What is blocking business investment and productivity growth? A fresh focus on the problems of fragmentation in the world economy

2016-BFO-cover-350Adrian Blundell-Wignall Director of the OECD Directorate for Financial and Enterprise Affairs, gives a preview of what’s in the OECD Business and Finance Outlook scheduled for release on 9 June 2016

More than seven years after the global financial crisis reached its trough the world economy is still sputtering. Banking systems in advanced economies have been strengthened and recapitalised, regulatory reforms of financial systems are well into their implementation stage and monetary policy remains highly supportive. But the global environment has not been supportive as emerging market economies, notably China, have struggled with the reversal of the commodity “supercycle” that sustained the earlier boom and related excess capacity.  One important result has been a failure of the business sector in advanced economies to respond with new investment and restructuring needed to generate jobs and the productivity growth that can support rising incomes and employment. These are essential components of the inclusive growth we need to address challenges like climate change and rising wealth inequality.

So what is blocking business investment and productivity growth? There are many contributors which we can summarise here as “fragmentation”: the heterogeneous policies, rules, laws and industry practices that create perverse incentives and block business efficiency and productivity growth. This is the theme of the OECD Business and Finance Outlook to be released on 9 June 2016.

Fragmentation manifests itself at all levels of the global economy, from the global macro-economy and economic systems to sectoral and micro-economic issues to legal ones. This Outlook surveys a range of cases where fragmentation creates problems and suggests priorities and directions for changes that will encourage inclusive growth.

The Outlook surveys important aspects of the broad global picture: the outlook for financial markets and influences on productivity, based on a detailed examination of the performance of 11 000 of the world’s largest listed companies. The observations point to the need to rely less on monetary easing and more on structural policy initiatives to stimulate investment and productivity growth and to encourage faster diffusion of productivity advances when they occur. Issues relating to the design of one such initiative, fiscal support for business research and development, are also covered in detail.

The Outlook also goes into greater depth to examine narrower issues where the devil is often in the details.  Stock exchanges are important elements of the infrastructure for funding business investment since they not only facilitate raising new capital but add to the attractiveness of such funding by providing it with liquidity. The Outlook examines the fragmentation that has arisen from the proliferation of trading venues and issues related to ensuring fairness. It points to regulatory initiatives needed to maintain a level playing field among investors.

The emerging renewable power sector is reviewed, focusing on challenges to mobilising finance for the large expansion of the sector that will be needed as the world phases out fossil fuel-generated electricity. Many of the issues that must be addressed relate more to the framework conditions surrounding the power sector than to financial engineering. If these issues are resolved, ample capital is likely to be forthcoming to finance the needed investments. One chapter focuses on differences in life expectancy around retirement age across different socioeconomic groups and the issues they raise for the insurance industry and pension funds as well as for public policy. Rules governing access to pensions and retirement saving must be designed carefully to avoid discriminating against lower socioeconomic groups.

The Outlook also examines areas in which variations in laws and legal regimes across countries unnecessarily fragment the economic environment by treating similar activities differently. One of these is foreign bribery, where enforcement across jurisdictions covers a very wide range which creates very different economic incentives to resort to bribery. The other is investment treaties, which must be interpreted by arbitration tribunals. These tribunals effectively establish rules that modify corporate law and governance arrangements and create different classes of shareholders with different sets of rights. The current interpretation of many treaties allows covered shareholders to recover losses resulting from company damages incurred by host government actions. This in turn creates incentives that may affect companies, shareholders, creditors and capital markets, and suggests a need for consideration of how claims for such losses should be treated as a more general policy matter.

The chapters are supported by company and market data not seen before, shedding light on some of the current great policy puzzles in the world economy.

Useful links

Business-Finance-Outlook-20126-callout-350The launch of the 2016 OECD Business and Finance Outlook takes place at 9.30am CET on 9 June 2016. Register to participate or watch the live webcast www.oecd.org/daf/oecd-business-finance-outlook.htm

The 2016 OECD Forum on 31 May – 1 June, is entitled “Productive economies, Inclusive societies”. The Forum is organised around the three cross-cutting themes of OECD Week: inclusive growth and productivity, innovation and the digital economy, and international collaboration for implementing international agreements and standards. Register now, it’s free!

Improving investment asset allocation decisions

Probably not a Panthera solution
Probably not a Panthera solution

Markus Schuller, Panthera Solutions

Professional managers of other people’s money, like regional banks, private banks, wealth managers, investment companies, (multi-) family offices, etc. are confronted for the first time in decades with a situation that forces them to do one of the following:

  1. Grow aggressively in size to play a shaping role in the industry’s concentration process.
  2. Take on the competition with investment management fintechs in offering low-cost, fully automated wealth management solutions.
  3. Position themselves as leaders in an investment management niche via innovation-driven competitive edge.
  4. Accept to be squeezed out of the market.

The first two options are out of reach for many investment service providers as they are too small, too conservative and/or too loaded with overhead costs. Assuming they want to survive, they will have to target a niche where they can exploit an innovation-driven competitive edge. This means becoming a learning organization with a continuous improvement cycle. We regularly ask the investment management deciders and investment committees how they learn. Silence is the most frequent response.

Another insight we gained in our consulting work concerns resistance to change. In our 2015 article “Man at the centre of the investment decision” we concluded that the underperformance of professional investors versus the market portfolio is dominated by two structural factors. The first is a straightforward cost penalty incurred due to transaction costs, management fees, distribution fees, etc. The second is the “Behaviour Gap Penalty”, defined as the contribution of the human factor to a biased perception of reality caused by cognitive dissonances. Indicators of the penalty along the investment process include certain market timing techniques, the application of flawed portfolio optimization techniques, minimizing career-risk as primary objective and other expressions of cognitive biases.

The less personal the aspect to be optimized in an investment process, the lower the organizational resistance, so minimizing fees, optimizing tax structures, or implementing regulatory changes meets relatively little resistance. Increased organizational resistance becomes visible when we’re dealing with asset-allocation related topics. There, one can distinguish between subject-specific input on methodologies, in which the professional investor got academically or professionally socialized (you do what you know) and subject-specific input on methodologies beyond the academic or professional socialisation of the professional investor.

For example, a CIO trained in modern portfolio theory can apply the mean-variance optimization in his job, and will show little resistance to a change towards minimum-variance optimisation. But if you ask that same person to switch from correlation-based risk management to causality-based risk management, expect a significantly increased level of resistance, as it goes beyond his or her background. The highest resistance level can be found when investment process topics relate to the individual decider, like optimizing the daily work routine, configuring the team role profile, or reducing the person’s knowing-doing gap.

So how do you create what we at Panthera call a High Performance Investment Team (HPIT©) able and willing to oscillate between the operational and meta-levels in its qualitative and quantitative optimisation of the investment process? Only working on low resistance levels will not lead to a sufficiently significant competitive edge. You have to go where it hurts, and this inevitably becomes personal. But if an industry has exceptionally high relevance for society and is rewarded over-proportionally well for it, equally high expectations have to be met. (A logic that is considered surprisingly new in the finance industry.)

We’ve identified four levels of change management interventions to boost performance: individual, team, process, culture. The quantitative and qualitative optimisation methods applied at individual and team level are similar, for example establishing certain skills and rituals that are needed to get the job done well. Where there is low resistance, change can probably be effected without any external guidance. But given the potential personal and organisational tensions involved in the medium higher resistance actions, it’s better to seek external guidance in tackling these issues.

Culture and Process define the game arrangement of an investment process. The meaning of this can be described as follows: we all know that the more often one plays at a casino, the more likely it is that the house wins, even if a player can temporarily enjoy a lucky streak. A certain asymmetry in favour of the house is structurally embedded in the game. The very same is true for the game arrangement in an investment process. If a certain overachieving behaviour of the individual decider, say high work ethics, is expected, while the same standard is not set as part of the team or organisational culture, it only is a matter of time until the individual aligns his behaviour to the established organisational culture or leaves the organisation.

To take a couple of examples. If an employee is expected to openly experiment with new asset allocation methodologies, following an evidence-driven trial and error process, but the organisation remains driven by a culture based on fear and therefore responds destructively to errors, it only is a matter of time before the employee either returns to the rituals that come with a fear-based culture or leaves the organisation. Or if an investment management employee is expected to act as intra-preneur, but the organisational decision-making process and compensation schemes are aligned to those of public authorities for civil servants, it is only a matter of time until the employee either returns to the rituals that come with a bureaucratic culture or leaves the organisation.

If professional managers of other people´s money want to position themselves as leaders in an investment management niche via innovation-driven competitive edge, the optimization goals shown in the illustration below have to be targeted to establish and manage high performance investment teams.

Organisational optimisation

HPIT

Source: Panthera Solutions

Useful links

OECD work on international investment

 

Joint government interpretation of investment treaties

investment treatiesDavid Gaukrodger, Senior Legal Advisor, OECD Investment Division

Public debate about investment treaties often focuses on whether treaties are being well-interpreted in investor-state arbitration cases in accordance with governments’ intent. Governments at the OECD have considered the role governments can play in the interpretation of investment treaties through joint government interpretations and other forms of government “voice”.

Shared government interpretations of investment treaties are increasingly recognised as a way to help improve treaty interpretation. The 2001 joint interpretation of the NAFTA agreement by the three NAFTA governments has had a decisive influence on the interpretation of key aspects of that treaty. Along with Canada, Chile, Mexico, the United States and other governments, the European Commission has included in its treaties express provisions allowing for binding joint government interpretations of the treaty. Major recent treaties such as the TPP, the ACIA treaty between ASEAN members, CETA or the Pacific Alliance contain such provisions.

Intergovernmental discussions at the OECD have focused in particular on how joint interpretations might be used for the many existing treaties that do not expressly contemplate them. Vague provisions in many older treaties leave broad scope for interpretation. The existing treaty text may thus frequently allow sufficient scope to achieve a jointly-desired interpretation. A growing range of governments now perceive those treaties to be outdated.

Joint interpretations can be issued at any time and can be a simpler and faster device than renegotiation to address some aspects of treaty policy. They may also allow governments to address unwanted interpretations that could otherwise lead governments to consider terminating treaties. Discussions and exchanges of views with treaty partners about proposed joint interpretations in advance of treaty renewal dates can also help inform future negotiations and decisions about treaties.

At the same time, joint interpretations may be less certain in their effects than formal treaty amendments. It may also be difficult to achieve common views on particular issues and some governments may prefer the flexibility of making submissions as a non-disputing party in particular disputes rather than agreeing to joint interpretations. The evolving views of many governments about treaty policy may, however, provide new opportunities for joint interpretive agreements.

Joint interpretations can help treaties to achieve a better balance between stability and flexibility in order to provide a solid policy framework for investment decisions while allowing for adaptation to changing circumstances. They may help governments to better balance foreign investor protection and the right to regulate because it can be difficult to fully build this balance into treaties in advance. Joint interpretive agreements are also likely to be an increasingly important tool for ensuring that treaties are interpreted in accordance with the treaty parties’ intent and achieve their purposes. Such agreements could allow a substantial range of older treaties to be at least harmonised if not made identical in the short term.

A new OECD paper considers key questions such as the binding nature of joint interpretations or the scope for joint agreements in light of existing treaty language. It identifies a number of empirical and policy questions of interest. An earlier paper addresses the range of options for government voice with regard to investment treaties.

As part of its broad range of work on investment treaties, the OECD offers evidence-based analytical materials and a forum to governments for sustained exchanges on these issues. G20, OECD and other jurisdictions gather bi-annually to discuss investment treaty policy at an OECD-hosted inter-governmental investment roundtable known as the Freedom of Investment (FOI) Roundtable. Non-OECD countries including Brazil, People’s Republic of China, India, Indonesia and South Africa are actively involved. Since 2011, the FOI Roundtable has addressed investor-state dispute settlement (ISDS) and investment treaties at its regular meetings. Summaries of these discussions are available on the OECD website. In October 2015, the OECD launched a broader government-led dialogue about investment treaties.

The FOI Roundtable is addressing issues at the centre of public debate over investment treaties such as the quest for balance between investor protection and governments’ right to regulate, which will be the focus of the OECD’s annual conference on investment treaties on 14 March 2016. These conferences provide opportunities for governments to discuss their policies and work, and to exchange views with stakeholders and experts.

Useful links

The legal framework applicable to joint interpretive agreements of investment treaties

2016 Conference on investment treaties: The quest for balance

OECD work on international investment law

OECD-hosted Freedom of Investment Roundtables

Making Trade and Investment Work for People

NAECKen Ash, Director of the OECD Trade and Agriculture Directorate

Both the UN Sustainable Development Goals (SDGs) and the OECD New Approaches to Economic Challenges (NAEC) explicitly recognize that trade and investment are not goals in themselves, but are a means to an end. That desired end is stronger and more inclusive growth, better jobs for more people, and improved societal well-being. Trade and investment policies cannot deliver these outcomes alone, but they can contribute as part of a wider package of comprehensive structural policy reforms, designed in light of the specific situation in countries at various stages of development.

Global value chains (GVCs) account for an increasing share of world income, reflecting the high degree of economic interdependence among nations today. All countries have increased incomes associated with GVCs, in particular major emerging economies, but these benefits do not accrue automatically. The fragmentation of production across borders highlights the importance not just of open, predictable and transparent trade and investment policies, but also of effective complementary policies that enable less developed countries (LDCs) and small and medium enterprises (SMEs), in particular, to participate in and to benefit from GVCs. In brief, making trade and investment work for people requires a coherent and well integrated public policy agenda.

GVCs magnify the costs of protection. As goods, services, capital, data and people cross borders multiple times, the cumulative effect of a number of individually small costs imposes a significant burden on traders and on investors. These costs can result from explicit restrictions, such as tariffs, from inefficient or unnecessary border procedures, and from constraints on the flow of capital. Where foreign investment is a driver of export capacity, the cumulative effect may even discourage firms from investing, or maintaining investment, in the country. As a result, production facilities, technologies and knowhow, and jobs might move elsewhere.

In a world dominated by GVCs, there is a tendency for more, and more demanding, regulatory standards, driven by the imperative to ensure reliability, quality, and safety. The right to regulate and to protect consumers is not in question, but regulations should be science-based, proportionate and non-discriminatory. Any unnecessary costs imposed by excessive regulatory burden falls most heavily on SMEs and firms in LDCs, where the capacity to adapt is often limited. In too many cases, this can preclude effective participation in GVCs.

There would be no GVCs without well-functioning transport, logistics, finance, communications, and other business services to move goods and coordinate production along the value chain. Today, services represent over 60% of GDP in G20 economies, including 30% of the total value added in manufacturing goods. The supply of these services is often provided through investment, yet services markets remain relatively restricted in many countries, imposing high costs on domestic as well as foreign firms, limiting productivity growth, and constraining participation in GVCs unnecessarily.

GVCs also strengthen the case for unilateral policy reform. Domestic firms benefit from the expanded export opportunities that are often the aim of trade negotiations, but they also benefit from access to world class imports of intermediate goods and services. Opening your own markets, in particular for intermediate inputs, can benefit your own firms and workers. But the gains are even greater when more countries participate and markets for goods, services, capital, technology, data, ideas, and people are opened on a multilateral basis.

GVCs make evident the necessity of more coherent rules for trade and investment; this twin engine of development can only reach its full potential if other policy areas are also better aligned and in coordination with those on trade and investment. These areas include macroeconomic, innovation, skills, social and labour market policies among others. The nature of the enabling environment and complementary policies to accompany trade and investment opening depends on country specificities; while there is no ‘one size fits all’ policy recipe, there are a number of common ingredients.

Trade and investment opening are necessary but insufficient conditions for stimulating much needed and more inclusive growth, development and jobs. Accompanying policies that promote responsible business conduct and enable the needed public and private investments, in particular in people, in innovation, and in strategic physical infrastructure, help ensure not just that growth is realized, but that the benefits are shared widely.

Useful links

OECD work on trade

OECD work on investment

Do lower taxes encourage investment?

Business-Finance-Outlook-ENPierre Poret, Deputy Director, OECD Directorate of Finance and Enterprise Affairs

Conventional wisdom holds that countries with lower taxes attract higher levels of foreign direct investment (FDI). At first glance, this intuitive assumption seems to be supported by the evidence. Some tiny jurisdictions with low or no taxes on foreign investment do seem to attract more FDI than major economies, but “investment” is the wrong term for billions of dollars that flow in and out of these places as part of the strategies multinationals use to pay less tax.

A new methodology for calculating FDI has been developed at the OECD to provide a clearer and fuller picture of FDI flows. Long time series of these new generation FDI statistics are not yet available. In the meantime, we analysed the financial statements of around 10,000 multinationals to model the relationships between their capital spending; rates of return; and tax holidays and exemptions, among other factors of investment. We found that tax holidays and exemptions do matter in investment decisions, but they are not the only factor and not necessarily the most important.

At the same time, governments around the world have become increasingly concerned with “double non-taxation”, i.e., companies not paying tax in either the country where they make their profits or the country where their headquarters are. Double non-taxation is one of the targets of the OECD/G20 project to counter tax base erosion and profit shifting (BEPS). Over 120 countries have participated in the project in recognition of the fact that a country trying to tackle BEPS on its own would probably lose out to more generous rivals. With the recent release of the final BEPS package, and the ongoing work on exchange of tax information, governments are well equipped to meet this challenge. However, governments also have three additional means at their disposal to prevent tax abuses without undermining investment.

Public governance of tax incentives according to internationally-agreed best practices. The new tax chapter of the OECD Policy Framework for Investment (PFI), used by dozens of countries and regions such as the South African Development Community and the Association of Southeast Asian Nations, provides multilaterally-agreed guidance to help countries avoid potential abuses of tax incentives and resist undue pressure to offer tax incentives. The PFI calls for incentives to be granted only following a proper legislative process. The PFI also provides guidance on the implementation and administration of tax policy regarding investment, for instance on making sure different levels of government are working together, addressing capacity constraints in tax offices, establishing criteria for analysing the costs and benefits of incentives, and providing for “sunset clauses” that say how long the agreement stays in force. This ultimately works in favour of the broader business community concerned with public sector transparency and a level playing field. As this issue is of particular relevance for developing countries, the OECD, in collaboration with the IMF and World Bank, has also developed Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment.

Clarifying the degree of exposure of tax measures to investor claims under investment treaties. Many governments see investment treaties as a way to increase the investor confidence and long-term trust needed to encourage investment. However, there is concern that some investors and law firms are claiming that sovereign states who change tax regimes to phase out excessive advantages, or who enforce tax laws more energetically, are violating investment treaties and should pay compensation. Most investment treaties currently apply to tax measures, but to differing degrees. Some of these treaties – especially more recent ones – contain mechanisms that give the state parties the power to make joint determinations on individual tax measures, but these are still the exception: only 3.6% of the 2060 treaties in a sample the OECD analysed contain a clause of this kind related to tax measures. Other investment treaties limit the types of claims that can be brought against tax measures and permit, for example, only claims for expropriation.

Clarifying the scope of application of investment treaties to tax measures can help provide a more certain policy landscape for governments and investors. Under the legally binding OECD Code of Liberalisation of Capital Movements, certain tax measures can amount to a restriction to the free flow of capital and can fall within the scope of the Code. But the Code gives governments adequate policy space – for example, taxes that are not identically applied to residents and non-residents but are levied in accordance with widely accepted principles of international tax law, are not considered as a discriminatory restriction under the Code.

Violations of tax laws by investors may also be relevant to the application of investment treaties. This is because illegality of the initial investment is increasingly expressly recognised as a bar to treaty coverage and, for instance, the recently-negotiated Comprehensive Trade and Economic Agreement between the EU and Canada would limit the definition of investments to those made “in accordance with law”.

Communicating collectively to companies the expectation that they should obey not only the letter but also the spirit of tax law. The OECD Guidelines for Multinational Enterprises (the Guidelines), a set of recommendations to companies by OECD and non-OECD governments, call on enterprises to comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate and not to seek or accept exemptions outside the statutory or regulatory framework related to taxation. Complying with the spirit of the law means discerning and following the intention of the legislature. Tax compliance also entails co-operation with tax authorities to provide them with the information they require to ensure an effective and equitable application of the tax laws. The Guidelines’ recommendation that enterprises should also treat tax governance and tax compliance as important elements of their oversight and broader risk management systems is reinforced by the recently revised Principles of Corporate Governance. Governments should increase their efforts to raise public awareness of the tax chapter of the Guidelines in support of their broader agenda to modernise and cooperate on tax policies.

Trade and FDI drive economic globalisation and help stimulate the growth of national economies. Fair and efficient tax systems are central to sharing the fruits of that growth equitably among nations and citizens. The challenge for governments is to put in place policies that attract investment and enable them to collect their fair share of taxes.

Useful links

OECD work on international investment

Global Capital Stock 2005-2014: A Natural Benchmark for Multi-Asset Portfolios

global capital stocksAndrea Vacchino and Markus Schuller, Panthera Solutions

How can you know whether a multi-asset portfolio is well managed? Many institutions have policy indices built according to the investment management’s preferences and expectations on risks and returns associated to each asset class. Other institutional investors run peer group comparison between multi-asset managers or measure their portfolio against total return indices. But these are workarounds only. Surprisingly, there is no policy portfolio benchmark investors can use at the very beginning of multi-asset investment against which to measure later decisions.

Even seven years after the Great Recession, the world is still suffering significant data gaps in its understanding of the Global Capital Stock, so we decided to build an objective, multi-asset, market-weighted policy portfolio index, based on the measures of the global capital stock.

Initially, we focused on measuring the current stock of different assets worldwide, a big challenge since only limited primary or secondary research is available. We looked especially at illiquid global stock components such as real estate, land and private equity, thanks to the contribution of several international institutions such as the OECD, BIS, Global Data Gaps Initiative, SME Europe, the European Commission and (hedge) fund managers like Strategos Capital Mgmt. Due to their support, we gained access to data or won insights on data interpretation and manipulation. At this point we would like to sincerely thank all the institutions and fund managers who supported our project.

This was the most comprehensive research conducted in the field so far, but was only the beginning of an ongoing optimization process. We concentrated on the Global Capital Stock of 11 assets and their major changes since 2005 because pre-2005, the tradeoff with regards to the quality and availability of data would have been too unfavorable. It’s only in recent years that academia has benefitted from the increasing reach and quality of databases like OECD Stats. We want to highlight research on specific asset classes in certain geographies such as New Estimate of Value of Land of United States (Larson, 2015). We used this kind of work not just for retrieving data but also to interpolate applicable findings to other uncovered areas.

The two figures below visualize our findings when measuring the Global Financial Stock per asset class, firstly expressed as percentage and then in Trillions of USD (click to see full size).

Asset allocation

Asset allocation

Outstanding trillion USD

Trillion USD

The graph below plots the evolution of nonsecuritized loans in terms of geographic exposure. We would like to highlight the growing weight of China and the relative decline of Japan as a result of the rebalance in the global economies.

Nonsecuritized loan composition

Geographical

Lastly we tested the performance of the Policy Portfolio against a global 60-40 portfolio and the gestaltu portfolio, which represents an alternative liquid market portfolio.

By comprehensively measuring the Global Capital Stock and its two byproducts, the Policy Portfolio and the investable policy portfolio, we understand our research as a first step towards reliably defining a natural benchmark for multi-asset portfolios. When comparing a multi-asset portfolio with the policy portfolio, one can derive preliminary conclusions on asset managers’ active decisions in terms of their strategic asset allocation configuration.

The limitations of our research revolve around the margin of error in measuring the Global Capital Stock. However we feel strongly optimistic about future development about data gap initiatives which will further reduce the margin of error.

We will continue our efforts on searching for better measures of the Global Capital Stock, for finding better indices to covering the Global Capital Stock for the Policy Portfolio, and for converting the Policy Portfolio into an Investable Policy Portfolio. The results of our ongoing optimization process will be accessible through the quarterly publication of the PS Policy Portfolio Index.

Useful links

For fuller details of the methodology and findings, see the report this article is based on here or click on the cover page above.

Capital stock data at the OECD – status and outlook Paul Schreyer et al, OECD (2011, Word document)

OECD work on financial statistics

OECD work on productivity statistics

Regional investment: Time to cooperate

FfD_Logo-140Carole Biau, Investment Division, OECD Directorate for Financial and Enterprise Affairs

One of Aesop’s fables tells of an old man on the point of death, who summoned his sons around him to give them some parting advice. He gave the eldest son a bundle of sticks and asked him to break it. The son was unable to, and his two brothers did no better. The old man then took the bundle apart and gave each of them a stick, which was easily broken.

The moral of this tale – that there is strength in unity – is very straightforward and more or less universal. Similarly, a Kenyan proverb holds that “sticks in a bundle are unbreakable”. However we often seem to lose sight of this basic truth – not only as individuals but also as countries.

Regional economic co-operation has been on the international development agenda for decades. But it requires strong coordination, including in the field of investment policy, and that does not come automatically. On the contrary, countries have often used “beggar-thy-neighbour” policies and seen geographic proximity as a threat rather than an opportunity for investment attraction. Governments have for instance competed to offer investors overly generous tax breaks and incentives, depriving each host country of much needed tax revenues. We have seen similar “races to the bottom” in terms of labour or environmental standards.

Regional collaboration on investment policies can also open up economies of scale. Infrastructure investment in Africa is a case in point: many countries are land-locked and cannot reach ports without cross-border road and rail connections; others are too small to develop cost-effective power or ICT networks; and some potential infrastructure resources (such as lakes and dams) cut across borders and cannot be developed by countries in isolation. In all of these cases, aligning policy frameworks – so that investors face the same ‘rules of the game’ across neighbouring countries – can make a big difference for unlocking investment in cross-border infrastructure projects.

Clearly, whether it is to overcome co-ordination failures or to tap economies of scale in investment policy, regional collaboration – or “bundling of sticks” – is needed. This can help countries move away from a zero-sum game and towards win-win situations.

What are countries doing to strengthen regional co-operation? To take one example: since 2012 the 15 Member States of the Southern African Development Community (SADC) have partnered with the OECD to design the SADC Investment Policy Framework. This framework will be discussed and finalised when SADC Member States come together in Johannesburg on 21-22 July 2015. The framework will help SADC countries to collectively enhance their investment policies, so as to attract investment that can work for the development of the region as a whole. It provides concrete options for: improving coherence and transparency of the investment environment; enhancing market access and healthy competition; reinforcing protection of investors’ rights; and, promoting responsible and inclusive investment.

The Association of Southeast Asian Nations (ASEAN) provides another example of a win-win regional collaboration on investment policy. The ASEAN-OECD Investment Programme allows for experience sharing on investment policy design, implementation and harmonisation across ASEAN Member States. It offers a platform for individual economies to disseminate the results of Investment Policy Reviews undertaken by governments in partnership with the OECD, while benchmarking investment policies and to contributing to identifying good practices. Aesop would be happy with this strengthening of the SADC and ASEAN “bundling of sticks”.

In both regions, these efforts build on the OECD’s main tool to promote investment policy reform and co-ordination: the Policy Framework for Investment (PFI). After having been used by over 25 developing and emerging countries undertaking OECD Investment Policy Reviews since 2006, the PFI has just been updated to ensure its continuing role as a global reference for investment policy reforms and development co-operation. 2015 therefore marks an exciting juncture: the OECD, regional groupings such as SADC and ASEAN, and individual countries, are all embarking on joint work towards implementation of the updated PFI.

Other international organisations, bilateral and multilateral development partners, and the business community, will not be left on the sidelines. In fact when the updated PFI was endorsed in June 2015, they encouraged countries and donors to use the tool as a reference for development co-operation, and particularly as a path towards the new Sustainable Development Goals (SDGs). As the resources needed every year to achieve the SDGs are at least ten times greater than the current levels of aid (ODA), it goes without saying that mobilising private investment flows through instruments such as the PFI will be crucial.

Exactly how different countries and regions can make the most use of the PFI is being discussed this week in Addis Ababa, at the third international conference on Financing for Development. This is a valuable opportunity not only for individual countries to take part, but also for regional groupings such as SADC and ASEAN to share their efforts towards making their bundle of sticks unbreakable and investment for development a “positive sum game”.

Useful links

The Policy Framework for Investment

Southern African Development Community (SADC) Investment Policy Framework

ASEAN-OECD Investment Programme

OECD work on international investment