Foreign investment¹ is often heralded as one of the major benefits of globalization for poor countries, poor communities, and poor children. The effects of investment strategies on children are important to analyze, because "when poverty engulfs a family, the youngest are the most effected and most vulnerable . . . ." (UNICEF 2001). Multinational corporations are increasingly taking advantage of new communication and production technologies to relocate to countries where costs (especially labor costs) are lower, predominantly in transition economies and in countries in the developing world. As a result of this kind of investment, called foreign direct investment (FDI), developing countries may gain access to new sources of capital, technology, skills, and employment.

Do children gain when multinationals move in? There are many examples of corporations making positive contributions to development and poverty reduction. Sometimes this results from corporate philanthropy, such as the partnership between foreign and domestic businesses in South Africa supporting the Naledi Hospice, a facility that provides care and services for children affected by HIV/AIDS. In other cases, companies offer their workforce and suppliers terms and conditions that represent a genuine attempt to contribute to the welfare of the local society and economy. By providing wages and conditions far above national minimum levels, families can greatly improve the quality of children’s lives; enabling them to attend school, receive medical care or improve their diet. When children themselves work,² their earnings can contribute directly to their own survival, as well as enhance feelings of self-esteem through the knowledge that they are contributing to household incomes.

To what extent, though, does FDI influence the lives of children in poor countries? One major limitation is its geographical spread across the developing world. In the year 2000 the top ten developing country recipients³ accounted for 83 percent of the total US$240 billion in FDI inflows to the developing world. In the same year the Least Developed Countries (LDCs)⁴ saw a 15 percent fall in their share of total FDI to just US$4.4 billion. Furthermore, investment in Angola alone -- predominantly for oil extraction -- accounted for 40 percent of FDI flows to LDCs, leaving just US$2.6 billion for the remaining 47 LDCs (UNCTAD 2001). Although even small amounts of FDI can be an important source of capital for individual countries, overall FDI doesn’t reach many of the world’s poorest children.

By providing wages and conditions far above national minimum levels, families can greatly improve the quality of children’s lives; enabling them to attend school, receive medical care or improve their diet.

Another limitation is that a significant share of FDI occurs through mergers and acquisitions rather than through the construction of new factories. When a foreign company takes over a local firm, capital doesn’t necessarily flow across international boundaries: ownership of the title may simply transfer from one country to another. The result: no new jobs; no tangible investment in human capacity. This kind of cross-border transaction represents a "missed opportunity" for families and for children, who often need to help supplement household income through paid labor. Moreover, the "rationalization" process that accompanies takeovers typically leads to job losses, as companies aim to maximize efficiency through staff redundancies. This in turn can lead to children losing access to basic services, for example being withdrawn from school. In Zimbabwe, for example, where unemployment has reached 80 percent, the widespread loss of jobs has made it impossible for many parents to pay tuition fees (IRIN 2004).

Even where FDI does provide additional new jobs, the process of attracting investment can also take a heavy toll on workers’ rights. In their attempt to offer the most appealing investment climate to foreign companies, many governments have engaged in a "race to the bottom," competing with other countries vying to attract FDI. Often this has meant keeping minimum wage rates as low as possible or denying workers in export processing zones basic labor rights – including the protection of child workers from exploitation. According to a report by the Labor Ministry of Nicaragua, in order to lower costs and attract investors, companies hired children for less than $1.00 per day to work on coffee and banana plantations (USDS, 1998).

In their attempt to offer the most appealing investment climate to foreign companies, many governments have engaged in a "race to the bottom," competing with other countries vying to attract FDI.

Foreign investment benefits children when strong links are made between foreign companies and local communities. To encourage such links many governments have placed performance or entry requirements on foreign investors, requiring them to form joint partnerships with domestic firms, to source a certain proportion of inputs from local companies, or transfer technology and skills to the local workforce. These initiatives can provide real gains to young people and their families.

Unfortunately, these pro-development policies have been targeted for removal by the investment liberalization agreements of the World Trade Organization (WTO). For example, under the TRIMS Agreement (on Trade-Related Investment Measures) foreign investors are no longer required to source a given proportion of inputs from domestic firms. Similarly, the Agreement on Subsidies and Countervailing Measures (SCM) prohibits governments from providing subsidies contingent upon the use of domestic rather than imported goods (both agreements apply to trade in goods only).

These agreements undermine efforts by developing countries to link FDI with the domestic economy, and potentially bring real gains to children. The European Union continues to press for new investment negotiations to address FDI and other forms of long-term, cross-border investment. The international community should support these efforts to protect communities from the threat of unprincipled multinationals, and help make FDI a real investment in children.

For more information about the International Save the Children Alliance, visit savethechildren.net.

Footnotes:

1. The purchase of assets of an individual or firm in one country by individuals or firms in another. (including Direct Investment and Portfolio Investment).
2. The ILO estimates that there are 352 million children worldwide ages 5-17 who are economically active (this figure includes unpaid, legal and illegal forms of work).
3. China (including Hong Kong), Brazil, Mexico, Argentina, Singapore, Malaysia, Bermuda, Poland, Chile, South Korea.
4. In the year 2000 the UN listed forty-nine countries as "Least Developed."

References:

IRIN (2004), Zimbabwe: Hundreds of thousands may be out of school, (29 April), Bulawayo

UNCTAD (2001), World Investment Report 2001: Promoting Linkages, UNCTAD: Geneva

UNICEF (2001), State of the World’s Children 2001, UNICEF: New York

U.S. Department of State (1998), Country Reports on Human Rights Practices for 1997 USDS: Washington, D.C.






Contributed by Kimberly Ogadhoh, adapted with permission from a report by Save the Children UK (2002), Globalisation and Children’s Rights: What role for the private sector?

To read another Global Envision article about globalization and its effects on poverty, see Poverty or Prosperity.