Increasing efficiency

Over recent decades, governments in most developing countries have played an activist role in development, building infrastructure and often engaging directly in productive activities. Their policies have also been critical in determining the environment in which the private sector operates. Much of this activism has produced encouraging progress: over twenty years, developing countries have on average achieved growth rates that had not been managed before, either by the developing countries or by today's developed market economies at a similar stage of their development. In relation to expectations and potential, however, progress in many countries has been unsatisfactory.

Faced with widespread poverty and slow economic growth, governments are naturally keener than ever to promote development. But their progress is constrained by weak institutions and management. These constraints vary greatly among countries, and their capacity to deal with them reflects differences in population, incomes, natural resources, and political systems. In many countries, however, managerial weaknesses are explained in part by the shortage of experienced and well-trained people. While this bottleneck will ease as education spending yields dividends, the immediate need is to use existing resources, including managerial skills, more effectively and economically.

Although managerial capacity places an overall limit on a country's development, it is far from homogeneous. The skills needed to frame macroeconomic policy differ from those needed to run a productive enterprise; and large organizations place greater demands on management than do small ones. Governments tend to be involved in the management of big organizations, such as running state farms and marketing boards, rather than relying on peasant farmers, small traders, and individual truckers. And the mistakes that big organizations make have more serious consequences.

The main criterion for judging economic management is "efficiency" -- a concept that has meaning only in the context of an agreed set of objectives. The search for efficiency is not merely a matter of finding technically optimal solutions; it is also a political process. Governments seeking change have to start with existing institutions that have their own historical inertia and underlying political interests. The process of reform therefore involves negotiation and compromise, accepting "second-best solutions" that are politically feasible. Individual countries attach different weights to particular political and economic objectives.

In every country efficiency has two distinct but related aspects that are critical to economic performance: efficient resource allocation-through prices, markets, and administrative interventions; and operational efficiency-to maximize the use of labour and capital through the sound management of enterprises, projects, and programmes in both the public and private sectors.

These in turn contain both static and dynamic dimensions. In static terms, efficiency may be defined as maximizing the present value of output from a given level of inputs. Alternatively, when the goal is to achieve a particular social objective (such as malaria eradication) or to provide a specific service (for example, a telephone link), efficiency may be defined as cost minimization.

Although both policy and institutional aspects of efficiency are interwoven, for the purposes of analysis it is useful to distinguish between them. In both, however, the state plays a pivotal role: it is government that determines the policy environment in which enterprises and farmers must operate; government that provides the social and Physical infrastructure that underpins productive activities; and government that frequently contributes to production through state-owned enterprises.

The virtues of micro-economic efficiency can be magnified or undermined by the choice of macroeconomic policies. Successful macro-management requires a strong capacity for policy analysis, backed by mechanisms to translate policies into actions and a reliable monitoring and evaluation system.