MAI would close off policy options

In a critique of a report on the MAI by Prof. E.V.K.
Fitzgerald of Oxford University, the UK-based World
Development Movement maintains that accession to the MAI
would rule out government policies aimed at building up the
domestic industrial base. Although developing countries have
been promised exemptions to accomodate their particular
interests, the actual negotiations and applications of these
exemptions might run aground due to political pressures.

by Chakravarthi Raghavan

GENEVA: Multilateral investment rules will not bring in any
higher flows of inward investment to developing countries, but
will close off their policy options for strengthening and
diversifying their domestic industries, and prohibit policies
that would prevent financial instability of the kind
experienced in Mexico and East Asia.

In presenting this critique, the UK-based World Development
Movement (WDM) has called for abandoning the efforts at the
Organization for Economic Cooperation and Development (OECD)
to negotiate a Multilateral Agreement on Investment (MAI), and
for the initiation of research efforts in fora that allow
developing countries full rights of participation to develop
rules to govern foreign investment and the operations of
transnational corporations, and in a process that would ensure
that development needs are at the core of an international
regulatory framework.

While the WDM critique addresses the negotiating process
and substance of the OECD's MAI, most of its arguments apply
with equal validity to the efforts towards formulating a set
of multilateral investment rules - whether at the WTO talks in
the study group on trade and investment, or at the UNCTAD
talks on a Multilateral Framework on Investment (MFI), which
so far have proceeded on the basis that the MAI framework
could be adopted, with "a development dimension" built in as
special exemptions.

The WDM critique by Barry Coates is a response to a
recently published report by Prof. E.V.K. Fitzgerald of Oxford
University. Commissioned by the UK Department for
International Development (DFID), the report, while heavily
critical of the OECD-MAI, nevertheless reached a conclusion
supportive of the MAI, arguing that developing countries could
make use of exceptions to meet their development concerns, and
would benefit from higher inward FDI by acceding to the OECD-
MAI and from the MAI substituting for weak domestic

The Fitzgerald report, and some UK funding via extra-
budgetary resources for UNCTAD's activities promoting
multilateral investment rules, figured at recent UNCTAD-NGO
consultations, when the WDM and other British NGOs suggested
that the funding was for UNCTAD to promote the report. UNCTAD
officials denied that they had accepted the funds for this

The DFID, while making usual disclaimers that the report
did not represent its policy, made it available to the OECD,
where the MAI negotiations have been stalled, and to
developing-country governments as well as UNCTAD and other
bodies. The WDM critique is available at its web site:


"There are numerous inconsistencies between the analysis
and the conclusions drawn in the report," says the WDM. "Most
notably, the anticipated benefits from acceding to the MAI
rely on untested and unstated assumptions. Further, some
omissions in the interpretation of the draft text mean that
insufficient weight is given to the risks and potential costs
to developing countries."

The Fitzgerald report itself has said the DFID had
commissioned the study on 23 February this year, with a four-
week time frame to produce a report; hence, the "research" had
been based on available documentation and their own field
experience, but they had been unable to consult international
bodies, NGOs or representatives of developing countries. Also,
the discussions in the report on the MAI were based on the
consolidated text of the OECD-MAI draft of 12 February this
year and the accompanying commentary (both provided by the
OECD), but since the negotiations are incomplete, the text is
ambiguous at many critical points, and so the authors had been
obliged to comment on the basis of what they understood to be
the "spirit of the proposals."

Noting this, the WDM says that within the short period of
time allotted to it, the report had done an impressive amount
of work in analyzing official information, but its attempt to
draw a firm conclusion had resulted in wrong advice being
given to the OECD and developing countries.

The Fitzgerald report argues that while there are no
specific provisions relating to developing countries as such
in the MAI, rules under it for country-specific exemptions
leave sufficient scope for meeting developing-country
interests. Further, the report contends that aid donors and
OECD member countries could provide funds for poorer
developing countries to cover the costs of accession.

The restrictions in the MAI on performance requirements and
other controls would not constitute a serious disadvantage,
since developing countries could avail themselves of a wide
margin for exceptions. The general exceptions to the
application of the MAI for national security, public order,
and safeguards for monetary, balance-of-payment (BOP) and
other macroeconomic disequilibria are crucial conditions for
accession by developing countries.

The WDM challenges these assumptions and underlines that
whatever the provisions for country-specific exemptions, there
would be political pressure on developing countries to limit
the use of broad exemptions and, in any event, such exemptions
would be rolled back subsequently. Nor is it likely that any
new and additional funding would be available to the poorer
countries to cover the costs of accession.

Loss of sovereignty

Restrictions on the scope and application of government
policy-making are central to the MAI and a significant loss of
sovereignty would be inevitable, the WDM points out, adding
that such a loss of sovereignty as a result of accession to
the MAI would:

* close off options for developing countries to use a range
of policies aimed at strengthening and diversifying their
domestic industries, policies that have been used by all OECD
members and Newly Industrializing Countries (NICs) in their
development phase. The MAI would inhibit the ability of the
poorest developing countries to diversify their economies away
from the export of primary commodities and low- wage products,
and risks locking these countries into a marginalized role in
the world economy;

* prohibit the use of policies that could play an important
role in preventing the financial instability experienced by
Mexico and East Asia in recent years; and

* prevent developing countries from protecting themselves
against the social, cultural and environmental damage that may
be associated with certain types of foreign investment.

And while the Fitzgerald report argues that accession to
the MAI will result in higher flows of inward investment, the
links between more investment and accession to the MAI are
tenuous, the WDM notes.

Surveys show that the decision to invest is dominated by
commercial considerations, particularly access to the host
country's domestic market, rather than issues of investor
protection. And many countries with extensive restrictions on
incoming investment, such as China, Malaysia and Thailand,
attract the highest flows of foreign investment.

Rejecting the view that the MAI will substitute for weak
domestic institutions, the WDM points out that the MAI's
complexities and legal ambiguities will do little to eliminate
uncertainty. An international agreement such as the MAI is no
substitute for strengthening domestic regulations and their

The central issue with regard to the impact of the MAI is
not whether there should be more foreign investment into
developing countries - such investment is urgently needed -
but whether governments should have the right to control such
investments, including through policies to screen investment
proposals, encourage investments that would create development
benefits, and refuse entry to investors likely to harm local
communities and destroy the environment.

Costs of accession

Accession to the MAI will impose a heavy burden of costs on
developing countries - including the direct costs of preparing
for accession, negotiating access and implementing the
disciplines. These costs are likely to be substantial, and it
is unlikely there would be any additional funding from OECD

Beyond these direct costs, developing countries would also
face risks derived from potential abuse of power by foreign
investors, some of which are larger than most developing
countries. The dispute settlement process would create
enormous scope for the foreign investors to make legal
challenges against host-country governments. It would not be
necessary for a foreign investor to show intentional
discrimination against it, and thus a violation of national
treatment; merely being able to show the law in question has
such an effect would be sufficient. Similarly, the MAI's
provisions on expropriation cover any law or policy that has
the effect of expropriation, as the claims by US investors
against Canada and Mexico show.

Assumptions that developing countries would be able to
negotiate broad and largely unrestricted exemptions from an
MAI are not warranted. In the real world of political
negotiations, developing countries will have little
negotiating leverage once the agreement has been signed. And
while it is assumed (by the Fitzgerald report) that developing
countries would get generous accession terms, it is possible
that they may face standards as high as those for the OECD
countries, the WDM points out, since flexible entry terms for
developing countries would mean reduced benefits for foreign
investors, the vast majority of whom are based in industrial
countries. Industry associations have already identified
developing countries as the main target for the MAI, noting
that "the preponderance of restrictions on foreign investment
lie outside the OECD area, in developing countries."

"Tough negotiations are likely to be conducted over any
exemptions for developing countries that would reduce the
benefits to OECD-based TNCs. Already, capital exporting states
or major investors often make adoption of a bilateral
investment treaty a condition for investments, on a 'take it
or leave it' basis. Only the larger and more powerful
developing countries have an opportunity to engage in
meaningful negotiations."

The desire of OECD countries to conclude the MAI
negotiations in the face of widespread opposition, both within
each OECD member country and globally, means every effort is
being made to accommodate the exemptions lodged by OECD
countries. The negotiations take place among OECD members,
with considerable latitude for tradeoffs and deals between
blocs and individual countries.

But non-OECD countries would face negotiations with OECD
countries as a whole, armed with little power or leverage. And
when an individual developing country experiences a period of
economic or financial crisis, emergency assistance from the
developed countries or international financial institutions
would be conditioned on accession to the MAI with few or no
exceptions. Such conditionality has been evident in the
requirements for liberalization of inward investments by East
Asian countries as a part of the IMF's assistance package.

Need for government intervention

A series of reports by UN agencies such as UNDP and UNCTAD
have identified three key issues requiring government policy
intervention. These are:

* liberalization of trade and investment has been
accompanied by increasing disparities between rich and poor,
both between and within countries;

* liberalization of international capital has resulted in
rapid transfer of speculative capital, severe BOP deficits,
economic recession and social hardships;

*some types of foreign investment have caused economic,
social and environmental damage.

An MAI will exacerbate these. It would rule out a range of
policies that have been used by governments to diversify their
economies and build a domestic industrial base.

An MAI would prohibit capital controls that could protect
economies from speculative and destabilizing movements of
foreign capital. While much of recent attention has been
focused on the destabilizing effects of short-term lending,
"there is evidence that foreign direct investment itself can
create BOP problems."

Beyond direct costs, developing countries would also face
risks derived from the potential abuse of power by foreign
investors, some of which are larger than most developing

Calling for an abandonment of the MAI process, the WDM has
called for research to be initiated in a forum where
developing countries would have full rights of participation,
to develop rules governing foreign investment and the
operations of TNCs. Such a process would ensure that
development needs are at the core of an international
regulatory framework. (Third World Economics No.191,
16-31 August 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North
Development Monitor (SUNS).