Transcript Improving the Investment Climate

Discussant’s Note
WDR 2005
A Better Investment Climate
World Bank – CII
Taj Land’s End
Mumbai, November 24, 2004
Saumitra Chaudhuri, Economic Advisor, ICRA Ltd
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It’s a very interesting report …
• Sheer volume of surveys conducted and the
findings is immense and issues of
interpretation are a serious challenge
• Lines of inquiry are many and all the
explanations perhaps couldn’t be fitted in.
• This session is on “A Better Investment
Climate for Everyone” and we will go there.
• But some comments on the Finance chapter
are called for, and I will make them here.
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Improving the Investment
Climate
Overview & Part I–Ch. 1–3
[& Ch. 6 – Finance & Infrastructure]
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The Central Theme
• Economic growth is the desirable outcome
– This is dependent on the presence of many
intangibles – principal amongst them being a
conducive investment climate
• That is, the micro-condition within which
economic agents operate enables (or
disables) the realization of the macropotential of the economy
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Context of the statement …
• When the state of development is low …
– Poverty is best addressed through rapid growth
• Leapfrogging can allow faster growth
– Learning from experience can yield more
efficient public policy regimes
• Micro reality creates precursors to growth
• Policy is a process not an event
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Substance & Method of Inquiry
• The object is intangible and multi-faceted
– It has no single or even common metric.
– No received method for this analytical approach
– It straddles different aspects of life – from
regulatory framework, to politics, to education
and awareness, to issues of motivation.
– Conclusions sought to be drawn are what the
motivations are for investment decisions and
how policy & other endowments shape them.
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Importance of Organization
• A very perceptive point – that the informal
sector should transform
– “good investment climate increases incentives
to become part of the formal economy.”
• Share of GDP arising in Informal Sector
– over “half …. in many developing countries”
– Fig 6. – 27% for Mexico going up to >70% for
Georgia and 45% for Sri Lanka
– India 15% of non-agricultural GDP (1999-00)
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Labour & Productivity
• Size of informal sector in India: 1999-2000
– 80 million workers, O/w 30 million in manufacturing and 28 million in trading & repair
– Workforce in formal (organized) sector is 27
million, and 19 million in the public sector
– Informal sector workforce ½ rural and ½ urban
– Valued added/worker Rs 24,242=Rs 193,451 cr
in 1999-00 or 15% of non-agricultural GDP
– Urban VA/worker = 2.2X of rural workers
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India’s informal sector
• Identification of major problem
–
–
–
–
Access to capital 31%
Competition from larger units 27%
Local problems (14%); Infrastructure (13%)
No major problem (35%)
• Registered with who (regulatory body)?
– Nobody 46%;
Local bodies 28%;
– Shops&estbmt 20%; Sales tax auth.: 11%
• Loans Rs. 30,000 cr O/w 47%
banks
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Hundreds of points ….
• Which I thoroughly endorse. Listing them is
neither physically possible nor desirable.
• Specifically, the survey-based investigation
is enormously informative and the
magnitude of the task undertaken is indeed
mind boggling.
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Many interesting things …
• Some however not quite explained
– Over 90% firms report gaps between formal policies
and the practice. Q. How big & country variation?
– China’s tax growth is double GDP growth; India’s is
about the same (F1.18). Q. Constant prices? Quasi
fiscal revenues in China taken?
– Larger firms face much lower constraints in tax and
policy related issues (F2.3). Q. Why?
– Large variation in extent of policy uncertainty between
formal and informal sector firms (F.7). Q. Why?
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Formulation problems ….
• Policy Credibility
– F2.8: “Firms are more likely to invest where the
policies are perceived to be more credible”
– This tests the truth of the statement “If A, then I
will do B”, while in the mind of the respondent
it probably is “If A, will consider doing B”.
– The positive proposition is far more difficult to
test than the negative one “If A, then I will not
do B”.
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Benefits of predictability ….
• Policy Predictability
• “Improving policy predictability can increase the
probability of new investments by more than 30%”
(p. 48 and F2.8 and F2.9).
• Q. Is credibility the only or even the first limiting
constraint?
• Q. Or are there are simultaneously occurring other
limiting constraints such as access to finance, and/or
competitiveness, and/or the condition of their
balance sheets?
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Excursion into politics …
– Electoral representation is, as capitalism is:
• The motive force in both is self-interest
• If fine in economics, must be so too in politics!
– History too is, as history is:
• The English Parliament deposed the monarch
somewhat before the Glorious Revolution (p49)
• Tyranny of the majority antedates Tocqueville
• Ethnic segmentation as impediment to growth was
the research program of the emergence of the
modern nation state in Europe
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Finance & Infrastructure
• There is another session on Infrastructure, but not
on Finance, so a few comments:
– “Private firms originally created much of the world’s
infrastructure…” (p125)
• Not the aqua-ducts or roads in the Roman Empire or the roads
& canal systems in India or China at least!
– “evidence shows that foreign banks improve the
efficiency and performance of domestic banks and
reduce interest rate margins” (p119)
• Yes, but in the sense that Silicon Valley helped IT in India.
Overstatement undermines the message.
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Finance & Infrastructure (2)
• State owned banks and directed credit:
– “overall record of these interventions is
discouraging” and performance “has generally
been poor” (p117)
• Indian experience – it is unlikely that we would
have succeeded with:
– Green Revolution and achieving food security, or
– Creating tens of thousands of entrepreneurs in 70s and
80s.
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Conclusion
• Policy is not immanent:
– It is contextual; has all the properties of
innovation – viz. they are fruitful, age & perish.
– Then new policies need to be developed to face
new challenges and altered contexts.
– The presumption of prior knowledge is not the
best point of departure
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Thank you
For your patience
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