Geneva, 12 May (Chakravarthi Raghavan) -- Developing countries face the option of either continuing with present trends - autonomous FDI liberalization, along with bilateral and regional accords for promotion and protection of FDI - or prepare for negotiation of a multilateral framework for investment (MFI), and ensure it reflects their developmental, political and social needs and concerns. 

In offering this view, in an UNCTAD Discussion paper (No. 134) Mr. A.V.Ganesan former Commerce Secretary to the Government of India, has noted that the first option of keeping out of an MAI is contingent on developing countries having the collective will and strength to resist pressure by industrialized countries to begin negotiations on an MAI at the WTO or join the OECD-MAI currently under negotiations at Paris.  

But the Uruguay Round experience or the more recent, Dec 1996, Singapore WTO Ministerial meeting and decision "do not augur well for this option", and developing countries may therefore do well in adoption the second option.  

In choosing the multilateral route, whether under compulsion or conviction, and preparing for negotiation of an MAI and ensure it takes adequate care of their developmental, as well as political and social needs and concerns, developing countries need to keep two important factors in view, Ganesan argues.  

The paper, "Strategic Options Available to Developing Countries with regard to a Multilateral Agreement on Investment," is a research paper for the Group of 24 (developing countries) on International Monetary Affairs, and is due to be published in Vol.X of the UNCTAD special series, "International Financial and Monetary Issues for the 1990s."  

The paper was prepared, in January this year, before the full unfolding of the financial crisis in Asia, and before the OECD-MAI negotiations were suspended in April for further reflexion. The paper does not deal with the IMF's efforts to push for capital account convertibility - a move which the Deputy Managing Director of the IMF, Mr. Stanley Fischer has said has become more urgent since the MAI negotiations were getting nowhere. 

As the implications and real nature of crisis in Asia, more generally identified now by many experts economists as a financial and assets market crisis, rather than a BOP crisis, many mainstream economists have been openly questioning the wisdom of unrestricted capital flows of all kinds (as the MAI or the IMF convertibity idea envisage).  

At the UNCTAD organized seminar on 1 May, Prof. Gerald Helleiner, Professor of Economics at Toronto University and Research Coordinator of the G-24 project, had pointed out that most analysts now assigned some responsibility for the Asian crisis to premature financial liberalization and pushing for further liberalization of capital account was surely inappropriate. 

Helleiner said there was a common thread behind the drive of major OECD countries in all the fora. The OECD countries were pursuing coherently a common objective (spelt out in the 1997 DAC Report) - whether on the MAI at the OECD or investment talks at the WTO or the WTO agreement on financial services or the capital account convertibility proposals at the IMF or the IMF 'rescue packages' in Asia, making loans conditional on further liberalization of capital accounts. 

Ganesan's paper said the establishment of a comprehensive and legally binding MAI has now come to occupy a prominent place in the international economic policy agenda and, considering the complexity and sensitivity of the issues involved, the negotiations of an MAI may prove to be the most difficult of negotiations developing countries have to undertake, with perhaps the most far-reaching long-term implications. 

"The willingness of developing countries to join the negotiations should therefore be preceded by a strong and collective, as well as individual, application of their minds to the issues involved and their negotiating objectives."

While there has been an upsurge in the 1990s in the flows of FDI to developing countries, in the context of the debate on an MAI, three important factors need to be kept in view on these flows.  

Firstly, this upsurge has been caused mainly by the autonomous and unilateral liberalization by developing countries of their FDI policies and regulatory regimes.  

Secondly, nearly 90% of the flows has been received by about 20 developing countries, of which China alone received over one-third.  

Thirdly, the primary determinant of the flows is the market and investment opportunities that the host countries offer.

Therefore, while an MAI may contribute to an improvement in the investment climate of a country, it will not be the dominant factor in directing FDI flows to developing countries.  

In this situation, Ganesan argues, two basic options are available to developing countries in responding to the demand for an MAI.  

The first option is to allow current trends and arrangements -- namely pursuing their own autonomous liberalization of their FDI regimes, together with bilateral and regional arrangements for promotion, protection and fair and equitable treatment of FDI -- to evolve and gather further strength and momentum, and move towards a possible multiilateral framework at an opportune future time on the basis of experience gained and consensus generated on important issues. 

"As long as they keep their investment climate stable and congenial, developing countries would continue to attract FDI in tune with the market and investment opportunities they offer," Ganesan says.  

"This option is contingent, however, upon developing countries having the collective will and strength to resist pressure by the industrialized countries to begin negotiations on an MAI in the WTO and/or to join the OECD-MAI currently under negotiation among the OECD member countries."  

The second option, he argues, is to prepare for the negotiations of an MAI and try to ensure that it takes adequate care of their developmental, as well as political and social needs and concerns.  

In choosing the multilateral route, "whether under compulsion or with wide conviction," developing countries need to keep two important factors in view.  

Firstly, the main motive of industrialized countries behind an MAI is the gaining and consolidation of market access opportunities for their business enterprises around the world.  

"Hence the overriding emphasis in the MAI proposed by them on non-discriminatory treatment between domestic and foreign investors from the pre-establishment phase onwards."  

Secondly, the forum, scope and content of an MAI are inter-related, and the implications of an MAI will depend heavily on the forum chosen for it. 

The two most critical issues of an MAI, Ganesan says, from the standpoint of developing countries are: the definition of investment and national treatment in the pre-establishment phase.  

"The definition of investment in the draft OECD treaty goes far beyond the traditional notion of FDI to include portfolio investment, debt capital, intellectual property rights and every form of tangible or intangible asset. Such a broad definition has serious implications not only for the scope and coverage of the MAI, but also for the obligations relating to free transfer of funds by foreign investors." 

The grant of national treatment in the pre-establishment phase onwards -- i.e. freedom of entry, right of establishment, non-discriminatory treatment between domestic and foreign investors right from the admission stage -- is the corner-stone of the OECD treaty. 

The crux of the difference between existing bilateral treaties/regional arrangements and the proposed MAI is in the issue of national treatment for foreign investors in the pre-establishment stage.  

"This has vital implications for the political, social and developmental objectives of developing countries, as such an obligation would curb their freedom and flexibility to pursue their own policies in consonance with their needs and circumstances."  

The other key issues requiring special attention of developing countries are: performance requirements and investment incentives, movement of natural persons, restrictive business practices of business enterprises, transfer of technology and the obligations of the investors.  

In addition, the issues of competition policy and environmental concerns need examination from the perspectives of developing countries.  

Before they choose the multilateral route, it is important that developing countries try to evolve a collective or common stand on these key issues, notwithstanding the fact that the interests and attitudes of individual developing countries may vary widely.  

In the end, the critical question will be whether, having chosen the multilateral route, they have taken care to ensure that the scope, structure and content of the multilateral treaty safeguard adequately their legitimate interests and concerns. 

"The formulation of their negotiating objectives on the issues mentioned above, collectively to the extent possible and individually as necessary, is therefore important."  

Ganesan suggests that for pursuing the multilateral route, the best forum for developing countries is, for various reasons, the WTO. In particular, he says, this will enable them to negotiate a "bottom-up" approach for dealing with the issues of market access, with the GATS providing a useful model to follow.  

On the contrary, the OECD treaty follows the "top-down" approach because its goal is to establish the highest possible standards for liberalization of investment regimes.  

The WTO route, he further argues, will also ensure that all developing country members of the WTO are party to the MAI, thereby eliminating the possibility of any non-signatory country being at a competitive disadvantage visavis a country signatory to an MAI.  

This however seems to be at odds with his argument elsewhere in the paper that non-signatories to the WTO will be at a disadvantage in competing for FDI, as compared to a signatory and "such an apprehension has no empirical basis."

The WTO route, he further argues, will also ensure coherence between MAI and other WTO agreements, besides ensuring at a more general level of coherence between trade and investment policies.  

In proposing the WTO route, Ganesan has drawn on the arguments of the UNCTAD World Investment Report of 1997 that there should be "coherence between trade, investment and competition policies both at the national and international levels if the problems generated by globalization of the world economy and liberalization of trade and FDI regimes are to be effectively tackled." 

However that WIR view, in the aftermath of the Asian financial crisis and the debates on the whole range of neo-liberal issues, has come for some serious challenge among political economists. 

And the Ganesan views about the WTO perhaps is also clouded by his own involvement as an Indian top bureaucrat, first as India's chief negotiator in the Uruguay Round, and subsequently as the Commerce Secretary -- perceptions of the WTO that have now been belied by the actual experience, which shows clearly the WTO as asymmetric and full of inequities for developing countries. 

However, he says, in choosing the WTO route, developing countries need to consider the option that the MAI, although regarded as a multilateral agreement, operates in the WTO as a stand-alone agreement with a dispute settlement mechanism devoid of cross-relation provisions. 

But given his argument that the WTO accords already cover some investment issues (in the GATS, TRIPs and TRIMS), and given the position of the powerful industrial countries that they prefer the WTO for these subjects, not strictly related to trade, mainly because of the cross-retaliation possibilities to sanction erring countries, the idea of a 'stand-alone' agreement without cross-retaliation possibilities seems like whistling in the dark. 

Visavis the OECD MAI, Ganesan says that invited developing countries may certainly take part in the OECD consultation process, but in deciding whether to accede or not they should take into account the basic aim and standards of that treaty. 

Those of them who judge that the gap between their own autonomous policies and treaty obligations is not substantial but can be managed by them might wish to join the OECD treaty.  

Ganesan puts in this group the NIEs (like Brazil, Hong Kong, Singapore, Taiwan, ASEAN countries like Malaysia and Thailand and some Latin Americans like Argentina, Chile, Colombia, Peru and Venezuela). A multilateral treaty with high standards might be viewed by them as an instrument to attract more foreign investment, provided the treaty takes care of a limited number of their concerns, in particular the safeguards necessary for BOP. 

But could such BOP provisions in a treaty, whose high standards cover all kinds of investments, be enough. Judged by the current Asian experience, it could prove to be a case of 'hope' rather than any 'fact'. 

For developing countries with large and growing domestic markets -- like China, India and Indonesia - the size of the domestic market is a great advantage as foreign investors are more likely to access their markets through local presence than direct exports.  

An autonomous and transparent liberalization of FDI regimes coupled with national treatment in the post-establishment phase and adequate protection of investments, would still enable them to attract FDI. Their attitude to a multilateral treaty will hinge on how the issue of national treatment at the pre-establishment stage is resolved. 

This may also be true for a number of others -- Egypt, Ghana, Morocco, Pakistan, the Philippines, Sri Lanka, Tunisia, Vietnam and Zimbabwe.  

For the oil exporting countries in West Asia, availability of capital is not a problem. And as long as their domestic ownership policies and system of differential taxation of enterprises based on level of foreign ownership are not altered by legally binding multilateral obligations, other issues of an investment treaty may not come into conflict with their autonomous policies. 

But, says Ganesan, for the majority of developing countries, the high standards of the OECD treaty, designed for the capital exporters and advanced countries, "may entail unacceptable costs." They may therefore not find it possible to join it. 

"But the decision to join the OECD treaty should not be prompted by the apprehension that a non-signatory developing country will be at a disadvantage in competing for FDI as compared to a signatory one. Such an apprehension has no empirical basis." 

In view of the heterogeneity of developing countries, the impact and implications of joining or not joining an MAI will vary widely among them. The vast majority of low-income developing countries and the least developed countries (LDCs) are currently on the fringe of FDI flows. "Although an MAI may not make a dramatic difference to this situation, these countries may look upon it as an additional tool for enhancing their investment climate, and thereby increasing the chances of their receiving some incremental FDI flows." 

The broad analysis of the implications of a multilateral investment treaty for different categories of countries, Ganesan says, should not mask the political dimensions of such a treaty for all developing countries. 

The political and social implications explain in substantial measure why so many developing countries are reluctant or unwilling to convert unilateral FDI liberalization policies into binding multilateral commitments.  

"The question of national and non-discriminatory treatment for foreign investors is closely linked to the issue of erosion of political and economic sovereignty much more strongly than in the case of foreign trade. 

"Besides this political sensitivity, the scope for their utilizing FDI to serve their developmental objectives, in particular their need to develop and strengthen their own indigenous industrial and technological capabilities -- i.e. ensuring sufficient 'economic space' for their own enterprises to develop -- rests crucially upon the freedom and flexibility they have in the admission and regulation of foreign investment. 

"Thus, political and development considerations are intermeshed in the issue of national treatment at the entry stage, albeit with varying degrees of intensity, for almost all developing countries, regardless of the category in which they fall."