University of International Business and Economics
27 May 2014
Friends,
As many of you will be aware, deliberations are currently underway in New York to set a successor framework to the Millennium Development Goals, which arrive at their deadline next year. We expect that a new set of goals - tentatively called the Sustainable Development Goals - will be agreed by the United Nations General Assembly in 2015, and will set new benchmarks for global development that will extend to 2030. We expect this new agenda will not only aim to ensure lasting inclusive economic growth and end extreme poverty by 2030, but will also address universal challenges that are facing countries both developed and developing alike - such as rising inequality and climate change.
United Nations Member States are currently working together to formulate transformative, universal and aspirational development goals, which clearly will require unprecedented amounts of financial resources. The irony may be that these deliberations come at a time when the world economy as a whole hasn't yet quite shaken off the after effects of the global financial crisis. Indeed many analysts agree we have settled into what some would call a "new normal" of slower growth. Against the backdrop of slower medium-term prospects for the world economy, public coffers are strained and there is a lower appetite for risk on the part of private investors.
So today I will argue that investment for sustainable development requires more resources and actors than we have had in the past, and why we at UNCTAD consider sustainability to be one of the defining investment opportunities of our time. In order to realize returns to investors and benefits to society at large, we need to harmonize approaches involving the private and public sectors to ensure adequate resources are channelled to the areas where they are needed most urgently.
Let me first describe for you the new global economic landscape that we face today in our post-crisis world and how investment and the sustainable development agenda fit into it. Then I will address the specific costs and sources of investment that this agenda will require and suggest how greater coherence can help to mobilize the funds needed.
First, let me describe how international investment has evolved and changed in recent years. As you know, we have experienced tectonic shifts in the economic landscape since the global financial crisis of 2008. To be sure, some of these changes, such as growing South-South ties and the rise of emerging countries, were already underway before the crisis. But the crisis amplified these dynamics. Now, almost half a decade later, countries that were the traditional mainstays of the global economy are vulnerable and trapped in a low growth rut. On the other hand, previously marginal countries have become major players on the global stage, even if their economic growth has slowed somewhat recently.
These dynamics have been accompanied by fundamental changes in the global marketplace. The past decade has seen the rapid expansion of global production networks, creating corporate giants with wealth that can dwarf that of entire countries. Global value chains, which are leading a transition from international trade in goods to trade in tasks, have seen intermediate goods and services jump to 80% of all world trade. If governments and enterprises devise policies strategically, it is possible for developing countries to benefit from these global value chains - to create jobs, bolster skills and technology, foster sustainable small enterprises and spur wealth creation. Transnational corporations also possess the requisite funds and expertise to contribute to solving multiple world problems. But these outcomes will not happen automatically. They require careful and targeted planning and policymaking, based on dialogue and strong partnerships between the public and private sector.
UNCTAD's latest data on FDI flows give us reason for cautious optimism. Here I can preview for you some of the FDI statistics which will be published in the World Investment Report 2014 next month. Our preliminary estimates show that global FDI flows in 2013 rose by 11 per cent to an estimated $1.46 trillion. This level was last seen in the pre-crisis era. This is good news, and all indications are that the investment recovery is finally on track, with the outlook for 2014 and 2015 optimistic.
Last year saw a continuation of one of the most positive trends in the investment sphere since the crisis - the rise of developing countries' share of global FDI. In 2013, developing country receipts reached a new high of $759 billion, or 52 per cent of total global FDI inflows. On the other hand, for the second consecutive year, the percentage of FDI that went to developed countries remained at a historically low level of 39 per cent. And while FDI flows to the European Union recovered, those to the United States continued their decline. As investor appetite for assets in traditional markets remained lacklustre, investment levels in emerging markets and developing countries continued to grow. There were increased flows to Latin America, the Caribbean and Africa, and developing Asia became the largest host region in the world. FDI inflows to transition economies also recorded a new high.
At the same time, it is also worth noting that developing countries have gained share as both recipients and sources of FDI flows. Data from UNCTAD's most recent Global Investment Trends Monitor indicates that investments undertaken abroad by transnational corporations from developing countries increased by 4 per cent in 2013, reaching a record level of $460 billion. Taken together with $100 billion in investments abroad by companies from transition economies, total FDI outflows from developing and transition economies amount to 39 per cent of global FDI outflows - a historically high figure. Almost half of FDI from developing and transition economies was in equity investments. On the other hand, transnational corporations from the developed economies continue a "wait and see" approach. They are holding large amounts of cash reserves in their foreign affiliates in the form of retained earnings, which constitutes part of reinvestable earnings, one of the components of FDI flows. This component reached a record level of 67 per cent, according to our latest data.
In this new global economic landscape, we thus have new modes of organizing production, new players from emerging economies, and we have a great deal of resources continuing to search through the system for a profitable investment opportunity. We also have new global challenges, which the Sustainable Development Goals, or SDGs as we have become to call them, will soon make explicit.
Achieving the SDGs, in whatever final shape or form, will require significant investment in areas such as agriculture, infrastructure, health, education, and other aspects of sustainable development (such as climate change mitigation and adaptation) - well above current levels.
As in the past, it will be for public bodies - national, regional and international - to take the lead in mobilizing the resources to meet these targets. They will be looking at a range of ways to raise funds, including through special levies or environmental taxes. International tax cooperation; cutting the cost of migrants' remittances; and improved tax collection and a wider tax base in developing countries are likely to be part of the equation. But given the magnitude of the challenge, and existing budgetary constraints, it seems prudent that we also explore previously neglected sources of funding.
A huge investment gap means that the private sector also needs to step in. Public finances on their own cannot meet existing demands; nor can the domestic private sector cope in many developing countries. Private investment from overseas will have to bear the brunt, especially foreign direct investment (FDI).
FDI that generates productive capacity will be central in this regard. The five countries that in absolute terms contributed the bulk of worldwide progress on the MDGs - China, Indonesia, Brazil, Vietnam, and Thailand - appear in the first quartile among developing countries on economic growth and on performance in FDI attraction.
I have made strengthening UNCTAD's role in the sustainable development agenda one of my key priorities, since taking office as Secretary-General last fall. At UNCTAD we are also closely supporting the activities of the Open Working Group on Sustainable Development Goals in New York. Together with the World Bank, UNCTAD is co-leading the group of agencies working on "means of implementation" for the SDGs. The basic idea is that when the goals are agreed to next year, we must already have in our minds ideas about the strategies and resources that individual countries will need to implement to achieve each goal. We must understand that some countries will need more headroom than others to implement their commitments. This, we hope, will provide a new vision of global partnership that can pick up where the unfinished business of the Millennium Development Goals leaves off.
Investment will be one of the most important "means of implementation" if we are to meet our developmental challenges. FDI to developing regions is already nearly six times higher than ODA ($703 billion vs $126 billion in 2012), and there is downward pressure on the latter. FDI also exceeds other private flows such as remittances (at $375 billion in 2012), although this source of private funding is also the subject of a number of innovative initiatives to direct it more effectively towards sustainable development.
The private sector will be a key ally in strengthening delivery of our global development commitments. It is therefore vital that we explore ways of encouraging private funding for development. This includes creating an investment environment that is secure, predictable and conducive, to encourage investors to play a more central role in the development agenda.
It also means greater coherence in investment policies and rule-making to encourage investment while at the same time promoting sustainable development. Investment liberalization and promotion needs to be accompanied by appropriate regulation aimed at ensuring that development benefits of investment are maximized and risks minimized. Indeed, many countries are currently in the process of reinforcing their regulatory frameworks to improve environmental and social sustainability of investment. For developing countries, this is often a formidable challenge, as they may not only lack domestic expertise, but also have to consider the potential impact of higher regulatory standards on their international competiveness.
This need for coherence between policies to attract investment and promote sustainable development applies to the investment agreements among countries and regions. Such accords have proliferated over the years, leading to multiple treaties and obligations. Existing investment treaties often do not adequately support sustainable development. A number of countries have taken steps to give more prominence to sustainable development in such treaties, for example through references to the protection of health and safety, labour rights and the environment, but more needs to be done.
A related issue is the current controversy over the growing number of cases in which investors go to international arbitration to challenge the national regulations of their host country. Such challenges, which are based on investment treaties, involve a range of policies - including environmental and social ones.
To promote sustainable development, national investment policies and international agreements will have to change so that the focus is no longer exclusively on investment protection, but also on economic, social and environmental concerns. To this end, we at UNCTAD are looking specifically at how such a "new generation" of foreign investment policies can pursue a broader development policy agenda, while building or maintaining a generally favourable investment climate. "New generation" investment policies place inclusive growth and sustainable development at the heart of efforts to attract and benefit from investment. For example, such policies can seek to link foreign investment into industrial policies and foster responsible investor behaviour by incorporating principles of corporate social responsibility. They can also seek to preserve the headroom for host countries to pursue sustainable development goals without having to face investment litigation.
So, investment for sustainable development is opening the door both to new thinking, partnerships and forms of investment, and this paradigm shift is occurring faster than anyone might have expected a few years ago. Our contention is that not only will investing in sustainable development help revive growth, it will also provide a profitable return to investors. Consider the example of poverty reduction over the last decade and a half. Nearly 15 years ago, cutting extreme poverty in half seemed like an ambitious goal, when it was included in the Millennium Declaration of the United Nations. But that goal was achieved more than five years ahead of schedule. And this achievement stands as one of the greatest wealth creation exercises the world has ever seen - not only for poor people, but also for those who invested in them.
Since 2000, countries like China grew rapidly through export-driven manufacturing that generated better paying jobs, which in turn cut world poverty in half, and ended up creating the world's largest middle class. The overall investment needs to accomplish this were roughly in the hundreds of billions of dollars. And, in the rise of countries like China, many investors put money on the table, and it paid a handsome return. In addition, hundreds of millions of people moved out of poverty. It was, you could say, "a win-win" for those involved.
Today, as the international community looks to the future, we not only want to end extreme poverty - but we want to do it in a sustainable way. That means reducing carbon emissions, using more green technology, and changing consumption patterns worldwide to ensure that future generations can still enjoy clean water and clean air. This is potentially a much bigger opportunity than export-driven manufacturing. This is also an opportunity that isn't restricted to a single country or a handful of countries. While cutting poverty in half may have required hundreds of billions in investment, ensuring sustainable and inclusive growth will require trillions of dollars in investment. And I am confident that it will deliver hundreds of billions of dollars in returns to investors, as well.
This brings me to the need to recognize the scale of the task we are setting ourselves, and to match ambition with action. For example, if we are truly aiming to fully eradicate poverty by 2030, we would need the whole of Sub-Saharan Africa not merely to repeat China's miracle, but to actually do better than China has over the last 20 years. And, we must do so in an environmentally sustainable manner.
The scope and ambition of the SDGs will require a significant scaling-up of investment to generate productive capacities, clean technologies and sustainable infrastructure. Estimates of the total requirements vary, but they are all orders of magnitude beyond what has been achieved to date. According to one estimate, investment in infrastructure (in transport, sanitation, energy, and other sectors) in developing countries as a whole will need to increase from approximately $0.9 trillion per year today, to approximately $1.8-2.3 trillion per year by 2020, or from around 3 per cent of GDP to 6-8 per cent of those countries' GDP. The investment needs for sustainable development in Africa alone are huge. For instance, it is estimated that countries in sub-Saharan Africa will require $93 billion per year in infrastructure investment in pursuit of their development goals. Currently, less than half that amount is provided for.
There is therefore a significant challenge in finding financing sources. It is estimated that about 38 per cent of the capital spending related to infrastructure investment in the region will come from the public sector, a further 14 per cent from official development assistance, or ODA, and the remainder from multilateral development banks and the private sector. Given that public sector sources are already stretched, and that ODA is shrinking, it will be essential to find ways to mobilize the private sector and facilitate private investment, in partnership with the public sector, to meet the post-2015 challenge.
We should also look to new and innovative sources of finance, at home and abroad, to meet our development challenges. The upcoming UNCTAD World Investment Report 2014: Investing in the SDGs will examine some of these issues. And again we can learn from the lessons and experiences of the MDGs. We must continue to advocate for ODA, such as the target of 0.7 per cent of GDP from DAC donor countries, but we must also find ways to bring together a broader coalition of finance for the SDGs, including international organizations and the corporate sector. Development financing and investment must be directly and closely linked to expected outcomes to ensure money is spent effectively.
New development actors will need to step in to help provide a secure and predictable environment, particularly to deliver the major step increase in investment in infrastructure that sustainability will require in developing countries. This is important because private financing alone is often very pro-cyclical and tends to fall during and after crises, as our recent experience has reminded us. Sharp declines of private finance for infrastructure in the developing world occurred after the East Asian crisis of the late 1990s and happened again in 2008.
A promising example of such a new actor is the BRICS Development Bank, which China and the other BRICS countries are taking steps to set up since their agreement on its creation at their Durban Summit in 2013. The Durban 2013 BRICS Summit Declaration explicitly identified that the objective of a BRICS Development should be "mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.
A BRICS Bank will not only be able to leverage the new sources of investment from emerging countries financially, but will also contribute to the needed enabling environment through co-financing projects with the private and public sectors, including traditional development banks, like the regional development banks and the World Bank. The current plans call for a BRICS Bank with initial capital of $50 billion. But the amounts that could be mobilized through co-financing and offering attractive terms to private sector partners are even greater.
These are just a few of the innovative proposals on the table to help renew our global partnership for development in support of the Sustainable Development Goals. I hope you will agree with me that harmonizing the public and private sector approaches to sustainability can provide a win-win for all of us. We at UNCTAD are actively discussing these ideas and trying to promote them with both our private sector and public sector counterparts. This type of "out of the box" thinking and brainstorming on how to raise the resources needed to implement the SDGs will continue worldwide even after the Goals are finally agreed on next year. I am eager to hear your thoughts on these issues and to continue the conversation right here in this room with all of you now. So I will conclude here, and I hope we can open the floor for discussion.
Thank you!
