JUST GET OUT OF THE WAY: How Government Can Help Business and Reduce Poverty

1
JUST GET OUT OF THE WAYHow Government Can Help
Business and Reduce Poverty

• Robert E. Anderson
• School of International Service
• American University
• March 3, 2006

2
Growing Private Sector is the Only Way to Reduce
Poverty

• Income redistribution (welfare, charity) can not
  eliminate poverty.
• Only economic growth will increase incomes.
• Thriving private sector essential for economic
  growth.
• Governments need to create favorable conditions
  for the private sector to function, i.e. improve
  the business environment.

3
Welfare is Not the Solutionto Poverty
4
Government Expenditures on Education
5
Why is the Business Environment Often Poor?

• Experts recommend what they know, i.e. polices
  in rich countries.
• Focus on market failure rather than government
  failure.
• Remnants of former socialist thinking.
• Economic control supports political power.
• Rent seeking by both business and labor.
• Corruption/cronyism

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Best Method of Privatization

• Objective Find most capable private owner.
• Method Sell to highest cash bidder in a
  competitive auction open to anyone.
• Rationale Investor willing to pay the most has
  the best plan for managing the business.

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Weak, Complicated, Non Transparent Privatization
Methods

• Sell partial ownership
• Flotation on stock market.
• Two trance sales.
• Management/employee buyouts
• Evaluate proposed business plan.
• Place conditions/requirements on future operation
  (e.g. investment commitments)
• Restrict foreign investors

8
Banks -- Better Off Without Them

• Often just pyramid schemes.
• Deposits wasted on bad loans.
• State-owned banks lend to state-owned companies
• Private banks lend to owners and friends.
• New deposits pay interest on old (bank is liquid
  but insolvent).
• Government guarantees keep depositors ignorant
  and happy.
• Eventually crash causing banking crisis.

9
Banking Crises in Poor Countries Cost 1 Trillion
(1976-2002)
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How to Regulate Banks?

• Conventional Approach
• Regulate management of banks
• Government guarantee of deposits
• Alternative Approach
• Modeled after securities regulation
• Encourage foreign entry
• Require information disclosure
• No government guarantee investor beware.
• Used by New Zealand

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Worst Outcome

• Information disclosure ineffective
• Depositors withdraw money
• Banks reduce lending
• BUT
• Publics savings not wasted
• Traditional intermediation used instead
• Retained profits
• Inter-group lending
• Large investors
• Family/Friends
• Informal credit organizations

12
Company Bankruptcy

• Basic Choice
• Restructure if going concern value greater than
  liquidation value.
• Liquidate if going concern value less than
  liquidation value
• Who decides?
• Government
• Private investors and creditors.

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Bankruptcy Procedures

• Privately negotiated restructuring
• Government/court liquidation (for example,
  Chapter 7)
• Government/court restructuring (for example,
  Chapter 11)

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Government Restructuring Should Not be Allowed

• Introduces a confused mixture of social,
  political, and economic objectives.
• Preserving jobs and protecting labor unions.
• Helping suppliers
• Maintaining tax base
• Helping political supporters and cronies
• Creates zombie companies that should be
  liquidated.
• Barrier to creation of efficient, modern
  companies.
• Raises the cost of capital for profitable
  companies.

15
Lack of Competition Greatest Obstacle to
Development

• Businessmen complain about such obstacles as
• Lack of finance
• Poor infrastructure
• Corruption
• Poorly trained workers.
• But McKinsey Global Institute country studies
  show importance of competition as incentive for
  business to improve.

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Government Barriers to Competition Are Backed by
the Force of Law

• Tariffs and restrictions on imports.
• Restrictions on foreign ownership and investment.
• Government control of inputs such as land, power,
  or water.
• Permits to start a business.
• Crony capitalism.

17
Degree of Trade Protectionism(Percentage of
Developing Countries)
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Competition Agencies

• Private barriers to competition are usually self
  defeating without government support.
• Agencies often have a confused mixture of
  objectives
• Promote fair competition.
• Promote small business
• Become a weapon in the competitive battle
• Require expert judgment and wide discretion
• Probably do more harm than good.

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Corporate Governance Is Not an Important Issue in
Poor Countries

• Problem how can owners control managers.
• Dispersed ownership creates the problem.
• Dispersed ownership rare in most countries,
  particularly poor countries.
• Corporate governance will only become an issue if
  governments encourage or require dispersed
  ownership, for example, through privatization.
• Many U.S. experts seem to support dispersed
  ownership.

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Controlling ShareholderIs Normal
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A Large Stock Market is Not a Desirable Objective

• A cost not a benefit of dispersed ownership.
• Small investors need stock market to trade.
• Controlling shareholders rarely use the organized
  stock market.
• Not an important source of capital even in the
  countries with large stock markets.
• 5-6 of total needs in India.
• Drain on capital in U.S.
• The tail wagging the dog.

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What Does Corporate Social Responsibility Mean?

• Treat workers, consumers, and investors fairly
  because this is good business.
• Obey all laws, e.q. worker safety, taxation,
  minimum wage, product health safety,
  environmental protection.
• Balance the interests of all groups in society
  (stakeholders) in making decisions and not just
  shareholders.

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Many Objectives MeanNo Objectives

• State-owned enterprises show this model does not
  work.
• Balancing interests of stakeholders very
  difficult, for example, living wage.
• Democratic governments are elected to determine
  social responsibility through laws and
  regulations.
• Who elected corporate executives, World Bank,
  U.N., OECD, or other groups to create and enforce
  standards of corporate social responsibility?

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Conclusions

• In developing countries, government failure is
  far more important than market failure.
• Tailor government policies to fit the ability of
  government institutions.
• Dont let the perfect be the enemy of the good.
• Second best may be the only practical option.