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
Stability, but how?
• Constitutions
• Institutions
• Contracts
• Time horizons
• International agreements
Investment Incentives
International Legal Guarantees
Investor-State Contracts• Policy Stability Agreements
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
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
Top Related