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Corporate Governance and DevelopmentThe literature shows that good corporate governance generally pays for firms, for markets, and for countries. It is associated with a lower cost of capital, higher returns on equity, greater efficiency, and more favorable treatment of all stakeholders, although the direction of causality is not always clear. The law and finance literature has documented the important role of institutions aimed at contractual and legal enforcement, including corporate governance, across countries. Using firm level data, researchers have documented relationships between countries corporate governance frameworks on the one hand and performance, valuation, the cost of capital, and access to external financing on the other. Given the benefits of good corporate governance, firms and countries should voluntarily reform more. Resistance by entrenched owners and managers at the firm level and political economy factors at the level of markets and countries partly explain why they do not.
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Rethinking the State's Role in FinanceThe global financial crisis has given
 greater credence to the idea that active state involvement
 in the financial sector can be helpful for stability and
 development. There is now evidence that, for example,
 lending by state-owned banks has helped in mitigating the
 impact of the crisis on aggregate credit. But evidence also
 points to negative longer-term effects of direct
 interventions on resource allocation and quality of
 intermediation. This suggests a need to rebalance the
 state's roles from direct to less direct involvement,
 as the crisis subsides. The state does have very important
 roles, especially in providing well-defined regulations and
 enforcing them, ensuring healthy competition, and
 strengthening financial infrastructure. One of the crisis
 lessons is the importance of getting the basics right first:
 countries with complex but poorly enforced regulations
 suffered more during the global crisis. Evidence also
 suggests that instead of restricting competition, the state
 needs to encourage contestability through healthy entry of
 well-capitalized institutions and timely exit of insolvent
 ones. There is also new evidence that supports the
 state's key role in promoting transparency of
 information and reducing counterparty risk. The challenge of
 financial sector policies is to better align private
 incentives with public interest, without taxing or
 subsidizing private risk-taking.
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Indonesia : Private Sector Development StrategyThe report reviews the Bank's private sector development strategy in Indonesia, stipulating that the country's potential will not be realized without a pattern of private sector activity, - different from the past - but, taking the opportunity offered by the crisis to make fundamental changes in the business environment, and in how business is conducted. The first priority calls for the banking, and corporate sectors to speed up the resolution of corporate debt, and ease financial flows for investment, and working capital to resume. Second, the structural inefficiencies, partly conducive to the crisis, and to its long lasting effect, need to be overcome; therefore, reforms should enable Indonesia to become a modern market economy, able to avoid future crises. This encompasses fighting corruption in the public administration, ensuring the rule of law through the court system, reinforcing property rights, and dispute resolution mechanisms, and, ensuring transparency and corporate governance. Third, broad-based, and sustainable economic growth need to be ensured by measures such as removal of obstacles to small, and medium enterprise (SME) activity, as well as SME development promotion, including physical, and social infrastructure building. Finally, the creation of an infrastructure, and regulatory framework to take full advantage of new information/communications technologies, is paramount.