Attract investment to reduce poverty says World Bank

Governments seeking growth and poverty reduction must work to attract both local and foreign investment, says the World Development Report 2005. Released in Johannesburg on Thursday, the report argues that, more than foreign direct investment, domestic private investment is the engine for economic growth. A good investment climate encourages firms to invest, expand and create jobs, and this benefits society as a whole. Private investment as a share of GDP more than doubled in Uganda, and nearly doubled in China and India, as a result of improvements in the investment climate in those countries in the 1980s and 1990s. The report draws on new research, case studies and data from the Investment Climate Survey of 26,000 firms in 53 developing countries and the Doing Business Project, which benchmarks regulatory regimes in 130 countries. It makes four main points. Firstly, to benefit business and society, well-designed taxation and regulation is needed, and the investment climate needs to embrace all kinds of business, not only those that are large or politically connected. Secondly, reducing business costs associated with weak contract enforcement, inadequate infrastructure, crime, corruption and regulation, is critical because these costs can amount to three times what firms pay in taxes. In developing countries, reducing policy-related risks, such as insecure property rights, macroeconomic instability and arbitrary regulation, is equally important because such risks top the concerns of firms and cripple incentives to investment. Thirdly, progress requires more than changes in formal policies. A priority for governments is to tackle corruption and other forms of 'rent-seeking', so as to build credibility with firms, foster public trust and legitimacy, and ensure that policy interventions are crafted to local conditions. Finally, the report argues that persistence, more than perfection, is the key. Uganda boosted its per capita GDP by more than 4 percent a year between 1993 and 2002 - eight times the average in sub-Saharan Africa - through a series of reforms to liberalise the economy, achieve macroeconomic stability and reduce trade barriers. The government has maintained this policy, dealt with setbacks and gained credibility. Peace is essential to productive investment, as is an environment with adequate levels of political and economic stability, where personal and property rights are reasonably secure, the report said. Studies across a broad spectrum of countries show that the more secure these rights, the faster the country's economic growth. Secure rights facilitate access to credit, and encourage investment and environmental conservation, especially in farming, the researchers commented. Another recommendation is to strengthen the courts and other dispute resolution mechanisms. This reduces the risks for businesses and increases their interest in investing. In Burundi, Cameroon, Cote d'Ivoire, Kenya, Madagascar and Zimbabwe, where firms have little confidence in the courts, they are unwilling to expand trade by doing business with anyone they don't know well, the report found. It pointed to the fact that Tanzania's recently created commercial court draws praise from lawyers and, although the filing fees are higher than in ordinary courts, its caseload keeps growing. Robbery, fraud and crimes against people and property undermine the investment climate. The Investment Climate Survey noted that 37 percent of respondents in Nigeria identified crime as a major or severe constraint to their operations, 50 percent did so in Zambia and 70 percent in Kenya. Overall, one-third of all firms surveyed in sub-Saharan Africa declared crime a significant constraint, compared to 20 percent in South Asia. The country risk assessments prepared by rating agencies factor in the risk of unfair expropriation of property by governments. Those with credible mechanisms to reduce this threat and a history of treating investors fairly are perceived as low-risk. While governments have a right to take property in some circumstances, such as health emergencies and the public interest, the report suggests they make it clear that property will only be expropriated to serve a public purpose, and with prompt, adequate and effective compensation. To address historical imbalances in land ownership, says the report, there are other options between inaction and ill-conceived action available to policy-makers. One is to buy land for redistribution, a policy followed by South Africa, Brazil and Colombia. Zimbabwe's controversial seizure of white-owned farms resulted in plummeting agricultural production and turned a previously robust economy into the fastest shrinking one in 2003. On workers and labour markets, the report makes it clear that the goal is to protect workers more than jobs, and striking a balance between promoting job creation and protecting existing jobs is particularly contentious during periods of economic reform. Broad labour market strategies include fostering a skilled and healthy workforce, addressing HIV/AIDS and malaria, and crafting labour market interventions to protect all workers, including those in the informal economy, while encouraging firms to hire workers, and helping workers cope with a changing economy. Other recommendations call for developing countries to reassess their minimum wage legislation, as too high a minimum wage leads firms to restrict hiring or remain in the informal economy.