G20 golden chance to lead on development

China Daily (Canada) - - LIFE -

n Septem­ber, China will host the G20 Lead­ers’ Sum­mit for the first time. It could not have cho­sen a more op­por­tune mo­ment to as­sume the G20 chair. And Pres­i­dent Xi Jin­ping should seize the oc­ca­sion to push China’s am­bi­tious development agenda glob­ally. Specif­i­cally, Xi should make the case that development done right ben­e­fits ev­ery­one, and he should launch dis­cus­sions on a mul­ti­lat­eral in­vest­ment agree­ment to be de­vel­oped next year.

This is an achiev­able goal for the sum­mit: the G20 has a record of rel­a­tive suc­cess in co­or­di­nat­ing mul­ti­lat­eral ef­forts, such as in its re­sponse to the 2008 global fi­nan­cial cri­sis. More­over, the in­gre­di­ents of suc­cess­ful development are well known. They in­clude con­stant tech­no­log­i­cal im­prove­ment, which is crit­i­cal for sus­tained growth and em­ploy­ment; a fo­cus on max­i­miz­ing hu­man and phys­i­cal cap­i­tal; and in­fra­struc­ture in­vest­ments geared to­ward re­duc­ing trans­ac­tion costs and in­creas­ing ef­fi­ciency.

We also know the cur­rent gaps that ex­ist in development. De­vel­op­ing coun­tries to­day are con­strained by low lev­els of hu­man and fi­nan­cial cap­i­tal, and by low re­serves of or ac­cess to for­eign ex­change, which limit their abil­ity to im­port the raw­ma­te­ri­als and equip­ment needed to as­cend global value chains.

The best way to close the gaps in hu­man and fi­nan­cial cap­i­tal, and to in­crease ac­cess to for­eign ex­change is through for­eign di­rect in­vest­ment. FDI should not be dif­fi­cult to at­tract, be­cause the po­ten­tial re­turns are higher in de­vel­op­ing coun­tries, where cap­i­tal is scarce rel­a­tive to la­bor.

But as eco­nomic­sNo­bel Prize win­ner Robert Lucas has noted, cap­i­tal has been flow­ing in the wrong di­rec­tion, from low- to high-in­come coun­tries. This trend is de­plet­ing de­vel­op­ing coun­tries’ avail­able cap­i­tal, lim­it­ing development and widen­ing the global in­come gap. And as Laura Al­faro, Seb­nem Kalemli-Oz­can and Vadym Volosovych pointed out in a 2008 study for the Re­viewof Eco­nom­ics and Sta­tis­tics, poorer coun­tries are de­prived of cap­i­tal flows partly be­cause they lack the in­sti­tu­tions needed to re­ceive and fa­cil­i­tate in­vest­ments. In a sense, these coun­tries are trapped, be­cause they need cap­i­tal to de­velop these nec­es­sary in­sti­tu­tions in the first place.

A mul­ti­lat­eral in­vest­ment agree­ment could fix this prob­lem by mak­ing it eas­ier to in­vest in de­vel­op­ing coun­tries. It could also strengthen the eco­nomic foun­da­tion for growth in de­vel­op­ing coun­tries by estab­lish­ing in­vest­ment pro­tec­tions and in­cen­tives, dis­pute-res­o­lu­tion pro­ce­dures, cor­po­rate so­cial re­spon­si­bil­ity bench­marks, and reg­u­la­tory frame­works for in­vest­ments made by state-owned enterprises and sov­er­eign funds.

TheWorld Trade Or­ga­ni­za­tion is the nat­u­ral place to ne­go­ti­ate this agree­ment, but past ef­forts have failed partly be­cause ne­go­ti­a­tions were seen as heav­ily fa­vor­ing de­vel­oped coun­tries over de­vel­op­ing ones. With the global in­vest­ment en­vi­ron­ment hav­ing changed dra­mat­i­cally in the past decade, such ne­go­ti­a­tions should be restarted. De­vel­op­ing coun­tries now ac­count for a grow­ing share of global out­ward di­rect in­vest­ment, which means some emerg­ing mar­ket economies them­selves are be­com­ing a source of cap­i­tal and thus have a role to play in any fu­ture in­vest­ment frame­work.

China is the prime ex­am­ple, be­cause it has ben­e­fited so much from FDI that it is now in­creas­ing its own ODI. Ac­cord­ing to theUN Con­fer­ence on Trade and Development, in 2013 China be­came the third-largest source of other coun­tries’ FDI and is ex­pected to be­come a net cap­i­tal ex­porter for the first time in 2016. This trend can only con­tinue con­sid­er­ing the com­bined im­pact of China’s “go global” pol­icy— urg­ing do­mes­tic com­pa­nies to in­vest over­seas— and it’s Belt and Road Ini­tia­tive to build in­ter­con­ti­nen­tal trade in­fra­struc­ture.

In time, China will likely be the world’s largest source of FDI. Hav­ing gone from be­ing a re­cip­i­ent of FDI to a net con­trib­u­tor in re­cent decades, China is per­fectly po­si­tioned to lead G20 dis­cus­sions on global development.

It should do so by set­ting a con­crete goal for a work­able development frame­work with a clear time­line for reach­ing spe­cific mile­stones. An early mile­stone should be to es­tab­lish a non-bind­ing in­vest­ment fa­cil­i­ta­tion frame­work for de­vel­op­ing coun­tries. And, more gen­er­ally, the agree­ment should em­pha­size in­clu­sive­ness and hon­est deal­ing to fos­ter eco­nomic growth for de­vel­op­ing and de­vel­oped coun­tries alike.

The au­thor, a for­mer chief econ­o­mist at and se­nior vice-pres­i­dent of theWorld Bank, is a pro­fes­sor at and hon­orary dean of the Na­tional School of Development, Pek­ing Uni­ver­sity, and the found­ing di­rec­tor of the China Cen­ter for Eco­nomic Re­search. Project Syn­di­cate

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