TWN Info Service on Finance and Development
G20 has resisted
investment protectionism - UNCTAD/OECD
This is the main finding of the fourth joint report on G20 investment measures by the UN Conference on Trade and Development (UNCTAD) and the Organization for Economic Cooperation and Development (OECD).
The report, released
on Thursday, comes in advance of the 11-12 November G20 Summit in
It contains up-to-date country-specific information about developments in foreign investment policies at the national and international levels.
According to the joint report, its findings provide no grounds for complacency. Recent measures by some G20 emerging markets attest to these countries' concerns about the impacts of global macroeconomic imbalances on their economies.
"If these imbalances and related risks for other countries are not dealt with in a credible manner, the resulting policy tensions could degenerate into a protectionist spiral. In non-financial sectors, risks of discrimination against foreign investors are still real as well."
G20 Leaders will want to continue their vigilance in this area, the report recommended.
In a media briefing on the joint report, Mr James Zhan, Director of the Investment and Enterprise Division of UNCTAD, said that the key message from the report is that the G20 countries have largely continued resisting protectionist pressures (during the reporting period).
He said that from May
to October of this year, 17 G20 countries took some sort of investment
policy actions, and eight G20 countries -
He further said that
G20 countries have almost stopped introducing new emergency schemes,
but numerous existing ones continue to be open for new entrants. Only
two countries introduced new schemes (
He also highlighted some messages that he said could be read in between the lines of the report. He said that the report records only new investment policy measures taken by G20 members, and has not covered measures taken by other countries (i.e., non-G20 members). It has also not covered the investment protectionist actions taken by governments in implementing the existing investment laws and regulations.
"When we say the picture is very positive in the sense that the majority or overwhelming majority of new G20 investment-specific measures has aimed at facilitating and encouraging investment flows, and largely resisting protectionist measures, it doesn't tell about the other side of the story... We do observe a kind of covert investment protectionism in the implementation of existing investment policies, particularly, at the entry level in the approval of foreign investment projects..."
He further said that while globally, the overall trend is in the direction of liberalization, promotion and protection of investment, the share of restrictive measures as part of overall policy developments has increased considerably over time. For example, between 2000 and 2009, the restrictive measures as a share of total new investment measures have grown from 2% to 30% and the share of liberalization/promotion measures has declined from 98% to 70%.
"This is the global picture compared with the G20," Zhan said, adding that despite the overall balance on the side of liberalization and promotion, the impact of the ongoing implementation of restrictive measures cannot be overestimated.
According to the joint UNCTAD-OECD report, which covers investment policy and investment-related measures taken between 21 May 2010 and 15 October 2010, foreign direct investment (FDI) flows to G20 countries declined sharply by 36% in the second quarter of 2010, after four quarters of modest recovery in the wake of the financial crisis.
As the economic recovery remains fragile and new risk factors (such as competitive devaluations) are emerging, G20 and global FDI flows for 2010 as a whole are estimated to remain stagnant. That implies that 2010 FDI flows will still be some 25% lower than the average of the last three pre-crisis years (2005-2007).
"A new FDI boom remains a distant prospect," the report says.
During the reporting period, 17 G20 members took some sort of investment policy action (investment-specific measures, investment measures relating to national security, emergency and related measures with potential impacts on international investment, international investment agreements). Emergency measures with potential impacts on international investment continued to account for most of the measures during the period.
Eight G20 members took
investment-specific measures (those not designed to address national
security or emergency concerns) during the reporting period. For example,
cables, earth stations
that provide telecommunications services by means of satellites, and
The report notes that
Three countries took measures designed to reduce the volatility of short term capital flows: Brazil doubled the tax levied on non-residents' investment in fixed-income securities to 4%; Indonesia introduced a one-month minimum holding period on Sertifikat Bank Indonesia (SBIs), a debt instrument, and tightened banks' net foreign exchange positions; and Korea introduced limits on forward exchange positions of banks, restricted the use of foreign currency loans granted by financial institutions established in Korea to residents to overseas purposes, and tightened regulations on banks' foreign exchange liquidity ratio.
"The measures show some continued moves toward eliminating restrictions and improving clarity for investors (Canada, China, India, Indonesia, the Republic of Korea and Saudi Arabia), but also some steps toward increasing restrictions (Australia, Brazil, Indonesia, and the Republic of Korea)."
The report finds that none of the G20 members took investment measures related to national security in the reporting period.
Noting that emergency measures continued to be the most frequent measure covered (by the report), the report says that the evolution of support schemes in different economies and in the financial and non-financial sectors shows varying patterns.
"More than two years after the financial crisis struck, G20 countries have almost stopped introducing new emergency schemes but numerous existing ones continue to be open for new entrants. Other schemes have already been discontinued and assets and liabilities resulting from the interventions are being wound down."
Two countries introduced
new emergency schemes:
Ten countries continued to implement emergency measures with potential impact on international investment at the end of the reporting period. Many schemes, especially broad support schemes for the real economy, remain open to new entrants.
The report further
finds that only three G20 members -
At the end of the reporting
period on 15 October 2010, 35 of the 36 schemes listed in this and earlier
reports to G20 Leaders are still open for new entrants - only one scheme,
Even where schemes have been closed to new entrants, some G20 members continue to hold assets and liabilities left as a legacy of emergency measures, stresses the report. This legacy is significant and continues to influence market conditions even after the closure of programmes to new entry.
At the end of the reporting period, nine countries held legacy assets and liabilities resulting from emergency schemes for the financial sector and 10 countries held them as a result of schemes dedicated to non-financial sectors. Total outstanding public commitments under emergency programmes - equity, loans and guarantees - on 15 October 2010 exceeded US$2 trillion.
In the financial sector,
public expenditure commitments for certain individual companies represented
hundreds of billions of US Dollars. For instance, the German government's
financial commitment for a special purpose vehicle - "bad bank"
- exceeds US$220 billion, and a British bank benefits from a guarantee
of assets of over 280 billion pounds sterling. In the
As of 15 October 2010, says the report, several hundred financial firms continue to benefit from public support, and only about 15% of the financial firms that had received crisis-related support have fully reimbursed loans, repurchased equity or relinquished public guarantees.
In non-financial sectors, over 30,000 individual firms have benefited or continue to benefit from emergency support; governments estimate that the total number of firms that will receive crisis-related aid will exceed 40,000 companies. Individual companies operating in the non-financial sectors have received advantages worth several billion US Dollars.
According to the report,
some governments have begun to unwind financial positions - assets or
liabilities - acquired as part of their crisis response. These actions
took several forms: sales by governments of their stakes in companies
Only one country -
Two countries have
dismantled guarantee or capital injection programmes for the financial
sector, but still have outstanding legacy assets or liabilities left
over from these programmes (
"The disposal of assets acquired as part of governments' emergency response to the crisis may again influence international capital flows and, depending on the approach chosen for disposal, may entail risks of discrimination against foreign investors. Not all governments have communicated their approach and timelines for unwinding financial positions they have taken as part of their crisis response,"the report says.
The few cases where
governments have already disposed of assets show a range of methods.
Noting that governments are not always in a position to determine the timing of their exit, the report cautions that the "potential impact on competitive conditions of legacy assets and liabilities is thus likely to persist for the years to come."
During the reporting period, G20 members continued to negotiate or pass new international investment agreements (IIAs), thereby further enhancing the openness and predictability of their policy frameworks governing investment. Between 21 May and 15 October 2010, six bilateral investment treaties and three other agreements with investment provisions were concluded by G20 members.
The report summarizes that "G20 members have continued to honour their pledge not to retreat into investment protectionism. On the contrary, the majority of investment measures taken during the review period carry on the trend towards investment liberalisation and facilitation."
It notes that managing the investment impacts of emergency measures taken in response to the crisis still constitutes a great challenge for G20 governments.
"These measures could be applied in a discriminatory way toward foreign investors. In addition, they pose serious threats to market competition in general and to competition operating through international investment in particular."
Governments have, in some cases, begun dismantling and unwinding emergency schemes. This process will take several years, it adds.
Again in this phase, risks of protectionism may arise, the report cautions, adding that governments' choice of the approach and timing of unwinding will determine the prevalence of these risks and thus the trust and confidence that investors will have in governments' fairness and openness.
"It remains a crucial challenge for G20 Leaders to ensure that emergency programmes are wound down as quickly as is prudent, given remaining systemic concerns and the continued fragility of the economic recovery. Assets that were acquired as a legacy of crisis-related schemes should be disposed of in a timely, non-discriminatory and open manner. Exit strategies should be transparent and accountable and should not be used as a pretext to discriminate directly or indirectly against certain investors, including foreign investors.
"There are also grounds for concern that support policies are becoming an entrenched feature of the policy landscape in some countries. The fact that many emergency schemes are still operating two years after the crisis points to the political dilemmas facing governments. Although there may be a few cases where concerns about systemic stability persist, there is now a growing risk that governments are being captured by a logic for subsidisation from which it is difficult to escape. Internationally, government subsidies in one country create pressure on governments elsewhere to subsidise or shoulder the structural adjustment shifted on to them by other subsidising governments," says the report.
It stresses that G20 Leaders should also be mindful of the risks for international investment resulting from global macroeconomic imbalances.
These pose two types of problems for international investment policymakers. First, in a general way, global macroeconomic imbalances and related policy tensions detract from investor confidence and therefore dampen investment, both domestic and international.
Second, countries have begun adopting policies (capital controls and financial regulations with similar effects) aimed at buffering their economies from volatility of foreign exchange markets and capital flows induced by these imbalances.
Such policies will, if they become entrenched, lead to fragmentation of international capital markets along national lines and may be difficult to dismantle once in place, the report stresses.
"Progress by G20 Leaders in credibly addressing global macroeconomic imbalances will help create an environment in which international investment can make its full contribution to global prosperity and sustainable growth," it concludes.+