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Winning the Game of Mining Taxation

Paul Barbour's picture

The last few years have brought an uptick in the number of mining investments that have been the subject of disputes between investors and governments. This trend is of considerable concern to the players in the sector across the globe.
 
Yet, there is a wealth of wisdom to be—pardon the pun—mined from the literature over the past few decades in an attempt to distill what the main risk factors are in agreements that govern investments in the sector, with specific focus on taxation regimes. 

Number of Expropriatory Acts by Sector – three-year rolling averages
 
Source: Chris Hajzler (2010), “Expropriation of Foreign Direct Investments: Sectoral Patterns from 1993 to 2006,” University of Otago in MIGA,World Investment and Political Risk 2011

Are Rates of Return in Places that are Fragile and Affected by Conflict Really Higher?

Paul Barbour's picture

Supporting populations in fragile and conflict-affected situations (FCS) is a key priority for the World Bank Group.  The Group’s President, Jim Yong Kim, has repeatedly stressed the importance of finding ways to bring sustainable peace and development to these difficult contexts. According to the World Development Report 2011: Conflict, Security, and Development, more than 1.5 billion people in today’s world live in FCS, or in countries with high levels of criminal violence.

Apart from the very human cost of fragility, it colors foreign investors’ perceptions of risk, especially political risk, affecting private sector activity. This begets a vicious cycle, where economies worsen, increasing fragility. The importance of political risk, including political violence, in the perceptions of investors is well documented, including in the annual MIGA-EIU surveys presented in MIGA’s World Investment and Political Risk report. In particular, MIGA’s 2011 report focused specifically on investing into FCS, and the survey results demonstrate that political violence remains a very serious factor inhibiting investment.

Aside from capital, foreign direct investment (FDI) can bring essential knowledge and technology across borders. These benefits are often what make FDI so sought-after by policy makers. But investors have to consider the return on their investment relative to the risks they are taking, especially political risks such as expropriation, currency convertibility and transfer restrictions, breach of contract by the sovereign, and war and civil disturbance.
 

Agricultural FDI: Risky Business?

Khalid Alsuhaibani's picture

Al-Arabiya reported a few weeks ago that the political crisis in Ukraine and Russia is threatening the availability of food in Egypt and Jordan. Food prices becoming hostage to political crises is certainly not a new phenomenon: food plays an important role in the stability of societies through its availability, affordability, and quality. We learned this lesson from the 1789 French Revolution and more recently, many commentators link soaring food prices in 2010 with the events leading up to the ‘Arab Spring.’ The latter is not surprising when Arab countries import 56% of their cereal consumption, and some Arab countries import 100% of their wheat consumption. These recent market dynamics have led many countries to revisit their food security strategies with an eye to securing food supply.

There is a vigorous debate over the reasons pertaining to the food price increases in 2008, 2010, and 2012. Many highlight the effects of seasonal, short and medium term factors such as weather changes and biofuel-related crop conversions as well as long term factors such as population growth, income growth, and climate change. These price increases in food have enormous effects on people, for example, the 2008 food crisis pushed 105 million people into poverty.
 

Let the lights shine, hopefully for 24 hours a day (as needed)

Antoine Jaoude's picture

Growing up in war-torn Beirut, I experienced the Lebanese Civil War from a childlike perspective. I was in middle school at the time when a power outage lingered for months on end. Reviewing textbooks and doing homework at night was no easy task. The flickers of candlelight reflecting on the glossy pages of my textbook made reading very laborious—not to mention how it compromised my safety and shrank my attention span. I was 12 years old at the time. Today, I am 34. It has been 23 years since the war ended and power shortage in Lebanon remains.  
 
In the aftermath of the civil war, there was a national consensus to privatize and decentralize the power sector in Lebanon. Decentralization would shift control from the ministerial level to distinct municipalities across the country. Privatization in particular would help the power grid expand to meet the growing demands of population increase. Both moves would involve inflows of foreign direct investment, and open up competition, and create more jobs. However, political disagreements erupted around the intricacies of privatization policies and decrees and any further attempt to privatize or decentralize has floundered.
 
Today, Electricite du Liban (EDL), a state-owned enterprise run by the Ministry of Energy and Water controls 90 percent of power generators, transmission, and distribution services in the country. A surge of demand after the civil war has pushed EDL to further expand the power grid.
 

“When the Tide Goes Out, You See Who’s Naked”

Cara Santos Pianesi's picture

Said Martin Sandbu, the FT economics writer that moderated the FT-MIGA Summit, Managing Global Political Risk, last week in London.   
 
This is the fifth year that MIGA, the political risk insurance and credit enhancement arm of the World Bank, co-hosted the event to launch its World Investment and Political Risk report.  Undoubtedly, these have been heady years and most participants agreed that, while it is still strong, political risk has waned since the global financial crisis and the Arab Spring. This sentiment dovetails with the findings of the report, which show that macroeconomic stability won by just a hair over political risk as the factor that international investors fear most.
 
Also in line with these findings, the World Bank’s Andrew Burns cautioned that the world will soon be grappling with the next group of challenges brought about by the tide. What tide? Here, Sandbu meant the significant investment that has flowed to developing countries in search of yield over the past few years, quantitative easing that has kept economies afloat, and high commodity prices. All of these factors are now in flux.
 “When the Tide Goes Out, You See Who’s Naked
And now, the (potential) nudity. That is, as investment to emerging markets tapers, macreconomic tools are used less bluntly, and commodity prices normalize, will countries have laid enough strong economic foundations to weather the inevitable changes that will occur? And as this MIGA-sponsored conference deals with political risk, how will economic changes affect the destiny of leaders and, resultantly, citizens?
 
Tina Fordham of Citi Research emphasized that the structural determinants of political risk are still very present. She noted little improvement in unemployment and an increase in vox populi risk. By this she meant shifting and more volatile public opinion around the world—amplified by social media—has recently resulted in a proliferation of mass protests.  Panelists discussed several other risk factors, including increasing polarization in politics, pressure on central banks to keep the economic show on the road, reduced investment in infrastructure, and a reversal in living standards in some hard-hit countries.
 

Iberoamerica: Contributing to the long-term prosperity of a continent

Jose Carlos Villena Perez's picture

During my recent business development trip to Spain to represent MIGA at a forum on Latin American port infrastructure organized by Tecniberia, I had an opportunity to see with my own eyes and appreciate the great achievements made by many Iberoamerican nations.

One remarkable point in the still-young economic history of the 21st century is the “decade of sustainable prosperity” in Latin America. The region benefits from one of the longest growth periods in its modern history, with only Chinese and other emerging Asian powers jeopardizing its first position at the imaginary podium of the 21st-century economic empires.

It seems that Iberoamerica has finally managed to break its peculiar Malthusian trap (short periods of booming growth followed by deep recession) in which it fell again and again throughout the 20th century, and has seriously taken a sustained path of progress.

However, there are no grounds for complacency and passive contemplation of what has been achieved in this prodigious decade. Iberoamerican leaders and governments have to continue consolidating their economies, eradicate any poor past practices, and acquire new human resources and technical infrastructure. This will help them position their countries among the most advanced nations of the world and diminish the immediate risks of a slowdown in global growth.

The region is still facing evident challenges: the strengthening of the middle class, reduction of income inequality, exploitation of vast natural resources, and the engagement of minority groups or aboriginal majority in political and social life. Enrique Iglesias, head of the Iberoamerican General Secretariat (SEGIB) and former president of the Inter-American Development Bank, recently pointed out that "Iberoamerica is not going to have it easy going forward.  We are no longer sailing with a favorable wind and we will have to use our own engines—sometimes the wind will even be against us...We have to start thinking in these new terms."

Smartly Tapping Global Markets: A Driver for the Rise of the South

Cara Santos Pianesi's picture

We’ve become accustomed to talk about the rise of the “global South” in business and economic circles—as these past several years have seen developing countries (mostly BRICs, but also others) surging economically while the global North has retrenched.  I’ve discussed in this blog space how outbound investment from developing countries is one indicator that we can point to confirm this trend.

The UN Development Program (UNDP) recently released its annual Human Development Report that takes as its theme the rise of the global South. I attended the Washington launch of the
report which was held, for the first time, at the World Bank. World Bank chief economist Kaushik Basu noted during the event it’s a welcome move. The World Bank and UNDP have much information, tactics, resources, and energy to share.

New challenges, new alliances

Jose Carlos Villena Perez's picture

Multilateral organizations and Southern Europe can do more to cooperate to restore these countries’ global competitiveness

One of the lessons learned from the past few years is that economic development processes are reversible. The once-bright southern Europe economies are languishing today, wrapped in a slow and painful process of adjustment aimed at restructuring their productive sectors and enter once and for all into the 21st century economy.

It’s clear that these countries’ recovery will not be achieved simply with reforming their administrative and regulatory frameworks. Perhaps one of the most complex issues that Italy, Portugal, and Spain are currently dealing with is the interruption of credit flows to the real economy. This interruption is doing considerable harm to the countries of southern Europe; the credit shortage is affecting their competitiveness and jeopardizing any possible hint of improvement, putting the overall global economic recovery at risk.

Partnership in Political Risk: Singapore Goes Global!

Paul Barbour's picture

On February 22, MIGA partnered with the Singapore Management University (SMU) and International Enterprise Singapore (IE Singapore), to launch the most recent World Investment and Political Risk Report in Asia. The event, at SMU’s downtown campus, focused on the key issues of sovereign and political risk and how foreign investors can mitigate them.

The latest World Investment and Political Risk report is the fourth in a series that we’ve recently launched in London and Washington, DC as well. There are some important nuggets on FDI trends and perceptions this year. The report notes that foreign investors, attracted by stronger economic growth in developing countries while mindful of risks, still remain optimistic about these destinations.

Davos 2013: A Thief Stealing Bells Is Not an Optimist

Kevin Lu's picture

For the past five years, the participants to the Annual Meetings of the World Economic Forum (WEF) have gathered in Davos to discuss urgent global crises the world was facing: subprime lending, the credit crunch, banking, Greece, the euro zone’s woes, and so on. Soul-searching about the political and economic status quo ensued. This year, with leadership transitions in the two largest economies completed, the euro zone no longer facing imminent break-up, and China growing at 7.8%, Davos resumed some normalcy. Some even claimed optimism.

Some of the optimism is based on the growth prospects in Asia and China. For the past five years, while Europe has not grown at all, Chinese GDP has grown 60%. In this year’s Davos, there were no fewer than five public sessions on China, with topics ranging from its rapid growth, transformation of its growth model, and emergence of its soft power. Interests in Asia are high.

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