International Investment Rules and the Environment: Stuck in the Mud?

By Zarsky, Lyuba | Foreign Policy in Focus, August 15, 1999 | Go to article overview

International Investment Rules and the Environment: Stuck in the Mud?


Zarsky, Lyuba, Foreign Policy in Focus


The governance of international capital flows will be one of the key environmental policy issues of the next decade. Along with labor, human rights, and other social advocates, environmentalists are increasingly demanding that international rules and corporate norms governing investment explicitly embrace environmental and social performance goals.

The 1990s witnessed a sea change in the pattern of international capital flows. In 1990, official sources accounted for more than half of international capital flows to developing countries. By 1995, over three-quarters came from private sources. The biggest story was the explosion in portfolio (equity and debt) investment, which soared from $5 to $61 billion from 1990-95.

The growth of foreign direct investment (FDI) is equally dramatic. From 1990-95, the volume of FDI flows to developing countries nearly quadrupled. Reflecting a strong "rich country bias," the lion's share of FDI still flows between G-7 countries. Nonetheless, developing and transition countries,

especially China, have become important FDI recipients.

The surge in FDI has been propelled by global and national moves toward trade and investment liberalization. According to a recent UNCTAD (UN Conference on Trade and Development) report, 95% of the 599 changes in laws and regulations governing FDI in developing countries between 1991 and 1996 were directed toward liberalization.

Given the lack of effective state regulation in many developing countries, the explosion of FDI has triggered a hot debate about how to govern global investment. The debate revolves around assessments of environmental and social impacts of FDI in both home and host countries. The key question is whether--and at what pace--globalization will induce standards to harmonize upward or downward.

Environmentalists argue that, given the current lack of national and global regulation, the gravitational pull is decidedly downward. Gaps in standards either draw the dirtiest OECD (Organization for Economic Cooperation and Development, composed of the world's 29 wealthiest countries) industries to developing countries or encourage foreign firms to pollute once they get there. In either case, the effect is the creation of "pollution havens". In addition, local and/or national policymakers and communities compete intensely to attract or retain FDI, especially by powerful multinational corporations (MNCs), which are increasingly establishing global production and supply networks. Less onerous or "more flexible" environmental regulation is a locational bargaining chip. The result? A "race to the bottom" in environmental standards, as OECD countries struggle to keep MNC investment at home. …

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International Investment Rules and the Environment: Stuck in the Mud?
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