Labor protection and investment regulation: promoting a virtuous circle.

• Author: Agusti-Panareda, Jordi

The policy goals of promoting foreign direct investment (FDI) and improving labor conditions of workers are often characterized as exclusionary. This short essay surveys the empirical literature and discusses the potential for positive synergies between FDI and labor. Research shows that the two are not at odds; on the contrary, they can buttress each other. A virtuous circle needs to be drawn between the two, but not because doing so may have a positive impact on economic variables such as production, revenue, economic development, or trade measurements. Rather, and more simply, it should be drawn because the only defensible relationship between FDI and labor is one in which the living conditions of workpeople improve. Albeit often neglected, the core of any set of economic considerations is its human dimension: labor.

1. A BINARY RELATIONSHIP? AN OLD CREDENCE REVISITED II. HOW NOT? CHALLENGING CONVENTIONAL WISDOM III. HOW? FOSTERING SYNERGIES BETWEEN LABOR AND FDI IV. WHY? A HUMANIST IMPERATIVE I. A BINARY RELATIONSHIP? AN OLD CREDENCE REVISITED

   During his 2014 State of the Union address, touting the nation's economic strength, President Barack Obama declared that China is no longer the world's number one place to invest--America is, he claimed. (1) Analysts in Beijing have responded to this statement loudly, arguing that this apparent "setback" is the result of the rising labor costs and improving labor conditions in the Asian superpower. (2) But what really is the relationship between foreign direct investment (FDI) and labor today? The assumption that foreign investors privilege countries with low labor standards has been amply challenged through detailed research over the years, but the subject is far from moot. In light of recent data--and as the Western nations recover from the worst financial, economic, and jobs crises since the Great Depression--we believe that reflecting on this relationship between labor and FDI is timely and could be helpful in recalibrating a debate still too often characterized as one where a binary choice between encouraging FDI or ensuring adequate protection of workers is either inevitable or looms hauntingly. This essay seeks to make a simple contribution by illustrating how and why the relationship between FDI and labor can and should be conceptualized as a virtuous circle.

   After this brief introduction, Part Two surveys the literature to show that labor and FDI are not at odds with each other. Part Three describes the role of key international actors and instruments in fostering synergies between labor and FDI. Finally, Part Four asserts that labor should be at the core of economic considerations such as FDI regulation.

2. HOW NOT? CHALLENGING CONVENTIONAL WISDOM

   Anticipating charges of naivete, we must first address the "how not" and confront the dynamics that arguably undermine the nexus between improvement of labor conditions and increased FDI. Numerous researchers have examined the old "how not" belief that lower labor standards should attract more FDI because of the assumed lower costs these standards would entail. A common thread can be observed in a variety of empirical studies at the global, regional, and national levels that rely on a range of datasets and methodologies: that is, research does not support the old credence that the improvement of labor conditions is at odds with the promotion of FDI. (3)

   This traditional belief relies on the degree of worker protection as a proxy and focuses on one hypothetical correlation: Less worker protection entails lower labor costs for the investor. However, not only do empirical studies question the existence of such an oversimplified relationship between labor costs and labor standards, (4) but also, and more importantly, research findings consistently show how this belief misleadingly leaves many other relevant factors and variables out of the picture. Accounting for these factors and variables, empirical studies often conclude that FDI is attracted to stable environments with strong worker rights. (5)

   The reality is that the impact of labor standards is far more complex, and multiple positive correlations can be drawn between labor standards and FDI. (6) Researchers have dispelled both concerns regarding "race to the bottom" dynamics and claims that the universalization of labor standards may destroy the comparative advantage of countries seeking to attract FDI. (7) Conversely, research has also shown that lowering labor standards might have a negative impact on FDI. For instance, deficient provision of core labor standards might very well diminish export competitiveness, rather than improving it. (8) However, it would be foolhardy to stop here and ignore the potential for conflicting dynamics between labor and FDI flows and policies in both receiving and home countries. (9) Even if solely based on misinformed beliefs, perceptions of antagonism between FDI and labor, as may be epitomized by a fear of adopting standards in the hopes of luring FDI, only need the blessing of a given consensus to operate. To avoid their pitfalls and promote a virtuous circle, it thus becomes crucial to stress two important questions: "How?" and "Why?"

3. HOW? FOSTERING SYNERGIES BETWEEN LABOR AND FDI

   The potential for positive effects of FDI on labor goes far beyond the creation of employment (10) in the host country." The economic impact of workers' rights is multifaceted and cannot be reduced to the labor costs (in other words, labor productivity relationship). Numerous positive synergies may link FDI and the improvement of working conditions as indicated by studies identifying several variables related to the promotion of labor standards that may play a crucial role in enabling and encouraging FDI.

   Researchers, for instance, have noted positive correlations between FDI and core labor standards (12) based on the latter's favorable impact on political stability, (13) human capital, (14) and economic growth. (15) Workers' and unions' rights, such as freedom of association and collective bargaining, promote social and political stability, which are crucial factors for attracting and enabling investment. Indeed, these factors, we should stress, often trigger adherence to rule-based dispute settlement mechanisms and substantive standards applicable to foreign investors. (16) Furthermore, labor standards--such as those pertaining to the elimination of forced labor, or the elimination of child labor in favor of child education, or the fight against discrimination--impact favorably on the development of human capital, and are paramount to enabling and attracting FDI. More broadly, labor standards have been identified as important contributors to economic development and market growth (17)--another vital variable for FDI to flourish. (18)

   Researchers thus conclude that the observance and enforcement of core labor standards can lead to higher levels of FDI. (19) The positive link is also confirmed by studies on the decision-making processes and priorities of investors when choosing target countries. In this vein, we can refer to a recent United Nations Conference on Trade and Development (UNCTAD) survey on the views of executives of transnational companies as to the factors determining their decisions regarding the location of FDI. The cost of labor (or, cheap labor) ranks only eighth in a list of criteria that investors across industry sectors consider, and it comes well after factors positively associated with labor standards, such as the size and growth of the local market, the availability of skilled labor, and a stable environment. (20)

   Although market forces may favor the unraveling of a virtuous circle, policy and normative action at both the domestic and international levels still bears crucial importance to its advancement. Measures to foster positive synergies between FDI and labor can take place both in host and home countries. (21) A myriad of public and private actors can have an impact or play an important role. (22) Yet the length of this piece only allows us to refer to a handful of instances. We focus specifically on the role of certain key international actors.

   First, we must refer to the International Labour Organization (ILO), which strives to improve labor conditions and advance social justice through several means of action, including setting labor standards; supervising, publicizing, and promoting country compliance; and providing technical assistance to promote decent work agendas in member states. (23) Such endeavors, we argue, enable a fertile ground for FDI. (24) The ILO is, in this vein, the international organization whose mandate and work is most directly related to laying the foundations for a virtuous circle between FDI and labor. (25)

   Other multilateral organizations also have an important role to play in structuring this "how," particularly those whose declared ends are intimately related to the improvement of social conditions, (26) spanning from the United Nations Development Programme (UNDP) to the World Bank Group (WBG) and the World Trade Organization (WTO). (27) A challenge of our times lies in ensuring the coherent application of the international commitments of states. For example, in the field of labor, this means ensuring what states have agreed to at the ILO informs their actions and decisions in other multilateral institutions. While still a desideratum, some signs of rapprochement can be noted. (28)

   Moving to the role of other international actors, we cannot pretend to examine or even acknowledge all those whose work or mandate are relevant to our query. But we can single out how development financing and investment insurance agencies, mainly public but also private entities, have started attaching social conditionalities, including labor standards, to their foreign investment support and lending operations. (29) While oftentimes weak or with loose enforceability, these conditionalities...