Foreign Investors Gone Wild

By Sarah Anderson, Foreign Policy in Focus. Posted May 7, 2007.

When Bolivian President Evo Morales took office in January 2006, he pledged to follow through on his campaign pledge to increase Bolivians' share of revenues from their major source of foreign income, natural gas. International gas companies, however, threatened to sue. Previous Bolivian governments had signed a flurry of bilateral investment treaties that gave foreign investors the right to bypass domestic courts and file such lawsuits through international tribunals. Morales complained that these rules made him feel like a "prisoner" in the presidential palace.

The Bolivian president's predicament is a common one for political leaders around the world. They are caught in an interlocking web of rules and institutions that promote and protect foreign investment -- with little regard for the costs to democracy, the environment, or the public welfare. These increasingly controversial investor protections have become the "get out of jail free" card for corporations in the global economy. They are promoted by the World Bank and other international financial institutions, codified by bilateral investment treaties and free trade agreements, and enforced through the World Bank's arbitration court and other international tribunals.

Countries are pushing back against these investor protections. They might be able to find common cause with some in the U.S. Congress. But the deep pockets of the corporations and the rigged rules of the global economy pose significant obstacles.

Investors Über Alles

Armed with unprecedented legal powers, foreign investors have literally gone wild. They can sue over alleged violations of a long list of protections. The most controversial guard against government actions, including environmental and public health laws, that diminish the value of their investment. While international arbitration judges cannot force a country to change its laws, they can award massive damages to the investor. And that threat alone can have a chilling effect. A U.S. chemical corporation, for example, succeeded in using investment rules in the North American Free Trade Agreement (NAFTA) to pressure Canada to repeal an environmental health regulation.

In the Bolivian gas case, the Morales government dismissed the threats and managed to renegotiate contracts with all the foreign investors, substantially increasing the governments' revenues. Other leaders have not been so fortunate. In nearby Argentina and Ecuador, for example, governments are facing potentially crippling "investor-state" lawsuits.

Argentina has been socked by more than 30 such claims, many of them in retaliation for measures to alleviate the pain of the country's 2002 financial meltdown. A U.S.-based gas company, for example, sued over an emergency law that froze utility rates to protect consumers from runaway inflation. The company, CMS Gas, won $133 million in compensation, money that could have compensated Argentine consumers.

Ecuador is facing a $1 billion suit by Occidental Petroleum, a company widely reviled in that country for alleged human rights and environmental abuses, including using child labor to clean toxic materials, failing to repair pipeline leakages, and operating in protected indigenous lands without authorization.

Occidental's critics cheered when the Ecuadorian government gave Occidental the boot in 2006, charging that it had violated its contract by transferring a share of production to another foreign firm. The Bush administration immediately suspended trade negotiations with Ecuador, while the IMF entered the fray by advising the government to begin accumulating reserves to pay off a possible damages award. Ecuador's Attorney General responded by accusing the IMF of "hateful partiality in favor of interests that have seriously hurt" the country.

In another case with disturbing human rights implications, Italian investors are targeting post-apartheid affirmative action policies in South Africa. They are suing over a law designed to redress historic racism by requiring mining companies to have 26% black ownership and 40% black management by the year 2014. These policies, the investors claim, violate protections against expropriation and discrimination in the Italy-South Africa bilateral investment treaty.

Currently, there are more than 100 cases pending before the World Bank's International Centre for Settlement of Investment Disputes (ICSID), which decides most investor-state disputes. More than 90% have been against developing countries. Meanwhile, these rules are not delivering increased foreign investment. Tufts University researchers recently found that signing bilateral investment treaties with the United States had no effect on Latin American and Caribbean investment flows. In fact, Brazil, which has refused to sign any such deal with the United States, is by far the region's biggest recipient of U.S. investment.

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