Given his background, Raj Shah is well placed to lead U.S. development efforts in the already-big areas of global health and agriculture. But I hope that a small portion of his attention can bring some strategic focus to another set of issues that may be even more critical to the long-term fight against poverty: business climate reforms.
If the poorest nations are going to grow rapidly and eventually wean themselves off of international largesse, the only real route is private sector growth. Only local businesses and their employees can provide tax revenue on a sustainable basis. And while poor countries have made progress in fixing macroeconomic problems (e.g., inflation has been tamed almost everywhere), the micro barriers to growth remain devastating in too many places. Especially in sub-Saharan Africa, it is simply still way too hard to open, operate, and grow small businesses. Rwanda is the only low-income African country above the global median. And fully two-thirds of low-income African countries are clustered in the bottom quartile -- Africa is still, by far, the worst region to do business.
But donor efforts, especially from the United States, to support business climate reforms are unconscionably ad hoc. The U.S. Treasury provides technical advisors, USAID helps countries with land registry, etc, but the allocation of these programs rarely makes much sense. The “African Global Competiveness Initiative”, the USAID umbrella for many of these activities, has been more of an ex post accounting exercise than a real strategy. Fortunately, AGCI expires next year.
The scattered effort so far is too bad because these tend to be low-cost efforts that can really help countries unleash their own entrepreneurs -- at least in countries that are serious about removing these obstacles. It is also too bad because these are exactly the kind of aid programs that the American public can get behind. I can hardly think of anything as all-American as promoting and celebrating small business -- after all that’s what turned us from a poor country into a rich one.
I’ll be keenly interested to hear from Shah whether he sees a better way for the U.S. to support business reforms in poor countries. We at CGD have proposed in the past that the U.S consider joining the Investment Climate Facility in Tanzania as a good first step. We’re also working on a proposal for a next-generation facility in this area.