MAI-type investment model criticized at NGO-Ambassadors meeting

The OECD model of a multilateral agreement on investment came under severe criticism from both NGOs and developing country Ambassadors at a recent discussion session on a possible Multilateral Framework on Investment (MFI) jointly organized by UNCTAD and NGLS. In negotiating a possible MFI, development should be the focal point and not merely, as in the MAI-type model, an ancillary consideration to investor rights and the appropriate forum for such negotiations should be the UN system.

GENEVA: The OECD model of a Multilateral Agreement on Investment (MAI) was sharply criticized on 10 June by all non- governmental organizations (NGOs) and many developing country Ambassadors who participated at a discussion session on a possible Multilateral Framework on Investment (MFI).

The half-day meeting, organized by the UN Conference on Trade and Development (UNCTAD) and the Non-governmental Liaison Service (NGLS) - with the cooperation of Oxfam, WWF International and the Third World Network - was attended by about 30 diplomats, 27 NGO representatives and 10 UNCTAD and NGLS staff members.

Almost all the NGO representatives said they objected to the substance and process of the OECD-MAI negotiations and treaty text. Many of them called on the WTO Ambassadors of both Southern and Northern countries not to initiate any negotiations for an investment agreement in the World Trade Organization.

Dialogue with civil society

Several Ambassadors from developing countries stressed that governments needed to have the authority to regulate the entry and operations of foreign investors so as to ensure net positive benefits from foreign investment.

Ambassadors from some industrial countries, however, spoke of the benefits of multilateral rules on investment and investors' rights.

Opening the discussion, UNCTAD Secretary-General Rubens Ricupero said there was an obvious need for open dialogue on a possible MFI - given the recent evolution of the issue, the most important event in which was the OECD Ministerial decision to have a six-month pause in negotiations.

The OECD process had not developed as envisaged, he said, and problems had arisen because sectors of civil society in the North felt they should have been heard and, by arousing awareness, many NGOs were able to build a strong body of opinion against it, whilst Parliamentarians also took a keen interest.

This, said Ricupero, was an eloquent example of how a negotiating process that was planned to be contained and limited (and thus confined to like-minded countries within the OECD) in order to attain more efficiency or a quick decision, proved to be a source of difficulty.

This was the first episode where a major negotiation by industrial countries faced such a problem, in which the mobilization of public opinion finally found expression in positions taken by governments. There was thus a need for open dialogue with civil society, which was the aim of this meeting.

Ruth Mayne of Oxfam UK said the delay of the OECD-MAI negotiations provided a chance for standing back and making a fresh start. The inability of OECD governments to reach agreement, the Asian crisis and great public opposition to the OECD process indicated the need for a new approach.

She added that the role of FDI depends on the quality of investment and the regulatory framework. NGOs have difficulty with the MAI because of the nature of the rules, the strengthening of rights of investors without investors assuming responsibilities in return.

She stressed that any rules should recognize the clear rights of governments to regulate foreign investments and that companies must meet their obligations.

Martin Khor of the Malaysia-based Third World Network said that before considering a possible MFI, the role and nature of FDI had to be studied and understood. Whilst there were positive effects, the potential negative effects should also be stressed.

These included the danger that FDI could overwhelm local firms, farms and livelihoods; that imbalances in equity ownership between foreigners and local people (and among different communities in a country) could cause political instability and that this, in turn, would turn away investors; and that FDI could lead to balance-of-payments crises and financial instability as a result of high profit outflow and import content.

He said that when the balance-of-payments effect of foreign investment was raised as a potential problem two years ago during discussions in Geneva, some advocates of an investment agreement in the WTO had dismissed it as insignificant. However, the threat posed by a current account deficit and balance-of-payments problems could be very serious, as was now seen in the East Asian crisis.

There was, he said, an important need for governments to exercise policy options such as strategic choices in foreign investment policies, and this was why the OECD-MAI model was unacceptable for developing countries as it could curb or kill their development potential.

He added that many NGOs had issued a joint statement strongly objecting to attempts to start a negotiation on investment in the WTO as this would involve an agreement with the same model as the OECD's MAI. Given the WTO's mandate to negotiate for liberalization, once a negotiating process begins in the WTO, developing countries were likely to be pressurized to adopt an MAI-type treaty.

Two-edged sword

Ambassador Agnes Yahan Aggrey-Orleans of Ghana said many developing countries are under pressure to attract FDI and to have liberalization and deregulation policies. But, she said, there is evidence that FDI liberalization cannot bring growth or fulfil socio-economic needs in developing countries.

She stressed that Ghana wanted FDI but its major concern was how to harness FDI to meet national objectives. A high proportion of FDI flows to Africa was in extractive industries, which could lead to imbalances in development.

It was crucial for governments to exercise their sovereign right to have a development strategy. This concern to manage investment resources was due to recognition that FDI was a two-edged sword which could have significant negative consequences. She said it was a national responsibility to ensure the negative effects were minimized and the positive effects maximized.

She added that FDI's adverse consequences include a negative effect on domestic savings; the decapitalization effect (where profit outflow exceeds new inflow) and negative trade effect (where increased imports outweigh exports).

FDI should be beneficial to both the investor and the host country, and for this to be the case, the entry and operational terms of FDI should be regulated. Any MFI that diminishes national control over economic policies cannot attract wide support, the Ghanaian Ambassador added.

Ambassador Munir Akram of Pakistan said the need for an MAI had not been fully established and bilateral agreements best served investment needs. Stressing the need for development perspectives in the investment discussion, he said the problems caused by FDI included: the possible negative effect on the balance of payments due to profit outflow and higher imports; volatility of portfolio and FDI flows; suppression of smaller local companies; effect on natural resources, for example, of chemical and fuel industries; and distortion of consumption patterns by the sale of branded products.

Akram said that in a multilateral framework of investment, there must be special and differential treatment for developing countries, but not only of the type as in the Trade-Related Investment Measures (TRIMs) Agreement (that is, the giving of a grace period before compliance).

Akram elaborated that there was a need for: a mechanism to minimize the destructive effects of volatile capital flows; a limited definition of investment that did not include portfolio investment; developing countries to be allowed to selectively open up in stages when their economies get stronger; recognition that development requires developing countries to have performance requirements such as exports and indigenization; rules to deal with bribery, and so on; and a commitment by home countries not to impose high standards that restrict the exports of developing countries to developed countries and thus reduce the attractiveness of developing countries as investment sites.

Ambassador Nacer Benjelloun-Toumi of Morocco said that the OECD's MAI would not be taken into the WTO as it does not take into account development aspects. When the investment negotiations come up in the WTO, the concerns of all members would be taken into account, he said.

The difficulties in the MAI negotiations show this to be a very sensitive area. The MAI document should not be taken as a basic document on which to negotiate.

Development dimension neglected

Roberto Bissio, director of the Montevideo-based Third World Institute (ITeM), said the problem was not the OECD-MAI per se but the principles and policies behind it. The same principles were being pushed in many fora, such as in the Summit of the Americas where US President Clinton tried unsuccessfully to propose that an investment treaty be agreed to first.

At an NGO parallel event, attended by over 2,000 people, he said, the MAI was discussed and rejected, and it was concluded that "it's not that the MAI is bad because it's secret, but rather it is secret because it is bad."

The problem, Bissio said, was not in the lack of consultation with civil society, but in the substance of the MAI and its variant forms in other fora. He said at a dialogue between MAI negotiators at the OECD and civil society in Paris last year, it was clear the development aspects had not been considered and that many developed countries knew they would not be in the OECD today if the MAI rules had applied to them when they were at the developing countries' stage of development.

Ambassador Wu Jianmin of China said that in relation to the troubles faced by the MAI, Confucius' saying, "too much haste, less speed", applied. He said it was quite right for previous speakers to emphasize that FDI has two sides, and that whilst China welcomed FDI, the development dimension must be fully taken into account. He added the government must retain the right and flexibility to regulate investments, and this would benefit both the North and the South.

China, he added, had, since 1993, been the second largest recipient of FDI and when asked what the secret behind this was, the usual answers were political stability, steady growth and a huge market. However, what was overlooked was that China had a sound development strategy involving striking a delicate balance between the three factors of development, stability and reform. Stability is the precondition, development the goal and reform the driving force, and the balance between the three had to be maintained.

Ambassador Wu said before the East Asian crisis, developing countries were urged to open up and liberalize their financial sector as a panacea. "No one told us we need to have a sound regulatory system," he said. "We in China said we need to liberalize at the right pace. If we liberalize too fast, there can be a major problem." The Chinese currency is convertible in the current account but not the capital account as conditions are not yet ready for that. The move towards full convertibility had to be taken step by step.

Negotiating forum

On the forum for discussing an MAI, he said, the OECD was only made up of industrial countries and if negotiations are in such a restricted circle, what would be the result? He proposed that UNCTAD be given a larger role as it was universal in membership, and had expertise.

Ambassador Ali Mchumo of Tanzania said when the MAI issue came up in the WTO, Tanzania opposed it vehemently. It surprised many who thought LDCs should support it. "We opposed it precisely as an LDC as it would restrict our capacity to have development policies," he said. "Also, the assumption that there would not be FDI in LDCs if there is no liberal regime is not true."

He said Tanzania's decision in the WTO investment working group whether to negotiate or not would be determined by factors of which the key is the erosion of the freedom to determine our future.

Decisions by companies may only lead to quick gains for investors and would not be necessarily good for development. The obligations on states would be even more onerous than those contained in the TRIMs Agreement that, in any case, may need to be reviewed.

Ambassador Mchumo said LDCs were better off without an MFI as what investors want can be negotiated in bilateral agreements.

He added that an MAI would not increase the flow of investment. LDCs suffer from lack of investments due to the lack of a market, infrastructure and, in some cases, stability. The truth was it is development that will lead to investment, and not foreign investment that would lead to development.

The WTO was not the best forum to discuss the investment issue, as the WTO was a trade body and liberalization- oriented. The venue must be one which is focused on development. He said that civil society had also played a role in sensitizing governments to these issues.

Farhad Mazhar of UBINIG, a Bangladesh NGO, said grassroots movements in LDCs were suspicious of both the MAI and an MFI. The rich countries had failed to meet their commitments to aid and to the UN world summits. The TRIMs Agreement had removed a lot of the state's power over investment policy. Civil society resented globalization and looked suspiciously at any move to give licence to TNCs to freely invest in LDCs without regulations.

Tony Tujan from the Philippines research group IBON, said that the Philippines had recently attracted a lot of foreign portfolio and direct investment. Although the GDP rose suddenly, at the same time, decapitalization took place as 10% of local firms were closed down each year.

He said in the long term, FDI tended to generate balance- of-payments problems. During the peak period of FDI inflows, there were also significant capital outflows. Whilst FDI operated on the basis of the rate of return, development had a different aim. He added that the framework for discussion should not be liberalization but development. Thus, the venue of discussions on investment could not be the OECD or the WTO but should be in the UN system. Teteh Hormeku, representing the African Trade Network of 25 NGOs, said that recent official investment discussions had adopted a wrong starting point of looking at the right of investors and then attempting to attach a development dimension to this.

The opposite should be the case: to take development as the starting point and then analyze the role of foreign investments in that context.

He said African countries had taken a lot of measures to ensure the rights of investors. Not only had FDI failed to respond but it had behaved in ways that did not benefit Africa. The slow flow of investments to Africa was due to structural problems which could not be solved unless governments formulated national strategies on where and how FDI operates. Hence, to accept an MAI and then talk of its development dimension was a wrong approach. The OECD agreement could not be corrected by sending it to the WTO. A more appropriate forum to discuss investment is the UN system.

Lori Wallach from Public Citizen, a US consumer group led by Ralph Nader, said that opposition in the US had grown very strongly among not only public groups but also Congress members, state governments and national unions. The main reason was opposition to the substance of the MAI and agreements of a similar nature. Given this, a change in the negotiating forum, from the OECD to the WTO, would not alter this opposition. MAI-type treaties were seen as handcuffing the capacity of governments to regulate corporations.

Need for balance

Ambassador Mounir Zahran of Egypt said developing countries did not need a multilateral framework for investment. Any international instrument that is credible should have a balance between rights and responsibilities. The OECD-MAI did not provide such a balance. Whilst governments must make commitments, there was no guarantee whatsoever from the other side (the companies).

"Why should you sit on a train when you don't know where it is going?" he asked. "What kind of investment do we want? Any kind whatsoever, even if it is volatile? The East Asian crisis has rung an alarm bell. Some emerging countries have suffered, and this should not be repeated."

He said the inclusion of portfolio investment in the MAI was not consistent with the development perspective. Referring to the OECD's MAI, he said, "They baked a cake and they can eat it, I don't envy them. They ask me to join? No sir, I am not ready to go into such a venture. I don't need any such agreement that provides short-term investment. This is not needed in my country. I don't need investment that only benefits from my market but which is not export-oriented."

In a second session on the role of investors, Ambassador Toumi of Morocco said a pragmatic approach should be taken. If stringent rules on obligations were put on investors, backed by a dispute settlement system, investments would not come. Issues like anti-competitive behaviour, technology transfer and consumer protection deserve close attention. Some people advocated only non-binding guidelines on these as having binding rules would not promote investments.

Jessica Woodruff of the UK-based World Development Movement said to be realistic meant needing to have instruments to rectify the negative aspects of FDI. The MAI fails because it is not based on reality; it assumes wrongly that all FDI is beneficial and crudely assumes that all liberalization is okay.

Referring to advocates of a level playing field for foreign and local investors, she said: "Just because the field is level does not mean the outcome is going to be equal, for example, if Jamaica and Germany were to compete on the same football field."

She said governments would fail in their responsibility if they gave up their rights to regulate companies.

The way forward was not to incorporate a development dimension into an MAI. The role of governments is crucial if FDI is to play a role in development. "The tragedy is that the MAI process had put us a decade back on what needs to be done to get investments to do good," she said. "Moving the process to the WTO is not the answer as any process based on the ideological belief in liberalization is doomed to failure."

Reconstructing the framework

Tony Clarke of the Canada-based Polaris Institute said a year ago, Canada was an active leader in promoting the MAI but it had now shifted its negotiating position because of the massive public opinion and actions that had built up against the MAI. The same was happening in several OECD countries. The lessons were that the model constructed in the OECD was fundamentally flawed and the process in the OECD was also flawed.

A totally different approach to investment had now to be adopted, he said. The framework had to be reconstructed. The liberalization model was only one model, and it ignored the framework in the UN system linking investment with development, and where investment was seen in the context of the need for development, taking into account the rights and responsibilities of governments and corporations and the rights of citizens and people.

There was no point in continuing the negotiations in the OECD as it was locked into the wrong model. Neither should it be taken up in the WTO which was also locked into the same model. The only place that offers a chance to link investment and development was the UN system.

Clarke also warned that the neo-liberal framework and the MAI model were being advocated in many fora, and this needed to be watched.

Ambassador Roderick Abbot, chief of the European Commission delegation to the UN, said trade and investment are two sides of the same coin - as a company could choose to export goods to a market, or invest in that market. Investments were made when companies were convinced they could make a profit. A global framework for investment rules was needed because increases in FDI should not be taken for granted in future. There would be high competition for scarce investment resources where large high-income countries would have the advantage. Countries that insist on joint-ventures or technology transfer or that limit access to their markets would not find friends. He added that he was not saying that governments should not exercise broad policies but that if this approach was taken too far, the baby may be thrown out with the bathwater.

Ambassador Anthony Hill of Jamaica posed a series of questions in the light of changing contemporary circumstances. He did not share the view that there was a stagnant pool of capital that everyone had to run after. He asked whether there should be a multilateral framework for investment, and whether that filled a gap? Would the central purpose be to protect investors, or to protect consumers and the development of developing countries? He commented that even UNCTAD could not be an advocate of development as it had been in the past but wanted to stand back. "UNCTAD has now become a little more respectable than in the past," he added.

Hill said the IMF and the WTO were now the "centres of wisdom", but developing countries had to develop confidence. He added that UNCTAD's capacity for research had to be rebuilt. It had limited resources to match the international financial institutions in terms of outreach, but it must reach out to universities and NGOs. What is needed is to build normative values and rules or normative-based rules and not just a rules-based system. He quoted from a recent lecture of an American professor who said the time of non-compliance with WTO rulings was coming, and there was nothing anyone could do about it.

Precipice of change

In the concluding session, Martin Khor of TWN, representing the NGOs, said the world was on the precipice of economic change, with the East Asian sub-region facing depression whilst the African region continued to face marginalization, and the world economy was very unstable. The touted claims of gains from liberalization of all types had not been realized whilst the threats of volatility and recession were all too real.

At such a time, it was unacceptable to ask developing countries and the world's citizens to embark on a multilateral investment framework that sought extreme investment liberalization. He said a multilateral approach was dangerous; if a government were to make mistakes, it would find it hard or impossible to change policies if it were tied down by multilateral rules.

He added that it was wrong to take the MAI as a model and then merely attach a development dimension to its elements, as UNCTAD seemed to be doing. Instead, UNCTAD and other organizations should carry out in-depth analysis of the development process and the impacts of foreign investment, positive and negative, in various aspects of the development process.

UNCTAD Secretary-General Ricupero proposed further dialogue with civil society in order to make the process inclusive. He said that in the process of negotiations, if we explore the possibility of an MFI (and he stressed the word "if"), "this is not an academic discussion; but if we already have negotiations or pre-negotiations and it is unavoidable, then the process has to be inclusive."

If the aim is to have something deserving of the name "multilateral", it had to include everyone, including Russia and China. He was not saying the discussions should be in UNCTAD or the UN; it could also be conducted in the WTO, as full participation by non-members was also allowed there. The point was that it had to be all-inclusive if the objective is a multilateral agreement.

Also, a way must be found in which the concerns of civil society could be considered fully. He suggested that further meetings could be arranged with NGOs to discuss specific issues, based, for example, on the yet-to-be-published series of 24 UNCTAD papers on investment, or the European Parliament resolution on the MAI. ( TWN-Third World Economics No. 187/188, 16 June-15 July 1998)