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Driving Investment-Climate Reform

For six decades, we have held true to our founding vision—that the private sector is essential to development.

In this series of stories, you’ll learn more about how IFC grew from a small organization to become the largest global development institution focused on the private sector.

 



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The 1980s brought IFC back to its essential founding challenge—one that was always larger than IFC itself.

The challenge was this: no matter how much capital we could provide and mobilize ourselves, it would never be enough to finance the large-scale job creation needed to lift countries out of poverty. Solutions at that scale would require broad and concerted government action to improve the investment climate, turning countries into more attractive destinations for private capital.

IFC could be the catalyst, advising on reforms and financing landmark projects. Ultimately, however, governments would have to show political will—to drive the reforms needed to increase investment flows dramatically, and to maintain them for years to come.

The turning point came in the world’s largest emerging market, China—and success there helped IFC drive a wave of investment-climate reform in other developing countries across the world.

As China began liberalizing its economy and opening it up to foreign investment, it asked several international development agencies for help. IFC entered China in 1985, making an initial investment in a Peugeot truck factory and advising on improving joint-venture laws.  In doing so, our team discovered a much bigger barrier to foreign direct investment: joint-venture candidates would face difficulty repatriating profits earned in local currency because of restrictions in China’s foreign-exchange regime.

To address this critical issue, in 1986 IFC provided to Chinese authorities the results of a survey of 100 foreign companies that had expressed interest in the country. The companies’ biggest concern was the difficulty of exchanging currency. Playing our honest-broker role as a member of the World Bank Group, we were able to make a persuasive case for reform.

The Chinese government agreed to gradually ease these restrictions over the next few years.  After essential last steps in 1990—coupled with reforms encouraged by other development agencies—China saw an explosion in foreign direct investment.

While the export-oriented sectors got most of the attention, much of this investment was aimed at the domestic market, where currency exchange was essential.  Over the next 25 years, the country achieved unprecedented economic growth.  By 2016 it had lifted 700 million people out of poverty, more than any other country in history.

Encouraged by progress in China, IFC worked with the World Bank and the donor community to create a new body to help other countries attract foreign direct investment, the Foreign Investment Advisory Service (FIAS). Over the next three decades, FIAS—now called the Facility for Investment Climate Advisory Services—would support reforms in more than 100 countries. This work led to an era of rapid growth in foreign direct investment, with net flows to developing countries increasing from just $12 billion in 1986 to $120 billion in 1997.

 

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