Changing the Investment Rules for Latin America

The relationships between governments and investors – especially transnational corporations -are changing rapidly, and this is especially true in Latin America today. Last month, Bolivia, Venezuela, and Nicaragua surprised many international observers by announcing that they would withdraw from the World Bank’s international arbitration body, the International Center for the Settlement of Investment Disputes (ICSID). The ICSID is a place where – under prior arrangement – foreign investors who have a dispute with a host government can submit their case to binding arbitration.

Bolivia’s position is that ICSID is not an impartial arbitrator, and cannot be expected to act as one, so long as it is part of the World Bank. As was highlighted by the recent controversy that led to the resignation of World Bank head Paul Wolfowitz, the Bank may have 185 member countries, but it is really dominated by Washington. The saga continues as the Bush Administration once again has chosen a close neo-conservative associate of President Bush – former U.S. Trade Representative Robert Zoellick – to run the institution. The World Bank has long used its power – not only from its own lending of $23 billion annually, but also as part of a “creditor’s cartel” led by the International Monetary Fund – to pressure governments to adopt policies favored by transnational corporations. These include privatizations and removing restrictions on foreign ownership, trade, and investment flows.

The Bolivian government also argues that there are other conflicts of interest involved in having the World Bank’s arbitration panel rule on disputes between governments and foreign investors. Pablo Solón, Bolivia’s Special Ambassador for Trade and Integration, cited the case of Aguas de Illimani, a subsidiary of the French international water giant Suez. It turned out that the International Finance Corporation, a part of the World Bank Group, was a shareholder in Aguas de Illimani. It is clear that the same institution should not be both arbitrator and a party to the dispute.

The ICSID process, like other such international arbitration panels, does not have the transparency, checks and balances, or openness of a real judicial system – like ours in the U.S., for example. It is shrouded in secrecy. And the World Bank’s influence in selecting arbitrators makes it anything but neutral.

Bolivia maintains that their government, which was elected with a majority that was tired of seeing the country’s natural resources drained to make foreign companies rich while their country remained the poorest in South America, needs to change the rules so that they are at less of a disadvantage relative to giant corporations. They have a good case. Since the government raised its royalty rates on hydrocarbons – with the government’s share of the biggest gas fields going from 18 to 82 percent – it has increased its revenue by nearly 7 percent of GDP. This is a huge increase in revenue.

The IMF wrote in their country papers on Bolivia that the country would be hurting itself by raising the royalty rates. They were wrong, as were most of the experts in Washington and the US business press. In these circles it is taken as given that anything which pleases foreign investors is good for the host country, as it will attract foreign investment. Likewise, anything that foreign investors don’t like is generally portrayed as a potential disaster.

In recent years it has not worked out that way, especially in Latin America. At the end of 2001 Argentina engaged in the largest sovereign debt default in history, and most economists and journalists predicted they would suffer terrible consequences for many years to come. But in fact the economy declined for only three months, and then went on to average nearly Chinese levels of growth for the last five years: 8.6 percent annually. Venezuela raised the royalties on foreign investors in the Orinoco basin from 1 percent to 30 percent, and on May first claimed a majority stake in all joint ventures with foreign companies. The big oil companies – Chevron, Exxon Mobil, British Petroleum, ConocoPhillips, and others accepted these changes and are still there, making plenty of money.

In fact, what is happening now in Latin America and other developing countries is an attempt to correct for the extremism that characterized economic policy changes in the 1980s and 90s. Aside from the macroeconomic failures that resulted from these changes, one result was to seriously shift the balance of power to favor foreign investors over governments. The advent and increasing use of “investor-to-state dispute resolution,” with investors able to sue governments directly for actions that infringe upon their profits, is a recent development. About two-thirds of these lawsuits have come about in just the last five years. Similarly, there has been a proliferation of Bilateral Investment Treaties (BITS), now more than 2500, many of them containing provisions for ICSID to arbitrate disputes.

But there does not appear to be any relation between adopting these “investor-friendly” reforms and even the amount of foreign direct investment that a country receives, as even the World Bank’s own research has concluded. For many years China has led all developing countries as a recipient of foreign direct investment. But the main option for foreign companies that have a dispute with the government has been local arbitration through the country’s own China International Economic and Trade Arbitration Commission (CIETAC).

The new assertiveness of Latin American governments toward foreign investors has proven remarkably successful so far, winning them billions of dollars of new revenues and allowing some of the new democratic governments to deliver on their promises to help alleviate poverty. The conventional wisdom is that these changes are just a temporary result of high prices for oil and other minerals and commodities, and unusually low interest rates – all of which have given developing countries more alternatives and bargaining power. But it is much more likely that these changes are institutional and permanent.