The OECD-led proposal for a Multilateral Agreement on Investment (MAI) has run into difficulties because of disagreements among some of the key negotiating parties. The author of this article, who is responsible for special programmes at the Vienna-based United Nations Industrial Development Organisation (UNIDO), offers a sharp critique of the proposals (in their present form) from a developing country perspective.
The issue is apparently cut and dried: free movement of goods and services in world trade, and free movement of capital, have helped sustain global economic growth. In developing countries, this growth, expressed in terms of higher per capita GDP, has been fuelled essentially by aid, direct foreign investment, investment in securities, remittances from nationals working abroad and, of course, export income.
The huge growth in net financial flows to the developing countries over the last 20 years, reveals the increasingly predominant role of private investment (see Table 1). Resource flows originating in the private sector rose to $244bn in 1996 – 86% of total net flows to developing countries, though admittedly, these resources were not evenly distributed. Sub-Saharan Africa accounts for only 5%. East Asia/the Pacific (44.5%) and Latin America/the Caribbean (30.5%) received the lion’s share.
Global investment in decline
In global terms, however, savings and investment fell over the same 20-year period (see Table 2). While Asia could boast record growth figures (from 26.5% to 31% for savings and from 26% to 32% for investment), all other regions saw a significant fall. This was particularly true of Africa, whose savings level dropped from 29% over the period 1974-81 to 18% in 1990-95. There was a similar reduction in investment (from 32% to 21%). The currency crisis in Asia, which began in late 1997, suggests that we can no longer put our faith in ongoing rapid investment in that part of the world. It may be that the worldwide declines and, more particularly, those in the industrialised countries (essentially OECD), have spurred those responsible for the MAI to seek a framework for stimulating investment.
A closer examination shows that huge profits were generated by the productive sector in the G7 countries between 1980 and 1995, resulting in a return to pre-1970 performance levels. But there was no correlation between profits and investment over the same period. Profit levels in the productive sector of the G7 group (originating from income on capital) were 31.5% in 1980 rising to 34.5% in 1995. Meanwhile, investment, as a percentage of GDP, fell from 17.5% to 16%.
In 1994, the industrialised countries received twice as much direct foreign investment as the developing nations, with leading multinationals taking maximum advantage of the liberalisation of investment regimes during the 1990s. Generally speaking, US firms led the way. Japan’s transnational companies came a long way behind in second place, almost level with the UK (followed by Germany, France and a few of the developing countries – notably in Asia and Latin America). Delays have occurred in reaching consensus over the content of the MAI which, one should recall, is an OECD, not a US initiative. A key reason for this is that nowadays, investors not only invest, but also aspire to ‘leadership’, and there have been internal disputes about influence within a group of about 100 transnational companies (supported by their respective governments).
As far as the World Trade Organisation (WTO) is concerned, two aspects are worth noting.
- First, investment rules and practices are not uniform worldwide.
- Second, transnational companies face problems arising from the risk of operating in regions where profit levels are low. Also, the smooth running of business is hampered by state interventionism – which is an obstacle to investment.
To complement the existing legal framework for trade, transnational companies and OECD countries have argued that a multilateral system should be set up to eliminate the undesirable effects of state intervention in investment. The OECD took the initiative and drafted the MAI which would be a genuinely unified world investment system, based on existing codes. By limiting the field of action to investors, and investment in the context of more global trade promotion, the objective of those who devised the Agreement is to monitor the establishment of a global charter on investment. Its primary aim will be to provide protection for investors, and to create a motivating global framework which favours them. A charter of this kind should promote optimum allocation of world savings circulating in the form of investment. But it does not contain any reference to the importance of creating jobs or to the distinction between investment which generates employment and that which does not.
Conditions imposed from outside
Negotiations on the MAI began in 1995. The aim was that agreement should be reached by 1997, but there has been a delay. Paradoxically, it is not the proposals relating to rights and obligations, which are heavily weighted towards the operation of market forces, that are behind the delay. This concept of ‘market forces’, defined with the investor very much in mind, already appears to give priority to the most influential multinationals. In fact, the OECD seems to have been forced into a rethink – which could delay the MAI by a year – because it failed to incorporate into the text, the spirit of the American Helms-Burton Act. Among other things, this seeks to prevent foreign firms from investing in Cuba. Thus, it is disputes over influence behind the scenes within the OECD that are holding up the accord.
In principle, the MAI’s objective is to liberalise investment systems and protect investors, but there is a risk that the ultimate objective of unification, standardisation and optimum allocation of world savings may not be achieved. The approach of the aforementioned Helms-Burton Act, for example, involves an exception to the principle of trade and investment liberalisation, based on political considerations. Also, the provisions of the North American Free Trade Agreement (NAFTA) call into question certain sovereign rights of states where the exercise of such rights would make it impossible for a transnational company to recover at least its investment costs in a given market. The reality is that by giving the interests of transnational companies precedence over state sovereignty, the MAI would make it easy for national savings to be withdrawn from a country. And those nations that have most influence are keen to ensure that this has little chance of happening to them in reality. So there is a basic contradiction as regards the objective. This largely explains the lack of transparency surrounding the drafting of the text. The MAI will certainly not be initialled by the US representatives, if the Helms-Burton Act and the unspoken stipulations of NAFTA are not, somehow or other, taken into account in the recast MAI.
In all probability, the Agreement will be influenced by the world’s most powerful countries. The text has reached its current (October 1997) form through the combined efforts of market interests and the various OECD governments, without any real involvement by legislators, let alone the citizens or civil society of the OECD states – which are, for the most part, democracies. Indeed, without the insight and bold approach of the US consumer protecprotection movement, whose efforts have been reported by parts of the French media, the scope for collusion between public and privatesector leaders in ACP countries implicit in the current text would not have been identified. Meanwhile, the MAI provisions on the treatment and protection of investors appear not to be running into any official opposition from the authorities in the 29 OECD countries.
A ‘no-fault’ system
The WTO aims to standardise the process of world trade liberalisation with texts covering trade and services, intellectual property, investment and counterfeiting. It was this approach which broadly inspired the proposal for the MAI. Although the WTO Director General, Mr Ruggiero, suggests that the Agreement could form the basis of a ‘Constitution’ for a unified global economy, no one doubts that collusion between countries and a few multinational companies could herald the emergence of a new form of governance in the world, based on the preeminence of the right to use one’s capacity to influence. This would involve new forms of hierarchy within the OECD itself, and it is the difficulty involved in achieving consensus on this point which is holding back implementation.
The MAI is founded on the postulate that further world growth requires trade liberalisation, linked in turn to the pioneering role of investors. The view is that to enable the latter to fulfil their role better, the main obstacles must be eliminated and they should be protected as much as possible. By accelerating the flow of assets owned or controlled by investors, it is assumed that an increase in global wealth will be promoted. Accordingly, so the argument goes, all that is needed in ACP countries is for the state’s interventionist role to be limited – even in areas of ‘public interest’ – by bringing them into the new system. The state’s job would be to provide the flanking measures, based on a no-fault principle and designed to guarantee the absolute right of investors.
To sum up, any loss of earnings (whether of profit, or even where the return on investment is unsatisfactory) could be covered by a legal provision. This would be within an international framework reserved exclusively for this purpose, and based on the ‘right’ to exercise influence – which is a long way from the principle of equality before the law. If the MAI is ratified by ACP countries, the elevation of the interests of multinational undertakings which this implies will automatically render obsolete, the principles of the Lomé Convention. The operation of the market will come first.
In reality, should ACP states without any particular economic influence become insolvent, their leaders, whether democratically elected or not, could be forced as a last resort into surrendering their land, the resources that lie beneath it, their waters and their air space to voracious market forces. And there is certainly no guarantee, even with the employment that might be generated, that this system based on dependence and the loss of sovereignty, would enable poor states lacking influence to demonstrate to their people that they have become participants in growing global wealth. In fact, they would increasingly be obliged to absorb any losses experienced by the investor, distributing the impact of this within their own countries – while it is not at all certain that any profits from investment would be shared out in the same way among those involved in producing the fruits of growth.
Is the state to blame?
The MAI’s 12 chapters deal exclusively with ways of protecting investors, whatever form the investment takes (money, securities, property rights, etc.). For states, there is no mention of rights, just obligations. This imbalance, in which multinational undertakings would be protected at the expense of states, will help consolidate the dominance of wealthy countries over intermediate and (more particularly) low-income ones. By dividing the world in two – the investors and the others – the MAI officially sanctions the right to transfer property to, and concentrate it in the hands of, a few financial oligarchies with unlimited influence.
Indeed, there is a kind of consensus that states have been collectively guilty of discriminating against multinational undertakings. This ill-founded generalisation, and the absence of a genuine representative role for civil society in drawing up the MAI, casts doubt on the real intentions of the authors of the text. In the final analysis, it should be recognised that when states resort to so-called ‘discriminatory practices’, they do so on behalf of their own taxpayers and for reasons of general public interest.
Removing a state’s ability to defend the public interest, with national fiscal provisions which effectively legitimise a form of expropriation by international companies, is analagous to reversing the burden of proof in a court of law. The government would be required to guarantee that it is not placing obstacles in the path of a multinational’s interests before it could legislate for the public interest. In the event of a dispute, the authorities, with no direct quantifiable interest, would find it extremely difficult to justify offering compensation. Indeed, the authorities could no longer be viewed as investors since they are no longer authorised to become involved in productive activities. Yet if the state agrees to forego its sovereign rights, thus depriving itself of its unique status, it would almost automatically find itself in the dock in disputes with investors. All that would remain for it would be to decide how much taxpayers’ money should be allocated to pay ‘fines’ levied for acts, in respect of which it bears no fault. In such a system, politics in the future may take on some of the darker aspects of systems we thought we had left behind.
So the investor is no longer just a physical or legal person who uses capital to purchase goods. With such a broad definition of ‘investment’, allowing any type of asset directly or indirectly held or controlled by an investor to benefit from the MAI, society is changing from one where the consumer came first to one where the investor is king. This new notion entails the following:
- the investor transfers all or part of his direct or indirect assets, rights or goods, for a short or long period, to an organisational structure whose purpose is to generate profit, power and influence;
- the investor applies most of his energy, directly or through an intermediary, to the service of the project, so as to achieve the objective pursued;
- the system monopolises, or at least draws off part of, those direct or indirect assets, rights or goods, belonging to a group of physical or legal persons, which exist in forms that are unacceptable to market forces;
- the attributes of political power and investors’ power are merged for the good of the community of investors, the latter’s place in the structure depending on their ability to influence;
- the most influential investors are elevated to the rank of ‘untouchable’, at the centre of an integrated system consisting of concentric circles, with the least influential on the outer rim.
Given the relationships of influence that exist between OECD countries and intermediate and low-income nations, and the fact that the ‘non-investor’ has no option but to honour his obligations, the MAI’s dispute-settlement is clearly a one-way process that only benefits the investor. Add to this the fact that some state ‘representatives’ do not really represent their citizens, but are actually quasi-official actors for transnational companies, and the scope increases for non-influential states to ‘change hands’ in the wake of their failure to honour ‘obligations’ to transnational companies.
A court for deciding disputes?
The evident disappearance of preferential treatment under the MAI should be enough in itself to convince low-income countries with little influence (ACPs in particular) not to support the underlying principle of the Agreement. Its sole raison d’être appears to be the desire to remove sovereignty from non-influential states where transnational companies encounter obstacles to their control and distribution of global wealth. What if there should be a conflict between an ACP country and a transnational company? On present form, the rules of any international arbitration court set up under the system will be just as opaque as those which the WTO has so successfully implemented in its dispute-resolution procedures. Which ACP state will be the first to cede its national sovereignty and state prerogatives in these circumstances?
In the context of extending systems geographically to include low- and intermediate-income countries, the ACPs should not rule out the possibility of setting-up a court at sub-regional or regional level to decide disputes about jurisdiction between the public and the private sector. This might help avoid an impasse. It is not widely known that under the present provisions, a state which signs the MAI will not be allowed to withdraw from it for 20 years.
The MAI proposal would destroy the notion of force majeure used by most insurance companies. In their frenzy to protect investment, the drafters’ reference to ‘protection against social disorder’ would entitle investors to compensation if they can prove a loss of profits. Given the frequency of this phenomenon on certain continents, the potential for making a great deal of money at taxpyers’ expense looks very real indeed. It will also be necessary to examine how solvent states actually are. If resources are low and a country defaults, it appears that the only plausible action would be to annex land – as in colonial times!
The right to influence
On the positive side, the MAI does allow for exceptions and reservations. However, the outcome of the ‘banana’ dispute in the WTO shows that exceptions and reservations have lost their primary function, and are now mere palliatives to bring wavering states ‘on board’ and ensure their subsequent subservience to the rule of the strongest. Based on Article III.4 of the GATT, the complaint by the USA, Mexico, Honduras, Ecuador and Guatemala against EU restrictions on the import, sale and distribution of bananas, was deemed admissible. Article XVII of the General Agreement on Trade in Services, which stresses ‘most-favoured-nation’ treatment must also be assumed to be operational. In short, the key aspect is guaranteeing equal treatment for all those involved in the world-trade scene. This means it is no longer legally possible to discriminate against non-nationals. The provisional version of the MAI stresses this, in the context of investors. Echoing the NAFTA text on this subject, it introduces the concept of equal access for all to national markets.
For the OECD, it is a new form of governance based on levels of influence, but it can only be a matter of time before the less influential nations, and ACPs in particular, suffer a genuine loss of sovereignty. Another consequence of economic globalisation, at the national level, may be an evolution in the idea of ‘public service’ – away from serving the people and towards serving the investor.
Against this backdrop, it is not surprising that in the MAI, the concept of protecting the investor is gaining ground over the principle that allows special treatment to nationals. This approach is alalready seen in the WTO and NAFTA texts. Both of these organisations have nearly always viewed state regulations covering trade, services, currency, information and, now, investment, as abusive protectionism. By doing away with such intervention, or by taking the matter to international courts where states’ economic influence will predominate, the champions of liberalism hope to eliminate or at least minimise disguised nontariff barriers which they see as impeding the development of world trade. What if, despite all these efforts, the reduction in global investment recorded in the last two decades is not reversed within the next five years? The answer is that the MAI will undoubtedly have served other objectives, which will have to be highlighted. If investment does increase, however, the MAI will be seen as having enabled investors to boost their expectation of market control, with the transparent agreement of future signatory states. What is certain is that transnational companies will have increased their right to wield influence in the world. YEA