1. Foreign Investment Incentives and Policy Stability: The case of mining royalty laws in Chile and Peru Jennifer Tobin Brookings Institution and Yale University

2. Overview How do investment incentives meant to stabilize the short-term policy environment for foreign investors function in the long run?

3. Outline Policy Stability: What is it? Why do we want it? How do we get it? Peru and Chile: Institutional Background Mining Royalty Laws: What are they? What happened? Why? Next Steps

4. FDI and Growth FDI Human Development Growth Human Development Workforce Capacity Domestic Savings Government Human Development Government Revenue Government Policy Preference Capital Household Human Development Spending Household Income Technological Spillovers Range and Complexity of Output Organization and Adaptability of Production Growth

5. Attracting FDI Credibility of the investment environment: macroeconomic stability political stability policy stability

6. Policy Stability Rules of the Game: Clear Well known Well enforced Stable

7. Why Stability? Reduces the uncertainty of the future rewards for investing InvestmentGrowth

8. Stability, but how? Constitutions Institutions Contracts Time horizons International agreements

9. Investment Incentives International Legal Guarantees Investor-State Contracts Policy Stability Agreements

10. Investment Incentives Short versus long-term effects

11. Institutional Environment: Chile Strong Presidency Bicameral Legislature Strong parties Low corruption Fiscal discipline Conservative monetary policy

12. Institutional Environment: Peru Strong presidency Few checks and balances Party system: Weak and fragmented Judicial system: Inefficient, corrupt, subject to political manipulation. Recent macroeconomic stability

13. Mining and FDI

15. FDI: Restrictions/Incentives DL 600 Stability Agreements BITs FTAs

16. Mining Royalty Laws Not a tax In place in almost all developed countries and more than 120 countries world-wide

17. Mining Royalty Laws: Chile Pro: Government Public Opinion Concertacion Con: Business and Industry Alianza IMF Rejected

18. Mining Royalty Laws: Peru Pro: President Public Opinion Most left-parties Con: Finance Minister APRA Business and Industry IMF Passed

19. Expectations What would we have expected to happen? Just what happened: Peru: Instability Chile: Stability

20. Grand Theoretical Claim Would they have lost investment? Did Incentives matter? Why not collude? In creating short term stability-- created long term policy gridlock

21. Next Steps