Investment/development nexus needs deeper study

Two contrasting approaches emerged at an UNCTAD expert meeting on 28-30 May on existing bilateral investment treaties (BITs) and their development dimensions. Experts from the North advocated a multilateral investment agreement or framework whose disciplines are based on the same principles of BITs but with emphasis on the protection of investors' rights. Experts from the South, however, argued that national policies and development needs should be taken into account in bilateral agreements and stressed that BITs had only a minor significance in attracting foreign investments. The following three articles give a report on the meeting.

by Chakravarthi Raghavan

GENEVA: An expert meeting under UNCTAD auspices on existing bilateral investment treaties (BITs) and their development dimensions ended with an agreed conclusion on the need for further attention to development dimensions and provisions in them contributing to attracting foreign investment.

The three-day Expert Meeting on Existing Agreements on Investment and their Development Dimensions was attended by over one hundred participants - from countries, international and intergovernmental and non-governmental organizations, and concluded with a Chairman's summary and a brief "agreed conclusions" that mentioned the issues discussed, the questions that needed further attention, as well as need for similar experts' meeting to deal with existing regional and multilateral agreements in order to obtain a more complete picture.

The Chairman's summary, on his own responsibility, was negotiated with delegations, and as a result, a view that development concerns could be addressed through the route of "treaty exceptions, phase-ins and transitional rules" (an approach in the OECD negotiations on Multilateral Agreement on Investment) was knocked out.

Many of the developing country delegations who actively participated in the meeting explained that the "exceptions" approach proceeded on the basis that a multilateral framework was necessary, and could draw on elements out of the BITs, and injecting "development" as an "exception".

It was too premature to draw any or all of these conclusions, they said.

The agreed conclusions said that the expert meeting had focused on five sets of issues: reasons for concluding BITs, issues addressed by the BITs, experience with application of BITs, role of BITs in development of national law and standards of international law, and the development dimensions.

The expert meeting had a broad and useful discussion, though some questions deserve additional attention - provisions in BITs which contribute to attracting foreign investment and at the same time address development concerns.

Two contrasting approaches

Two contrasting approaches emerged at the expert meeting on existing BITs and their development dimensions.

The first approach, pushed by some experts and delegates from developed countries, and seemingly supported by the UNCTAD Secretariat's Investment Division, was to build a case for a multilateral investment agreement or framework by arguing that existing BITs are insufficient and inadequate. Disciplines of a multilateral agreement, based on the same principles of BITs but with additional points, could boost investors' security and bring in foreign investment flows.

The second approach was explicitly or implicitly brought out by experts, delegates and NGOs from developing countries, who argued on the need for governments in developing countries to retain the right to tailor their own policies towards foreign investment in accordance with national priorities and development needs.

They stressed that BITs they had signed were in accordance with national laws and policies, and that in any case such agreements had only minor significance in attracting foreign investment. A multilateral agreement on investment (along the lines of the OECD model) would not allow the flexibility of bilateral agreements but instead curtail the degree of freedom of developing countries to follow their own investment policies.

Judged by the experience with bilateral treaties, a multilateral agreement would not necessarily attract more investment inflows to signatory countries.

A number of participants, both in comments inside the meeting, and in explanations outside, were also critical of the usefulness of the approach of the UNCTAD Secretariat - taking as a basis, the existing BITs or proposed MAI, and attempting to "inject" a development dimension to the various provisions.

Some experts explained later that a whole range of interdependent issues of trade, development, investment, macro-economy, technology, and even social and cultural issues were involved. These had to be carefully analyzed without an a priori bias in favour of or against a multilateral investment framework.

Many of the interdependent issues must be studied from the viewpoint of development needs and the appropriate role of investment policy for this; only then could there be a discussion on the nature of investment agreements from a development perspective.

The Northern experts' perspectives

At the expert meeting, everyone agreed that FDI had an important role in economic growth and development, and that almost all countries were doing their best to attract Foreign Direct Investment (FDI). The issue therefore, was not the desirability of FDI, but the proper place of FDI in the development process, and the right of states to formulate appropriate policies towards FDI so as to maximise benefits and minimise costs from it.

The official position of countries of the North was to put stress on maximum rights and protection to foreign investors through binding agreements, and to argue that this was essential for FDI inflows to the South.

The United States put it most clearly in emphasising three factors: non-discrimination to FDI, protection of investor rights and enforcement mechanisms to ensure both. This was its aim in bilateral investment treaties (BITs), NAFTA, APEC and the MAI.

In effect, the US argued that if these elements for investor's rights were taken care of, development would be automatic, and there was no need for any development dimension as such.

An invited lead speaker, Jean-Luc Le Bideau, Professor of Economics at the University of Paris, took this typical approach of first looking at the needs and constraints faced by Transnational Corporations (TNCs) in wanting to globalize their activities and, in that context, then judging the adequacies or otherwise, of BITs.

In this approach, he concluded that a multilateral investment agreement is needed to meet the needs of the transnational corporations.

He did not touch at all, explicitly, on the "development dimension".

But implicit, in his approach, was the view that "development dimension" means that the development policies of developing countries would have to be significantly reformed to meet the needs of foreign investors and the demands of an OECD-type MAI.

Le Bideau said that in their efforts at globalization, TNCs faced obstacles such as discrimination, inadequate IPR protection and additional obligations which hindered their operations. For foreign investors, strict disciplines need to be put on States to ensure full protection of the investor rights through a binding agreement and a dispute settlement machinery. Many BITs contained many disciplines on states such as providing non-discrimination and national treatment to TNCs, protection and security of investors' property, IPR protection and prohibition of TRIMS.

Yet, the French academic said, BITs are inadequate as they still do not include items that are "seen as absolutely critical for liberalization".

Le Bideau said these absent items include obligations for progressive liberalization (which exist in some regional and international agreements), rights of foreign investors to participate in privatisation, prohibition of restrictive conditions towards foreigners, and restrictive business practices.

Hence, the question whether the bilateral framework was sufficient and suitable to ensure FDI growth or whether the bilateral framework should be a special step towards liberalising FDI.

To a question from the chair, Jamaican Deputy Attorney-General Patrick Robinson, whether it was his point that a multilateral framework was needed for a higher level of investment liberalization than currently exists in BITs, Le Bideau said some elements of liberalization were now provided for in BITs but these were not sufficient.

The aim of a multilateral treaty, he said, is "much broader" than BITs: it would be more ambitious, would have to ensure a high level of liberalization, be non-discriminatory and avoid barriers to investment. This was not always the case in bilateral agreements.

Understanding the development process

The Director of the Third World Network, Martin Khor, stressed that the mandate given at UNCTAD-IX was to examine the development aspects and implications of a possible multilateral investment framework.

It was misleading to merely pick up the elements of bilateral agreements or the (OECD's) proposed MAI and then proceed to look at development dimensions of these elements. Such a narrow approach already implied acceptance of the need for a multilateral framework, and that the only work needed was to stick on "development dimensions."

Such an approach would be putting the cart before the horse, he said.

Rather, the UNCTAD mandate required that, before any judgment is made about the desirability of a multilateral investment framework, there should first be an examination and understanding of the development process and the conditions for development and of the appropriate role of investment and investment policy in that process.

Experience showed that FDI follows growth; growth does not emerge out of FDI. Countries that first had their development process going, and had economic growth attracted FDI; FDI did not flow to countries with poor growth even if they signed BITs guaranteeing investors' rights.

As many other speakers stressed, the main factors attracting FDI were a growing market, good infrastructure and social and political stability. These factors were vital to sustain development and also for the sustainability of benefits to the foreign investor. Foreign investors took a short-and medium-term view of returns, whereas a long-term view was needed to sustain growth and stability.

The development perspective required an understanding of the needs and experiences of development, such as the disadvantages of having been a colony, the need for capacity building of local firms and the domestic economy, the need to mobilise savings, absorb technology and sustain the balance of payments.

Khor said there was a need to recognise that countries at different levels of development require a different approach to liberalization. For example, as many studies have shown, countries at a lower development level could not afford to liberalise too much, if their local firms and farms were still too weak to compete with foreign goods and firms.

As the domestic sector strengthened and became more competitive, then liberalization could proceed in order to increase local efficiency. Thus, developing countries should have the adequate degrees of freedom to choose the pace at which, and the sectors in which, to liberalise.

A correct use of and thus policy towards FDI was crucial and what was important was the sustainable use of FDI in which foreign investors could be partners of development. Developing countries should retain the crucial right to determine the entry and conditions of operations of FDI as investment policy was a critical aspect not only of economic policy but also of ensuring long-term social and political stability.

For example, in countries with different ethnic groups, the state may need to make use of investment policy to bring about better balance in ownership or access to resources and equity (including the balance between foreign and local ownership, and ownership among the different ethnic groups), in order to attain long term political and social stability. This stability itself provided the crucial underpinning for development and for attracting FDI flows.

It was within this development context that the issue of BITs and a multilateral framework should be examined. Each investment agreement was a compromise between the rights of host countries to set national priorities according to development needs, and the needs of foreign investors for profits and security.

The bilateral approach would better allow for flexibility in that the interests, priorities and specificities of host countries could be better taken account of. In contrast, the multilateral approach as embodied in the OECD's MAI and in the Northern countries' proposals at the WTO were one-sided: stressing maximum investors' rights and ignoring the needs and rights of states in developing countries. It would also apply uniformly to all countries, without flexibility for different levels of development or specific needs and conditions of individual countries.

Need to have development perspective

Prof Le Bideau's presentation, Khor said, was not a suitable approach in the context of the UNCTAD mandate to examine the development dimensions of investment agreements, as it already made the assumption that maximum liberalization and national treatment for foreign investors was the main or the sole objective.

It had failed altogether to consider the development perspective, or the rationale, of why most developing countries at present had some restrictions or limits on the entry and conditions of establishment and operations of foreign companies. It was therefore not able to understand the key issue of the need to reconcile the interests of foreign investors with the development needs of developing countries.

In one way or another, most countries put conditions on foreign investments to meet their development needs - such as the need to ensure the survival and development of local enterprises and farms; transfer of technology and skills to the local economy; benefits from greater inter-linkages between foreign firms and the domestic sector; employment; promotion of industrial and other sectoral policy; geographical balance and regional development; protection and promotion of balance of payments position.

Investment liberalization should serve the needs of development, rather than development objectives and policies subserving the needs of liberalization per se.

So far, the UNCTAD process had only focused on elements of investment agreements. UNCTAD should first examine the development perspective, for example, the development needs of developing countries and why they have conditions on foreign investments, the issues faced by countries when dealing with investment policies and foreign investors, and whether such conditions as now exist are appropriate and adequate to meet development objectives.

The European Commission's expert said that while there were many aspects of the TWN presentation with which he could agree, as one with private sector experience before joining the EC, he could say that foreign investors took a medium-term view.

The expert from Canada commented that although he did not agree with all the points made by TWN, he was thankful that it provided some balance to the meeting's discussion. He said it was clear that in order to have a multilateral investment agreement, many of the points raised would need to be taken into account, including the social experiences of different countries.

The Chinese perspective

The expert from China, Ms Li Ling from the Ministry of Foreign Trade, commented on the issue of pre-establishment national treatment for foreign firms. She noted that this had been advocated in both bilateral and multilateral treaties by some Northern countries but on which some developing countries had expressed reservations.

Li said that provision of pre-establishment national treatment may be suitable for industrial countries at the same level of development but for developing countries it would not be fair or appropriate, as developing countries are at a lower level of development. If foreign investors have the same rights as domestic investors, in reality the domestic investors would have less favourable treatment, as they are not on the same footing as foreign investors. Thus it was not appropriate for developed countries to ask for pre- establishment national treatment for their firms.

She also posed the problem of the standstill provision in BITs involving developing countries with US and Canada. Under this, restrictions would be listed in an exception list, and in future one could not add on more restrictions that were not on the list, and neither could the list be extended after signature.

This caused difficulties for developing countries, which usually had a short list whilst the developed countries had a long list, as the latter had a lot more experience in absorbing foreign investments.

Also, since developing countries are in the process of development, it is very hard for them to decide which sectors could be opened up. Only after years of experience, could they then conclude that they should have put certain areas and sectors on the exception list. But this would not be possible if the agreement had provided for national treatment on a pre- establishment basis.

Li said that even the developed countries had changed their policies, following their own experiences. For example, Canada had once had an open policy towards foreign investors, then due to experience it placed more restrictions, and only later on did it have more open policies again.

If developed countries could have the flexibility to alter their policies, all the more should developing countries be allowed to do so. She concluded that pre-establishment national treatment rights were therefore not appropriate.

Li added that in China's experience, the standard of BITs was not very high compared to the OECD standard. Yet China had received a lot of foreign investment, the second highest recipient in the world.

"Our experience is that our policy should be based on our own needs and level of development. We liberalise step by step according to the real level of development. If ten years ago we had opened up as much as now, we might have hurt our own development as well as hurt the prospects for foreign investment too. Each country has the right to decide when, where and how to liberalise investment, based on their own needs and development strategies." (TWE No. 162, 1-15 June 1997)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS)from which the above article first appeared.