Sherine Nasr reports on the World Bank's formula for a better investment climate The World Bank (WB) Development Report for 2005, issued earlier this month, offers a formula advocating the means to better the investment climate in developing countries. The report highlights a good, stable investment climate as the main tool by which to provide opportunities and incentives to firms -- from micro-enterprises to multinationals -- to expand, create jobs and thus play a central role in growth and poverty reduction. "Improving the investment climates of their societies is critical for governments in the developing world, where 1.2 billion people survive on less than $1 a day, where youths have more than double the average unemployment rate, and where populations are growing rapidly," the report said. New data from the WB provides fresh insight into how investment climates vary around the world and how they influence growth and poverty. The WB development report draws on surveys on the investment climate which were conducted on 26,000 firms in 53 developing countries, including Egypt. With rising population, economic growth is the only sustainable mechanism for increasing a society's standard of living. According to the report, the critical role the investment climate plays in poverty reduction can be seen in two ways. First, at the aggregate level, economic growth is closely associated with reductions in poverty. Second, contributions that firms make to society can be seen in the way a good investment climate enhances the lives of people directly in their many capacities as employees, entrepreneurs, consumers and as users of infrastructure, property and finance. The report makes it clear that the contributions are mainly determined by the investment climate. Government policies and behaviours play a key role in shaping the investment climate. "While governments have limited influence on factors such as geography, they have more decisive influence on the security of property rights, approaches to regulation and taxation, both at and within borders, the provision of infrastructure, the functioning of finance and labour markets, and broader governance features such as corruption," the report said. Governments influence investment through the impact of their policies on costs, risks and barriers to competition. "Taxes are the most obvious example," it added. Tax rates in developing countries are similar to those in developed countries, but a high level of informality, coupled with poor administration and corruption, reduces revenue collection and places a disproportionate burden on those who comply. They also distort competition. "Keeping the size of government in check and spending public money efficiently help ease the pressure on revenue collection," the report says. Costs also have a time dimension. There are big variations in the time taken to obtain a telephone line and to clear goods through customs, as well as in the time managers need to spend dealing with officials. "The time it takes to register a new business ranges from two days in Australia to more than several months in other developing countries." Concerning the issue of risks, firms in developing countries rate policy uncertainty as their top concern. Insecure property rights, macro-economic instability and arbitrary regulations chill incentives for investment. "The majority of firms claim gaps between formal rules and what happens in practice. "The informal economy accounts for more than half of the output in many developing countries," the report underlines. "While governments are not required to fix everything all at once, significant progress can be achieved by addressing important constraints facing firms, restraining corruption and building credibility to give firms the confidence to invest," the report concludes.
