1. Angela Paris Inter-American Development Bank Private Enterprise Brazil, October 26, 2004 Taking an interdisciplinary approach: The IDB’s Business Climate Initiative

2. Outline of the presentation Outline of the problem Outline of the problem What needs to be done: why the traditional “project approach” is inadequate What needs to be done: why the traditional “project approach” is inadequate How is the IDB approaching the problem How is the IDB approaching the problem Closing remarks Closing remarks

3. Five Decades of Mixed Results * * Source: World Bank

4. Macroeconomic Stability Subindex Eastern Europe 01234 5 6 LAC Africa Middle East Rest of Asia Developed East Asia Source: The Global Competitiveness Report 2003-2004 Macro Instability 64 82 63 52 30 29 8 Ranking

5. A reality check: Competitiveness Rankings EU AREA Finland: 1-1 United Kingdom: 11-15 Germany: 13-13 Austria: 17-17 Spain: 23-23 France: 27-26 … Italy: 47-41 LAC Chile: 22-28 Mexico: 48-47 El Salvador: 53-48 Brazil: 57-54 Colombia: 64-63 Argentina: 74-78 Venezuela: 85-82 * Source: World Economic Forum. 2003-2004 Rankings

6. Latin America ranks low Growth Competitiveness Index Eastern Europe 0123456 Africa LAC Rest of Asia Middle East East Asia Developed Source: The Global Competitiveness Report 2003-2004 63 14 34 29 58 44 80 Ranking

7. Contracts and Law Sub-index 0123456 LAC Eastern Europe Africa Rest of Asia East Asia Middle East Developed Source: The Global Competitiveness Report 2003-2004 Weak Rule of Law 76 64 62 60 29 33 14 Ranking

8. Corruption Control Index Rest of Asia Eastern Europe Middle East 01234567 Africa LAC East Asia Developed Source: The Global Competitiveness Report 2003-2004 …and Corruption Control 82 77 62 45 50 42 16 Ranking

9. Why investments are lagging: Six villains Macro-economic instability Macro-economic instability Poorly designed regulatory frameworks Poorly designed regulatory frameworks Insufficient attention to enforcement Insufficient attention to enforcement Deficient Infrastructure Deficient Infrastructure Shallow banking markets/difficulty in creating liens Shallow banking markets/difficulty in creating liens Inefficient legal system Inefficient legal system

10. Informality: the silent ambush Good macro-economic policies and private ownership necessary but not sufficient conditions for economic growth Micro-policy issues – value chains Effects on: –Productivity –Labor –Competition

11. Not just one cause, not just one solution Fiscal policy Regulatory burden Labor markets Institutional quality Access to markets Access to financing

12. Foreign Investors Challenges Contract enforcement Contract enforcement Cash flow profiles Cash flow profiles –Asymmetry in negotiation power –Change in financial equilibrium –Unreliable environment Foreign exchange exposure Foreign exchange exposure Overreaction by stock markets Overreaction by stock markets Economies of scale Economies of scale

13. Opacity: ROR premium over US

14. Lessons Learned Macro-economic and regulatory stability a necessary but not sufficient condition Macro-economic and regulatory stability a necessary but not sufficient condition Public disillusionment with private ownership (especially foreign) Public disillusionment with private ownership (especially foreign) Size of economy obstacle for large investments Size of economy obstacle for large investments Subsidies for lower income customers may still be a necessity Subsidies for lower income customers may still be a necessity Public acceptance of tariffs is still a central issue Public acceptance of tariffs is still a central issue

15. The future of business Should we wait for the perfect business climate before we invest? Should we wait for the perfect business climate before we invest? Importance of “good-enough governance” Importance of “good-enough governance” Must design investments to avoid the major obstacles and capitalize on the good points, including entering in partnerships with the public sector. Reduce “climate dependency” Must design investments to avoid the major obstacles and capitalize on the good points, including entering in partnerships with the public sector. Reduce “climate dependency” In the meantime, the IDB is working to remove obstacles to doing business and create a “good-enough governance” In the meantime, the IDB is working to remove obstacles to doing business and create a “good-enough governance”

16. The IDB’s Business Climate Initiative Part of the implementation of the Competitiveness Strategy and the first Strategic Direction of the Private Sector Development Strategy. Recognition that private sector is a significant driving force of economic growth and it needs to be supported.

17. Pragmatic and results oriented initiative Macroeconomic Framework Macroeconomic Framework Financial Systems Development Financial Systems Development Legal and Regulatory Frameworks Legal and Regulatory Frameworks Governance Governance Institutional Development Institutional Development Public Private Partnerships Public Private Partnerships Cooperation with International Community Cooperation with International Community

18. A Process, not a project Multifaceted problems: multi-expert teams Multifaceted problems: multi-expert teams Inter-disciplinary solutions Inter-disciplinary solutions Evolutionary and comprehensive approach: Property rights, collateral, bankruptcy laws AND procedures AND courts AND alternative methods of resolution AND enforcement Evolutionary and comprehensive approach: Property rights, collateral, bankruptcy laws AND procedures AND courts AND alternative methods of resolution AND enforcement

19. Closing Remarks In spite of volatility, LAC economies have made some progress in their business climate, but much remains to be done In spite of volatility, LAC economies have made some progress in their business climate, but much remains to be done Project by project approach will fail Project by project approach will fail Ongoing, incremental, process of change Ongoing, incremental, process of change Interdisciplinary processes need to be adopted Interdisciplinary processes need to be adopted Closer cooperation and coordination among international community (IFIs, donors, Agencies) is required Closer cooperation and coordination among international community (IFIs, donors, Agencies) is required

20. Thank You Angela Paris Inter-American Development Bank Angelap@iadb.org Te. 202 623 1143