As the promised leveraging effects of blended finance fail to materialise, the European Union is increasingly focussing on the policy environment in partner countries, based on an assumption that the problem must lie there. This approach is present in the design of the External Investment Plan, an initiative that allocates aid money to encourage businesses to invest in Africa as well as the EU’s neighbouring countries. The plan, based on three interconnected pillars — finance, technical assistance and policy dialogue — is expected to continue as part of the implementation of the next EU budget (2021-2027), which is currently under negotiation. However, the recently released “Handbook on improving investment climate in developing countries” sheds light on how the EU and its member states are using aid money to promote European companies’ interest in developing countries. The work summarised in the Handbook is based on the premise that foreign direct investments (FDI) flowing from Europe to the global south necessarily contribute to sustainable development and the realisation of human rights. This is a problematic assumption, particularly in relation to employment. Experience shows that encouraging FDI risks eroding workers’ rights and crowding out domestic firms. Mergers and acquisitions often result in job losses and women are largely engaged in unskilled, labour-intensive activities.
The lack of nuance in the Handbook on the potential benefits and dangers of European investments implies that the actual objective may be to promote Europe’s economic interests, rather than improving the economic and social situation in partner countries. For instance, the Handbook suggests that EU Delegations and local authorities in partner countries engage in a dialogue with European and local businesses to decide on the policy reforms to prioritise. This approach seems to be well aligned with the use of European economic diplomacy, whose explicit aim is to promote European economic interests abroad. Economic diplomacy is presented as “complementing and reinforcing the EU development policy”. In practice, the opposite may be true: aid will be used as a carrot and stick to prompt reforms in partner countries to please European companies.
Additionally, the Handbook raises some clear cases of policy incoherence. Tax certainty and transparency, as well as secure land tenure, are important for business. However, the EU has resisted adopting a regulation designed to ensure complete transparency of how much tax is paid by European companies in each country where they operate. This contributes considerably to the tax avoidance by large, often EU-registered, companies as well as the annual US$ 200 billion of lost revenue in developing countries. Similarly, the focus on transforming land into an asset that can be traded and speculated upon is questionable. It paves the way for large scale allocation of land to investors, rather than focussing on securing customary land use rights for communities who have traditionally lived off them.
The emphasis on foreign investors’ protection risks further tilts the balance of power in their favour. By including investor-state-dispute settlement (ISDS) clauses in trade deals, transnational companies are able to sue resource-strapped governments for hundreds of millions of dollars in often clandestine hearings if they feel a new policy measure may threaten their investments or profit margins. In fact, ISDS is so unfair that European governments recently decided to suppress the mechanism within Europe.
To get the most out of FDI, countries need to impose a range of market access provisions and performance requirements on the investor, such as local content obligations that increase linkages with domestic production, thereby enhancing local jobs. Moreover, the scope of the national treatment and Most Favoured Nation principles — by which equal treatment of foreign and local companies is required and by which countries cannot discriminate between trading partners — may have to be restricted, the screening and licensing of FDI may be imposed along with joint venture requirements, technology transfers, etc.
The EU is supposed to promote human rights, civic space and participatory democracy in its relations with third countries. The blurred lines between its work on investment climate and its economic diplomacy are at odds with these obligations and may undermine existing democratic institutions, such as national parliaments and other spaces in partner countries in which civil society and local companies engage with government. Additionally, it may further side-line independent trade unions, civil society organisations and workers and farmers’ organisations, to benefit European businesses. To ensure alignment with its human rights obligations, the EU and member states should work with developing countries to reform their investment agreements and ensure social, gender and other equity and human rights considerations prevail over investors’ economic interest. This is a fundamental requirement of policy coherence for development, which we expect the new Commission and Parliament to uphold.