Unlike East Asia and Europe, the Americas lack a shared integration strategy and Latin America struggles with a burdensome investment climate. CGD visiting fellow Nancy Lee, former U.S. Treasury deputy assistant secretary for Europe, Eurasia, and the Western Hemisphere, suggests a fresh approach to regional integration: a regional investment agreement. Countries would set common standards for reducing barriers to domestic and foreign investment, much the same way that trade agreements set standards for reducing trade barriers. Such an agreement would boost growth and be especially helpful to poor people, because it would enable small businesses trapped in the informal sector shift to the more productive formal sector.
Q: What’s the problem you are trying to solve?
A: Policymakers in Latin America deserve real credit for strengthening the region’s defenses against inflation and financial instability and for opening markets. But their success in stabilization is not enough to ensure sustained high growth. Cracks remain in the region’s growth foundations. The investment-to-GDP ratio is lower than any other emerging market region; productivity growth remains disappointing; human capital formation lags behind high-growth emerging regions. The region is turning its attention to supply side policies, and policymakers are focusing on improving education and infrastructure. But for most countries the burdensome microeconomic environment for investment remains the stepchild of the reform agenda.
Additional Resources
Q: How does Latin America compare to Europe and East Asia in terms of regional integration?
A: The collapse of support for hemispheric free trade leaves the region without a shared integration strategy. Yet we know that regional integration, especially its benefits for domestic and foreign investment, has helped turbo-charge growth and income convergence in emerging Europe and East Asia. More than ten countries have joined the European Union in this decade and reaped striking benefits. Emerging East Asia is now knit together in cross-border production-sharing chains, facilitated by governments and regional organizations. Europe has pursued a top-down, formal process, while East Asia has pursued a bottom-up process led by the private sector. The challenge for the Americas is to find a third way -- one that relies less on supranational bureaucracies, uniformity, and aid than does the European Union but takes a more systematic approach to reform than did East Asia.
Q: How would a regional investment agreement work?
A: The idea is a collective effort to set standards for improving the quality of regulatory, tax, and legal systems affecting both domestic and foreign investors. Countries could use a regional agreement to set common standards or benchmarks for an agreed set of investment climate indicators based on international norms. Such standards could simplify and expedite systems for starting a business, paying taxes, obtaining licenses, registering property, dealing with border controls, and accessing credit and infrastructure services.
An agreement could also include standards in other important areas of the investment climate: it could lock in limits on public debt or strengthen protection of the environment and labor. This approach is made possible by the enormous leap forward in techniques for measuring the investment climate using objective, verifiable indicators, not unlike the measures of formal trade barriers, that are consistent across countries and regularly updated by third-party institutions, like the World Bank. Compliance with agreement standards could be fostered through regular country report cards, or a peer review process, or dispute settlement options for investors and states. Generous transition periods and ample technical assistance could be offered to interested participating countries to help them build capacity to meet standards.
Q: What are some of the specific indicators that could be covered by the agreement?
A: Examples of regulatory, tax, and legal indicators, where consistent cross-country data already exist, include
- The official costs of starting a business (normalized by per capita income)
- The number of procedures necessary to obtain various types of business licenses
- The number of business tax payments required annually
- The time required for customs clearance
- The strength of creditor rights based on standardized criteria.
Q: Who should take the lead to make this happen?
A: To launch this effort, interested countries could begin by calling for exploratory discussions to define options for an agreement scope and structure that could generate broad support. Such a call might logically come from those countries already focused on investment climate reforms but interested in expanding the benefits. Colombia, Guatemala, Mexico, and Peru, for example, have been named among the top ten global reformers by the World Bank. The United States would have much to gain from a successful agreement, which could boost the region’s contribution to U.S. growth and help level the regional playing field in areas such as environmental and labor standards. Washington could encourage regional institutions to take an active supporting and convening role in the discussions, including by engaging the private sector as a partner. The U.S. could also mobilize aid to help governments build capacity to meet agreed regulatory, tax, and legal standards. In early 2009, the leaders of the region will gather in Trinidad and Tobago for the Fifth Summit of the Americas. Leaders at the Summit might support pursuit by interested countries of a regional investment agreement as one possible new way forward toward integration progress in the hemisphere.
Q: How can people learn more about this idea?
A: Start by reading Integration in the Americas: One Idea for Plan B, a CGD Note that provides a more detailed summary than this Q&A. For a more complete discussion, see my essay, which will appear as a chapter in the forthcoming CGD book, The White House and the World: A Global Development Agenda for the Next U.S. President. And for the YouTube generation, there’s also the short video embedded in this page. Readers who have comments or are interested in helping to push forward the idea are invited to contact me directly.