Tuesday, May 1, 2007
Do Investment Agreements Attract Investment?Evidence from Latin America
Kevin P. Gallagher and Melissa B.L. Birch
Journal of World Investment and Trade, December 2006
In a globalizing world where many developing nations lag behind the developed world in standards of living, developing countries increasing look to foreign direct investment (FDI) as a source for foreign currency, employment generation, and to gain access to cutting edge technology. Over the past twenty years the U.S. government has argued that signing Bilateral Investment Treaties (BITs) and regional trade agreements with strong investment chapters will bring the more foreign investment to the participating country or region.
This new paper calls these claims into question. GDAE’s Kevin P. Gallagher and Melissa Birch find that signing a BIT with the United States does not have an independent effect on attracting foreign direct investment from the United States.
Their paper is the first to look exclusively at the determinants of foreign investment in Latin America. It draws on an extensive dataset of U.S. foreign investment in the region between 1980 and 2002. The most significant determinants of foreign investment are the degree to which a nation has a large or growing economy, and whether the nation has achieved macroeconomic and political stability. Their findings are consistent with the majority of studies on the determinants of foreign investment in developing countries. Though a small handful of studies have found some evidence of a BIT-investment link, recent studies by the World Bank and Yale University have found that BITs on their own do not attract investment.
In an interesting twist, the authors do find that there is a correlation between the number of total BITs signed and the amount of foreign investment that flows to Latin American countries. In other words, countries that are signing BITs with countries besides the United States are attracting more foreign investment.
If the findings in this study and the others on investment treaties and FDI are correct, they suggest that developing country governments should think twice before signing an investment treaty with the United States. The treaty may stimulate little investment, and such treaties carry costs, most notably limitations on the policy instruments governments can use to promote national development.
http://www.ase.tufts.edu/gdae/policy_research/BITs.htmlA Bilateral Investment Treaty (BIT) is defined as an agreement establishing the terms and conditions for private
investment by nationals and companies of one state in the state of the other. Generally, these types of agreements eventually lead to the betterment of the economic development of a country, except for the USA. Most of the treaties signed with the USA have not benefited the developing countries at all. This is extremely odd, as treaties signed with other countries have helped the less developed countries.
The signing of these treaties is only possible because of globalization. The number of treaties signed between countries is increasing each year, as the world realises that to survive we must stick together. Globalization is playing a great role in combating the problems faced by developing countries. Due to these treaties, developing countries have more income, which they can spend on improving the conditions in their country, as well as investing so that the country's economy grows.
Yet globalization is also a danger. Looking at the evidence, any treaties signed with the USA have hindered, rather than helped less developed countries. Such treaties are not one sided, but come at a cost to both parties. So, apart from not gaining any foreign direct investment, the poorer country will have to bear the costs of the treaty.
In a way, this cartoon shows what it is like for the developing countries as compared to the developed ones. They are overshadowed by them, but there is no way that they can grow without their help. Globalization is not without complications.
Labels: economic globalization, money
11:06 AM
