OVERVIEW• World Development Report, the 27th in the World Bank’s flagship series, looks at what governments can do to create better investment climates for their societies.• First, the Report emphasizes that the goal should be to create an investment climate that is better for everyone—in two dimensions.1) The investment climate should benefit society as a whole, not only firms.2) And the investment climate should embrace firms of all types, not just large or influential firms.
• Second, the Report argues that efforts to improve the investment climate need to go beyond just reducing business costs. Those costs can indeed be extraordinary in many countries, amounting to several times what firms pay in taxes.• Third, the Report underscores that progress requires more than changes in formal policies. The gaps between policies and their implementation can be huge, with the vast informal economies in many developing countries providing the most palpable evidence.
• The WDR 2005 raises some issues of concern to developing countries. The report acknowledges that there is a trade-off between entering into binding international commitments and maintaining policy flexibility, and the report notes the complexity of multilateral negotiations.• This report focuses on the point that government take step to promote the private sector investment. Government take steps to decrease the hurdles or form private sector favored policies.
Steps like decrease in taxes, governmentdocumentation time, licensing procedure andother trade barriers which cause the decreasein the foreign investment or private sectorinvestment should be taken. Private sectors are the major part of increase in the growth of the country and also play an important role in reducing the poverty. Private sector also provides employment opportunities and help to reduce the unemployment. It expands the variety of goods and services available and reduces their cost, to the beneﬁt of consumers. It supports a sustainable source of tax revenues to fund other important social goals. Improve the lives of people directly. Differences in incomes across countries highlighted the role of “institutions”—the broad organizational framework governing market transactions.
IMPROVING THE INVESTMENT CLIMATE• A good investment climate fosters productive private investment— the engine for growth and poverty reduction. It creates opportunities and jobs for people.• The WDR 2005 argues that improvements in the investment climate in developing countries will lead to increased flows of foreign direct investment (FDI) and consequently, to higher levels of economic growth and development.• Assumption” More investment is always better than less investment”• Emphasis is on the quantity and not on the quality i.e All investment will be equally good.
COSTS• The costs of producing and distributing products to firms are a normal function of commercial activity, while others flow directly or indirectly from government policies. The most obvious direct cost is taxation.• The costs associated with crime, corruption, regulation, unreliable infrastructure, and poor contract enforcement can amount to over 25 percent of sales—or more than three times what is typically paid in taxes. The level and composition of these costs vary widely (figure 1.2)
RISKS• Non-transparent or unpredictable governmental policies and behaviors may adversely affect investors’ decisions and thereby chill incentives to invest in a particular country.• Investment risks, like costs, are a normal function of commercial ventures, including uncertain responses from consumers and competitors, so firms should bear them.• Governments, however, have an important role in helping firms cope with risks associated with the security of their property rights.• Governments can also increase the risks and uncertainties that firms face directly.
VARIATION IN INVESTMENT CLIMATE• Foreign capital flows(FDI) can lead to higher levels of investment and growth but developing countries must retain the responsibility to determine the timing, amount and type of investment (including specific investment projects) that may enter the country.• The new evidence shows large variations in investment climate conditions not only between countries, but also within countries.• China and India provide compelling examples: investment climate improvements in these countries have driven growth and the most dramatic reductions in poverty in history.
DRIVING GROWTH• With rising populations, economic growth is the only sustainable mechanism for increasing a societys standard of living.• A good investment climate drives growth by encouraging investment and higher productivity.• Investment climate improvements in the 1980s and 1990s, private investment as a share of GDP nearly doubled in China and India; in Uganda it more than doubled.
REDUCING POVERTY• The critical role the investment climate plays in poverty reduction can be seen in two ways.1) At the aggregate level, economic growth is closely associated with reductions in poverty. Indeed, investment climate improvements in China drove the most dramatic poverty reduction in history, lifting 400 million people out of poverty over 20 years.2) Second, the contribution can be seen in the way a good investment climate enhances the lives of people directly, in their many capacities.• Reduced the costs of goods and services• Lowered food prices in countries.• More secure rights to farmers and other ﬁrms to invest• Allowed urban slum dwellers to increase their incomes by working more hours outside the home.• Help poor people educate their children and improve their homes
DELIVERING THE BASICS• Developing countries need larger capital inflows to raise the level of investment and GDP growth and to create jobs. Inflows of foreign direct investment can contribute to these objectives. Developing countries focuses on the rules that reduce the risks of investments and these rules ensure that flows provide development benefits.• Indeed, as developing countries move up the technological and production ladder and as a country’s export structure shifts from a dependency on commodity exports towards exports of higher value-added and innovation-based products. so that, incomes and standards of living also increase and become more sustainable in the long-run.
• The right of developing countries to regulate foreign investors and the need for foreign investment to undertake obligations in line with host’s country interests.• The gaps between policies and their implementation can be huge. Governments need to tackle corruption and other forms of rent-seeking, to build credibility with ﬁrms, to foster public trust and legitimacy, and to ensure their policy interventions are crafted to ﬁt local conditions.
• Governments need revenue to cover the costs of providing public services—including those that improve the investment climate and of meeting other social goals.• Tax rates in developing countries are similar to those in developed countries. But a high level of informality, coupled with poor administration and corruption, reduces revenue collection, places a disproportionate burden on those who do comply, and distorts competition.• While a narrow tax base reduces the feasibility of creating comprehensive social safety nets in most developing countries.
Firms rate tax administration as a separate and additionalobstacle from tax levels. In countries includingBangladesh,Brazil,and Ethiopia, more than 50 percent ofﬁrms said that tax administration was a very severe ormajor problem (ﬁgure 5.9).corruption in tax administrations are common, and weakenthe incentives to comply with taxes and contribute toleakages.
While tax rates andstructures differAcross countries,corporate tax ratesand value-addedtax rates arebroadly similar indeveloping anddevelopedcountries(ﬁgure5.6).
•Firms in Estonia reported that,on average, imports clearedcustoms in less than 2days. Bycontrast, the average for ﬁrmsin Tanzania was 18 days andin Ecuador,16 days.•These delays can impose realcosts on workers and ﬁrms indeveloping countries: onaverage ﬁrms in the garmentindustry grew more slowly, inboth output and employment,and wages were lower incountries where customsclearance took longer.
• Financial markets, when functioning well, connect ﬁrms to lenders and investors willing to fund their ventures and share some of the risks.• Good infrastructure connects ﬁrms to their customers and suppliers and helps them take advantage of modern production techniques.• Developed ﬁnancial markets provide payment services, mobilize savings, and allocate ﬁnancing to ﬁrms wishing to invest. When these markets work well, they give ﬁrms of all types the ability to seize promising investment opportunities. They reduce ﬁrms’ reliance on internally generated cashﬂows and money from family and friends giving them access to external equity and debt.
When these markets work well, they give ﬁrms of all types the abilityto seize promising investment opportunities. They reduce ﬁrms’reliance on internally generated cash ﬂows and money from familyand friends giving them access to external equity and debt, somethingthat smaller ﬁrms in particular often lack (ﬁgure 6.2). They allow poorentrepreneurs to grow their businesses, even though they have littlemoney themselves.
Conversely, inadequacies in ﬁnance and infrastructure create barriers toopportunities and increase costs for rural micro entrepreneurs as well asmultinational enterprises. By impeding new entry into markets, theseinadequacies also limit the competitive discipline facing incumbent ﬁrms, dullingtheir incentives to innovate and improve their productivity. Such inadequaciesare large in developing countries (figure. 11).
• Firms with access to modern telecommunications services, reliable electricity supply, and efficient transport links stand out from ﬁrms without them. They invest more,and their investments are more productive. Yet in most developing countries, many ﬁrms must cope with infrastructure that fails to meet their needs.•The problems, asexpressed by ﬁrms, vary byregion, with Sub-Saharan Africaand South Asia having poorerinfrastructure than Europe andCentral Asia. They alsotend to vary by infrastructureservice and ﬁrms size--electricity is often the biggestproblem, and larger ﬁrmsexpress more concerns thansmaller ﬁrms about all services(ﬁgure 6.4)
Governments also used their infrastructure agencies to channelassistance to particular regions and give jobs to favoured groups,increasing the agencies’ costs and frustrating attempts to hold themaccountable for the efficient delivery of services. With high costs and lowprices, the agencies were unable to ﬁnance investment from their owncash ﬂows or borrow on their own credit.
• People’s skills and health affect their ability to participate in society, escape poverty, and cope with economic and natural risks, and contribute to productivity increases and growth.• The link between investment in human capital and growth is mediated by the way education services are delivered and skills are allocated in the economy. But investment climate improvements almost always increase the demand for human capital.• The availability of skilled and healthy workers also shapes the decisions of ﬁrms to adopt new technologies, expand, or enter new markets.
• Improving the investment climate goes hand in hand with enhancing human capital. A skilled workforce is essential for ﬁrms to adopt new and more productive technologies, and a better investment climate raises the returns to investing in education. Government support for education and training affects the prospects for individuals and the ability of ﬁrms to pursue new opportunities.• Many ﬁrms in developing countries rate inadequate skills of workers as a serious obstacle to their operations. Governments need to take the lead in making education more inclusive and relevant to the skill needs of ﬁrms, strengthening quality assurance mechanisms, and creating a sound investment climate for providers of education and training services.
1. Government support for education and training affects the prospects for individuals and the ability of ﬁrms to enter new markets and adopt new technologies. Firm-level surveys show that more than 20 percent of ﬁrms in many developing countries rate inadequate skills and education of workers as a major or severe obstacle to their operations .2. Regulation of labour markets is usually intended to help workers, but can also be a signiﬁcant constraint on ﬁrms.
INTERNATIONAL RULES AND STANDARDS•International arrangements affecting the investment climate have a long history.• The number of international arrangements dealing with investmentclimate issues has grown dramatically in recent decades.• There are now more than 2,200 bilateral investment treaties,200regional cooperation arrangements, and some 500 multilateralconventions and instruments. These arrangements cover most areasof the investment climate—from property rights protection, taxationand corruption, to regulation in areas as diverse as banking, shipping,telecommunications, labor, and the environment.
• Entering an international obligation on a particular issue increases the costs of policy reversal and so enhances policy credibility.• Accepting international obligations on some issues may be necessary to obtain benefits in other areas as part of a broader negotiation. For example, the potential benefits from joining an international “club,” such as the World Trade Organization (WTO),the European Union (EU), or the North American Free Trade Agreement (NAFTA),may lead governments to offer policy commitments on a range of matters that, considered alone, might be less appealing.
• The number of regional economic cooperationarrangements has grown strongly in recent years.
Model is being adopted by theNew Partnership for Africa’s Development(NEPAD; box 9.3).
The WDR 2005 suggests that the developing countries musthave international agreements that have the following features:1. The agreements must focus on the liberalization of trade and investment and on the reduction in barriers that can improve the investment climate by reducing costs, expanding market sizes, and enhancing competition among firms.2. The agreements must contain higher standards of protection for investment and investors. The report states that developing countries will benefit from a multilateral agreement on investment that provides high standards of protection to investors including provisions on dispute settlement, indirect expropriation and transfer of funds.3. The agreement must encompass harmonization as opposed to customization of standards as harmonization reduces costs and also provides signals of high standards to traders and investors.4. The agreements must be binding commitments so that there is little chance of rolling back.
• It is further argued in the report that the establishmentof international rules or standards relating to investment isone of the major factors that help to create a favorable climate for investment in terms of enhancing the credibility ofgovernment investment policies, reducing internationaltransaction costs, and addressing international spillovers or sharedconcerns.
• Developing countries are not alone in grappling with investment climate improvements.• Developed countries and international agencies also provide around $26 billion per year in nonconcessional loans or guarantees to support specific transactions. Increasing the emphasis on the contribution these transactions make to the creation of more transparent and competitive markets would expand the development impact of this support.• It has been estimated that removing the various distortions imposed by developed countries could deliver gains to developing countries of $85 billion in 2015—or more than four times the development assistance currently provided for investment climate improvements.
This chapter highlights three ways the international communitycan help improve investment climates in developing countries:1. By removing policy distortions in developed countries that harm the investment climates in developing countries .2. By providing more, and more effective, assistance to the design and implementation of investment climate improvements, and better leveraging support provided directly to firms and transactions.3. By tackling the substantial knowledge agenda to help policymakers broaden and accelerate investment climate improvements.
Outside environmental protection, there are also many areas wherethe argument for international cooperation can be strong.This is the case with international efforts to combat corruption, forexample, which can seriously undermine investment climates.
CONCLUSION• This report focuses on the point that government take step to promote the private sector investment. Government take steps to decrease the hurdles or form private sector favored policies.• Assumption of WDR 2005 is that more investment is always better than less investment, and hence the emphasis is on the quantity and not on the quality of capital inflows. This emphasis on quantity presupposes that all types of investment will be equally good and will automatically lead to economic growth and development. But it also lends support to the troubling perception that the objective is not to view investment flows in terms of the needs of developing countries but in terms of the need to improve the opportunities for investors in developed countries. Studies have shown that between 25 and 45 per cent of FDI has a demonstrably negative impact on host societies.
• Report also raises some issues of concern to developing countries. The report acknowledges that there is a trade-off between entering into binding international commitments and maintaining policy flexibility, and the report notes the complexity of multilateral negotiations. However, these issues are raised more as an afterthought and there is no discussion of how developing countries could deal with these problems.• Reliance on data of gross FDI flows to developing countries provides a misleading picture of the overall benefits of these flows.• The scale of categorizing company size is not portraying the true picture of economy.• Report focus on the acquisition of money from foreign body or financial institution and avoide the direct lending of money from friends and family.
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