Foreign Investment Incentives and Policy Stability:The case of mining royalty laws in Chile and Peru

Jennifer TobinBrookings Institution and

Yale University

Overview How do investment incentives

meant to stabilize the short-term policy environment for foreign investors function in the long run?

Outline Policy Stability:

What is it? Why do we want it? How do we get it?

Peru and Chile: Institutional Background Mining Royalty Laws:

What are they? What happened? Why?

Next Steps

FDI and GrowthFDI

FDI

Human Development

Growth

Growth

Human Development

Workforce Capacity

Domestic Savings

Government Human

Development

Government Revenue

Government Policy

Preference

Capital

Household Human Development

SpendingHousehold

Income

Technological Spillovers

Range and Complexity of

Output

Organization and

Adaptability of Production

Growth

Attracting FDI Credibility of the investment environment:

• macroeconomic stability• political stability• policy stability

Policy Stability

Rules of the Game:•Clear•Well known•Well enforced

•Stable

Why Stability?

Reduces the uncertainty of the future rewards for investing

Investment Growth

Stability, but how?

• Constitutions

• Institutions

• Contracts

• Time horizons

• International agreements

Investment Incentives

International Legal Guarantees

Investor-State Contracts• Policy Stability Agreements

Investment Incentives Short versus long-term effects

Institutional Environment: Chile

Strong Presidency Bicameral Legislature Strong parties Low corruption Fiscal discipline Conservative monetary policy

Institutional Environment: Peru

Strong presidency Few checks and balances Party system: Weak and fragmented Judicial system: Inefficient, corrupt,

subject to political manipulation. Recent macroeconomic stability

Mining and FDI

Gross FDI (%GDP)

02468

101214161820

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Chile Peru Latin America & Caribbean

Mining and FDI

Ores and metals exports (% of merchandise exports)

0

20

40

60

80

100

1970 1975 1980 1985 1990 1995 2000

Chile

Peru

South American Average

FDI: Restrictions/Incentives DL 600 Stability Agreements BITs FTAs

Mining Royalty Laws Not a tax In place in almost all developed

countries and more than 120 countries world-wide

Mining Royalty Laws: Chile

Pro:

Government

Public Opinion

Concertacion

Con:

Business and Industry

Alianza

IMF

Rejected

Mining Royalty Laws: Peru

Pro:

President

Public Opinion

Most left-parties

Con:

Finance Minister

APRA

Business and Industry

IMF

Passed

Expectations

What would we have expected to happen?

Just what happened: Peru: Instability Chile: Stability

Grand Theoretical Claim Would they have lost investment? Did Incentives matter? Why not collude?

In creating short term stability--created long term policy gridlock

Next Steps