Integrate trade negotiations and supply capacity, Ricupero

by Chakravarthi Raghavan

Geneva, 12 Feb 2001 -- UNCTAD Secretary-General, Mr.  Rubens Ricupero, stressed Monday the need for practical ideas to counter the current concentration of FDI flows, now confined to major industrialized economies and a handful of developing countries and ensure its spread across the large majority of developing countries, as well as to ensure that the capital flows due to cross-border mergers and acquisitions perform a beneficial role for host countries similar to that of greenfield investments.

Ricupero, who was speaking at the opening of the fifth session of UNCTAD’s Commission on Investment, Technology and Related Issues, also said that it was not enough to negotiate trade agreements or preferential agreements if the country concerned has no supply capacity to take advantage.

“We have to integrate the effects of trade agreements or trade negotiations with the means to take advantage of the opportunities.  This building up of capacity is primarily based on investments, domestic and foreign, and the links established between large companies with global distribution channels and the small and medium enterprises in the domestic sector.”

Among the items on the agenda for the week-long meeting are the issues of mergers and acquisitions and policies to maximize the positive and minimize the negative impact of international investment, home-country measures to attract FDI, and exchange of national experiences on investment policy reviews.

In opening the meeting, Ricupero said there were aspects of the phenomenon of an increase in foreign direct investments (FDI) and its role in the world economy that need to be carefully addressed. When one looks at the FDI flows at the global level, and hears about the central role of FDI in the globalization process, one could be led to the mistaken conclusion that this phenomenon touches each and every country in the world.

“But this is not so,” Ricupero said. “The phenomenon is highly concentrated, with most of the FDI occurring mainly among the highly advanced economies and, even then mostly for mergers and acquisitions (M&As). Only a small proportion went to the developing world and, in terms of distribution, to a small number of newly industrialized economies, that are either being favoured because [of] the size of their markets or the optimism about their future.”

The overwhelming majority of developing countries, and more so the least developed countries (LDCs) do not fully participate in the FDI boom in the world economy, and thus do not benefit from the positive effects of the FDI on host economies. The wave of cross-border mergers and acquisitions causing the FDI flows, Ricupero said, also lessen the benefits associated with ‘greenfield’ FDI and its tangible benefits to the host country.

Ricupero drew attention in this connection to the report of the experts meeting on M&As as well as the analysis of the UNCTAD’s World Investment Report 2000, and to the recommendations from the recently held symposium at Oslo, which had focussed on the practical side of promoting FDI flows to LDCs.

But beyond making some reference to these, Ricupero did not provide any assessment or his own views.

The expert meeting on M&As (with a chairman’s summary), as well the WIR-2000, while recognising that M&As could have some negative effects on development, view this as a short-term possibility, and that in the long-term even FDI for mergers and acquisitions could lead to the same beneficial effects as greenfield investment.

However, several recent studies, including those done for the Group of 24 finance ministers, have taken a more sceptic view and underline the lack of clear empirical evidence on FDI and their alleged benefits.

A study for the ILO on mergers and acquisitions in the financial sector (though focussing mainly on employment - the ILO’s area of competence) has examined several of the arguments and claims by proponents of M&As and has said that it has resulted in fewer banks, loss of employment and diminishing access to services for consumers. The report also brings out that there has been considerable scepticism among small businesses about claims that they would benefit and point to studies that show that larger financial institutions tend to charge more and higher fees than their smaller counterparts and that there is an inverse relationship between sizes of financial institutions and their loan portfolios to small businesses. In terms of consumers, they lose personal services and the cost of the service also has increased.

In a recent paper, the head of the UN regional economic commission for Latin America and the Caribbean , Mr. Jose Ocampo, has also brought out that liberalizing trade and investment, and the boom in investments, have not brought high growth rates to Latin America, Africa or even the Asian economies (excepting for those like India and China, which do not exactly have a liberal and ‘open’ regime).

The Oslo symposium (to which Mr. Ricupero made a reference) and its final document is heavy on what the host economies, the LDCs in this instance, need to do to attract FDI -  through an enabling environment (a stable macro-economic policy, and a favourable legal and regulatory framework, physical, social and institutional infrastructure). It also speaks of an external dimension, involving access to regional and global markets, and increased ODA, including effective debt relief, and home countries intensifying efforts at promoting and increasing investments in the LDCs.

These and several other studies and papers for the Brussels UN Conference on Least Developed Countries leave an impression that though the Washington Consensus collapsed with the Mexican Peso crisis (of 1994), and rarely gets the same emphasis as in the past, the emphasis on the state taking care of macro-economics and liberalising and leaving things to the private sector etc survives in so far as the policy advice to developing countries and the LDCs about the benefits of FDI, M&As, privatization etc - whether such advice comes from the trading system, the UN and its system or the Bretton Woods institutions. -SUNS4834

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

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