Investment liberalization should follow step by step rules

The Group of Eight (G8) Summit in Germany listed investment liberalization as an important topic for discussion. Participating leaders are expected to engage in thoughtful dialogues on the issue and elaborate on their respective stances.

Investment liberalization and trade liberalization are the most substantial parts of economic globalization. Investment liberalization is at a higher stage of development by comparison, but it did not appear as an idea and policy until the late 1970s; and then gradually spread across the world. In the 1980s, an increasing amount of developing countries began to attract foreign capital and import various technologies. By the end of the last century, economic globalization had become an irreversible trend, and during this process a large batch of emerging economies including those of China, India, Russia and Brazil have grown much stronger.

However, this period turned out a mingling of good and bad capital flow. The 1997 Asian financial crisis struck a heavy blow in the area, and terrible crises also hit countries such as Russia, Turkey, Brazil, and Argentina. The reality of past events has reminded people that various kinds of investment can only generate benefits when properly regulated.

Upon entrance into the 21st century, the international investment liberalization process has seen new developments. Financial markets and institutions, in particular, have adopted a new look over the past decade. It is difficult to give a full, detailed picture of all the drastic changes that took place during this period, but a huge number of facts have indicated that the current status of the international financial and monetary system is still unstable.

In 1997, for example, there were 1,685 hedge funds worldwide. Now, however, the number has increased to more than 9,800. In a few short years, hedge funds and equity investment firms in various forms have become the most prominent influences on international financial markets. These large-sized institutions not only tried to control the prices of major shares, exchange rates, oil and other commodities; but also swept the world with corporate mergers and acquisitions. Questions began to stir up when hedge funds totaled 4 trillion US dollars last year. These funds used to purchase and regroup many old-brand companies in the U.S. and Europe; thereby gaining assets while dismissing tens of thousands of workers.

Barney Frank, Chairman of the Financial Services Committee, House of Representatives, recently sent a letter to President Bush, urging the government to cooperate with Europe in placing strict controls on hedge funds and private equity firms before they are able to create more disastrous results.

Investment liberalization allows capital to flow more freely across countries, and requires governments to loosen supervision and control on international capital. However, caution must be exercised due to the fact that the international market and industries have been developing at an uncontrollable rate. Countries and regions should engage in equal-footed dialogues in the spirit of mutual benefit; seeking common ground and pragmatic collaboration, so as to balance investment liberalization with their respective economic conditions and sustainable development goals.

Meanwhile, the welfare of relevant countries, especially developing countries, must be considered; for only with higher economic and prosperity levels in these countries can investment liberalization successfully move forward. Otherwise the process could scarcely persist. In discussion of this issue, it is essential to distinguish between productive capital and speculative capital; and treat each differently by encouraging the former and rigorously regulating the latter.

What's more, equal attention should be paid to the interests of both investors and host countries. Some countries suggested the formulation of multilateral rules on direct trans-border investment. This has always been a controversial topic and opinions from all sides should be patiently considered. The final goal should be a stable, organized, and balanced flow of capital among countries.

In a word, investment liberalization must be promoted in a cautious and calculated manner.

By People's Daily Online; The author Su Jingxiang is a research fellow with China Institutes of Contemporary International Relations.