Mick Moore and Hubert Schmitz have reviewed the investment climate. What follows is an abstract of their paper:
Governments of developing countries are increasingly being urged to ‘improve the investment climate'. This is generally good advice. Economic growth would go up, and poverty would go down, if governments were better attuned to the ways in which private investment can be promoted. The problem is that the recommendation to improve the investment climate often comes packaged in a way that may not be very practical in the context of poor countries. The standard advice is moulded by what we term the ‘institutional gap paradigm': the belief that, if a country lacks some standard best-practice institutions that are assumed to be associated with a good investment climate, then the best way to improve the investment climate is to reform its institutions to move them closer to best practice, typically through transfer of models and practices from wealthy countries. The empirical evidence for this advice is shaky. The ‘institutional gap paradigm' is based on optimistic, doctrinally-based assumptions about politics, policy change, and the relationship between political and economic power that are least likely to apply in those countries that most need improved investment climates, i.e. countries in which governance institutions are weak and fragile and public policy is highly politicised. In such contexts, it is very difficult to move directly to the ‘ideal' relationship between public authorities and private investors: a relatively high level of institutionalised trust, regulated at arms-length through universalistic, standardised, transparent and enduring legal mechanisms, rather than through more particularistic, temporary, heterodox, experimental and politicised hand-in-hand connections between public authorities and private investors. Although a reflection of low levels of institutionalised trust between private investors and the holders of political power, these more hand-in-hand relationships can represent effective channels through which the two can realise their common interests, and create investment climates that are good enough in their context.
Our overall conclusion is that the standard investment climate advice would be more useful if it were (a) based on a more overt recognition of the centrality of the political relationships between investors and those who exercise public power and (b) tempered by a greater appreciation that temporary, heterodox, hand-in-hand arrangements might be effective at boosting private investment in situations where governance institutions are weak and fragile and highly politicised. We also conclude that we do not know a great deal about the form and effectiveness of these hand-in-hand arrangements, and indicate some ways of researching them.
Professor Mick Moore - Director of the Centre for the Future State
Professor Hubert Schmitz - Convenor of the Research Programme ‘Public Action and Private Investment'.