1.  SUMMARY

  Oxfam GB works with the poor to overcome poverty. Foreign investment can play an important role in poverty reduction. However, our experience is that without adequate regulation, its costs can outweigh its benefits, and vital opportunities for development can be squandered. We are concerned that the Multilateral Agreement on Investment (MAI), both in content1 and process of negotiation, threatens to exacerbate this tendency.

  This submission reviews progress made since April 1998, reiterates some persistent shortcomings, and in the light of recent events, revisits fundamental principles. It concludes with a repeated call to abandon the proposed MAI and make a fresh start to consultation and negotiation for a development-centred MAI that:

—  Is rules-based and bottom-up, and builds on lessons learnt;

—  Is centred on sustainable development with balanced rights and responsibilities;

—  Incorporates binding regulatory standards, especially in the areas of labour, the environment, investment incentives and restrictive business practices;

—  Solicits formal public consultation and full parliamentary debate;

—  Is negotiated in a more inclusive and transparent forum within the UN;

—  Is negotiated in UNCTAD if it reviews its approach, and conducts further research on FDI impact.

2.  THE SIX-MONTH ASSESSMENT AND CONSULTATION PHASE

  The OECD Ministerial Meeting in April 1998 called for a "period of assessment and consultation." The UK Government has been increasingly open to consultation, and Oxfam welcomes the opportunity to submit evidence to the Select Committee. However, formal public and parliamentary reviews based on independent assessments have been insufficient in the UK and the OECD2. There has been particularly inadequate attention to the implications for and consultation with developing countries.

3.  LACK OF SUFFICIENT REFORM—LESSONS LEARNT

  Despite the deteriorating circumstances within the OECD negotiations, it is worth reiterating areas of persistent shortcomings in proposals to date, since they would need to be addressed in an alternative MAI.

  3.1  Domestic implications for UK: Oxfam still believes that despite being relatively deregulated, the UK would suffer restrictions on future policy discretion (such as the New Deal for Regeneration). The imprecise nature of de facto discrimination, the lock-in clause in this untested MAI model, lack of clarity on the right to regulate, the threat to ethical investment, and the paucity of lodged exemptions are all cause for serious concern3.

  3.2  Right of entry: Unlike most bilateral agreements, the MAI has an open door policy on the right to establishment and capital flows. However, restrictions and a staged approach are necessary4 to build indigenous capacity according to varied development needs among sovereign states; labour-intensive investment is also commonly preferred. Furthermore, multinationals' power in advertising, marketing and the media has substantial social, cultural and political implications unless regulated5. Restrictive measures were instrumental in the economic and social advance of OECD and East Asian countries. A sector by sector GATS-like approach is required.

  3.3  Performance requirements: The proposed prohibition of performance requirements goes far beyond TRIMs6. This further reduces the benefit to and diversification of local economies, restricts the transfer of appropriate skills and technology, and threatens appropriate and time-bound protection for viable local firms. Exchanging a performance requirement for an "advantage" puts poor countries at a disadvantage, and encourages the use of investment incentives, which rich countries find far easier to offer.

  3.4  Financial stability: Deregulating capital transfers under open access, and removing performance requirements also mean reduced protection of the balance of payments, and encourage short-termism and speculation. Unregulated foreign direct investment, as well as portfolio investment covered by the MAI, can lead to serious balance of payments crises. It cannot be assumed that the more FDI the better; an optimum level exists that countries must determine and maintain7.

  3.5  Environment and labour standards: An MAI presents an opportunity for a binding agreement on governments for the Non-Lowering of Standards (environmental and labour) applying to all investors, and adherence to key core ILO standards especially the right to organise and collective bargaining8. The right to regulate or raise standards must be clearer, since national legislation may legitimately discriminate de jure or de facto9. Relevant sections of the OECD Guidelines on multinationals should become binding, and conflicts with existing international environmental agreements must be removed10.

  3.6  Access to MAI tribunals: Giving foreign investors privileged access to international tribunals puts citizens, states and domestic investors at a serious disadvantage. Threats of legal action to challenge legitimate state action could encourage a "chill" effect on national legislation and could prevent governments from favouring ethical investors.

  3.7  Developing country participation: The OECD has conducted outreach programmes inviting developing countries to join the MAI, but denied them negotiating rights. The expressed intention of some OECD members and of business representatives is that developing countries are the main targets for the MAI11. Pressure on developing countries to accede would be great, out of fear of exclusion, few development options and weak bargaining positions. Non-members would feel obliged to raise incentives and lower standards, and thus further risk attracting inappropriate FDI12.

  3.8  Financial incentives, taxation and restrictive business practices: This MAI has not addressed these root causes of distortion in global investment allocation. Without regulation of these practices, the envisaged level playing-field is made impossible.

4.  REVISITING OBJECTIVES

  Recent developments reinforce the need to return to the fundamental principles of an investment treaty. Developments include the growing coalition of diverse organisations opposed to the MAI13, resolutions from certain UK local authorities, the highly critical vote in the European Parliament, and now the withdrawal of France and the collapse of talks in Paris. The global financial turmoil underlines the dangers of further capital liberalisation. The fact that the MAI is riddled with complexities, exceptions and carve-outs further testifies to its flaws.

  The MAI text objectives were the establishment of "high standards for the liberalisation of investment regimes and investment protection, and with effective dispute settlement procedures"14. Herein, the MAI failed to address the central problem of globalisation, namely how to balance liberalisation with a positive framework of international and enforceable regulation15. The MAI has thus tried to put the cart before the horse. Liberalisation and investor-protection are seen as the principle rather than the tool, the end rather than the means towards sustainable development and human rights. Rights are given to foreign investors while their responsibilities are relegated to voluntary codes.

5.  NEW FORUM

  It appears that a shift of the MAI to the WTO is now favoured among most OECD members, although the OECD will meet again in 1998 to discuss the MAI. The OECD is an illegitimate forum for setting global ground-rules for investment. However, although an improvement, the WTO is also unsuitable. The WTO's explicit purpose is to hasten liberalisation (not sustainable development), and it characteristically refers labour and environment matters to other fora. The WTO is commonly seen as dominated by rich countries, unaccountable, inaccessible to civil society, and developing countries still have little real power despite their ability to participate with one person, one vote. Nevertheless, an agreed MAI would be mandatory on all its members16.

  The mandate of UNCTAD includes investment, although other UN bodies should also be considered as potential fora. UNCTAD officials have been quoted as favouring a bottom-up "positive list" approach17, and UNCTAD has drawn up development-friendly criteria for investment18. However, it has itself been criticised for adopting an add-on approach to development19. It needs to review its approach, and conduct more research on the impact of foreign investment.

6.  CONCLUSION

  Foreign investment can clearly contribute to sustainable development and poverty reduction. However, its positive impact depends on appropriate conditions and regulation at the national level to promote pro-poor growth, and international regulation to ensure fair competition and high quality investment. A multilateral agreement is required to provide this foundation as well as a predictable and reliable environment for investors.

7.  RECOMMENDATIONS TO UK GOVERNMENT

  Oxfam GB advocates with renewed emphasis a fresh start towards an alternative MAI that:

—  Is rules-based and bottom-up, and builds on lessons learnt;

—  Is centred on sustainable development with balanced rights and responsibilities;

—  Incorporates binding regulatory standards, especially in the areas of labour, the environment, investment incentives and restrictive business practices;

—  Solicits formal public consultation and full parliamentary debate;

—  Is negotiated in a more inclusive and transparent forum within the UN;

—  Is negotiated in UNCTAD if it reviews its approach, and conducts further research on FDI impact.

October 1998

NOTES

  1.  Comments on the MAI are drawn from the April 1998 text primarily.

  2.  In response to the fact that many developing countries do not have multinational enterprises of their own that could benefit from reciprocal privileges in the MAI, the OECD Secretariat's TOR of 28 July 1998 aims to "make the case" for FDI by drawing from its own existing material with no further impact assessment. It asks whether incentives should be given to encourage developing countries to join (perhaps including debt relief as recommended by the Fitzgerald Report). The Fitzgerald report for DFID was done very rapidly with narrow consultation, and displays significant contradictions (see The development implications of the MAI: WDM Critique of the Fitzgerald Report to DFID, WDM 1998). DFID held a useful meeting on 25 September 1998 with academics, NGOs and the DTI from which meeting points are also incorporated in the discussion below.

  3.  These comments build on results drawn from Oxfam's own commissioned research into the potential impact of the MAI on poverty issues in the UK.

  4.  Restrictions on entry are required to prevent inappropriate take-overs (such as the media), to control access to key assets (especially natural resources), to build domestic capacity, to reduce irresponsible business, to prevent balance of payments crises, and to ensure the opening of economies no faster than their law enforcement systems allow. Examples of entry restrictions include mining (Venezuela, China), highly polluting industries (Taiwan), forestry (Honduras, Thailand), land and agriculture (Brazil, Pakistan), oil and gas (Tanzania, Colombia)—(see WDM 1998 above on country examples).

  5.  French and Canadian governments have argued against open access by proposing a "cultural" exception, although this was to cover cultural industries, in particular the audio-visual; however, this was firmly resisted by the US. The French have since pulled out of current MAI negotiations. Under the MAI, the decision for instance of the Bermuda not to allow McDonalds entry in the interest of protecting culture and building local capacity would be disallowed.

  6.  Trade Related Investment Measures (TRIMs) agreed in the Uruguay Round in 1993 operate on an opt-in basis and do not include non-trade related measures such as technology transfer and employment. Developing Countries have five years from January 1995 to implement TRIMs; because TRIMs are far-reaching in themselves and were poorly negotiated, the negotiations on an alternative MAI would be an opportune time to renegotiate TRIMs as well.

  7.  The South Centre (see Foreign Direct Investment, Development and the New Global Economic Order: A Policy Brief for the South, South Centre 1997) considers there to be an "optimum level" of FDI. FDI remittances can be just as volatile as portfolio investment, and profits may anyway be reinvested as portfolio and can be liquidated and shifted abroad relatively easily. Foreign claims on currency reserves may be so great and may have to be financed by increased exports at a level that is not sustainable. Relevant performance requirements include the need for a minimum export requirement, and limits on imports which together with controls on investment quantity and on excessive repatriation, are necessary to avoid serious negative impact on the balance of payments.

  Chile takes further measures to discourage short-term and speculative investment: free repatriation of capital is not possible for the first year of investment, a small tax is imposed on speculative capital, and reserve requirements are imposed on foreign borrowing. Although supported by the World Bank Chief Economist, Joseph Stiglitz in a speech in Helsinki on 7 January 1998, these measures would most likely be outlawed under the MAI unless with an IMF stamp of approval which would require evidence of an already existing balance of payments problem.

  8.  Given the opposition of developing countries to conditionality on labour standards, it may be appropriate to only insist on government compliance to the right to organise and the right to collective bargaining, in the first instance. These are the fundamental enabling rights to many of the other ILO core standards and are clearly trade and investment-related. It would be important, however, for member governments to commit themselves to implementing other internationally recognised core labour standards within a fixed time-frame.

  9.  In the MAI text, the need for governments to regulate or raise standards is only acknowledged by a footnote and subject to conformity with the agreement. An example of explicit or de jure discrimination against foreign investors would be fisheries rights (protecting the environment) or targeting marginalised areas or groups (for preferential assistance); an indirect or de facto discrimination would be government policy preference for management of natural resources by local communities for more sustainable management. An illustration of undermining the right to govern is the case of the US company Metalclad which is reported to have initiated a $90m action following the decision of the governor of a Mexican province to close a waste disposal facility found to be over an aquifer.

  10.  Such international agreements, referred to as Multilateral Environment Agreements, are based on differential responsibility on the basis of the level of economic development, which can translate into discrimination. The Kyoto Protocol is an example: multinationals from countries not eligible under the protocol could sue developing countries taking part (receiving "climate-friendly" technolgy in exchange for "carbon credits").

  11.  A Press Release from the International Chamber of Commerce (16/1/98) stated that "most of the problems addressed in the agreement lie outside the OECD membership. It is thus crucial that as many OECD countries as possible accede to the agreement. There is a danger that the intrusion by the MAI into environmental and labour standards could reduce the prospects of MAI accession by these countries" (see note 8). There is also implicit political pressure to accede through other ways, for instance in the EU negotiating directive for future relations with Africa, Caribbean and Pacific (post-Lome IV bis).

  12.  This view is clearly expressed by Dr. Fitzgerald in his report commissioned by DFID: "The Development Implications of the MAI" (1997:42).

  13.  A notable feature of the Coalition is the diverse nature of its members who are united on a point of principle that investors should not be treated in such an unbalanced fashion. There are over 600 organisations representing development, consumer, environment, human rights, churches and indigenous peoples interests. Unions have been concentrating on improving labour clauses within the OECD. The campaign has spread to parliamentarians, local authorities, state/provincial governments, affected industries and developing country governments.

  14.  The ambiguity in verifying discrimination and the potential conflicts with a whole range of national legislation may well not provide the predictability sought by investors. And there is also evidence that the economic climate is a greater determinant than the policy environment in influencing investment flows.

  15.  This view is well expressed by Sol Picciotto "A Critical Assessment of the MAI" presented at an Oxfam/WWF conference organised in April 1997.

  16.  These views were expressed at two events organised by UNCTAD in Geneva, one with NGOs and ambassadors on a Multilateral Framework on Investment (MFI) on 10 June 1998, and one with NGOs and trade unionists from 11-12 June. Participants views against the WTO were echoed by Baghwati Powerful Reasons for the MAI to be dropped even from WTO agenda, Financial Times 22/10/98.

  17.  Carlos Fortin, Deputy Secretary General of UNCTAD, envisaged a GATs like bottom up approach to an MAI if indeed an MAI was needed rather than an MFI (speaking at the above event 11-12 June).

  18.  UNCTAD outlined development friendly criteria for investment informally at the Commission on Investment, Technology and Related Financial Issues (second session 29 September-3 October 1997). These illustrated a balanced approach including the right to regulate, exceptions to national treatment on development grounds, allowance of necessary performance requirements, and the right to restrict entry in key sectors. The Commission on Transnational Corporations produced a draft Code of Conduct on TNCs, but these were abandoned in 1992 and the function transferred to UNCTAD. This code could be revisited though flawed in places; it sets out terms for both investor and host country.

  19.  Nearly 50 NGOs signed a statement to the UNCTAD Secretary General to this effect in the 11-12 June summit mentioned above.