Promote Private Sector Development Research Articles

Exchange Rate Volatility and Governance Indicators

This study investigates the relationships between exchange rate volatility and governance indicators for emerging economies. Government effectiveness and regulatory quality as main indicators of governance are analyzed in terms of their implications for exchange rate volatility for a selected group of emerging countries consisting of Argentina, Mexico, South Africa and Turkey covering the period from 1996 to 2022. Government effectiveness indicator captures perceptions of the quality of public services, the quality of policy formation and implementation, the credibility of the government’s commitment to designed policies, the quality of the civil service and the degree of its independence from political pressures. Regulatory quality indicator measures perceptions of the ability of the government to formulate and implement sound policies and regulations that allow and promote private sector development. It is shown that countries with higher degrees of government effectiveness exhibit lower exchange rate volatility. In addition, higher levels of regulatory quality turn out to be associated with lower exchange rate volatility. These findings yield significant policy implications for emerging countries that experience high exchange rate volatility, which constitutes the major contribution of this study to the literature.

Influence of governance indicators on public debt accumulation in Africa

PurposeThe unsustainable public debt of most African economies adversely affects their economic growth and stability. This study aims to explore the influence of cross-country indicators of governance from African countries on public debt accumulation.Design/methodology/approachThe study deployed a quantitative research design technique. Secondary data was used in this study. The frequency of the data is annual, and it is available from 1996 to 2022 for 48 countries in Africa. The study deployed the system generalized method of moments for the estimation.FindingsThe study finds that countries with high regulatory quality standards, control corruption and ensure effective governance accumulate less government debt while countries that abide by the rule of law instead accumulate more government debt. The study also finds that economic growth and government revenue reduce government gross debt while government expenditure and investments increase public debt.Research limitations/implicationsDue to data unavailability, other factors which are likely to influence government debt accumulation were not included in the study as control variables. This is the limitation of the study.Social implicationsAfrican governments should strive to maintain high regulatory quality standards through the formulation and implementation of sound policies and regulations that permit and promote private sector development, and ensure quality and accountability of public and civil services. Governments are also urged to control corruption and enact good laws so that the enforcement of these laws will not worsen the risk of becoming debt-distressed.Originality/valueRecent studies on governance and public debt were focused on the Arabian Gulf countries, countries of the Middle East and North Africa (MENA) region and a combination of high and low-income countries. This study scrutinizes exclusively the effects of the quality of governance indicators on public debt accumulation, in the context of Africa.

Is the discovery of oil a blessing or curse in the era of climate change?

The decades-old question of whether oil is a blessing or a curse to countries that discover it has received much attention in the literature on energy and resource economics and policy. Despite the contributions of the resource curse literature and its critique, the global consensus to address climate change by reducing emissions from fossil fuels poses a new challenge to the extractives-led growth strategies. This research analyzes the ways oil discoveries influence carbon emissions differently in countries with contrasting institutional quality. Our results show that the significant and intensifying treatment effects of finding oil over time lead to an increase in carbon emissions in low institutional quality countries, while such effect is not significant in high institutional quality countries. The carbon curse triggered by detrimental effects of low institutional quality encourages improving a government’s ability to provide sound policies and regulations to promote private sector development. Such ability is the focal point between neoclassical economics and developing societies that served to reveal the institutional underpinnings of market economies for high-quality growth. Beside high-quality growth, our finding reveals supplementary motivation for the quality of government, which helps mitigate the carbon curse triggered by finding oil.

Enhancing Foreign Currency Allocation for Private Sector Development – Case of the Reserve Bank of Zimbabwe Forex Auction System

Foreign currency shortages remain a perennial challenge in Zimbabwe leading to several spillover effects such as shortages in electricity, raw materials, fuel, inflation among other market distortions. The central bank introduced the Dutch Auction system in an attempt to address forex shortages but the effectiveness of this approach has been questioned. This study employed the Vector Autoregressive (VAR) and error corrected (VECM) models in order to empirically determine how the Reserve Bank of Zimbabwe can efficiently allocate foreign currency in a manner which supports private sector development. In the short run, the auction is an effective tool to promote private sector development. However, long run analysis presents a deletions effect. This is due to a rise in round-tripping from market participants to leverage and perform arbitrage on different rates (auction and parallel), increased backlog reflecting shortages in allotments and high incidences of corruption. All this leads to a significant decrease in the confidence levels of the economy among private stakeholders. The study recommends monitoring of authorized auction dealers, improve public confidence by minimizing rent-seeking behavior, re-model exporters participation in the auction system or abandoning the auction system altogether.

The determinants of foreign divestment in South Korea

Purpose This paper aims to enhance empirical research on foreign divestment and international relocation by multinational firms are still limited and understudied, although these issues have been a frequent phenomenon and carry important economic implications. Design/methodology/approach The paper investigates the trends of foreign divestment in South Korea and examines firm- and host country-level determinants in total, manufacture and service sectors from 2010 to 2019. Findings Using probit model analysis, the main findings are first, among the firm-level factors, sales revenue and parent firm dummy are shown as negative and significant determinants of foreign divestment especially in manufacturing sector. Second, among the country-level factors, gross domestic product growth rate and regulatory quality that measures perceptions of sound policies that promote private sector development are shown negative and significant determinants of foreign divestment. On the other hand, relationship between the environmental policy stringency and foreign divestment is shown positive and significant. Originality/value The results suggest that these nonfirm-specific characteristics are also important factors in firm decision to divest from the host country.

Perceptions of Opportunity and Fear of Failure: Does the National Demography Matter?

Focusing on demographic transitions, we develop a theoretical framework grounded in the sense making literature that suggests that people in nations undergoing demographic transitions relate their entrepreneurial behavior to perceptions of enhanced opportunity and fear of failure. Prior studies in the entrepreneurship literature scrutinized these two tendencies separately. Our argument is that they operate in tandem that demographic deficits unleash both perceptions of opportunity and fear of failure. We also maintain that government policies to promote private sector development moderate these relationships. Using a database that covers fourteen years, and 67 countries, we test hypotheses derived from the framework and obtain results that are mostly consistent with it. We discuss the implications of our study for the potential entrepreneurs and policymakers in the conclusion.

Diversifying a resource-dependent economy: private\u2013public relationships in the Kuwaiti economy

The Kuwaiti economy is characterized by two major structural imbalances—heavy dependence on oil production and dominance of the public ownership. Kuwait has struggled over the years to implement a two-pronged development strategy —diversifying the country’s economic base away from the oil sector and promoting private sector development. This paper explores the economic impact of some policy reform options currently being considered. It employs a unique set of input–output tables, derived from supply–use tables, that distinguishes transactions made by private and public enterprises as well as providing a matrix of imports by industry. The public–private sector interdependence analysis revealed interesting results regarding sectoral differences in strengths of forward and backward linkages. For instance, the findings indicated that the strength of the publicly owned oil sectors lie in their forward linkages, supplying other sectors with their outputs, but their backward linkages is weak. On the other hand, the chemicals industry is identified as one of a few sectors with balanced and relatively strong forward and backward linkages in both public and private sector. The policy analyses conducted in this paper are highly relevant to the ongoing policy debate in Kuwait over the design of the economic reform programs. The public–private linkage analysis has revealed insights into policy synergies through which one instrument can affect more than one policy target.

Capital investment in telecommunications infrastructure and tourist arrivals in developing countries: Does the public–private sectors relationship matter?

This study investigates the relationship between capital investment in telecommunications infrastructure (TELCOM) and tourist arrivals in developing countries. Additionally, it examines whether the public–private sectors relationship moderates the effect of TELCOM on inbound tourism. The model is empirically tested for 46 developing countries for the years 2005–2019. Applying system generalized method of moments and dynamic fixed-effects estimators, the results show there is a positive and significant relationship between TELCOM and tourist arrivals. We also find that a stronger relationship between the public and private sectors magnifies the positive effect of TELCOM on inbound tourism. The moderating effect of quality of regulations on TELCOM-tourism nexus is a novel finding, highlighting the important role of governments in creating and implementing sound policies and regulations that permit and promote private sector development.

Impact of Macroeconomic, Governance and Risk Factors on FDI Intensity—An Empirical Analysis

The study analyzes the impact of macroeconomic, governance and risk factors on foreign direct investment (FDI) intensity with respect to the US market during the period 1960–2019. The study adopted regression methodology. The FDI, macroeconomic and risk data were sourced from the Federal Reserve Economic Data (FRED) database. The governance data were collected from the World Bank Governance Database. The study suggests that infrastructural investments lead to higher FDI. A stronger Euro leads to higher FDI activity in the United States. Research & Development investments is a significant factor which contributes towards enhanced FDI activity. The higher the corporate profitability, the greater the FDI inflows. Exports and imports are significant factors which determine FDI in markets like USA. Inflation has a negative impact on FDI flow regulations, which are aimed to promote private sector development is negatively related to FDI intensity. FDI activity by firms tend to be lower when corruption levels are higher in the country. The higher the governance perception in terms of voice and accountability of citizens, the greater the propensity to attract FDI. The perception of the effectiveness of a government’s commitment towards the quality of public and civil services is directly related to FDI investment.

Ease of Doing Business and Foreign Direct Investment: Case of Sub-Saharan Africa

This paper investigates the empirical relationship between selected ease-of-doing-business indicators and foreign direct investment in sub-Saharan Africa. Using a panel of 45 sub-Saharan African countries covering the period 2004–2018 and the system generalized method of moments estimation technique, the paper reveals that ease-of-doing-business indicators play a significant role in attracting foreign direct investment to the sub-region. Specifically, a percentage point improvement in the ease of starting a business in sub-Saharan Africa results in a 0.79 percentage point increase in foreign direct investment. Moreover, a percentage point improvement in tax administration, coupled with the existence of an optimal tax rate, increases foreign direct investment inflows by 0.17 percentage point. This paper contributes to the empirical literature by proposing a new model that incorporates the quantitative effects of ease-of-doing-business indicators on foreign direct investment. These findings underscore the need for policymakers to operationalize business friendly policies that permit and promote private sector development in order to attract multinational corporations.

Nigerian Transnational Companies and Economic Development across Sub-Saharan Africa

In examining how the private sector could be gainfully engaged in economic development of African countries, issues such as corporate social responsibility (CSR) framework, multinational enterprise and livelihood option suffice. These are some key elements of a credible policy package that will promote private sector development and boost intra-African trade. Another vital area that needs to be creatively addressed in the capacitation of African enterprises is access to financial resources, which studies suggest is one of the major constraints to private sector development in Africa. As one of the largest economies in Africa, Nigeria has played a leading role in private sector engagement in economic development. A number of Nigerian transnational companies have extended their operations and maintained active presence in some other Africa countries, particularly Sub-Saharan African countries. In addition to their primary business, they have invested heavily in some human development sectors such as health, workforce development and infrastructure—initiatives which not only benefitted them, but create richer economies and enhance human capital development of the host countries. The study is mainly focused on the capital investments of two Nigerian Transnational Companies— Globalcom, a Telecommunication company and the Dangote Group—a manufacturing and trading firm. The study uses their operations and investments across Sub-Saharan Africa as case studies of Nigeria’s private firms’ contribution to economic development in Africa. The study will look into published statistical records and other materials to generate information on trade and foreign investment within the study area. Keywords : Transnational Companies, Economic Development, Africa DOI: 10.7176/IAGS/83-05 Publication date: June 30 th 2020

Trade openness and child health: a heterogeneous panel cointegration analysis

ABSTRACTIn this paper, we examine the impact of trade openness on child health, based on a cross-country panel data set covering 66 countries for the period 1960–2013. To account for the time-series properties of the data and potential cross-country heterogeneity in the impact of trade openness, the study employs heterogeneous panel cointegration techniques that are robust to omitted variables and endogeneity problems. The results reveal that trade openness and child health are cointegrated, and that trade works to reduce the child mortality rate significantly in the long-run. The results are robust to the methodology and trade openness and child health indicators employed, as well as to the presence of cross-sectional dependence and changes in the sample composition. The findings also suggest that the impact of trade on child health tends to be stronger in countries with better institutional quality, lower corruption, good governance, political stability, and sound policies that promote private sector development.

Short- and long-term relation between economic development and government spending: the role of quality of institutions

ABSTRACTThis paper tests the Wagner’s assumption of the one-sided directional flow moving from economic growth to public spending considering an international database over the 1996–2012 period. By using indicators on the level of country control of corruption, government effectiveness, political stability, rule of law, regulatory quality and voice and accountability, the paper analyses the economic performance-public spending nexus controlling for the quality of the institutions. The empirical evidence supports the existence of the Wagner’s law, showing that, in the short-run, public spending positively reacts to a positive shock in national income, with a lower magnitude for democratic countries. In the long run, the error-correction model shows the convergence between public spending and national output occurring less quickly for non-democratic, low-income and to a smaller extent for non-OECD countries. Institutional quality, such as effort in controlling corruption and the presence of regulations that permit and promote private sector development, may help reducing the amount of per capita public spending and making it more productive. Higher expenses in compositional amenities such as public services for the elderly may explain why public spending per capita will increase the most in economies with a higher share of the population that need healthcare facilities.

Governance infrastructure and FDI flows in developing countries

With the existence and management of certain national and global-level institutions being called into question by their electorates and members, the aim of this paper based on a sample of 122 countries over the period 2002–2017 was to investigate the continuing applicability and relevance of current and existing macro governance infrastructure on patterns of foreign direct investment (FDI) in developing countries. Employing the World Bank’s ‘good governance index’ our findings demonstrate that certain aspects of country – level governance infrastructure continue to be a significant predictor of host country FDI, with particular emphasis placed on the ability of governments to effectively formulate and implement policies alongside an effective regulatory environment promoting private sector development. Thus, countries with weak institutional capacity to design and implement an effective investment regime, and secondly absorb FDI will struggle to attract and benefit from the positive externalities associated with FDI.

The Sources of Unemployment in Lesotho

Lesotho’s unemployment, poverty and income inequality and other social ills remain pervasive in the face of non-inclusive growth. Using structural vector autoregressive framework and annual time series data spanning from 1980 to 2014, this paper investigates the sources of the high unemployment in Lesotho, a small landlocked developing country whose currency is pegged to that of South Africa. The impulse response functions, forecast error variance decomposition and historical decomposition jointly revealed that unemployment dynamics in Lesotho largely emanate from shocks to employment, unemployment itself, productivity, real wages and inflation. The importance of positive shocks to employment and unemployment itself in explaining unemployment variations decline over time while the importance of positive shocks to productivity, real wages and inflation grow with time. In light of this, Lesotho’s government should promote private sector development, diversify the economy’s markets and invest in human and physical capital development with a view to increase employment.

Kingdom of Lesotho: Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for Extension of the Arrangement and Rephasing of Disbursement

The Extended Credit Facility (ECF) program extended to Lesotho after a sharp fall in revenues remained broadly on track. Lesotho maintained positive growth supported by expansion of mining and construction. Fiscal consolidation efforts have helped to strengthen international reserves, despite weak diamond prices. Executive Directors welcomed the government’s continued efforts to improve the business climate and promote private sector development. They also suggested the need to maintain fiscal consolidation efforts, while safeguarding priority social and growth-promoting capital spending.

Promoting Private Sector Development in China: The Challenge of Building Institutional Capacity at the Local Level

China's rapid growth in recent decades can be attributed in large part to the emergence of a vibrant private sector, which now accounts for around three quarters of the economy. Despite government pronouncements in support of private small businesses, public policy and institutions to support private sector development have been slow to emerge and address their needs. However, many privately owned enterprises are in need of assistance, affected by internal capability constraints such as a lack of management and leadership skills and by an external environment that still privileges state-owned enterprises. Although policy makers may have had other policy priorities in the past, and private enterprises have been able to survive and grow without inputs of professional advice and support, we argue that in the future small and medium-sized enterprises in China will require appropriate and effective business support to continue to grow. In this context we consider two interventions designed to build institutional capacity to provide business support at a local level and the barriers to be overcome if an effective framework for state promotion of privately owned small businesses is to be established.

Culture, social relations and private sector development in the Thai and Vietnamese fish hatchery sectors

AbstractThis paper provides a comparative analysis of the social and cultural dimensions of fish hatchery development in Vietnam and Thailand. Two detailed case studies highlight the importance of a variety of culturally mediated, informal interpersonal relationships in facilitating the establishment of new hatchery enterprises. The analysis reveals that in both Vietnam and Thailand, informal relationships are extremely effective conduits for the transfer of productive technologies from public institutions to private entrepreneurs and for the subsequent development of private enterprises. It is concluded that if current policies aimed at promoting private sector development are to be more successful, they must be better tailored to the contours of specific cultural geographies in locations where they are implemented.

Angola: 2007 Article IV Consultation: Staff Report; Staff Supplement and Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Angola

The staff report for the 2007 Article IV Consultation on Angola highlights economic performance, macroeconomic stability, and fiscal policy. Growth in the medium term will rely increasingly on the non-oil sector, where reforms to promote private sector development will be critical to offset a potential loss in competitiveness from an appreciating real exchange rate. A key challenge is to ensure that political pressure to scale up public spending does not undermine macroeconomic stability. Lower output growth and oil revenues than envisaged in the baseline scenario could jeopardize public and external debt sustainability.

Reforming Business-Related Laws to Promote Private Sector Development: The World Bank Experience in Africa

The importance of an appropriate legal framework reflecting the cultural, sociopolitical, and economic circumstances of a country is now widely considered to be an important element in the development process. The latest recognition of this link may be found in the Comprehensive Development Framework adopted by the World Bank, where the second pillar underscores the fact that no equitable development is possible without, among other things, an effective system of property, contract, labor, bankruptcy, commercial codes, personal rights laws, and other elements of a comprehensive legal system. This study presents a historical perspective of legal reform programs in Africa, especially after the post-independence period. It then reviews the experience to be discerned from World Bank-financed legal reform projects in Africa, which have the primary objective of promoting private sector development. It focuses primarily on legislative reform, that is, reform of substantive laws and subsidiary legislation, and activities designed to ensure the appropriate application of the new texts, such as capacity building and strengthening of legal institutions, including the ministries responsible for justice, the judiciary, and the legal profession.