Business Page October 31, 2004

 

We continue this article influenced by the publication of World Bank's World Development Report 2005, released late last month. This report has both relevance and lessons for us in Guyana since it seems to be addressing issues with which we have been familiar and indeed concerned for a very long time. We noted that the report had identified uncertainty of policies as one of the major barriers to investment, as well as the three major influences which the government exerted on the investment climate through the impact of their policies and behaviour on the costs, risks, and barriers to competition facing firms. It was not enough for the government to address one or two of them - a government serious about attracting investments both local and foreign had to tackle all three, and variations in investment climates around the world highlighted the potential for improvement.

Costs

It only takes a superficial look to see how government policies and behaviours influence the costs of doing business and hence the range of investment opportunities that might be profitable, with taxes being the most obvious example. But the role of governments is not only to regulate the level of taxes - they must also provide those public goods, supporting the provision of infrastructure, and addressing market failures which no single entity can or should do, even in a private- sector driven economy.

The supply of electricity has been a bugbear of this country for close to a quarter of a century, and has created severe dislocations not only in the manufacturing sector but across the economy and the society. No business can operate with unreliable and inadequate electricity and the cost of the back-up system has been enormous and debilitating. This explains why this column considers any comparison of electricity tariff with other countries completely academic. It is not just the cost of acquisition of back-up facilities or the fuel consumed, but also the disruption and the salaries and wages and physical facilities which have to be made available.

The physical considerations are indeed formidable, as, for example, road access and potholes which do serious damage to vehicles. There are, however, the less visible costs such as crime, corruption, statutory compliance or the inefficiencies of the marketplace which can cause serious distortions, or the unnecessary barriers which impede the rate at which business can enter or exit the market. Not that we have done nothing in certain sectors, but ironically those areas we have addressed have generally placed a necessary cost on entities in the sectors on which some controls have been placed such as the insurance and financial businesses.

Our court system is riddled with problems such as contract enforcement, ownership difficulties and the speed with which simple legal processes are completed. Which serious country would shut down its companies' registry for months or would allow for delays of years in settling important business issues? What type of credible complaint mechanism exists to deal with the corrupt official who insisted on being paid tens of thousands of dollars for a straightforward licence? The businessperson who is an active and guilty a participant in this illegality usually compounds it by hiding the transaction for his auditors. It may not be in the books but it is a cost all the same.

Noting that costs also have a time dimension, the report notes the large variations in the time taken to obtain a telephone line and to clear goods through customs, as well as in the time managers need to spend dealing with officials. In the more developed countries it takes just a couple of days to register a business, but several months in Third World countries.

Risks

Government's role is to maintain a stable and secure environment, including protecting property rights. It should be recognized that policy uncertainty, an unstable economy and a decision-making process that at best appears illogical, inhibits opportunities and chills incentives.

This is not to suggest that governments must bear firms' risks or that the firms should not do serious, professional and independent research. Businesses by their very nature are forward-looking and therefore risky, but those are normal and reasonable costs of doing business, regardless of the country. The government's role is to see that it does not make it any more risky.

Barriers to competition

Naturally, firms love monopoly, but barriers to competition benefit some firms while denying opportunities and raising costs for other firms and for consumers. They can also dull the incentives for protected firms to innovate and increase their productivity. In this regard, the government does little to help, and even after criticising the most generous package of incentives granted to Barama by the PNC, the government is reported to have extended the same concessions for another ten years.

Despite its avowed intentions to free up the telecommunications sector, it has watched like any helpless citizen as ATN dragged out any attempts to introduce competition into the sector.

The dilemma

Once again reflecting our own conditions, the report notes that over 90 per cent of firms in developing countries report gaps between formal policies and what happens in practice. The report notes the basic tension underlying this gap because of the mismatch between the objectives of firms - both local and foreign - and those of the societies in which they operate. This tension is most evident in taxation and regulation.

Most firms complain about taxes, but taxes finance public services that benefit the investment climate and other social goals. Many firms would also prefer to comply with fewer regulations, but sound regulation addresses market failures and can therefore improve the investment climate and protect other social interests.

Without a sound and possibly legally-instituted investment regime, developing countries behave as though they have little choice, and when the crunch comes the big and influential company almost invariably gets what it wants.

But governments must recognize that the investment climate is for everyone and the creation of a good investment climate that balances the interests of all, including the government is the real challenge it faces.

A process, not an event

The report adds that no country has a perfect investment climate, and that perfection in even one policy dimension is not necessary for significant growth and poverty reduction. Experience shows that progress can be made by addressing important constraints in a way that gives firms confidence to invest, and by sustaining a process of ongoing improvements. The important thing is to start. Minimum tasks include strengthening government capabilities, enhancing the court system, reducing crime, improving domestic taxation as well as regulation and taxation at the border.

Conclusion: Where to start?

After considerable persuasion over several years, the President assented to the Investment Act 2004 on March 31, 2004, the deadline for the tabling of the National Budget. Out of this should have come an Investment Code, the designation of investment priorities and the appointment of an Investment Promotion Council. Abso-lutely nothing has happened since, and it is tempting for the cynic to conclude that it was only because of the pressure from the United States Agency for International Development (USAID) and the PR to be had from crowing about it in the 2004 budget speech that the act was passed. We could not have a more wrong reason.                                                                  

 

 

          

 

 

 

 

 

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