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Policy-makers asked to look at TDR, not WIR, for advice

Geneva, 17 Sep (Chakravarthi Raghavan) - Foreign Direct Investment (FDI) inflows fell sharply in 2001 to $735 billion, or less than half of inflows in 2000, and no rebound this year is expected either, the UN Conference on Trade and Development said Tuesday.

At a press briefing to release the World Investment Report (WIR) 2002, UNCTAD Deputy Secretary-General Carlos Fortin said the decline was due to the slowdown in the world economy and the weakening of business confidence, accentuated by the 11 September events.

Fortin, however, asked policy-makers in capitals looking to development policy advice and alternatives and finding none at WIR, to look at the Trade and Development Report 2002.

The 350-page WIR-2002 - with 81 pages of annexed tables, 65 boxes (of figures and tables in the text, most of them more descriptive than providing a clear policy analysis or conclusions), besides 75 figures, 71 tables, 13 box figures, and 7 box tables - with its repetitive messages in the text, makes a pretty confusing welter of reading.

On the investment data itself, there are many problems with the way the international system collects data, primarily based on the International Monetary Fund’s Balance of Payments Statistics, and these are collated and put together in various publications like this.

The particular difficulties involved in the use of this data for capital inflows and outflows and FDI stocks, and put together by the WIR (derived from the BOP data) were brought out by Prof Bob (Robert) Sutcliffe in a review article ( SUNS #4321), but the problems pointed out in 1998 haven’t been solved and still persist.

But the IMF data itself has a big black hole, like the black holes in space. It has been known to everyone involved in finance and monetary issues for several years. Several task forces were set up to deal with it; however, so far, not only with no results but also quietly swept under the carpet - with some occasional references by non-orthodox economists when writing on financial crisis in the developing world and hedge funds etc.

In economic and payments theory, at the world level, the Balance of Payments has to be zero. However, for more than three decades now (except for one year in the 90s when it showed zero), the world’s BOP has been in “deficit” annually in the range of billions of dollars, listed as errors and omissions. There was a $93 billion global payments deficit in 2000. The accumulation of these “unaccounted” gaps runs into trillions.

In the beginning when it began to be noticed, the IMF used to have a line in its BOP data attributing the ‘small difference’ (even then it was some billions of dollars) to statistical quirks and data errors. But when the gap began to grow, it was all attributed to the “corruption” and capital flight from the developing world.

No doubt there is plenty of corruption (official and corporate), but it is now so universal that the industrial world has escaped this taint only by merely redefining corruption and excluding corporate contributions to elections and other such political payments.

However, even this explanation of corruption and money secreted abroad could not be used indefinitely, and an OECD-IMF-World Bank task force reluctantly agreed that this was a serious problem - international banks and financial institutions, and global corporations using various gimmicks to hide their profits and losses in particular tax jurisdictions, all have contributed to this and been responsible. The IMF task force in the late 1980s and early 1990s, even tried to come to grips with this and suggested some tentative ideas, but could not get very far and wound up its work. The IMF/UN data collection and collation go on as before.

Every effort to get at meaningful data is thwarted - as in the attempts to create a meaningful way of data collection of ‘trade in services’ brought out in a recent publication by this author, “Developing Countries and Services Trade: Chasing a Black Cat in a Dark Room, Blindfolded”, TWN Penang.

But a data problem that was swept under the carpet in the free-wheeling corrupt financial capitalism at work in the world economy is now like a cancer eating up the system - a symptom of which is shown in the various accounting and other corporate scandals.

There is little that UNCTAD can do about all these, but at least it either need not use such data to create and present a misleading picture or can make some prominent references to the major statistical gaps and unreliability of data, in trotting out the figures and data.

The IMF data about capital flows and foreign direct investments (based on its definitions of residents and non-residents), treats as FDI capital investments and equity investments (involving more than 5% of the share capital in an enterprise - why only 5% and not less or more has never been satisfactorily explained) as showing a longer-term relationship. All profits and remittances are treated as negative on the current account, and the retained profits of a foreign enterprise in a country as new investment.

Now, in the world of finance capital and the use of derivatives, as a senior UNCTAD economist and expert, Jan Kregel, has brought out in a number of academic writings, with the use of derivatives, such distinctions are no longer meaningful. A 10-year ‘investment’ can be split into a stream of 22 derivatives (interest and amortisation), repackaged and even sold off to others as top rated investments, and the original investor bears no liability or risk. Only the host country is left with one, and with not too valuable physical assets for continuing the operations, but asked to shoulder the costs of private debts through public finance!

Even otherwise, there are other aspects that result in a misleading picture, such as in FDI stocks of individual countries and regions which are estimated on the basis of accumulation of inflows which may have no linkage to the actual value of these assets and their market values.

David Woodward (2001), ‘The Next Crisis: Direct and Equity Investments’, Zed Books, has dealt with various problems arising from these, and argues that like the debt crisis and others that have given rise to the crisis in East Asia and Latin America now, the unreliability of the FDI data would be the source of the next major crisis in the world financial system.

Transnational Corporations play a pervasive role in exports of developing countries and while “enhancing export competitiveness is important and challenging, it should be seen not as an end in itself but a means to an end - which is development,” says the WIR 2002, and devotes some 131 pages in Part II to this subject (including in boxes and country case-studies).

However, one is hard put to find any new insights (than those in the past few years where WIR has been promoting TNCs and FDI and WTO rule-making), policy analysis or conclusions and recommendations to governments of developing countries, beyond encouraging them to formulate policies to maximise benefits and to woo ‘export target oriented’ Foreign Direct Investment.

It is difficult of course to say something fresh or new every year. But is there a need to produce such annuals without any thing new and merely repeating those in past years?

Prof. Bob Sutcliffe in his review of WIR-98 (SUNS #4321), Prof Alejandro Nadal of Mexico (SUNS #4517) and Prof. Gerald Epstein (SUNS #4521) in their reviews of WIR-99 have addressed the policy issues of FDI, TNCs and development.

The current report speaks of lessons of experiences of various countries, and the range of policies that governments need to attract FDI and TNCs for export competitiveness.

It then says: “it goes well beyond the scope of this report to address the range of broad-based policies that are needed to promote development.”

At the press briefing in Geneva, UNCTAD deputy secretary-general Carlos Fortin (flanked by Mr. Sam Laird of UNCTAD’s Trade Programmes division and Mr. Luddger Odenthal, an economist of the Investment division), referred to the several country case studies and their lessons, as well as to the UNCTAD Trade and Development Report 2002.

However, the TDR 2002 (SUNS #5110 and 5111) has a different, if not, opposite message (from the WIR).

The TDR brought out that the South was trading more but earning less (with some like Mexico or Brazil having increased their share in world exports, but with no proportionate increase in manufacturing value added, in fact less than they did in 1980) or of China where the state-owned enterprises, exporting labour-intensive products, were in fact enabling China to meet the external payments as a result of the TNC sector, with its high import inputs and exports not paying for imports, and some of the lessons to be drawn.

The UNCTAD senior officials all said that FDI and TNCs are not the panacea.

But even the country studies and some of the citations do not provide clear answers. Even in the case of Mexico - which adopted all the neo-liberal policies, joined NAFTA and had privileged access to its Northern neighbour during its booming economic years, something that no other developing or transition economy can replicate - the outcome has been of accentuated income disparities, dual economy and poverty too.

The WIR quotes from a study by Michael Mortimer about Mexico, and how the automobile firms of the US invested there to upgrade the Mexican auto-manufacture to world quality and improved its competitivity.

However, Mortimer (a neo-classical economist at ECLAC) in the UNU/Wider papers (‘Transnational Corporations and the Global Economy’, SUNS #4253), said that the US automobile TNCs, in trying to defend their domestic market share from penetration by Japanese manufacturers, expanded and upgraded their Mexican operations, in some cases surpassing the benchmarks of the US industry, including the Japanese transplants in the US, but this resulted in the demise of the Mexican auto-parts industry. The US (and the subsequent Japanese operations) had no backward linkages into the Mexican economy. Of the Mexican experience, Mortimer said in the study, the TNC-centric model “has enabled many TNCs, especially US ones, to defend their market shares in their home markets.  However, national Mexican companies for the most part are not major participants in the most dynamic industries of international trade. Rather, they operate in generally undynamic sectors such as cement, glass etc.”

Assessing the attempts of Latin American governments to convert FDI into an engine of growth, Mortimer has also said in the journal World Development No.9 (cited by Geisa Maria Rocha in her article on ‘Neo-Dependency in Brazil’, in the New Left Review No.16, July-August issue’): “While the objectives of corporate strategies were for the most part met, the growth and development goals of the host countries were not.” Maria Rocha has also cited Mr. Rubens Ricupero (Secretary-General of UNCTAD) as echoing Mortimer: “the commercial objectives of TNCs and the development objectives of host economies do not necessarily coincide.”

UNCTAD’s own TDR 2002, to which Fortin made a reference in terms of development policy and the manufacturing value added, shows (page 81 of the TDR) that Mexico between 1980 and 1997 increased its trade share in manufactured exports from 0.2 to 2.2 percent, but its manufacturing value added actually dropped over the same period from 1.9 to 1.2 percent.

While in the (neo-liberal) ideologically driven policy era of the 1980s and 1990s, there were few voices that undertook serious studies to question the policy, in terms of political development economics, more recently (more than before), a very large number of mainstream and non-orthodox economists have been bringing out and publishing studies that challenge and show that ‘liberalisation’ of trade and capital is neither welfare enhancing nor resulting in development, but that the state and government have to use a great deal of regulatory and control instruments.

Perhaps the only ‘new’ material in the report (part I, pp 25-26) is the FDI performance and FDI potential index and country-rankings, to which Fortin drew attention when asked to point to anything new in the report that was not a repetition of the same in the past reports. The indexes, Fortin said, is something new and is a very useful benchmark for policy-makers.

Country indexes are now the fashion in various UN publications, with the UN system (and the governments constituting it have some responsibility in this matter), judging the value of contents of publications in terms of press clippings.

Such indexes perhaps help civil societies campaigning against their governments, to cite and apply pressure - whether it be the human development index, the human rights index and other such indexes that have proliferated.

Whether these ‘benchmarks’ give any clue to policy-makers on policy changes is an issue where the jury is out and perhaps won’t come in for a long, long time; may be as in a trial, it needs a direction from the judge (the intergovernmental bodies). The luxury of a new trial is not available.

However—unless one goes on the basis that FDI is always good (even if not a panacea), and attracting FDI to what the WIR calls the full potential (whether asset seeking or any one of these factors being mentioned every year about why TNCs invest abroad) helps the host countries, and ‘bench-marking’ their performance in an index helps policy-makers—surely UNCTAD is required to draw some policy conclusions about the role of FDI itself. That is absent in the WIR.

What conclusion can be drawn, for example, from an index saying that in terms of FDI performance India ranks 119 in 1998-2000, China 47, or that Japan (the WIR division’s economist drew attention to this in response to a question from an Indian journalist about Chinese and Indian performances) with 131 is below India? Japan obviously developed and became competitive without FDI.

If you ask a Chinese official, who trusts you as a friend, he will frankly say that their policies on FDI had been attuned as much to bring back flight capital, and that much of the FDI was really round-tripping, and that in terms of the WTO, they are not even sure whether it will work now.

Surely, more relevant to policy-makers in China, India or other developing countries (and UNCTAD too) are several studies (including by Rodriguez and Rodrik, and more recently by Weller and Hersh) that show that China and India have grown better than many other developing countries because they did not blindly follow the advice to liberalise, and privatize and sell off domestic assets to TNCs.

Also, the Latin American experiences where the foreign direct investors are leaving a country (showing that the FDI is neither counter-cyclical, long term nor anything else) - as is now the case in every Latin American economy hit by the current crisis - is more relevant to policy-makers.

There are several boxes and case studies, including one about Argentina, its crisis and effects on the TNCs there. Surely, anyone in Argentina, Latin America or anywhere in the developing world, would look to see what the WIR can or has to say on the effects of the crisis (which, according to several studies, was also the result of the activities of the foreign firms and the peso-dollar convertibility and open capital accounts) on Argentina, or of the whole of its enterprises (domestic and foreign).

IPS adds in reports from Geneva and Santiago:

The world flow of investments dropped abruptly in 2001, and the same trend is being seen this year, but the outlook for the medium term is promising, says the United Nations Conference on Trade and Development (UNCTAD), which predicts that in 2002, in industrialised and developing countries alike, a reduction in cross-border investment, though in some cases only the movement in one direction - either inflows or outflows - will be affected.

In its “World Investment Report 2002”, UNCTAD says the flow of capital to China would likely increase this year, while investment aimed at Argentina, Brazil and Indonesia could be much lower than levels recorded in the peak years, in the 1990s.

Citing several studies, the report maintain that the attacks against New York and Washington had only a modest effect on transnational corporations’ plans for foreign investment, and that the leading transnationals are forecasting continued expansion focussing on production and distribution.

The preferred destinations of the TNCs are thought to be the US, Germany, Britain and France. Also on the list of investment recipients are China, Brazil, Mexico, Hungary, Czech Republic and South Africa. The decline in foreign direct investment (FDI) has been concentrated among industrialised countries, says the WIR. FDI in the industrialised North shrunk 59%, compared to the 14% reduction recorded for the developing South.

In 2001, FDI totalled $735 billion, or a 51% decline with respect to the previous year. The outflow of these same investments was $621 billion, or 55% less than in 2000.

Of the $735 billion in inflows, the industrialised economies took in $503 billion, the developing world $205 billion, and the transition economies of Central and Eastern Europe the remaining $27 billion.

The figures show that despite the substantial moves toward economic liberalisation in the past decade, developing countries continue to attract less than one-third of the total FDI.

The flow of foreign investment in the developing world fell from $238 billion in 2000 to $205 billion in 2001, though the lion’s share of the decline was due to the fact that there were fewer recipient countries.

FDI for three countries - Argentina, Brazil and Hong Kong China (which has been politically reincorporated into China but figures as an independent economy for UNCTAD’s purposes) - was responsible for $57 billion of the fall.

Africa continues to be only a minor recipient of FDI, although the inflows nearly doubled from $9.0 billion in 2000 to more than $17 billion in 2001. But the increase did not reach most of the African countries, however. The difference of some $8.0 billion was in large part aimed at a handful of projects concentrated in South Africa and Morocco.

The WIR places great importance on the growing role of transnational corporations in a world economy undergoing a process of globalization: 65,000 TNCs exercising their influence through some 850,000 branch offices around the world, employing an estimated 54 million workers, and with the foreign branches contributing one-tenth of the world GDP and a third of the world exports.

Among the TNCs there is evident a trend towards concentration, as the biggest firms dominate the overall picture. In 2000, the 100 largest non-financial transnationals - led by Vodafone, General Electric and Exxon Mobil Corporation - recorded more than half of all sales and jobs at foreign affiliates among companies of their type.

As a consequence of the major mergers and acquisitions (M&A) that took place in 2000, the employee rolls of the largest 100 transnationals grew 20% and their sales rose 15%. [But in the current crisis, many of them are shedding labour and employees.]

But that was the situation prior to the deceleration of the global economy, the dissipation of the stock exchange euphoria surrounding new technologies and the publicity of accounting irregularities committed by a number of multinational firms.

In the Latin American region, the policies that were so successful in drawing foreign investment into the region in the 1990s, based on privatisations and commodities exports, are no longer effective in a world that privileges investment in high-technology sectors. - SUNS5194

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