June 7 2006, Washington D.C.

This half day seminar brought together World Bank Group staff and external guests to discuss emerging lessons and practical experiences in managing investment climate reform processes. It focused on the political and institutional aspects of reform, including triggers for reform, packaging and sequencing issues, building public support, creation of institutional arrangements to implement and sustain reform, and monitoring and evaluation.

Agenda: PDF 16KB

The First Session dealt with drivers and lessons of reform:

What drives institutional change?
PDF 1,700KB
Subir Lall, Deputy Division Chief, IMF

This presenation showed how institutional change impacts growth and private investment, and focused on highlighting the main drivers of change: (i) openness to trade; (ii) political accountability; (iii) a good institutional "neighborhood"; (iv) policies that reduce opportunites for corruption; and (v) higher levels of education. Aid's impact is negative since countries that receive more aid are also those with more disadvantageous initial conditions; moreover aid may reduce incentives to reform. Two central findings to improving institutional quality: (i) micro-level reforms need to be complemented with broader macro measures conducive to institutional change; and (ii) the design of institutional reforms--and donor advice--need to reflect loal conditions, based on principles of reducing corruption and increasing transparency and accountability.

Background reading: PDF 203KB

Policy Reform: Lessons from the 1990s
PDF 374KB
Roberto Zagha, Senior Adviser, PREMVP, World Bank

This presentation showed why the responses to reforms in the 1990s were uneven and mixed, mainly because reforms: (i) focused more on use of resources than expansion of productive capacity; (ii) underestimated the value of macro economic management of the reform process; (iii) mistook sound principles for rigid rules; (iv) sought to roll back government role beyond what was feasible; and (v) tried to address any and all constraints, rather than the binding ones. The experience of practitioners suggests that: there are no universal solutions for implementation, country specificity is key; change often occurs through a procces of experimentation and learning; expectations of what can be achieved need to be realistic; and reform involves changing the mindset, which requires expertise tempered by humility and inquisitiveness.

Background reading: PDF 8,0MB and PDF 52KB

Managing the Politics of Investment Climate Reforms: Case Study Findings
PDF 108KB
Sunita Kikeri, Advisor, PSDPO, World Bank

This presentation showed that there is and can be no "standard" reform process, but certain common themes emerge from 25 case studies: (i) reformers used new governments, crisis, increasing competition, and new benchmarking information to get reforms on to the agenda; (ii) radical reforms were possible during crisis/political change, but pilots and other pragmatic approaches were used for reforms that faced uncertainty or opposition--achieving policy credibility by adopting clear strategic goal and a steady process of change was key; (iii) investing early in the politics--via education/persuasion strategies, dialogue and consultation--paid fof; (iv) implementation required revitalizaton of institutions, while oversight mechanisms were created to sustain reform; and (v) proper results measurement is needed to monitor progress and hold reformers accountable for results.

Background reading: PDF 285KB

The Second Session dealt with reform process in practice.

China: Crossing the River While Feeling the Stones?
PDF 260KB
Yasheng Huang, Assistant Professor of International Management, Sloan School of Management, MIT

In China the 1980s witnessed radical reforms--privatization of the control rights of rural land, growth of rural private sector, and political reforms. By contrast the 1990s saw no linear deepening of reforms, with biased FDI and urban liberalization. One reason why reforms slowed down is different type of leadership in the 1990s, with leaders mostly from urban areas and more state-oriented, focused on investing in equipment and public investment, rather than improving firms' incentive structures. Another is the lack of constraints on the executive stemming from fiscal recentralization in the mid-1990s, which weakened checks and balances. Local authorities with fewer resources but more responsibilities also began to predate. All of these factors contributed to a slowing down of the reform process, and of TFP growth, in the 1990s.

Background reading: PDF 25KB

India: Championing Reforms at the State Level?
PDF 25KB
Swaminathan Aiyar, Consulting Editor, The Economic Times

Using the experience of port reforms in Gujarat and reforms elsewhere, this presentation highlighted a number of lessons: (i) state level reforms help change the national mind-set and also lead other states to wake up and begin reform; (ii) local champions, rather than donor conditionality, is essential; (iii) aiming for distant but important goals can institutionalize the process of change while minimizing opposition; (iv) reformers--and donors--should know when to step back in difficult reforms and focus on changing the "internal dynamics" to create the climate for change; (v) credible rankings, global awards, and competition for innovations are good ways of doing this; and (vi) engagement with stakeholders, including academia, media, opposition parties and local think tanks is vital to bringing about reform--particularly in open, democratic environments such as India.

Latin America: Engaging business in policy-making?
PDF 217KB
Ben Ross Schneider, Professor of Political Science, Northwestern University

This presentation laid out a framework for analyzing business politics and comparing patterns between countries. In terms of their activities, business associations have direct contacts with policy makers and are often represented on policy councils. Campaign contributions may not buy much influence given the subordination of the legislature to the executive and low reelection rates. Different types of policy encourage different responses from business. Reforms that are broad in scope with rapid implementation, e.g. trade policy, are more prone to business participation. Chile, Mexico and Colombia for example relied on close consultation with business associations in negotiating trade agreements, while Argentina and Brazil excluded business. Country variations are caused by prior government actions, and subject to change through the policy process. Business influence is better when it is formal, encompassing, organized and transparent.

Background reading: PDF 82KB


For further information please contact Sunita Kikeri at skikeri@worldbank.org.