Spotlight G20: Why the G20 must set rules for private sector involvement in development

Nuria Molina-Gallart, Guest Blogger, part of our 2011 Spotlight G20 Series

The G20 are turning more and more to the private sector as the solution to public sector malaises, but there need be binding rules in place to ensure that private finance can contribute to sustainable and equitable development.

G20 governments are increasingly pushing for greater private sector involvement in developing countries, ranging from infrastructure financing, investment in food and agriculture, or climate finance.

Private sector finance could be the answer; it just depends on what is the question. If the question is “Can private sector investment play a role in creating jobs and paying taxes and contribute to sustainable and equitable development?” The answer is probably yes. If the question is “Can the private sector fill in public sector financial and regulatory gaps?” Then the answer is probably not.

Unregulated financial markets and corporate greed has brought the world to its knees- this is just stating the obvious. Human memory is sometimes short; but not so short that we have forgotten how we got into this endless global crisis.

The current G20 (and European institutions’) approach to the private sector’s involvement in development is not enough. It is based on Corporate Social Responsibility (CSR) and enabling business environment, which are necessary but not sufficient conditions to make private sector work for equitable development. CSR principles are voluntary, and voluntary principles are not enough: who will pay taxes if there are no binding tax laws and punitive enforcement mechanisms? Improving the business climate is much needed, but not at the expense of a race-to-the bottom in regulatory frameworks.

What we really need is binding frameworks which set fair play rules:

  1. Pay your taxes: The G20 should strongly encourage countries to pass accounting laws that require all Multinational Companies and financial institutions to disaggregate their financial reporting country by country and fully disclose their beneficial ownership. This measure would help curb tax evasion and avoidance from developing countries. Plundering the world is not a good business strategy, and smart business leaders know this.
  2. Create decent jobs locally and local added value: The G20 should call for binding rules to ensure that foreign investments create decent local jobs, transfer technology, comply with strict local content rules, and re-invest a good share of their profits in the developing countries in which they operate. Currently, global investment rules outlaw some of the abovementioned performance requirements. Responsible investment can only take place if current rules are radically changed to include, among others, strict performance requirements for multinational companies and financial institutions.
  3. Respect the environment, local communities and human rights: As the G20 sets up panels to make infrastructure projects more attractive to the private sector, they should also ensure that ex-ante impact assessments and technical and financial feasibility studies are systematically conducted to ensure that investors respect international standards and human rights.

The G20 governments have the financial muscle to ensure that private actors comply with these rules: bilateral and multilateral financial institutions disburse billions of public resources every year to support private sector investment; and public procurement to private companies is, on average, almost a fifth of most countries’ GDP. No private company should access state aid or be awarded public procurement contracts if they are non-compliant with the rules above.

As citizens Occupy the World, G20 leaders should listen to what people have to say. A new fair social contract is needed now, and it should be one that is built on different foundations to those that brought us into this global mess.

Nuria Molina-Gallart is the Director of the European Network on Debt and Development (EURODAD).

2 Responses to “Spotlight G20: Why the G20 must set rules for private sector involvement in development”

  1. Great post Nuria! I would add that we need as part of this “new social contract” an agreement that taxes should be progressive and that income distribution should be less unequal. Wages should increase in the developed world (Germany and the USA), since they have stagnated for too long.

  2. […] The article was written by Nuria Molina for the Triple Crisis Blog G20 Series. […]