Economic Reform in Developing Countries
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Economic Reform in Developing Countries

Reach, Range, Reason

  • Global Development Network series

Edited by José María Fanelli and Lyn Squire

This book offers insights into the process of economic reform in developing countries. It is organized around three factors that are critical to the success of any reform. According to Nobel Laureate Amartya Sen, these key dimensions are Reach, Range, and Reason. ‘Reach’ refers to the ability of reform to be person-centered and evenhanded, reaching all individuals in society. ‘Range’ considers the institutional reforms and policy changes necessary to implement change and the possible ripple effects on other policies and populations. Finally, ‘Reason’ captures the importance of constantly asking why a particular reform has been selected.
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Chapter 5: The Effect of Free-Trade Agreements on Foreign Direct Investment and Property Rights Protection

Lorenza Martínez Trigueros and Roberto Romero Hidalgo

Extract

5. The Effect of Free-Trade Agreements on Foreign Direct Investment and Property Rights Protection Lorenza Martínez Trigueros and Roberto Romero Hidalgo Amartya Sen defines ‘range’ as the methods policymakers use to achieve specific goals, and he emphasizes that range involves a variety of institutions. Following his admonition to consider the interactions between reform initiatives and institutions, this chapter focuses on the effects which a tradereform initiative (a trade agreement) can have on institutions (property rights). More specifically, we analyze the negative impact of weak property rights protection on foreign direct investment (FDI) as well as the role of multilateral trade agreements as an alternative to overcome this effect.1 Such agreements affect commercial flows and have the potential to improve property rights protection in these countries. Specifically, multilateral trade agreements have greater impact on FDI going to countries which lack adequate property rights protection. When these agreements include a chapter about conflict resolution through an arbitrage panel, they help mitigate some of the defects of weak domestic institutions by allowing some conflicts to be solved in panels formed by international members. Foreign investors can appeal to this more transparent authority whenever their property rights are violated. This option offers a level of security for investors when legal institutions in a country are corrupt or incompetent. Put another way, these treaties allow countries lacking a clear definition or strong protection of property rights to free ride on the protection offered by more efficient international institutions. This mechanism might even have positive...

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