Court and David Osborne Overseas Development Institute, London
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Catalyzing Policy Reform: A Case Study of the SMEPOL project in Egypt Julius Court and David Osborne Overseas Development Institute, London 17 October 2005 DRAFT – Please do not cite. Table of Contents Executive Summary iii 1. Introduction 1 2. Literature on Policy Processes 2 2.1 What is meant by policy impact? 2 2.2 What are “good” policy processes? 2 2.3 How does policy change happen? 3 3. Case Study: SMEPOL in Egypt 6 3.1 Background 6 3.2 SMEPOL Project Objectives and Structure 7 3.3 Key Questions and Approach 10 3.4 Findings 12 4. Discussion: Key Lessons & Broader Applicability 19 4.1 Main Lessons 19 4.2 Issues of Broader Applicability 22 5. Conclusion 28 6. References 29 Annex 1: List of People Interviewed 3132 Annex 2: SMEPOL Performance Assessment 3233 Figures and Tables Figure 1: Outline of the Policy Process 2 Figure 2: Jobs created by the private sector in Egypt: 1986-1996 6 Figure 3: Influences on Small Firms 11 Figure 4: Individual Components of Governance, 2000-4 23 Figure 5: A Model for Policy Change 25 Figure 6: A Model for Policy Influence 27 Table 1: Project Results Framework, 2001: Logical Framework Analysis (LFA) 9 Table 2: Summary of Main Lessons from SMEPoL 19 Table 3: Hypothesized Outline of Summary Assessment 22 Table 4: How to Influence Policy and Practice 26 ii Catalyzing Policy Reform: SMEPOL in Egypt – DRAFT Executive Summary We know a lot about why SMEs are important and the types of policies that can help foster their development. We know much less about how to actually go about policy reform in the SME sector. Given the range of interventions possible – including access to markets, tax, finance, legal and regulatory changes – comprehensive reform is almost always going to be challenging politically. This paper aims to do three things. Firstly, it reviews the literature, assessing what we mean by policy impact, what do ideal policy processes look like and then what actually influences policy? Secondly, it focuses on the Small and Medium Enterprise Policies (SMEPOL) project in Egypt as a successful example of donor support for SME policy development. Finally, we discuss the key lessons from this experience and the extent to which they are more broadly applicable in other contexts. SMEPOL is an important case because it has been a successful project. The project has helped put MSME issues much higher on the policy agenda, generate a range of policy-relevant research, build capacity in key ministries, improve policy development processes and develop a cohesive Competitiveness Strategy for Egypt. This is no small achievement given the widely acknowledged difficulty of policy influence projects and low rates of projects achieving substantial success. It is particularly notable given the challenging and unpredictable context and the “shocks” the project faced over its duration. Drawing on the literature and the SMEPOL case, we provide two sets of lessons that seem critical. First, we outline the kind of threshold context that needs to be in place for chances of successful policy interventions to be maximized. These include: need; context of reform; mandate / authority; and champions. Second, we outline a set of project specific lessons which include: focus on policy impact; take a partnership approach; be flexible; and put in place risk management structures. A key point regarding the broader applicability of policy development projects is that success depends on matching the intervention to the context. Where threshold conditions exist, it should be possible to carry out policy development projects such as SMEPOL (although they will need to be adapted). Where threshold conditions do not exist, the key is for donors to assess the context and put in place relevant programmes – whether research, consulting stakeholders or influencing key policymakers – to help spur change. Either way, more effort to understand the political context and mechanisms of change would help maximize the chances of project success in the SME sector. iii Catalyzing Policy Reform: SMEPOL in Egypt – DRAFT 1. Introduction The importance of the micro, small and medium-enterprise (hereafter MSME) sector in promoting economic growth and development is widely recognised.1 The economic argument is that MSMEs can help improve competition, entrepreneurship and productivity.2 Furthermore an efficient MSME sector can provide a strong input into local, regional and national demand for, and supply of, goods and services. Since MSMEs are often more labour intensive, they can also have an accentuated impact on unemployment and poverty. Not surprisingly, many national governments and international aid agencies have programmes to provide particular assistance to MSMEs.3 While much has been written on the desired content of specific MSME policy, much less has been written on how to go about policy reform in the MSME sector. There often seems to be an assumption that reform is a technical process of choosing the optimal solution. In reality, almost all reforms are deeply political. Fortunately, there is a growing literature on the politics of economic policy reforms and the challenges of policy implementation.4 What drives policy change in the MSME sector? How can donors actually help? What maximizes the chances of policy impact? We explore these questions using policy reform in the SME sector in Egypt as a case study – in particular the impact of and lessons from the Small and Medium Enterprise Policies (SMEPOL) project. Supported by the Government of Egypt (GoE), International Development Research Center (IDRC) and Canadian International Development Agency (CIDA), the project aimed to improve the policy environment for micro, small and medium enterprise development. It aimed to do this through activities to improve policies, legislation, regulations and procedures regarding SME development. The SMEPOL project is widely seen to have been successful in many ways. It has helped put MSME issues much higher on the policy agenda, generate a range of policy-relevant research, build capacity in key ministries, improve policy development processes and develop a cohesive Competitiveness Strategy for Egypt. This paper aims to do three things. First, it reviews the literature, assessing what is meant by policy impact, what do ideal policy processes look like and then what actually influences policy? Second, it focuses on the SMEPOL project in Egypt as an example of a donor attempt to support / catalyze MSME policy reform. Third, it discusses what the key lessons are from this experience and the extent to which such a project might be replicable in other contexts. We conclude briefly with some of the main findings. As such the paper is relevant for a number of themes at the conference on Reforming the Business Environment being held from November 29 to December 1, 2005 in Cairo, Egypt. These include: • the political processes surrounding reform of the business environment and efforts to improve public-private dialogue; • designing national reform programmes; • role of donor agencies in supporting reforms of the business environment for small enterprises; • the challenges donors face; and • practical lessons regarding the design and implement reform programmes. 1 World Bank “World Development Report 2005: A Better Investment Climate For Everyone, World Bank, Washington, D.C, September 2004. 2 Beck, T., A. Demirgüç-Kunt, and R. Levine, R. 2004. “SMEs, Growth, and Poverty: Cross-Country Evidence.” Paper for the Conference on Small and Medium Size Enterprises, October 14-15, 2004. Washington DC: The World Bank. 3 There is also a literature that questions the extent of the claims about the particular value of SMEs versus focus more generally on improving the business climate for all economic agents. 4 Williamson, (1994); Knack and Keefer (1995); Rodrik (1996) focus on economic reform processes. Brinkerhof and Crosby (2002) provide an excellent analysis of the challenges of implementing policy reforms. 1 Catalyzing Policy Reform: SMEPOL in Egypt – DRAFT 2. Literature on Policy Processes 2.1 What is meant by policy impact? Given the focus on policy change, it is important to set out here exactly what we mean by policy. Reflecting much of the literature and practice on public administration, we suggest that policy is defined as a ‘purposive course of action followed by an actor or set of actors’ (Anderson, 1975) – in this case the actions of the Government of Egypt. Following Lasswell (1977), an idealized model of such a policy cycle tends to include many of the stages shown visually in the diagram below (Figure 1). Figure 1: Outline of the Policy Process 1. Problem Definition/ Agenda Setting 2. Constructing the Policy 6. Evaluation Alternatives/ Policy Formulation The Policy Cycle 5. Policy Implementation 3.Choice of Solution/ and Monitoring Selection of Preferred Policy Option 4. Policy Design Source: Young and Quinn, 2002. There are extensive literatures about the policy process (Hill, 1997; Sabatier, 1999; Sutton; 1999) and it is not our intention to repeat them here. We stress that policymaking is not linear and does not in reality work through these stages logically. Rather, the key point is that policy change involves more than what is written in documents, plans and laws and includes changes in implementation and actions on the ground. Therefore, in this paper, we include a discussion of the following components: • Agenda setting: Awareness of and priority given to an issue or problem. • Policy formulation: The options and strategies chosen (i.e. strategy documents, work-plans, budgets, legislation, regulation, legal precedents) • Policy implementation: The forms and nature of policy administration and activities on the ground (i.e. programmes, approaches, funding levels, communication). • We also focus on the issue of policy capacities since this was important to the project and is highlighted in IDRC’s strategic evaluation work. 2.2 What are “good” policy processes? The emphasis in the SMEPOL project was not just on improving policies, but also improving policy processes.