Investment and trade policy as drivers of sustainable development

by Álvaro Cedeño Molinari, 
June 2016

When was the first time you read or heard about sustainable development? I remember that in Costa Rica the term was almost unknown and people were very sceptical about it until 22 years ago when the government in office saw the necessity of balancing economic, social and environmental policies through a sustainable development approach. Costa Rica had a series of comparative advantages that were very appealing and could help to attract foreign direct investment, such as political and social stability, an open economy, a well-educated workforce, an extraordinary investment climate, and CINDE, Costa Rica’s top notch investment promotion agency.

The government understood that these advantages had to be strengthened in order to attract foreign investors such as INTEL, which in 1997 installed one of its largest manufacturing locations in Costa Rica. The establishment of INTEL introduced a new dynamic in which Costa Rica created a novel investment environment for highly specialised sectors through a sustainability approach. Through public-private partnerships involving government, state universities and companies, a new curriculum was developed to fulfill the private sector’s needs. What followed was the foundation of a solid platform of free trade agreements and bilateral investment treaties, in parallel with the modernisation of the free trade zone regime. Important infrastructure projects were completed. There was a spillover effect, mainly because former employees went on to found their own high-tech businesses and, with the establishment of other advanced manufacturing and life science companies, an innovation cluster emerged. Above all the installation of a corporation as giant as INTEL, and the ripple effect it caused, helped the Costa Rican government and its people to understand how to enter global value chains as a small country.

Notwithstanding this remarkable success story, Costa Rica remains a developing country with major challenges. The Sustainable Development Goals (SDGs) are the instruments that can help economies like Costa Rica to overcome the enormous infrastructure investment gap of US$ 2.5 trillion needed between today and 2030. UNCTAD has stated that SDG sectors hold only a fraction of the worldwide assets of banks (US$ 121 trillion), pension funds (US$ 34 trillion), insurance companies (US$ 26 trillion), transnational corporations (US$ 25 trillion) and sovereign wealth funds (US$ 6.3 trillion). This illustrates that closing such a relatively small gap should be achievable. I can even think of additional funding alternatives, such as the reduction of excessive costs destined to military defense, or addressing the growing tendency to illicitly evade taxes in fiscal paradises, as recently revealed in the Panama Papers.

We must acknowledge the sense of urgency for investment in sustainable development or, as I like to call it, “regenerative development”. You see, in the last 30 years, Costa Rica managed to triple its growth at the same time as it doubled its forest coverage. This is no easy task, but I am sure it has everything to do with coherence. We need coherence on a global scale, so that all international organisations, here in Geneva and elsewhere, can have a united agenda that addresses the importance of regenerative development and the actions needed to move forward in order to tackle the effects of climate change.

I believe there is a lot of room for international organisations to act towards sustainable or regenerative development. The WTO for instance has instruments to assist. A tangible measure we can count on is the Trade Facilitation Agreement (TFA). It is estimated that, upon entering into force, it could reduce worldwide trade costs by between 12.5% and 17.5%. That is no less than US$ 400 billion. Countries that implement the TFA in full will reduce their trade costs between 1.4% and 3.9% more than those that do only the minimum that the TFA requires. The opportunities for the biggest reductions in trade costs are greatest for low and lower-middle income countries.

The WTO members envisioned this situation and concluded an Information Technology Agreement (ITA) in 1996. 82 members adhered to it, representing +/- 97% of the world’s trade in information technology (IT) products. At the Tenth Ministerial Conference held in Nairobi this past December, 50 members agreed to the expansion of the ITA, by adding 201 more products valued in 2015 at US$ 1.3 trillion per year.

Also, the biggest of the low hanging fruits, so heavy it is almost touching the ground, is the elimination of fossil fuel subsidies. It can’t be done overnight and it can’t be done without pain. It will alter entire national economies that are based on fossil fuel extraction, trade and consumption. In the Paris Agreement, all 195 member countries of the UN committed themselves to fossil fuel subsidies reform. This process of deep de-carbonisation will require a two-fold approach: first, to leave untouched all fossil fuels that are still underground today; and second, to substitute all that future fossil energy with renewable sources. The only way to achieve this is through scientific research, technological innovation and, of course, extremely efficient global trade in goods and services.

The next low hanging fruit is investment flows to manufacture more, and better, equipment required to replace fossil energy with clean energy. This refers to anything from wind and geothermal turbines, solar panels, efficient irrigation systems, water treatment plants, low-carbon agricultural machinery, energy storage and efficiency systems, ranging from sensors and windows to electric appliances and building materials. In fact, a regulatory bypass would operate if, for example, a technology like solar panels could be brought to a level of cost-efficiency that it would shift the paradigm towards decentralised electricity generation at near zero cost, regardless of what energy distribution companies think or do about it.

And finally, the successful conclusion of negotiations for the Environmental Goods Agreement (EGA) is essential. EGA is not only about liberalising and removing tariffs on environmental goods. EGA is also about tackling climate change — it’s about increasing our ambitions and translating trade’s capacities towards climate action efforts. In short, EGA is about promoting green growth through foreign direct investment in clean energies and fostering “GVCs”, “Green Value Chains”.

Álvaro Cedeño Molinari is Ambassador and Permanent Representative of Costa Rica to the WTO.

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