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Better Institutions Key to Poverty Reduction in Middle East and North Africa

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 that systematically address such problems and create new institutions suited to local needs can dramatically increase incomes and reduce poverty. Among other countries, the research team consulted experts from Egypt and Morocco regarding the countries' experiences with market institutions in order to help inform the report's findings.

"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."

The report features MNA experience that provides both historical context and solutions that remain relevant to current challenges in market institution building. For example, it finds that, in the 11th century, North Africa's Maghribi traders built trading networks to provide institutional support for the expansion of their markets around the Mediterranean. These networks helped the traders overcome obstacles to expanded trade, such as uncertain selling prices in distant lands and the risk of theft in transit—challenges entrepreneurs everywhere today continue to face.

Another useful MNA example featured in the report is the region's historical experience with land rights, an important agricultural market institution.

Complex, Inefficient Institutions a Common Problem

Complex and inefficient institutions are a common problem, especially for poor people in poor countries. The report finds that official procedures for setting up a new business in many countries of the MENA region can be extremely onerous, ranging from nine to fourteen separate procedures and from three to five years compared with five procedures and just over one year in Hong Kong and two procedures and two months in Australia.

"Overly complex regulations are especially problematic in poor countries," says Roumeen Islam, director or 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.

"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.

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 tend 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 often experience rapid improvements in the amount and quality of coverage.

But highly concentrated private ownership can also restrict media freedom.

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.

"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."

Four Guiding Principles

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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