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In the 1960s, the World Bank created a mechanism that allows corporations to sue states

Jacobin | 29 October 2023

In the 1960s, the World Bank created a mechanism that allows corporations to sue states


In February of this year, the Delaware-based company Próspera filed an international legal claim demanding the government of Honduras pay it $11 billion — a sum equal to about two thirds of its 2022 national budget. The offense, according to Próspera, was the government’s recent outlawing of the company’s plan to operate a privately run city — with special economy zones and autonomy from the central government on issues like taxation, administration, and security — on the island of Roatán.

Based on an idea floated by former World Bank chief economist Paul Romer to emulate the success of city-states like Hong Kong and Singapore, Próspera was launched in 2013 with the backing of then Honduran president, Porfirio Lobo Sosa.

When new president Xiomara Castro’s took to the campaign trail in 2021, she promised to revise the legislative framework enabling these controversial carve-outs, denouncing them as a threat to the country’s sovereignty. Once she took office in early 2022, her government began to take action in response.

As dystopian as Próspera’s own plans were, the mechanism that allows for the company to sue a sovereign nation is all the more worrying. This mechanism is the international investor-state dispute settlement (ISDS) system.

A Story Forewarned

The World Bank’s International Centre for Settlement of Investment Disputes (ICSID), established in the mid-1960s, is the premier institution and venue for hearing such cases.

This system allows foreign investors to bypass local courts and defend their “rights” at international tribunals that are typically comprised of three professional arbitrators (who may have side jobs such as lawyers and advisers to corporations). They adjudicate whether states have breached investor protections under international trade treaties and other legal documents, like contracts, that have these provisions.

Among previous cases have been challenges to environmental protections; minimum wage legislation; and taxes that companies don’t want to pay. South Africa was even sued by European mining investors over postapartheid black economic empowerment policies, saying such measures had effectively expropriated their investments. (Through that case, the investors secured exemptions to those policies).

One of the most chilling things we found while researching our recent book, Silent Coup: How Corporations Overthrew Democracy, was how serious questions and concerns about the World Bank’s ICSID, and the international investor-state dispute settlement system, were raised and forewarned generations ago.

Honduras was one of twenty-one developing countries, primarily from Latin America, that voted against the creation of ICSID at World Bank meetings in Tokyo in September 1964. The rationale for that vote, sometimes remembered as “El No de Tokyo,” is strikingly similar to contemporary criticisms of this system. In a statement from those 1964 meetings, a Chilean representative explained the group’s opposition to the idea, saying that,

The new system would give the foreign investor, by virtue of the fact that he is a foreigner, the right to sue a sovereign state outside its national territory, dispensing with the courts of law. This provision is contrary to the accepted legal principles of our country and, de facto, would confer a privilege on the foreign investor, placing the nationals of the country concerned in a position of inferiority.

Before that meeting, the World Bank had held other regional consultations about its planned institution to oversee investor-state disputes. We found records of these in Washington, DC and brought copies of them back with us to London. They included revealing summaries of meetings in Latin America and also Asia.

Delegates from twenty Latin American countries gathered in February 1964 in Santiago, Chile, for example, where Argentina’s representative “found great difficulty in accepting the principle underlying the draft Convention,” and “felt that to detract from national sovereignty was not an acceptable method for improving the investment climate.” Brazil’s delegate, too, was unconvinced by the idea that “foreign investors would be granted a legally privileged position, in violation of the principle of full equality”.

Meanwhile, at a regional meeting in Asia in April 1964, India’s representative warned that “the proposals in their present form gave investors additional rights of unspecified scope” without saying anything about their obligations. He also seemed worried about the narrow and limited debate. Despite urgings to the contrary, there were no national or international debates underpinning the establishment of the investor-state dispute settlement system.

Some developing countries went so far as to resist the settlement system from the start. It nevertheless moved forward. Andreas Lowenfeld, a German-American legal academic who was involved in some of that period’s discussions, later said: “I believe this was the first time that a major resolution of the World Bank had been pressed forward with so much opposition.”

Today countries including Honduras seem to have few good options: facilitate transnational capital, including through carve-outs of their territories, laws, and independence, or be disciplined by it. That the World Bank has facilitated this, under an official mission to end global poverty, only adds insult to injury.

The current case against Honduras, though extreme, is no surprise. It was forewarned and is now one case among many on a global level. It is just one of the latest in what’s now almost one thousand of these disputes filed against countries across the globe at the World Bank.

The Straitjacket

One of the most frightening functions of this system is how it locks countries into policies and paths that privilege international business, seemingly at any cost. Honduras is one of the latest to say it is considering withdrawing from the system — but doing so is much easier said than done.

This is because access to this international legal system is enshrined in thousands of bilateral and multilateral trade and investment agreements, crisscrossing the globe. Many of these have what are called “sunset clauses” — or more ominously, “zombie clauses” — that mean that their provisions can stay in force for years, even for decades, after the treaties themselves are canceled or withdrawn from.

While this system is little known among the public, there are whole subfields of the legal and financial industries that have focused on it.

One of the industry insiders we spoke to was Luis Parada, who was on the defense team of El Salvador’s government while it was facing a claim from a multinational mining company that demanded the right to dig no matter what. It had failed to receive permits as well as prove that it had rights to all the land it needed to mine.

We were expecting this lawyer to argue the case of the government that he represented. But he went much further, criticizing the whole industry that he also worked in. “Let’s put it this way,” he told us in a slick office building just a short walk from the White House and the World Bank in Washington, DC, “if I were the president of a country, I wouldn’t be happy with my country being a party to this system.”

To dismantle it, he believed, would require “a broad consensus of determined states”. States set it up, and they “are the only ones that can fix it,” but it would be hard for any one country to do it alone. Many at once were needed. “I have not seen a critical mass of states with the political will [to tackle it], much less a broad consensus,” he said with regret. “But I still hope it happens.”

 source: Jacobin