12:16 PM Oct 16, 1996

WTO'S "COMPELLING" CASE FOR MIA

Geneva 16 Oct (Chakravarthi Raghavan) -- The secretariat of the World Trade Organization made public Wednesday a report clearly aimed at influencing the debate among the WTO members on the wisdom of taking up and establishing multilateral rules on investment at the WTO.

Explanations by the staff of the secretariat at a media briefing showed that the choice of the subject of FDI and MIA by the secretariat, and the release now of the chapter from the annual report due to be published in November, was related to the consideration of the issue by the WTO members in preparation for Singapore.

Originally put out as "New WTO report", after protests in the General Council from India which accused the secretariat of partisanship in canvassing a particular viewpoint on a matter of intense debate among WTO members, the secretariat subsequently made clear it was a "secretariat" report and that the investment issue is a chapter dealt with in the annual report (yet to be published) which has been released in advance.

The WTO Director-General described last week the report as making out a "compelling case" for taking up the investment issue at the WTO and frame multilateral rules on investment (the EU-Canada sponsored Multilateral Investment Agreement or MIA).

But perhaps the only convincing case it makes for a mutually supportive and compatible multilateral framework of rules on trade and investment is its statement that "investors have a strong preference" for this option, rather than governments dealing with FDI issues bilaterally or in small groups, supplemented by a patchwork of rules in the WTO.

Originally, the WTO secretariat had announced it was fielding two of its directors to brief the media on the report. Only one of them, Richard Blackhurst, Director of Economic Research and Analysis was at the briefing. The other WTO official, Adrian Otten, the director of the WTO's Intellectual Property and Investment Division, which services any discussion in this entire area, did not turn up at the briefing.

Blackhurst explained how the secretariat chose to address this topic in its annual report (expected to be published sometime in November).

They had chosen the investment issue because of the growing importance of FDI, that FDI and trade were increasingly interlinked and intertwined and could not be dealt with as separate issues. Also, he said, WTO members were discussing the issue and whether or not they should have negotiations, with one group of countries for examining it and others opposed. Hence the secretariat decision to pull out the chapter from the forthcoming report, and provide it now.

Blackhurst claimed that it was the role of his own division to provide delegations in understandable language available literature, and felt they should improve the quality of the debate by providing timely information. They had done this by undertaking systematic research of literature in various international organizations and academia, but had not done any research of their own.

Asked why in that event, the secretariat had not looked at other literature that provided a contrary view to its conclusions, Blackhurst suggested they may have missed some, but probably had missed others supporting the secretariat view.

But he could not answer why for e.g. in the case of Mexico (to show benefits of FDI to improve local technology and productivity) they had only cited Swedish economist Blonstrom and his writings of 1983 and 1986, while ignoring that of Mortimer at ECLAC (regional UN body) on the effects of US FDI in Mexican automobile industry, vastly upgrading the technology of the subsidiary of General Motors, but without any linkages into the indigenous sector. The questioner also referred to other writings that showed FDI in developing countries did not create any backward and forward linkages but only enclave economies.

The WTO's chief economist conceded that the effect of FDI in host countries was varied and no uniform conclusions could be drawn.

The report purports to make out a convincing case about the beneficial nexus between trade and investment, and benefits to host developing economies and their development through contribution to savings, technology flows and their diffusion within the host country, raising country-wide productivity, improving competition and enhancing welfare of consumers.

However, much of this is implied through use of such ambiguous words like 'can', 'could', 'should' etc -- which are only expressions of hope or political statements, but not of any evidence or proof.

For e.g. it says FDI currently does not flow to the poorest countries, and "can be a source" not just of badly needed capital, but also of new technology and intangibles such as organizational and managerial skills and marketing networks, "can provide" a stimulus to competition, innovation, savings and capital formation, and through these to job creation and economic growth.

The footnote to this refers the reader, not to any experience of any of the 'poorest' countries, a term generally understood to mean the least developed countries, but to 'a recent analysis' of China's experience!

The problem in the entire area of nexus between FDI, trade, development and its sustainability economy wide, has been that much of the study and analysis have been 'firm specific' -- what motivates a firm to invest abroad, what happens to its manufacturing activities abroad and at home, to its profits and capitalization, the technology transfers within the firm etc. But there have been very little of studies and analysis in aggregate and in terms of country experiences.

The few that have been (such as Cambridge academic Bob Rowthorn's studies on Ireland, Ha-Joon Chang on Globalization and TNCs etc) are not referred to at all in the WTO secretariat report (either for support or rebuttal).

And the latest UNCTAD studies on the East Asian experience shows that in fact these countries attained industrialization and rapid growth because they were selective in allowing FDI and in directing it, and the governments played a key role.

Are FDI flows helping to globalize and integrate the differing economies in the world?

The chart in the report (page 11), if anything shows that over the 1984-1994, total FDI stock of the major capital exporting countries, have either stagnated or only marginally increased in the non-OECD countries -- which throws some doubts on the globalization/integration thesis and its benefits to the world economy.

The WTO's economist, Richard Blackhurst, who briefed the media said that was not how he would read it, and referred to a different part of the report about its conclusions which deals with FDI flows from mid-1973, but did not explain why the total FDI stock was similarly estimated from 1973 to enable a proper comparison.

Blackhurst spoke of the importance of the FDI by referring to the UNCTAD World Investment Report about sales of overseas affiliates of TNCs growing more rapidly than world trade. But in reply to questions he conceded that much of the data was based on extrapolation from returns and data of US TNCs, and that FDI data across the world were not full and comparable. The report argues about the "wider and largely dynamic" effects of FDI in a host country - such as stimulus to competition, innovation, productivity, savings and capital formation.

The document makes little attempt to deal with the issue of FDI and development and effects on host countries.

This is not surprising at all. There is in fact very little of study (in currently available literature) on the range of issues relating to development or the effects of FDI on host countries over time. In a article in the American Economic Review in September this year, Andres Rodriguez-Clare, for e.g., points out that while TNCs serve to increase world welfare by functioning as a channel through which host countries could obtain access to the abundant resources of the home country, "very little is known about how multinational affects the host country through other channels such as transfer of technology, training of workers and generation of linkages".

Through econometric modelling, the author shows that activity is beneficial to a host country only where the TNC has a "high-linkage" effect to the host economy.

The author says, "...multinationals are more likely to have a positive linkage effect when the good that the multinationals produce is more complex, the costs of communication between the headquarters and the production plant are higher, and the home and host countries are more similar". If these conditions are reversed, then the multinational could even hurt the developing economy, formalizing the idea that multinationals may create enclave economies within developing countries.

The author's model shows that TNCs from more developed countries are less likely to generate a positive linkage effect. This is because, as the variety of intermediate goods available in their home country expands, the TNCs reduce their demand for intermediate goods in the host country.

While he shows how this could be corrected, an MIA in the WTO (providing for trade and investment liberalization) would come in the way.

The WTO secretariat report acknowledges that empirical work on FDI and trade has not tried to establish causation to determine whether FDI inflows cause grater exports or expanding exports attract FDI. But it says that simple and positive correlation, which it purports to establish, is sufficient, without having to establish whether trade and FDI are substitutes or compliments.

This is apart from the question whether more trade necessarily creates more development employment etc. To use the report's terminology, it "can" but not always. As the President of Tanzania outlined at Midrand, liberalisation of trade and investment in his country has "deindustrialized" his country, in terms of making local enterprises bankrupt through imports, but did not bring in any FDI.

Even many of the advocates of FDI liberalisation and the MIA, at the current session of the Trade and Development Board (during the informal discussions Wednesday) noted that there has been very little study or attention paid to the effects, positive and negative, of FDI on Development and asked the UN Conference on Trade and Development to take this up as part of its ongoing research work.

The WTO secretariat report tries to suggest, but carefully avoids a specific statement or words to that effect, that taking up the issue at the WTO and formulating a framework of rules would produce more FDI, technology, managerial skills etc, to least developed countries and others badly needing FDI and these associated 'benefits' but not now getting it.

At last week's Global Investment Forum, where a number of African and other developing countries seeking, but unable to get, FDI questioned the view that MIA would produce FDI for them, none of the proponents -- neither Canada, EU, US, Japan nor international big business -- were ready to provide any such assurance.

The report also argues that a WTO-based multilateral framework of rules would bring about global policy coherence, and would be better than governments dealing with FDI issues bilaterally or in small groups, supplemented by a patchwork of rules in the WTO (in various areas which address some trade-related and distortive effects).

Coming after an extensive, and day-long discussion at the UNCTAD Global Investment Forum (where similar viewpoints advocated in UNCTAD's World Investment Report were challenged), the WTO secretariat's report is an anti-climax: it provides no new facts, and throws no new light.

The 65-page document has 3-1/4 pages of bibliography may leave an impression on the wary that the WTO secretariat and its authors have conducted an extensive search of available literature in reaching their conclusions. But a careful reading shows many omissions -- either the authors have not read them and are not aware, or the omissions make a case for not having an MIA. Also, much of the literature cited is based on experiences of the OECD countries, and a few on the East Asian experience (but often on the view of that experience that prevailed in the 1980s, but rebutted now by the UNCTAD studies).

For e.g., the WTO secretariat report cites the WIRs, but does not deal with the TDRs or the UNCTAD papers on East Asian Development. A paper by Yilmaz Akyuz (in that series) which surveys the literature to show that there is no "happy marriage" between theory of international trade and analysis of FDI determinants.

Some studies of the effect of FDI in increasing technological capability and productivity in Mexico is cited, such as in automobile sector. However, other studies, such as by Mortimer of Eclac, show that the US FDI in Mexico (General Motors for e.g.) while it increased the productivity and technological capacity of the subsidiary, bringing it on a par with that of the US plants, there have been very little linkages with the indigenous industry.

Sylvia Ostrey, an ardent exponent of TNC-led integration of the world economy, has acknowledged in the UNCTAD journal "Transnational Corporations" that the technology transfer is firm specific, and does not diffuse across a country.

Again a recent instance that has surfaced in Brazilian media reports, is of German FDI in Brazil, acquiring the metal working firm, Metaleve, in the Sao Paulo region. One of the first acts of the new owners was to shut down the Brazilian firms local R & D work -- thus in a sense reducing Brazilian capacity to innovate.

Ha-Joon Chang (of Cambridge University), in his paper on Globalization and TNCs (presented at a seminar in Washington earlier this year), has brought out that the FDI and TNCs have confined their "core" research and development work -- the qualitative work that enables innovation -- to their home countries or other industrialized countries, but not to host developing countries. Japanese TNCs keep all their R & D work to their home bases.

Though the WTO report that the FDI promotes competition, over the last year or more there have been enough media reports that some of the firms going to east Europe with FDI, including some western auto-giants, have applied pressure to keep out competition.

The best one can say is that evidence on either side is quite mixed, and no firm conclusions can easily be drawn in favour of MIA.

The WTO report also plays down the BOP effects of FDI -- which produce exports, but with a high propensity to import -- by referring to it as short- to medium-term effects, and implies the problem would be resolved through flexible (or is it floating) exchange rates.

While such exchange rate policy may get around the immediate BOP problem, there are enough studies to show that it creates macro-economic instability, and uncertainty for investors.

The report makes many references to the GATS (and its architecture), and refers to the OECD guidelines of the 1970s (with countries having right to make reservations), and thus clearly promotes the view that an MIA could enable particular countries to enter limitations or reservations -- the socalled negative list approach.

If all the WTO developing country members were to adopt an MIA with this approach, the resulting outcome could run into many hundred times the reservations and limitations in the NAFTA (more than offsetting the benefits of a single multilateral agreement over more than a thousand bilaterals that the WTO says would be otherwise needed).

But it also implies ability of the developing country to foresee all future problems and enter reservations. It was to offset it that the GATS had a positive list approach - countries committing themselves only to areas where they agree to make a concession or provide a market opening.

The secretariat report, and Blackhurst's responses at a media briefing on the intentions behind release of the report, unintendedly, brought out how complex the issue is and how the WTO secretariat cannot be relied upon even to undertake a full systematic search of available literature to provide objective analysis and study that all countries need before even contemplating the issue of an MIA.

Also, the lack of transparency and openness of the WTO decision-making for members, and even more to the general public (apart from the big businesses of the North) makes a more powerful case for a process in a UN forum that is open and atleast neutral, as between North and South and the TNCs and the public.