Enclave Projects: Negative Social Impacts and the Need for Law

Sam Han
Vol. 38 Associate Editor

Large international financial institutions (IFIs) have increasingly been experimenting with enclave projects over the past two decades in efforts to develop the territories and promote long-term growth of less developed countries. These IFIs, including major banks such as the World Bank, the International Monetary Fund (IMF), and the Inter-American Development Bank (IDB) aim to assist member countries to foster development of foreign trade and investment as a means of spurring economic growth.[1] One means of doing so has been through the implementation of an enclave project in a specific region of the less developed country. Enclave projects are generally known as large production-oriented investment projects that import a sophisticated production system into the local economy, operate with a high degree of autonomy, and export the produced goods out of that community thereby generating foreign exchange.[2] These enclave projects would initially carve out a certain area of land and grant it legal independence to facilitate the extraction and the subsequent exportation of resources such as hydroelectricity, coal, and gas. One significant benefit of enclave projects is that investors can be assured that the projects are for the most part insulated from the external forces of the host country’s government. Though the goods produced will not likely have a direct benefit to the local economy, enclave projects will have a considerable impact on a macroeconomic level. The ability to generate foreign exchange will attract more prospective investors and this chain of investments will spur economic and industrial developments that will eventually spread outside the enclave area. Furthermore, the production of goods increases revenue for these developing countries through royalties and taxes, while creating jobs and employment opportunities for the local population.[3] Though enclave projects are not meant to generate sustainable social impact, they nonetheless provide a scheme that helps mitigate the perception of risk and mobilize much needed private funding for large-scale industrial development. In 2015, the World Bank approved of $700 million in guarantees to Ghana for the Sankofa gas project, an enclave project, which helps develop new sources of gas for domestic power generation.[4] This initial capital has expected to generate $7.9 billion more from the private sector, resulting in one of the largest direct foreign investments in Ghana.[5] One significant hurdle for the implementation of successful enclave projects in these developing countries, however, is the negative social impact that they might have on the local community. For instance, enclave projects may shift local labor from traditional crops to the operation and construction of projects. Though in the short-term this provides employment opportunities, it leaves many unemployed in the event that the project plant closes. Furthermore, there may be concerns that residents will be displaced by the construction of a project that might cover large areas of land and demand local water and energy sources or housing. These severe consequences may galvanize the international community to push back, which would prevent enclave projects from operating smoothly. In anticipation of these potential problems, IFIs should implement policies into international laws and regulations that would help mitigate any detrimental social impact if it were to occur. One possible solution may be to follow the Inter-American Development Bank’s lead and mandate some sort of compensation plan for the local populations affected by these projects.[6] Not only would this establish a premise of good corporate governance and social responsibility, it would create a positive effect in earning the goodwill of consumers and other stakeholders. Laws that help promote the use of sound environmental, social, health and safety, and labor practices of the enclave regions, would promote good business behavior while facilitating good relations between the civil society and the private sector.[7] Though these methods may not be a full proof method of remedying all harms, it is a step forward in mitigating a significant portion of the negative social consequences that enclave projects pose. Though enclave projects are beneficial in assisting developing countries, there must be more laws that properly address the negative social impact that they may have on local communities.

[1] Agreement Establishing the Inter-American Development Bank, Art. 1., July 31, 1995; International Bank for Reconstruction and Development Articles of Agreement, Art. 1., Feb. 16, 1989. [2] Inter-American Development Bank, Enclave Projects: What Are They and What Can Be Done? 4 (2004), https://publications.iadb.org/handle/11319/3788. [3] Id. at 5. [4] World Bank Approves $700M Investment in Ghana’s Sankofa Gas Project, Offshore Energy Today.com (July 31, 2015), http://www.offshoreenergytoday.com/world-bank-approves-700m-investment-in-ghanas-sankofa-gas-project/. [5] Id. [6] Inter-American Development Bank, supra note 2, at 3. [7] Inter-American Development Bank. Environmental and Social Aspects. PRI Environmental and Social Guideline. Private Sector Department. March 2004.