What does good investment look like?

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The UK government sees greater foreign direct investment in poorer countries as a key driver for development. Matt Grady offers some tests that need to be satisfied if investment is going to help tackle poverty.

Since her appointment as Secretary of State for International Development, Priti Patel has made it clear that this government intends to place an even greater emphasis on trade and the role of investment in tackling poverty. The Economic Development Strategy, published in January, stated:

“DFID’s focus and international leadership on economic development is a vital part of Global Britain – harnessing the potential of new trade relationships, creating jobs and channelling investment to the world’s poorest countries.”

Trade which rewards workers for their enterprise and ensures safe working conditions is welcome. Trade which enhances the livelihoods, and in turn the living standards, of the world’s poorest and most vulnerable people is welcome. Trade which spreads the risks and rewards more equally throughout the supply chain is welcome. But expecting any of these outcomes as an automatic result from increasing investment flows is wishful thinking.

Foreign direct investment (FDI) can be a valuable engine for development. However, steps must be taken to ensure that it is the right type of investment, that it is channelled into the right sectors, and that the terms of the investment respect national sovereignty – this is something that we touched upon in an earlier blog on how Brexit could contribute to development.

So, before offering unequivocal support to new investment in poorer countries, politicians should ask themselves whether the investment meets a few key tests.

  1. Does the investment mean more money for the country in question?

Investment that merely changes the ownership of companies and diverts profits to remote head offices based in Europe or the USA does not drive development.

Furthermore, if states are not able collect appropriate tax revenues from multinational corporations – perhaps due to use of shell companies or the terms of an investment treaty – then the economic implications of that investment may be negligible or even negative. Steps must be taken to ensure that the rewards from investments are retained within developing countries to avoid FDI being used as a tool to extract wealth from developing countries.

  1. Does the investment complement national policies?

For investment to contribute to development it must complement national strategic plans.

It should improve the skills base of the local population and contribute to improved infrastructure, ideally as part of a wider strategic plan. Investment can lead to increased trade, create jobs and opportunities for economic growth which can in turn lead to development. The chances of this happening are greatly increased when investment complements policy goals that are formed and managed at national level.

  1. Does the investment respect national democracy?

A web of over 3000 investment treaties have been signed throughout the world, setting the terms on which international investment operates. Many treaties were sold with the promise of driving development and eradicating poverty. However, there is little evidence that these treaties have increased investment or development; rather, many have served to increase corporate influence and constrain government policy space, for example, by limiting local content requirements within government procurement. Clauses contained within most treaties allow investors to sue states if their ability to make a profit is affected by government policy. These exceptional privileges are granted without enforcing obligations on investors.

It is fair that investors expect to be able to invest in a country and not have their property expropriated but it’s wrong for the risks of investment to be socialised while the profits are privatised. Risk assessments before investing are a normal part of responsible business practice and, rather than expecting governments to underwrite risk, businesses can use market based solutions such as commercial risk insurance. The UK government should not support the inclusion of investor to state dispute settlement (ISDS) mechanisms within treaties. If the UK is to become a hub for investment into developing countries, then it must adopt policies that address the flaws in the current system.

Conclusion

Priti Patel’s Department for International Development has a responsibility to ensure that the initiatives it supports make a positive contribution to development. Before pushing investment as a priority, is must ensure that there is an evidence base that demonstrates the effectiveness of development-friendly investment and shows that investment would satisfy the three tests that we propose.

Further to this it should review whether the protections offered to investors are suitable. It should assess whether the inclusion of tribunal mechanisms such as ISDS support or challenge democracy and clearly understand the development impact of these special courts.

The onus is on the government. If it is unable to prove that tribunal mechanisms are necessary to protect investors, then it should not support their inclusion. In addition, if it cannot prove a clear link between bilateral investment treaties and increased investment flows then the government should review its investment protection policies and terminate all existing bilateral investment treaties, something India and South Africa have already done.

Matt Grady is Traidcraft’s trade policy advisor. He is on Twitter @MattGradyTwit