12:15 PM Sep 24, 1996

SOUTH CENTRE WARNING ON MIA TALKS

Geneva 24 Sep (Chakravarthi Raghavan) -- The South Centre, in a policy brief sent to all the countries of the South has advised them against allowing the issue of a multilateral investment agreement being soon put on the WTO agenda, whether for initial study and discussions or negotiations.

The 11-page policy brief says that while fully recognizing the benefits of suitable foreign investment, the political implications and economic ramifications of the proposed new global regime suggest that it would be unwise for developing countries to agree to put the matter soon on the WTO agenda - whether for initial study and discussions or for negotiations.

It also argues that the WTO is not an appropriate place for initiating studies or discussions on these matters.

The South Centre, with the help of some eminent economists and other outside experts, is in the process of preparing a more detailed study on the investment regime issue. But in view of the imminence of the Singapore Ministerial meeting, and the drive by the WTO secretariat and some of the powerful countries to get the issue on the WTO agenda, the South Centre has prepared a smaller policy brief.

This has been forwarded to the heads of South Countries by Mwalimu Julius Nyerere who heads the Centre.

In his covering letter, Nyerere identifies the North's proposal for liberalisation of FDI and subjecting it to a global regime as an issue of "North-South agenda", and one of major importance for North-South relations and the shape and character of the international economy in coming decades.

It has major implications for developing countries, Nyerere says, and not the least in restricting their development options and their economic and political independence.

The issue, he says, is being pressed with haste, despite the expressed uncertainties and major misgivings on the part of many developing countries. There has been virtually no serious in-depth discussion involving developing countries not up to now has there been careful analysis of the implications, costs and benefits for different types of national economies or those at varying levels of economic development.

Nyerere notes that the major issues underlying the proposal are set out in the policy brief and that his purpose in drawing this to the attention of the heads of state/governments in the South is to draw their attention to the need for careful deliberation on the part of all developing about the merits of such a global regime.

"The South Centre also suggests that there is a need to consider whether such a matter should in any case be discussed and negotiated in the framework of the WTO."

Only on the basis of detailed national, regional and global studies could developing countries conclude there is a need for some kind of multilateral investment agreement and "these cannot be done properly in a hurry".

The developing countries would also need to work out with some precision their position on the contents of such an agreement, specifying elements that would make it balanced and supportive of their basic political and developmental goals.

"And before entering into discussions with the united countries of the North," Nyerere says, "South countries do need to get together and work out among themselves a well-thought out joint policy stance to be adopted in discussions and negotiations on the subject in international forums.

"Only by working together can they protect and promote their immediate and long-term interests while working towards equitable and development-oriented global investment practices. It would certainly not be wise for developing countries to react individually to what is, in effect, a unilateral North initiative - and one based on the details which developed countries have for many months been working out among themselves."

The South Centre policy brief, in summary conclusions, says an investment regime of the kind being proposed has major implications for the South, as also for the North.

From the perspective of the South, the very nature of the agreement raises a number of important objections. These concern

* the manner of its preparation and presentation,

* the fact that basic elements present the prospects of a highly unbalanced agreement,

* the fact that developing countries would be giving up their right to adopt a selective approach to foreign investment to promote their chosen development strategy, something which is essential if they are to derive maximum advantage,

* the fact that developing countries will be subjecting themselves to potentially aggressive competition from powerful overseas investors whose business practices may distort the local market structure,

* the fact that, owing to the complexity of the issues, many developing countries are not yet in a position to assess fully their interests in this matter, and

* the fact that discussions in WTO would exclude from participation those developing countries who are not members.

The policy brief argues that the broad contours of the North's proposals for an international investment regime is a multilaterally agreed rules for a clear framework to provide free flow of FDI, and in the interests of simplicity, greater certainty and good international economic relations.

But the nature of the regime proposed makes it clear it cannot be regarded mainly as serving the purpose of rationalizing present bilateral and regional arrangements. The multilateral regime proposed would involve a "very substantial extension" of the Uruguay Round agreements affecting investment including GATS, TRIMs and TRIPs. Any agreement on FDI under the WTO would be binding and involve disciplines and permit imposition of sanctions, even cross-sanctions between trade and investment. They would place substantial obligations on developing countries as hosts to FDI (which is mainly from the developed countries) and would extend the right of investors considerably.

If agree to, the proposals would vastly reduce the scope for host governments to exercise their independence and reduce their choice in policy-making. While developing countries would thus see their political and economic sovereignty significantly circumscribed, no corresponding rules seem to be envisaged to introduce duties and obligations on powerful foreign investors.

"Thus, what is presented as a practical matter, is a highly political one."

Referring to the extensive preparations already done in the WTO, the policy brief says that if developing countries agree to put the matter on the WTO agenda, they would only be in a position to react to these proposals.

"Despite the WTO Secretariat's statement that discussions will need to achieve adequate balance reflecting the mutual dependence of home and host countries in any foreign direct investment, past experience of the developing countries in the GATT and WTO indicates that, unless they work together, it will be extremely difficult - indeed almost impossible - for them to alter the general intent of the current proposals to any substantial extent."

It cites several other elements involved in such a discussion on FDI, and says that bearing in mind all these concerns, and the serious reservations of a more economic nature concerning the proposals, it is difficult to concur with the observations of the WTO secretariat that at the present time "there is a widespread demand for international cooperation to discuss a new regime for FDI within the WTO at the present time."

"Such a demand," the Centre says, "does not seem to exist generally among the developing countries."

The policy brief addresses some systemic issues, the micro and macroeconomic arguments in favour of free flows of FDI, and goes on to note that FDI may have many benefits, but also has costs and "there is nothing to justify the presumption that the net result will always be positive." For a developing country, the cost of FDI is not restricted to the stream of profits that has to be repatriated so long as investment continues. There are also foreign exchange costs that are onerous since these countries always face foreign exchange constraints.

FDI is not the only way to import technology, nor is FDI the optimum way, in terms of costs and benefits, for acquiring a new technology.

The earlier distinctions between FDI and portfolio investments are less clear, and it is now more and more possible for a foreign company to buy a controlling interest in a local company.

Many developing countries have adopted financial liberalization, and markets for derivatives have developed in many industrial countries. FDI thus may now involve additional cross-border financial flows, potentially as destabilizing as international portfolio flows.

While FDI, for developing countries, has some advantages over portfolio flows, in fact the rates of return expected by the investor, the socalled 'hurdle' rate, are much higher and, in the absence of local reinvestment, can be a burden to the host country.

For developing countries to fully harness the benefits of FDI, they have to be selective and unfettered foreign investment could have a net negative impact. By asserting the right to invest, the proposed multilateral investment regime, prohibits a selective approach.

The experience of developing countries show that only those that carefully controlled the inflows of FDI as part of a forward- and outward-looking industrial development strategy have benefited.

While criticisms of incentives, and beggar-thy-neighbour competitive incentives are valid, preventing collective loss to the South in such competition is best achieved by developing countries agreeing among themselves on common policies rather than the far-reaching multilateral agreement.

Unrestricted FDI could also have serious effects on competition within developing countries whose largest domestic firms are likely to be small in size compared to the TNCs and their subsidiaries.

The report also draws attention to the many serious political and social reservations and implications of an multilateral regime on FDI, and cautions that foreign firms may be seen as having an excessive influence over the political process and national economic policies, giving rise to publications reactions endangering domestic stability.

"It could also be seen as an insidious form of recolonization by the North," the Centre's policy brief says. Political difficulties would also arise by the application of the most-favoured-nation treatment and 'national treatment' in circumstances where there are strong objections to national economic resources being owned or effectively controlled by companies from another country. Cultural considerations would also need to be taken into account.

Stressing the need for extensive studies and analyses, the South Centre urges these taking place within South-wide forums such as of the Group of 77 and the Non-Aligned Movement.

In the absence of such studies, the Centre warns, "developing countries will be unable even to engage effectively in the important initial discussions likely to take place in UNCTAD, following the Midrand conference."

It will be important for developing countries to keep a detailed watching brief on these efforts and ensure that the South's best experts are involved in this work and follow matters carefully.

It is in the interest of all developing countries to prevent the launch at Singapore Ministerial Conference of the WTO a process to discuss within the WTO a liberal global regime for FDI.

While the benefits of suitable FDI are fully recognized, the economic arguments and strong empirical evidence outlined suggest that FDI can best make a contribution to economic and social development when a selective approach is adopted, accepting or encouraging FDI in accordance with a country's designated economic and social development objectives. This applies as much to those that currently receive little or no foreign investment as to those receiving considerable inflows.

The FDI issue merits detailed and careful study and reflection before it is possible to assess whether any multilateral agreement should be discussed or negotiated, and if so what its objectives and contents should be. At the international level, these processes should take place in the global forum of UNCTAD, which facilitates participation of all developing countries and could be conducive to full and free exchange of views by all.