Corporate Governance and Development

The literature shows that good corporate governance generallypays—for firms, for markets, and for countries. It isassociated with a lower cost of capital, higher returns on equity,greater efficiency, and more favorable treatment of all stakeholders,although the direction of causality is not always clear. Thelaw and finance literature has documented the important roleof institutions aimed at contractual and legal enforcement,including corporate governance, across countries. Using firm-leveldata, researchers have documented relationships between countries’corporate governance frameworks on the one hand and performance,valuation, the cost of capital, and access to external financingon the other. Given the benefits of good corporate governance,firms and countries should voluntarily reform more. Resistanceby entrenched owners and managers at the firm level and politicaleconomy factors at the level of markets and countries partlyexplain why they do not.      

Managing Government Exposure to Private Infrastructure Risks

The privatization of infrastructure should lead to the developmentof new infrastructure, improvements in the operation of existinginfrastructure, and a reduction in budgetary subsidies. Whethercountries reap the full benefits of privatization, however,depends on how risks are allocated. If, as is often the casein developing countries, governments assume risks that shouldbe borne by investors, they may reduce incentives for efficiencyand incur significant liabilities. To solve these problems,governments need to improve their policies and restrict theirrisk bearing to certain political and regulatory risks overwhich they have direct control. When a government provides guarantees,it should attempt to measure their cost and improve the waythey are handled in the accounts and budgets. Measurement andbudgeting are critical to improving decisions about the provisionof guarantees, to improving project selection and contract design,and to protecting governments from unknowingly entering intocommitments that might jeopardize future budgets.      

Privatization,financial development,property rights and growth

This study analyzes how prevailing institutional arrangements i.e., property rights, contracting rights, political institutions, and corporate governance practices affect privatized firms’ performance, capital markets development, and economic growth. Most of the studies surveyed show that privatization enhances privatized firms performance, efficiency, and profitability, which percolates to economic growth. Privatized firms performed better in countries with better regulatory and legal frameworks. Partial privatization may be beneficial in countries with weak institutions, namely, the French civil law countries. The stronger the economic and the governing institutions, the easier it is for privatized firms to thrive and contribute to economic growth. Overall, privatization allows firms to achieve improved efficiency while driving the development of the financial sector.     

Can corporatization improve the performance of state-owned enterprises even without privatization?

This paper examines an important reform program in China concerning State Owned Enterprises (SOEs), namely, corporatization without privatization. It finds that corporatization has had a significantly positive impact on SOE performance. It further shows that the sources of efficiency engendered by corporatization can be traced to the reform of the internal governance structure of these firms. The results indicate that, even without privatization, corporate governance reform is potentially an effective way of improving the performance of SOEs; such reforms represent a policy alternative for countries seeking to restructure SOEs without massive privatization. The results also suggest that it may be optimal for governments to carry out corporatization of SOEs before eventual privatization.     

The politics of transnational accountability policies and the (re)construction of corruption: The case of Tunisia,Transparency International and the World Bank

This study explores the intersection between accountability policies and anti-corruption measures. Transnational actors define acceptable governance and implement accountability policies on the assumption that corruption is a problem endemic to developing countries. Such accountability policies influence and help constitute transnational geographic and social spaces. However, the impacts of such assumptions and the resultant policies on developing countries and their citizens have not been widely investigated. This study uses a critical discourse analysis of the case of Tunisia before and after its 2011 revolution, to explore the politics and vested interests specific to anti-corruption policies promoted by transnational actors. The study’s contribution is twofold: Firstly, we identify the highly fungible character of the emanant cycles of Western-driven corruption discourses, and indicate their consequences in Tunisia. Secondly, we propose a future research agenda towards non-exploitative anti-corruption and accountability policies.     

Enforcement and Good Corporate Governance in Developing Countries and Transition Economies

More than regulations, laws on the books, or voluntary codes,enforcement is key to creating an effective business environmentand good corporate governance, at least in developing countriesand transition economies. A framework is presented to help explainenforcement, the impact on corporate governance when rules arenot enforced, and what can be done to improve corporate governancein weak enforcement environments. The limited empirical evidencesuggests that private enforcement tools are often more effectivethan public tools. However, some public enforcement is necessary,and private enforcement mechanisms often require public lawsto function. Private initiatives are often also taken underthe threat of legislation or regulation, although in some countriesbottom-up, private-led initiatives preceded and even shapedpublic laws. Concentrated ownership aligns incentives and encouragesmonitoring, but it weakens other corporate governance mechanismsand can impose significant costs. Various steps can be takento reduce these costs and reinforce other corporate governancemechanisms. But political economy constraints, resulting fromthe intermingling of business and politics, often prevent improvementsin the enforcement environment and the adoption and implementationof public laws.      

Public Satisfaction and the Capability,Integrity, and Accountability of Financial Regulators

Strengthening the accountability of government officials to achieve public satisfaction in democratic countries has been a crucial issue. We study the issue empirically using the concept of national governance based on a case study of the key Taiwanese financial regulator, namely, the Financial Supervisory Commission (FSC). This paper integrates theories of resource-based views, trust, and corporate governance to motivate the empirical analysis. The findings show that accountability is positively related to public satisfaction. Capability and integrity have a positive relation to the accountability of the regulator, suggesting that one of the most effective ways to get public satisfaction is to recruit staff with capability and integrity.     

DOES PRIVATIZATION FOSTER CHANGES IN THE QUALITY OF LEGAL INSTITUTIONS?

We analyze the effect of privatization on the quality of legal institutions of governance. Our findings suggest that large-scale privatization (in terms of progress and volume) increases the risk of corruption in developing countries but has no effect on the legal institutions of governance (i.e., law and order and investor protection). The method of privatization (public share issues versus private sales) helps curb corruption and improve the quality of law enforcement and of investor protection. In developed countries, the progress and volume of privatization reduce the risk of corruption, and the method of privatization enhances the quality of law enforcement.     

An Assessment of Privatization

Mounting empirical evidence of privatization's benefits coincideswith increasing dissatisfaction and opposition among citizensand policymakers. This dissatisfaction reflects the growingquestioning of the benefits of privatization, the general downturnof global markets in the past few years and the resulting swingof the pendulum back toward increased governmental supervision,the overselling of privatization as a panacea for all economicproblems, and the concern that privatization does not producemacroeconomic and distributional gains equivalent to its microeconomicbenefits. This article takes stock of the empirical evidenceand shows that in competitive sectors privatization has beena resounding success in improving firm performance. In infrastructuresectors, privatization improves welfare, a broader and crucialobjective, when it is accompanied by proper policy and regulatoryframeworks. The article argues that despite the growing concernsprivatization should be neither abandoned nor reversed. Rather,there should be a strengthening of efforts to privatize correctly:by better tailoring privatization to local conditions, deepeningefforts to promote competition and regulatory frameworks, enforcingtransparency in sales processes, and introducing mechanismsto ensure that the poor have access to affordable essentialservices.      

The Politics of Russian Enterprise Reform: Insiders, Local Governments, and the Obstacles to Restructuring

Russia and other countries in the Commonwealth of IndependentStates that have implemented voucher privatization programshave to account for the puzzling behavior of insiders—manager-owners—who,in stripping assets from the firms they own, appear to be stealingfrom one pocket to fill the other. This article suggests thatasset stripping and the absence of restructuring result frominteractions between insiders and subnational governments ina particular property rights regime, in which the ability torealize value is limited by uncertainty and illiquidity. Asthe central institutions that govern the Russian economy haveceded their powers to the provinces, regional and local governmentshave imposed a variety of distortions on enterprises to protectlocal employment. To disentangle these vicious circles of control, this articlesconsiders three sets of institutional changes:; adjustmentsto the system of fiscal federalism by which subnational governmentswould be allowed to retain tax revenues generated locally; legalimprovements in the protection of property rights; and the provisionof mechanisms for restructuring and ownership transformationin insider-dominated firms. The aim of these reforms would beto change the incentives that local governments, owners, andinvestors face; to convince subnational governments that a moresustainable way of protecting employment lies in protectinglocal investment; to raise the cost of theft and corruptionby insiders and local officials; and to allow investors to acquirecontrolling stakes in viable firms.      

IN SEARCH OF OWNERS: PRIVATIZATION AND CORPORATE GOVERNANCE IN TRANSITION ECONOMIES

Experiments in privatizing enterprises in transition economiesabound, from extensive efforts at sales to strategic owners(as in Estonia and Hungary), to programs based primarily oninsider buyouts (as in Russia and Slovenia), to innovative massprivatization programs involving the creation of large and powerfulnew financial intermediaries (as in the Czech and Slovak republicsand Poland). Each approach has inherent strengths and risks.But if the objectives are to sever the links between the stateand the enterprises, to school the population in market basics,and to foster further ownership change, the initial weight ofevidence seems to favor significant reliance on voucher privatization,especially given the difficulty most countries have findingwilling cash investors.      

PRIVATIZATION: LESSONS FROM MARKET ECONOMIES

In the past decade governments all over the world have begunprivatizing state enterprises—indeed, it is becoming quitehard to find a country without a program of privatization underway or at least on the policy agenda. This striking reversalof the push to expand state ownership in the 1960s and 1970sresults from generally poor performance of state enterprisesand a disappointing record of past reform efforts that fellshort of ownership change. This article examines the objectives of privatization and thestrategies for achieving them, documenting recent trends andreviewing the experience with privatizing state-owned commercial,manufacturing, and service enterprises in both competitive andnoncompetitive markets. The authors analyze the various tacticsthat can be or have been employed, in relation to scope, pace,sequencing, and methods of implementation. The evidence showsthat privatization produces benefits of efficiency and innovation—ifdone right. The lessons of experience discussed in the articleoffer guidance on how to realize the promise of privatizationwhile minimizing the risks and costs.      

SOUTH-SOUTH TRADE: Theory, Evidence, and Policy

Recently a number of commentators have argued that trade policyin developing countries should be deployed discriminatorilyto encourage the expansion of trade among southern countries.Such a strategy is seen as being central in the framing of anew international economic order. This article evaluates thearguments in favor of a relative expansion of South-South tradeand reviews the experience of developing countries with discriminatoryregional trading arrangements. It contends that the case forspecific policies to promote South-South trade is not convincingand that experience with discriminatory arrangements is notencouraging. The expansion of South-South trade can be expectedto continue in the context of multilateral trade expansion,and the potential gains are likely to be greater if this processis allowed to evolve freely in a multilateral setting.      

What Can Countries in Other Regions Learn from Social Security Reform in Latin America?

About a dozen countries in Latin America have enacted reformsthat include elements being contemplated elsewhere, includingthe partial privatization of social security. It is not easyto draw universal lessons for social security reform from theexperience of countries such as Argentina, Chile, and Mexico,however, where sizeable public pension systems went bankruptbefore the populations aged, mainly because of mismanagement.Most developing economies have much smaller social securitysystems. Relatively well-managed systems in industrial countriesface problems that are long term in nature and have been broughtabout by an aging population. The experiences of Latin Americanevertheless offer some general lessons for countries in otherparts of the world. These lessons relate to changes in labormarket incentives accompanying reforms and how workers reactto them, government actions that have met with success in managingthe transition to funded pensions, and the expectations of individualsfrom social security systems. Latin America's reforms suggestthat the most effective approach is to keep payroll taxes low,governments solvent, and social security systems focused onproviding reasonable insurance against poverty in old age. JEL codes: G23, H31, H53, H55, J26     

MANAGEMENT OF PUBLIC INDUSTRIAL ENTERPRISES

This study indentifies the factors that influence the performanceof state industries.Based on a review of thirteen countries,the authours isolate three qualities in the business and managerialenvironment that distinguish successful public enterprises fromthe others. These are (a) the degree of competition that publicenterprises are exposed to; (b) the degree of financial autonomyand accountability under which public enterprises operater;and (c) the extent and manner in which managerial autonomy andaccountability are ensured. It is impossible, and perhaps misleading,to assess statistically the importance of each of these factors.Where all three exist, however, the performance of public enterprisesis significantly better than in those cases where most or allthese factors are absent.      

Democracy, Public Expenditures, and the Poor: Understanding Political Incentives for Providing Public Services

The incentives of politicians to provide broad public goodsand reduce poverty vary across countries. Even in democracies,politicians often have incentives to divert resources to politicalrents and private transfers that benefit a few citizens at theexpense of many. These distortions can be traced to imperfectionsin political markets that are greater in some countries thanin others. This article reviews the theory and evidence on theimpact on political incentives of incomplete information forvoters, the lack of credibility of political promises, and socialpolarization. The analysis has implications for policy and forreforms to improve public goods provision and reduce poverty.      

Competition and Efficiency after Privatization: The Role of the NAO

One of the arguments for privatization is to promote market competition in order to facilitate efficiency gains. This review of NAO privatization reports shows that the promotion of competition is rarely stated as an objective of a privatization and, where it is, it can lead to difficulties in drawing objective audit conclusions. The work of the regulators is of considerable importance after privatization; and a more recent role for the NAO is that of responsibility for the financial audit and value-for-money studies of these regulators. These NAO studies provide new opportunities to review the effectiveness of the regulators and to promote accountability in competition policy after privatization.     

Governance Structures and Accountability in Primary Care

Organizations providing public welfare services typically have distinct accountabilities to several parties, and the accountability chains linking these parties are often administered through different governance structures. This article reveals that in primary care in England the accountability chains characterized by different governance structures result in inconsistent levels of accountability.     

Using International Institutions to Improve Public Procurement

The World Trade Organization's voluntary rules on governmentprocurement are a useful mechanism for ensuring that publicprocurement procedures are efficient. They also provide an opportunityto reduce the uncertainty of participants by increasing transparencyand accountability. Yet most developing countries have chosennot to subject their procurement policies to international disciiplinesand multilateral surveillance. Their reasons may include anunfamiliarity with the government procurement agreement (GPA);a perception that the potential payoffs are small; a desireto discriminate in favor of domestic firms; or the successfulopposition of groups that benefit from the current regimes.Although the economic rationales for abstaining from the GPAare not compelling, a quid pro quo for accession may be neededto overcome opposition by special interests. Developing countryprocurement markets are large enough that governments may beable to make accession to the GPA conditional on temporary exceptionsto multilateral disczplines or on better access to export markets.      

THE RELATIVE EFFICIENCY OF PRIVATE AND PUBLIC SCHOOLS IN DEVELOPING COUNTRIES

Aside from revenue mobilization, one of the arguments for allowingthe private sector to assume a larger role in the provisionof education is that it would increase efficiency, as administratorsbecome more responsive to the needs of students and their parents.But what is the evidence? Based on case studies that compareprivate and public secondary education in Colombia, the DominicanRepublic, the Philippines, Tanzania, and Thailand, private schoolstudents generally outperform public school students on standardizedmath and language tests. This finding holds even after holdingconstant for the fact that, on average, private school studentsin these countries come from more advantaged backgrounds thantheir public. school counterparts. In addition, preliminaryevidence shows that the unit costs of private schools are lowerthan those of public schools. Although these results cannot,in themselves, be used as arguments for massive privatization,they indicate that governments should reconsider policies thatrestrain private sector participation in education. Furtherresearch is needed to determine whether some teaching and administrativepractices in private schools are applicable to public schools.