Apr 3, 1998

Geneva, 1 Apr (Chakravarthi Raghavan) -- For any broad consensus to be achieved, international investment discussions and negotiations need to involve not only governments, but representatives of civil society, who have a real stake in the outcome, UNCTAD Secretary-General Rubens Ricupero said Wednesday.

Ricupero was addressing an UNCTAD Expert Group meeting on regional and multilateral investment agreements and their development dimensions.

Dato J.Jegathesan, deputy director-general of the Malaysian Industrial and Development Authority is chairing the 3-day meeting with participation of some expert panellists.

The meeting is part of the UNCTAD effort to promote consensus on a possible multilateral framework on investment.

Ricupero noted that developing countries saw FDI as vital to promote their economic development and supplement domestic savings. He did not know of any country in the world which was not trying to attract FDI, which had now become more intimately linked to development than before. But to ensure tangible benefits, any international agreement must have a development-friendly criteria. These have to point the way as to how investment frameworks can promote equitable integration of developing countries into the international economic systems by facilitating and increasing FDI to a wide range of countries, and not just a few as now.  

Equally important was that the development friendly criteria must point the way as to how an investment framework could help countries to maximise positive effects of FDI and minimise the negative effects.  

In this regard, Ricupero said, he wondered whether it would not be more useful to gather information about the concrete experiences of countries with FDI in dealing with their chronic problems of current account deficits of countries that have received important flows of FDI, whether it has been able to generate additional capacity for exports and for integration into the global network of production and distribution, and real contribution to the development of local technological capacity and managerial skills. It would be useful to get empirical evidence in recent years of the FDI experiences.

Referring to the recent developments on a Multilateral Agreement on Investment (MAI) in the OECD (where differences among member countries and public opposition from NGOs has blocked conclusion of an accord as originally planned in April this year), Ricupero said it would be premature to draw any conclusions. But some procedural lessons could be drawn. 

The MAI discussions were a clear reminder that investment issues by their very nature touch on an entire range of issues relating to production and involve complex issues of national policies in both industrial and developing countries. As the Canadian former trade official and economist, Sylvia Ostrey has noted FDI was at the core of the internationalisation of domestic policy agenda of countries.

Therefore an extra effort has to be made to ensure that all countries are able to participate in these discussions.

A second procedural lesson was that for any broad consensus to be achieved, it was essential that international discussions and negotiations should involve all those potentially affected. Not only governments, but also representatives of civil society who have real stakes in the outcome, must also be heard. This was the logical consequence of internationalisation of the domestic policy agenda. In the same way that consumers and business organizations, trade unions and NGOs make themselves heard and felt at the national level, they are being increasingly heard and felt at the international level.

Referring in this connection to the recent meeting in Geneva on Policing the Global Economy, organized by the Bellerive Foundation and the NGO 'GLOBE International', Ricupero said he was surprised by the cool reaction of the audience not only to his views, but also those of others like the WTO head, Renato Ruggiero. As environment minister of Brazil, he had been in close contact with the environmental NGO community and he was shocked to see at the Geneva meeting "how the gap has widened in recent years between the environment community which was present there in force and people who were trying to look at economic problems in the world in a balanced way" and how they could make the best out of the current trend towards globalization and liberalization.

It could not be said that everyone at that meeting was representative, and may be some were missing. "But one should not under-rate the intensity of the feelings... the differences in perceptions that have developed between those who are sincerely committed to the problems of environment and social conditions of people and those dealing with concrete economic matters."

Ricupero said he had not been very successful in persuading the NGOs there and he suspected that what happened in Paris over the MAI was the result of the gap that he had just described.

An expert panellist, Mr. A.V.Ganesan, former Commerce Secretary of India, in speaking on the development objectives of investment agreements, argued that the value of inward FDI to economic growth and development was fairly well recognized and the unilateral and autonomous liberalization of FDI policies and regulatory frameworks by developing countries was a clear recognition of this. FDI was becoming important than trade for delivering goods and services to foreign markets, and was increasingly driven by objectives of accessing foreign markets not only for output of TNCs but also for securing factors of production. FDI was more intimately connected with development than ever before. A major objective of developing countries in seeking FDI was that it would make a significant contribution to enhancing efficiency and competitiveness of their economies.  

The most important development issue for many developing countries was the building up of domestic industrial and technological capabilities. Domestic capacity building was at the core of the development problems of developing countries, who however faced a dilemma in shaping their FDI policies, Ganesan said.

On the one hand they felt that the competitive pressures from foreign companies were needed to upgrade the efficiency and competitiveness of the domestic enterprises and the domestic economy as a whole. On the other hand, they apprehended that the financial, technological and competitive gap between domestic enterprises and TNCs was so great that domestic enterprises had little chance of survival if there were free and unrestricted competition between the two.

To meet this dilemma, developing countries typically followed a dualistic approach. They were encouraging flow of FDI to maximise benefits, including more recently such investment in infrastructure and through privatization, where heavy capital and technological investments were needed. At the same time, they tried to foster, support and, if necessary, protect domestic enterprises with a view to building up and strengthening domestic industrial and technological capabilities - often both a developmental and political objective. 

This approach was reflected, in Ganesan's view, in bilateral investment agreements that seek to promote FDI through protection of foreign investors, once they had been admitted in accordance with host country laws and practices. At the same time BITs did not restrict or inhibit the right of host countries to follow their own policies towards FDI. In particular, the right of entry and establishment and national treatment in the pre-establishment phase was not guaranteed by the

BITs. This was one of the reasons for the explosion in conclusion of BITs. Most regional agreements too did not guarantee national treatment to foreign investors in pre-establishment phase - except in cases where they are of larger economic cooperation among countries of more or less same levels of development.

Given the heterogeneity in levels of development of developing countries - and the asymmetry between developed and developing and capital exporters and imports - the development objectives among developing countries would vary widely. It was neither feasible nor desirable to formulate an inventory of development objectives applicable to all developing countries, and that could be stated with precision in a legally binding agreement.

"An investment agreement cannot be made development-friendly merely by hortatory statements in the preamble or body of an agreement," Ganesan said adding that the various WTO agreements showed how difficult it was to translate into contractual language such objectives and rights.  

Hence it was of fundamental important that if an investment agreement was legally binding and is to take care of development objectives in a manner suited to needs of individual countries, it must allow sufficient freedom and flexibility to host countries to pursue their own policies towards FDI.

A development-friendly agreement could also be investor-friendly when it accorded fair and equitable treatment, legal security and dispute resolutions mechanisms in the post-establishment phase.  

Such an approach, followed in BITs and regional accords, would enable developing countries to pursue their liberalization policies autonomously and according to their own pace without apprehension that such liberalization has to be 'locked-in' under a multilateral agreement. On the definition of investment, Ganesan said if national treatment in the pre-establishment phase is excluded, the definition could be broad and open-ended as in most BITs. But if national treatment issue comes to the fore, then the definition has to be narrowed and confined to traditional notions of FDI - leaving out portfolio flows, IPRs, debt capital etc. 

Any investment agreement should also address obligations of investors, legally binding where possible and recommendatory otherwise; restrictive business practices; performance requirements; and harmonization with WTO agreements. Investment and competition policies would need to be addressed in a holistic manner, both at national and international levels, and their harmonization would be important for the pursuit and realization of development objectives.

Friedrich Hamburger, Director of the European Commission's Development Policy directorate, in explaining the Lome accords said that it was characterized by investor-friendliness and some elements of development-friendly approaches.

Thailand's Chakramom Phasukavanich, Deputy Secretary-General of the Board of Investment, explained the ASEAN and APEC approaches. In the ASEAN, a soon-to-be-signed agreement, would allow countries to keep some national industries for themselves until 2010. In the APEC development objective was not the prime objective, and the menu of options for liberalization represented the clash between the approach of the developing members and those of Japan and the US.

Several speakers from developing countries suggested that BITS, though voluntary, were mostly influenced by the developed countries. Having adequate rules in multilateral frameworks to ensure development objectives would seem to depend on a certain measure of unity among the developing countries, and this did not seem to be feasible. Also, while developing countries were undertaking liberalization, they should be able to do so at their own pace, balancing the interests of domestic development, local industries through local content requirements, and promotion of exports. Several industrial countries said multilateral rules and liberalization of investment would promote economic growth and development.

The Third World Network said that domestic capital accumulation and building technological capacity with equity built into both processes lay at the heart of the development issue. And when one spoke of foreign investment, one really was talking about Transnational Corporations, which brought in capital and transfer of technology within firms, but were unable to diffuse that technology across the country. The liberalisation of foreign capital and TNC operations, and the mimetic behaviour induced by them among consumers, while maximising the capital accumulation within the TNC, seemed to be reducing domestic savings - as some recent data in India seemed to suggest. And the recent crisis in south-East Asia showed that in today's world of derivatives, the distinctions between various forms of capital may not be so strict.

And as Prof. Stephen Hymer had written 25 years ago, in his critique of the UN's first report on multinational corporations and world development, the dual nature of TNCs lay in their ability to bring capital and technology and organizational ability to developing countries, even as their hierarchical, authoritarian and centralized structure resulted in draining a host developing country of its ability to plan for itself. Their international hierarchical structure, as Hymer has further pointed out, seemed to result in a vertical differentiation among countries -- with high decision-making restricted to centres like New York, Tokyo, London, Frankfurt and Paris, an inner ring between the 40th and 50th longitudes, while most developing countries would remain as 'branch plant operators', not only with reference to their economic functions, but throughout the whole gamut of social, political and cultural roles.

In a context where, development objectives and rights could not be easily spelt out in the multilateral investment framework, how could these situations be handled and how would TNC investments promote development was the critical challenge.