Special Commissioned Paper for the 19th G-24 Technical Group Meeting, August 2004

The World Development Report 2005: An Unbalanced Message on Investment Liberalization.

The principal message of the World Development Report 2005 of the World Bank to  the developing countries is that they should adopt liberal policies related to foreign  investment to spur economic growth and development, and that the development of  binding multilateral rules relating to foreign investment would create a favorable  climate for foreign investment in developing countries. This is the same argument  made by the developed countries for developing new rules on investment  liberalization in the WTO and in bilateral agreements with developing countries.

However, such a message, when articulated in the context of the World Bank or in the  context of the WTO, simply promotes the economic interests of the North. It  disregards or downplays the fact that the promised developmental benefits of  investment liberalization by developing countries have not yet, by and large, come  about. FDI inflows, despite investment regime liberalization in many developing  countries, continue to go, in large part, to developed countries and to only a few  developing countries. In fact, relative to the share of FDI inflows of developed  countries, the share of developing countries in general and of the poorest among them  in particular, has been on the decline.

In addition to declining quantities of FDI inflows to most developing countries, the  quality of FDI inflows vis-à-vis their developmental impacts on host countries  continues to be a cause of concern for many developing countries. Investment  liberalization along the lines proposed by developed countries would have developing  countries do away with, for example, performance requirements and other regulatory  instruments that could ensure that FDI provides direct domestic developmental  benefits in terms of capital retention, technology transfer, and human resource  capacity-building.

Such proposals for investment liberalization from developed countries run counter to  their own historical experiences vis-à-vis FDI regulation. By and large, developed  countries had, during their own development process, taken a strategic approach to  foreign investment, characterized by flexible policy regimes and regulatory  restrictions and requirements on FDI taken according to needs of and changes in their  economic structure and external conditions.

Developing countries have, however, recognized the need for policy space and  regulatory flexibility when it comes to FDI. It is on this basis that they have mostly  been opposed to the launch of negotiations on new rules and disciplines on trade and  investment in the WTO. They rightly understand that such new rules and disciplines  could adversely impact on their policy space and regulatory flexibility vis-à-vis FDI  regulation.

The WDR 2005, therefore, needs to provide a more balanced view of the trade and  investment debate, in order to take into account developing countries’ perspectives  vis-à-vis foreign investment.

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