The Challenge of Economic Diversification : The Role of Policy and the Investment Climate

Transcription

1 The Challenge of Economic Diversification : The Role of Policy and the Investment Climate Xavier Forneris Senior Investment Policy Officer Trade & Competitiveness World Bank Group Presentation at the Economic Developers Alberta (EDA) Conference Alberta, Canada, April 6-8, 2016

2 Outline 1. What is Diversification? 2. Case studies: country attempts to diversify Role of Policy and Investment Climate Lessons learned 3. What about Alberta? 2

3 Part 1: Diversification Abundant economic literature Diversification is considered a key policy objective for countries (regions) specialized in natural resources for many reasons (to minimize exposure to volatility and external shocks, to generate more jobs, etc.) Strategy was also used by countries to accelerate growth through exports (East Asia: Singapore, Malaysia, Taiwan, Korea, Japan ) 3

4 The Diversity of Economic Diversification Production diversification Export diversification FDI diversification Financial diversification Fiscal diversification Regional diversification (within a given country or group of countries) Job diversification, etc. 4

5 Export Diversification More diverse outputs is a first step but if these goods/services are for the domestic market only, it s not transformative. Limited benefits. Need to diversify exports strong evidence that export diversification is associated with higher, long-term growth. Studies on export diversification tend to focus on products export diversification would mean adding new products to the country s export basket 5

6 Export Diversification can also mean Breaking into new markets: exporting the same products but to other countries Improving quality of existing exports Increasing exports of services (not just goods) 6

7 FDI Diversification It can support economic and export diversification. Diversifying FDI can mean: Diversifying the type of FDI you receive» Resource-Seeking FDI» Market Seeking FDI» Efficiency-Seeking FDI» Strategy-Seeking FDI Receiving FDI from new source countries Exporting FDI in more sectors, to more countries (Outward FDI). More sensitive. 7

8 Financial Diversification Investment of government savings in a diversified portfolio of assets to finance future government consumption. Can help generate income flows that mitigate the economic volatility associated with a commodity-based economy We ll see examples of this in Europe and the Middle East. 8

9 Fiscal Diversification Increasing the amount of government revenues (tax) coming from the non-extractive sector Another important form of diversification and a way to reduce reliance on oil/mining revenues to finance public spending. Should be a way to measure success of econ. diversification efforts. 9

10 Regional Econ. Diversification How much economic activity is concentrated in one or two regions/cities? What can be done for less developed regions within a country (or group of countries EU regional dev funds). Australia monitors regional economic diversification: [In]Sight is an online index and interactive map tracking the competitiveness of Australia s 560 Local Government Areas (LGA) Role of clusters Toulouse (France) aerospace 10

11 Economic Diversification Multi-faceted, highly complex and challenging. Lots of failures and few successes. No silver bullet or one-size-fits-all. Only some possible approaches, trials and errors. Case study approach: look at other countries or regions around the world that managed to diversify (somewhat) and examine how they did it, realizing that all is contextual 11

12 Part 2: Selected Case Studies 1) Chile : Offshoring, fish/salmon, wine 2) Dubai: finance hub, trade hub (logistics, Jebel Ali), real estate development 3) Abu Dhabi: tourism/entertainment, trade, finance, green energy 4) Indonesia: from oil to agriculture and manufacturing 5) Malaysia: from rubber to manufactured exports 6) Australia: from iron ore to services (tourism and education among others) 7) Canada, Norway, Botswana Others? 12

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14 Lessons from these experiences? Some countries with a strong resource base have managed to diversify but many have not No silver bullet or one size fits all. Each country must find its own path. Some cases are difficult to replicate (e.g., Dubai) and not without risks (real estate crisis). Easier to start from your comparative advantages, what you already have than start a totally new industry from scratch (Chile went into offshoring from a strong ICT base; Malaysia from oil to plastics and petrochemicals). Going downstream is one form of diversification 14

15 Some ingredients of success? Well-designed, realistic diversification strategy Firm, long-term political commitment Vibrant collaboration between Govt., Business,Academia Substantial public investment in Infrastructure, Education, Human capital (importance to save during boom years, Sovereign Wealth Funds or Funds for Future Generations) Effective institutions to promote, facilitate and regulate economic activity and investment (economy-wide and sectoral) Understanding the key role of policy next slide. 15

16 Lesson: Policy plays a key role Sound macroeconomic management Good policies that encourage: private investment in targeted sectors (incl. FDI) linkages between foreign/domestic firms (SME) private investment in innovation, skills, R&D Spatial development (free zones, industrial parks, clusters ) Conducive Investment Climate: Open trade and investment policies (FTAs, Investor Protection, reduced barriers to entry especially in targeted sectors) Regulatory reform to reduce the costs of doing business (especially in the non-nr sectors you want to promote) 16

17 PART 3: LOOKING AT ALBERTA FROM AN EXPORT AND FDI DIVERSIFICATION PERSPECTIVE 17

18 What is Alberta exporting? Energy still dominates Source: AlbertaCanada.com, Alberta s Export Performance in 2014.

19 What did Alberta export in 2014? Source: AlbertaCanada.com, Alberta s Export Performance in 2014.

20 Extractives is also first Alberta Export to US Source: AlbertaCanada.com, U.S.-Alberta Relations.

21 Where do Alberta Exports go? Source: AlbertaCanada.com, Alberta s Export Performance in 2014.

22 FDI Trends In Alberta By Industry Clusters ( ) # of Projects by Industry Cluster ( ) Source: fdi Markets (The Financial Times)

23 FDI Trends In Alberta By Industry Clusters ( ) Sum of Capital Investments by Industry Cluster ( ) Creative Industries Environmental Technology Financial Services Food, Beverages & Tobacco ICT & Electronics Industrial Physical Sciences Retail Trade Tourism Transportation, Warehousing & Storage other

24 Alberta: example of new type of investment around the energy/mining sector TWI (UK) a training/education firm opened a regional office in Calgary, Alberta in Estimated investment: US$45m, 59 Jobs To provide competence training and examinations in the areas of welding inspection, painting inspection, non-destructive testing, plant inspection, etc. It has to do with oil & gas and related industries (power, chemical, and petrochemical). But this is one form of diversification. 24

25 Finding your own Path Every country, region (State/Province) or city around the world strives to diversify, reinvent or re-position itself. Thailand Board of Investment uses this analogy: Thailand 1.0 Agriculture Thailand 2.0 Light Industry Thailand 3.0 More sophisticated manufacturing Next is Thailand 4.0 Knowledge-based economy (Digital, Green Economy, Services) What will Alberta do? 25

26 Starting from a strong position: Canada s economy is highly competitive 26

27 Canada s Competitiveness: WEF Highly efficient labor markets (7th) Health and primary education (7th) Solid institutional environment (16th) Banking system considered sound (potentially overvalued housing market could be a risk) WEF s recommendation: Canada should continue to foster innovation at the company level. Company spending on R&D (26th) and capacity to innovate (23nd) are significantly below levels in the United States. 27

28 Canada: Ease of Doing Business 28

29 Canada: Education and Skills 29

30 ANNEX Selected readings and Knowledge Tools 30

31 Selected Readings The Global Competitiveness Report , World Economic Forum (edited by Prof. Schwab) available at Natural Resources: Neither Curse Nor Destiny, by Leiderman and Maloney (eds.), World Bank and Stanford University Press (2007) Economic Diversification in Resource Rich Countries, by Gelb, Center for Global Development (2010) Stages of Diversification, by Imbs and Wacziarg in American Economic Review, 93-1 (2003). 31

32 Selected Readings What You Export Matters, by Hausmann, Hwang, and Rodrik, in Journal of Economic Growth (2007) From Flying Geese to Leading Dragons: New Opportunities and Strategies for Structural Transformation in Developing Countries, by Lin in Global Policy 3 (2012) Economic Diversification in the GCC: The Past, the Present, and the Future, by Callen et al., IMF Staff Discussion Note (2014) Foreign Direct Investment as a Catalyzer of Economic Diversification, WBG s Investment Climate team (2016) 32

33 Selected Readings An African Success Story: Botswana, by Acemoglu, Johnson, and Robinson in Rodrik (ed.) In Search of Prosperity: Analytical Narratives on Economic Growth, Princeton University Press (2003) Wine Production in Chile by Benaventa; and Salmon Farming in Chile by Katz in Chandra, (ed.) Technology, Adaptation and Exports: How some Developing Countries Got it Right, World Bank (2006) Economic Diversification: The Case of Malaysia, by Zainal Aznam Yusof, Revenue Watch institute. The Diversification of the Emirati Economy, by Ali Raza Sattar available at 33

34 Selected WBG s Knowledge tools on Investment Climate and Investment Policy General investment climate webpage: IPP webpage: IPP Overview Video: describes how our IPP offering can help countries attract, retain and grow FDI IPP Bite-Sized Learning Videos: Role of FDI; Investment Incentives; Investment Promotion; Investment Entry; Investment Protection; and Investment Linkages. IPP Toolkits: Investor Reform Map, Investment Entry, Investment Incentives, Investor Protection, and Investment Generation 34