Tue, 16 Sep 2003

Code of conduct needed for corporations, not MAI

Henry Heyneardhi and Savio Wermasubun

Among the contentious issues at the fifth ministerial meeting of the World Trade Organization in Cancun, Mexico, was the European Union-proposed WTO investment agreement. It is another attempt by the EU to advance the agenda of transnational companies (TNCs) in opening up new opportunities for capital expansion.

Its endorsement will endow foreign investors full freedom to venture into all economic sectors in every WTO member country and guarantee them all kinds of treatment equal to domestic investors. The agreement furnishes TNCs with unprecedented power to formally challenge national regulations, such as social and environmental legislation, that they consider obstacles. Critics dub the proposal a "corporate bill of rights."

Earlier, developed countries initiated a proposal globally known as the Multilateral Agreement on Investment (MAI) via the Organization for Economic Cooperation and Development (OECD) in 1997.

Aware that the MAI might undermine democratically elected local and national governments, groups representing human rights, environmental and public health concerns, workers, women, the poor, consumers and farmers orchestrated a massive protest movement, mainly within the OECD member countries.

The OECD stopped negotiations on MAI by the end of 1998, but later decided to shift its efforts to the WTO forum. A leaked internal memo of the European Commission -- which acts on behalf of the EU in WTO trade negotiations -- dated two weeks after the MAI negotiation process was halted, reads: " ... even if a perfect result is not achieved in a first agreement, the main point is to get investment rules firmly implanted in the WTO," (Investment Watch, 2003).

Supporters of the draft global investment treaty argue that it will not only shore up foreign direct investment (FDI) into developing countries, but also open new employment opportunities in those countries and enable technology transfer from developed countries. An investment treaty will create a more predictable investment climate, as favored by investors.

The same treaty will even bring countries that are currently unattractive for FDI into investors' targets. Another argument is that FDI is playing an increasingly important role in sustainable development in developing countries.

How strong are these arguments?

Indeed, FDI plays an important role in Third World economies, particularly in industrial development and export growth. In 1990, FDI in developing countries amounted to US$240 billion. The amount, however, was only 25 percent to 30 percent of global FDI.

There is no strong evidence that the investment agreement will increase the FDI rate. The 53 African countries together receive only 2 percent of FDI injected into the Third World -- largely due to a tiny domestic market, poor infrastructure, lack of security and political instability. It is nothing to do with the lack of an investment agreement.

Even if a global agreement on investment were to boost FDI in developing countries, there is no real evidence that it would contribute to economic growth. It is the quality of investment that determines growth and development.

FDI flow has also changed in character. It is now associated with cross-border mergers and acquisitions; thus its positive impact on the domestic economy through technology transfer, employment generation and other effects has been diluted.

Many countries such as Japan, South Korea, Taiwan and China manage higher economic growth without liberalizing their investment regimes (Kavaljit Singh, Financial Times, July 7).

The claim that FDI plays an important role in sustaining development is acceptable to some extent, but the role should be put within a strong regulative framework that ensures the maximum benefit from FDI flows and minimizes its negative effects on countries.

Nowadays, developing countries are forced in one way or another, due to lax labor and environmental legislation, to protect foreign investment. Such instances may be found in free trade zones in which many countries deliberately lower their social and environmental standards just to secure a continuous inflow of FDI.

Things are certain to grow worse for developing countries, because the bottom line of MAI or its new proposed version virtually aims to deprive governments of their authority to regulate foreign investment. The initiative may have been on its way to success through WTO and its regulatory instruments.

The WTO disputes settlement mechanism, for instance, enables developed countries to put pressure on poor and developing countries, which they consider to have acted harmfully against their TNCs.

Instead of MAI, internationally binding rules on the conduct of TNCs are far more urgent, given the current global venture of capital and international business practice. Such rules are necessary to balance rights and excessive corporate power and their social and environmental obligations, wherever they operate.

A set of Codes of Conduct should be based on international treaties, guidelines and instruments, such as labor conventions of the International Labor Organization, the Universal Declaration of Human Rights, the Rio Declaration (from the 1992 Earth Summit in Rio de Janeiro) and the Copenhagen Declaration on Social Development.

The UN, as a multilateral institution, surely has a significant position and role in its formulation and enforcement. An effective global code of conduct for corporations will lead to the minimization of socially and environmentally harmful investment and the synchronization of short-term economic interest inherent in FDI and the principles of sustainable development.

Henry Heyneardhi, Researcher, The Business Watch Indonesia, Solo

Savio Wermasubun, Researcher, SAMADI Justice & Peace Institute, Solo