WIR upbeat on FDI, private forecasters differ

by Chakravarthi Raghavan

GENEVA: Global Foreign Direct Investment (FDI) flows rose considerably in 1997, and will rise again in 1998 despite the financial crisis, the UN Conference on Trade and Development (UNCTAD) predicted on 10 November, estimating the 1997 inflows at $400 billion and outflows at $424 billion.

An UNCTAD press release on the WIR-98 also predicts FDI to rise in 1998, reaching $430-440 billion - with much of it concentrated in the developed countries, as well as Latin America and the Caribbean, and with FDI flows to Asia and the Pacific "at best remaining the same" as in 1997.

FDI data by their nature are notoriously difficult to come by, and there is not even a common understanding of what is FDI among those who are in the business of collecting and publishing it - even the IMF (balance-of-payments data) and OECD concepts don't match.

And as the review article by Prof. Bob Sutcliffe notes, the WIR-98 data, tables and figures, have some internal inconsistencies, making one unsure of reliability of other data cited.

The 1997 data for individual countries, the notes to the annex to WIR-98 (pp 353-355) make clear, are estimates based on data drawn from various sources - of which the IMF data is acknowledged as the most authoritative. But the annex also shows that as of 1 July 1998, UNCTAD got national data reports from only 57 countries, and for 11 others estimated from IMF tapes. And as of May 1998 IMF tapes data, for several of the reporting countries, at least one of three components of FDI -- equity investment, reinvested earnings and intra-company loans -- are not available. And for 48 economies, FDI data are said to be not available throughout 1997, and have been estimated.

And the IMF's balance-of-payments data don't "balance", as they ought to at world level. For nearly two decades now there is a $100 billion hole in this. In the early stages when this imbalance was found, it was got rid of and explained as 'errors and omissions'.  But as it began to mount up, explanations were sought, and at first was attributed to "capital flight", corruption and other ills of developing world.

But even the IMF and the World Bank no longer have this view. An IMF 1992 investigation, as an earlier one in 1987, concluded that much of this discrepancy is due to discrepancies in data on investment income -- which in theory could become new FDI (reinvested earnings) or intra-company loans (or even used from Cayman and other isles for hedge fund leveraging loans). And as Chandra Hardy has pointed out (#SUNS 4116) these global imbalances in BOP accounts have been increasing, and in 1994 the unaccounted investment income reached $124 billion.

In September, just before UNCTAD Trade and Development Report came out with a sombre warning about the likelihood of a global recession, if not depression -- a fear that is now shared by most mainstream economists and forecasters -- the WIR team brought out a report cautiously optimistic about FDI projections for Asia, based on information available before the developments in summer, including the Russian meltdown and its impact on private investors -- as US Federal Reserve Chair Alan Greenspan put it, the general risk-aversion of all investors -- throughout the world began to be fully felt.

But the WIR-98 upbeat projections, published now, of FDI flows for 1998 being unaffected by the financial crisis, are in contrast to the sombre estimations from two authoritative and leading private sector estimations about capital flows to emerging economies (available on their websites).

In its September estimates about emerging economies, the Washington-based Institute of International Finance (IIF) revised downward its own April estimates. It reduced the 1997 estimates of direct investment flows from a $122.9 billion made in April this year to $119.7 in September.

And IIF forecasts for 1998 has been reduced from a $114.5 billion made in April to $105.9 in the September projections, and a further drop to a $101.8 billion is forecast for 1999.

JP Morgan is even more pessimistic. It estimates, in forecasts made in October, net direct investment flows to emerging economies to fall from a $133 billion in 1997 to $102 billion in 1998, and an even sharper fall to $85 billion or 17% in 1999.

The WIR-98 has been released with much fanfare around the world -- with press conferences in 22 places by staff members of the division of UNCTAD producing the annual report, and in press briefings in 49 other centres, mostly by local government officials. UNCTAD Secretary-General Rubens Ricupero was due to launch the report at Lyon in France, where UNCTAD has organized a week-long event to bring together major TNCs and enterprises and officials and enterprises of developing countries to promote investment in their countries.

But at UNCTAD's headquarters here, Ms Anne Miroux, recently promoted from another division to be in charge of a branch in the WIR division dealing with trends and data, was assigned to hold a briefing with Mrs Anh Nga Tran-Nguyen, a staffer from another division dealing with portfolio investments. They were unable to answer questions about the basis for their projecting FDI growth in five affected Asian countries in 1998 or on M&A in North America, and asked newsmen to write a letter for answers!

The chief author of the WIR, Mr. Karl Sauvant, who has been travelling to hold briefings at Washington, London and elsewhere, in all his years at UNCTAD here has never appeared before the media (who are more familiar with data from various sources) to brief and answer questions on WIRs.

In WIR-95, UNCTAD had broached the idea of a multilateral framework on investment (the sub-title of the relevant portion calling it ('Towards a Multilateral Agreement on Investment'), viewing the Marrakesh Agreement for WTO as containing elements of such a framework, and referring to the negotiations at the OECD for an MAI, and elsewhere in trade-related regimes - the EU, NAFTA, MERCOSUR and APEC.

The WIR-95 had been readied that summer, but Mr. Ricupero, who was Brazil's GATT negotiator during the Uruguay Round and its services negotiations, and who took over at UNCTAD in September of 1995, in signing the overview, made last minute changes to the text by speaking of a multilateral framework on investment.

And in November 1995, the WIR division, organized at Divonne, in France (near Geneva) the first of its many seminars and symposia to address the MAI issue. At that seminar, the invited participants made presentations on the TNC mode of development and promoted the idea of a multilateral WTO agreement for right to invest and investors rights, including a demand that the rights and the multilateral agreement should extend to short-term capital flows.  But the comments of some of the key ambassadors participating and the questions raised by them, showed some sharply divided views.

Ricupero, who chaired that seminar, in summing up had then said that there was no consensus on the need for a treaty, the timing and the forum.

At the ninth session of the UNCTAD Conference in Midrand, South Africa, in May 1996, the secretariat was asked "to identify and analyze implications for development of an MFI (Multilateral Framework on Investment), taking into account the interests of developing countries."

After Midrand the division followed up with other seminars and symposia, promoting the idea of multilateral investment regime, with lead speakers mostly from the OECD and private sector proponents. More recently this year, it held consultations with NGOs.

WIR-98 has some 2-1/2 pages of "analysis" about the "potential impacts of a possible multilateral framework on investment". It then says the MFI is only a hypothesis, but goes on to provide a "discussion at an abstract level" of the advantages and disadvantages of an MFI.

On one set of assumptions of what such a framework could contain (including more liberal FDI policies and rollback provisions of restrictions by host countries), WIR-98 says it would help to increase FDI flows. But a second conceivable outcome, it says, could also reduce the quantity and quality of FDI flows, while a third outcome could be that it would have no impact on quantity and quality of FDI flows.

But on balance, the WIR-98 says, these considerations suggest an MFI would improve the enabling environment for FDI, but that expectations about an MFI on FDI flows should not be "exaggerated".

Perhaps, it should have been called a hypothetical analysis of hypothetical assumptions. For, some of the most ardent advocates of a multilateral investment regime (including in a paper prepared by US academic Stephen Guisinger for an OECD dialogue in 1996 with dynamic emerging market economies of Asia, to promote their joining an MAI) have conceded that "little is known about benefits of FDI liberalization to host economies". Other theorists about FDI liberalization and its benefits have said there is no empirical evidence to construct an investment theory, but "international trade theories" (rooted in immobility of factors of production across borders) could be used as proxies for FDI liberalization.

But 2-1/2 years after Midrand, the secretariat has not published any analysis of development implications of an MFI. But a box in the WIR-98, outlines its work in this area as involving substantive support to the inter-governmental process, preparing some 20 issue papers (that were promised more than a year ago, but yet to be published), holding regional symposia and Geneva-based seminars, dialogue with civil society and training facilities.

At the September 1998 meeting of the UNCTAD Commission dealing with these questions, Mrs. Lynn Mytelka, Director of the Division on Investment, Technologies and Enterprise Development, had explained the delay in producing the analysis of development implications and the issues papers, as due to the fact that the funds for the research and analysis had been raised by the secretariat only in the second half of 1997, that the trust fund had become operational only at end of 1997, and the expert staff had only now been recruited and beginning to join.

Some developing country delegations say that while the efforts of a bureaucracy to use a mandate to expand the staff is understandable, it was puzzling that an organization whose main raison d'etre is development of developing countries has been unable to locate and assign competent staff from within it to undertake a conference mandate. They note that according to UNCTAD's manning table, the WIR division which has been discussing these questions has a professional staff strength of at least thirteen. Perhaps, delegations suggest, the reason for the delay lies in the secretariat originally proceeding on the basis that an OECD MAI is certain and would be brought up into the WTO, and that it would be best to take the draft OECD MAI and look under each of its provisions for a "development dimension" or exception. In fact this would appear to have been presaged by UNCTAD, as an observer at the WTO Working Group on Trade and Investment, but the comments of some key Third World delegations made clear that this was not what they were looking for.

Meanwhile, several developing country delegations have now begun to look to other sources - inter-governmental and non-governmental - for analytical support and study of the entire range of issues - the pros and cons of FDI on development and the conditions and role of host country governments to maximise benefits and minimise disadvantages, including on such issues like balance-of-payments, transfer pricing, development of indigenous capacities in technology and research and development etc, and the obligations that foreign investors as well as their home countries that would claim a right to take up their case under such a regime should undertake.

More recently, Mr. Ricupero has said that there are many central issues relating to trade, investment and development that need more study and explanations, before people engage themselves in negotiations on multilateral investment rules.

He also said at a press conference at the end of the High-Level segment of the Trade and Development Board, that he had taken serious note of the recent comments and views of Prof. Jagdish Bhagwati, the free trade advocate, who since 1997 (and outbreak of the financial crisis in Asia) has been forthright in criticising the IMF attempts at capital convertibility or efforts for a multilateral investment liberalisation regime at the WTO to promote the interests of foreign investors. (SUNS4321)

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