Co-facilitators,

I am pleased to make this statement on behalf of the Group of 77 and China in this segment of the debate as we review Chapter II; "mobilizing international resources for development; foreign direct investment and other private flows". We thank you both for facilitating the process.

The Group of 77 and China wishes to emphasize four points at the outset, namely:

1. Chapter II on the mobilization of private international resources is conceived in the Monterrey Consensus as integral to the achievement of the objective or goal of the Monterrey Consensus as set out by world leaders in paragraph I, "to eradicate poverty, achieve sustained economic growth and promote sustainable development as we advance to fully inclusive and equitable global economic system".

2. Chapter II also sets out a list of specific policy actions required in the context of mobilizing international resources for development by way of FDI and other specific flows. Paragraphs 20 to 25 elaborate on those actions with even greater specificity. We need to undertake this review exercise in the spirit of those policies, the extent to which they have been implemented and the developmental impacts they have generated.
 
3. The fundamental purpose of mobilizing the international private flows is "for development", that is, for the benefit of the developing countries, not the owners of the foreign resources. They must naturally be compensated, but if they are the prime beneficiaries, then the objective of the Chapter would not be met. The G77 and China recognizes that this will not be easily achieved in a totally competitive environment, but our leaders were not unaware of the difficulty when they stressed the potential importance of foreign direct investment "to transfer knowledge and technology, create jobs, boost overall productivity, enhance competitiveness and entrepreneurships and ultimately eradicate poverty through growth and development." Put differently, the objective and the challenge is not just to stimulate foreign private flows, but private flows which lead to development. Our assessment of performance therefore cannot be just quantitative, that is, the annual growth in foreign private flows, but also qualitative. What does the foreign private flow leave behind in the long term? What is the level of corporate responsibility displayed by the foreign investor?

4. The chapter does not only address foreign direct investment but includes "other private flows". These other flows would include loans to public and private sectors, foundations and other philanthropic flows. Capital market borrowings, especially at variable exchange rates, are potentially destabilizing. This is likely to be particularly true where loans go into long gestation investments such as physical infrastructure and social sector activities like human resource development. Policy must seek to stimulate, identify and quantify such other sources of private flows. They also must be assessed qualitatively against the "development" benchmark. For example, flows for disaster relief should be separated from flows for development.

Co-facilitators,

Against the expectations of our leaders for Chapter II, the critical issue is what has been the performance of foreign private capital since the Monterrey conference of 2002. A few points stand out:

- The data available is more for foreign direct investment and private loans but less for short-term rent-seeking flows and do not take account of reflows from these investments.

- Foreign direct investment to developing countries, as a group, has increased between 2000 and 2006 but the net addition to productive investment is difficult to determine.

- The FDI flows to developing countries are concentrated in a few countries and in a limited number of sectors. The sectors of attraction are largely the primary extractive sub-sectors, mainly energy (oil and gas) and the tertiary sub-sectors, mainly finance, information and communication and tourism. Most of these sectors have limited spread effects especially in terms of employment and tax revenues.

- The competition for these private resource flows has been intense leading to significant, competitive incentives by developing country Governments. Incentives to the private investors have been reinforced by developed country Governments through provisions negotiated in bilateral agreements with developing countries and in multilateral agreements such as trade related investment measures (TRIMs) and the TRIPS in the World Trade Organization. Importantly, under most of these agreements, developing countries have been constrained in the use of performance measures which would assist in encouraging investors to contribute to developmental goals.

- A significant proportion of direct foreign investment has been through mergers and acquisitions, including from privatization, which indicate substitution rather than addition to the stock of capital and in many cases to a reduction in overall employment through rationalization and increase technology utilization.

- Other private flows such as portfolio capital have been mainly speculative with significant volatility and a high potential to induce pressure on the stock and foreign exchange markets. These flows, in significant measure, account for the pressure on developing countries to hold increasing levels of domestically mobilized resources in foreign reserves to defend the local currency against speculatory challenges.

- A number of developing countries, especially in the middle- and lower-middle income groups, already have very high, unsustainable levels of debt. Low income and particularly HIPC countries which have benefited from debt reduction do not have access to additional borrowing. In any event these countries would attract the most disadvantageous borrowing conditions. Put differently, developing countries which have difficulty attracting foreign direct investment also have difficulty attracting foreign private loan resources.

Co-facilitators,

Developing countries, have been, as was stated in the discussions on chapter I, and in accord with their commitments in the Monterrey Consensus, enhancing their macroeconomic policy and management,  engendering stability and predictability in their investment environment, including through financial and investment sector liberalization, the promulgation of investment codes, the concluding of bilateral investment treaties (BITs), and double taxation agreements and offering significant tax and other incentives.

Developing countries are however very diverse, both in their sectoral and quantitative needs for foreign investment resources. Some developing countries have significant foreign exchange resources and are even foreign investors in developed and other developing countries. Some, especially natural resource rich or which have large domestic markets are targets for foreign investors in search of large profits especially in the short term. The majority of developing countries however, especially those at lower levels of development, those with limited natural resources and small national markets or which face other development challenges such as remoteness or being landlocked require long term investment for areas such as basic infrastructure. Typically they have difficulties in mobilizing private investment flows. One explanation is that their investment requirements are long term, low profit yielding and have high unit cost. These countries have to make special efforts, that is, pay a premium in incentives or otherwise to attract foreign private capital. The Commonwealth Secretariat has estimated that this investment premium could average 20% for small States.  

Co-facilitators,

The leaders anticipated this situation in the Monterrey Consensus.  After outlining all their expectations of developing countries in paragraph 21, they stressed in paragraph 22 that "to complement national efforts, there is need for the relevant international and regional institutions, as well as appropriate institutions in source countries to increase their support for foreign private investment in infrastructure and other priority areas… in developing countries and countries with economies in transition."  They then listed a number of areas in which support could be provided by external institutions and governments.  All of these are in addition to their charge in paragraph 6 that "national development efforts need to be supported by an enabling international economic environment."

Co-facilitators,

As the Group of 77 and China pointed out in its statement yesterday, the international community has done little to create a supportive and enabling international environment for broad-based development.  There have been few initiatives by developed countries to incentivise their investors to invest in developing countries, and in some cases there are strong sentiments against investments in developing countries and this is seen as exporting jobs.  Efforts by the international community, including developed countries, are usually to push developing countries to provide even more facilitative environments. There has been little effort by the international community to provide the stable international environment or to sustain the "sufficient and stable private financial flows to developing countries and countries with economies in transition" called for in paragraph 25.

Co-facilitators,

The review of this chapter has to take a detailed look not only at aggregate performance (flows) but also at the specific circumstances of the various categories of developing countries, and fashion proposals which can respond to different circumstances. No "One size fits all" solutions and no further expectations of developing countries will address this situation.

I thank you.