11:46 AM Oct 14, 1996

WIDE NORTH-SOUTH GAP AT GLOBAL FORUM

Geneva Oct (Chakravarthi Raghavan) -- The Global Investment Forum, organised on 10 October by UNCTAD as a high-level segment of the 43rd Trade and Development Board session, demonstrated clearly the wide gap and sharp differences between North and South countries on the concept and usefulness of a multilateral framework for investment rules.

On one side were officials from Northern countries, the OECD secretariat and representatives of Northern Transnational Corporations (TNCs), all arguing that the globalisation process must be facilitated by a multilateral investment agreement (MIA) in the WTO and/or a multilateral agreement on investment (MAI) being brewed in the OECD but later to be opened up for other countries to sign.

On the other side were several Ministers, diplomats and the NGO sector from developing countries, first expressing suspicion over the North's motives and later voicing clear opposition to the MIA or MAI as instruments of a one-sided treaty of rights to foreign companies (without obligations in return) and of a return to colonial-type domination of their economies.

By the final session, two major Asian countries (India and Indonesia) had come out against even a discussion or study of the MIA issue in the WTO.

Such a WTO study process is "totally unacceptable and inappropriate", said Indonesia. India noted that UNCTAD has now been mandated to look at the issue including from a development perspective, and "duplication" at the WTO would marginalise the UNCTAD process. India also said the OECD could negotiate what it wants, but there was no way it could be multilateralised without consent of the developing world.

An African Minister called the pro-MIA arguments of the North a "deceit", while another recalled that earlier attempts of "multilateralising" the world (in the 18th and 19th centuries) had led to the removal of resources and people from Africa.

Only one of the developing countries that spoke on the issue, Madagascar, was in favour of having an MIA in the WTO, based on rights of establishment and national treatment for foreign firms, the MFN principle and the WTO's dispute settlement system. Its Trade Minister believed the MIA would increase investment flows and save Madagascar from having bilateral negotiations.

Of the developing countries that spoke up on the MIA issue, India, Indonesia, Uganda, Egypt, China, Bangladesh, Zambia, and Ghana either voiced opposition or urged great caution and asked for more time before any discussions on multilateral rules. They also favoured that discussions, if at all, should be in UNCTAD

The widespread opposition to and suspicion of the MIA was a surprise to some participants, including media representatives, and organisers of the Forum. The WTO Director-General and some Northern countries for several months had been giving the impression that there was a near-consensus among WTO members (except for one or two developing countries) in favour of a "trade and investment" discussion in the WTO.

As opposition to the MIA became increasingly evident at the global forum, the Canadian Ambassador, John Weekes, tried to assure developing countries that the shape of the MIA was not pre-determined and their views could be incorporated. A Canadian-sponsored non-paper in the WTO proposing a work programme for investment would cover such issues as the role of development. Fears of the MIA were thus not justified, and discussions should be held in both UNCTAD and the WTO, he tried to argue.

However, statements from other Northern countries and Northern-based organisations (including the US, Japan, the EC, the OECD and the International Chamber of Commerce) showed that they already have a clearly defined design of the aims, goals and scope and shape of an MIA or MAI.

The multilateral investment framework they have designed is aimed at giving TNCs (most of which are Northern-based and Northern-controlled) the right of entry and establishment in countries of their choice, in almost all sectors, and to obtain national treatment, and absolute freedom for capital and profit repatriation.

As this Northern design of a MIA/MAI was increasingly confirmed, more and more developing countries (including those that had not been known to be opposed before) gave voice to their suspicions and opposition, as the day progressed at the forum.

The Forum had opened on an upbeat note for the MIA proponents: the organisers had arranged for a special first session on "business perspectives", to enable the International Chambers of Commerce (ICC) to speak on the importance of FDI and the need for an MIA to enable continued growth in all kinds of foreign investments.

The ICC made the point that past distinctions about various kinds of investment were no longer of value, and FDI and portfolio investments should both be brought into scope of an MIA; the right of investment, national treatment, repatriation of profits and capital should be guaranteed, and that there should be no restrictions or stipulations by the host country about technology transfer etc.

And one of the ICC representatives, in a disdainful reference to the non-government community (NGOs) that participate, cheek by jowl with the ICC, at such international meetings, insisted the ICC was on a separate footing. It looked as if the ICC was claiming in the international fora a status even higher than governments. The fact that the two speeches from the ICC representatives were the only ones at the day-long forum to be delivered from a special rostrum by the side of the podium seemed to suggest that the organizers were in tune with this view.

In the discussions at the first session on "FDI trends and policies", a question was posed to business representatives as to the determinants of FDI flows. Why was two-thirds of total FDI going to OECD countries and the rest to a few developing countries?

John Koo, president of LG Electronics of South Korea, said that the most important factors attracting investors were a big market, growth potential of the market, and the firm's ability to be competitive in that market.

Peter Brabeck, vice-president of Nestle, stressed the importance of brand-names and marketing to companies. An attraction would be that companies be given freedom from restrictions placed on marketing, for instance the implementation of the Code of Conduct on advertising infant formula.

But Braebeck did not allude (nor was he asked to by the moderator) to how Nestle acquired the knowledge or process to make condensed milk, and from there went to make its baby-food formula. If he had delved into his company's history, he would have known that the Nestle began with what would today be a violation of TRIPs - using other people's IPRs and using their 'trade secrets', by enticing one of their employees. And the Basel-based Swiss chemical and pharmaceutical companies till long into the post-war period flourished by copying German patents.

Ministers and officials from many developing countries took the opportunity of the first session to present the efforts they had made to make their countries more attractive to foreign investors, including in establishing political and economic stability, transport and energy infrastructure.

Some of them later said this was what they had been advised to do by the organisers - instead of dealing with the issue of merits and demerits of FDI for development.

But a representative from Ireland stressed that in her country's experience, there was an "absolute necessity" to have linkages between domestic and foreign investors, and that governments must be "very active" to promote this. She said that of course there is a "downside" to foreign investments, such as profit repatriation and transfer pricing. The host country was also more vulnerable, as a decision can be taken abroad that can have "devastating effect" on the host economy, for example, job retrenchment. There was such a risk, although a smaller one, in domestic investment as well.

Bill Jordon, secretary-general of the ICFTU, said it was wrong to view the rise in FDI as a success. The rising trend in FDI was "dangerously imbalanced". UNCTAD's reports had shown that 100 poor countries attracted only one percent of total FDI; whilst China had $38 billion investment, Africa obtained only $5 billion.

Moreover, only a quarter of FDI was for productive investment, whilst three-quarters was spent on mergers and acquisitions -- an effort of corporations to increase their "power". Whilst FDI was rising in developing countries, poverty was growing even faster. He called for a MIA which included conditions on labour standards and human rights. "A non-protectionist social clause will lead to an investment framework with a level playing field," he said.

Martin Khor, director of the Third World Network, addressed the issue of benefits and costs of FDI, which he said was supposed to be a key issue of the panel, and which was discussed in four briefing papers distributed by TWN to the Forum.

A paper presented by a Malaysian economist, Dr. Ghazali bin Atan, at a recent TWN seminar on The WTO and Developing Countries, had shown that whilst FDI brought many benefits, it also had costs. The study found that FDI led to higher consumption and thus lowered the savings rate of the host economy.

It could also have negative effects on the balance of payments (BOP) through two mechanisms. On the financial side, the repatriation of profits and other investment income was far larger than the inflow of capital. This caused a "decapitalisation effect" which could be even more serious than debt because the rate of return on investment (normally 20% and above) was far higher than the rate of interest on external loans.

On the trade side, foreign investors also had high import demand for capital and intermediate goods. The increased export earnings from FDI and other import savings (if any) may not be enough to offset a negative trade effect.

Governments needed to be aware of the potential risks and to take strong measures to increase the benefits and reduce the costs of FDI to protect the balance of payments. With an MIA or MAI, such measures would not be possible.

Khor added that FDI regulation was needed in some conditions where imbalances in equity ownership could cause political instability. He related the Malaysian experience where 13 years after Independence, foreigners still owned 70% of the equity whilst the majority Malay community had only 1% and other citizens had 20%.

After racial riots caused by this situation, the government instituted an investment policy requiring foreign investors to allow half the equity to be owned by locals and of that, 30% to by Malays. The redistribution took place in the new part of the growing cake. Today, the foreign share had fallen to 30-40% whilst the Malay share had risen to 20-30% and other citizens had 25-30%. This policy contributed to increasing political stability that underlay the country's recent economic growth.

Khor said that this example showed the importance of the ability of governments to retain policy instruments and options to regulate foreign investments, which a MIA or MAI would remove, and this removal could cause political and social instability and thus threaten development prospects.

Egypt said FDI was extremely important, but there had to be promotion of national capital for investment. If foreign investors sought right to invest and national treatment, they should assume obligations and provide certain guarantees so that sudden capital outflows, as happened in Mexico, would not take place.

Mexico's representative said that FDI was only one element that could be added to local savings in mobilising investment resources, and that FDI is not a panacea. Moreover, external savings (used to support domestic savings) should be in the form of direct investment and not indirect investment (like portfolio etc).

Prof. Sanjaya Lall of Oxford University, who was a resource person for the session, said some key elements of FDI trends included that flows to the OECD had risen again, that in developing countries there was a focus of FDI in only a few and there was a convergence of FDI policy in terms of similar regimes, policies and incentives.

The picture, he said, did not add up: FDI is not going to countries that need it, but to countries with such attractions as a large market and political and economic stability. The determinants of longterm flows included good physical infrastructure, skills and technical capability and a good supply base for components and skills.