News from the Investment Experts' Group: Improving APEC's Investment Climate - Meeting the Challenge of Doing Better
Related microeconomic issues impact the development of business. "Almost everything matters for competitiveness. The schools matter, the roads matter, the financial markets matter and customer sophistication matters," writes Michael Porter who is the Director of the Center for Competitiveness at Harvard University, in the Notes on Globalization and Strategy Newsletter which is published by the Anselmo Rubiralta Center for Globalization and Strategy.
In seeking to meet this challenge of improving the investment climate in APEC member economies, the Investment Experts Group (IEG) has expanded its work program in three important respects. First, there is a need to identify the barriers to both domestic and foreign investment, both at-the-border and behind-the-border, and what is at stake if economies maintain high barriers. Second, IEG is seeking to assist developing member economies in making more optimal policy choices when considering the process of reform of their domestic investment climates. Third, there is a continuing need to identify and meet capacity building requirements in key areas particularly as it relates to investment agreement making.
"True competitiveness, then, is measured by productivity. Productivity allows a nation to support high wages, attractive returns to capital, a strong currency - and with them, a high standard of living. What matters most are not exports per se or whether firms are domestic or foreign-owned, but the nature and productivity of the business activities taking place in a particular country," Porter further explains.
Considerable work has already been undertaken on quantifying the visible barriers at the border such as prior authorization requirements, restricted sectors, restrictions of transfer of the capital related to foreign direct investment (FDI), local content requirements, etc. What is missing is knowledge of the behind-the-border barriers such as inadequate property rights, inflexible labor markets, poorly designed taxes, barriers to competition and poor governance and regulation. It is becoming obvious that these factors play an important role in attracting FDI which is a major driver for economic growth as it brings technology and management best practice to developing economies.
According to Dr. Andrew Stoeckel, Executive Director of the Centre for International Economics, Australia, who reported the initial findings of an investment study at the September 2006 IEG meeting, behind-the-border barriers not only restrict the level of and benefits from FDI, but also restrain domestic investment, which is 14 times as large as FDI in the APEC region. Therefore, behind-the-border barriers to foreign and domestic investment place a far greater restraint on growth prospects and poverty eradication than border barriers.
Dr. Stoeckel emphasized the enormous impact of these barriers by quoting one estimate which shows that lowering FDI barriers to that of the most open APEC economies could increase FDI across APEC in the order of 26 per cent, boost GDP by 2.6 per cent and reduce poverty by 20 per cent. He continued, "Another interesting finding was that there is considerable potential to boost domestic investment in lower-income APEC economies by removing behind-the-border barriers as lower-income economies are net exporters of savings seeking higher returns in developed economies".
IEG is now moving on to the second stage of this study. This involves constructing a picture of the behind-the-border barriers to investment across APEC economies and undertaking a stock-take of the institutional mechanisms and capacity currently available across APEC that can nurture support for domestic reform of investment-related policies. The methodology will include drawing thematic key messages from five case studies of reform of behind-the-border barriers in certain key areas where reform had been successful. The study report will buttress the case for APEC's commitment to further liberalisation of investment and provide suggestions as to priority areas that economies could address in removing impediments to investment. The study will also dovetail well into the broader structural reform agenda being implemented by the Economic Committee.
On the issue of guiding developing member economies in making coherent policy choices when undertaking domestic investment reform, IEG is studying the OECD Policy Framework for Investment (PFI). Rainer Geiger, Deputy-Director, OECD Directorate for Financial and Enterprise Affairs, explained at the APEC/OECD Seminar on the PFI in September 2006 that the PFI is a "tool" which provides guidance and a checklist of important policy issues to governments interested in creating a business environment that is attractive to all investors including domestic investors. The PFI presently covers ten policy domains that affect investment - trade policy, tax policy, investment policy, investment promotion and facilitation, corporate and public governance, human resource development, infrastructure and financial sector development, competition and responsible business conduct. The PFI aims to advance the implementation of the UN Monterrey Consensus, which emphasized the vital role of private investment in effective development strategies in achieving the UN Nations Millennium Development Goals. It was developed over a two-year period by 60 OECD and non-OECD members including 15 APEC member economies and was adopted by OECD Ministers in May 2006.
The level of information sharing on the PFI has picked up in the past year with two events directed at deepening our understanding of its potential. First, IEG organised the APEC/OECD Seminar "Working Together on Investment for Development" in Busan, Korea in November 2005. A follow-up seminar was jointly organized by APEC and OECD in Viet Nam in September 2006. Business support for further study of the PFI has increased in 2006. Mr. Ken Waller, the APEC Business Advisory Council (ABAC) representative who attended the September 2006 IEG meeting, stated that ABAC has put forward a recommendation to APEC Economic Leaders to continue to work with IEG and OECD to promote the use of the PFI. ABAC also observed that given the message of investment liberalization is not well established in the WTO process, the PFI is acting as a major driver for that message.
As a next step IEG is planning to organize a high-level public-private dialogue on the PFI in Melbourne, Australia in March 2007 to exchange views between high level policymakers, international organisations and donor banks and business people on how this new tool could help to improve the investment climate in the APEC region. Central to the discussion in Melbourne will be a dialogue on how individual economy PFI assessments will be undertaken based on some initial methodologies developed with respect to a number of APEC developing member economies. There will also be some exploration of the potential for the PFI as a tool for regional "peer learning" and "peer dialogue".
Enhanced dialogue and close collaboration with the business community is essential to improving the environment for investment. Mr. Waller stated that mutual participation of the IEG Convenor and ABAC representatives in their respective meetings has greatly enhanced interaction between IEG and ABAC in the past two years. For example, the IEG has considered carefully the paper Barriers and Impediments to Foreign Direct Investment (FDI): Checklist and Recommended Policy Response developed by ABAC as an important input from business communities. As a next step, the IEG will conduct a comprehensive survey to identify high priority investment barriers building on various surveys including those of the World Bank, the World Economic Forum, International Institute for Management Development (IMD) and organize a symposium back-to-back with the 2nd ABAC meeting to be held in Tokyo in 2007. The survey will seek to identify the key priority policy issues with the participation of the business community.
IEG also recognises a need to undertake new work to promote greater consistency in the investment provisions in regional Free Trade Agreements (FTA). Central to this at the IEG level is a New Zealand sponsored study of the Core Elements in APEC Investment Agreements to be completed during 2007. Important work already conducted by IEG during 2006 that will feed directly into the analysis of the core elements includes a recent workshop in Xiamen, China on non-discrimination in investment agreements and two major studies prepared for APEC on investor-state dispute settlement practice and its influences on treaty-making.
The increasing number of investment agreements, in particular with more complexity and regulatory difficulties in their proper implementation, is considered as one of factors behind the sharp increase in investment disputes. For example, at the end of 1994, only three investment treaty-related disputes had been brought to the World Bank Group's International Centre for the Settlement of Investment Disputes (ICSID), yet by the end of 2005 there were 102 pending arbitration proceedings. Additionally, more than 90 treaty-based arbitrations not involving ICSID had been instituted by the end of 2005, compared to only two at the end of 1994. The rise in investment disputes has several negative impacts including the high cost of arbitration proceedings and the awards rendered, in particular for developing economies. The IEG and UNCTAD jointly organized a seminar in Mexico in October 2006 to develop human resources and institutional capacity particularly in developing economies in the management of Investor-State dispute settlement cases. IEG is also planning to organize a follow-up seminar in Australia in 2007.
In conclusion, Leaders and Ministers have set some ambitious objectives for APEC in relation to improving the investment climate in the region. The expanded work program of IEG is helping to meet that challenge.
Written by Roy Nixon, Convenor of the APEC Investment Experts' Group and Senior Adviser in the Australian Treasury.