Private investment in East Asia averaged 14 percent of GDP in the five-year period from 1998 to 2002.  Foreign direct investment averaged 3.3 percent of GDP during the same period.  The informal sector employs up to 78 percent of the non-agricultural workforce in Indonesia and 72 percent in the Philippines.

Selected Investment Climate Indicators

An annex to the World Development Report 2005 contains indicators from the World Bank’s Investment Climate Surveys and the Doing Business Database. Findings for the region include:

Investment Climate Surveys

• The Investment Climate Surveys in Cambodia (2003), China (2002, 2003), Indonesia (2004), Malaysia (2003) and the Philippines (2003), cover over 6500 registered firms.  In addition, 250 micro and informal firms were interviewed in both Cambodia and Indonesia.

• Policy uncertainty is the leading constraint overall, with one in three firms in the region reporting it as a major or severe constraint.  However, there are variations across countries; only 22 percent of firms in Malaysia ranked it as a severe or major constraint while 48 percent did in Indonesia.

• Macroeconomic instability ranked as the second most severe constraint.

• Corruption ranked as the third most severe constraint.  While the majority of firms report that bribes need to get paid to 'get things done,' countries in East Asia ranked in the bottom half of the distribution across all countries surveyed.  The share of sales paid in bribes is reported as 2.6 percent in China and six percent in Cambodia.

• Confidence that courts will uphold property rights is expressed by more than 80 percent of firms in Malaysia and China, 60 percent in Indonesia and 40 percent in Cambodia.

• The time that management spends dealing with officials and red tape can be substantial, from 10 percent in Malaysia, 11 percent in the Philippines, 14 percent in Cambodia and 19 percent in China.

 Doing Business Database

• Registering a business takes 198 days in Laos, 151 in Indonesia, 41 in China and 22 in South Korea.

• Registering property takes 143 days in Malaysia and 2 days in Thailand.

The report cites China’s experience to demonstrate the potential returns to investment climate improvements:

·         China demonstrates the significant impact of investment climate improvements in increasing growth and poverty reduction. China’s investment climate reforms over the last two decades helped lift 400 million people out of poverty.  China’s growth is officially reported at an average of eight percent a year for the past 20 years, and the share of its population below $1 a day fell from 64 percent in 1981 to 16 per cent in 2001.

·         Second, perfection is not required to realize these gains. The key is to address important constraints in ways that give firms confidence to invest and to follow initial reforms with ongoing improvements. China began by recognizing rudimentary property rights for a large share of its population.  It has since introduced a number of reforms to encourage the development of private business.  It was worked to attract FDI, improve business regulations and infrastructure, joined the WTO and worked to tackle corruption and improve transparency.  Its investment climate is still not perfect.  But the persistence of its reform process has yielded enormous benefits.

Linking the surveys’ objective measures of policy-related costs and risks to firm performance measures, the possible contributions of changing investment climate conditions can be simulated. For example, if Tianjin, a large port city east of Beijing, could achieve the same investment climate as Shanghai, firm-level productivity could increase by 15 percent and sales growth by 20 percent.

The report shows that the returns to investment climate improvements can dwarf the impact of international aid flows. The manufacturing value added in China or South Korea alone dwarf global aid flows.

(China.org.cn September 29, 2004)