In search of a “better” globalization

by Nikos Lavranos, Secretary-General of EFILA

The backlash against globalization

At the OECD, Global Forum on International Investment (6 March) more than hundred stakeholders from businesses, trade unions, academics and OECD member states gathered together for a one-day meeting considering ways towards a “better” globalization, which is more “inclusive”, i.e., which benefits all.

The OECD set the scene by describing the current backlash against globalization, trade, investment and investor-state dispute settlement (ISDS) as an urgent matter that must be addressed now to reverse the trend of protectionism and populism, which is increasingly visible in the US and Europe.

While it was stressed from the outset that foreign direct investments (FDI) have created many jobs and hugely benefitted many countries around the world over the past decades, it was also concluded that this was not an “inclusive” development. In other words, the benefits of globalization were distributed unevenly and there have been many more losers – not only low-skilled workers but also domestic businesses – than has generally been acknowledged so far.

At the backdrop of this, it was argued that nowadays FDI must not only be perceived to be more inclusive but that they must be more inclusive by making a positive, lasting and substantial contribution to the economy and benefit all citizens of the host state.

The responsibility of multinationals

In this context, many speakers from emerging economies and representatives of trade unions put the responsibility to achieve this on multinationals.

In the first place, many speakers stressed the need that the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct must be systematically adhered to by all investors. Moreover, it was argued that multinationals must take the lead towards a low carbon economy and “green investments”.

In the second place, it was stressed that multinationals must pay their fair share of taxes. The current tax system which allows multinationals to avoid paying the full amount of taxes was criticized. The OECD’s efforts against Base Erosion and Profit Shifting (BEPS), the increasing transparency regarding international tax rules and the implementation of country-to-country reporting were considered essential in countering the backlash against globalization.

In the third place, multinationals were called upon to invest in the “social infrastructure” of societies by supporting the losers of globalization in building a new future.

Towards “quality” investments?

The discussion then turned towards a new econometric study which aims at analyzing how “good” or “quality” investments, which are “inclusive”, could be fostered.

To achieve that it is first all necessary to decide the factors which should be taken into account in order to determine whether, and if so, to what extent an investment is “inclusive”.

The researchers of the study made a distinction between (i) FDI policy and framework composition, (ii) different FDI types, and (iii) FDI outcomes.

The first results show that all of these factors have an important impact on the outcome, which means that a much more nuanced view of FDI must be developed for this new narrative. It also was admitted by the researchers that there is still a lack of sufficient data regarding the various FDI types and FDI outcomes. Obviously, the vast differences in the economies of various is another complicated factor, which makes it difficult to provide easy answers.

As a one of the speakers pointedly concluded:

“it is not the same if an investor invests in producing microchips or potato chips”.

Preliminary results were also shown which indicate that foreign investors compared to their domestic counterparts generally pay higher wages, tend to have a higher productivity, create more and better jobs, and employ more female workers. In other words, foreign investors are in many cases already now providing relatively more inclusive investments than domestic investors.

A new positive globalization narrative

While this study has just been started and much more work needs to be done, the discussion raised several additional issues.

The first issue is the seemingly complete absence of required state action. Instead, many participants expect that multinationals will take on this responsibility, while states do not need to act. However, one may question whether this is not a too easy solution for the states. After all, the domestic Rule of law and governance situation in each state can significantly impact the level of “inclusiveness” of an investment. For example, if a state is run by practically one family clan, any FDI will naturally benefit mainly or exclusively that family clan and thus can never be considered “inclusive”. However, does this fact make every investment – even in for example renewable energy – automatically a “bad” investment? And is the investor solely responsible for the fact that the country is run by a family clan?

The second issue concerns the almost exclusive focus on multinationals in this narrative, whereas it is well-known that SMEs play a very important role in most, if not all, economies of the world. It therefore would seem necessary and appropriate to consider how these additional obligations – if they were to be imposed on investors – would affect SMEs. More generally, it would seem important to make a clear distinction between the needs and obligations of multinationals and SMEs. In other words, the narrative must also be “inclusive” vis-à-vis all types of investors and investments.

The third and probably most complex and contentious issue relates to the question of how states could make a distinction between “bad” and “good” FDI without discriminating against certain foreign investors. Arguably, a state could always invent and apply certain criteria, which would enable it to decide one way or the other as it sees fit, while the investor would be rather helpless against this kind of potential arbitrariness.

This in turn raises the fundamental question of whether this new narrative of “quality” FDI and “inclusiveness” can actually be effectively applied in practice? For now, it is too early to give a definite answer.

Nonetheless, the efforts of the OECD and most of its member states to continue to push for a multilateral framework, which promotes and supports FDI as an essential and important element for an open economy must be applauded. This is a rarely heard sound in these days.

The development of a new, positive narrative in support of FDI is any case a welcome tool to help fight the backlash against globalization.

 

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