Convenor: Hubert Schmitz, IDS
How, in the political and institutional environments typical of poor countries, can governments and other state actors achieve substantial increases in productive private investment? This is the question that drives this new research programme of the Centre for the Future State (CFS). The policy relevance of this question is clear. It is now generally accepted that substantial reduction in poverty requires accelerating economic growth and that such growth requires increasing investment. Low levels of private sector productive investment appear to be a major obstacle to economic growth in the poorest countries. Even though this issue has received much attention in the academic debate in the last 40 years, solutions for poor countries remain difficult to derive.
In the recent policy debate, these issues are discussed in terms of improving the investment climate. For example, the 2005 World Development Report ‘A Better Investment Climate for Everyone' identifies a range of obstacles and ideas for moving forward. At the core of much of the debate is the idea that improving the formal institutional framework, notably legal protection of property rights and enforcement of contracts is a precondition for raising investment and growth.
This view is problematic. The central issue is one of sequence and dynamics. Does ‘getting the institutions right' come first or does growth lead to demand for institutional transformation? Recent research questions that institutional transformation has to come first. Some countries have been able to initiate investment and growth without prior institutional transformation. Equally interesting are differences in investment within countries that cannot be explained by institutional factors. How can we explain substantial investment and growth in particular industries and localities in countries that are thought to have poor investment climates?
To make progress in understanding and improving the investment climate, we have started to unpack the connection between public action and private investment. In dissecting the existing case material, we find a common thread running through the success stories, which is the ability of policymakers and private investors to construct a relationship based on common interests. So far however we have only fragments of evidence. Our new research seeks to investigate more systematically the relevance of this alignment of interests. Using intra-country comparisons, we ask why some regions/sectors have better investment and growth record than others. Does the construction of common interest make the critical difference? Under what conditions does it work? How has it evolved? And what aspects might be transferable?
The new research is based on intra-country comparisons. This common feature to the empirical studies is deliberate. Investment and growth result from a combination of many different factors. In order to examine the relevance of any particular factor it is important to be able to hold at least some contextual factors constant. The advantage of intra-country (as opposed to inter-country) comparisons is that they make it possible to hold in particular the general legal and policy framework constant. Each case study is based on a combination of quantitative and qualitative material. Given the focus on alignment of interests and on relationships, we have sought to obtain the views from respondents in both the public and private sectors.
Review of the Investment Climate Debate : The standard advice in much investment climate reform is to replace governance through informal relationships with governance through formal rules, in particular the legal protection of property rights and the legal enforceability of contracts. This review agrees with this view as a long term goal, but it disagrees with the big push for the introduction of formal rules. It suggests that this big push is idealistic: it is very difficult to achieve and may not produce the expected increases in investment. The review then puts forward a different approach which, it suggests, leads to better analysis and promises to be more relevant on the ground. For more detail click here.
Brazil : The São Paulo research institute CEBRAP has carried out a comparative project which compares two towns characterised by different public-private interactions and then analyses the implications for the quantity and quality of productive investment and growth. Alvaro Comin and Carlos Torres Freire stress the importance of using a relational approach to understand the differences between the two towns. For more detail, click here.
Egypt : Egypt has been at the receiving end of much donor advice on the investment climate and has carried out a number of policy reforms to improve the investment climate. The levels of private investment remained nevertheless disappointingly low. This changed in 2004 with the introduction of business people in to the cabinet. The improvements in investment and growth are generally attributed to the bureaucratic reforms and simplicities of rules and proceedures undertaken by the new government. Hela Yousfi and John Humphrey confirm that these institutional reforms contributed to the economic resurgence but stress that relationships remain very important for investment decisions. A full copy of the paper can be accessed here
The importance of focussing on relationships becomes particularly clear if one seeks to explain differences between sectors. Abla Abdel-Latif (American University of Cairo) has examined the relevance of relationships between key policy makers and investors in two traditional industries (food and furniture) and two new sectors (information and communication technology). For more detail, click here
This project will ‘piggy back' on a survey of 2500 enterprises , which sought to assess the investment climate at the district level (outside the big urban areas). The research team will compare two districts which are very similar in terms of sectoral concentration and other factors, but differ greatly in terms of ability to generate investment and growth, paying particular attention to the role public-private coalitions. The central hypothesis is that, holding geography, factor endowments and sectoral concentration constant, it is the ability to construct and maintain coalitions of interest between local-level political leaders and private investors around key policy reforms that determines success. The team is led by Neil McCullough (IDS and Asia Foundation) and includes Arianto Patunru ( University of Indonesia ) and Christian Luebke (ANU). For more detail, click here
China : It is well known that China has been very successful in attracting foreign direct investment. It is less well known that there are substantial internal differences in investment and growth, even within the coastal region. Andrea Hampton (formerly IDS, now Crown Agents) asks why one locality in China is so much more successful in attracting investment than a neighbouring locality, examining the alignment of interests across the public-private sector divide and within the public sector. For more detail, click here
A more detailed analysis of the relationships between local government and private enterprise is provided by Eun Choi of the IDS Governance Team. She analyses the multiple fee payments imposed by local government and shows how and why they contribute to both private and public sector growth. For more detail click here
Chinese Investment in Africa : This project is concerned with Chinese private investment outside the extractive industries . Such investment is of particular interest, given that Western firms regard the investment climate in SSA as very poor and seem reluctant to invest. How then can we explain the apparent willingness of Chinese firms to invest? This study will pay particular attention to the relationships between state and private actors both within China and in Africa as potential reasons for this investment propensity. However, it will also consider other possible explanations for the substantial and increasing Chinese investment in Africa. Jing Gu (new IDS Fellow) is the main researcher working with Song Hong (Chinese Academy of Social Sciences), supported by John Humphrey. For more detail, click here
Vietnam: Enormous energies and resources are devoted to institutional reform in order to improve the investment climate and thus promote economic growth. The assumption is that institutional reform comes first and that investment follows. The project examines whether this widely assumed sequence applies in the real world or whether in fact investment and growth provide the impetus for institutional reform. The project suggests a new way of examining this issue, focussed on the case of Vietnam. The preparation of the project was funded by the Centre for the Future State. The actual research is funded by the ESRC-DFID. For details, click here