A New Threat To The South

One of the greatest threats ever to the economic development and national sovereignty of countries of the South is looming large on the horizon. This is a Multilateral Investment Agreement (MIA) which the European Union (EU) hopes the World Trade Organisation (WTO) will approve in principle at its first ministerial meeting in Singapore in December 1996. The MIA, it is reported, has the support of the United States, Canada, Japan and some other Northern states.

The MIA

The proposed MIA seeks to give rights to foreign companies to establish themselves with 100 percent equity in all sectors (except security) in any WTO country. At the same time it requires the host country to give `national treatment' to foreign companies and to adjust and even abrogate laws and policies which favour local enterprises.

In more specific terms, the MIA, encompasses two essential features. One, it emphasises free access for foreign investors meaning by which that there should be no attempt to exclude or restrict them in any way. They should not, for instance, be prohibited from owning real estate. Neither should they be asked to set aside equity for local entrepreneurs or expected to enter into joint ventures with local partners. Two, foreign investors should be accorded the same treatment as local investors in every sense, including, equal opportunities to receive aids and subsidies from the government. In this regard there should be no direct or indirect protection of a particular local industry or enterprise.

Reasons

EU leaders and their backers have argued that the MIA will stimulate greater foreign direct investments (FDI) in the South and bring about its rapid development. While no one disputes the importance of FDI, it is doubtful that merely by providing unfettered access for foreign investors, capital and technology will pour into a country. Certain countries in Sub-Saharan Africa such as Ghana and Zambia have liberalised their economies and opened up their markets much more than most of Northeast and Southeast Asia (East Asia) and yet they have not been able to attract foreign investments to the same degree. To illustrate this point,it is worth noting that in 1995, China alone received 38 billion of the 100 billion FDI that went to the entire developing world. (And China incidentally is not a member of the WTO). Foreign investments, it is obvious, will gravitate to whichever place on earth that can assure investors of maximum returns. Lucrative markets will continue to attract foreign investors while stagnating economies which one would have thought deserve much more the injection of capital, both domestic and foreign, will have little choice but to languish. The proposed MIA will not change this.

The real reasons why certain countries in the North are pushing for the MIA are something else. Sensing that Asia especially East Asia is emerging as the global centre of growth, Europe in particular has decided that it must try its best to get a huge slice of the cake. Since many of the buoyant Asian economies have, over the years, adopted various measures to protect their own industries and enterprises, Northern countries feel that they should be persuaded to remove all restrictions to enable them (the North) to reap the full benefits of investing in the region. Besides, the overwhelming presence of the North in these Asian economies will undoubtedly hamper the endogenous development of skills, knowledge systems, entrepreneurial networks and the like which in the long run could well pose a challenge to the global dominance of the Northern centres of power. In other words, the MIA, it is not inconceivable,is a cleverly crafted devise to cripple potential economic competitors from Asia and elsewhere.

Likely Consequences

There is no need to emphasise that the retardation of the economic development of East Asia and the South in general is one of the most likely consequences of the proposed MIA. Its adverse impact may make itself felt in at least five areas within the economy. One, East Asian economies will no longer be able to pursue their present selective approach to foreign investments while strengthening their own domestic industries and enterprises in certain critical areas through subsidies and tariffs. It is this selective approach that had helped countries such as South Korea and Taiwan to develop. Two, related to this is the danger of unregulated, uncontrolled flow of foreign investments from economically stronger countries in the North swamping say certain important sectors of the Malaysian (or some other) economy which are just beginning to show some promise such as banking and shipping. Local service industries cannot be expected at this stage to compete against their Northern counterparts with their powerful capital base and market reach. Three, if the MIA comes into force, it will also become much more difficult for a Southern government to insist upon technology transfers to local enterprises since foreign investors will be under no obligation to fulfil such responsibilities. Four, what is worse, the MIA will hinder research and development (R&D) within the South itself since the impetus for industry related science and technology will have to come from local enterprises that need to utilise the fruits of R&D for their growth and expansion. If a Southern economy is dominated by foreign industries with scientific and technological roots in some Northern capital, how can one expect R&D to flourish within the country itself? Five, the MIA will also be a major obstacle to efforts by a Southern government to rectify domestic economic problems confronting it such as a balance of payments deficit. It will not be easy to reduce imports and increase exports in a situation where local firms and services have been totally emasculated by foreign enterprises.

The adverse consequences of the MIA however go beyond economics. A Southern country which may have inherited regional or ethnic disparities from the colonial period may want to rectify these imbalances through a conscious restructuring programme that provides special incentives and opportunities to deprived areas or disadvantaged communities. The MIA will not allow this. Similarly, the MIA will force a Southern government to justify why it is opposed, for instance, to a certain foreign product in the entertainment industry entering and establishing itself in the country. Local moral values and ethical standards will have to be subordinated to the MIA's obsession with economic gain.

If we reflected upon the economic, social and ethical ramifications of the MIA, they reveal what is perhaps its most salient feature. It challenges the right of a nation to determine its own economic, social and ethical development. The MIA, to put it differently, is utterly contemptuous of national sovereignty and political independence. For countries of the South, many of whom had struggled long decades to free themselves from the tyrannical yoke of colonial rule, the MIA is an affront to their dignity.

Binding

It is an affront which we cannot afford to ignore. If the EU sponsored MIA is accepted by the WTO, it will become legally binding upon all WTO member-states. This means that a country that fails to abide by the MIA can be hauled up before a WTO panel. If it is found guilty of violating what would have become a WTO treaty, it will be asked to change its domestic laws, policies or practices to accommodate the MIA. Failure to do so could result in the imposition of certain penalties or sanctions upon the erring state. The sanctions would be within that same sector or sub-sector of the economy where the law had been violated in the first instance. For example, if the violation had taken place in the services sector then the sanction would be in the same sector; if, on the other hand, the violation was specific to the banking sub-sector then the sanction would be in the same sub-sector. If it proves ineffective, the state that has filed the complaint against the erring party can then seek `cross-sectoral retaliation'. Cross-sectoral retaliation has very serious implications. According to a document produced by the United Nations Conference on Trade and Development (UNCTAD), cross-sectoral retaliation means that sanctions can be applied in another unrelated sector of the economy where the impact upon the erring state will be even more severe. As the UNCTAD paper puts it graphically, "If you don't grant my bank permission to set up or be given national rights, I will restrict or have countervailing duties on imports of your rubber or electronic products to my country". Cross-sectoral retaliation "is what gives WTO its clout, as this can be used effectively to discipline the weaker countries".

Standing Up

Given the dangerous threat of the MIA, it is encouraging that countries in the South are beginning to stand up. Malaysia was one of the first to realise its danger. Indonesia, India and Uganda have also at different international fora spoken out against the MIA. Ghana and Zambia have expressed their reservations. A number of other countries are unhappy about this blatant attempt by powerful states in the North to use the WTO to further their own narrow interests.

Citizens' groups in the South are also articulating their opposition to the MIA. In this connection, the Third World Network (TWN) has done a superb job in alerting both citizens' groups and governments in the South to the devious manoeuvres of the powerful in the North. It has appealed to the governments in the South to insist that the Singapore meeting of the WTO sticks to its original agenda of reviewing the implementation of the Marrakesh Treaty which created the WTO. Foreign investments per se have no place in the WTO's mandate.

If the nations and peoples of the South yield to the powerful in the North on this issue of the MIA, they would have surrendered their independence and sovereignty to forces which will continue to perpetuate their dominance over them ad infinitum. It will then be a matter of time before the re-colonisation of the South becomes a total reality.

Chandra Muzaffar
21 October, 1996