International mechanisms shaping the environmental impact of transboundary capital flows

In recent years, private capital flows have increased dramatically, raising a number of questions about how central a role private capital is now or will be playing in shaping economic development in developing and transition countries. Only five years ago, official capital flows to these countries exceeded private capital flows. Now, private flows are five times as large as 1 public flows. Private flows exceed $240 billion, more than six times their 1990 levels. Currently, the vast majority of these private flows to developing countries – around 80% – is accounted for by a dozen countries. Indeed, most developing countries are not being showered with a stream of private capital. The World Bank notes that 140 of 166 developing countries receive under 5% of capital flows to developing countries.

The phenomenon of sharply rising private flows has prompted the environmental advocacy community to begin assessing the ways in which these changes affect the promotion of environmentally sustainable development in developing countries. We ultimately need a more precise understanding of the political, economic, and institutional forces driving different types of capital flows, the environmental implications of these different flows, the actors and interests that shape them, and the mechanisms through which the behavior of these actors may be influenced. The purpose of this paper is to contribute to the strategic planning process being undertaken through WRI and WWF’s IFFE project by analyzing the ways in which international institutions are, or are not, contributing to the environmental character of private capital flows. It is not meant to be a comprehensive research paper; rather, its goal is to lay out some of the major issues on this topic with ideas on the importance of various mechanisms and possible “entry points” for influencing them, as a basis for further discussion.

An assessment of the role international institutions may play in influencing the environmental nature of private flows is important for three reasons.

First, in recent years, international institutions such as the multilateral development banks (MDBs) have been given increasing responsibility for addressing global and regional environmental issues in their work at the same time they have faced constant criticism from NGOs for causing serious environmental degradation. Assessing the ways in which these institutions can influence private capital flows is therefore embedded in larger debates about their environmental efficacy.

Second, many scholars and advocates argue that international institutions are becoming more powerful in the governance of a world where nation state power is declining. Indeed, in the post Cold-War era, the absence of a dominant state willing to lead the new international order has turned fresh attention to international organizations and their role in promoting collective solutions to global and regional problems. However, at the same time, other groups of analysts point out the shortcomings of international institutions, particularly in the environmental realm; they focus on the lack of enforceability of treaties, the relative weakness of existing global environmental institutions, and the difficulty international institutions have in implementing environmental projects and policies. More work is needed to define more precisely areas in which international institutions really do make a difference in solving global problems and participating in global governance, and areas where other actors may do the job better.

Finally, while a traditional focus of scholars of international relations and pressure groups has been to examine the role state-created international institutions play in shaping state behavior, we must broaden our thinking to ask what role international institutions may play in influencing non-state actors, such as businesses and institutional investors, as well as what role other international bodies may play in influencing state or non-state actors. Such work is taking place, but requires significantly more attention.

Structure of study

The paper is divided into three main sections. Part One presents an overview, both of the changing composition of private capital flows, and the broad role international institutions play in shaping state and non-state behavior. Part Two examines each category of capital flow in greater depth, identifying and evaluating the roles that existing international institutions play in shaping the capital flow, and potentially shaping its environmental character. Part Three addresses the role that other international institutions, such as environmental organizations, might play in shaping the environmental character of private capital flows, as well as the political efficacy of creating new mechanisms.