critical analysis of world development report 2005

2. GROUP MEMBERS
HAMZA SHAUKAT
Punjab University I.A.S
Department

3. OVERVIEW
TABLE OF CONTENT
INTRODUCTION
IMPROVING THE INVESTMENT
CLIMATE
DELIVERING THE BASICS
INTERNATIONAL RULES AND
STANDARDS
CONCLUSION

4. OVERVIEW

5. OVERVIEW
• World Development Report, the 27th in the World Bank’s
flagship series, looks at what governments can do to create
better investment climates for their societies.
• First, the Report emphasizes that the goal should be to create
an investment climate that is better for everyone—in two
dimensions.
1) The investment climate should benefit society as a whole, not
only firms.
2) And the investment climate should embrace firms of all types,
not just large or influential firms.

6. • Second, the Report argues that efforts to improve the
investment climate need to go beyond just reducing business
costs. Those costs can indeed be extraordinary in many
countries, amounting to several times what firms pay in taxes.
• Third, the Report underscores that progress requires more
than changes in formal policies. The gaps between policies
and their implementation can be huge, with the vast informal
economies in many developing countries providing the most
palpable evidence.

7. • The WDR 2005 raises some issues of concern to developing
countries. The report acknowledges that there is a trade-off
between entering into binding international commitments and
maintaining policy flexibility, and the report notes the complexity of
multilateral negotiations.
• This report focuses on the point that government take step to
promote the private sector investment. Government take steps to
decrease the hurdles or form private sector favored policies.

8. Steps like decrease in taxes, government
documentation time, licensing procedure and
other trade barriers which cause the decrease
in the foreign investment or private sector
investment should be taken.
Private sectors are the major part of increase in
the growth of the country and also play an
important role in reducing the poverty.
Private sector also provides employment
opportunities and help to reduce the
unemployment.
It expands the variety of goods and services
available and reduces their cost, to the benefit
of consumers. It supports a sustainable source
of tax revenues to fund other important social
goals. Improve the lives of people directly.
Differences in incomes across countries
highlighted the role of “institutions”—the
broad organizational framework governing
market transactions.

9. IMPROVING THE INVESTMENT
CLIMATE

10. IMPROVING THE INVESTMENT
CLIMATE
• A good investment climate fosters productive private investment—
the engine for growth and poverty reduction. It creates
opportunities and jobs for people.
• The WDR 2005 argues that improvements in the investment
climate in developing countries will lead to increased flows of
foreign direct investment (FDI) and consequently, to higher levels
of economic growth and development.
• Assumption” More investment is always better than less investment”
• Emphasis is on the quantity and not on the quality i.e All investment
will be equally good.

12. COSTS
• The costs of producing and
distributing products to firms
are a normal function of
commercial activity, while
others flow directly or
indirectly from government
policies. The most obvious
direct cost is taxation.
• The costs associated with
crime, corruption, regulation,
unreliable infrastructure, and
poor contract enforcement
can amount to over 25
percent of sales—or more
than three times what is
typically paid in taxes. The
level and composition of
these costs vary widely (figure
1.2)

13. RISKS
• Non-transparent or unpredictable governmental policies and
behaviors may adversely affect investors’ decisions and
thereby chill incentives to invest in a particular country.
• Investment risks, like costs, are a normal function of
commercial ventures, including uncertain responses from
consumers and competitors, so firms should bear them.
• Governments, however, have an important role in helping
firms cope with risks associated with the security of their
property rights.
• Governments can also increase the risks and uncertainties
that firms face directly.

15. VARIATION IN INVESTMENT
CLIMATE
• Foreign capital flows(FDI) can lead to higher levels of
investment and growth but developing countries must retain
the responsibility to determine the timing, amount and type of
investment (including specific investment projects) that may
enter the country.
• The new evidence shows large variations in investment
climate conditions not only between countries, but also
within countries.
• China and India provide compelling examples: investment
climate improvements in these countries have driven growth
and the most dramatic reductions in poverty in history.

17. DRIVING GROWTH
• With rising populations, economic growth is the only
sustainable mechanism for increasing a society's standard of
living.
• A good investment climate drives growth by encouraging
investment and higher productivity.
• Investment climate improvements in the 1980s and 1990s,
private investment as a share of GDP nearly doubled in China
and India; in Uganda it more than doubled.

18. REDUCING POVERTY
• The critical role the investment climate plays in poverty reduction
can be seen in two ways.
1) At the aggregate level, economic growth is closely associated with
reductions in poverty. Indeed, investment climate improvements
in China drove the most dramatic poverty reduction in history,
lifting 400 million people out of poverty over 20 years.
2) Second, the contribution can be seen in the way a good
investment climate enhances the lives of people directly, in their
many capacities.
• Reduced the costs of goods and services
• Lowered food prices in countries.
• More secure rights to farmers and other firms to invest
• Allowed urban slum dwellers to increase their incomes by working
more hours outside the home.
• Help poor people educate their children and improve their homes

20. DELIVERING THE BASICS

21. DELIVERING THE BASICS
• Developing countries need larger capital inflows to raise the
level of investment and GDP growth and to create jobs. Inflows of
foreign direct investment can contribute to these objectives.
Developing countries focuses on the rules that reduce the risks of
investments and these rules ensure that flows provide development
benefits.
• Indeed, as developing countries move up the technological and
production ladder and as a country’s export structure shifts
from a dependency on commodity exports towards exports of
higher value-added and innovation-based products. so that,
incomes and standards of living also increase and become more
sustainable in the long-run.

22. • The right of developing countries to regulate foreign investors
and the need for foreign investment to undertake obligations
in line with host’s country interests.
• The gaps between policies and their implementation can be
huge. Governments need to tackle corruption and other forms
of rent-seeking, to build credibility with firms, to foster public
trust and legitimacy, and to ensure their policy interventions
are crafted to fit local conditions.

23. IMPROVING TAXATION

24. • Governments need revenue to cover the costs of providing
public services—including those that improve the investment
climate and of meeting other social goals.
• 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, places a disproportionate burden on those who do
comply, and distorts competition.
• While a narrow tax base reduces the feasibility of creating
comprehensive social safety nets in most developing
countries.

25. Firms rate tax administration as a separate and additional
obstacle from tax levels. In countries including
Bangladesh,Brazil,and Ethiopia, more than 50 percent of
firms said that tax administration was a very severe or
major problem (figure 5.9).
corruption in tax administrations are common, and weaken
the incentives to comply with taxes and contribute to
leakages.

26. While tax rates and
structures differ
Across countries,
corporate tax rates
and value-added
tax rates are
broadly similar in
developing and
developed
countries
(figure5.6).

27. •Firms in Estonia reported that,
on average, imports cleared
customs in less than 2days. By
contrast, the average for firms
in Tanzania was 18 days and
in Ecuador,16 days.
•These delays can impose real
costs on workers and firms in
developing countries: on
average firms in the garment
industry grew more slowly, in
both output and employment,
and wages were lower in
countries where customs
clearance took longer.

28. FINANCE AND
INFRASTRUCTURE

29. • Financial markets, when functioning well, connect firms to
lenders and investors willing to fund their ventures and share
some of the risks.
• Good infrastructure connects firms to their customers and
suppliers and helps them take advantage of modern
production techniques.
• Developed financial markets provide payment services,
mobilize savings, and allocate financing to firms wishing to
invest. When these markets work well, they give firms of all
types the ability to seize promising investment opportunities.
They reduce firms’ reliance on internally generated cashflows
and money from family and friends giving them access to
external equity and debt.

30. When these markets work well, they give firms of all types the ability
to seize promising investment opportunities. They reduce firms’
reliance on internally generated cash flows and money from family
and friends giving them access to external equity and debt, something
that smaller firms in particular often lack (figure 6.2). They allow poor
entrepreneurs to grow their businesses, even though they have little
money themselves.

31. Conversely, inadequacies in finance and infrastructure create barriers to
opportunities and increase costs for rural micro entrepreneurs as well as
multinational enterprises. By impeding new entry into markets, these
inadequacies also limit the competitive discipline facing incumbent firms, dulling
their incentives to innovate and improve their productivity. Such inadequacies
are large in developing countries (figure. 11).

32. • Firms with access to modern telecommunications services,
reliable electricity supply, and efficient transport links stand
out from firms without them. They invest more,and their
investments are more productive. Yet in most developing
countries, many firms must cope with infrastructure that fails
to meet their needs.
•The problems, as
expressed by firms, vary by
region, with Sub-Saharan Africa
and South Asia having poorer
infrastructure than Europe and
Central Asia. They also
tend to vary by infrastructure
service and firms size--
electricity is often the biggest
problem, and larger firms
express more concerns than
smaller firms about all services
(figure 6.4)

33. Governments also used their infrastructure agencies to channel
assistance to particular regions and give jobs to favoured groups,
increasing the agencies’ costs and frustrating attempts to hold them
accountable for the efficient delivery of services. With high costs and low
prices, the agencies were unable to finance investment from their own
cash flows or borrow on their own credit.

34. FOSTERING A SKILLED
WORKFORCE

35. • People’s skills and health affect their ability to participate in
society, escape poverty, and cope with economic and natural
risks, and contribute to productivity increases and growth.
• The link between investment in human capital and growth is
mediated by the way education services are delivered and
skills are allocated in the economy. But investment climate
improvements almost always increase the demand for human
capital.
• The availability of skilled and healthy workers also shapes the
decisions of firms to adopt new technologies, expand, or enter
new markets.

36. • Improving the investment climate goes hand in hand with
enhancing human capital. A skilled workforce is essential for
firms to adopt new and more productive technologies, and a
better investment climate raises the returns to investing in
education. Government support for education and training
affects the prospects for individuals and the ability of firms to
pursue new opportunities.
• Many firms in developing countries rate inadequate skills of
workers as a serious obstacle to their operations.
Governments need to take the lead in making education more
inclusive and relevant to the skill needs of firms, strengthening
quality assurance mechanisms, and creating a sound
investment climate for providers of education and training
services.

37. 1. Government support for education and training affects the prospects for
individuals and the ability of firms to enter new markets and adopt new
technologies. Firm-level surveys show that more than 20 percent of
firms in many developing countries rate inadequate skills and education
of workers as a major or severe obstacle to their operations .
2. Regulation of labour markets is usually intended to help workers, but
can also be a significant constraint on firms.

38. INTERNATIONAL RULES AND
STANDARDS

39. INTERNATIONAL RULES AND
STANDARDS
•International arrangements affecting the investment
climate have a long history.
• The number of international arrangements dealing with investment
climate issues has grown dramatically in recent decades.
• There are now more than 2,200 bilateral investment treaties,200
regional cooperation arrangements, and some 500 multilateral
conventions and instruments. These arrangements cover most areas
of the investment climate—from property rights protection, taxation
and corruption, to regulation in areas as diverse as banking, shipping,
telecommunications, labor, and the environment.

40. • Entering an international obligation on a particular issue
increases the costs of policy reversal and so enhances policy
credibility.
• Accepting international obligations on some issues may be
necessary to obtain benefits in other areas as part of a
broader negotiation. For example, the potential benefits from
joining an international “club,” such as the World Trade
Organization (WTO),the European Union (EU), or the North
American Free Trade Agreement (NAFTA),may lead
governments to offer policy commitments on a range of
matters that, considered alone, might be less appealing.

41. • The number of regional economic cooperation
arrangements has grown strongly in recent years.

42. Model is being adopted by the
New Partnership for Africa’s Development
(NEPAD; box 9.3).

43. The WDR 2005 suggests that the developing countries must
have international agreements that have the following features:
1. The agreements must focus on the liberalization of trade and
investment and on the reduction in barriers that can improve
the investment climate by reducing costs, expanding market
sizes, and enhancing competition among firms.
2. The agreements must contain higher standards of protection
for investment and investors. The report states that
developing countries will benefit from a multilateral
agreement on investment that provides high standards of
protection to investors including provisions on dispute
settlement, indirect expropriation and transfer of funds.
3. The agreement must encompass harmonization as opposed
to customization of standards as harmonization reduces
costs and also provides signals of high standards to traders
and investors.
4. The agreements must be binding commitments so that there
is little chance of rolling back.

44. • It is further argued in the report that the establishment
of international rules or standards relating to investment is
one of the major factors that help to create a favorable climate
for investment in terms of enhancing the credibility of
government investment policies, reducing international
transaction costs, and addressing international spillovers or shared
concerns.

45. THE INTERNATIONAL
COMMUNITY CAN
LEND A HAND

46. • Developing countries are not alone in grappling with
investment climate improvements.
• Developed countries and international agencies also provide
around $26 billion per year in nonconcessional loans or
guarantees to support specific transactions. Increasing the
emphasis on the contribution these transactions make to the
creation of more transparent and competitive markets would
expand the development impact of this support.
• It has been estimated that removing the various distortions
imposed by developed countries could deliver gains to
developing countries of $85 billion in 2015—or more than four
times the development assistance currently provided for
investment climate improvements.

47. This chapter highlights three ways the international community
can help improve investment climates in developing countries:
1. By removing policy distortions in developed countries that
harm the investment climates in developing countries .
2. By providing more, and more effective, assistance to the design
and implementation of investment climate improvements, and
better leveraging support provided directly to firms and
transactions.
3. By tackling the substantial knowledge agenda to help
policymakers broaden and accelerate investment climate
improvements.

48. Outside environmental protection, there are also many areas where
the argument for international cooperation can be strong.
This is the case with international efforts to combat corruption, for
example, which can seriously undermine investment climates.

49. CONCLUSION

50. CONCLUSION
• This report focuses on the point that government take step to
promote the private sector investment. Government take steps to
decrease the hurdles or form private sector favored policies.
• Assumption of WDR 2005 is that more investment is always better
than less investment, and hence the emphasis is on the quantity and
not on the quality of capital inflows. This emphasis on quantity
presupposes that all types of investment will be equally good
and will automatically lead to economic growth and development.
But it also lends support to the troubling perception that the objective
is not to view investment flows in terms of the needs of developing
countries but in terms of the need to improve the opportunities for
investors in developed countries.
Studies have shown that between 25 and 45 per cent of FDI has a
demonstrably negative impact on host societies.

51. • Report also raises some issues of concern to developing countries.
The report acknowledges that there is a trade-off between
entering into binding international commitments and maintaining
policy flexibility, and the report notes the complexity of multilateral
negotiations. However, these issues are raised more as an
afterthought and there is no discussion of how developing countries
could deal with these problems.
• Reliance on data of gross FDI flows to developing countries
provides a misleading picture of the overall benefits of these flows.
• The scale of categorizing company size is not portraying the true
picture of economy.
• Report focus on the acquisition of money from foreign body or
financial institution and avoide the direct lending of money from
friends and family.

52. Creation of
financial market
instead of reducing
problem creates a This report only
Differences in focuses on
lot of new problems incomes across
because they are economic
countries growth and
form for equal highlighted the role
distribution of neglects the
of “institutions”. social and other
wealth not for the
accumulation of human factors.
wealth.

53. Only focus on
the learning of
Many financial skill and
institutions like specially the
DFIs, banks and specialize skills
other financial which benefits
institutions not to the investor.
United State solve problem and
escapes them accumulate the
from the WDR financial
report. framework for the
flow of wealth from
developing to
developing
countries.