1 Policy and implementation of Reforms: the Experience in El Salvador and Possible Lessons for Madagascar Manuel Hinds Antananarivo May 2005

2 Choosing and organizing the government’s main objectives Insert your plan within global trends: what is successful in the world today? Establish a limited number of objectives and actions to attain them Undertake only those tasks that can be implemented Organize programs in a way that makes easy to understand how they contribute to attain the objectives Design them in simple, fool-proof fashion

3 In El Salvador: The overall objectives 1. Opening the economy to the world a) Trade b) Connectivity 2. Increasing its competitiveness not by reducing salaries but instead: a) The cost of capital b) Transaction costs 3. A requisite for these objectives was the stabilization of the economy

4 The program of reforms in El Salvador 1. Increase the VAT from 10 to 13% 2. This and expenditure rationalization would allow a: Reduction in protection, from an average of 25 to 6%... Plus stabilizing the economy and get investment grade rating, plus… 3. Increase the expenditure in human capital 4. Open telecom and electricity to competition 5. Privatize telecom and electricity 6. Pension reform 7. Dollarize the economy

5 The strategic situation The private sector opposed the reduction of protection They could not acknowledge this They opposed the VAT increase The workers in telecom and electricity opposed competition and privatization The strategy Go first for the VAT increase Prepare all other reforms at full speed

6 All the objectives were fulfilled… Except dollarization, which was dropped from the plan to reduce the number of objectives It was attained by a subsequent government

7 Once the objectives were defined… The key was to coordinate all the resources at the disposal of the government to carry out the reforms in an efficient way This required close coordination with: The line ministries The National Assembly International institutions Close contact with the press Timing of reforms

8 Examples of timing The increase in the VAT to get the funds to reduce protection, increase investment in education and stabilize the economy First introduce competition in telecom and electricity and then privatize The opening of these markets introduced competition from more efficient providers The workers of the state-owned decided it was better to get privatized to survive

9 Relationship between the MoF and the line ministries Lines of communication Strategic committee: Monday mornings, setting the agenda of issues for the President Focus the activity, review strategic programs Grab space in the media Economic committee: weekly Social committee: weekly Cabinet meetings: monthly

10 Other crucial linkages: National Assembly Visit the Finance Committee at least once a month Two breakfasts per week: With the leader of the government’s party in the Assembly and the head of the Finance Committee With the opposition leaders

11 Other crucial linkages: the World Bank, the IMF and the IDB Met with all missions twice: at the start and wrap up Discussed projects with them, issues, implementation problems Visited Washington every three months to discuss overall strategies and each project This gives you an independent view of what is happening inside the government And a complementary chain of enforcement

12 Other crucial links: the press Never refused an interview, even with hostile journalists or TV interviewers Answered each question in the context of the overall strategy, explaining how decisions were made Wrote op-eds from time to time on specific issues

13 The advantage of transparency Reforms always go against vested interests, which can… Mount formidable opposition But a clear plan and transparent intentions to carry it forward provides a strong cohesion to the government’s efforts Which the opposition tends to lack And elicits support from the population, Which appreciates the value of stated intentions and coherence

14 The advantage of focusing El Salvador still has many challenges to face… But some strategic problems were resolved These solutions provide new bases for progress

15 Lessons learned from El Salvador: the attitude Think like a developed country Aim at the first prize Insert the country into the international context What is moving the world’s economy? Use the developmental power of the small enterprises

16 The global challenges The ability to communicate The ability to coordinate to attain complex tasks The ability to embed existing knowledge in: Production and Logistics Doing things better – the value chain

17 The domestic challenges Macroeconomic instability Low productivity: People disconnected from the rest of the world and from each other Low human capital in health and education Low levels of skills Particularly coordination to attain common goals High transaction costs Lack of financing

18 The medium term goal: Madagascar… With an efficient government, which Facilitates economic activity, without cumbersome bureaucratic procedures Delivers services efficiently to the population Accelerates and implements reforms Where the main engine of growth in the rural context would be the small enterprise… Exporting and Selling domestically

19 The action plan Keep an eye on stabilization Create a level playing field Reduce transaction costs Use the reform of the state to reform society… To become a connected society Train the people to use connectivity to: Use their existing knowledge better Improve their knowledge and health Reduce transaction costs

20 Stabilization is essential It improves the investment climate It reduces interest rates It reduces transaction costs

21 Create a level playing field Reduce protection This benefits mostly the small enterprises, which have access to their inputs at international prices in the domestic market Eliminate privileges Make it simple to create and manage a business

22 Using the connectivity to reform the state Simplify and turn more efficient the delivery of government services through the use of connectivity Choose one or two of these services that could be improved rapidly through connectivity Create the demonstration effect Design an overall program to reform the state