Global Policy Forum

Jim Lobe

Claims that a global agreement on foreign investment to be negotiated under the World Trade Organization (WTO) will be good for sustainable development in poor countries are highly suspect, according to a new report released Monday by Friends of the Earth International (FoEI) and the British-based World Development Movement.

The 27-page report, 'Investment and the WTO: Busting the Myths,' calls for developing countries and non-governmental organizations (NGOs) to resist efforts, pushed primarily by the European Union (EU), to promote such an agreement at the WTO Ministerial Conference in Cancun, Mexico, in September.

Instead, NGOs and poor countries should push for the United Nations to adopt binding rules on the conduct of multinational corporations that invest in poor countries as the best way to ensure that their foreign direct investment (FDI) promotes indigenous strategies for sustainable development, particularly those that alleviate poverty and protect local communities and the environment, according to the two groups.

"Corporate lobbyists and our government want to spin proposals for a WTO investment agreement into a pot of honey for the developing world, but nothing could be further from the truth," said Liana Stupples of the British section of Friends of the Earth (FoE).

"Without binding rules for multinational corporations under the UN, the developing world will have everything to lose and big companies will have everything to gain," she said. "This WTO agreement must not be allowed to go through."

FDI in developing countries rose to record levels of several hundred billion dollars annually during most of the 1990s, although almost all of it was concentrated on only a dozen countries, particularly China. FDI from western multinational corporations far exceeded the $50 billion or so that was provided in loans and credits from bilateral aid agencies and multilateral institutions, like the World Bank and the International Monetary Fund.

The new report, which addresses 13 main arguments made by the EU in support of a WTO investment agreement, comes five years after the collapse of negotiations by the Organization for Economic Cooperation and Development (OECD)--the club of the world's wealthiest countries--for a Multilateral Agreement on Investment (MAI), a proposed global accord that, according to its critics, amounted to a "corporate bill of rights" that would have given multinationals sweeping powers in countries where they invested, including the ability to challenge national and local social and environmental laws and regulations.

Pressure exerted by consumer, environmental, and other activist groups in western countries who saw the MAI as a major challenge to the powers of democratically elected local and national governments eventually forced governments to drop the effort.

But the EU has persisted, using the WTO, instead of the OECD, as the favored forum. At the 2001 WTO Ministerial Conference in Doha, Qatar, it pressed for such an investment agreement to be included in the round of global trade negotiations that was launched there. To get its way with reluctant developing countries, the EU's representatives even suggested that it would veto changes in international patent law that would permit poor countries to import cheaper generic drugs to fight diseases like AIDS.

Talks on how an investment accord might be organized have proceeded slowly, however, as poor countries have shown little enthusiasm for a deal. If an agreement is not reached in Cancun, the initiative could suffer the same fate as the MAI, according to the new report.

It is in this context that the EU, and particularly the British and Japanese governments, have been touting the alleged benefits of both FDI and an agreement to promote it. And it is those arguments to which the new report is addressed.

Promoters of an investment accord, for example, have argued that FDI helps poor countries not only by bringing capital to the country, but also by providing additional benefits, such as more jobs and the transfer of sophisticated technology. They also contend that, by providing greater predictability for investors, an investment agreement will attract more FDI, even to those countries that currently receive little or none.

They have also argued that FDI by itself is a major factor in providing sustainable development for poor countries and that a WTO agreement would be better for developing countries than negotiating bilateral treaties with rich nations because they can use their collective power more effectively to gain better terms.

All of these arguments are suspect, according to FoEI and WDM, however. While they concede that FDI can play an important role in sustainable development, the indispensable factor to achieving the latter is ensuring that such investment is regulated or channeled in appropriate ways.

But such an approach would actually be made more difficult by an agreement that provides greater protections and powers to corporate investors, according to the report. The authors argue that such an agreement would actually tend to further the "race to the bottom" by developing countries that are forced to relax labor or environmental laws in order attract investment.

The report points to the experience of Latin America and the Caribbean in the 1990s compared with the 1970s to argue that "there is no automatic link between increased FDI and (economic) growth." FDI in the region was 13 times greater in the 1990s than in the previous period, while growth in the region's gross domestic product was 50 percent lower. The reason was that FDI was concentrated in buying state-owned assets, such as mines or telecommunications companies, rather than creating new industries that provided new jobs and technology.

"The key point is that FDI is not inherently good or bad -- there are trade-offs between the risks and returns," according to the report, which criticizes proponents for arguing that FDI should be sought as an end in itself.

The notion that a WTO investment agreement will also attract FDI to countries that to date have received little or none also amounts to a myth, according to the report, which noted that almost all of Africa, for example, has been excluded from the huge expansion of FDI in the 1990s.

Even the World Bank, which has tried to encourage FDI in its lending programs, has raised questions about the value of an investment agreement. "[A]n international agreement that seeks to substantially increase investment flows by increasing investor protections seems destined, on the basis of available evidence, to fall short of expectations," it concluded in a recent report.

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