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Foreign Investment Incentives and Policy Stability: The case of mining royalty laws in Chile and Peru. Jennifer Tobin Brookings Institution and Yale University. Overview.

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

Jennifer Tobin

Brookings Institution and

Yale University

overview
Overview
  • How do investment incentives meant to stabilize the short-term policy environment for foreign investors function in the long run?
outline
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 growth

Technological Spillovers

FDI

Range and Complexity of Output

Organization and Adaptability of Production

Human Development

Workforce Capacity

Domestic Savings

Growth

Capital

Growth

FDI

Human Development

Household Human Development Spending

Household Income

Growth

Government Policy Preference

Government Human Development

Government Revenue

FDI and Growth
attracting fdi
Attracting FDI
  • Credibility of the investment environment:
        • macroeconomic stability
        • political stability
        • policy stability
policy stability
Policy Stability

Rules of the Game:

  • Clear
  • Well known
  • Well enforced
  • Stable
why stability
Why Stability?

Reduces the uncertainty of the

future rewards for investing

Investment

Growth

stability but how
Stability, but how?
  • Constitutions
  • Institutions
  • Contracts
  • Time horizons
  • International agreements
investment incentives
International Legal Guarantees

Investor-State Contracts

Policy Stability Agreements

Investment Incentives
investment incentives10
Investment Incentives
  • Short versus long-term effects
institutional environment chile
Institutional Environment: Chile
  • Strong Presidency
  • Bicameral Legislature
  • Strong parties
  • Low corruption
  • Fiscal discipline
  • Conservative monetary policy
institutional environment peru
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
fdi restrictions incentives
FDI: Restrictions/Incentives
  • DL 600
  • Stability Agreements
  • BITs
  • FTAs
mining royalty laws
Mining Royalty Laws
  • Not a tax
  • In place in almost all developed countries and more than 120 countries world-wide
mining royalty laws chile
Mining Royalty Laws: Chile

Pro:

Government

Public Opinion

Concertacion

Con:

Business and Industry

Alianza

IMF

Rejected

mining royalty laws peru
Mining Royalty Laws: Peru

Pro:

President

Public Opinion

Most left-parties

Con:

Finance Minister

APRA

Business and Industry

IMF

Passed

expectations
Expectations

What would we have expected to happen?

Just what happened:

  • Peru: Instability
  • Chile: Stability
grand theoretical claim
Grand Theoretical Claim
  • Would they have lost investment?
  • Did Incentives matter?
  • Why not collude?
  • In creating short term stability--created long term policy gridlock