Business Environment Reform in Fragile and Conflict Affected States Report September 2017

The objective of this study, is to help DFID country offices and central policy teams to improve their understanding and implementation of Business Environment Reform by contributing to the evidence of what works and what does not work.  Business Environment Reform in Fragile States faces distinct challenges associated with the factors underlying conflict and fragility. These challenges include the tendency of conflict – both violent and non-violent – to centre on the control of economic assets and resources and the benefits flowing from them.

The key findings of this study are:

Business Environment Reform in Fragile and Conflict Affected States is distinctive from Business Environment Reform in more developed markets as it faces multiple challenges: to achieve the objectives of stimulating broad-based economic growth, expand economic opportunity in formal and informal markets, and address drivers of conflict and fragility – all at the same time.

When Business Environment Reform in Fragile States focuses predominantly or exclusively on economic growth, it risks contributing to perverse impacts and fails as a policy instrument to foster inclusive development.

Based on these points, this study proposes a new vision for Business Environment Reform in Fragile States that goes beyond a technical focus on ease of doing business and places more emphasis on the accompaniment of political processes to implement reforms and to achieve broader development impacts.

Specific findings on the lessons and experience of Business Environment Reform in Fragile States include the following:

Business Environment Reform can act as an important disciplining mechanism for macroeconomic stability. A focus on macroeconomic stability and improving the investment climate can contribute to economic development. Business Environment Reform can help to discipline state institutions by strengthening market accountability and efficiency.

Business Environment Reform has had positive results reducing transactions costs in some Fragile States. If one measures Business Environment Reform success by a reduction in transaction costs, interventions such as one-stop shops have been successful in many cases.

Business Environment Reform impact on overall competitiveness is inconclusive. While much Business Environment Reform programming has focused on transaction costs it did not affect broader competitive dynamics of Fragile States markets associated with the ‘cost of doing business’ – a factor emphasised to be more important for investment decisions.

Technical measurement indicators of ‘Business Environment Reform success’ have limited value in assessing a country’s trajectory out of fragility. Typical Business Environment Reform measures regarding the ease of doing business say little about the more pertinent questions of the development impact of Business Environment Reform, and how it is (or is not) contributing to dynamics of conflict and development. These questions are not prioritised in assessments of Business Environment Reform programmes in Fragile States.

Business Environment Reform programmes in Fragile States face the same constraints as other development interventions in Fragile States. These include political economy issues, lack of capacity or capacity gaps between different state institutions; and a lack of political will to implement reforms. As a result of these constraints, the impact of Business Environment Reform on fostering inclusive development is limited.

Business Environment Reform implementation has been more successful after security has been established after a war, and when accompanied by political commitment and capabilities to implement reforms. In the aftermath of war, sequencing decisions of Business Environment Reform in Fragile States involve trade-offs between supporting inclusive economic growth and power consolidation of the government.

Business Environment Reform as a concept and programme appears not widely known outside a limited group of development actors. While ‘Business Environment Reform’ as a development policy instrument was clearly understood by respondents from bilateral and multilateral donors and their targeted beneficiaries, it was largely unknown beyond this restricted group of actors

The country findings emphasise specific aspects of Business Environment Reform implementation in the respective countries that illustrate broader experience of Business Environment Reform in Fragile States. High-level findings include the following:

Rwanda demonstrates how Business Environment Reform can be an effective intervention where it is subsidiary to, and part and parcel of, a broader strategy for which there is significant political support for mobilising the state to plan and implement the country’s economic transformation in the aftermath of war.

Uganda illustrates the challenges for Business Environment Reform within political systems in which formal rules and structures largely remain subordinate to patronage politics, and in which corruption is deeply entrenched. Within such contexts, ostensibly business-friendly policies and institutions may be put in place, but they will have limited impact.

Ethiopia is an example of the potential for Business Environment Reform to play a supporting role in sequenced, focused economic and social development objectives – in this case, raising the productivity and incomes of large numBusiness Environment Reforms of farmers in the informal sector – even within an explicitly state-centric economic development model.

Sierra Leone shows how Private Sector Development and Business Environment Reform efforts that do not address long-standing dynamics of conflict and fragility will tend to exacerbate them, and that efforts largely decoupled from the livelihoods of the wider public may advance special and private interest rather than inclusive development.

The study recommends moving Business Environment Reform in Fragile States beyond a technical focus on ease of doing business and proposes a new vision for Business Environment Reform to foster broader development impacts. This upgrade to ‘Business Environment Reform 2.0’ emphasises the importance for Business Environment Reform in Fragile States to do the following:

Embrace a systems approach rather than a transaction approach to recognise the complex network of interconnected a business interests, agendas and systems in Fragile States;

Accompany political processes to implement reforms rather than focus only on providing technical assistance for Business Environment Reform;

Take into account the variety of ways in which formal and informal actors foster business initiative and innovation and generate economic value.

Manage impact of Business Environment Reform on drivers of conflict and fragility through interventions that are conflict-sensitive and cognisant of political economy dynamics.

The study also recommends several new entry points for Business Environment Reform programming in Fragile States:

Focus on sectors that create broad-based opportunity. Business Environment Reform gains in effectiveness if structured around sectors and initiatives that represent real economic opportunities for value chain development in the formal and informal economies.

Harness major investment projects and development initiatives as entry points for Business Environment Reform. Projects and initiatives that already have broader political support can serve as an entry point for Business Environment Reform and generate the necessary political backing.

Prioritise regional (multi-country) Business Environment Reform programming, especially for smaller economies.

Maximise Business Environment Reform programmes as a tactical instrument for governments and government institutions at national and sub-national levels to build performance legitimacy.

 

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