Unlike the 1990s, nowadays the costs and benefits of foreign investments are being evaluated in a much more balanced manner now, keeping in mind not only economic factors but also social, political, and strategic factors. It is increasingly becoming clear that the benefits of foreign investment have been fewer than anticipated while the costs have been much bigger.
BY KAVALJIT SINGH
Posted by Bulatlat
Vol. VII, No. 25, July 29-Aug. 4, 2007
In the last five decades, there have been dramatic swings in the policy pendulum governing foreign investments at various levels in response to changing global political context. In the 1960s and 70s, the dominant thinking was foreign investments should be restricted as it interferes in the domestic economic policy making besides posing a threat to national sovereignty. The 1980s and 90s witnessed major swings in the investment policy pendulum towards greater liberalization of the regulatory framework at the national level. The swing was more pronounced in developing countries, particularly in Asia, Latin America, and Central and Eastern Europe. Countries unilaterally (sometimes voluntarily) undertook liberalization measures such as lifting their controls on foreign ownership, removing performance requirements, and liberalizing their capital account. An increasing trend towards privatizing public sector companies in developing and transition countries added momentum to investment liberalization processes. Several countries also offered various guarantees and subsidies to foreign investors.
The extent of these swings in policy can be measured in several ways. For instance, expropriations had increased in the 1960s and early 1970s, but almost disappeared in the 1990s. According to UNCTAD, a total of 1,393 regulatory changes were introduced in national investment regimes during 1991-2001, out of which 1,315 (almost 95 per cent) were meant to create a favorable investment environment. In 2001 alone, as many as 208 regulatory changes were made by 71 countries, of which only 16 changes were less favorable for foreign investors.
The 1990s witnessed a surge in the number of bilateral investment treaties (BITs) as more and more countries started adopting liberalized investment policies. The highest number of BITs were negotiated and concluded during this decade. Regional initiatives on investment liberalization also emerged in the 1990s. In 1991, negotiations took place between the U.S., Canada, and Mexico to launch the North American Free Trade Agreement (NAFTA) in 1994. In many aspects, NAFTA was simply an extension to Mexico of the existing Canada-US Free Trade Agreement.
Is the Pendulum Swinging Back?
Despite the dominant trend towards greater liberalization of investment flows, nowadays certain kinds of investments have come under closer scrutiny by policy makers. In several countries (both developed and developing), there are moves to tighten existing investment rules or to enact new rules to regulate foreign investments and protect “strategic sectors” from foreign investors.
Unlike the 1990s, nowadays the costs and benefits of foreign investments are being evaluated in a much more balanced manner, keeping in mind not only economic factors but also social, political, and strategic factors. It is increasingly becoming clear that the benefits of foreign investment have been fewer than anticipated while the costs have been much bigger. In some host countries (such as Bolivia and Malaysia), there is a greater realization of costs involved with foreign investment. The initial euphoria associated with the benefits of foreign investments seems to be subsided. To a large extent, disappointment with certain kinds of foreign investment has put a big question mark on the benefits of investment liberalization.
The growing unease with foreign investments could be grasped from several recent developments, some of which are summarized below:
* Several Latin American countries (such as Bolivia, Ecuador, Argentina, Ecuador, and Venezuela) are renegotiating contracts with TNCs to bring economic equilibrium between the foreign company and the host country. In Bolivia, for instance, the government successfully renegotiated contracts with ten foreign energy companies (mostly from the region) in October 2006. Under the new contracts, majority ownership of gas fields has been transferred to the state and government’s energy tax revenues are expected to increase by four times. The renegotiation of contracts was the outcome of the nationalization policy announced by President, Mr. Evo Morales, on May 1, 2006, under which foreign companies were asked to sign new contracts giving the government majority control or leave the country. In March 2006, Ecuador passed a new law that gives the government 60 per cent tax on oil profit of foreign companies if the oil prices exceed certain benchmarks.
* Cross-border M&As deals have become the bone of contention in recent years. As discussed elsewhere, several important M&As deals have been blocked by policy makers in both the developing and the developed world. In many countries, attempts are being made to screen foreign investments from a security perspective.
* In 2006, India’s National Security Council suggested a new law, National Security Exception Act, which would empower the government “to suspend or prohibit any foreign acquisition, merger or takeover of an Indian company that is considered prejudicial to national interest.”
* Russia is considering new rules to protect its strategic resources, particularly oil and gas. Despite strong pressure from the EU (the main consumer of Russian energy resources), Russia has refused to ratify the Energy Charter Treaty which covers the key areas of trade, investment protection, environmental issues, and dispute resolution. Though Russia signed the charter in the early 1990s, it has refused to ratify it. Russia has refused to provide non-discriminating access to foreign companies to the country’s pipelines, primarily the gas transportation network controlled by state-owned gas company, Gazprom.
