Ohmynews (Korea) | 2006-09-21
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 governments. 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 Argentine government’s appeal that there were emergency measures dictated by the dire financial, economic, and social crisis in the country was rejected outright by the tribunal.
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.