Editorial: UNCTAD makes the case for respect of national policy objectives
*Aulline H. Mabika
The UNCTAD's Trade and Development Report for 2006 urges Least Developing Countries (LDCs) to implement more autonomous policies, and also to further strengthen the global partnership for development to achieve the Millennium Development Goals (MDGs) adopted by the United Nations for 2015. The report questions global trade practices and accuses them of being too narrow and inadequate to address developmental issues: “International trade rules and conditions attached to aid and loans provided to developing countries should not reach the point of restricting the governments of those countries from doing what is best for their economies.”
The Trade and Development Report (TDR) , which is the first major report UN report following the collapse of the Doha Round in July, addresses the theme of "Global partnership and national policies for development", argues that globalization
makes the impact of external influences over national policy targets more acute: Bilateral and regional trade agreements often involve tighter constraints, and there are many non-trade channels that constrain policy space, particularly International Monetary Fund (IMF) conditionalities.” "The TDR underlines that the international trade rules and regulations which are emerging from multilateral negotiations and a rising number of regional and bilateral trade accords could rule out the use of the very policy measures that were instrumental in the development of today's mature economies."
The report argues that a fully inclusive multilateral trading regime must have a
sufficient degree of flexibility to reflect the interests and needs of all its members. This point has also been raised by developing countries about the unfair negotiating practices at the World Trade Organisation (WTO). WTO negotiation procedures have often given the impression of less than full transparency and participation, so that some countries appear to have stronger influence than others. Decisions taken in so-called "green room" meetings or in other gatherings of a limited number of members are often presented to the entire membership as fait accompli. These procedures prompt concerns about unequal influence and unequal representation in the decision-making processes. The reports therefore states that while trading rules extend to extend to all signatories in the same way in terms of legal obligation, “they are much more burdensome for developing countries in economic terms. This implies that it is crucially important to look at the "level playing field" metaphor not in terms of legal constraints, but in terms of economic constraints, considering countries' different structural features and levels of development."
In suggesting greater independence in policy-making, the report reflects the long-cherished aspiration of the developing countries to regain their "policy space" for decision-making, curtailed in the last few decades by global free-market economics and by the conditions imposed by multilateral financial organisations such as the IMF. The report recognises and guarantees governments’ domestic policy space and flexibilities, preserving their right to use policy tools including trade measures, that develop fair and sustainable economies, protect and promote employment, social welfare, health and the environment and guarantee public participation: Self-centred national economic policies including mercantilist trade policies or beggar-thy-neighbour macroeconomic and exchange-rate policies through which influential countries can harm the economic performance of others, need to be checked by multilateral rules and disciplines. But such restrictions on national policy autonomy should not require developing-country officials to relinquish policies that support economic development.”
The report argues that for development policies to be successful, they need to be linked more closely to national policies to develop productive capacities and reduce aid dependence. It goes on to mention more importantly that, any conditions attached to aid must not hamper a government’s efforts to discover the best ways to develop productive capacities and its ability to experiment to find the best approach in its local context. The report advocates for a production and employment oriented approach to poverty reduction that would encompass, rather than be narrowly focused on, increasing social sector spending and achieving human development targets. It would also entail a development driven approach to trade rather than a trade driven approach to development. An approach to developing productive capacities which is simply trade-centric will not be sufficient for sustained and inclusive growth in developing countries.
The report further notes that developing countries can impose stringent rules on patent
disclosure and subsequently grant narrow patents, or they can have flexible discretionary use of compulsory licensing. However, in many cases regional and
bilateral trade agreements foreclose part of the autonomy left open to developing countries by the Trade-Related Aspects of Intellectual Property Rights (TRIPS). Many observers consider the TRIPS agreement to be the most controversial of the Uruguay Round Agreements because of its potential to restrict access of developing countries to technology, knowledge and medicines. The limitations introduced by TRIPS imply an asymmetry that favours the owners of protected intellectual property - mainly in developed countries - at the expense of those trying to gain access to such
intellectual content, mainly in developing countries. Also, provisions regarding technology transfer and technical cooperation, which are of importance mainly for developing countries, are of a "best endeavour" nature and difficult to enforce, and non-compliance is not subject to a penalty.
The need for policy space in Africa has been echoed by African leaders and is still a topical issue when calls were made to African leaders to urgently attend to Africa's declining influence in world institutions. African ministers of finance and economy who met in Mozambique on August 3-5 and made a recommendation to their heads of state and government to endorse the issue of protecting Africa's voice and participation in the world arena.
The Sao Paulo Consensus reached at UNCTAD XI in 2004 made the point that:
The process of liberalisation shall take place with due respect for national policy objectives and the development level of individual members, both overall and in individual sectors. There shall be appropriate flexibility for individual developing country member for opening fewer sectors, liberalizing fewer types of transactions, progressively extending market access in line with their development situation…
The above words make the case for the need for appropriate balance between national policy space and international disciplines and commitments. Therefore, States must ensure that they retain the right to regulate and to ensure that services are accessible to children, women and the most vulnerable groups, and that the quality of health care is sufficient. Leaders of governments in African LDCs should be aggressive and guard jealously their policy space to ensure that people’s livelihoods are not mortgaged through wholesale liberalization.
*Aulline H. Mabika is a Research Intern with SEATINI.
Trade: Developing countries need greater 'policy space', says UNCTAD
International trade rules and conditionalities attached to aid and loans to developing countries should not reach the point of restricting governments of these countries from doing what is best for their economies, according to the United Nations Conference on Trade and Development (UNCTAD).
Advancing an argument for greater ''policy space'' for these countries, UNCTAD's Trade and Development Report 2006 recommends that governments in developing countries show will and creativity in developing macroeconomic policies.
The report says that to work for development, growing global economic interdependence must be complemented by a well-structured system of global economic governance.
The report argues that there is no single quantifiable balance between multilateral disciplines and national policy autonomy that would suit all countries or apply across all spheres of economic activity. The degree of national policy autonomy needed to promote national economic development differs across countries.
The report advocates for developing countries to pursue active industrial policies, and suggests that they maintain tariff structures at relatively higher levels, and modulate applied tariffs on particular industrial sectors around a relatively lower average level.
Though the Doha work programme itself has not provided for any line-by-line bindings of developing country tariffs, the proposals under consideration after the Hong Kong Ministerial meeting of December 2005, envisage developing countries
reducing their tariffs and binding them on a line-by-line basis.
The annual UNCTAD report, which this year addresses the theme of "Global partnership and national policies for development", argues that globalization makes the impact of external influences over national policy targets more acute. The resulting reduction in autonomy is sometimes seen only in connection with
commitments undertaken in multilateral trade agreements.
However, the report notes, bilateral and regional trade agreements often involve even tighter constraints, and there are many non-trade channels that constrain policy space. One prominent example is of the conditionalities attached to credit extended by international financial institutions. The proliferation of these conditionalities over the past 20 years has given rise to increasing criticism, especially as they have extended into structural and even non-economic areas without taking sufficient account of country-specific factors in their formulation.
The report notes that apart from such de jure constraints of national policy
autonomy that are the result of commitments to obligations and acceptance of rules set by international economic governance systems and institutions, there are also a number of important constraints that result de facto from policy decisions relating
to the form and degree of a country's integration into the international economy.
Most prominent among these is the loss of the ability to use the exchange rate as an effective instrument for external adjustment, or the interest rate as an instrument for influencing domestic demand and credit conditions.
Deregulation of domestic financial markets, the elimination of credit controls, deregulation of interest rates and the privatization of banks were key elements in the reform agenda of the 1980's and 1990's. Paradoxically, according to the report, while the conventional agenda made every attempt to "get the prices on financial markets right," there was no concept of how the most important prices, the exchange rate, and, closely related, the interest rate, should be managed. The two options for national exchange-rate policy that eventually emerged were either to let the currency float freely or to adopt a completely fixed exchange rate, options that came to be known as "corner solutions". The "corner solutions" are based on the assumptions that, in the case of free
floating, international financial markets smoothly adjust exchange rates to their "equilibrium" level, while in the case of a hard peg, product, financial and labour markets would always smoothly and rapidly adjust to a new equilibrium at the pre-determined exchange rate.
In reality, however, exchange rates under a floating regime have proved to be highly unstable, leading to long spells of misalignment, with dire consequences for the real economic activity of the economies involved.
Given this experience with both rigidly fixed and freely floating exchange rates, "intermediate" regimes have become the preferred option in most developing countries with open capital markets - they provide more room for maneuver when there is instability in international financial markets and enable adjustment of the real exchange rate to a level more in line with a country's development strategy.
Combining a completely open capital account with full autonomy in monetary policy and absolute exchange-rate stability is impossible, UNCTAD says. The report suggests that engaging in a managed-floating exchange-rate regime, combined with selective capital controls (i.e.reclaiming some monetary policy
autonomy), seems to be a viable second-best solution.
The report notes that for small open economies, and developing countries in particular, the exchange rate must be flexible enough to prevent persistent
misalignments, yet stable enough to avoid excessive volatility and discourage financial speculation. In the absence of effective multilateral arrangements for exchange-rate management, macroeconomic policy in many developing countries has aimed increasingly at avoiding currency overvaluation.
This has not only been a means of maintaining or improving international
competitiveness, it has also been a necessary condition for keeping domestic interest rates low and has provided insurance against the risk of future financial crises. Moreover, independence from international capital markets allows central
banks to use their instruments to actively pursue development targets.
Encouraging examples have shown that it is possible to avoid an acceleration of inflation by non-monetary measures, such as income policy, institution building in
support of forming a national consensus on reasonable wage claims, or direct government intervention into the process that determines prices and, even more importantly, nominal wages. China as well as Argentina, by experimenting with new price-stabilization devices, have gained considerable policy space recently.
The report also recommends that developing countries adopt active industrial policies intended to spur economic growth and structural change that create employment and raise living standards over the long term.
According to the report, this is a change from the 1980's and 1990's, when developing countries were advised by the Bretton Woods institutions to keep their hands off and let market forces do the work of ''getting the prices right''.
The improved global economic environment for many developing countries -including the current upswing in some nations resulting from high demand for oil and other raw materials, and the expanded manufacturing prowess of others, such
as China - needs to be turned into a dynamic process of economic growth and structural change that creates employment and raises living standards over the long term.
To do this, the report says that developing countries should be actively involved in fostering and strengthening domestic businesses. These countries should not also
be overly restricted by international trade rules or by conditions imposed by international lenders from doing what's best for their economies, the report says.
It urges governments to take a pro-active stance in macroeconomic and industrial policies to accelerate private investment and technological upgrading and to stimulate the creative forces of markets: it is risk-taking, innovative entrepreneurial decisions that lead to new lines of production and the creation of new firms and jobs. Governments should also protect fledgling enterprises when
necessary, including through the careful application of subsidies and tariffs, until domestic producers can meet international competition in the sale of increasingly sophisticated products.
The report notes that far-reaching reforms undertaken by most developing countries in the 1980's and 1990's, often at the behest of international financial organizations and lenders, did not deliver as promised. The reforms emphasized
greater macroeconomic stability, greater reliance on market forces, and a rapid opening up to international competition. But in many cases, private investment did not rise as predicted; many economies stagnated or even retracted; and many developing countries already struggling with high levels of poverty found that these steps towards liberalized economies increased rather than decreased inequality.
The reform agenda focused almost exclusively on market forces for more efficient resource allocation through improvements in the incentive structure and on reduced discretionary State intervention. Efficiency enhancement in resource
allocation was sought through liberalization and deregulation at the national level, and through opening up to competition at the global level. Over the years, the reform agenda has been extended to include additional elements such as capital-account liberalization and improvements in national governance on the one
hand, and greater emphasis on poverty reduction and social aspects of
development on the other.
The orthodox reform agenda was based on the belief that capital accumulation, a pre-condition both for output growth and for changes in economic structures, including diversification, industrialization and technological upgrading, would follow automatically from improved allocation of existing resources. The report says that this expectation was rarely met. Indeed, the orthodox reforms were frequently accompanied by low rates of investment and de-industrialization, often with negative social consequences.
Moreover, although liberalization and deregulation may have generated efficiency gains, these gains did not automatically translate into faster income growth. Instead, they often led to growing inequality. Policies promoted with a view to getting relative prices "right" at the micro level failed, because in too many cases
they got prices "wrong" at the macro level.
The report says that the recent upswing in many developing countries - fuelled in part by demand from the US and China - will only lead to sustained growth when governments actively support the process of capital accumulation and structural
change. It argues that structural change cannot be left to markets alone, and it
criticizes the orthodox approach to "sound macroeconomic policies" under which price stability is considered to be the most important condition for sustained economic growth.
The report contends that monetary policy could play a more effective role in support of growth by focusing on the provision of low real interest rates, which would incite investment, and a competitive and stable exchange rate, which would promote domestic producers in world markets. To allow monetary policy to play that role, emerging-market economies should reduce their dependence on foreign
capital inflows, as many of them have already done, and should identify additional non-monetary instruments for price stabilization, such as income policy or direct intervention into price and, especially, wage formation.
It also underlines that any prescription for economic development must respect the specific situation of each country. There is no "one-size-fits-all."
Nonetheless, the report identifies some common factors that should be applied:
policies supportive of innovative investment; adaptation of imported technology to local conditions; strengthening of industrial policy; and "strategic trade integration" - that is, the careful, managed introduction of domestic businesses into
The report stresses that government policy support of the private sector should be provided only on the basis of clearly established operational goals that can be monitored, and should be for specified periods.
Temporary, carefully designed subsidies can foster innovative investments, and temporary import protection can allow learning processes to unfold among domestic businesses, the report says, adding that industrial tariffs remain an important instrument because they are a source of fiscal revenue that is difficult to replace in many of the world's poorer nations, and because international agreements have reduced the degrees of freedom to use other policy instruments in support of diversification and technological upgrading.
The report recommends maintaining internationally approved tariffs at a relatively higher level and modulating applied tariffs on particular industrial sectors around a relatively lower average level. Such an approach is possible if industrial tariff
reductions that might result from ongoing multilateral trade negotiations extend only to average tariffs and not to individual tariff lines, the report says.
This flexible approach to tariffs could be supported by setting aggregate limits to subsidies within which WTO members are allowed to allocate subsidies flexibly to firms and economic sectors. Such a scheme could be similar to the provisions on
Aggregate Measures of Support (AMS) for agriculture, under which WTO members have set targets for percentage reductions while leaving considerable flexibility to member governments in the allocation of reductions across different
A number of developing countries have maintained a tariff regime that allows them to modulate applied tariffs on manufactured goods. However, the current multilateral negotiations on non-agricultural market access (NAMA) are set to reduce this flexibility in tariff setting and binding that developing countries have so far been able to maintain.
In sum, the report says, a developing country's tariff policy needs to be part of a long-term industrialization strategy. Selective trade liberalization should be in line with a country's ability to achieve technological upgrading. In addition, temporary
protection should be combined with export promotion associated with quantitative targets that are easy to monitor and allow governments to withdraw support from firms that do not achieve upgrading targets.
Since the Uruguay Round Agreements reduced the degrees of freedom for
developing countries to use other policy instruments designed to support
diversification and technological upgrading, the relative importance of industrial tariffs has increased.
On the one hand, WTO rules and commitments have made it far more difficult for developing countries to combine outward orientation with the kind of policy instruments that today's mature and late industrializers employed to promote economic diversification and technological upgrading. On the other hand, under
the current set-up of multilateral trade rules, countries still have the possibility to pursue policies that will help them generate new productive capacity and new areas of comparative advantage. Such policies largely concern the provision of public funds in support of R&D and innovation activities. The report argues that a fully inclusive multilateral trading regime must have a sufficient degree of flexibility to reflect the interests and needs of all its members. WTO negotiation procedures have often given the impression of less than full transparency and participation, so that some countries appear to have stronger influence than others. Decisions taken in so-called "green room" meetings or in other gatherings of a limited number of members are often presented to the entire membership as fait accompli. These procedures may have resulted from well-intentioned attempts to preserve practicality and efficiency in complex decision-making. However, they have prompted concerns about unequal influence and unequal representation of national priorities in processes the results of which affect all participants.
Further discussions and negotiations will also need to explore a range of options aimed at creating a new framework or new guidelines for special and differential treatment (SDT) in the WTO. This endeavour would probably need to start from
the recognition that SDT for developing countries means redressing structural imbalances rather than giving concessions. From this perspective, and in the spirit
of the global partnership for development, developed countries would need to agree to a new framework or new guidelines for SDT without receiving concessions in return.
The Doha Work Programme has yet to deliver on the development promise of the Doha Declaration. The eventual outcome may well further reduce flexibility in policy-making by developing countries, particularly in the area of industrial tariffs.
On the other hand, a failure of the ongoing multilateral negotiations could result in greater importance being given to regional or bilateral free trade arrangements as the legal mechanisms that define rules and disciplines in international trade.
The report stresses that the WTO provides negotiated, binding and enforceable rules and commitments. The resultant certainty and predictability in international
trade are arguably key benefits of this regime. Jeopardizing the basic rule of
non-discrimination and complicating adherence to the consensus-based norm of the existing multilateral trade regime would run the risk of leading to a proliferation of specific agreements with disciplines that may well go beyond the scope desired by developing countries. Alarmed by increasing volatility in the stock, commodities, and currency markets of developing countries and emerging economies, the report also warns that without quick international action to reduce global trade imbalances, financial crises in the wake of a tumbling dollar will threaten the benign growth performance of the world economy. The flexibility and pragmatism of US macroeconomic policy that so far has
prevented deficiencies in the global trading system from leading to outright
deflation and recession - that has limited the damage "only" to huge trade imbalances - cannot and will not go on forever.
The report calls for a multilateral effort to redress global imbalances, in part
through an expansion in domestic demand in key industrialized countries other than the United States - countries such as Japan and Germany, which currently have huge surpluses - so that shocks don't reverberate through the developing world.
At a press briefing shortly before the report's launch on 31 August, UNCTAD Secretary-General Supachai Panitchpakdi said that the report has one very
important dimension - its treatment of national policy space, which has always been lingering in the background of discussions. He added that the report was a highly courageous and constructive effort by UNCTAD ''to take the bull by the horns'', referring in this respect to the discussion of policy space as mandated by the Sao Paulo Consensus (para 9) and the World Summit Outcome (para 22d).
Heiner Flassbeck, Director of UNCTAD's Globalization and Development Strategies Division, said that in terms of traditional macroeconomic thinking, if
one looked at China for example over the last 20 years, 95% of all good
economists would come to the conclusion that China's situation is an impossible one - a country that is growing at almost 10% per annum over 15 years, and having extremely low interest and inflation rates. What UNCTAD has been doing is trying to show why this was possible. China used more policy instruments and their
assignment of policies was different from the traditional assignment of policies circumscribed by 'sound monetary' conditions. This is in line with critical thinking that is coming up following what was called the Washington Consensus, which
was based on the idea of ''getting prices right''.
In response to a question on the failure of the Washington Consensus and what
conclusions were drawn in the report on second-generation reforms based on the fact that Joseph Stigliz had remarked that these second-generation reforms had also failed, Flassbeck said that the World Bank has learnt a lot from the experience of the Washington Consensus and that the Washington Consensus is not enough.
''We are not in favour of total regulation of the market, but we are saying that total deregulation of the market is not a solution to the development problem. You need
more than that. You need in certain sectors other kinds of regulation and you may need deregulation,'' he said, adding that one needs to look at it carefully as there is no one size that fits all.
''Do not be shy to look at things that were taboo under the Washington Consensus, but consider it in a broader development strategy from the macro-economic as well as the micro-economic point of view,'' he said.
* This is an abridged version of a report reproduced from the south-north development monitor (SUNS 6093) where it first appeared on September 5, 2006.
Does Investment Always Foster Development: The effects of bilateral investment treaties on developing countries
*Amin George Forji
The topic of bilateral investment treaties (BITs), the agreements establishing the terms and conditions of private investment by transnational corporations, is now a subject for debate among scholars and overnments. During the last two decades, BITs have proliferated and now play a significant role in the conduct of global trade and investment regulation. The investors’ motive is to improve even further the global mobility of capital, which puts capital-poor economies at greater risk by ceding sovereignty to foreign investors and submitting to compulsory arbitration in the event of contract disputes. However, the question of whether the treaties in fact help in the development of less-developed countries (LDCs) remains. At the very least, BITs are systematically altering the landscape of world trade, and one would do well to examine their sudden rise more carefully.
On the face of it, these agreements should as their main goal LDCs, but is this borne out? Although the term "development" can be variously defined and interpreted, there has been a consensus internationally relating it to the U.N.’s Millennium Development goals, culminating in what is now known as the "Right to Development." But if BITs are essentially rules for conducting business and secondarily about development, how does this impact the developing countries?
Regardless of terminology, the fact remains that BITs are generally crafted as political documents and quite often contain no mention of development. Western countries prefer to prioritize investment. If a development objective is involved, it is often generalized to the exclusion of any role for government. For example, the language in BITs negotiated by U.S. investors contains pointed reference to economic development, "Recognizing that agreement upon the treatment to be accorded such investment will stimulate the flow of private capital and the economic development of the parties ... and agreeing that a stable framework for investment will maximize effective utilization of economic resources and improve living standards."
Can these treaties deliver the implied promises they make to LDCs? Does a country necessarily advance because it attracts foreign investment of this kind? Do BITs promote the basic interests of the population of the LDCs? Can they dramatically contribute to eradicating hunger and poverty? Can they help solve the problems of access to health care, the provision of education, worker safety, etc.?
If there is no affirmative answer to these questions, then BITs won’t achieve their stated goal of advancing development. Are they then still worth scrambling for? A basic purpose of BITs is to provide a more stable and secure environment for foreign direct investment (FDI) and thereby ensure "investor confidence" and stimulate new FDI flows. The security and guarantees provided by a BIT should encourage the availability of FDI to developing countries. Most emerging economies must provide such assurances before investors can be persuaded to enter into potentially risky agreements.
There is little evidence, however, that signing a BIT does encourage greater FDI in developing countries. As the World Bank admits, "empirical studies have not found a strong link between the conclusion of a BIT and subsequent investment inflows." Countries that have avoided BITs (such as China) have been far more successful in attracting FDI than have those that have signed BITs, which have far-reaching, negative implications for host country governments and citizens because of the sweeping safeguards for investors at the cost of domestic socio-economic rights and environmental standards. A common concern about investment agreements is that they subject countries to the risk of litigation by multinational corporations whose home countries are signatories to the same agreements; for example, if the host government’s environmental, health, social, or economic policies are seen to hinder the company’s "right" to profits. If BITs are to operate as a positive force in the domestic economies and development planning of LDCs, then, as presently framed, a lot has to be done in the interests of equity. They are as yet incomplete, asymmetric, or even counterproductive, so that even those who support the recent proliferation of BITs believe these concerns must be addressed.
Are BITs instruments of economic hegemony?
In a letter to the U.S. Senate regarding the U.S.-Uzbekistan BIT, the President Bill Clinton wrote that the agreement creates "conditions more favorable for U.S. private investment" and is designed to "protect U.S. investment," which reinforces the notion that BITs, like NAFTA and other multilateral "free trade" agreements, primarily serve the interests of Western nations and corporations. The U.S.’s underlying goal is hardly to invest in Uzbekistan but rather to enable its private interests the more easily to extract raw materials and enjoy cheap labor with a contract that appears to be fair, at least superficially. How then do we respond to the question, "Are BITs instruments of economic hegemony?" This is a hard question, probably without a definitive answer. My submission is that it is by counterposing their intended effect against practical experience it is possible to show that, in general, they promote domination over fostering growth in emerging economies.
An examination of BITs will demonstrate that capital-exporting countries can usually control the agenda and language in their own interest. For example, every BIT has to be drafted, on the initiative, more often than not, of the capital-exporting country. The host country has a choice of either accepting the terms of the contract or rejecting them, thereby foregoing foreign investment. The saying, "Beggars can’t be choosers," applies here, and the resulting language of BITs will reflect the interests of the home signatory, thus sealing the agreement asymmetrically, while appearing to be equally negotiated between the two parties.
We are now in an era of BITs, where investing countries increasingly strive to determine how recipients conduct their lives and affairs. They are now used as another way for example to ensure that recipient governments implement liberalization, privatization, and deregulation agendas dictated by the investing powers. By economic hegemony, I mean to say that one side imposes its standards on the other as a norm. It is clear from the foregoing that, although the BIT is called a treaty, the two parties are far from being coequal. Political "equality" that in fact is inequality obviously leads to unequal outcomes. In a BIT between a developed nation and an LDC, the latter is usually in a weaker bargaining position owing to a lack of reserve capacity in its economy, its weaker political situation, and its weaker negotiating resources. Between equal partners, benefits may be mutual. In asymmetric negotiations, the stronger tends to benefit more, having the capacity to sell, whereas the poorer will be unable to take advantage of the relatively improved market access.
Although LDCs are ready to sacrifice much, it is difficult on the other hand for the developed countries to reduce agricultural exports or end domestic subsidies in competition with exports from the developing country, as subsidies will have to be ended for all its products, to the benefit of non-BIT signatories. Despite some attractions, BITs can have serious and dangerous consequences for developing countries. There can be a lot of economic and political hedging in a contract, which is presented to the LDC on a take-it-or-leave-it basis. This has been possible especially because BITs are often negotiated on a one-on-one basis with weak, corrupt, compliant governments.
Many researchers have pointed out that while BITs may be a tempting vehicle for a developing country to gain some specific advantages from its developed partner, such as better market access for some of its exports, there are also several potential dangers. Most developed countries are known to have used these treaties to extort from their partners what they cannot achieve through the WTO and have been able to oppose or resist certain corresponding disincentives.
Many BITs in fact include rules not part of the WTO regime on investment and government procurement and competition law, which have so far been rejected by emerging nations in their WTO negotiations. BITs, for example, sometimes oblige them to cut tariffs more steeply and open up their service sectors. The effects can be devastating, as the case of Mexican agriculture demonstrates. BIT negotiations generally mean that the recipient must alter its laws, policies, and, perhaps, its entire development strategy to put investors in a more advantageous position. Is this economic hegemony? The politic term would be "business," but people conduct business to extract profits, not run charities.
Bilateral Investment Treaties cover four main areas: Foreign Direct Investment (FDI) admission, treatment, expropriation, and the settlement of disputes. Although there is no uniform protocol for administering BITs, every typical modern BIT shares the following provisions:
Absolute standards of treatment (e.g., fairness and equity) as well as relative standards (national or MFN, most-favored nation treatment).
Safeguards against expropriation and nationalization.
Recourse to arbitration, which could be state-to-state or investor-to-state.
Allowance for the transfer of monies as well as protection from war and civil disturbance.
These substantive provisions have figured in several high-profile disputes between investing and host countries. A very recognizable feature of BIT agreements is that they typically provide for the resolution of these investment disputes by way of arbitration in an international forum such as the International Center for the Settlement of Investment disputes (ICSID) in the World Bank Group or arbitration centers such as the International Court of Arbitration of the International Chamber of Commerce. There is a significant difference in the form of relief provided. The controversies surrounding BIT dispute resolution have provoked a series of concerns, including: Why seek a different dispute mechanism when every country in the world has a legal system in place to protect foreign investment and purports to adhere to norms of international law? With so much adverse impact likely from BIT disputes on the economies and politics of LDCs, are the promises of these treaties to these countries at all reliable?
A case study example of an investment dispute is the ICSID landmark decision in CMS vs. Argentina (2001-2005). The World Bank tribunal’s May 12, 2005 ruling in the landmark case of the government of Argentina and CMS Gas Transmission Company (CMS) was in favor of CMS, awarding damages of approximately US$150 million, including interest, following Argentina’s nationalization. This decision meant that, far from attracting more investment in Argentina, BITs had ruined its economy.
The drama started during its economic crisis of 2001, when Argentina defaulted on much of its foreign debt. As a result, the government decided to nationalize the assets of several BIT institutions, including CMS, which eventually sued before the ICSCID and obtained a favorable ruling. The award set an important precedent for companies operating in LDCs as signatories to BITs. Are LDCs as a result in a win or no-win situation in signing BITs? The fact is that they are costly if not violated and very costly if violated.
a) Costly not to violate — "a necessary evil"
First off, why the mad rush by LDCs to sign BIT agreements that may later hamper their development agendas? Well, governments without credible property rights regimes enter these agreements as a way of making themselves more attractive to capital, hoping that the economic benefits of FDI will include increased labor productivity and the diffusion of technology and other forms of productive know-how, which should ultimately contribute to economic growth. BITs, it is argued, generate competition among emerging nations because no one wants to be left behind, and this has driven the spread of BITs. They are based on the assumptions that free trade and the removal of regulations on investment will lead to economic growth, the reduction of poverty, increased living standards, and employment opportunities. In effect, BITs signal investors that property rights will be respected above all. Why then the concern about BITs? I submit that they are indeed costly if not violated. They are promising up front, certainly, but bear in mind that these binding international agreements severely constrain future governments in their policy options and help to lock in existing economic reforms, whether imposed by the IMF, World Bank, or the Asian Development Bank, or pursued by national governments on their own volition.
Most importantly, BITs involve sovereignty costs, since an LDC agrees to trade sovereignty for credibility with investors. LDC governments have been prone to pay these sovereignty costs, unless they have a reasonable domestic alternative. Developing countries accept restrictions on their sovereignty in the hope that the protection they offer from political and other instability will eventually lead to an increase in FDI, which is one of the stated purposes of BITs. To realize the benefits of a BIT, then, the recipient must surrender significant control over its governance of direct investment and submit disputes with investors to arbitration. Governments must agree to give up the use of a broad range of policy instruments, such as taxation, regulation, currency, and capital restrictions, which they might have otherwise legitimately wanted to use to achieve domestic, political, social, and economic ends.
b) Costly to violate ? More harm or more good?
The second argument in this essay is that BITs are costly to violate, by which I mean the negative consequences LDCs face when they lose a case in international arbitration. In the famous CMS case, Argentina was ordered to pay $133.5 million as well as interest in compensation to the U.S.-based Multinational Content Management System (CMS), on the grounds of having violated the BIT between Argentina and the U.S. The tribunal rejected the Argentine government’s appeal that there were emergency measures dictated by the dire financial, economic, and social crisis in the country outright. This illustrates the high cost of violating a BIT, however they may have been drawn up. The problem is complicated by the fact that the resolution of such conflicts is not subject to the standard juridical systems of the signatories but rather is handled by tribunals or similar bodies specified in the treaty. This inevitably amounts to the privatization of commercial law, with no democratic accountability for the decision makers. Potential host nations, as a result, face the classic collective action problem in order to protect investors’ interests in their territories, as the agreements in the end will be very costly to violate. An unjustified property rights violation will have broader implications in the context of a treaty the home government entered into in good faith. The potential reputation damage to the violator is consequently much more significant in foreign policy if treaty violations can be alleged.
How else can I qualify BITs? They are certainly one step forward and one step back for the economies of developing countries. The high profile cases are shifting the emphasis of BITs gradually and interestingly from trade protection to foreign policy issues.
Despite the likely adverse impacts on the economies of LDCs, the BIT movement as a whole must be regarded as part of an ongoing process to create a new international law of foreign investment to respond to the various demands and challenges of the global economy that has so rapidly emerged within the last few years.
The BIT movement has certainly laid a foundation for the creation of an international investment framework that may eventually attract a worldwide consensus.
* This article first appeared in Ohmynews (Korea) and is reproduced by SEATINI from the website www.bilaterals.org