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Policymakers asked to look at TDR, not WIR, for advice

Not only are there serious flaws in the data on capital flows in this year’s World Investment Report, but the UNCTAD study itself fails to critically examine the role - or lack thereof - played by foreign direct investment in promoting development in the Third World.

by Chakravarthi Raghavan

GENEVA: 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 United Nations Conference on Trade and Development (UNCTAD) said on 17 September.

At a press briefing to release the agency’s 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 policymakers in capitals looking for development policy advice and alternatives and finding none in the WIR, to look at UNCTAD’s Trade and Development Report 2002.

Dubious data

The 350-page WIR-2002 - with 81 pages of annexed tables, 65 boxes (of figures and tables in the text, with most of them more descriptive than providing 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 for a pretty confusing welter of reading.

With regard to the investment data itself, there are many problems with the way the international system collects the data. The data are primarily based on the International Monetary Fund’s (IMF) Balance of Payments (BOP) Statistics, and these are collated and put together in various publications like the WIR.

The particular difficulties involved in the use of this data on capital inflows and outflows and FDI stocks put together by the WIR (derived from the BOP data), were brought out by Prof Robert Sutcliffe in a review article on WIR-1998 1, but they still persist.

The IMF data itself has a big black hole, like the black holes in space. This has been known to everyone involved in finance and monetary issues for several years, and several task forces were set up to deal with it. However, so far, there have not only been no results but the issue has also been quietly swept under the carpet, with only some occasional references by non-orthodox economists when writing on financial crises 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 1990s when it did show 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.

When this was first noticed, the IMF used to attribute 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 corruption and capital flight from the developing world.

No doubt there is plenty of corruption (official and corporate), and it is now so universal that the industrial world has only escaped this taint by 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 - the various gimmicks resorted to by international banks and financial institutions and global corporations to hide their profits and losses in particular tax jurisdictions 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 conclusions, but could not get very far and wound up its work. In the meanwhile, the IMF/UN data collection goes on as before.

Every effort to get at meaningful data is thwarted, as in the attempts to create a meaningful way of collecting data  on  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 (Penang: Third World Network, 2002)).2

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 the data in trotting out the figures.

The IMF data on capital flows and FDI (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) as showing a longer-term relationship. All profits and remittances are treated as negative on the country’s current account, and the retained profits of a foreign enterprise in the country as new investment.

Now, in the world of finance capital where the use of derivative instruments is widespread, as a senior UNCTAD economist Jan Kregel has brought out in a number of academic writings, such distinctions are no longer meaningful. A 10-year ‘investment’, for example, can be split into a stream of 22 derivatives (interest and amortization), 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.

In his book The Next Crisis?: Direct and Equity Investment in Developing Countries (London and New York: Zed Books, 2001), David Woodward has dealt with various problems arising from these, and argues that like the debt crisis and others that have given rise to the crises in East Asia and Latin America now, the unreliability of FDI data would be the source of the next major crisis in the world financial system.3

No fresh insights

Transnational corporations (TNCs) 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 WIR-2002, which 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 (other than those in the past few editions of the WIR which have 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 maximize benefits and to woo “export target oriented” FDI.

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

[Prof Sutcliffe in his review of WIR-1998, and Prof Alejandro Nadal and Prof Gerald Epstein in their reviews of WIR-1999 4, 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 Sam Laird of UNCTAD’s Trade Programmes division and 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, TDR-2002 has a different, if not opposite, message.5 It 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) and the case 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.

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. Take the case of Mexico, which adopted all the neoliberal policies, joined the North American Free Trade Agreement (NAFTA) and had privileged access to its Northern neighbour during its booming economic years. But the outcome has been of accentuated income disparities, dual economy and poverty too.

The WIR quotes from a study by Michael Mortimore 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, Mortimore (a neoclassical economist at the UN Economic Commission for Latin America and the Caribbean (ECLAC)), in the UNU/Wider papers6, 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, Mortimore 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, Mortimore has also said in the journal World Development (No. 9, 2000): “While the objectives of corporate strategies were for the most part met, the growth and development goals of the host countries were not” (cited in Geisa Maria Rocha, “Neo-dependency in Brazil”, New Left Review No. 16, July-August 2002). Rocha has also cited UNCTAD Secretary-General Rubens Ricupero as echoing Mortimore: “the commercial objectives of TNCs and the development objectives of host economies do not necessarily coincide.”

UNCTAD’s own TDR-2002  shows (on p. 81) that Mexico between 1980 and 1997 increased its trade share in manufactured exports from 0.2% to 2.2%, but its manufacturing value-added actually dropped over the same period from 1.9% to 1.2 percent.

While in the (neoliberal) 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 alike have been bringing out and publishing studies that show that ‘liberalization’ of trade and capital is neither welfare-enhancing nor resulting in development, but that the state has to use a great deal of regulatory and control instruments.

Perhaps the only ‘new’ material in WIR-2002 (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 in the report that was not a repetition of past reports. The indexes, Fortin said, are something new and a very useful benchmark for policymakers.

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 or other such indexes that have proliferated.

Whether these ‘benchmarks’ give any clue to policymakers on policy changes, though, is an issue on which the jury is out - and perhaps won’t come in for a long, long time; maybe, as in a trial, a direction is needed 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 that attracting FDI to what the WIR  calls the full potential (whether asset seeking or any one of the factors being mentioned every year about why TNCs invest abroad) helps the host countries - and that ‘benchmarking’ their performance in an index helps policymakers - 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 ranked 119 in 1998-2000, China 47, and Japan 131, below India? (The WIR  division’s economist drew attention to this in response to a question from an Indian journalist about Chinese and Indian performances.) 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 policymakers in China, India and other developing countries (and UNCTAD too) are several studies (including by Rodriguez and Rodrik, and more recently by Weller and Hersh7) which show that China and India have grown better than many other developing countries because they did not blindly follow the advice to liberalize and privatize and sell off domestic assets to TNCs.

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

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 else 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 on the whole of its enterprises (domestic and foreign).

Inter Press Service (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 UNCTAD. The performance UNCTAD predicts for 2002, in industrialized and developing countries alike, entails a reduction in cross-border investment, although in some cases only movement in one direction - either inflows or outflows - will be affected.

In WIR-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 maintains that the attacks against New York and Washington had only a modest effect on TNCs’ 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 FDI has been concentrated among industrialized countries, says the WIR. FDI in the industrialized 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 industrialized 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 liberalization 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 TNCs 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 ExxonMobil - 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.]

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 privatizations and commodities exports, are no longer effective in a world that privileges investment in high-technology sectors. (SUNS5194)                                                    

Endnotes

1.   “Capitalism sans frontiere?”, TWE #198.

2.   See “Chimeral benefits of market liberalization”, TWE #284.

3.   See “Foreign investment illusions”, TWE #278.

4.   “World Investment Report 1999 flawed on many fronts” and “A critique of neoliberal globalization?” respectively, both TWE #221.

5.   See reports on TDR-2002 in TWE #279.

6.   See reports in TWE #191 on the book Transnational Corporations and the Global Economy.

7.   On the Weller & Hersh study, see “Poor hurt by deregulation of trade and capital flows, says new study”, TWE #283.

From Third World Economics No. 290 (1-15 September 2002)

 

 

 


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