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Mobilizing international resources for development: foreign direct investment and other private flows

FfD-Agenda

 

United Nations, A/ AC. 257/ L. 2, June 2000

"Mobilizing international resources for development: foreign direct investment and other private flows

4. Enhancing private capital flows for financing development: facilitating private flows, especially longer-term flows; expanding foreign direct investment to a much larger number of developing countries, countries with economies in transition and sectors; enhancing the development impact of investments in transnational corporations in developing countries; improving measures in destination and source countries to reduce risks of excessive international financial volatility; capacity-building and technical assistance."

 

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First Working Paper of the Facilitator

United Nations, A/AC.254/24, March 2001

 

" Heading II. Mobilizing international resources for development: foreign direct investment and other private flows

Long-term investment flows, in particular foreign direct investment, are of essential importance in complementing the national development efforts of developing countries and countries with economies in transition, particularly to consolidate infrastructure development, enhance technology transfer, deepen productive linkages and boost overall competitiveness.

A central challenge is to attract FDI flows and other private flows to a much larger number of countries and sectors. Key to this effort is the emergence and consolidation of transparent, stable and predictable frameworks for private activity as well as the institutions, corporate governance and infrastructure that allow businesses, both domestic and international, to operate efficiently.

One immediate priority area would be helping countries that have made significant progress in the institutional and policy front to gain recognition among international investors. Another priority area is the creation of guarantee and/or co-financing mechanisms to help encourage FDI to countries and sectors where there are insufficient flows.

Would global hearings –involving governments, the private sector and civil society- to discuss the issues surrounding international investment agreements contribute to find common ground to facilitate investment flows to more developing countries and sectors?

How can the international community, and in particular technical assistance programs by the international financial and trade institutions, contribute to foster a good climate for a dynamic private sector –both domestic and foreign- to support development?

How can international organizations further support the efforts of developing countries and the private sector to improve corporate governance in support of development, including through innovative partnerships that enhance social and environment responsible investments as well as through the formulation and implementation of competition policies and corporate standards and regulations that effectively take into account the needs of developing countries?

How to strengthen public-private partnerships, including through ODA leverage and the support of the international and regional financial institutions, to finance critical infrastructure projects and other priority development areas for developing countries and countries with economies in transition, not only by sharing risk with the private sector, but also by improving awareness of business opportunities in these countries?

How to enhance the role of export credit and guarantee authorities and corresponding bodies at the multilateral level, for instance MIGA, as well as private sector bodies of the multilateral development banks, e.g., IFC, FIAS, in stimulating and triggering increased flows to developing countries?

Which other measures and incentives could be effectively used by source countries and international institutions, both public and private, to encourage corporations to invest in low-income countries, and/or in sectors with the greatest developmental impact?

What further action by international financial institutions and public-private partnerships could help promote more and deeper linkages between foreign affiliates and the domestic economy to enhance the developmental impact of foreign investments, including through enhanced transfers of technology? How best to link the promotion of small enterprises in developing countries to efforts to maximize the benefits from foreign investment?

How to strengthen the contribution of the multilateral development institutions, particularly the World Bank and the regional development banks, working in partnership with the private sector, in supporting the promotion of long-term private financial flows to regional and subregional development projects?

Bearing in mind that financing from equity and other securities is key to corporate financing, what additional steps are necessary to promote institutions, such as regional stock exchanges, and innovative instruments, to expand the access of developing countries to securities markets?

Which should be the features of the technical assistance for capacity-building to contribute to enhancing private capital flows for financing development, particularly in the areas of human resource development and institutional strengthening including through science, technology and ICT?"

 

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Report of the Secretary-General
to the Preparatory Committee for the
High-Level International Intergovernmental Event
on Financing For Development

United Nations, A/AC.257/12, January 2001

"Host developing countries and countries with economies in transition that seek to attract long-term international investment flows should continue to take steps to put into place a transparent, stable and predictable framework for private investment and the institutional infrastructure that allows its efficient implementation. Such a framework and the related infrastructure encourages not only international but also, just as importantly, domestic investment.(...)

An inventory of home-country measures to enhance FDI outflows to developing countries should be established. Developed countries should emulate best practices regarding such measures, and should devise additional measures to encourage and facilitate investment flows to developing countries, especially least developed countries and other low-income countries.(...)

Member States should consider the convening of ad hoc global hearings to discuss the issues surrounding international investment agreements, in particular the extent to which such agreements can further the development of developing countries. Such a dialogue should involve Governments, the private sector and civil society.(...)

The high-level meeting should encourage relevant international organizations to undertake a deeper examination of issues related to corporate governance, in particular their relevance to developing and transition economy countries, taking into account their specific legal, social and cultural environment. In particular, support should be given to efforts to develop and implement international accounting, reporting and auditing standards, taking the needs of these countries into account.(...)

The relevant international organizations and donor countries, in cooperation with the potential recipient countries and with firms and private-sector associations, should expand and facilitate information flows on investment opportunities in developing countries, particularly least developed countries and African countries. At the same time, international institutions involved in supporting FDI flows should evaluate the development impact of investment flows in recipient countries, including social development concerns.(...)

Countries should examine critical infrastructure constraints for private sector development. Priorities should be identified for the involvement of the private sector in the financing of infrastructure projects, including those in areas, such as telecommunications, that help to bridge the digital divide. Private-public sector commercial partnerships (e.g., co-financing, partial or full risk guarantees, and technical assistance and advisory services) may also offer opportunities in support of the above. In cases in which host countries provide incentives to encourage private-sector financing, guarantees should be fully identified, appropriately classified, and monitored so that they do not hide contingent fiscal risks that could threaten fiscal stability.(...)

The high-level meeting should propose the establishment of an expert group to examine ways and means by which FDI flows among developing countries can be further encouraged. Attention should be given to "growth triangles", especially those comprising geographically proximate areas, and to the role of regional investment frameworks in facilitating an intraregional division of labour and helping to attract FDI.(...)

ost and home countries, as well as transnational corporations and international organizations, should compile an inventory of best practices through which more and deeper linkages between foreign affiliates and local enterprises can be encouraged, with a view to helping to foster a vibrant domestic enterprise sector in developing countries; in particular, this inventory should contain successful practices to transfer and disseminate technology, as well as to build local research and development capacities. Transnational corporations should emulate such best practices to the largest extent possible. Likewise, options should be devised through which existing commitments in international agreements to encourage the transfer of technology can be operationalized.(...)

Greater international cooperation among national competition authorities is necessary and should be encouraged. Special attention should be given to work aimed at strengthening international cooperation on competition policy and regulation, in particular as regards mergers and acquisitions, with a view to promoting a greater understanding of the issues involved, especially in developing countries, and to increasing cooperation in implementation among all countries concerned. Merger review guidelines have a role to play in this context by increasing transparency and reducing differences in the technical criteria used.(...)

Transnational corporations and other firms should accept and implement the principle of good corporate citizenship and should, inter alia, subscribe fully to the United Nations Global Compact. Global Compact participants should take specific measures that foster development - including innovative partnerships, linkages and collective action - and share their experience with all stakeholders.(...)

Credit-rating agencies should endeavour to rate sovereign risk according to criteria that are as objective and transparent as possible. Borrowing developing and transition economy countries should give priority to the development of reliable local systems of credit information in accordance with international practices and in close cooperation with international rating agencies.(...)

Governments and international organizations should implement measures to strengthen the transparency of financial markets; and the relevant authorities, in their review of the impact of the activities of highly leveraged international investors on the stability of national banking systems, should propose ways in which the risks associated with this impact can be taken into account in revising the existing capital adequacy standards for banks.(...)

Recent initiatives of the General Assembly and the Bretton Woods institutions in the fight against money-laundering should be pursued and Member States should continue to strengthen measures against illicit transfer of funds and improve the exchange of information across borders; encourage additional measures by large international banks; and enhance international cooperation with a view to reaching a common approach to combat money laundering and financial crime (see also recommendation in chap. I).(...)

The high-level event should consider setting up an ad hoc forum to bring together representatives of Governments, international organizations, business, labour and NGOs in order to facilitate a dialogue on policy and technical assistance issues relating to foreign direct investment. The objective should be to facilitate such flows to developing countries - especially least developed countries - and to identify obstacles and examine best practices as regards government policies for maximizing the contribution of FDI to development and minimizing any negative effects."

 

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Joint Statement of the Co-Chairmen
at the Conclusion of the First Part of the
Third Session of the Preparatory Committee

United Nations, 8 May 2001

 

" II. Foreign direct investment and other private flows

There was broad consensus among speakers that foreign direct investment (FDI) and other long-term private flows can have a strong positive impact on development, including through transfer of technology, employment, national capacity building (human and institutional), diversification of the production base, development of well-functioning infrastructure, and entrepreneurial capacity.4/ Thus, measures to promote such flows are desirable, within an appropriate policy framework. There was also wide recognition that developed and developing countries, and also the international community, may contribute to expanding long-term private flows and extending them to all developing countries, including least developed, land-locked and small-island developing States.

Source-country policies: there is much that home countries can do to promote private investment flows to developing countries, including opening their own markets (because investment flows are attracted by export opportunities back to the home country, as well as access to the host-country market and exports to third countries), disseminating information on investment opportunities in developing countries and providing technical assistance to developing countries to help them strengthen their capacity to better oversee these flows. Host-country policies: Host countries can promote long-term capital flows, including FDI, through: a stable macroeconomic environment and adequate infrastructure; domestic regulatory framework that is encouraging to investment, does not discriminate between domestic and foreign investment, and is characterized by stability, transparency and predictability; and by allowing for easy exit. International policies: Official development assistance (ODA) can be a catalyst for FDI to developing countries through technical assistance to increase national human and institutional capacity and support infrastructure investment. Other instruments of cooperation include investment guarantees and private/public partnerships. Multilateral development institutions, including regional banks, could take actions in support of long-term private flows at the regional level. Regional groupings can also help promote FDI.

 

Towards policy priorities

On steps to enhance the development impact of long-term private flows, as FDI and other long-term private flows can have adverse as well as positive effects on development, warranting development of national and international policies to maximize the positive and minimize the negative impacts, the following were proposed:

Assessments of the impact of FDI on development in developing countries should be carried out, including impact on transfer of technology, development of indigenous research, acquisitions (competition), and environmental and social effects. The results of the assessments should be used to devise domestic and international policies to increase development-augmenting FDI and spread it to countries that have not yet received significant inflows. Implications of the assessments should be drawn as well for consideration in devising codes of conduct, particularly regarding socially and environmentally responsible investment activities. They could also be compiled as an inventory of best practices.

Involving the business sector more deeply in the FfD process. In the light of the dialogue with business interlocutors on 2 May 2001 and the part of the draft resolution pertaining to engagement with the business sector that the Prep Com has today recommended for adoption by the General Assembly, it is clear to us a consensus exists that dialogue with the business sector can be an important means for strengthening the positive role of FDI. The FfD Secretariat can have an important function, in this regard, in maintaining and expanding contacts with interlocutors for the business sector. Among the issues that should be discussed with the business sector are the following:

Looking more closely into the issue of risk and what determines perceptions of risk; Examining how business could be encouraged to act in socially and environmentally responsible ways; Exploring ways to build on experiences in public/private partnerships, including development of appropriate "rules of engagement", and investigating the potential for public/private partnerships in general.

Exploring the usefulness of bilateral and international investment agreements in promoting the flow of FDI and in enhancing its development impact. There has been considerable interest in such agreements and considerable controversy. In this light, many countries support holding hearings on international investment agreements to investigate them more thoroughly and in an open and participatory manner.

Assessing volatility of international capital flows and effectiveness of policy tools to mitigate it. There has been considerable focus on the volatility of short-term capital flows, but it has also been argued that long-term flows, even FDI and portfolio investment, can become highly volatile. Several policy proposals to mitigate financial volatility may be studied, including on the relative costs and benefits of small and open stock markets in developing countries.

Enhancing technical assistance for national capacity building with respect to policy making regarding private international flows: Among the specific foci of technical assistance in this regard are human and institutional capacity building, entrepreneurship, networking, investment promotion, tax constraints, improving corporate tax structures, business law, and better data collection, especially in least developed countries."

 

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High-Level Panel on
Financing for Development -
Recommendations & Technical Report

United Nations, A/55/1000, 26 June 2001

 

Recommendations:

" Private capital flows

The bulk of savings will come from domestic resources, but foreign capital can provide a valuable supplement to finance investment and growth. Again the primary responsibility to tap the vast pool of funds available in the forms of foreign direct investment, portfolio investment, and bank loans, lies with developing countries themselves.

Actions by developing countries

Foreign direct investors, just like domestic investors, want assurance of political stability, knowledge that the rule of law prevails—so that there will be long-term stability of rules and procedures—and freedom from corruption. In addition, foreign investors expect a commitment to be treated no less favorably than domestic investors, as well as provisions for free transfer of capital, profits, and dividends, guarantees against expropriation of their assets, and binding arbitration of disputes. It is in host countries’ interest to provide these conditions.

Foreign investors should not be exempted from domestic laws governing corporate and individual behavior, however; nor should the authority of domestic courts, tribunals, and regulatory authorities over foreign investors and their enterprises be curtailed. By the same token, we advise against the use of costly and discretionary investment incentives and eroding labor and environmental standards in a “race to the bottom”.

To attract other forms of foreign capital besides direct investment, progressively more developing countries have been liberalizing their capital accounts in recent years. The long-term trend still ought to be to further liberalize capital flows, but the experience of financial crises has shown that countries should only introduce liberalization measures in appropriate circumstances: that is, when they have sound macroeconomic fundamentals, a healthy domestic financial system, and an effective system of prudential supervision. In very special circumstances, temporary taxes may need to be imposed on capital inflows, to moderate the destabilizing effects of volatile capital movements.

Actions by industrial countries

Industrial countries have an important role in facilitating private capital flows into developing countries. In cooperation with pertinent multilateral public institutions and private organizations—such as chambers of commerce and industry—these countries should enhance the flows of information on investment opportunities in developing countries, insurance schemes, and market access provisions.

The industrial countries should also consider more systematic discipline of their own competitive tax concessions, which sometimes unfairly and artificially erode developing countries’ relative attractiveness to foreign investment.

In the discussions on a new international financial architecture, an important outstanding issue concerns how to prevent private lenders from calling in their capital if confidence erodes. For this purpose, bonds should have collective action clauses that permit a qualified majority of bondholders to approve changes in their payments clauses. Major industrial countries should join Canada and the UK in introducing such clauses into the bonds they issue, to ease the way for the adoption of these clauses in bonds issued by emerging markets.

Industrial countries still impose some important impediments to foreign investment by some categories of investors among their nationals; it is important that they remove artificial constraints that prevent investments into emerging markets.

Actions by international community

In countries that have not had time to build up a credible track record, many potentially viable infrastructure investment projects do not get financed by the private sector because their returns are subject to government and regulatory risk. The multilateral development banks should be enabled to increase their role in helping their client countries attract FDI, through cofinancing and by providing guarantees.

New proposals for determining banks’ minimum capital requirements are under discussion in the Basel Committee on Banking Supervision. Care is needed to make sure the new rules do not make international bank loans prohibitively expensive to most developing countries."

 

Technical Report:

" 3- Private Capital Flows

The bulk of the saving available for a country’s investment will always come from domestic sources, whether that country is large or small, rich or poor. But foreign capital can provide a valuable supplement to the resources a country can generate at home. Nowadays, large sums of capital cross national borders in the form of foreign direct investment (FDI), and the international capital markets constitute a further vast pool of funds on which countries can draw. For the world’s middle-income countries, the potential of these resources far exceeds what will conceivably be available from public sector resources. And even poor countries can hope to draw on FDI, although on average they attract less of it (relative to GDP) than middle-income countries. The extent to which FDI bypasses smaller and poorer countries is often exaggerated; many countries that are either small or poor, or both, have high ratios of FDI inflows to GDP[11] .

Foreign Direct Investment

The dramatic expansion of FDI into developing countries during the past decade is due in part to the improvements in the climate for investment that many of these countries have achieved. In a growing number of countries, a long-held suspicion of foreign investors has been replaced by a welcoming attitude, as countries became more aware of the access to markets and modern technology, as well as capital, which FDI brings. Another attraction is that flows of FDI are less susceptible to sudden reversal than flows of short-term portfolio capital, as the Asian crises recently demonstrated.

FDI may be attracted by several factors: the opportunity to develop natural resources, the attractiveness of a country as an export platform, or the wish to produce locally as the most profitable way to supply that country’s domestic market with the particular products that a multinational sells worldwide. But in every case the investment climate is also a major factor in deciding whether to invest. Investors want political stability. They want assurance that the rule of law prevails, so that the rules and procedures governing their operations will be stable and predictable, and freedom from corruption. They seek skilled work forces and efficient infrastructure. They also need assurance that their investments will be safe against arbitrary expropriation, and they value an international mechanism for settling disputes with host governments, such as that provided by the International Center for the Settlement of Investment Disputes at the World Bank.

FDI is also more likely to take place when the host government is prepared to make a commitment to national treatment, that is, to treating foreign investors and their investments no less favourably than domestic investors. Other important conditions include transparency in government policy; provisions for the free transfer of capital, profits, and dividends; willingness to allow temporary residence for key personnel; and the absence of performance requirements. Of course, in extreme circumstances, countries may need to make exceptions to protect their national security, to safeguard the integrity and stability of the financial system, or to respond to a balance of payments crisis. And national treatment does not mean special treatment: foreign investors should not be exempted from domestic laws governing corporate and individual behaviour, nor should the authority of domestic courts, tribunals, and regulatory authorities over foreign investors and their enterprises be curtailed.

Developing countries will need to continue to improve their attractiveness to FDI. This includes upgrading accounting and auditing standards and improving transparency, corporate governance, and the efficiency and impartiality of their administration, as well as their physical infrastructure. Actions like these, which will benefit the domestic private sector as well as foreign investors, are the right way to compete for FDI. The wrong way is to hand out tax concessions or erode domestic social or environmental standards in a race to the bottom. One of the roles that an International Tax Organisation could play is in disciplining competitive tax concessions, which end up mainly benefiting foreign investors rather than the host countries. These disciplines would need to apply to industrial as well as developing countries, since many industrial countries are now also engaged in tax competition to attract FDI.

The primary obligations of foreign investors, as of domestic corporations, are to obey the law and be economically effective. But there is also a widespread view that they have a responsibility to behave as good corporate citizens of the countries in which they invest. Those responsibilities are laid out in the Global Compact sponsored by the Secretary-General, to which companies are invited to subscribe. The Compact’s nine principles include two dealing with human rights, calling on businesses to support and respect the protection of internationally proclaimed human rights and to make sure they are not complicit in human rights abuses. Four of the principles deal with labour standards, calling for upholding freedom of association and the right to collective bargaining, as well as eliminating forced labour, child labour, and discrimination. Three deal with environmental issues, calling for businesses to adopt a precautionary approach to environmental challenges, to undertake initiatives to promote greater environmental responsibility, and to encourage the use of environmentally friendly technologies.

The multilateral development banks (MDBs; these include the World Bank and the regional development banks) have for some time played a role in attracting FDI to developing countries through co-financing, through investment guarantees, and through the sponsorship of the International Center for the Settlement of Investment Disputes. Their contribution has been valuable, and there is a good case for enabling the MDBs to increase their catalytic role[12] . Many potentially viable infrastructure investment projects fail to get private sector financing because their returns are subject to political and regulatory risk—still often perceived as high in emerging markets that have not had time to build a credible track record. MDBs can provide partial risk guarantees to investors that will safeguard them against a host government reneging on pricing or performance agreements, as well as against expropriation and currency inconvertibility.

Portfolio Investment

Besides FDI, developing countries today can hope to benefit from inflows of portfolio capital from world capital markets. Without these flows, governments and the local private sector would not be able to reduce their cost of capital by tapping private foreign savings. It is for this reason that progressively more developing countries have been liberalising their capital account in recent years. But this has proved to be a mixed blessing. Although the infusion of capital in good years was quite substantial, in all too many cases the boom years soon gave way to a bust, marked by currency or banking crises, or both. Countries with large foreign debts, particularly short-term debts and private sector debts denominated in foreign currencies, proved vulnerable to crises, as herds of investors fled in panic. No one can claim that private financial institutions distinguished themselves by this boom-bust behaviour.

Recognition of the susceptibility of borrowing countries to financial crises led to international discussions to redesign the international financial architecture in ways that would reduce this vulnerability. One outcome has been an effort to strengthen financial systems in emerging markets. Another has been the design of standards and codes intended to codify best practice and improve transparency in a number of relevant areas: data provision, prudential regulation and supervision of the banking system, accounting standards, corporate governance, and more. This is a welcome initiative, which should help emerging markets reduce the gap between their systems’ present performance and best practice. There is, however, concern that developing countries are not being adequately involved in the design of these standards. And it is important that the IMF’s Reports on Standards and Codes recognise that rapid implementation of these codes can be difficult and costly, and not make unreasonable demands about the speed of implementation. Abundant and efficient technical assistance is also called for, to help countries build the capacity to implement these codes.

The experience of financial crises has also led to a reconsideration of appropriate macroeconomic policies. The dangers of insecurely pegged exchange rates are now widely recognised. And although the long-term trend ought to continue to be towards progressive liberalisation of capital movements, it is important that liberalisation be phased in, and then only in appropriate circumstances. Liberalisation can safely proceed only gradually in pace with the capacity of the domestic financial system and when there is no serious macroeconomic disequilibrium, financial institutions are solvent, and an effective system of prudential supervision is in place. There may be occasions during capital surges when the introduction of temporary capital inflow taxes proves to be part of the least-bad policy mix. But some other forms of capital controls are unambiguously counterproductive, such as those that privilege short-term over long-term borrowing. And there is some evidence that controls intended to prevent capital outflows often have the opposite effect, of limiting net inflows, because investors are more willing to bring money into a country when they believe they will be able to take it out again when and how they choose.

These and other reforms can hope to reduce the frequency and severity of financial crises, but it would be unrealistic to suppose that they can eliminate crises entirely. Accordingly, the discussions of a new international financial architecture have also considered how to improve present arrangements for crisis resolution. For its part, the IMF has streamlined its emergency facilities, abolishing a number of windows that were little used while introducing two new facilities. One of these is the Supplementary Reserve Facility, which is designed to lend large sums quickly at high interest rates for relatively short periods. The other is a Contingent Credit Line, which allows preapproved countries to draw on emergency financing when a crisis strikes via contagion from other countries. Although the objective of this facility, of making substantial sums pre-emptively available to countries threatened by contagion, makes a great deal of sense, the fact is that no country has yet chosen to apply for this line of credit.

The most important outstanding issue in the discussions on a new international financial architecture concerns how to ‘bail in’ the private sector, that is, to secure the participation of private creditors in resolving crises by extending debt maturities. Everyone agrees that there could be circumstances when this would be necessary, given the massive amounts of foreign credit that can be withdrawn and the incentives for private creditors to run for the exits once confidence erodes. Keeping a lid on moral hazard also depends on the private sector knowing that it may be bailed in rather than bailed out. Some helpful elements of a solution can be delineated. Bonds ought to have collective action clauses, permitting a qualified majority of bondholders to approve changes in the payments clauses. Most bonds issued in London already have such provisions, but bonds subject to New York law do not. Other major industrial countries ought to join Canada and the United Kingdom in introducing such clauses into the bonds they issue, to ease the way for their adoption by emerging markets.

Important as it is to reduce the frequency and the costs of crises, it would be a Pyrrhic victory if crises were eradicated by killing the capital flows that create them. These flows can benefit both developing and developed countries: borrowing by developing countries allows them to accelerate their development, and lending by developed countries allows their citizens to place part of their savings in high-yielding assets and diversify their portfolios. Both therefore have an interest in allowing private investors in the developed countries to invest in emerging markets where the investors find that to their advantage.

Yet despite the liberalisation and globalisation of recent years, industrial countries still impose some quite important impediments to such investment. For example, many insurance companies in the United States are not free to invest in emerging market debt, because many of the individual states that regulate them prohibit this. Similarly, pension funds in many Continental European countries are effectively prohibited from buying emerging market equities. The draft Pensions Directive that has been presented by the European Commission to the European Parliament would change this, but has yet to be voted on. It is important that industrial countries remove such artificial constraints on investment in emerging markets, especially where the investors in question can be expected in their own self-interest to take a long-term view. And there is a danger that the new proposals for determining banks’ minimum capital requirements, now under discussion by the Basle Committee on Banking Supervision, will make even bank loans prohibitively expensive to all but the most creditworthy developing countries[13] .

Private capital cannot be expected to finance poverty reduction or human development directly. Nonetheless, it can be an important factor in promoting growth—or in precipitating crises. That is why it is important to achieve a substantial inflow of private capital, with much but not all of it in the form of FDI, to developing countries; and why it is important to reduce the crisis vulnerability of the system."

 

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Draft Outcome Prepared by the Facilitator

United Nations, 09/17/01

 

" Mobilizing international private resources for development

11. Foreign direct investment and other private flows are a vital complement to national development efforts of developing countries and countries with economies in transition, particularly for enhancing technology transfer, and boosting overall productivity, competitiveness and entrepreneurship. A central challenge is to attract these flows to a much larger number of countries, including low-income countries, SIDs, and landlocked developing countries.

12. We call on the multilateral financial and development institutions to deepen their support to national efforts to improve the investment climate, upon request, in priority areas such as policy and regulatory frameworks, corporate governance, and competition policy.

13. We request the Secretary General to explore, with the support of all relevant stakeholders, possible avenues to strengthen international cooperation in the promotion of foreign direct investments in developing countries and countries with economies in transition, including through investment agreements.

14. We commit to implement measures that will encourage foreign direct investments in a greater number of developing countries, particularly in low-income countries, SIDs, and landlocked developing countries. Measures of this type include the removal of artificial domestic constraints and tax concessions in industrial countries that prevent or discourage investments into developing countries.

15. We call on the multilateral and bilateral financial and development institutions to redouble their efforts in support of private investments in infrastructure development and other priority areas for developing countries, such as information and telecommunication projects to bridge the digital divide. Such support includes strengthening export-credit, risk-guarantee, and co-financing mechanisms, and promoting long-term private flows to support sub-regional and regional projects with high development impact.

16. We urge the business sector to consider not only the financial but also the social and environmental implications of their enterprises and encourage civil society organizations to help ensuring adequate attention to these aspects. In this regard, we request the World Bank Group and regional development banks, through their private sector activities, to promote socially and environmentally responsible investments and foster good corporate citizenship.

17. To ensure enhanced and predictable financial flows to developing countries and countries with economies in transition, a stable international financial system is also crucial. We call on the multilateral financial institutions to deepen their support to the development of appropriate regulatory frameworks to help sustain sufficient—and sufficiently stable—private flows to these countries, including through:

Measures in source and destination countries to increase the transparency of financial flows and to contain the excessive volatility of short-term capital flows and of highly leveraged transactions, including trade in currencies; Measures to ensure orderly, gradual and well sequenced capital account liberalization processes; Safeguards to ensure that the new Basel capital accord does not increase pro-cyclicality of bank lending, and that it does not make bank loans prohibitively expensive to these countries; Measures to improve sovereign risk assessment, based on transparent procedures and on well-disclosed economic criteria."

 

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Revised Draft Outcome Prepared by the Facilitator

United Nations,12/06/01

 

"Mobilizing international resources for development: foreign direct investment and other private flows

18. Private international capital flows, particularly long-term flows, as well as international financial stability, are a vital complement to national development efforts. Foreign direct investment contributes toward financing development in the long term, in a more stable and orderly fashion than portfolio investment. And foreign direct investment is especially important for its potential to transfer knowledge, skills, and technology, create jobs, boost overall productivity, enhance competitiveness and entrepreneurship, and ultimately reduce poverty through economic growth and development. A central challenge therefore is to attract direct investment flows to a much larger number of developing and transition countries.

19. To attract stable inflows of capital, countries need to continue their efforts to achieve transparent, stable, and predictable investment climates, embedded in sound macroeconomic policies and institutions that allow businesses, both domestic and international, to operate efficiently and profitably and with maximum development impact. Special efforts are required in such priority areas as economic policy and regulatory frameworks for promoting and protecting investments, including avoidance of double taxation; corporate governance and accounting standards; and competition policy. These efforts can be enhanced through technical assistance for capacity building as requested by recipients, including the actions envisaged in the Doha Ministerial Declaration.

20. To complement national efforts, we call on the international financial and development institutions to increase their support for private foreign investment in infrastructure development and other priority areas, including projects to bridge the digital divide. This support includes provision of export credits, risk guarantees, cofinancing, and leverage of aid resources and venture capital, as well as provision of information on investment opportunities. We will strengthen the multilateral financial and development institutions to perform these tasks.

21. While Governments provide the framework within which businesses operate, firms, for their part, have a responsibility to engage as reliable and consistent partners in the development process. We urge firms to consider, in the spirit of good corporate citizenship, not only the economic and financial but also the social and environmental implications of their undertakings.

22. We underscore the need to sustain sufficient and stable private flows of all types to developing and transition countries. In this regard, it is important to design measures, in source and recipient countries, to increase the transparency of financial flows and to contain the excessive volatility of short-term capital flows and of highly leveraged transactions, including trade in currencies; to ensure orderly, gradual, and well-sequenced processes for liberalizing capital flows; and to improve sovereign risk assessment, based on transparent procedures and on well-disclosed, objective economic criteria. Multilateral financial institutions could provide further assistance for these purposes."

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Draft outcome of the International Conference on Financing for Development
-Monterrey Consensus

 

Mobilizing international resources for development: foreign direct investment and other private flows

20. Private international capital flows, particularly foreign direct investment, along with international financial stability, are vital complements to national and international development efforts. Foreign direct investment contributes toward financing sustained economic growth over the long term. It is especially important for its potential to transfer knowledge and technology, create jobs, boost overall productivity, enhance competitiveness and entrepreneurship, and ultimately eradicate poverty through economic growth and development. A central challenge, therefore, is to create the necessary domestic and international conditions to facilitate direct investment flows, conducive to achieving national development priorities, to developing countries, particularly Africa, least developed countries, small island developing States, and landlocked developing countries, and also to countries with economies in transition.

21. To attract and enhance inflows of productive capital, countries need to continue their efforts to achieve a transparent, stable and predictable investment climate, with proper contract enforcement and respect for property rights, embedded in sound macroeconomic policies and institutions that allow businesses, both domestic and international, to operate efficiently and profitably and with maximum development impact. Special efforts are required in such priority areas as economic policy and regulatory frameworks for promoting and protecting investments, including the areas of human resource development, avoidance of double taxation, corporate governance, accounting standards, and the promotion of a competitive environment. Other mechanisms, such as public/private partnerships and investment agreements, can be important. We emphasize the need for strengthened, adequately resourced technical assistance and productive capacity-building programmes, as requested by recipients.

22. To complement national efforts, there is the need for the relevant international and regional institutions as well as appropriate institutions in source countries to increase their support for private foreign investment in infrastructure development and other priority areas, including projects to bridge the digital divide, in developing countries and countries with economies in transition. To this end, it is important to provide export credits, co-financing, venture capital and other lending instruments, risk guarantees, leveraging aid resources, information on investment opportunities, business development services, forums to facilitate business contacts and cooperation between enterprises of developed and developing countries, as well as funding for feasibility studies. Inter-enterprise partnership is a powerful means for transfer and dissemination of technology. In this regard, strengthening of the multilateral and regional financial and development institutions is desirable. Additional source country measures should also be devised to encourage and facilitate investment flows to developing countries.

23. While Governments provide the framework for their operation, businesses, for their part, are expected to engage as reliable and consistent partners in the development process. We urge businesses to take into account not only the economic and financial but also the developmental, social, gender and environmental implications of their undertakings. In that spirit, we invite banks and other financial institutions, in developing countries as well as developed countries, to foster innovative developmental financing approaches. We welcome all efforts to encourage good corporate citizenship and note the initiative undertaken in the United Nations to promote global partnerships.

24. We will support new public/private sector financing mechanisms, both debt and equity, for developing countries and countries with economies in transition, to benefit in particular small entrepreneurs and small and medium-size enterprises and infrastructure. Those public/private initiatives could include the development of consultation mechanisms between international and regional financial organizations and national Governments with the private sector in both source and recipient countries as a means of creating business-enabling environments.

25. We underscore the need to sustain sufficient and stable private financial flows to developing countries and countries with economies in transition. It is important to promote measures in source and destination countries to improve transparency and the information about financial flows. Measures that mitigate the impact of excessive volatility of short-term capital flows are important and must be considered. Given each country’s varying degree of national capacity, managing national external debt profiles, paying careful attention to currency and liquidity risk, strengthening prudential regulations and supervision of all financial institutions, including highly leveraged institutions, liberalizing capital flows in an orderly and well sequenced process consistent with development objectives, and implementation, on a progressive and voluntary basis, of codes and standards agreed internationally, are also important. We encourage public/private initiatives that enhance the ease of access, accuracy, timeliness and coverage of information on countries and financial markets, which strengthen capacities for risk assessment. Multilateral financial institutions could provide further assistance for all those purposes.

 

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04 June 2002

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