Geneva, 4 Aug (Chakravarthi Raghavan) Multilateral investment

rules will not bring in any higher flows of inward investment to developing countries, but will close off their policy options for strengthening and diversifying their domestic industries, prohibit policies that would prevent financial instability, experienced in Mexico and East Asia. 

In presenting this critique, the UK based World Development Movement (WDM) has called for abandoning the efforts at the OECD to negotiate an MAI, and initiation of research efforts in fora that allow developing countries full rights of participation to develop rules to govern foreign investment and the operations of transnational corporations, and in a process that would ensure that development needs are at the core of an international regulatory framework.

While the WDM critique is addressed to the negotiating process and substance of the OECD's MAI agreement, most of its arguments apply with equal validity to the efforts for a multilateral investment rules -- whether at the WTO talks in the study group on trade and investment, or the UNCTAD talks on a Multilateral Framework for Investment, which so far has proceeded on the basis that the MAI framework could be taken, and 'a development dimension' could be built in as special exemptions.  

The WDM critique by Barry Coates is a response to a recently published report by Prof. E.V.K.Fitzerald of the Oxford University. Commissioned by the UK Department for International Development (DFID), the report while heavily critical of the OECD-MAI, nevertheless reached a conclusion supportive of the MAI, arguing that developing countries could make use of exceptions to meet their development concerns, would benefit from higher inward FDI by acceding to the OECD-MAI, as also by the MAI substituting for weak domestic institutions.  

The Fitzgerald report, and some UK funding via extra-budgetary resources for UNCTAD's activities promoting multilateral investment rules, figured at recent UNCTAD- NGO consultations when the WDM and other British NGOs suggested that the funding was for UNCTAD to promote the report. UNCTAD officials denied that they had accepted the funds for this purpose.  

The DFID, while making usual disclaimers that the report represented its policy, made it available to the OECD, where the negotiations have been stalled, and to developing country governments and to UNCTAD and other bodies. The WDM critique is available at its web site (http://www.wdm.org.uk)  

"There are numerous inconsistencies between the analysis and the conclusions drawn in the report," says the WDM. "Most notably, the anticipated benefits from acceding to the MAI rely on untested and unstated assumptions. Further, some omissions in the interpretation of the draft text mean that insufficient weight is given to the risks and potential costs to developing countries." 

The Fitzgerald report itself has said the DFID had commissioned the study on 23 Feb this year, with a 4-week time to produce a report, and hence the "research" had been based on available documentation and their own field experience, but that they had been unable to consult international bodies, NGOs or representatives of developing countries. Also, the discussions in the report of the MAI have been based on the consolidated text of the OECD-MAI draft of 12 February this year, and the accompanying commentary (both provided by the OECD), but that, since the negotiations are incomplete, the text is ambiguous at many critical points, and so the authors had been obliged to comment on the basis of what they understood to be the "spirit of the proposals."  

Noting this, the WDM says that in the short-time, the report had done an impressive amount of work ion analysing official information, but their attempt to draw firm conclusion had resulted in wrong advice being given to the OECD and developing countries.

The Fitzgerald report argues that while there are no specific provisions relating to developing countries as such in the MAI, rules under it for country-specific exemptions leave sufficient scope for developing country interests and that aid donors and OECD member countries could provide funds for poorer developing countries to cover the costs of accession.  

The restrictions in the MAI on performance requirements and other controls would not contribute a serious disadvantage, since developing countries could avail of a wide margin for exceptions. The general exceptions for national security, public order, and safeguards for monetary, BOP and other macroeconomic disequilibria to the application of the MAI are crucial conditions for accession by developing countries.  

The WDM challenges these assumptions and underlines that whatever the provisions for country-specific exemptions, there would be political pressure on developing countries to limit the broad exemptions and, any event, such exemptions would be rolled back subsequently. Nor was it likely that any new and additional funding would be available to the poorer countries to cover the costs of accession  

Restrictions on scope and application of government policymaking are central to the MAI and significant loss of sovereignty would be inevitable, WDM points out, adding that such a loss of sovereignty by accession to the MAI would:

* close off options for developing countries to use a range of policies aimed at strengthening and diversifying their domestic industries policies that have been used by all OECD and NICs in their development phase. The MAI would inhibit ability of the poorest developing countries to diversify their economies away from the export of primary commodities and low wage products, and risks locking these countries into a marginalised role in the world economy;

* prohibit use of policies that could play an important role in preventing the financial instability experienced by Mexico and East Asia in recent years; and  

* prevent developing countries from protecting themselves against social, cultural and environmental damage that may be associated with certain types of foreign investment.

And while the Fitzgerald report argues that accession to MAI will result in higher flows of inward investment, the links between more investment and accession to MAI are tenuous, the WDM notes.  

Surveys show that decision to invest is dominated by commercial considerations, particularly access to the host country's domestic market, rather than issues of investor protection. And many countries with extensive restrictions on incoming investment such as China, Malaysia and Thailand attract the highest flows of foreign investment.

Rejecting the view that the MAI will substitute for weak domestic institutions, the WDM points out that the MAI's complexities and legal ambiguities will do little to eliminate uncertainty. An international agreement such as the MAI is no substitute for strengthening domestic regulations and their enforcement.

The central issue about the impact of MAI is not whether there should be more foreign investment into developing countries -- such investment is urgently needed but whether governments should have the right to control such investments including policies to screen investment proposals, encourage investments that would create development benefits, and refuse entry to investors likely to harm local communities and destroy the environment.

Accession to the MAI will impose a heavy burden of costs on developing countries - including the direct costs of preparing for accession, negotiating access and implementing the disciplines. These costs are likely to be substantial, and it is unlikely there would be any additional funding from OECD donors.

Beyond these direct costs, developing countries would also face risks derived from potential abuse of power by foreign investors, some of which are larger than most developing countries. The dispute settlement process would create enormous scope for the foreign investors to make legal challenges against host country governments. It won't be necessary for a foreign investor to show intentional discrimination against the foreign investor, and thus a violation of national treatment, but merely show the law has such an effect. Similarly, the MAI's provisions on expropriation cover any law or policy that has the effect of expropriation as the claims by US investors against Canada and Mexico show.

Assumptions that developing countries would be able to negotiate broad and largely unrestricted exemptions from an MAI are not warranted. In the real world of political negotiations, developing countries will have little negotiating leverage once the agreement has been signed. And while it is assumed (by the Fitzgerald report) that developing countries would get generous accession terms, it is possible that developing countries may face standards as high as those for the OECD countries, WDM points out.

Since flexible entry terms for developing countries would mean reduced benefits for foreign investors, the vast majority of whom are based in industrial countries. Industry associations have already identified developing countries as the main target for the MAI, noting that 'the preponderance of restrictions on foreign investment lie outside the OECD area, in developing countries.'

"Tough negotiations are likely to be conducted over any exemptions for developing countries that would reduce the benefits to OECD-based TNCs. Already, capital exporting states or major investors often make adoption of a bilateral investment treaty a condition for investments, on a 'take it or leave it' basis. Only, the larger and more powerful developing countries have an opportunity to engage in meaningful negotiations."  

The desire of OECD countries to conclude the MAI negotiations, in the face of widespread opposition, both within each OECD member and globally, means every effort is being made to accommodate the exemptions lodged by OECD countries. The negotiations take place among OECD members, with considerable latitude for tradeoffs and deals between blocs and individual countries.  

But non-OECD countries would face negotiations with OECD countries as a whole, with little power or leverage. And when an individual developing country experiences a period of economic or financial crisis, emergency assistance from the developed countries or international financial institutions would be conditioned on accession to the MAI with few or no exceptions. Such conditionality has been evident in the requirements for liberalization of inward investments by East Asian countries as a part of the IMF's assistance package.

A series of reports by UN agencies such as UNDP and UNCTAD have identified three key issues requiring government policy intervention. These are: 

* liberalisation of trade and investment has been accompanied by increasing disparities between rich and poor, both between and within countries;

* liberalization of international capital has resulted in rapid transfer of speculative capital, severe BOP deficits, economic recession and social hardships; 

* some types of foreign investments have caused economic, social and environmental damage.

An MAI will exacerbate these. It would rule out a range of policies that have been used by governments to diversify their economies and build a domestic industrial base.

An MAI would prohibit capital controls that could protect economies from speculative and destabilizing movements of foreign capital. While much of recent attention has been focussed on the destabilizing effects of short-term lending, "there is evidence that foreign direct investment itself can create BOP problems." 

Beyond direct costs, developing countries would also face risks derived from the potential abuse of power by foreign investors, some of which are larger than most developing countries. 

Calling for an abandonment of the MAI process, the WDM has called for research to be initiated in a forum where developing countries would have full rights of participation, to develop rules governing foreign investment and operations of TNCs. Such a process would ensure that development needs are at the core of an international regulatory framework.