A Breather For All

Since 1995, when it became clear that the Uruguay Round was going to end successfully, the Organisation for Economic Cooperation and Development (OECD) has been working on the MAI. The broad objectives of the agreement, which will have the force of a treaty, are a commitment by the signatories to extend equal treatment to foreign and domestic investors and to treat all countries as equal. These correspond, on the trade side, exactly to national treatment and MFN (most favoured nation) status. The underlying principle is to open up international flows of investment by removing discriminatory local clauses and to eliminate the threat of expropriation. In other words, what was done for trade since 1950 via the successive trade rounds, is now being sought for investment as well in a much a shorter time-frame.

 

This haste is an important reason why the OECD has found it hard to achieve completion. While the idea may be good in theory and in the long run, in practice in the short run it has the potential to expose domestic interests to foreign competition before they are fully ready for it. Whence the many convincing red herrings like threats to culture, environment and development (as opposed to mere growth). In reality, the EU and the US are both trying to hide behind High Principle. The initial euphoria after the Uruguay Rounds successful completion having evaporated, everyone is having second thoughts, not about the idea but the speed of implementation.

For India this hiatus must come as a welcome break during which it can review how it wishes to approach the issue. So far the Indian government has opposed the MAI in much the same way it had opposed the Uruguay Round between 1984-88 we dont need it and for the same reasons abridgment of sovereignty. The inability to direct foreign investment into areas that the government regards as being compatible with the needs of development is seen as a major handicap. Implicit in this is the assumption that some types of investment are superior to others and that only the government knows what is best. While the former is doubtless true, the latter is not.

For instance, India stands to gain a great deal more by opening up foreign investment in labour-intensive industries currently reserved for small industry by way of both jobs creation and exports. For conclusive proof, look at China. Instead, the government has always opted for the opposite encouraging investment in heavy industry which have a low job-creating potential and zero exports. This mindset persists even now, witness the election manifestos of all political parties. There is also the matter of helping and protecting Indians firms which invest abroad. Surely, a regime which encourages and protects foreign investment generally must be useful to Indian firms as well.