Last week I had the pleasure of hosting a lively and useful discussion of Nancy Lee's idea for improving economic integration in the Americas -- via a focus now on investment rather than trade. Joining the discussion were economists and regional experts from the public and private sectors, some with a good nose for the politics as well as the economics. (Nancy Lee's proposal is a good example of a "practical idea" grounded in independent research, to invoke the Center's tag line. That's one reason I'm keen to see it get some political legs.)
The aim of her proposal is to address one of the region's critical binding constraints on growth -- the investment climate -- and to do it in a way that is also helpful for addressing inequality by including barriers that impact SMEs trapped in the region’s vast informal sector. She proposes a collective effort to set standards for the tax, regulatory, and legal environment in the form of a Regional Investment Agreement. Participating countries would sign on to standards that benefit their firms at home, their firms interested in investing in the regional neighborhood, and foreign firms investing within their borders. New databases measuring key aspects of investment climates in ways that are objective and consistent across countries make such an approach possible.
Nancy presented compelling evidence that relatively low investment ratios and the problematic microeconomic climate for investment are major problems in the region, associated probably with keeping the region's growth well below that of emerging market regions like East Asia and Europe, even in the last 5 years when the external environment has been the most favorable the region can reasonably expect.
Four interesting points emerged from the discussion. First, participants see this proposal as quite different in nature from a trade agreement. It is not based fundamentally on reciprocity, an exchange of concessions -- you lower your barriers to my exports and in return I lower my barriers to yours. Instead, the rationale for joining such an agreement is similar to that which motivates financial regulators to agree on common standards, as in the Basel Accords. Good standards help a country’s firms at home and abroad. There are positive externalities that accompany improving tax and regulatory environments as a region. If the intra-industry supply chains that have so driven and spread growth in East Asia are to flourish in this hemisphere, this kind of agreement could provide a real boost to coordinated improvements in microeconomic conditions across countries. It's a win-win situation.
For that reason it might be better not to even use a word like "integration" which invokes "trade" for so many people -- though in the end it is about integration to everyone's benefit.
Second, participants had strong views on the coverage of such a standards agreement, which could conceivably cover the microeconomic environment, the macroeconomic environment, and other timely issues like protection of labor and the environment. Most participants questioned the wisdom of trying to include labor and environmental protection, at least in initial efforts. Trying to reach agreement in areas where positions differ so widely was viewed as too heavy a lift.
Third, there was strong interest in the potential to agree on codes of conduct for taxation with the key example being agreements that would constrain countries’ entering into a race to the bottom through for example fiscally imprudent tax holidays. The as yet unsuccessful efforts of Central American countries to agree on standards that avoid a race to the bottom were cited as an argument that this proposal could make a real positive difference.
And lastly, participants addressed the question of which countries might take the lead in pursuing such an agreement. They agreed that countries that have large informal sectors, interest in expanding regional supply chains, and companies interested in investing more in the region are logical candidates. Central America was viewed as a good place to start, but it was also suggested that Brazil’s increasingly outward-oriented world class companies might spur Brazilian interest.
I hope this idea can get onto the agenda of the April 2009 Summit of the Americas. We'll see.