The Challenges facing Developing Countries in their International Relations
2. International Investment Treaties and Developing Countries
Valpy Fitzgerald, Queen Elizabeth House, Oxford
Abstract: The establishment of international investment rules has often been regarded as an agenda which benefits mainly multinational firms and developed countries. This presentation illustrates the importance of international investment treaties to developing countries. It finds that the globalisation of capital markets presents developing countries with unprecedented opportunities and challenges. These new opportunities and constraints, however, affect the smallest and weakest developing countries differently from the larger developing ones. To ensure that even the smallest gain from the global economy, the careful construction of a multilateral investment agreement is essential.
The importance of foreign direct investment (FDI) flows today, derives only partly from their five-fold increase to developing countries in the past ten years. More importantly, services and goods are delivered more through FDI than through exports. That regional arrangements like the EU and NAFTA have focused on elimination of barriers to investment flows, is hence hardly surprising.
Recent debates on the links between globalisation and inequality have highlighted the skewed pattern of FDI flows, to indicate the marginalisation of the least developed countries (LDCs). It is true that in absolute terms, the greater part of foreign investment has gone to middle-income industrialising countries, particularly in Latin America and Asia. However, relative to other sources of finance, FDI is a high proportion of private business investment in most developing countries: one-half in Africa, one-quarter in Latin America and one-fifth in Asia. In other words, in spite of the receipt of a lesser proportion of investment flows, foreign investment is more important to the low-income economies than the middle-income ones. The positive implications of access to financial flows are simple - greater access to financial resources and productive technologies, creation of new jobs and provision of fiscal resources for human development.
The critical condition which allows the optimisation of these opportunities, however, is the disciplining of their economies by developing countries to international standards. Failure to meet the standards by foreign investors is penalised by a migration of capital resources, in a situation where the competition for attracting these flows is high.
To indicate receptivity to international standards that attract foreign investment, various signalling devices are used. Almost all developing countries have embarked on unilateral liberalisation of their investment regimes. The inadequacies of such a strategy are twofold. First, if the poorest countries are unable to compete for investment, they run the risk of adopting the extreme measure of offering unilateral incentives such as tax holidays, subsidies and regulatory relaxation. Ensuing competition over such unilateral concessions precipitates a race to the bottom, in terms of regulation of investment flows. Second, even if domestic legislation and unilateral guarantees are identical to multilateral ones, the former do not substitute for the latter in terms of credibility. A network of bilateral investment agreements (BITs) has also emerged. But in both unilateral commitments and BITs, the larger developing countries (‘the Big Six’ i.e. Brazil, China, Indonesia, India, Korea and Mexico) possess much greater manoeuvre based on their larger markets and greater weight in international forums. A multilateral investment agreement, would offer several advantages over the existing patchwork of BITs and unilateral liberalisation measures, since investors would have a single standard to rely on, which could also be well understood and monitored by the recipient countries. It would be of particular value to the smaller developing countries, which lack the negotiating leverage to secure BITs that are favourable to them.
Much of the opposition to a multilateral investment agreement, has stemmed from the association of such an attempt with the MAI that was negotiated among the OECD countries, to the exclusion of developing countries. The opposition of developing countries and NGOs to the agreement, was only one of the reasons that doomed the MAI to failure. To overcome the mistakes associated with the MAI, a more useful approach would be to negotiate a multilateral investment agreement within the WTO. The objective would be to establish ‘a common set of binding rules providing a simplified, secure and predictable framework for investment encompassing existing bilateral agreements and practices.’ These rules would cover asset protection, national treatment and dispute settlement. However, interests of the poor countries could be protected through provisions such as the concept of ‘in like circumstances’. The concept allows a regulation of strategic sectors, when foreign firms are very large relative to domestic firms. Recognition however, must be given to the fact that investment negotiations in the WTO will inevitably be slow. States are reluctant to bring issues associated with domestic jurisdiction to the international negotiating table, particularly when they spill into questions of minimal labour and environmental standards and international tax issues.
In the course of the discussion, chairperson Professor Neil McFarlane posed the interesting counterfactual - what would be the consequences of not developing multilateral rules on investment? Further, given that a multilateral investment regime is also likely to curtail certain investment flows, is the establishment of such a regime desirable?
The speaker pointed out that liberalisation of financial flows has advanced rapidly from the national to the regional levels, and has further been institutionalised through various regional agreements. It is likely that the movement will expand over time to the international level. The issue then, is not whether an international investment regime will emerge, but whether it will emerge to help the poor. Tough international rules about investment flows may be devised as a part of such a regime to assist stability and growth in the least developing countries. Herein lies the scope for concerted policy formulation and action.
(The full paper can be found at: www.ids.ac.uk/ids/tradebriefings/index.html)
The rest of the seminar series:
Introduction
The Politics of Aid and Conditionality by Stephen Jones
International Investment Treaties, Valpy Fitzgerald
Good governance and the MDBs, Christina Biebesheimer
Global Governance and the Post Washington Consensus, Richard Higgott
Intrusive Regionalism, Amitav Acharya
Regionalism in the Middle East, Louise Fawcett
Aiding Democracy Abroad: Lessons from the late 1980s-90s, Thomas Carothers
Developing Countries and the International Financial Architecture, Ngaire Woods
Humanitarian Intervention, Thomas Weiss