SEATINI Articles

The human being, surprisingly, is once again becoming an interesting subject for those - such as the United Nations Conference on Trade and Development (UNCTAD) – that are involved in such mundane and uninteresting matters as trade. Even when UNCTAD has “development” as part of its agenda, the adjective “human” before development, is a new addition. Those who are in the business of producing knowledge at UNCTAD have always assumed that economic growth automatically encompassed “human” development. Empirical data from those who know better, including UNDP’s annual “Human Development” Reports, has shown beyond doubt that there is no necessary, or automatic, link between economic growth and human welfare. Growth is a necessary ingredient, yes, but not sufficient.

But this qualification is still resisted by many neo-classical economists. There are still hard-core believers in the market as the final arbiter of everything, including human welfare. Increasingly, however, and may be perhaps grudgingly, a part of the economic fraternity (even within UNCTAD) is beginning to acknowledge that the human being is more important than the market, that the market is no guarantor of human welfare, that action needs to be taken that goes beyond the market to ensure sustainable human development. But the debate goes back and forth between those who argue that the market can handle even issues related to human welfare (through proper pricing and incentives policies), and those who argue that “market failures”, by definition, are beyond the ambit of the market and therefore it is the function of the state to address them.

Hitherto it was assumed that social policy is the preserve of governments answerable to the people, that matters such as health, education, social infrastructure and the protection of the vulnerable and the marginalized are areas that require state intervention. To the state its own, to the market its own. That was the rough and ready division of labour between the state and the corporate world. But states in much of the third world are getting a bad name. They are perceived as corrupt, undemocratic, self-serving, and generally insensitive to the plight of the poor. And when they are not corrupt or any of those negative things, they do not have the power to deliver, since globalisation has eroded much of their power. Hence it is to the corporate capital that development theory is increasingly turning to see if Capital can be made more accountable to concerns of human welfare. Attempts such as UN Secretary-General Kofi Anan’s proposed “global compact” with transnational corporations are new initiatives that have switched responsibility for social welfare back from the state to the corporate world. It is now the state to its little corner, and the market holding the rest of the terrain.

The question is whether corporate capital whose raison detre is to deliver profits to its owners, the shareholders, can also deliver human welfare. Can capital be made accountable to sustainable human development? Does capital have a soul?

Although not posed in this romantic fashion, this was one of the issues discussed in a workshop organised by UNCTAD and ICTSD (the International Centre for Trade and Sustainable Development), on Globalisation and Human Development, in Namibia, 10-11 May, 2000. The workshop was held in the framework of UNCTAD’s (new) project of encouraging dialogue to strengthen “policy coherence” between goals of sustainable human development (SHD) and economic integration in the globalization process and trade liberalization. The broad agenda of the dialogue was to shed new light on linkages between economic integration, international trade, and SHD. More specifically, the Namibia seminar sought to address issues such as:

· opportunities and risk management measures for African countries with regard to globalisation and further trade and investment liberalisation; and,

· the development of policy recommendations for promoting developing country interests, including SHD objectives, in the multilateral system and other international governance frameworks.

Is UNCTAD equal to the new challenge?

Sustainable Human Development is a relatively new dimension in UNCTAD’s knowledge repertoire. UNCTAD is staffed mostly by economists, and their knowledge base is predominantly economistic with a strong bias towards the neo-classical paradigm. Few in UNCTAD really know how to integrate the concept of SHD within their conceptual toolbag let alone how to operationalise it within their work programme. It is therefore commendable that UNCTAD has taken the initiative to work with NGOs (like ICTSD) to plough this new-found furrow. About twenty participants from Africa from Government, the academia and civil society met in the Namibian capital of Windhoek under the joint sponsorship of UNCTAD and ICTSD. How UNCTAD seeks to reconcile the demands of SHD with those of foreign direct investments (FDIs) was one of several issues addressed by the seminar.

Within the UN system it is UNCTAD which is mandated to monitor the movement of global capital and the activities of transnational corporations. Since the matter was transferred to the UNCTAD from its previous home (the UN Centre on Transnational Corporations), there has been a subtle, but significant, transformation in the manner in which the matter is handled. As well as providing raw data on the flow of capital and on TNCs, the annual World Investment Reports (WIRs) also set out to advocate the liberalization of markets for a freer flow of capital. In relation to countries of the third world, UNCTAD has taken a pro-activist advocacy role to induce them to create better conditions to attract transnationals and FDIs. In a paper presented at the seminar the author argued that UNCTAD’s advocacy role compromises its role as an agency to gather information on FDIs and TNCs and transmit it to its constituencies in an unbiased manner. In other words, by championing the cause of FDIs as the central element in the development strategy of third world countries UNCTAD has gratuitously taken upon itself the weight of a theory that is hard to sustain either in logic or in history. There is really no evidence to show that FDIs bring development; indeed there may well be a stronger case to argue that FDIs bring about underdevelopment.

An uncritical advocacy of FDIs and the TNCs by UNCTAD has rendered its annual investment reports (WIRs) seriously flawed on both statistical and conceptual grounds. The most egregious faults are conceptual. Statistics at best of times are a servant of theory and guided by theory. Also, when you collect data on the movement of investment capital at a global level covering more than hundred-and-fifty countries, and on the activities of a hundred and more TNCs, you are bound to make mistakes. Or, failing to get reliable data, you may have to resort to making “estimates” or even blind guesses. This is nothing novel in the economics profession whose “scientific” pretensions often hide conceptual or ideological underpinnings and flawed statistics.

In the case of the WIRs, it is their conceptual laxity and indulgence that render their statistics incredulous. First then to the conceptual shortcomings of the WI Reports.

The most serious of these are, among others, their concept of “development”, the way they define the “nationality” of enterprises, and their definitions of what constitutes “inflows” and “outflows” of FDIs.

Take UNCTAD’s determination of the nationality of enterprises. On what basis does it confer nationality on these enterprises? It is a hazardous exercise to try to determine the nationality of “transnational” corporations, especially those that are registered in the developing countries, or in tax havens. Or, from formal nationality identification to try to draw conclusions about ownership and control. One would probably get away with describing Microsoft as “American” or Toyota as “Japanese” but is one justified in describing Anglo-American as “South African” just because it is registered there and its major owners have South African nationality? The US Administration can haul Microsoft before the court for a ruling on the basis of State anti-trust legislation, and the court may even decide that Microsoft be split in two. In the case of the Anglo-American, if the South African Government were to contemplate similar action in relation to it, there would be immediate outcry from those in the capital centers of New York and London (and other centers) who really own the Anglo-American. It is not South Africans who own Anglo-American in any real sense. TNCs as a genre may have similar “structural” features, but each one has a history of its own, and one needs to go deep into the subterranean levels with respect to many of them to know who really owns or controls them. In the case of the so-called TNCs “belonging” to the third world, one has to be extra careful for many of them were colonial creations and remain steadfastly colonial both in their ownership and control and in the kinds of investment decisions they make. In one case, it was discovered that whilst a “Malaysian” enterprise secured a tender for the supply of power equipment to Zimbabwe, behind the Malaysian enterprise was German capital and German equipment; the Malaysians were acting mainly as middlemen. So what is one to make of such repeated statements in WIRs that “third world TNCs” are increasingly investing in each other’s countries? The third world, in reality, do not have much of “TNCs” to brag about.

Or what is one to make of the following table in a study undertaken by UNCTAD on Uganda?

Apart from the curious phenomenon that Kenya, whilst supposedly in dire need of FDI, is itself exporting it (the extra it has) to Uganda, there is also the problem of the nationality of the enterprises that are deemed to have originated from Kenya. Are they really Kenyan? Might they not be Ugandans living in Kenya bringing some of their capital back home? Might not they be, indeed, British or German firms masquerading as Kenyan?

The point of this discussion is that generalizations made in the WI Reports about the source and quantities of FDI flows into African countries are based on the most spurious data based on the most indulgent definition of terms. Neither the data nor the generalizations should be given the kind of authoritative credence that UNCTAD seeks to secure for them simply because they appear to be “concrete” figures.

Perhaps the most bizarre, and in its implications the most obscurantist and therefore the most dangerous, definition within the WIR repertoire is that of “outflows”. For the WIR an “outflow” of capital is when a national company of a country exports capital outside the country. If a Kenyan company brings capital into Uganda, it is an “outflow” from Kenya and is defined as “FDI”. But then how would one describe it when a foreign enterprise exports capital outside the country? What happens when a British company based in Kenya takes capital out of the country? Well, that, according to UNCTAD, is only remittance of profits or dividends or under whatever other label such capital is exported. Such outflows are not really “outflows” in the WIR dictionary. So what is so obscurantist or dangerous about this? It is necessary to explain this.

In the ICTSD seminar in Windhoek, there was not enough time to go into details, but at least the following types of outflows of capital from Africa and other developing countries were identified.

3. Increased payments on account of rise of interest rates in industrialized countries

6. Loss of capital through privatization of public assets of developing countries

11. Loss of export revenue on account of protectionism in industrialized countries

The question of whether these payments are legitimate or not is not the issue at this point. For example, it could be argued that payments in the form of profits or dividends are legitimate, but that outflows of capital resulting from intra-TNC transfer pricing are not. At this point the argument is that, legitimate or not, all these forms constitute effective “outflows” of capital, not in the limited meaning of UNCTAD’s WIRs, but in real, tangible terms. They are, simply stated, amounts of capital leaving the country irrespective of who takes them out and for what reason, or loss of capital earnings for one reason or another.

The following figures are given as mainly illustrative, with the implied recommendation that the UNCTAD should incorporate the above categories in its definition of “outflow” of capital, and provide a methodological guidance on how reliable data might be collected on these.

1. Outflows in the form of profits and dividends – probably in billions of dollars from the South to the North by Northern corporations and banks operating in the South. These are figures that are possible to collect, at least indicative figures.

2. Debt payment on loans - According to UNDP sources, the debt of developing countries has increased from $567 billion in 1980, to $1,419 billion in 1992, to $1,940 billion (or 1.9 trillion) in 1995. Between 1980 and 1992 interest payments totalled $771.3 billion, plus $890.9 b. in repayment of principal. So in 12 years (1980-1992), the developing countries made $1.7 trillion in debt repayments, i.e. they paid three times more than their 1980 debt, only to find themselves three times more in debt by 1995. If this is not “outflow” what is?

3. Increased payments on account to rise of interest rates in industrialized countries.

During the 1980s, while interest rates were 4 per cent in the industrialized countries, the effective interest rate paid by developing countries was 17 per cent. On total debt worth more than $1000 billion, this meant a special interest premium of $120 b. annually. This merely aggravated a situation in which net transfers to pay totalled $50 b. in 1989. (UNDP, 1992)

The 1997-98, for example, East Asian crisis provoked sharp increase in risk premiums. In June 1997 Thailand was paying 7 per cent to its lenders, by December 1997, 11 per cent. By late 1997, Brazil and Russia had to double the yield on their debt issue in order to remain attractive to foreign investors.

5. Loss of capital (and jobs) on account of Structural Adjustment Programmes

In 1995, for example, the World Bank wanted Mozambique to lower tariffs on processed cashew nuts to 14%. Mozambique said it needed 20% to survive, so it refused. In 1996, WB imposed its will on Mozambique as part of HIPC initiative, and forced tariff reduction. Local factories had to face competition from Indian companies, factories closed down, and 10,000 people lost their job. The loss of income and local savings has yet to be calculated.

6. Loss of capital through privatization of public assets of developing countries

In the aftermath of 1982 Mexican crisis, the then US Secretary to the Treasury, Nicholas Brandy, authored a plan (called the Brady Plan) to improve the “credit worthiness” of the debtor countries. While he was still at the Treasury, his associate, Hollis Mcloughling, created a private company, Darby Overseas in the tax haven, Cayman Islands, to avoid paying taxes to US Treasury. Brady on retirement formed his own company, International Financial Holding (IFH) which, soon after its creation, purchased (literally for a song) the fourth largest Peruvian bank, Interbank, which was privatized under (you guessed it) the Brady plan. This was no conspiracy; it is simply “smart business”. This is only one example, multiplied a hundred times for practically each of the countries, especially in Africa, where “forced” privatizations have taken place. The Zambian government, for instance, now claims that it has made grievous capital losses in its privatization programme.

These are often arbitrarily determined in terms of intra-enterprise agreements between affiliates of TNCs operating in developing countries. Some of these (especially copyrights) do not transfer any technology whatsoever. Loss to the developing countries can be calculated or estimated, and could run into billions of dollars.

Much of the value of official “aid” to developing countries is vitiated on account of enormous fees that are paid out to management and technical consultants from the “donor” countries. This is a figure that UNCTAD could collect through monitoring the terms and disbursement of “aid” from the North to the South.

This is a widely practiced, and silently condoned, method by which foreign enterprises take capital out of the country through overpricing their imports (thus exporting capital more than required), and underpricing their exports (thus robbing the country of export revenue). The global accounting companies (now reduced, by mergers and acquisitions to the “big six”) have professionally trained staff whose task is to help their global clients in the techniques of transfer pricing as well as of avoiding taxes. Africa could be losing billions of dollars each year through this route. UNCTAD could work out a method of measuring this kind of outflow from the third world. According to Agustin Papic, the pharmaceutical TNCs make internal sales to their Latin American subsidiaries at prices between 33% and 314% above world market levels. Other examples are: Rubber Industry, 40%; Chemicals, 26%; Electronics, 1,100%

10 Outflows on account of deteriorating Terms of Trade

In 1992, a basket of goods from the South could buy 52% less than it could in 1980, i.e. they had to export twice to obtain the same goods. Between 1986 and 1989 (4 years), Sub-Saharan Africa lost $55.9 billion in lost earnings through falling Terms of Trade. 90% of exports of SSA are raw materials. According to Augustine Papic, former member of the UN’s North-South Commission, the invisible transfer of wealth from South to North due to deterioration in terms of trade could total some $200 b. per year, that is more than paid out annually in debt-service payments.

11. Loss of export revenue on account of protectionism in industrialized countries

According to the UNDP, the developing countries have lost $35 billion annually accounted for as follows:

12 Loss of revenue on account of blockage on the free movement of people

According to UNDP figures, the cumulative loss of hard currency remittances for countries in the South in the 1980s was in the range of $250 billion.

13 Loss of capital through bio-piracy

In conclusion, UNCTAD needs to seriously revise its definition of “outflows” and suggest methodologies for computing the net outflow of capital that must surely be from the South to the North, or losses of capital revenues by the South for one reason or another. UNCTAD’s current definition is both invalid and serves to hide the reality of capital movements. It may be argued that it is difficult to compute these figures, for example those of transfer pricing. That may be so in the case of some of the above categories. But even so, it is important, and necessary, for UNCTAD to make the effort to secure at least indicative figures. A second answer to this objection is that the present figures of WIR flows as computed by UNCTAD experts are, by their own admission, no better than “estimates”.

It was pointed out in the Windhoek seminar that the manner in which UNCTAD collects its data on FDI flows are not only conceptually flawed (as shown above) but also they are based on extremely questionable data and methods of collecting them.

According to Annex B (Statistical Annex) of WIRs where the method of collecting data is explained, “The most reliable and comprehensive data on FDI flows that are readily available from international sources …are reported by the IMF …obtained directly from IMF’s computer tapes containing balance-of-payments statistics and international financial statistics.” Other sources mentioned are: “UNCTAD, FDI/TNC database, which contains published or unpublished national official FDI data obtained from central banks, statistical offices, or national authorities.”

There are several conceptual problems here. First there is no definition of FDI provided. It appears to be a hybrid category that combines “genuine” FDIs (or “greenfield” investments) and portfolio and even speculative capital movements. In fact, despite claims by even distinguished Harvard-trained economists, the distinction between “greenfield” and speculative investment is extremely difficult to make, especially if capital passes through the intermediation of banks. For example, short-term and speculative capital went to Thailand during the 1990s through the banking system, with some virtually as “call money” or as weekly or monthly turnovers. The banks on-lent these for investment to local enterprises based, as it turned out, on weak (property or land) collaterals. When the financial crisis was forced on the country by foreign exchange speculators, foreign short-term bank capital left the country in a hurry. Thus, for this kind of capital it is impossible to say ex ante whether it is for investment or for speculation only; the matter becomes clear only ex post. And the truth of the matter is that the bulk of capital movement these days (and this means as much as 90% or 95%) is of speculative character.

Hence, the importance that UNCTAD gives to FDIs, through its WIRs, is wildly exaggerated. By not clarifying how much of the “FDI” figures are “genuine” FDIs, UNCTAD creates yet another obscurity for, despite the eclectic nature of its presentation (where it sometimes criticizes speculative capital), it leaves the overall impression that all the figures that it provides for FDIs are indeed “genuine” FDIs, and play a “significant” role in the development of third world countries. This is, to say the least, highly improper, some may say even unethical.

Secondly, UNCTAD has no source of collecting FDI data on its own. It depends on mainly the IMF figures, supplemented by national figures and TNC database. This is interesting for it raises several problems. On the data provided by the IMF, it is necessary to ask if from the current account figures that the IMF provides it is possible to derive capital account numbers. How do UNCTAD’s experts manage to do this? There is no explanation of this in Annex B. On the TNC data base, it is necessary to ask whether the definition of capital flows that the TNCs use are compatible with a more objective analysis of capital flows from the receiving country’s point of view. Indeed, as it turns out, WIR seems to have accepted TNC definition of FDIs. WIR puts FDIs into three categories - equity investment, reinvested earnings, and intra- company loans. These are legitimate TNC-oriented categories, useful to them for their own purposes. But are they also legitimate from the “recipient” country’s point of view? Should not “reinvested earnings” be considered as “domestic savings” rather than as fresh FDI? Also, how does one describe “intra-company” loans as FDIs when these are transactions from within the company? Do we not need a new definition of capital flows?

The figures WIRs put out (with all their conceptual shortcomings) are even statistically speaking, neither reliable nor, possibly, calculable. Thus, WIRs regularly give a long list of countries for which at least one component of FDI inflows is not available. Thus, the WIR 99, on Table 1: p.353, gives a number of countries for which one, two or even all three categories of “FDI” - Equity Investment, Reinvested earnings, and Intra- Company Loans - were not available. How, then, do the UNCTAD experts compute these figures? Presumably using “national” statistics. But as for these, consider the following table on FDIs that an UNCTAD study on Zimbabwe (Globalization and Zimbabwe, 2000) secured from various sources.

Notes and Sources: ZIC = ‘Approvals’ : Zimbabwe Investment Centre, personal communication

Bmap = ‘intentions’: BusinessMap (1999)

UNCTAD = ‘Gross FDI’: UNCTAD (1996,1998,1999)

WB = ‘Net FDI’: World Bank (1998/99, 1999)

IMF = ‘Net FDI’: IMF (1999)

Kaliyati = ‘Net Private Capital Flows’: Kaliyati and Makina (1998)

The question is, if UNCTAD in its WI Reports attempts to “supplement” IMF or TNC derived data on FDI flows with “national” figures, which of the above six very different figures would it want to use? To make matters worse, WIRs admit that “For those countries for which FDI data were not available throughout the period (upto 1997), data have been estimated by UNCTAD.” (Emphasis added)

When at the Windhoek seminar it was suggested that UNCTAD’s figures on FDIs were conceptually flawed and statistically unreliable, and that they may indeed be figures from a “black box”, the UNCTAD official (from the division that puts out WIRs) who was co-host of the Seminar admitted that these observations were valid, and that the figures were indeed estimates.

There are references in the WIRs, here and there, over its ten years of reporting that FDIs and TNCs are not unproblematic. In other words, the authors of these reports can show passages where they have put to question the unqualified view of FDIs as agents of development. However, this is done in an eclectic, incidental, manner, for the overall thrust of UNCTAD’s argument is that both FDIs and TNCs are good for development and that the developing countries should be creating the necessary environment to attract these.

Even if this were the case, it is questionable if it is the role of UNCTAD to act as advocates for TNCs. The fact of the matter is that it is far from settled question to argue that TNCs and FDIs are positive factors for development. It is still an open-ended question, for the verdict of history of the last fifty years could go either side. In this situation of uncertainty about the positive or negative role of FDIs/TNCs, it would have been prudent for UNCTAD not to have taken such a definitive position as it does in its WI Reports. It should have provided a balanced assessment of the situation, sticking strictly to facts, and leave the conclusion to the readers of its reports, indicating the weaknesses of its statistics and other quantitative data. By sticking its neck out in favor of FDIs/TNCs, UNCTAD has not only become an advocate for TNCs but also, if history’s verdict goes against TNCs, then UNCTAD would retrospectively be held responsible for having advocated not the development of the developing countries (its essential mandate) but their underdevelopment or impoverishment. This would for UNCTAD be a shocking indictment, for it would contradict its very raison detre.

Following the thrust of the argument advanced here, it is important that UNCTAD distances itself from an advocacy role for FDIs/TNCs. Furthermore, it needs to revisit the conceptual, or knowledge, basis of its WI Reports. UNCTAD prides itself as a “knowledge-based” institution. If so, then it is legitimate to ask where its knowledge comes from and for whose benefit. The first move in the direction of correcting its flawed conceptual basis of WI Reports would be to redefine “outflows” of capital to include at least the above thirteen categories of capital outflows that are in the main responsible for the continuing impoverishment of the bulk of humanity.

A third step that UNCTAD needs to take (besides distancing itself from an advocacy role for TNCs, and changing the conceptual basis of WIRs) is to integrate considerations of “sustainable human development” in its work programme. This means many things. The first is for UNCTAD to move away from its economistic moorings and recruit qualified people who understand the human being in its holistic concept and not purely as an economic or market category. Secondly, UNCTAD needs to follow the lead of UNDP in the latter’s effort to include the human index in measuring “development”, and try to go beyond UNDP on this route. Thirdly, since UNCTAD is also concerned about trade, it must build into its knowledge and analytical framework a methodology of how to measure trade from not simply productive point of view but also from an equity point of view. Here it must challenge UNDP’s concept of equity as welfare, which is confined within the utilitarian philosophy and which still tolerates an asymmetrical world as long as the “welfare” of the poor is catered for. UNCTAD could go beyond this and consider alternative philosophical foundations to welfare and utilitarianism. The grassroots protestors against the WTO at Seattle and Washington had provided a clue on the direction that trade should take, namely in the direction of “fair” not “free” trade. Justice as fairness is a sparsely explored concept and UNCTAD might want to develop its knowledge base towards bringing it closer to the people than existing power structures by looking at justice as fairness rather than in terms of justice as poverty eradication.