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need autonomy over foreign investments GENEVA: Multilateral investment rules to protect the freedom and rights of foreign capital would not advance the development or industrialization of the South, and would prove inherently unstable, participants said at a Third World Network seminar on 29 September on "Trade and Investment: Development Perspectives". Any future negotiations for an international investment agreement in the WTO should be on the basis of consensus and within the framework of the Trade-Related Investment Measures (TRIMs) Agreement review under the built-in agenda, and fully take into account the draft UN Code of Conduct on TNCs and the draft UNCTAD code of conduct on technology transfer, according to Egyptian Ambassador Dr Mounir Zahran, who was among a panel of ambassadors at the seminar. Experts at the seminar had earlier underscored the importance of host developing countries being able to manage the kind and type of foreign investments and the conditions of operation so as to ensure not only returns to the investors but also investments that would ensure upstream and downstream activities and linkages in the domestic economy, as well as technology spillovers, growth, employment and rising incomes. A former Indian Representative to the GATT, Mr. Bhagirath Lal Das, said it was clear that the multilateral agreement on investments envisaged is one for the protection of investors' rights, and not for enhancing foreign investment in the developing countries. The subject of investment has been pursued vigorously in the GATT/WTO for the last 16 years. It was raised in the 1982 Ministerial Meeting, at Punta del Este in 1986, at the Singapore Ministerial Meeting in 1996 and is now being pursued for inclusion in the 1999 negotiation process in the WTO. For developed countries, Das said, it was an important element of their aggressive three-pronged approach to secure an expansion of opportunities for their economic operators. The opportunities for their traders and manufacturers have already been significantly expanded through the liberalization of the import regimes of developing countries, and those for their innovators and high technology, through the disciplines of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Now the third prong, that is, the expansion of opportunities for their investors, is sought to be achieved through an agreement on the protection of investors' rights. Concerted push The fact that there has been a slowdown in the momentum in the OECD MAI process should not lull developing countries into believing that the proposal will not be pushed in the WTO in the near future, Das said. Past experience has shown that the internal differences among the major developed countries were forgotten when it came to extracting concessions from developing countries. The investment talks give them an opportunity to soften the ground for the march of their investors into developing countries. Investment is an important geo-political tool to project the home country's interests effectively. The major developed countries will not let slip this important opportunity. They will resolve their internal differences and push these proposals in a concerted way. Hence it will be wrong for developing countries to be complacent about it, Das said. A multilateral agreement on investment of the type which is being sponsored would bind the developing countries to all time commitments on constraining their options for channelling the foreign investment into useful sectors and priority geographical regions as also for managing the flows in such a way as to avoid problems for their balance of payments and exchange-rate stability. The type of multilateral agreement canvassed is not going to enhance investment. Foreign investors are attracted by developed infrastructure, incentives for investment and protection of investment. If these features exist, investors would come. Otherwise they would never come, in spite of a developing country having joined a multilateral agreement. Hence an agreement is not necessary for attracting investment. However, if developing countries still decide to agree to have negotiations on this subject, it is important for them to ponder over the choice of forum. The WTO is obviously not the correct forum. First, it is not the natural forum for this subject, as the link between investment and trade is only an indirect one; and the WTO should be primarily handling trade issues. Second, if such a subject as investment comes into this forum, other subjects of importance for developing countries will once again be relegated to the background, far from centrestage. Third, past experience has shown that developing countries generally end up making concessions in the trade forum without getting anything of substance in return. There is no reason to believe that the situation will be any different with regard to investment. Fourth, if an agreement is worked out in the WTO, there will be a grave risk to developing countries posed by the process of cross-retaliation, whereby for any perceived violation of an obligation in this area, the import of their goods can be curtailed in major developed countries. If there is going to be any negotiation on this subject at all, it should be in an organization which has the jurisdiction and capacity to handle investment, production, trade, technology and development issues in an integral manner. And the only organization which fits the bill is the United Nations, in any case not the WTO, Das said. Mr. Martin Khor of the Third World Network said that the recent financial crisis in Asia, which is now moving across the world, has highlighted the serious risks for host countries in multilateral investment rules that protect the rights of foreign investors without imposing corresponding obligations. Unless the host countries have the ability to regulate and direct the foreign investments, it would create outflows that could result in balance-of-payments crises. Khor cited a Malaysian central bank report which showed that while the country got a large FDI flow, most of it went to pay for imports of capital and other input goods from the investors - apart from other transfers. This was one of the factors behind the current account deficits of the region. Zahran said that investment policy was a key instrument of development, and FDI played a role. While the policy advice of the IMF and the World Bank for economic liberalization opened up investment opportunities in developing countries, and paved the way for stable flows of FDI, in parallel there has been the recent financial market turmoil accompanied by sharp falls in equity and currency prices, affecting the economic growth prospects of most emerging markets. In the wake of financial turmoil Developing countries, Zahran said, must insist that international investment agreements should allow for a certain degree of flexibility to disregard certain provisions of the instrument. Developing countries have also to pursue a number of other objectives, including facilitation of market access, promotion of technology transfer on affordable terms, know-how and capacity building and establishing a climate of stability and predictability in international investment relations - a pertinent factor in relation to portfolio flows. The turmoil caused by hedge funds, short-term capital flows and their volatile nature in South-East Asia, which has spread to other regions such as Russia and some Latin American countries, raises a number of concerns as to whether a broad-based definition of investment is favourable to developing countries or whether they should opt for a more narrow definition, drawing a distinction between FDI and portfolio investments. And not all sorts of FDI are in the interests of developing countries either. Not all of them are committed to contribute to the pursuit of development objectives and policies. Short- term flows and market-oriented investment flows should not necessarily be welcomed in all developing countries. These countries should benefit from the lessons of the turbulence affecting financial markets in some emerging economies. The WTO working group on trade and investment is an educational process and should answer the fundamental question of how the development perspective would be taken into account. "As yet, we have not been convinced of the necessity of a multilateral agreement on investment, whether that is to be concluded in the WTO framework or outside." And negotiations, if any, that may take place in the WTO for an international investment agreement should be on the basis of consensus and within the framework of the TRIMs review. UNCTAD should be fully engaged in that process, and the draft UN Code of Conduct on TNCs and the draft UNCTAD code of conduct on technology transfer should be fully taken into account. Such an instrument should reflect a true balance of rights and obligations between foreign investors and host countries, in particular developing countries, Zahran said. Amb. Anthony Hill of Jamaica said that the points raised by Prof. Jan Kregel on the kinds of FDI and vertical integration within a country (that is, all the production processes being located inside the country, and not a sequential mode of production spread across countries)should be reflected upon. Hill did not agree it was a bad thing if the FDI comes in the form of capital goods imports. Uganda's Amb. Nathan Urumba cited a report of the South Centre to urge caution and careful consideration by countries of the issues. India's Amb. S. Narayanan drew a sharp distinction between policies of liberalization that countries might pursue autonomously and policies to be followed by WTO rules. The question developing countries should ask themselves is whether any multilateral investment agreement would increase investment flows to every developing country. As to the prospects for WTO discussions and negotiations, Narayanan said the EC had some political sensitivities over the agricultural negotiations mandated to begin in 1999 and felt it would be difficult for the EC to move on agriculture unless it could get concessions in other areas like investment. The US, on the other hand, seemed to feel that developing countries were not ready for a high-quality agreement at the WTO and hence was pursuing it at the OECD. Narayanan noted that in the informal discussions at the WTO, the present financial crisis is being used to promote the view that the answer to the problem lies in more liberalization. Mr. Chakravarthi Raghavan, who chaired the seminar, said it was like telling an alcoholic that the cure for his illness was imbibing more alcohol. Last year, the WTO had pushed financial liberalization talks, arguing that this would be a solution to the problems of Asia. Now even the IMF officials are admitting that too fast a pace of liberalization had created a situation where an accident was bound to happen (as now). Many mainstream economists have now come out in favour of capital controls and disfavouring multilateral investment agreements. Even a General Agreement on Trade in Services (GATS) approach to binding investment obligations written into schedules would not be useful, since countries at an early stage of natural- resource or extractive development would not need many conditions, while later, on industrial upgrading, would need policies on technology and conditions to promote domestic linkages. Developing countries would thus need flexibility to vary their policies. (Third World Economics No. 194, 1-15 October 1998) The
above article was originally published in the South-North Development
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