Improving the Investment Climate 2005 Knowledge Economy Forum Improving the Investment Climate Warrick Smith World Bank

The investment climate Investment and productivity improvements are the main sources of long-term growth. Source: WDR05, drawing on Bosworth & Collins The investment climate shapes the opportunities and incentives for firms to invest and improve their productivity Government policies and behaviors play central role.

A better investment climate for everyone Better for society as a whole, not just firms Better for firms of all types. World Development Report 2005 draws on new data: Surveys of 30,000 firms in 53 developing and transition economies. Doing Business database, covering >140 countries

Risks, costs, & barriers to competition Relevant government policies and behaviors cover a broad field – but firms evaluate as part of a package. Stability & security Regulation & taxation Finance & infrastructure Workers & labor markets Governance Risks Costs Barriers to competition

Policy-related risks The dominant concern of firms in developing and transition economies. Improving policy predictability alone can increase likelihood of investment by over 30%.

Risks: Perceptions vary across countries Interpretation of regulation is unpredictable Lack confidence in courts to protect their property rights Percent of firms – IC Surveys Percent of firms – IC Surveys

Policy-related costs Taxes are rarely the biggest cost burden. Source: IC Surveys

Costs: Regulatory burdens Registering a new business Enforcing a contract Days – DB Database Days – DB Database

Costs: Regulatory burdens (2) Registering property Resolving insolvency Days – DB Database Years – DB Database

Costs: Labor market regulation Rigidity of employment index Employment protection rules Index – DB Database WDR05 & Scarpetta

Costs: Some other dimensions Time dealing with officials Report paying bribes Percent of management time – IC Surveys Percent of firms – IC Surveys

Policy-related barriers to competition Weaken incentives to innovate and boost productivity. More competitive pressure, more innovation

Variations within countries & across firms Conditions vary within countries Smaller firms often suffer most 25 50 75 Have a loan from a formal financial institution Confident that courts will uphold property rights Believe regulations will be interpreted consistently Percent of firms Large Medium Small Informal China

More than changes in formal policies ? Corruption & rent-seeking Credibility gaps Public trust & support Fit with local conditions

Regulation and corruption More red-tape, more corruption Source: WDR05.

Influential firms… …enjoy a better investment climate… …but innovate less. Source: WDR05, drawing on IC Surveys

Focus on delivering the basics Benefit all firms and activities in the economy Stability and security Peace and macroeconomic stability are fundamental. Secure property rights link effort to reward. Regulation and taxation Balancing social goals. Big opportunities to improve both without sacrificing other goals. Finance and infrastructure Traditional approaches have poor track-record. Improve investment climate for service providers. Workers and labor markets Skilled and healthy workforce. Regulate to benefit all workers. Help workers cope with change.

Private participation in infrastructure Over 2,700 PPI projects in developing & transition economies since 1990. Many outstanding successes. Private investment flows have fallen from their peak. Many projects renegotiated. About 6% of projects cancelled or in distress. Source: WDR05, drawing WB PPI Database

Going beyond the basics? Selective interventions Many rationales, but no sure-fire strategies. Two underlying challenges: Identifying activities with strong potential for future growth in an increasingly dynamic and competitive world. Governance, including capture by beneficiary firms. Not a substitute for broader improvements Often miss promising activities. Can be a distraction from broader progress. Create distortions and can go spectacularly wrong. Approach with caution… Clear objective and rationale Maintain discipline Be transparent Review schemes regularly.

Persistence, not perfection, is the key No country has a perfect investment climate. Key constraints vary across & with countries. Sustain a process of ongoing improvements. Public communication Consultation bodies Mechanisms to review existing constraints Processes to review new regulatory proposals.

Improving the Investment Climate 2005 Knowledge Economy Forum Improving the Investment Climate Warrick Smith World Bank