Enhancing investment flows in APEC - Introductory Presentation

Presentation Structure• Overview• At Border Barriers to FDI Flows• Behind-the-Border Barriers to Foreign andDomestic Investment

Overview• 1) Falling poverty across APEC and drivers ofpoverty reduction and sustainable development• 2) APEC work on investment to address theseissues– Stage 1 Study: At Border Barriers– Stage 2 Study: Behind-the-Border Barriers• 3) Summation of Key Issues• 4) What to do?

1). Poverty rates have fallen across APECPer cent of APEC population60504030201001988 2000$1 a day $2 a day

The key role of investmentInvestmentGrowthPoverty reduction

Drivers of poverty reduction andsustainable development• Growth leads to poverty reduction• Only two ways income per person can grow– Productivity (the amount of output per unit of input)– Investment (more capital per person)• Foreign Direct Investment (FDI) offers both• But there are significant barriers to FDI amonglow income APEC economies– Border barriers– Behind-the-border (BTB) barriers

Drivers of poverty reduction andsustainable development(continued)• What boost to APEC growth would there be fromremoving those barriers?• More quantification on barriers to investment atthe border than BTB barriers

2). APEC work on investment to addressthese issuesForeign savingsForeign direct investment(FDI)Border barriersPortfolio investmentAPEC Stage 1Study – BorderBarriers to FDIDomesticsavingsOffshoreinvestmentBehind-the-border (BTB) barriersTotal in-county investmentAPEC Stage 2Study – Behindthe-BorderBarriers• Growth• Stability• Poverty reduction

Stage 1 Study: At Border Barriers• Brief look at FDI flows in APEC• What is known about barriers from– OECD– UNCTAD• What can be concluded about analyses ofremoval of barriers

FDI inflows into APEC economies600FDI inflowFDI inflows as a % of GFCF18.0FDI inflow (US$b)50040030020010015.012.09.06.03.0FDI inflows a a % of GFCF01992 1994 1996 1998 2000 2002 20040.0

FDI inflows less FDI outflowsfor APEC economiesNet FDI inflow/GFCF14121086420-2APEC low incomeAPEC-41992 1994 1996 1998 2000 2002 2004

FDI inflows and outflows for APECeconomies (average for 2002-04)FDI inflow/GDPFDI outflow on GDPFDI inflowFDI outflowHong Kong, ChinaSingaporeChileAustraliaChinaVietNamMalaysiaPeruNew ZealandMexicoRussian FederationPapua New GuineaCanadaPhilippinesThailandKorea, Republic ofUnited StatesChinese TaipeiJapanIndonesianana0 3 6 9FDI flow/GDP (%)120 25 50 75 100 125FDI flow (US$bn)150 175

FDI inflow less FDI outflow for APECeconomies (2002-04)FDI inflow less FDI outflow as a share of GDPFDI inflow less FDI outflowChileSingaporeChinaPeruMexicoNew ZealandMalaysiaAustraliaPapua New GuineaPhilippinesThailandKorea, Republic ofIndonesiaRussian FederationJapanUnited StatesHong Kong, ChinaChinese TaipeiCanada-4 -2 0 2 4%-100 -50 0US$bn50 100

Barriers in the APEC region by sectorElectricityTelecommunicationsTransportsHealth*FinanceEducation*Business servicesEnvironmental*TourismDistributionConstructionManufacturing**0.0 0.2 0.4 0.6 0.8 1.0FDI barriers

Types of FDI barriers in APEC economiesMeasure of barriers0.250.200.150.100.05Ownership Operational Screening0.00UNCTAD studyOECD study

Barriers in APEC economies are higherthan in other regionsMeasure of FDI barriers...0.500.400.300.200.10UNCTAD studyMeasure of barriers to FDIOECD study0.00APEC developing Non-APEC APEC OECD Non-APEC OECD

Impacts of barrier on prices/costs indifferent industries40Average effect of a 0.1 barrier on prices or costsImpact of barriers (%)3020100Telecommunications Banking Engineering Distribution

What’s at stake: change in barriers underpolicy scenarioPhilippinesIndonesiaMalaysiaThailandChinaCanadaMexicoKorea, Republic ofAustraliaJapanRussian FederationNew ZealandBarriers after ScenarioReduction in barriersUnited StatesPeruChile0.0 0.2 0.4 0.6FDI barriers0.8 1.0

What could be the effect of lowering barriers tothat of the most open APEC economies?• Increase FDI across APEC by 26 per cent• Could boost GDP by 2.6 per cent (at low end ofrange)• Have biggest effect in low income economies(up to 86 per cent FDI increase)• Reduce poverty (US$1/day) by 20 per cent

But …• Estimates are partial, no flow-on effects– No economy-wide repercussions for interest ratesor activity in rest of world– Do not have complete coverage of APECeconomies– Relationship between increase in FDI andremoval of barriers is imprecise

What do we know?FDI falls as barriers increase -FDI and barriers in the service sectors of 37countries100Inward FDI stock/GDP (%)8060402000.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80Investment barrier index

Stage 2 Study:Behind-the Border (BTB) Barriers• The relative importance of foreign and domesticinvestment• The significance of BTB barriers givendisparities in FDI flows between economies withsimilar at border barriers?

Composition of investment in APEC(average 2002 to 2004)Portfolioinflows21%APECFDIinflows8%APEC lower incomePortfolioinflows4%FDIinflows5%Domesticinvestment74%Domesticinvestment88%

Low investment in some APEC economies isnot due to low savingsNew ZealandAustraliaUnited StatesVietnamMexicoPeruIndonesiaChileCanadaPhilippinesChinaJapanKorea, Rep.Chinese TaipeiThailandPapua New GuineaHong Kong, ChinaRussian FederationMalaysiaSingaporeDomesticsavingsgreater thandomesticinvestment-10 -5 0 5 10 15 20 25 30Current account balance (% of GDP)

Economies with similar barriers havedifferent FDI – is this due to behind-theborder(BTB) barriers?80 Behind the border barriers?Country 1 Country 26040200Netherlands/GermanyDenmark/ArgentinaParaguay/ItalyChile/FrancePortugal/HungarySwitzerland/El SalvadorCzech/United StatesNorway/ColombiaPoland/VenezuelaAustralia/AustriaCanada/TurkeyFDI/GDP (services)

BTB barriers are important - income andmeasures of governance for 171 countriesLog 2004 GDP (US$2000)543210-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5Governance measure 2004 (average = 0)

APEC Stage 2 Study – its approach• Outlines framework to conceptualise barriers• Presents case studies to highlight successfulexamples of economic reform– 1. Greater Mekong Subregion Transport– 2. Thailand’s Bankruptcy Law Reform– 3. China’s accession to the WTO– 4. Vietnam’s Enterprise Law Reform– 5. Australia’s Competition Policy

Behind-the-border barriers• Finance costs• Inefficient taxes• Regulatory burden• Corruption• Poor infrastructure• Legal systems• Property rights• Contractenforcement• Policy predictabilityand credibility• Barriers to entry• Competition law• Functioning financemarketsCost Risk CompetitionProductivityGrowth

3) Summation of Key Issues forStages 1 and 2 Studies• There are some 30 per cent of people in APECin poverty (US$2 per day)• Growth is the main driver for poverty reduction• Investment is a precursor to growth• Low investment in many poor economies is notdue to low savings

3) Summation (continued)• There are large barriers to investment acrossAPEC economies– Higher in poor countries– Border barriers to FDI well-known, higher in APEC– But BTB barriers more important and less wellresearched• Both the quantity and quality of investmentmatters• Better investment across APEC is needed– right amount, right type, right area, right time– all at least cost

4) What to do?• Host of factors need to be right for betterinvestment to lead to economic growth• Factors are different for each economy• Issues are within economies ⎯ the BTB issues• Challenge is for each economy to harness theirown institutional processes that best addresstheir BTB barriers• Lessons from others on how reforms undertakenmay help

The challenge:increasing the ‘sweet spot’PolicydesirabilityAAdministrativefeasibilityPoliticalfeasibilitySource: World Bank Development Report, 2005

The challenge:increasing the ‘sweet spot’(continued)PolicydesirabilityAAdministrativefeasibilityPoliticalfeasibilitySource: World Bank Development Report, 2005

Next steps• Good start to BTB barriers is World Bank’sDoing Business report:– Covers nearly all APEC economies– Is amenable to quantification– Exists for several years– Consistent and comparable

Next steps(continued)• An approach that allows some quantification ifmembers choose is useful:– Encourages transparency– Knowing what is at stake helps motivate change– Helps set priorities– Builds knowledge base– All barriers either increase rents, costs or risk• Case studies of where barriers have beenremoved and the experience can give valuablelessons

Thank youPaul KennellyForeign Investment and Trade Policy DivisionDepartment of TreasuryCanberra , AustraliaPaul.Kennelly@treasury.gov.au