For­eign in­vest­ment treaties are bad for poor coun­tries

Sunday World - - World Of Jobs - UMA KOL­LAM­PARA­M­BIL

BI­LAT­ERAL in­vest­ment treaties have been a source of po­lit­i­cal con­tro­versy in re­cent years. This is clear from the alarm­ing in­crease in the num­ber of dis­putes be­tween in­vestors and gov­ern­ments.

The treaties cre­ate an un­equal distri­bu­tion of rights and obli­ga­tions be­tween de­vel­oped coun­tries, which are the source of most for­eign di­rect in­vest­ment (FDI), and de­vel­op­ing coun­tries, which are mainly re­cip­i­ents. They lead to the in­creased risk of lit­i­ga­tion and have a neg­a­tive im­pact on the net ben­e­fit of in­vest­ment to re­cip­i­ent coun­tries.

In­vestors have ini­ti­ated a large num­ber of cases against coun­tries that have bi­lat­eral in­vest­ment treaties (BITs). More­over, the ben­e­fit of these treaties in at­tract­ing FDI is not seen to com­pen­sate for the lit­i­ga­tion ini­ti­ated against these coun­tries.

This is why there is a grow­ing view that the tra­di­tional model for BITs needs a re­view. This must fo­cus on de­vel­op­ing a new-gen­er­a­tion for­eign in­vest­ment pol­icy frame­work. This should, along with pro­mot­ing for­eign in­vest­ment, also en­able re­cip­i­ent coun­tries to reg­u­late FDI in line with their pub­lic poli­cies. What treaties were de­signed to do BITs pro­vide for in­ter­na­tional ar­bi­tra­tion of dis­putes be­tween in­vestors and gov­ern­ments. Ar­bi­tra­tion can hap­pen at the World Bank s dis­pute set­tle­ment body, the Stock­holm Cham­ber of Com­merce or the In­ter­na­tional Cham­ber of Com­merce in Paris.

Al­ter­na­tively, there is an ad-hoc tri­bunal set up un­der the United Na­tions Com­mis­sion on In­ter­na­tional Trade Law. The World Bank s body ac­counts for 62% of all cases, the UN s for 28%, Stock­holm s for 5% and oth­ers, in­clud­ing the Paris-based or­gan­i­sa­tion, for 5%.

Cases at the UN body are reg­is­tered pub­licly. This is not the case in other fo­rums. And par­ties to a dis­pute be­fore the UN body could un­til re­cently in­voke rules that al­low pro­ceed­ings to be kept se­cret. This has been changed.

The num­ber of BITs has grown from about 500 in 1980 to 2 923 in 2014. This is at­trib­uted to the com­pe­ti­tion be­tween de­vel­op­ing coun­tries for FDI which, in turn, is driven by the be­lief that these in­vest­ments pro­mote eco­nomic growth.

They do this by help­ing re­cip­i­ent coun­tries nar­row the gap be­tween do­mes­tic sav­ings and the size of cap­i­tal they need for in­vest­ment. FDI also opens the door to the lat­est tech­nol­ogy and en­ables de­vel­op­ing coun­tries to plug their economies into global ex­port net­works.

There were 38 cases pend­ing in the World Bank body based on al­leged vi­o­la­tions of BITs in April 2003. There was a ten­fold in­crease in just over 10 years, ris­ing to 436 cases by De­cem­ber 2014.

Why coun­tries thought treaties were a good idea

In the ab­sence of a mul­ti­lat­eral frame­work, bi­lat­eral in­vest­ment treaties were seen by de­vel­op­ing coun­tries as a way to sig­nal that they were a safe des­ti­na­tion for in­vest­ment.

So far, quan­ti­ta­tive stud­ies have con­cen­trated on analysing the im­pact of the treaties on pro­mot­ing FDI. The con­clu­sions are not unan­i­mous. Re­cent stud­ies in­di­cate treaties merely af­fect the di­rec­tion of in­vest­ment in­flows, not the quan­tity. This sug­gests that multi­na­tional cor­po­ra­tions route their in­vest­ments through coun­tries like the Nether­lands, which have clauses in their bi­lat­eral treaties that favour in­vestors.

It s there­fore not sur­pris­ing that in re­cent years BITs have been a source of po­lit­i­cal con­tro­versy. At least 45 coun­tries and four re­gional in­te­gra­tion or­gan­i­sa­tions are re­vis­ing or have re­vised their model agree­ments. The aim has been to in­clude pro­vi­sions on pre-es­tab­lish­ment com­mit­ments (that en­sure most favoured na­tion treat­ment) and sus­tain­able devel­op­ment-ori­ented clauses.

South Africa ter­mi­nated its treaties with the Nether­lands, Switzer­land and Ger­many in 2014. It has since given no­tice that it will ter­mi­nate its treaties with Bel­gium, Lux­em­bourg, Spain and In­done­sia. South Africa is re­plac­ing these treaties with the Pro­mo­tion and Pro­tec­tion of In­vest­ment Act. Un­due risk on host na­tions Af­ter the ex­plo­sion of these treaties in the 1990s, there has been a re­duc­tion in new ones. This has been brought about by the re­al­i­sa­tion that tra­di­tional treaties put un­due risk on host na­tions with­out obli­gat­ing in­vestors to con­trib­ute to devel­op­ment re­quire­ments.

The num­ber of cases set­tled through ar­bi­tra­tion has in­creased dra­mat­i­cally from 50 cases in 2000 to 608 cases in 2014. The grav­ity of the situation is clear from the large num­ber of claims made by in­vestor lit­i­gants that put host states un­der se­ri­ous fis­cal strain. Le­git­i­macy ques­tioned Lit­er­a­ture on the im­pact of bi­lat­eral treaties on ar­bi­tra­tion cases is mostly qual­i­ta­tive, deal­ing with ei­ther anec­do­tal cases or le­gal anal­y­sis of treaties. These stud­ies have high­lighted the in­con­sis­ten­cies and con­tra­dic­tory awards by tri­bunals. This in turn has led to the le­git­i­macy of awards be­ing ques­tioned.

Other stud­ies pointed out ad­di­tional fac­tors that con­trib­ute to de­fi­cien­cies. These in­clude a lack of trans­parency, high costs and con­cerns about the qual­i­fi­ca­tions of ar­bi­tra­tors.

An over­whelm­ing ma­jor­ity of dis­putes are ini­ti­ated by in­vestors from de­vel­oped coun­tries (North) against de­vel­op­ing coun­tries (South). This is de­spite the fact that North-North for­eign di­rect in­vest­ment ac­counts for a big­ger share of global FDI com­pared with North-South FDI.

Poor ju­di­cial pro­cesses and other idio­syn­cratic char­ac­ter­is­tics of de­vel­op­ing coun­tries may ex­plain this anom­aly. Our study Anal­y­sis of in­vest­ment dis­pute cases han­dled by the World Bank shows that most of the cases brought by in­vestors are against coun­tries with treaties. More­over, the net ben­e­fit ac­cru­ing to coun­tries with treaties is sub­stan­tially lower than for coun­tries with­out.

Our anal­y­sis con­firms the need for de­vel­op­ing na­tions to be wary of the risks as­so­ci­ated with tra­di­tional treaties whose sole con­cern is the pro­tec­tion of in­vestors.

Our find­ings con­firm the cor­rect­ness of the call by de­vel­op­ing coun­tries for a new for­eign in­vest­ment pol­icy frame­work. This should pro­mote for­eign in­vest­ment and also en­able de­vel­op­ing coun­tries to reg­u­late in­vest­ment in line with their do­mes­tic pub­lic pol­icy pri­or­i­ties.

A new gen­er­a­tion of in­vest­ment treaties must bal­ance in­vest­ment pol­icy and the devel­op­ment strate­gies of host coun­tries while en­sur­ing re­spon­si­ble in­vestor be­hav­iour.

Kol­lam­para­m­bil is pro­fes­sor of eco­nom­ics at the Univer­sity of the Wit­wa­ter­srand. Source: http://the­con­ver­sa­tion.com/

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