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Why Governments Should Not Wait for Godot

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.

CAMBRIDGE – The scenario is all too familiar. A reformist government wants to boost economic growth and employment by implementing market-friendly reforms designed to make the country more attractive to (often foreign) investors. Policymakers understand that these investors possess the technological prowess, organizational capability, and market reach that the country desperately needs. Committees are created to improve the country’s performance in the World Bank’s Doing Business index, the World Economic Forum’s Global Competitiveness Report, or other beauty contests promoted by a sprawling array of international rankings.

The reformist government overcomes grueling fights with legislators and civil society, who accuse it of putting investors’ interest ahead of those of its own people. But with perseverance, it successfully adopts reforms that improve the country’s rankings and gets glowing coverage in the international press. The learned world’s impression of the country (and even that of money managers) changes significantly for the better. And then the government waits for foreign investment to arrive. And waits. And, as in Samuel Beckett’s famous play, the anticipated inflows, like Godot, never show up.

This problem stems in part from assuming that what needs fixing is captured in international rankings. Too often it is not: worldwide, there is zero correlation between improvements in the Doing Business and Competitiveness indexes and growth or investment performance.

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