Post-Cancun: What's on the Table for Investors?

September 1, 2003—Wrapping up the recent annual World Bank/IMF meetings in Dubai, World Bank President James Wolfensohn and IMF Managing Director Horst Kohler called for a renewed spirit of multilateralism and equality between rich and poor countries. Wolfensohn highlighted the need for a new balance between developed and developing countries on aid and trade, and urged leaders to renew their commitment to fighting world poverty. “This is essential not just for poverty reduction and prosperity—but for security and peace,” he said.

Wolfensohn pointed to the commitments made by both rich and poor countries to help reach the Millennium Development Goals—including cutting global poverty in half by 2015. He said actions so far had not matched those commitments, and called on governments to fulfill their responsibilities and help rebalance an inequitable global system. He noted that the recent World Trade Organization (WTO) meeting in Cancun had been a wake-up call because poor nations had refused to accept the trade proposals put forward by the rich countries.

Unbalanced trade policies impact many things, including foreign direct investment, which, when done sustainably and responsibly, is an important driver for economic growth and poverty reduction.

The issue of an international investment agreement has been on the table for discussion by the WTO since 1996. The idea is to launch a multilateral framework to secure transparent, stable, and predictable conditions for long-term cross-border investment that will expand trade.

“The drive to include an international investment agreement in the WTO accords comes against a backdrop of one of the most impressive waves of foreign direct investment in history,” says Richard Newfarmer, a World Bank economic adviser.

But the question of what’s in the current round of WTO negotiations, the so-called “Doha Development Agenda,” for investors really goes beyond the issue of an investment agreement, Newfarmer adds. While an international agreement might contribute to increasing stable flows of investment—by increasing market access for investors to permit enhanced competition, and by augmenting protection of investors’ rights to reduce risks—investors would probably benefit more from the greater market access through new deals on services and new investment opportunities in developing countries’ export industries.

Today, restrictive foreign investment policies are being progressively dismantled around the world as governments work to attract foreign investors, with policy barriers being lowered in sector after sector in an attempt to increase competition and spur growth, and speed up the pace of technological progress. A positive outcome in Cancun would have accelerated this process.

Realizing high potential FDI gains in developing countries requires more than liberalization, however. It also needs a regulatory framework that, where possible, permits competition and disciplines natural monopolies in network industries, as well as pro-poor regulation that ensures access and cross-subsidies to the poor.

Increased investor protections, built into a global investment agreement, “would arguably help participating developing countries send a positive signal to potential foreign investors regarding the permanence of policy changes, the expected standard of treatment afforded to foreign investors, and recourse to a dispute settlement procedure,” says Newfarmer.

But protections resulting from a multilateral investment agreement alone would probably not produce much additional investment flow. That’s because bilateral investment treaties already cover about half of investment to developing countries, and any new multilateral protections are unlikely to be superior—and therefore additive—to these bilateral investment treaties.

“The benefits of a multilateral investment agreement for developing countries ironically hinge on the increased market access such an agreement would leverage for their exporters and on the additional domestic reforms it leverages at home, particularly in services,” says Newfarmer. “Evidence suggests that trade liberalization, combined with clear investment rules, as well as new access to markets abroad, holds the largest potential for increasing investment in developing countries.”

The next meeting in the Doha round is set for Hong Kong at an as yet undetermined date.