is the provocative title of the World Bank's World Development Report 2005,
released late last month. The report notes that a good in-vestment climate
with opportunities and incentives for firms - whether multinationals to
micro-enterprises - to invest productively, creates jobs, and leads to a
growth in the economy. Significantly, the report deems job creation and the
provision of other opportunities for young people as essential to create a
more inclusive, balanced, and peaceful world.
While there was
perhaps already sufficient empirical evidence of the importance of the
investment climate, a survey of more than 26,000 firms in 53 developing
countries, and the Bank's Doing Business Project, which benchmarks
regulatory regimes in more than 130 countries, both provide further insights
into how investment climates influence growth and poverty. Like the World
Investment Report which was addressed in this column last week, this report
also provides experiences and guides to the options open to governments to
create a better investment climate - an investment climate that benefits
society as a whole, not just firms, and one that embraces all firms, not
just large, politically-connected ones.
There is perhaps no
more striking evidence of the link between the investment climate and
poverty reduction than the performance of the economies of India and China.
Indeed, investment climate improvements in China led to the most dramatic
poverty reduction in history, lifting 400 million people out of poverty over
20 years during which time the proportion of that country's population
living on less than US$1 per day has declined from 64% in 1981 to 17% now.
India with a growth rate of approximately 7% in the mid-nineties saw a fall
from 54% to 35% in the same group in the last two decades of the last
century. It is the performance of these two countries that will be mainly
responsible for the millennium development goal of halving the proportion of
the world's population living in poverty by the year 2015.
identifies four issues which it considers critical to investment - improving
policy predictability, economic and political instability, infrastructure
disruption, corruption and inability to enforce contracts. Warwick Smith,
the lead author of the report suggests that governments need to focus on
improving the basic framework within which entities operate - stability and
security, regulation and taxation, finance and infrastructure and worker and
labour markets. He calls for education and worker training, effective labour
regulations and the need for the government to help workers cope with the
changes in industry and business as new firms enter while others exit.
The report notes
that it is not necessary - indeed it might be undesirable - for all the
changes to be made at one time, and cites China, India and Uganda as
successes. It considers that the contribution firms make to society shape
the opportunities and incentives for firms to invest productively, create
jobs, and expand, and that these are largely shaped by government policies
and behaviour. It notes that while governments have limited influence on
factors such as geography, they have more decisive influence on the security
of property rights, approaches to regulation and taxation (both at and
within their borders), the provision of infrastructure, the functioning of
finance and labour markets, and broader governance features such as
increases, particularly in the poorer developing countries, the imperative
for economic growth becomes more urgent. An appropriate investment climate
drives growth by encouraging investment and higher productivity. Investment
underpins economic growth by bringing more inputs to the production process.
While we in Guyana often mistakenly consider investment as meaning foreign
investment, the report reveals that the bulk of private investment remains
It is, however, not
just the volume of investment that matters for growth, rather it is the
productivity gains that result. In other words, does the investment climate
encourage higher productivity by providing opportunities and incentives for
firms to develop, adapt, and adopt better ways of doing things - not just
innovations of the kind that might merit a patent, but also better ways to
organize a production process, distribute goods, and respond to consumers?
businesses in Guyana are mercifully spared some of the problems identified
as existing elsewhere, such as barriers to importing modern equipment and
adjusting the way work is organised. Problems which we share, however,
include sufficient comfort with what Joseph Schumpeter called "creative
destruction" - an environment in which firms have opportunities and
incentives to test their ideas, strive for success, and prosper or fail. A
good investment climate makes it easier for firms to enter and exit markets
in a process that contributes to higher productivity and faster growth. The
report reckons that net market entry can account for more than 30 per cent
of productivity growth, and that firms facing strong competitive pressure
are at least 50 per cent more likely to innovate than those reporting no
such pressure. There are still too many entities which believe that they
have a right to exist - too big or old or connected to fail.
The critical role
the investment climate plays in poverty reduction can be seen firstly at the
aggregate level where economic growth is closely associated with reduction
in poverty. As we stated above, both China and India are profound examples
of what changes in policies can do and the benefit of clear rules of
engagement when it comes to investments.
At the level of
setting the investment climate, there should be absolute clarity and a
completely objective and rules-based approach. Instead of the Investment Act
providing the clarity and removal of political involvement in the investment
approval process, it has in fact aggravated the situation, as bureaucrats at
best second guess the politicians and at worst await political directions,
while the public and more importantly, the business community, act as if
unaware of the legislation. That community disengaged itself once the
legislation was passed and must now accept some of the blame for its
ineffectual operation; it should start asking questions of the government.
The Investment Act
was intended to be supplemented by some kind of guide prepared by the Guyana
Office for Investment (GO-Invest) but that office has been noticeably
invisible and one wonders whether it is again the strain between the
personalities in that office and the Ministry of Trade. Both heads of these
entities should be concerned that Guyana is not among the countries in the
Doing Business Project of the World Bank with which they must be assumed to
is a major deterrent to investment, and Mr Smith said that the survey found
that "the number one concern of firms was actually policy uncertainty - not
knowing what the government would do next." He added that his team saw other
manifestations of these policy risks as well. For example, more that 80% of
firms in Bangladesh lacked confidence in the courts to uphold their property
rights. Quite a large number of firms in many countries also find regulation
to be "completely unpredictable."
The report notes
the three major influences which the government exerts on the investment
climate through the impact of their policies and behaviour on the costs,
risks, and barriers to competition facing firms.
Next week we
look at how this happens and how the influence can best be exerted.
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