South Africa Breaks Out

South Africa has decided to stop the automatic renewal of investment agreements that it signed in the early post-apartheid period, and has announced that some will be terminated. Ecuador and Venezuela have already terminated theirs. India says that it will sign an investment agreement with the US only if the dispute-resolution mechanism is changed. For its part, Brazil has never had one at all.

There is good reason for the resistance. Even in the US, labor unions and environmental, health, development, and other nongovernmental organizations have objected to the agreements that the US is proposing.

The agreements would significantly inhibit the ability of developing countries’ governments to protect their environment from mining and other companies; their citizens from the tobacco companies that knowingly purvey a product that causes death and disease; and their economies from the ruinous financial products that played such a large role in the 2008 global financial crisis. They restrict governments even from placing temporary controls on the kind of destabilizing short-term capital flows that have so often wrought havoc in financial markets and fueled crises in developing countries. Indeed, the agreements have been used to challenge government actions ranging from debt restructuring to affirmative action.

Advocates of such agreements claim that they are needed to protect property rights. But countries like South Africa already have strong constitutional guarantees of property rights. There is no reason that foreign-owned property should be better protected than property owned by a country’s own citizens.

Moreover, if constitutional guarantees are not enough to convince investors of South Africa’s commitment to protecting property rights, foreigners can always avail themselves of expropriation insurance provided by the Multilateral Investment Guarantee Agency (a division of the World Bank) or numerous national organizations providing such insurance. (Americans, for example, can buy insurance from the Overseas Private Investment Corporation.)

But those supporting the investment agreements are not really concerned about protecting property rights, anyway. The real goal is to restrict governments’ ability to regulate and tax corporations – that is, to restrict their ability to impose responsibilities, not just uphold rights. Corporations are attempting to achieve by stealth – through secretly negotiated trade agreements – what they could not attain in an open political process.

Even the notion that this is about protecting foreign firms is a ruse: companies based in country A can set up a subsidiary in country B to sue country A’s government. American courts, for example, have consistently ruled that corporations need not be compensated for the loss of profits from a change in regulations (a so-called regulatory taking); but, under the typical investment agreement, a foreign firm (or an American firm, operating through a foreign subsidiary) can demand compensation!

Worse, investment agreements enable companies to sue the government over perfectly sensible and just regulatory changes – when, say, a cigarette company’s profits are lowered by a regulation restricting the use of tobacco. In South Africa, a firm could sue if it believes that its bottom line might by harmed by programs designed to address the legacy of official racism.

There is a long-standing presumption of “sovereign immunity”: states can be sued only under limited circumstances. But investment agreements like those backed by the US demand that developing countries waive this presumption and permit the adjudication of suits according to procedures that fall far short of those expected in twenty-first-century democracies. Such procedures have proved to be arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels. While proponents argue that investment treaties reduce uncertainty, the ambiguities and conflicting interpretations of these agreements’ provisions have increased uncertainty.

Countries that have signed such investment agreements have paid a high price. Several have been subject to enormous suits – and enormous payouts. There have even been demands that countries honor contracts signed by previous non-democratic and corrupt governments, even when the International Monetary Fund and other multilateral organizations have recommended that the contract be abrogated.

Even when developing-country governments win the suits (which have proliferated greatly in the last 15 years), the litigation costs are huge. The (intended) effect is to chill governments’ legitimate efforts to protect and advance citizens’ interests by imposing regulations, taxation, and other responsibilities on corporations.

Moreover, for developing countries that were foolish enough to sign such agreements, the evidence is that the benefits, if any, have been scant. In South Africa’s review, it found that it had not received significant investments from the countries with which it had signed agreements, but had received significant investments from those with which it had not.

It is no surprise that South Africa, after a careful review of investment treaties, has decided that, at the very least, they should be renegotiated. Doing so is not anti-investment; it is pro-development. And it is essential if South Africa’s government is to pursue policies that best serve the country’s economy and citizens.

Indeed, by clarifying through domestic legislation the protections offered to investors, South Africa is once again demonstrating – as it has repeatedly done since the adoption of its new Constitution in 1996 – its commitment to the rule of law. It is the investment agreements themselves that most seriously threaten democratic decision-making.

South Africa should be congratulated. Other countries, one hopes, will follow suit.

Copyright: Project Syndicate, 2013.
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