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.
This article was tagged: Bretton Woods Institutions (BWIs), Capital Flows, Foreign Direct Investment (FDI), Reform of the International Financial System, World Trade Organization (WTO)