Countries need autonomy over foreign investments

In pushing for a multilateral investment agreement, the
developed countries are seeking to expand the opportunities
available to their investors. In the light of the current
economic crisis, developing countries should be wary of such
moves which could constrain their ability to manage FDI.
Although an agreement is not necessary to attract FDI,
developing countries deciding to enter into negotiations
should choose the UN as the appropriate forum for such talks,
rather than the WTO.

by Chakravarthi Raghavan

GENEVA: Multilateral investment rules to protect the freedom
and rights of foreign capital would not advance the development
or industrialization of the South, and would prove inherently
unstable, participants said at a Third World Network seminar on
29 September on "Trade and Investment: Development
Any future negotiations for an international investment
agreement in the WTO should be on the basis of consensus and
within the framework of the Trade-Related Investment Measures
(TRIMs) Agreement review under the built-in agenda, and fully
take into account the draft UN Code of Conduct on TNCs and the
draft UNCTAD code of conduct on technology transfer, according
to Egyptian Ambassador Dr Mounir Zahran, who was among a panel
of ambassadors at the seminar.
Experts at the seminar had earlier underscored the
importance of host developing countries being able to manage
the kind and type of foreign investments and the conditions of
operation so as to ensure not only returns to the investors but
also investments that would ensure upstream and downstream
activities and linkages in the domestic economy, as well as
technology spillovers, growth, employment and rising incomes.
A former Indian Representative to the GATT, Mr. Bhagirath
Lal Das, said it was clear that the multilateral agreement on
investments envisaged is one for the protection of investors'
rights, and not for enhancing foreign investment in the
developing countries. The subject of investment has been
pursued vigorously in the GATT/WTO for the last 16 years. It
was raised in the 1982 Ministerial Meeting, at Punta del Este
in 1986, at the Singapore Ministerial Meeting in 1996 and is
now being pursued for inclusion in the 1999 negotiation process
in the WTO. For developed countries, Das said, it was an
important element of their aggressive three-pronged approach to
secure an expansion of opportunities for their economic
operators. The opportunities for their traders and
manufacturers have already been significantly expanded through
the liberalization of the import regimes of developing
countries, and those for their innovators and high technology,
through the disciplines of the Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPs). Now the third
prong, that is, the expansion of opportunities for their
investors, is sought to be achieved through an agreement on the
protection of investors' rights.

Concerted push

The fact that there has been a slowdown in the momentum in the
OECD MAI process should not lull developing countries into
believing that the proposal will not be pushed in the WTO in
the near future, Das said. Past experience has shown that the
internal differences among the major developed countries were
forgotten when it came to extracting concessions from
developing countries. The investment talks give them an
opportunity to soften the ground for the march of their
investors into developing countries. Investment is an important
geo-political tool to project the home country's interests
effectively. The major developed countries will not let slip
this important opportunity. They will resolve their internal
differences and push these proposals in a concerted way. Hence
it will be wrong for developing countries to be complacent
about it, Das said.
A multilateral agreement on investment of the type which is
being sponsored would bind the developing countries to all time
commitments on constraining their options for channelling the
foreign investment into useful sectors and priority
geographical regions as also for managing the flows in such a
way as to avoid problems for their balance of payments and
exchange-rate stability. The type of multilateral agreement
canvassed is not going to enhance investment. Foreign
investors are attracted by developed infrastructure, incentives
for investment and protection of investment. If these features
exist, investors would come. Otherwise they would never come,
in spite of a developing country having joined a multilateral
Hence an agreement is not necessary for attracting
investment. However, if developing countries still decide to
agree to have negotiations on this subject, it is important for
them to ponder over the choice of forum. The WTO is obviously
not the correct forum.
First, it is not the natural forum for this subject, as the
link between investment and trade is only an indirect one; and
the WTO should be primarily handling trade issues. Second, if
such a subject as investment comes into this forum, other
subjects of importance for developing countries will once again
be relegated to the background, far from centrestage. Third,
past experience has shown that developing countries generally
end up making concessions in the trade forum without getting
anything of substance in return. There is no reason to believe
that the situation will be any different with regard to
investment. Fourth, if an agreement is worked out in the WTO,
there will be a grave risk to developing countries posed by the
process of cross-retaliation, whereby for any perceived
violation of an obligation in this area, the import of their
goods can be curtailed in major developed countries.
If there is going to be any negotiation on this subject at
all, it should be in an organization which has the jurisdiction
and capacity to handle investment, production, trade,
technology and development issues in an integral manner. And
the only organization which fits the bill is the United
Nations, in any case not the WTO, Das said. Mr. Martin Khor of
the Third World Network said that the recent financial crisis
in Asia, which is now moving across the world, has highlighted
the serious risks for host countries in multilateral investment
rules that protect the rights of foreign investors without
imposing corresponding obligations. Unless the host countries
have the ability to regulate and direct the foreign
investments, it would create outflows that could result in
balance-of-payments crises. Khor cited a Malaysian central bank
report which showed that while the country got a large FDI
flow, most of it went to pay for imports of capital and other
input goods from the investors - apart from other transfers.
This was one of the factors behind the current account deficits
of the region.
Zahran said that investment policy was a key instrument of
development, and FDI played a role. While the policy advice of
the IMF and the World Bank for economic liberalization opened
up investment opportunities in developing countries, and paved
the way for stable flows of FDI, in parallel there has been the
recent financial market turmoil accompanied by sharp falls in
equity and currency prices, affecting the economic growth
prospects of most emerging markets.

In the wake of financial turmoil

Developing countries, Zahran said, must insist that
international investment agreements should allow for a certain
degree of flexibility to disregard certain provisions of the
instrument. Developing countries have also to pursue a number
of other objectives, including facilitation of market access,
promotion of technology transfer on affordable terms, know-how
and capacity building and establishing a climate of stability
and predictability in international investment relations - a
pertinent factor in relation to portfolio flows. The turmoil
caused by hedge funds, short-term capital flows and their
volatile nature in South-East Asia, which has spread to other
regions such as Russia and some Latin American countries,
raises a number of concerns as to whether a broad-based
definition of investment is favourable to developing countries
or whether they should opt for a more narrow definition,
drawing a distinction between FDI and portfolio investments.
And not all sorts of FDI are in the interests of developing
countries either. Not all of them are committed to contribute
to the pursuit of development objectives and policies. Short-
term flows and market-oriented investment flows should not
necessarily be welcomed in all developing countries. These
countries should benefit from the lessons of the turbulence
affecting financial markets in some emerging economies.
The WTO working group on trade and investment is an
educational process and should answer the fundamental question
of how the development perspective would be taken into account.
"As yet, we have not been convinced of the necessity of a
multilateral agreement on investment, whether that is to be
concluded in the WTO framework or outside."
And negotiations, if any, that may take place in the WTO for
an international investment agreement should be on the basis of
consensus and within the framework of the TRIMs review. UNCTAD
should be fully engaged in that process, and the draft UN Code
of Conduct on TNCs and the draft UNCTAD code of conduct on
technology transfer should be fully taken into account. Such an
instrument should reflect a true balance of rights and
obligations between foreign investors and host countries, in
particular developing countries, Zahran said.
Amb. Anthony Hill of Jamaica said that the points raised by
Prof. Jan Kregel on the kinds of FDI and vertical integration
within a country (that is, all the production processes being
located inside the country, and not a sequential mode of
production spread across countries)should be reflected upon.
Hill did not agree it was a bad thing if the FDI comes in the form
of capital goods imports.
Uganda's Amb. Nathan Urumba cited a report of the South
Centre to urge caution and careful consideration by countries
of the issues.
India's Amb. S. Narayanan drew a sharp distinction between
policies of liberalization that countries might pursue
autonomously and policies to be followed by WTO rules. The
question developing countries should ask themselves is whether
any multilateral investment agreement would increase investment
flows to every developing country.
As to the prospects for WTO discussions and negotiations,
Narayanan said the EC had some political sensitivities over the
agricultural negotiations mandated to begin in 1999 and felt it
would be difficult for the EC to move on agriculture unless it
could get concessions in other areas like investment.
The US, on the other hand, seemed to feel that developing
countries were not ready for a high-quality agreement at the
WTO and hence was pursuing it at the OECD.
Narayanan noted that in the informal discussions at the WTO,
the present financial crisis is being used to promote the view
that the answer to the problem lies in more liberalization.
Mr. Chakravarthi Raghavan, who chaired the seminar, said it
was like telling an alcoholic that the cure for his illness was
imbibing more alcohol. Last year, the WTO had pushed financial
liberalization talks, arguing that this would be a solution to
the problems of Asia. Now even the IMF officials are admitting
that too fast a pace of liberalization had created a situation
where an accident was bound to happen (as now). Many
mainstream economists have now come out in favour of capital
controls and disfavouring multilateral investment agreements.
Even a General Agreement on Trade in Services (GATS) approach
to binding investment obligations written into schedules would
not be useful, since countries at an early stage of natural-
resource or extractive development would not need many
conditions, while later, on industrial upgrading, would need
policies on technology and conditions to promote domestic
linkages. Developing countries would thus need flexibility to
vary their policies. (Third World Economics No. 194,
1-15 October 1998)

The above article was originally published in the South-North Development
Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.