World Development Report 2005: A Better Investment Climate for Everyone

288 Pages·2004·3.01 MB·English

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world development report
2005
A Better Investment Climate
for Everyone
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world development report
2005
A Better Investment Climate
for Everyone
A Copublication of The World Bank
and Oxford University Press
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© 2004 The International Bank for Reconstruction and Development / The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: [phone]
Internet: www.worldbank.org
E-mail:
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Contents
Foreword xiii
Acknowledgments xv
Abbreviations and Data Notes xvi
Overview 1
The investment climate is central to growth and poverty reduction 1
Tackling costs, risks, and barriers to competition 4
Progress requires more than changes in formal policies 5
A process, not an event 7
Focus on delivering the basics 9
Going beyond the basics involves additional challenges 12
The international community can lend a hand 14
PA RT I
Improving the Investment Climate 17
1 The investment climate, growth, and poverty 19
Understanding the investment climate 20
How investment climate improvements drive growth and reduce poverty 24
Sharpening the focus on poverty reduction 31
Creating a better investment climate for everyone 35
2 Confronting the underlying challenges 36
The basic tension: Firm preferences or the public interest? 37
Restraining rent-seeking 40
Establishing credibility 45
Fostering public trust and legitimacy 50
Ensuring policy responses reflect a good institutional fit 53
Making progress 54
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3 Tackling a broad agenda 56
The investment climate as a package 56
Setting priorities 58
Managing individual reforms 68
Maintaining momentum 71
Strengthening capabilities 74
PA RT II
Delivering the Basics 77
4 Stability and security 79
Verifying rights to land and other property 80
Facilitating contract enforcement 84
Reducing crime 89
Ending the uncompensated expropriation of property 92
5 Regulation and taxation 95
Regulating firms 95
Taxing firms 106
Regulating and taxing at the border 111
6 Finance and infrastructure 115
Financial markets 115
Infrastructure—connecting firms and expanding opportunities 124
7 Workers and labor markets 136
Fostering a skilled and healthy workforce 137
Crafting interventions to benefit all workers 141
Helping workers cope with change 151
PA RT III
Going Beyond the Basics? 157
8 Selective interventions 159
The allure—and traps—of selective interventions 159
Experience in specific areas 163
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9 International rules and standards 175
International arrangements and the investment climate 175
Enhancing credibility 176
Fostering harmonization 180
Addressing international spillovers 182
Future challenges 184
PA RT IV
How the International Community
Can Help 187
10 How the international community can help 189
Removing distortions in developed countries 189
Providing more, and more effective, assistance 190
Tackling the substantial knowledge agenda 195
Bibliographical note 198
Endnotes 199
References 210
Background papers for the WDR 2005 241
Case studies commissioned by the U.K. Department for International Development
for the World Development Report 2005 242
Selected Indicators 243
Measuring the investment climate 244
Challenges in measuring the investment climate 244
The World Bank’s new measures 245
Technical notes 250
Selected world development indicators 253
Data sources and methodology 253
Changes in the System of National Accounts 253
Classification of economies and summary measures 254
Terminology and country coverage 254
Technical notes 265
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Boxes
1 The investment climate perspective 2 2.15 Decentralization and the investment climate 53
2 How do firms in developing countries rate various 2.16 E-government and the investment climate 54
investment climate constraints? 5
3.1 Improving the investment climate, China’s way 57
3 Tackling a broad agenda—lessons from China, India,
3.2 India’s path 58
and Uganda 7
3.3 Do small firms play a special role in economic
4 Main messages from World Development Report
growth? 64
2005 15
3.4 International integration is especially important for
1.1 What do we mean by the investment climate? 20
small states 65
1.2 New sources of investment climate data from the
3.5 Exporting and productivity—what is the link? 65
World Bank 21
3.6 Trade liberalization in India—recent evidence 66
1.3 Geography matters, but it is not destiny 22
3.7 Foreign locals—the role of emigrants and diaspora 67
1.4 The environment matters for well-being and
3.8 Expanding the zone of feasible and desirable policy
productivity: Main messages from WDR 2003 25
improvements 68
1.5 Improving the investment climate and growth: the
3.9 The Bulldozer initiative in Bosnia and Herzegovina 70
cases of China, India, and Uganda 27
3.10 Consultative mechanisms in Latvia and Turkey 72
1.6 Measuring productivity 28
3.11 Shepherding investment climate improvements in
1.7 Growth with a poor investment climate—possible,
Vietnam 73
but unlikely to be sustained 29
3.12 The evolution of a reform champion in Senegal 74
1.8 Developing a product is a learning process—as
3.13 Networks of regulatory professionals
Hyundai shows 29
in infrastructure 75
1.9 Firm dynamics 30
4.1 Macroeconomic stability and the investment
1.10 Showing potential returns to investment climate
climate 80
improvements 31
4.2 Property rights reform in China: Even modest
1.11 How growth translates to rising incomes for poor
progress can ignite a strong response 80
people 32
4.3 Secure property rights and environmental
1.12 Women and the investment climate 34
stewardship 81
2.1 Governance and the investment climate 37
4.4 The distribution of property rights 82
2.2 Firms in history 38
4.5 Thailand’s 20-year program to title rural land 83
2.3 Firms and social responsibility 38
4.6 De-monopolizing property transaction
2.4 How do firm differences affect their policy
professionals 84
preferences and priorities? 39
4.7 Intellectual property rights: The ongoing debate 85
2.5 The predation of Gécamines in Mobutu’s Zaire 41
4.8 Crime, poverty, and inequality 90
2.6 Natural resource endowments: Blessing or curse? 41
4.9 New York City’s police reforms—are they
2.7 Combating corruption in Botswana and Lithuania 42
exportable? 91
2.8 The form of intervention: How many cheers for
4.10 Property wrongs: Is there ever a statute of
transparency? 44
limitations? 93
2.9 Business associations and the investment climate 45
5.1 Public ownership, regulation, and the investment
2.10 Reducing policy uncertainty to stimulate climate 97
investment 46
5.2 Regulating in Jamaica—from transplants to better
2.11 Entrepreneurship and uncertainty 47 institutional fit 98
2.12 The power of credibility 49 5.3 Environmental regulation and global integration 99
2.13 Building credibility through persistence 5.4 Easing business registration requirements in Vietnam
in Uganda 50 and Uganda 101
2.14 Shining the light on government–firm dealings in 5.5 One-stop shops—or one-more-stop shops? 101
natural resources and infrastructure 52
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5.6 Balancing the tradeoffs between specificity and 7.4 The core labor standards 141
discretion in regulation 103
7.5 The role and impact of unions 142
5.7 Contracting for certainty 103
7.6 Labor regulation and global integration 146
5.8 Competition laws in developing countries 106
7.7 Do firms’ perceptions square with actual labor
5.9 Taxation and global integration: A race to the regulations? 148
bottom? 108
7.8 Reforming severance pay in Colombia and Chile 154
5.10 Who pays taxes levied on firms? 108
8.1 Unforeseen successes in Bangladesh and Kenya 160
5.11 Tax receipts as lottery tickets? 110
8.2 Picking “winners” can be an expensive gamble—
5.12 Dealing with short-term international capital SOTEXKA in Senegal 160
flows 113
8.3 Integrating informal traders in Durban 164
5.13 Reducing customs delays in Singapore
8.4 Rural credit in Brazil 165
and Ghana 114
8.5 Staying small in India—by design 167
5.14 Contracting out customs in Mozambique 114
8.6 China’s special economic zones 167
6.1 Governments and finance markets: A long and
8.7 Export processing zones in Mauritius and the
difficult history 117
Dominican Republic 168
6.2 Expanding access to finance in rural areas—new
8.8 The WTO and selective intervention 169
approaches in India 120
8.9 Rolling the dice in Indianapolis 170
6.3 Commercial microfinanciers enter the market 120
8.10 Competing to attract investment within countries 171
6.4 Establishing a registry for movable collateral in
8.11 Fixing the FDI strategy for Mexico’s computer
Romania 121
industry 172
6.5 Improving corporate governance in Brazil and South
8.12 Successful “linkage programs” in Singapore and
Korea 122
Ireland 172
6.6 The political economy of electricity in India 125
8.13 Public-private partnerships for R&D 174
6.7 Improving the investment climate for small private
9.1 Evaluating rules and standards—compliance
providers of infrastructure 127
mechanisms and participation 176
6.8 Better government accounting, better government
9.2 BITs—enhancing credibility one bit at a time? 177
policy 128
9.3 NEPAD and its peer review mechanism 179
6.9 Expanding rural access to electricity and
telecommunications 131 9.4 The evolving system of investor-state dispute
settlement 181
6.10 The power to improve productivity in Nigeria 132
9.5 Harmonizing business law in Africa—OHADA 181
6.11 Port reform in Colombia and India 134
9.6 International cooperation to combat corruption 183
6.12 The benefits of rural roads in Morocco
and elsewhere 134 9.7 Privatizing international cooperation on corporate
social responsibility 184
7.1 Malaria and HIV/AIDS cloud the investment
climate 137 9.8 A multilateral agreement on investment? 185
7.2 Why Intel chose Costa Rica as the site of a 10.1 Multidonor technical assistance facilities and the
multimillion dollar plant 139 investment climate 193
7.3 Tackling skill imbalances through public support for 10.2 Knowing when to stop: UNDP’s microfinance
training and retraining programs 140 activities in Bangladesh 194
Figures
1 Domestic private investment dominates foreign direct 4 Growth is closely associated with poverty reduction 3
investment 2
5 How 60,000 poor people rated jobs and
2 Productivity accounts for a significant share of self-employment as paths out of poverty 4
growth 3
6 The informal economy is substantial in many
3 More competitive pressure, more innovation 3 developing countries 4
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7 Costs vary widely in level and composition 4 1.18 Rising GDP is associated with rising tax revenues—
expanding the opportunities to fund services for the
8 Small and informal firms are often hit hardest by
poor 35
investment climate constraints 5
Formal and informal firms have different perspectives 39
9 Constraints reported by firms—comparing Bulgaria,
Georgia, and Ukraine 8 2.1 The main locus of bribe-taking can vary 41
10 Firms in many developing countries lack confidence 2.2 More business start-up procedures increase both
in the courts to uphold their property rights 9 delays and corruption 42
11 The inadequacies of finance and infrastructure are 2.3 More influential firms face fewer constraints 44
severe for many developing countries 11
2.4 More influential firms innovate less 45
Firms rating finance and infrastructure as a “major”
2.5 Cronyism is reduced by greater accountability—and
or “severe” constraint 11
legislatures play an especially important role 46
12 Firms often rate skill shortage and labor regulations
2.6 Policy uncertainty dominates the investment climate
as serious obstacles 11
concerns of firms 46
13 Manufacturing value-added in a single country
2.7 Policy uncertainty is a concern for informal firms as
can far exceed net global official development
well 47
finance 14
2.8 Firms are more likely to invest when the policies are
1.1 Institutions, broadly measured, clearly matter for
perceived to be credible 48
growth 21
2.9 Improving policy predictability can increase the
1.2 Costs vary widely in level and composition 23
probability of new investment by over 30 percent 48
1.3 Regulatory unpredictability is a big concern
2.10 The power of restraint: governments with less
for firms 23
discretion present lower investment risk 49
1.4 Competitive pressure can vary significantly between
2.11 Support for markets does not always track economic
countries 23
growth—as in Latin America 51
1.5 Investment climate conditions vary within
2.12 Strong support for international trade and business—
countries 24
but less confidence in corporations 52
1.6 Investment climate conditions can affect firms
3.1 Constraints reported by firms—comparing Bulgaria,
differently 24
Georgia, and Ukraine 59
1.7 Significant economic growth is a modern
3.2 Informality is a matter of degree 62
phenomenon 25
3.3 Women’s participation is concentrated in the
1.8 Fast sustained growth in East Asia—declines in Sub-
informal sector, among the smallest firms 62
Saharan Africa 26
3.4 The contribution of SMEs to GDP does not vary too
1.9 The contribution of private investment to GDP has
much by income—but the relative importance of
grown 26
informal and formal firms shifts dramatically 63
1.10 Private investment has grown faster in countries with
3.5 Gross exports and FDI in developing economies
better investment climates 27
jumped in the 1990s 65
1.11 Differences in TFP account for the largest share of
3.6 Gaining access to technological innovations—key
differences in GDP growth per worker 28
sources 67
1.12 More competitive pressure, more innovation 29
4.1 Not entitled? 81
1.13 The contribution of net entry to productivity is
4.2 Leasing activity is more prevalent in Tunisia than in
higher when barriers to entry are lower 30
Egypt or Lebanon, thanks to laws facilitating
1.14 Poverty reduction is closely associated with growth 31 repossession 84
1.15 Self-employment and wage income are the ways out 4.3 Many firms do not believe the courts will uphold
of poverty 33 their property rights 87
1.16 Growing economies generate more jobs—particularly 4.4 Reforms speed up court business in República
in developing countries 33 Bolivariana de Venezuela 87
1.17 The informal economy is substantial in many 4.5 Crime takes a heavy toll on many Latin American
developing countries 34 economies 89