Proposals for a multilateral framework for FDI has received a mixed response. Could nations with wildly different views ever agree on such a thing asks Ashleigh Lezard.

Four years after the last attempt collapsed amid arguments and insults, a new initiative to build a multilateral framework for foreign direct investment has emerged. Hidden in the middle of a 52-paragraph ministerial declaration arising from last November’s World Trade Organization (WTO) meeting in Doha, Qatar, are some turgid sentences that may or may not be critical to FDI in emerging markets – views about their relevance differ wildly.

Paragraph 20 states: “Recognising the case for a multilateral framework to secure transparent, stable and predictable conditions for long-term cross-border investment, particularly foreign direct investment, that will contribute to the expansion of trade, and the need for enhanced technical assistance and capacity building in this area as referred to in paragraph 21, we agree that negotiations will take place after the fifth session of the ministerial conference on the basis of a decision to be taken, by explicit consensus, at that session on modalities of negotiations.”

Translated into plain English, this appears to mean that governments are going to start negotiating the terms for an eventual FDI framework. Clearly nothing is going to move too fast but, if the project ever got off the ground, the WTO declaration proposes that it should cover such things as transparency, non-discrimination, settlement of disputes and balance of payments.

The term capacity building (the latest fad in multilateral speak) crops up frequently; it seems to mean that developing countries should be helped to acquire enough institutional and human resources to participate fully in the discussions. It would be pointless if they could not contribute.

Cause for excitement

As vague as these statements are, however, and as far away from becoming reality as the framework proposal stands, their mere existence has already caused excitement. The last attempt at putting something similar together – the OECD’s ill-fated Multilateral Agreement on Investment (MAI) – foundered in 1998 because developing countries and non-governmental organisations (NGOs) thought they were having a first-world plan forced on them. Initial feedback on the WTO proposal suggests that much of this hostility still exists, the emphasis on “capacity building” notwithstanding.

The clause for an investment framework nearly did not make the Doha Agreement due to opposition from various parties. There have been long standing protests particularly from Indian representatives. Murasoli Maran, India’s commerce and industry minister, insisted that capacity building is included on the agenda, a view echoed by NGOs and other developing countries.

Capacity building

Sheila Page, research analyst for the International Economic Develop-ment Group at the Overseas Development Institute (ODI) in London, says capacity building is vital if developing countries are to play an active role in negotiations. “Countries need to be represented. Botswana, for example, does not have a permanent representative in Geneva [at the WTO], and even the European Union representative was reported to have said that he could not provide people to take part in negotiations.”

All parties in the United Nations Conference for Trade and Development (Unctad) believe that capacity building is the most important part of the agreement. However, it will also have great benefits for developing countries in all multilateral negotiations.

WTO director-general Mike Moore, in various meetings with developed nations’ trade representatives since Doha, has pushed for more financing for developing nations to drive much wider participation in negotiations, increasing the next round’s chances of success.

WTO pledges money

Recently, WTO member governments pledged SFr30m (E20m) to help developing countries build capacity. Unctad will also continue to run various workshops in developing countries. Mr Moore believes the lack of knowledge and skills to take part in negotiations prevents developing countries from agreeing to a framework for investment rules. He says that most developing countries do not oppose rules but are holding back because of lack of information and understanding of the issues.

The Indian government and various NGOs do not agree. They say a framework for investment has fundamental effects on democracy and sovereignty. Regulations would restrict governments from being able to screen any foreign investment into a country, restricting domestic policies, they argue. Richard McNally, economics and development policy adviser for the World Wide Fund for Nature (WWF), sees this as particularly harmful to environmental policy. “A binding multilateral agreement would lead to a chilling of environmental rules like in the North Atlantic Free Trade Agreement (Nafta), it would be tying countries hands to rules that they do not want,” he says.

Mr Moore does not agree. He says: “What governments decide to do is their own business, they must work that out, it is their decision to work out their own policies.” Rubens Ricupero, Unctad’s secretary-general, agrees that it is important to “discuss general rules from the Doha agreement, but not to get involved in practical policies towards investments”.

WTO under fire

So why are questions still raised about a framework? Some argue that the WTO is the wrong body to run it due to lack of transparency in negotiations. A recent WWF report said: “Current proposals for expanding the international legal regime governing FDI are orientated almost exclusively towards the liberalisation of capital flows as an end in itself, which may result in more benefits for private investors than in real improvements in public welfare.”

Mahmud Nawaz, a director of emerging market economics in London, says it is important not to overlook the developmental dimension of FDI. In the past two decades, aid flows from developed countries have significantly lowered; FDI has increased from $150bn in 1991 to $1300bn in 2000. It is now identified as one of the most important contributors to sustainable development and as globalisation in its most potent form.

Dr Supachai Panitchpakdi, director-general designate of the WTO, identifies FDI as “the most important source of external finance for developing countries”.

FDI brings to developing countries technical, managerial and educational development. Critics of a multilateral framework say it would undermine the benefits for developing countries by having them engage in a “race to the bottom” as countries lower standards to attract investment.

“Investment rules will be neutral, they will be non-discriminatory with the removal of, for example, performance requirements,” says Dr Nicholas Phelps, a lecturer in economic geography at the UK’s University of Leeds. “This removes the opportunities for innovative policies,” relying on a trickle-down effect and not actively promoting development. Dr Phelps adds: “The lifecycle of investments these days is very short; if there is no responsibility tied in with them then companies can move from place to place very quickly.”

Multilateral frame

These arguments beg the question – is there really a need for a multilateral framework or is the current bilateral system working? Pierre Pourret from the OECD, who participated in the negotiations for the MAI, thinks that an extension of the General Agreement on Trade in Services (GATS) is a better approach, with countries choosing which sectors to develop. Celso Amorim, Brazilian ambassador to London who participated in the Doha talks on behalf of Brazil, the second largest emerging market recipient of FDI, agrees with this approach and even a member of a WTO working group on investment who wishes to remain anonymous agrees that a widening of current rules is probably a better way to approach the issue than a whole new framework.

EU’s dissenting voices

There is also dissent among developed countries. Although the EU is the fiercest supporter of a framework, individual countries within it may not agree. The French, for example, were one of the most vocal critics of the MAI, saying an agreement threatened cultural interests. Even the most influential of players, the US government, has a mixed view of multilateral rules for investment.

Also, because “explicit consensus” will probably never be reached over these issues, it appears that multilateralism is going out of fashion. In World Investment Prospects, a recent report by the Economist Intelligence Unit, Clive Cook, deputy editor of The Economist, said there had been a resurgence in unilateralism as a consequence of September 11. He did not, however, believe this was detrimental to international investment; rather, market liberalisation was becoming bogged down in the global obligations and pressures of multilateral agreements.

Mr Cook argued that national self-interest should be used to propel global economic reform, with governments opening markets and cutting barriers to investment not because the WTO or another body tells them to, but because it is in their own interests to do so. Mr Cook called this “enlightened unilateralism” and wrote that perhaps it was the best way to tackle international investment, as “explicit consensus” will never be reached due to conflicting views in the investment community.