Private Sector Development Efficiency, Productivity and Growth 1 Development Equity Associates Inc. February-March, Sources: World Bank 2003; Mckinsey Global Institute

Private Sector development Efficiency, Productivity and Growth I. Productivity Is Key to Growth Incomes and Jobs II. Private Sector Development Is Necessary for Productivity but Not Sufficient III. Institutional Environment and Capability Are Also Key Factors

Private Sector development Efficiency, Productivity and Growth I. Productivity is Key  Key to Development Is Creating Productive Jobs Where People Live  In Statistics This Shows up As Growth  Development Is Not Redistribution but Productivity Gain

Private Sector development Efficiency, Productivity and Growth I. Productivity is Key – A Survey of perceptions

Private Sector development Efficiency, Productivity and Growth I. Productivity is Key – How to Increase it  Finance, Investment, Natural Resources, Human Capital Are Necessary But Not Sufficient  New Technology, Better Methods and Innovation – (Best Practices) Increase Productivity  Private Firms Spread Best Practices to Where People Live  Private Firms Are More Productive Than State Firms

Private Sector development Efficiency, Productivity and Growth II. PSD Necessary not Sufficient – All Firms are not the Same  Productivity of Firms Varies Within Sectors and Across Sectors and Across Countries.  Overall Productivity Can Increases If Less Productive Firms Exit and More Productive Firms Enter  Productivity Can Also Increase As Good Firms Grow and Branch Out  More Productive Firms Get Larger  Higher the Per Capita GDP Greater the the Share of Large Firms in the Economy

Private Sector development Efficiency, Productivity and Growth II. PSD Necessary not Sufficient – How Productivity Grows

Private Sector development Efficiency, Productivity and Growth II. PSD Necessary not Sufficient – Per Capita GDP & Firm Size

Private Sector development Efficiency, Productivity and Growth II. PSD Necessary not Sufficient – Freedom to enter, exit or grow  Competition Selects Best Firms & Drives Spread of Best Practice and Productivity  Firms Must Be Allowed to Fail –Assets, Ideas, People, Funds Can Be Reused in Better Ways –Incentive to Improve and Adjust When Facing Failure  Competition Forces Average Practice to Move Closer to Best Practice –Key for Diffusion of Best Practice –Enormous Value for Wealth Creation

Private Sector development Efficiency, Productivity and Growth III. Institutional Environment  Institutional Capability and Environment Counts More Than Factors of Production to Drive Productivity Growth  Openness of the Economy Is Important  Human Capability Is Also Important  Results of Industrial Policy Have Been Mixed

Private Sector development Efficiency, Productivity and Growth III. Institutional Environment – More Important for productivity

Private Sector development Efficiency, Productivity and Growth III. Institutional Environment – Openness and Human Capital

Private Sector development Efficiency, Productivity and Growth III. Institutional Environment – Social Safety Net  Needs to Accompany PSD for Social and Political Acceptability  Should Not Undermine Markets or Best Practice Capabilities of Firms  In Addition to Equity and Fairness Is Also Good for Efficiency and Growth –Experiment & Failure Drive Productivity Growth –Social Safety Net Allows Risk Taking