U.N., OECD warn that bailouts distort investment

GENEVA (Reuters) - Emergency bailouts by governments to cope with the financial crisis have distorted investment flows and should be scaled back as soon as it is safe to do so, an international report released on Monday said.

But the U.N. Conference on Trade and Development (UNCTAD) and Organization for Economic Cooperation and Development (OECD) also found that regular investment policies in recent months had tended to keep markets open and promote investment flows.

Their joint report, looking at investment measures between November 2009 and May this year, estimates that the total amount of public commitments by G20 states -- in the form of equity, loans and guarantees -- exceeded $1 trillion as of May 20.

The most prominent example of such measures is the $700 billion U.S. Troubled Asset Relief Program (TARP).

The U.S. Treasury Department said on May 21 that TARP would end up costing about $105 billion following repayments of funds and increases in the value of shares in public ownership, such as those of Citigroup.

OECD Senior Economist Kathryn Gordon said emergency bailouts in G20 states had led governments in the reporting period into one-on-one relationships with hundreds of financial firms and some 20,000 non-financial firms -- the "ultimate discrimination" against those without such ties.

"This is a source of great concern to us... that governments continue to engage in these one-on-one relationships," she told a news conference in Geneva. "We recognize it may be necessary when dealing with the crisis but it is a source of concern for international investment."

PUBLIC FUNDS BLOAT DEBT

UNCTAD and the OECD said bailouts and government support had a tendency to become entrenched, skewing investment flows.

"Such schemes should be scaled back as quickly as economic conditions permit so as to send a strong message to domestic and foreign investors that they henceforth are expected to operate without state aid on a commercial basis in the market place," the report said.

The UNCTAD/OECD study, the third such review, was commissioned by the G20 group of rich and emerging nations for their summit in Toronto at the end of the month.

In another report prepared for the G20, the World Trade Organization (WTO) said governments worldwide have largely resisted erecting trade barriers in response to the downturn but warned about an increasing use of export restrictions on food products and commodities.

"Given the current economic environment and the risks ahead, governments should remain vigilant to preserve the level of trade openness and act to remove the most trade restrictive measures taken over previous periods," the WTO said in its assessment of trends from November to May.

Most of the new trade restricting or distorting policies put in place since November have affected base metals, mostly steel, as well as machinery, farm products and transportation equipment, the WTO found.

The OECD and UNCTAD warnings about the impact of bailouts contrasted with generally positive marks for specific investment policies undertaken by G20 governments in the reporting period.

"The policy measures put in place by G20 members are mainly in the direction of further opening and liberalization of investment regimes or facilitating investment flows," James Zhan, director of UNCTAD's investment and enterprise division, told the Geneva briefing.

Global flows of foreign direct investment -- on which many developing countries rely for their growth -- fell by almost 40 percent in 2009 but are likely to pick up modestly this year, UNCTAD said in January.

Zhan said that the global economy needed a revival of private capital flows, as the public investments seen in the bailouts were unsustainable and generated state debts.

(Editing by Laura MacInnis and Matthew Jones)