For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments

fearing costly law-suits, may be induced in some circumstances to abstain from
introducing or enforcing regulations even when they serve a social goal as the
correction of externalities.⁵

The failure of the OECD MAI negotiations has been attributed, separately,
to two set of causes.⁶ On one side there are issues related to the design of the
agreement. The MAI draft has been considered quite demanding for partici-
pating countries: the rules were rather “strict” compared with those of existing
international investment treaties. On the other side, there is an unfavorable
general political climate. In particular, a rising role of NGOs in the interna-
tional scene and a deepening divide between developed and developing countries
on multilateral issues have been felt as working against the success of the nego-
tiations.

2.2 Towards the Economics of MAI

The stake of countries in international agreements on foreign direct investment
has been discussed in recent literature. In WTO (1996) and Drabek (1998) are
summarized a series of “institutional” arguments that may motivate countries,
especially LDCs, to object a multilateral investment agreement. First, there are
fears of loss of political control and consensus. By joining MAI, governments
lose power of action on MNEs, thus partly losing control on the economy. FDI
may also break up the social balance among different social groups and induce
a political change.⁷. Furthermore, uncontrolled FDI inflows may entail a polit-
ically costly process of adjustment associated with the replacement of domestic
by foreign production or with the enforcement of a change in budgetary practises
of governments.⁸ Second, countries may ob ject MAI for the fear of increased
economic insecurity and inequality. For instance, there may be an increased risk
of capital flight (see, e.g., UNCTAD, 1996 and 1997, and Rodrik, 1997).

Markusen (1998) proposes an approach to the economic analysis of the ad-
vantages and disadvantages of MAI-membership for LDCs.⁹ The basic trade-off
involved is that of rules versus discretion. By joining MAI, countries can cred-
ibly “tie their hands”, giving up some policy tools. There are advantages from
that. Adhering to strict rules may attract FDIs and foster investment due to
higher transparency, reduced transaction costs for MNEs and reduced political
risk. The loss of discretion entails also evident costs: reduced bargaining power
and the loss of discriminatory policy instruments.

Several theoretical arguments and abundant empirical evidence support the
thesis that MNEs, when transferring knowledge capital, create positive spillovers

⁵ Examples of possible misuse of the DSP by MNEs are reported within NAFTA, that has
rules on investment similar to that of MAI (UNCTAD, 1998, p. 61).

⁶See, for instance, UNCTAD (1999).

⁷The exp erience of Indonesia during the Asian crises may serve as a recent example of
p olitical instability in the presence of free capital flows.

⁸See also Rodrik (1997) on this point.

⁹See also Hoekman and Saggi (1999) for an analysis of the economic trade-off faced by
LDCs in participating into multilateral investment agreements.

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