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World Investment Report 2012

Overview

Chapter 4 – UNCTAD’S INVESTMENT POLICY FRAMEWORK FOR SUSTAINABLE DEVELOPMENT

A new generation of investment policies emerges

Cross-border investment policy is made in a political and economic context that, at the global and regional levels, has been buffeted in recent years by a series of crises in finance, food security and the environment, and that faces persistent global imbalances and social challenges, especially with regard to poverty alleviation. These crises and challenges are having profound effects on the way policy is shaped at the global level. First, current crises have accentuated a longer-term shift in economic weight from developed countries to emerging markets. Second, the financial crisis in particular has boosted the role of governments in the economy, in both the developed and the developing world. Third, the nature of the challenges, which no country can address in isolation, makes better international coordination imperative. And fourth, the global political and economic context and the challenges that need to be addressed – with social and environmental concerns taking centre stage – are leading policymakers to reflect on an emerging new development paradigm that places inclusive and sustainable development goals on the same footing as economic growth. At a time of such persistent crises and pressing social and environmental challenges, mobilizing investment and ensuring that it contributes to sustainable development objectives is a priority for all countries.

Against this background, a new generation of foreign investment policies is emerging, with governments pursuing a broader and more intricate development policy agenda, while building or maintaining a generally favourable investment climate. This new generation of investment policies has been in the making for some time and is reflected in the dichotomy in policy directions over the last few years – with simultaneous moves to further liberalize investment regimes and promote foreign investment, on the one hand, and to regulate investment in pursuit of public policy objectives, on the other. It reflects the recognition that liberalization, if it is to generate sustainable development outcomes, has to be accompanied – if not preceded – by the establishment of proper regulatory and institutional frameworks.

“New generation” investment policies place inclusive growth and sustainable development at the heart of efforts to attract and benefit from investment. Although these concepts are not new in and by themselves, to date they have not been systematically integrated in mainstream investment policymaking. “New generation” investment policies aim to operationalize sustainable development in concrete measures and mechanisms at the national and international levels, and at the level of policymaking and implementation.

Broadly, “new generation” investment policies strive to:

  • create synergies with wider economic development goals or industrial policies, and achieve seamless integration in development strategies;
  • foster responsible investor behaviour and incorporate principles of CSR;
  • ensure policy effectiveness in their design and implementation and in the institutional environment within which they operate.

New generation investment policies: new challenges

These three broad aspects of “new generation” foreign investment policies translate into specific investment policy challenges at the national and international levels (tables 6 and 7).

Addressing the challenges: UNCTAD’s IPFSD

To address these challenges, UNCTAD has developed a comprehensive Investment Policy Framework for Sustainable Development (IPFSD), consisting of (i) a set of Core Principles for foreign investment policymaking, (ii) guidelines for investment policies at the national level and (iii) options for the design and use of IIAs (figure 6).

UNCTAD’s IPFSD is meant to provide guidance on cross-border investment policies, with a particular focus on FDI, although many of the guidelines in the section on national investment policies could also have relevance for domestic investment. Policies covered include those with regard to the establishment, treatment and promotion of investment; in addition, a comprehensive framework needs to look beyond investment policies per se and include investment-related aspects of other policy areas. Investment policies covered comprise national and international policies, because coherence between the two is fundamental. The IPFSD focuses on direct investment in productive assets; portfolio investment is considered only where explicitly stated in the context of IIAs.

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Although a number of existing international instruments provide guidance to investment policymakers, UNCTAD’s IPFSD distinguishes itself in several ways. First, it is meant as a comprehensive instrument for dealing with all aspects of policymaking at the national and international levels. Second, it puts a particular emphasis on the relationship between foreign investment and sustainable development, advocating a balanced approach between the pursuit of purely economic growth objectives by means of investment liberalization and promotion, on the one hand, and the need to protect people and the environment, on the other hand. Third, it underscores the interests of developing countries in investment policymaking. Fourth, it is neither a legally binding text nor a voluntary undertaking between States, but expert guidance by an international organization, leaving policymakers free to “adapt and adopt” as appropriate, taking into account that one single policy framework cannot address the specific investment policy challenges of individual countries.

The IPFSD’s Core Principles: “design criteria”

The Core Principles for investment policymaking aim to guide the development of national and international investment policies. To this end, they translate the policy challenges into a set of “design criteria” for investment policies (table 8). Overall, they aim to mainstream sustainable development in investment policymaking, while confirming the basic principles of sound developmentoriented investment policies, in a balanced approach.

The Core Principles are not a set of rules per se. They are an integral part of the IPFSD, which attempts to convert them, collectively and individually, into concrete guidance for national investment policymakers and options for negotiators of IIAs. As such, they do not always follow the traditional policy areas of a national investment policy framework, nor the usual articles of IIAs. The overarching concept behind the principles is sustainable development; the principles should be read as a package, because interaction between them is fundamental to the IPFSD’s balanced approach.

The design of the Core Principles has been inspired by various sources of international law and politics. They can be traced back to a range of existing bodies of international law, treaties and declarations, including the UN Charter, the UN Millennium Development Goals, the “Monterrey Consensus”, the UN Johannesburg Plan of Implementation and the Istanbul Programme of Action for the LDCs. Importantly, the 2012 UNCTAD XIII Conference recognized the role of FDI in the development process and called on countries to design policies aimed at enhancing the impact of foreign investment on sustainable development and inclusive growth, while underlining the importance of stable, predictable and enabling investment climates.

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From Core Principles to national policy guidelines

The IPFSD’s national investment policy guidelines translate the Core Principles for investment policymaking into numerous concrete and detailed guidelines that aim to address the “new generation” challenges for policymakers at the domestic level (see table 6 for the challenges). Table 9 provides an overview of (selected) distinguishing features of the IPFSD’s national investment policy guidelines, with a specific focus on the sustainable development dimension.

The sustainable development features of the national policy guidelines imply that governments have the policy space to consider and adopt relevant measures. Such policy space may be restricted by international commitments. It is therefore essential to consider the IPFSD’s national investment policy guidelines and its guidance for the design of IIAs as an integrated whole. Coherence between national and international investment policies is crucial, with a view to, among others, avoiding policy discrepancies and investor– State disputes.

The national investment policy guidelines argue for policy action at the strategic, normative, and administrative levels.

At the strategic level, the IPFSD’s national investment policy guidelines suggest that policymakers should ground investment policy in a broad road map for economic growth and sustainable development – such as those set out in formal economic or industrial development strategies in many countries. These strategies necessarily vary by country, depending on its stage of development, domestic endowments and individual preferences.

Defining the role of public, private, domestic and especially foreign direct investment in development strategy is important. Mobilizing investment for sustainable development remains a major challenge for developing countries, particularly for LDCs. Given the often huge development financing gaps in these countries, foreign investment can provide a necessary complement to domestic investment, and it can be particularly beneficial when it interacts in a synergetic way with domestic public and private investment.

At this level it is also important to develop policies to harness investment for productive capacity-building and to enhance international competitiveness, especially where investment is intended to play a central role in industrial upgrading and structural transformation in developing economies. Critical elements of productive capacity-building include human resources and skills development, technology and know-how, infrastructure development, and enterprise development. It is crucial to ensure coherence between investment policies and other policy areas geared towards overall development objectives.

At the normative level, IPFSD’s national investment policy guidelines propose that through the setting of rules and regulations, on investment and in a range of other policy areas, policymakers should promote and regulate investment that is geared towards sustainable development goals.

Positive development impacts of FDI do not always materialize automatically. And the effect of FDI can also be negative. Reaping the development benefits from investment requires not only an enabling policy framework that provides clear, unequivocal and transparent rules for the entry and operation of foreign investors, it also requires adequate regulation to minimize any risks associated with investment. Such regulations need to cover policy areas beyond investment policies per se, such as trade, taxation, intellectual property, competition, labour market regulation, environmental policies and access to land.

Although laws and regulations are the basis of investor responsibility, voluntary CSR initiatives and standards have proliferated in recent years, and they are increasingly influencing corporate practices, behaviour and investment decisions. Governments can build on them to complement the regulatory framework and maximize the development benefits of investment.

At the administrative level, the guidelines make the point that through appropriate implementation and institutional mechanisms, policymakers should ensure the continued relevance and effectiveness of investment policies. Policies to address implementation issues should be an integral part of the investment strategy and should strive to achieve both integrity across government and regulatory institutions and a service orientation where warranted.

Measuring policy effectiveness is a critical aspect of investment policymaking. Investment policy should be based on a set of explicitly formulated policy objectives with clear priorities and a time frame for achieving them. These objectives should be the principal yard-stick for measuring policy effectiveness. Assessment of progress in policy implementation and verification of the application of rules and regulations at all administrative levels is at least as important as the measurement of policy effectiveness.

Objectives of investment policy should ideally include a number of quantifiable goals for both the attraction of investment and its development contribution. UNCTAD has developed – and field-tested – a number of indicators that can be used by policymakers for this purpose (table 10). In addition, UNCTAD’s Investment Contribution Index can also serve as a starting point (see figure 4 above). To measure policy effectiveness for the attraction of investment, UNCTAD’s Investment Potential and Attraction Matrix can be a useful tool.

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The IPFSD’s guidance on IIAs: design options

The guidance on international investment policies set out in UNCTAD’s IPFSD translates the Core Principles into options for policymakers, with an analysis of sustainable development implications. While national investment policymakers address these challenges through rules, regulations, institutions and initiatives, at the international policy level this is done through a complex web of IIAs (including, principally, BITs, FTAs with investment provisions, economic partnership agreements and regional integration agreements). The complexity of that web, which leads to gaps, overlaps and inconsistencies in the system of IIAs, is itself one of the challenges to be addressed. The others include the need to strengthen the development dimension of IIAs, balancing the rights and obligations of States and investors, ensuring sufficient policy space for sustainable development policies and making investment promotion provisions more concrete and aligned with sustainable development objectives.

International investment policy challenges must be addressed at three levels:

  • When formulating their strategic approach to IIAs, policymakers need to embed international investment policymaking into their countries’ development strategies. This involves managing the interaction between IIAs and national policies (e.g. ensuring that IIAs support industrial policies) and that between IIAs and other international policies or agreements (e.g. ensuring that IIAs do not contradict international environmental agreements or human rights obligations). The overall objective is to ensure coherence between IIAs and sustainable development needs.wir2012-tbl10
  • In the detailed design of provisions in investment agreements between countries, policymakers need to incorporate sustainable development considerations, addressing concerns related to policy space (e.g. through reservations and exceptions), balanced rights and obligations of States and investors (e.g. through encouraging compliance with CSR standards), and effective investment promotion (e.g. through home-country measures).
  • International dialogue on key and emerging investment policy issues, in turn, can help address some of the systemic challenges stemming from the multilayered and multifaceted nature of IIAs, including the gaps, overlaps and inconsistencies amongst these agreements, their multiple dispute resolution mechanisms, and their piecemeal and erratic expansion.

Addressing sustainable development challenges through the detailed design of provisions in investment agreements principally implies four areas of evolution in treaty-making practice:

  • Incorporating concrete commitments to promote and facilitate investment for sustainable development. Options to improve the investment promotion aspect of treaties include concrete facilitation mechanisms (information sharing, investment promotion forums), outward investment promotion schemes (insurance and guarantees), and technical assistance and capacity-building initiatives targeted at sustainable investment, supported by appropriate institutional arrangements for long-term cooperation.
  • Balancing State commitments with investor obligations and promoting responsible investment. For example, IIAs could include a requirement for investors to comply with investment-related national laws of the host State when making and operating an investment, and even at the post-operations stage, provided that such laws conform to the host country’s international obligations. Such an investor obligation could be the basis for further stipulating in the IIA the consequences of an investor’s failure to comply with domestic laws, such as the right of host States to make a counter claim in dispute settlement proceedings. In addition, IIAs could refer to commonly recognized international standards (e.g. the UN Guidelines on Business and Human Rights) and support the spread of CSR standards – which are becoming an ever more important feature of the investment policy landscape.
  • Ensuring an appropriate balance between protection commitments and regulatory space for development. Countries can safeguard policy space by carefully crafting the structure of IIAs, and by clarifying the scope and meaning of particularly vague treaty provisions such as the fair and equitable treatment standard and expropriation, as well as by using specific flexibility mechanisms such as general or national security exceptions and reservations. The right balance between protecting foreign investment and maintaining policy space for domestic regulation should flow from each country’s development strategy.
  • Shielding host countries from unjustified liabilities and high procedural costs. The strength of IIAs in granting protection to foreign investors has become increasingly evident through the number of ISDS cases brought over the last decade, most of which have been directed at developing countries. Shielding countries from unjustified liabilities and excessive procedural costs through treaty design involves looking at options both in ISDS provisions and in the scope and application of substantive clauses.

These areas of evolution are also relevant for “pre-establishment IIAs”, i.e. agreements that – in addition to protecting established investors – contain binding rules regarding the establishment of new investments. As a growing number of countries opt for the pre-establishment approach, it is crucial to ensure that any market opening through IIAs is in line with host countries’ development strategies. Relevant provisions include selective liberalization, exceptions and reservations designed to protect a country from overcommitting, and flexibilities in the relevant treaty obligations.

Operationalizing sustainable development objectives in IIAs principally involves three mechanisms (table 11):

  • Adjusting existing provisions to make them more sustainabledevelopment-friendly through clauses that safeguard policy space and limit State liability.
  • Adding new provisions or new, stronger paragraphs within provisions for sustainable development purposes to balance investor rights and responsibilities, promote responsible investment and strengthen homecountry support.
  • Introducing Special and Differential Treatment for the less developed party – with effect on both existing and new provisions – to calibrate the level of obligations to the country’s level of development.

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The IPFSD and the way forward

UNCTAD’s IPFSD comes at a time when the development community is looking for a new development paradigm, of which cross-border investment is an essential part; when most countries are reviewing and adjusting their regulatory frameworks for such investment; when regional groupings are intensifying their cooperation on investment; and when policymakers and experts are seeking ways and means to factor sustainable development and inclusive growth into national investment regulations and international negotiations.

The IPFSD may serve as a key point of reference for policymakers in formulating national investment policies and in negotiating or reviewing IIAs. It may also serve as a reference for policymakers in areas as diverse as trade, competition, industrial policy, environmental policy or any other field where investment plays an important role. The IPFSD can also serve as the basis for capacity-building on investment policy. And it may come to act as a point of convergence for international cooperation on investment issues.

To foster such cooperation, UNCTAD will continue to provide a platform for consultation and discussion with all investment stakeholders and the international development community, including policymakers, investors, business associations, labour unions, and relevant NGOs and interest groups.

For this purpose a new interactive, open-source platform has been created, inviting the investment and development community to exchange views, suggestions and experiences related to the IPFSD for the inclusive and participative development of future investment policies.