Making markets work: The role of effective public institutions in enabling private sector growth and development

Of the roughly 3.74 billion people in the global workforce, about 400 million, or 11 percent, work in the public sector. These are the people who deliver essential services, from running hospitals and teaching children, to building bridges. They are also the ones who make purchases on the public’s behalf such as MRI machines, construction services, and laptops for students. For example, in OECD countries public procurement spending as a share of GDP averaged 12.7%. And the public sector workers are the ones who shape how industries operate by setting quality and safety standards, establishing competition frameworks, and protecting consumers. In this way, public institutions – the ministries, departments, and agencies that carry out the day-to-day work of government – are vital not only for delivering essential services but also for enabling a thriving private sector. They provide the foundations businesses depend on: law and order, infrastructure, and reliable electricity. They also step in where markets fall short, addressing negative spillovers, closing information gaps, and managing shared resources. When they function effectively, businesses can too. What makes public institutions effective and efficient, and how can governments target reforms that improve them? A new report on Institutions and Prosperity: Public Institutions for Enabling the Private Sector focuses on two areas where government and markets meet most directly: regulation and public procurement. When these institutions work well, firms, consumers, and taxpayers all benefit. The report introduces a framework for diagnosing institutional weaknesses, defining capacity along two dimensions, organizational and governance. Organizational capacity covers the internal structures and resources needed to deliver: the staff, the budgets, the systems. Governance capacity covers the mechanisms that ensure delivery serves the public interest, rather than private or political interests. Both matter, and neither works alone. A well-trained staff with strong information systems can still fail if the institution lacks independence. And accountability mechanisms cannot compensate for chronically underfunded agencies or undertrained staff. Within organizational capacity, the report identifies four key components: the quality and incentives of personnel implementing policy; how budgets are allocated and managed; information systems that reduce transaction costs; and management practices that support strategy and coordination. Of these, personnel quality stands out as especially critical in both procurement and regulatory settings. Countries with higher-quality procurement staff consistently report greater ease in contracting with government(Figure 1). On the governance side, three dimensions determine whether institutions serve the public interest — or end up captured by the private and political interests they are meant to keep in check: accountability, or the mechanisms through which external stakeholders can influence institutional behavior; independence, or insulation from undue pressure by industries, politicians, or other interest groups; and transparency, which makes decision-making visible to the public . These dimensions reinforce one another: transparency has limited value without accountability mechanisms for poor outcomes, and accountability is harder to sustain when institutions can be captured by outside interests. Figure 2 shows that even within the OECD, sector regulators vary considerably in whether they are accountable to the legislature or the public directly. The implication is important: strong institutions in one sector do not automatically translate to strong institutions in another. Using this framework, the report draws on granular data, cross-disciplinary research, and real-world examples to give policymakers the tools to diagnose and address barriers to institutional performance. While it focuses on procurement and regulatory bodies, the framework can also be applied to institutions with other functions, including customs and tax administration authorities, central ministries, or subnational institutions. Ultimately, the report shows that effective public institutions create the conditions for markets to thrive. By building institutions that allow the public and private sectors to flourish, both firms and citizens benefit through improved service delivery, and greater job creation in the private sector.