Business and Industry Major Group
Enabling environment for rule-based business and investment Remarks by Dr. Louise Kantrow
Permanent Representative of the International Chamber of Commerce to the United Nations
3 March 2014
Intergovernmental Committee of Experts on Sustainable Development Financing UN Headquarters, Conference Room 1
Excellencies, ladies and gentlemen, good afternoon.
Established in 1919 by private sector representatives in five countries, ICC is the largest, most representative business organization, encompassing 6.5 million businesses in our global network, with national committees and direct members in 130 countries, as well as, active presence in over 230 countries though ICC’s World Chambers Federation. Private sector leaders and experts drawn from ICC’s networks establish the business stance on broad issues of trade and investment policy as well as on vital technical, sectoral and regional subjects. ICC has three main activities: rule setting, dispute resolution, and policy advocacy.
The United Nations development agenda beyond 2015 calls for a renewed global partnership to foster transformative changes that will apply to all countries, including: poverty eradication, tackling exclusion and inequality, women and girls’ empowerment, managing environmental challenges, inclusive and sustainable growth and decent employment, peace building and effective governance. We are now engaged in a critical discussion of development goals and the associated financing framework. The new framework for development cooperation should provide means to improve the mobilization and allocation of resources for sustainable development. The UN Secretary General’s HLP report noted that “financing must be understood as one component of a strategy that includes private sector efficiency and public sector productivity improvements”.
ENABLING ENVIRONMENT
One critical and over-arching pre-condition for sustainable development is good governance and an enabling environment. At all levels – domestic markets, foreign investment and international trade – private enterprise requires an operating environment conducive to growth and development, including: peace and stability, the rule of law, good governance with accountability and transparency, the absence of corruption, adequate infrastructure, an educated workforce, clear property rights and enforceable contracts.
Business has a critical role to play in accelerating progress towards sustainable development as an engine of economic growth and employment, as a key contributor of government revenues, and as a driver of innovation, capacity building and technology development.
Creating the right conditions for private enterprise may require strategic reforms to long-standing regulatory practices to unlock the full potential of private enterprise and open markets in a way that can promote economic growth, environmental protection and social development.
Financing a transformative development agenda will require that available resources be used more effectively and strategically to catalyze additional financing from official and private sectors. Developing countries will need to increase efforts to finance their own development by improving domestic resource mobilization including by strengthening tax administration, better harnessing natural resource revenue, and curbing illicit financial flows.
The ability to mobilize domestic revenues reduces aid dependency and can raise country creditworthiness.
Broadening the tax base, improving tax administration, and closing loopholes could make significant difference in lower-income countries where tax revenues account for only about 10-14 percent of GDP, one-third less than in middle income countries. Lower income country tax bases tend to be quite narrow, reflecting the smaller share of the formal sector in employment and business activity. Large informal economies and agricultural are rarely taxed. How can reforms in tax policy and administration best be achieved? International organizations and bilateral aid agencies have provided technical advice for many years. Looking forward, it will be essential that tax reforms are seen as egalitarian, socially just and fair in distributing the tax burden. This will also require that challenges posed by informality are addressed, including by identifying ways to tax the informal sector.
EMERGING SOURCES OF FINANCING – BOND FINANCING AND LOCAL CURRENCY BOND MARKETS
In a recent report, the World Bank notes that international bond flows to developing countries with maturity of at least five years began to increase around 2009 as conditions for bond financing became more favorable for middle income countries. The surge in bond issuance was partly the result of policy-induced low interest rates and quantitative easing in high income countries which prompted a search for yield by global investors. It also rose from the recognition of the economic potential of many developing countries with improved credit-quality. The World Bank expects bond financing to grow rapidly as a source of development finance for countries securing a credit rating at or above investment grade. In emerging market and developing economies, local currency bond markets (LCBMs) present a potentially important vehicle for developing the domestic investor base and mobilizing domestic savings to support public and private sector investment in productive assets. The development of LCBMs can help promote a deeper and more efficient financial sector reducing transaction costs and facilitating risk management. The viability of LCBMs for long term investment depends critically on policy credibility and commitment, including through the establishment of the right macroeconomic, institutional and regulatory preconditions.
CRITICAL IMPORTANCE OF RULE OF LAW
A government structure is dependent on the consistent and systematic applications of legal rules. The lack of universal protection for private property and contractual rights constitutes a substantive constraint on economic freedom by inhibiting or disincentivizing investment and trade. As such, the rule of law and the protection of private property and contractual rights constitute an important prerequisite for private investment-driven economic growth and high productivity.
A functional legal system is not only key in building economic foundations, it is also crucial in safeguarding democratic values. Without an integrated system of institutions that create order and facilitate daily transactions of all types – from traffic flow to business contracts – true rule of law and true democratic governance are lacking.
When property rights are not properly documented and property market institutions remain weak – as is the case in many countries – the informal sector dominates the economy and inhibits inclusive growth. Widespread informality leads to weak rule of law and corruption; in the absence of legal protection, that comes with property rights and the livelihood of informal entrepreneurs depends on the whim of local officials. When legal protection is out of reach for the majority of the population and when rules are enforced arbitrarily, abuse thrives and democracy cannot flourish.
RECOMMENDATIONS
The promotion of consensus-building through stakeholder dialogue – notably between governments, business and civil society – is vital for designing effective solutions and for implementing them in practice. They create a shared sense of accountability and responsibility. Such multi-stakeholder co-operation may take place for example in the context of creating an enabling business environment.
Improved state-business relations can be assumed to contribute to a better understanding of private sector needs by the government and thus to a more efficient allocation of resources in the economy. A government that is informed through regular meetings with the private sector about investment climate problems will usually have stronger ownership for reforms. Being in constant dialogue with private investors is also necessary to enable public officials to assess where markets can be expected to work and where they are likely to fail and offer or withdraw public support accordingly. This can create trust between the public and private sector, make policies more predictable, and thus minimize the risks for the private sector. It can also lead to jointly planned, financed and implemented public-private initiatives to deal with coordination failures and public goods.
Business will continue to engage respectfully and openly with communities, governments and other stakeholders around the world in pursuit of the of sustainable development objectives. ICC and the Global Business Alliance look forward to bringing the vast real world experience of its business members to this effort.
Permanent Representative of the International Chamber of Commerce to the United Nations
3 March 2014
Intergovernmental Committee of Experts on Sustainable Development Financing UN Headquarters, Conference Room 1
Excellencies, ladies and gentlemen, good afternoon.
Established in 1919 by private sector representatives in five countries, ICC is the largest, most representative business organization, encompassing 6.5 million businesses in our global network, with national committees and direct members in 130 countries, as well as, active presence in over 230 countries though ICC’s World Chambers Federation. Private sector leaders and experts drawn from ICC’s networks establish the business stance on broad issues of trade and investment policy as well as on vital technical, sectoral and regional subjects. ICC has three main activities: rule setting, dispute resolution, and policy advocacy.
The United Nations development agenda beyond 2015 calls for a renewed global partnership to foster transformative changes that will apply to all countries, including: poverty eradication, tackling exclusion and inequality, women and girls’ empowerment, managing environmental challenges, inclusive and sustainable growth and decent employment, peace building and effective governance. We are now engaged in a critical discussion of development goals and the associated financing framework. The new framework for development cooperation should provide means to improve the mobilization and allocation of resources for sustainable development. The UN Secretary General’s HLP report noted that “financing must be understood as one component of a strategy that includes private sector efficiency and public sector productivity improvements”.
ENABLING ENVIRONMENT
One critical and over-arching pre-condition for sustainable development is good governance and an enabling environment. At all levels – domestic markets, foreign investment and international trade – private enterprise requires an operating environment conducive to growth and development, including: peace and stability, the rule of law, good governance with accountability and transparency, the absence of corruption, adequate infrastructure, an educated workforce, clear property rights and enforceable contracts.
Business has a critical role to play in accelerating progress towards sustainable development as an engine of economic growth and employment, as a key contributor of government revenues, and as a driver of innovation, capacity building and technology development.
Creating the right conditions for private enterprise may require strategic reforms to long-standing regulatory practices to unlock the full potential of private enterprise and open markets in a way that can promote economic growth, environmental protection and social development.
Financing a transformative development agenda will require that available resources be used more effectively and strategically to catalyze additional financing from official and private sectors. Developing countries will need to increase efforts to finance their own development by improving domestic resource mobilization including by strengthening tax administration, better harnessing natural resource revenue, and curbing illicit financial flows.
The ability to mobilize domestic revenues reduces aid dependency and can raise country creditworthiness.
Broadening the tax base, improving tax administration, and closing loopholes could make significant difference in lower-income countries where tax revenues account for only about 10-14 percent of GDP, one-third less than in middle income countries. Lower income country tax bases tend to be quite narrow, reflecting the smaller share of the formal sector in employment and business activity. Large informal economies and agricultural are rarely taxed. How can reforms in tax policy and administration best be achieved? International organizations and bilateral aid agencies have provided technical advice for many years. Looking forward, it will be essential that tax reforms are seen as egalitarian, socially just and fair in distributing the tax burden. This will also require that challenges posed by informality are addressed, including by identifying ways to tax the informal sector.
EMERGING SOURCES OF FINANCING – BOND FINANCING AND LOCAL CURRENCY BOND MARKETS
In a recent report, the World Bank notes that international bond flows to developing countries with maturity of at least five years began to increase around 2009 as conditions for bond financing became more favorable for middle income countries. The surge in bond issuance was partly the result of policy-induced low interest rates and quantitative easing in high income countries which prompted a search for yield by global investors. It also rose from the recognition of the economic potential of many developing countries with improved credit-quality. The World Bank expects bond financing to grow rapidly as a source of development finance for countries securing a credit rating at or above investment grade. In emerging market and developing economies, local currency bond markets (LCBMs) present a potentially important vehicle for developing the domestic investor base and mobilizing domestic savings to support public and private sector investment in productive assets. The development of LCBMs can help promote a deeper and more efficient financial sector reducing transaction costs and facilitating risk management. The viability of LCBMs for long term investment depends critically on policy credibility and commitment, including through the establishment of the right macroeconomic, institutional and regulatory preconditions.
CRITICAL IMPORTANCE OF RULE OF LAW
A government structure is dependent on the consistent and systematic applications of legal rules. The lack of universal protection for private property and contractual rights constitutes a substantive constraint on economic freedom by inhibiting or disincentivizing investment and trade. As such, the rule of law and the protection of private property and contractual rights constitute an important prerequisite for private investment-driven economic growth and high productivity.
A functional legal system is not only key in building economic foundations, it is also crucial in safeguarding democratic values. Without an integrated system of institutions that create order and facilitate daily transactions of all types – from traffic flow to business contracts – true rule of law and true democratic governance are lacking.
When property rights are not properly documented and property market institutions remain weak – as is the case in many countries – the informal sector dominates the economy and inhibits inclusive growth. Widespread informality leads to weak rule of law and corruption; in the absence of legal protection, that comes with property rights and the livelihood of informal entrepreneurs depends on the whim of local officials. When legal protection is out of reach for the majority of the population and when rules are enforced arbitrarily, abuse thrives and democracy cannot flourish.
RECOMMENDATIONS
The promotion of consensus-building through stakeholder dialogue – notably between governments, business and civil society – is vital for designing effective solutions and for implementing them in practice. They create a shared sense of accountability and responsibility. Such multi-stakeholder co-operation may take place for example in the context of creating an enabling business environment.
Improved state-business relations can be assumed to contribute to a better understanding of private sector needs by the government and thus to a more efficient allocation of resources in the economy. A government that is informed through regular meetings with the private sector about investment climate problems will usually have stronger ownership for reforms. Being in constant dialogue with private investors is also necessary to enable public officials to assess where markets can be expected to work and where they are likely to fail and offer or withdraw public support accordingly. This can create trust between the public and private sector, make policies more predictable, and thus minimize the risks for the private sector. It can also lead to jointly planned, financed and implemented public-private initiatives to deal with coordination failures and public goods.
Business will continue to engage respectfully and openly with communities, governments and other stakeholders around the world in pursuit of the of sustainable development objectives. ICC and the Global Business Alliance look forward to bringing the vast real world experience of its business members to this effort.