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Better Institutions Key to Poverty Reduction in South Asia

Press Release No:2002/074/S

Ana E. Luna (202) 473 2907
Kruti Kapadia (202) 458 9031
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."

Progress in South Asia

South Asian countries have made great strides in reforming institutions. For example, India has simplified agricultural input regulations and Nepal has streamlined business licensing. In Bangladesh, the innovative Grameen Bank, is a model for other countries. However, complex and inefficient institutions remain a common problem, especially for poor people. In India, for example, registering a new business requires 10 steps and 77 days. In Sri Lanka, it takes 8 steps, 23 days. In Pakistan, resolving a dispute over a returned check can take over 365 days a year.

" Despite the progress, many in South Asia are still excluded from formal institutions that enable access to markets and improved living standards." says Roumeen Islam, director of the World Development Report 2002. "The region needs to further streamline institutions to complement what exists, as well as promote open trade and information flows to help make the market work for everyone." she adds.

Learning from Success

The report analyzes in detail institutional design at the micro level. It includes surveys of legal systems, business regulations, and media ownership in around 100 countries.

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 to 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. Simplifying judicial procedures can increase efficiency without sacrificing fairness. Alternative conflict resolution systems, such as those based on social norms, can also improve poor people's access to legal services. For example, the Maduripur Legal Aid Association, a Bangladeshi non-governmental organization (NGO), offers women free mediation services that settle most village disputes in under two months, at a low cost.

Land titling procedures are often too costly and complex for the poor to access. 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. Computerizing procedures in India led to more efficient land registration and greater access for small landholders to obtain titles quickly and transparently. Also, registration processing time was cut from 10 days to 1 hour.

New technologies are often beyond the reach of small farmers in rural areas, who lack information on what agricultural innovations are available and how to access them. By recording and disseminating data on new inventions, information sharing networks such as the Indian NGO, SRISTI has had a tangible impact on easing the burden of poverty.

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.

Countries that have reduced government ownership of the media have often experienced rapid improvements in the amount and quality of coverage.

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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