Public Sector Reform in New Zealand and Its Relevance to Developing Countries

Does New Zealand's success story have lessons for developingcountries contemplating public sector reform? That questionusually elicits one of two reactions, both inadvisable in theauthors' view. The first reaction is to be impressed with theefficacy of the reforms and conclude that they should be adopteduncritically in other countries. The second reaction is thatthe special conditions existing in New Zealand are such thatnone of its reform experience is relevant to others. The authorstake a middle position, maintaining that poorer countries canindeed extrapolate from the experience of their higher incomeneighbor despite the different conditions under which they haveto operate. New Zealand's comprehensive overhaul of its publicsector affords both general principles and specific elementsrelevant to countries looking to improve the quality, efficiency,and cost effectiveness of their public service sectors, anda careful analysis of those reforms can ascertain what mightbe transferable and what principles might apply.      

SOCIAL SECURITY AND THE POOR: Choices for Developing Countries

There is an urgent need to provide an effective safety net forthe poorest in societies ranging from socialist countries undergoingreform to Sub-Saharan African economies. This article examinessocial security systems in industrial countries and explorestheir relevance to developing countries. The objective of socialsecurity is defined broadly as public action, including thatby communities, to protect the poor and vulnerable from adversechanges in living standards. Relevant instruments include employmentand income guarantees, and also such formal policy instrumentsas assistance, social insurance, and family allowances. Thearticle highlights issues that arise in providing social securityin developing countries, particularly its effectiveness in protectingthe target groups.      

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.      

Privatization and Corporate Governance: Principles, Evidence, and Future Challenges

Unless developing countries embrace a corporate governance perspective,privatization is unlikely to provide the benefits of improvedperformance with accountability. This article introduces theconcept of governance chains that can constrain the grabbinghands of public and private actors by providing informationand accountability mechanisms to help investors monitor managers.Empirical data on established firms from 49 countries provideestimates of the relative importance and strength of privateand formal chains of governance. The framework and empiricalbenchmarks help explain the outcomes of past privatizationsand suggest certain steps that governments can pursue to besure to get the most out of future privatization activity.      

Public Social Spending in Africa: Do the Poor Benefit?

Education and health care are basic services essential in anyeffort to combat poverty and are often subsidized with publicfunds to help achieve that purpose. This paper examines theeffectiveness of public social spending on education and healthcare in several African countries and finds that these programsfavor not the poor, but those who are better-off. It concludesthat this targeting problem cannot be solved simply by adjustingthe subsidy program. The constraints that prevent the poor fromtaking advantage of these services must also be addressed ifthe public subsidies are to be effective.      

GOVERNMENT WAGE POLICY IN AFRICA: Some Findings and Policy Issues

This article documents recent trends in government wage andemployment levels for a number of African countries and challengesthe conventional wisdom that public wages are too high in Africa.Although most countries have significantly adjusted the realwages of government workers over the past decade, considerablevariance in cross-country experience with regard to governmentwage levels, wage structures, and employment growth is evident.On the basis of the observed trends, the article calls for amore microeconomic focus on the relationship between governmentpay and employment policies and on the real consequences ofsuch policies on the government's ability to provide goods andservices.      

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.      

PRIVATE INVESTMENT AND MACROECONOMIC ADJUSTMENT:A Survey

This article reviews theories of investment behavior and examinesempirical studies of investment in developing countries. Theemphasis is on understanding the interactions among macroeconomicpolicies, structural adjustment, and private investment. Thearticle deals with the effect of exchange rate policy on investment,the relationship between public and private investment, theimportance of market imperfections and financial constraintson capital formation, and the effect of economic instabilityon irreversible investment decisions.      

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.      

The "Cotton Problem"

Cotton is an important cash crop in many developing economies,supporting the livelihoods of millions of poor households. Insome countries it contributes as much as 40 percent of merchandiseexports and more than 5 percent of GDP. The global cotton market,however, has been subject to numerous policy interventions,to the detriment of nonsubsidized producers. This examinationof the global cotton market and trade policies reaches fourmain conclusions. First, rich cotton-producing countries shouldstop supporting their cotton sectors; as an interim step, transfersto the cotton sector should be fully decoupled from currentproduction decisions. Second, many cotton-producing (and oftencotton-dependent) developing economies need to complete theirunfinished reform agenda. Third, new technologies, especiallygenetically modified seed varieties, should be embraced by developingeconomies; this would entail extensive research to identifyvarieties appropriate to local growing conditions and the establishmentof the proper legislative and regulatory framework. Finally,cotton promotion is needed to reverse or at least arrest cotton’sdecline as a share of total fiber consumption.      

REACHING THE RURAL POOR THROUGH PUBLIC EMPLOYMENT: Arguments, Evidence, and Lessons from South Asia

With the limited set of policy instruments typically avaiablein the rural sectors of developing countries, imperfect coverageof the poor and leakage ot the nonpoor must be expected fromeven the most well-intentioned poverty alleviation scheme. Oneway to reach the poor more effectively is to build incentivesfor self-selection into the scheme. Labor-intensive rural publicworks projects have the potential to reach and protect the poor,as well as to create and maintain rural infrastructure. Thelimited evidence for South Asia suggests that few nonpoor personswant to participate, and that both direct and indirect transferever, be rapidly dissipated by a badly concevided and executedproject; the details of how project are selected, designed,and financed are crucial to success in both the short and thelong run.      

ALTERNATIVE FORMS OF EXTERNAL FINANCE: A SURVEY

For many developing countries, alternative forms of externalfinance—all forms of finance that are not guaranteed byor mediated through the public sector—have become increasinglyimportant as traditional financing to the public sector hasebbed. Yet a survey of the literature reveals few recent analyticalinsights about alternative financing, which includes foreigndirect investment, project lending, portfolio investment, closed-endequity funds, private nonguaranteed debt, licensing, joint ventures,quasi-equity contracts, and other forms of private, nonrecourselending to private borrowers. The literature offers little solidguidance for distinguishing between alternative and traditionalfinancing with respect to country risk, for establishing themost appropriate and efficient incentive structures and restrictionsin the host country, or for identifying the optimal financingmodes for international firms investing in developing countries.This gap in the analytical literature has important implicationsfor policy formulation. It is not always clear whether a countryis developing incentives and establishing safeguards (for ensuringadherence to project performance requirements) that are mosteffective in attracting alternative forms of finance.      

THE ROLES OF THE PRIVATE AND PUBLIC SECTORS IN ENHANCING THE PERFORMANCE OF SEED SYSTEMS

Seeds are crop-based agriculture's most important input, yetfew developing countries have succeeded in establishing efficientseed production and supply systems. In many developing countriesthe large-scale, centralized state farms and public seed corporationsestablished to multiply and disseminate improved seeds of selectedcrops have proved ineffectual, failing to meet the diverse cropand varietal requirements of farmers. Governments and assistingagencies are currently reassessing their strategies, payinggreater attention to the potential contributions of privatefirms, cooperatives, other nongovernmental organizations (NGOs),and farmers themselves. This article contributes to that reassessment. It defines thescope for involving the private sector in an array of seed-relatedactivities, identifies critical and complementary roles forthe public sector, and reviews seed system development in industrialand developing countries, with a primary focus on institutionaldimensions. The article advocates a phased withdrawal of thepublic sector from the commercial side of seed production andmarketing, while recognizing a continued important role forthe public sector in plant breeding research, germplasm andvarietal maintenance, training, quality control, and consumerprotection.      

Weak Links in the Chain: A Diagnosis of Health Policy in Poor Countries

Recent empirical and theoretical literature sheds light on thedisappointing experience with implementation of primary healthcare programs in developing countries. This article focuseson the evidence showing two weak links in the chain betweengovernment spending for services to improve health and actualimprovements in health status. First, institutional capacityis a vital ingredient in providing effective services. Whenthis capacity is inadequate, health spending, even on the rightservices, may lead to little actual provision of services. Second,the net effect of government health services depends on theseverity of market failures—the more severe the marketfailures, the greater the potential for government servicesto have an impact. Evidence suggests that market failures arethe least severe for relatively inexpensive curative services,which often absorb the bulk of primary health care budgets.A companion paper, available from the authors (seep. 219), offersa perspective on how government funds can best be used to improvehealth and well-being in developing countries. It gives an alternativeview of appropriate public health policy, one that focuses onmitigating the characteristic market failures of the sectorand tailoring public health activities to the government's abilityto deliver various services.      

SHELTER STRATEGIES FOR THE URBAN POOR IN DEVELOPING COUNTRIES

Rapid growth in many developing-country cities is strainingthe capacity of their shelter delivery systems. Governmentshave chosen a variety of implicit and explicit policies to amelioratethese strains. However, these policies are not always consistentwith their objectives, often because of a lack of knowledgeof how housing markets actually work and how policies affectand are constrained by market behavior. This paper reviews recentresearch on housing market behavior in developing countries,including the demand for housing and the pattern of housinginvestment across countries, the financing of housing by low-incomehouseholds, and the willingness to pay for secure tenure. Commonhousing policies are then examined, including public housing,sites and services projects, and slum clearance versus upgrading.Rent controls, measures to improve the supply of finance andinfrastructure, and building codes and standards are also discussed.      

Access to Financial Services: A Review of the Issues and Public Policy Objectives

This article reviews the evidence on the importance of financefor economic well-being. It provides data on the use of basicfinancial services by households and firms across a sample ofcountries, assesses the desirability of universal access, andprovides an overview of the macroeconomic, legal, and regulatoryobstacles to access. Despite the benefits of finance, the datashow that use of financial services is far from universal inmany countries, especially developing countries. Universal accessto financial services has not been a public policy objectivein most countries and would likely be difficult to achieve.Countries can, however, facilitate access to financial servicesby strengthening institutional infrastructure, liberalizingmarkets and facilitating greater competition, and encouraginginnovative use of know-how and technology. Government interventionsto directly broaden access to finance, however, are costly andfraught with risks, among others the risk of missing the targetedgroups. The article concludes with recommendations for globalactions aimed at improving data on access and use and suggestionson areas of further analysis to identify constraints to broadeningaccess.      

Is There a Case for Industrial Policy? A Critical Survey

What are the underlying rationales for industrial policy? Doesempirical evidence support the use of industrial policy forcorrecting market failures that plague the process of industrialization?This article addresses these questions through a critical surveyof the analytical literature on industrial policy. It also reviewssome recent industry successes and argues that public interventionshave played only a limited role. Moreover, the recent ascendanceand dominance of international production networks in the sectorsin which developing countries once had considerable successimplies a further limitation on the potential role of industrialpolicies as traditionally understood. Overall, there appearsto be little empirical support for an activist government policyeven though market failures exist that can, in principle, justifythe use of industrial policy.      

ACHIEVING SOCIAL OBJECTIVES THROUGH PRIVATE TRANSFERS: A Review

Private interhousehold cash transfers are an important sourceof income in many developing countries. Among the countrieswhose experience is reviewed in the article, the proportionof all households receiving private transfers ranges from afifth to a half. The amounts received are large, particularlywhen compared with the incomes of the poorest households. Understanding more about these transfers is important for designingpolicy because, among other things, these remittances providesocial and economic benefits similar to those of public programs,such as unemployment insurance, pension support, educationalcredit, and health assistance. As such, private transfers maysupplement or overlap with public transfers, and, if privatedonors give less as public transfers increase, the effect ofpublic programs on beneficiaries would be less than originallyintended. Or the transfers may alter the distributional effectsof public programs: for again, if private donors give less aspublic transfers increase, they share in some of the benefitsof public programs.      

THE DEBT CRISIS: WHERE DO WE STAND AFTER SEVEN YEARS?

The past seven years have seen little improvement in the worlddebt situation. During this period, policymakers have shiftedtheir attention from demand reduction by debtor nations to supplyexpansion. Most recently, debt reduction has become the principalissue. This article reviews various ways of resolving the debt problem.There is widespread agreement among competing proposals thatan efficient solution requires both debt reduction and economicgrowth in debtor countries. Disagreement arises over whetherthe necessary debt reduction and consequent adjustment in policiesin developing countries can be generated by market forces alone.The alternative is usually thought to be intervention by governmentsand commitment of public funds. This article groups and analyzesproposed solutions according to their relation to these twopositions. The survey concludes that there is no clear-cut solution tothe problem. Methods vary widely in their implications for efficiencyand equity as well as in their capacity to improve the situationand to do so quickly. Inevitably, official policy will continueto be determined less by economic ideals than by exigencies.The more urgent the problem becomes, the more likely the balanceis to swing from reliance on the market to direct intervention.      

GOVERNMENT SPENDING IN DEVELOPING COUNTRIES: Trends, Causes, and Consequences

Throughout the twentieth century governments have been spendingever larger proportions of national income. Three issues arisein discussions about the growth of such spending as it pertainsto developing countries: How does it compare with expenditurein industrial nations? What explains the growth in spendingby developing country governments? And what are the effectson economic growth? Government expenditure as a share of GDPin low- and middle-income countries, on average, is lower thancomparable shares in industrial market economies and, with fewexceptions, is growing. Many factors, including ideology, demographics,a positive income elasticity for public goods, the rising costof public goods relative to private goods, and perhaps developmenttheory and practice, explain this growth. As for the relationshipbetween government expenditure and economic growth, the empiricalevidence does not reveal any strong correlation. The size ofgovernment may engender strong ideological debate, but the positionthat the aggregate level of government expenditure is a significantdeterminant of growth rates receives little support.