Role of Investment Promotion 1 November 15, 2011 At the Brink of Recovery or Conflagration: The World at a Tipping Point © Enrique Woll Battistini 2011 The world the baby boomer generation’s grandparents knew as children has been obliterated by a century of recurring monstrous wars, concurrent with exponentially increasing revolutionary scientific and technological discoveries and inventions, and massive economic, social, political, and legal changes which for many signify development. These changes have occurred in a stark and pervasive moral and ethical vacuum, in the context of unconscionable, unsustainable, and monotonically increasing welfare disparities between the rich and the poor. The world as we know it now is at the historical fork between the threshold of recovery and the brink of a new conflagration, indeed at a very promising and very threatening tipping point, and begging for drastic global financial, economic, and social redress, which only the most comprehensive multilateral and national governance reforms that would redefine the social contracts in the East and the West, the North and the South, and between them, could satisfy. Some of the more evident issues in need of holistic attention are the following. The failure of post World War II governance paradigms It appears that the world has reached a point where the paradigms of national and supranational government in the fields of finance, industry and commerce, justice, and security, at both levels, established at the end of World War II through global institutions such as the United Nations, the World Bank and the International Monetary Fund, have on the one hand reached a certain level of philosophical irrelevance, and on the other, a level of practical incompetence, a la Peter Drucker. In this situation would also fall, under their own weight, sooner rather than later, the old British Commonwealth of Nations, the Organization of American States, the Commonwealth of Independent States created by the Russian Federation after the Soviet Union's demise, with its recent Eurasian Economic Community, the North Atlantic Treaty Organization, currently without  Role of Investment Promotion 2 any counterweight, and even the European Union, preceded by its Euro Zone and nascent fiscal union, and the probably hundreds of dependent organizations, treaties, and multinational projects. This will be so, of course, if the pernicious global socio-economic disorder, a historical ball and chain legacy that is being dragged about in this new century, and millennium, to common loss, and which is now focused on by new global protest organizations such as Avaaz.com and Los Indignados, and Occupy Wall Street, in a climate of neglected global warming and pollution, is sufficient indication of the incompetence of these mammoth and very expensive governance organizations to solve the serious problems facing humanity at large. This global disorder, which at the end of last century and the millennium operated somewhat below the radar of the great majority, which still accepted with some hope each day as it came, suddenly became visible, to all, as of the abominable event of September 11, 2001, and the resulting advent of new, frightful, and costly wars in the Middle and Near East, always fratricidal, and increased terrorism, and is frontally contravening the ambitious objectives of the fight against poverty of the United Nations for this new Millennium. This world disorder has been widening at an accelerated pace since the Lehman Brothers bust in 2008, with the recent repeated threats of insolvency by the U.S. Government, because of the blind political and fiscal disagreements between Democrats and Republicans, with the 2011 Arab Spring of unpredictable consequences, which may well be worse than terrible, and with the near term threat of chained bankruptcies in European Union countries. No one is exempt from this without large, and in some cases enormous, sacrifices. There remains, then, only the Organization for Economic Cooperation and Development, whose high principles and achievements deserve generalized attention, as an ideological and practical resource, and forum, for the democratic reformulation of the purpose of the current supranational and national entities, and their reorganization, or for the design and development of better institutions to replace them. The much-quoted New World Order, candy bait that led the G8 to the wars against Afghanistan, and Iraq, by the nose, is now, clearly, the manifest of the New World Disorder. The Formulation of Ad Hoc Green Development Strategies  Role of Investment Promotion 3 Undoubtedly, all countries must by force examine their own geographical, social, and economic realities to formulate ad hoc visions and strategies for prosperous futures, in the context of a globalized world caught in a menacing global warming that promises to invalidate many of our 20th century core beliefs, attitudes, and behaviors, and applied technologies and policies. The need to deal with the problem of how to reduce carbon emissions is at or near the top of the list in these endeavors. But the use of Carbon Bonds appears to be a tricky solution to the disproportionate levels of emissions by the OECD countries -some 30 and all except Australia in the Northern Hemisphere- relative to those of countries in the Third and Fourth Worlds, with many in the Southern Hemisphere. Indeed, if Carbon Bonds should be issued in connection with projects that apply green technologies in the latter countries, but that happen to be advantageous economically, relative to other technologies, even before the funds thus raised are considered, such investments could not be legitimately considered to cause reductions of global carbon emissions, and the application of the carbon credits pertaining to those bonds, to existing or new projects that apply technologies that carry carbon emissions at or above the average in the former countries, for economic advantage, should not be allowed under any circumstance. This restriction would continue to appear reasonable whether or not these projects were profitable despite environmental damage-related penalties levied on them, but more so if profit were derived after such penalties. In addition, if the application of green technologies in Third and Fourth World countries were economically feasible only with the benefit of Carbon Bonds, it would seem reasonable to consider, in short order, not only the potential for global reduction of carbon emissions but of all emissions, effluents, and contaminants of the environment, in order to determine the applicability of credits intended to be applied in the context of programs aimed at improving the much deteriorated globe we live in. The definition of a nation in the wider global context Whether or not a Global Financial Authority that would, for instance, constitute a World Central Bank having as voting members the two hundred or so existing  Role of Investment Promotion 4 National Central Banks, or simply regulate them, is on the horizon, and it very well might, no nation can today afford to define itself, its citizens, and its objectives within the sphere of its current or even future domestic concerns and interests, and must do so in the wider global context, as is very obvious to all. This is especially true of the USA, the sole remaining superpower, the lone leader of the West, if not the world, especially in the context of domestic and foreign poverty, whose resolution is mutually dependent, and without which real and meaningful long term world peace based on justice, and not arms, will never be had. This happy ending, I fear, will not happen spontaneously as a result of economic and social growth, and will require Global Private-Public Partnerships for Development, with Multilateral participation. But Government plans for domestic action of any kind, moreover against domestic poverty, and Government plans in the multilateral context for hemispherically articulated action against poverty in the Americas, or worldwide, if ever really considered, are hindered and defeated by commonplace political realities in the USA, such as those which beleaguer President Obama. Given the paradoxical reality that warring is a known quantity, ever present in the American folklore, and a recurring phenomenon in practice, whereas large scale Private-Public Partnerships for Development, and peace, are simply not, I believe that movements such as the Ninety-Nine Percent Declaration should take into account the wider global economic and social protest context. This threatening groundswell, which must be addressed, is exemplified by the “Los Indignados” of Spain, begun on May 15, that has spread not only to the USA, in the form of Occupy Wall Street, begun on September 17, but to the UK, is being amplified by other movements, in the First World, in the context of the European crisis, and is widening its reach to very many other countries in it and in the Second, Third, and Fourth Worlds, echoing the current global revolution begun earlier this year in the Arab Spring. The XXI century tax reform Taxation is of obvious world importance in this century of growing confrontations between the rich and the poor, in which general social peace will be attained only if we can fast establish a privately led Private Public global  Role of Investment Promotion 5 articulated system for sustainable development: That is, a system for comprehensive, fair, and environment friendly development. It is also fitting to note that the development and dissemination of an effective proposal for such a system would necessarily require and include a proposal for a complementary major global tax reform through which the public sector could yet make its greatest contributions to development in the XXI century. Taxes should not be instruments of envy, of punishment, or of abrupt economic or social leveling of the peoples. Most persons, no doubt, would agree with this. And taxes should also not be used by the State primarily as instruments of social manipulation, or of indirect management or control of economic activities, not even those of national interest, because economic health should result, primarily, from essentially unhindered private sector activities. This approach is not direct enough and is subject to the usual corrupting effects of special interest lobbies. Rather, the economy should be free to run its course under a legal framework that restricts it from generating significant negative externalities by directly prohibiting and limiting activities that would give rise to them, by responsibly licensing activities that require regulation, and by ensuring that all such costs be included in pricing. The State can and should preserve the health of the economy, at the macro level, essentially through the Central Bank, and the Treasury. These institutions must act with independence, and coherence, within the general and specific regulatory frameworks applicable to the activities of the public and private sectors. The former, by controlling inflation through adjustments to the discount rate, and through purchase and sale operations of Treasury bonds in the open market, and the latter, by complementing, by exception, the funding of the comprehensive State budget by responsibly incurring and retiring debt, by issuing and calling its bonds as may be appropriate. Thus, taxes should not only be the source of State funding, in order that it may fulfill its constitutional ends, but must also be its source par excellence, almost exclusive. In addition, the constitutional ends of the State and its consequent activities must constantly aim at the direct search for tangible citizen welfare through the provision of services within its exclusive competence, in the areas  Role of Investment Promotion 6 of Environment Food and Health Security, Energy Education and Comprehensive Development Security, Social and Internal Security, and National Defense Security, drastically limiting the supplementation of State tax revenues through indebtedness, or complementary activities, or entrepreneurial ventures, particularly those in which it would compete with the private sector, something with which the great majorities would also agree. Moreover, when State interventions in private sector activities are socially necessary, accepted, and extant, they must not be conducted by the State as entrepreneur, as stated, save in rare exceptions, and must always be done directly, through the comprehensive State budget, targeting the pertinent strategic sectors and actors, without neglecting the most impoverished social strata, and without resorting to special tax regimes. Now therefore, having linked the tax issue with the constitutional ends of the State, in its natural context, which is the comprehensive State budget, the heart of the State fiscal system, and a fundamental instrument of governance, it should be noted that the State fiscal system in the XXI century must gather certain essential characteristics for the State to be able to comply in the most effective and efficient manner with its central objective, the direct search for tangible citizen welfare: 1. Conceptual simplicity 2. Administrative simplicity 3. Fiscal divorce 4. Absolute transparency The indicated conceptual and administrative simplicity requirements would demand the existence of a single tax, or sole tax, which would be a sole consumption tax, or SCT, applicable exclusively at the consumer product level without exception, and would have a flat fixed rate, say of less than 20%. That is, the SCT would be applicable to the goods and services produced wholly or partially in the country, for direct personal consumption, acquired by individuals, or by legal entities, regardless of the purposes or uses intended or given, including as inputs, or for resale, or for export. This tax would be paid by  Role of Investment Promotion 7 individuals and legal entities upon each purchase, in a manner similar to that of the current payment method of the general sales tax, GST, segregating its amount, in the invoice, from the total price of goods and services concerned, with the individuals or legal entities selling, that would collect it, regardless of their nature or size, incurring the obligation of immediate payment to the Tax Authority, as allowed by the information and communication technologies in existence at the time. The conceptual and administrative simplicity required would also demand, as already stated, the absence of special tax regimes, that is, the absence of tax credits of any kind, or deductions, or exemptions, or reductions, or fragmentations, or waivers, or any distinction in the tax rules applicable to different legal entities or different individuals, or between these categories. Thus, having only the SCT, there would be no taxes on income, or property, or inheritance, for example, and it would per force have to be collected and administered at the central level by the Tax Authority and the Treasury, respectively. The required fiscal divorce within the State would consist of and require the total and irreversible separation and independence of the category of revenues from the category of expenditures in the comprehensive State budget, that is, of SCT collections from the category of uses or applications of funds to public expense and to public investment, without exception, beyond the correspondence that they must keep to maintain a reasonable fiscal balance and the national debt from Treasury bond issues at a minimum level, and under control. Therefore, the comprehensive State budget must consider and include a National Prosperity Reserve Fund (NPRF) which would allow for the growth of public spending and investment in line with the historical growth of the national GDP in times of Economic Recession, and even of Economic Depression, that is, that would enable the State to perform compensatory counter-cyclical economic stimuli whenever convenient. Furthermore, in the absence of the referred traditional instruments of manipulation through taxes, in order for the State to be able to comply fully with its primary purpose, which would be the direct search for the tangible citizen  Role of Investment Promotion 8 welfare, as pointed out, there would per force be cases of socially necessary and accepted State interventions in private sector activities, that it would not perform as an entrepreneur, but rather would be made directly, targeting the pertinent strategic sectors and actors, without forgetting the most impoverished population strata, by means of nonrefundable contributions, or of loans, or of complementary capital stock, by the Treasury according to the referred comprehensive budget. These interventions by the State in the activities of the private sector, through the Treasury, would be subject to private and public oversight, to satisfy the requirement of absolute transparency, by publishing the details of each case in the corresponding Web page, as part of the fiscal accountability of the nation. This new instrument of economic stimulus, and of social justice, would eliminate the deceptions and errors to which the more complex elements of the current tax system are subject, by individuals and legal entities, as well as the armies of private sector lawyers constantly confronted with the armies of public sector lawyers that produce a zero-sum economic result. In addition, this instrument would simplify the State function, allowing its reorganization, reform, and consequent reduction and public savings, and would eliminate tens of thousands of lawsuits of all types related to tax issues and the consequent futile efforts of and at the Judiciary to make or undo justice, resulting in savings and increased productivity in the private sector. A fiscal system of this kind, under equal internal and external economic environments, in comparison with the current, traditional system, would not only facilitate but would encourage the establishment of a socially acceptable minimum standard of living for the most impoverished, by aiming to achieve, over time, for the poorest population stratum that would together generate 1% of the national GDP, a monotonically increasing average per capita consumption relative to the national per capita GDP, that, in a context of national per capita GDP growth, especially, would constitute an objective, and realistic, economic and social growth and inclusion index, according to the economic possibilities of the nation.  Role of Investment Promotion 9 Thus, a worthy and realistic national goal, in the mid to long term, would be to attain a consumption level for the poorest population stratum together generating 1% of the national GDP of not less than, say, 10% of the consumption level of the stratum comprised by the wealthiest individuals together generating a reference level of 50% of the national GDP, with the concomitant stimulus to savings and investment. Over the remainder of this century, this reference level would be slowly and judiciously decreased for greater equality and inclusion of the poor. Given time, this fiscal system would, at the micro level, achieve this goal and the wider national objective of economic and social inclusion, by allowing the financing of all manner of regular and emergency social support programs, including a program of supplementary liquid income, and their monitoring in a scheme of comprehensive zero-based State budgeting by results, with the necessary transparency to effectively combat corruption in the public and private sectors. Crucially, a fiscal system of this type would enable the citizen determination, in a democratic and direct manner, of the percentage share of the various categories of expense and investment in the comprehensive State budgets, at least for the aforementioned broad categories of Environment Food and Health Security, Energy Education and Comprehensive Development Security, Social and Internal Security, and National Defense Security. ***  Role of Investment Promotion 10 Running head: ROLE OF INVESTMENT PROMOTION ORGANIZATIONS The Role of Investment Promotion Organizations in Third World Development Enrique A. Woll B. CENTRUM Católica October 31, 2007  Role of Investment Promotion 11 Abstract The capitalization imbalance between the northern hemisphere, and the southern hemisphere, developed countries and the underdeveloped, and between OECD countries and the rest, suggests that something may be failing in the capital markets’ capacity to arbitrate investments: It would seem that it does not function effectively, and that the not so uncommon perception of increasing relative backwardness of the Third World is true. If so, beyond investigating its causes, it is necessary to investigate the attributes, achievements, and plans of existing multilateral and governmental poverty eradication and economic development organizations, and of their private counterparts, and the regulatory environment, in order to determine the need and opportunity for the creation of new private-public systems to increase the north-south investments rate.  Role of Investment Promotion 12 The Role of Investment Promotion Organizations in Third World Development Simply stated, this article constitutes a preliminary search for the underlying causes of, and relationships between, the capitalization imbalance between developed countries and the underdeveloped, the capital markets’ international investments’ arbitration capacity, and the relative backwardness and extreme poverty of the Third World and Fourth World, respectively. It identifies key research questions that deserve to be addressed in this quest. It is inspired by the dire circumstances faced by the poorest of the poor, and the apparent need and opportunity for the creation of new private-public systems to increase the north-south investments rate. The Nature of the Problem Echoing a common perception of increasing relative backwardness of the Third World, Messinger & McCullough (2005) reported that: We live in a world of both endless possibility and immense injustice. The disparity between the very rich and very poor continues to grow, creating dangerous inequality. A world in which few prosper and many starve offends our commitment to fairness and insults our belief in justice for all. (para. 16) The gravity and intolerable nature of the phenomenon of extreme poverty and inequality they protest is readily apparent when one considers that “One billion people in the developing world live on $1 or less a day, lacking clean water, electricity, food, education and medical care” (Messinger & McCullough, para. 1). In this unhappy context, Manfred Schekulin (2005), Director, Export and Investment Policy, Australian Federal Ministry of Economics and Labour, and Chair of the OECD Investment Committee, in taking stock of the effects of Foreign Direct  Role of Investment Promotion 13 Investment, or FDI, on development over the last decade, noted what, for the destitute, is surely reason for hope: Private investment is a dominant force driving globalization. Cross-border investment flows have tripled over the last decade alone and foreign capital stocks are now twice the size of global GDP. Private investment is acting as a powerful catalyst for growth and, and as emerging economies from Asia to South America have shown, is one of the surest ways to sustained poverty reduction. (p. 26) But Schekulin, though, was quick to point out that not all countries are benefiting fully from the potential of higher investment: Flows of international capital to developing countries are concentrated in a handful of economies, with Africa virtually absent as an investment location. In 2003, five non-OECD countries accounted for more than a quarter of the total value of OECD country investment outflows. (p. 26) And thus, in the context of the capital markets’ capacity to arbitrate north-south investments, Schekulin (2005) brings to mind, and makes it apparent, and all but evident, that the natural selectivity of capital flows, in so far as its dark side is concerned, that is, its exclusionary effects, if clearly beyond the bounds of reasonable caution, hesitancy, or the sporadic flights to which transient adverse market reality will encourage investment, or if transcending, by far, the available market information that would explain its persistence, would be the real nature of the problem, the proximate cause behind the marked capitalization imbalance between the hemispheres. However, of course, in addition to any functional irrationality, there would be acting upon and determining such seemingly capricious flows, albeit in unknown measure, many significant limitations the capital markets are evidencing today, of a practical nature,  Role of Investment Promotion 14 such as technological insufficiency, and domain limitations, posing as flaws or imperfections, as well as other, perhaps more directly tractable causes of this imbalance, of a social, economic, and political nature, both spontaneous and imposed, including through governmental or multilateral action or inaction (Johnston, 2004; Ali, 2005; Schekulin, 2005), that, in concert with the foregoing, may further and crucially diminish the urgently required and reasonably expected southward flow of FDI, and thus constitute formidable pillars of underdevelopment for the Third World. But in the final analysis, this would be the problem that would matter: Insufficient southward-bound FDI flows, whatever its causes, in the context of a marked north-south capitalization imbalance, and extreme welfare differences, when capital is deemed essential to production, and increased capital to increased productivity and development, when inadequate capitalization levels may serve to perpetuate the status quo. Evidently, if real, it should be simultaneously targeted from many places and angles. The Importance of the North-South Capitalization Imbalance To be clear about the transcendental importance of the problem presented by the referred apparent capital markets’ irrationalities, and limitations, in the context of societal vices which gravely distort, and even impede their normal workings, and detracts from the flows of FDI to where they are needed the most, and of investigating it in search of theoretical and practical solutions, it should be noted that very few of those living in the post-communist 21st century, regardless of latitude, or country, would dispute the fact that direct investment is inextricably linked to the opportunity to work, survive, and prosper, whether it be of national origin or FDI, private or public, or whether it be in general infrastructure, buildings, equipment, or technology, or whether it be in intellectual property, proprietary or indeed public-domain. Further, it is common knowledge in the contemporary world that investment, particularly of private risk  Role of Investment Promotion 15 capital, is the crucial engine of development, in any country, and is especially important in the case of FDI and Third World countries (Schekulin, 2005), increasing their capitalization for growth ("Wrong Way Around," 2005). Thus, it would be unnecessary to prove that, in a general sense, inadequate capitalization levels would restrict the welfare and development of these countries, at least relative to that of other better capitalized ones in the First World, helping to explain the widespread tangible problem of people living on a dollar or less a day, and that, conversely, increased FDI flows would be beneficial to them and the underdeveloped countries they live in, by increasing their absolute levels of capitalization (Schekulin, 2005) and employment. Finally, if there is doubt regarding the extreme to which the north-south capitalization imbalance has manifested itself, and how likely it may be that this situation will change spontaneously, or soon, it should be considered that only two of the thirty OECD countries to date, Australia and New Zealand, are in the southern hemisphere. See Appendix. Poverty Eradication and the State of the Art of Development In connection with the grave problem of extreme poverty and inequality, Messinger & McCullough (2005, para. 3-4) claimed that the achievement of the Millennium Goals of the United Nations, agreed by all of its 189 member states in 2000, of reducing global poverty by the year 2015, and halving the number of the extreme poor, is possible given three main requirements: (a) international debt relief for the poorest countries, (b) increased development aid from the wealthiest countries, and (c) trade agreements that are fair and do not pose a threat to livelihoods and or medical needs of the extremely poor. According to Messinger & McCullough (2005), in June that year the United States and Great Britain agreed to cancel the debts of 18 countries with the International  Role of Investment Promotion 16 Monetary Fund, the World Bank, and the African Development Fund, but over a dozen countries that qualified but refused to comply with harmful economic policies required by creditors were turned down. In 1970, per Messinger & McCullough, the world community set the goal of raising humanitarian aid to the poorest countries to 0.7% of the gross national product of wealthy nations, but as of 2005 the United States was only contributing a scant 0.16% and had no plans to increase it. Messinger & McCullough set forth an example of how trade deals can be harmful to poor countries, citing the case of the Central American Free Trade Agreement, or Cafta, stating that: As written, Cafta would benefit a relative few at the expense of the poorest of the poor. Lack of access to lifesaving medicines, lax labor laws and heavily subsidized American produce flooding into the region – forcing small farmers out of work and deeper into poverty, as the North American Free Trade Agreement has already done in Mexico – are all potential hazards of this unjust policy. (para. 15) FDI, which includes such things as acquisitions, mergers, and factories built abroad, and increases both the integration of global markets and the rate of economic growth in receptor countries, by an estimated 0.4% for a one-percentage-point rise in the ratio of the stock of FDI to gross domestic product, is for those reasons a closely watched statistic in the world ("Wrong Way Around," 2005). The biggest source of FDI are the wealthiest countries in the Organization for Economic Cooperation and Development, OECD, but, in recent times, after its flows peaked in 2000 as a result of massive cross-border mergers between its member countries, a three year slump ensued ("Wrong Way Around," 2005), to the detriment of developing countries. Fortunately, in 2004 a new report from the OECD showed that total FDI outflows from OECD countries, though below their 2000 peak, by far, were at $667.8 billion while inflows  Role of Investment Promotion 17 were only slightly over $400 billion ("Wrong Way Around," 2005), and importantly, though tempered by a disturbing caveat: Foreign direct investment is beginning to flow in the right direction: out of the slow-growing wealthy countries and into emerging markets. But overall, capital is still moving from the developing world to the developed—and, in the process, helping to increase the imbalances that put the world economy at risk (para. 1). Indeed, Ben Bernanke, a governor of America’s Federal Reserve, “argues that the recent increases in the current account deficit are in fact the result of a global savings glut pouring out of the developing world” ("Wrong Way Around," 2005, para. 9). And, focusing on what might also encourage the flow of capital from the developing world to the developed, and reduce or reverse the proper flow of FDI, it should be noted that: Glenn Hubbard, a former chairman of President George Bush’s Council of Economic Advisers, argues that the culprit is weak financial systems; countries with poor investor protections, fragile equity markets and shaky banks offer few attractive opportunities for domestic savers. Government policies are also to blame, such as China’s machinations to keep the yuan weak, which forces it to buy massive amounts of dollars that are then invested in American securities” ("Wrong Way Around," 2005, para. 10). According to Ali (2005), “the world economy is in urgent need of a flow of FDI from the developed world into the developing countries, not vice versa” (p. 1). In fact, Ali proposed that since the early 1950s it has been recognized that for countries that have been recipients of FDI, it has been the most crucial factor in enhancing economic development and ensuring a reasonable standard of living. But Ali went further than Glenn Hubbard ("Wrong Way Around," 2005) on the topic of factors limiting FDI, parceling out the blame to include developed countries, stating that not only had trade  Role of Investment Promotion 18 and FDI been used to serve political goals but also that “. . . superpowers have frequently employed their political leverage not to further stability and economic progress in developing countries but to ensure the submission of the developing countries to their cultural and political domination” (p. 1). Expounding even further, Ali claimed that not only are most multinational companies driven [only] by profit maximization, thus failing to notice lesser but interesting investment opportunities capable of healthy returns, but that, “In addition, contrary to the globalization trend and the call for an integrated world economy, increasing numbers of MNCs espouse nationalistic investment policies. Consequently, they discriminate in their investment choices and destination according to their home country’s preferred foreign policy” (p. 1). The inconsistency of such nationalistic policies by developed countries with the principles of market economy place the disfavored countries in vulnerable economic positions, and together with the noted active political accommodations by MNCs and their zeal for profit maximization, would largely explain the widening gap between rich and poor countries, according to Ali, through diminished FDI inward flows to the latter, and may in fact constitute the first pillar of underdevelopment. But looking at factors internal to developing countries that help to explain the unfavorable financial markets reality, and the sometimes inadequate concomitant government monetary policies, even in major ones such as China, Ali (2005) identified the core nature of the backwardness that characterizes such countries, that may, to some degree, be self-reinforcing: (a) the absence of a vibrant middle class, (b) the absence of mature legal institutions, (c) the absence of transparent operations, and (d) the absence of remedies against fear and political instability leading to corruption. Ali proposed a convincing interpretation of the manner in which fear and political instability operates  Role of Investment Promotion 19 on the nurturing and cultivation requisite to the emergence of sound institutions and practices, and perverts development: In an environment of fear and instability neither nurturing nor maturity thrives. Worse, because of instability and frequent change in alliances, politicians in these countries are more likely to seek easy means to accumulate wealth, irrespective of legitimacy. Thus, it is to their advantage not to establish legal traditions and due process of law. However, because of their national and international networking, they tend to gain the trust and support of the power elite in the developed world. This appears to give them legitimacy and strengthens their economic positions. Consequently, profound and desired changes necessary to strengthening investors’ confidence in the institutions, especially legal ones, of many developing countries have become an impossible task. (p. 1) Thus, the second pillar of underdevelopment for poor countries, and many developing countries, may be the corruption which stems from an environment of fear and instability, impedes the emergence of sound institutions and practices, and diminishes FDI inward flows. In effect, Ali (2005) noting that “the depth of corruption in developing nations has seriously impeded FDI flow and constituted a threat to world economic stability” (p. 1), culminated by calling for responsible leaders to design “pragmatic means to counter corruption and prevent poverty” (p. 1). To that end, Ali prescribed that: It is possible to overcome the vicious circle of development and build sound institutions, if the leaders of the developed world embark on designing policies that prevent political/government corruption in developing nations, insist on transparent operations, minimize or end support for corrupt and authoritarian  Role of Investment Promotion 20 politicians in the developing world, and reverse the practice of using trade and investment in the service of political goals. (p. 5) To assess the significance of recent world FDI flows, and gain perspective, it should be fully noted that in 2004 net FDI outflows from OECD countries to developing countries was in the order of $261 billion, in contrast with the figure for 2003 which was $134 billion, according to the organization itself, and to this end, it is illustrative to briefly examine where some of these flows went: (a) China, mainland, experienced a record inward FDI flow of $55 billion in 2004, up from $47 billion in 2003, continuing to receive a large share of FDI in developing countries, largely from Hong Kong [non- member], at the risk of overheating its economy; (b) Hong Kong and Singapore experienced a total inward FDI flow of $50 billion in 2004, remaining as a significant destination for FDI inflows; (c) Brazil experienced an inward FDI flow of $18 billion in 2004, Chile an inward FDI flow of $8 billion, and Argentina an inward FDI flow of $4 billion, suggesting a South American recovery after the Argentine crisis, with all figures being about twice those of 2003 levels; and (d) India experienced an inward FDI flow of $5.3 billion in 2004, up from $4.3 billion in 2003, estimated at the low end evidencing a steady trend upwards since the late 1990s, and Russia experienced a growing inward FDI flow in 2004 after an already strong inward flow in 2003 (Anonymous, 2005). In this context, developing countries, while continuing to be the major recipients of FDI, in some cases were gaining experience as suppliers of outward FDI, as were México and Brazil, some of whose large companies were seemingly engaging in regional integration through investment to be followed by the establishment of true international corporate networks (Anonymous, 2005). China for instance, had entered the arena of enterprise-driven strategic FDI to secure raw materials, and according to its Administration for Foreign Exchange experienced a net outward FDI flow of $1.8  Role of Investment Promotion 21 billion in 2004, after a meager $152.3 million in 2003, and a peak of $6.9 billion in 2001 (Anonymous, 2005). Nevertheless, despite the purportedly high importance of FDI to development, according to Donald J. Johnston, Secretary-General of the OECD in 2004, “Human capital is the most important driver of economic growth. Physical assets or commodities cannot migrate of their own volition. Human capital can and does. Obviously, preventing migration would be unacceptable, the movement of labour being a fundamental freedom we uphold” (Johnston, 2004, p. 1). Thus, on the one hand human capital would be crucial to development, particularly to developing countries, and on the other, it should be free to flow to where it would. However, the staggering magnitude of the adverse social and economic impact on developing countries which such an unfettered freedom can have, is easily inferred from the November 2004 article that according to Johnston appeared in a major Canadian newspaper, lamenting the exodus of qualified doctors and nurses from African countries, highly skilled professionals attracted by the promise of living better lives in developed countries, but whose departure deprived their communities of valuable resources in the struggle against disease, especially AIDS. Though migration from developing countries to the developed can carry blessings that ameliorate its sometimes mostly adverse effects, the real value of migrants to their countries of origin and destination can go largely unrecognized, and even exploited: “Migration can be a positive force if, for instance, it results in substantial financial remittances back to the developing world. But the active recruitment efforts by developed countries – some call it poaching – to induce skilled doctors, nurses, scientists and engineers to settle in rich economies, without any compensation for the investment in these skills made by the taxpayers in low-income ones, is a concern. These skills are competitively priced by OECD standards, but they  Role of Investment Promotion 22 may be scarce and valuable back home” (Johnston, 2004, p. 1). Thus, an uncompensated and free-flowing migration of highly qualified human capital from poor countries, and many developing countries, to the developed may be a third pillar of underdevelopment. Further to the inconvenience of the nationalistic FDI policies espoused by developed countries denounced by Ali (2005), Johnston (2004, p. 3) decried as an incoherent policy “tied aid, which commits recipients of financial assistance to specific suppliers from donor countries . . . as it is in direct conflict with trade liberalization and free markets.” In fact, Johnston (p. 3) took up the general matter of incoherent OECD policies that undermine development, and referred to agricultural subsidies and trade barriers as “. . . notorious examples, for not only do they prevent the developing world from fully exploiting our markets, but they prevent our own citizens from accessing cheaper, often better, products.” But Johnston (p. 3) is most troubled by incoherence in the area of migration, “. . . particularly if it means emptying the developing world of valuable human capital.” Crucially, in Johnston’s view (p. 3), the plight of African countries being drained of their most prized human capital “. . . raises a key question about development assistance: can governments say they wish to foster development among poorer countries do so, when at the same time they pursue policies that impoverish the countries they are trying to help?” To Johnston (2004, p. 3) this perverse incoherence in government programs, for instance “. . . in terms of a development strategy when OECD member governments actively solicit skills from the developing world that cannot easily be replaced,” or in respect of agricultural subsidies and trade barriers, is common, and seems to stem mainly from political imperatives: The general problem is a lack of coherence among policies: one set of policy objectives conflicts with or undermines another. Alas, policy incoherence in  Role of Investment Promotion 23 government programmes is common. As a former politician and cabinet minister in a G7 country, I enjoyed a first hand view of that. In every instance I recall, incoherence was rooted in what were perceived by some as political imperatives. (p. 3) And in respect of incoherent policies at the OECD level, beyond recognizing and championing the organization’s role in pointing out how some of their policies undermine development, Johnston suggested that: (a) some coherence might be restored to the economics of migration by public policy in destination countries that required some compensating payment in exchange; (b) development requires a policy environment built on the rule of law and institutions that enable the economy to prosper, and to this end the widespread failure of the development community in identifying, adapting, and applying development-oriented policies within their governments and the OECD must be recognized and reversed; (c) the OECD development community must embrace a new role and transmit its expertise in matters relevant to the creation of legal and institutional environments for prosperity in order to increase the effectives of their development and donor policies; and (d) Governments in developing countries need to ensure coherence in their own policies in such matters as the creation of a favorable investment environment, and institutions building, as policy coherence for development is required of them too. In this manner, by contrast between what should be and what is, Johnston has identified what may turn out to be a fourth pillar of underdevelopment, namely incoherent government and multilateral policies under the influence of political imperatives. Schekulin (2005), recognizing the cited concentration of FDI flows as a geographic imbalance, remarked that issues such as market size and geography matter in the context of intense competition between developing countries to attract  Role of Investment Promotion 24 investment, but emphasized the importance of the quality of the business and investment environment, and of having the right policies in place, by pointing out that countries with unsatisfactory conditions loose out the most: A poorly conceived investment attraction strategy may create incentives which distort business decisions, and in some cases even deter private investors. Providing tax concessions, for instance, will have a limited impact, or indeed do more harm to the business climate, if these are compensated by other new taxes, or draw funds away from education. (p. 27). The need for coherent policies for investment and business promotion and facilitation raised by Johnston (2004) and Ali (2005) was further and importantly defined by Schekulin (p. 27) when he stated that “These must be aimed at correcting for market failures and developed in a way that can leverage the strong points of a country’s investment climate.” According to Schekulin (2005) there is no single policy instrument that will effectively enhance inward FDI; tax breaks and other easy fixes, such as subsidies alone, will not work when bureaucracy is too costly, and what is required instead is a range of conditions that will attract and sustain investments over the long run, namely the enactment of high standards in: (a) transparency, (b) procedural fairness, (c) openness, and (d) corporate responsibility. In this regard, “. . . the OECD with non- OECD governments, the World Bank and other organizations are developing a Policy Framework for Investment (PFI) . . . to support governments’ efforts to attract and to reap the benefits of global investments” Schekulin (p. 27). The PFI was designed to advance the United Nations Monterrey Consensus of 2002, reached by 182 governments in recognition of the crucial role of private enterprise in any poverty reduction strategy, and in September 2005 the UN World Summit “. . . renewed its commitment to  Role of Investment Promotion 25 mobilising private investment, both domestic and foreign, for advancing economic development and as a way to achieve the goals of the Millennium Declaration” Schekulin (p. 27). In this context, the PFI was designed to help build a coherent framework for investment, and should be used as a tool to assist various types of countries “. . . to benchmark their strategies against broadly accepted international practices” Schekulin (p. 27). The PFI emphasizes ten domains important to achieving and maintaining stable macroeconomic conditions, which have a strong impact on the investment environment according to Schekulin (p. 27): (a) investment policy, (b) investment promotion and facilitation, (c) trade policy, (d) competition policy, (e) tax policy, (f) corporate governance, (g) corporate responsibility and market integrity, (h) human resource development, (i) infrastructure development and financial services, and (j) public governance. Some of the main working features of the PFI, again, according to Schekulin (2005) are: (a) the PFI policy domains come with sets of questions to assess quality and coherence, and make transparent the opportunity cost of policy to investors, based on OECD and non-OECD experience and international agreements; (b) the PFI emphasis on comprehensive coherent policies for investment considers the broad interests of the community, particularly in domains that indirectly influence investment climate; (c) the PFI helps integration of policy regimes across countries, even in different regions, by facilitating self-evaluation and mutual assessments, but does not propose policy prescriptions; and (d) the PFI can help donor agencies design more robust capacity- building programs. Schekulin further commented that a taskforce of government representatives of more than 50 OECD and non-OECD countries is involved in the development of the PFI, through extensive regional consultation in every continent, in order that it be adapted and made relevant to the varying economic, legal, and cultural  Role of Investment Promotion 26 realities in countries in various stages of development, as would a living instrument that to remain practical evolves according to circumstances and experience, capturing the attention and interest of many governments and regional organizations and initiatives such as ASEAN, SEE, NEPAD and APEC. According to Schekulin: The PFI must be seen in the broader context of multilateral efforts, including the Doha Development Agenda and the Johannesburg World Summit on Sustainable Development Declaration, to strengthen the international and national business environments. Directed to governments, it complements instruments addressing good corporate practices, such as the OECD Guidelines for Multinational Enterprises. (p. 28) The OECD Guidelines for Multinational Enterprises, adhered to by some 39 countries, provide recommendations in at least 28 languages to globally applicable business areas such as human rights, consumer protection, labor, the environment, supply chain management, and the fight against corruption, and their effectiveness is helped by the fact that not only are countries adhering to the guidelines home to scores of major multinationals, but provide 85% of the FDI flows, informed Schekulin. Possible Needs and Opportunities for Action As noted herein, there are four areas relating to poverty eradication and the state of development that may constitute pillars of underdevelopment: (a) the inconsistency of nationalistic policies by developed countries with the principles of market economy together with the MNC zeal for profit maximization, (b) the corruption in poor countries stemming from environments of fear and instability, (c) the uncompensated and free- flowing migration of highly qualified human capital from poor countries, and (d) incoherent government and multilateral policies under the influence of political imperatives at both ends of the development spectrum. Each of these pillars may help to  Role of Investment Promotion 27 perpetuate underdevelopment, indeed actively foster poverty, at the least by adversely affecting inward FDI, as their effects may determine the core nature of the backwardness that characterizes poor countries, and many developing countries, that may in addition reinforce the status quo and actually feed back negatively into a vicious circle that forestalls development: (a) the absence of a vibrant middle class, (b) the absence of mature legal institutions, (c) the absence of transparent operations, and (d) the absence of remedies against fear and political instability leading to corruption. The development community, acting through the OECD, has taken stock of the alarming level of inequality between the rich and the poor, developed countries and the underdeveloped, and between OECD countries and the rest, and in apparent full consideration of the underlying causes and effects of underdevelopment, according to the literature, termed here pillars of underdevelopment, has taken steps for corrective action by the creation of the PFI, a new multilateral instrument, designed, in sum, to help build a coherent framework for governments to attract global investments, in line with the crucial role of private enterprise in any poverty reduction strategy, and as a way to achieve the goals of the Millennium Declaration, as already noted. Nevertheless, the capitalization imbalance between the northern hemisphere, and the southern hemisphere, developed countries and the underdeveloped, and between OECD countries and the rest, that at first sight suggests that something may be failing in the capital markets’ capacity to arbitrate investments, appears not to be addressed by the organization as a problem per se. Because of the significance of the identified causes and effects of underdevelopment in the context of the noted and marked capitalization imbalance, and the challenging required corrective actions implicit in them, it would seem possible that the capital markets as they function today, would not effectively arbitrate the massive north-south FDI flows required by developing countries if they are  Role of Investment Promotion 28 to narrow the gap that separates the richest from the poorest, and that the not so uncommon perception of increasing relative backwardness of the Third World is not only true, but may be here to stay. Moreover, even if the PFI and other corrective multilateral measures to come were efficiently implemented, they may turn out to be insufficient to provide effective relief, in a timely manner, to the over a billion desperately poor, and diminish the dangerous inequality in the world we live in, without the establishment of new private-public systems to dramatically increase the north-south investments rate. The Next Steps in Solving the Problem The capitalization imbalance between developed countries and the underdeveloped, between OECD countries and the rest, and in fact, between the northern and southern hemispheres, that suggests that something may be failing in the capital markets’ capacity to arbitrate investments, needs to be investigated further. It is necessary to investigate the impact of FDI on capitalization levels, productivity, and markets, in developed and developing countries, and on globalization per se, as well as on development in an integral sense. In the context of a possibly increasing north-south capitalization and welfare imbalance, beyond investigating the issue itself, it is also necessary to investigate the attributes, achievements, and plans of existing multilateral and governmental poverty eradication and economic development organizations, and of their private counterparts, and the pertinent regulatory environment, in order to determine the need and opportunity for the creation of new private-public systems to increase the north-south investments rate, and their required characteristics. Questions that Should not go Unanswered A brief, sober, but thoughtful consideration of the preceding discussion, should suffice to make evident the paramount need to find formal answers to the following  Role of Investment Promotion 29 fundamental research questions, however evident they may seem, if any headway is to be made, any time soon, in solving the Gordian problem of survival, on perhaps considerably less than a dollar per day per capita, which, unconscionably, the children, or more accurately, the underage adults in the one billion strong cohort of utterly destitute human beings of the current Third and Fourth Worlds, will likely continue to inherit, as heads of new families, every year, year after year: (a) is there a relative backwardness of the third world? (b) could there be an increasing relative backwardness of the third world? (c) is there an international capitalization imbalance? (d) could there be an increasing international capitalization imbalance? (e) could the causes of an increasing relative backwardness of the third world be fully or partially reversible, or even tractable? (f) could an increasing relative backwardness of the third world be partially due to an international capitalization imbalance? (g) could an increasing relative backwardness of the third world be partially caused by an ineffectiveness of the capital markets’ capacity to arbitrate international investments? (h) could an international capitalization imbalance be partially caused by an ineffectiveness of the capital markets’ capacity to arbitrate international investments? (i) could the effectiveness of the capital markets’ capacity to arbitrate international investments be partially determined by functional rationality, technological sufficiency, domain limitations, social, economic, and political vices, both spontaneous and imposed, including through governmental or multilateral action or inaction? In addition, the following contextual research questions would need to be addressed: (j) is multilateralism still a prominent paradigm in the world scenario, and will it be relevant in the foreseeable future, particularly to the third world, even if in a diminishing capacity in real terms? (k) is governmentalism an increasingly prominent and effective paradigm, in relation to the multilateral paradigm, and is it declining in  Role of Investment Promotion 30 relation to the private paradigm? (l) are poverty eradication and economic development organizations institutions of recognized crucial international contextual importance, given the much publicized abysmal welfare gap, at the individual level, between the first world and the third world? (m) are private poverty eradication and economic development organizations, counterpart to multilateral and governmental institutions, mainly of a charitable nature, but of growing international significance and potential for increased contextual effectiveness, though still incipient in the third world? (n) could the regulatory environment in its pertinent dimensions be constructively evolving mainly at the multilateral level, but require further adaptation, particularly at the national level? Finally, and crucially, the following defining research questions should not go unanswered: (o) could a relative backwardness of the third world not be expected to autonomously resolve itself in the current and proximate international context? (p) would the need for the creation of new private-public systems to increase the north- south investments rate exist were it determined that a relative backwardness of the third world could not be expected to autonomously resolve itself in the current and proximate international context? (q) could the timing and resources be adequate to the demands for the creation of new private-public systems to increase the north-south investments rate, given multilateralism and governmentalism, and the attributes, achievements, and plans, of multilateral and governmental poverty eradication and economic development organizations, and their private counterparts, and the regulatory environment, and given that a relative backwardness of the third world could not be expected to autonomously resolve itself in the current and proximate international context? (r) could it be found reasonable to provisionally assume that economic development action for poverty eradication, particularly by way of increasing the north-south investments rate, through  Role of Investment Promotion 31 the creation of new private-public systems, complementary to the effectiveness of the capital markets’ capacity to arbitrate international investments, and to competing multilateral, governmental, and private organizations in the current and proximate international context, could be expected to have a positive effect on the resolution of the abysmal welfare gap, at the individual level, between the first world and the third world? A Framework of Reference for Future Research Inequality has been inherent in every society since the dawn of humanity, and evidently may never, and probably should never be entirely eradicated, lest in the attempt, the will to have, and to succeed, that drives the have-nots, and fuels all economic activity, become irrelevant, and general productivity and welfare decline. Nevertheless, evidently, inequality in a globalized world of extremely rich and extremely poor, with some living hedonistic lives, and others living lives of mere pain and want, in full and plain view of each other, shamelessly, is dangerously destabilizing, and must be tempered within nations and internationally. In the latter context, aid from developed nations, multilateral action, and FDI, benefiting the poor in underdeveloped nations, in the short and medium terms, and the rich in developed nations in the long term, must continue to increase. In the context of this research, relevant history would start at the United Nations Monetary and Financial Conference at Bretton Woods, where the foundations for peace and prosperity were laid toward the end of World War II, in1944, with the establishment, in principle, of The International Bank for Reconstruction and Development, the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade, or GATT, and may extend well into the future. Indeed, in view of the lengthy time it has taken for the Conference’s intended, but failed, International Trade Office to surface as the World Trade  Role of Investment Promotion 32 Organization, in 1995, after the Uruguay Round of GATT, and in view of the magnitude of the problem at hand, there would be no immediate end to the cited perverse inequality, where the extremely poor are condemned to vicarious “enjoyment” of wealth they too feel entitled to, on The Rich and the Famous. On the contrary, on this basis, taken as a common sense but valid indication of the rate of significant change on the world stage, the abysmal welfare gap between the First World and the Third World can be expected to persist throughout the entire 21st century, roughly, should the right solutions be identified and acted upon promptly and courageously, under private leadership but with multilateral support, and indefinitely otherwise. In the end, success is contingent on the complex realities affecting humanity’s capacity and commitment to formulate the brave and effective ideas required to address the underlying nature of the problem. In this light, it would be wise to consider the possibility that the pillars of underdevelopment envisioned herein, as purportedly contextual causal issues, might lead, together with other factors, such as those more directly affecting the effectiveness of the capital markets’ capacity to arbitrate international investments, to the suspected north-south capitalization imbalance, and this imbalance, if real, might lead to underdevelopment, and under-productivity, and thus to the unacceptable welfare gap, perversely feeding back into the cited pillars of underdevelopment. And it seems that even if the pillars of underdevelopment, alone, were to explain the welfare gap, indeed constitute its entire set of causes, and even if the welfare gap were resolving itself or could be expected to resolve itself in the current and proximate international context, autonomously from the capital markets’ north-south investments arbitration, it might still be relevant to consider decidedly strengthening the north-south capital flows in the form of FDI, financed by risk capital and not debt, in the assumption that FDI  Role of Investment Promotion 33 encourages development, even in developed nations, as the rate of welfare gap- resolution is crucial to the needy. Thus, seemingly, it would behoove society to prepare to take economic development action, for poverty eradication, particularly by way of increasing the north- south investments rate, through the creation of new private-public systems, complementary to the effectiveness of the capital markets’ capacity to arbitrate international investments, and to competing multilateral, governmental, and private organizations in the current and proximate international context, on behalf of the severely disenfranchised and hopelessly poor, in order to have a positive effect on the resolution of the abysmal welfare gap, at the individual level, between the First World and the Third World, and thus on the relative backwardness of the Third World. In this respect, an adequate benchmark for measuring the effectiveness of any solution applied, would be the per-capita welfare statistics, particularly in reference to consumption, especially in nutrition, shelter, education, and health, and particularly in reference to savings, presumably compiled by the United Nations Organization over the preceding 62 years. Deus fortis juvat, Deus amantes amat, Ex misericordia Victoria.  Role of Investment Promotion 34 References Ali, J. A. (2005). Foreign direct investment and development. Competitiveness Review, 15(1), 1. Anonymous. (2005). Record investment flows. The OECD Observer, 250, 19-20. Johnston, D. J. (2004). Giving development a chance. The OECD Observer, 245, 3. Messinger, R., & McCullough, J. (2005, July 1). This Independence Day, a chance for global freedom from poverty. The Jewish Daily Forward. Retrieved October 18, 2006, from http://www.forward.com/articles/this-independence-day-a-chance- for-global-freedom/ Schekulin, M. (2005). Investing for development: The policy framework for investment. The OECD Observer, 251, 26-28. Wrong way around. (2005, June 27). Economist.com, 1. Retrieved October 18, 2006, from ProQuest database.  Role of Investment Promotion 35 Appendix Organization for Economic Cooperation and Development (OECD) 30 Member Countries Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States