Creating Markets - Lessons from Experience in Developing Countries
What lessons from evaluation are relevant to the success of the World Bank's renewed focus on creating markets?
To achieve the Sustainable Development Goals by 2030, development institutions will need to leverage an unprecedented amount of private sector capital to provide finance, build capital stock, and deliver access to quality goods and services. That is one reason why Creating Markets is a core component of the Maximizing Finance for Development (MFD) strategy of the World Bank Group (WBG).
Creating markets involves improving the capacity of public and private sector institutions and using market mechanisms to yield benefits from innovation, competition, and integration.
The World Bank Group has been creating markets for decades. For example, part of IFC’s institutional mandate is “to stimulate, and to help create conditions conducive to, the flow of private capital, domestic and foreign, into productive investment in member countries”.
The 2002 World Development Report (“Building Institutions for Markets”)—with its focus on competition and innovation—and the World Bank Group’s 2002 Private Sector Development Strategy both acknowledge the role that market mechanisms play in development processes and agree that “functioning markets” are critical to reducing poverty.
The motivation behind the World Bank Group’s most recent focus on market creation and private sector participation is the realization that public and concessional resources in client countries are increasingly scarce. Consequently, when considering how to finance a project or a program, the Bank Group is expected to explore all options in an orderly manner—starting with those that involve commercial financing—and seek to remedy the obstacles that block such private sector solutions in the future. The Cascade Approach encapsulates such modus operandi.
Findings from relevant IEG evaluations over the last ten years (see figure above) provide a rich source of lessons and determinants of success that are relevant for the implementation of the Cascade Approach and the success of the Creating Markets concept. These lessons of experience and success factors can be categorized along four dimensions: (1) country factors; (2) upstream policy work; (3) structuring and finance; (4) organization and management.
1. Country factors. At country level, success requires client governments that have clear objectives and a strong leadership drive, and are committed to a reform agenda that promotes market entry, competition and an improved business environment. Success also requires institutional capacities to manage effectively the public finances, develop a pipeline of bankable projects, and use open, transparent, and competitive procurement procedures.
2. Upstream policy work. Success factors include the depth and breadth of sector and legal framework reform efforts, and the early involvement of relevant stakeholders in such policy reform. The country readiness for enhanced private sector participation, via private sector country diagnostics, can help identify the required upstream policy work. This may include, for example, the integration of a pipeline of projects with private sector involvement into National Infrastructure Plans.
3. Structuring and finance. The high quality of project sponsors and project structuring advice are necessary success factors, albeit not sufficient ones. Such structuring advice must include the affordability implications of any required tariff changes to improve cost recovery, realistic project time frames, and the assessment of potential fiscal implications if contingent guarantees or public finance are present.
4. Organization and management. Successful market creating interventions demand an organizational and management focus on inclusiveness and poverty reduction. It also requires adequate incentives for World Bank Group staff and coordination efforts across Bank Group institutions, and between the Bank Group and other International Financial Institutions that may be financing similar projects or programs, or supporting the same policy reforms, in client countries.
This blog is the first of several in our new Creating Markets series which, with help from IEG colleagues involved in recent IEG evaluations, will summarize detailed lessons of experience and key takeaways regarding the four dimensions, listed above, that will inform the World Bank Group’s efforts in creating markets.
The motivation of this blog series is to share those lessons early to help the Bank Group be successful in its systematic implementation of the Creating Markets concept.