Overview

For more than a decade, a loose community of public interest organizations in the United States and their partners in other industrialized and developing countries has focused on reform of the multilateral development banks (MDBs) as a principal strategy to influence the environmental trajectories of developing nations. Intersecting with this "MDB reform" community has been a smaller and more specialized "trade and environment" community, which has focused on integrating environmental objectives into international trade regimes.

Those strategies made sense in a world in which the preponderance of development finance was provided by public international financial institutions, and in which international trade in goods had not yet been eclipsed by transboundary capital flows. Since the early 1990s, however, private capital flows have risen from less than half to more than four-fifths of total financial flows to developing and transition countries. The rapidly changing volume and composition of these flows are no doubt influencing the environmental sustainability of national and global development paths, but are doing so in ways that are complex and poorly understood.

Concurrently, integration of the global economy has spawned a whole family of debates about "globalization" which raise fundamental questions of whether the economic benefits of liberalized trade and investment exceed their social and environmental costs, and how those trade-offs should be managed. Those questions are now driving a variety of domestic and international political processes to define the Arules of the game” to govern transboundary economic relationships in the twenty-first century.

Rapid economic and political change is also redefining the role of the nation state with respect to supra- and sub-national governing entities, as well as with regard to domestic and international private sector and civil society actors. Current discourse about the changing landscape of development finance centers on the implications of the recent rise in private sector investment flows, which is indeed the most significant change at the global level. However, aggregate figures obscure the fact that "the developing world" is increasingly bifurcating into two worlds characterized by widely divergent contexts for environmentally sustainable development: the so-called "emerging markets," where a critical challenge is to manage the large influx and volatility of private investment; and poor countries (and pockets within emerging markets) that have been by-passed by investors, where indices of human development remain appallingly low.

The MDB reform and trade and environment communities—and indeed all those concerned about maintaining the integrity of local and global ecosystems and the welfare of human societies that depend on them—now face the challenge of understanding the environmental implications of the rapidly changing landscape of development finance, and formulating a strategic response. To what extent should those communities "go with the flows"?

In other words, should public interest organizations "follow the money" and shift their attention from public to private financial institutions? From trade to investment fora? From national governments to other policy arenas? From poor countries to emerging markets?

The purpose of this paper is to synthesize a broad range of information, ideas, and insights about the changing patterns and political economy of development finance to inform the strategic responses of the public interest community to this challenge. The paper begins in Section II with a characterization of how patterns of international financial flows have changed in recent years in terms of size and composition. Section III then explores some of the possible implications of those changes for the prospects of environmentally sustainable development in developing and transition economies. Sections IV through VI consider the potential of various institutions and policy arenas to exercise influence over the environmental character of international financial flows. Section VII outlines several recommendations, implications, and illustrative opportunities for the public interest community that emerge from the analysis.

Contents