The Hong Kong meeting of the Doha Round of trade negotiations has left a palpable sense of frustration in the developing world over the slow pace of agricultural liberalization agreed to by the rich countries. It may thus appear naive and counterproductive to raise the bar and suggest that we need to go beyond trade and move investment to the top of our priority list. Yet can any “development round” worthy of its name ignore this challenge?

It had originally been intended that the Doha Round would address investment, but the developing countries chose to downgrade the issue and concentrate on agriculture instead. This tactic has proven to be a two-edged sword.

In China, Brazil, Malaysia, and Mexico, foreign direct investment (FDI) accounts for 8% to 12% of gross fixed capital formation – without generating debt. Although the least developed countries attract less than 3% of north-south investments, these flows account for more than 3% of their GDP, a level higher than the average for developing countries.

In hopes of stimulating FDI, bilateral agreements have multiplied, but they rarely lead to balanced commitments. Competition among countries to attract investors is intense, and only a few, such as China or India, are able to negotiate on equal terms with the industrialized world. The developing countries, therefore, have an interest in calling for multilateral dialogue on investment conditions in order to obtain certain collective guarantees.

Indeed, without returning to the illusion of economic planning, these countries need to be able to set conditions for foreign investors that aim to maximize the local impact on employment, technological diffusion, strategic partnerships, and so forth. At the same time, developing countries may need to promote local private sectors and “infant industries” through temporary protectionist measures, which would help them to upgrade their output on the road to liberalization.

There is nothing heretical about such proposals. After all, the developed countries have done much the same thing. In the nineteenth century, the United States restricted foreign investment in several sectors, including finance. Today, both the US and the European Union keep a close watch on international acquisitions. The emerging countries of Asia similarly depart from the pure liberal model. Even Ireland, the champion of economic liberalization, has now turned to a more selective approach.

Refusal to recognize the legitimacy of such strategies caused the collapse of the Multilateral Agreement on Investment in 1998, after three years of negotiations between the OECD countries. The project was perceived – rightly so – as amounting to a surrender of sovereignty, because it introduced a rigid principle of non-discrimination between foreign and local companies that would eliminate the host country’s room for maneuver without offering anything in return. Such a prospect would be even less acceptable to developing countries.

Under what conditions can one reasonably hope to restart a multilateral agreement on investment? To be viable, such an agreement must recognize the legitimate need for some regulation. It would also need to help poor countries cope with the quasi-generalization of “social and environmental responsibility” standards that are increasingly shaping corporate practices and consumer demand. It should incorporate an investor code of ethics, as well as a formula for sharing the costs of implementing such standards among the state, foreign operators, and local sub-contractors.

Of course, imposing the same investment conditions in all countries could take away the incentive to invest in the least attractive of them. But an agreement could be reached to establish categories of countries, the most important aim being to prevent dumping between countries that are at the same stage of development.

To succeed, a multilateral negotiation would also need to address the expectations of foreign operators, who want assurances that their investments are safe. An agreement should contain provisions to improve the business environment – its transparency and predictability – by setting a framework for state intervention without stripping government of its prerogatives. This would reduce the probability of crises while putting in place mechanisms for cost-sharing should they occur.

No multilateral investment agreement will be able to address all of the institutional problems and market failures that prevent capital from flowing to developing countries. Some economists point to imperfect information, which precludes companies from considering the higher returns on investment available in the developing world. If this view is correct, an agreement could create new instruments for disseminating information, while signaling poor countries’ commitment to welcoming FDI.

Other analysts point to the increasing returns that accompany greater concentration of investment – a force that works to the disadvantage of poor countries. At the very least, a multilateral negotiation would provide an occasion to recognize the existence of the problem, reflect on how best to coordinate investments, and help move development assistance accordingly.

Despite the complexity involved and the need for technical assistance to the weakest nations in the negotiation, a multilateral investment agreement should be among the top priorities on the international agenda. Indeed, whereas agricultural trade issues put rich and poor countries’ national interests on a collision course, promoting investment flows to the developing world could unify all countries around a shared objective.