Making private capital flows to developing countries environmentally sustainable: the policy challenge

The 1990s have seen a dramatic shift in capital flows into the developing world. Despite pledges made at the 1992 UNCED Conference in Rio de Janeiro, official development aid has declined in real terms. At the same time, private direct investment and lending to developing countries has risen from $44 billion at the beginning of this decade to $256 billion in 1997, supporting a record economic boom in the developing world. Developing countries have become significant sources of capital, as well as hosts to transnational corporations. Cases illustrating the negative impacts of large investments under environmentally lax conditions are contrasted with the rise of environmental screening of funds by commercial entities, such as banks, insurance companies and investors. Although the new inflows of foreign capital may have brought the spread of Western consumerism, this new economic potential has also contributed cutting‐edge environmental technologies, that may assist developing countries leapfrog over the most damaging phases of industrialization. The article discusses the role of public lending agencies, international organizations and NGOs in setting the investment climate that determines the effects of foreign capital on the natural resources base, communities and the environment. Various mechanisms for defining environmental standards are discussed, and a more active role for governments and the United Nations is advocated.