Report on investment “promotes interests of the north”

21 September 2004

Researchers at the Geneva-based South Centre have argued that the Bank’s latest World Development Report (WDR), oversells the benefits of foreign direct investment (FDI), advocates the restriction of government policy space, and promotes the agenda of northern countries in trade and investment agreements. The report, A better investment climate for everyone, will be launched at the annual meetings in September.

The WDR team, led by Warrick Smith of the Bank’s private sector development department, worked on the assumption that increasing investment leads to reduced poverty and higher living standards. This is contested by South Centre researchers. According to Bernal, Kaukab and Yu, the WDR seriously underestimates the risks associated with FDI. These include negative impacts on balance of payments as foreign firms drastically increase imports of inputs; crowding out of local industry; abusive transfer pricing and profit repatriation; and social and environmental costs where regulation is in its infancy.

Even if most of these risks are avoided, the distribution of FDI is problematic. After over a decade of reform of investment policies – often imposed by the IFIs – “liberalisation alone has not been sufficient to attract FDI to the poorest countries.” The share of 45 least developed countries in global FDI inflows is less than a half a per cent and shows a declining trend over the 1991-2000 period.

liberalisation alone has not been sufficient to attract FDI to the poorest countries

South Centre argues that “active and effective state intervention is needed in order to ensure that developmental benefits are obtained from FDI”. They point to the historical record of Europe, America and the newly industrialised countries. This stance was reaffirmed at the recent eleventh session of the UN Conference on Trade and Development. UNCTAD concluded that governments should have the leeway to “evaluate the trade-off between the benefits of accepting international rules and the constraints posed by the loss of policy space”. This suggests that national treatment (granting the same rights to foreign producers as domestic ones) should be viewed with caution. Performance requirements, which force foreign investors to source inputs locally or transfer technology for example, should not be unduly restricted.

Finally, the WDR argues that “to complement the basics of a sound investment climate is to draw on the growing body of international rules and standards”. It is suggested that by joining such agreements, governments increase their credibility and reduce the perceived risks of investing in their country. This, in turn, leads to increased investment. The South Centre team counters that there is no empirical proof of a link between the conclusion of investment treaties and increased investment flows. Furthermore, much of what the WDR advocates as desirable features of an investment agreement, is exactly what has been opposed by developing countries. Opposition was first expressed in unsuccessful negotiations on the Multilateral Agreement on Investment and then during the debates over the so-called ‘Singapore Issues’ (investment, competition policy, trade facilitation, and government procurement) in the World Trade Organisation.