UNCTAD secretary-general Mukhisa Kituyi lays out the proactive and dynamic policies that will help the world to rethink trade and investment
As countries continue to work on the levers of dynamic growth and sustainable development, a central strategy has been to attract foreign investment to enhance a country’s participation and movement along global value chains. This approach is not only expected to increase a country’s domestic productive capacity and competitiveness, but also, ideally, to instigate structural transformation.
Plugging into GVCs has indeed been correlated with higher growth and improved productivity, yet there are also significant risks to pursuing this as a development strategy. These risks include getting locked into relatively low value-added activities, the potential footlooseness of GVC activities and increased vulnerability to external shocks.
For the first time in 30 years, the growth of GVCs in the past decade has come to a halt, with the share of foreign added value declining to 30% in 2017. This decline is consistent with broader trends, including the recent slowdown in economic globalisation and weakened trends in foreign direct investment. Given that deeper integration in GVCs can act as an important development lever, this stagnation is worrying, especially for the poorest regions.
Despite the slowdown, many countries, including G20 members, are continuing to promote greater openness to foreign investments and integration within GVCs.
Investment liberalisation provisions were among the most prominent measures implemented, along with efforts to promote and facilitate investments by simplifying administrative procedures, providing incentives and establishing special economic zones.
Given that more and more measures are rather favourable to foreign investment, what then are some additional policy changes that countries need to consider in order to enhance trade and investment flows through GVCs, especially for the purpose of promoting the participation and competitiveness of local small and medium-sized enterprises?
A more coherent policymaking approach
The transfer of intermediates and the coordination of tasks among network actors of a GVC results in business operations interacting with multiple policy areas at different levels on more than one occasion. Inconsistencies among these different policy areas or levels adds a layer of complexity and cost to the functioning of the GVCs.
Therefore, should a country want to pursue a strategy of creating a more enabling policy framework for GVCs, it cannot only undertake reforms within a specific policy area – in this case investment – but would rather have to ensure investment policy reforms are conducted coherently and synergistically with other policy areas.
Through its reform package of the international investment regime, the United Nations Conference on Trade and Development helps states identify the key areas of policy incoherence between investment policy instruments and other non-investment laws and policies, and in turn to consider solutions.
Specifically, UNCTAD helps countries enhance their policy coherence and synergies holistically across two dimensions: first by maximising synergies between international investment agreements and the national legal framework for domestic and foreign investment; second by managing the interaction between those agreements and other bodies of international law that touch upon investment.
Preserving space for dynamic policymaking
Experience shows that measures to attract foreign direct investment are not enough, given that the positive spillovers and linkages expected from plugging into GVCs do not necessarily materialise automatically or optimally. Countries are therefore increasingly undertaking more proactive and dynamic policymaking to experiment and identify the right mix of policy instruments that would enable them to respond effectively to rapidly changing global circumstances and to achieve their national development priorities. Consequently, industrial policies have become ubiquitous. Just in the last five years, at least 84 countries – both developed and developing, accounting for 90% of global gross domestic product – have adopted formal industrial development strategies.
Recognising the impetus towards policy dynamism, UNCTAD in its World Investment Report 2018 provides guidance on how to update investment policy instruments for creating more effective modern industrial policy strategies. It provides specific guidance on how to reorient domestic investment policymaking and how to leverage flexibility mechanisms to avoid creating undue policy constraints through international investment agreements.
We recognise that striking the right balance between policy coherence, consistency and dynamism will be a significant challenge for all countries, and for developing and least-developed countries in particular. A more collaborative approach will be needed, one that encourages the exchange of best practices, is open to international productive-capacity cooperation and coordinates efforts to avoid beggar-thy-neighbour outcomes. Given the importance of GVCs as a lever for development, the G20 has a vital role to play in promoting such a collaborative approach.