DIDYK V., WIBERG U. Sustainable Investment Policies in the Murmansk Region // The NEBI yearbook 1998. North European and Baltic Integration. - Copenhagen, 1998. - P.99-113. 7 Sustainable Investment Policies in the Murmansk Region Vladimir Didyk and UlfWiberg Introduction The debate about the definition and the meaning of the sustainable development concept has been going on for more than 20 years. 1 The most well-known defin- ition concerns the problem in a global perspective, whereas the implications of the concept in a regional context may have some specific features. Nevertheless, the basic principles of sustainable development preserve their importance as a general guideline for the formulation of a policy at the regional level as well. These are demands for i) ecological sustainability, which implies maintaining the economy at a scale that does not damage the ecological processes and functions; z) improving the quality of life of the present generation without denying future generations a similar opportunity; 3) an efficient functioning of an economic sys- tem which is able to produce a surplus and technological knowledge in a self-con- tained way (WCED 1987; UNEP 1992; Costanza 1994: 393). In recent years, this notion of sustainability has been extended in the regional development debate in Europe to refer to the maintenance of regional eco nomic and social systems. For example, Bryden and Commins (1997) argue that 'it is through community organisation that people can reinforce attitudes and practices, and also institutionalise mutually agreeable strategies for sustainability.' Investments play a critical role in providing environmental, social and eco - nomic sustainability. In this context investments should not be regarded in a nar- row financial sense, but one which 'includes all human actions to realize intended changes in social organisation as well as accumulation of knowledge. ... It is a choice for the future' (Young 1992: n). The aim of this article is to describe the current investment pattern in the Murmansk region ('oblast' in Russian) and to discuss future alternatives from a perspective of sustainability . 7 Didyk and Wiberg Changing Investment Patterns The economy of the Murmansk region is characterised by the following factors which influence the pattern of investment activities: i) the predominance of capital intensive, resource-extracting production, which is extremely dependent on a high regularity and level of investment; 2) severe climatic conditions, which cause much higher (50-100 per cent) per capita capital costs compared with cor- responding production and social infrastructure in central Russian regions; 3) a heavy concentration of environmentally hazardous production and objects and of areas which are suffering from severe environmental damage.2 There are obvious risks of irreversible degradation of sensitive Arctic ecosystems if measures for the protection of nature are not immediately integrated in investment strategies. Neither the characteristics just mentioned nor some unique regional eco- nomic features were adequately taken into account in the centralised investment policy of the former Soviet authorities, who concentrated on the rapid develop - ment of 'cheap' regional resources (Luzin 1993: 129). Consequently, the Mur- mansk region has experienced a deteriorating regime of reproduction, especially in the mining industry. Needs for environmental protection and renewal at the technical level have been neglected. Not only specialised industries, but the entire regional economy is in a trough of an investment cycle that began in the late 19405 and early 19505. A substantial renovation/reconstruction of most enterprises in the region is required.3 The transition from a centrally planned towards a market oriented economy that started in the early 19905 has been accompanied by a considerable decline Figure j.i: Industrial output, total capital investments and explicit environmen- tal protection investments in the Murmansk region (deflated indexes, 1991=100 per cent) Sustainable Investment Policies 101 in production and investments in almost all regions and sectors of the Russian economy. Figure 7.1 shows industrial output and the capital investment pattern in the Murmansk region during I99I-95.4 From 1991 to 1995, the level of capital investments dropped much faster than the industrial production. It will also be noticed that the decline in investments for environmental protection was even more dramatic than the average decline of capital investments. The environmental protection investments in the figure represent, among other things, capital expenditures for recultivation of land, con- structions for sewage treatment and facilities for controlling and detoxifying dis- charged gases. Between 1990 and 1995, the share of environmental protection investments in total capital investments declined from 2.5 per cent to 1.8 per cent. This has happened despite the introduction of a special tax to control pollution caused by industrial firms in accordance with the 'Russian Federation Law on the Protection of the Environment' (1992). In view of the specific characteristics of the region's economy, this collapse of investment activities will probably lead to more dramatically negative long-term consequences than in the regions further south. The fall in production volume has not been accompanied by a proportional decline of harmful environmental impact in the Murmansk region. During the period 1991 to 1995, when industrial output decreased by almost 40 per cent (Figure 7.1), pollution decreased by only 20 per cent (Table 7.1). As a consequence of economic decline, a significant migration out of the region has started. During 1991-95, the net out-migration was 88 ooo persons, which represented almost 9 per cent of the population. Taking into account the harsh climatic conditions and the need for economic rationalisation and a reduc- tion of the pressure on the environment, population decrease in itself could not evoke complaints. However, a negative consequence of the current out-migration is an increased share of retired and disabled people in the population. Obviously, from a perspective of social and economic sustainability, such a deformation of the population structure in a northern periphery is far from satisfactory. Despite the out-migration, the level of unemployment has risen more in the Murmansk Table j.i: Examples of pressure on the environment by economic activity in the Murmansk region 1991 1992 1993 1994 1995 Extraction (million 2610 2318 2221 1763 2287 cubic m.) Discharge of polluted sewage 367 411 307 305 303 (million cubic m.) Pollution of atmosphere 650 617 539 469 543 (thousand tonnes) Source: The Murmansk Region in Figures: Concise Statistical Handbook. Goskomstat of the Russian Federation (1996: 32) 102 7 Didyk and Wiberg region (12.3 per cent in 1995) than in Russia as a whole (8.0 per cent in 1995). Under current market conditions, it is also unlikely that new labour-intensive industries will be established in the region unless especially favourable compara- tive advantages are involved. Substantial structural changes are among the most important processes in the regional investment pattern during recent years. The most pertinent changes of the sources of investment funding (Table 7.2) have been a reduction in the share of spending from the federal budget alongside with expanded shares of financing from the enterprises' own resources and from other investment funds. It will also be noticed that the share of investment expenditures from local budgets has decreased. To a large extent, however, this shift is only a reflection of the privati- sation of state-owned enterprises. A more problematic pattern is the reduction of the foreign investment share from 3.2 per cent in 1993 to 0.8 per cent in 1995. This small and declining share indicates a wait-and-see attitude among potential for- eign investors. Data on the structure of investments by type of ownership (Table 7.3) show that the share of state investments (which includes investments by state -owned enterprises) has declined considerably (from 94.7 per cent in 1990 to 51 per cent in 1994). However, the corresponding change for the whole of Russia was even more dramatic (a reduction to 38 per cent in 1994). It should also be noticed that the share of private and municipal investments is substantially lower in the Mur- mansk region compared with Russia in general. This illustrates the specific char- acter of the regional economy, which is not very attractive for the expansion of private enterprise, and which has a weak public sector. A striking feature of the sectoral structure (Table 7.4 compared with Figure 7.1) is that especially investments in geology and exploration, but also in agricul- ture and construction, have declined dramatically in comparison to other sectors, while investments in energy have increased. The high share of geology in 1990 is explained by the expenditure on oil and gas prospecting, which reached a peak that year. Noteworthy is also the deep relative and absolute decline of housing Table j.2: The structure of capital investment in the Murmansk region by source of financing, per cent Financing from: 1992 1993 1994 1995 Federal budget 31.4 30.4 21.8 14.5 Local budgets 7.6 13.0 7.5 5.5 Investment funds 1.8 3.5 6.5 9.4 Own resources of enterprises 59.2 51.1 61.5 70.2 Resources of joint ventures 0.0 3.2 2.3 0.8 and foreign companies All sources 100 100 100 100 Source: Oblkomstat, 1993-1996 Sustainable Investment Policies 103 Table 7.5: The structure of capital investment in the Murmansk region and Russia by type of ownership, per cent 1992 1993 Murmansk 1994 Murmansk Murmansk Russia region Russia region region State 92.7 63.4 53 51 38 * Municipal 6.7 13 2.8 9.5 Private 4.1 6.4 14 8.7 16 Mixed without for- eign participation 2.6 21.8 20 36.9 33 Mixed with foreign participation 0.0 1.5 n.a. 0.3 3.3 All types 100 100 100 100 100 * The phenomenon did not exist. Source: Oblkomstat, 1993-1995; Goskomstat of the Russian Federation, 1995 construction, which is in marked contrast to the average tendency of expansion in Russia as a whole. Furthermore, it seems that the decrease in the region's hous- ing construction will continue in the near future. There are two reasons for this hypothesis: First, out-migration from the region will continue due to the high sttuctural unemployment, the unfavourable natural conditions and the high liv - ing expenses. Secondly, the cost of housing construction in the region is nearly twice as high as in the central parts of Russia. Table 7.4: Sectoral distribution of capital investment in the Murmansk region, per cent 1990 1992 1994 A. Productive sphere 73.2 60.5 68.0 of which: energy 1.8 4.6 16.1 geology and exploration 15.9 3.7 2.7 mining (metallurgical and chemical) 19.1 28.1 15.3 fish industry 9.4 3.8 8.2 agriculture 3.8 2.5 1.4 transportation 6.3 9.8 14.3 construction 4.3 1.5 0.9 other 12.5 6.5 9.1 B. Non-productive sphere 29.7 39.5 32.0 of which: housing construction 18.0 24.6 \ 13.4 Total capital investment 100 100 100 Source: Oblkomstat, 1991-1995 Ю4 7 Didyk and Wiberg From this discussion it may be concluded that the development in the Mur - mansk region, in the observed retrospective period, has been far from sustainable. With its legacy of problems, it is difficult to formulate a policy for a sustainable development in the region. Several acute issues, directly and indirectly related to the subject of this article, will not be analysed here. For example, how could principles of sustainable development be implemented in financially insolvent districts of the region with an almost depleted resource base for large scale exploitation and operating with obsolete equipment? How could resource-user-pays and polluter-pays principles be adequately applied to enterprises whose sales prices have reached world market levels but are still showing no profit? Or when the bankruptcy of these enterprises might entail unemployment for thousands of people? How could capital flight be avoided during a period of high economic uncertainty, and how could capital be used in a socially desirable way for the region? Nevertheless, some basic elements of a regional investment policy are discussed in the next sections. Investments from a Perspective of Sustainability The share of extracting industries in the Murmansk region is approximately 42 per cent, whereas the average for Russia is less than 9 per cent (Luzin 1994: 80). According to Table 7.4, the sectoral structure of investments, even taking! into account the dramatic decline in the real volume of investments, does not show any significant shift away from resource-based industries. During the current eco- nomic depression, we can hardly expect any significant structural change in the economy of the region and the related allocation of investments. There are plans to develop some large-scale investment projects, but they have little to do with any objective of Sustainability. Obvious examples are extraction of the hydrocar- bon deposit in the Barents Sea and the construction of a second complex at the Kola nuclear power station. Table 7.5 illustrates how investments in the protection and rational use of land and forests, in the protection and reproduction offish stocks, and in the creation of nature preserves have decreased dramatically, not to say been completely eliminated in recent years. Total investments in environmental protection in deflated prices have fallen by a factor of almost five between 1991 and 1995. The Regional Government's Role in Promoting Sustainable Investment According to the Russian Constitution of 1993, all 89 administrative regions (sub- jects of the Russian Federation), including the Murmansk region, have the right to pass their own legislation, but is must be in harmony with laws of Russia. There are also various potential levers and instruments of a direct and indirect Sustainable Investment Policies 105 character that influence the investment climate in a region. Regional investment policy is here defined as a set of measures that may be employed by governments at the national and regional level for the formation and use of investment resources aimed at maintaining, renewing and upgrading the collective and pri- vate assets in the regional economy. It should be noted that there are still uncertainties concerning the division of power between federal and regional authorities in a number of areas (mainly those which the Constitution defines as issues of joint responsibility, such as the use of natural resources and tax policy). However, the Federal Government and some regions recently signed agreements on a relevant separation of powers. A similar document is now being prepared for the Murmansk region. It is intended to clar- ify the areas in which the bodies of regional government may embark on socio- economic policy planning Success in regional development will depend on the choice and elaboration of objectives and strategy, the proper policy instruments and the mechanisms of organisational implementation. Today the regional governments have no distinct policies for economic devel- opment and investments. One reason is that under the circumstances of the socio-economic crisis, local and regional authorities are mostly kept busy by every-day needs (fuel supply, financing of the public sector and so forth) rather than with formulating any long-term oriented policy. In addition, the regional representative body, the Oblast Duma — which is charged with the formulation of such a policy, has been in operation for just a couple of years and has not had enough time for this critical challenge. The administration of the Murmansk region has taken some steps to encourage investments (e.g., prepared a draft of law^jOn creation of favourable condition for investments in the Murmansk region,' and organised international investment conferences, 'Northern opportunities' in 1995 and 1996). However, these steps are far too insufficient to make any impact on the generally deteriorating investment Table 7.5: Capital investment aimed at environmental protection in the Mur - mansk region, millions of roubles deflated to the price level of 1991 1991 1992 1993 1994 1995 Protection of: water resources 22.5 17.3 11.5 6.9 3.7 atmosphere 4.4 2.9 11.6 12.0 6.5 land - - - - 0.1 forests 1.6 0.1 0.1 0.3 0.2 fish - 0.5 - - - mineral resources 25.6 20.9 10.2 0.8 0.3 creation of preserves 0.3 - 0.2 - - Total 54.4 41.7 33.6 20.1 11.3 Source: Oblkomstat, 1992-1996 юб 7 Didyk and Wiberg climate or to promote sustainable investment in particular. The deterioration has happened despite a slight improvement in financial stability in 1995 compared with previous years (Soobschaet oblkomstat 1996) and an increase of the regional budget income by 20 per cent over the planned level (Ladan 1996). As is illustrated in Table 7.6, the main internal potential sources of financing investments in the Murmansk region are profits and depreciation of enterprises and savings by households of the region. The sum of these sources compared with current capital investments financed from internal and external sources have gradually declined in recent years. Another part of the problem is that due to inflation, the real physical volume of investment has decreased significantly. Thus the internal financing potential is increasingly unable to meet the need for investment capital in the region. This is confirmed by the following example. According to results of an international ten- der for reconstruction of the Pechenganickel smelter complex (aimed mainly to reduce the level of pollution), the project is estimated to cost $зоот. This cost is almost as high as the total capital investment in the Murmansk region in 1995 (which was i 611 billion roubles (Soobschaet oblkomstat 1996) or about $350111), and almost equal to the total after-tax profit per year of all industrial enterprises in the region. However, the output (in monetary terms) of the Pechenganickel plant has traditionally comprised only about 5 per cent of the total industrial out- put in the Murmansk region. It is quite clear from the presented data that to a large extent, a resolution of the acute development problems in the Murmansk region depends on a stronger ability to attract investment capital from external sources. Hence an important task for an investment policy formulated by the regional government is to facili- tate the growth of inward investment. Measures should include efforts to obtain Table 7.6: Annual volume of capital investment compared with potential sources of financing in the Murmansk region, billions of roubles in current prices 1991 1993 1994 1 . Capital investment financed from all sources 1.9 253.5 891.4 2. Main potential sources of financing 4.8 421.7 1181.4 of which: - net profit of the region's enterprises and organisations 2.8 333.0 404.7 - depreciation of fixed assets 0.7 18.3 401.9 - population's savings in deposits and securities 1.3 70.4 374.8 Ratio (2:1) 2.5 1.6 1.3 Source: Oblkomstat, 1992-1995 Sustainable Investment Policies 107 support from the federal government, financing from domestic and international investment funds as well as the creation of a favourable investment climate. But first of all, it is necessary to design a regional investment policy with distinct objectives and priorities. As already emphasised, a regional policy should serve the socio-economic interests of the inhabitants, with the ultimate goal of improving the quality of their lives. In view of the region's specific economic conditions, including its sen- sitive Arctic environment, the task of a regional investment policy becomes dual. On the one hand, a general improvement of the investment climate is needed to overcome the investment crisis. On the other hand, the regional government should oppose (at least not give subsidies to) investors in natural resources extrac- tion or new industrial constructions which may cause further environmental damage. Obviously, it is not enough to define preferable forms and directions of invest- ments. There must be a system of measures aimed at realising the policy goals. In single-industry towns, which are predominant in the region, there are strong needs for broad investment programmes aimed at conversion and diversification. As Gronlund (1994) points out in a discussion concerning the restructuring of single-industry towns, various policy measures and transfer schemes carried out by central government often 'had not been able to delay or solve local problems' (ibid.: 162). In the Murmansk region, support from the central government is almost absent, which makes the elaboration and implementation of restructuring programmes more problematic. In addition, there are examples of actions taken by the regional government which have not exactly been conducive to restruc- turing or improvement of the local investment climate. 'Bodies of local government are practically deprived of the rights to indepen- dently formulate, approve and execute their local budget.... Such a situation con- tradicts the Russian Federation law "On general guide-lines for the budget rights ... of local government bodies'" (Son 1995: 15, our translation). According to the law, a regional representative body is required to provide a stable basis for the local budgets for at least a five-year period. However, the real situation is quite differ- ent. For example, in the Kirovsk district of the Murmansk region, the local share of the total tax revenue accounted for 34.7 per cent in 1993. The share declined to 27.2 per cent in 1994 and to 20 per cent in 1995. 5 Thus, decisions on local bud- gets are still excessively centralised to the regional level. The example reveals an 'opportunistic behaviour' by the regional government, which is one of three types of political risk that investors may face (Eliasson 1995: 6). This type of political risk refers to 'unpredictable behaviour on the part of gov- ernmental authorities in the form of changes in the institutions of the economy that regulate everyday economic behaviour, notably the property rights institu- tions, and the legal framework for contractual arrangements among firms' (Elias- son et al. 1994: 14). The other two types of political risk refer to the collapse of political and economic systems and are hence beyond the influence of regional government. ю8 7 Didyk and Wiberg Alongside with measures to attract and stimulate investments, another impor- tant task for the regional government is to specify rules and guidelines concern- ing environmental safety, environmental liability and the protection of the rights and long-term interests of the local population. It would be useful to harmonise such environmental regulations with those of neighbouring regions in the Nordic countries. Potential Alternatives In this final section we will discuss potential investment alternatives and their possible consequences. The approach we suggest is to pay special attention to dif- ferences in the balance between domestic and international investment flows. The idea has been to demonstrate four extreme alternatives and their potential socio-economic and ecological consequences (Figure 7.2). Naturally, this approach is a rough qualitative estimation with a great deal of simplification. Nevertheless, the analysis may be a useful point of departure for the formulation of a governmental policy aimed at sustainable development. The first alternative attempts to capture the current decline of investment flows and the passive behaviour among enterprises and governments. If this trend continues, it is likely to result in a further fall of industrial production and related revenues due to the deterioration of the capital stock. This alternative will have an obvious, unfavourable impact on the social life in the Murmansk region. First, there would be a decline in real income among most employees and a further Figure 7.2: Matrix of potential investment alternatives and their consequences Domestic investment flows Low High - deteriorating assets — traditional pattern Low constrain production; of production; — decline in revenues; - preservation of number - out-migration of and income of labour force; population; - aggravation of envi- - high pressure on the ronmental problems. environment. International 1 2 investment flows 3 4 — acquisition of modern — growth of production; High technologies and skills — growth of people's — higher incomes of welfare; employees; — high pressure on the - unemployment growth; environment. — reduction of harmful environmental impact. Sustainable Investment Policies 109 polarisation of welfare levels. Secondly, there would be increased out-migration of the most mobile and well-trained inhabitants, with negative impact on the region's demographic structure. Thirdly, due to a scarcity of resources for restruc- turing programmes, social problems would be aggravated, especially in single- industry towns. Despite the assumption in this alternative of a decrease in productive output, environmental conditions are likely to be further aggravated. The reason is that the existing productive apparatus of the region's major industries will continue to function for several years to come. With a low level of investment, the negative environmental impact of production will increase. Another reason is that a reduc- tion in productive output will not automatically lead to a proportional decline of harmful environmental consequences, as was demonstrated above. The conclusion of the first alternative is that a further depression and long - term stagnation of investments in the region from both domestic and interna- tional actors will likely lead to a vicious cycle of problems. This alternative means a development far removed from sustainability. Our second alternative presupposes a significant recovery of domestic invest- ment flows alongside with a further wait-and-see attitude of foreign investors. Such a one-sided flow may be conditioned by specific government policies to restrict the options of foreign investors. According to this alternative, investments will make possible the maintenance of the capital stock and the productive capac- ity at a level that will secure some profits. Out-migration may slow down signif- icantly and living standards would be preserved. However, it is improbable that any isolationist policy will lead to a significant progress in environmental protec- tion. Despite a wide-spread recognition of the urgent need to reduce harmful impacts on the environment, the problem cannot possibly be solved in the near future due to lack of appropriate technologies in the country. Consequently, exclusive reliance on domestic investment and technologies entails a high risk of further environmental degradation in the region. The second alternative, there - fore, also contradicts the aim of sustainable development and should not be cho- sen as a strategy. The third alternative assumes a considerable increase of international invest- ments but very limited domestic investment flows. If foreign investments in the region are combined with transfers of modern technologies, it will stimulate eco- nomic efficiency and environmental safety. Higher efficiency will provide a potential for growing incomes among employees. However, the level of unem- ployment may increase significantly. In Western countries, people relegated from industrial production due to the growth of labour productivity have mostly been absorbed by a growing service sector. In the Murmansk region, there are less opportunities for expanding services to a level where they may absorb workers made redundant by radical industrial rationalisation. Some additional aspects should be noted. First, positive (from a perspective of sustainability) results from foreign investment can be expected only if they are combined with an introduction of modern, environmentally sound technologies. но 7 Didyk and Wiberg But this combination will not come about automatically. Specific policies are needed to attain the goal. Secondly, the probability of the third alternative depends on several conditions. Compared to domestic ones, foreign investmen t flows are much more sensitive to the level of comparative advantages including the existence of appropriate institutions and their efficient functioning (the investment climate) due to the additional risks involved in transborder joint ven- tures (Clegg 1992: 64). Furthermore, in the case of investments from Western countries in Russia, there is a significant barrier of cultural differences to consider (Svensson 1997). This barrier is difficult to overcome by any policy measure. Whereas the legal and institutional framework needed in emerging markets can be established through political and juridical change, cultural differences are usually very resistant to political decisions (ibid.: 107). Regarding the third alternative, we may conclude that alongside with some potential benefits to regional development, there is a risk of unfavourable 'side effects,' like higher unemployment. The implementation is, furthermore, limited by significant constraints. Our final alternative presupposes a most optimistic view concerning the recovery of domestic as well as growth of foreign investment. This alternative assumes a growing level of specialised economic activities in the Murmansk region due to a combination of comparative advantages for production and favourable market conditions for a majority of produced goods. The most obvi- ous potential strengths of the region are huge natural resources in combination with access to cheap labour. As a consequence, the alternative indicates a growth of productive output that will lead to improvements in welfare. However, it is unlikely that an economic expansion in the region will reach a level where it will exceed the volume and value of production in the 19805 and the corresponding level of employment. Any further economic expansion which involves the use of existing technologies will unavoidably lead to an aggravation of the ecological situation in the region. It is quite evident that none of the presented alternatives can guarantee a road towards sustainable development. A broad range of active policy efforts is need- ed to guide economic driving forces in a desirable direction. The basic guidelines for achieving ecological sustainability could be as follows: 'Harvesting rates of renewable natural resources should not exceed regenera- tion rate; waste emissions should not exceed the assimilative capacity of the environment; and non-renewable resources should be exploited, but at a rate equal to the creation of renewable substitutes' (Jansson et al. 1994: 5). One form of non-renewable resource substitution might be the creation of regional financial funds for heritage and development (trust funds). These might be built on revenues generated from the exploitation of the region's natural resources. The funds might be used independently from the state in order to the benefit long-term interests of the local population (Pretes and Robinson 1992). Sustainable Investment Policies It should also be stressed that the mobilisation of local initiative and entre- preneurship is essential for achieving sustainability. Such a strategy is especially important for single-industry towns. Having synthesised case studies of local development initiatives in different parts of Europe, Stohr (1990: 3-4) presented the following conclusion about successful restructuring initiatives in peripheral areas. They are well worth taking into account when discussing problems of development in the Murmansk region: 'The successful initiatives were oriented towards the broadening of local resources, combined with technological upgrading, training efforts, design and cultural activities, local financing and improved forms of local coopera- tion and information exchange. This not only helped to improve local employment and living conditions but also strengthened the local negotiating position with outside entrepreneurs, central government or international organizations.' One lesson from these experiences is that the currently dominating top-down policy approach of the Murmansk regional government should be revised in favour of policies stimulating and supporting local initiatives and self-gover- nance. Our impression is that the regional authorities are not using all options to improve the situation made available to them by the Constitution of 1993. There is an obvious absence of meaningful socio-economic policies. As Eliasson (1995: 2-3) points out, institutions (legal code, conventions, ethi- cal norms) define the investment climate. The most important among them are institutions supporting property rights, namely the right to manage property, to access and use the profits and to trade the property rights. Consequently, regional investment policies must place special emphasis on the development of an ade- quate institutional framework. Besides, this seems to be the only available way to stimulate investments as other standard policy instruments employing financial incentives for investors (tax breaks, cheap loans, investment grants, infrastructure aids) are very limited under the current economic depression. Using the international experience, the creation of a Regional Inward Invest- ment Agency (RIIA) as an element of a formal institutional structure for invest- ment promotion might be suggested. Usually such an agency has the following functions: i) policy formulation; 2) investment promotion and attraction; 3) investment approvals; 4) granting of incentives; 5) providing assistance; 6) monitoring, after-care (Young et al. 1994: 145). The argument in favour of an RIIA is that to overcome the current investment crisis, there is a need of spe- cialised marketing skills that can only be effectively employed by a specialised organisation or at least in one which has a separate position from that of the government.
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