'Reject the Multilateral Framework on Investment'

Nagesh Kumar, Director-General, Research and Information Systems (RIS) for Developing and Non-Aligned Countries, speaks to Clifford Polycarp regarding the issue of governing Investments.

CP : Is there the need for a multilateral framework to govern investments?

NK : Absolutely not. It has no relevance and the developed countries' arguments for it are not convincing. Firstly, they contend that foreign direct investments (FDI) are good for growth and development. However, FDI may crowd out domestic investments and leave the host country worse off. The developing countries need careful and selective to tune their policies in the requirement of their development policy goals, just like the developed did in their time of development.

The other argument is that such a framework will enable more FDI. If the agreements were the major factor for FDI, then China should not be receiving any FDI. It doesn't even have a bilateral treaty with the US on investment and yet the US is its most important source of investment. On the other hand, sub-Saharan African countries have done everything that was asked of them by the International Monetary Fund, the World Bank (WB) and the US but yet they receive no FDI. It is the macroeconomic potential and prevalent conditions, such as the purchasing power, market size and infrastructure, in a country that attracts FDI.

CP : And what about portfolio investment or investment in other assets?

If a multilateral agreement covers short-term flows, like portfolio capital, it will open a Pandora's box exposing poor countries to the risk of the crisis as was suffered by the East Asian countries. This crisis happened because there was total freedom on capital account convertibility in these countries. Short-term capital could go out of the country if there was even the slightest bad news or a rumour. If you cover short-term capital flows within the scope of a multilateral framework, it will give total freedom to investors, when to invest and when to pull out.

CP : But then don't you need a framework to precisely prevent such a sudden pullout?

NK : Actually, the whole agenda put forward by developed countries is written from the investor's point of view. They are seeking the rights of the investors, that they cannot be prevented from pulling out. They have not put forward anything that requires the investors or the home governments of the investors to be obliged to do certain things. In fact, it was only a submission by India, China, and a few other countries in November 2002, in the Working Group on the Relationship Between Trade and Investment (WGTI), that for the first time, these countries put on the table investor's and home government's obligations so that if at all there is a framework, it is a balanced one. But, that too is being resisted by developed countries.

CP : But, if there were such a balanced agreement. In that case, would you be in favour of a multilateral agreement?

NK : Prima facie, there is no case for a multilateral agreement. If one wants the protection of host governments, a multilateral framework is a very expensive way of getting that protection. Currently, there are various organisations and institutions, which provides a framework for investor protection, which also provides freedom to host governments to exercise whatever policy they feel is in their interest. For investor protection there is the Multilateral Investment Guarantee Agency (MIGA) under the WB, which provides an insurance or guarantee of investments. Then, there are more than 2000 bilateral investor protection agreements (BIPAs) in place between all the important investment players. Besides that, there is the International Convention on Settlement of Investment Disputes (ICSID), also under the WB.

CP : But again, these are institutions that protect the investor?

NK : There is also the United Nations Convention on International Trade Law (UNCITRAL). There is also a dispute settlement mechanism of International Chamber of Commerce (ICC). And so far, all these organizations or conventions have been covering all the problems. I do not think that there will be any investment dispute, which cannot be settled within the existing framework. If at all we need a framework, we need some convention to control cases like Enron and not for the protection of investors. The EU officials keep asking me why we are resisting such a framework and I ask them to cite any evidence or any case, which could not be handled by the existing mechanisms. None. I ask them what they are gaining out of it and they say, 'a level playing field'. But for whom? For the multinational companies. If you have a contest between a heavyweight champion and a pygmy, you can't call that a level playing field. When MNCs enter a developing country they command staggering resources and the host country companies, even the largest of them, are more like medium enterprises from international standards. If you want to really level the playing field, then do it for the host country firms rather than for the MNCs, so that they can stand as tall as the MNCs and compete with them.

Imagine a country like Bangladesh, Nepal, or any of the sub-Saharan African countries, the competence of the real genuine local enterprises is not very good. So, they need to be protected and nurtured. If they were asked to compete with MNCs, they may never come up. In India, they could come up. Companies like Videocon, BPL, Reliance, the Birla's, the Singhania's or the Poddar's could come up because had some time to grow before they were exposed to open competition. If right in the 1950's, they were asked to compete with the best in the world, would they exist today. One company, which came up after Coca Cola went out in 1977 was the Parle Group. It built a strong brand, a strong presence across the country in soft drinks. But overnight, one MNC came and bought it all over, the entire assets, even the brand name and the trademarks. Levelling the playing filed needs to be looked at from that point of view. That playing field is already tilted in favour of MNCs as they have huge resources. Some of them are much bigger than many of the countries.

CP : But, developing countries need FDI?

NK : Nobody is saying that they don't. But, the point is will you get more FDI if you sign on a multilateral agreement? And so far, they have not been able to say yes. Is anybody able to guarantee that if there is a multilateral agreement and that if I have signed it, I will get five times or even two times of the FDI that I am currently getting. Nobody is able to give that guarantee.

CP : The only way smaller countries, like the sub-Saharan African countries you mentioned or other least developed countries can currently try to attract FDI is by negotiating bilateral agreements. In doing so, what kind of bargaining power does such a country command against a developed country like the US independently as against through a multilateral framework?

NK : There is a standard pattern of bilateral investment treaties, which basically says investments that are allowed by the country will receive protection and equal treatment. So, there is no need for any negotiations or leverage in signing those treaties. There is a standard format that has evolved over time and is slightly moderated from a case-to-case basis. There is not much of a requirement of bargaining or leverage. The 1990's have seen the mushrooming of several 1000 treaties and this shows that it is very easy to negotiate. African countries have also signed on these treaties.

CP : And you feel they are fairly balanced?

NK : They are. Because they leave the flexibility needed. They accord protection to investments that have been admitted by the country's government in tune with its policy. So, the host country's policy framework is not touched. And the investor gets the assurance of protection by way of compensation in the event of its assets being taken over, the repatriation of its profits and the freedom to sell its assets and take its money back, if it is not doing well.

The real problem comes when a MNC enters and start to dictate terms and the host country government is negotiating with a MNC on specific transaction. A multilateral agreement will not solve that problem but aggravate it. A multilateral treaty giving so many rights to a foreign investor shifts the leverage in the hands of MNCs, to enter a country and demand a certain level of treatment. It will away whatever little bit of leverage the host government has. I don't care about the leverage of negotiations in bilateral treaties. The leverage in negotiations the MNCs will possess with such a multilateral framework when they enter a country will be more suited in favour of the investor than the government. So, this is a more serious problem.

CP : The issue is already in the World Trade Organisation (WTO). How should India tackle this issue, not just within the WTO but also within the international political framework?

NK : In the WTO, it is a matter of coalition building. There has been a lot of resistance in the developing world on bringing investment into the WTO negotiations. Investment is already in the WTO, albeit in a limited way, in the form of the agreements on Trade Related Investment Measures and the Global Agreement on Trade in Services. Countries like India, that are taking a position against such a framework need to keep on being in touch with other developing countries maintain that coherence until the Ministerial conference in Cancun, Mexico starts. This Cancun meeting is very critical from that point of view because the decision whether to have a negotiating mandate or not will be taken at that meeting.

CP : Internationally however, isn't there a broad agreement on the need for some sort of a multilateral framework?

NK : That has been coming up repeatedly. In the 1970s also, it was expressed that there is a need for a multilateral framework, but a framework to provide for the code of conduct of MNCs because there was a concern on the resources they commanded and the need to restrain their power. So, there were negotiations in the framework of the UN on the code of conduct of transnational companies, which was shot down by developed countries. But, that was a more balanced instrument. That had obligations and right of companies, host governments and home governments. Now, if the international community feels that there is a need for an international framework, then it has to be negotiated in an appropriate body. I don't think that the WTO is the right body for negotiations on investment. It is a trade forum and investment is not a trade issue. The right forum could be the UNCTAD or UN, which is outside the trade negotiations. If there is coherence among the membership of WTO that we probably need a multilateral framework on investment, then they should also look at what is the best forum for that. The WTO certainly has no competence in this area. The WGTI was set up after the Singapore ministerial conference, more than six year ago. So far, it has not even been able to conclude whether we need a multilateral framework. It was a study process for two years that within two years, they will submit a report. It is not something that you can conclude easily. OECD has tried its hand at negotiating a multilateral agreement on investment. After three or four years of negotiations, they abandoned it.

Trade is conducted on a day-to-day basis while investment is a long-term development issue. No country is willing to give easily on that, which led to the failure of the OECD negotiations. They tried to seek treatment for investment from other countries while they were not willing to give themselves. More than 700 exceptions were attached to the draft treaty, the MAI. Memebrs felt agitated that they were giving away too much and so they built exceptions. France decided to keep its cultural industry and wine industry out of the scope of the agreement. The US had security-based exceptions, and security broadly defined. The present day situation is as bad and it is going to be easy to achieve a consensus. When 29 developed countries, by definition, could not reach a consensus between themselves, then how can 140-odd countries in WTO comprising from most-developed to least developed countries reach a one. It is a waste of negotiating effort, which could be more sensibly and much more rewardingly be used in trade liberalization, which is the mandate of WTO. So, rather than spending their negotiating capital on trying to achieve what WTO is mandated to do, we are trying to dissipate the energy on things which are not concerned, or related or within the mandate of WTO. So, this is a very funny move to go into negotiations.

CP : The argument for that is that right now with the two main issues that are there, mainly the liberalization of the agriculture and service sectors, countries like the EU will have to compromise more, and the investment issue, amongst some others is expected to broaden and therefore balance the agenda.

NK : This is the politics of it. But, come clean on the other issues. They are not fulfilling any of the commitments they had undertaken on the liberalization of agriculture, textiles and garments, and services. What have they delivered on Mode 4 so far? So, they first need to gain the confidence of the developing countries by honouring what they have promised. Some deadlines that were agreed to in Doha have not been fulfilled. In the Uruguay Round too, US $290 billion worth of market access was promised to developing countries in the name of market access in agriculture, textiles and garments, which hasn't been delivered as yet. If they first deliver on their commitments, liberalise the markets for labour and deliver on all that was promised on agricultural subsidy reduction, then it is a different thing. How many times a developing country will give in return for something that was promised earlier and is now nothing but a mirage?

CP : Is there a case for a coalition of developing countries, perhaps led by India, to make a proposal to the UN for a framework like that was attempted in the 70s, to govern transnational companies?

NK : At this stage, it may be premature. First of all, I am not convinced that there is a need for a multilateral framework on investment. If there is a strong judgment of the international community that although WTO is not the right forum but, we may still need for some discussion on this, then we could go to the UN. But, it is premature now because right now, the discussion is in the context of whether WTO discusses it or not. The demandeurs are the developed countries. So, it is for them to say withdraw it from the WTO and in UN, they can raise that since the WTO is not the right forum then let it be discussed in the UN framework. So, we first have to ensure that it doesn't happen in the WTO and then it could be a good compromise for instance that we take it out of the WTO and discuss the relevance and the pros and cons of something like it in the UN.

CP : And it doesn't make sense to look at it as transboundary movement of capital and so it should fall within the ambit of the WTO?

NK : It is not as simple as that. If you can grant same kind of privilege to capital as you are doing to goods, then what about the other factor of production, which is labour. Allow the same framework to labour then perhaps one can think of it becuase there is a reciprocity. But, nobody is willing to discuss labour movement, which is the other factor of production. So, all these things suggest that the WTO is not the right place and if at all then discuss it with labour mobility.

CP : Do you think it is possible to take the issue out of WTO?

NK : If you read the mandate of Doha, you will see that it is subject to explicit consensus. And explicit consensus means that even one country can stop it. So, it is quite possible. Besides, there are chinks even amongst the developed countries. For instance, US wants a very broad-based agreement if at all, covering short-term capital as well, otherwise not, while Japan will not support short-term capital being covered. Then Japan and EU are not in agreement on the definition of investments. Only the EU is the strongest proponent of this investment agreement and all the others are not very convinced.