Accelerating growth and poverty reduction requires governments to reduce the policy risks, costs, and barriers to competition facing firms of all types, from farmers and micro-entrepreneurs to local manufacturing companies and multinationals. This is the conclusion of the World Bank’s annual World Development Report for 2005, which was launched on September 28th, 2004.
In a press release for the report, the Bank’s Chief Economist Francois Bourguignon said "A good investment climate is central to growth and poverty reduction. A vibrant private sector creates jobs, provides the goods and services needed to improve living standards, and contributes taxes necessary for public investment in health, education, and other services. But too often governments stunt the size of those contributions by creating unjustified risks, costs, and barriers to competition."
Christopher Neal, the External Affairs Officer for the Bank’s Development Economics Department, opened the press conference with a few introductory remarks. He introduced Bourguignon, who was joined by Warrick Smith, the Manager of the Bank’s Investment Climate office and lead author of the report, and Michael Klein, the Vice President of the Bank’s Private Sector Development network. Bourguignon reiterated the themes of the 2005 report. He called improving the investment climate the first pillar of the Bank’s poverty reduction strategy. This year’s report complimented last year’s report which addressed issues of greater empowerment, he said, as an empowered labor force provides more efficient and productive workers for the business community. The 2005 report used surveys covering 26,000 firms from 53 countries, as well as analysis from other research. The major findings of the report, he said, are that a good investment climate is critical to poverty reduction, to promote a better investment climate governments must reduce unjustified costs and other barriers to the private sector so as to promote competition, change must include more than formal policies, and priorities must be defined at the country level.
Smith said growth and poverty reduction linkages motivated the report’s thesis. A good investment climate is good not just for firms, he said, but for the greater society because of job creation and taxes generated. Foreign investments are beneficial, but analysis reveals much gain is generated by domestic firms which accounts for 80% of local developing economies. Much activity is in the informal sector. The report focused on China, India and Uganda. The researchers looked at firm risk, informal factors such as the effect of changing land titling, costs and competition and its impact on productivity. Smith said if government’s could improve the predictability of their policy making, then that would have a huge positive impact on investment. How regulations are inforced remain an important concern for firms. Taxes and other costs such as corruption needs to be evaluated on a country by country basis. Making the environment competitive has proven to be an important factor in making firms innovative, he noted. Poor investment climates tend to handicap smaller firms, Smith suggested. Creating a perfect investment climate is not the issue, he said, but creating an environment that addresses constraints that hold firms back and having a process for improvements. The international community should address trade barriers and market distortions that negatively impact developing countries.
Klein provided some perspectives from the Bank’s operations. The report, he said, focuses on the micro-foundations for growth. It is important, Klein suggested, to help people leave the informal sector and establishes formal sector businesses. This can bestow many benefits such as property rights and access to finance. There is a need also for better policy-relevant data to help country specific and within-country specific problems.
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