IFD Agreement and its Implications for African Investment

An Agreement on Investment Facilitation for Development (IFD) was successfully concluded at the 12th Ministerial Conference of the WTO, marking a significant advancement in creating the enabling environment to leverage foreign direct investment for development. After three years of vigorous text-based negotiations among over 110 delegations at all levels of development, WTO members participating in the talks on investment facilitation for development (IFD) announced on July 6 the end of negotiations on the Agreement’s text.[1]

The Agreement addresses practical obstacles faced by investors, especially in developing countries, and aims to enhance transparency, simplify investment processes, and improve investor-administration relationships. This comprehensive Agreement covers foreign direct investment across all sectors, aiming to stimulate economic diversification and spanning the entire investment lifecycle to ensure enduring positive effects on host countries.[2] The negotiations involved 113 WTO Members and were initiated by a group of developing countries. The IFD Agreement follows the earlier successes of the Joint Statement Initiative on Domestic Regulation in Services in 2021. This underscores the WTO’s adaptability in addressing contemporary economic and sustainable development challenges of the 21st century.[3]

The IFD is seen as a vital framework for attracting investment in developing countries. The level of investment in many countries has been anaemic, especially in low-income countries. While country risks and opportunities are some of the reasons behind the poor performance, complex processes, poor governance, and red tape are also to blame.

Figure 1: FDI Net inflows as % of GDP (latest year available)

Source: World Bank WDI

Figure 2: Low and Middle income net FDI inflows in US$ billions

Source: World Bank (2023)

WTO countries are venturing into a new era in terms of investment facilitation. So far, the WTO rulebook has addressed investment indirectly, primarily through national treatment and market access commitments on commercial presence, such as in the General Agreement on Trade in Services (GATS), and through disciplines, such as those found in the Agreement on Trade-Related Investment Measures (TRIMs). As with the WTO Trade Facilitation Agreement concluded in 2014, the negotiations on investment facilitation for development involve a shift away from the establishment of rigid rules in the form of investment protection or liberalisation enshrined in a dense network of more than 2,600 international investment agreements (IIAs) currently in force. Investment facilitation focuses on improving regulatory processes and domestic institutions and frameworks, defining good policy practises for attracting and retaining FDI, and fostering cooperation frameworks among governments and investors, particularly between developing nations.[4]

The development perspective

The IFD Agreement focuses on the specific flexibilities available to developing countries and LDC members, known as special and differential treatment (SDT). Section V of the Agreement acknowledges that some members may not be able to implement the Agreement immediately but may need more time and targeted capacity-building support. It outlines the implementation of provisions based on the capacities of developing and least-developed (LDC) members. LDCs must only commit as far as their development, financial needs, or administrative capabilities can take them. The IFD Agreement’s SDT section is based on the same model used under the WTO’s Trade Facilitation Agreement (TFA), which has been in force for just over six years.[5] Developing countries and LDC members would need to conduct a “needs assessment” analysis, also known as a regulatory gap analysis, to determine which provisions should be placed under which category.

Important discussions are being held on whether the IFD Agreement should include a dedicated Investment Facilitation Facility to manage donor contributions for helping developing country members implement the Agreement. The WTO’s TFA and the WTO’s Agreement on Fisheries Subsidies have established similar funding mechanisms, however, some members remain wary of implementing a similar mechanism under the IFD Agreement. Some argue that the facility can ensure necessary support for developing country members and serve as a valuable body for coordinating funds. In contrast, others argue that funding coordination efforts should be carried out by other relevant international organisations, such as the World Bank. Setting up such a facility for the IFD Agreement is complicated by the plurilateral nature of the initiative, as it may require resources from the WTO Secretariat, funded by all WTO members, raising budget allocation questions.[6]

What are the implications of investment facilitation for Africa?

In 2021, Africa received a record US$83 billion in FDI, up from US$39 billion in 2020, representing 5.2% of all FDI worldwide. [7] Africa’s share of global FDI remained low at between 3% and 4% in the last decade, despite the surge experienced in 2021. There is a need to unlock many of the unnecessary administrative processes currently in place, while maintaining strict regulations in areas such as environmental and social protection. The IFD agreement is expected to boost FDI inflows in Africa substantially but not at the expense of the sovereign ability to regulate the sector at the highest standards.

Figure 3: Africa: FDI inflows and share in world inflows, 2011–2021 (Billions of dollars and per cent)

Source: UNCTAD (2022) World Investment Report. Geneva

Africa has supported investment facilitation for development for years. In November 2017, African countries launched the Abuja Statement, which led to the Buenos Aires 2017 Joint Ministerial Statement on Investment Facilitation for Development and the launch of the Investment Facilitation (IFD) Agreement negotiations in the WTO in September 2020. Negotiators prioritise supporting the IFD Agreement by identifying the needs of developing and LDC Members through special and differential treatment provisions, providing technical assistance, and capacity building. At the continental level, the AfCFTA Investment Protocol’s conclusions further aim to attract and facilitate FDI, focusing on promoting sustainable investment that addresses crucial continental challenges such as unemployment, skills development, industrialisation, inequality, and infrastructure. The Protocol prioritises investment promotion and facilitation, emphasises dispute prevention, and includes provisions for technical assistance to ensure effective implementation.

Investment facilitation is crucial for crowding sustainable foreign direct investment (FDI) flows in Africa, which are critical for the continent’s future prosperity. Foreign direct investment (FDI) in Africa is considered a crucial source of external financing. To promote Africa’s future prosperity, there is a consensus that investment facilitation is essential to encourage sustainable FDI. Both national and continental efforts, including negotiations within the African Continental Free Trade Area (AfCFTA), are aimed at investment facilitation with a focus on retaining and expanding investments, preventing disputes, and providing technical assistance. The African Continental Free Trade Area (AfCFTA) Investment Protocol and the Investment Facilitation for Development (IFD) Agreement at the World Trade Organisation (WTO) are complementary initiatives that aim to facilitate sustainable and development friendly FDI in Africa.

The (IFD) Agreement aligns with the AfCFTA’s goals and emphasises sustainable FDI, as well as the responsibilities of foreign investors to ensure development-friendly investment. Both agreements emphasise technical assistance and acknowledge the need for financial and technical resources to support their implementation. The IFD Agreement offers value by providing capacity building and technical support for its implementation, along with sharing best practices in investment facilitation. This can contribute to domestic, regional, and continental reforms that promote various development outcomes, such as environmental protection, social and economic development, industrial growth, employment, technology transfer, and knowledge exchange. African countries that join the IFD Agreement can benefit from its technical assistance and capacity building, which can enhance not only the implementation of the IFD Agreement itself but also the AfCFTA Investment Protocol.

Out of the 110 WTO members participating in the Joint Initiative on Investment Facilitation for Development, 80 are developing economies and 20 of them are least-developed countries (LDCs). From within Africa, 22 members are currently a part of the landmark agreement. According to studies, the IFD Agreement may provide global welfare gains ranging from $250 billion to $1 trillion, with the majority of the gains going to middle- and low-income nations.[8]

Figure 4: Participation in the joint initiative on Investment Facilitation for Development by Africa

Source: WTO (2023)

Next steps

In the second semester of 2023, IFD participants have focused on four complementary tracks: advancing the discussion on legal incorporation of the IFD Agreement into the WTO legal architecture, engaging constructively with all WTO Members, and promoting outreach efforts to explain the Agreement’s pro-development benefits. The assessment of capacity building needs is also being elaborated during 2023, using a self-Assessment Guide. By the end of October 2023, IFD participants will complete final refinements to the text, including textual adjustments, technical coherence refinements, and language consistency across the English, French, and Spanish versions of the Agreement.[9], [10]

International Economics Consulting Ltd (IEC) supports G20, G33 and G90 countries on WTO. It also works with several countries in Asia-Pacific and Africa on free trade negotiations covering digital trade and e-commerce in multilateral and regional negotiations. IEC can support your businesses, associations and chambers of commerce to understand what the existing IFD means for you and prepare position papers that defend your interests. IEC can also support your business through impact assessments and regulatory reviews.

CEO Insights is a monthly publication of International Economics Consulting Group (IEC). IEC is an independent consultancy group working with governments, international development partners, and the private sector to navigate trade opportunities and promote sustainable growth and development.  Learn more about the services that IEC provides here.

Paul Baker is the founder and chairman of International Economics Consulting Group (IEC), a globally recognised consulting firm. Nominated for seven consecutive years in Who’s Who Leading Trade Economists, he has advised several G7, G20 and G90 governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s Trade Tech Working Group and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He is also a member of the UK’s All Party Parliamentary Group on Trade and Investment, and a regular contributor to the UK Parliament’s International Trade Select Committee, and UN panels on trade. 

 

References:

[1] WTO (2023). Investment facilitation negotiators announce deal on Agreement’s text. Available at:  https://www.wto.org/english/news_e/news23_e/infac_06jul23_e.htm

[2] EU (2023). EU and other WTO Members reach landmark deal to facilitate investment and support development. Geneva. Available at: https://policy.trade.ec.europa.eu/news/eu-and-other-wto-members-reach-landmark-deal-facilitate-investment-and-support-development-2023-07-06_en

[3] EU (2023). Ibid.

[4] Berger, A. et al (2021). Quantifying Investment Facilitation at Country Level: Introducing a New Index. Discussion Paper / Deutsches Institut für Entwicklungspolitik. Available at:  https://www.idos-research.de/uploads/media/DP_23.2021.pdf

[5] See WTO (2023). Investment Facilitation for Development in the WTO https://www.wto.org/english/tratop_e/invfac_public_e/factsheet_ifd.pdf

[6] Jose, R. (2023). The Investment Facilitation for Development Agreement; Where do negotiations stand ahead of the July 2023 deadline?. IISD. March 3. Available at: https://www.iisd.org/articles/deep-dive/investment-facilitation-development-agreement

[7] UNCTAD (2022). Regional Trends Africa. World Investment Report. Available at: https://unctad.org/system/files/non-official-document/WIR2022-Regional_trends_Africa_en.pdf

[8] Edward J. Balistreri and Zoryana Olekseyuk, “Economic Impacts of Investment Facilitation”, Working paper 21-WP 615, Center for Agricultural and Rural Development, Iowa State University, 2021.

[9] WTO (2023). WTO Structured Discussions on Investment Facilitation for Development

Statement by the Co-Coordinators. July. Available at: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/INF/IFD/W51.pdf&Open=True

[10] Stephenson, M. (2023).  Multilateral Cooperation in a Multipolar World: What can we learn fro Investment? T20 Policy Briefs, June. Available from: https://www.orfonline.org/research/multilateral-cooperation-in-a-multipolar-world/#_edn12

Related News

Key Implications of the Comprehensive and Progressive Agr...

Publications

Mauritius and the AfCFTA: The Digital Trade Protocol Part II

IEC in the News

UK-India Trade Updates – June 2024

Publications

Vietnam: Non-Cash Payment under Decree No. 52/2024/ND-CP

IEC in the News

Vietnam: The State of Digital Taxation

IEC in the News

Mauritius and the AfCFTA: The Digital Trade Protocol Part I

IEC in the News