Jul 22, 1998

DEVELOPMENT: ASIANS QUESTION GLOBAL INVESTMENT RULES

 

New Delhi, 21 July (TWN) -- Asian investment officials strongly reaffirmed the right of national governments to regulate foreign direct investment and determine their own national development strategies and priorities.  

Participants at a two-day regional symposium for Asia on "International Investment Arrangements and their Implications for Developing Countries" also questioned the need for a multilateral investment agreement.  

A majority of participants expressed doubts that such an agreement would increase the amount of investment flowing into their countries.  

A number of participants stressed that the quality of investment is equally, if not more, important in light of the South-east Asian crisis. Almost every government delegation emphasised the need for flexibility and rejected any notion of pre-entry and establishment rights for foreign corporations in their respective countries. The symposium held on 15-16 July 1998 in New Delhi, was organised jointly by UNCTAD and the Government of India. Nineteen participants from 15 developing countries attended, as well as observers from research and academic institutions and the private sector.

It was part of UNCTAD's outreach programme on a possible multilateral framework on investment (PMFI) for policy makers of developing countries. The first regional meeting was held in Morocco in June 1997 for African countries. A similar symposium for Latin America and Caribbean countries is planned for the first quarter of 1999. The series of meetings are largely financed by the Netherlands, Norway, Switzerland and the Commission of the European Union.

The purpose of the Asian Symposium was to familiarise government officials with existing international investment arrangements, from a development perspective in order to contribute to a better understanding of the development implications of key issues and concepts relevant to these arrangements. Among these were: the scope and definition of investment, admission and establishment, legal standards of treatment, protection and guarantees, settlement of disputes, transfer of technology and restrictive trade practices, and home country measures.  

The participants generally agreed that legal agreements do not necessarily ensure any increased investment into a country.  

Many reiterated that there are many factors that determine the investment attractiveness of a country. One participant frankly pointed out that his country's investment regime was even more open than parts of what the OECD-MAI envisaged, but they were still not attracting foreign investment.  

In his inaugural address, India's Commerce Minister, Mr. Ramakrishna Hegde, said that the development experience of many successful developing countries particularly in Asia has underlined the benefits of a trade- and investment-led growth.  

"At the same time, the recent economic and financial turmoil has brought home the need to manage these processes in a manner that is consistent with the long term development needs as well as special conditions of each economy in the society," he said. 

Mr. Hegde said that the upsurge of FDI flows to developing countries in the 1990s showed that investment climate and investment opportunities can be synchronised under the existing arrangements of bilateral agreements. 

"This can be done through unilateral liberalisation regimes as this provides developing countries with the required freedom and flexibility necessary to ensure that a liberal investment climate is in harmony with their own diverse needs and concerns," he said. 

He emphasised that while encouraging FDI, developing countries have been exercising their discretion to select the priority sectors in which FDI is permitted; guide the choice of the production units; lay down appropriate conditions regarding dissemination of technology, management practices etc; foster support and if necessary prefer domestic enterprises.  

This was due to the dilemma facing developing countries like India.  

On the one hand, FDI is encouraged to reinforce the basic strength in the domestic economy and develop infrastructure, enhance export production and build domestic industrial and technical capabilities. The basic premise is that the competitive pressures through FDI can play an important role in upgrading the efficiency and competitiveness of domestic enterprises and the domestic economy as a whole. 

On the other hand, developing countries also apprehend that the financial, technological and competitive gap between the domestic enterprises and transnational corporations is so wide that it would be difficult for domestic enterprises to survive if there is unrestricted and free competition between the two.  

Hegde pointed out that the linkages between investment and development are even stronger than those between investment and trade.  

"The investment policy of a country addresses a host of complex and inter-related issues of national importance viz regional disparities, income inequalities, employment, taxation and social justice," he said. 

Since these vary from country to country, and over time, "we have to ensure that the freedom of recipient countries to pursue national development strategies while availing FDI is not affected adversely by evolving a multilateral framework to regulate FDIs". 

He underlined the importance of countries having the flexibility to use a combination of investment incentives and performance requirements to pursue development objectives, and the need for effective transfer of technology. He was concerned over empirical evidence of problems faced by FDI receiving countries regarding transfer of skills and technology.  

"Some studies have also indicated that the cost of technology imported from TNCs was excessive and could strain the balance of payment situation of host countries".  

There were also cases where companies possessing particular technologies refused to invest in joint ventures.  

Hegde also referred to lack of mobility of labour, and that while some developing countries had some apprehensions about unregulated flow of FDI, similar concerns about mobility of human capital are prevalent in the developed countries. This was a matter that needed to be addressed.  

The Indian minister noted that the OECD negotiations on the MAI have thrown up many core issues that have prevented even the developed countries from arriving at a final accord.  

He stressed the important need for developing countries to acquire an adequate knowledge base and to be prepared collectively and systematically to deal with the multilateral trading system.  

"A matter as vital as investment flows which today affects our economic well being, social development and environmental sustainability, cannot be left to developed countries and to their calculations of costs and benefits," he said. 

Developing countries, added the minister, must make an informed choice and the development dimension must be adequately reflected in any consideration of trade and investment issues.  

In relation to the study and educative process of the WTO Working Group on Trade and Investment, the minister said this process must take fully into account the needs, interests and the concerns of the developing countries without losing sight of the development dimension.  

He reminded the Symposium that the mandate to the group particularly mentioned that the work undertaken shall be without prejudice to the work in UNCTAD and other inter-governmental fora. Ambassador Farooq Sobhan of Bangladesh, who chaired the second day's discussions, posed some questions: 

What are the concerns of developing countries regarding the MAI? Are we well off without it? Should we re-shape it to make it responsive to our needs by ensuring investor responsibilities and obligations? If there is a need for an agreement, what are the modalities? 

If developing countries were to present the draft UN Code of Conduct for TNCs (shelved in 1991 due to TNC pressure supported by some OECD governments) to the OECD as a stand alone agreement, would the OECD accept it or try to marry the MAI and the Code? 

Amb. Farooq cautioned developing countries that "putting your rubber stamp on the MAI doesn't ensure that investment flows will come". He said that there is a need for expertise, especially legal expertise, as there is severe imbalance in multilateral negotiations.  

"We are experiencing the pain of not enough expertise," he added. 

In discussing the "Interface between international trade, investment and competition policies", Professor Jagdish Bhagwati in a keynote speech supported a reformed version of the OECD-MAI -- one that is a voluntary Code, rather than a mandatory agreement as part of the Single Undertaking at the WTO with its package of trade sanctions and cross retaliation. 

Bhagwati a free-trade advocate and trade policy expert said the WTO itself still needs to remove more border barriers such as in agricultural products and textiles and should focus its energies on the GATT/WTO agenda.

"The WTO should not go into social clauses, environmental standards and the MAI," he said.  

Bhagwati argued that the push behind the MAI came from transnational corporations and their OECD governments. The huge growth of TNCs means that they have more power over domestic politics, and through their governments at the international level, too. They therefore naturally seek their own interests by stressing TNC rights and not obligations.

Thus they also neglect to look after the worldwide efficiency aspects of MAI or host country interests in comparable degree, if at all.  

Prof. Bhagwati regarded the national treatment requirement of FDI, receiving treatment "not less favourable" than domestic investors (thereby allowing treatment that is more favourable for foreign investors) to be "distortive of efficiency." 

While he also believed that performance requirements to be trade distortive, he nevertheless accepted that "these are areas where host countries should be free to make their own choices ... and it is not for MAI to impose obligations".

The main problem, he said, was that the MAI as presently conceived and pursued, is fundamentally flawed, and it was worthwhile for UNCTAD and developing countries to make efforts to reform it.  

A number of participants and resource persons at the symposium questioned the premises of arguments for a multilateral agreement, and even the legal concepts being promoted as part of customary international law, especially with respect to the development dimension and developing countries.  

According to Professor M. Sornarajah of the National University of Singapore, much of the customary international law in the area of investment is contentious.  

"Asians did not participate in making those laws (we did not even exist as countries then) and there are fresh efforts to dress up international law as having been formed by all countries. The MAI is part of a long effort by European states to maintain their homogeneity," he said during the first session on "Trends and International Agreements".

Prof. A.A. Fatouros, academic and former permanent representative of Greece to the OECD, traced 50 years of evolution of national and international law and policy on FDI. He said that the dynamic growth of transnational enterprises, partly as a result of the effective use of legal devices, has put continuing pressure on policy makers at all levels to contribute to the creation of a legal framework to match the enterprise's needs and purposes. However, he concluded, it is not enough to say that agreements that are good for investment will also be good for development. In fact, "we do not really know how far these agreements are good for investment."  

Further, not all private investment is good for development and actual benefits from FDI for particular countries vary significantly. 

Fatouros also said the most concrete and detailed part of the legal framework of FDI consisted of national laws and policies. International rules and concepts operate in constant reference and interaction with national ones. Controls, direct and indirect, exist in all countries even though neo-liberal economics has taken over in the form of GATT/WTO and a range of regional and plurilateral agreements exist.  

In order to serve the development goal, international investment agreements, said Prof. Fatouros, should allow adequate flexibility to the host government.  

Most of the presentations that followed, especially those by Asian resource persons, including seasoned national negotiators and policy makers, strongly reiterated the importance of national regulation and flexibility to meet development goals. 

In stark contrast, the presentation by Amb. Marino Baldi of Sitzerland on the OECD-MAI clearly established the fundamental thrust and objective of that agreement: to fully liberalise a country's economy to the unfettered interests of TNCs under the principles of non-discrimination and national treatment at the pre- and post- establishment stages of a foreign investment. 

Although Baldi purported to discuss the development aspects of the MAI, there was no such task undertaken at all beyond the assertion that "a considerable number of countries may find it in their interest to become part of the MAI".

The Swiss diplomat said that freedom to invest and the foreign investor's presence in the market stimulated OECD interest in developing rules for themselves and "we feel profoundly that the door ought to be open to other countries". He then proceeded to outline the MAI. A broad definition of investment including portfolio investment, intangible assets (such as intellectual property) would apply that determines actual MAI disciplines and lays the scope of dispute settlement. 

National treatment at entry, most-favoured nation obligations, non-discrimination in privatisation constitute the core of the MAI. Investor-to-state dispute settlement would be added to the traditional state-to-state proceedings, he said. Although reservations to national treatment are permitted, debate still continues on whether this should be subject to the standstill principle. 

Baldi made it clear that performance requirements will be prohibited, citing the example that an obligation to transfer technology in order to invest would not be allowed.  

This presentation provoked many comments.  

Mr. A.V. Ganesan, former Commerce Secretary of India and chief negotiator for his country during the Uruguay Round, said that the non-discrimination is the one principle that goes against development.  

"At the very outset, the MAI negates development," he said. No developing country can have non-discrimination at the entry or establishment stage.  

Dr. Nagesh Kumar from the Delhi-based Research and Information system for the Non-Aligned and other Developing Countries said there was a need to distinguish between the quality and quantity of FDI. The former was often neglected, and since it can be very good or very bad and developing countries look to FDI as a development resource, the question of quality becomes very important.  

A possible MFI or MAI will not guarantee quality because they take away the ability of governments to control the quality of FDI, he added. He noted that United Nations University empirical research in a number of countries showed that screening mechanisms and performance requirements had some effect on improving the quality of investment. 

Commentator for the session, Mr. Pradeep Mehta of CUTS, an Indian NGO, asked whether a MFI is necessary? Will it promote investment flows to those countries that are not receiving FDI so far? Some LDCs, he said, have very liberal investment regimes but are still not getting FDI. 

The participants from Indonesia and Nepal also questioned how the MAI could help developing countries.  

Chee Yoke Ling of the Malaysia-based Third World Network said that the South-east Asian experience has crucial lessons. At the first stage, the economic success of many Asian countries was the result of regulated and managed foreign investment with FDI as an instrument within a larger national development strategy framework.  

But even before the recent crisis, a number of countries, including Malaysia, Thailand and Indonesia, were facing balance of payments problems. In the Malaysian case, empirical evidence showed the link between BOP deficits and the amount of FDI entering the country, emphasising the importance of the quality of FDI.  

In response to Ambassador Farooq Sobhan of Bangladesh, Amb. Baldi said that the OECD Guidelines on Multinational Enterprises showed the importance of ensuring good corporate behaviour, but that they would not be legally binding because it was "not feasible" to do so.  

In discussions on the definition and scope of investment, admission and establishment terms, Asian participants agreed that these deal with development and it is up to each country to determine its own development policies and priorities. 

Although the BITs and other agreements often contain very broad definitions of investment, the fundamental difference, according to many participants, was that the investor protection provisions that followed were specific to the approved or established investment activity. In contrast, the MAI disciplines and dispute settlement scheme would cover all matters within the definition in that agreement.  

Kenneth Vandevelde, academic from the USA, who presented a paper on Scope and Definition of Investment laid out the general pros and cons of a broad definition of investment, and concluded that the best way to deal with development concerns would be at the entry and regulation stage, rather than to do so via the definition clause. He noted that it may be useful to exclude portfolio investments because it is less easily monitored and more volatile.  

Peter Muchlinski from the University of London who spoke on Admission and Establishment also described several options, stating that while there is some pressure on states to liberalise conditions of entry and establishment, actual practice showed that controlled liberalisation is most common. He observed that even the United States, the most avowedly "open door" economy in the world, retained extensive restrictions over foreign ownership in strategic industries. 

"Even though market access provisions are common in inter-state agreements, they do not uniformly display provisions that offer investors full rights of entry and establishment," he said.  

Commenting on the two presentations, TWN's Chee Yoke Ling said that if development is the objective of FDI then it is crucial that developing countries retain the sovereign right to control FDI.  

She said that while the volatility of portfolio investment is recognised now, there is equal need to understand better the workings of classic FDI. The relationship between FDI and balance of payments problems, the links between investment and financial liberalisation, the conditions for FDI to truly contribute to sustainable development and under what conditions FDI could lead to problems such as displacement of local firms, excessive profit outflows, and influence consumption patterns -- all these need to be understood better.  

The South Centre study on FDI, Development and the New Global Economic Order was highlighted as a useful policy analysis for developing countries.  

Chee also said that undistributed profits of foreign investors in a host country could be used for portfolio investments. Such re-investments needs to be controlled, too. 

She also questioned the need for an MFI in the sense of one masterplan for investment. UNCTAD should assist developing countries in identifying development needs and priorities and the conclusion may then be that different approaches are required.  

For example, a multilateral framework for short term capital flows and specific regulations for specific sectors such as the chemical industry. But retaining national control is fundamental.  

According to a member of the Indian delegation, the ability of countries to determine their national interest is crucial. That is why bilateral investment agreements incorporate the phrase "in accordance with the law of the State" when dealing with admission and establishment.  

"We need to pause and look at the South-east Asian crisis. Two years ago, these countries were comfortable with their investment management, both portfolio and other forms of investment. In view of the evolving nature of the global economy, it is a dangerous situation if we don't have flexibility," he said.  

Indonesia's Mr. Sudiono Basuki said that his country had high economic growth for a number of years and then, in a few months, the economy fell steeply. It was necessary to understand why that happened. He pointed out that behind the FDI was a private sector debt, and repeated the need to distinguish FDI from portfolio investment.  

Prof. Sornarajah said that the South-east Asian practice is one where only approved investments get protection. Protected investments, in turn, are those consistent with the laws and policies of the country concerned. "This enables national control over the nature of protection; there is no carte blanc protection," he said.  

Malaysia's director of Industrial Policy, Ministry of International Trade and Industry said liberalisation should be in a progressive way, at a rate compatible to the needs and desires of a country. "Flexibility is therefore important," said Ms. Siaw Lean Sim. Even the offer of incentives is screened for deserving cases, she added.  

Peter Muchlinski also differentiated right of establishment from the provisions in the Uruguay Round services agreement (GATS) - the former is about the permanent presence of a company and the right to do business while trade in services deals with market access. He also cautioned against the forces of global competition that could destroy what could be a good industry in a country in the long run. At the same time, infant industry protection should not lead to a spoilt hild.

Competition law, he added, assumes that free competition is good for the economy in the narrow sense, but investment screening asks the broader question of social goals.  

On national treatment and MFN, strong views were expressed by senior trade and investment experts at the Symposium.  

Dr. V.R. Panchamukhi, Director of the Research and Information system for the Non-Aligned and other Developing Countries, commenting on two presentations by Fatouros and Muchlinski criticised the extension of the non-discrimination principle to investment regimes. This approach, he said, fails to distinguish between what is free and fair. 

"In an unequal world with different societies, nations and players, some form of differentiation is required. If non- discrimination is seen as a virtue, and discrimination a sin, the world should not have seen protective textile agreements, subsidies in agricultural products, unilateral Super 301 and the like that serves the powerful," he said.  

He stressed that national treatment and MFN have to be linked to a level playing field, and we should worry not only about the field but also as to the capability of the players. A number of case studies by his organisation using 16 indicators (including skill, access to resources, R and D capacity, transfer pricing, product differentiation, intangible assets) revealed that foreign investors scored more than double the level of domestic investors.  

According to Panchamukhi, national treatment is totally unjustifiable and unfair if the levels of the players are so unequal. There is a need for a comprehensive and integrated strategy to strengthen the domestic sector, and then open up to international competition.   "The challenge for developing countries is how to safeguard national interests so that the onslaught of aggressive TNCs does not sweep us under the carpet," he warned.