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The East: Credible Governments Critical For Private Investment

  • Robert Lyle

Washington, 26 June 1997 (RFE/RL) - When it comes to credibility of governments and the reliability of their institutions, the World Bank says private business people rank the countries of Central and Eastern Europe in the middle of global averages but put the nations of the former Soviet Union at the very bottom.

The bank surveyed more than 4,000 local entrepreneurs in 69 countries recently on such things as corruption, the reliability of the judiciary, the security of property, the predictability of laws and policies and the stability of government.

It found that in every single category, the business people rated the nations of the former Soviet Union as the worst in the world, with the single exception of insecurity of property. There, governments in Latin America ranked a few percentage points worse.

The reliability of government institutions and the credibility of governments turns out to be a critical factor in the economic success of nations around the world, says the bank.

In its annual World Development Report, issued yesterday in Washington, the bank says there is a "strong correlation between a country's credibility rating and its record of growth and private investment."

The bank would not release individual country ratings, but only geographic groups to illustrate that an "effective state is the cornerstone of successful economies" and that without it, economic and social development is impossible."

All the economic success stories, says the bank's report, were made possible by an effective state, one which "harnesses the energy of private business and individuals and acts as their partner and catalyst, instead of restricting their partnership."

With all the talk about reducing the governments role and letting markets be free, says Bank President James Wolfensohn, "many have felt the logical endpoint of all this was a minimalist state."

"Such a state would do no harm," he says, "but neither could it do much good."

The bank's chief economist, Joseph Stiglitz, says the old view was that people had to choose between government or markets. "What we're trying to argue," he told a press conference Tuesday, "is that in fact there's a very limited role for government, but it's very important. The fact that its limited does not mean that it's unimportant -- without it you can't have the private sector."

The report says governments' first job is to get the fundamentals right, by establishing a foundation of law, maintaining economic stability and following policies that don't distort the economy, providing basic social services and infrastructure, protecting the most vulnerable in society and protecting the environment.

Amazingly, says the report, the survey found that "many states are performing their core functions poorly" -- failing to ensure law and order, protect property or apply rules and policies predictably.

Business people and investors do not consider these governments to be "credible," and growth and investment suffer as a consequence, says the report.

The nations of Central and Eastern Europe have made progress in re-focusing the government's role away from central planning, says the bank, but this re-engineering of the state is "far from complete."

In the Commonwealth of Independent States, the process is "still in its early stages" and most of these countries have basic institutional structures which are "ineffective, particularly the weak accountability of the executive to the legislature."

In addition, says the report, the former Soviet states face three pressing issues: "failure to curb organized crime, poorly defined property rights, and unpredictable regulatory frameworks." Solving these will require "a strong judiciary to buttress the rule of law," says the bank.

Stiglitz says that while these countries had large governments under communism, "there was actually a lot of extra-legal activity that went on -- in fact, for those systems to work, people had to use a variety of grey market and black market operations" and that mentality fed into the corruption that plagues these countries today.

Government credibility, concludes the report, is as important for attracting private investment as the content of its rules and policies. For markets to flourish and people to lead healthier and happier lives, says the bank, governments need to "focus on the basics" of what they do best and reinvigorate public institutions.