Beyond Good Policy: Why Strong Public Institutions Matter for Investment, Jobs and Growth

The World Bank finds that stronger public institutions can improve procurement, regulation and investment outcomes by combining skilled staff, sound finances, digital systems and effective governance. For governments and development partners, targeted institutional reforms can reduce business costs and uncertainty while strengthening competition, innovation and private-sector-led growth.

The World Bank's study, Institutions and Prosperity: Public Institutions for Enabling the Private Sector, argues that economic growth depends not only on sound policies, investment and infrastructure, but also on whether public institutions can actually deliver. Prepared by a World Bank team led by Rita Ramalho under the guidance of Governance Global Director Arturo Herrera, the report examines ministries, regulatory agencies and procurement bodies as critical links between government policy and private-sector growth. It finds that weaknesses inside these institutions can increase business costs, delay investment, weaken competition and ultimately restrict job creation.

Strong Institutions Can Turn Policy Into Economic Results

The report identifies seven dimensions that determine whether public institutions work effectively. Four relate to organizational capacity, personnel, financial resources, information systems and management practices, while three relate to governance, accountability, independence and transparency.

The key message for policymakers is simple: these elements cannot be reformed separately. A government may introduce sophisticated digital systems, but results will remain limited if employees lack the skills to use them. Similarly, highly qualified regulators may struggle if political or commercial interference limits their independence.

Evidence from public procurement shows how much institutional capacity can matter. In the Russian Federation, around 20 percent of variation in quality-adjusted prices paid by government for goods and services was linked to the skills of individual procurement officers. Better-trained officials can therefore potentially improve value for money while reducing delays and costly procurement mistakes.

Procurement Weaknesses Can Become Business Barriers

Government procurement connects public spending directly with private companies, making institutional efficiency particularly important for businesses.

Payment delays are one major concern. The report cites evidence that public entities in southern Europe took an average of five to six months to pay for goods and services purchased between 2000 and 2010. Delayed payments can reduce companies' cash reserves and investment, while smaller and less-experienced firms may eventually leave public procurement markets.

For governments seeking greater SME participation, procurement reform therefore needs to go beyond opening tenders to smaller companies. Predictable payments, better budget management, transparent tendering and effective complaints systems are also needed.

Digital procurement provides another opportunity. Around 160 countries had some form of electronic government procurement system by 2024, but only about 40 had connected these platforms with information-management systems outside procurement. Evidence from India and Indonesia also shows that e-procurement helped companies outside purchasing authorities' home regions win government contracts.

For development partners, this highlights the need to finance not simply digital platforms but also interoperability, staff skills, data management and institutional reforms.

Better Regulation Can Unlock Investment and Competition

Regulatory agencies also have a major influence on the business environment. Investors need clear rules, predictable decisions and regulators capable of responding to technological and market changes.

The report's case study of Peru's telecommunications sector demonstrates the risks of weak capacity. Outdated tracking systems and inadequate compliance tools made it difficult to monitor radio-spectrum use. Following auctions, OSIPTEL was unable to sufficiently track compliance, contributing to operators misusing or underusing allocated spectrum. The report argues that better real-time data collection and analytical capabilities could strengthen oversight and competition.

Leadership stability matters as well. Frequent changes in senior decision-makers can interrupt reforms, change priorities and delay regulatory milestones. In fast-changing sectors such as telecommunications, such delays can eventually affect the accessibility, quality and price of services.

For private investors, stronger institutions could reduce regulatory uncertainty. However, poorly designed regulation, political interference, unpredictable decisions and complex compliance requirements can increase costs and discourage investment.

A Reform Agenda for Governments and Development Partners

The report ultimately recommends a diagnose-before-reform approach. Governments should first determine whether poor implementation comes from staff shortages, weak skills, inadequate financing, fragmented information systems, poor management, insufficient accountability, political or commercial influence, or limited transparency.

This approach has important implications for international development partners. Infrastructure financing should increasingly be accompanied by institutional strengthening. Building roads, power systems, broadband networks or digital government platforms may produce weaker development returns if the agencies responsible for procurement and regulation cannot manage them effectively.

For policymakers, priorities should include professionalizing procurement staff, improving budget execution and payment systems, integrating government databases, strengthening regulatory expertise, protecting appropriate institutional independence and publishing useful procurement and regulatory information.

For businesses, these reforms could create substantial opportunities. More transparent procurement can broaden access to government contracts, integrated digital platforms can lower transaction costs, predictable regulation can support long-term investment, and stronger oversight can improve competition.

The wider economic message is clear: institutional capacity is part of economic infrastructure. Governments can spend more money and adopt ambitious policies, but development outcomes depend heavily on the organizations responsible for implementation. Strengthening those institutions could help governments obtain greater value from public spending while creating a more predictable environment for investment, competition, innovation and private-sector-led growth.