Martin Khor

The tide is turning against investment treaties that allow foreign investors to take up cases against host governments and claim compensation of up to billions of dollars.

Indonesia has given notice it will terminate its bilateral investment treaty (BIT) with the Netherlands, according to a statement issued by the Dutch embassy in Jakarta last week.

“The Indonesian Government has also mentioned it intends to terminate all of its 67 bilateral investment treaties,” according to the statement.

It has not been confirmed by Indonesia. But if this is correct, Indonesia joins South Africa, which last year announced it is ending all its BITS.

Several other countries are also reviewing their investment treaties.

This is prompted by increasing numbers of cases being brought against governments by foreign companies who claim that changes in government policies or contracts affect their future profits.

Many countries have been asked to pay large compensations to companies under the treaties.

The biggest claim was against Ecuador, which has to compensate an American oil company US$2.3bil (RM7.6bil) for cancelling a contract.

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Robin Broad

This post is drawn from a new article regular TCB contributor Robin Broad wrote with John Cavanagh, “A Strategic Fight Against Corporate Rule,” The Nation, February 3, 2014.

Over the past several decades, multinational corporate Goliaths have helped to write and rewrite hundreds of rules skewing tax, trade, investment and other policies in their favor. The extraordinary damage these policies have caused has become increasingly apparent to the communities and governments most directly affected by them. This, in turn, has strengthened the potential of a movement that’s emerging to try to reverse the momentum. But just like David with his slingshot, the local, environmental and government leaders seeking to revise rules to favor communities and the planet must pick their battles carefully.

We have come to believe strongly that one of the most promising of these battles takes aim at an egregious set of agreements that allow corporations to sue national governments. Until three decades ago, governments could pass laws to protect consumers, workers, health, the environment and domestic firms with little threat of outside legal challenge from corporations. All that changed when corporations started acquiring the “right” to sue governments over actions—including public-interest regulations—that reduce the value of their investments. These rights first appeared in little-known bilateral investment treaties. Twenty years ago, corporate lawyers embedded them in the North American Free Trade Agreement (NAFTA). Today, more than 3,000 trade and investment agreements and even some national investment laws grant foreign investors these powers.

The Obama administration is attempting to insert similar anti-democratic investor protections in new trade and investment agreements with countries that border the Pacific and with the European Union. Hoping to expedite the so-called Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), in early 2014, U.S. congressional leaders introduced fast-track trade promotion legislation that would severely limit Congress’s ability to amend such agreements. The widely anticipated move set off a storm of protest from unions, environmentalists, liberal members of Congress and others, and will likely remain a high-profile fight in the United States in the coming months.

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Timothy A. Wise

Cross posted from Global Post.

ADDIS ABABA, Ethiopia — The African Union commemorated the 10-year anniversary of the Maputo Declaration on agricultural development with the launch of the “Year of Agriculture and Food Security” last week at its summit in Addis Ababa.

Around the summit, following discussions of the political and humanitarian crises in South Sudan and the Central African Republic, I heard the talk turn to agriculture. And African governments certainly have a lot to talk about.

Since Maputo, which mandated that African governments commit to spending at least 10 percent of their budgets on agriculture by 2015, 20 nations have pledged to do so under the rubric of the Comprehensive African Agricultural Development Program (CAADP). Agricultural spending has doubled across the continent, a notable achievement that has shown solid results in increased food production and economic growth for those countries that have fully invested in the sector.

But there is a long way to go. According to a new report from the nonprofit ActionAid, most governments are not “walking the talk” – they are failing to live up to their CAADP commitments.

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Martin Khor

Originally published at Third World Economics.

The investor-state dispute system, whereby foreign investors can sue the host-country government in an international tribunal, is one of the issues being negotiated in the Trans-Pacific Partnership Agreement.

In the public debate surrounding the Trans-Pacific Partnership Agreement (TPPA), an issue that seems to stand out is the investor-state dispute settlement (ISDS) system. It would enable foreign investors of TPPA countries to directly sue the host government in an international tribunal.

In most US free trade agreements (FTAs) with investor-state dispute provisions, the tribunal most mentioned is the International Centre for Settlement of Investment Disputes (ICSID), an arbitration court hosted by the World Bank in Washington.

ISDS would be a powerful system for enforcing the rules of the TPPA, which is currently being negotiated by the US and 11 other Pacific Rim countries. Any foreign investor from TPPA countries can take up a case claiming that the government has not met its relevant TPPA obligations.

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Martin Khor

In the recent public debate surrounding the Trans-Pacific Partnership Agreement (TPPA), an issue that seems to stands out is the investor-state dispute settlement system (ISDS).

It enables foreign investors of TPPA countries to directly sue the host government in an international tribunal.

In most US free trade agreements, the tribunal most mentioned is ICSID, an arbitration court  hosted by the World Bank in Washington.

The ISDS is a powerful system for enforcing the TPPA’s rules. Any foreign investor from TPPA countries can take up a case claiming that the government has not met its relevant TPPA obligations.

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Martin Khor

Last Thursday I took part in an unusual Open Day on the Trans-Pacific Partnership Agreement in Kuala Lumpur.

A thousand people turned up at the event, showing how this trade agreement has aroused great public interest and concern.

The organiser of the half day event was the Ministry of International Trade and Industry (MITI), which had been criticised by several citizen groups as not revealing enough information about the TPPA.

It was unusual because the Trade Minister Datuk Seri Mustapa Mohamed spoke frankly of a “trust deficit” on TPPA between MITI and the public.

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C.P. Chandrasekhar

Increasing evidence that the era of high growth in Asia may be nearing its end has triggered speculation on ways to revive growth in the region. It has also challenged the belief that more developing countries would like the first generation new industrialisers in Asia (South Korea, Singapore, Taiwan and Hong Kong) transit to developed country status in a relatively short period of time. This has spawned a new industry involving the use of multi-country, inter-temporal GDP numbers to identify the countries that have escaped being stuck in the so-called “middle income trap” and the lessons that can be learned from them. Academic economists (Barry Eichengreen, Donghyun Park, and Kwanho Shin, 2013) and international institutions like the IMF (Regional Economic Outlook: Asia and Pacific, April 2013) and the ADB (Jesus Felipe, March 2012) have jumped on to the bandwagon.

A typical analysis would first use the data to say something of the following kind: Growth slowdowns are more likely to occur when countries reach income levels (measured in PPP terms) that identify them as being in the “middle income range”. But some countries, such as the first tier new industrialisers in Asia, managed to escape this middle income trap. Examining their experience (even though they are few in number) points to what needs to be done if others such as China, India, Indonesia, Malaysia, and Vietnam are to ensure sustained growth that takes them to developed-country status.

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Matias Vernengo

The expression of ‘dollarization’ has at least two different meanings. In the narrow sense, it refers to massive currency substitution, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency, more often than not the United States dollar or, in some cases, the euro. Note that currency substitution could be complete and might even imply the elimination of a domestic token. Full dollarization in that sense has taken place in small countries, mostly in Latin America, the Caribbean and the Pacific which are heavily dependent on the United States. Dollarization, in this sense, is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell 1961, p. 661).

In the broader sense, dollarization refers to US hegemony in the world economy as a result of the US dollar being the numeraire currency in international markets. This christens the United States as the premier international monetary authority that regulates and dictates the flows of international financial commitments for global economic activity. Of particular importance in this context is the fact that the key international commodities, including oil, are priced in US dollars in international markets. The former conception of dollarization can be described as dollarization strictu sensu, while the latter as latu sensu dollarization, i.e. not the specific use of  the dollar by a country, but by the whole world economy—an international system in which the dollar is de facto a global fiat money.

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Philip Arestis and Malcolm Sawyer

Whether a euro area banking union would have saved Cyprus from its recent TROIKA (of European Commission, European Central Bank and IMF) tragic treatment is a very interesting question. If it would, then clearly a move towards a banking union, as part of the construction of a political union should be a major component of the reconstruction of the euro area. As we argued in our March 2013 blog, the European Union (EU) summit meeting, 28th/29th June 2012, took a number of decisions in terms of a possible euro area banking union. The most relevant decision was the creation of banking supervision by the European Central Bank (ECB), banking licence for the European Stability Mechanism (ESM), and financial assistance by the ESM to governments, members of the euro area, when in financial difficulty. The banking supervision, however, will not come into full operation before 2014. ESM member states would then be able to apply for an ESM bailout when they are in financial difficulty or their financial sector is a threat to stability and in need of recapitalization. This is exactly the problem with the recent Cyprus problem, as we now elaborate.

Essentially the major problem in Cyprus has been the size and insolvency of its banking sector. It is far too big in relation to the total economy (ten times its annual GDP is often quoted by the TROIKA; being big relative to economy means its assets and liabilities relative to GDP are large); it is also the case that as an off-shore financial and business centre, the Cypriot banking attracted a significant amount of foreign deposits. The first feature poses the danger of a ‘systemic risk’ for the entire economy when one or more banks fail. The second feature exposes Cyprus to accusations, such as those from politicians in Germany and elsewhere that Cyprus has become a ‘money-laundering’ centre within the European Union. By the summer of 2012 it became clear that the two biggest domestic banks in Cyprus were in trouble because of huge losses from the exposure of their branches in Greece, in view of the depressed macroeconomic conditions there, promoted by TROIKA; also in view of the ‘haircut’ of the Greek sovereign debt, of which Cypriot banks had acquired a great deal by 2010. This mixture of wrong decision-making by Cypriot bankers and bad luck created the need for bank re-capitalisations. As a result, Cyprus applied for financial help from its partners in the euro area in the summer of 2012.

The request by Cyprus for a bail-out has certain unique features. The tiny economy of Cyprus requested 17.5 billion euros which, by contrast to the previous Southern European bail-outs, was a comparatively trivial sum in absolute terms. It was, nonetheless, quite large, nearly 100%, when expressed as a percentage of Cyprus GDP. The initial negotiations between the TROIKA and the outgoing government of Cyprus were accompanied by political noises from Germany implying that the German electorate was fed up with having to hand over money to the Southern European periphery yet again. The reason as to why the heavily indebted southern periphery of Europe was morally ‘undeserving’ of financial help was simply undesirable money-laundering. The argument produced is that hard working and prudent German tax payers should not be expected to rescue an overblown banking sector in Cyprus, which became a ‘tax haven’ for wealthy non-Europeans. These are especially Russians, whose deposits in Cyprus are thought to be of the order of 25bn euros, an amount that is almost one-third of the total deposits in the Cyprus banks. The depositors in the Cyprus banking system should be partly expected to rescue their economy, a proposal that was apparently initiated and promoted by the IMF part of TROIKA. The European Commission was reluctant on this score, fearing a bank run in Cyprus and potentially elsewhere in the euro area. Such a plan, it is argued by TROIKA, helps to reduce the unsustainable large banking and financial sectors of Cyprus. It is also the case that to the extent the ‘bail-in’ of the banks in Cyprus is successful it will introduce some market discipline in banking. By sending the message to all depositors in all banks that if a bank needs re-capitalisation they may be asked to bear some of the cost, the depositors will be forced to take more care where they ‘park’ their savings. Unfortunately the world is a much more complicated place to rely for such arguments to be uncontroversial. This is particularly so in the world of money and finance. In any case, and as the editorial of the Financial Times (18 March 2013) rightly commented “instead of throwing Cyprus a life-buoy, leaders put a millstone around its neck”.

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Martin Khor

Many articles and books have been published on the contrast and competition between the present Western and the Asian-style economic models.

Western countries are said to have the free-market model based on competition among private firms, with the government taking a hands-off approach.

East Asian countries are branded as practising “state capitalism” in which the government plays a major role in helping the local private sector and the state also fully or partially owns many enterprises.

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