South Africa and Ecuador Lead By Example

Investment Treaties Bring More Risk Than Benefit

Kevin P. Gallagher

Kevin P. Gallagher is the author of the new book Ruling Capital: Emerging Markets and the Reregulation of Cross-border Finance. He is a professor on the Pardee School of Global Studies, Boston University.

As they negotiate a mega-trade and investment deal with the United States—the Transatlantic Trade and Investment Partnership (TTIP)—Germany and the rest of Europe have recently started to question the merits of signing treaties that allow private investors to sue their governments over new regulations to promote economic prosperity. This is old news to emerging market and developing countries that have experienced an onslaught of corporate suits against their governments as they have attempted to foster policies for human rights and environmental protection that create inclusive growth for their citizens. While Europe debates the costs and benefits of singing a deal with the U.S. that allows such loopholes, pioneering nations such as South Africa and Ecuador offer sober lessons.

Both South Africa and Ecuador have been subject to pasts where ultra-right regimes favored foreign driven elites. By the turn of the century both countries had toppled such regimes in favor of new governments focused on correcting past inequities and putting their countries on a path of broad-based equitable prosperity.

Yet, to allay fears, once these new regimes took office, South Africa and Ecuador both signed or inherited whatever they could to send the “right” signals to the world investment community that they were open for business and that the boat wouldn’t be rocked.

Then each country discovered that they had signed on to treaties that allowed the very interests they toppled to take them to secret tribunals that could potentially overturn the very foundations of the new societies they sought to justify. That’s right, if you sign a trade or investment deal with the U.S. or a European nation over the past few decades you are under much more scrutiny than if you are simply a member of the World Trade Organization (WTO), where just states file claims against each other. The deals across Western and developing countries, more often than not, allow private firms to directly sue a government.

In South Africa, foreign investors found loopholes to sue the South African government in private for its policies to greater equality in its lucrative mining sector. South Africa had required that these companies be partly owned by “historically disadvantaged persons.”

In Ecuador, foreign investors attacked the country for new environmental regulations that enforced foreign firms to clean up their act and engage with local and indigenous communities that had long been exploited.

After foreign firms attacked the black empowerment law, South Africa put in process an all-inclusive multi-stakeholder review of all its bilateral investment treaties. The government concluded that these treaties were inconsistent with its new constitution that aimed to restore the human rights and improve the employment prospects of South Africans. Bilateral investment treaties, the review found, “pose risks and limitations on the ability of the government to pursue its constitutional-based transformation agenda.” Since this review, South Africa has further concluded that “bilateral investment treaties were now outdated and posed growing risks to policymaking in the public interest.” On that basis, the government has recently moved to terminate many of its bilateral investment treaties. South Africa is far from thumbing its nose at foreign capital. Alongside the carefully negotiated withdrawal from its treaties, South Africa is willing to renegotiate them.

Similarly, Ecuador—attacked by Occidental Petroleum corporation under secret tribunals—has begun to withdraw from its treaties as well. Occidental and others confront Ecuador’s new constitution that seeks to rectify past inequities and seek better treatment for indigenous peoples and to protect the country’s rich ecological heritage.

Both countries stand on strong moral and economic grounds. First, both countries have been subject to regimes that have exacerbated severe an unjust inequities. Second, trade and investment treaties have not proven to deliver their promised benefits.

Such treaties boast that they will bring more foreign investment and that such investment boosts economic growth. However, the majority of economic analysis show that such treaties do not bring foreign investment and that foreign investment, when it does come, is not necessarily correlated with growth. Brazil, a nation that has refused to sign such treaties, remains the second largest recipient of emerging-market and developing country foreign investment in the world.

Indeed, the latest United Nations Conference on Trade and Development Report confirms that investment treaties are not strongly correlated with attracting foreign investment. In addition, new research by the Peterson Institute for International Economics further confirms that when foreign investment does come to a nation, it is not necessarily correlated with economic growth. Indeed, in many cases foreign firms put locals out of business for an impact that is a net negative.

Both South Africa and Ecuador have remained in good standing despite their re-evaluation of these policies, as the Germans and other Europeans inevitably will as well. South Africa continues to receive record amounts of foreign invesmtnet. In the case of Ecuador, that country has investments upwards of 23 percent of GDP, while Latin America as a whole has investments at a mere 20.5 percent. Moreover, Ecuador’s credit rating has been upgraded in recent years and has paved its way back to global capital markets—despite the country’s disdain toward obscure trade and investment treaties.

The world of global economic governance, and global capital markets themselves, has begun to realize that elevating the rights of private capital over national governments can create more political and economic risk than benefit. Nations such as South Africa and Ecuador should be praised for their progressive action Nations such as Germany and their counterparts in Europe should follow their lead and make sure the TTIP allows for the continuity of market capitalism and welfare for citzenries.

Triple Crisis welcomes your comments. Please share your thoughts below.

Triple Crisis is published by

Comments are closed.