Keep investment pacts off Cancun's agenda

By Kavaljit Singh

Comment & analysis

Financial Times

July 7 2003

If the European Union, Japan and Canada have their way, negotiations for a multilateral investment agreement will begin at the World Trade Organisation meeting in Cancun in September. But many developing countries are doing everything they can to ensure they do not. They are right to do so: an MIA has the potential to cause them serious economic damage.

There is no conclusive evidence that investment agreements lead to increased foreign investment. Since the 1980s, developing countries have signed numerous bilateral investment agreements, yet they receive less than one-third of the world's total foreign direct investment flows. Africa, consisting of 53 countries, receives less than 2 per cent of the total FDI flows to all developing countries. That is not because of a lack of investment agreements: rather, it is because of factors such as the small size of domestic markets, poor infrastructure, civil unrest and political instability.

Even if one assumes that an MIA might lead to increased investment in some countries, there is no guarantee that it would contribute to economic growth and development. It is the quality of investment that determines growth and development. Since most portfolio investments have tenuous links with the real economy and are speculative in nature, their contribution to economic growth is negligible. Even FDI flows, traditionally known for their stability and spillover benefits, have changed in character. Since the bulk of FDI flows are now associated with cross-border mergers and acquisitions, their positive impact on the domestic economy through technology transfers, employment generation and other effects has been diluted. It is worth recalling that restrictions on foreign investment have not necessarily led to poor economic performance. Many countries, such as Japan, South Korea, Taiwan and China, have registered higher growth without liberalising their investment regimes.

The existing frameworks of investment liberalisation are highly biased in favour of protecting foreign investors' rights. Countries enjoy correspondingly less freedom to adjust their investment policies to suit their development needs. Although the EU favours the adoption of a "bottom up" approach to investment, which allows countries to select the sectors they wish to liberalise - along the lines of the General Agreement on Trade in Services - there is no guarantee that it would give member countries the policy freedom they need. As seen during the ongoing Gats negotiations, it puts added pressure on countries to make wider commitments over the years. Likewise, an agreement covering many but not all developing countries would also be problematic, as it would in effect compel outsiders to join later on.

The MIA's one-size-fits-all strategy is ill-conceived because WTO members are at different stages of development. What is good for capital-exporting Japan may not be good for capital- importing Bangladesh. Investment is a much more politically sensitive issue than trade. In spite of the liberalisation of investment rules that has occurred in recent decades, all countries (including the developed ones) have used regulation to ensure that foreign investment meets their development goals. This is why previous attempts to establish a multilateral investment regime have failed. Recent "mini-ministerial" meetings of the WTO have also failed to build a consensus on launching negotiations.

The MIA has many other flaws. What would happen to the more than 1,800 existing bilateral and regional agreements once the MIA came into force? Would these be deemed invalid? The WTO's working group on trade and investment has yet to give this issue the attention it deserves.

Another problem is that the WTO's interest in balance of payment issues is at present confined to current account transactions. But an MIA would necessitate capital account liberalisation. That may not be to many countries' taste, given the reappraisal of the benefits of capital account liberalisation that has taken place since the 1997 Asian financial crisis.

The WTO is not an appropriate venue for negotiating an investment agreement. Since its mandate is confined to trade in goods and services, it has neither the jurisdiction nor the competence to deal with investment issues. The WTO's trade arbitrators, for instance, lack the expertise that would be needed to work out how much compensation a foreign investor should receive if a member country violated the MIA. The world may well need a radically different institution to address investment issues at the multilateral level.

Unless the MIA's advocates can find a solution to these fundamental issues, they should not continue to press their case. There will be no shortage of other matters to discuss at September's meeting.

The writer is director of the Public Interest Research Centre, Delhi