Investment Facilitation in Transitional and Fragile States
This paper outlines a new tool for policymakers to deploy to encourage private-sector development in developing nations. Specifically it argues that in fragile states there are systemic failures that cause an intermediation gap between sources of capital and entrepreneurs seeking investment. This gap prevents investment by raising transaction costs and exacerbating information asymmetry.
This paper outlines a new tool for policymakers to deploy to encourage private-sector development in developing nations. Specifically it argues that in fragile states there are systemic failures that cause an intermediation gap between sources of capital and entrepreneurs seeking investment. This gap prevents investment by raising transaction costs and exacerbating information asymmetry.
We propose a model of investment facilitation that bridges the intermediation gap. The model is based on donor funding of a neutral nongovernment facilitator to identify attractive investment opportunities, link them to capital, and facilitate transactions.
Investment into Fragile States Is Vital
In March 2013 the Center for Strategic and International Studies published Our Shared Opportunity: A Vision for Global Prosperity. The report was the result of a year of consultations among the Executive Council on Development—a group of government, business, nongovernmental, and philanthropic leaders convened to consider the role of the private sector in U.S. development policy.
The report observed that the private sector was the key lever by which the United States engages developing countries and identified the need for the U.S. government to bring “a stronger focus on broad-based growth and private-sector-led development.” It tasked policymakers with seeking new ways to leverage the private sector to achieve our foreign policy goal of promoting economic development.
Core to this goal is the attraction of foreign and private investment into developing nations. Such investment is already a much more significant source of capital than official assistance to developing nations. Our Shared Opportunity called for the U.S. government to seek further means of leveraging its programs to attract investment into developing nations.
Within that context, this paper emphasizes that “developing nations” are not a homogenous entity. Many developing economies are already defined as “emerging markets” and are established destinations for investment. Smaller and less developed “frontier markets” are also beginning to see large international capital flows. Yet postconflict and conflict-affected markets remain relatively isolated from broad-based investment. These “fragile states” urgently need foreign capital, yet they struggle the most to obtain it. The capital that does enter fragile states is generally directed to resource extraction, infrastructure, and servicing foreign aid presence. These are necessary investments but are not sufficient to create the broad-based economy essential to sustainable growth and lasting peace.
