Why Governments Should Not Wait for Godot – Project Syndicate, 12.19
To ensure that anticipated foreign investment actually arrives, governments need organizational capabilities that go beyond Adam Smith’s maxim that they must do no more than ensure “peace, easy taxes, and a tolerable administration of justice.” They need to do at least three additional things. by Ricardo Hausmann
- Third, and most controversially, governments often need a corporation to facilitate investment in new strategic areas and manage the activities generated by previous strategic investments.
- These corporations may be set up as holding companies for already existing state-owned enterprises that currently report to their respective line ministries. The ministries should focus on their regulatory functions, leaving the holding company to provide close financial and operational oversight and exercise shareholder rights on behalf of society. The holding company can also be capitalized with assets that the government already owns.
- These corporations should use part of their proceeds for pre-investment activities in new potential areas and use their knowledge of the country to create joint ventures with firms that have knowledge of targeted industries. In fact, by being an equity partner, the corporation can capture the upside of government efforts to fix the ecosystem.
- The corporation should also explore opportunities for divestment of existing holdings in order to free up capital needed to advance the economic diversification strategy.
- Conventional wisdom discourages governments from creating such corporations on the grounds that the risks of poor governance and bad performance are too large. A more useful approach would be to develop the tools and mechanisms to ensure good and improving governance. Published audited financial statements, high technical capacity (facilitated by salaries and career paths that are competitive with the private sector), powerful advisory boards with foreign participation, and partnerships with institutions such as the International Finance Corporation (the World Bank’s private-sector lending arm) could create the right environment for excellence.
Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist at the Inter-American Development Bank, is a professor at Harvard’s John F. Kennedy School of Government and Director of the Harvard Growth Lab.