Government Policy in Frontier Economies

Success in frontier markets is driven, in large part, by getting government relations right. It thus makes sense to understand a hard-working government's perspective so as to be able to structure the interactions correctly. For their part, policymakers in frontier economies seeking to generate private sector development need to understand the realities of business investment to structure the right incentives. In this section we describe how well-intentioned governments should act to develop their private sector. Existing schools of private sector development often produce contradictory advice: for example, some recommend being responsive to the demands of firms while others believe that such demands will corrupt the state. We argue that this is because both policymakers and advisors fail to understand that most schools of private sector development are only helpful in tackling one of the four markets. For example, the World Bank's Doing Business approach is helpful for developing workhorses, which thrive on clear and limited regulation. Similarly, the "cluster" approach of cultivating a competitive advantage in several key industries makes sense for developing magicians, which often need subsidies and specialized infrastructure in order to compete on world markets. Insights from the public choice school in economics, ever concerned with capture of government processes by elites who are not interested in investing in the broader economy, are crucial in knowing how to rein in and appropriately regulate powerbrokers.

Thus, policymakers need to bring a different strategy to each of the four markets. They need to empower workhorses by establishing clear rules of the game, limited red tape, good infrastructure, and consistent and equal interpretation of the law and enforcement of contract. They need an engaged strategy to attract and retain magicians, seeking to build competitive advantages in appropriate sectors; if the government doesn't yet have the capabilities to do this, it needs to help private actors organize output industries, and remove bottlenecks when government is the problem. Policymakers need fair and active regulation of powerbrokers, and they need to establish clear lines between political and business actors. If vested interests are too strong to tackle immediately, policymakers need to build new constituencies that will demand fairly-priced output from powerbroker firms, by-for example-publicizing prices of goods like gasoline, mobile airtime, and electricity, and comparing them with regional averages. Finally, policymakers should have a clear-headed approach to the rentier sector, never giving away the nation's assets for too cheap a price, and never forgetting to follow up and regulate. In some industries in many frontier economies, there is not enough red tape-mining is usually one of them.

Governments that fail to understand the four markets may undertake a common mistake, which is to seek FDI for some vaguely-defined development benefit. These governments may end up offering incentives for mining companies to export the country's resources during a period of low commodity prices or for a foreign retailer with an international supply chain to corner the local grocery store market. Instead, they should be saving their incentives for attracting magicians, whose "magic" is that when one magician does well, no other firms are crowded out; on the contrary, firms are crowded in.

Policymakers, beyond having to uniquely approach each of the four markets, need to look at the collective weight of economic activity in their countries in order to try to tip the overall balance constantly in favor of "good lobbying" rather than bad. This can lead toward the desired outcome of positive reinforcement between business development and political development, a feature that is often absent in frontier economies.

Good corporate citizens can learn a lesson here too. Design the government's optimal private sector development strategy, recognizing the importance of magicians and productive workhorses in driving a country's prosperity, and see what your firm can do to encourage that outcome. That's sustainability, and it's good for your business if you benefit from a productive and prosperous society. (And if you don't benefit from a productive and prosperous society, you might think about changing your line of work.)