How, in the political and institutional environments typical of poor countries, can governments and other state actors achieve substantial increases in productive private investment? This is the question that drives this research programme of the Centre for the Future State (CFS).
The policy relevance of this question is clear. It is now generally accepted that substantial reduction in poverty requires accelerating economic growth and that such growth requires increasing investment. Low levels of private sector productive investment appear to be a major obstacle to economic growth in the poorest countries. Even though this issue has received much attention in the academic debate in the last 40 years, solutions for poor countries remain difficult to derive.
In the recent policy debate, these issues are discussed in terms of improving the investment climate. For example, the 2005 World Development Report ‘A Better Investment Climate for Everyone’ identifies a range of obstacles and ideas for moving forward. At the core of much of the debate is the idea that improving the formal institutional framework, notably legal protection of property rights and enforcement of contracts is a precondition for raising investment and growth.
This view is problematic. The central issue is one of sequence and dynamics. Does ‘getting the institutions right’ come first or does growth lead to demand for institutional transformation? Recent research questions that institutional transformation has to come first. Some countries have been able to initiate investment and growth without prior institutional transformation. Equally interesting are differences in investment within countries that cannot be explained by institutional factors. How can we explain substantial investment and growth in particular industries and localities in countries that are thought to have poor investment climates?
To make progress in understanding and improving the investment climate, we have started to unpack the connection between public action and private investment. In dissecting the existing case material, we find a common thread running through the success stories, which is the ability of policymakers and private investors to construct a relationship based on common interests. So far however we have only fragments of evidence.
Our new research seeks to investigate more systematically the relevance of this alignment of interests. Using intra-country comparisons, we ask why some regions/sectors have better investment and growth record than others. Does the construction of common interest make the critical difference? Under what conditions does it work? How has it evolved? And what aspects might be transferable?
For a review of the investment climate debate by Mick Moore and Hubert Schmitz, see ‘Idealism, Realism and the Investment Climate Debate‘.
For the research by Abla Abdel-Latif and Hubert Schmitz on growth alliances in Egypt, see:
– Abla Abdel-Latif and Hubert Schmitz (September 2010), State Business Relations and Investment in Egypt, Research Report 61, IDS, 2009
– Abdel-Latif, A. and Schmitz, H. (2010) ‘Growth Alliances: Insights from Egypt’, Business and Politics 12.4
– Abdel-Latif, A. and Schmitz, H. (2011) ‘The Politics of Investment and Growth in Egypt: Experimenting with a New Approach’, Development Policy Review 29.4: 433-58
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