Index

Expert Opinion: Investment Rules for Sustainable Development

By Konrad von Moltke

Investment determines the future of any market economy. It is at the heart of efforts to promote sustainable development. Without investment, all efforts to achieve sustainable development will be futile. As more investment becomes international in character, international agreements will be needed to ensure that such investment also promotes sustainable development. These rules will be of paramount importance to developing countries if they wish to avoid the mistakes concerning environment and development that were made over the past century by the industrialized world.

Governments and commentators have thus far failed to adequately recognize differences between international trade and international investment. The issue linkage “trade and investment” trips off the tongue with deceptive ease. Yet, trade and investment are distinct economic activities, as far removed from one another as the two sides of a balance sheet— assets and liabilities on one side; profits and losses on the other. The two are inextricably linked, yet nobody would confuse assets with sales. Indeed, to do so is a criminal offense in most market economies. It should consequently be self-evident that trade and investment require distinct regimes with rules and institutions that fit the needs of each activity.

The genius of the World Trade Organization (WTO) has been its ability to fashion rules that are appropriate to trade. Yet the temptation to take this success and apply it to investment must be resisted. It is hard to imagine how WTO rules can be made to fit the needs of investment. Indeed, even the negotiation process of the WTO is designed to meet the needs of trade rules, with a process of give and take, and may prove quite unsuitable to the development of investment rules, where right and wrong prevail.

Governments have thus far negotiated investment agreements that address a limited part of the international investment agenda, namely investor protection. There are now nearly 2,500 bilateral investment treaties (BITs), but there is no clear evidence that this vast structure has contributed to better investment or has promoted development in poorer countries. Yet, governments persist in their attempts to create such rules by including them in bilateral and regional trade agreements or by folding them into other issues such as trade in services or non-tariff barriers to trade.

In the past ten years, governments twice sought to transform these patchwork investment rules into a universal agreement—and twice they failed. First at the Organisation for Economic Co-operation and Development (OECD) with the Multilateral Agreement on Investment (MAI) and again at the WTO with the attempt to include investment in the Doha Round. Yet, no lessons seem to be learned from this experience. Governments persist in negotiating rules that do not meet the core challenge of international investment, namely how to balance private rights and public goods in a manner that is legitimate, transparent and accountable. Such rules would also create a structure that promotes sustainable development.

Ultimately rules for international investment are about good governance for the global economy. Financial flows are already fairly unrestrained and countries compete to attract investment so that investor access is usually possible—what remains at stake are the conditions of access and operations, and that requires a continuous balancing of investor rights and the development priorities of the host state. That goal is much more difficult to achieve than simple liberalization of trade or opening of investment opportunities. It should be evident that investment agreements will be unlike trade agreements— and the institutions required to support them will be unlike those of the WTO.

These differences are most obvious when it comes to dispute settlement. Trade disputes are about rules made by states and can be settled between states. Investment disputes are often about individual investments; they involve an investor and a state and thus require institutions that are capable of recognizing the legitimate interests of both (private) investors and public authorities. Settlement of investment disputes bears only passing resemblance to the settlement of trade disputes, and it must meet the essential criteria of being legitimate, transparent, and accountable.

The differences in dispute settlement are just the tip of the iceberg: international investment rules involve different parties, different issues, different principles, and different institutions than trade rules. Attempts to link them to trade agreements risk obscuring these differences and producing rules that neither promote investment nor support development.

International investment agreements involve three critical actors in the investment process: investors, host governments where investments are located, and home governments of the investors. Each of these actors has rights and obligations in relation to international investment, and rules governing these rights and obligations must be proportionate to the investments themselves: large investments in activities that are sensitive from the perspective of environment and development must carry more obligations than smaller investments in activities of lesser sensitivity. Getting this balance right requires a process of negotiation that is transparent and that is guided by a desire to promote public welfare even as investment is rendered more predictable and investor rights are protected.

Are there prospects that governments will finally begin to craft such international investment rules that serve both investors and the goals of public policy? Ultimately governments will have little choice but to do so because the logic of investment is inexorable, and international investment requires appropriate international rules. The question is only how long the detour to reach that outcome will continue to be.

The late Konrad von Moltke, from Germany, was a Senior Fellow at the International Institute for Sustainable Development (IISD) and Adjunct Professor of Environmental Studies at Dartmouth College.