Putting the Policy Framework Into
Action: Next Steps
Richard Newfarmer
World Bank
Rio de Janeiro, Brazil
October 2005
Policy Framework for Investment
y What is it?: 10 questions in 10 policy domains
– Investment, promotion, trade, competition, tax,
corporate governance, CSR, human resources,
infrastructure, and public governance
y How can governments use PFI?
–
–
–
Self evaluation
Peer review
Regional arrangements
y Question: How does the government set priorities
among various domains? Are all questions are not
equally important in attracting investment
– Investment restrictions > competition policy?
– Within area, questions can be much deeper
– Short term (IPA) > long-term (education)?
Countries have quite different strategic
requirements… but small countries can do well
20
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hi ,
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e t
M n
ge
Ar zil
a
Br i na
h
C
Least FDI
Most FDI
30
25
Top 10 receive almost
80% of total FDI flows
(left axis)
15
35
Some countries with a small share of total FDI
have high FDI/GDP ratios (right axis)
20
FDI as a share of GDP
45
25
Share of Total FDI
Countries sorted by share of Total FDI, 19
40
15
5
PFI: From checklist to strategy
y Requires embedding in a strategy
– Establish investment objectives
y Speed growth (Tech, productivity)?
y Expand exports?
y Expand employment?
y Relieve infrastructure constraints?
y Regional development?
y Assess assets and impediments to investment
– Assets: Labor, resources, location?
– What are the binding constraints to investment?
y Realism: Take account of capacity to implement
Generic priorities: Getting the most FDI
… and getting the most (TFP) from FDI
y Stable macro policies (e.g. Gastanaga, et al 1998)
y Create positive investment climate (infrastructure,
property rights, intellectual property, corruption) (DaudeStein, 2001)
y Removing policy-induced barriers to entry and
competition (e.g., tariffs, entry restrictions, tax policies)
Reducing trade barriers increases competition
Per cent level of tariffs, annual
per cent growth in trade
Tariff levels
35
(left axis)
Trade growth
(right axis)
30
12
10
25
8
20
6
15
4
10
5
2
0
0
1980s
2000s
1980s
2000s
Generic priorities: Getting the most FDI
… and getting the most (TFP) from FDI
y Stable macro policies (e.g. Gastanaga, et al 1998)
y Create positive investment climate (infrastructure,
property rights, intellectual property, corruption) (DaudeStein, 2001)
y Removing policy-induced barriers to entry and
competition (e.g., tariffs, entry restrictions, tax policies)
y Invest in education (Borenszstein, et al 1997, Dunning
1998)
Education raises the productivity of FDI,
leading to higher growth…
Per capita GDP
growth rate
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
High
Medium
Schooling
Low
High
Medium
Low
FDI to GDP ratio
Note: The low, medium, and high categories for FDI to GDP ratio are below 0.01%, 0.01%-0.2%, and over 0.2% respectively. For the
schooling variable, the low, medium, and high categories are below 0.4, 0.4-1.0, and over 1.0, respectively
Source: Borensztein et al (1998)
Generic priorities: Getting the most FDI
… and getting the most (TFP) from FDI
y Stable macro policies (e.g. Gastanaga, et al 1998)
y Create positive investment climate (infrastructure,
property rights, intellectual property, corruption) (DaudeStein, 2001)
y Removing policy-induced barriers to entry and
competition (e.g., tariffs, entry restrictions, tax policies)
y Invest in education (Borenszstein, et al 1997, Dunning
1998)
y Pro-active policies (promotion, linkage creation,
technology networks)
PFI: Next steps
y Possible to advise on ways to set priorities?
– Context manual
– Analyzing binding constraints
y Possible to categorize by level of capacity to implement?
– Low income countries need to answer different questions
(property protection) than middle income countries
– Different investments require differing type of regulatory
capacities: e.g., retail services v. power
y Pilots to test PFI… How to create dialogue?
–
–
–
Within governments
With governments
Between governments
Putting the Policy Framework Into
Action: Next Steps
Richard Newfarmer
World Bank
Rio de Janeiro, Brazil
October 2005