Taking an interdisciplinary approach: The IDB’s Business Climate Initiative

1. Taking an interdisciplinary approach: The IDB’s Business Climate Initiative Brazil, October 26, 2004 Angela Paris Inter-American Development Bank Private Enterprise

2. Outline of the presentation • Outline of the problem • What needs to be done: why the traditional “project approach” is inadequate • How is the IDB approaching the problem • Closing remarks

3. Five Decades of Mixed Results* * Source: World Bank

4. Macroeconomic Stability Subindex East Asia Developed Rest of Asia Eastern Europe Middle East Africa LAC 6 0 1 2 3 4 5 Source: The Global Competitiveness Report 2003-2004 Macro Instability 8 29 30 52 63 64 Ranking 82

5. EU AREA Finland: 1-1 United Kingdom: 11-15 Germany: 13-13 Austria: 17-17 Spain: 23-23 France: 27-26 … Italy: 47-41 LAC Chile: 22-28 Mexico: 48-47 El Salvador: 53-48 Brazil: 57-54 Colombia: 64-63 Argentina: 74-78 Venezuela: 85-82 A reality check: Competitiveness Rankings * Source: World Economic Forum. 2003-2004 Rankings

6. 14 Developed 29 East Asia 34 Middle East 44 Eastern Europe 58 Rest of Asia 63 LAC Ranking 80 Africa 0 1 2 3 4 5 6 Source: The Global Competitiveness Report 2003-2004 Latin America ranks low Growth Competitiveness Index

7. Contracts and Law Sub-index Developed Middle East East Asia Rest of Asia Africa Eastern Europe LAC 0 1 2 3 4 5 6 Source: The Global Competitiveness Report 2003-2004 Weak Rule of Law 14 33 29 60 62 64 Ranking 76

8. Corruption Control Index Developed East Asia Middle East LAC Eastern Europe Africa Rest of Asia 0 1 2 3 4 5 6 7 Source: The Global Competitiveness Report 2003-2004 …and Corruption Control 16 42 50 45 62 77 Ranking 82

9. Why investments are lagging: Six villains • Macro-economic instability • Poorly designed regulatory frameworks • Insufficient attention to enforcement • Deficient Infrastructure • Shallow banking markets/difficulty in creating liens • Inefficient legal system

10. Informality: the silent ambush • Good macro-economic policies and private ownership necessary but not sufficient conditions for economic growth • Micro-policy issues – value chains • Effects on: • Productivity • Labor • Competition

11. Not just one cause, not just one solution • Fiscal policy • Regulatory burden • Labor markets • Institutional quality • Access to markets • Access to financing

12. Foreign Investors Challenges • Contract enforcement • Cash flow profiles • Asymmetry in negotiation power • Change in financial equilibrium • Unreliable environment • Foreign exchange exposure • Overreaction by stock markets • Economies of scale

13. Opacity: ROR premium over US

14. Lessons Learned • Macro-economic and regulatory stability a necessary but not sufficient condition • Public disillusionment with private ownership (especially foreign) • Size of economy obstacle for large investments • Subsidies for lower income customers may still be a necessity • Public acceptance of tariffs is still a central issue

15. The future of business • Should we wait for the perfect business climate before we invest? • Importance of “good-enough governance” • Must design investments to avoid the major obstacles and capitalize on the good points, including entering in partnerships with the public sector. Reduce “climate dependency” • In the meantime, the IDB is working to remove obstacles to doing business and create a “good-enough governance”

16. The IDB’s Business Climate Initiative • Part of the implementation of the Competitiveness Strategy and the first Strategic Direction of the Private Sector Development Strategy. • Recognition that private sector is a significant driving force of economic growth and it needs to be supported.

17. Pragmatic and results oriented initiative • Macroeconomic Framework • Financial Systems Development • Legal and Regulatory Frameworks • Governance • Institutional Development • Public Private Partnerships • Cooperation with International Community

18. A Process, not a project • Multifaceted problems: multi-expert teams • Inter-disciplinary solutions • Evolutionary and comprehensive approach: Property rights, collateral, bankruptcy laws AND procedures AND courts AND alternative methods of resolution AND enforcement

19. Closing Remarks • In spite of volatility, LAC economies have made some progress in their business climate, but much remains to be done • Project by project approach will fail • Ongoing, incremental, process of change • Interdisciplinary processes need to be adopted • Closer cooperation and coordination among international community (IFIs, donors, Agencies) is required

20. Thank You Angela Paris Inter-American Development Bank Angelap@iadb.org Te. 202 623 1143