The global economy and the global investment agenda - an OECD perspective


Remarks by Angel Gurría, OECD Secretary-General

USCIB Global Investment Conference, Washington, 10 March 2010

Ladies and gentlemen,

It is a great pleasure to be back with you at the United States Council for International Business and I thank Peter Robinson and Charlie Heeter. Since the outset of the crisis, you have been tracking developments in the investment field. The OECD, as the Organisation that manages the most relevant investment instruments, shares your concerns about keeping a positive environment for international investments.

As a matter of fact, we have just delivered, with the WTO and UNCTAD, the second report to the G20 leaders on Trade and Investment Measures. We concluded that, there have been no major episodes of protectionism, and that the worst case scenario seems to have been avoided. However, the most painful manifestation of the crisis, high unemployment, may give rise to political pressures to adopt protectionist measures. Let me start with how we see global economic developments, the role of international investment therein and some thoughts about the way forward.

The global economy – is there light at the end of the tunnel?

We are still facing very difficult times. The financial crisis that erupted in September of 2008 plunged the global economy into its most severe economic crisis in the post-war period. We estimate GDP in 2009 to have contracted by some 3.5% in the OECD area as a whole and unemployment to have reached a post-war high of 8.8% last December.

International investment - a major driver of world growth - declined by over 50% globally in 2009 and international M&A activity was a third of the level reached in 2007. Developing countries had shown resilience during the crisis, but in 2009 they finally suffered their first serious declines in inward international investment flows. This was reflected in a 40% decline in international M&A activity going to the BRICS. But now we see a rebound and the emerging economies like China, India and Brazil are leading the recovery.

Policy responses have been bold and swift and have avoided the worst of the crisis. Economic growth is now coming back. Although the recovery remains fragile in the OECD area, GDP grew somewhat more strongly than anticipated in the United States, Japan, Canada and Australia in the last quarter of 2009. Strong activity in emerging markets is propping up world trade, which we expect to grow by about 6% this year. This is a strong rebound from the fall of over 12% in 2009.

The main challenge we face going forward is how to ensure that a solid recovery takes hold. This is important because the crisis will have a long-term impact on our economies’ growth performance. We estimate that OECD countries have lost about 3% of their potential output as a result of the crisis. This loss is in part due to a durable increase in unemployment as well as increased costs of capital and higher risk aversion. New sources of growth like innovation and green growth, as well as structural measures to improve labour productivity and utilisation, will therefore be crucial to put the world economy back on a strong, sustainable and jobs-rich growth path.     

International Investment as a driver of global growth – Perspectives for 2010

There is light at the end of the tunnel as regards global international investment performance for advanced, emerging and developing economies:

We observed relatively robust international investment activity in January 2010 and the first half of February which hints at a stabilization in 2010. But markets are still fragile and further declines in international investment can still not be excluded.

In the crisis, emerging economies have consolidated their positions as major international investors. The emerging economies in the G20 accounted for only 1% of G20 FDI outflows in 2000. By 2008 they accounted for 12% of FDI outflows. This should facilitate inter-governmental cooperation on investment policies, because the interests of developed and emerging economies are no longer so starkly divided along the lines of home and host countries – everyone is a bit of both.

The OECD is becoming more inclusive in order to reflect these changes of the world economy. Twelve emerging countries, including Brazil, have now adhered to the OECD investment instruments. Accession discussions with Russia are underway. Chile signed the accession agreement with the OECD early this year. The OECD also engages with G20 emerging economies like China, India and Indonesia through investment policy peer reviews.

The global investment agenda - the state of play and the challenges ahead

The stakes are high, as investment protectionism could wipe out prospects for recovery. So far, multilateral surveillance through the Freedom of Investment Roundtables, our monitoring reports to G20 leaders and OECD investment rules have helped keep protectionist pressure under control.

But government resistance may be weakening. As I mentioned, the WTO-OECD-UNCTAD second report to G20 leaders on trade and investment measures released this week, portrays a positive picture but calls for vigilance as emergency measures taken in response to the crisis in both the financial and real sectors could threat open investment flows.  We also observe renewed interest in some countries in a role for capital controls. The OECD believes that these controls may play a role as last-resort measures in exceptional circumstances, but should be temporary to avoid an escalation of investment restrictions.

Beyond the crisis, the growing presence of foreign government-controlled investors still raises concerns for national security and law enforcement: while these concerns are understandable, we need to recognise that  investments by state-owned enterprises, public pensions funds and sovereign wealth funds (SWFs) can bring benefits to home and host societies alike. The OECD’s Freedom of Investment Process, which includes SWFs, helps to strengthen trust and confidence between these investors and recipient countries by promoting good practices on both sides.

Foreign access to exhaustible finite natural resources is becoming a growing source of disputes in investment relations between host and home countries. To reap the full benefits of natural resources investment, countries need a sound domestic policy framework and a way of promoting responsible business conduct regardless of the investor’s nationality. The OECD is using its investment instruments to help both, host and home governments work together and make the most of foreign investment in sectors such as energy and agricultural land.

Let me then move to the forward looking options. Again, beyond the crisis, there is concern that the proliferation of investment treaties and the issue of the legitimacy of investor-state arbitration may be raising the complexity of investment rules. In order to benefit from the dynamics of international investment while ensuring the protection of investor’s rights, both developed and developing countries have continued to actively negotiate bilateral investment agreements and regional trade agreements with investment chapters. This has resulted in the existence of some 3000 such agreements at present. But we also observe reluctance to enforce investor-state arbitral awards. As emerging countries integrate into the world economy and increasingly invest in other countries, the time is right to improve international rules for investment protection.

A common legal framework on international investment may be appropriate for a world that is more and more integrated and that requires certainty and clarity for international operations. At the OECD we perceive growing interest in this issue.

I know this is a complex undertaking, and that we need to garner enough support, considering that in the past, we had some bad experiences when putting the investment discussions in the context of a multilateral framework. But as I mentioned before, emerging economies, as well as advanced ones are getting closer in their interest to maintain an open investment environment.

In practical terms, the OECD is considering the feasibility of a non-binding “Model Investment Treaty”, building on converging understandings in OECD and partner countries and invites other organisations to join these reflections. Such a “Model Investment Treaty” could reduce drafting and negotiation costs for negotiating parties, reduce transaction costs imposed on foreign investors and create the enabling conditions for equal competition among foreign investors. It could be used by governments to foster more consistency and predictability in their bilateral and regional treaties while allowing for flexibility in reflecting countries’ positions and adequate consideration of competing policy priorities.

A non-binding Model Investment Treaty would reflect consensus on core provisions for inclusion in an investment agreement. It would provide interpretations and options with regard to the wording of specific clauses. It would record countries’ positions vis-à-vis the model’s provisions if necessary. A model treaty serves as a common reference point for the negotiating parties, which accelerates their discussions, facilitates a final agreement and increases mutual certainty about interpretations. This has been the positive experience with the OECD Model Tax Convention which serves as the basis for the more than 3000 bilateral tax treaties in force today around the globe.

Business has a key role to play in supporting our OECD work on International Investment

Let me conclude by inviting you to contribute to and support our work. We can work together in four strategic areas:

First, rebuilding trust in markets: The Freedom of Investment Process, as a forum open to all non-OECD G20 members, has the potential to deliver stronger peer surveillance to avoid protectionism. The private sector could do its share to resist protectionism by conducting business with integrity and transparency, thereby enhancing the public’s trust in markets.

Second, promoting responsible business conduct: The OECD Guidelines for Multinational Enterprises encourage enterprises to integrate business ethics into their decision-making. Leading business associations have supported the implementation of Guidelines. Just recently, they engaged actively with the OECD to apply the Guidelines to the development of guidance on managing investments with transparency and integrity in conflict zones and fragile states.

Third, an update of the OECD Guidelines starting in 2010 will provide an opportunity to discuss how to increase their relevance and help enterprises to use them more effectively. The process will include inputs from non-OECD G20 members and other interested parties. This will help advance consensus on a global standard for responsible international business and promote a level playing field between international investors. The update of the OECD Guidelines for Multinational Enterprises is a key opportunity for business to contribute to the development of this consensus.

And finally, your views on the possibility of a non-binding Model Investment Treaty will also be welcomed. I am looking forward to your support, your input and our increased cooperation!  Thank you very much!


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