WORLD TRADE
ORGANIZATIONWT/WGTI/W/148
7 October 2002
(02-5396)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 2 October 2002, has been received from the Permanent
Mission of India.
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DEVELOPMENT PROVISIONS1
1. Development is a complex process. There is no single formula that can fit into every
economic situation in such  a manner that it inevitably leads to growth.  Developing countries,
therefore, need policy space so that they can de termine for themselves how the process of economic
development can be speeded up and the welfare of their citizens enhanced.  This also includes the
policy space to determine the manner in which investment shall be regulated and channelled.  Any
multilateral discipline that seeks to limit this policy space, by its very definition, would reduce the
policy options available to developing countries to use foreign investment for promoting
development.
2. The basic assumption underlying the proposal for multilateral disciplines on  investment is
that the principle of free trade, which permeates WTO rules in respect of goods and services, wouldapply equally to movement of capital. If conditions of a perfect market prevail, then freedom of
international capital movement could possibly lead to benefits both for home and host countries and
for investors.  This is not a realistic situation. In a paper
2, Barry Eichengreen of the University of
California, Berkeley states that:
"efficient markets paradigm is fundamentally misleading when applied to capital
flows. Limits on capital movements are a distortion.  It is an implication of the theory
of the second best that removing one dist ortion need not be welfare enhancing when
other distortions are present. There are any number of constellations of distortions,
especially in developing countries for which this is plausibly the case.  If the capital
account is liberalized while import-competing industries are still protected, capitalmay flow into sectors in which the country has a comparative disadvantage, with
immiserizing effects. If a downwardly-inflexible real wage causes too many resources
                                                     
1 Members are in the process of learning in the Working Group on the Relationship between Trade and
Investment in accordance with the mandate outlined in paragraphs 20-22 of the Doha Ministerial Declaration
read in conjunction with the Chairman’s statement at th e Ministerial Conference.  The paper is a contribution to
the learning process without prejudice to India’s position on the need to establish any multilateral framework oninvestment within the WTO. India reserves the right to re vert to the subject as and when its technical knowledge
increases.
2 Eichengreen, B, 2001, "Capital Account Liberalization:  What Do the Cross-Country Studies Tell
Us?",  http:\\elsa.berkeley.edu/users/eichengr/bourgignonpaper6.pdf.WT/WGTI/W/148
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to be devoted to capital intensive activities, then a capital inflow may further
aggravate this misallocation, again reducing the incomes and welfare of domestic
residents.  If information asymmetries are endemic to financial markets and
transactions, then there is no reason to assume that financial liberalization, either
domestic or international will be welfare improving.  And even if informationasymmetries in domestic markets are judged insufficiently severe to undermine the
case for domestic financial liberalization, the same may not be true of international
financial liberalization to the extent that international financial transactions take place
among agents separated by greater physical and cultural distance.  Insofar as these
problems are most severe when the transactions in question involve developing
countries, where the capacity to assemble and process information is least advanced,
there can be no presumption that capital will flow into uses where its marginalproduct exceeds its opportunity cost.”
3. Studies by Gordon Hanson, Bria n Aitken and Harrison have highlighted cases where foreign
investment may have lowered host-country welfare.
4. The point is that financial flows in no way resemble flows of goods and services.  There is no
tangible, direct linkage between buyers and sellers.  Money, by its very nature, is more fluid, lesstransparent, in its movement. It has been the experience of many developing countries in recent years
that overwhelming emphasis on external capital, be it in the form of commercial borrowing or
investment resources, carries within itself the seeds of possible economic crisis, which, in the case of
impoverished developing countries, can assume the form of a huge human disaster with its own
implications in terms of political and economic stability in the region and, indeed, in the world as awhole. Developing countries must never subscribe to any doctrine that would limit policy flexibility
in this important area. The problem is further compounded by the fact that money can assume many
different forms from time to time with the result that it is, even now, difficult to monitor its
movement.
5. The developing countries would also need policy flexibility to determine the form of
investment that would lead to highest growth.  There is a need to focus on those investments that
contribute to the expansion of trade, as clearly indicated by Ministers at Doha.  The definition of
investment would have important implications for the development dimension. Greenfield
investments, for example, would be of more significance than mergers and acquisitions as they could
have more beneficial spread effects on the econom y. Likewise, developing countries would need to
guard against the crowding out effect of foreig n investment, as pointed out in UNCTAD’s World
Investment Report of 1999. Any movement of capital that would cause serious damage to thedomestic industry, particularly small- and medium-sized enterprises and have adverse effects on
employment would need to be carefully regulated.   Developing countries need to retain the ability to
screen and channel foreign investment in accordance with their domestic interests and priorities.
Bilateral investment treaties have been favoured the world over precisely for the flexibility they
provide to the host country in this regard.
6. The need to establish home-country and investor responsibilities and obligations even while
we talk of host-country obligations was made by UNCTAD in the April 2002 meeting of the Working
Group. While foreign investment could generate positive changes in the economy through the
induction of capital, technology, managerial and marketing skills, it could also have various negative
effects.  It need not necessarily bring in any significant new technology as empirical evidencepresently indicates, generate little value added for employment or develop linkages with domestic
industry in the host country. The objective of global profit maximisation by trans-national
corporations rather than by each new subsidiary ma y sometimes result in conflict of interests with the
developing host country being the loser in many cases. It is important, therefore, that the Working
Group discusses also a binding code of conduct on investors with a further stipulation that it shall beWT/WGTI/W/148
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enforced by home countries through a set of precise domestic laws that can be activated by any host
country.
7. There is a need to have a fresh look at performance requirements. Empirical studies have
shown that affiliates of certain trans-national corporations buy the bulk of their inputs from parent
companies and other affiliated companies leaving only a small proportion for unaffiliated supplierswithin the host country or in third countries. UNCTAD’s Trade and Development Report 2002 has
highlighted the poor record of generation of value added and linkages by trans-national corporations.
It is also an undeniable fact that until recently pe rformance requirements were an integral part of the
growth strategy of all developed countries. It is important, therefore, that performance requirements
on employment generation, transfer of technology, export performance requirements, manufacturing
requirements, training and research and development requirements etc., remain available to
developing countries to ensure that foreign investment contributes to the achievement of developmentpolicy goals.
8. The General Agreement on Trade in Services (GATS) does not impose any prohibition on
performance requirements.  It further envisages limita tions on national treatment in respect of sectors
covered by commitments.  This point is relevant pa rticularly because there has been some attempt to
draw a parallel between mode 3 of GATS and investment disciplines.
9. Another point to which attention needs to be dr awn is the possible damaging effect of capital
outflows on balance-of-payments. There are many recent cases of such damage to the economies of
developing countries. While this calls for further policy flexibility to maintain restrictions on
outflows, there is also a strong case for performance requirements such as export obligations and
foreign exchange neutrality to moderate the adverse effects of capital outflows.
10. Capital is a factor of production and, as such, is not more or less significant than any other
factor of production. If disciplines aimed at freer movement of capital are being considered then in the
interests of the development needs of developing countries, the need to simultaneously build in
disciplines facilitating movement of labour, particularly professionals and skilled personnel, could be
a compelling argument.
11. To conclude, money falls in the category of neither goods nor services. WTO is a trade-
negotiating forum: it is neither a forum of bankers, nor of monetary economists. The less-developed
countries in the WTO do not have the skills and the expertise that the richer countries have. Perhaps
the best contribution that can be made to the cause of development is to understand the limitations of
developing countries and focus only on trade issues within the WTO.
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