Ladies and Gentlemen,
I am deeply honored by your invitation to address this forum, and to provide you with UNCTAD's assessment of current global investment trends and policy responses.
As we meet here today, the fallout from the global financial and economic crisis in 2008 is continuing, and it is likely to be felt for some time to come. Despite the beginnings of a recovery in 2009 and 2010, global growth is now faltering again: down from 4 per cent in 2010 to 2.8 percent in 2011 and to 2.3 per cent in 2012. It is likely that global growth will, at best, remain at this level in 2013.
This weak growth is mainly due to the poor performance of the developed economies, which grew at a mere 1.2 per cent in 2012, and are likely to fall below 1 per cent in 2013. In developing and in transition economies, growth has been stronger - sustained by resilient domestic demand - although it is also set to decelerate to around 5 and 3.5 per cent respectively. This is in part due to homegrown problems, but in large part because the economic woes of the developed countries are now spilling over to developing countries and economies in transition through weaker demand and heightened volatility in capital flows and commodity prices.
The slowdown of the global recovery has also made itself felt in global investment flows. Indeed, global foreign direct investment (FDI) inflows declined by 18% in 2012, to an estimated $1.3 trillion - a level close to the trough reached in 2009 - due mainly to macroeconomic fragility and policy uncertainty for investors. This means that the FDI recovery that started in 2010 and 2011 will now take longer than previously expected. We estimate that FDI flows could rise moderately to $1.4 trillion in 2013 and $1.6 trillion in 2014, with anticipated improvements in macroeconomic conditions and an increasing use of some of the record levels of cash reserves that TNCs are currently sitting on. However, persistent uncertainties and structural weaknesses in major developed economies and in the global financial system may prove crucial for investor confidence and delay the recovery even further.
Beyond these global trends, we are also seeing important changes in the composition and distribution of FDI flows. In particular, it is worth recording that in 2012, for the first time ever, FDI flows to developing economies exceeded those to developed countries, by some $130 billion. This is in large part because, FDI flows to developing economies remained resilient to the slowdown of the world economy, declining by only 3%, while in developed countries, FDI flows fell drastically to values last seen almost ten years ago. This changing pattern of FDI flows is confirmed also in the global ranking of the largest FDI recipients: in 2012 three of the top 4 host economies were from developing economies. While the United States and China maintained their top position, Hong Kong (China) and Brazil each moved up one place from their 2011 ranking.
But even if developing countries overall did comparatively well, there are important regional differences. In particular, flows to developing Asia decreased by 9.5% in 2012, although they remained at historically high levels. In contrast to the decline in Asia, Latin America and Africa saw a small increase in FDI inflows. Nevertheless, inflows to Asia are still accounting for 59% of FDI flows to developing countries.
A third trend we can observe is the changing sectoral composition of FDI in recent years, with the services sector replacing manufacturing as the largest recipient. The primary sector was the most heavily hit in relative terms in 2012, both in greenfield projects and cross-border M&As. The fall was driven by a decline in the mining, quarrying and petroleum industry, representing the bulk of FDI activity in this sector. The main manufacturing industries displayed very poor FDI performance. Again, manufacturing industries in the area of processing of extractive material were the main losers in this sector. In contrast, services were the least affected sector. This may be due to the fact that some service industries are by nature less sensitive to business cycles (for example in the utilities) whilst others face more promising medium term growth prospects (for example business services).
Ladies and Gentlemen,
Against this backdrop of the fallout from the financial crisis, governments have implemented a number of measures to restore growth. Initially, several large economies pursued coordinated stimulus packages, often including large-scale investments, which successfully served to prevent the crisis from becoming a meltdown. More recently, several governments have focused on fiscal consolidation, and are hoping to restore investor confidence and growth through austerity measures. So far this has not proved successful and it is likely that additional stimulus measures to restore growth in the world economy may be needed.
In the area of investment, we have seen many countries revise their policy stances, both nationally and internationally. While the overall trend for countries continues to be towards the liberalization and promotion of foreign investment, we can also observe a move towards more regulatory or restrictive policy measures. Two decades ago, on average, more than 95 percent of investment policy changes were related to improving the entry conditions and treatment for foreign investors - i.e. more liberalization, promotion and facilitation. However, since then, the share of national policy measures directed at more investment regulations and restrictions has increased significantly and is now heading towards 30 percent.
UNCTAD's latest Investment Policy Monitor (covering the period November 2012 - February 2013) reports a surge in new investment restrictions and regulations, bringing the share of such measures to a new height. Individual measures included new land ownership restrictions, nationalizations and stricter screening procedures for FDI. In many cases, this policy shift is a rebalancing of investment policy making from an exclusive focus on liberalization to a more balanced approach, which aims to also maximize the development benefits from FDI. Indeed, many of these policies reflect the legitimate concerns of national governments and may be supportive of sustainable development objectives. Nevertheless, there is a risk that investment restrictions are misused for protectionist purposes, and greater international cooperation is needed to clarify the distinction between legitimate investment restrictions and protectionism.
The more cautious approach we are seeing at the national level is also mirrored at the international level. This can be seen in five striking developments. The first relates to the decrease in the number of newly negotiated investment agreements. In 2012, 30 international investment agreements (IIAs) were signed - the lowest annual number of newly concluded treaties in 20 years (and considerably lower than last year's number of 47). This may, in part, be due to the concerns increasingly voiced by civil society groups about some of these agreements, as well as to the ongoing shift in investment policy making.
The second important development is the rise of regional approaches to policymaking. In today's spaghetti bowl of IIAs, bilateral agreements constitute the overwhelming majority. However, the gradual shift towards regionalism is potentially more significant economically, in terms of the global output covered by these agreements. In 2012, negotiations at the regional level continued to intensify, involving at least 110 countries and 22 agreements. Two of the most prominent developments are the ongoing negotiation of the Trans-Pacific Partnership Agreement (TPP), in which the combined economic weight of the participating States would account for 35 per cent of global GDP; and the European Union's investment treaty-making powers, in which any agreement concluded by the bloc will bring together at least 27+1 countries. Other regional groupings, such as ASEAN and the Central American States, have also emerged as regional investment actors.
The shift to regionalism can bring about the consolidation and harmonization of investment rules and be a step towards multilateralism. However, where new regional treaties do not entail the phase-out of old bilateral ones, the result may very well be the opposite: instead of simplification and growing consistency, regionalization may lead to a multiplication of treaty layers, making the network of agreements even more complex and prone to overlaps and inconsistencies.
The third observable trend concerns the growing emphasis on sustainability considerations in the negotiation of international investment agreements. Although many of the recently concluded agreements follow the traditional model that focuses solely on investment protection, others deviate from this. Several new innovations are meant to ensure that treaties do not contradict, but instead contribute to, countries' sustainable development strategies.
The fourth notable trend that I would like to highlight relates to the ongoing reassessment of international investment agreements by a number of countries. Governments have approached this in a different manner, including (i) revising their model treaties, (ii) renegotiating "old" ones to replace them with "modern" ones, (iii) putting on hold the conclusion of any new agreements, and (iv) even terminating existing bilateral agreements and denouncing the ICSID Convention (WIR 2010).
These actions have been taken largely in response to an increasing number of international investor-State claims, which brings me to my fifth point. In 2012, investment disputes reached a new record, with at least 62 new investment arbitration cases initiated against host countries. This is the highest number of known treaty-based disputes ever filed in one year. Investment arbitration cases against host countries have been on the rise: by the end of 2012, the total number of known treaty-based disputes reached 518 and the total number of countries that have responded to one or more investment treaty claims increased to 95.
I believe that the ongoing re-assessment of investment policies at the national and international level can be beneficial both to growth and development. Investment policy-making must achieve a fine balance between attracting FDI and protecting the rights of investors on the one hand, and ensuring lasting development gains from such investment on the other. UNCTAD recently launched its Investment Policy Framework for Sustainable Development, so as to assist investment policy makers in the design of policies that focus on inclusive economic growth, provide support for industrial development, and seek to address the environmental and social impacts of investment. We hope that it can make a useful contribution to the current policy debates.
With this in mind, I wish to thank you for your attention and listen very carefully to your deliberations.