A Better Investment Climate for Everyone 2005 world development report

2 The investment climate l Private firms of all types are key actors in growth and poverty reduction u Create more than 90 percent of jobs. u Provide most of the goods and services consumed in society. u Pay most of the taxes needed for public funding of health, education, and other services. l Size of contribution depends largely on how governments shape the investment climate u The opportunities and incentives for firms to invest productively, create jobs, and expand.

3 A better investment climate for everyone l Better for society as a whole, not just firms l Better for firms of all types. u WDR draws on new data: Surveys of 30,000 firms in 53 developing countries, including 3,000 micro and informal firms in 11 countries. Doing Business database, covering >140 countries Complemented for Uzbekistan by IFC SME Survey 2003

4 Driving growth l Main sources of long-term growth are investment and productivity improvements u A good investment climate drives both, while protecting other social interests. l China, India & Uganda illustrate power: Private investment as % of GDP Growth experiences China – Ave. nearly 10% p.a. India – Doubled rate since 1970s. Uganda – 8 times ave. rate in sub- Saharan Africa.

5 In Uzbekistan the share of private SMEs who HAVE NOT INVESTED in fixed assets has doubled over the past three years (IFC SME survey 2003) % of respondents

6 Risks, costs, & barriers to competition Stability & security Regulation & taxation Finance & infrastructure Workers & labor markets Governance Risks Costs Barriers to competition l Firms evaluate government policies & behaviors across a range of areas as part of a package.

7 Policy-related risks l Dominate concerns of firms. l Improving policy predictability can increase likelihood of new investment by over 30%. Percent of firms

8 In Uzbekistan the legislative base is sometimes contradictory (IFC SME Survey 2003)… and… For example, when assessing VAT liability on imported goods, the following regulations contradict each other:  Tax Code;  Directive approved by a joint Resolution of the Ministry of Finance and the State Tax Committee (dated March 7, 2003)

9 … Changes in regulations which impact businesses do not consider the opinion of entrepreneurs In 2003, the Cabinet of Ministers adopted over 40 decrees and resolutions directly effecting the activities of SMEs. But: recent launch of discussion groups through Chamber of Commerce a hopeful sign of change “Why are regulatory documents which affect the business environment never publicly discussed with those who are being impacted by such changes?” -- IFC SME survey Focus Group participant

10 Policy-related costs l Taxes are rarely the biggest burden

11 Policy-related costs (2) l Costs also have a time dimension u >10% of management time often spent dealing with officials. u Individual procedures can be onerous – and have wide-ranging implications. Days

12 Policy-related barriers to competition l Restrict opportunities, increase prices for consumers, and weaken incentives to innovate and boost productivity. More competitive pressure, more innovation

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

14 Investment climate constraints – priorities vary by country Source: World Bank Investment Climate Surveys l Share of firms reporting ‘severe’ or ‘very severe’ obstacle

15 Major business constraints in Uzbekistan in 2003 – some improvements but still major obstacles for private business Answered to the question (in %) Share of respondent who indicated that these processes were “rather problematic” or “very problematic”

16 Major business constraints in Uzbekistan: tax system and informality “I am not against working fairly, however under existing conditions I hardly will be able to cover my costs. That’s why I have to hide part of my operational resources from official documentation.” --Focus Group Participant Under existing business conditions, please estimate the share of sales hidden from taxation by companies similar to yours?

17 Major constraints to business in Uzbekistan: discretionary power of controlling agencies Controlling agencies have the right, without a court order, to:  Suspend banking operations on an account  Collect penalties on an indisputable basis  Suspend activities of an enterprise  Impose fines of up to 1000-times the minimum wage BUT: Changes to penalty and sanction system are under preparation “At present, controlling agencies can come and basically “kill” my business without even presenting evidence of wrongdoing on my part. Although, in accordance with our Constitution no one has a right without a court’s decision to deprive me of my rights, including the right to entrepreneurial activity” Focus Group Participant

18 Major business constraints in Uzbekistan: access to cash

19 Major constraints in Uzbekistan: bureaucratic obstacles against foreign trade 19 Why are you not involved in export / import operations?

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

21 State capture can be costly Source: World Bank Investment Climate Surveys l Evidence from Eastern Europe and Central Asia shows more influential firms face significantly fewer obstacles l And yet are 50% less likely to innovate, invest and create new jobs

22 Persistence, not perfection, is key l No country has a perfect investment climate. l Focus on important constraints, and sustain a process of ongoing improvements. u Priorities need to be determined in each case Big differences across, and within, countries. u Maintaining momentum is essential Public communication Consultation bodies Mechanisms to review existing constraints Processes to review new regulatory proposals.

23 Focus on delivering the basics l Benefit all firms and activities in the economy u Stability and security Peace and macroeconomic stability are fundamental. Secure property rights link effort to reward. u Regulation and taxation Balancing social goals. Goal is better regulation and taxation, not necessarily less. u Finance and infrastructure Traditional approaches have poor track-record. Improve investment climate for service providers. u Workers and labor markets Skilled and healthy workforce. Regulate to benefit all workers. Help workers cope with change.

24 Going beyond the basics? l Selective interventions u Many rationales, but no sure-fire strategies. u The more ambitious the goal, and the weaker the governance, the longer the odds of success. u Not a substitute for broader improvements. Can be a distraction, and can go spectacularly wrong. l International rules and standards u Committing to enhance credibility Forgone flexibility; Possible legitimacy concerns. u Harmonizing to reduce costs Institutional fit; competition between standards. u Cooperating to address policy spillovers Common priorities; capacity constraints.

25 The international community can help l Growth from better investment climate can dwarf value of aid flows Manufacturing value-added vs. global aid flows l International community should do more u Reduce distortions in developed countries u Strengthen aid for investment climate improvements u Tackle substantial knowledge agenda.

26 Main messages l Improving the investment climate is critical to faster growth and deeper poverty reduction. l Reduce policy-related risks, costs, and barriers to competition. l Requires more than changes in formal policies. l Persistence, rather than perfection, is key to progress. l Focus on delivering the basics. l International community should do more to help.