Chapter 3 Making Progress

3.1 The challenges outlined in chapter 2 may seem daunting. But a growing number of countries are making significant improvements to their investment climates—and are being richly rewarded in faster growth and steeper poverty reductions. China, India, and Uganda, mentioned for their achievements in chapter 1, are hardly alone. Many countries have made progress in improving particular areas of their investment climates, from securing property rights and business regulation to infrastructure and labor markets. This experience provides lessons on the key ingredients of reform in particular areas of the investment climate. It also provides insights into how governments might manage a process of investment climate improvement to broaden and accelerate progress. 3.2 The chapter opens by looking at the implications of the breadth of the investment climate. The investment climate encompasses a wide range of government policies and behaviors, many of which are interrelated , and all of which can influence the opportunities and incentives facing firms. The good news is that perfection is not needed in even one area to ignite significant growth and poverty reduction. The key is to address binding constraints in a credible way—and to create a process for making ongoing improvements. 3.3 The chapter then looks at lessons of experience in each of the key elements involved in managing such a process. Identifying priorities. Catalyzing and managing changes in individual policy areas—including in the face of resistance from beneficiaries of the status quo. Maintaining momentum. And building government capabilities. Grappling with the investment climate as a package 3.4 Government policies and behaviors shaping the investment climate play out over a broad domain, from contract enforcement, business regulation and taxation to finance, electricity supply, and labor markets. Governments typically administer each area in isolation, distributing responsibilities across a range of ministries and agencies. In contrast, firms tend to view particular investment opportunities as a package, and government policies and behaviors that influence the costs, risks, and barriers to competition are part of that package. Why might this matter? 3.5 First, the impact of any partic ular policy improvement will depend on the extent to which it addresses a constraint that is binding on firms. So improving access to credit will not have much impact on firms' investment decisions until more fundamental concerns about the security of their property rights have been addressed 1 —an effort described as "pushing on a string." 2 Special tax incentives may …