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foreign direct investment

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.
 

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.

Investing in Infrastructure in Africa: Conundrum and Opportunity

Esohe Denise Odaro's picture

Last week, the U.N. Conference on Trade and Development (UNCTAD) released its semi-annual report on FDI flows, which reflected generally dismal results: global FDI declined by 8 percent, with a 5 percent decrease for the developing world in particular. Investing in Infrastructure in AfricaI found it interesting that South Africa’s significant decline in FDI seemed to catch a good deal of media interest. Yes, the continent’s darling and the usually one of the highest recipients of FDI saw a drastic drop (by 43%); admittedly this deserves more than a glance. But I wonder why Finland and Ireland’s numbers, at 96.2 and 42.8 percent respectively, didn’t make much news. South Asia’s inflows also fell by 40 percent as a result of declines across nearly all countries in the subcontinent. In India, inward FDI fell from US$18 billion to US$10 billion. Why South Africa? In my opinion, the flow of investment to sub-Saharan Africa is often reported as a sign that the doors of the last frontiers are being approached.

Managing Risk and Keeping Focused in Turbulent Times

Mallory Saleson's picture

It’s been almost a year since Tunisian street vendor Mohamed Bouazizi set himself on fire, sparking a wave of protests in his country and ensuing events that led to what we now refer to as the “Arab Spring”. Today, these events were remembered, and the future of the region debated, during a seminar MIGA co-hosted with the Financial Times in London on Managing Global Political Risk: Old Risks, New Moment.

Tunisia’s Minister of Finance Jalloul Ayed spoke passionately, eloquently, and with tremendous insight about the challenges and opportunities facing his country, noting many look to Tunisia as setting the pace and showing the way. “So far so good”, he noted, adding “democracy is now hopefully part of our political tradition.” But there is a daunting road ahead, dealing with the priorities, creating jobs for the hundreds of thousands of unemployed youth, encouraging much-needed investment. His biggest concern? “We cannot lose focus; we have to reform and get the job done.”

Pop the Champagne: Developing-Country Outbound Investment Hits Record High

Cara Santos Pianesi's picture

The UN Conference on Trade and Development (UNCTAD) has just issued its Global Investment Trends Monitor that looks at outward-bound foreign direct investment (FDI). Here’s the lead: The share of developing and transition-country FDI in global outflows increased to 28 percent in 2010, up from 15 percent in 2007, the year prior to the global financial crisis. These are historic levels, both in absolute terms and as a share of the global total of outbound FDI.

Another important snippet from UNCTAD is that a full 70 percent of developing and transition-country outward investment is destined toward other developing and transition countries—this is also known as “South-South” investment. The Monitor attributes this trend to the stronger recovery and economic condition is those destinations.

For Love of Jobs or Money?

Michael Strauss's picture

As part of the launch of the World Bank’s World Development Report, a distinguished panel (including MIGA’s own Edith Quintrell) convened at IFC to discuss the topic of Private Sector Growth and Job Creation. Jyrki Koskelo chaired the panel and asked for a lively and frank discussion. He got more than he bargained for.

In addition to Ms. Quintrell and Mr. Koskelo, the panel included:

  • Arnold Ekpe, CEO of Eco
  • Rosalind Kainyah, Vice President, External Affairs, Tullow Oil
  • Justin Lin, senior Vice President and Chief Economist, World Bank
  • Jay Naidoo, World Development Report Advisory Council Member, and, most provocatively
  • Mohamed Ibrahim, Chairman of the Mo Ibrahim Foundation.

 

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