9:55 PM May 8, 1996
CORPORATIONS AND INVESTMENTAt a colloquium on "Integrating Developing Countries into the Global Economy: Challenges and opportunities", the Director of the World Bank's International Economics Department, Mr. Masood Ahmed and UNCTAD's DTCI Chief, Mr. Karl Sauvant, conceded after sharp questions and comments from the floor that more research and studies were needed before drawing conclusions on FDI, Development and a Multilateral Investment Agreement to assure rights of establishment for foreign investors. In their lead presentations at the colloquium, which was chaired by the Jamaican Permanent Representative to the UN Offices in Geneva, Amb. Anthony Hill, Ahmad and Sauvant sought to project the view that trade liberalisation and FDI liberalisation were the key to faster integration into the global economy for countries to take advantage of globalization. For the presentations, Ahmed drew heavily on the Bank's 1996 Global Economic Prospects report, and Sauvant on the 1995 World Investment Report. But Carlos Fortin, Deputy to the UNCTAD Secretary-General, suggested that Globalization through liberalization of trade and FDI did not seem to address the central problems of development namely poverty eradication and safeguarding of the environment. UNCTAD's own studies on the effects of the trade liberalization in the Uruguay Round show that it will not reduce poverty to any significant extent. The globalization and liberalization phenomenon have also raised new questions including financial instability dueto volatile markets, and the marginalization of sub-Saharan Africa. In comments from the floor, Mr. Chakravarthi Raghavan of the Third World Network pointed to the discrepancies in the Bank's report and noted that to show that East Asia was a fast integrator, China had been excluded in calculating tariff levels and cuts in East Asia, while it had been included in judging FDI flows. No reasoning for this has been given. And by excluding the indicator of credit ratings on capital markets, China is shown to be a fast integrator, but the report does not show what happens if credit rating as an indicator is excluded from all. China was undoubtedly fully justified, in sensibly ignoring the Bank advice, and reducing tariffs or opening up to the FDI in a measured way. The data about fast growth has been correlated to the integration level index to suggest that fast integrators grow fast. As a statistical correlation, the reverse could be as easily argued, namely those who grow fast tend to attract more FDI and trade, and hence are faster integrators. UNCTAD's own studies, as of other mainstream economists, had showed that East Asia grew fast because the countries did not liberalise their foreign trade pell-mell as advocated by the Bank, but in a measured and selective manner. They lowered imports only when it was needed to provide their exporters inputs at international prices, and were slow liberalizers to FDI, with the State retaining control and providing incentives to direct FDI to particular sectors and promoting exports. The OECD, in a paper for its recent workshop in Hong Kong on its Multilateral Agreement on Investment (MAI), had conceded that there had been little study about the effects of FDI liberalization on host economies and had fallen back on trade liberalization theories to advocate the MAI. However, the world had experienced what happened in a liberal order to capital flows. In the 19th century when a liberal order had prevailed under British hegemony, capital flew from a capital poor India to a capital-rich England and, similarly, from Europe to the United States though by then the US was richer than Europe. Economists in international institutions should show more humility and undertake more extensive empirical studies without priori conclusions before advocating economic -- trade and foreign investment -- liberalization to developing countries, Mr. Raghavan said amidst applause from the audience. In other interventions and comments, Mr. Michael Sakbani, a senior UNCTAD economist that to establish causality between fast integration and fast growth, the study should first establish the trend rate of growth and then juxtapose it to the rate of growth under faster integration across countries to make any causal conclusions. If the world were a single economy, then the problems of BOP and current account deficits could be ignored in relation to liberalization of trade and capital flows. But in its absence it could not be ignored. Also in a single world economy, the imbalances created by capital flows could be compensated by labour movements. But this was not possible in a global economy of nation states where labour movement is restricted. Others, who intervened, noted the macro-economic instability and BOP problems caused in sub-Saharan Africa as a result of premature and across-the-board liberalization. Egyptian ambassador, Mr. Mounir Zahran, spoke of the very low level of FDI that has come to Africa despite the high returns that FDI can expect in Africa, as noted by an UNCTAD report. On the MIA, he asked what advantage any country would have through a multilateral agreement, that a bilateral agreement does not secure. Until this was demonstrated, the MIA could not get any support. The Philippines ambassador, Mrs Lilia Bautista, defended the use of incentives (which Mr. Sauvant had said was wasteful and was not a major factor behind TNC investments) and spoke of its positive benefits in promoting exports. Another intervenor in the audience wondered how UNCTAD would reconcile its views against incentives by host countries when there was a proposal from the secretariat that home countries should consider providing incentives to investors for FDI in developing countries. Both Ahmad and Sauvant in their responses justified the general thrust of their arguments about FDI, but conceded the need for more study and research. Mr. Sauvant suggested that despite the OECD study by Prof Stephen Guissinger, the benefits of FDI to substitute for domestic savings and investment were clear, as was shown by the experience of East Asia. Mr. Raghavan, however, questioned this interpretation of the East Asian experience and said it was actions of host countries in first raising domestic savings and investment, often by intervention of the State and forced savings as in Singapore, that high savings, investment and growth was established. It was this growth and actions by the host countries to attract FDI selectively and regulate and direct their use that then further increased exports and growth. This, he said, had been clearly brought out in UNCTAD's own studies and reports on the East Asia experience.