Supporting Private Business Growth In African Fragile States
Benjamin Leo And Ross Thoutte.
The World Bank Group faces significant operational changes over the near to medium term. More than half of poor countries are projected to graduate from the World Bank’s International Development Association (IDA) concessional assistance over the next 15 years.1 As a result, IDA’s country client base is projected to become dominated by African fragile states. To its credit, the World Bank Group recognizes these coming changes and the unique needs and constraints present in fragile environments. It has publicly expressed a plan to develop an organization-wide strategy tailored specifically for fragile and conflict-affected situations.
At the same time, private businesses often are able to operate in the absence of stable, well-established governments and therefore can present donor organizations with an attractive pro- growth opportunity in fragile states. After all, the overwhelming majority of African jobs come from the private sector, and private businesses are responsible for some of the most dramatic improvements in the African economic landscape over the past decade. Perhaps most impressively, the mobile telecommunications sector, comprised almost entirely of private firms, generated more than 300 million mobile phone subscribers between 2000 and 2008. Recognizing these issues, the World Bank Group must make business growth a central objective of its future strategy for fragile and conflict-affected states. The most recent World Development Report and its subsequent implementation report partially reflect this sentiment. They argue that the organization must “position fragility, conflict, and violence at the core of its development man- date” and that the Bank must “significantly adjust its operations model” to reflect this priority shift.2 Currently, the World Bank Group is devising a new strategy that will set the tone for Group- wide strategic changes.
Scope and key findings
First, we examine three key private sector–related factors in African fragile states: what businesses cite as the most binding constraints to private sector growth; what government priorities are for business climate improvements or strategic economic sectors; and what types of projects have been more effective over time. This analysis draws upon World Bank Enterprise Survey data, a newly assembled database of African fragile state government priorities, and World Bank Independent Evaluation Group project outcome rating data. Our summary findings include:
- Business constraints. On average, the most frequently cited business constraints in African fragile states include electricity (68 percent of survey respondents), access to finance (56 percent), political instability (56 percent), corruption (48 percent), and tax rates (40 percent).
- Government priorities. African fragile state governments have prioritized the following issues: regulatory framework reforms (100 percent of sample countries), transport infrastructure (100 percent), electricity (92 percent), access to and cost of finance (83 percent), and macroeconomic stability (75 percent). Our analysis seeks to identify government priorities in a defined set of African fragile states. A separate comparison between fragile and nonfragile low-income country priorities could be useful to World Bank project design staff.
- Project outcome performance. The private sector–related sub- sectors with the highest project outcome ratings include: telecommunications, oil and gas, transport infrastructure, and trade policy reform. At least half of IDA projects had at least “satisfactory” outcome ratings in these subsectors. The worst performing subsectors include: port infrastructure; banking; micro, small, and medium enterprise finance; rail infra- structure; and mining.
Subsequently, we assess the alignment of World Bank Group operations within these three areas over the last decade. For this analysis, we have assembled a new database covering all World Bank Group operations in fragile states since 1980, which includes current and past fragile states (both African and non-African). Overall, we find that project alignment varies widely across the World Bank Group’s three largest subsidiaries—IDA, the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). Despite several bright spots, our analysis suggests that strategic changes in the World Bank Group’s operations are needed—particularly for IFC and MIGA. Our summary findings include:
- IFC and MIGA alignment performance. IFC and MIGA projects are only modestly aligned with the private sector’s most binding constraints or government priorities. Instead, projects have been heavily concentrated in low-risk sectors, such as the extractive sector (between 1980 and 2000). In recent years, this concentration has shifted toward the financial sector (on a project count basis) and the telecommunications sector (on a project value basis). Taken together, IFC activities over time suggest that the organization chooses its investments on a project-by- project basis, rather than implementing a comprehensive, systematic strategy in African fragile states.
- IDA alignment performance. IDA exhibits very strong alignment with government priorities and reasonably good prioritization in sectors with higher project outcome ratings. But it has a more mixed performance with respect to focusing on what businesses cite as the most binding private sector– related constraints. By illustration, it has focused a disproportionate share of private sector–related projects on transport infrastructure, which businesses cite less frequently as a “major constraint.” On the other hand, IDA has pursued fewer projects focusing on the most binding constraints, such as electricity and access to finance.3
Based on this analysis, we propose a new guiding framework for the World Bank Group and other donor institutions for prioritizing private sector–related projects in fragile states. We recommend that private sector promotion policies prioritize three key issues: addressing the most severe constraints to private sector growth; matching the host government’s stated priorities; and targeting sectors and subsectors with proven track records, relative to other sectors. Moreover, donor policies and projects should also contribute to broader development goals, including job creation, economic growth, broadening and strengthening of the tax base, and positive spillover effects into other economic sectors.
Ideally, donor institutions would pursue projects in sectors or areas where all three components intersect (what the private sector needs, what the government wants, and what donors do effectively). For example, a project to build roads in the Republic of Congo would meet all three criteria.
To be most effective, this framework could be applied to all segments of the World Bank Group project cycle—including policy design, ongoing operations, and exit evaluations. Operational implementation of the proposed approach clearly should be customized across subsidiaries and individual countries. But without a concerted and consistent strategy both within and across subsidiaries, World Bank Group projects will continue to perform at a suboptimal level in fragile and conflict-affected states.4
To help implement this framework, the World Bank Group should consider ways of addressing three central issues: improving managerial capacity to enable a bolder approach to fragile states; revising human resource strategies to attract and retain staff who are willing to take risks and understand the operating conditions in fragile states; and improving staff incentives to reward greater risk-taking and innovation. Each of these areas is enormously challenging, but must be tackled in order to successfully implement an ambitious fragile states agenda.
1.Moss and Leo (2011). 2. World Bank Group Development Committee (2011). 3. World Bank Group project decisions are complex and consider a broad array of issues. Promoting private sector business growth is just one of the many priorities of the World Bank Group; this may be reflected in its project portfolio. 4. Fragile states are often affected by violence and conflict and generally suffer from poor governance. Furthermore, large elements of the private sector in these countries may be criminalized, dominated by rent-seeking actors, or entirely informal and unregulated. As such, expectations for project effectiveness in these countries should be lower relative to nonfragile countries. But adhering the proposed framework would address some of the pitfalls involved in fragile state private sector growth promotion efforts and might improve their effectiveness.