12:15 PM Sep 24, 1996

COORDINATION OF FDI-TRADE POLICIES ADVOCATED

Geneva 24 Sep (Chakravarthi Raghavan) -- The UN Conference on Trade and Development has advocated the need for coordination, at national and international levels, of policies relating to trade and foreign direct investment (FDI), including through multilateral arrangements.

This view is in the World Investment Report, 1996 which has been released for publication with press conferences at several world capitals -- chaired by government leaders at these centres.

In line with a growing practice among international organizations to publicise their reports, by distributing embargoed copies directly -- by press conferences and briefings at various centres, the WIR-1996 has also been publicised, with the embargo disregarded in most places, as last year. It has also been made available in advance to academics and others, and thus disregarding the conditions under which media accept embargoes.

This brought a sharp protest over the WIR's handling from the UN Correspondents in Geneva at the UN's regular press briefings Tuesday.

While at the UNCTAD headquarters in Geneva, the Secretary-General Rubens Ricupero and his deputy, Roger Lawrence, released the document and held briefings at a press conference, the press conferences for release of the report (at other places) was due to have been chaired by the Secretary of State for Commerce and Tourism in Spain, by a representative from the Ministry of Economy and Finance in Paris, and by an Under-Secretary of the Philippines Government in Manila. The leader of the team that wrote the report, Mr. Karl Sauvant (a political scientists who has hitherto been leading that division), was holding a press briefing in Washington, with a World Bank economist (Persephone Economou) who is mentioned as one of the team that wrote the report.

The WIR-1996 in its policy analysis and conclusions (about FDI/Trade relationships and the idea of a multilateral investment framework or agreement) in substance has repeated last year's report, though somewhat toned down with some ambiguous language that could be interpreted as supportive of both sides of the argument. Some of those who have been 'consulted' in drawing up the report this time, on first glance say that some of the views favouring a WTO/MIA consideration of the issue have been toned down.

Coincidentally, but in the context of the attempt of the WTO Director-General and the EU and Canada to push a Multilateral Investment study and negotiations at the WTO (through the Singapore Ministerial Conference), the Chairman of the South Centre, Mwalimu Julius Nyerere, has addressed heads of Government/State of the South countries cautioning them against these moves, and advising careful prior national studies and assessments before allowing themselves to be hurried into any discussion of the issue internationally.

The WIR-1996, in a chapter dealing with the question of 'International Arrangements for Foreign Direct Investment', opens with a sentence: "It is now widely recognized among policy-makers that the potential benefits of FDI for economic development and growth can far exceed the potential costs."

The chapter itself cites no particular study or empirical evidence to back this conclusion in terms of economics and development, though the use of 'can' in this sentence, as in some other parts of the report, suggest a conscious attempt to tone down a more assertive language in an earlier draft, and make it more balanced.

UNCTAD Secretary-General Rubens Ricupero, at his press conference, said that read by itself, the sentence could be misleading, but that read carefully, the report and the chapter leave no doubt that while at one level FDI could bring benefits, it could also have negative effects.

He also noted that in practical terms, it was clear that almost every country in the world was courting foreign investment. But this does not mean that countries have renounced their own criteria in seeking investment, but it was an argument in favour of the WIR looking at FDI as a positive force, he added.

In an earlier chapter on the linkages between trade and FDI, the WIR says that the reduced obstacles to FDI and the possibilities that they open up for TNCs to disperse production activities within integrated international carry potential benefits and costs.

It then adds: "The nature of these benefits and costs, and how they compare with those that have traditionally been associated with trade and FDI, are not yet clear."

It then says the particular section of the report 'explores tentatively' some possible implications, especially for developing countries, of the relationship between FDI and trade into the new environment.

While the section speaks about 'static' and 'dynamic' effects and other such terms, it does not really shed much light on the possible implications, except to offer the policy advice to countries about the importance of national policy coordination between FDI and trade policies. It then says that the strong trend in the recent past towards liberalisation of trade and FDI reflects a recognition that there are inefficiencies that arise from trade-restriction induced FDI and FDI-restriction induced trade.

However, this ignores that developing countries have been forced to undertake liberalization of trade and investment under the compulsions of the World Bank and IMF conditionalities, and the overall effects have been often negative and not any resounding success.

On the effects of FDI on trade and development, an article in the 'Transnational Corporations', a periodical published by UNCTAD's Division on TNCs and Investment (DTCI), quotes Prof John Dunning (an advisor and Guru of the UNCTAD-DTCI) as saying in 1988, "one of the lacunae in the literature on international business is a dynamic approach to its role in economic development..." and that there is little systematic exposition of "the impact of TNC activity on dynamic comparative advantage."

At the OECD sponsored 'consultations', in Hong Kong, early this year, with some emerging economies, over the efforts to conclude an "OECD Multilateral Agreement on Investment", the OECD's principal paper for that meeting (by Prof. Stephen E. Guisinger) said: ".. very little is known about repercussions of FDI on host economies. There is a rich literature on the effects of trade policy liberalisation on macro-economic variables. And considerable scholarly work has been done on the impact of FDI on host economies under existing investment regimes. However, for a variety of reasons... the link between investment liberalisation and macro-economic performance has received scant attention from researchers."

While offering in an annex, the standard neo-classical view on "integrating" theories of FDI and trade, the studies cited in the WIR do not address or take further the acknowledged gaps in knowledge on FDI, Development and Host Countries and their mutual relationships -- any further than Dunning's views in 1988 or Prof. Guisinger's paper early in 1996 at the Hong Kong consultations, about lack of knowledge.

Dunning's own extensive writings are more on micro-economics of TNC activities, and very little on developing countries and development. Most of the writings of Dunning's and others cited in the report are also 'industry- or firm-specific' on benefits and costs.

The country-wide benefits and costs depend on the country's level of development and industrialization, and no general conclusion applicable to everyone can be drawn, other economists have been arguing.

The East Asian experience, often cited by the neo-liberal ideologues, suggests in fact that only a pragmatic approach where governments intervene in the economy, to control and direct the FDI flows (with nature of controls varying over time, and even during the same time between different sectors), can be beneficial.

An UNCTAD paper (for the Kuala Lumpur Conference on the East Asian Development) has surveyed the extensive literature available on various aspects of FDI and notes both lack of literature on FDI and Development as such and suggests that it is not possible to determine the relation among trade, FDI and domestic investment independently of macro-economic factors that influence the decisions of firms to invest at home or abroad... and factors that influence the overall competitiveness. But investment decisions themselves could alter macroeconomic conditions and competitiveness and exert an important influence on the macro-economic performance, including growth, employment and external balances.

Analysis of this interaction is essential for understanding causes and effects of FDI, but "much of the literature on FDI sheds very little light on these linkages as it concentrates on micro-economics of investment decisions", that study says.

One of the few economists who appears to have studied the effects of FDI on Trade, BOP and Growth in Developing Countries, Dr. Ghazali bin Atan (Chief Economist of a private sector investment fund in Malaysia), in a paper presented at a recent seminar in Geneva (organized by the Third World Network) said that FDI has benefits as well as costs, and to maximise benefits and minimise costs, developing countries should not surrender their "right to policy" through any multilateral agreement which would impinge on their right to allow or not allow FDI in particular sectors, direct such FDI, determine its nature (in terms of joint venture etc) and conditions.

Other academics and economists have also written on particular aspects, but all of them seem to agree on a pragmatic approach, and one that does not tie the government of any country to a policy framework either restricting its ability to choose a balance in any particular sector or even at a future juncture.

Little of these differing views are dealt with in the WIR, neither in the chapters, nor even in the bibliography. A very minor part of a Third World Network paper is cited (about an investment regime likely to come in the way of country's ability to meet policy objectives).

The Midrand final documents of UNCTAD-IX supported an UNCTAD study of the multilateral investment agreement issues at UNCTAD.

A careful reading of the WIR study suggests (what the Nyerere letter and the South Centre's policy brief underline) that the inter-governmental consideration envisaged at UNCTAD, need extensive national studies within developing countries as well as their groupings, with the assistance of their own research bodies and non-governmental organizations, and the WIR study alone is insufficient.

The chapters on FDI and Trade relationships or in advocating 'international arrangements' for FDI, despite the many revisions that seem to have been carried out on an earlier version, are still based on simplistic assumptions that what is good for a firm is good for the country -- a difficult proposition to accept for policy-decisions either for the home or the host country of the TNC.

The chapter on international arrangements, assembles a variety of facts on bilateral and regional agreements, and injects some questionable propositions about how some of the agreements, including some of the WTO agreements already cover 'investment' questions.

Any economic activity would of course have an effect on investment. The old GATT's simple exercise in lowering tariffs (or enabling countries to raise tariffs) have effects on domestic and foreign investment.

But if this were sufficient to make the claim that the GATT covers 'investment' -- there would have been no bother or lengthy arguments before and during the Uruguay Round negotiations over the US and Japanese efforts to bring in 'investment' as such. Finally, negotiations became possible only by restricting negotiations to those investment issues that are directly trade-related and trade-distortive.

The WIR notes the need to address the development dimension in any multilateral framework on investment, and suggests that the development dimension could be addressed in international investment accords at all levels (bilateral, regional and multilateral).

It then goes on to note the "hortatory commitments" to promote FDI flows -- citing the Lome-IV provisions and the WTO's TRIPs agreement which it says commits governments to provide incentives to promote technology transfer to least developed countries.

Even if two years (of the WTO) be too short to assess the actual effects of these provisions of the TRIPs, there is an extensive literature on the actual effects of the Lome-IV in promoting investments among ACP countries and the weaknesses in TRIPs, which are not dealt with in the WIR.

In terms of promoting investments to the large number of sub-Saharan Africans who are LDCs (and members of the Lome IV), judged by actual FDI Lome-IV has been a failure. Also, there is considerably literature that Lome has only increased dependency, and not promoted self-sustaining development and industrialization in these countries.

The WIR also argues that the development dimension could be addressed by enabling countries to exclude certain areas from the obligations of an investment agreement or providing longer transitional periods -- citing TRIMs and TRIPs. The WIR also commends a similar approach by the OECD and the EU to allow relatively less developed nations time to strengthen their indigenous economic base before exposing themselves to greater international competition.

It took the present industrialized countries more than 150 years (after the industrial revolution in UK) to reach their current levels of development and to open themselves to international competition -- and even then adopting a variety of instruments to ward themselves off from competition from the developing world (whether in textiles and clothing trade or agriculture).

To suggest that the development dimensions of the South countries in an MIA or an MAI could be dealt with in the kind of time-frames of the TRIMs or TRIPs suggest not enough knowledge or experience on development has been brought to bear on WIR, nor have the implications of the WTO head's acknowledgement at Midrand that the WTO cannot address equity issues been grasped in terms of future rule-making, been appreciated.

In the two years since the WTO, developing country officials (other than those in trade establishments who were responsible for the outcome) have begun to realize that these time-horizons for compliance do not address the real problems, nor the inequity built into the system, and need to be addressed at Singapore and beyond.

But in fairness to the DTCI, in its transfer from New York to Geneva, the unit has been left with only 2 or 3 economists, and perhaps one with some real knowledge of development economics. All others have been professionals with legal and or political science expertise.