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Contributions from
the Column
Studies and reports
Donor harmonisation is still in the early stages
Somalia between hope and scepticism
Private sector as engine for development
Debating development and the private sector
11/2004 |
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[ World Development Report 2005 / UNCTAD investment data ]
Debating development and the private sector
“Private firms – from farmers and microentrepreneurs to local manufacturing companies and multinational enterprises – are at the heart of the development process” and favourable investment conditions, accordingly constitute an important element in developing countries’ fight against poverty. This view is expressed in the World Bank’s recent World Development Report entitled “A Better Investment Climate for Everyone”. A vibrant private sector creates jobs, provides essential goods and services and contributes taxes, which serve to fund government spending on health and education. At least this is how it should be. The bank concedes that if it came down to the interests of private firms, there would be neither taxation nor regulation. Nonetheless, both benefit the interests of society as a whole. “Creating a good investment climate requires governments to balance these interests,” the report states.
According to the World Bank, barriers to investment in poor countries such as corruption, inadequate infrastructure, unreliable rule of law and others can result in costs of 25 percent of total sales and even 300 percent of taxes paid by private companies. Policies to improve the investment climate must achieve four things:
– curb corruption and clientelism in order to restrain rent seeking;
– increase the trustworthiness of political decision makers;
– foster public support so as to create a climate in which market operators have faith in one another; and
– take care that measures to improve the investment climate fit local conditions.
Such policies should increase stability and security, for example by guaranteeing property rights, ensuring contracts and fighting crime. They must create the necessary infrastructure and conditions for a functioning financial sector, and they must provide educational opportunities and social security in order to equip employees for a competitive economy.
The Development Service of the Protestant Church in Germany (EED) issued a statement criticising the World Bank’s report as one-sided. It says that it is wrong to believe that it is in the hands of the developing countries to shake off poverty. This, according to EED, cannot be achieved by private investment alone, nor is it thought sufficient to improve conditions in the poor countries. In the EED’s view, the World Development Report does not adequately focus on international hurdles to development. Moreover, the World Bank approach is accused of not going far enough: more is said to be required than simply improving the opportunities for investment – after all, companies are unlikely to invest unless they have the chance of making profits.
While the EED review does indeed point out some weaknesses, its main thrust is unconvincing. The EED leaves the impression that the World Bank’s view is that the economy needs only to overcome obstacles and poverty will then be automatically reduced. However that does not reflect the World Bank’s position. In its paper, the EED says that civil society organisations “strongly object to the improvement of investment conditions by simply reducing regulation and lowering standards.” The World Development Report states in a similar vein: “A good investment climate is not just about generating profits for firms – if that were the goal, the focus could be narrowed to minimising costs and risks. It is about improving outcomes for society as a whole.”
Contrary to what the EED maintains, the World Development Report does not assume that poverty decreases automatically to a certain extent as “a by-product of private investment.” Rather, the Bank attributes responsibility to policy – for instance for making the investment climate development-friendly by encouraging alliances between foreign investors and local companies or specifically improving the situation of the rural population or businesses in the informal sector. The exact words of the World Bank’s report are: “When direct poverty reduction is given priority, the key will be to understand how potential investment climate improvements impact the poorest members of society in their various capacities: as employees, as entrepreneurs, as consumers, as users of public services, and as recipients of tax-funded services or transfers.”
The section of the EED paper which deals with the role of foreign direct investment (an issue the World Development Report hardly elaborates on) is more substantial than its review of the World Development Report. The EED points out that, just like loans, direct investment can also have a negative impact on a country’s balance of payments if, for example, the repatriation of profits and the import of primary products exceed the value of the sums invested – as has happened in Bangladesh, among other places. Developing countries should only accept direct investment if it benefits local businesses, for example in their role as suppliers. Any future multilateral agreement on investment should not reduce the scope for such a goal-oriented investment policy.
For years, the UN Conference on Trade and Development (UNCTAD) has been drawing attention to these issues in its world investment reports. This year’s report concerns cross-border investment in the service sector. According to UNCTAD, the amounts have increased markedly and now make up two thirds of all foreign direct investment. UNCTAD gives two reasons for this expansion. First, the report mentions the growing proportion of services in the gross national product. Second, it points to the fact that most services are not tradeable and therefore need to be produced when and where they are consumed. UNCTAD sees three risks in foreign investment in services. First, like investment in other areas, additional capital can destabilise a national economy if it pushes the balance of payments into overdraft. Second, there is a risk that formerly public monopolies are turned into private monopolies. Third, investment in culturally sensitive areas can create feelings of resentment among the people in the target country. According to UNCTAD, “strong, independent and competent regulatory structures are vital if the potential benefits of FDI are to be tapped.”
As UNCTAD data for 2003 show, global FDI has declined for the third year in a row – by 17.6 percent to $ 560 billion. In 2000, a record year, the sum had amounted to $ 1,400 billion. Of the developing regions, Latin America, above all, suffered losses. In contrast, foreign investment increased in Africa and Asia, albeit with considerable differences between various countries. (ell)
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