State of Play at WTO/UNCTAD/OECD on investment

by Chakravarthi Raghavan

Since the anti-MAI campaign relative to the OECD process was launched more than a year ago, the inter-connections between the OECD MAI, WTO's trade and investment, UNCTAD's possible multilateral framework on investment, captial account convertibility at the IMF and financial services liberalization at the WTO have come to be seen as just the same animal in different garbs. The following provides an update on the state of play on the trade and investment issue in Geneva:

The WTO has a study group that is due to meet towards end of November to continue its discussions. As per the Singapore mandate, it is to make a report by the end of 1998.

Though originally its chairman (Thailand's WTO ambassador) and the EC and Canada had hoped the study process could be completed and moves towards negotiations set in motion, it appears that the study group may have to extend its study. There is talk of an extension by six months, while some like India have insisted that another year or more is needed.

The preparatory process for the 3rd Ministerial (expected at San Diego in end November 1999) is due to look at this and other matters under the Singapore work programme at its meeting in February 1999.

Meanwhile, UNCTAD's Division on Investment, Technology and Enterprise Development (the former UNCTC in New York), is trying to continue to promote a Possible Multilateral Framework on Investment (PMFI). The latest WIR 98 (a review article on this [see the article titled "Capitalism sans frontiere?"] commissioned and published in the South-North Development Monitor-SUNS is being separately emailed to the anti-mai campaign group.)

The WIR-98 contains much regurgitated material about determinants of FDI and bilateral and regional arrangements, and has a 2-1/2 page of "analysis" of the "potential impact of a possible multilateral framework on investment" on FDI. The analysis, based on "assumptions and hypothesis", is supposed to answer to a "hypothetic question" about advantages and disadvantages of an MFI.

In a chapter discussing bilateral investment agreements, and regional integration frameworks, the UNCTAD investment report (WIR-98 Ch IV pp 128-130) discusses the "The potential impact of a possible multilateral framework on investment" and says:

"This section does not deal with the advantages or disadvantages of an MFI, but with a hypothetical question: if there were an MFI, how would it affect the volume and pattern of FDI flows? Since an MFI is only a hypothesis and not a reality - and since there is little information about TNCs would incorporate a variable such an MFI into their locational decisions - answers to this question are unavoidably tentative.

"One conceivable outcome of an MFI is that it would help to increase FDI flows - and perhaps affect other features of such flows as well. Such an outcome is based in part on the assumption that a multilateral agreement would not only consolidate recent changes towards, more liberal policies by many countries, but would incorporate "rollback" provisions - requiring countries to commit themselves to reducing or eliminating existing barriers to FDI and strengthening investment protection and the proper functioning of markets. Even in the absence of further liberalization, a multilateral framework could facilitate investment by providing stronger assurances - as compared with unilateral or even bilateral measures - when it comes to the protection of FDI and the stability of domestic FDI regimes. The presumably greater stability, predictability and transparency resulting from an MFI would create a generally more favourable climate for investors. The impact on inflows might be greatest for those countries that are not already signatories to bilateral, regional, plurilateral or multilateral investment agreements, and countries whose current policies, even if favourable to FDI, are not considered sufficiently predictable by investors. At the same time, whether or not FDI flows would actually increase - and whether there would be a change in the quality and patterns of flows - would depend on the precise content of an agrement, the nature of national commitments and exceptions to the generalized multilateral rules and, of course, the other FDI determinants that would come into play at that point.

"A second conceivable outcome of an MFI is that it could actually reduce the quantity and quality of FDI flows, because the negotiation of an MFI would take several years, creating uncertainties about the investment climate worldwide and thereby discouraging foreign investors. Further, even if negotiations did produce an agreement, the MFI that would result could conveivably enshrine a less liberal multilateral environment than has already evolved unilaterally or regionally. (However, the extent to which a formal binding of the regulatory frameworrk at a less liberal level would affect FDI flows is unclear.) Such an MFI could also alter the patterns of FDI flows across geographic regions and industries. In particular, an MFI might reduce FDI flows to countries that gain from the currently restrictive policies of their competitors for such investment and increase flows to otherwise desirably locations that are receiving little inward FDI because of uncertainties about policies.

"A third conceivable outcome of a possible MFI is that it would have little or no impact on the quantity and quality of FDI flows, as it would not materially alter the policy framework for FDI. One reason why this might be the result is that there has already been significant liberalization in many countires, in particular in many developing countries and countries in transition, during the 1980s and 1990s (chapter III, table III.2); and this liberalization has contributed to a surge of FDI flows that reached a new record in 1997. Therefore, an MFI that contains, for example, standstill provisions - requiring countries to commit themselves not to introduce new barriers to FDI, lower standards of investment treatment or measures likely to impair the proper functioning of markets - would essentially maintain the status quo, as far as the openness of economies to fDI, their treatment of foreign affiliates and the functioning of their markets are concerned. Moreover, the extensive network of bilateral investment treaties, which numbered over 1500 by the end of 1997 (chapter III), would provide protection for investors and could be easily extended to additional countries. Finally, there would be no significant effects on the geographic patterns of FDI flows, as they are largely influenced by other FDI determinants.

"On balance, these considerations suggest that an MFI would improve the enabling environment for FDI, to the extent that it would contribute to greater security for investors and greater stability, predictability and transparency in investment policies and rules. This, in turn could encourage higher FDI flows and potentially some redistribution of those flows, particularly to countries whose investment climate would newly reflect the multilateral framework. How much different an MFI would make, however, in terms of the quantity, quality and patterns of actual FDI flows is difficult to predict because as in the case of BITs, it is precisely the function of an enabling framework to allow other determinants, and especially economic determinants, to assert their influence.

"Expectations, about the impact of an MFI on FDI flows (if it were indeed to be negotiated) in comparison to the current regulatory framework and the directin in which it is developing should therefore not be exaggerated. There are, of course, other issues that need to be considered in connection with a possible MFI --especially the possible role of such an agreement in providing a framework for intergovernmental cooperation in the area of investment (UNCTAD, 1996a, 1997a) - but these fall outside the scope of the present analysisw which is specifically focused on the determinants of FDI flows."

UNCTAD's Division on Investment, Technology and Enterprise Development (the former UNCTC in New York) produces every year the World Investment Report. Even during the Uruguay Round, the UNCTC secretariat attempted to persuade developing countries to agree to negotiate "investment rules" as part of the services negotiations.  Developing countries refused to accept the UNCTC view. In services, GATS became possible only when a compromise was reached to deal with "delivery of services" in four modes of which "commercial presence" was only one - and the WTO members were to offer the extent of commercial presence they would allow, and the limitations of this foreign commercial presence for national treatment. The TRIMS agreement, dealing with trade-related investment issues in goods, became possible only when it was agreed that it would only clarify the existing GATT obligations under Art. III (for equal treatment of imported and domestic goods, after crossing the border), and for a review of these after 5 years to determine whether any thing further needs to be added in terms of investment policy and competition policy.

In 1994 at Marrakesh, the EC brought up the subject of trade and investment but there was no consensus. After the WTO was formed, the idea of taking this up at the first ministerial was broached.

The EC and several European nations have been providing extra-budgetary funds to UNCTAD's TNC Division for seminars etc on the MAI/MFI issues.

In 1995, UNCTAD's World Investment Report came out advocating a multilateral framework on investment. The same year, in November, the UNCTAD TNC division organized (with funding from Canada, EC and some from Brazil) a seminar at Divonne, near Geneva, for WTO ambassadors to promote investment rules, and the issue being taken up at the first Ministerial meeting of the WTO in December 1996.

UNCTAD Secretary-General Rubens Ricupero, who chaired the initial 1995 seminar, at the end summed it up by saying that there was no consensus either on the need for a multilateral agreement, or on its content, or the place to negotiate it. His then deputy, Roger Lawrence, who chaired Divonne-II in 1996 made more or less a similar summing-up.

In March-April 1996, UNCTAD-IX, held at Midrand, the UNCTAD secretariat was asked to undertake an analysis of the development implications of a possible multilateral framework on investment.

In 1997, the secretariat told delegations that a number of issues papers were being prepared and would soon be available. But so far, none of the papers have been out.

At the UNCTAD Commission dealing with these questions, in September 1998, the head of the division, Mrs. Mytelka explained the delay as due to time taken to raise funds and recruit people to do this job, and that they were soon expected to join the secretariat.

Recently, at the TWN seminar on Trade and Investment on 30 September, and subsequently at a Press Conference on 23 October, Mr. Ricupero said that considerable further study of the issues were needed before anyone could undertake any negotiations, and drew attention to the views of Prof. Jagdish Bhagwati (since Dec 1997) in an interview in an Indian paper, the US Foreign Affairs, and more recently a letter to the WTO -- expressing himself against investment rules at the WTO, and advocating instead the UN forum to deal with rights of investors, their obligations, labour and environment questions etc. Ricupero told the 23 Oct press conference that he had taken serious note of the Bhagwati letter in the FT.

It is clear that with the OECD process at a stalemate, there is an effort by several Europeans (including Norway which has an interest in that the state has created a special fund out of the oil revenues to fund future social security and looks for profitable investments abroad) to push the process at the WTO.

There is now a great deal of talk of dialogue with civil society (often bringing in a mix of public interest NGOs and business groups and set one against the other), at the OECD, WTO (with trade and environment and trade and development meetings set for early next year, and every new candidate for the DG job swearing how important dialogue with NGOs are to him!), UNCTAD (the WIR division has been attempting this -- through the consultations with NGOs at Geneva in May-June, and is planning some regional consultations in Latin America). All these appear to be aimed at trying to divide the NGO movement and show how reasonable they all are in holding consultations with NGOs.

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