BDS market development guide.pdf - PACA

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Box 7: Key Considerations in Assessing the Role of the State in BDS
Any valid picture of sustainability in BDS markets has to consider the role of government—what governments should and should
not do. In doing so, a number of factors need to be taken into account.
Key Principles and Issues: from the broad consensus on a market-friendly approach, the key priorities for governments
pursuing poverty reduction are those functions that only they can do or that they can do better than others—meaning health,
education, security, macroeconomic management, etc. Focus on core competence and subsidiary—delegating to the lowest
possible level—is the key principle.
Rationale: governments’ involvement in marketplaces (such as BDS) can be justified on two grounds: market failure and equity
concerns. Within these two headings, governments should focus on:
• Public Goods—which are non-rival and non-excludable, meaning that consumption by one user doesn’t reduce supply to
another and users can’t be prevented from consuming the good. These are regarded as a top priority for state intervention.
• Markets Where Externalities and Imperfect Information Are Particularly Evident—where there are wider benefits to society
from the consumption of a good beyond the individual consumer and where consumers and/or suppliers don’t have enough
information to make the right decisions. These markets—where there are public goods aspects—are regarded as a
secondary priority for state intervention.
In fact, there are very few pure public goods. There are many more goods that fall into the second category—such as training—
where there may be positive externalities, but the case is hardly clear-cut. There can be major information constraints in some
markets, such as training—benefits from training are often not immediate or tangible. However, although public subsidy for
training is common, there are also vigorous and completely private training markets in many low-income countries.
The key problem here is that these arguments for intervention—drawn from economic theory—can be used to justify state
intervention in most markets. Markets are never perfect, and there’s always inequality. Does this mean we should always
intervene? Clearly not!
Capacity: a more practical way of thinking through governments’ potential role is to consider a hierarchy of functions of the
state (Figure 11). From this, governments with limited capacities should focus on doing a small number of basic things well,
rather than many things badly. In terms of BDS, this might mean, for example, only appropriate regulation or funding for core
research.
What About the Example of High-income Economies? In many wealthy countries, government involvement in BDS is
widespread, posing the question of whether low-income countries should seek to emulate this role. Several points need to be
made here:
• In some countries, there is a historic, relatively close relationship between competent states and the private sector that
allows governments to play a more active role in BDS. More commonly, governments intervene for a variety of social and
political reasons that have little to do with improved market functioning. Unfortunately, it is often this latter approach that is
exported to low-income countries through aid-funded projects.
• Despite the efforts of governments, for most businesses in most industrialized economies, BDS is provided through the
marketplace. In the United Kingdom, for example, one study showed that only 14 percent of business advice—a
cornerstone of SME policy—is provided by official government-supported agencies.
• The quality and effectiveness of much officially supported BDS in these countries is highly questionable and, at its worst,
akin to a welfare state for struggling enterprise. In the United Kingdom, there is a negative correlation between usage of
public sector sources of advice and profitability; in other words, subsidized advice has been taken up by badly performing
SMEs (many of which were actually seeking financial assistance).
• The resource base of industrialized countries dwarfs that of low-income countries, and the practices that have developed
are those of rich states where sustainability concerns press only lightly.
In short, the role of governments in BDS often followed in high-income countries are typically ineffective and/or hugely
expensive and depend on subsidies. BDS projects that are modeled on these approaches are inappropriate—and indeed
damaging—for low-income countries.
Chapter Three—Where Do We Want to Go?—
Developing a Clear Picture of Sustainability