Trade and Investment

China’s G-20 agenda: Call for a multilateral investment framework for development

Justin Yifu Lin
Professor and Honorary Dean, National School of Development, Peking University
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China will take over leadership of the G20 meeting in 2016, providing a timely and opportune moment to move its development agenda forward at the global level. One important contribution that China could make would be to launch discussions on a multilateral investment agreement for development next year. One achievable goal could be for G20 members to agree on a working framework setting out the principles and timeline for concluding this multilateral agreement.

Why is a multilateral investment agreement critical for development?

If we investigate the development process, we find that constant technological improvement is a critical ingredient for continual growth and job creation. This process of improvement requires not just innovation, but sufficient injections of human and physical capital. In addition, infrastructure investment is needed in many developing countries in order to reduce transaction costs within the economy and raise efficiency. Developing countries are precisely constrained by low supplies of human and financial capital. Moreover, they are typically constrained by a lack of foreign exchange, which limits their ability to import raw materials and equipment, embodied with new technology, needed in the upgrading process.

The natural solution to these development gaps – of human capital, financial capital, and foreign exchange – is to attract foreign direct investment (FDI). As returns to capital should be higher in developing countries where capital is scarce relative to labor, the flow of capital from high to low income countries should create gains on both sides. However, as pointed out in the Lucas Paradox, capital has been flowing in the ‘wrong’ direction, from low to high income countries (see Figure 1, constructed using the same methodology employed in Prasad, Rajan and Subramaniam (2006)), further depleting the available capital in developing countries, constraining development prospects, and contributing to the widening global income gap.

Figure 1

Lin-blog-figure-1-e1435786456989

One reason for this reverse flow of capital is a lack of investment facilitation in developing countries. This investment gap underlines the global need for some kind of multilateral investment agreement, which would not only facilitate the flow of capital in the ‘right’ direction, but also fundamentally strengthen the foundations of growth for developing countries. Some of the issues that this agreement would deal with include: investment protection and incentives; dispute resolution; corporate social responsibility; and regulation related to investment by state-owned enterprises and sovereign entities.

Why now, and what is the best platform?

The World Trade Organization (WTO) is the natural platform in which to negotiate this multilateral investment agreement, particularly given the strong links between trade and investment. However, past efforts to conclude such an agreement stalled and were eventually forsaken, in part due to perceptions that the agreement was weighted too heavily in favor of developed country interests and failed to take into account developing country needs.

The global investment environment has changed dramatically in the past decade, and conditions are now much more favorable for the creation of a multilateral investment agreement that will bring substantial benefits to developing countries. Notably, developing economies now account for an increasing share of outward direct investment (ODI) (see Figure 2). It is therefore the right time to re-start discussions on the creation of a multilateral investment framework. Given the growing participation of emerging market economies in FDI, the G20 meeting in 2016 will be a good platform for establishing such a framework. Indeed, the G20 proved its usefulness in coordinating multilateral efforts to respond to the 2008 global financial crisis, and continues to play a constructive role in global economic governance.

Figure 2

Lin-blog-figure-2-e1435786443641

The role of China

China has benefited tremendously from FDI in its own development process, and over the past decade, its own ODI has increased significantly (see Figure 3).

Figure 3

Lin-blog-figure-3-e1435786431449

According to UNCTAD, in 2013 China became the third largest source of FDI to other countries and this year is expected to become a net capital exporter for the first time. This trend of rising Chinese FDI is likely to strengthen in the future, when one considers the combined impact of China’s ‘Going Out’ and ‘One Belt, One Road’ strategies. In time, China is likely to become the world’s largest source of FDI. Having been a major recipient of FDI, and now a growing contributor of FDI, it is both timely and appropriate for China to lead discussions at the G20 in 2016 on how to harness investment for global development.

An inclusive but non-binding Investment Facilitation Framework

In conclusion, a concrete goal for the 2016 G20 meeting should be for members to agree on a working framework for achieving this multilateral investment agreement for development. This framework could lay out a concrete timeline for achieving specific milestones. For example, one milestone could be the achievement of a non-binding investment facilitation framework. Most importantly, the core of the agreement should include a non-binding principle while highlighting inclusiveness, and emphasize an overarching commitment to fostering economic growth for developing countries.

This blog is based on Dr Lin’s intervention at the ICTSD Dialogue on “G20 in 2016” in Beijing on 19 May 2015. It was transcribed by Yeling Tan and Shuaihua Cheng.

This article first appeared on the E15 Initiative, a project implemented in collaboration with ICTSD.

Author: Justin Yifu Lin is a Co-convener of the E15 Expert Group on Industrial Policy. He is Professor and Honorary Dean of the National School of Development at Peking University.

Image: People walk on a bridge near the financial district of Pudong in Shanghai November 21, 2014. REUTERS/Aly Song

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