Trends in international investment policy: Caribbean responsesSunday, July 08, 2012
The following is a speech made by University of the West Indies Pro-Vice Chancellor Professor Alvin Wint at a seminar, "Towards a New Generation of Investment Policies", hosted by Jampro in collaboration with the United Nations Conference on Trade and Development (UNCTAD) at the Jampro business auditorium on Thursday
THE last several decades have seen perceptible shifts in the policy stance of national governments towards international investment.
In the 1950s and 1960s the general attitude towards international investment was welcoming, but with important reservations, as governments saw FDI, in particular, as one important element of a wider development strategy which focused on gaining access to technology and capital with respect to investments in extractive industries; or utilising foreign investment as part of strategies of import substitution industrialisation.
The reservations expressed by governments in relation to investments of this nature corresponded to the nature of the investments. Because investments in extractive industries typically involved extracting non-renewable resources that were locationally bound, governments had locational bargaining power and maintained concerns about properly pricing the nation's patrimony. Where foreign firms were allowed to invest to take advantage of protected national markets as part of ISI development strategies, the bargaining power of governments was also high as these protected markets provided high rates of return for investors, both foreign and domestic.
The welcome that was extended to foreign investors had, by the late 1960s and into the 1970s turned to suspicion and concern as it became increasingly apparent to governments that foreign firms were not making the contributions to development that had been anticipated on their entry into national markets.
These concerns led, in the extractive industries, to disputes between governments and MNCs. In 1966, the World Bank established the International Centre for the Settlement of Investment Disputes (ICSID). In the first three decades of ICSID's existence 30 per cent of the disputes registered with ICSID were in the extractive industries. The Caribbean played a leading role in early disputes registered with ICSID since three of the first five disputes filed with ICSID were from ALCOA, Kaiser and Reynolds. These companies disputed the unilateral imposition of a production levy by the Jamaican Government in 1974. The GOJ's action was prompted by the fact that the GOJ was gaining very little taxation revenue from the subsidiaries of North American Aluminium and Bauxite companies operating in Jamaica since they were able to engage in transfer pricing and other strategies that minimised their Jamaican profit levels. Indeed, through 1973, two of the companies operating had never paid one penny/cent of income tax.
It was also becoming apparent that the chief beneficiaries of ISI strategies were the companies (foreign and domestic) that were sheltered from international competition through the high tariff walls that were essential components of this strategy. In a study conducted in Indonesia in the early 1980s, but using data from the 1960s and 1970s, two of my colleagues, based upon the records of the Indonesian investment screening authority (BKPM), determined that the majority of foreign investments oriented to the Indonesian domestic market generated negative value-added for the country when an appropriate cost-benefit analysis was conducted.
But this negative value-added obtained whether one was dealing with foreign or local firms. On arriving in India 20 years ago as a part of a World Bank mission advocating trade and investment liberalisation it became clear how much Indian automobile (and by extension a range of other consumers) had suffered as a result of the combination of trade and investment protection.
By the 1980s, developing countries had begun a process of trade and investment liberalisation that led to changed attitudes towards FDI and a shift from a focus on investment screening to investment promotion. As countries brought their barriers to trade down, and as investments in extractive industries waned in importance, the locational advantages in the state-foreign investor bargain shifted from national governments to foreign investors. Against this background, governments adopted more liberal positions vis-à-vis FDI, alongside establishing promotional agencies charged with the mandate to court the footloose FDI that was considering sites for establishing primarily export-oriented FDI projects.
UNCTAD had begun a process of tracking changes in investment policy around the world. In UNCTAD's 2003 World Investment Report it noted that 95 per cent of the changes in investment policies between 1991 and 2002 were in the direction of greater investment liberality.
There is possibly no more significant indication of the shift in attitudes toward FDI from suspicion to embrace than in India. In the 20 years following upon Mamohan Singh's 1991 liberalisation efforts; and his agreement with the advice of the 1992 World Bank mission on investment policy liberalization in which I participated, India has changed perceptibly. FDI is now involved in many sectors of the Indian economy, but importantly, local investment has been transformed, as Indian firms have become integrated into the global economy, not only in IT, where India has played a starring role, but even in automotives where Indian companies now own iconic global brands and are providing innovative products for world markets. As is well known, for example, in 2008, India's Tata motors acquired the Jaguar and Land Rover brands from Ford Motor company for US$2.3b.
More recent changes in investment policy in developing countries reflect the fact that the choice facing governments is not simply one of investment protection versus investment liberality. Governments around the world are remembering that they have a critical and activist role to play in regulating firm behaviour in the interest of national welfare. It is against this background that UNCTAD proposes a new generation of investment policies that seek to align the behaviour of firms (foreign and domestic) with national development objectives. These policies and processes for aligning investment policy with national development policy are discussed in detail in WIR 2012.
Importantly, the need for this alignment has never been alien to the Caribbean region. I note four examples:
* The first comes from Jamaica's effort to attract investment in the extractive industry in the 1950s. The Jamaican Government was very concerned that there be social acceptance of bauxite mining, and was aware that the Jamaican mining environment was quite different from that in other much larger countries such as Australia, Brazil and Guinea. Accordingly, the Jamaican legislators, headed by Norman Manley, included in the 1947 bauxite mining regulations the stipulation that "mining firms should restore the land after mining and maintain mining land that they owned in a state of agricultural productivity". This regulation was important to Jamaica's development agenda, but it was not without cost and concern from prospective mining companies. When the GoJ was seeking to increase earnings from the industry in 1953, the representative from Reynolds Metals pointed out that "no country other than Jamaica required restoration of land after mining and the maintenance of unmined land in a state of agricultural productivity". But this regulation from GoJ was important and necessary to Jamaica's development agenda. One might say it constituted an example of the current new generation investment policies that align investment policy with national development and place a premium on sustainable development.
* A second Caribbean example comes from Trinidad & Tobago in the early 1990s when the country sought to attract new investment into the oil and gas sector, in particular natural gas. The GoT&T played an active role in the investment attraction process engaging in highly targeted investment promotion. But it also sought to integrate its investment promotion activities with a programme of national technological training in which it sought to develop T&T as the Caribbean's industrial and technology leader through a process of institutional development that was aligned with investment attraction. Investors with whom I discussed investment decisions in T&T in the early 1990s emphasized the importance of both the targeted attraction efforts (which dealt with market imperfections such as "Where is Trinidad?" and of the Government's complementary processes of the development of the country's technical capacity.
* Another example comes from Jamaica in the late 1990s. As many will recall the GoJ developed an industrial policy in 1996 which placed considerable importance on the development of the country's information technology capacity. In the late 1990s, the Jamaican Fair Trading Commission which was established in the mid- 1990s to strengthen the country's competition policy framework received a submission from a new Internet service provider seeking to interconnect with the network of Jamaica's monopoly telecommunications operator, Cable & Wireless. The FTC approached C&W to discuss the issue of interconnection. C&W pointed to its monopoly that had another 15 years to run (plus another potential 25 years thereafter) and indicated that it would allow no firm to connect to its network. In response to the notion that its monopoly extended only to voice telephony, it pointed out that its monopoly was comprehensive and even pointed to the prescience of its name, which was, after all, cable (and wireless). The FTC disagreed indicating that this position was in restraint of competition and cited the doctrine of "essential facility" which states that where a public utility has a facility that cannot be readily replicated, others should have ready access to this facility. The FTC Director was, by 1998, Minister of Commerce, Industry and Technology, Philip Paulwell who went on to engineer the negotiated termination of C&W's monopoly position using tactics that included moral suasion, international support in London and the US. In so doing, he was successful in creating alignment between investment policy and national development strategy in a manner that did not create the negative investor reactions that had resulted from the unilateral alignment effort of Michael Manley in 1974. Interestingly, Jamaica was not unusual in its shift from disputes with investors in extractive industries in the 1970s to disputes with investors in infrastructure industries in the 1990s. In 2003, 40 per cent of the cases pending at ICSID were in infrastructure industries versus 21 per cent in extractive industries, where in earlier years extractive industries had the majority of cases that went to ICSID.
* The final example is the Caribbean's understanding that there is an important regional element to investment policy to ensure that investment policy is aligned to the process of regional development espoused by the countries of the Caribbean region, and most recently reaffirmed by the GoJ in response to concerns about the level of support in Jamaica for a regional development position. Although all countries of the Caribbean region have created national IPAs, there is a recognition that from the perspective of many investors the Caribbean is viewed as a single economic space and the problems and successes of any of the countries of the region affect the investment prospects of all. In light of this the Caribbean has begun a process of functional cooperation in investment promotion and policy that corresponds to its functional cooperation in areas such as education (UWI, CXC), maritime and national security, disaster preparedness, international negotiations, and so forth. The former and current CEOs of JAMPRO have been important in the formation of the Caribbean Association of Investment Promotion Agencies (CAIPA). Further, last month the inaugural meeting of the CARICOM/CARIFORUM Regional Investment Promotion Steering Committee (RIPSC) was held in Guyana. This Committee, which I have been asked to chair, will oversee efforts to share best practices in investment promotion; coordinate investment policy reform and alignment to development strategy, and monitor key studies in areas such as investment incentive harmonisation and investment policy strategy to seek to ensure that the Caribbean is best positioned to take advantage of investment flows.