obstacles they face, businesses list pol- changes (such as lower tariffs) but the skills, while avoiding the counterproduc- icy uncertainty, macroeconomic insta- fine-tuning of policy and the evolution tive interventions that so often destroy bility, taxes and corruption at the head of institutions. This is why, it suggests, employment in the formal sector. . . . of the list. What do these have in com- the credibility of the government's The world's wealthy countries can al- mon? Incompetence and malfeasance by journey, as in China, may be more im- so help by lifting their many barriers to governments is again the answer. . . . portant than the details of policy at imports from developing countries and In many developing countries, the re- each stage along the way. by targeting aid on improving the in- quirement is not less government but Turning these broad objectives into vestment climate. more and better directed government. specific policy is a tricky business. The Governments then are both the dis- What does this involve? Four require- Bank describes its core recommendation ease and the cure. This is why develop- ments are listed: a reduction in the as "delivering the basics." These are: ment is so hard and so slow. The big "rent-seeking" that affects all countries stability and security, which includes advance is in the richness of our under- but mars developing countries to an ex- protection of property. . ., facilitating standing of what makes an economy treme extent; credibility in the making contract enforcement, curbing crime and thrive. But that understanding also and execution of policy; the fostering of compensating for expropriation; better demonstrates the difficulties. The public trust and legitimacy; and the tai- regulation and taxation, which means Bank's recognition of the nature of the loring of policy responses to what works focusing intervention where it is need- disease is at least a first step towards in local conditions. ed, broadening the tax base and lower- the cure. One of the conclusions the report ing tax rates, and reducing barriers to rightly draws from this list is that trade; better finance and infrastructure, reform is not. a one-off event but which requires both more competition "A Better Investment Climate for Everyone, a process. What is involved is not and better regulation; and transforming World Development Report 2005. Oxford Uni- just discrete and well-known policy labour market regulation, to foster versity Press and the World Bank. Source: Martin Wolf, "Sweep Away the Barriers to Growth, " Financial Times, October 5, 2004. Summary: This article discusses the relationship between governance.in poor countries and why poor governance continues to be an obstacle to economic development. According to the 2005 World Development Report, poor governance is the most important obstacle facing busi- nesses. The report estimates that this costs businesses as much as 25% of sales. Even when businesses are asked to list their most important obstacles, most of them stem back to gov- ernance (policy uncertainty, macroeconomic instability, taxes, and corruption). Suggestions for improved governance: . A reduction in rent-seeking among government institutions. Credibility in the formation and implementation of policy. . Fostering of public trust and legitimacy. Tailoring of policy responses to local conditions. In general, the report recommends a process for improving institutions. "Delivering the ba- sics" includes: " Stability and security (contract enforcement, curbing crime) Better regulation and taxation (broadening the tax base and lowering taxes overall, reducing trade barriers) Better infrastructure for financial institutions (more competition, better regulation) Improved labor market regulation (foster skills, avoiding counterproductive inter- vention) Discussion Questions: If you were a government authority in a poor, developing country, where would you start? Which of the recommendations do you believe is most important for the suc- cess of the others? To what extent is there a conflict between creating an improved business climate versus meeting the needs and wants of the general population? " Which economic groups within developing countries stand to gain the most of the reforms recommended by the World Bank? The article points to China as an example of a developing country that has been successful in establishing a favorable business climate. How has China been success- ful in achieving these reforms over a relatively short period of time? Although the benefits of these reforms is clear (increasing income per person), are there any costs?HEADLINES The Wealth of Nations Social scientists have sought for centuries to understand the essential conditions that enable a nation to achieve prosperity. In The Wealth of Nations, Adam Smith said: "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things." The following article discusses the poor quality of governance in developing countries and the obstacle this poses to economic development. It takes 200 days to register a new Happily, "investment climate improve- of contracts, inappropriate regulations, business in Haiti and just two in ments in China and India have driven corruption, rampant crime and unreli- Australia. This contrast perfectly en- the greatest reductions in poverty the able infrastructure can cost 25 per cent capsulates the gulf between one of world has ever seen." . . . Governmental of sales. This is more than three times the world's poorest countries and one failure is the most important obstacle what businesses typically pay in taxes. of the richest. A sophisticated market business faces. Inadequate enforcement Similarly, when asked to enumerate the economy is a uniquely powerful engine of prosperity. Yet, in far too many poor countries, the law's delays' and the in- solence of office prevent desperately needed improvements in economic performance. That makes [the 2005] "World Development Report" among the most important the World Bank has ever produced. It is about how to make mar- ket economies work. . . . The report is based on two big research projects: sur veys of the investment climate . . . in 53 countries; and the "doing business" The World Ban project, which identifies obstacles to business in 130 countries. . . . The ar- Green means grow: The map above shows the World Bank's composite Worldwide Governance gument starts with growth. As the re- Indicator in 2005. The index measures voice and accountability, political stability, government port rightly notes: "With rising effectiveness, regulatory quality, rule of law, and control of corruption. Green indicates a populations, economic growth is the country that is in the top 25% based on this measure, yellow next 25%, orange next 25%, and only sustainable mechanism for increase red bottom 25%. Dark green and dark red are the top and bottom 10%, respectively. The pros- perity in Europe, North America, Australasia, and Japan coincides with the best institutions of ing a society's standard of living." governance; the poverty in so much of Africa and parts of Asia with the poorest ones. Continued on next page