The New Politics of Private Investment in Developing Countries

• In Event: Politics of Industrialization and Economic Development

Abstract

The privatization of public infrastructure is a mainstay in the developed and developing world. Over 28% of privatized state development projects are located in low- to medium-income countries. Previous literature suggests that these countries are high-risk and therefore least likely to attract investment. This study asks: what incentives do countries provide when attracting infrastructure investment, and how does the nature of pre-existing institutions determine the incentives provided to private firms? We suggest that states with weaker accountability and regulatory structures are more likely to find investment partners that seek high risk-high return investments. We use a global dataset of private participation in infrastructure (the PPI-World Bank database) to demonstrate that low-medium income countries with weak regulatory institutions are more likely to attract foreign investment and to internalize financial risk. We use case studies from South Asia and former Communist countries in Eastern Europe and Eurasia to demonstrate that the presence of rent-seeking elites in high-risk countries make it more likely that foreign firms negotiate favorable terms. We show how this trend has important implications for the quality of privatized infrastructure and competition in emerging economies.

Authors

• Paula Daniela Ganga, Columbia University

• Erum Aly Haider, Georgetown University