>Free investment regime may not help South > >A policy brief by the South Centre which examines the risks and implications >associated with FDI flows to South countries suggests that rather than >accepting any or all FDI, these countries should pursue a policy of >selectivity and adopt a coordinated and integrated approach on various >future FDI-related matters. > >by Chakravarthi Raghavan > >------------------------------------------------------------------------ > >GENEVA: "The South countries need to take a coordinated and integrated >approach to the various FDI-related matters on the international agenda," >the South Centre has suggested in a Policy Brief on Foreign Direct >Investment, Development and the New Global Economic Order. > >The Policy Brief is in the process of being sent to South countries by the >Chairman of the South Centre, Mwalimu Julius Nyerere. > >How to "foster an enabling environment" to attract FDI has become an >important question, and in this context "the key issue is whether such an >enabling framework should embody a free investment regime". > >This issue assumes special importance in an era of increasing global >economic liberalization, with the advanced industrial countries of the North >making considerable efforts to persuade the developing countries of the >virtue of removing the remaining constraints on FDI. > >FDI, the paper says, has the potential to help achieve development >objectives and plays a key role in the integration of a country into the >global economy. > >However, underlines the paper, in the current climate of enthusiasm over >FDI, the costs tend to be overlooked. > >It cannot be presumed that the net socio-economic impact of FDI will in all >circumstances be positive and there are reasons for questioning whether, in >all cases, FDI is the cheapest and most appropriate means for obtaining >foreign financial resources and desired technology. > >FDI, the document says, can and does make an important contribution to >development in a number of ways, provided certain conditions are met with >respect to; (a) the nature of the projects which are undertaken, and (b) the >timing of these projects and setting prudent limits for total amount of FDI. > >The experience of the successful countries in East Asia, where FDI has >played a significant role shows that these countries have, by and large, >used such investment in a purposeful way, as part of the government's >national and technological development policies. > >But these countries have been selective in their use of FDI, the paper >points out. > >"The current inclination of many developing countries to accept any and all >FDI gives cause for concern in that such an approach may harbour trouble for >their future development prospects." > >"Not all FDI is conductive to development; some kinds may do more harm than >good." > >FDI can create special hazards for South > >FDI, the paper says, creates special hazards for developing countries in the >context of financial liberalization and increasingly sophisticated markets. > >The potentially serious problems posed for the recipient countries in >respect of balance-of-payments, the exchange rate and macroeconomic >management are frequently overlooked or underestimated by the international >financial institutions and those advocating free flows of FDI, the South >Centre paper adds. > >>From the point of view of the long-term financial stability and therefore, >economic development, "there is an optimum level of flows and stock of FDI, >which depends in part on its sectoral allocation, for any particular >developing country, just as, by analogy, there is an optimum level of >sustainable debt," the paper adds. > >The paper calls for further careful in-depth empirical research to be >carried out by UNCTAD, WTO and UN regional economic commissions on key >issues relating to FDI flows and economic stability and financial frugality. > >Many countries, developing and developed, are now offering investment >incentives to attract FDI, but there is overwhelming evidence that such >incentives are a relatively minor factor in locational decisions of TNCs >relative to other locational advantages - such as market size and growth, >production costs, skill levels, political and economic stability and a >regulatory framework. > >But the way the competitive game in incentives is being played by >governments, no country can afford to refrain from offering investment >incentives for fear of losing out to similarly placed countries. > >"Developing countries as a whole lose collectively from competition among >themselves in offering ever greater incentive packages to attract FDI. >Collectively and individually, developing countries would gain from >cooperation rather than competition in this sphere." > >The paper challenges the arguments that an OECD-type multilateral investment >agreement would generate greater FDI flows, where the paper notes that the >huge increase in FDI in the last 15 years has taken place without any >multilateral investment agreement and, more importantly, there does not seem >to be much correspondence between the liberality of a country's FDI regime >and its FDI inflows. > >The present era of liberalization and globalization, with freer financial >flows and increasingly sophisticated financial markets carries >opportunities, but also significant hazards for developing countries, the >paper warns. > >The international financial institutions (IFIs), it complains, draw >attention only to the opportunities, and largely, if not altogether, >overlook the hazards. > >The view that developing countries are not constrained by BOP and should not >be concerned with foreign exchange implications or other foreign capital >inflows, the paper says, is based on a theoretically legitimate but >empirically erroneous economic doctrine that has come to hold sway in IFIs >for a while in the 1990s, the paper points out. > >For developing countries, the current account balance still does matter and >governments are obliged to intervene to correct the imbalances using fiscal, >monetary and other policies to restrict consumption and increase investment. > >"The costs of government inaction in this area may be very high," the paper >warns and adds, "it is therefore important to assess the implications of FDI >projects for a country's current and prospective balance of payments." > >There are in-built instabilities connected with FDI flows, in particular >with respect to profits retained by subsidiaries and, under certain >circumstances, these can generate financial crises. > >The volatile nature of FDI flows and their possible procyclical nature also >give cause for concern. > >The best way therefore, to limit the risks associated with FDI, avoid its >undesirable effects, and increase the likelihood of it making a positive >contribution to a country's socio-economic development efforts is to pursue >a policy of: > >* Selectivity with respect to the magnitude and timing of capital inflows >including FDI. > >This implies that governments should be able to determine the composition of >capital inflows and formulate appropriate policies of government >intervention to manage capital inflows, including those of FDI. > >* Selectivity with respect to specific projects, with preference for those >with large technological spill-overs or other important socio-economic >benefits. > >Confining FDI to priority sectors > >This may involve confining FDI to economic sectors and sub-sectors regarded >as priorities in the country's overall socio-economic development. > >To the argument that while it might be good if investment goes to priority >sectors, but that no harm will be done if it goes also to non- priority >sectors, the South Centre brief points out that taking account of all >relevant costs and benefits and macro-economic implications, "there may well >be FDI projects where the costs to the economy and society exceed the >benefits" and such projects should be screened out or certainly discouraged >by developing country policies that are mindful of the aggregate effects of >FDI. > >* Prudence with respect to total FDI flows as well as FDI stock so as not to >render the economy financially more fragile in the context of future >economic shocks. > >"A global investment regime which took away a developing country's ability >to select among FDI projects, and to regulate inflows for macro- economic >reasons, would hinder development and prejudice economic stability," the >paper stresses. > >"Indeed, the now advanced industrial countries built up their present >economic strength under a regime, of strict controls over inflows and >outflows of capital, which lasted for several decades, relaxing them only >gradually and, in some cases only relatively recently." > >"Such an erosion of government autonomy in decision-making with respect to >FDI as implied by current North proposals can have serious economic and >political consequences for developing countries." > >All developing countries lose from competition among themselves to offer >ever greater FDI incentives and hence a policy conclusion to be drawn is >that, in addition to being selective in their acceptance of FDI, developing >countries would benefit collectively from cooperation on the matter of >investment incentives rather than competition in this sphere. > >A "development-friendly" policy framework for FDI > >Outlining the broad contours of a "development-friendly" policy framework >for FDI, the paper says that a framework should at least include elements >which: > >* allow countries to be selective with regard to the timing of FDI and to >actual FDI projects, according to current development levels and needs; > >* legitimize "qualified" market access so that a potential host country >could specify the degree to which it would give national access, in terms of >percentage limit on foreign shareholding, or the total value of individual >or aggregate foreign investment; > >* prevent abuse of monopoly power by large transnationals, encouraging, as >far as possible, level playing fields between large foreign investors and >small domestic companies so that the latter can survive and flourish; > >* permit limitations to national treatment, giving governments scope to >stipulate performance requirements and similar measures, TRIMs >notwithstanding, in order to encourage foreign enterprises to contribute to >development objectives, including a healthy BOP; and > >* establish rules of conduct for foreign investors to prevent bribery and >corruption and tax avoidance through transfer-pricing among other things. > >To provide a credible and predictable environment for foreign investment, >whether by the North or the South, ground rules would be needed to guarantee >the protection of investment and provide an appropriate dispute settlement >mechanism, suitably designed to take account of the circumstances of >developing countries. > >And if it be concluded that there has to be a multilateral regime for FDI, >rather than the current bilateral and regional agreements, an approach worth >considering, is that based on a "positive" list approach to liberalization >of FDI - whereby each country specifies the economic sectors and industry, >if any, in which it is willing to open up to FDI and willing to assume >treaty obligations. > >This would give each developing country the scope to determine its own pace >and approach to the liberalization of FDI. > >The paper notes that competition policy issues would become critical if >developing countries were to engage eventually in negotiations on an >"ultra-liberal" multilateral FDI regime of the sort envisaged by the OECD. > >Competition policy issues > >"In any case, what is at issue is the kind of competition policies, national >and international, which are necessary for the development of the South. >Developing countries as a group will need to promote their own ideas on >'development-friendly' competition policies." > >While the US sees competition to be an objective in itself, the Europeans >have viewed it to be an integral part of their industrial policy, assessing >its success according to whether or not it leads to greater efficiency or in >a dynamic sense, more productive growth. The Japanese on the other hand, >have tried to avoid allowing too little or too much competition. > >The paper suggests that developing countries should adopt a "Japanese- type" >of competition policy which promotes both cooperation and competition >between firms. > >In view of their state of under-development and lack of competitive >capabilities of most domestic firms in developing countries, the domestic >competition authorities may, for example, promote mergers among domestic >companies, while prohibiting takeovers of domestic firms by large foreign >enterprises. > >"This implies the need for discretion on the part of competition authorities >in the implementation of domestic competition policies." > >"Agreement on domestic competition policies, as part of a broader >multilateral investment agreement, which enshrined the concept of national >treatment would clearly be inappropriate for developing countries," the >paper says. Thus, agreement and action are required both on competition >policies that developing countries themselves should implement and on an >international policy to deal with issues which domestic competition policies >cannot tackle. > >In the short- and medium-term, developing countries have to contend with the >impending discussions and negotiations on the Uruguay Round in- built >agenda; the discussions on the results of the UNCTAD and WTO studies on >investment and competition matters and, importantly, the evolving OECD >multilateral investment agreement. > >"It will be essential for the South to take a coordinated and integrated >approach to the various FDI-related matters on the international agenda," >the paper adds. > >But the suggestions in this regard seem rather weak: > >* The G77 in Geneva should set up a small working group on FDI matters, and >meet regularly to review related issues and the report to the G77; > >* Undertake various FDI-related studies in different parts of the South, and >for South experts and institutions involved to link themselves >electronically via internet; and > >* Set up an expert group to monitor the OECD MAI-related proceedings, study >in depth the OECD draft agreement and its implications for the South, and >report its conclusions to the G77. - Third World Economics (16-31 October >1997) > >Chakravarthi Raghavan is the Chief Editor of the South-North Development >Monitor (SUNS)
