8:09 AM Sep 13, 1996

OVERWHELMING VIEW AGAINST MIA DISCUSSIONS AT WTO

Geneva 12 Sep (Chakravarthi Raghavan) -- Foreign Direct Investment can be useful to developing countries for industrialization and development but requires actions by the host country governments using a range of strategic and tactical policy instruments by host countries, and governments should not give away these by accepting multilateral investment accords and disciplines on governments.

This was a strong message that came out of a session on 'Trade and Investment issues' at a seminar on 'The WTO and Developing Countries' organised by the Third World Network held here this week for Group of 77 delegations on the WTO issues on the road to the Singapore Ministerial Conference (in December) and beyond.

Several of the leading Third World ambassadors and negotiators at the WTO attended the two-day seminar and participated actively.

At the session on investment issues, chaired by Mr. Bhagirath Lal Das, economic experts from academia, as well as private sector and non-governmental research institutions of Africa, Asia and Latin America presented papers, and made oral presentations with charts and figures on the positive and negative aspects of the streams of investment flows and their consequences on development.

The papers and presentations dealt with direct benefits and total effects, positive and negative, on trade, macro-economics, consumption at the cost of high levels of savings, and the possible actions host countries could take to maximise benefits and minimise costs -- and implications of all these for South countries and their industrialization and development in a Multilateral Investment Agreement (MIA) at the WTO or the Multilateral Agreement on Investment (MAI) at the OECD.

The two slightly different acronyms, which confuse the normal public and policy-makers, enable some proponents of the MIA to push it as different from an MAI have though something in common: right of foreign investors to invest, with hosts being able to restrict it only on security considerations, the right of national treatment (meaning same if not better treatment as for domestic investors) and applying most-favoured-nation (MFN) principle, meaning benefits to investors in any agreement by one country with another would automatically apply to others.

The experts who spoke and presented papers were Mr. Ghazali Atan (Chief Economist of the MBF Unit Trust Management of Malaysia, a leading investment fund), Ha-Joon Chang (a South Korean economist) who teaches at the Economics Faculty of the Cambridge University, Mr. Martin Khor (Director of the Third World Network). Discussants included Amb. Ali Mchumo of Tanzania, Mr. Yilmaz Akyuz, a senior economist who heads the macroeconomic unit at UNCTAD's Global Interdependence Division, Mr. Yao Graham, Director of the Third World Network's Africa Secretariat and Mr. Humberto Campodonico, an ECLAC consultant who runs DESCO, Peru, a Latin American research and development NGO.

In presenting his own 'perception' of the lively, and occasionally heated, 2-1/2 hour discussion, Mr. Das (former Director of UNCTAD's Division on International Trade Programmes and earlier India's Ambassador and Permanent Representative to GATT) said that the discussions were in two parts: one relating to the implications of the FDI and the other relating to the proposed MIA. The two are ofcourse related, he said.

The benefits of FDI -- for e.g. inflow of capital, development of technology etc have been pointed out. But the large number of problems relating to FDI had also been brought out.

Hence, Das said, there has to be an active role of government in guiding FDI. The implications of FDI have to be studied in detail.

Generally, Das said, there was agreement that there should be no MIA. "The need for such an agreement has not been established," he said, and the erosion of discretion of host countries to guide FDI will be "dangerous". National treatment for foreign investors will also not be appropriate, and all these could be dangerous for domestic economies.

"A strongly persuasive statement for study and consideration of an MIA in the WTO" had been made during the debate, Das noted. "However, there was overwhelming opinion against any study or consideration of an MIA in WTO. It is feared that any such entry of MIA in the WTO framework has the risk of enforcement of emerging disciplines through the WTO integrated dispute settlement process i.e. through trade restrictions.

"Considering the past history (of the GATT and WTO) it is widely feared that any start of such studies or consideration in the WTO could lead to an inevitable agreement.

"Already," Das noted, "there is a decision at UNCTAD-IX for examination of this subject in UNCTAD at intergovernmental level. And the overwhelming opinion was that this subject should examined there. There is no need for any duplication of this work in the WTO."

The debate on the issue at the seminar, governed by Chatham House rules for the media (non-attributable and non-quotable) showed that even some of the leading proponents of a study process at the WTO were vehement in insisting that their countries were opposed to some of the fundamental provisions sought in an MIA: right to of foreigners to invest on an MFN basis and right to national treatment.

While they saw no danger in starting a process of study, others saw some serious political and other problems, and appealed to those of the developing countries favouring a study process not to press the idea at Singapore, thus threatening to divide that meeting and take the focus away from the more important implementation and followup problems of the developing world.

One participant from the busines sector said the MIA would destroy small and medium enterprises (SMEs) in the countries of the South, and even the largest among them were SMEs compared to the TNCs, and would result in neo-colonialism over the South. He asked Third World governments to unite and reject the move.

Earlier, Ghazali bin Atan, whose academic thesis was on the effects of FDI on Trade, BOP and Development and growth in developing economies, noted that the secret of sustaining growth lay in the ability of countries to maintain a high enough rate of productive investment and FDI could be useful to bridge the gap between investment and savings, but under very careful conditions to prevent the negative effects and ensure success.

Atan said that though FDI is often described as non-debt creating, even at a 15% return (foreigners now demand greater returns), from the third year the inflows would be more than offset by outflows.

The negative effects of unrestrained FDI flows, bin Atan said, included the 'decapitalization' (or outflow of factor payments) effect, trade and balance of payments effects (due to high reliance on imported capital and intermediate goods and the small effects on exports in terms of net value added), the reduction of domestic savings in favour of high consumptions (that the investors promote), as well as de-industrialization and 'denationalization' -- when capital invested belongs to foreigners.

Some of these had direct negative economic effects, and also, political and social effects and could result in disorder -- thus reducing the FDI itself.

All these meant that to achieve success in using FDI, the countries must work to ensure:

* that the availability of foreign capital does not detract from domestic savings efforts;

* that factor payment costs must be minimised and prudently managed; any additional advantages and incentives to foreigners (tax holidays, free land, cheap infrastructure) will increase investors rate of return and the outflow of factor payments. These must be prudently managed, and should not discriminate against locals. Developing countries should not also fall into the trap of outbidding each other to attract FDI;

* minimise factor outflows by insisting on joint ventures so that part of the returns accrue to locals, and facilitate technology transfers and local's ability to link with foreign markets;

* the foreign enterprises should be 'encouraged' to list on the local bourses so that locals could buy their shares;

* concentrate the FDI in tradeable sectors, particularly of export activities;

* raise the total content of local output over time.

Atan said that from what he had heard at the other sessions of the seminar, developing countries may already have impaired their ability to do so under the TRIMs rules. But they should be careful not to give away more of their rights.

* active measures to encourage and foster domestic investment; and

* strive to increase their own savings rates and improve size and competitiveness of their private sector so as to avoid being 'beggars for aid, fdi or other forms of inflows'.

These were preconditions for ensuring successful use of FDI, and countries using FDI without regard to these would be doing so at their own peril.

"Any moves designed to prevent host countries from instituting such policies, however they are couched, are moves designed to keep developing countries at the bottom of the global economic order," he said.

Ha-Joon Chang said that recently the thesis on inevitability of globalization and growing importance of TNCs had gained a new momentum, but this was often based on 'shaky empirical evidence and excessive generalisation."

Despite the talk of increase in FDI flows to the developing world, if China (where a large proportion of the FDI is suspected by some commentators as domestic investments rerouted through overseas Chinese communities), the growth in FDI to developing countries had increased from 17.8% to 21% between 1983-89 and 1990-94 -- despite the liberal FDI policies introduced by many developing countries. Even this was concentrated on just a handful of developing countries.

The increasing 'globalization' of TNCs, in the sense of relocation of core activities such as R & D is at a must slower and uneven pace. Most TNCs are still heavily based in their 'home' countries and the 'core' activities have been only relocated in other developed countries, and in regional terms -- within North America and Europe. There is very little of core relocation by Japan.

Though East Asians are presented as successful because of their pro-TNC policies, most of their policies have deliberately controlled and directed FDI according to their perceived national interest.

While the earlier, popular "extreme anti-TNC view" may be flawed, most of these worries have some justification and these still raise doubts about the role of TNCs as leading agents in economic development.

Chang said that while the new trade rules and the rise of TNCs may have limited the scope, strategic industrial policy had not been rendered impossible for developing countries.

Evidence showed that growth inside an economy led to FDI flows, rather than the other way round and "therefore it is questionable whether adopting a more liberal FDI policy will lead to an increase in FDI flows, without policies that will substantially improve economic prospects of the country."

"Intelligent governments," Chang said, "conducting strategic industrial policy should try and have tried their best to use TNCs in a strategic way.... adopting liberal FDI policies across all sectors and industries will mean giving up one's potential bargaining power in those sectors where one has it, before even exercising it, and therefore does not seem particularly wise."

Chang said: "Therefore, it will be a big mistake for governments to voluntarily give up all such room for manoeuvre by adopting a universally liberal FDI policy across all sectors.

"In the same vein," he concluded, "the recent proposals to introduce international investment agreements, which, atleast in some versions, will severely limit the freedom of the developing countries to engage in such strategic approach to FDI and other TNC activities, do not seem particularly wise."

Mr. Martin Khor, Director of the TWN, said that before agreeing to any discussion at any international forum, each developing country must carry out an in-depth study of its implications for itself. A possible checklist would include:

* loss of scope for reducing foreign share and increasing local share of equity in a country and make impossible 'social engineering', so necessary in countries with race relations problems;

* disappearances of joint ventures and with it benefits of ownership to locals, technology transfers and ability to limit foreign outflows;

* making invalid requirements for local incorporation of companies, and force extreme financial liberalisation;

* the limited scope for restrictions would mean foreigners would buy up land, real estate, a range of service activities, finance, agriculture, mining, construction and manufacture and overwhelm the national economy;

* the proposed MIA would have a blanket cover-all approach and would overcome all resistance to liberalisation in services and other sectors, and would end the more 'development-friendly' approach of the General Agreement on Trade in Services (GATS);

* governments would lose use of important instruments of macro-economic policy; and

* there will be strong implications for local cultures - since foreigners could enter and take over media, communications and information sectors.

The MIA was being pushed in the WTO to enable the majors to discipline the developing countries through trade sanctions.

Khor found the argument that without an MIA start in the WTO, the OECD process for an MAI can't be influenced and the OECD's 'high quality' MAI would be forced on developing countries. Even if Singapore Ministerial meeting starts a process, the OECD process would be concluded by middle of 1997. There was no way that the WTO could be forced to accept it, if developing countries as a whole, or even a small group of them say 'no'. Nor could any individual developing country really be forced to join the OECD.

If the EC-Canada move to get an endorsement for 'trade and investment' as an issue is accepted -- whether as a study or something else -- given the unequal bargaining powers of the South and the experience in the Uruguay Round, the North will have its way.

The threat of an agreement at the OECD was being used to force developing world to agree to it in the WTO. "Today it is investment, tomorrow it could be used to bring in anything else," he said.

UNCTAD-IX had asked for a thorough study, "at an intergovernmental level"and discussions and clarifications at UNCTAD over the next few years could clarify the role of the trading system in this area.

The WTO as a contractual organization was not a suitable forum for study or negotiation of such a complex issue that went far beyond trade. And the issue was not 'mature' either for any international negotiations.

Mr. Yao Graham, a Ghanian economist and researcher, in a paper on behalf of the TWN Africa Secretariat, noted that the MIA was being "aggressively marketed" to African governments as necessary to provide investor confidence. But such confidence cannot come without domestic political and macro-economic stability, improved infrastructure and human resources and expanded regional markets.

African countries were vulnerable to this approach because of their overwhelming dependence on the EU market, and with aid and technical advice opening Africa to 'manipulation' more than most other regions. The absence of fora for public debate was hampering independent analytical inputs to government thinking and the still existing strong colonial linkages may work in favour of direct arm twisting and cross-conditionalities.

Despite the legitimate need to attract FDI, a "rose-tinted view" of FDI must be avoided by African governments. The liberalisation debate has precluded the debate in Africa on industrialization and dynamic competition.

For Africa to avoid integration on unequal basis, the lessons of history and contemporary practice showed that a complex process combing measures to improve opportunities for domestic accumulation and industrialization was the key to convergence of economies. Africa must not read history wrongly in the belief that FDI inflows into economies of late industrializers was a response merely to rapid and comprehensive liberalization.

Africa must not go so far as to eliminate the possibility of using a strategy that combines creating favourable environments for FDI with managing the right to regulate those TNCs in order to enhance their development potential, or the right to provide targeted and 'affirmative action' support to local firms to build domestic industrial capacity capable of competing externally in the future.

"It is neither in Africa's interest (because the WTO is the wrong institution for developing countries to be promoting such agenda), nor realistic to be seeking to take on more issues given that African countries are already saddled with enough trouble, including cumbersome notification requirements in an effort to implement WTO provisions."

Humberto Campodonico said that while most Latin American countries in the 1990s had taken steps to promote FDI and liberalise, there still existed in many countries restrictions to FDI in different areas.$

The EU's proposals for an MIA "would almost completely undermine the existing capacities of Latin American states to regulate FDI flows and maintain control over important sectors of the economy"

The fact that most of the Latin Americans are adopting neo-liberal policies did not mean they may not adopt other policies in the future. But with an MIA in the WTO, they would not have that choice.

Campodonico outlined a number of existing restrictions to FDI in various sectors such as in mass media (in Argentina, Bahamas, Brazil, Chile, Dominican Republic, Ecuador, Honduras, Panama, Venezuela); to oil extraction and production (Costa Rica, Dominican Republic and Paraguay); atomic energy (Brazil and Trinidad and Tobago); air transport (Bahamas, Brazil); mining-related areas (Costa Rica, Dominican Republic, Guatemala); banking activities (Costa Rica, Ecuador, El Salvador, Guatemala, Paraguay and the Dominican Republic. All these would have to be eliminated in an MIA.

Equity participation requirements like for joint ventures and limitations in several countries would also need to be eliminated -- on air and maritime transport (Honduras and Paraguay); generation and distribution of gas and electricity (Bahamas); petroleum exploration and exploitation (Guatemala, Honduras); radio and television (Costa Rica); small hotel industries (Bahamas); fishing (Brazil, Dominican Republic, Venezuela); and Insurance (Dominican Republic, Honduras and Venezuela). These too would have to go, and in some areas it would need constitutional amendments.

The MIA would be another step in the direction of standardization of economic policies to promote free mobility of capital and would ultimately outlaw any control on outflows of profits, foreign exchange and capital in a BOP crisis. The standardisation of economic policies promoted by globalisation, the Latin American economic researcher and a consultant for ECLAC said, actually diminished capacities of national governments to apply particular domestic policies and they will lack strength required to confront contemporary economic problems to achieve national development. "The proposals go farther than the WTO's trade mandate, and its discussion is out of place in the WTO and should be carried out in other fora like UNCTAD."

(Future issues of SUNS would carry reports on discussions on other issues at the seminar as well as some abstracts)