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FINANCE: Investment Curbs Seen Stifling World Economy

Abid Aslam

WASHINGTON, Jun 26 2008 (IPS) - The United States and other beneficiaries of foreign investment are seeking to restrict it, a leading U.S. think tank says in a report warning that this "protectionist drift" could roil capital markets and stifle global economic growth for years to come.

Numerous countries have approved or are seriously considering laws to restrict new foreign investment or subject it to significantly more government scrutiny and regulation, says the Council on Foreign Relations.

Among these are some 11 – including the United States, Russia, Canada, China, and Germany – that, together, receive 40 percent of the world's foreign direct investment (FDI).

In a classical FDI deal, an investor from one country acquires a lasting interest – a physical investment in a factory, say – in an enterprise in another country. The investment must be large enough to afford the investor control over the foreign entity.

Such investment has proved a stronger engine of global economic development than has trade, say authors David Marchick and Matthew Slaughter.

"Investment liberalisation has been the strongest driver of growth worldwide," they say.

Marchick is global head of regulatory affairs at Carlyle Group, a top private equity firm. Slaughter, a senior fellow at the council, has served on President George W. Bush's council of economic advisers.

"Looking ahead, an even stronger protectionist drift…could exacerbate the ongoing turmoil in global capital markets, with widespread consequences for the real economy in many countries," they say.

Restrictions on foreign investment would result in considerable costs to the global economic system, reducing benefits to investor, or "source", and recipient, or "host" countries alike.

"The United States offers some of the clearest evidence on the host-country benefits of FDI inflows," according to the report, "Global FDI Policy".

"Beyond employing millions of Americans, the U.S. operations of foreign companies make American workers and the overall economy more productive through investment in physical capital, investment in R&D [research and development], and trade," it adds.

The document says outbound investments benefit source countries because "these outflows enhance the competitiveness of their multinational parent companies by allowing them to better serve foreign markets."

Marchick and Slaughter urge governments to curb their appetite for restrictions on foreign investment. Government review of foreign investments should be governed by four principles, they say.

First, any investment-review law should be limited to national security considerations and should not be tainted by economic motivations.

Second, the review process should be quick and predictable so as not to disrupt potential investments.

Third, the confidentiality of business transactions should be carefully safeguarded.

Fourth, countries should avoid targeting specific sectors – telecommunications, say, or energy – for comprehensive reviews of every proposed FDI deal. Already, investment reviews once limited to defence sectors have spread to energy, ports, telecommunications, and even gambling.

The authors further recommend that finance ministers from key countries involved in international investment meet annually to discuss and refine these principles, and that the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) play a more active role in encouraging countries to adopt the resulting "best practices".

Marchick and Slaughter trace their "protectionist drift" back to 2006. That was when it emerged the Bush administration had approved the acquisition of British port operator P&O by Dubai Ports World, which is owned by the government of the Arab emirate. The deal would have left the Dubai firm operating six large U.S. ports.

Many in Congress, including top lawmakers from Bush's Republican Party, vowed to block the deal, which they said would compromise national sovereignty and security. Some went so far as to suggest that terrorists would gain a toehold on the U.S. shoreline were the ports allowed to pass into Arab hands. Political wrangling ended when Dubai Ports announced that it would sell the six ports to a U.S. entity.

U.S., Middle Eastern, and other commentators accused the politicians of abusing national security and pandering to xenophobia while obscuring the fact that U.S. authorities would have retained jurisdiction over national security and customs enforcement. Some speculated that the politicians – and the local political, business, and union bosses who backed them – were really out to protect patronage politics, not national sovereignty or security.

General John Abizaid, then commander of U.S. forces in the Middle East, spoke out against those who opposed the deal, saying it "really comes down to Arab- and Muslim-bashing that was totally unnecessary."

Marchick and Slaughter take the politicians' national security arguments at face value, adding that a number of other countries also have scrutinised or squashed deals on similar grounds.

The United States and Europe remain highly suspicious of investment from developing countries, China, and Arab states because many of the biggest investors in these countries are government-owned entities – most prominently, so-called sovereign wealth funds.

The authors reject Western fears about the investment pools, noting that sovereign wealth funds "have existed for more than 50 years and have been responsible investors."