Spotlight G20: A Good Place to Do Business?

Aldo Caliari, guest blogger

Part of the Triple Crisis Spotlight G-20 series.

At the G20 Summit Leaders may not have been able to agree on a lot of things. In fact, the European crisis was, like at the Cannes Summit last year, an urgent fire to put out. Its smoke helped cover the rest of the critical issues on which the world is still anxiously awaiting for this self-appointed committee to reshape the global financial and monetary system after the most severe financial crisis since the 1930s and to prove its worth.

But on other areas creeping movement is noticeable and worrisome. One of them is the approach to investment rules and the balance between attracting foreign investment and the need to preserve host countries’ policy space to regulate it appropriately so it serves development.

One instance is the report on “investment protectionism” that the OECD and UNCTAD prepare every six months, as mandated by the G20. In principle, this is a factual report that simply describes measures taken by countries to restrict foreign investment. Measures taken for a variety of purposes and that are in many cases well-justified, are lumped together under this same denomination. UNCTAD, one of the two organizations developing such report, has recognized the lack of clarity inherent to the concept of “investment protectionism” stating that “The motivations for FDI restrictions are manifold and include, for instance, sovereignty or national security concerns, strategic considerations, socio-cultural reasons, prudential policies in financial industries, competition policy, infant industry protection or reciprocity policies. In each case, countries may have very different perceptions of whether and under what conditions such reasons are legitimate.”

A mere look at what this period’s report, the “Seventh Report on G20 Investment Measures,” calls “protectionism” sheds light on the diversity and justifications of the covered restrictions. The report includes restrictions in matters of national defense (Italy), imposing a financial transactions tax (FTT) (Brazil), requiring government approval of brownfield Foreign Direct Investment in pharmaceutical sectors (rather than automatically granting it), restricting foreign ownership of radio broadcasting (Russia), Argentina’s expropriation of assets in a company exploiting strategic natural resources, and an agreement among the BRICS to provide local currency loans to the business community of other treaty partners.

Yet, the G20 Leaders’ implication when they said at Los Cabos, “We are deeply concerned about rising instances of protectionism around the world,” is that all those measures are to be equally rejected. The Leaders also restated their standstill commitment with regard to measures affecting trade and investment, now extended until 2014.

One might shrug off these concerns. After all, the standstill has been in place since the first G20 meeting, and countries continue to undertake the restrictions they see fit. This is one area where the innocuous nature of the informal and non-binding nature of the G20 helps it do no harm.

The concerns should not be shrugged off too quickly. This year saw the first meeting of G20 trade ministers. Decisions taken on G20 Summits have a projection in multilateral institutions where the G20 command enough power to sway decisions, foreclose important debates or determine the outcomes of others.

This is not lost on the business community. The Business 20 (B20) recommended, in advance of the G20 Los Cabos meeting, that the G20 give G20 trade ministerial meetings (working with the B20) the mandate to review the reports on investment protectionism.  Hence, these meetings of the B20 and G20 trade ministers would become a sort of “peer review” mechanism that will “more effectively lead to a rollback of such measures.”

In a recently issued “scorecard” for the G20, the International Chamber of Commerce makes no secret of its long-term goal of “a Multilateral Framework for Investment reflecting all interests (host and home countries), developing a non-binding International Model Investment Treaty as an interim step.”

The G20 Los Cabos Summit reviewed reports on the exercise started within the G20 Development Working Group in Seoul regarding the work to “review and … develop key quantifiable economic and financial indicators for measuring and maximizing economic value-added and job creation arising from private sector investment in value chains.” This was definitely a promising task. Production in global supply chains was a rapid conduit for financial difficulties across the world during the last financial crisis.

The exploration could have helped understand why so many developing countries in a global-value-chain dynamic tend to get locked into the least profitable segments of the chain. The environmental and social costs of value chains could have also been addressed, as well as a comparison with investments outside value chains, oriented to local or national markets. The resultant study that the G20 endorsed is very disappointing and seems tailored to pander to only the large transnational corporations that dominate such value chains.

Firstly, several international organizations – World Bank and OECD to name a couple — have methodologies for reviewing and assessing investment and policy environments. The study misses the opportunity to take a critical look at those. Among external critiques that have, over the years, exposed flaws in those methodologies, the rankings have been criticized for skewing government incentives away from the needs of the majority of poor, most of whom are women engaged in informal, micro and rural enterprises.

Secondly, the study proposes a set of “policy instruments for targeted or sector-specific investment attraction and negotiation” which are all skewed towards instruments of the “incentive” type. The study overlooks a large range of instruments of regulatory nature, particularly those that would balance rights conferred upon investors with obligations, or performance requirements and measures to ensure creation of backwards and forward linkages. This is exactly the type of measures that large TNCs would reject.

Finally, the emerging set of indicators is very inadequate for the purported objective of measuring the “economic value added, job creation and sustainable development impact” of the investment. Indicators deal with measuring how much the investment in question adds to (without indicators to measure how much investment might detract from) job creation, capital formation and so on. In that way, the calculation will tend to overestimate the positive impact of foreign investors compared to other sources of finance.

The growing closeness of the G20 and the B20 –which, by the way, celebrated their meetings in Los Cabos back-to-back — represents an immense power grab for this portion of the private sector represented in the G20, giving them an unprecedented degree of access to decision-making. Efforts to include countervailing views from non-governmental actors –communities, workers, small and medium-sized enterprises—are urgently needed.

Aldo Caliari is Director of the Rethinking Bretton Woods Project at the Center of Concern.

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