World Bank Vice President Michael Klein spoke exclusively with Sherine Abdel-Razek about how the role of the private sector can be enhanced in a global economy In his first official visit to Egypt, Michael Klein, the World Bank's vice president for private sector development met Minister of State for Foreign Affairs and International Cooperation Fayza Abul-Naga, and Minister of Finance Medhat Hassanein. During his two-day visit he also participated in a roundtable discussion at the Egyptian Centre for Economic Studies (ECES) where he introduced the findings of a new World Bank report on the effect of over-regulation on doing business worldwide. How do you see the role of the private sector in the global economy now compared to the 1980s and 1990s when the FDI and privatisation movements were at their peaks? When communism fell, it became clear that there was not much of an alternative around in the foreseeable future but to shift to a market-based economy. This was clear not only in the former communist countries but also in many of the developing countries which had witnessed an increase in state-run activities in the 1970s. Then there was the debt crisis in the 1980s and attention shifted to microeconomic stabilisation and trade liberalisation. Privatisation came up in the 1990s as a normal development. Also, it was during the 1980s and 1990s that countries slowly opened up capital regulations and thus created the possibility for foreign investments to go abroad. However, some of the enthusiasm for privatisation has dampened in recent times. The attention has shifted slightly away from the pure mechanical process of privatisation to finding the right environment in which the private companies will do well. When privatisation happens in competitive sectors such as manufacturing and many services, then privatisation is a very robust way of improving economic performance. But if you only privatise a public monopoly and make it a private monopoly that tends to do very little. The important step is to open up companies in various sectors to competition so that new funds can enter and those who cannot perform well can fail. For privatisation to be useful to the economy, the fundamental business environment has to be right -- with freedom to enter, freedom to grow and freedom to fail. This should be accompanied by respect of property rights, contract enforcement and so on. Now countries are working on improving this environment to make it easier for privatised companies to work. When it comes to foreign investment, much of the boom in FDI was related to investment in infrastructure. This boom was concentrated in Latin America and East Asia, primarily in the electricity sector. It has always gone this way; governments ran out of money because of fiscal problems but still have infrastructure needs and demand more water, more electricity, etc. The only solution was to resort to the private sector for investment. The problem that halted more privatisations of these sectors in these countries and worldwide is that the private sector does not deliver their services for free. On the contrary, they have to raise the price of these services and consumers have to shoulder this increase. In sectors like electricity and water, prices all over the world are below cost, as it is usually subsidised, and so you have to raise prices to keep the private sector in business. Governments found this very difficult politically so the enthusiasm for privatisation and thus more FDI in the private sector has stalled. And how did this affect the participation of the private sector in the world economy? In competitive sectors such as manufacturing and services, the private sector's role is growing. Of course there are select industries where the government ownership is still dominant, like the case in certain industries in Egypt. But there is no real argument that a competitive private sector is better that a protected government sector. In infrastructure the situation is more complicated. In industries where there is real competition and where prices are high compared to cost, like telecommunications, you see a greater role for the private sector. For example, note the rush of private companies into the mobile telephone business in Egypt. Also private companies are entering the markets with wholesale clients, large customers like airports which earn fees from airline companies and not from individuals, this is where the private sector is still going ahead. The real stumbling block for privatisation is the electricity and water industries for the reasons I mentioned; there we do not see much progress at the moment and I think it will be subdued for some time. Also, in countries where privatisation did not take off or where private participation in infrastructure is limited, like India, it is still moving slowly but there is no longer a boom as in the early 1990s. What about the private sector's participation in Egypt? I don't know enough about the details of Egypt, but it is well advised to move ahead with privatisation in the competitive sectors like steel and aluminum. In principle it is good to have private sector participation in the competitive sectors but at the same time we have to provide these entities with a suitable environment. You have to encourage new entrants to come and open up trade so that you can have genuine competition and do not merely reproduce the problems of the public sector. What is the aim of your visit to Egypt? This is a visit with two purposes. First, to learn more about Egypt, to hear a little about what people think about the policy environment and the role of private sector here. The second purpose is to meet our field officers in the World Bank and the International Finance Corporation. I have a dual role in both organisations so I had joint staff meetings to see how we can work better together. What are your impressions from your meetings with Egyptian officials? In my meeting with Abul- Naga, she made the point that the best way to help the private sector is more trade liberalisation, as is happening with the EU association agreement as a means to expose the private sector to more competition. Hassanein discussed with me a study about the informal sector in Egypt. It is based on means of reducing the cost of entering the formal sector through cutting regulations, registration fees, time costs and inspection costs while simplifying tax and customs administration, while also increasing the benefits of being formal through more protection of intellectual property rights, better contract enforcement regulations, better access to finance, etc. This is a very sensible agenda to pursue. Whether Egypt will follow through with success and vigour remains to be seen, but I think these are the most important steps the country can take for the private sector, especially for small and medium enterprises. One of the main purposes of your visit was participating in a roundtable discussion on the findings of a report issued recently by the World Bank. Tell us more about the report. The report is "Doing Business in 2004: Understanding Regulation". It is an attempt to benchmark a number of policies that characterise the business environment for the private sector across the 133 countries covered by the report. We started with five regulations: business registration, labour laws, contract enforcement, creditor rights and bankruptcy. We are trying to expand it to more indicators in future years. We did not ask firms about their experiences and their costs but instead tried to see what the law says. We write down these procedures and then analyse to see which countries have the most complicated procedures and then see in what way is this affecting the role of the private sector in this country. On average, unsurprisingly, we found that it is better not to have very complicated procedures and we discovered that heavier regulation brings bad outcomes. Heavier regulation is generally associated with greater inefficiency in public institutions -- longer delays and higher cost -- and results in higher unemployment, increased corruption, less productivity and investment, but not better quality, of private or public goods. The countries that regulate most, the poorest countries, have the least enforcement capacity and the fewest checks and balances in government to ensure that regulatory discretion is not used to abuse businesses and exact bribes. We also discovered that the poorer the countries the more complicated the regulations and thus poor countries will benefit a lot from simplifying their regulations . Maybe they do not have enough rules to protect their workers for example and that is why they are over regulating? This is a common argument -- that in poorer countries, market failures make it harder on the poor so they regulate more. But in reality people are not better protected by more regulations. On the contrary, we find more corruption, people are forced into the informal sector, where they have no protection and we find that simplifying things gives them more protection. Another big finding is that those with the least regulations are the Scandinavian countries where they had problems in the early 1990s with heavy-handed welfare states and they systematically simplified life for businesses so that more people are employed and more income and taxes are generated. The most complicated regulations are in Latin American countries, which is why their privatisation and reform efforts in the 1990s have had few results. If you don't create competitive conditions, and contract enforcement is difficult, then turning to the private sector is useless. How does the report rate the Egyptian business environment? On registration and contract enforcement, Egypt is in a good position but still has some ways to go. On employment regulations we find that the employment regulation index, which is the average of the flexibility of hiring, conditions of employment and flexibility of firing indices is very high at 83. Indices are scored between 0 and 100, with 100 representing the most regulation. The conditions cover mandatory working hours, mandatory leave and minimum wage legislation. Egypt has very strict rules for firing. We find that the law has established a list for grounds of firing and that redundancy is not considered a fair basis for dismissal. If you want to have competition in the economy to raise productivity and income, then companies which do not perform and may go out of business have to be able to lay off workers for reasons of redundancy. These are not popular ideas in Egypt. Maybe this protects workers in their jobs, but when a company realises that if it hires workers it will not be able to get rid of them, it will be less likely to hire in the first place. This explains why many people work in the informal sector. So these regulations that are ostensibly meant to protect do not protect anyone except some insiders, and push a lot of people out of the safety net. On creditor rights there are two points. The creditor rights index is calculated by assigning a value of one for a "yes" response on each of four types of creditor rights and summing the total score across all four variables. A minimum score of zero represents weak creditor rights and the maximum score of four represents strong creditor rights. Egypt's score is one. This means that creditors have to wait longer compared to other claim stake holders in case of bankruptcy. That makes it more difficult to banks to offer credit because it's tougher to get it back. Many other countries have this ranking, including the US. But such countries make up for this by having excellent credit information system, while Egypt's credit information system is very poor. This means that people who get credit will always be those who are well connected.
