of the average annual income, in Bolivia, for example, it takes 20 steps, 88 days and costs 266 percent of the average annual income. By contrast, Panama is the best performer in the region, with seven steps, followed by Peru with 8; Uruguay and Chile with 10; Argentina and Venezuela with 14, and Brazil and Mexico with 15.

"Overly complex regulations are especially problematic," says Roumeen Islam, director or the World Development Report 2002. "Despite the tremendous progress of market reforms and judiciary changes in the Latin America and the Caribbean region, there are still overly complex regulations that hurt businesses and consumers, lead to higher corruption, and lower productivity."

In Colombia and Peru, for example, resolving a dispute over a returned check can take over two years. In Costa Rica it takes 370 days, and 283 in Mexico, 200 in Chile, and 180 in Brazil, while in Jamaica and Belize, it takes 202 and 60 days, respectively. In Singapore, by contrast, it takes just 35 days.

The report finds that simplifying judicial procedures can increase efficiency without sacrificing fairness. In many Latin American countries, the predominance of written and complicated procedures have burdened the judicial process in collecting debt. It lasts and average of 180 days in Honduras and 300 days in Argentina.

"A factor commonly associated with inefficiency in Latin America is the predominance of written over oral procedures," says Islam. "A move towards oral procedures has produced positive results in Italy, Paraguay and Uruguay."

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. El Salvador, Thailand and Uganda have established small claims courts that rely on simplified, sometimes merely spoken, procedures. Labor tribunals in Ecuador are also associated with reduced time to disposition, and incorporate a strong element of arbitration and conciliation.

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. Mexico and Peru simplified land registration procedures, so that even holders of small lots could obtain titles quickly and transparently. In Brazil, a government-sponsored effort is under way to give quilombo dwellers legal title to ancestral lands.

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. Brazil and Bolivia have recently adopted more flexible regulations to permit services such as low cost phone and water connections in shantytowns.

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 that have reduced government ownership of the media have often experienced rapid improvements in the amount and quality of coverage. For example, Mexico's partial privatization of broadcasting in 1989 led to a sharp increase in coverage of government corruption scandals.

Although state ownership of the media is very low in Latin America and the Caribbean compared to other regions, both television and the press tend to be more concentrated in the hands of only a few private owners. And highly concentrated private ownership can also restrict media freedom.

In addition, despite the low state ownership in the region, many Latin American countries have restrictive regulations –with over one third of the press requiring licensing of journalists—according to the report.

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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