Multilaterial Agreement on Investment (MAI)

The MAI - insult plus injury to developing nations

By Martin Khor,
Director of the Third World Network
4 March 1998

In February 1998, a meeting was organised in Paris to continue negotiations for a Multilateral Agreement on Investment. Although only the rich countries of the OECD were at the discussions, the treaty is also meant for developing countries. The MAI would however have serious and even devastating effects on the economies and societies of the South. Martin Khor analyses the MAI's provisions in the first of two articles.

An international treaty giving foreign investors unprecedented rights to enter countries in almost all sectors, freely bring funds in and out of these countries, and to be treated better than local companies, is being negotiated by governments of the rich countries behind closed doors, largely unknown to the public.

Scheduled to be concluded in 1998, the Multilateral Agreement on Investment (MAI) is giving rise to protests from citizen groups around the world, and to grave concerns from developing countries.

The MAI is being drawn up by the 29 rich nations that form the powerful Organisation for Economic Cooperation and Development (OECD). But it is also (indeed primarily) meant for the other countries to sign on to.

In February 1998 the OECD held another round of talks, which concluded indecisively. But the countries are still trying to finalise the treaty before the year's end. They want to finish the job before increasing public awareness puts the brakes on it.

Developing countries are not even invited to the negotiations, even though they are expected to also sign on, once the 29 OECD nations have finalised the treaty.

'This is why we are calling it a multilateral agreement, and not an OECD agreement, as we are negotiating a treaty for the world,' an OECD official explained at a seminar in Hong Kong in 1996 for Asian governments in an attempt to attract them to join the MAI.

The response was cool. Many Asian delegates expressed outrage at the audacity of the rich nations' attempt to draft a global treaty of such great significance, without first consulting the majority of countries or inviting them to participate in the negotiations.

They felt further insulted when the OECD officials explained, without batting an eyelid, that developing countries had to be kept out of the talks as the aim was to have a treaty with 'high standards', and taking on board the concerns of the Third World would 'dilute' these standards.

In 1997, a Canadian group, the Council of Canadians, got hold of the highly confidential draft of the MAI text and placed it on the Internet. The treaty's features and its effects are so serious and shocking that the non-governmental organisations launched a global anti-MAI campaign.

The MAI's main objectives are to attain high standards of 'liberalisation' for foreign investments, to give maximum protection to the property of foreign investors, and to set up a strong enforcement system to ensure that these first two goals are met.

Under the liberalisation sections, the MAI would give foreign investors the right to enter and establish enterprises with 100% equity ownership in all member countries.

This is particularly significant since a very broad definition is given to the term 'investors' (to include any person or legal entity, whether or not for profit, whether private or government-owned, including a corporation, sole proprietorship, trust, and association), and to 'investments' (every kind of asset, including an enterprise, shares and equity, bonds and debts, intellectual property rights, contracts and concessions).

Thus, governments would no longer have the authority to screen the entry of foreign investors (or even of non-commercial societies), or to place limits on the degree of their participation in the national economy and society.

Foreign investors must also be given 'national treatment', defined as treatment no less favourable than that accorded to local investors. In other words, foreigners and their firms can be treated better than locals, but not less favourably.

This implies that policies that favour local businesses, farmers or even consumers (for example in house and land purchases and ownership) would be prohibited. Small and medium-sized local firms and farms would not be able to enjoy 'affirmative action' policies as these would be considered illegitimate acts of discrimination against foreign companies.

Key foreign personnel of foreign firms must be given the right of entry and work authorisation (denial will be forbidden even on the ground that local professionals require employment), and their numbers cannot be restricted.

Also, governments are prohibited from imposing 'performance requirements' on any foreign or local investor. The prohibition list includes requirements on firms to use locally made goods and services, to export a percentage of goods and services, to transfer technology, to relate the firm's value of imports or local sales to its export value; to establish a joint venture or achieve a minimum level of local equity participation, to hire local personnel, and to achieve a level of production, sales or employment in the country.

Many items on this list are seen by governments as social obligations that foreign corporations should meet as a contribution to the host country's development goals. The MAI would ban governments from requiring any corporation (local as well as foreign) to meet these obligations.

Governments must also give 'national treatment' to foreign investors in all kinds of privatisation schemes. Preference shown to local firms, or reservation of shares for local enterprises or citizens, during privatisation exercises would be illegal. Special share arrangements (for example, retention of golden shares by a state in order to maintain policy control of the privatised entity) may also be banned.

Under the MAI's 'investment protection' section, states cannot expropriate or nationalise a foreign investor's assets (or take any measures having equivalent effect) except for a public purpose and accompanied by prompt and adequate compensation.

Since the definitions of expropriation and equivalent measures cover broad areas, compensation claims can be made against a state not only for clear instances (such as acquisition of land or factory) but also by an investor who feels he has been unfairly taxed, that his intellectual property rights are not adequately protected, or that his rights to resources or business opportunities have not been respected.

In another clause on 'transfers', the MAI states that all payments relating to an investment may be freely transferred into and out of the host country without delay. This obliges host countries to have the most liberal policy towards capital inflows (including the entry of funds for stock-market speculation) and outflows (including profits, proceeds for sale of shares or assets).

With this clause, countries would be prevented from having measures which they believe are needed to prevent the kind of hot-money flows that have recently caused financial havoc to the South-East Asian countries, and led eventually to balance-of-payments difficulties.

To enforce the investors' rights spelled out above, the MAI will have a 'dispute settlement' system in which a state can take another state to an international arbitration court for not meeting its obligations, and an investor can likewise sue a state.

If found guilty, the offending state will have to pay financial compensation for the damage, or undertake restitution in kind, and other forms of relief.

State-to-state disputes are also heard in other fora, such as the World Trade Organisation. The MAI is, however, unique in that an investor can also sue a state, making it the first multilateral treaty providing such a privilege to a private investor.

The only precedent is in one narrow provision of the North American Free Trade Agreement (NAFTA). Under this, in April 1997, a US company, Ethyl Corporation, sued the Canadian government for banning the import of a gasoline additive MMT, which is a dangerous toxin.

Ethyl claims the ban violates NAFTA provisions and is seeking restitution of US$251 million to cover losses from the 'expropriation' of its MMT production plant and its good reputation. Ethyl claims the ban will reduce the value of its plant, hurt future sales and harm its reputation.

The Ethyl case is an example of suits governments could face under the MAI. Such court cases would make governments fearful of having any policy that displeases the corporations. Even the fear of the threat of a suit could put brakes on health, safety, environmental and social policies.

Initially, MAI members can ask that certain sectors and activities be exempted from having to follow certain obligations. However, these exemptions are to be only temporary, must be stated in the country's reservations list, and must be phased out.

All OECD members are expected to be initial members of the MAI, but it will also be open to any other countries.

The OECD is already persuading developing countries to join the MAI and some could be subjected to pressures. The implications will be serious for those who join.

Most developing countries welcome foreign investment. But many countries also have sophisticated regulatory frameworks that govern the entry and conditions of establishment and operations of foreign firms.

Restrictions are placed on foreign investments in certain sectors or in some ways (for example, requiring that a percentage of equity be reserved for locals). These are aimed at attaining a minimum level of participation of local people in the economy; at protecting and strengthening local firms and small farmers who would otherwise not be able to face the onslaught of giant multinationals; and at protecting the balance of payments from too much financial outflows due to profit repatriation and high import bills of foreign companies.

The proposed MAI would prevent developing countries from adopting the policy instruments and options they require to attain economic development.

As the MAI will have such an important effect on so many aspects of our social and economic lives, and on the environment, there must be an open debate on it in all countries.

To facilitate this debate, governments should provide detailed information on the MAI to Parliaments, the media and the public. For we can afford to ignore what these MAI negotiators are secretly rushing to conclude only at our own peril. - Third World Network Features