International Economic Law, Globalization and Developing Countries

International Economic Law, Globalization and Developing Countries Edited by Julio Faundez University of Warwick, UK C...

Author: Julio Faundez | Celine Tan

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International Economic Law, Globalization and Developing Countries Edited by

Julio Faundez University of Warwick, UK

Celine Tan University of Birmingham, UK

Edward Elgar Cheltenham, UK • Northampton, MA, USA

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© The Editors and Contributors Severally 2010 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009941140

ISBN 978 1 84844 113 2

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Printed and bound by MPG Books Group, UK

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Contents List of contributors Acknowledgements 1 2

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Introduction Julio Faundez and Celine Tan International economic law and development: before and after neo-liberalism Julio Faundez Multilateral disciplines and the question of policy space Yilmaz Akyüz Assessing international financial reform Daniel Bradlow Crisis and opportunity: emerging economies and the Financial Stability Board Enrique R. Carrasco The new disciplinary framework: conditionality, new aid architecture and global economic governance Celine Tan Taxing constraints on developing countries and the global economic recession David Salter The World Trade Organization and the turbulent legacy of international economic law-making in the long twentieth century Fiona Macmillan Holistic approaches to development and international investment law: the role of international investment agreements Peter Muchlinski Human rights and transnational corporations: establishing meaningful international obligations James Harrison Core labour standards conditionalities: a means by which to achieve sustainable development? Tonia Novitz

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IEL, globalization and developing countries

Developing countries and international competition law and policy Kathryn McMahon Does the globalization of anti-corruption law help developing countries? Kevin E. Davis Intellectual property, development concerns and developing countries Pedro Roffe Biotechnology and the international regulation of food and fuel security in developing countries Mary E. Footer Environment and development – the missing link Philippe Cullet The UN Climate Change Convention and developing countries: towards effective implementation Vicente Paolo B. Yu III

Bibliography Cases Legislation International instruments Index

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331 354

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Contributors Yilmaz Akyüz, Special Economic Advisor, South Centre, Geneva, Switzerland Daniel Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria, and Professor of Law, Washington College of Law, American University, Washington DC, USA Enrique R. Carrasco, Professor of Law, College of Law, University of Iowa, Iowa, USA Philippe Cullet, Professor of International and Environmental Law, School of Law, School of Oriental and African Studies, London, UK Kevin E. Davis, Beller Family Professor of Business Law, School of Law, New York University, New York, USA Julio Faundez, Professor of Law, School of Law, University of Warwick, Coventry, UK Mary E. Footer, Professor of International Economic Law, School of Law, University of Nottingham, Nottingham, UK James Harrison, Associate Professor, School of Law, University of Warwick, Coventry, UK Fiona Macmillan, Corporation of London Professor of Law, School of Law, Birkbeck, University of London, London, UK Kathryn McMahon, Associate Professor, School of Law, University of Warwick, Coventry, UK Peter Muchlinski, Professor of International Commercial Law, School of Law, School of Oriental and African Studies, London, UK Tonia Novitz, Professor of Law, School of Law, University of Bristol, Bristol, UK Pedro Roffe, Senior Fellow, Intellectual Property Programme, ICTSD, Geneva, Switzerland vii

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David Salter, Associate Professor, School of Law, University of Warwick, Coventry, UK Celine Tan, Lecturer in Law, Birmingham Law School, University of Birmingham, Birmingham, UK Vicente Paolo B. Yu III, Programme Coordinator, Global Governance for Development Programme, South Centre, Geneva, Switzerland

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Acknowledgements Thank you to all the authors who contributed to this project. We are grateful to Anna Farmer who compiled the bibliography, liaised with our contributors and provided essential administrative support to this project. We are also grateful to Paul Trimmer for his technical support in compiling the final version of the manuscript. A special thanks to Ben Booth at Edward Elgar Publishing for his guidance and advice throughout this project. Julio Faundez and Celine Tan January 2010

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1.

Introduction Julio Faundez and Celine Tan

The ongoing process of economic globalization has been accompanied by a comprehensive and ambitious agenda aimed at incorporating developing countries into the global economy. A critical feature of this agenda is the prominent role played by international economic law as a vehicle for bringing together the complex and seemingly disparate components of economic globalization. The prominent role played by law is manifested in the comprehensive codification of international trade, the proliferation of international investment treaties, the enhanced role of international adjudication and the dominant role played by international financial institutions, such as the World Bank and the IMF, in national economic policymaking and governance. The surge of international economic law and the consequent legalisation and judicialisation of international economic relations would suggest that the weaker members of the inter-state system have fared well during the past three decades of economic globalization. After all, as a corollary to assumptions about the rule of law, it would be reasonable to expect that the development and application of international legal rules would protect the rights and interests of weaker states. This expectation is reinforced by two parallel processes that have taken place in recent years: the widespread democratisation experienced by most states in the developing world and the new prominence achieved by the international human rights movement. Yet, despite these seemingly auspicious conditions, developing countries, as a group, have not fared as well as expected. Unlike economically powerful countries, developing countries face enormous and often irresistible pressures to adhere to rules of international economic law, some of which significantly restrict their capacity to formulate policies suitable to their needs. The lack of effective participation of most developing countries in the elaboration of many international economic rules and the often asymmetric content of these new rules suggest that the legalisation of international economic relations may not have brought about unqualified benefits to developing countries.

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Indeed, some would argue that most contemporary rules of international economic law are not development-friendly as they are largely aimed at promoting a one-sided view of globalization – embodied in the so-called Washington Consensus – which is meant to be applied by all developing countries, regardless of local economic, political and social conditions. Under this approach, the rules of international economic law neither provide states in the developing world with greater voice in determining the content and orientation of the international economic system, nor do they empower them to determine the direction of their economic policies. International economic law’s lack of responsiveness to the circumstances of developing countries can be attributed to two main factors. First, the incorporation of developing countries in the postwar period into an international legal system which they had limited influence in designing meant that, historically, developing countries have had to conform to rules and institutions established for the benefit of and tailored to the circumstances of industrialised countries. Second, the continuing marginalisation of developing countries from the locus of decision-making in contemporary economic relations and international economic law has hindered their ability to redress these asymmetries. In many ways, developing countries have remained the ‘objects’ rather than the ‘subjects’ of international economic law. Although globalization and the attendant reconfiguration of economic relations has complicated this analysis somewhat – the economic advancement of some countries, classified popularly as ‘emerging economies’, has meant that there is now a greater heterogeneity of interests in this collective known as ‘developing countries’ – the common issues which bind this group have remained largely the same. The participation of developing countries in the formulation, implementation and enforcement of international economic rules and within international economic institutions remains qualified and this has significant impacts for their social and economic development, political governance and ecological sustainability. The objective of this volume is to investigate and assess the impact of international economic law and international economic institutions on topics of special interest to developing countries. It does not represent an agreed position, nor does it purport to be exhaustive, but it does offer a variety of critical perspectives on a range of issues: international finance, investment, trade, competition, taxation, intellectual property, the environment, food and fuel security, human rights, international labour standards, anti-corruption laws and climate change. Julio Faundez begins (in Chapter 2) by considering the complex theoretical and empirical questions arising from the sudden and unexpected


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rise of international economic law as the most important field of international law in recent years. He argues that international economic law’s rise to prominence is closely linked to its association with the Washington Consensus, hitherto the prevailing development paradigm. In order to understand international economic law’s rise in status, Faundez examines international law’s approach to development over the past five decades and explains why, in the 1960s and 1970s, before the emergence of neoliberalism, developing countries failed to enlist the international legal system in support of their development objectives. He provides a brief explanation of the various political and economic factors that led to the consolidation of the Washington Consensus and the proliferation of international economic rules, most of which are backed by effective enforcement mechanisms. Against this background, Faundez considers the future of international economic law if, as expected, a new consensus on development emerges in the aftermath of the 2008 international financial crisis. His answer is that the future of international economic law looks promising, but this optimism is based on a negative assessment of the current international institutional framework. Indeed, he concludes that, because international economic rules are not deeply embedded in a dynamic and efficient institutional framework, this will not stand in the way of major reform. Faundez’s discussion is complemented by an economist’s perspective on international economic law in Chapter 3. Here, Yilmaz Akyüz considers the issue of national autonomy and asks whether – and if so how – existing multilateral rules restrict the capacity of countries to formulate national policies. While his focus is mainly on multilateral rules in finance and trade, he includes a discussion of trade-related areas such as investment and technology. Akyüz argues that there is an urgent need to reform multilateral disciplines so as to bring about more coherence between the rules of international trade and international finance, and a better balance between countries’ international obligations and their national autonomy. In his view, this balance can be achieved if multilateral rules are combined with policy flexibility at the national level. Akyüz’s argument for greater policy space does not favour a particular type of economic policy. It is simply a plea for a framework of international rules that would enable states to experiment with different ways of organising their economies, provided their policies do not discriminate against or create negative consequences for other countries. Following on from general analysis of international economic rules and institutions, the subsequent three chapters address the critical role of international law and international organisations in a globalized financial system. In light of the financial crisis of 2008 and its aftermath, these


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chapters aim to sketch the contours of the current regulatory framework for international financial flows, including international aid transactions which continue to make up the bulk of resource transfers to developing countries, and consider the conditions under which such financial flows are taking place in the era of globalization and the question of how such flows are regulated and governed. Daniel Bradlow (Chapter 4) addresses the critical issue of international financial governance in his assessment of international financial reform. After mapping the historical context for the contemporary international financial architecture, Bradlow establishes the main purposes of international financial governance and outlines the key standards that should be used in evaluating the efficacy of such governance. He then tests the current international regulatory framework against these five standards – holistic vision of development, comprehensive coverage, respect for applicable international legal standards, coordinated specialism and good administrative practice. Bradlow finds that, while some changes have taken place, current international law and existing international organisations remain problematic in regulating international financial flows, and he provides some proposals for reforms to the architecture in the short and long term. Enrique Carrasco supplements the discussion on reform of international financial governance in Chapter 5 by examining the evolution of the Financial Stability Forum (FSF), now the Financial Stability Board (FSB), the inter-governmental forum established in the wake of the Asian financial crisis in the late 1990s. He assesses how the global financial crisis provided the opportunity for emerging economies to advocate for greater voice in international financial decision-making and the reform of international financial institutions by using the example of how economic and geopolitical factors contributed to the transformation of the FSF. The issue of international financial reform is also crucial for lower income developing countries that depend on official rather than private financial flows as a means of resource generation. For many countries dependent on official development assistance, the discipline of the international aid architecture has significant effects not only on their domestic economies but also on their social and political organisation. In Chapter 6, Celine Tan considers the impact of the new regime of aid governance – perceived as a departure from the strictures of the conditionality-dominated framework of aid delivery of structural adjustment – on developing countries’ engagement with the global economy and the international economic law which sustains it. She argues that, instead of departing from policies of the past, the new modalities of concessional financial transfers have been altered to serve a deeper and more intrusive form of disciplinary control


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over recipient countries and this has adverse impacts on their relationships with the exterior. Aside from financial transfers, taxation is a substantial means of income generation for developing countries. The regulatory framework of taxation is therefore a crucial one for these countries and one considered in Chapter 7. Here, David Salter examines the issue of policy autonomy in the context of taxation. He identifies the various domestic and international constraints that developing countries face in designing and implementing fiscal and taxation policies and notes that, in recent years, the autonomy of many developing countries has been compromised by the requirement to implement tax reform packages prompted by IMF conditionalities. Salter argues that these conditionalities follow a similar pattern and generally include the replacement of sales or turnover taxes by a broad-based value added tax, low rates of corporate and personal income taxes and the gradual elimination of import and export taxes. Quite apart from the ‘one-size-fits-all’ nature of the tax reforms required by the IMF, Salter notes that the current financial crisis raises serious questions as to the sustainability and wisdom of these reforms. Indeed, the reluctance of the various groupings of African, Caribbean and Pacific (ACP) countries to conclude the new Economic Partnership Agreements (EPAs) with the EU can be explained, in part, by the fact that, under these new agreements, developing country partners stand to lose significant revenue since they would be required drastically to reduce, and eventually eliminate, tariffs. There is little doubt that since its establishment the WTO has rapidly become one of the most significant actors in the global economy. In many respects it has become the emblem of the efforts to establish a global system of international trade based on the principle of non-discrimination, as reflected in its two fundamental rules: the most-favoured nation clause and the principle of national treatment. In her contribution to this volume, Fiona Macmillan in Chapter 8 acknowledges the importance of the WTO, but does not see it as a vehicle for furthering developing country interests. Instead, she argues that the organisation serves as a mechanism for maintaining developing countries in a permanent state of dependency towards more powerful economic countries. She notes that the rise of corporate capitalism, as reflected in the powerful role of multinational companies, undermines the doctrinal foundations of the WTO. Indeed, in her view, today the policy of free trade and its underlying doctrine of comparative advantages have become devices used by multinational companies to secure absolute advantage. An alternative viewpoint on the role of transnational corporations (TNCs) is offered by Peter Muchlinski (Chapter 9). In his contribution, Muchlinski asks whether international investment law, as embodied


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mainly in bilateral investment treaties, should be redesigned to take into account the development interests of host states. This proposition raises an important question since there are many who assume that the only way to achieve good development outcomes is through full and unrestrained investment liberalisation. Nevertheless, as Muchlinski shows, this view has recently been challenged. In recent investment disputes, some arbitral tribunals have been asked to consider whether issues relating to national development priorities should be taken into account in the interpretation of bilateral investment treaties. UNCTAD has urged developing countries to negotiate development-friendly investment treaties, and some international NGOs have prepared model international investment agreements that seek to strike a balance between their national development policies and the guarantees and incentives they offer to foreign investors. The enormous power that transnational corporations acquired under the current process of globalization raises the question whether private companies have direct international responsibility for human rights violations. The traditional answer to this question has been negative, both in terms of the nature of international law – which applies mainly to state actors – and in terms of jurisdiction – as there is no international forum to judge human rights violations by non-state actors, except to a limited extent in the area of international criminal law. This traditional view, however, is slowly changing. In Chapter 10, James Harrison critically reviews a range of recent initiatives aimed at securing TNCs’ compliance with international human rights standards. Focusing on the 2003 UN Draft Norms on the Responsibilities of Transnational Corporations and the alternative framework prepared by Professor John Ruggie, Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations, Harrison evaluates both approaches in the context of the limitations of the international framework in altering the behaviour of TNCs generally. The difficulties in implementing international human rights standards in the current context of unrestrained globalization is as much a structural problem related to the nature of international law as it is an ideological problem regarding the nature of development. Indeed, as Tonia Novitz shows (Chapter 11), under the prevailing results-based approach to development, the social dimensions of globalization are regarded as subsidiary social goods that are readily sacrificed if perceived to stand in the way of achieving measurable economic outcomes. This approach does not allow any room for notions such as sustainable or participatory development. In the area of core international labour standards, Novitz is hopeful that a process-based approach to development will make it easier to forge more effective links between the economic and social aspects of globalization.


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She proceeds to explain the origins of the notion of core international labour standards and reviews the way in which labour conditionalities are employed in multilateral and bilateral instruments. Although acknowledging that imposing conditions in order to secure respect for the social dimension of globalization is a firmly established practice, she argues that such conditionality would yield better development outcomes if they were the product of a more participatory process, one that takes into account the interests of all relevant stakeholders. Conditionality has also been pursued in different international arenas to achieve other objectives, such as combating corruption. For more than two decades, international organisations, such as the World Bank, and bilateral donor agencies have focused their efforts on measures to tackle corruption. These measures have included the establishment of anti-corruption units in developing countries, the enactment of domestic legislation in developed countries aimed at discouraging so-called ‘foreign corrupt practices’ and the conclusion of various anti-corruption Conventions under the aegis of the UN and other international organisations. Kevin Davis in Chapter 13 turns his attention to the globalization of anti-corruption measures, and, in particular, whether the intervention of foreign legal institutions in resolving questions that, arguably, should be resolved by domestic institutions has a positive or a negative effect. Davis offers a detailed analysis of the arguments for and against involving external bodies in the resolution of this problem. Noting that the lack of empirical evidence on the impact of the transnational anti-corruption regime makes it impossible to draw general conclusions, he argues however that it is often the problem of the lack of political will to combat corruption that poses the biggest obstacle to addressing corruption, particularly when important economic and political interests are at stake. As the process of economic globalization has intensified, there are many who favour the establishment of a competition law regime at the international level. Recently, the argument has focused on the advantages and disadvantages of establishing a global competition regime within the framework of the WTO. In theory, as the process of global economic integration moves forward, the argument in favour of establishing a global regime on competition is attractive. Developing countries, however, have strongly resisted the idea of establishing a global competition law regime. In Chapter 12, Kathryn McMahon analyses the objections of developing countries to the globalization of competition law and reflects upon the consequences of not having such a regime. She discusses alternative mechanisms to coordinate international responses to anti-competitive behaviour and analyses the impact of two key landmark cases, the WTO’s 2004 Telmex decision (Panel Report: Mexico – Measures Affecting


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Telecommunications Services) and the recent US Supreme Court decision in the case concerning F. Hoffman-La Roche Ltd v. Empagran. Aside from competition policy, the regulation of intellectual property represents one of the other most controversial and divisive issues on the current international lawmaking agenda. In Chapter 14, Pedro Roffe offers a succinct but comprehensive analysis that explains how the participation of developing countries has evolved, since the inception of the international intellectual property system in the nineteenth century. He notes that, while the experience of specific countries within the international intellectual property system has been different, developing countries have tended to make their claims collectively through the United Nations system since the establishment of UNCTAD in 1964. Roffe’s chapter also demonstrates that, notwithstanding the proliferation of international institutions with responsibilities over specific issues of intellectual property, the intellectual property regime, as a whole, is tilted in favour of private interests and, as a consequence, does not adequately respond to the needs and interests of developing countries. The issue of intellectual property rights is also considered by Mary Footer (Chapter 15) in the context of biotechnology and the international regulation of food and fuel security. Here, Footer considers the challenges posed by the twin problems confronting the world today – the growing demand for food and fuel – and evaluates one of the most contentious solutions to both: the use of biotechnology in agriculture to facilitate greater yield and quality of produce to meet these demands. She maintains that, while there is still scepticism over the use of biotechnology to secure food and fuel security, the main hurdle facing developing countries’ application of such technology in agricultural production remains the problem of access. Footer thus argues that there is a need not only to develop a fresh methodological approach towards evaluating the potential use and impact of biotechnology in developing countries but also to consider new innovative models of technology ownership and cooperation to overcome the access barriers posed by the current intellectual property regime. The last two chapters of this volume tackle the crucial link between international economic law and the environment. Traditionally viewed as separate spheres of international lawmaking, the relationship between economic law and protection of the environment is becoming a crucial aspect of negotiations in both international trade and investment regimes and multilateral environmental agreements. In Chapter 16, Philippe Cullet addresses the three main links between international environmental law and economic development – the reconciliation of conservation and development objectives, the manifestations of notions of equity in principles of international environmental


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law (notably the principle of common but differentiated responsibilities) and the implementation of international environmental law in developing countries. In particular, Cullet examines the evolution of the concept of sustainable development, a yet legally unclear umbrella notion, and discusses the varied and contradictory trends which characterise the relationship between environmental law and development. The tensions between economic growth and development and environmental protection are similarly highlighted by Vicente Paolo B. Yu III (Chapter 17) in his discussion of the international climate change regime. Yu presents a policymaker’s perspective on the United Nations’ Framework Convention on Climate Change (UNFCCC) from a developing country’s standpoint. Arguing that the Convention represents the only multilaterally agreed, legally binding agreement governing the international community’s actions vis-à-vis climate change, he evaluates the difficulties that developing countries have faced in securing their interests in negotiations under the UNFCCC. Yu reviews the scientific basis underpinning the lawmaking process within the regime, particularly as it relates to the notion of historical responsibility of developed countries for carbon emissions, and the links between climate regulation and socioeconomic development in developing countries, reiterating the principle of equity underlying the Convention. Yu argues for the establishment of a balanced framework for global cooperative action on climate change guided by a fair and equitable apportionment of responsibility and taking into account differing capacities of countries in combating the threat of climate change.


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2.

International economic law and development: before and after neoliberalism Julio Faundez*

1.

INTRODUCTION

Two features have characterised international economic law (IEL) during the recent period of rapid and seemingly unrestrained economic globalization: its emergence as the most important field of international law and its close association with the ruling paradigm of development, as embodied in the celebrated Washington Consensus. The rise to prominence of IEL is a novel development. Indeed, until recently, IEL rules were not regarded as real law, even by the undemanding standards of legal validity and efficacy applied by most international lawyers. As a consequence, courses devoted to general international law rarely covered IEL. Most international law treatises and textbooks either ignored it or dedicated only a short chapter noting that there were few rules in this area and that most of them were either not binding (such as the numerous rules in the GATT Agreement) or highly contested (such as those in the area of international investment law). From the 1980s, however, after the outbreak of the current wave of globalization, IEL underwent a massive transformation to become the most important field of international law. Its importance is confirmed by three different measures: volume, scope and efficacy. The volume of new international economic rules is reflected in the large number of multilateral and bilateral treaties on matters relating to trade, finance and investment and in the numerous decisions by international economic organisations and other bodies that set standards and voluntary codes in areas as varied as banking, corporate governance and food standards. The scope of IEL rules, perhaps one of its most novel and distinctive characteristics, is related to the extent to which the rules address matters hitherto regarded *

Professor of Law, School of Law, University of Warwick, Coventry, UK. 10


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as part of the exclusive domestic jurisdiction of states. The greater efficacy of IEL rules is reflected in the significant improvements in their enforceability, due to the establishment of numerous international tribunals with jurisdiction to resolve international economic law disputes. Thus, today, there are more IEL rules and they reach deeper into the national policymaking process and are taken seriously because they are more readily enforced. The prominence achieved by IEL in the late twentieth century is noteworthy because, throughout the 1960s and 1970s, developing countries tried, unsuccessfully, to make use of international legal institutions to support their development efforts. At the time, most developing countries relied on a development model in which the state played a leading role in steering the economy. By the 1980s, however, developing countries began to embrace a set of IEL rules predicated upon a radically different model: one that is based on the principles of neo-liberalism and drastically restricts the role of the state and transfers control over key economic decisions to international agencies or to markets. This model of development is generally known as the Washington Consensus. In the areas of trade and investment liberalisation, economic deregulation and protection of property rights, IEL rules and institutions faithfully reflect the Washington Consensus. This is precisely the reason why today most governments and international legal scholars take IEL seriously and why anti-globalization activists deride it. This set of principles has also provided the basis for the emergence of a new economic paradigm for developing countries. Indeed, according to leading proponents of globalization, the rapid economic integration of the world economy has made it necessary to harmonise rules and standards in order to create a level playing field. These rules and standards – largely derived from economic science – have been applied to all states across the world regardless of their level of economic development. This approach is justified, according to Larry Summers – the influential US economist, policy-maker and former chief economist of the World Bank – because the rules of economics are like laws of engineering: one set of rules works everywhere (Klein, 2009). IEL has thus become the main vehicle through which the principles of the Washington Consensus have been translated into international binding rules and policies. The recently acquired status of IEL in international law is also significant because the set of rules that currently govern the world economy seem to be slowly departing from traditional assumptions underlying the conceptual framework of international law. While hitherto international law has relied on the consent of states to legitimise its rules and institutions, today IEL rules and practices have become increasingly removed from


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the notion that the consent of states is a prerequisite for the validity and enforceability of international law. A more powerful source of legitimation for IEL rules seems to be the imperative of global economic integration and the needs and interests of the leading developed states and international power brokers. Thus, for example, today it is not easy to discern a clear link between the profuse number of conditionalities imposed on developing countries and the traditional view that under international law states are only bound by rules that they freely accept. Regardless of whether this development signals the demise of state sovereignty, as some observers suggest, it is interesting to note that the current transformation of IEL has been accompanied by a revealing shift in the description of states and the content of IEL rules. States are now often no longer referred to as actors, but merely as economies; those that are successful are described as emerging economies and those that are not are either ignored or described as failing or fragile. Likewise, IEL rules, along with numerous decisions of questionable legal validity, are described as disciplines, thus suggesting that states no longer enjoy the prerogative of opting out of international rules. It is also revealing that the rhetoric employed by developed states and by international economic organisations suggests that one of the main purposes of IEL rules is to ‘lock in’ the process of structural reform that these states are supposed to implement so as to ensure that chronically volatile developing states do not undermine the predictability and stability of the word economy. This view of IEL rules as a straightjacket could well be a reasonable economic expectation for leading private international economic actors; but its political and legal implications are, if not dangerous, at least a matter for serious concern. The notion of IEL as a straightjacket for developing countries also raises the inevitable question of what will happen to IEL if, as is likely, the financial crisis of 2008 gives way to a new development paradigm. Will IEL shift back towards a more state-centred approach to development? If so, will developing countries be in a position to make use of international legal institutions to further their interests? Or, will they focus instead on politics and diplomacy rather than law? The rapid ascent of IEL and its link to the prevailing development paradigm undoubtedly raises an array of complex and highly contested theoretical and empirical questions. The purpose of this chapter is to contribute towards the clarification of some of these questions. Its three main objectives are: (1) to explain IEL’s evolving approach to development during the past five decades; (2) to identify the impact that globalization has had on the foundations of international economic law and reflect upon its likely impact on developing countries; and (3) to identify contemporary legal and political trends that may provide clues to discerning how the


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relationship between IEL and development is likely to evolve in the postWashington Consensus period.

2.

THE POST-WAR SETTLEMENT AND IMPORT SUBSTITUTION (1950–80)

The post-war settlement brought about the establishment of the United Nations, the World Bank and the International Monetary Fund (hereafter, the Bretton Woods institutions) and the General Agreement on Tariffs and Trade (GATT). This institutional framework was based upon two main pillars: the prohibition of the use of force (UN Charter: Art. 2 (4)), unless duly authorised by the UN Security Council; and the notion that the international community had a duty to promote peaceful social and economic change, in order to maintain peace and security. Under the Charter, the prohibition of the use of force is balanced by a clear understanding that the international community has a special responsibility for improving social and economic conditions throughout the world so as to create conditions for political stability and thus prevent conflicts between and within states. Seen from this perspective, the political and economic objectives of the post-war settlement were inseparable, which explains why the UN Charter is committed to achieving both objectives at the same time. Economic and social development was thus an essential component of the post-war settlement. The grand political objectives reflected in the UN Charter were not achieved. The cold war, which divided the world into two irreconcilable camps, undermined the ideal that the UN would centralise the use of force and generated instead a network of regional security pacts that were concerned with political stability rather than development. Moreover, the reluctance of some colonial powers to accept the principle of selfdetermination brought about a wave of wars of national liberation that divided members of the UN and distracted the attention of the organisation away from economic affairs. After the completion of the process of decolonisation, however, the newly independent states in Africa, Asia and the Caribbean, together with other developing countries, joined forces to create a powerful political bloc at the United Nations. The objective of this bloc (later loosely identified as the Group of 77) was to enlist international law and institutions in support of their members’ quest for social and economic development. Between 1950 and 1980 most developing countries assigned to the state a strong role in economic development. In this capacity, the state was actively involved in promoting the establishment of a manufacturing base


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and modernising the agricultural sector, often through the redistribution of land. These goals were not easy to achieve. Chronic shortage of foreign exchange made it difficult for developing countries to import the required capital goods. Moreover, local industries had difficulties competing with imported goods from more advanced countries. Most developing countries therefore began implementing, albeit in different ways and at different speeds, an economic policy that came to be known as import substitution. This policy was based on the simple idea that, rather than wasting scarce foreign exchange on imported products that only the rich could afford, the state should, through an array of regulatory mechanisms, provide incentives for the development of local manufacturing capacity. The implementation of this policy required a commercial policy that today would be regarded as protectionist but which was then regarded as essential in order successfully to secure national development objectives. The Bretton Woods institutions, though ultimately committed to a liberal international economic system (Frieden, 2006), did not stand in the way of the implementation of import substitution strategies. On the contrary, the World Bank actively contributed to strengthening the economic capacity of states through technical assistance and grants aimed at strengthening the economic infrastructure of developing countries. The IMF, which allowed and encouraged countries to maintain capital controls, ensured, through pegged but adjustable exchange rates, that balance of payments deficits did not cause disruptions to the regular flow of international payments. The GATT, which at the time focused mainly on reducing tariffs in industrial goods, was not overly concerned with the plight of developing countries. Indeed, in the 1950s, the GATT was described as a rich man’s club. In any event, GATT rules on subsidies and other forms of state support were both vague and flexible and thus did not stand in the way of import substitution policies. Moreover, by the late 1960s, new GATT rules were adopted that exempted products from developing countries from the most-favoured-nation principle so that those countries could enjoy preferential access to the markets of industrialised countries (Bartels, 2007). During this period, developing countries focused their attention on two major objectives: first, strengthening their capacity to control the exploitation of their natural resources and consequently to assert their right to regulate multinational companies operating in the sector; and second, ensuring access to modern technology in order to support and further develop their efforts to implement the policy of import substitution. Disputes over the right of developing countries to control their natural resources, and in particular whether they could nationalise the assets of companies operating in this sector, were prevalent during most of the


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twentieth century (Sornarajah, 1994: 294). At the international legal level there was no consensus on how to resolve these disputes. Although developed countries conceded that developing countries had a right to nationalise, they insisted, nonetheless, that international law required them to pay prompt, adequate and effective compensation. They also claimed that regulatory measures implemented by developing countries constituted indirect expropriation and, as such, also required prompt, adequate and effective compensation (Weston, 1975). The views between developed and developing countries on this issue remained far apart throughout this period. Indeed, in 1964, the US Supreme Court, in the celebrated Sabbatino case,1 candidly acknowledged that this was an area in which the law was unsettled since capital exporting and capital importing countries held widely conflicting views. As a consequence, disputes over the regulation of natural resources were largely handled diplomatically, culminating often in different forms of external intervention, which sometimes led to the overthrow of governments that insisted on their right to nationalise foreign-owned property (Iran 1952, Guatemala 1954, Chile 1973). Transfer of technology was another issue that concerned developing countries. The devastating political and economic impact of colonialism on countries that had recently become independent was felt sharply in the area of technology. Colonial powers were not, in general, concerned with education and as a result, upon independence, there was a dramatic lack of suitably qualified people either to run the economy or to organise modern manufacturing firms. Indeed, during the period of colonialism before the Second World War, only 12 out of more than 100 developing countries had achieved enough know-how to be classified as experienced manufacturers (Amsden, 2007: 37). The urgent need to have access to technology was also sharply felt by Latin American countries, even though they had achieved independence in the first half of the nineteenth century. Although some of the latter countries had made significant progress in the implementation of state-led import substitution policies, they soon found that their capacity to further develop their manufacturing base was impeded by their lack of technology. During the 1960s and 1970s developing countries tried, unsuccessfully, to lobby for the adoption of new rules of international economic law that reflected their interests and development priorities. In this context, the United Nations General Assembly, where developing countries held the majority of seats, provided them with a unique platform to discuss and promote their views. This process resulted in the adoption

1

Banco Nacional de Cuba v. Sabbatino (1964) 376 US 398.


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of several General Assembly resolutions, including the Resolution on Permanent Sovereignty over Natural Resources, the Declaration of the Establishment of a New Economic Order, the Charter of Economic Rights and Duties of States and the Declaration on International Investment and Multinational Enterprises (Cox, 1979; Weston, 1981). These Resolutions and Declarations were not formally binding, and not one made its way into the labyrinth of customary international law. Nonetheless, these Declarations and Resolutions provided the basis for the development of more structured charters on the regulation of multinationals (Draft Code of Conduct on Transnational Corporations, prepared by the UN Economic and Social Council) and on the regulation of transfer of technology (prepared by UN Conference on Trade and Development, UNCTAD). These two Codes underwent interminable discussions within the UN, but were never formally approved (for the text of these draft codes and declarations, see Weston et al., 1990). The provisions on natural resources, foreign investment and technology transfer contained in the Charter of Economic Rights and Duties of States capture the essence of the aspirations of developing countries during this period (Weston et al., 1990: 568). Article 2 (1) reaffirms the principle that states can freely exercise full sovereignty over their natural resources and economic activities. Article 2 (2) sets out in detail the rights that derive from a state’s sovereignty over natural resources and economic activity. These rights include the right to regulate foreign investment in accordance with its own laws; the right to regulate the activities of multinational companies operating within its jurisdiction; and the right to nationalise foreign-owned property, subject to appropriate compensation determined by its own laws and reviewed by its own courts. Article 2 also provides that no state shall be required to grant preferential treatment to foreign investment and that multinationals should refrain from intervening in the internal affairs of host states. In the area of technology, the Charter (Art. 13) proclaims the right of every state to benefit from advances in technology for the purpose of furthering its economic and social development. It calls upon states to facilitate the transfer of technology for the benefit of developing countries and, in particular, it calls upon developed states to support the scientific and technological infrastructure of developing countries. Transfer of technology is defined in the UNCTAD Draft (1.2) as ‘the transfer of systematic knowledge for the manufacture of a product, for the application of a process or for the rendering of a service and does not extend to the transactions involving the mere sale or mere lease of goods’ (Weston et al., 1990: 585). The UNCTAD Draft also purported to prohibit restrictive business practices often associated with the transfer of


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technology, such as exclusive dealing, restrictions on research and tying arrangements.

3.

TOWARDS THE WASHINGTON CONSENSUS

Attempts by developing countries to influence the content of IEL were unsuccessful. Today, the UN Resolutions and Codes drafted during this period have long been forgotten and many observers would probably regard them as politically quaint, economically barmy or the product of misguided economic nationalism (Krasner, 1985: 6–11, 299; Pauwelyn, 2005b: 42; Finger, 2008). Yet, it is worth remembering that in terms of economic outcomes the policy of import substitution was quite successful. Indeed, between 1950 and 1980, the period when this policy was applied, developing countries experienced an unprecedented expansion in living standards and per capita income that brought about an important decline in levels of poverty. During this period income in developing countries grew at a rate of 5 per cent. During this same period income in developed countries grew at a rate of 4 per cent (Amsden, 2007: 6; Yusuf, 2009: 9–11). It is therefore necessary to ask whether IEL rules played any role in the achievement of these good economic outcomes. It is clear from the account in the previous section that IEL rules did not play a direct role in securing the positive economic outcomes during the period 1950–80. Ironically, however, these positive outcomes can be rightly attributed to the fact that international economic institutions and rules provided developing countries with space to experiment with a variety of economic policies aimed at securing a more solid and competitive productive base. As Alice Amsden notes, the GATT allowed developing countries to deviate from the principles of free trade in order to build their national economies (Amsden, 2007:48). Thus, although the international trading system was liberal, developing countries were allowed to customise their policies and formulate their own industrial policies, protect the industries that they wanted to promote and exercise strict controls on foreign direct investment. The international monetary system, which did not require or encourage financial liberalisation, complemented the prevailing flexible international trading system. Thus in many respects, the notion of ‘embedded liberalism’ used by John Ruggie to describe the post-war settlement among developed countries also applies to developing countries because, although the rules of IEL adhered in principle to liberal multilateralism, the prevailing system allowed developing countries to deviate from this principle for the sake of strengthening their economies and ensuring the stability of their political institutions (Ruggie, 1982: 397, 413).


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The flexible system of international economic rules that allowed developing countries to liberalise at their own pace did not last. By the 1970s, as the Bretton Woods system of fixed exchange rates collapsed and competition in trade and investment among industrialised countries intensified, the institutions of the world economy came under severe stress. In addition, the emergence of multinational companies as the leading economic agents in the world economy began to make nation states appear politically and economically outdated (Dunning, 1993). From the perspective of multinational companies, the division of the world into territorial units with diverse and conflicting regulatory frameworks was inefficient. It was an unnecessary political barrier that impeded the free flow of capital and goods. Since calling for the elimination of national legal systems was not practical, multinationals lobbied vigorously and successfully to secure uniform international standards in key areas of international trade, investment and intellectual property. Along with the spread of multinationals, other factors, such as the revolutionary developments in information technology and improvements in transport and telecommunications, also contributed to strengthening the demand for a more uniform system of economic regulation throughout the world. Changes in the organisation of production and the emergence of new technology were undoubtedly critically important in making the relatively flexible and benign rules of IEL of the post-war settlement appear out of date. Nevertheless, there were also a variety of political decisions that, in combination with other developments, contributed to bringing about a new set of rules. By the late 1970s the United States had become increasingly frustrated by the GATT’s inability to make significant progress in the elimination of non-tariff barriers or to develop a robust approach in the regulation of unfair trade practices (dumping and subsidies). Instead of comprehensive regulations in these areas, the GATT had developed a series of Codes that were binding only on countries that chose to accept them. The regulatory fragmentation generated by this approach was exacerbated by the fact that the leading trading nations began to look for solutions to their urgent commercial policy problems outside the framework of the GATT, resorting to a variety of devices including voluntary export restrictions, orderly marketing arrangements and special treaties that controlled the flow of products into certain markets through quotas. It is thus not surprising that, at the time, this state of affairs was described by some commentators as managed protectionism, and one of the leading trade law scholars argued that the institutions of world trade were crumbling (Jackson, 1978). Whether or not these assessments were correct, there is little doubt that by the late 1970s and early 1980s the world trading system was rapidly moving away from the ideal of multilat-


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eralism embodied in the GATT. This unfortunate state of affairs was made worse by the policy of the US Government to resort to unilateral measures in order to protect its economic interests by imposing or threatening the imposition of sanctions on countries that had laws or practices which, in the view of the US President, unjustifiably restricted US commerce. This policy, characterised as aggressive unilateralism (Bhagwati and Patrick, 1990), was vigorously used to open up markets to US exports and to protect intellectual property rights held by US multinationals (Chorev, 2005: 333).

4.

BRINGING IN NEW RULES

The United States policy of aggressive unilateralism was combined with a more positive and dynamic policy aimed at persuading developing countries to accept the longstanding views held by the US and other capital exporting countries regarding the protection of foreign-owned property. This policy led to the establishment of an extensive network of bilateral investment treaties (BITs) with developing countries (Vandevelde, 2000). The US policy on BITs was soon replicated by most capital exporting countries and by the end of 2007 there were over 2,600 BITs in force. This process brought about a major shift away from the views that developing countries had supported during the period leading up to the approval of the Charter of Economic Rights and Duties of States. The US and other developed countries did not, however, focus only on bilateral solutions. They also used their financial clout and political influence within the United Nations to prevent developing countries using the UN as a political platform to rally support for their views on development. Thus, for example, the New York based UN Centre on Transnational Corporations (UNCTC) – which, since 1974, had been instrumental in supporting developing countries in their negotiations with multinational companies and had taken an active role in preparing the draft Code of Conduct on Multinationals – was transferred to UNCTAD in Geneva in 1993 with a smaller budget and reduced staff.2 UNCTAD itself, which had been established by developing countries to ensure that the international trade agenda did not neglect the overriding importance of development issues, was marginalised as the IMF and the World Bank began to assume a prominent role in steering the process of development (Love, 2001). The two large oil price increases in the 1970s, which were followed

2

See http://unctc.unctad.org/aspx/index.aspx (accessed 28 August 2009).


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by the debt crisis of the 1980s, exposed, once again, the vulnerability of developing countries to the vagaries of the world economy. The sequence of events is well known. The large OPEC surpluses (petro-dollars) were recycled by the private banking system in the form of low-interest-rate loans to developing countries. Since the loans were cheap, many developing countries borrowed excessive amounts and were not careful to ensure that the investments procured by the loans would generate adequate surpluses. Thus, when in the late 1970s interest rates shot up and there was a second sharp rise in oil prices, the world economy faced a serious recession, which had a devastating impact on developing countries (Cline, 1995). These circumstances provided the IMF and the World Bank with a unique opportunity to persuade developing countries to abandon their state-led development polices and to embrace instead market-friendly policies (Woods, 2006: 53). The mechanisms used by the Bretton Woods institutions have varied over the years (see Tan, Chapter 6 in this volume), but they have all included conditionalities, which generally involve soft loans in exchange for the implementation of policy reform. The initial programmes of policy-based lending were embodied in the notorious Structural Adjustment Loans, which exchanged badly needed finance for the implementation of policy measures aimed at reducing the role of the state, releasing market forces and reducing the discretion of politicians (Mosley et al., 1991a: 40–45; Babb, 2005). These structural adjustment policies soon became the new paradigm for development and, in the 1990s, were christened the Washington Consensus by an insightful economist (Williamson, 1990b). The policies prescribed by the Washington Consensus included fiscal discipline, tax reform, interest rate liberalisation, trade liberalisation, liberalisation of inward foreign direct investment, reduction and redirection of public expenditure, deregulation, privatisation and security of property rights. These policies were never agreed by all states, but they enjoyed the support of the US Treasury, the US Federal Reserve Board and the two Bretton Woods institutions (Williamson, 2000: 257). They were imposed on developing countries by the Bretton Woods institutions through a range of formal and informal mechanisms, which some observers describe as soft law (Alvarez, 2005). Political and economic pressure on developing countries by the United States and other developed countries also played an important role in spreading Washington Consensus policies throughout the world. The World Bank claimed that these policies were a sound alternative to the policies of import substitution, which had given far too much discretion to corrupt politicians, usually captured by narrow interest groups (World Bank, 2005a: 6). Despite its obscure political origins, its problematic mode of implementation and questionable rationalisation, the Washington


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Consensus soon became the overriding constitutional framework for IEL. In the terminology used by Hans Kelsen’s positivist legal theory, the Washington Consensus became the ‘basic law’ of the world economy (Kelsen, 1967). The completion of the Uruguay Round and the establishment of the WTO is a landmark in the process of implementation of the Washington Consensus. Indeed, after a long period of bitter wrangling and interminable arguments the international community approved, in 1995, several related agreements that brought to an end debates that had plagued the GATT for several years. The Single Undertaking brought under one roof the reformed GATT Agreement of 1947, and agreements regulating unfair trade practices, safeguards, non-tariff barriers, trade in services, traderelated investment measures and intellectual property. It also established a unified dispute settlement system for all these agreements so that in any particular dispute any of these agreements can be considered by the adjudicating bodies – Panels and Appellate Body. The Uruguay Round also made it easier for complaining parties to establish a Panel and, through a reverse consensus rule, made the adoption of Panel and Appellate Body reports virtually automatic. The judicialisation of international trade disputes is generally regarded as the single most important achievement of the Uruguay Round (Jackson, 2008: 444). Equally, significant, however, is the fact that some of the key provisions of the Uruguay Round Agreement effectively made import substitution policies illegal: the Agreement on Subsidies and Countervailing Measures prohibits subsidies contingent upon the use of domestic over imported products; the Agreement on Trade Related Investment Measures prohibits states to require foreign enterprises to use products produced locally or to set limits to the importation of products linked to the value or volume of local products that they export; and the TRIPS Agreement does not allow compulsory licensing for the purpose of furthering home-grown industrial policies. The cumulative effect of these provisions has brought about a qualitative change that clearly distinguishes the WTO from the old GATT. While obligations under the old GATT were based on the reciprocal exchange of concessions among the Contracting Parties, the WTO has moved towards a more regulatory stance under which its rules are more prescriptive and not subject to negotiation. Thus, not surprisingly, WTO obligations are now referred to as disciplines, underlining the fact that the possibility of flexibly opting in and out of rules and procedures – a typical feature of the old GATT – is no longer available. This is one of the reasons why even ardent advocates of free trade have come to regard WTO structures as unworkable (Sally, 2007: 39).


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The determination to deepen the implementation of the Washington Consensus did not come to an end with the approval of the WTO Agreements in 1995. Indeed, such was the perceived success of the single undertaking approach employed at the Uruguay Round that the OECD attempted to replicate it in the area of international investment. This attempt took the form of a draft multilateral agreement on investment (MAI) that was meant to consolidate, in a single treaty, the rules and principles designed to protect foreign investors currently scattered in hundreds of bilateral investment treaties. In theory, securing the approval of the MAI initiative should have been easy, since the proposed treaty was intended, in the first instance, to include only members of the OECD and the vast majority of its provisions were no longer controversial, having already been accepted by most states in the numerous BITs. Unexpectedly, however, the MAI initiative generated such enormous controversy that its sponsors decided to abandon it (Henderson, 1999). This setback did not, however, diminish the zeal of those who were keen to further pursue the implementation of the Washington Consensus. Indeed, since the WTO turned out to be a hopelessly inefficient mechanism for negotiating new rules, developed countries opted for the bilateral route. A massive wave of Regional Trade Agreements (hereafter RTAs) therefore emerged, which, as well as further liberalising trade between treaty partners, introduced new rules (disciplines) in areas where the WTO had been unable to make progress. These new obligations, also known as Singapore issues – which developing countries refused to accept at the Singapore Ministerial Conference in December 1996 – include commitments in areas such as the environment, competition policy, labour standards, international investment and intellectual property (Whalley, 2006: 16; Heydon and Woolcock, 2009). In the area of intellectual property, some bilateral agreements require developing countries to introduce higher standards of protection than those required by the TRIPS Agreement (see Roffe, Chapter 14 in this volume). For example, the US–Jordan Treaty of 2000 establishes a free trade area and also provides for extensive protection of inventions in all fields of technology without taking into account the exceptions envisaged in the TRIPS Agreement (Art. 27.3(b)) (UNCTAD-ICTSD, 2003: 52, 60). This process has led to the emergence of a vastly complex network of bilateral treaties – described by some as a Spaghetti Bowl – that create special bilateral regimes, which are slowly eroding the WTO’s cherished principle of multilateralism and have the potential to create considerable political and legal confusion as many states find themselves subject to conflicting obligations (Baldwin, 2006: 1508; Bhagwati, 2008). As globalization intensified and the implementation of policies of eco-


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nomic liberalisation in developing countries encountered difficulties, the agenda of the Washington Consensus expanded to include a variety of issues that fell within the general framework of governance. The addition of governance to the original Washington Consensus has further widened the jurisdictional domain of international economic law, thus bringing about a further reduction of what international lawyers generally regard as areas that are primarily within the domestic jurisdiction of states (Faundez, 2003). Indeed, today, the World Bank and other international organisations have unilaterally assumed jurisdiction to decide whether the quality of governance in individual states is consistent with accepted minimum international standards. These minimum standards have not been agreed by states and are based broadly on Anglo-American notions of law and administration (Kapur, 1998: 8). Following this newly acquired power, the World Bank and other international organisations have began to judge whether domestic institutions are adequate for the implementation of the policies prescribed by the Washington Consensus. Although IEL rules have not yet formally authorised the World Bank or the IMF to determine when a complete overhaul of domestic institutions is required (regime change), the persistent use of concepts such as fragile and failed states suggests that this could well be the next stage in the process. In any event, regardless of whether or not the World Bank has the power to compel countries to follow standards of governance consistent with the original principles of the Washington Consensus, industrialised countries have already made use of their superior economic power to persuade developing countries to make changes in their standards of governance. To this end, developed countries have made prolific use of the Generalised System of Preferences, which dates back to the 1970s, to ensure that developing countries comply with governance standards. India recently challenged some aspects of the EU preferential trade programme that it deemed discriminatory. The Appellate Body upheld India’s challenge on the ground that the EU’s programme did not represent a positive response to an objective development need of the beneficiaries. The EU introduced changes to its programme, but its revised programme is also flawed since, while one of the conditions for eligibility is that the countries should be vulnerable, vulnerability is not defined in terms of the objective needs of the beneficiaries but in terms of their share of EU imports. The revised programme also requires states that wish to benefit from the programme to ratify several human rights conventions, which are not linked to any objective development need (Bartels, 2007: 742). The United States also uses its GSP programme to persuade developing countries to sign treaties and adopt legislation that they would not have otherwise accepted or enacted (Jones, 2006). It also makes use of pre-negotiation agreements,


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also known as Trade and Investment Framework Agreements (TIFAs), to persuade countries interested in entering into RTAs to introduce legislative and institutional changes (UNCTAD, 2008b). They are very effective since conditions imposed through bilateral treaties are tailored to suit the trading and commercial interests of the US. They are also easy to monitor and verify. Bilateral conditionalities therefore complement and reinforce the policies pursued by the World Bank and the IMF. From a developing country perspective, the current international economic legal system is flawed for the following five reasons. First, most developing countries have little or no influence in the decision-making processes of international economic organisations, especially in the IMF and the World Bank. Moreover, even in organisations such as the WTO, in which all countries formally have the same power to influence decisions, most developing countries effectively have no input in the decision-making process as developed countries employ a series of informal devices and subterfuges to exclude them (Jawara and Kwa, 2003: 305; Gathii, 2006). Second, today, international economic institutions, such as the World Bank and the IMF, have assumed an inordinate amount of control over key economic policy and governance decisions of developing countries through the imposition of various forms of conditionalities and the exercise of surveillance powers (Woods, 2006). Third, even in cases where developing countries are formally equal counterparts in the formulation of IEL rules (as is the case of bilateral investment treaties between developed and developing countries), the reciprocal obligations established by these treaties are, in fact, vastly unequal. Indeed, while both parties agree to protect the investment of the other party’s nationals in their territory, in reality, investment flows in only one direction – from developed to developing country. These treaty obligations, though formally symmetrical, therefore ensure that the standards of one of the parties are respected by the other. The process of negotiation of these treaties further confirms their asymmetrical nature. Indeed, these treaties are based on Model Treaties drafted by lawyers in the Foreign Offices of developed countries and leave developing countries very little room for negotiation (Schneiderman, 2000; Singh, 2001). Fourth, the recent expansion of IEL-based international adjudication has been loaded in favour of private-sector actors, as key decisions in international investment and trade disputes are mainly handled by arbitrators and panellists whose expertise is mainly in private and commercial law (as is the case of ICSID) or in specialised areas of international trade (as is the case of WTO Panels). These experts often lack the necessary knowledge, experience or inclination fully to assess the wider national and


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international public policy implications of the issues arising from cases submitted to them. Fifth, in the absence of explicit IEL rules, many areas of international economic relations are governed by standards that are designed either by small groupings of powerful states, such as the G-7, the G-8, and more recently the G-20, or by inter-governmental organisations in which developing countries have little or no influence (Schneider, 2005). There is little doubt that under the current international economic legal system developing countries are, in general, ‘rule takers’, rather than active agents in framing legal rules. There are, of course, many areas in which developing countries have made good use of and achieved benefits from the new IEL rules. Indeed, some countries have successfully defended their rights through the WTO dispute settlement mechanism (such as the case of Brazil and cotton subsidies; see Cross, 2006); others have benefited from the use of provisions of the GATS to exploit their comparative advantages (such as India and outsourcing; see Jensen and Kletzer, 2008); and developing countries successfully campaigned to persuade the WTO to adopt a Declaration on the TRIPS Agreement and Public Health that restates that countries have the right, under the TRIPS Agreement, to grant compulsory licences to protect public health (UNCTAD-ICTSD, 2003: 16). Yet, for developing countries as a whole, the current framework of IEL rules is not an unqualified success. The economic performance of developing countries during the upsurge of globalization in 1980 has been disappointing, especially when compared with the levels of growth achieved during the preceding thirty years. Indeed, while developing countries’ income grew at an average rate of 5 per cent between 1950 and 1980, average growth rates dropped to barely 3 per cent between 1980 and 2000. These average figures conceal, of course, significant variations. India and China, which opened their economies but did not apply the Washington Consensus, have registered spectacular growth rates, while other developing countries in Latin America and Africa, which followed the Washington Consensus and/or were subjected to strict structural adjustment programmes, registered average growth rates below 3 per cent (Amsden, 2007: 6, quoting World Development Report 2002 Development Indicators). These figures show, contrary to the views of some observers (IMF, 2007: 135–70), that unrestrained globalization has not been an unqualified success for developing countries. It is also unclear whether globalization has brought about an overall reduction in inequality, either in terms of the relationship between developed and developing countries or in terms of poverty reduction within countries (Sutcliffe, 2004; Wade, 2004).


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5.


HAS IEL GONE TOO FAR?

The fact that developing countries have not played a major role in shaping the form and content of IEL rules is not surprising. After all, they have never played a major role in shaping events in the world economy. In recent years, however, developing countries have been under enormous political and economic pressure to ‘globalize’, and IEL rules have played a crucial role in this process. The problem, however, is that many of the new IEL rules have come into being through mechanisms (such as conditionality) that do not fit comfortably with the traditional notion that binding rules of international law are created by the consent of states. Also, many of the new IEL rules have penetrated so deeply into the fabric of what has previously been considered the domestic jurisdiction of states (the issue of policy space) that questions are rightly raised about the impact of globalization on the foundations of international law and state sovereignty. These questions have been widely debated among social scientists and legal theorists and no consensus has yet emerged on this issue. This debate is relevant to this chapter because it is premised on the problematic assumption that IEL is a coherent and systematic system of rules. Before testing this assumption, however, it is necessary to offer an overview, albeit schematic, of the way some social scientists and legal theorists have addressed the question concerning the wider relationship between sovereignty, globalization and international law. The impact of globalization on state sovereignty has been noted by most international relations specialists, political economists and international lawyers. While economists do not generally address issues relating to international law or state sovereignty, some ideologues of globalization regard the advent of globalization as inevitable, thus highlighting the economic logic of this process while downplaying the role of international law and political bargaining (Friedman, 1999; Wolf, 2004). Political scientists and lawyers sceptical about normative concepts such as sovereignty argue that the focus for a proper understanding of the world economy should be on the political and economic interests of the leading players in the world economy, rather than on empty normative concepts (Krasner, 1999; Goldsmith and Posner, 2005). Those who hold this view about international relations are also sceptical about international law and, as a consequence, are not overly concerned about the impact of globalization on its foundations. There are, of course, many social scientists who take more seriously the impact of globalization on sovereignty and international law. Within this group, some regard globalization as a positive factor insofar as it may be the prelude to a world order in which citizens are part of a larger cosmo-


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politan order (Pogge, 2002: 168; Held, 2004; Habermas, 2006). These theorists, however, do not address difficult issues such as the sources of law or the structure of the institutions in the new cosmopolitan order. Theorists who take a less sanguine approach to the current process of international economic norm setting describe the process as coercive socialisation (Hurrell, 2007: 212), neo-colonialism (Mutua, 2000; Anghie, 2006) or simply a new form of imperialism (Chimni, 2004). International lawyers have adopted a variety of approaches to interpret and conceptualise the impact of globalization on IEL and international law generally. Most of these approaches have been pragmatic insofar as they attempt to incorporate the momentous changes that have taken place in recent years into the current international law discourse. José Alvarez (2005), for example, in an extremely well-documented study, provides unambiguous evidence that, in recent years, international organisations have taken an expansive and often careless approach to the creation of international law rules and notes that this process is effectively changing the meaning of national sovereignty. A more ambitious attempt to wrestle with the abundance and complexity of new international economic rules is found in the work of lawyers who have sought to apply principles and techniques of administrative law to interpreting the emerging IEL regulatory framework (Kingsbury et al., 2005). This approach is valuable insofar as it provides enormous data on the rapid spread of IEL rules and raises important questions about overall political and legal implications. The weakness of this approach is that it assumes that the political problem of legitimacy generated by the current process of economic globalization can be resolved by applying principles and techniques of domestic administrative law originating mainly in Europe and the United States. It thus fails to take into account that, although in domestic settings administrative law is an essential feature of the rule of law, a good and efficient system of administrative law presupposes a strong and legitimate political system, something that is sadly missing at the international level. Some international lawyers, observing that globalization has undermined the old-fashioned, state-led diplomatic process for making and interpreting international law, have opted for pragmatic solutions that change the focus of analysis. Thus, Anne Marie Slaughter (2004a, 2004b), for example, points out that the role of established professional diplomats has now been taken over by governmental and non-governmental experts who are controlling and driving the process of norm creation at the international level. In order to ensure that the leading actors in this network do a good job, international lawyers should develop creative mechanisms of accountability to control their activities. This approach does not,


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however, address the issue regarding the transformation of sovereignty under the impact of globalization nor the impact of this transformation on the role of developing countries in the emerging international economic legal order. Instead, working on the assumption that the spread of worldwide economic liberalism is inevitable, it seeks to provide lawyers with a technical perspective in order to make networks accountable, thus enhancing the legitimacy of this process. Not all lawyers, however, take such a complacent view. Ernst-Ulrich Petersmann (2002b, 2008), for example, is keenly aware that the legal and political foundations of the current process of economic globalization are weak. Noting that there is a manifest incoherence between the principles of the WTO that focus on free trade and some international human rights instruments that have a distinct anti-market bias, he calls for a radical approach to ensure simultaneous and timely respect of all human rights – economic, political and social – both at national and international levels. He calls this approach multi-level constitutionalism and argues that in order to achieve it the international community should adopt the European Union’s approach to economic integration. Petersmann’s proposal has provoked a lively and unexpectedly acrimonious response from prominent members of the international human rights community (Alston, 2002; Howse, 2002; Petersmann, 2002a; see also Picciotto, 2003). Most international lawyers have focused their attention on rationalising and explaining international legal development and have refrained from directly addressing the delicate question of state sovereignty (but see Schachter, 1997; Lauterpacht, 1997). One of the most prominent international lawyers, the late Robert Jennings, has offered a powerful defence of the continuing validity of the notion of sovereignty (Jennings, 2002). A more qualified defence of sovereignty is offered by John Jackson, a leading IEL specialist. He argues that sovereignty should be renamed and redefined. He proposes to call it ‘sovereignty modern’ so as to take into account the fact that not all contemporary rules of international economic law can trace their origin to the consent of states (Jackson, 2003, 2006). Jackson’s argument, though interesting, is unpersuasive. He does not clearly explain which international rules do not require the consent of all the states, nor does he explain where and how these rules originate. Thus, his objective of redefining sovereignty does not succeed. It amounts to little more than a gentle plea for the peaceful co-existence of traditional international law with a so-called ‘modern’ international law that has to be accepted because otherwise the world economy would become ungovernable. In this respect, Jackson’s argument comes close to those who argue that the economic rules of the global economy should not be subjected to political bargaining.


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Regardless of whether political or legal theorists welcome, or deplore, the demise of national sovereignty, they all seem to share the same assumption: that current IEL rules are part of a comprehensive and coherent system of rules. In formal terms this assumption is reasonable because, as explained in earlier sections of this chapter, most of the new rules of IEL are consistent with the principles of the Washington Consensus. Yet, on close inspection the new rules of IEL are more fragile, less predictable and not as uniformly applied as either pro- or anti-globalization activists and scholars assume. Indeed, a close analysis of the application of IEL rules would probably show that, at the point of implementation, the variety of increasingly intrusive forms of international regulation are either ineffective or their implementation is partial and selective. The fragility of international economic law rules stems – as I argue below – from the absence of adequate international institutions with the capacity to transcend genuinely the narrow political and economic interests of the leading actors in the world economy. In the absence of a strong international institutional framework, IEL rules are subject to the political and economic vagaries of powerful nation states. Thus, in terms of the question raised by the title of this section, IEL rules have not gone far enough because they are not embedded within a coherent system of international institutions. This may greatly facilitate the renewal of IEL rules once market fundamentalism, as embodied in the Washington Consensus, gives way to another development paradigm.

6.

IEL RULES AND INTERNATIONAL GOVERNANCE

The objective of establishing a level playing field among actors in the world economy is frequently cited as the main justification for the proliferation of IEL rules. In terms of international law, this sound objective is embodied in the ideal of multilateralism, which is in turn based upon the principles of equal treatment and non-discrimination. The GATT was the first international economic instrument to take this principle seriously, and the WTO, as its successor, is the main vehicle entrusted with the implementation of this important objective. Yet, despite the rhetoric of multilateralism, the main proponents of the WTO have not taken this commitment seriously either when they designed the WTO or in their practice within the institution. Indeed, as numerous observers have noted, the political mechanisms of the WTO are hopelessly inefficient and its political organs have no capacity to take decisions or shape the practice of the organisation in accordance with


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changing economic circumstances. The persistent failure to develop new rules and policies in successive Ministerial meetings is directly related to the inadequacy of the WTO as a political institution. The principle of unanimity, inherited from the GATT and described by some as medieval, is not at the heart of the problem. The main problem is that developed countries are not genuinely committed to the principle of multilateralism because of their distrust arising from the need to protect and further their own national economic interests. The WTO thus contains a labyrinth of complex rules that are interpreted by an adjudicatory mechanism, yet it does not have an effective mechanism to provide timely and dynamic responses to the ever-changing global economic environment (Pauwelyn, 2005a, 2005b). Although the reluctance to establish a more coherent and politically effective WTO is often attributed to the neo-liberal distrust of bureaucracies and big government, this interpretation has no basis. Indeed, the opposite is closer to the truth. The decision to opt for a model of globalization that relies on self-enforcing rules stems from a lack of faith in the possibilities of achieving economic globalization through genuine multilateral channels and not from a genuine belief in the virtues of unregulated markets. This explains why the patently naïve belief that unregulated markets would rule the world was so readily embraced by the leading industrial countries in the world. The reluctance to establish institutions capable of effectively creating a more equitable process of globalization through multilateral mechanisms is also reflected in the policy of the major industrial powers towards the Bretton Woods institutions. These institutions, which should have played a critical role in providing guidance to achieve equitable economic outcomes, became instead the leading organs entrusted with the implementation of the now discredited Washington Consensus. In the 1980s, the World Bank pushed the structural adjustment agenda, with no concern for its social and economic impact (Onis and Senses, 2005: 284). Poverty eradication was an afterthought, incorporated into the Bank’s agenda in the 1990s, long after it had become clear that the ‘one-size-fits-all’ Washington Consensus policies were not yielding good development outcomes and were causing serious domestic political problems. The IMF’s appalling record in applying Washington Consensus principles for the resolution of financial crisis in developing countries in the 1990s is well documented and has been widely criticised (Stiglitz 2002a; Woods, 2006). The poor performance of these two major institutions can again be traced back to the failure by the leading proponents of globalization to take seriously the importance of creating a level playing field managed through effective multilateral institutions. Neither the IMF nor the


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World Bank has the structures or procedures to take decisions that would remotely reflect the interests of the majority of countries in the world. Their voting system, designed for a different era, gives privileged influence to western powers, especially the United States. Paradoxically, the failure to introduce a timely redesign of the Bretton Woods institutions called for an approach to globalization that played down its political edge by relying on the technical language of economics. Thus, the Washington Consensus became a useful mechanism which, while empowering the Bretton Woods institutions, concealed the disagreements and tensions among the leading proponents of globalization. Against this background, it is not surprising that the leading industrial nations have all but ignored the principle of non-discrimination in international trade – one of the pillars of the ideal of multilateralism. In recent years, Regional Trade Agreements (RTAs) have become the most popular international instrument to manage trade and other international economic relations at the bilateral or regional level. Indeed, such is the popularity of these agreements – which at the last count numbered over 200 – that today they account for 50 per cent of world trade. The rationale for entering into these agreements is that they are building blocks aimed at facilitating economic integration among partners. Although these agreements are not prohibited by the WTO, they are closely regulated by the treaty (GATT 1947: Art. XXIV). Under this provision RTAs are intended to further trade liberalisation, but must not raise trade barriers in relation to WTO members that are not parties to the agreements. This basic principle requires members of RTAs to eliminate duties and other restrictive regulations of commerce with respect to substantially all trade and not to introduce more restrictive trade regulations in respect of trade with third parties. Under the rules of Article XXIV, all RTAs must be notified and approved by the Committee on Regional Trade Agreements, which includes all WTO members. Although the first of these requirements has been fulfilled, the second has not. Indeed, the Committee has only approved one RTA (the customs union between the Czech Republic and the Slovak Republic) because its members disagree on the interpretation of Article XXIV. As a consequence, all but one of the RTAs in force exist in a virtual legal limbo because WTO members have been unable to decide whether their aims and objectives are consistent with the aims and objectives of the WTO. According to Jagdish Bhagwati (2008), RTAs have effectively destroyed the principle of nondiscrimination and have swallowed up the trading system. The reluctance of the leading industrial powers fully to implement the principle of multilateralism is yet another reflection of their half-hearted commitment to establishing a genuine level playing field for the global


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economy. Their own national political and economic interests have made it impossible to achieve this objective. This has not prevented them from imposing ‘one-size-fits-all’ obligations on developing countries, as reflected in most IEL rules. Thus, while developing countries are prevented from using subsidies to develop local industries, developed countries employ subsidies to protect their agricultural sectors; while developing countries are required unconditionally to open up their economies to foreign investors, developed countries carefully screen investment from sources that they deem politically sensitive (Mattoo and Subramanian, 2009); while most developing countries have no choice but to accept tough conditionalities from the IMF and the World Bank, some developed countries use their influence in these institutions to give preferential treatment and additional financial support to their political allies (Stone, 2008); while the Millennium Development Goals were agreed with great fanfare, their implementation has provided developed countries with yet another opportunity to compel developing countries to adopt policy changes (Soederberg, 2004); while developing countries that enter into trade agreements are required to make sweeping changes to their tariff structures, their developed country partners are not prepared to commit themselves to even a minimum level of foreign aid (Hinkle and Schiff, 2004; South Centre, 2008a); while preferential trade agreements are described as building blocks to further integration, some of these agreements have made it difficult for developing countries to avail themselves of the flexibilities of the TRIPS Agreement (Stiglitz, 2008: 1701). Thus, one of the features of international governance in recent years is that international economic law has been used largely to impose discipline only on developing countries. Indeed, it is quite revealing that, in a recent negotiation of a free trade agreement with the US, Australia refused to accept a state-investor arbitration clause, claiming that it has a well-established legal system that can fairly and equitably handle claims from the private sector (Gagné and Morin, 2006: 372). Australia’s argument underlines the one-sided nature of most IEL rules. While developing countries are rule-takers, developed countries retain enormous discretion to decide whether and how to comply with rules that are meant to create a so-called level playing field. The lack of coherence of IEL rules stems largely from the fact the promoters of the Washington Consensus failed to create institutions capable of directing and managing the process of globalization. Instead, they chose to introduce massive structural change through institutions, such as the IMF and the World Bank, which have a huge legitimacy deficit and institutions, such as the WTO, which do not function as genuine multilateral organisations.


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CONCLUSION

This chapter has shown that either directly or indirectly IEL has been concerned with economic development. From the immediate post-war period until the 1980s, IEL was weak and almost irrelevant, thus allowing developing countries space to formulate their own economic policies. During the recent period of unrestrained globalization, IEL has played a crucial role as a vehicle for implementation of the Washington Consensus in the developing world. Developing countries have been required to implement a strict set of rules, while developed countries, especially those that have played a leading role in the promotion of globalization, have embraced these rules half-heartedly. Instead of tackling the urgent need to reform old international institutions and build effective new institutions to manage the process of globalization, these countries have pursued, through a range of bilateral and regional arrangements, a strategy that gives them ample political space to secure advantages over their close economic competitors. This process has undermined the ideal of multilateralism and made a mockery of the much flaunted objective of creating a level playing field. Paradoxically, the weakness of the prevailing international institutional framework bodes well for the future of IEL. Indeed, because IEL rules are not deeply embedded in dynamic, efficient or legitimate institutions, they cannot stand in the way of major reform. Indeed, if the world’s leading powerbrokers take seriously the task of building new and more effective institutions for the world economy, and if there emerges a new consensus on development that takes into account the needs and capacities of developing countries, there will then be a unique opportunity to develop new IEL rules and procedures to steer and manage globalization. This is a difficult task which will succeed only if it is carried out in consultation with all interested parties. One reason to be optimistic is that, today, developing countries will not be taken by surprise as they have learned the hard way that IEL rules, even the most technical, have a major impact on development.


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3.

Multilateral disciplines and the question of policy space Yilmaz Akyüz*

1.

INTRODUCTION

After a relatively short-lived, win-win hype about globalization, there is now a widespread concern among developing countries that their ability to control their economic and social development is increasingly circumscribed by their global economic integration. On the one hand, many of the policy instruments widely used by both mature and late industrialisers to reach their current levels of development are no longer available because of international rules and obligations and rapid liberalisation and opening up. On the other hand, increased reliance on global markets is not generating broad-based improvements in living conditions. This concern has grown as the promises of free market reforms advocated by the Bretton Woods institutions (BWIs) and the benefits claimed from the rules-based multilateral trading system have failed to materialise for large segments of the population in the developing world. Rapid integration into the global economic system diminishes national policy autonomy in two ways. First, liberalisation of markets and dismantling of restrictions over cross-border movements of goods and services, money and capital render economic performance highly susceptible to conditions abroad and weaken the impact of national policy instruments over macroeconomic and development policy objectives. Second, international rules and obligations diminish sovereign control over national * Special Economic Advisor, South Centre, Geneva, Switzerland. This chapter is an abridged version of Akyüz (2009) as a background paper for Trade and Development Report, 2006. The author is grateful to Bhagirath Das, Martin Khor, Richard Kozul-Wright, Chakravarthi Raghavan and the participants of the Third World Network workshop on Global Economic Developments and National Development Strategies, Geneva, 6–12 August 2006, and of the FONDADUNDESA Conference on Policy Space for Developing Countries in a Globalized World, New York, 7–8 December 2006, and especially to Zdenĕk Drábek, for helpful comments and suggestions. They are not responsible for remaining errors. 34


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policy instruments. These two sources of external constraints overlap and reinforce each other. On the one hand, liberalisation of markets reduces the number of instruments controlled by policy-makers in much the same way as sovereign policy autonomy is circumscribed by enhanced multilateral disciplines. On the other hand, multilateral rules and practices weaken the influence of national policy instruments over national policy objectives by promoting liberalisation and opening up. This chapter focuses on multilateral disciplines in finance and trade. These include not only negotiated rules and obligations as contained in several WTO agreements and the Articles of Agreement of the BWIs, but also conditionalities attached to lending by the latter. The following section will focus on the concept of national policy autonomy and the rationale for multilateral disciplines. This will be followed by a discussion of multilateral disciplines in finance and trade and the question of coherence between the two. In finance, attention is on International Monetary Fund (IMF or Fund) surveillance over macroeconomic and exchange rate policies and loan conditionality. In trade, the rationale and nature of WTO rules and obligations and their effects on policy autonomy in developing countries are examined in four main areas: industrial tariffs, industrial subsidies, investment-related policies and technology-related policies. The need for reform in trade and finance is discussed with a view to bringing coherence and flexibility without undermining multilateral disciplines. Attention is also paid to the space that is available and the extent to which alternative policy instruments could be deployed in order to overcome the constraints entailed by multilateral rules and obligations. The chapter concludes with a discussion of the extent to which the existing policy space is used by developing countries and a summary of the main policy proposals. There can be little doubt that, in an interdependent world, there is a strong rationale for multilateral disciplines as a global collective action designed to prevent discriminatory and beggar-my-neighbour policies and to promote international economic stability. Current arrangements, however, suffer from a number of shortcomings. First of all, they lack coherence. While international trade is organised around a rules-based system with enforceable commitments, this is not the case in international money and finance. There are effectively no multilateral disciplines over macroeconomic and exchange rate policies of countries which have a disproportionately large impact on international monetary and financial conditions. This constitutes the single most important threat to the stability and openness of the trading system. It is also an important source of instability for the majority of developing countries, which are highly vulnerable to external financial shocks.


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The choice of which interactions should be brought under multilateral disciplines and the design of rules and practices are not neutral in the extent to which they accommodate the development trajectories of different countries. While industrial countries escape multilateral disciplines in money and finance, developing countries borrowing from the BWIs face conditionalities that circumscribe not only their macroeconomic policies but also their broader development strategies. Existing multilateral rules and practices seek to promote free movement of industrial goods, capital and enterprises which favour advanced countries, but not labour, agricultural products or technology where benefits would be greater for developing countries. In legal terms the WTO rules and commitments provide a level playing field for all parties, yet effective constraints they impose over national policies are much tighter for developing than for industrial countries. These asymmetries are largely reflections of shortcomings in global economic governance. Many developing countries have little influence in the formulation of WTO rules or the conditionalities of the BWIs. Nor are they adequately represented in fora which set standards for harmonisation of policies and practices. However, multilaterally negotiated rules in trade and finance are not always the most important constraints on policy autonomy in developing countries, and they often leave more space than is sometimes portrayed. In several areas brought under the WTO legislation there is room for manoeuvre, notably in industrial tariffs, intellectual property rights and trade in services. On the other hand, many areas of policy remain outside existing multilateral legislation, including not only exchange rate and capital account regimes but also development-policy issues such as foreign direct investment (FDI), competition policy, and labour and environment standards. However, there is now a mercantilist offensive by major industrial countries to tighten existing WTO rules and to subject many development-policy issues to WTO disciplines. The space left by existing multilateral legislation has been lost in other ways. Many low-income countries dependent on aid have seen much of their policy space eroded by donor, IMF and World Bank conditionalities. There has also been widespread unilateral liberalisation of trade, investment and capital account regimes. Several developing countries have undertaken commitments in bilateral or regional agreements with major industrial countries which typically extend WTO disciplines in tariffs, investment and intellectual property protection, and entail new obligations in areas left outside multilateral legislation such as capital account regimes and environment and labour standards. It is notable that despite widespread acceptance of market-based,


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outward-oriented development strategies, and proliferation of multilateral rules and obligations, there is still considerable diversity in national policy regimes in the developing world. The degree of harmonisation of national policies and practices is limited, and the demise of the nation-state is wildly exaggerated. This diversity reflects not only the existence of room for different policies and practices, but also variations in the extent to which countries are willing or able to use the space available in order to align their policies to suit their own objectives and priorities, rather than to go along with the neo-liberal model of development. This is particularly true in finance, as demonstrated by considerable diversity in capital account regimes. The central conclusion of this chapter is that there is a need to reform the existing multilateral disciplines in order to bring greater coherence between trade and finance, and a better balance among countries in terms of the constraints they effectively face and the autonomy they enjoy. This should be an exercise of rationalisation which could entail tighter, rather than looser, multilateral disciplines in some areas, notably in money and finance. It should aim at reconciling multilateral disciplines with policy flexibility. It is argued that this is best accomplished by incorporating flexibility into rules rather than providing policy space as exceptions.

2. I.

ISSUES AT STAKE Economic Openness and Policy Autonomy

The autonomy of national economic policy refers to the effectiveness of national policy instruments in reaching national policy objectives.1 In conventional policy analysis it is generally assumed that national authorities have command over policy instruments but not the ability to control specific national goals precisely in the way desired; that is, there is a gap between de jure sovereignty of national economic policy and de facto control over national economic development. Economic openness not only widens this gap by allowing foreign influences on national objectives but also reduces de jure sovereignty of national economic policy by subjecting it to international disciplines and constraints.2 1

The distinction between instruments and targets constitutes the basis of the theory of economic policy first elucidated by Tinbergen (1952); see also Hansen (1967) and Bryant (1980: ch. 2). 2 The impact of openness on policy autonomy goes back to Tinbergen (1956); see also Cooper (1968). For the distinction between de facto control over national


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National authorities do not always have full command over policy instruments even in a closed economy insulated from external influences. Policy-making is a tentative process surrounded by uncertainties. Rational policy decisions need to rely on an implicit or an explicit model describing the structure of the economy, including the relations between instruments and objectives of policy. Not only is this structure unstable, but knowledge and information about it is highly imperfect. This means that specific instruments cannot always be assigned to predetermined objectives. Rather, a pragmatic approach would be needed, based on solving problems as they emerge in the achievement of the goals pursued. This calls for considerable flexibility in the policy-making process, including the selection and application of instruments.3 While bringing certain benefits, economic openness aggravates policy dilemmas. In an open economy the need for flexibility is greater because policy objectives are influenced by volatile and unpredictable external factors including growth of, and access to, foreign markets, foreign interest rates and exchange rates, availability of external financing and debt servicing obligations. On the other hand, economic opening often has the implication of losing control over certain instruments. For instance, under an open capital account regime the exchange rate and the interest rate are both potential policy instruments, yet, at most, only one of them can actually be employed as an independent policy instrument (for the distinction between potential and actual policy instruments, see Bryant, 1980: ch. 2). Briefly, with deepening integration into global markets, the range of policy instruments shrinks as, at the same time, foreign influences over national policy objectives become stronger and the trade-offs between internal and external objectives are intensified. Economic openness and greater integration of countries into world markets is often accompanied by their insertion into international governance systems, coming under rules and procedures of multilateral institutions. These rules and procedures narrow policy autonomy by reducing de jure sovereignty of national economic policy. It is often in this latter sense that ‘policy space’ is used in its popular expressions; that is, it refers not so

development and de jure sovereignty of national economic policy see Bryant (1980: ch. 10–12). 3 This seems to be the reasoning behind the argument by Rodrik (2004: 3) that ‘the analysis of industrial policy needs to focus not on policy outcomes – which are unknowable ex ante – but on getting the policy process right. We need to worry about how . . . private and public actors come together to solve problems in the productive sphere, . . . and not about whether the right tool for industrial policy is, say, directed credit or R&D subsidies’.


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much to the implication of liberalisation and openness for effectiveness of policy in attaining national objectives as to constraints placed on de jure sovereignty of national economic policy by international rules and obligations. However, liberalisation can have similar consequences for policy autonomy as international obligations. For instance, there is little difference between loss of autonomy to use tariffs as an industrial policy tool because of WTO rules and loss of ability to use the exchange rate as an effective instrument for external adjustment because of capital account liberalisation. In fact, these two sources of constraint on national economic policy are not always independent since multilateral rules and practices now generally push in the direction of faster liberalisation and greater openness. II.

Shifting Objectives of Multilateral Disciplines

The objectives of current multilateral disciplines are crucially different from those pursued by the planners of post-war international economic architecture which helped produce the golden age in the industrial world and allowed considerable advances in developing countries. The post-war architecture was premised on the recognition that economic interdependence among nations called for a certain degree of international disciplines over policy-making, particularly with a view to reducing the scope for discriminatory and beggar-my-neighbour policies. But it also left considerable space for sovereign autonomy vis-à-vis markets. By contrast, current multilateral rules and practices seek to deepen economic integration through liberalisation in areas of interest to industrial countries and restrain policy autonomy by surrendering power to global markets dominated by transnational corporations (TNCs). The design of the immediate post-war architecture was greatly influenced by the interwar experience when pursuit of self-interest by many countries through beggar-my-neighbour policies had led to the breakdown of international trade and payments. The outcome was a deep global economic crisis and progressive disintegration of the international economy. It was thus agreed that the prevention of a recurrence of such an outcome called for international cooperation in policy making, including multilateral mechanisms designed to restrict discriminatory and beggarmy-neighbour policies in trade and finance. This was the rationale for the creation of the International Monetary Fund to ensure an orderly system of exchange rates and multilateral payments under conditions of strictly limited international capital flows, and for the proposal to establish a rules-based framework for international trade on the core principle of non-discrimination. These arrangements were based on a broad agreement on three issues.


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First, markets could not always be relied on to generate economically efficient and politically acceptable outcomes. Second, close linkages between trade, finance and development imply that solutions should not be sought in isolation. Finally, because of cross-border dimensions and global spillovers, these policy issues cannot be left to uncoordinated individual country actions. These principles allowed considerable room for policy intervention while securing international disciplines and a reasonable degree of coherence among multilateral rules and obligations in trade and finance.4 While the current approach to the organisation of the international economic system is driven by a desire to achieve a deep and broad global economic integration compared with the shallow integration sought by post-war planners (Ostry, 2000), the ongoing liberalisation-cumintegration process does not cut across all sectors but is highly selective. Deep integration is pursued in three areas where advanced countries have the upper hand: free movement of industrial products, money and capital, and enterprises. By contrast the lid is kept on three areas where liberalisation would generally benefit the developing world; namely, agricultural goods, labour mobility and technology transfer. Social considerations are invoked for leaving labour and agriculture out, and protection of property rights and incentives for innovation are used as justification for restrictions on free flow of technology. This selective approach to liberalisation has the consequence that existing multilateral rules and practices exert greater constraints on the ability of developing countries to move forward in their development trajectory than on that of advanced countries. For liberal orthodoxy the principal rationale of the WTO is not to provide a framework for an orderly, non-discriminatory, rules-based system of international trade in recognition of diversity in national strategies for openness and the balance between private and public action, but to promote rapid liberalisation. The unconditional most-favourednation (MFN) principle that governed the post-war arrangements has increasingly been replaced by market access and national treatment as liberalisation and ‘non-distortion’ have become the organising principles of international trade and investment. In fact, the drive to seek greater liberalisation of markets than would be feasible at the multilateral level has eroded the MFN principle by giving rise to proliferation of bilateral and regional free trade and investment agreements. Liberalisation has also become the central concept in the operations

4

On how these principles shaped the post-war international economic architecture, see Akyüz (2004a, 2006b). For the historical evolution of the multilateral economic system, see UNCTAD (1984: part II).


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of multilateral financial institutions. Prevention of policy distortions and government failure through conditionalities attached to lending to developing countries has come to be considered the principal rationale for the continued existence of the World Bank, even though international capital markets could assume the task of provision of external financing to many developing countries.5 Again the Fund is seen as a useful instrument for disciplining governments in developing countries, even though it has no effective power to exert multilateral disciplines over exchange rate and macroeconomic policies of the countries that matter most for international economic and financial stability. Whatever the merits of the arguments about the respective roles of governments and markets in economic matters, they cannot provide a legitimate basis for organising the international economic order. To the extent that countries are responsible for their own destiny, they have the right to choose or experiment with any system of organisation of their economic affairs provided that it does not amount to discriminatory and beggar-myneighbour policies or create large negative spillovers beyond their borders. Arguing for policy space is not arguing for a particular stance in industrial, trade and technology policies, but denying it amounts to one-size-fits-all prescriptions based on the requirements of the development trajectories of industrially advanced countries. In any case, there is considerable doubt about the credibility of orthodox arguments. Neither economic theory nor historical evidence provides a strong causal link between openness and economic development. While trade, technology and industrial policies have not always been used effectively, there is barely any example of successful industrialisation without government support and protection in these areas. However, the orthodoxy constantly downplays the role of successful industry policy interventions in East Asia.6 It also disregards the fact that many of the trade, technology and industrial policy instruments now denied to developing 5 This has been argued even by economists who are otherwise critical of orthodoxy: ‘it is more plausible to locate the Bank’s comparative advantage in assisting developing countries in the presence of weaknesses and distortions in member countries’ domestic political processes than in overcoming the international capital market imperfections’ (Gavin and Rodrik, 1995: 311; see also Rodrik, 1995; Gilbert et al., 1999). For a discussion of the rationale for multilateral financial institutions, see Akyüz (2006b). 6 The orthodox explanation of the East Asian experience has gone through phases. Originally, there was a tendency to ignore selective industrial policy interventions and portray it as a market-based experiment. Subsequently, such interventions had to be recognised but were discarded on grounds that they did not matter or that the conditions that allowed them to make a contribution to


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countries were successfully employed by today’s developed countries during their industrial transformation.7

3.

MULTILATERAL CONSTRAINTS ON POLICY AUTONOMY

The existing system of global economic governance lacks effective multilateral disciplines over exchange rate, macroeconomic and financial policies, or for redress and dispute settlement regarding the negative impulses generated by such policies. In this respect governance in money and finance lags behind that for international trade. It is particularly notable that, while recent years have seen considerable tightening of international disciplines in trade and several other areas of policy addressed in the WTO, there has been no attempt to fill the vacuum created by the breakdown of the Bretton Woods arrangements despite increased international monetary and financial instability and recurrent crises in emerging markets. In a way finance has become the vanguard of the liberal international order, premised on the assumption that financial markets can do their own disciplining and do not need international rules. When currencies can move rapidly in relatively short periods from one level to another, multilateral disciplines over tariffs would not provide a predictable trading environment since such swings easily alter relative competitive positions. It takes several years of negotiation to achieve 10 to 20 per cent tariff cuts, but under floating and free capital mobility exchange rates of major currencies are known to have fluctuated as much over a matter of a couple of weeks. On the other hand, when exchange rates remain divorced for prolonged periods from economic fundamentals, arguments advanced in favour of free trade lose their rationale. In fact, even on mainstream reasoning, there would be a strong justification for tariffs and non-tariff protection to correct distortions caused in trade flows and resource allocation by exchange rate misalignments.

industrialisation do not exist in other countries. For a recent critical assessment of these propositions, see Wade (2003a). 7 This neglect is particularly notable in view of the existence of a vast literature on the history of trade, investment, technology and financial policies in mature and late industrialisers. For an overall assessment see Chang (2002). On trade barriers, see Hufbauer (1983), UNCTAD (1984), Bairoch (1993), O’Rourke and Williamson (2000) and Akyüz (2005c); on investment policies, see Chang (2003) and Kumar (2005); and on technology policies and patent rights, see Bercovitz (1990), Chang (2001), Gerster (2001) and Kumar (2003).


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Adverse impulses for trade are also generated by unpredictable and large swings in interest rates on major reserve currencies that dominate international transactions. Hikes in interest rates raise debt servicing obligations of countries whose external debt is contracted in reserve currencies and tighten the balance of payments constraint. They can also redirect capital flows away from deficit and indebted countries, aggravating external financial difficulties. Often, these necessitate restrictions on imports through cuts in economic activity or the introduction of tariff and nontariff barriers, leading to contraction in world trade. The burden of adverse monetary and financial impulses invariably falls on the trading system because of the implicit acceptance by the international community of the priority of meeting financial obligations over observance of commitments to free trade. Article XII of the GATT provides that ‘any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported’ subject to certain provisions.8 There are, however, no analogous provisions in the international financial system allowing countries facing serious payment difficulties to suspend their financial obligations. The asymmetry between trade and finance in bearing the brunt of balance-of-payments disequilibria continues unabated as recent attempts to introduce orderly debt workout procedures, including temporary debt standstills, have been blocked by international financial markets and the United States government (Akyüz, 2002, 2005b). Lack of multilateral disciplines in money and finance is a major concern to developing countries because they are highly vulnerable to external financial shocks and such shocks are more damaging than trade shocks. Boom–bust cycles in capital flows to developing countries and major international financial crises are typically connected to large shifts in macroeconomic and financial conditions in the major industrial countries. The sharp rise in the United States interest rates and the appreciation of the dollar was a main factor in the debt crisis of the 1980s. Likewise, the boom–bust cycle of capital flows in the 1990s which devastated many countries in Latin America and East Asia was strongly influenced by shifts in monetary conditions in the United States and the exchange rates among the major reserve currencies (UNCTAD, 1998b: ch. IV, 2003b: ch. II). 8

It should, however, be noted that in practice this provision is rarely applied. India failed to invoke it after the Fund expressed the view that its reserves were adequate (see Raghavan, 1999). In reality the burden still falls on trade as countries facing severe BOP difficulties are obliged to implement austerity measures, cutting economic growth and imports.


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4.

INTERNATIONAL MONETARY AND FINANCIAL DISCIPLINES

I.

What Disciplines?

The Bretton Woods system was designed to close two main channels of exchange rate instability. First, it sought to limit the scope for markets to generate unexpected and erratic movements in exchange rates through restrictions over short-term arbitrage flows which had proved so damaging in the interwar period. Second, it restricted the ability of governments to manipulate exchange rates of their currencies by subjecting them to multilateral disciplines. However, it also provided considerable space for national policy when underlying conditions called for exchange rate adjustment. Thus, countries undertook obligations to maintain their exchange rates within a narrow range of their agreed par values, but they were allowed to change their par values under fundamental disequilibrium. An unauthorised change in par value would enable the Fund to withhold the member’s access to its resources and even to force the member to withdraw (Dam, 1982: 90–93). The demise of the Bretton Woods system changed all that. While floating was adopted with the understanding that its stability depended upon orderly underlying conditions, obligations regarding exchange rate arrangements under Article IV failed to strike a balance between national policy autonomy and multilateral disciplines. Indeed, as pointed out by Triffin (1976: 47–8), they were ‘so general and obvious as to appear rather superfluous’, and the system ‘essentially proposed to legalize . . . the widespread and illegal repudiation of Bretton Woods commitments, without putting any other binding commitments in their place’. With exchange rate obligations effectively gone, the only multilateral disciplines left in monetary and financial matters concern current account convertibility and currency practices. According to Article VIII members are obliged to avoid restrictions on current payments and discriminatory currency practices.9 They are required to obtain the approval of the Fund to impose restrictions on the making of payments and transfers for current account transactions. Members failing to comply with these obligations can become ineligible to use the general resources of the Fund. These

9 It is notable that, originally, multiple exchange rate practices differentiating between current and capital transactions were not considered to be violation of obligations regarding current account convertibility in Articles VII and XIV (Dam, 1982: 133).


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obligations are subject to the provisions of the scarce currency clause of Article VII which permit countries to impose exchange controls on current transactions against a currency declared to be scarce, and the provisions of transitional arrangements under Article XIV which allow a country to maintain the restrictions on payments and transfers for current international transactions that were in effect on the date it became a member. The scarce currency clause, which was originally designed with the United States in mind and which could help put pressure on surplus countries, has never been implemented, while transitional arrangements have been rapidly dismantled with widespread adoption of current account convertibility by developing countries.10 The Articles of the Fund do not provide a global regime for crossborder capital transactions with clearly defined rights and obligations of recipient and source countries and international debtors and creditors. Although they allow the Fund to request members to exercise control on capital outflows, this provision has never been invoked even at times of rapid exit of capital and financial meltdown in emerging markets during recent years. Nor do the Articles provide protection against creditor litigation against countries imposing unilateral standstills at such times, even though the Board recognised that such action might be needed (Akyüz, 2005a: 10–11, 16–17). While the Articles recognise the right of members to regulate international capital flows, in reality the Fund has encouraged liberalisation of the capital account. In effect, as pointed out in a recent report by the Independent Evaluation Office, the Fund lacks not only clear and effective jurisdiction over capital account issues but also a ‘clear position’ (IMF–IEO, 2005b: 11, 50). II.

Surveillance

There has been an attempt to balance lack of specific obligations with respect to exchange rate policies with increased emphasis on surveillance over national policies in the context of Article IV consultations. With the second amendment of its Articles, the Fund was charged to exercise firm surveillance over members’ policies at the same time as members were allowed the right to choose their own exchange rate arrangements. Initially, surveillance focused primarily on the sustainability of exchange rates and external payments positions and on monetary and fiscal policies as their

10

In 1970 only 34 countries out of a total of 115 members of the Fund had accepted current account convertibility. This was 143 out of 186 in 1997 (Dailami, 2000: table 15.2).


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principal determinants. The guidelines established in 1977 made an explicit reference to the obligations of members to avoid manipulating exchange rates to gain an unfair competitive advantage over other members.11 The scope and coverage of surveillance has expanded over time into structural policies, the financial sector and capital flows, particularly after a series of emerging market crises (IMF–GIE, 1999). Various codes and standards established for macroeconomic policy, institutional and market structure, and financial regulation and supervision have thus become important components of the surveillance process (Cornford, 2002: 31–3). The increased coverage of surveillance has not been accompanied by measures to make it more symmetrical and balanced between developed and developing countries. First of all, financial codes and standards are determined in fora where developing countries either are unrepresented, as in the Financial Stability Forum (now the Financial Stability Board), or they have limited representation, as in the Bank for International Settlements and the Basel Committees, or limited power, as in the IMF itself where the concentration of voting rights in the hands of major industrial countries allows them to have a determining influence and veto power over key decisions. The obligations contained in the new codes and standards reflect the view that the main causes of financial instability and crises are to be found in the policies and institutions of emerging markets, but entail neither a fundamental change in policies and practices in the source countries nor improvement in the transparency and regulation of currently unregulated cross-border financial operations. Indeed, as they are established on the basis of best practices or benchmarks appropriate to major industrial countries, their implementation would require little change in policies and practices in industrial countries while necessitating fundamental reforms in developing countries. Despite the emphasis on voluntary participation, the implementation of such codes and standards is backed by an extensive system of externally applied incentives and sanctions (Cornford, 2002: 63–72). As one observer pointed out, this ‘new set of external disciplines come hand-in-hand with a particular model of economic development of doubtful worth’ (Rodrik, 1999: 3). More importantly, the Fund is unable to exert meaningful disciplines over the policies of its non-borrowing members and prevent unsustainable exchange rates and balance of payments positions, and currency manipulations.12 This is true not only for developed-country creditors of the

11

See Executive Board Decision no 5392-(77/63), adopted on 29 April 1977. The Fund has also been unable to prevent build-up of financial fragility and crises in emerging market economies under its supervision. However, this is not 12


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Fund, but also for non-borrowing developing countries. For its borrowers the policy advice given by the IMF in Article IV consultations often provides the framework for conditions to be attached to any future Fund program (IMF–GIE, 1999: 20). But its surveillance of the policies of the most important players in the world economy has lost any real meaning with the breakdown of the Bretton Woods system, the establishment of universal convertibility of the currencies of major industrial countries, and the emergence of international financial markets as a main source of liquidity. III.

Conditionality

The original rationale of conditionality was to protect the financial integrity of the Fund and the revolving nature of its resources. This called not only for relatively short repayment periods but also macroeconomic adjustment in borrowing countries to bring external imbalances to sustainable levels.13 Subsequently, however, conditionality became (and remains) one of the most contentious issues as the balance between financing and adjustment was gradually lost. Rather than providing adequate liquidity to weather payments difficulties, the Fund started to impose exactly the kind of policies that the post-war planners wanted to avoid in countries facing payments difficulties – that is, adjustment through austerity – irrespective of whether these difficulties were due to excessive domestic spending, distortions in the price structure, or external disturbances such as terms of trade shocks, hikes in international interest rates or trade measures introduced by another country. More importantly, the Fund has become increasingly involved in broader development issues and moved rapidly towards structural conditions, including those related to governance. Consequently there has been a proliferation of structural performance criteria and governance-related conditionalities in the past two decades, covering a wide area of policy, ranging from trade and finance to public enterprises and privatisation, and

because it did not have leverage over policies in these countries, but because of shortcomings in its diagnosis of the underlying problems and recommendations (see Akyüz, 2005a). 13 For the original rationale and the subsequent evolution of IMF conditionality, see Dell (1981). See also Polak (1991); Jungito (1994); Kapur (1997); Mohammed (1997); Goldstein (2000); Kapur and Webb (2000); Buira (2003); Babb and Buira (2005); and IMF–IEO (2005a). Much of what is discussed here also applies to conditionality by multilateral development banks, notably the World Bank.


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even labour market institutions and social safety nets (Goldstein, 2000; Kapur and Webb, 2000; Buira, 2003). The average number of structural conditions doubled between the 1970s and 1980s and at the end of the 1990s it was more than 50 for a typical Extended Fund Facility program and between 9 and 15 for standby programs. The number of structural performance criteria in the IMF programs with the three Asian countries hit by the 1997 crisis was four times the average for all Fund programs over 1993–99, leading to concerns that there was a ‘temptation to use currency crises as an opportunity to force fundamental structural and institutional reforms on countries’ (Feldstein, 1998). The Bank was not spared from such temptations. On a strict definition of conditionality used by Kapur and Webb (2000: 5–7), the number of conditions attached to lending at the end of the 1990s by the Fund and the Bank together ranged between 15 and 30 for sub-Saharan Africa and 9 and 43 for other regions. These numbers go up to 74–165 for SSA and 65–130 for other regions if a less strict definition is adopted. Questions have been raised by several researchers, both inside and outside the BWIs, about the effectiveness of conditionality in preventing policy failure and improving economic performance (Gilbert et al., 1999; Kapur and Webb, 2000; Meltzer Commission, 2000; Ocampo, 2001; Stiglitz, 2002b). More importantly, there is very little correlation between compliance and economic performance, and often much of the improvement in performance could be attributed to increased funding that accompanies programs (see, for example, UNCTAD, 1998b: 124–5 and table 34). The Fund’s extensive use of structural conditions in its lending programs is widely considered a violation of the guidelines established in 1979, which explicitly state that performance criteria would normally be confined to macroeconomic variables, and that they could relate to other variables only in exceptional cases when their macroeconomic impact is significant. As argued by a former Research Director of the IMF, these guidelines aimed at making conditionality ‘less intrusive by limiting the number of performance criteria, insisting on their macroeconomic character, circumscribing the cases for reviews, and keeping preconditions to a minimum. Yet, these restraining provisions have not prevented the intensification of conditionality in every direction that the guidelines attempted to block’ (Polak, 1991: 53–4).14

14 In response to mounting criticism the Fund management issued new guidelines in 2002 (IMF, 2005c). However, they do not address the fundamental problem of intrusiveness of structural conditionality, an issue now evaluated by the Independent Evaluation Office (see IMF–IEO, 2005a).


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There is a strong rationale for well-designed macroeconomic conditionality, not only as a device for risk management by the IMF as a lender (Kapur and Webb, 2000: 1–2) but also for securing orderly international payments, notwithstanding the uneven treatment in this respect of borrowing and non-borrowing members. However, structural conditions, by their nature, are different. They impose a particular model of development, entail permanent changes in institutions, and circumscribe policies in such ways that their reversal may be extremely difficult. By doing so, they can create asymmetry between program and non-program countries, and even change the balance of power between them in international economic relations. Unilateral trade liberalisation undertaken by developing countries with Fund programs put them at a disadvantage in multilateral trade negotiations. A country liberalising unilaterally acquires no automatic rights in the WTO, yet it could become liable if it needs to take measures in the context of Fund programs in breach of its obligations in the WTO.15 IV.

Reform of the Bretton Woods Institutions

Any reform of the BWIs should start with questions of mandate and governance in order to define clearly their role in the multilateral economic architecture, rather than the terms and conditions of their lending (for an elaboration of the proposals discussed in this section, see Akyüz, 2005a). There is a strong case for the Fund to go back to its original mandate and focus on safeguarding international monetary and financial stability, leaving national structural-cum-development issues to the World Bank. Its involvement in the latter issues is an unjustified diversion and duplication. All facilities created for this purpose could be transferred to the Bank as the Fund terminates its activities in development policy and longterm lending. It could then focus on its core responsibility of preventing exchange rate misalignments and gyrations, persistent global trade imbalances and crises in emerging-market countries. With its exit from development finance, the Fund’s lending activities would be confined, as originally envisaged, to the provision of short-term liquidity to countries facing temporary payments difficulties. The key reform issue here is how to strike a balance between financing on the one hand and macroeconomic and exchange rate adjustment on the other, 15

For a discussion of this issue see WTO (2004a). In Korea financial restructuring undertaken with the support of the Fund after the 1997 crisis naturally resulted in an increase in government equity in financial institutions. This became a basis for a legal challenge in the WTO on grounds that such measures constituted actionable subsidies (see WTO, 2003c: para. 8–10).


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and how to design performance criteria without going into micromanagement in monetary and fiscal matters. Greater automaticity in access to the Fund’s resources would certainly be helpful in both respects. The Fund should not be allowed to bail out lenders and investors in countries facing financial crises since such operations create a moral hazard for creditors and shift the burden on to debtors. Instead, it should help develop orderly workout mechanisms to prevent financial meltdown and to restructure debt which cannot be serviced according to its original terms and conditions. Temporary debt standstills and restrictions on capital flows should thus become legitimate ingredients of multilateral financial arrangements. These would not only bring a better balance between debtors and creditors and limit the abuse of the Fund’s power over countries facing financial crisis, but also prevent the burden of external financial difficulties being placed on the trading system. While transfer of development issues to the Bank would create a better division of labour between the BWIs and address the problems associated with IMF structural conditionality, the role of the Bank would also need to be redefined in order to prevent migration of the problems from one institution to another. De-linking bilateral and multilateral arrangements for development finance should be an important step in broadening the policy space of countries borrowing from multilateral organisations. Certainly, it is up to sovereign nations to enter into bilateral agreements on debt and financing, but these should be kept outside the multilateral system. There is also a strong rationale for establishing global sources of development finance. This could be achieved through agreements on international taxes, including a currency transactions tax (the so-called Tobin tax), environmental taxes and various other taxes such as taxes on the arms trade, to be applied by all parties to the agreement on the transactions and activities concerned and pooled in the UN development fund (for such sources of development finance, see Atkinson, 2005). An advantage of such arrangements over present aid mechanisms is that once an agreement is reached, a certain degree of automaticity is introduced into the provision of development finance without going through politically charged and arduous negotiations for aid replenishments and national budgetary processes often driven by narrow interests.

5.

WTO RULES AND OBLIGATIONS

Unlike multilateral arrangements in money and finance, the GATT–WTO trade regime is organised around binding and enforceable rules and commitments established on the principles of non-discrimination and reci-


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procity. These rules and commitments apply to a host of agreements which are not all about trade, including the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the agreements on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Trade-Related Investment Measures (TRIMs) and Subsidies and Countervailing Measures (SCM) (for a lucid analysis of the framework for international trade, see Das, 1999). The core principle of non-discrimination has two basic components. First, the MFN rule which requires that the ‘like products’ of all members be treated in the same way, with the benchmark being the best treatment offered to any country, whether or not it is a member. This rule, in effect, prohibits granting more favourable treatment to certain countries and requires extension of tariff concessions to all members. The second component of non-discrimination is national treatment which provides a level playing field between foreign and domestic goods in domestic markets: after entering a member country, foreign goods should enjoy treatment not less favourable than applied to domestic products. This rule is designed to ensure that within-border treatment of foreign goods does not diminish or remove the concessions accorded to them on the MFN rule by differential application of domestic measures such as taxes. In the same vein, as in TRIMs, it also prohibits regulations favouring utilisation of domestic products over foreign products. With the establishment of the WTO there has been a tendency to extend the application of the national treatment principle from trade in goods to the non-trade areas of TRIPS and GATS. There have also been proposals by developed countries to extend it further to investment and competition policy. Unlike orthodox rhetoric that unilateral trade liberalisation is always welfare-enhancing for the country undertaking it, the GATT–WTO framework is essentially based on the recognition that trade concessions could lead to costs which need to be reciprocated so that there are benefits to all.16 However, parties do not usually expect to derive net benefits from each and every agreement taken separately, but from the package as a whole – something that provides the rationale for cross-bargaining and ‘the single undertaking’. There are basically two sets of exceptions to these rules and principles: those that apply to all parties and special and differential treatment accorded to certain members. In the former respect the most important

16

It has also been argued that reciprocity helps to mobilise gaining sectors and segments in support of trade liberalisation, thereby balancing the opposition of losers (see Finger and Winters, 2002).


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exception is the so-called escape clause which allows a member to suspend its obligations under certain conditions in order to safeguard its industry against import surges. Safeguards are designed as temporary emergency measures, to be accompanied by adjustment, not as instruments of protection to establish competitive firms and industries. There are also exceptions to the MFN rule. Perhaps the most important ones are the provisions which allow free trade agreements and custom unions among members, and the exemptions granted to specific commitments under GATS. Government procurement and certain types of subsidies are also exempted from the national treatment rule. Second, there are exceptions granted to developing countries. The so-called enabling clause introduced in 1979 under ‘Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries’ provides exceptions to the MFN rule by allowing developing countries to enjoy preferential market access and to offer limited or less-than-full reciprocity. In principle, it implies recognition of the infant-industry argument; however, in practice, special and differential treatment has generally been confined to longer transition periods – albeit not long enough to allow infant industries to mature and become viable in competition with early starters from advanced industrial countries. Another important exception for developing countries is provided by the 1994 balance-of-payments provisions of Article XVIIIB of the GATT, which allow them to deviate from their obligations on a temporary basis and use import restrictions, including quantitative barriers, in order to safeguard their external financial positions and foreign exchange reserves. Again this constitutes recognition of a vulnerability of developing countries to occasional balance-of-payments difficulties and their limited access to international financial markets. Article XVIIIA permits modifications or withdrawal of concessions in order to support the establishment of a particular industry and Article XVIIIC permits import restrictions for similar purposes, yet such provisions are rarely used because they call for compensatory concessions to other countries adversely affected (Das, 1999: 100–101). The following section will examine the economic significance of WTO rules for developing countries in three key areas: industrial tariffs, industrial subsidies and investment-related policies. Given that a level playing field, defined legally, can have totally different economic consequences for different countries according to their levels of development, attention will be paid to the extent to which legally equally binding constraints also provide economically equally biting constraints on policies in different countries, notably between developed and developing countries. The ultimate purpose is to determine the nature of constraints on policy autonomy in developing countries and the space that is still available.


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6. I.

53

KEY WTO RESTRICTIONS ON POLICY SPACE Industrial Tariffs

Until recently, WTO disciplines for industrial tariffs were not considered a major source of constraint on commercial policy in developing countries. This was, largely, because the modalities adopted in the Uruguay Round (UR) had provided substantial flexibility to these countries in setting their industrial tariffs. During the UR negotiations agreement was reached for reduction in average tariffs (by 30 per cent by developing countries and 40 per cent by developed countries), but freedom was left for the choice of product lines to be bound and the extent of tariff reduction to be made in each product line. There was no wholesale liberalisation that applied to all tariff lines. This flexibility has resulted in considerable diversity among countries regarding their binding coverage for industrial tariffs. While most developed countries have almost full binding coverage, in the developing world this is the case only for some countries, notably in Latin America. Further, even though bound tariff rates are high in many developing countries, applied rates are much lower because of trade liberalisation undertaken voluntarily or as a result of conditionalities imposed by the BWIs. Simple average applied tariffs in developing countries in 2001 stood at around 11 per cent compared with an average bound rate of some 29 per cent. The corresponding numbers for developed countries were lower, at 5.7 and 4.7 per cent respectively. This diversity and freedom enjoyed by developing countries in choosing which tariff lines to bind and where to bind them can disappear in the negotiations of the Doha Work Programme on non-agricultural market access (NAMA).17 The proposed non-linear Swiss formula advocated by developed countries aims to bind almost all industrial tariff lines and reduce bound tariffs on a line-by-line basis. The main objective is to harmonise tariffs across both products and countries. In effect, such a procedure would, for many developing countries, translate unilateral liberalisation into WTO commitments. In some cases the application of the Swiss formula could bring the newly bound rates below the current applied rates, forcing the latter to be lowered even further. The proposed cuts would imply a drastic narrowing of bound tariffs between developed and developing countries. On some proposals, the difference between simple average bound tariffs of these countries could fall

17

Much of the remainder of this section draws on Akyüz (2005c).


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from its current level of some 23 percentage points to as little as 5 percentage points (Fernandez de Cordoba et al., 2004b: table 5a). The proposed tariff cuts could have adverse consequences for developing countries on several fronts. First, to the extent that the negotiations result in deep cuts in applied tariffs, their impact on balance of payments, employment and income could well be negative since the evidence generally shows that rapid liberalisation tends to raise imports much faster than exports, particularly in low-income countries.18 Second, they would also lead to sharp declines in government revenues from trade taxes in poorer countries where such taxes account for an important part of the budget. Since it is unlikely that tariff cuts would bring a rapid increase in imports in these countries because of balance-of-payments constraints, and value added taxes could rarely make up for lost trade taxes, the decline in government revenues could be particularly large.19 The immediate adverse effects of increasing binding coverage and lowering bound tariffs on balance of payments, income and employment, and trade taxes could be expected to be moderate for those developing countries where applied tariffs are already at very low levels. By contrast their longer-term implications for industrialisation and development could be more serious. An irreversible commitment to low tariffs across a whole range of sectors would carry the risk of locking developing countries into the prevailing international division of labour, since many of them would need to provide support and protection to new sectors needed for industrial upgrading. The loss of freedom to use tariffs for industrial development carries even greater risk today because many of the more effective and first-best policy options successfully used in the past for industrial upgrading by today’s mature and newly industrialised countries are no longer available to developing countries because of their multilateral commitments in the WTO, notably in the agreements on subsidies, TRIMs and TRIPS. The proposals, in effect, remove the flexibility provided during the Uruguay Round to developing countries for their industrial progress. The key issue here is how to reconcile multilateral disciplines with the

18

See Santos-Paulino and Thirlwall (2004), UNCTAD (2004e) and Kraev (2005). In the conventional analysis of the impact of trade liberalisation, based on computable general equilibrium (CGE) models, resource utilisation and trade balances are assumed to be unchanged. These CGE models almost invariably find efficiency gains from liberalisation. For a critique, see Akyüz (2005c). 19 Fernandez de Cordoba et al. (2004a) and South Centre (2004). These concerns are justified since evidence shows that many low-income developing countries dependent on trade taxes have been unable to recover the revenues lost from trade liberalisation (see Baunsgaard and Keen, 2005).


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policy flexibility needed for industrial progress in developing countries. Setting bound tariffs line-by-line at sufficiently high levels to accommodate all contingencies would provide considerable flexibility, but it would also render multilateral commitments superfluous. In any case, as noted, developing countries do not need high tariffs for all sectors (and) at all times. However, they should have the option of using tariffs on a selective basis as and when needed for progress in industrialisation. They should not be expected to keep moving tariffs downward from one trade round to another but should be able to move them in either direction for different sectors in the course of industrial development. This kind of flexibility is best accommodated by binding average tariffs without line-by-line commitment – that is, to leave tariffs for individual products unbound, subject to an overall constraint that the average applied tariff should not exceed the average bound tariff. Clearly, the average bound tariff should be high enough to accommodate the needs of different sectors at different stages of industrial maturity. Such an approach does not only have the advantage of simplicity; it would also reconcile multilateral disciplines with policy flexibility since countries would be subject to an overall average ceiling in setting tariffs for individual products. Furthermore, for most countries in the early and intermediate stages of industrial development, it would result in lower average tariffs than would be the case under line-by-line commitments. In practice it would have the effect of balancing tariff increases with reductions; a country would need to lower its applied tariffs on certain products in order to be able to raise them elsewhere. This would encourage governments to view tariffs as temporary instruments, and to make an effort to ensure that they effectively serve the purpose they are designed for, namely to provide a breathing space for infant industries before they mature and catch up with those in more advanced economies. II.

Industrial Subsidies

The agreement on SCM constitutes a major departure from the pre-WTO GATT regime, which lacked comprehensive principles and rules on subsidies and allowed considerable freedom to developing countries in the use of support measures for export promotion and import substitution.20 The agreement deals with this issue at three levels: it provides rules and restrictions regarding governments’ use of subsidies; determines the type

20

In fact, the Subsidies Code that emerged from the Tokyo Round recognised that subsidies were an integral part of development programs. I am grateful to B L Das for this information.


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of action that could be taken against violating members; and specifies the procedures to be followed (for a detailed description, see Das, 1999: ch. 4.1; Ayala and Gallagher, 2005). The main objective of the agreement is to prevent the so-called trade-distorting, targeted direct or indirect government support to firms and industries. Restrictions are imposed not only on export subsidies but also on those provided for domestic sales in accordance with the national treatment principle. The agreement applies mainly to industrial subsidies. GATS contains no subsidy disciplines for services, while special rules apply to agriculture. For services, the disciplines on subsidies are under negotiation. The concept of subsidy is defined to include transfers by governments and public agencies, and intra-private-sector transfers affected through government intervention. Budgetary transfers could take the form of direct payments, forgone revenues and rights, government guarantees and equity participation, and provision of goods and services by public agencies below their market value. Benefits conferred by differential application of certain rules to different sectors and activities are also considered to be subsidy even if they involve only intra-private transfers without any financial repercussions for public agencies. This would, for instance, be the case in directed bank credits to certain sectors at preferential rates set by the government where the cost of implicit subsidy would be borne by non-preferential private borrowers. The SCM agreement classifies subsidies into three categories according to whether they are trade distorting and causing injury to other members: permissible (green light), prohibited (red light) and actionable (amber light) subsidies. Subsidies that are not specific to firms and industries are permissible or non-actionable, while specific subsidies are either prohibited or permissible but actionable.21 This corresponds to the distinction between ‘functional’ and ‘selective’ intervention which has occupied a central place in the debate on the role of the government. Provision of various public goods and services to all domestic enterprises in the form of subsidised physical and social infrastructure or cheap energy supplies resulting from low energy taxes would not be in violation of the rules set by the SCM agreement. The agreement allows even selective subsidies provided that the subset of activities and enterprises earmarked are not confined to export and importcompeting firms and industries. Thus, it should be possible to apply differential tax rules or public service charges to enterprises according to their size.

21

Actionable subsidies are not prohibited. However, they are subject to challenge, either through multilateral dispute settlement or through countervailing action, if they cause adverse effects to the interests of another member.


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Direct and indirect assistance to firms and industries contingent on export performance is explicitly prohibited. This is also true for importsubstitution subsidies – that is, assistance promoting the use of domestically produced, as opposed to imported, products. However, subsidies to domestic producers competing with imports are not among the prohibited but among the actionable subsidies, a grey area between prohibited and permissible subsidies. These are permitted but actionable if they inflict costs on other members by causing or threatening material injury, violating the national treatment principle through the impairment of trade concessions, or prejudicing their interests. LDCs and countries with a per capita income of less than $1.000 per annum (Annex VII: developing countries) are permitted to use export subsidies until graduation from this category. Developing countries as a whole benefit from higher thresholds in the application of countervailing duties. In assessing the extent to which the agreement on SCM limits policy space, it should be noted that the distinction between economy-wide and sector-specific subsidies is not always clear-cut in their incidence. A subsidy to a specific sector (such as energy or education) could have significant economy-wide implications when it has strong linkages. Similarly, economy-wide subsidies can benefit only a limited number of industries, as in assistance to prevent industrial pollution. Since in practice it may be difficult to determine whether a subsidy is, in fact, specific (Anderson, 2002: 168), there is scope to design subsidies in such a way that they can help import-competing and export sectors without contravening WTO rules and triggering retaliatory action. In reality many industrial countries seem to be able to provide considerable support to industry through carefully crafted and disguised subsidies (Weiss, 2006). A careful reading of the agreement shows that many instruments of support effectively used by late industrialisers are now outlawed and could trigger retaliatory action, particular in view of pervasive mercantilist tendencies. These constraints are particularly biting for middle-income countries seeking industrial upgrading. The instruments that were formerly used extensively but are now outlawed include subsidies in the form of direct payments, tax credits and tax holidays for import-competing and export sectors; generous tax rebates and duty drawbacks for exporters; selective allocation of licences for technology imports and investment; preferential access to credit at subsidised interest rates for export financing and investment; and provision of subsidised infrastructure services.22

22 For measures used by the Asian newly industrialised economies (NIEs), see English and de Wulf (2002), Pangestu (2002) and Weiss (2005a).


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The rationale for prohibition of selective subsidies is the same as that for the harmonisation of tariffs across product lines; namely, to minimise distortions in international trade and resource allocation. However, this rationale has not been taken to its logical conclusions. The negotiations on NAMA recognise a role for industrial tariffs despite the push for harmonisation and cuts. This implies that, on orthodox thinking, the prohibition of export subsidies contains a bias against trade. More importantly, the agreement on SCM does not have a consistent rationale for permissible and prohibited subsidies. The rationale for permitting specific subsidies for research and development (R&D), environment and regional development is said to be correction of market failures.23 But these are not the only areas where markets fail. The literature is replete with examples of capital market failures and externalities which necessitate infant-industry support to firms and industries to enable them to undertake certain activities with high social rates of return which they would not otherwise be willing or able to do. When capital markets are reluctant, because of asymmetric information, to finance learning and cover initial losses of potentially efficient and profitable firms, targeted credit allocation could be an effective and perhaps the only way for upgrading into new activities. Such failures are certainly more common in developing countries. They have also become pervasive in recent years as financial liberalisation has led to greater instability and encouraged taking a short view in lending decisions. These provide a strong rationale not only for infant-industry intervention in the allocation of investment credits but also for directed and subsidised export credits and credit insurance. There is also the much-debated inconsistency between agricultural and industrial subsidies. Current WTO rules allow both export subsidies and domestic support to agriculture while severely restricting them in industry. This asymmetry clearly works against developing countries. Indeed, the role of subsidies is embedded within a broader issue concerning the relative significance of different sectors and the intersectoral transfer of resources between agriculture and industry at different stages of development. In most developing countries in the early stages of industrialisation the scope for transferring resources to agriculture through direct and indirect subsidies is highly limited. This is not just a matter of fiscal constraints but of the availability of general resources outside agriculture to effect such transfers.

23

Drawing on Hoekman and Kostecki (2001), Ayala and Gallagher (2005: 7) argue that the crafters of the agreement differentiated between subsidies justified on market failure grounds and those that are not.


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Consequently, while industrial countries provide massive subsidies to agriculture, this sector is generally taxed in developing countries through pricing policies and export taxes in order to mobilise resources for industrialisation. In some parts of the world, marketing boards established during the colonial period have been used for this purpose. In Africa in the 1970s, for instance, exports contributed between 20 and 40 per cent to government revenue. Agriculture was taxed at similar rates in other parts of the developing world, including Asia, except that in the latter region an important part of the resources mobilised in this way went back to agriculture as infrastructural investment, helping to raise productivity. Although, since the early 1990s, marketing boards have generally been dismantled and export taxes eliminated and many developing countries have moved towards more liberal agricultural pricing policies with the support of the BWIs, these steps have only removed anti-agricultural bias rather than resulting in the kind of assistance provided by industrial countries.24 Developing countries appear to be ambivalent about the policy constraints brought by WTO disciplines regarding industrial subsidies because, unlike richer countries, they often lack financial resources to provide extensive support to emerging and/or declining industries. Given that many of them already suffer from massive agricultural subsidies provided in the developed countries, they do not seem to be willing to open up this route for industrial products as well. While the constraints brought by the agreement on SCM could be particularly biting for middle-income countries which need to move rapidly towards dynamic, high value-added industries, the exceptions granted to Article VII countries provide them more space than they can possibly exploit given their financial constraints. There is a strong rationale for multilateral disciplines over the use of subsidies in traded goods sectors. However, it should also be recognised that the prohibition of industrial subsidies places much greater constraint over industrial development in countries at early and intermediate stages of industrialisation than in mature industrial countries. III.

Investment-related Policies

There are two main sources of WTO disciplines on investment-related policies: the agreement on TRIMs and specific commitments made in the

24

For a discussion of taxation of agriculture, see UNCTAD (1998b: part 2, ch. 2–3) and Anderson (2002); for a review of agricultural support in developed and developing countries, see Aksoy (2005) and Baffes and de Gorter (2005).


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context of GATS negotiations for the commercial presence of foreign enterprises, or the so-called mode 3, in the services sectors. In addition to these a number of other agreements provide disciplines, directly or indirectly, on investment-related policies, such as the prohibition of investment subsidies linked to export performance in the agreement on SCM. There was also an attempt by OECD countries to broaden WTO disciplines on FDI policies in recipient countries by means of a multilateral agreement on investment (MAI), but this has been dropped from the agenda for the time being as a result of resistance by developing countries. However, there is now a renewed effort by some industrial countries to bring investment policies in developing countries under tighter multilateral disciplines through a fundamental change in the modalities of services negotiations in the Doha Round. The TRIMs agreement does not refer to foreign investment as such but to investment generally. Following a subsequent interpretation by a panel on a TRIMs dispute, its provisions are now understood to apply to domestic investment as well as FDI (for a detailed treatment of the TRIMs agreement, see Das, 1999: ch. 3; Bora, 2002). The agreement is simply a reiteration of GATT provisions for national treatment and quantitative restrictions in the context of investment measures, yet has nothing to say about market access or national treatment of foreign investors. It effectively prohibits attaching conditions to investment in violation of the national treatment principle or the restrictions regarding the utilisation of quantitative measures. From an economic point of view, the most important provisions of the agreement relate to prohibition of domestic content requirements whereby an investor is compelled or given an incentive to use domestically produced rather than imported products, and of foreign trade or foreign exchange balancing requirements linking imports by an investor to its export earnings or to foreign exchange inflows attributable to investment. Even though these provisions apply to domestic and foreign investment alike, the debate on the extent to which they constrain policy space in developing countries has almost invariably focused on FDI (see, for example, Wade, 2003b; Kumar, 2005; Weiss, 2006). This is in part because the arrangements in the WTO in this respect are highly unbalanced. First of all, there are no multilateral disciplines restricting beggar-my-neighbour investment policies by recipient countries through various incentives to foreign firms, including for investment in export industries linked to international production networks. Such incentives provide effective subsidy to foreign investors and can influence investment and trade flows as much as domestic content requirements or export subsidies, particularly since a growing proportion of world trade is taking place among firms linked


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through international production networks controlled by TNCs.25 More importantly, multilateral restrictions through TRIMs over policies in recipient countries vis-à-vis TNCs are not matched by multilateral codes of conduct for TNCs, which are known to practise trade-restricting policies (Kumar, 2005: 194). These create asymmetry not only between TNCs and recipient governments but also between developed and developing countries. Since most developing countries do not have TNCs investing abroad to any significant extent, the benefits accruing to countries from the agreement on TRIMs are not reciprocal in so far as restrictions imposed over government policies in recipient countries serve to boost the profits of investors. Clearly the impact of the provisions of the TRIMs agreement depends very much on the objectives pursued in attracting FDI as well as the nature of investment. While most financially-constrained countries, notably in Latin America and Africa, seek FDI for its potential contribution to balance of payments and government finances, others, particularly in Asia, emphasise its role in the transfer of technology and entrepreneurial know-how and in the linkages with international production networks and global markets for goods and finance. A large proportion of FDI in Africa is in the exploitation of minerals; in Latin America in the form of acquisition of government assets, including non-traded public utilities; and in East Asia in labour-intensive assembly industries linked to international production networks (Akyüz, 2006a). The TRIMs provisions are particularly biting for investment in manufacturing for domestic and/or international markets, notably in automotive and electronics industries. Perhaps the single most important restriction here concerns domestic content requirements. In developing countries, most of the industries linked to international production networks have high import contents in technology-intensive parts and components, while their domestic value added often consists of wages paid to unskilled or semi-skilled workers.26 Raising the domestic content of such production 25

There is a body of literature which argues against multilateral disciplines for incentives on grounds that if they are ineffective there are no real negative spillovers, and if they are effective they improve global allocation of FDI (see Hoekman and Saggi, 1999: 12–13). Not all mainstream economists agree that FDI incentives are non-distorting (see, for example, Bhagwati, 1998). That incentives tend to distort investment patterns in much the same way as export subsidies distort trade patterns, see Kumar (2002). 26 For a detailed discussion of the issues regarding TNC-dominated international production networks, see UNCTAD (2002: ch. 2–3). For an account of the impact of TRIMs on policy space in Malaysia, a country extensively participating in global production networks, see Rasiah (2005).


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is important not so much because of its impact on balance of payments as because development of domestic industries for technology-intensive parts and components constitutes an important step in industrial upgrading.27 Restrictions on domestic content requirements would thus limit transfer of technology and import substitution in industries linked to international production networks. The domestic content of industrial production is not independent of the tariff regime. Other things being equal, low tariffs and/or duty drawbacks encourage high import content. By the same token it should be possible to use tariffs as a substitute for quantity restrictions over imports by TNCs when they are unbound in the WTO or bound at sufficiently high levels. Imports by TNCs could also be discouraged by raising transaction costs through administrative means, as practised in some East Asian late industrialisers in support of domestic industries producing import-competing goods. As long as there are no commitments to foreign investors for unrestricted market access, the constraints imposed by the TRIMs agreement could be overcome by tying the entry of foreign investors to the production of particular goods. For instance a foreign enterprise may be issued a licence for an automotive assembly plant only if it simultaneously establishes a plant to produce engines, gearboxes or electronic components used in cars. Similarly, licences for a computer assembly plant can be tied to the establishment of a plant for producing integrated circuits and chips. Such measures, which raise domestic value-added and net export earnings of TNC-dominated sectors, would not contravene the provisions of the TRIMs agreement.28 However, they call for considerable bargaining power against TNCs. Such an approach was indeed an essential feature of investment coordination policies widely practised in East Asia, vis-à-vis not only foreign but also domestic investors. There are also other measures that recipient developing countries can use as part of entry conditions for foreign enterprises. One such measure is imposing export performance requirements without linking them to imports by investors. This would not contravene the TRIMs agreement since it would not be restricting trade (Bora, 2002: 177). Governments in developing countries would also be free to require joint ventures with local enterprises or local ownership of a certain proportion of the equity

27 The contribution of FDI to balance of payments varies inversely with the share of profits in value added, the extent of its reliance on imports, and the proportion of the final product sold in domestic markets (see Akyüz, 2005b: 30n). 28 I am grateful to B L Das for pointing this out to me.


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of foreign enterprises. In fact, many of these conditions appear to be used widely by industrial countries in one form or another (Weiss, 2006: 4–5). Since the TRIMs agreement applies only to trade in goods, local procurement of services such as banking, insurance and transport can also be set as part of entry conditions of foreign firms in order to help develop national capabilities in services sectors. However, such a route would only be possible as long as developing countries continue to have discretion in regulating access of TNCs to services. The existing GATS regime provides considerable flexibility to developing countries regarding policies for commercial presence in services. It allows them to choose the sectors in which they make liberalisation commitments on a bilateral offer-request basis, and to determine the restrictions they would want to apply to market access and national treatment in each sector. It effectively adopts a positive list approach for sectoral commitments and a negative list for restrictions; that is, GATS disciplines apply only to sectors bound during negotiations (that is, included in a country’s schedule of commitments) and countries can only apply the restrictions and exemptions explicitly specified in their commitments. This is a main reason why developing countries have generally been unwilling to include many sectors in their schedules of commitments. Developed countries have been seeking fundamental changes in the modalities of GATS negotiations (for a detailed description of the proposals and pitfalls for developing countries, see Das, 2005). They called for the requested countries to compulsorily take part in plurilateral and sectoral negotiations, make binding commitments in a minimum number of sub-sectors in each of the four modes of supply (benchmarking), and to bind a certain percentage of the current level of applied liberalisation not included in countries’ schedules of commitments so far. Requests have also been made to major middle-income developing countries by industrial countries for market access and national treatment in sectors such as finance, energy, telecommunications, maritime transport, computer and engineering services where TNCs from these countries have a clear competitive edge (Khor, 2006) but are strongly opposed by some developing countries. The changes in the modalities of GATS sought by developed countries would no doubt shrink policy space in developing countries a lot more than the TRIMs agreement. Prohibition of pre-establishment conditions would imply that various entry requirements that are permissible under TRIMs (such as production of certain goods, joint ventures or types of legal entity), noted above, would become illegal for FDI in services. On the other hand, the application of national treatment would have the same consequences as TRIMs in prohibiting domestic content and forex


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balancing requirements, aggravating the negative impact of FDI in services on balance of payments. Moreover, while national treatment in TRIMs applies to goods traded by investors, in GATS it would apply to the investor. This would preclude any preferential treatment of national suppliers of services even when the development of indigenous capacity and institutions and broad-based provision of public services call for support and protection (see Cho and Dubash, 2005).29 As far as mode 3 is concerned, GATS is an agreement on investment, not trade.30 It is indeed quite arbitrary to describe ‘commercial presence’ as a mode of supply for services but not for manufactures or primary commodities. For some (such as Hoekman and Saggi, 2002: 445), this provides a rationale for bringing them together under the same disciplines of a multilateral investment agreement. Failing that, the recent proposals by industrial countries for GATS are an attempt to expand multilateral commitments in investment in an area that matters most for TNCs, since in developing countries FDI typically faces greater restrictions in services than in manufacturing. However, this also means that the concerns that underlie the opposition of developing countries to MAI (shared in part even by some free-trade economists such as Bhagwati, 1998) apply with an even greater force to these proposals. The logic of the matter now calls for taking mode 3 of GATS out of the WTO rather than promoting it as a multilateral regime based on principles of right to establishment and national treatment and seeking to extend it to other sectors such as industry and agriculture.

7.

CONCLUSIONS

While focusing on the question of national policy autonomy, a key proposition of this chapter is that in a world where economies are closely linked through flows of goods, services, money, capital and so on, there is a strong rationale for multilateral disciplines over national policies. However, certain conditions need to be met in order for such disciplines to help promote international economic stability and broad-based economic growth and development. First, there should be coherence among arrangements in different spheres of economic activity so that they rein29

Rasiah (2005) provides an illustrative account of the implications of GATS and its extension for policy space in Malaysia. 30 Strictly speaking this is similarly true for mode 4; it is not about trade per se, but labour movements. There are no compelling reasons why such matters should be taken up in the WTO rather than, say, in the ILO or UNCTAD.


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force, rather than undermine and destabilise, each other. Second, the rules should be even-handed across countries in terms of the flexibility and space they allow. Both of these call for a global governance system that secures, inter alia, voluntary, full and equal participation in the formulation of multilateral disciplines. Current multilateral arrangements barely meet these principles. Coherence between trade and finance is not secured because of lack of multilateral disciplines over macroeconomic and exchange rate policies of the countries that matter most for global monetary and financial stability, and because of the priority attached to meeting international financial obligations at the expense of trade and growth. This constitutes the single most important threat to the stability and openness of the trading system. On the other hand, conditionalities attached to multilateral lending by the BWIs place constraints not only on macroeconomic and financial policies but also on broader social and economic development strategies in developing countries, and these extend beyond what is needed for the international economic stability and financial integrity of these institutions. The trading system does not fare better in terms of the balance between developed and developing countries. Although WTO rules and obligations are legally equally binding for all parties, they are designed primarily to accommodate the development trajectories of industrial countries, imposing tighter effective constraints over policies in developing countries, particularly those at intermediate stages of industrialisation. This is true, above all, in areas of economic activity where there are inherent asymmetries between developed and developing countries, such as FDI and intellectual property rights. Furthermore, as shown by several examples above, the WTO rules do not constitute a coherent system based on a consistent application of principles for global collective action designed to provide global public goods, but rather a pile of ad hoc concessions and exceptions exchanged in pursuit of self-interest by its more powerful members. The above analysis also shows that, despite the proliferation of multilateral rules and obligations, there is still room for manoeuvre within the confines of the multilateral system. Moreover, a number of important areas of policy remain outside the multilateral disciplines. There are hardly any rules in the international monetary and financial system obliging countries to adopt a particular exchange rate or capital account regime and, as noted, this is, in fact, a shortcoming of the multilateral system contributing to global economic instability. Similarly there are no hard and comprehensive multilateral rules in several areas such as labour mobility, FDI, trade in services and competition policy. In conclusion, a return of the development paradigm to replace orthodox


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free market ideology requires action on three fronts. First, there is a need to restructure multilateral disciplines to widen the boundaries of policy intervention for development. This should be an exercise in rationalisation, rather than doing away with multilateralism. Second, for some countries there may be both the need and scope to regain the policy space and flexibility lost through unilateral action. It is true that policy reversal can be quite costly, but this may be worth considering when potential benefits are large. Finally, it is important to use the space that is available; something that calls for a fundamental rethinking of economic policy in many developing countries.


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Assessing international financial reform Daniel Bradlow*

1.

INTRODUCTION

The foundations for the current international financial governance arrangements were laid at the Bretton Woods Conference in 1944. At this conference, which was attended by delegates from 44 countries, the International Monetary Fund (IMF or Fund) and the International Bank for Reconstruction and Development (IBRD) were created, with the IMF originally having US$8.5 billion in resources and the IBRD having US$7.67 billion in prescribed capital. The Fund’s function was to use its authority and financial resources to help create and support a rules-based international monetary system that was designed to maintain stable exchange rates and relatively free payments for current transactions (IMF Articles of Agreement: Art. I). The IMF was expected to use its surveillance authority to oversee the operation of the international monetary system and advise members on their balance of payments and the maintenance of the par value1 of their currencies. The founding states also anticipated that the IMF would use its financial resources to help those member states that were experiencing balance of payments problems to correct these problems in ways that were not destructive of international or domestic prosperity. The IMF’s Articles of Agreement made clear that, while its member

* SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria, and Professor of Law, Washington College of Law, American University, Washington DC, USA. The author wishes to thank Maya Berinzon for her research assistance. 1 Under the system established with the creation of the IMF, each state was expected to establish the value of its currency in terms of the US dollar, whose value would be fixed in terms of gold. The member state was expected to maintain this value, known as the par value of the currency, within narrow limits. It could only change the par value with the consent of the IMF. 67


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states were surrendering some control over their exchange rate and their policy discretion in regard to current transactions, they retained the authority to regulate capital transfers as they saw fit (ibid: Art. VI). Thus, the founding member states did not anticipate that the Fund would play any direct role in the regulation or oversight of either national or international financial markets or in the international allocation of credit. At the time this makes good sense because relatively few banks operated across national boundaries, all financial regulation was national, and international financial activity was a relatively small part of the global financial scene. The IBRD’s role was to help finance the reconstruction of Europe and the economic development of its erstwhile colonies and a few other states in Africa, Asia, and Latin America (IBRD Articles of Agreement: Art. I). At the time this was understood to mean that it would provide financial support primarily for physical infrastructure projects that were not able to raise sufficient financing from private sources. Since that time, the world has changed dramatically. The number of states participating in the global monetary and financial system has increased, as has the number of financial institutions that operate across national borders. The par value system of exchange rates has broken down and we now live in a world with freely fluctuating exchange rates and liberalised financial flows. In this environment, international financial flows exceed, by several orders of magnitude, annual international trade volumes; international capital markets are a key component of the global financial order; and there is no financial regulator in a major economic power that is able to effectively regulate its financial industry without addressing the international aspects of that industry’s operations and without collaborating in some way with its counterparts in other key countries. The IMF and the IBRD have grown and the scope of their operations has expanded far beyond what their creators envisaged in response to this changing reality. They currently each have 186 member states. The IMF now has about US$337,019 billion2 in its general resources and the IBRD now has a total authorised capital of US$189,801 billion. The IMF has become involved in international financial market oversight and in reviewing its member states’ financial regulatory frameworks. It also uses the conditions attached to its financial support to get its developing member states to change their monetary and fiscal policies, their

2 The actual amount is SDR217,431.7 billion (1SDR was equal to about US$1.55 on 18 August 2009).


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financial governance arrangements and their poverty reduction strategies in ways that the IMF considers necessary for their future development. Thus, in effect, the IMF has become an important actor in the policy making process of those developing countries that rely on its financial support.3 The IBRD is now only one member of a group of international financial organisations, known collectively as the World Bank Group.4 Its operations have grown to include helping countries improve various aspects of their governance arrangements, dealing with social and environmental problems in its member states, and helping its member states deal with their international financial payments problems. In addition, the demands of international financial governance have grown too complex for these institutions to manage on their own. As a result, there are presently a broad range of international forums and bodies that are involved in various aspects of international financial governance. They include the Basel Committee of Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Administrators, which provide forums in which national regulators can meet and coordinate their regulatory efforts. In addition, they include groupings of states – such as the G-8, the G-10, the G-20, and the G-24 – that meet regularly to coordinate their interests in regard to international financial affairs. As is clear from the many financial crises that the world has experienced since the 1980s, these international governance arrangements do not always function effectively. In fact, at least since the 1997 Asian financial crisis, there has been general agreement that the existing arrangements for international financial governance, often referred to as the ‘global financial architecture’, need to be reformed.5 This general agreement led to the formation of the G-20 and, in 1999, to the creation of the Financial Stability Forum (FSF), in which financial regulators from the G-8 countries and 3 On 25 April 2010, the World Bank’s member states agreed to increase the IBRD’s capital by US$86.2 billion. This increase still needs to be implemented. See ‘World Bank Reforms Voting Power, Gets $86 Billion Boost’, http://web.world bank.org / WBSITE / EXTERNAL / NEWS / 0,,contentMDK:22556045~pagePK:64 257043~piPK:437376~theSitePK:4607,00.html. 4 The members of the World Bank Group are the IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for the Settlement of Investment Disputes (ICSID). 5 These arrangements include institutions like the IMF and the World Bank (for a useful overview of the international financial architecture, see generally Alexander et al., 2006; Davies and Green, 2008).


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key international organisations met to share information and coordinate their activities.6 However, over time, the attention paid to this topic has been inversely proportional to the wellbeing of the global financial system. Consequently, during most of the early years of the millennium, the topic was not high on the international agenda. This began to change as signs that the global political economy could be running into problems began to appear. There was an agreement at the 2006 International Monetary Fund Annual Meeting to reform IMF governance (IMF, 2006b). The agreed measures included small increases in the quotas (and therefore votes) of China, Mexico, Turkey and South Korea, and additional support for the African Executive Directors. Most of these reforms have now entered into effect. In 2008, the World Bank Group (‘the World Bank’ or ‘the Bank’) agreed to create a new seat for an additional African Director, although this has not been implemented. More recently the leadership in the Fund and the Bank each appointed a high-level commission to study their governance: the Manuel Committee was appointed by the IMF (IMF, 2008c; Committee on IMF Governance Reform, 2009) and the Zedillo Commission by the World Bank (World Bank, 2009d). In addition, the G-20 summits in 2008 and 2009 devoted considerable attention to reforming key financial governance institutions, in particular, the IMF and the FSF (G-20, 2008 and 2009 a–d). These developments suggest that there could be changes in the international financial architecture in the short to medium term. Consequently, it is an opportune time to assess the actual significance of the reforms that either have recently been implemented or are under consideration and the potential they might create for further international financial governance reform. Such an evaluation requires us to answer six questions: What are the purposes of international financial governance? What standards should we use in assessing the adequacy of any set of arrangements for international financial governance? What are the problems with the current international financial architecture? What, in fact, has been achieved in terms of reforming international financial governance? What more can be achieved in the short run? What more needs to be achieved, over the medium to long term, if we are to eventually have an effectively functioning international financial architecture?

6 See further Financial Stability Board (FSB), http://www.financialstability board.org/about/history.htm (accessed 7 July 2009).


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WHAT ARE THE PURPOSES OF INTERNATIONAL FINANCIAL GOVERNANCE?

International financial governance should have two objectives. The first is to support an international monetary system that is predictable and stable and that facilitates payments for international economic transactions. The second is to oversee an international financial system that both protects the interests of savers and investors around the world and allocates credit efficiently and fairly amongst all potential borrowers. Effective international financial governance should, therefore, facilitate productive and sustainable economic activity that serves the interests of all stakeholders in the international economic order.

3.

WHAT STANDARDS SHOULD BE USED IN EVALUATING INTERNATIONAL FINANCIAL GOVERNANCE?

Any arrangements for international financial governance will only effectively achieve the requisite objectives if they conform to the following five sets of principles: a holistic approach to development, comprehensive coverage, respect for applicable international law, coordinated specialisation, and good administrative practice. I.

Holistic Approach to Development

All states are developing states in the sense that they are striving to create better lives for their citizens, however they understand this concept. Thus, a key test for the international financial architecture is how effectively it supports the efforts of participating states to achieve their common developmental objective. It follows that one standard for assessing international financial governance is the vision of ‘development’ that informs its arrangements and activities. The original vision of development as an economic process that focuses on growth, as measured by GDP per capita, is no longer seen as sufficient because it is now recognised that the level of development of both individuals and societies can be positively or negatively affected by a range of non-economic factors.7 This insight has led to a new understanding of

7 UNDP (1990); Sen (1999); Declaration on the Right to Development, 4 December 1986 (UNGA, 1986). This new evolving definition of development is


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development as being a comprehensive and holistic process that involves intertwined economic, environmental, social, cultural, political and even ethical dimensions. According to this view, the economic aspects of development cannot be separated from its social, political, environmental and cultural aspects, all of which are components of one dynamically integrated process. The extent to which the international financial governance arrangements incorporate this holistic vision of development determines how well the arrangements can account for all the economic, financial, environmental, social, cultural and political implications of the international financial system and, thus, how effectively it helps all states achieve their developmental objectives. II.

Comprehensive Coverage

The principle of comprehensive coverage holds that the mechanisms and institutions of international financial governance should be applicable to all stakeholders in the international financial system and should deal with all the methods, institutional arrangements, and instruments they use in their financial operations (Alexander et al., 2006; Davies and Green, 2008). This means that the mechanisms of international financial governance need to be concerned with all the activities and operations of all financial intermediaries that engage in cross-border financial transactions; large corporate and sovereign investors and borrowers that utilise a broad range of complex financial instruments; financial actors who wish to base their financial transactions, both as savers and investors, on religious principles; small local financial institutions that operate only in local markets and are engaged in transactions that involve small and medium-size enterprises; community based businesses and local farming operations; and micro-credit and other financial intermediaries that are concerned with the problems of poverty and expanding access to financial services to all.

also evident in the work of the World Bank and aspects of the work of the IMF. It can also be seen in the formulation of such principles as the ‘Equator Principles’ (The Equator Principles – A Financial Industry Benchmark for Determining, Assessing and Managing Social and Environmental Risk in Project Financing, http://www.equator-principles.com/principles.shtml (accessed 9 July 2009)); in the Principles developed by the United Nations Special Rapporteur on business and human rights (see Ruggie, 2008); and in the numerous industry and corporate codes of conduct that exist. See also Bradlow (2005a).


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A. Three corollaries There are three important corollaries that follow from the principle of comprehensive coverage. First, the mechanisms of international financial governance must be sufficiently flexible and dynamic to adapt to the changing needs and activities of their diverse stakeholders. For example, as the ‘top end’ large-scale financial institutions develop new financial instruments and new arrangements through which to conduct their operations, the international financial architecture must have the capacity to understand these instruments and arrangements and to determine how to most effectively account for them and their impacts on the various stakeholders in the international financial system. At the same time the international financial architecture must be able to accommodate the changing needs of the ‘low end’ small and micro financial institutions. Second, the totality of international financial governance arrangements must ensure that the international community receives all the services it requires from a well-functioning global financial system. These services are: a global lender of last resort, global monetary regulation and global development finance; regulation of trade and investment in financial services; global regulation of the cross-border activity of financial institutions; coordination of national financial regulation, including ensuring that all financial regulation promotes such issues as access to financial services for all (individuals, corporate entities, and states); coordinated taxation of financial transactions; arrangements for dealing with sovereign debt problems and complex cross-border financial institution and corporate bankruptcies; and regulation of international money laundering. The third corollary, which is intended to ensure that the international financial architecture is flexible, efficient and not unduly centralised, is the principle of subsidiarity.8 This principle holds that all decisions should be taken at the lowest level in the system compatible with effective decision making. Thus, the principle would require that global financial governance arrangements encourage national or even sub-national decision making to 8

‘The principle of subsidiarity is defined in Article 5 of the Treaty establishing the European Community. It is intended to ensure that decisions are taken as closely as possible to the citizen and that constant checks are made as to whether action at Community level is justified in the light of the possibilities available at national, regional or local level. Specifically, it is the principle whereby the Union does not take action (except in the areas which fall within its exclusive competence) unless it is more effective than action taken at national, regional or local level. It is closely bound up with the principles of proportionality and necessity, which require that any action by the Union should not go beyond what is necessary to achieve the objectives of the Treaty,’ http://europa.eu/scadplus/glossary/subsidiarity_en.htm (accessed 7 July 2009).


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the greatest extent possible, consistent with effective decision making and implementation. This principle is particularly important in international financial governance because of the diversity of interests of its many stakeholders and because so many of its stakeholders have only local or regional interests, as opposed to global ones. It is however a complicated principle to implement because it must apply both in standard operating conditions and in crisis situations, which may require that decisions are made at a different level than is the case during standard conditions. In addition, it needs to be linked to a conflict resolution mechanism that is capable of resolving disputes between regulators as to which level is the most appropriate for resolving a particular issue. The principle of comprehensive coverage therefore establishes a second test which global financial arrangements must satisfy. They must be able to demonstrate that they have both the technical expertise and the mandate to address the concerns of all the stakeholders in the international financial system and that they have the capacity to adapt as the interests and actions of these stakeholders evolve over time. It is important to recognise that this does not mean that all these issues must be dealt with by the global mechanisms themselves, but it does mean that they have some mechanism for ensuring that these interests are addressed at the appropriate level in the system and that learning and information on best practices in this regard is shared within the system. III.

Respect for Applicable International Law

The institution arrangements for international financial governance, either because they are formal international organisations created by treaty or include the participation of sovereign states in their decision making, should comply with applicable international legal principles (see, for example, Schermers and Blokker, 2003; Klabbers, 2007; Sands and Klein, 2009). While international law does not provide detailed rules and standards that are applicable to international financial affairs, it does provide the general principles that should guide the institutional arrangements for international financial governance. In particular, this means that the decision-making bodies and institutions involved in international financial governance should conform to universally applicable customary and treaty based international legal principles. There are four sets of principles that are applicable in this regard.9

9

See for example Brownlie (2008).


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A. Sovereignty The first is the principle of respect for national sovereignty. It is clear that, by participating in a global governance arrangement, states are agreeing to forgo some level of national independence in order to reap the benefits of a well-functioning international system. Given the different power and wealth characteristics of the participating states, it follows that, de facto, the amount of independence they give up will be positively related to their power and wealth. However, the principle of national sovereignty should still provide all states, regardless of their wealth and power, with the means for preserving as much independence and policy space as is practicable and consistent with the demands of effective global financial governance. B. Non-discrimination The second is the general principle of non-discrimination. This means that the institutions of international financial governance should treat all similarly situated states and individuals in the same way. The key question thus becomes what standards can be used to ensure that all stakeholders receive treatment that is fair and reasonable. The first standard applicable to the treatment of states is that the institutions of global financial governance, such as the IMF, should treat similarly situated states similarly and differently situated states differently. This means that while they should base their treatment of all states on the same principles, they should apply these principles in a way that is responsive to the different situations of each member state. Their treatment of non-state stakeholders should be based on the same approach. Second, it means that recognition should be given to the fact that weaker and poorer states are significantly different in capacities from rich and powerful nations. One way of implementing this principle could be to apply the general principle of special and differential treatment that is applicable in a number of international legal contexts, for example in international environment and international trade law, to international financial governance. In the international financial context, this principle would ensure both that weak and poor countries are given access to financing on easier terms than may otherwise be applicable and that special attention is paid to ensuring that they are able to enjoy a meaningful level of participation in international financial decision-making structures, even when they are based on principles like weighted voting. A consequence to this may be that the organisation offers some mechanism of accountability to these states and their citizens to compensate for any participation deficit. In the case of natural persons, the relevant principles should be derived from the Universal Declaration of Human Rights (UNGA, 1948), which is now considered largely to be part of customary international law (Ruggie,


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2007a: para. 38; see generally Hannum, 1998). Pursuant to this document, it would seem that individuals have reason to expect that the principles and institutions of international financial governance, including national regulatory bodies, respect their rights to housing, health care, education, jobs, and social security. The institutions of international financial governance should also respect their rights to freedom of speech and association. Thus, one indicator of good financial governance could be the level of respect that the institutions of international financial governance show for human rights in their member countries. C. State responsibility The third set of international legal principles applicable to international financial governance deal with the responsibility of states for the functioning of the financial system. Based on general principles of state responsibility,10 they have an obligation to provide foreign legal persons (including financial institutions) that are present in the state, either through an investment or an individual transaction, with fair and non-discriminatory treatment. This means that these foreign entities should receive comparable treatment to similarly situated domestic institutions. It does not necessarily mean that they should receive the same treatment as all domestic financial institutions, regardless of their size or role in the domestic financial system. D. International environmental law A fourth set of applicable international legal principles are derived from international environmental law (see generally Hunter et al., 2006). At a minimum these principles would impose on financial regulators an obligation to insist that financial institutions fully understand the environmental and social impacts of their financial practices and of individual transactions. This is particularly relevant given the potential impact that environmental events such as climate change can have on financial risk, and vice versa. This suggests that international financial governance should be working to ensure that the global financial system promotes environmentally sustainable practices and minimises the incentives for financial actors to engage in environmentally risky behaviour. The principle of respect for applicable international law establishes a third test for international financial governance, namely to what extent do the arrangements for international financial governance promote respect for

10 See Responsibility of States for Internationally Wrongful Acts, Resolution 62/61, 6 December 2007 (UNGA, 2008).


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national sovereignty, the environment, and the rights of all natural and legal stakeholders in the international financial system? IV.

Coordinated Specialisation

The principle of coordinated specialisation acknowledges that, even though development is holistic and all aspects of international governance are interconnected, international financial governance cannot function efficiently without a limited mandate and in the relevant institutions having the requisite technical expertise to implement these mandates. Thus, the principle of coordinated specialisation has two requirements. First, the mandate of the mechanisms and institutions of international financial governance must be clearly defined and limited to international monetary and financial affairs. Second, the institutions of international financial governance cannot ignore the other important aspects of the development process. Consequently, there is a need to ensure some form of coordination between the institutions and mechanisms of international financial governance and other organisations and arrangements for global governance. The coordinating mechanism, if it is to effectively resolve tensions between the different aspects of international governance, needs to be transparent and predictable. It may also need some dispute settlement mechanism. This principle, therefore, establishes a fourth standard for measuring the adequacy of international financial governance. This standard is that the mechanisms of international financial governance must have both specialised mandates and a means for coordinating their policies and operations with other institutions of global governance, each of which has its own limited mandate. This means that the institutions of global financial governance must offer other institutions of global governance a meaningful opportunity to raise concerns with them and that there must be some mechanism for resolving tensions between the different specialised mechanisms of global governance. V.

Good Administrative Practice11

The basic principles of good administrative practice in global governance are the same as those applicable to any public institution. These principles are transparency, predictability, participation, reasoned decision making, and accountability. This means that all the institutions of international financial

11 Kingsbury et al. (2005). See generally Institute for International Law and Justice, http://iilj.org/publications/default.asp (accessed 10 July 2009).


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governance must conduct their operations in a manner that is sufficiently open for their procedures, decisions, and actions to be predictable and understandable to all stakeholders. They must also offer these stakeholders some meaningful way of raising their concerns and having them addressed by the institutions. The institutions should also be required to explain their decisions and operations to all interested stakeholders. Finally, the stakeholders should be able to hold the institutions accountable for their decisions and actions. Thus, the final standard against which international financial governance arrangements can be measured is the extent to which they comply with the five principles of good administrative practice stated above. VI.

Summary of the Standards for Evaluating Arrangements for International Financial Governance

The five standards that can be used for assessing the adequacy of any international financial governance arrangements are: 1. 2.

3.

4. 5.

4.

Are the arrangements based on a holistic understanding of development and how do they incorporate this vision? Do the arrangements for international financial governance deal, at an appropriate level in the system, with all the stakeholders and all the policy and regulatory issues relevant to the functioning of the international financial system and do they have the capacity to adapt to the changing interests and concerns of these stakeholders? Do the mechanisms for international financial governance comply with all applicable international law standards, including respect for national sovereignty, the rights of all natural and legal persons, and responsible environmental law practices? How do the institutions of international financial governance interact with other global governance institutions? Do the institutions and mechanisms for international financial governance comply with the five principles of good administrative practice: transparency, predictability, participation, reasoned decision making, and accountability?

WHAT ARE THE PROBLEMS WITH THE INSTITUTIONS OF INTERNATIONAL FINANCIAL GOVERNANCE?

Using the standards articulated above, it is possible to identify the key problems with the existing international financial architecture.


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Holistic Vision of Development

The primary institutions of international financial governance – the IMF, the World Bank, the Financial Stability Board (FSB) – either do not explicitly embrace a vision of development or they emphasise economic factors over other considerations in the vision of development articulated in their founding documents. The IMF’s mandate, as set out in its Articles of Agreement, is to promote stable international monetary arrangements, which it now interprets as including some role in the oversight of international financial markets. However, its Articles do not make any explicit reference to development and it has no formal responsibilities for promoting development. Moreover, it would find it difficult to incorporate a holistic vision of development into its operations because it has interpreted its Articles of Agreement as precluding it from dealing with certain aspects of a holistic vision of development. For example, it should not take political considerations into account in its policies and operations. The World Bank, pursuant to its Articles of Agreement, has an explicit development mandate. The Articles further stipulate that it must base its decisions on economic considerations and expressly preclude it from doing so on the basis of the political character of its member states or on political considerations. Thus, while the Bank has been very creative in expanding its mission to include many activities that it believes to be relevant to development, its Articles place constraints on its ability to fully embrace a holistic vision of development. Finally, the FSB, which consists of representatives from the key financial regulatory bodies in the G-20 countries, has a clear and relatively narrow regulatory mandate. Its concerns are financial regulation and the coordination of such regulation among its participating members. Thus, it is clear that regardless of how much key officials in these entities understand that development is a complex holistic process involving environmental, social, political, cultural elements in addition to economic ones, they are hampered in their ability to incorporate this understanding into the functioning of their organisations. Changing this situation will require either amendments to their Articles or changes in their relations with other international organisations. II.

Comprehensive Coverage

The current international financial governance arrangements suffer from problems of under-inclusiveness in both a regulatory and a participatory sense. There are three aspects to regulatory under-inclusiveness.


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First, the current multilateral regulatory bodies do not cover all the relevant actors in the international financial system (Alexander et al., 2006; Department of the Treasury (US), 2009; UN, 2009b; UNCTAD, 2009d). While some national banking regulators meet at the Basel Committee of Banking Supervision (Basel Committee), capital market regulators meet in the International Organization of Securities Commissions (IOSCO) and insurance regulators meet in the International Association for Insurance Supervisors (IAIS), there is no currently existing international institution or mechanism for coordinating regulation of such key actors in the financial system as credit rating agencies or those entities, like hedge funds, private equity funds and sovereign wealth funds, that make up the socalled ‘shadow banking’ system that has played such a critical role in the creation of the 2008 financial crisis. This lack of international coordination is a consequence of the fact that, currently, national regulation of the shadow banking system is limited or non-existent. However, the net effect of this situation is that the current institutional arrangements for international financial governance are incomplete and important financial actors fall outside the scope of these institutions. It should be noted that this is likely to change as national regulatory regimes are changed to incorporate the shadow banking system. Another aspect of this regulatory under-inclusiveness is that significant financial instruments are not covered by the international arrangements (Department of the Treasury (US), 2009; UN, 2009b; UNCTAD, 2009d). For example, many credit derivatives are currently left unregulated by national financial regulators in such key jurisdictions as the US and Europe. As a result, there is also inadequate coordination of regulation at the international level. This may change as national financial regulation is reformed. The final aspect of regulatory under-inclusiveness is that the global regulatory bodies sometimes rely on self-regulation by the entities that they are expected to regulate. For example, the Basel II capital adequacy guidelines allow qualifying banks to develop their own risk assessment models and to base their capital requirements on these models (Basel Committee on Banking Supervision, 2006; for critical analysis, see Tarullo, 2008). In addition, by basing capital weighting decisions on the credit ratings assigned to specific transactions, the guidelines effectively delegate this decision to the credit rating agencies. This situation results in under-regulation because it allows self-interested parties to make decisions that affect their own capital requirements or their own relationships with their clients. Participatory under-inclusiveness is concerned with the operating principles of the international regulatory bodies themselves rather than with their activities (Alexander et al., 2006). In particular, it refers to the fact


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that not all national regulatory bodies are able to participate in decision making at the global level. For example, only 27 countries participate in the Basel Committee even though the capital adequacy rules and the core banking principles developed by this Committee are, in fact, applicable globally. Similarly, while IOSCO has more general membership, its Executive Committee has established two important working groups: a Technical Committee and an Emerging Markets Committee (Alexander et al., 2006). The Technical Committee – most of whose members come from the G-10 countries, including two each from the US and Canada – has limited membership. It is responsible for developing and overseeing the regulatory issues and standards of interest to the world’s most liquid and sophisticated financial markets (Davies and Green, 2008). While its proposals are submitted to the Emerging Markets Committee and the Executive Committee before being shown to the full membership, the Technical Committee is the forum in which the bargaining and the shaping of issues take place. As a result, de facto, only the Technical Committee members fully participate in the identification of issues for consideration by the IOSCO membership and they play the leading role in formulating its responses to these issues. A third example is the Financial Stability Board (formerly the Financial Stability Forum), which is the key global forum for coordinating financial regulation and for discussion of global financial regulatory policy but its membership is limited, primarily, to regulators from the G-20 countries. A final, more complex, example is the IMF and the Bank, which help transmit the regulatory standards established in the more technical regulatory bodies to all their member states (Bradlow, 2006). While they have universal membership, these organisations do not offer all states meaningful participation in their decision making. This follows from their weighted voting system and the structure of their Board of Directors. For example, Belgium has more votes in the IMF than Brazil; and sub-Saharan African countries, which are big consumers of the services of the World Bank and the IMF, currently have two representatives on their Boards, while Western Europe has eight. The current arrangements also have a second participatory underinclusiveness. They are under-inclusive in the sense that that they do not provide for effective participation by all relevant and interested stakeholders. Consequently, in addition to the problems with state actors discussed above, entities like the IMF, the World Bank and the FSB do not provide effective means for participation by all the various non-state actors who have an interest in financial regulation and governance. This is a particularly significant problem at the ‘low end’ of the system at which both institutions dealing with poverty and poor people themselves have inadequate


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means for participating in international financial governance, despite the profound impact of international financial decisions on their lives. As we saw above, an important corollary of comprehensive coverage is subsidiarity. In the case of international financial governance, this means deferring to national regulators to the greatest extent possible and, when international-level regulation is necessary, ensuring that it provides for maximum feasible national implementation and interpretation. The current international financial governance arrangements satisfy the requirement of subsidiarity for some member states and not for others. In the case of the rich and powerful states, the arrangements are very respectful of their need for making, to the greatest extent feasible, their own financial regulatory policies and their own monetary and financial policies. Consequently, the bodies which affect them most directly – such as the Basel Committee, IOSCO, IAIS, the FSB – tend to be bodies in which decisions depend on national implementation for their efficacy. This means that while these bodies develop standards that they expect all their members to implement, their decisions are non-binding and it is left to each state to decide for itself whether or not to incorporate the international standard into its domestic regulatory regime. These states are also able to interpret and apply the international standard in the way that is most congenial for them. While there are likely to be adverse market consequences for financial institutions and borrowers in any state that does not follow the international standards, there will be no legal consequences. On the other hand, weak and poor countries do not have the same degree of discretion in regard to these international standards, despite the fact that they have usually played no, or a very limited, role in developing them. There are two reasons for this. First, the international financial governance institutions on which they are most dependent for financing – the World Bank and the IMF – tend to support the key international regulatory standards and to advocate for their adoption by all their member states. Second, these institutions are able, through their technical support and the conditions attached to their financial support, de facto, to push these weak and poor states to adopt and implement standards. Thus, these poor and weak states end up having less policy discretion than the richer and more powerful member states. The situation of these states is further compromised by the participatory under-inclusiveness discussed above. III.

Respect for Applicable International Legal Standards

It is clear that the relevant international legal standards do not include provisions that are explicitly applicable to international financial governance. Nevertheless, there are some general considerations that are relevant


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to assessing how effectively they are being applied in international financial governance. Formal compliance with certain applicable international legal principles is relatively non-controversial. The key institutions of international financial governance are respectful of the national sovereignty of their member states. They appear to formally respect the principle of non-discrimination in regard to the member states, in that they do not negatively discriminate between states to the detriment of any state. Third, they appear to pay attention to the rights of legal persons, particularly financial institutions in their activities and policies. The remaining areas of concern, therefore, are their respect for the rights of natural persons and their compliance with international environmental legal standards. At a minimum, this would manifest itself in some discussion of these issues in the policy and operational documents of the key institutions of international financial governance. This is necessary in order to indicate that attention has been paid to these issues and how they affect financial regulation and financial transactions. It is very difficult to find any indication that attention has been paid to them in the documents of the key regulatory bodies – the Basel Committee, IOSCO, IAIS, the FSB or the Bank of International Settlement (BIS). On the other hand, some attention is paid to these issues by the public international financial institutions. The World Bank addresses environmental law and some human rights issues in its safeguard policies.12 However, these policies, which deal with how the Bank should address social, cultural, and environmental concerns in its operations, do not explicitly require the Bank to assess the human rights impacts of Bank operations and so are not comprehensive in their coverage of human rights issues. The IMF acknowledges the relevance of some human rights issues to the challenges of governance (Gianviti, 2000). Yet, like the Bank, it does not explicitly or comprehensively evaluate the human rights impacts of its policies or operations. IV.

Coordinated Specialisation

There are a number of international institutions that have specialised responsibilities in international financial governance. They include the IMF, the World Bank, the FSB, the Basel Committee, IOSCO, IAIS, the BIS, and the WTO, which is responsible for facilitating development of

12 See World Bank, Safeguard Policies, http://go.worldbank.org/ WTA1ODE7T0 (accessed 9 July 2009); Danino (2006); IFC (2006a).


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international standards in trade in services, including financial services. Each of these entities has, prima facie, clear and well-defined specialised areas of expertise and their mandates are confined to these limited areas. It is difficult to keep each institution confined to its area of expertise. The dynamics of their work tend to push them to see connections between their area of responsibility and other substantive issues, even if these fall within the mandate of other international organisations. This can be seen most clearly in the work of the World Bank and the IMF, both of which over time have expanded their scope of work to include aspects that were outside their original mandates (UN, 1945: Art. 70–71; Grossman and Bradlow, 1995). A good example is the way in which the Bank and the Fund have both come to address issues like good governance as they have seen how these issues affect the developmental or international monetary affairs of their member states. However, their concern with these issues, because it is filtered through their specialised mandates, is not comprehensive and has a certain ad hoc quality. This ‘mission creep’, in addition to taxing the Bank’s and the Fund’s resources, credibility and ultimately legitimacy, also weakens other international organisations. The reason is that these other organisations, while they may formally have the authority to act in certain areas, lack the financial and political means to offer serious counterweights to the financially powerful IMF and World Bank. The existing international order envisages that this challenge of combining specialisation of function with the need for coordination between the various international bodies will be addressed through the United Nations (UN) system. The Economic and Social Council was supposed to be the body where these different specialised agencies could come together to coordinate their activities (UN, 1945: Arts 62–6). However, this coordination has not functioned effectively, in large part because the specialised financial agencies are able to use their financial power to overwhelm other international organisations in almost any sphere where they choose to operate. For example, if the World Bank decides that, in order to effectuate its development mandate, it should become involved in health related projects, it is able to allocate substantial amounts of money for such projects. Similarly, when the IMF, through the conditions it attaches to its finance, requires its member states to cut expenditures in ways that impact on health, it indirectly exerts a key influence over its member states’ health sectors. The result is that those states which are interested in developing their health sectors are more likely to turn to the World Bank or the IMF than to the World Health Organization, with its relatively small budget, for advice and support in their health related activities and policies. This situation inevitably undermines the position of the WHO, which is sup-


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posed to be the UN specialised agency responsible for health. The IMF and the World Bank have had similar effects in regard to other UN agencies, for example those dealing with agriculture, children, and education. The key role played by these two international financial institutions would be less problematic if they had an express mandate to act as the international coordinating bodies. However, they do not. Moreover, given their current governance and legitimacy problems, it is most unfortunate that their operations have undermined other key parts of the United Nations system. The situation with regard to coordination of the various actors involved in international financial governance is further exacerbated by the fact that some of the key actors in international financial governance are not part of the UN system. For example the FSB, which plays a key role in coordinating the various international financial regulatory bodies, is not a UN agency. Consequently over time a distortion has appeared in the international governance system in the sense that the financial institutions have grown in power and resources while the non-financial ones have declined. The net effect is that international financial governance is not effectively coordinated with other areas of global governance. This is particularly troubling given the importance of the principle of a holistic approach to development. V.

Good Administrative Practice

Finance, which is so dependent on confidence, is not an activity that lends itself easily to all the principles of good administrative practice. It has no problem with the principle of predictability, since this is essential to the functioning of finance. Similarly, at least as a general proposition, it can satisfy the principle of reasoned decision making because all key actors in the financial system need to understand the decisions of regulators and other key players in international financial governance if they are to act in conformity with these decisions. However, the principles of transparency, participation and accountability are more challenging for the international financial governance institutions. Consequently, the remainder of this section will focus on these three aspects of good administrative practice. A. Transparency The mechanisms for international financial governance have attempted to adapt to the need for transparency. This is perhaps not surprising, given the need for their information to be shared with international financial markets.


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The IMF and the World Bank have both significantly improved the transparency of their operations in recent years. Their information disclosure policies now require that many of their documents are made publicly available as a matter of course and there is greater effort to communicate with stakeholders about their policies and operations.13 However, they are not fully transparent. For example, there are still certain categories of documents, such as their archives, that are not easily available. In addition, the IMF does not have a publicly available set of operational policies and procedures, which makes it difficult for interested stakeholders to fully understand how it goes about doing its business. The other mechanisms of international financial governance – the international regulatory coordination bodies – are reasonably transparent. They share information with their members, who often, pursuant to national requirements, will make this information public. They publish drafts of their proposed policies and invite comment on the drafts. For example, the Basel Committee published a number of drafts of the Basel II capital adequacy guidelines and engaged in extensive discussions with key stakeholders about these drafts. B. Participation The compliance of the institutions of international financial governance with the requirement of participation is problematic. The World Bank and the IMF, despite their near-universal membership, do not provide for effective participation by all member states. The level of member state participation depends on their share of votes in the institution and this is a function of each member state’s historical wealth and power. Consequently, as indicated above, there are many member states that are under-represented in the organisations and others that are overrepresented. There is also a participatory deficit in the international regulatory institutions. The reason is that these bodies either have restricted memberships (for example, the Basel Committee and the FSB) or, despite their open membership policies, have key decision making bodies with restricted memberships (for example, the Technical Committee of IOSCO). The result is that a large number of countries, in fact, are excluded from participation in these bodies (Alexander et al., 2006; Davies and Green, 2008). The openness of all these organisations to participation by non-state stakeholders is complex. In some cases, while they do not formally

13 See World Bank, The World Bank’s Policy on Information Disclosure, http:// go.worldbank.org/TRCDVYJ440 (accessed 9 July 2009); IMF (2005b).


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provide for non-state-actor participation in their decision making, they will consult with key stakeholders. However, the lack of formal consultation mechanisms means that other stakeholders may be excluded from the consultation process. For example, the Basel Committee is likely to consult, directly or indirectly, with large private banks and organisations representing banks and any other entities that it sees as relevant to its work. Thus, informally these consultations are likely to create opportunities for participation by certain entities from outside the Basel Committee member countries in the work of the Basel Committee. However, since the Basel Committee has discretion in deciding with whom to consult, it is less likely to consult with consumer groups and other civil society groups that may have an interest in the Committee’s work. This will be true for civil society groups both from Basel Committee member countries and from elsewhere. This lack of participation can be mitigated at the national level, if the national law or policies require significant public consultation and participation in regard to financial regulatory and operational affairs. C. Accountability In this context, accountability means that all the stakeholders in international financial governance should have some means of holding decision makers responsible for their decisions and for their implementation of these decisions. Using this yardstick, it is clear that the World Bank is the most accountable global financial institution (Bradlow, 2005b; Bissell and Nanwani, 2009). In addition to providing its member states with means to raise concerns at the Board level, it has a procedure for dealing with complaints about allegedly improper procurement awards, and independent entities – the Inspection Panel and the Compliance Advisor Ombudsman – for investigating complaints from private parties who allege that they have been harmed or threatened with harm by the failure of the members of the Bank Group to comply with their own operational policies and procedures in the projects that they fund. It should be noted, however, that, while it is possible for private parties to challenge any World Bank operation in these entities, the complaints tend to deal far more with project based loans than with policy based loans, which are likely to be more directly relevant to international financial governance. The IMF has made some effort to enhance its accountability through the creation of the Independent Evaluation Office. This office, which conducts studies of IMF operations, is similar to the Independent Evaluation Group in the World Bank. However, it does provide for public consultation on its work plan and on the scope of its studies. The international regulatory bodies are sufficiently different from the


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IMF and the World Bank that it is not reasonable to expect them to be accountable in the same way. Their members are regulatory agencies, each of which is accountable, nationally and through the national administrative procedures, to their various stakeholders. However, the more significant concern is that there is no accountability of these regulatory bodies to stakeholders who do not participate, either directly or indirectly, in the work of the international regulatory bodies. This is particularly significant because the non-participants in these bodies tend to be the poorer and weaker states, which nevertheless are compelled either by other multilateral organisations or by donor countries to conform to the policies and guidelines of these international regulatory bodies.

5.

WHAT REFORMS HAVE BEEN AGREED TO?

This section evaluates the recent efforts to reform the international financial architecture. The current reform efforts can be divided into three areas. I.

Reforms Being Implemented

First, there are those reforms that have been, or are being, implemented.14 Most noticeable here is that the G-20 has emerged as the primary forum for discussion of international financial governance matters. This is important because it represents an acknowledgement of the shift in global power. This change has led to similar broadening of representation in international regulatory bodies. For example, the membership of the Financial Stability Forum, which was the forum in which the banking, finance and insurance regulators from the G-8 countries plus representatives from international financial institutions like the IMF met to discuss financial regulatory matters, has been expanded to include the regulators from all the G-20 countries and the status of the entity has been enhanced, as exemplified by the changing of its name to the Financial Stability Board (FSB).15 This should result in broader participation in deliberations about financial regulation. However, it is not clear that the FSB will be more responsive than the FSF to the concerns of low-income countries. 14

G-20 (2008, 2009a, 2009b, 2009c); see also Annual and Spring Meetings of the International Monetary Fund and the World Bank Group, http://www.imf. org/External/am/index.htm (accessed 10 July 2009). 15 See Financial Stability Board, http://www.financialstabilityboard.org/about/ history.htm (accessed 7 July 2009).


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There have also been some reforms in the IMF. The IMF has made some effort to improve representation through minor changes in its voting allocations, and promising additional support to the African members of the Board. The IMF has also taken a number of actions that are designed to enhance access to its financing. These include reforming its conditionality requirements so that they are more targeted and streamlined; eliminating some under-utilised facilities; creating the Flexible Credit Facility and the Exogenous Shocks Facility, both of which are only available to member states that meet certain qualifications; and raising the limits on member states’ access to IMF financing (IMF, 2008b). The World Bank (2008a) has also agreed to increase its lending over the next three years. The IMF has also taken action to reform its financial capacity. Member states have increased its resources by US$500 billion. The IMF secured most of this funding (IMF, 2009a). These contributions, in the case of those member states that participate in the New Agreement to Borrow (NAB), are in the form of loans through the NAB. In other cases, for example Russia and China, the contributions are made through the purchase of an unprecedented issue of IMF bonds. Both the NAB loans and the bond purchases may only result in temporary increases in the resources of the IMF. They will also not result in the states that contribute these resources gaining any permanent increase in voting power in the IMF. The IMF has taken additional measures designed to increase global liquidity. With G-20 support (G-20, 2009c) it has implemented a new SDR16 allocation equivalent to US$283 billion (IMF, 2009d). Pursuant to its rules, the IMF must allocate SDRs among all its members on a pro rata basis. Consequently, developing countries will receive about US$100 billion, of which low-income countries get about US$19 billion. It is possible that rich countries will decide to redirect their share of the SDR allocation to developing countries. In many countries such a decision, because it involves a commitment of state resources, will require legislative authorisation, which is inherently uncertain. Moreover, the G-20 have agreed that the IMF should sell some of its gold reserves to fund an endowment for its administrative costs and provide (approximately US$6 billion) concessional funds for the poorest developing countries (G-20, 2009d; IMF, 2009g). These gold sales were approved by the IMF Board of Executive Directors in August 2009 and the sales will now be executed (IMF, 2009b).

16 Special Drawing Rights are created by the IMF to provide member states with additional liquidity.


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II.


Reforms that Have Been Proposed but Not Implemented

The second area is reforms that have been proposed but not yet implemented (G-20, 2009a). These include an agreement that future heads of the IMF and the WB will be selected on the basis of merit and not nationality. The G-20 also agreed to implement all the voice and vote reforms agreed in 2008 and to advance the quota review scheduled for 2013 to no later than January 2011. Despite their agreement, it is unclear when and if these reforms will be implemented. The key problem is that the European states that are ‘over-represented’ in the organisation are unlikely to surrender their votes (and therefore agree to quota reforms) without compensation and, to date, it is unclear how they can be adequately compensated (Grajewski, 2009). III.

Reforms Still Under Consideration

The third area of reform consists of issues that are still under discussion. The most significant of these are the recommendations of the Manuel report and the recommendations of the Zedillo Report. In the case of the Manuel Committee (2009), the recommendations on IMF governance reform include changing the requirement that the five largest member states have their own Executive Director, changing the scope of IMF surveillance to make it more comprehensive, and changing the majority voting rules to eliminate the US veto. These proposals require amendments to the IMF Articles. Since adoption of such amendments requires parliamentary approval in many member states, it is very difficult to predict if and when they will actually be implemented. One indicator is that it took 12 years for the Fourth Amendment to the IMF Articles to receive the 85 per cent majority needed for its adoption (IMF, 1997, 2009e).

6.

WHAT MORE CAN BE ACHIEVED IN THE SHORT RUN?

In evaluating the potential for further reform efforts in the short run, it is necessary to pay careful attention to the constraints within which these reforms must be achieved. There are two issues that are relevant in this regard. First, we are undergoing a shift in power in the global political economy. Currently, the ‘rising powers’, as typified by the BRICs (that is, Brazil, Russian, India, China), are not powerful enough to successfully demand substantial reform of global financial governance arrangements and the


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‘declining powers’, primarily the G-8 countries, can still block changes that are not to their liking. Thus, the rising powers have only succeeded in obtaining marginal changes in IMF quotas, and the rise of the G-20 has led to the eclipse but not yet to the demise of the G-8. This has two implications for governance reforms. First, it suggests that it is not feasible in the short run to reform any faster or further than the current major and traditional powers are willing to accept. This may change over time as power shifts more towards the newly rising powers but at the moment this is an important constraint. Second, the current governance reform process is unlikely to result in sustainable reforms because these reforms, necessarily only partial, will always be subject to new pressures and constraints as the shift in global power plays itself out. Second, the reform efforts have been selective in the issues that they address. Thus, while they have addressed some regulatory issues and some governance issues, they have not addressed any of the interlinked issues. For example, the key challenges for global financial governance, in addition to more traditional financial issues, include the environmental crisis and the related problems of poverty and inequality, which both impact global financial flows and financial regulation. Consequently, their exclusion from discussions on international financial governance undermines current efforts to sustainably reform the international financial architecture. One indication is that some developing countries refused prior to the Copenhagen conference to make commitments on curbing carbon emissions until the rich countries clarified how much funding they are willing to contribute towards helping them deal with climate change. These constraints suggest that the potential for serious additional reform efforts in the short run is limited – especially as the global economy begins to grow again and the pressure imposed by the 2007–09 recession declines. They even seem to indicate that the prospects for implementation of the agreed but not yet implemented reforms are uncertain. One result of the limited reform achieved so far is that the institutions’ legitimacy problems continue to fester. For example, there has been no agreement on increasing the accountability of the IMF management and staff or on enhancing the ability of all stakeholders to participate in its operations. This raises some important challenges for those stakeholders who are interested in promoting international financial governance reform. Given the current situation, there are only two areas in which there is scope for additional reforms in the short run. The first is financial regulatory reforms, like those that are currently being considered in the US and Europe. While these reforms are likely to have their greatest impact


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at the national level, they could result in some changes in governance at the global level. The second is enhancing the accountability of the global financial governance institutions, in particular the IMF. The reason for this is that it is currently the only major multilateral institution with a clear financial mandate that does not have some independent accountability mechanism. Given that such mechanisms can be introduced without requiring Article amendments or even action beyond the level of the Board of Executive Directors, they are relatively easy to implement. Consequently, to the extent that the pressure for reform continues, this is a relatively easy way to respond to the pressure. However, this should not be interpreted to mean that such mechanisms are mere sops to institutional critics. In fact, the history of these mechanisms suggests that they do have an impact on the working of the institutions.

7.

MEDIUM-TERM REFORM CONSIDERATIONS

The constraints that limit reform efforts in the short run should not be applicable over the medium term. The reason, as indicated above, is that the force of these constraints is likely to weaken over time. Consequently, when contemplating medium-term reform efforts, it is reasonable to think more laterally and to re-imagine the international financial regime. Due to space constraints, this is not the appropriate occasion to spell out a new international financial governance regime in great detail. Suffice it to say that such a regime can take many forms as long as it conforms to the key principles set out in the third section of this chapter. This means that the regime must be comprehensive in its coverage. It must also be based on a holistic vision of development that both guides the implementation of its specialised technical mandate and ensures that there is an effective means for coordinating its activities with those of other institutions of global governance. It must also conform to all applicable international legal standards, and to the principles of good administrative practice, which include having transparent operational policies and procedures, effective accountability mechanisms and meaningful participation by all stakeholders. The functions that the international financial regime must be able to perform include being a global lender of last resort, a global monetary regulator and a provider of global development finance; a facilitator of fair trade in services; a sovereign debt workout mechanism, a means for dealing with complex cross-border bankruptcies; a global financial regulator, which promotes, in addition to financial efficiency and innovation, fair financial systems that ensure access for all to financial services and appro-


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priate consideration of environmental and social risk; and an efficient and fair global tax system.

8.

CONCLUSION

This chapter has set out a framework for assessing both the current international financial architecture and the actual efforts at reforming the international financial governance regime. Pursuant to the framework, it is clear that the existing regime has substantial deficiencies and that the current reform efforts are inadequate. However, it also indicates that, while additional reform is possible, there are good reasons not to expect fully adequate reform in the short run. Over the medium term such reform may be more feasible. The chapter provides some guidance on the issues that a fair, environmentally and socially sustainable international financial governance regime should address, but it does not spell out in any detail how such a regime would look. This is a task for another chapter.


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Crisis and opportunity: emerging economies and the Financial Stability Board Enrique R. Carrasco*

1.

INTRODUCTION

The current global financial and economic crisis began in the subprime mortgage sector in the United States. Through the process of securitisation, subprime mortgage loans were pooled together, sliced into tranches and transmitted to investors in many parts of the world. When the US housing bubble burst and housing values plummeted, subprime borrowers began to default on their mortgage loans, which caused mortgage-backed securities and other related assets (collateralised debt obligations, for example) to plummet in value as well. These so-called ‘toxic assets’ led to massive losses among banks, which then led to a freeze in the credit markets. Although throughout much of 2008 the crisis was largely limited to the financial sector, by 2009 it became clear that the world was witnessing a full-blown economic crisis – the worst since the Great Depression. At the outset of the crisis, most observers believed that emerging economies would not be significantly affected by the crisis, which appeared to be concentrated in the United States and Europe. This is because most emerging economies did not hold toxic assets. Moreover, after the economic/financial crises in the 1980s and 1990s, many emerging economies engaged in significant reform of their financial sectors, including significant increases in foreign exchange reserves, which would make them less vulnerable to external shocks. Thus they would be ‘decoupled’ from developed countries’ economies and not be dependent on them for economic growth and stability (IMF, 2008a: 44; Kose and Prasad, 2008). Indeed, in the midst of the financial crisis in the summer of 2008 it appeared that

* Professor of Law, University of Iowa College of Law. Many thanks to Judith Faucette, Wesley Carrington, Laurie Glapa, Bryan Sullivan, and Kyounghwa Kang for their excellent research assistance. 94


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growth in emerging economies, amounting to half of all global economic growth in a given year, could help avert a global meltdown. Nevertheless, emerging economies have not been immune from the global crisis. Despite their progress, they still depend greatly on foreign capital and investment, which is problematic when, during a crisis, foreign investors withdraw their money to perceived safer investments. Moreover, much of the double-digit growth seen throughout the developing world has been dependent on the availability of foreign credit, a stable currency and sustainable global demand for exports, all of which were put in jeopardy because of the crisis. The crisis has also shown that emerging economies are still highly susceptible to financial contagion, even when their fundamentals appear to be sound. Given the importance of emerging economies to the global economy, the current crisis cannot be overcome on a sustainable basis without taking into account their welfare and interests. This will require policymakers to address the governance framework of international finance with the aim of giving emerging economies (and developing countries in general) greater voice in the governance of international financial institutions, which heretofore have been dominated by the G-7 countries (Canada, the US, France, Germany, the UK, Japan, and Italy), which have thus dictated the standards and codes that govern international finance. This chapter will address what appears to be the beginning of a change in the status quo. It will do so in the context of the evolution of the Financial Stability Forum (FSF), which was formed in the wake of the Asian financial crisis of the late 1990s. The FSF is an inter-governmental forum whose purpose is to promote the stability of the international financial system, with an eye towards reducing the type of financial contagion that marked the Asian crisis. It has figured prominently in the current crisis, having issued a major report in April 2008 that analysed the crisis and proposed a series of reforms. The FSF’s legitimacy has suffered, however, because of the lack of emerging-country membership. In a summit held in November 2008, the G-20 called upon the FSF to expand its membership in this regard. This was accomplished four months later at the April 2009 G-20 summit, with the transformation of the FSF into the Financial Stability Board (FSB), whose membership includes all G-20 countries. Thus the global financial crisis created an opening for emerging economies to push for and achieve institutional reform that may give them greater voice in the regulation of international finance. Section 2 of this chapter will identify how the crisis came to affect emerging economies via capital and investment outflows, currency depreciation, stock market crashes, and drop in export and commodities prices. Section


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3 will discuss the creation of the FSF, noting that despite the FSF’s initial visibility its presence was slight as compared with that of the International Monetary Fund (IMF). Section 4 will address the high-profile role of the FSF in the global financial crisis, a role that created an opening for emerging economies to press for greater representation and voice in that body. Section 5 will cover the FSF’s transformation into the FSB, which was driven by the G-20. As a result of G-20 summits in November 2008 and April 2009, the FSF became the FSB with a broadened mandate and emerging country membership. The conclusion assesses the post-crisis role of emerging economies in the governance of the global financial system. Globalization and development have situated emerging economies in positions of influence and consequence in the global economy. The expanded FSB membership is a reflection of this status. While it is too early to make definitive judgments about the effectiveness of the FSB, its postcrisis workload is meaningful and presents emerging economies with an opportunity to increase their voice and influence in matters relating to the regulation of international finance.

2.

THE GLOBAL FINANCIAL CRISIS AND EMERGING ECONOMIES

The plight of emerging economies (and developing countries in general) did not concern policymakers at the outset of the crisis, given that it originated in the advanced economies of the United States and Western Europe. As noted above, financial institutions in emerging economies/developing countries did not hold the toxic assets that poisoned the advanced economies, and significant reforms led a good number of observers to believe in the decoupling theory, which would insulate emerging economies from the damaging winds of the financial storm that emanated in 2007. However, about a year after the storm commenced, financial contagion made its mark when trading was suspended in mid-September 2008 on the Russian stock exchanges Micex and RTS. It was not long before the crisis was truly global in scope. At the time of writing the IMF has entered into sixteen Stand-by Arrangements and three Flexible Credit Lines with countries seeking to stem the contagion. Transmission of financial stress from advanced to emerging economies was stronger in emerging economies that have tighter financial links with advanced economies, with bank lending (dominated by Western European banks) being a key conduit (especially in emerging Europe) (IMF, 2009j: 141). The major stressors have been capital and investment outflows, significant downward pressures on emerging countries’ currencies, stock market crashes, and declines in exports and commodity prices.


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I.

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Capital and Investment Outflows

Foreign capital flowed into emerging countries at a record pace in the 2000s, with foreign claims quadrupling between 2002 and 2008 to reach $4.9 trillion (BIS, 2008: 68). Emerging economies have come to depend on western capital in the form of loans and investment for funding to build infrastructure, run their governments and export goods. When the financial crisis spread globally, emerging economies witnessed a significant drop in capital inflows as investors withdrew their investments for safer havens and foreign lending declined significantly. Net private capital flows to emerging economies fell from $929 billion in 2007 to $466 billion in 2008 and may plummet to just $165 billion in 2009 (IIF, 2009: 1). Declining capital flows led to concerns that emerging economies were at increased risk of defaulting on their debt. The possibility of sovereign defaults led to investment downgrades from credit rating agencies and increased prices of credit default swaps – which insure government bonds against default (IMF, 2008a: 45). Even emerging economies that appeared to have solid fundamentals were threatened by this vicious cycle. II.

Currency Depreciation

Like the Asian financial crisis, the current crisis put heavy downward pressure on the currencies of emerging economies as investors fled from the perceived risk of emerging market currencies and into perceived safer currencies such as the dollar. Many currencies plunged by 30 to 50 per cent against the dollar or euro, forcing countries to burn through their foreign exchange reserves to halt the decline. In just one day in October 2008, the South African rand dropped 9.5 per cent, the Turkish lira fell 6.6 per cent, the Brazilian real dropped 5.7 per cent and the Polish zloty fell 4.9 per cent (Slater and McKay, 2008). Falling currency values are particularly problematic for borrowers who must repay loans denominated in foreign currencies – a dollar loan to a Polish borrower becomes more expensive to repay as the zloty falls in value. Prior to the global financial crisis, foreign currency loans surged in developing countries because of low interest rates. Borrowers in emerging economies owe approximately $4.7 trillion in foreign currency debt. In some eastern European countries, such as Hungary, Romania and Bulgaria, a full half of all debt is denominated in a foreign currency (Matlack and Scott, 2008). Plunging currencies in the region forced a number of countries to resort to the IMF to avoid default.


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III.


Stock Market Crashes

The global financial crisis caused steep declines in emerging economy stock markets, with daily double-digit losses not uncommon and many indexes losing over half of their value. For instance, the MSCI Emerging Market Index dropped by over 50 per cent in 2008, even including a December rally. Russia’s index fell 74 per cent in 2008, while China’s dropped 52 per cent. Even some of the best-performing emerging economy markets, such as Chile’s, fell by nearly 40 per cent in 2008, while the emerging market bond index (EMBI) fell 10.9 per cent on the year (IMF, 2009h: 185–93). While stock markets tumbled, debt spreads rose dramatically. Between August 2008 and March 2009, credit default swap spreads increased by more than 200 basis points on average in Africa and the Middle East, and by more than 500 basis points in Latin American and European emerging economies. Spreads increased most dramatically in the Ukraine, rising over 3000 basis points while stock prices declined 62 per cent (due largely to capital flight motivated by fear of currency failure and wholesale stock market collapse) (IMF, 2009h: 11). The volatility of emerging equity markets, as measured by the MSCI Emerging Markets Index, peaked at close to 90 per cent in the last quarter of 2008 but has declined steadily in 2009, dropping to 30 per cent in the spring of 2009 (IMF, 2009h: 185). Importantly, in the first few months of 2009 emerging economy stock markets pared their losses and actually fared better than their developed counterparts. By April 2009 Eastern European emerging markets had improved 18 per cent from their lowest point in 2008, Asian and Latin American emerging markets exceeding their lowest 2008 values by nearly 25 per cent (IMF, 2009j: 3). The MSCI Index fell by 11.4 per cent in the first quarter of 2009, compared with a 21.2 per cent drop in developed countries’ stock markets (Oakley, 2009). This differential is probably due to China’s continuing economic growth, supported by a 4 trillion yuan stimulus package in late 2008. Moreover, emerging economy stock markets fell further and faster – and therefore hit bottom faster – than developed country markets in 2008. And, unlike those of US and Western European banks, emerging economy bank balance sheets are not heavily tainted with toxic assets. IV.

Drop in Exports and Commodity Prices

The current crisis has also resulted in decreased demand for emerging economy goods and goods-related service exports (Borchert and Mattoo, 2009: 3; IMF, 2009h: 11). In export-led economies, such as China, exports have fallen by record amounts as the worldwide scope of the financial crisis has pushed down economic growth and consumer demand in developed


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countries such as the United States (ADB, 2009b: 3–5). Export growth in East and Southeast Asia fell by 30 per cent in January 2009 from the last quarter of 2008 and by 10 per cent in South Asia, with exports in electronics, textiles, toys, and footwear particularly affected (ibid). Latin America has also experienced severe export contraction, though imports have also fallen to create a balance (Panitchpakdi, 2009). India witnessed one of its major exports – textiles – plummet 25 per cent in 2008 because of lower demand in Western Europe and the United States (Jagota and Gangopadhyay, 2008). Brazil and China, however, have been affected more drastically than countries like India because their exports to the United States are primarily goods and goods-related services, not services like information technology that have been less affected by the crisis (Borchert and Mattoo, 2009: 3). Throughout the developing world, vertical specialisation in trade contributed to a boom in the 1990s, but vertical specialisation has magnified the impact of the crisis on these countries, particularly in Asia and Eastern Europe, as the interconnectedness of suppliers and manufacturers at different levels of the trade process causes a downward spiral when one participant fails (Pitigala, 2009: 4–5; Tanaka, 2009). Restrictions on credit and trade finance are also contributing to the decline in exports, as are volatile exchange rates that make trade unpredictable (World Bank, 2009b: 37). Some of the mitigating factors that allowed for strong exports despite gradually declining US demand – shifting trade patterns, for example, as in the shift in India’s exports from the United States to China in the 2004–07 period, and high commodity prices, as in Latin America – are no longer present in 2009, which puts a strain on emerging economies (World Bank, 2009b: 37–8). In terms of growth, India and China are expected to be most affected by slowed growth in OECD countries through decreased demand for exports (ADB, 2009a: 107). Much like the decreasing demand for exports, falling commodity prices during the crisis have affected those countries dependent on exports of primary products. Nearly all commodity prices began to decline dramatically in July 2008 (IMF, 2009i). The fall in the price of oil has been especially dramatic, from record highs of about $150 a barrel in July 2008 to about $40 a barrel in January 2009 (Lipsky, 2009). Countries with large oil sectors, such as Brazil, rely on minimum oil prices below which exploration and future oilfield development are not profitable. Low commodity prices have especially threatened Russia, where oil and natural gas make up two-thirds of all export earnings (Bank of Russia, 2009). Falling commodity prices also hurt food exporters – exports are expected to decline, for example, by 32 per cent in Vietnam, 25 per cent in Indonesia, 18 per cent in Thailand and 13 per cent in Malaysia in 2009 (ADB, 2009b: 3). Although lower energy costs and staple food prices ease the burden on


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citizens of poor countries, many emerging economies whose economies rely on the production of commodities will experience slower growth and have difficulty paying debts incurred when commodity prices were higher (ADB, 2009b: 3–5; Ghosh et al., 2009: 20). V.

Hopeful But Guarded Signs of Recovery

Although emerging economies face significant economic and financial challenges as a result of the global crisis, there are indications of abatement. In September 2009, the IMF predicted that the global economy would expand at slightly less than 3 per cent in 2010, an increase from its July 2009 estimate of 2.5 per cent. Thanks in part to improved commodity prices, economic growth is expected to be positive in most emerging economies, with China’s and India’s 2009 GDP expected to grow 6–8 per cent and 5.8 per cent respectively. As to emerging market assets, portfolio investment inflows have improved. Equities markets have witnessed a significant rebound of 30 to 60 per cent from the end of February 2009 to July 2009. Emerging Markets Bond Index Global sovereign spreads have dropped by more than half since October 2008. Still, emerging economies are not completely out of the woods. They continue to face a drop in foreign investment. Countries with pegged exchange rates will continue to experience significant constrictions on monetary policy, given downward pressures on their currency. And they will remain dependent on global growth and cross-border lending, particularly with respect to Emerging Europe and the Commonwealth of Independent States (IMF, 2009f: 3–4). Moreover, the crisis has had a devastating impact on the poor in the developing world. Analysts expect the number of chronically hungry people to rise to over 1 billion in 2009, reversing earlier progress in the global fight against malnutrition. Because of the global recession, an additional 55 to 90 million people will suffer from extreme poverty in 2009. The crisis has also seriously compromised efforts to combat HIV/AIDS, maternal and infant mortality, and malaria (World Bank, 2009c: 3, 7, 14).

3.

THE FINANCIAL STABILITY FORUM

Prior to the spread of the crisis to emerging and developing economies, an entity called the Financial Stability Forum was urgently engaged in diagnosing the complex causes of the crisis and proposing coordinated regulatory efforts to resolve it. Before the crisis, the FSF laboured in the shadows of the IMF. Like the IMF, the FSF was dominated by developed countries.


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The FSF was created in 1999 to address vulnerabilities in the international financial system, identify and oversee action needed to address these vulnerabilities, and improve cooperation and information exchange among authorities responsible for financial stability. The FSF’s mandate and its organisational structure grew out of a report commissioned by the G-7 in 1998 and written by Bundesbank President Dr Hans Tietmeyer. Tietmeyer presented his report to the G-7 finance ministers and central bank governors in February of 1999 and the FSF convened for the first time in April 1999 under Chairman Andrew Crockett. The initial members of the FSF consisted of the finance minister, central bank governor and a supervisory authority from each of the G-7 countries, as well as representatives from the International Monetary Fund (IMF), World Bank, Bank for International Settlements (BIS), Organisation for Economic Co-operation and Development (OECD), Basel Committee on Banking Supervision (BCBS), International Accounting Standards Board (IASB), International Association of Insurance Supervisors (IAIS), International Organization of Securities Commissions (IOSCO), Committee on Payment and Settlements Systems (CPSS) and Committee on the Global Financial System (CGFS). The European Central Bank and additional national members were added after its creation – Australia, Hong Kong, the Netherlands and Switzerland. A persistent criticism of the FSF was that it did not include any developing or emerging economies. Chairman Crockett’s explanation for this lack of representation was that the FSF could be more effective if it was ‘homogenous’ (Liberi, 2003: 573). The representatives met twice yearly or as needed in a plenary session, as well as convening in regional meetings and working groups. There were three initial working groups, focusing on Highly-Leveraged Institutions, Offshore Financial Centres and Capital Flows, along with two additional groups, the Implementation Task Force and the Deposit Insurance Study Group. Though additional participants from developing and developed countries were invited to join in the work of the additional groups, these were not considered formal working groups and these participants were not members of the FSF. The FSF was initially convened as a response to failings in the international financial regulatory system, which consists of codes and standards promulgated by various standard setting bodies and voluntarily adopted by nation states. In the wake of the financial crises of the 1990s, there was a push to create a New International Financial Architecture that would better address problems as they arose and better coordinate financial supervision and regulation on an international scale. The FSF was part of this push, with the particular goal of promoting the harmonisation of


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standards among international financial organisations and institutions (Walker, 2001a: 130–31). The FSF’s work prior to the current crisis was underwhelming, despite the existence of an Implementation Task Force. The most ambitious project was the adoption of a Compendium of Standards, intended to harmonise and make the many sets of standards published by standard setting bodies more workable. The Compendium comprised 64 standards that sought to harmonise the work of the FSF’s institutional members. Because the FSF recognised that implementing so many standards would be an arduous task for most countries, the FSF flagged ‘Twelve Key Standards’ for priority in implementation, such as the IMF’s Code of Good Practices on Fiscal Transparency, the IASB’s International Accounting Standards, and IOSCO’s Objectives and Principles of Securities Regulation. The standards take a sectoral (for example, banking) as well as a functional (for example, regulation and supervision) approach, and differ between principles (such as the Basel Committee’s Core Principles for Effective Banking Supervision), practices (such as the Basel Committee’s Sound Practices for Loan Accounting) and methodologies or guidelines (such as implementation guidance) (Walker, 2001a: 135–54; Yokoi-Arai, 2001: 1636–7; Weber and Arner, 2007: 412–17). The three working groups have also published reports in more limited areas, but difficulty coming to agreement on tough issues means that they are similarly toothless. Reports include recommendations that are repetitive of others’ work, basic frameworks that need elaboration on the details, and entreaties for the various players to cooperate. They also tend to point to substantial future work that needs to be done, positioning the FSF as a body that has potential rather than one that is actually achieving solutions to the problems it identifies. The Implementation Task Force has been somewhat more successful in focusing on implementation strategies for the 12 key standards in the Compendium, laying out how institutions such as the IMF can help put the standards into practice (Walker, 2001b: 175–8). In sum, despite the FSF’s visibility at its inception within the context of the New International Financial Architecture, its work thereafter did not figure prominently in international finance, and its presence on the global financial stage was slight compared to the IMF.

4.

THE FSF’s ROLE IN THE GLOBAL FINANCIAL CRISIS

The FSF’s obscure existence changed in the spring of 2008, when it issued a high-profile report on the crisis. The report brought the FSF out of the


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shadows and at the same time made it a very visible target of reform by emerging economies seeking a greater presence and voice in that body. The deliberations that led to the report commenced in the autumn of 2007. I.

The FSF’s September 2007 Meeting and the Working Group’s Preliminary Report

The FSF met in September 2007 in New York to discuss ‘the implications for financial stability of recent turbulence in global financial markets and what might need to be done going forward to strengthen financial system stability and resilience’ (FSF, 2007). It was at that meeting that they formed the Working Group on Market and Institutional Resilience, at the request of the G-7 treasury deputies, to analyse the underlying causes of the crisis and to make proposals to enhance market stability and resilience. The Group comprised representatives of the BCBS, IOSCO, IAIS, Joint Forum, IASB, CPSS, CGFS, IMF and BIS, as well as national regulators in key financial centres and private sector market participants. In October 2007, the Working Group provided an outline of their work plan in the form of a Preliminary Report to the G-7 Finance Ministers and Central Bank Governors. The Report noted that since June 2007 the global financial markets were adversely affected by a reduction in risk-taking, risk repricing, and a liquidity squeeze. It identified the US subprime mortgage market and related structured products as the triggers of the crisis that was affecting a wide range of markets, including the broader market for structured credit products and the leveraged loan markets, as well as the commercial paper and interbank funding markets. The crisis was being spread by, among other things, rating downgrades of mortgage-backed securities, a lack of confidence in ratings and valuations of other structured credit, and the drop in funding for many asset-backed commercial paper conduits. Although market participants had begun to take measures to rebuild confidence in the structured finance market, the report stated that there were a number of weaknesses in the financial markets, some of which were apparent beforehand, that required the attention of national and international financial policymakers. Accordingly, the Working Group agreed that it would provide an analysis of the recent events and recommend actions needed to enhance market discipline and institutional resilience. In so doing, it would focus on risk-management practices; valuation, risk disclosure and accounting; the role of credit rating agencies; and principles of prudential oversight (FSF Working Group, 2007: 3). The Group also took upon itself an examination of issues relating to regulators’ ability to


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coordinate their reactions to market turbulence on a national and international level. II.

The FSF’s Interim Report

In February 2008, the Working Group issued its Interim Report to the G-7 Finance Ministers and Central Bank Governors. The Report reviewed the prevailing conditions and adjustments in the financial system. Noting that the adjustment period was likely to be prolonged and difficult, the Interim Report recommended a series of short-term actions including: (i) realistic asset pricing, market liquidity and credit intermediation; (ii) further work to provide confidence to markets that valuation practices and related loss estimates are adequate; (iii) ensuring that supervisors continue to work closely with financial institutions to assure adequate levels of capital and liquidity; and (iv) ensuring that central banks continue to respond effectively and in a coordinated fashion to developments. The Interim Report also identified, preliminarily, the now well-known factors that contributed to the credit crisis, ranging from fraudulent practices in the US subprime mortgage sector to poor disclosure by financial firms of risks associated with their onand off-balance-sheet exposures (FSF Working Group, 2008: 3–5). III.

The FSF’s April 2008 Report

On 11 April 2008, the FSF submitted its report to the G-7 (FSF, 2008a). The Report, which received global press coverage, proposed ‘concrete actions in . . . five areas: (1) strengthened prudential oversight of capital, liquidity and risk management; (2) enhancing transparency and valuation; (3) changes in the role and uses of credit ratings; (4) strengthening the authorities’ responsiveness to risks; and (5) robust arrangements for dealing with stress in the financial system’ (ibid: 2). The Report set forth a number of recommendations with respect to the five areas. For instance, as to strengthened prudential oversight of capital management – a key aspect of the crisis – it recommended: (i) raising Basel II capital requirements for certain complex structured credit products; (ii) introducing additional capital charges for default and event risk in the trading books of banks and securities firms; and (iii) strengthening the capital treatment of liquidity facilities to off-balance-sheet conduits (ibid: 12–21). As to enhancing transparency and valuation, the Report strongly encouraged financial institutions to make robust risk disclosures using the leading disclosure practices set forth in the Report and called upon standard setters to improve and converge financial reporting standards for off-balance-sheet vehicles (ibid: 22–31).


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With respect to the role and use of credit ratings, the Report recommended that credit rating agencies should (i) implement the revised IOSCO Code of Conduct Fundamentals for Credit Rating Agencies to manage conflicts of interest in rating structured products and improve the quality of the rating process and (ii) differentiate ratings on structured credit products from those on bonds and expand the information they provide (ibid: 32–9). As to strengthening the authorities’ responsiveness to risks, the Report called for a college of supervisors to be put in place by the end of 2008 for each of the largest global financial institutions (ibid: 40–44). And regarding robust arrangements for dealing with stress in the financial system, the Report called upon central banks to enhance their operational frameworks and strengthen their cooperation for dealing with stress (ibid: 45–52). IV.

Follow-up Reports

In October 2008, the FSF issued a follow-up report (October Report) which stated that a substantial amount of work was underway to implement the recommendations of the FSF’s April 2008 Report. Still, in view of market developments, implementation of certain recommendations had to be accelerated, including putting in place central counterparty clearing for over-the-counter (OTC) credit derivatives and harmonising guidance on valuation of instruments in inactive markets. The October Report also stated that the FSF would address additional issues, such as addressing the international interaction and consistency of emergency arrangements and responses being put in place to address the financial crisis, mitigating sources of pro-cyclicality in the financial system, and reassessing the scope of financial regulation, with a special emphasis on unregulated institutions, instruments and markets (FSF, 2008b). In April 2009, the FSF (2009b) issued another update to coincide with the G-20’s London Summit. The April 2009 Report noted that extensive progress had been made in the implementation of the recommendations set forth in the FSF’s April 2008 Report. For instance, banking supervisors had published proposals for improving risk coverage under Basel II, especially with regard to credit-related risks in the trading book. They had also published revised capital charges for liquidity commitments to off-balance-sheet entities and for the re-securitised instruments. Central counterparty clearing for OTC credit derivatives had been launched in the United States and in Europe. Consistent guidance had been issued by the IASB and the US Financial Accounting Standards Board for fair valuation when markets are illiquid. The 2008 revisions of IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies (CRAs) had been


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substantially implemented by several CRAs including the three largest agencies. And supervisory colleges had been established for most of the global financial institutions (FSF, 2009b).

5.

TRANSFORMATION OF THE FSF

With the spread of the crisis to emerging economies and the increased prominence of the FSF came renewed calls to broaden the FSF’s membership. A key voice in this regard was the G-20, a forum created in the wake of the Asian financial crisis in which finance ministers and central bank governors from systemically important industrialised and developing countries discuss issues relating to the global economy.1 In November 2008 and April 2009, the G-20 held summits in Washington DC and London, respectively, to address the global crisis. The summits resulted in the transformation of the FSF into a Board and a broadening of policy deliberation to include emerging and developing countries. I.

The November Summit

On 15 November 2008 leaders of the G-20 met in Washington DC to address what had become the worst global financial and economic crisis since the Great Depression. One of the primary purposes of the summit, dubbed by some as ‘Bretton Woods II’, was to begin discussions on reforms of the global financial architecture that would prevent the occurrence of another globally devastating crisis. There was some initial anticipation that Bretton Woods II would produce a framework of fundamental reforms of the global financial system created in July 1944 during a three-week conference in Bretton Woods, New Hampshire. This was, of course, highly unrealistic, especially since George Bush was in the twilight of his presidency – President-elect Obama did not attend the summit, sending instead former Secretary of State Madeleine Albright and former Representative Jim Leach on his behalf to meet informally with G-20 leaders. Therefore, apart from declaring a series of ‘immediate steps’ – such as the continuation of vigorous efforts to stabilise the financial system, to use fiscal measures as appropriate to stimulate domestic demand, and to help emerging

1 The G-20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States. The European Union is the twentieth member.


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and developing economies gain access to finance – the G-20 leaders during the weekend summit could only agree upon a set of principles that would guide future reform of the financial markets. Recognising that international cooperation among national regulators – who form the first line of defence – and strengthening of international standards are necessary in today’s global financial markets, the G-20 leaders set forth five principles that would guide policy implementation: (i) strengthening transparency and accountability; (ii) enhancing sound regulation; (iii) promoting integrity in financial markets; (iv) reinforcing international cooperation; and (v) reforming international financial institutions. As to the fifth principle, the summit’s Declaration stated: We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness. In this respect, emerging and developing economies, including the poorest countries, should have greater voice and representation. The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their membership. The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stresses, and act swiftly to play a key role in crisis response. (G-20, 2008: para. 9)

The Action Plan attached to the Declaration set forth measures to be implemented by 31 March 2009 as well as in the medium term. With respect to the fifth principle the Action Plan, among other things, called for expanded FSF membership and greater collaboration between the FSF and the IMF, which would include conducting ‘early warning exercises’, by the March deadline. The call for institutional reform is not new, of course. In the 1970s, developing countries unsuccessfully demanded more power and influence within the IMF under the rubric of the New International Economic Order. Upon the 50th anniversary of the Bretton Woods institutions in 1994, non-governmental organisations (NGOs) throughout the world brought forward wide-ranging critiques of the IMF and the World Bank vis-à-vis developing countries. The NGO movement led to ongoing debate over governance issues at the BWIs, which resulted in a meagre adjustment recently in voting power within the IMF – an adjustment that left the United States and Eurozone countries firmly in power. Still, the leaders of the November G-20 summit pushed for further reform within the IMF as well as the FSF. Moreover, the reformed Fund and Forum would work together to identify future crises in their incipience – early warning exercises. The collaboration anticipates that the IMF


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will assess macro-financial risks and systemic vulnerabilities, while the FSF will assess financial system vulnerabilities, drawing on the analyses of its member bodies including the IMF. Where appropriate, the IMF and the FSF may provide joint risk assessments and mitigation reports (Kahn and Draghi, 2008). II.

London Summit

Given the November summit’s 31 March 2009 deadline for immediate actions, attention quickly shifted after the Washington DC summit to London, the host for the next summit on 2 April 2009. As with the November summit, high hopes accompanied the lead-up to the London summit, with UK Prime Minister Gordon Brown claiming the summit would launch a ‘grand bargain’ among countries that would help end the global recession and set in motion reforms that would prevent future crises. However, after a reality check, particularly with respect to differences between the United States and Europe over additional stimulus measures, expectations were lowered. Nevertheless the London summit concluded with great fanfare – with a number of ‘announceables’, even though a good number of the measures had been agreed upon before the summit or were left to be agreed upon. Through a creative use of numbers, the summit leaders declared that, on top of a fiscal stimulus of $5 trillion, they had agreed upon ‘an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy’ (G-20, 2009c). Recognising that global recovery must include emerging and developing economies – the engines of recent world growth – the leaders agreed: (i) to triple the resources available to the IMF to $750 billion; (ii) to support a new SDR allocation of $250 billion; (iii) to support at least $100 billion of additional lending by the multilateral development banks; (iv) to ensure $250 billion of support for trade finance; and (v) to use additional resources from agreed IMF gold sales for concessional finance for the poorest countries. The leaders also declared that they were ‘determined’ to reform international financial institutions such as the IMF to ensure that emerging and developing economies have greater voice and representation. The declaration, however, lacked any newly agreed-upon reforms. By contrast, with respect to strengthening financial supervision and regulation, the leaders agreed to establish a new Financial Stability Board as a successor to the FSF. The purpose of the change was to place the FSF ‘on stronger institutional ground’ so that it can more effectively assist national authorities, standard setting bodies (SSBs) and international financial institutions in


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addressing vulnerabilities and implementing strong regulatory, supervisory and other policies in the interest of financial stability. Organisationally, the FSB consists of a Chairperson, a Steering Committee, the Plenary with member countries, SSBs and international financial institutions, and a Secretariat. The Chair oversees the Steering Committee, the Plenary and an enlarged Secretariat with a full-time Secretary General. The FSB Plenary is the decision-making organ of the FSB. The Steering Committee is an executive organ that provides operational guidance between plenary meetings (twice per year) to carry forward the directions of the FSB. Plenary membership, which will be reviewed periodically, includes the current FSF members plus the rest of the G-20, Spain and the European Commission. FSB members are obligated to pursue the ‘maintenance of financial stability, maintain the openness and transparency of the financial sector, implement international financial standards (including the 12 key International Standard and Codes), and agree to undergo periodic peer reviews, using among other evidence IMF/World Bank Public Financial Sector Assessment Program reports’ (FSF, 2009a). In addition to the FSF’s current mandate – to assess vulnerabilities affecting the financial system, identify and oversee action needed to address them, and promote coordination and information exchange among authorities responsible for financial stability – the FSB will: ● ● ●

● ● ●

monitor and advise on market developments and their implications for regulatory policy; advise on and monitor best practice in meeting regulatory standards; undertake joint strategic reviews of the policy development work of the international SSBs to ensure their work is timely, coordinated, focused on priorities and addressing gaps; set guidelines for and support the establishment of supervisory colleges; manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and collaborate with the IMF to conduct Early Warning Exercises.

To promote the broader mandate, the FSB Plenary will establish the following Standing Committees: (i) Vulnerabilities Assessment, (ii) Supervisory and Regulatory Co-operation (including for supervisory colleges and cross-border crisis management), and (iii) Implementation of Standards and Codes. It may establish other Standing Committees and ad hoc working groups, which can include non-FSB member countries, as necessary. In an effort to promote its institutional legitimacy, the FSB’s mandate includes increased regional outreach activities to broaden the circle of


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countries engaged in work to promote international financial stability. Moreover, the FSB will engage in stronger public relations outreach to raise the visibility of its work and role in the international financial system. Reconstituted in this way the FSB will play an integral role in strengthening the global financial system in the context of international cooperation (such as developing a framework for cross-border bank resolution arrangements), prudential regulation (such as working with accounting standard setters to implement recommendations to mitigate procyclicality) and broadening the scope of regulation (such as developing effective oversight of hedge funds) (G-20, 2009b).

6.

CONCLUSION

The global financial crisis has demonstrated not only the continued dependency of emerging and developing economies on the developed countries but also the critical importance of emerging economies to global economic growth and future prosperity. The world that existed at the inception of the BWIs has radically changed: countries that were tangential economically and financially in the mid-1940s can no longer be ignored. Consequently it is a matter of when, not if, emerging (and developing) economies will gain greater voice and representation in the governance of international financial institutions. The transformation of the FSF into the FSB with full G-20 membership may well constitute an important marker in this regard. Had the FSF remained in obscurity in the current crisis, it is unlikely that broadening its membership would have become a major issue in governance. But crises present policymakers with opportunities as well as challenges. Time will tell whether the FSB will give true voice to emerging economies. Much will depend on whether the FSB is effective. The expanded membership, while a plus for emerging economies, may compromise the organisation’s efficiency. Moreover, it lacks enforcement powers – it must seek to improve the global financial system through moral suasion and monitoring, the tools of soft law. However, this does not mean that emerging economies have won a meaningless battle. The FSB’s post-crisis workload is not insignificant. For instance, the G-20 has charged the FSB to develop proposals for developing a framework on corporate governance and compensation practices. The FSB is also charged with ensuring effective operation of supervisory colleges of cross-border financial institutions. And it will have to develop an effective relationship with the IMF. The two institutions will collabo-


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rate on government exit strategies as the crisis recedes. Most importantly, the IMF and the FSB must fulfil their roles in the Early Warning Exercises in order to detect vulnerabilities that may lead to another systemically threatening crisis. Ultimately, the FSB’s fate will depend on the viability of the G-20 and the commitment of emerging economies to become partners with developed economies in a multipolar global financial system.


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The new disciplinary framework: conditionality, new aid architecture and global economic governance* Celine Tan**

1.

INTRODUCTION

‘Country ownership’, ‘partnership’ and ‘participation’ are key pillars of what has become increasingly referred to as the ‘new aid architecture’. This prioritisation of ‘country-owned’ development strategies in the negotiations for development financing – including engendering a broad-based participatory policymaking process – signifies part of a wider conceptual shift in development policy and practice that has been taking place since the late 1990s. Catalysed primarily by the inception of the Poverty Reduction Strategy Paper (PRSP) framework, introduced in 1999 as preconditions for debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) initiative and for concessional financing from the World Bank and the International Monetary Fund (IMF), this new blueprint for official development assistance (ODA) claims to move away from the prescriptive legacy of conditionality which has traditionally characterised the relationship between parties to such financing. In this respect, the principles underpinning the new aid architecture1 are regarded as the opposite of the doctrine of ‘conditionality’, operating as a conceptually and operationally divergent framework for regulat-

* This chapter is drawn from the author’s book, Governance through Development: Poverty Reduction Strategies, International Law and the Disciplining of Third World States (2010), London: Routledge. ** Lecturer in Law, Birmingham Law School, University of Birmingham, Birmingham, UK. 1 The term ‘aid architecture’ is conventionally understood as ‘the set of rules and institutions governing aid flows to developing countries’ (IDA, 2007: para. 3). The terms ‘aid’, ‘official development assistance’ (ODA) and ‘development financing’ will be used interchangeably in this chapter to refer to grants or concessional loans to developing countries by multilateral or bilateral donors. 112


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ing relationships between the disbursers and recipients of development financing. Specifically, this new framework is perceived of as a departure from the practice of structural adjustment financing in which the behaviour of states – with particular reference to national policymaking and institution building – is governed by the financing terms set by the financiers. Under the new aid architecture, the locus of decision-making is ostensibly transferred back to the countries in receipt of development financing through a series of changes in the content and modalities of aid and aid governance. This chapter examines the impact of this new regime of aid governance in the context of the evolution of conditionality as a regulatory instrument. It contends that changes to the policies and modalities of development financing in recent years have had the effect of entrenching rather than retiring the use of conditionality in development financing. This, in turn, impacts significantly on recipient countries’ engagement with and obligations under international law. The emergence of conditionality as a default mechanism for regulating aid relationships has led to the construction of a highly discretionary regime of global lawmaking, enabling the progressive embedding of policy reforms outside conventional channels of rule-making. The conditionality-based aid framework entails the intimate and extensive supervision of state policy and corresponding regulatory reform by institutional bureaucracies with limited provisions for external oversight of these arrangements. The chapter argues that the new architecture of aid has extended and refined this regulatory role of conditionality. Instead of departing from the policies of the past, the new modalities of conditionality have been altered to serve as a deeper and more intrusive form of disciplinary control over the developing countries subject to them. Aside from reinforcing the asymmetrical nature of international economic law, this new regime exacerbates the fracture of domestic legal and constitutional frameworks in developing countries in the wake of globalization. The rest of the chapter will be organised as follows. Section 2 will examine the nature of conditionality and locate its utility within the context of official development financing. Section 3 will chart the emergence of conditionality as a mechanism of economic governance and, within this context, map the changes to the regulatory framework of aid since the late 1990s. The next section will examine how the new architecture of aid has changed the nature and scope of conditionality and its impact on developing countries. Finally, by way of conclusion, Section 5 will consider the effect of this new aid regime on developing countries’ engagement with the global economy and the international economic law which sustains it.


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2. I.


DECONSTRUCTING CONDITIONALITY Conditionality as a Quasi-Legal Instrument

Conditionality represents the regulatory aspect of the relationship between parties involved in international sovereign financing, most notably between the World Bank and the IMF and their client states. While the doctrine of conditionality shares similar characteristics with other contractual instruments, the nature and practical application of conditionality is largely peculiar to the nature of the relationship it regulates and to the type of financing that is being regulated. The disciplinary force of conditionality does not derive exclusively (and often not primarily) from standard contractual sanctions but from the wider economic and geo-political impact of non-compliance. Conditionality refers to conditions which regulate the aspect of the economic programme or specific institutional or structural reforms that is being financed by the financing agency or institution, at either the national or sectoral level. Such programme or policy conditionalities are not specified in the legal agreements for financing but are, instead, described in a separate document incorporated by reference in such agreements (see Tan, 2006: 14, Box 2; World Bank, 2005d: paras 35–8).2 Like other obligations under financial contracts, the principle of conditionality contains a fiduciary component, requiring the performance of due diligence on the part of the financing institutions to minimise the risk of a debt default or a departure from agreed financing objectives. However, the scope and scale of this exercise under the doctrine of conditionality is far greater and much more intrusive than that undertaken in conventional contractual relationships. In particular, the content of conditionality extends beyond supervision of the financial aspects of the loan or grant agreement and is instead focused primarily on changes

2 For example, the programme of reform which forms the basis of a World Bank’s development policy loan (formerly known as a structural adjustment loan) is contained in a Letter of Development Policy (LDP) submitted by the borrower to the Bank’s Executive Board (World Bank, 2005d: para. 37; 2001a: para. 16). Meanwhile, adjustment programmes attached to the IMF’s financing arrangements – whether under a Stand-By Arrangement (SBA), an Extended Fund Facility (EFF) or under a concessional facility such as the Poverty Reduction and Growth Facility (PRGF) – are detailed in a Letter of Intent and/or a Memorandum of Economic and Financial Policy (MEFP) similarly submitted to the IMF’s Executive Board (IMF, 2002: para. 10).


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in government policy and institutional reform that is the subject of the agreement.3 This is reflective not only of the disproportionate gap in bargaining power between the donor/lender and the client/borrower but also of the disciplinary objective of development financing as a whole: to compel the client state to undertake domestic reforms in pursuit of objectives – social, economic or political – of the financier state or financing institution. The World Bank itself acknowledges conditionality’s disciplinary force, admitting that conditionality ‘is involved whenever the donor has the right to halt the flow of resources if the recipient country does not meet certain conditions’ (World Bank, 2005c: para. 4). This link between the disbursement of funds and ‘the implementation of a desired action of policy’ (World Bank, 2005f: para. 1) is often the only sanction for non-compliance given the ambiguous legal nature of conditionality4 (see below). Unlike a borrower’s obligation to carry out a specific project under investment or project financing, such as the construction of a school or highway, a borrower or grant recipient’s commitment to execute the programme of reform under a policy-based loan or stabilisation arrangement is generally not regarded as contractually enforceable. From a legal perspective, a borrower or aid recipient state does not usually breach a legal obligation should it fail to comply with policy conditionalities under an official financing agreement. Instead, the direct primary sanction for a breach of conditionality is the non-disbursement of funds under the agreement. Failure to comply with programme conditionalities can also have other financial repercussions for the defaulting state. Chiefly, failure to

3

‘Conditionality’ must therefore be distinguished from ‘conditions of financing’ which comprise the terms of the legal agreement between the financing entity and the client state, including financial conditions pertaining to the repayment period, loan charges, interest rate, procedures for loan withdrawals and policies on cancellation and dispute settlement provisions (Agarwal, 2000: 1–9; Tan, 2006: 18; World Bank, 2005d: para. 35). In policy-based loans, this will also include the covenant referring to the programme of policy reform or economic stabilisation and an undertaking by the client state that it shall implement the programme in exchange for financing (Tan, 2006: 14, Box 2). 4 Although conditionality may sometimes be used in what is normally termed ‘investment’ or ‘project’ financing – aimed at specific infrastructure or other ringfenced expenditures – this particular instrument is most commonly used in financing policy changes, usually via a programme of structural or sectoral policy and institutional reform. The chapter will use the term ‘conditionality’ in the context of the latter type of financing.


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implement a programme of reform successfully, particularly in the case of an IMF programme, can lead to the suspension of other financing from other financial institutions or donors, delay official debt relief and/ or send adverse signals to private financial markets and/or other official financiers generally. Debt relief under the enhanced HIPC initiative, for example, is contingent on the debtor country establishing ‘a track record of reform and sound policies through IMF- and IDA-supported programs’ (IMF, 2009k). Countries’ track records with the IMF are taken into account for debt reschedulings under Paris Club arrangements (Paris Club, 2008: Annex 3; Vilanova and Martin, 2001: 2) as well as by international credit rating agencies in their assessments of countries’ investment climates, thereby affecting countries’ future financial solvency and access to credit. Moreover, as discussed further below, the proliferation of joint financing frameworks, such as multi-donor budget support arrangements, has increased the interdependence of programme conditionalities by linking disbursements from different official financiers to the compliance of a central programme of reform (administered usually by the World Bank or the IMF) or, more onerously, to successful implementation of multiple programmes administered separately by respective institutions. This means failure to comply with conditionalities established by one donor or financier may affect disbursements from other financial sources. II.

Conditionality and Official Development Assistance

Conditionality forms a major part of official development assistance (ODA). It is the combination of fiduciary, political and policy elements which makes conditionality particularly suited to regulating the relationship between the financiers and the clients in receipt of development finance. The objective of policy and institutional reform is central to conceptualising the role of conditionality in official development financing. Conditionality links the two components of an aid relationship identified by Degnbol-Martinussen and Engberg-Pedersen: normative and operational, normative activities broadly referring to influence over social, political and economic organisation and ideology in recipient countries and operational activities comprising the implementation of aid projects and programmes, including technical assistance, infrastructural development and emergency assistance (Degnbol-Martinussen and EngbergPedersen, 2003: 96). Conditionality polices what the authors term ‘the interface between normative and operational activities’ (ibid), providing the framework to ensure that financed projects and programmes in recipi-


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ent countries meet the normative objectives of the bilateral or multilateral donor. It also provides the basis for negotiations between the two parties to a grant or loan agreement. The use of conditionality in development financing agreements stems primarily from the reluctance of international financial institutions (IFIs), including multilateral development banks (MDBs), and official aid agencies to apply full contractual force to an agreed programme of policy and institutional reform. While the financing agreement in itself is usually legally binding between the two parties – a key exception being IMF arrangements (see below) – financiers and their clients are unwilling to establish binding legal commitments for the substantive content of the programme itself. There are a number of reasons for this reluctance. First, the political nature of aid itself renders such relationships unsuited to standard forms of legal enforcement. In particular, due to the potential sensitivities over their content, IFIs and donors remain cautious about impinging on sovereign prerogative by insisting on legal compliance with policy and institutional reform. The World Bank, for example, is hesitant to be seen as ‘influencing or interfering’ with processes which may involve ‘delicate and sensitive domestic considerations and involve internal decision making, including parliamentary approval’ (World Bank, 2005d: para. 39). Attributing legal force to policy and institutional reforms which have yet to gain domestic legislative (or popular) approval may conflict with national constitutional arrangements, making compliance more onerous for the country and enforcement politically difficult for the financier. Second, while failure to comply with conditionality can result in similar financial penalties (see discussion above), the financial ramifications of subjecting such financing to the rigour of conventional contractual enforcement are much more severe. Aside from the loss of other official financial support and the downgrading of the borrower’s standing in international financial markets, such a breach of contract could trigger cross-default provisions in commercial loan agreements which tie loan compliance with servicing of multilateral debt (see World Bank, ibid). This is also particularly pertinent given the inherently complex political and institutional nature of policy reforms, which often makes determination of breach difficult. Third, with respect to the IMF, access to the institution’s resources is supervised by a regime which defers, at least notionally, to its original design as an international credit union as well as its obligation under Article 1(v) of its Articles of Agreement to assist its members facing financial difficulties. Hence, drawing on the IMF’s general resources – made


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up of members’ contributions according to their quota subscriptions – is considered an assertion of the right of members to draw on such contributed funds. While this automaticity has been eroded over the years since the IMF’s inception and such contributions have been supplemented by funds from other sources,5 the absence of any ‘language of credit’ (Akyüz, 2004b: 13) or ‘language having a contractual connotation’ (IMF, 2002: para. 9) in IMF arrangements reflects this founding ethos. This includes financial arrangements under the Fund’s concessional lending facilities, established under trusts and subsidised by a combination of donor contributions and net profits of the IMF.6 Finally, IFIs and other donors have also traditionally been reluctant to subject their aid operations to external justiciability. The World Bank and the IMF in particular have consistently resisted outside interference in their decision-making and administrative processes and have repeatedly opposed recourse to external adjudication for disputes with member states. The two institutions have reserved for themselves the right to interpret their own constitutions and by-laws and, while both have agreements with the United Nations giving them authority to seek advisory opinions from the International Court of Justice (ICJ) on matters of interpretation and legal issues arising from their operations, this procedure has never been utilised (Shihata, 2000b: 222). Bilateral aid operations may be more accountable but much of the policy design and implementation of aid programmes would only be subject to scrutiny under domestic administrative or legislative processes, with little recourse to independent arbitration.7 Ascribing conventional legal force to policy commitments under a development financing agreement would thus also impose corresponding obligations on the part of the financiers which the IFIs and other donors have been unwilling to undertake. Establishing precise legal criteria both for defining the scope of policy conditionality and for determining com5 Notably the General Arrangements to Borrow (GAB) and New Arrangements to Borrow (NAB) which are essentially credit lines established with a number of countries and central banks (see IMF, 2001: 72–6). 6 Although they are technically referred to as ‘loans’, nothing in their trust instruments indicates that such arrangements possess contractual force (see Gold, 1996). Instead, all Fund arrangements are classified as Executive Board decisions in which members are assured of a specified amount of Fund resources under certain circumstances and for a specified period (IMF, 2002: para. 9). 7 The activities of the UK’s Department for International Development (DFID), for example, are overseen by a UK parliamentary committee (see Collinson, 2002: 8) but aid recipient states and/or citizens in aid recipient countries do not have access to this process except by invitation.


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pliance with such conditionalities may expose the IFIs and other donor agencies to legal challenge on more controversial aspects of their activities. As discussed in the following section, the remit of conditionality has expanded significantly – in terms of both content and purpose – over the years and this legal ambiguity has enabled official financiers, notably the Bretton Woods institutions, to pre-empt potential disputes over the content and implementation of reform programmes they finance. It also allows the IFIs to circumvent constitutional questions which may arise from their engagement in policy and institutional reform, including potential breaches of the World Bank’s constitutional limitation on non-project financing8 and prohibition on political interference9 as well as questions over the IMF’s mandate to engage in long-term development assistance. Conditionality has thus served as a useful default instrument for regulating the relationship between parties to official development financing in light of such concerns. The use of conditionality has enabled IFIs and other donors to regulate the terms of the financing and the behaviour of the aid recipient country closely but correspondingly provided sufficient flexibility to negotiate departures from agreed terms. Nonetheless, as discussed above and as the following sections will demonstrate, the logic which underpinned the inception of conditionality as a mechanism for regulating the relationship between the subjects of international development finance – including the flexibility, deference to the notion of sovereign autonomy – has evolved over the years to take on a conversely regressive role, reflective of the developments in the international political economy but also, crucially, reflective of the political objectives of development aid itself.

8 Article III, Section 4(vii) of the Articles of Agreement of the International Bank for Reconstruction and Development (IBRD) states that ‘Loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development’ (emphasis added). A similar provision is found in the International Development Association (IDA)’s Articles of Agreement, Article V, Section 1(d). Policy-based loans have usually been justified under the ‘exceptional circumstances’ provision although the exception has increasingly become the norm, exceeding a third of the share of Bank lending since 1998 (see World Bank, 2009a: i). 9 Article IV, Section 10 of the IBRD’s Articles of Agreement and Article V, Section 6 of the IDA’s Articles of Agreement both provide that the Bank and its officers ‘shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned’.


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3.

CONDITIONALITY, GLOBAL GOVERNANCE AND THE NEW AID ARCHITECTURE

I.

Conditionality as an Instrument of Governance

The progressive entrenchment of conditionality as the primary instrument regulating the relationship between parties to official development finance agreements has resulted in its emergence as a key mechanism of global economic governance. In prescribing a standard template of policy and institutional reforms – including reforms to trade, fiscal and monetary policies and establishment of specific administrative and budgetary processes – to recipient countries, the conditionalities which accompany development financing have had the effect of organising, harmonising and enforcing key regulatory norms across different jurisdictions outside conventional fora for lawmaking. In this manner, conditionality also serves as what Braithwaite and Drahos term a ‘mechanism of globalization’ – ‘processes that increase the extent to which patterns of regulation in one part of the world are similar, or linked, to patterns of regulation in other parts’ (Braithwaite and Drahos, 2000: 15, 17). Consequently, conditionality has evolved into a mechanism which not only governs the terms of financial support between two state entities (the financier and recipient countries) but also provides a framework for the universalisation of other regulatory norms beyond those rules necessary for regulating the aid relationship itself. The purpose of conditionality is no longer solely about maintaining debtor discipline to protect the fiduciary interests of its financiers. Over the years, the remit of conditionality has expanded dramatically towards restructuring the policy and institutional framework of aid recipient countries as an end in itself rather than as a means to an end, such as fiscal stability (in the case of the IMF) or economic growth and poverty reduction (World Bank and other donors). The progressive entrenchment of conditionality as a quasi-legal mechanism for governing financial transactions in lieu of formal legal arrangements has also accorded IFIs and other donors significant autonomy (from constitutional and external oversight) and wide discretionary powers visà-vis the nature of and substance of their financial and policy interactions with their client states. This has enabled them to extract a wide range of policy commitments from borrowing or aid recipient countries, including fairly intrusive reforms to domestic institutions, without attracting legal or constitutional challenges or subjecting the policy prescriptions to wider international legal scrutiny. As a result of the ambiguous legal nature of the policy and institutional reforms prescribed through financing conditionalities, compounded by the associated financial stakes, it is difficult for


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recipient states to challenge the validity and content of such conditionalities. The consequence of these developments has been the construction of a highly discretionary regime of financing, relying on the supervision of client states by bureaucracies within IFIs and donor institutions with correspondingly few fixed rules of guidance. At the same time, the uniformity of the reforms prescribed through financing conditionalities – in areas such as trade liberalisation, land tenure, intellectual property rights, fiscal and monetary policy, and investment climates – globalizes the regulatory scope of conditionality. This has meant that domestic structures of law and regulation in different jurisdictions are increasingly harmonised, not through conventional channels of international norm brokerage – such as through negotiation, consensus and ratification of international treaties – but through compliance with the terms of financing of a shared donor or creditor. In this manner, conditionality serves as ‘regulation by appropriation’ or ‘regulation through credit disbursement’ in which the behaviour of actors is shaped by the terms of their financing arrangements (Kalderimis, 2004: 105). The legacy of structural adjustment on countries subject to its discipline furnishes a key example of the regulatory role played by the conditionality regime in the global economy. Implemented primarily during the debt crisis of the 1980s and premised on the conceptual framework of economic neo-liberalism in the 1980s, structural adjustment programmes (SAPs) used conditionality as a tool for reforming the economic trajectories of developing countries seeking development assistance from the Bretton Woods institutions. Under this conceptual approach, economic growth led by market forces became the new rationale for domestic and international economic relations, with the potential for development and poverty education contingent upon ensuring fiscal and monetary austerity in developing countries and creating an enabling environment for economic activity, including trade and financial liberalisation, investment deregulation and the privatisation of public enterprises (SAPRIN, 2004: 1–4). Conditionalities attached to policy-based lending from the World Bank and stabilisation programmes from the IMF were therefore aimed at facilitating the universal adoption of the Washington Consensus model of economic policymaking. This has led to the now-widespread critique of SAPs as ‘one-size-fits-all’ blueprints or boilerplates for economic planning in which the same policy and institutional reforms were prescribed for different countries regardless of differing economic circumstances (see Stiglitz, 2002a: 34, 47), leading to the aforementioned globalization of regulation across SAP-recipient countries. At the same time, commitments to these reforms often bypassed local and national decision-making structures. While sweeping changes were


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introduced to domestic policy and institutions, very little consultation took place nationally (between civil society, the public and the government) and bilaterally (between the government and the IFIs) prior to the entry into force of such arrangements. This is compounded by the fact that such conditionalities do not form part of the international financing agreement, which means that, for the most part, even if such agreements require legislative authorisation, legislators are not normally familiar with the policy and institutional reforms that may be necessitated by the financing arrangement. States were consequently inserted into the international economic order and subjected to external regulatory authority in a manner that may not necessarily be compatible with domestic constitutional or administrative arrangements. II.

The New Face of Conditionality

Towards the end of the 1990s, disillusionment with structural adjustment programmes as a template for economic development on the part of the IFI and donor community, intensified by a groundswell of opposition from global social movements and a cadre of specialist transnational nongovernmental organisations (NGOs), led to the conceptualisation of a new framework for aid conditionality. Extensive criticism of the Washington Consensus and its failure to contain the social and economic fallouts associated with SAP reforms, coupled with a series of financial crises in the developing world, led to what Higgott describes as a ‘mood swing’ in the international political economy from the Washington Consensus to the ‘post’-Washington Consensus, driven by the recognition ‘that globalization has to be politically legitimized, democratized and socialized if the gains of the economic liberalization process are not to be lost to its beneficiaries’ (Higgott, 2000: 134). The politics and processes of conditionality, particularly as it was administered at the IFIs, were seen as contributing to this crisis of legitimacy. The top-down, prescriptive manner in which policy and institutional reforms were imposed on countries subject to conditionality’s application, along with the failure of its substantive content to account for and mitigate the social and economic dislocations of SAPs, rendered the instrument complicit in a crisis of confidence in the international economy in the late 1990s. The imperative to reshape the principles and modalities of conditionality was therefore crucial to restoring faith in the international economic order in the post-Washington Consensus period. At the same time, other bilateral and multilateral donors had begun to review existing aid modalities in the face of mounting criticism over the efficacy of aid programmes in developing countries (see, for example, DFID, 1997: 37–8; Kayizzi-Mugerwa, 1998). In this respect, the narratives ema-


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nating from the ‘aid effectiveness’ agenda – academic and policy research in the 1990s focused on evaluating ‘the role, impact and effectiveness’ of ODA – had a significant influence on the reorientation of international development policy (Christiansen with Hovland, 2003: 10–11). Although there was some critique of the instrument’s substantive content, conditionality, as it was practised by the IFIs and other donors, was primarily perceived to be problematic from a technical perspective of aid administration. For the international aid establishment, the questions were less about the legitimacy of conditionality as a mode of regulation or the appropriateness of the reforms instituted through conditionality than about improving the enforcement and implementation of such reforms (see Morrow, 2005: 2). The need to rehabilitate the credibility of conditionality was thus viewed as essential to institutionalising the content of conditionality and improving its regulatory efficacy. In other words, the new framework of aid engagement in the post-Washington Consensus era did not envisage a rolling-back of the neo-liberal policies which characterised the old conditionality regime but sought rather to ‘develop a political institutional framework to embed the structural adjustment policies of the Washington Consensus’ (Jayasuriya, 2001: 1, emphasis added). In order to do so, the new aid architecture needed to restore a sense of agency in the relationships between the financiers of ODA and their client states and to broaden the constituents in the policy formulation and decision-making process within the states themselves. Designed to alleviate the hostility towards the centralisation of control under conventional modes of conditionality, the new conditionality regime had to be geared towards mobilising support in aid recipient states for the policy and institutional reforms associated with development policy loans and grants. In recasting the aid relationship as one of partnership between the financier and recipient, the new conditionality regime enlists ‘recipient states as partners or agents in their own self-management’ (Abrahamsen, 2004: 1453–4). The incorporation of the new principles of ownership, partnership and participation into the design of aid programmes represented a key change in the discourse and practice of conditionality, shifting the emphasis away from coercion and compulsion towards policy dialogue and cooperation as the basis for donor–recipient negotiations in aid relationships. Following this conceptual shift, the modalities of conditionality have correspondingly evolved, changing the operational landscape of aid governance. Morrow identifies two components of this new framework of aid engagement: ‘country selectivity’ and ‘consensual conditionality’ (Morrow, 2005: 5). The former describes a disbursement policy which prioritises countries which are deemed to possess ‘a reasonably good set of policies and institutions’, while the latter means policy reforms are only established


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as conditions of financing where they have been mutually agreed and/or have ‘sufficiently broad support within the recipient country’ (ibid: 5–7). Operationally, this new framework has meant a gradual shift towards new policies and modalities of conditionality, notably the movement from ex post conditionality – financing in exchange for commitments to future reforms – to ex ante conditionality – financing in exchange for compliance with pre-established actions. It has also meant an increase in the use of modalities such as programme reviews and outcome-based conditionalities – conditions based on meeting set targets and objectives rather than action – as well as non-binding monitoring instruments such as benchmarks and triggers. At the same time, the content of conditionality has also shifted away from purely fiscal, monetary and structural economic conditions towards an emphasis on institutional reform, particularly a focus on reforming public financial management systems and state budgetary administration (see further discussion below). From an aid financier’s perspective, the shaping of conditionality in this manner is aimed at ensuring greater success in policy implementation and institutional reform through the removal of the element of formal coercion which characterised previous models of conditionality. Although coerciveness remains a substantial component of this new regime of conditionality, the mechanics of enforcement depend less on the threat of sanction or censure than on the incentive of reward for good behaviour. Here, although the objective of conditionality remains one of regulation and supervision of countries’ behaviour, disciplinary force is no longer imposed through direct sanction but rather through a framework of self-regulation and internal discipline exercised by the recipient state authorities (see Harrison, 2001: 660–61). This new configuration has not extinguished the politics of structural adjustment nor altered the dynamics of power or conditions of resource dependency inherent in the use of conditionality as a regulatory instrument, but has instead resulted in a situation where external intervention is not exercised through coercive financing terms but ‘through closer involvement in state institutions and the employment of incentive finance’ (ibid: 660).

4. I.

THE RECONSTELLATION OF INTERNATIONAL ENGAGEMENT Self-Regulation and the New Aid Architecture

Although the reform of the conditionality regime represents a significant part of the overhaul of international development policy and the tech-


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nologies of aid management since the late 1990s, it is only one aspect of the reorientation of international aid architecture. The shift in the policy and practice of conditionality has been accompanied by the revision of existing modalities of aid delivery and the introduction of new development financing instruments. Taken together, these changes reflect a wider reconfiguration not just of aid relationships but of north–south relations generally, of which aid forms a pivotal strand. In many respects, the new aid architecture provides a new disciplinary framework for developing countries’ engagement with the exterior, entrenching and refining the regulatory role of conditionality in the global economy despite claims to the contrary. First, the front-loading of conditionality has redefined the parameters of development financing. Whereas traditional conditionality is linked to commitments to policy reform – with specific conditions having to be met by recipient countries before each tranche of a loan, grant or debt relief is released – the increasing use of ex ante conditionalities in development financing, particularly from the World Bank and the IMF, has meant that concessional assistance is now viewed as a reward for reforms already committed to and implemented by the potential recipient state. Commonly implemented through what is known as ‘prior actions’, ex ante conditionality requires recipient states to comply with a set of policy and institutional measures before an official financing arrangement is entered into. At the World Bank and the IMF, prior actions are normally required to be completed before a financing arrangement is presented to the respective Executive Boards for approval (IMF, 2006a: para. 14; World Bank, 2005d: para. 13). This means that, unlike traditional conditionalities which have to be complied with after the financing agreement has been entered into and which are often tied to the release of each tranche of the loan or grant, prior actions are only formally brought to the attention of the Executive Directors once conditions have been complied with. The design of prior actions therefore is not reviewed officially and discussions on policy and institutional reforms are undertaken largely between staff of the IFIs and the country authorities. Approvals of financing arrangements are contingent on compliance with such prior actions. Critics have argued that the front-loading of conditionality in this manner significantly increases the discretion and leverage of IFI bureaucracies and aid agency staff ‘vis-à-vis the governments of developing countries’ without corresponding institutional oversight (see Babb and Buira, 2004: 14). It also involves a high degree of scrutiny of administrative systems within the client state, particularly if resources are channelled through the budget


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support instruments10 introduced as part of the wider reform of aid delivery. Prospective recipient states are expected to secure changes, including legal or other regulatory reforms or administrative or institutional reform, before a financing arrangement proceeds. Although prior actions are often listed in a schedule accompanying the legal agreement (see World Bank, 2005d: para. 13), the use of such conditionalities may end up obscuring the total number of conditionalities which accompany a financing arrangement. The use of ex-ante conditionality is compounded by the application of ‘country selectivity’ and the attendant use of pre-qualification criteria as a basis for aid allocation. Tied to the overarching concept of ‘ownership’, the principle of country selectivity enables donors to identify countries with economic and social development strategies which correspond with the financing priorities and/or objectives of the donors and ‘reward’ them for ‘good behaviour’ (see Morrow, 2005: 5; Harrison, 2001: 659–60). Finance is thus extended not primarily on the basis of need but on the relative ‘merits’ of the prospective recipient state’s policy and institutional framework, using certain indicators of country performance to measure countries’ current circumstances and future potential for reform. Although this practice does not link policy commitments directly with a specific instrument of financing – that is, it is not conditionality per se – country selectivity does inform financing decisions at a very political level. The World Bank’s concessional lending arm, the International Development Association (IDA), for example, relies on a performancebased allocation (PBA) system, underpinned by a complex scorecard known as the Country Policy and Institutional Assessment (CPIA), when allocating financing to eligible countries. The CPIA measures a country’s performance on a range of macroeconomic, structural, social and public sector criteria (World Bank, 2008b: 3). The complexity of the formula used to arrive at a figure for financing allocations, particularly its disproportionate emphasis on ‘governance’ as a criterion, highlights in many ways how the World Bank as an institution is trying to manage conditionality as an instrument for regulatory change in response to the priorities of its major shareholders (and donors to the IDA).11

10 Budget support, such as the World Bank’s Poverty Reduction Strategy Credits (PRSCs), is a relatively new mechanism for aid delivery in which financial resources are channelled directly to recipient countries’ budgets, using local accounting systems and budget processes and linked to sectoral or national policies rather than being ring-fenced for specific project activities or tied to specific expenditures (DFID, 2004: 3; World Bank, 2005b: 3–4). 11 Unlike the non-concessional IBRD which raises its capital from the financial markets, resources for the IDA are derived mainly from donor contributions


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Country selectivity is further encouraged by the growing use of Poverty Reduction Strategy Papers beyond the Bretton Woods institutions and the HIPC initiative. As a document setting out a country’s national development plan, the PRSP12 provides a useful template from which country selectivity can be exercised as it enables donors to pick and choose which parts of the national strategy they are willing to support. PRSPs form an integral part of many bilateral and multilateral donor programmes, particularly in informing their budget support activities. Consequently, the onus is on developing countries to design strategies which maximise their potential for aid by adhering to a policy and institutional framework favoured by donor governments. As Harrison observes, based on his case studies of Tanzania and Uganda: ‘it is certainly the case that a country strategy which effectively taps into international orthodoxies of development and governance stands a much better chance of being funded by donors’ (Harrison, 2001: 669). It is therefore unsurprising that, from 2000 to 2004, 68 per cent of the World Bank’s policy-based lending went to countries that ranked above average on the CPIA (World Bank, 2005e: para. 28). Country selectivity under the new aid paradigm amplifies the political and often ideological nature of aid relationships. Countries have a financial incentive for institutionalising the policy environment expected of them by IFIs and aid donors and presenting such reforms as part of a domestic reform package, undertaken voluntarily to demonstrate a willingness to engage with the international economic community on established terms. Unlike traditional conditionality where conditions are negotiated between financiers and clients and policy reforms are clearly delineated as reflecting donor interests, ex ante conditionality blurs the distinction between internal and external interests. This further complicates internal structures of decision-making and political accountability within the recipient state in two ways. First, as such conditions are not established as part of an international treaty or bilateral agreement between the IFIs or donors and the recipient state, decisions to undertake critical policy reforms bypass state legislatures as

and supplemented by net proceeds from the IBRD and repayments from IDA borrowers. See http://go.worldbank.org/DG0REG38A0 for further details. 12 PRSPs must also focus and be developed nationally through a participatory process involving a cross-section of stakeholders. Aside from Bank and Fund concessional financing and debt relief, PRSPs have also served as the basis of other concessional support, including multi-donor joint financing arrangements in which multiple donors use a common assessment and evaluation framework for disbursement of aid to a recipient country (see World Bank, 2005b).


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such policy dialogues remain the prerogative of the executive. In spite of provisions for participatory policymaking within the new aid architecture – such as via the PRSP process – discussions over the scope and content of policy reforms are still largely confined to bilateral negotiations between government ministries and donor agencies, especially if such reforms are pre-requisites for financing eligibility under the ex ante approach. Second, the emphasis on country ownership has indirectly shifted the responsibility for success or failure of aid programmes on to national authorities irrespective of the extent of donor input into the design of such programmes or of external factors, such as trade or financial shocks. This shift in responsibility downwards to recipient governments further removes the accountability of the IFIs and other donors to the ultimate beneficiaries of development financing – the citizens of the recipient state. It also precludes discussion of international factors which contribute to the economic and social pressures faced by developing countries and forecloses possibilities of a wider international reform agenda on issues, such as declining terms of trade, asymmetrical trade and investment rules and the absence of international regulation of finance capital, which also impact adversely on countries’ capacities to generate and sustain revenue for such development. II.

Harmonisation of Aid Relations

Aside from improving the efficacy of aid delivery and the successful implementation of policy reform, changes in the modalities of aid governance over the past decade have also been aimed at standardising aid processes across different jurisdictions, both among donors and within recipient states. The process of ‘aid harmonisation’, linked closely to the aforementioned ‘aid effectiveness’ agenda, is increasingly formalised under the auspices of the OECD-sponsored Paris Declaration on Aid Effectiveness 2005, signed by over 140 developing and donor countries and development agencies.13 Aimed ostensibly at promoting country ownership of development strategies, harmonising donor and creditor practices and establishing ‘mutual accountability’ for the use of aid resources, the institutional framework established by the Paris Declaration and its attendant Accra Agenda for Action (AAA) (2008) is fast becoming the umbrella body for global aid relations. In particular, joint financing arrangements based on the Paris

13 See OECD website, http://www.oecd.org/document/22/0,3343,en_2649_323 6398_36074966_1_1_1_1,00.html (accessed 7 August 2009).


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Declaration principles have become common instruments for coordinating budget support14 financing to recipient countries (Alexander, 2007: 7; Eurodad et al., 2008: 19–22). Under such a framework, a Memorandum of Understanding (MoU), Partnership Framework (PF) or Joint Financing Arrangement (JFA) is usually entered into between a country in receipt of budget support and its financiers, including the multilateral development banks and bilateral aid agencies (World Bank, 2005b: para. 1). The MoU, PF or JFA outlines the objectives and procedures for engagement for the group of donors and the responsibilities of the recipient government but does not constitute a legally binding document (ibid: para. 2). However, signatories to the document are expected to establish binding financing agreements which are ‘compatible with the spirit and provisions’ of the arrangement (ibid: para. 13 and Annex 1, para. 4.1). Proponents of joint financing frameworks argue that it assists in the harmonisation of donor policies and practice and aligns donor support with country strategies (ibid: para. 2; OECD DAC, 2003: Box 1.1). However, critics of the process have been concerned that this shift towards universalisation aid policy and delivery have and will continue to have an adverse impact on aid practice and developing countries’ engagement with donors and concessional creditors. Specifically, the aid harmonisation agenda has not extinguished the structural deficits inherent in aid relationships, notably the power asymmetries between IFIs and other donors and resources-strapped developing countries (see Alexander, 2007: Bissio, 2007: para. 7). The implications of this aid harmonisation agenda for conditionality have been twofold: (1) joint financing arrangements have resulted in greater imbalance in negotiating strength between donors and recipients and less flexibility in the context of conditionality design and implementation; and (2) the new modalities of aid delivery accompanying such arrangements have resulted in more intrusive conditionality, focused significantly on reforming public administrative systems in developing countries. Altogether, this new model of conditionality has consigned many aid recipient countries into a straightjacket of external scrutiny over national policies and institutions with correspondingly little accountability on the part of the donors. Rather than enabling space for negotiations, joint financing arrangements have had the converse effect of consolidating donor priorities and subjecting recipient countries to a single model of aid delivery. Unlike traditional bilateral aid arrangements which – while problematic in terms

14

See note 10 above.


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of increasing transaction costs – enable recipient countries to negotiate on the basis of historical ties and wider economic and political relations with each donor country and/or institution, joint financing arrangements attempt to standardise aid relations under a single umbrella of assessment and implementation. These arrangements are supposed to be based on a country’s operational development strategy and usually incorporate a common Performance Assessment Framework (PAF) setting out the performance indicators necessary to gauge government performance under the arrangement (World Bank, 2005b: para. 13). In most cases, the World Bank’s instruments are adopted as the default framework, such as the PRSP as an operational strategy and the PRSP’s Annual Performance Review (APR) and the Bank’s CPIA as performance indicators. Although the OECD DAC guidelines stipulate that a ‘good framework for aid co-ordination will enable leadership by partner governments’ (OECD DAC, 2003: 18), many aid recipient governments lack the capacity to negotiate on equal terms with a single donor, let alone a group of donors and official creditors. In spite of exhortations to the contrary, the new aid regime has been designed and led by a handful of western donor states in concert with the World Bank. Developing countries have had little input into the construction of the new aid framework. Moreover, claims of harmonisation have not been borne out in practice. Instead of streamlining the number of conditionalities, research by civil society groups, such as the European Network on Debt and Development (Eurodad), have demonstrated that PAFs can be a consolidation of donors’ ‘shopping lists’ so that the PAF becomes ‘the sum of all donors’ wish lists’, with little clarity as to how the reforms required should be implemented and assessed (Eurodad et al., 2008: 20). At the same time, tying aid flows to a single framework for conditionality design, evaluation and assessment risks countries being cut off from financial transfers from multiple sources should they fail to meet critical conditions under a joint assistance strategy. This is particularly pertinent for countries undergoing an IMF programme as most official creditors and donors pivot their financing decisions and disbursements on countries’ ‘on track’ implementation of the IMF’s programme of reform. Case studies have demonstrated instances where IFIs and donors have withheld funds because of a country’s failure to meet IMF conditionalities,15

15 For example, in 2001, disbursements from the IMF, IDA and a group of bilateral donors providing budget support under a common budget support framework were discontinued after the Malawian government failed to meet the conditions of its PRGF programme (IMF, 2005a: para. 3), while in 2003 the IMF


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with serious consequences for public sector expenditure in aid-dependent countries. Additionally, the establishment of a joint strategy, concluded after lengthy negotiations between donors, creditors and the recipient government, renders the conditionality framework attached to this new aid model inflexible to respond to economic contingencies or other necessary changes in the social, political and economic structure of the recipient state (see Bissio, 2007: para. 74). Reforms under the new aid framework significantly increase donor influence and presence within a country, facilitating deeper policy dialogue between donors and official creditors and country authorities. Outwardly, budget support is viewed as promoting a country’s ownership of its development programme – with IFIs and donors supporting different elements of the programme – but in reality these resources are rarely untied from the expectation of donor input into their policy content. A World Vision study in 2005 noted that ‘in terms of political influence, donors prefer direct budget support because relatively little money can buy significant access to political decision-making’ (World Vision, 2005: 47). Under the rubric of ‘partnership’ and ‘policy dialogue’, the new aid regime has enabled donors and other official creditors to influence national economic policymaking in developing countries at a very strategic level, including providing capacity building and technical assistance to countries to develop national development plans (see for example World Bank, 2005b: para. 13). Aside from expecting a greater say in government policy, donors and creditors also expect greater scrutiny over domestic administrative structures, often demanding reforms in public financial management (PFM) in exchange for the ‘autonomy’ that comes with providing financial resources directly into government coffers. This includes the opening up of public accounts to external inspection and reforming domestic public procurement policy and practice. The Paris Declaration advocates the use of country systems of public financial management, accounting, procurement and evaluation but only insofar as such systems meet the standards established by the donor community. Consequently, countries’ systems are assessed by donors and reviewed on a regular basis with governments often engaging in periodic dialogues with creditors and donors on government performance and implementation of reforms (see Afrodad, 2007: 19; Alexander, 2007: 6). The focus on reforming public administrative systems, including budgetary processes and procurement practices, is not confined to harmonised

and the EU withheld over US$138 million of support to Zambia when it exceeded the IMF’s budget deficit limit by 0.4 per cent (Nkombo, 2008: 2).


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aid frameworks. There has been a progressive shift generally towards standardising public financial management systems in developing countries through aid conditionalities. The World Bank’s review of conditionality trends and practices in 2005 showed that conditions in public expenditure management and other fiduciary areas had grown rapidly within a decade, with at least 75 per cent of Bank loans involving public expenditure management conditions (World Bank, 2005e: para. 27). While the donor community claims that such conditions are ‘designed to fight corruption, strengthen fiscal governance, enhance transparency in resource allocation, and improve overall management and accountability in public expenditures’ (ibid), the implementation of such conditionalities also provide donors with greater supervision over recipient states’ fiduciary processes and greater control over government expenditure. III.

Towards a Globalized Aid Regime

Changes in the policy and practice of international development financing over the past decade have had an enormous influence over the development trajectories of countries subject to its jurisdiction. Many of the shifts in the conceptual framework and operational structures of aid policy and aid delivery have had an impact on developing countries who receive such financing, fiscally as well as strategically and politically. As discussed above, the new regime entails greater supervision not just of countries’ policy choices in specific areas but also their national policymaking frameworks and public administrative systems. One of the explicit objectives of the new architecture of aid has been the facilitation of better aid coordination and the harmonisation of aid policy and practice, seeking to standardise the fragmented regulatory webs involved in the negotiation, evaluation and disbursement of official development financing. In this manner, the new aid regime aims to globalize aid relations across different jurisdictions through institutionalising standardised systems for economic planning and public administration in aid recipient states. It moves beyond the universalisation of economic policies seen during the era of the Washington Consensus in which states were conscripted into a unified model of economic development and, instead, penetrates into the heart of public policymaking and public administration in developing countries. This is facilitated through a systematic globalization of public administrative structures and the centralised monitoring of countries’ budgetary and other financial systems. Where previous conditionalities focused on the restructuring of the economy, the new conditionality regime is aimed at establishing the strategic and institutional structures necessary for the


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implementation of such economic reforms. The requirements for countries to formulate comprehensive development plans, such as the PRSP, and subscribe to a universal template or blueprint for national policymaking in order to access aid resources engenders a form of constitutional mimicry which validates the ongoing clientalist relationship between aid donors and aid recipients, exacerbating the power cleavages between developed and developing countries. In other words, developing countries are increasingly required, through aid conditionalities, to adopt policies and institutional reforms which do not just reflect the economic and geo-strategic priorities and interests of powerful donor states but also, in many ways, imitate the donors’ structures of social and political organisation without due consideration of local circumstances or constraints. Recipient countries tend to restructure their administrative systems and reform social and economic policies in accordance with the template established by the donor community in order to access funds. Consequently, research on the impact of donorsupported PFM reform programmes has demonstrated that they have tended to pay too much attention to ‘complex technical solutions and too little to existing constraints in terms of capacity, incentives and politicaleconomy factors’, leading to a failure of such reforms even when judged by donor standards (de Renzio, 2006: 633; see also Molenaers and Nijs, 2009: 571). This type of importation of law and policy is described by Badie as exemplifying the ‘logic of dependence’ characterising the historical relationship between the north and south (Badie, 2000: 14–15). For Badie, this internalisation of the western political order in what he calls the ‘peripheral states’ is driven by the need to prove, at least on the part of the local political elites, their affinity with and adherence to the norms and standards of the patron states to secure continued access to resources from the exterior (ibid: 14–15, 25–8). According to Badie, the asymmetry of these relations produces ‘the phenomenon of forced constitutional imitation’ whereby the ‘[t]he client state must bring its own political structures into alignment with those of the patron state’ (ibid: 25–6). However, unlike the mimicry facilitated by conventional aid conditionalities in which states were overtly required to adopt such reforms in exchange for financing, the new forms of conditionality masks the dynamics of power and coercion inherent in the aid relationship. The emphasis on engagement with country authorities through a process of ‘policy dialogue’ enables the IFIs and other donors to extract policy commitments and to secure support for policy and institutional reforms outside conventional channels of norm brokerage and bilateral negotiations. The effect of these reforms has been a significant restructuring of state apparatuses


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and a corresponding radical overhaul of the business of government in aid recipient countries. The construction of the relationship between parties to development financing assumes a more globalized form under the new aid paradigm, creating what some have termed ‘a new level of supranational economic governance’ (Bissio, 2007: para. 7) but without the corresponding mechanisms of accountability. As discussed previously, the design of aid policy and aid delivery is increasingly conducted within clusters of donordominated groups and centralised in the name of aid harmonisation. However, despite exhortations of ‘mutual accountability’, this new aid and conditionality framework remains deeply asymmetrical. Recipient states remain highly accountable to IFIs and donors, but rarely vice versa, and donors, not domestic constituents, remain primary consumers of financial information and government performance reviews under the new aid regime16 (Afrodad, 2007: 21; Nkombo, 2008: 5). Moreover, as with the previous conditionality regime, the reforms necessitated under the new conditionality framework may also impact adversely on countries’ engagement with other aspects of international economic law. Where external market-friendly reforms, such as trade liberalisation and financial deregulation, prescribed under structural adjustment programmes often impacted on countries’ bargaining positions vis-à-vis bilateral and multilateral trade and/or investment agreements, public sector reforms under these so-called ‘third generation’ conditionalities can similarly conscript countries into international obligations outside conventional negotiating frameworks. For example, conditions on reforming public expenditure systems in recipient countries often involve liberalising a country’s procurement regime to allow foreign firms to tender for government projects (see Bissio, 2007: para. 43). Developing countries generally have resisted attempts to liberalise government procurement under multilateral and bilateral trade negotiations due to the utility of government procurement as developmental strategy.17 By insisting on international competition for government procurement as a condition of financing – even for purchases outside the

16 In many instances, financial information, such as reports on budgets and public expenditure, is prepared for and consumed by solely official creditors and donors by one or two government departments, such as finance ministries and/or ministries of planning, and does not filter down to the other arms of government or the public at large (see Afrodad, 2007: 21). 17 Government procurement is often used as a national strategy for promoting local industries in developing countries, a policy that was commonly utilised by developed countries during their period of industrialisation.


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aid-allocated budgets – donor states are securing trade reforms through the back door, thus undermining recipient states’ positions in other international lawmaking fora.

5.

CONCLUSION

The doctrine of conditionality is an integral part of development financing, governing not only the terms of financial support between a donor or official creditor and the aid recipient country but also impacting on the recipient country’s engagement in the wider international economy. The evolution of conditionality from primarily a mechanism for regulating aid relations into an instrument of global economic governance has been facilitated by the changes in both the content of conditionality and the modalities of conditionality over the past few decades. In turn, this emergence of conditionality as a mechanism of global economic governance has a significant impact on developing countries’ engagement in the global economy and with the international economic law which sustains it. The regulatory role of conditionality has been both reinforced and refined with the inception of new modalities of aid delivery and policies of development financing in the past decade. While framed in the language of engagement and autonomy, the new framework for governing the relationships between official donors and creditors and their client states assumes a conversely stringent disciplinary effect on the behaviours of those in receipt of ODA that is both a reiteration and a reinforcement of the old modes of conditionality. This new aid paradigm impacts on the constitution of international law and global governance by establishing a new regulatory framework which is fundamentally restructuring relationships between the various actors engaged in development financing. The regulatory framework established by the new aid paradigm departs from the conventional disciplinary force of conditionality in two respects. First, it depends less on coercive rules of engagement and more on the politics of persuasion, disciplining aid recipient countries through voluntary accession to reforms. Countries are obliged to accept the reform agenda set by the IFIs and other donors not because they are contractually bound to do so under international agreements but because such consent is sine qua non for access to such financing in the first instance. Second, and relatedly, the new forms of conditionality place responsibility for social and economic development and the efficacy of aid primarily on the shoulders of the recipient state. The discourse of ‘ownership’ and ‘accountability’ which permeates the new aid architecture problematises the recipient state in the process of social and economic development.


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Under the new aid regime, states shoulder the primary responsibility for meeting developmental challenges and overcoming socio-economic exclusion in the globalized, interdependent era. Poverty and other economic and social dislocations within a nation state is perceived as less rooted in the international than the national, caused not by the lack of resources stemming from the iniquities of the global trade and financial system or the design and content of aid conditionalities but by: (a) the state’s own incapacity to generate or absorb financial resources due to wrong policy choices; and (b) the state’s inability or disinclination to utilise the resources generated in a productive and redistributive manner. The effect of this has been a reassignment of responsibility which forecloses opportunities for revision of the rules and institutions of international economic law which contribute to the social and economic problems faced by developing countries in the era of globalization. As Abrahamsen notes, the recasting of aid relationships as ‘partnerships’ has meant that ‘development aid as a principle of international solidarity gives way to an obligation on the part of the developing country to manage its own underdevelopment wisely’ (Abrahamsen, 2004: 1460–61). The new aid framework thus diffuses emphasis on the asymmetry of aid relationships and inequality of global economic rules by refocusing the debate away from the causes of resource constraints in developing countries towards how states manage these limited resources. At the same time, this renewed focus on the state legitimises donor interventions in recipient countries which extend beyond those of traditional conditionalities, entailing intimate supervision of countries’ policy choices and administrative structures above and beyond that necessary for fiduciary oversight. The relationship between donor and recipient in a development financing arrangement remains dominated by the rules set by the donor community and without clear criteria for establishing genuine ‘mutual accountability’ or avenues for redress in the event of a dispute. The discourse of ‘ownership’ and ‘partnership’ under the new conditionality framework continues to mask the unequal nature of the aid relationship and the continuing political objectives of aid. The new aid paradigm also means that decision-making on crucial areas of public policy and public administration is increasingly taking place at a supranational level, contributing to the emergence of what some scholars term a ‘global administrative space’ (Kingsbury et al., 2005: 25–6). The cessation of national control over crucial aspects of norm creation, enforcement and adjudication, including dispensation with domestic ratification of externally negotiated rules and the performance of administrative and regulatory functions by ‘transnational administrative bodies’ such as IFIs, is a hallmark of this global administrative plane (ibid: 3–4, 16; 25–6).


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However, the politics and economics of the aid relationship mean that this enmeshment of local and global regulatory structures has different impacts on developing countries who represent the recipients of official development assistance from those it has on developed countries who make up the majority of aid donors. Without a radical overhaul of the underlying premise and structures of this relationship, the revised conditionality framework can only serve to reinforce the systemic asymmetries in global economic governance and international economic law.


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Taxing constraints on developing countries and the global economic recession David Salter*

1.

INTRODUCTION

Taxation and the corresponding raising of tax revenue are central to a country’s culture, legal system and ultimate development. The correlation between taxation and development is imprecise not least because of the other tangible and intangible factors that impact upon development. However, tax revenues feed development and without economic growth linked to development tax revenues are circumscribed. In the absence of a worldwide unitary tax system, taxation and the raising of tax revenues lie primarily within the province of individual countries. Consequently, taxation has the potential to empower a country to allocate resources and to adopt policies, determined by economic and political considerations, as to its wealth and its distribution. In developed countries, the presence of strong governance systems ensures that this potential can normally be realised and hence the control of taxation and for that matter borrowing remains in central government. This cannot be said of developing countries. In this chapter, an examination is undertaken of the ways in which such fiscal autonomy or sovereignty has been fettered or constrained in developing countries whose tax systems and other governance systems are at an earlier stage of development than their counterparts in developed countries. This encompasses an initial consideration of in-built domestic constraints, followed by an analysis of inter-country constraints (regional trade/tax agreements, multilateral and bilateral double taxation agreements, and tax competition) and international institutional constraints arising out of membership of or dealings with international organisations or supranational legal regimes, leading * Associate Professor, School of Law, University of Warwick, Coventry, UK. 138


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to a conclusion that purveys a sense of a fiscal sovereignty that is shared rather than owned. The chapter is written against the backdrop of the present period of global economic integration ushered in by the liberalisation of trade and capital flows and deregulation of markets promoted by international organisations, such as the International Monetary Fund (IMF) and the World Bank, and supranational legal regimes, such as the World Trade Organization (WTO), collectively referred to in the remainder of this chapter, for ease of reference, as international economic institutions. The chapter also considers, albeit more briefly, aspects of the extent to which a developing country may have the freedom or discretion to react within the context of its constrained fiscal autonomy to the antithesis of the economic growth that was anticipated by the aforementioned international economic institutions and by the United Nations (UN) to follow global economic integration, namely a global economic recession.

2. I.

TAX AND FISCAL POLICY Background

There is no single or accepted template for a tax system. Consequently, every country endeavours, insofar as it is able, to design a tax system which is a reflection of its needs and requirements set against its resources and that serves, principally, its own ever changing economic, political and societal circumstances. This is an exercise that involves, amongst other things, selecting from a plethora of taxes and duties those taxes and duties which, when combined, will contribute in an equitable manner as between taxpayers towards the revenue required to meet the costs of those purposes that are seen as the responsibility of government (broadly, public purposes). Tax revenue constitutes only a portion of total government revenue and the proportions of total government revenue attributable to tax and non-tax revenue respectively vary substantially from country to country. Nevertheless, the importance of tax revenue as a major source of government revenue is fundamental to sustainable development even in developing countries where there may be a marked dependence on nontax revenue, such as foreign monetary aid which may be proffered, for example, in order to support trade and development. Further, the ability of a government to tax and raise tax revenue is also an affirmation of that government’s legitimacy or its ‘right to rule’, which in the case of a developing country may reflect a growing economic strength that is, in turn,


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reinforced by a greater commitment to the provision of non-tax revenue by donor and aid organisations. When attention is directed towards the public purposes that may be funded by government revenue, it can be seen that, as with the absence of a template for a tax system, there is similarly no universal gauge as to what constitutes a public purpose, nor as to the manner in which and extent to which a particular public purpose may be supported monetarily, nor as to the relative weight that may be attached to respective, and often competing, public purposes. Moreover, in determining the distribution of the absolute and relative tax burdens as between taxpayers, notions of fairness and equity are also variable. For example, views as to whether an income tax should be progressive and, if so, how progressive it should be will often differ. Indeed, these notions may not always be compatible with achieving optimal levels of tax revenue (for example, where circumstances dictate that in the interests of equity tax revenue should be forgone, and they may be, au contraire, eschewed, in appropriate circumstances, in favour of efficiency). In these respects, a developing country often occupies an unenviable position that draws it, on grounds of equity, towards the redistribution of wealth in order to alleviate poverty and inequality whilst requiring it, in the interests of efficiency, to act in ways that nurture wealth and investment. II.

Domestic Constraints on Fiscal Autonomy

In light of the above circumstances, it is not surprising that, whilst tax systems may serve similar purposes and have common components, each tax system is unique and, as will be seen, each potentially provides competition for the other in the quest for tax revenue. Notwithstanding this reality, the above notions of equity and efficiency engender a certain degree of uniformity in those instances in which, as identified by AviYonah and Margalioth (2007–08: 4), taxes are necessary to overcome the free riding inherent in the financing of public goods, to control market imperfections, and to achieve social justice through redistribution. Economic growth (efficiency) is promoted by the first set of goals, whereas social justice (equity) is promoted by redistribution and the provision of public and merit goods, most notably health and education.

Ultimately, however, decisions that are made by a country regarding what will comprise the essential elements of its tax system, and determinations such as the relative importance to be attributed to the concepts of efficiency and equity within that system, are essentially matters of political and economic judgment informed by internal factors. Increasingly


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however, in the present era of global economic integration and interdependence of countries, these decisions are also determined by external fiscal relations with other countries and with international institutions. This is especially evident in the case of developing countries in the context of their relationships with international economic institutions such as the IMF and World Bank, which play a pivotal role in fostering much needed economic development in those countries. It is a political as well as an economic judgment that must be made, initially and inevitably, against the backdrop of the prevailing and anticipated domestic conditions and circumstances. It is one that is particularly acute in a developing country where the ‘the tax challenges . . . are shaped by initial conditions such as the degree of inequality [in asset and income distribution], the growth prospects of the country, the degree of national savings, the degree of political stability and state legitimacy in non-tax realms’ (World Bank Group, 2008: 7). Further, a juxtaposition of developed and developing countries brings out, in this context, significant differences between them, which include ‘variations in industry type (primarily the relatively high shares of agricultural and small businesses in developing countries), in the size of administrative and compliance costs, in the levels of corruption, in the levels of monetization in the economy, in political constraints, and in the relative size of the informal economy’ (Avi-Yonah and Margalioth, 2007–08: 4). Clearly, the extent to which these in-built domestic constraints exist will vary from one developing country to another, as will the manner in which they are accommodated and the impact which they may have upon the substantive and administrative aspects of particular tax systems. In terms of their accommodation, it may be relatively easy to pontificate on a simplistic and general plane about steps that should not be taken to address these constraints. For example, on a substantive level there is little point, especially in a least developed country in, say, sub-Saharan Africa, in relying on a personal income tax to raise significant amounts of revenue for public purposes where the per capita income of all but a relatively small minority of the population is low; whilst, on an administrative level, it is folly to countenance an inefficient, ineffective and corrupt tax administration. However, in the case of either substantive or administrative concerns, it is, obviously, quite another matter and much more difficult to provide specific, viable and sustainable pointers as to what may be done. III.

Inter-country Constraints on Fiscal Autonomy

As intimated in the introduction above, a country’s fiscal autonomy or sovereignty may also be constrained as a consequence of its relationship


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with other countries and, as will be seen, such constraint may be consensual or otherwise. This circumstance has become particularly evident in recent times, and especially since the 1980s when global economic integration took root following the relaxation of exchange and capital controls and the lowering of trade barriers between countries. The result is that the definition of the parameters of what may be done and the consequent configuration of tax systems has been influenced, increasingly, by fiscal relations with other countries, with the consequence that the resolution of some tax issues often lies beyond the sole autonomy of a single nation state. To a degree, this is true for all countries regardless of their respective levels of development, and particularly so in relation to the externality of the enhanced fiscal interconnection between countries. As Bird and Mintz (1993–94: 408) observed, succinctly: ‘No taxing jurisdiction is an island unto itself: each is part of the global whole and especially of its immediate region, and hence its freedom of fiscal action is to some extent inevitably constrained.’ In some instances, a constraint on a country’s freedom of fiscal action may be market led and be a feature of tax competition between countries which, in some respects, has been exacerbated by globalization and the increased mobility of capital to which it has given rise. For example, a developing country may offer tax incentives to attract foreign direct investment not because it necessarily wishes to do so (as it is likely to lose tax revenue that would otherwise be due), but in order to compete with other countries which also offer such incentives or their equivalent. In other cases, a country may accept a constraint on its fiscal sovereignty – as opposed to a constraint on its ability to act fiscally – voluntarily and formally acknowledge that acceptance within the confines of either a multilateral or bilateral agreement entered into with other countries. In this latter respect, it does not follow that a decision to voluntarily accept a constraint on fiscal sovereignty must necessarily lead vis-à-vis other countries to a negative outcome, that is, to a diminution of fiscal authority without a commensurate return. However, as will be seen, this may sometimes be the case especially, in certain circumstances, where developing countries are concerned. Therefore, there may be instances in which some relinquishment of fiscal autonomy or sovereignty may be accepted voluntarily and be beneficial. For example, the perceived benefits to be derived from joining a regional economic union, such as the European Union (EU), which is founded on mutuality and reciprocity may outweigh any compromise of individual fiscal autonomy or sovereignty which membership of the union may entail. Similarly, in a discrete tax context it may be evident that the advantages (fiscal and/or otherwise) to be gained from agreeing to co-operate and co-


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ordinate warrant some dilution of fiscal sovereignty; for example, where a country is, along with its neighbours, party to a customs union that may provide, particularly, for the elimination of customs duties and the removal of quantitative restrictions on the import and export of goods between members of the union. More generally, issues that involve a compromise of national fiscal autonomy (that may not necessarily be beneficial) may also arise in relation to the trading regimes that purportedly seek to facilitate trade between major trading partners. Thus, in the context of developing countries, for example, the EU and African, Caribbean and Pacific countries (the ACP countries) have agreed, in accordance with the Cotonou Agreement which they entered into in 2000, to conclude WTO-compatible economic partnership agreements (EPAs) that will replace pre-existing preferential trade arrangements in favour of ACP countries. These are intended to establish reciprocal trade relations between EU countries and ACP countries based on the progressive removal of barriers to trade, including tariffs, and on the enhancement of co-operation in all areas relating to trade. The Cotonou Agreement states that this goal is intended to foster the promotion of sustainable development and poverty reduction in ACP countries by, first, assisting the integration of those countries into the world trading system and, second, by supporting the regional economic integration of ACP countries. In furtherance of the Cotonou Agreement, negotiations have been conducted between the EU and six ACP regional groupings since 2002. However, progress has been slow, not least because of concerns about the possible detrimental impact on development in ACP countries that may be caused by the loss of government revenue that would occur as a result of the provisions relating to the removal of tariffs in EPAs, and which, as will be seen below, may be difficult to recoup from other taxes. Consequently, these negotiations have resulted in only one EPA, which was signed by the EU and CARIFORUM on 15 October 2008, although a number of interim agreements have been initialled between the EU and individual ACP countries and sub-groups of countries (for a recent review of EPA negotiations, see European Centre for Development Policy Management, 2009). Further, fiscal sovereignty may also be compromised or surrendered when countries enter into multilateral or bilateral double taxation agreements,1 most commonly bilateral, with a view to eliminating or

1

Double taxation agreements may also be referred to as double taxation treaties or double taxation conventions. The term ‘double taxation agreements’ (DTAs) will be used in this chapter.


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mitigating double taxation that would otherwise arise in circumstances in which two (or more) countries assert their jurisdiction to tax income derived from cross-border (international) transactions; for example, where a company is taxed by its country of residence (its home country) on its worldwide profits and also by the country in which it has a permanent establishment (its host country) on the proportion of those profits that are attributable to that permanent establishment. In relation to bilateral DTAs, which presently operate within an extensive and continually growing global network, there is likely to be an inherent element of reciprocity when such a DTA is entered into by two developed countries, especially where, as will be seen, each is a member of the OECD. In the case of such countries, the likelihood is that cross-border flows of income from one country to the other will be commonplace and significant, and that such flows of income will be related, predominantly, to trade conducted by companies/entities operating within the same multinational group, that is, within a multinational enterprise (MNE). The scale of the trade conducted by MNEs worldwide can be gleaned from the fact that ‘an estimated 79,000 MNEs control some 790,000 foreign affiliates, with the value added activity of foreign affiliates accounting for 11% of global GDP, sales amounting to $31 trillion (about one fifth of which represents exports) and the number of employees reaching 82 million’ (UNCTAD, 2008d: 9). Moreover, the importance of such multinational groups to developed countries, in particular, is emphasised by the fact that ‘about 85% of the world’s multinationals are headquartered in OECD member countries’ (Avi-Yonah, 2004: 383). In these circumstances, it often makes economic sense for developed countries to seek to regularise their respective (and otherwise competing) jurisdictions to tax in a DTA. One reason for this, with a view to countering the spectre of double taxation and its negative effect on cross-border transactions, is to allocate taxing rights between the countries in relation to pertinent kinds of income – such as business profits, royalties, interest, and dividends – in a manner which, in practice, will provide an ‘acceptable’ share of the tax take for each country and a degree of certainty for multinationals as to the taxation of income covered by the DTA. Commonly, this regularisation is achieved by such countries entering into DTAs that follow the OECD Model Tax Convention on Income and on Capital (the OECD Model).2 The first draft of this Model, with accompanying Commentaries, was published in 1963. Both the OECD

2 OECD (2008a). Some developed countries, such as the Netherlands and the USA, have produced their own model conventions which depart from the OECD


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Model and its commentaries have been subject to revision over the years and its current version embodies the latest changes that were made in 2008. The OECD Model establishes a framework for the negotiation of DTAs and one which furthers a core objective of the OECD, namely the promotion of trade between its members. The Model’s allocation of taxing rights, with a view to combating double taxation that would otherwise be a hindrance to trade, reflects its intended primary use by members of the OECD and, more generally, by non-OECD capital exporting countries; user which is particularly apposite in circumstances in which the abovementioned reciprocity is present and where the countries enjoy similar bargaining positions. However, where such reciprocity is absent and the respective bargaining positions of countries are unequal, as is likely to be the case with a developed and a developing country, the rationale for using the OECD Model as a basis for a DTA is less compelling. This is recognised in the United Nations Model Double Taxation Convention (the UN Model) which, although following the approach of the OECD Model in many respects, nevertheless seeks to provide an ‘alternative’ framework for the negotiation of DTAs between developed and developing countries and, in so doing, to provide a more balanced and equitable allocation of taxing rights than the OECD Model might provide in such an instance. As Miller and Oats (2009: 123) state: The UN Model Convention, developed in 1980, favours capital importing countries as opposed to capital exporting countries and it was developed for use between developing and developed countries. More scope is afforded for the taxation of the foreign investor by the source country. The UN Model is designed to aid developing countries to tax a larger part of the overseas investor’s income than the other two Models [OECD and US]. It permits double tax relief by exemption and includes tax sparing clauses . . . It permits withholding tax to be levied on royalty payments leaving the country whereas the latest versions of the other two Models do not . . . one of the most useful features of this Model is the enhanced rights it affords to developing countries to tax a part of the [business] profits of multinational companies.

In practice, however, the utility of the UN Model is heavily dependent upon the willingness of developed countries to enter with developing countries into DTAs which follow its norms. The number of DTAs between developed and developing countries which are founded on the UN Model per se suggests that this is a path, with its accompanying diminution in

Model in some important respects and provide the basis for the DTAs which they enter into with other countries.


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tax revenue for the developed country, which too few developed countries wish to take. In fact, an imbalance between the respective bargaining positions of countries is more likely to lead to a contrary outcome that favours, as might be expected, the stronger party. In this regard, Stewart (2003: 147) opined in the course of her consideration of the influence of developed country governments on tax reform in developing and transitional countries: A key feature of bilateral tax treaties is that tax concessions are achieved by bargaining and are generally not based on ‘sound principles of taxation’. More powerful countries can typically extract significant concessions in this process. In addition, the form of tax treaties was developed by reference largely to tax laws of developed countries and the shape of international commerce among those countries.

This situation leads, in turn, to a concomitant allocation of taxing rights. Again, in the words of Stewart: The treaty mechanisms to prevent double taxation frequently have the effect of allocating tax revenues to the ‘home’ or ‘residence’ country of the investor (usually a developed country) and away from the ‘host’ or ‘source’ country (usually developing and transition countries). Typically, this reallocation occurs by application of a credit mechanism or by shifting the taxing jurisdiction to the residence country. (ibid)

The starkness of the circumstances outlined above by Stewart may, on occasions, be ameliorated by the inclusion of tax sparing provisions in bilateral DTAs between developed and developing countries, notably in those entered into by former colonial powers and their erstwhile colonies. Typically, these provisions are intended to ensure, as between the developed and developing countries, that when the developing country makes available a tax incentive (for example, a tax holiday or a reduced rate of tax to a foreign investor) the fiscal efficacy of that incentive is not undermined by the developed country within which the investor is resident. Thus, in this situation, it is incumbent on the developed country to grant a credit to its resident for taxes that the resident would have paid in the developing country but for the tax incentive. This reduces the total level of taxation on that foreign investment and thereby increases the level of cross-border investment and related benefits for the developing country. It also means, of course, that the developed country will lose the tax revenue that it would have collected in the absence of the tax credit. More generally, the question of whether tax incentives made available by a developing country in this way are effective in attracting foreign direct investment which leads, subsequently, to sustainable economic growth is debateable (see Klemm, 2009).


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However, the significance for a developing country of entering into a DTA may extend beyond the allocation of taxing rights, notwithstanding the importance that clearly attaches to that allocation in relation to the raising of tax revenue. The DTA may, for example, enhance a country’s international standing as ‘bilateral tax treaties seem to serve largely “to signal that a country is willing to accept the international norms” regarding trade and investment, and hence, that the country is a safe place to invest’ and ‘a symbol of international capitalist engagement’ (Stewart, 2003: 148). In a similar vein, Dagan (1999–2000), whilst denying the need for DTAs to alleviate double taxation when in her opinion unilateral mechanisms are as effective, acknowledges, nevertheless, the following advantages that a DTA may offer to a developing country: the administrative convenience, certainty, and the international economic recognition the treaty regime provides may prove much more important for developing countries than for developed countries. In other words, unlike the benefits that accrue to developed countries, the main benefits for developing countries are increased legitimacy on the international level and, at times, a more robust foreign policy. However, developing countries, unlike developed countries (which receive symmetrical benefits), must make a sacrifice in the guise of tax revenues to win these benefits. (Dagan, 1999–2000: 990)

The DTA itself may also provide other advantages for a developing country, in particular, those relating to co-operation between the parties to the agreement. This may involve, for example, the exchange of information (often with a view to furthering another of the commonly expressed purposes of a DTA, namely the combating of tax avoidance and/or tax evasion) and other aspects of mutual assistance such as the mutual agreement procedure whereby cases brought by taxpayers in which it is alleged that taxation has been imposed (usually double taxation) otherwise than in accordance with the DTA may be resolved. The outcome of such co-operation may be to enhance the ability of both countries to collect tax revenues with the result that the sacrifice of tax revenues made by a developing country as a result of the allocation of taxing rights under the DTA, to which Dagan refers, may, to some extent, be mitigated. However, as with all matters pertaining to the collection of tax in a developing country, the extent to which this mitigation is likely to be achieved will be related to the resources that are available to a tax administration or revenue authority, and, where these are limited (which is probable), to the priority or otherwise that is given in the use of those resources, especially personnel with the requisite level of expertise, to the tracking of particular revenue streams, and, in this instance, to the pursuit of tax revenue in the international sphere.


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It is clear that these instances of the interaction between countries have a potential bearing on the fiscal autonomy of developed and developing countries. Their significance, however, is perhaps more telling for developing countries in view of the curbs which, principally through a sharing of sovereignty, may be placed on their right or ability to tax and hence to raise tax revenues. These curbs, arguably, are not sufficiently outweighed by more tangential benefits that may be provided by way of consensus in, for example, a bilateral DTA. In the following part of this chapter, consideration is given to the manner in which the fiscal autonomy of developing countries may be further compromised as a result of the influence which international economic institutions have had on the configuration of the tax systems in many developing countries. IV.

International Economic Institutions and Constraints on Fiscal Autonomy

Interaction between international economic institutions and countries can occur in a myriad of ways and with varying degrees of significance. In the present context, such interaction has often involved interplay between the achievement of economic goals set by international economic institutions and domestic fiscal provision with, additionally, the UN and some of its agencies having a long established interest in free market economic development and concomitant tax issues. Indeed, as will be seen, it is sometimes difficult to disentangle the different modes of engagement between an international economic institution and a country when they are, principally, economically motivated (for example, the removal of trade tariffs with a view to furthering the liberalisation of trade but nevertheless trespass upon national fiscal autonomy). This is an undercurrent that is commonplace, especially in the relations between developing countries and the IMF, the World Bank and the WTO respectively, and one which normally contemplates some measure of tax reform in order to facilitate the achievement of the designated economic goal(s). In relation to the OECD, this profile is perhaps best illustrated by the fact that one of the motivations for countries to enter into a bilateral DTA that follows the OCED Model is that provision is thereby made for the elimination or mitigation of double taxation that would otherwise have been a hindrance to cross-border trade. In fact, the preamble of many such bilateral DTAs recites that an express purpose of the agreement is the facilitation of international trade and investment between the contracting parties (or words to that effect). More generally, the provision by the


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OECD, amongst other things, of a forum where its members can work together ‘to address the economic, social and environmental challenges of globalisation’ (OECD, 2007) tends to translate for its members in relation to their fiscal responsibilities into expectation rather than obligation and this is encapsulated in the notion that an OECD member will abide by OECD driven standards and practices. However, there may be occasions when adherence to such standards and practices may also be expected of non-OECD members, as is illustrated by the OECD’s initiative against harmful tax practices that commenced in the late 1990s and which is ongoing. Latterly, the notion of moving towards a global ‘level playing field’ in the areas of transparency and effective exchange of information for tax purposes has been paramount. This has led, in particular, to an acceptance by tax havens (some of which may, of course, be developing countries) of the need for a greater transparency, made manifest by the steadily growing number of tax information exchange agreements entered into by tax havens with developed countries based on the OECD’s Model Agreement on the Exchange of Information on Tax Matters that was published in 2002. The correlation between the achievement of economic objectives and related challenges to fiscal autonomy is readily apparent when the relationship between the WTO and its members is considered. For countries, developed or developing, that are members of the WTO, membership itself, notwithstanding the supposed separateness of free trade obligations from domestic tax systems, brings constraints on members’ fiscal autonomy. On a generic level, this is epitomised by the need to comply with the fundamental non-discrimination principle that can be found in the WTO Agreements such as the General Agreement on Tariffs and Trade (GATT) and in the General Agreement on Trade in Services (GATS) and which finds expression, respectively, in the ‘most favoured nation obligation’ and the ‘national treatment obligation’, either of which may apply to internal tax obstacles to trade in goods or services with other WTO members.3 More specifically in the tax context, the use of direct and indirect tax incentives may be prohibited by the WTO Agreement on Subsidies and Countervailing Measures (the SCM Agreement) where they take the form of subsidies granted, directly or indirectly, in relation to exports. For the purposes of the SCM Agreement, a subsidy includes any forgone or

3 For an example of a violation of the non-discrimination principle, see the preferential access to EU markets accorded to ACP countries that preceded the provision in the Cotonou Agreement between the EU and ACP countries for WTO-compatible trade agreements (EPAs).


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uncollected revenue ‘that is otherwise due’. However, only those subsidies which are contingent, legally or factually, on export performance (or which discriminate against importation) are prohibited.4 However, for many developing countries the relationships with international economic institutions that have had and continue to have a direct bearing on their fiscal autonomy are those forged with the IMF and the World Bank. As Stewart and Jogarajan opine, ‘international financial institutions, in particular the International Monetary Fund (IMF) and the World Bank, have come to dominate the direction and conduct of tax reform projects in developing countries’ and, moreover, ‘the IMF has been the pre-eminent organisation in establishing the overall norms and direction of tax reform as well as direct involvement in tax reform projects’ (Stewart and Jogarajan, 2004: 147). In the words of Fjeldstad and Moore, the IMF is ‘the number one driver of the global reform agenda’ (Fjeldstad and Moore, 2008: 238). In this regard, the IMF has since the 1980s commonly required tax reform as a necessary condition of the funding that is made available to a borrowing country in order to finance broader economic or structural reform. The terms of this tax conditionality are normally set out in a borrowing country’s policy intention documents, notably in a Letter of Intent, and these terms have tended to be fairly uniform from country to country. In this respect, Stewart and Jogarajan, in the course of their study of all published Letters of Intent from 1997 to early 2004, teased out the following characteristics of the IMF tax reform ‘package’: The IMF tax reform ‘package’ incorporates the following elements: a broadbased value added tax (VAT), introduced as early as possible, preferably at a single rate of close to 20 per cent, to replace older-style sales and turnover taxes; a low-rate, broad-based corporate and personal income tax which is ‘neutral’ with respect to different investments and activities; and the simplification, gradual reduction and eventual elimination of import and export tariffs. In addition, it includes excises on a few items, such as petrol and alcohol, elimination of minor taxes and reform of payroll and land taxes to broaden their base and simplify administration. Finally, the IMF is now a forceful advocate of tax administration reform. (Stewart and Jogarajan, 2004: 152, footnote omitted)

4

For consideration of income tax measures that may constitute prohibited subsidies, see Lang et al., 2004: 28–34. For an analysis in the same text of the well-known DISC/FSC/ETI cases in which the WTO Panel and the Appellate Body determined that the US tax treatment of foreign sales corporations, which effectively excluded their trading income from taxation in the US, was contingent upon export performance and, consequently, WTO-incompatible, see ibid: 748–59.


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The IMF’s rationale for such a tax package is related, specifically, to its mandate to ensure that governments can raise sufficient revenue in a reliable and consistent manner to pay interest on their loans, repay their debts and also, where necessary, be in a position to undertake further borrowing. Its principal focus is on efficiency, which explains in particular the requirements, in relation to substantive tax provision, for the replacement of trade taxes (that is, taxes on imports and exports) and the introduction of a VAT. Consequently, in this respect, as Avi-Yonah and Margalioth (2007–08) indicate, the replacement of trade taxes with domestic consumption taxes, particularly VAT, is geared towards furthering macroeconomic activity and providing the benefits of free market trading to developing countries. More particularly, as Avi-Yonah and Margalioth (2007–08) further point out, this encompasses the following notions. Thus, export taxes are regarded as inefficient because local producers who export their goods are disadvantaged compared with foreign producers, whilst the VAT is seen as more efficient than import taxes because it does not discriminate between domestic and imported goods. Moreover, the elimination of import taxes allows local consumers to benefit from lower prices created by competition between domestic and foreign producers. Further, the elimination of import taxes makes local producers become more efficient and focus their efforts on their competitive advantage. From the perspective of a developing country, which has little choice but to accept IMF tax conditionality if it is to be able to borrow, the impact on its fiscal autonomy is clearly far reaching and ‘invasive’. Indeed, broadly, the constraints on such autonomy imposed by tax conditionality straddle choice of taxes (with VAT as the preferred consumption tax), tax design (chiefly, through simplification) and reform of tax administration. In the context of this chapter, these constraints reinforce the notion of a ‘shared’ rather than ‘owned’ sovereignty that became evident in the earlier examination of certain inter-country constraints on fiscal autonomy, particularly bilateral DTAs. Looking ahead, these areas of fiscal autonomy will continue to exercise the IMF, and other international economic institutions, especially in a changed and less favourable global economic environment. They will also concern those in the international arena who are involved in tax reform. This concern may extend, as Fjeldstad and Moore (2008) anticipate, to an emergent epistemic community of taxation professionals, including those employed in national tax administrations, consultancy companies and international financial institutions and organised in regional and global organisations: an ‘epistemic community [that] both shaped and was shaped by a period of unusually radical tax reform in the developing world since the 1980s’ (ibid: 258).


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Finally, the last substantive part of this chapter considers whether domestic, inter-country and international economic institution-country constraints on the fiscal autonomy of developing countries provide, individually and/or cumulatively, sufficient flexibility to enable such countries to react effectively to the particular challenge of the prospect of declining tax revenues in the immediate aftermath of a global economic recession.

3.

ROOM FOR FISCAL MANOEUVRE IN THE IMMEDIATE AFTERMATH OF A GLOBAL ECONOMIC RECESSION?

The onset of a global economic recession brings into sharp focus the vulnerability and fragility of the economies of all countries, but particularly of those of countries in the developing world. The current recession is no exception. However, unlike previous recessions its impact has been accentuated by the more pronounced interconnection between, and interdependence of, countries that has followed the period of global economic integration that began in the 1980s. It is an interdependence that is weighted in favour of developed countries and one which, as acknowledged recently by the G-20 in its Global Plan for Recovery and Reform, imposes on its members a responsibility to act in ways that ensure ‘a fair and sustainable recovery for all’ (G-20, 2009c). In time, this broad declaration of intent from the G-20, together with its associated stratagems to boost the global recovery and related promises of monetary assistance, will have an impact. Thus, in relation to least developed countries, the G-20 has pledged ‘$50 billion to support social protection, boost trade and safeguard development in low income countries’ and ‘$6 billion additional concessional and flexible finance [from the IMF] for the poorer countries over the next 2 to 3 years’ (ibid: para. 25), which will no doubt provide welcome support for such developing countries. Notwithstanding such forthcoming ‘international’ monetary support, there is a primary responsibility on developing countries to take, in so far as they are able, such steps as are necessary within their own individual jurisdictions to withstand the immediate consequences of the current recession. It is a responsibility that is far from easy to discharge and one which provides, amongst (many) other things, a pressing fiscal challenge for developing countries of how to respond to the prospect that tax revenues (and hence government revenue) are likely to decline as a result of the contraction in legitimate economic activity brought about by the recession. This is a challenge that must, of course, also be faced by developed countries but one which such countries are far better placed to meet.


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The response to this challenge in developing countries may simply be to accept the decline in tax revenues and to acknowledge that this, together with falls in government revenue in other spheres, will necessitate cuts in government expenditure, especially in relation to the provision of public services, save to the extent that external donor aid can be found to cover the shortfall. Alternatively, it may be decided that there is a political and social imperative to resist these cuts in government expenditure, as far as possible, and that one way to do this is to seek to stabilise and maintain tax revenues. This is a decision that is not without risk, because, whatever fiscal action is contemplated, it is imperative to ensure that those measures that might be taken with a view to stabilising and maintaining tax revenues do not deter the engagement or re-engagement in the economic activity that is essential to bring about a sustainable economic recovery. In short, the measures must not be pro-cyclical in their effect and thereby exacerbate the prevailing economic downturn. It is also a decision that clearly has a particular poignancy in the context of this chapter because of the constraints on fiscal autonomy to which a developing country may be subject, and it is one that raises the fundamental question of how much latitude or room for manoeuvre may be available to a developing country in this situation when it wishes to take remedial fiscal action. In this regard, expediency may suggest that the contemplated remedial fiscal action might focus on measures that are designed to generate tax revenue in the short term rather than on those which are likely to contribute to an enhanced fiscal return over a longer period (for example, the simplification of the tax system or reforms that are designed to further the efficiency and effectiveness of a tax administration). If this is so, it follows that general pronouncements that emanate from the international community about the prospective provision of non-monetary support in fiscal matters to developing countries are unlikely to be regarded as a panacea for the immediate difficulties of straitened economic times unless related, specifically, to the resolution of pressing tax revenue concerns. This includes the following statement which was forthcoming from the UN in December 2008, albeit in furtherance of the wider agenda of financing for development in accordance with the Monterrey Consensus: We will continue to undertake fiscal reform, including tax reform, which is key to enhancing macroeconomic policies and mobilizing domestic public resources . . . We will step up efforts to enhance tax revenues through modernized tax systems, more efficient tax collection, broadening the tax base and effectively combating tax evasion. We will undertake these efforts with an overarching view to make tax systems more pro-poor. While each country is responsible for its tax system, it is important to support national efforts in these areas by


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strengthening technical assistance and enhancing international cooperation and participation in addressing international tax matters, including in the area of double taxation (UN, 2008a: para. 16).

In the short term, the preferred, relatively technically straightforward and attractive option in the endeavour to stabilise and maintain tax revenues may be to make changes to an existing tax or taxes and related tax burdens; for example, by altering rates of tax and/or by withdrawing or suspending allowances and exemptions, rather than, more ambitiously, extending the tax base through the adoption of the more exacting and time-consuming option of introducing ‘new’ taxes. However, as intimated above, a critical consideration in relation to measures that may be directed towards the stabilisation and maintenance of tax revenues is the extent to which the freedom or discretion to react is ‘hedged in’ by the fiscal constraints examined in this chapter. In this respect, the degree of fiscal flexibility that is available will vary from one developing country to another as each country will have its own unique experience of the individual and cumulative impact of domestic, intercountry and international institutional constraints on its fiscal autonomy. Notwithstanding this heterogeneous experience, there is, nevertheless, a marked congruence as to the taxes such as a personal income tax, value added tax (VAT) and a corporate income tax that characterise the tax systems of many developing countries that has been encouraged in numerous instances by the IMF tax reform ‘package’. This makes it possible to identify elements of commonality when the impact of fiscal constraints on the freedom of developing countries to introduce changes to these taxes with a view to stabilising and maintaining tax revenues is considered. A comprehensive examination of such elements, however, lies beyond the confines of this chapter and, consequently, the remainder of this section seeks simply to highlight, briefly, those elements that might be regarded as particularly salient. In the case of a personal income tax, domestic constraints are most likely to predominate. In particular, the room for manoeuvre for developing countries, albeit in varying degrees, is conditioned by the limited numbers of individuals within the tax constituency overall and of those who may be able and, equally importantly, willing to bear the increased tax burden that measures (such as a more steeply progressive income tax) designed to stabilise and maintain tax revenues may entail. In countries where there is a correlation between the enjoyment of higher levels of income and the wielding of economic and political power within society as a whole, the scope for resistance to such measures by those so privileged, the elite, is clear. Moreover, even if there is acquiescence in the promul-


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gation of such measures, this does not guarantee compliance generally and/or by members of the elite. Indeed, such measures may, on the contrary, act as a catalyst for taxpayers to resort to tax avoidance and/or tax evasion; actions that under-resourced revenue authorities in developing countries may find very difficult to detect and combat and which will serve, therefore, to undermine the raison d’être for the measures. The scope for developing countries to stabilise and maintain tax revenues through an increase in VAT revenue may also be circumscribed by domestic constraints. In particular, VAT can be regressive and especially so when it is applied at a single rate. Consequently, an increase in the rate or rates of VAT, or the withdrawal/suspension of exemptions that will have an equivalent effect, is likely to worsen the extant high inequality in developing countries; a situation that prudence suggests is inadvisable, particularly during a recession. However, if it is decided that the rate or rates of VAT should be increased, it does not follow that the consequent expected increase in VAT revenue will be forthcoming. Much may depend on the prevalence of the conditions necessary for an effective VAT generally, particularly regular bookkeeping, reliable self-assessment and an efficient revenue authority, which experience has shown may be lacking in many developing countries. It might also be added that an increase in the rate or rates of VAT, notwithstanding any deficiencies in the administration of a VAT, may encourage the transference of economic activity, with a view to avoiding or evading tax that would otherwise be payable, to the informal sector. In this respect, some commentators have advocated the widening of the VAT tax base to cover relevant economic activity conducted within the informal sector (see, for example, Fjeldstad and Moore, 2008: 244–5). This is an objective that, needless to say, requires careful planning and execution, not least in relation to the tax collection mechanisms that might be employed, and one that is not likely to be achievable in many countries in the short term. The fetters imposed by these domestic constraints may be compounded by inter-country constraints that are contained within regional agreements, such as the customs union referred to earlier in this chapter, by virtue of which compliance with prescriptive norms may be required, for example, as to the bands within which rates of VAT may be levied. Further, in the context of international institutional constraints, the role of the IMF, in the case of many developing countries, is likely to be the most significant. The introduction of a VAT in place of trade taxes represents the most radical measure within the standard IMF tax reform ‘package’. As a consequence, a proposed change to a VAT regime that has its origins in such a package, such as an alteration to the applicable rate(s), will need to


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be reconcilable with a country’s obligation to service its debt to the IMF. Moreover, such changes may be subjected to particular scrutiny where they are proposed in developing countries which have struggled to adapt to the fiscal ramifications of trade liberalisation. In this regard, trade liberalisation in some low-income and post-war economies has led not only to a reduction in trade taxes, which were previously the main source of tax revenue, but also to a situation in which alternative tax revenues, derived in particular from VAT and income tax, have risen significantly less than the decline in trade tax revenue (World Bank Group, 2008: 58). In fact, recent research conducted under the auspices of the IMF found that low-income countries tended, typically, to recover at best only 30 cents on each dollar lost to the decline in trade tax revenue (Baunsgaard and Keen, 2005). Further research is required in order to achieve an understanding of the reasons for this ‘revenue gap’, although it has been suggested by some commentators, but not without challenge, that one factor that explains why the introduction of VAT as a substitute for trade taxes has led to declines in total tax revenues in low-income countries is the high levels of informal economic activity in those countries (World Bank Group, 2008: 58–61). Be that as it may, the prospects for closing this ‘revenue gap’ are unlikely to be enhanced by measures that complicate the design and structure of a VAT regime. This would seem, therefore, in the context of measures that might be taken to stabilise and maintain VAT revenue, to militate against, for example, the introduction of multiple rates of VAT. Finally, in the case of a corporate income tax, tax avoidance and/or evasion (as with a personal income tax and a VAT) may threaten the efficacy of measures that would otherwise increase the tax burden of corporations. However, the principal concern is likely to be whether, as a result of the measures, MNEs are minded to relocate to another country. As indicated above, the right of a developing country to tax the profits of a permanent establishment of an MNE is already likely to be constrained in many cases by DTAs entered into with developed countries that are based on the provisions of the OECD Model Convention, particularly in this context Article 5, which defines ‘permanent establishment’ more narrowly than its UN Model counterpart, and Article 7, which provides for the attribution of business profits to a permanent establishment. However, in this instance, the pertinent constraint is the need to retain competitiveness with other similarly placed countries. Perversely perhaps, it might be decided that a reduction in the corporate tax burden is preferable if this is what is needed to persuade MNEs to remain; a reduced fiscal return in the short term being compensated by a continuing opportunity to tax in coming years. The drawback is that ‘competitors’ may be tempted to


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retaliate by reducing their corporate tax burden to an even lower level and, thereby, to raise the spectre of a destructive ‘race to the bottom’. This section of the chapter has provided a topical cameo of the constraints that may fetter the fiscal autonomy of developing countries. The impact of those constraints has been considered, admittedly, in narrowly defined circumstances. Nevertheless, notwithstanding these narrow confines, an impression has been created not only of the limits that may be placed on fiscal self-help by developing countries but also of the responsibility for these limits that lies, particularly, with those developed countries and international institutions to which developing countries are beholden.

4.

CONCLUSION

Taxation provides the potential for empowering a country to allocate resources and make policy decisions, which are partly economic and partly political, on wealth and its distribution. In the case of developed countries, even when borrowing, most have strong governance systems to ensure that taxation controls are retained by central government. In developing countries where governance is weak, taxation is an essential element in persuading donors to lend. In such circumstances, developing countries face an uneasy and destabilising situation. Taxation that is linked to borrowing requirements usually finds its way to foreign enterprises and other external actors such as consultants and contractors. Moreover, central government is usually weakened by being dependent on external sources and foreign investors.


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The World Trade Organization and the turbulent legacy of international economic law-making in the long twentieth century Fiona Macmillan*

1.

INTRODUCTION

This chapter focuses on the establishment of the WTO with a view to suggesting that it constitutes the climax, and so the beginning of the end, of the current process of international economic law-making. The chapter argues that, in essence, the emergence of the WTO as an institution is a crystallisation of pervasive structures and ideologies that combined and gained particular force and impetus during the twentieth century. Specifically, the chapter considers the effects of the so-called doctrines of comparative advantage and free trade in the context of the rise of corporate capitalism in the post-World War Two period. Tied in with this potent combination is the process of decolonisation. The effect of decolonisation on the world economy has, of course, been profound. In particular, decolonisation has called for the development of new techniques for accessing the resources of the so-called developing world on terms that ensure that the dominant position of the former colonial powers in the world economy is maintained. This chapter is premised on the claim that both the doctrine of comparative advantage, which has provided the theoretical ballast for the current world trade regime, and the rise of corporate capitalism, the practical arrow in the theoretical bow, are inherently well-adapted to the task of maintaining the subordinate position of the former colonies. In this sense, the underlying argument of the chapter is that the establishment of the World Trade Organization was not only the climax of the current process of interna-

* Corporation of London Professor of Law, School of Law, Birkbeck, University of London, London, UK. 158


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tional economic law-making but also the institutional realisation of the postcolonial process.

2.

THE ‘DOCTRINE’ OF COMPARATIVE ADVANTAGE

The commitment to a global free trade regime, which underlies the rhetoric – if not the reality – of the WTO system, is said to be based upon the socalled doctrine of comparative advantage. The idea of comparative advantage was developed in the work of nineteenth-century classical economists, building on the work of Adam Smith (Smith, 1776). Smith’s insight was that economic gains would be produced where a nation concentrated on producing particular commodities and then traded its surpluses in these commodities. Smith argued that government interference in international trade would inhibit the development of such specialisation (Dunkley, 2001: 108–9). The work of David Ricardo (Ricardo, 1817) added the refinement that the ability to specialise was a consequence not of so-called absolute advantage in the form of production costs but of comparative advantage based on national tastes, technology and resources bases, as well as production costs (Dunkley, 2001: 109; Alessandrini, 2005). Beginning in the late nineteenth century, advocates of international free trade regimes have employed the theory as a tool to support their political position. This re-badging of a political question as an economic one, and, moreover, an economic question that is governed by an economic ‘doctrine’, has been an important weapon in the crusade for the liberalisation of world trade, of which the establishment of the WTO is a significant part. However, despite the authority implicit in the use of the word ‘doctrine’, it would be wrong to conclude that the theory of comparative advantage commands universal adherence amongst economists. While it has some pious adherents, there are those who embrace it only subject to extensive qualifications, as well as those who are even less enthusiastic (Dunkley, 2001). Those wedded to the Washington Consensus are, of course, most likely to fall into the group of pious adherents. The modern version of the ‘doctrine’ argues that optimal allocation of international resources will be achieved if each country uses its comparative advantage to produce only the commodities that it can most efficiently produce and trades those commodities with other countries in order to obtain the commodities that it does not produce (Dunkley, 2001: ch. 6; Leonard, 1998: ch. 1). Essentially, therefore, the argument is one about optimal allocation of resources as a consequence of the operation of an unfettered market mechanism. Ultimately, it is argued, where there is


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optimal allocation of resources then economic welfare will be maximised. It is also frequently argued that economic growth will be stimulated and everyone will be better off in economic terms. However, even some prominent free trade advocates are doubtful about this proposition and accordingly reluctant to hang the free trade case under this banner (Bhagwati, 2002: 41–3). Non-economic benefits in the form of greater international cooperation and harmony are also postulated by adherents of the doctrine of comparative advantage and its concomitant of international trade free from government interference (Alessandrini, 2005; Dunkley, 2001: 110). These non-economic benefits would, it is argued, flow from the fact of economic interdependence. There are a number of difficulties in using the doctrine of comparative advantage as a spiritual guide for the development of the world trading system. Foremost among these is the fact that it has always been unclear whether the doctrine is prescriptive or merely descriptive of the process of international trade (Leonard, 1998: 1; Davis and Neacsu, 2001: 754–62). Even those who embrace it on a prescriptive basis acknowledge that it may cause ‘short-term’ dislocations. In particular, the need for ‘structural adjustment’ in a country’s economy as it gears up to meet its comparatively advantageous destiny will create hardship in those sectors from which resources move (Dunkley, 2001: 147ff). As Dunkley notes, the free trade response to this creation of ‘winners and (temporary) losers’ is that ‘if the former “bribe” or compensate the latter so as to facilitate their adjustment, everyone will be economically better off’ (Dunkley, 2001: 109). Many proponents of free trade also acknowledge that, in a world of imperfect markets, there are circumstances in which temporary forms of government intervention in the market may be necessary (Dunkley, 2001: 109; Bhagwati, 2002: 11–33). There are, however, a range of objections to the doctrine of comparative advantage and its concomitant of free international trade that go beyond acknowledging the need for some tinkering around the edges. Some of these arguments constitute developments or extensions of those accepted by free trade proponents as grounding temporary forms of government intervention. For example, there is relatively widespread acceptance of the proposition that infant industries with potential comparative advantage may need some form of protection in their early life in order to realise their comparative advantage (Dunkley, 2001: 112). An extension of this argument that is not widely accepted amongst free trade proponents is that today’s developed countries owe their current state of development to the fact that they employed blanket or selective protection in order to nurture the process of industrialisation (Dunkley, 2001: 114–15; Arrighi, 2002: 47–58 and ch. 3; Alessandrini, 2005). The corollary of this being


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that to deny such protectionist advantages to developing countries is to deprive them of an essential step in the development process (Dunkley, 2001: 114–15; Alessandrini, 2005: 58–60). Another set of arguments, which for free trade proponents constitutes an unjustifiable extension of a largely acceptable qualification of the comparative advantage doctrine, relates to the use of protective devices to improve income or the rate of employment. Such arguments are very much part of the Keynesian legacy (Keynes, 1932; Dunkley, 2001: 116–17). However, they go considerably beyond the acceptance by some free trade proponents that certain externalities may justify intervention in the market. This is especially so since there tends to be a consensus amongst free trade proponents that such externalities should be dealt with by non-tariff measures, such as subsidies, rather than by direct protection (Dunkley, 2001: 113; Bhagwati, 2002: 26–33). There have been many criticisms of the economic assumptions upon which the doctrine of comparative advantage is based (Dunkley, 2001: 110). A serious problem about its current applicability relates to its assumption that capital, along with skilled labour, is largely immobile (Gray, 1998: 82). The efficiency and welfare advantages predicted by the doctrine are based upon the movement of traded commodities, in the form of raw materials and manufactured goods, across borders. The twentieth century, however, was marked by an increase (that has continued unabated into the twenty-first century) in the movement of the means of production across borders. This generally occurs by means of foreign direct investment by multinational enterprises, which establish subsidiary undertakings in another country for this purpose. It seems clear that corporate decisions about the optimal destination of foreign direct investment are informed by a range of factors including ‘raw materials, energy sources, markets, labor supply and costs, transportation availability and costs, capital availability, the potential for economies of scale, services and infrastructure (electricity, water supply, waste disposal, and so forth), governmental actions (taxes, incentives, regulations), and site costs’ (Leonard, 1998: 21). Disagreement exists about the relative weight of these factors, and it seems likely that their significance differs substantially from industry to industry (Leonard, 1998: 21–6). The important point, however, is that the prevalence and pattern of foreign direct investment suggests that capital seeks absolute, rather than comparative, advantage (Gray, 1998: 81–3; Dunkley, 2001: 118). This is likely to create welfare problems in countries that compete for foreign direct investment. Currently, such problems are most likely to be experienced in developing countries.


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3.

COMPARATIVE ADVANTAGE, FREE TRADE AND DEVELOPING COUNTRIES

Cogent criticisms have been made about the ability of the doctrine of comparative advantage to deal with the obvious global disadvantage of developing countries. The concern here, as Dunkley notes, is that ‘in a world of uneven development free trade, or even trade per se, may be inherently unequalising’ (Dunkley, 2001: 119). There is a range of economic arguments that explain why the doctrine of comparative advantage may be unable to deliver its promised welfare benefits to developing countries. One of the important general arguments in this context is that comparative advantage is created and cumulative, rather than natural, ‘being based on historical development processes, acquired skills, cultivated industry patterns or “first mover” benefits, so it can change over time, can be shaped by governments or industry leaders and can decay through neglect’ (Dunkley, 2001: 122). If this is so, then the cumulative comparative advantage of developed countries will ensure either that inequalities always remain or that they take an unacceptably long time to disappear. Another important school of economic thought postulates perpetual inequalities as a consequence of free trade. According to this argument, where there is low elasticity in demand for the exports of a country but high elasticity in domestic demand for imports, then export prices relative to import prices will result in a continuous trade deficit (Mill, 1844: 21). As this tends to describe the terms upon which at least some developing countries export their primary products and import manufactured products, it is argued that under free trade conditions these developing countries will remain trapped in a trade deficit preventing them from realising the welfare gains promised by free trade doctrine (Dunkley, 2001: 118 and 145ff). These are not, of course, the only explanations for the current trade deficit and retarded economic development suffered by developing countries. It is certainly the case that the adverse economic position of developing countries has been exacerbated by the fact that they have been denied comparative advantages that they might have otherwise enjoyed. In this respect two factors, in particular, are worthy of note. The first is that the requirements for the global protection of intellectual property rights,1 the large-scale benefits of which are overwhelmingly enjoyed by undertakings based in the developed world, deny to develop-

1

This is a result of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement) (GATT, 1994b), about which much more below.


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ing countries any comparative advantage that they may have accrued in the processes or imitation of certain manufactured goods and in ‘incremental innovation’ (Reichman, 1993: 175). To place this in context, it is essential to understand that many of today’s developed countries once placed extensive economic reliance on the unfettered ability to copy manufactured goods emanating from other more developed economies. (It is acknowledged that this point might be thought to push the notion of comparative advantage beyond its orthodox scope, although as the critique of the doctrine in this chapter tends to demonstrate, the ambit of that scope is contested.) Secondly, the trading position of many developing countries is adversely affected by the fact that developed countries have continued to protect their domestic markets for certain primary products and manufactured goods exported from developing countries.2 However, the extent to which the opening of developed country markets to such exports would alleviate the trade deficits of developing countries remains a matter of debate amongst economists (Dunkley, 2001: 119; Bhagwati, 2002: 89–90). The protectionism of developed countries is a response to what is perceived as a potential flood of ‘cheap imports’ from the developing world. It is not uncommon for industries in developed countries to argue that, in order to survive, they need protection from such imports, which are made on the back of low labour costs in developing countries. From the free trade point of view, this argument denies to developing countries their legitimate comparative advantage. In economic terms, some questions have been raised about the validity of this free trade argument given that many of the employers of low-cost labour in the developing world are multinational corporate interests, which marry high technology with lowcost labour in order to achieve an advantage that gives little in the way of welfare benefits to the host developing country (Dunkley, 2001: 120–21). In addition to this, it is not clear that the developed world market for cheap manufactured imports from developing countries functions in quite the way that classical free trade economists postulate. Theoretically, the comparative advantage of the developing country will be realised when developed world consumers purchase the cheaper imports rather than more expensive domestic products. However, increasing numbers of consumers in the developed world eschew the products of low-cost labour on ethical grounds. This not only shows the limits of economic theory but

2

The ongoing dispute over market access for the cotton and cotton products of Benin, Burkina Faso, Chad and Mali is a good example of this (see WTO, 2003a, 2003b).


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also indicates that the debate about free trade should transcend arguments about the validity in solely economic terms of the doctrine of comparative advantage. Ethical concerns about the exploitation of labour, whether by multinational corporate interests or by domestically based interests, are one of a number of non-economic arguments that may be made about an unfettered free trade regime. What these arguments have in common is the rejection of wealth maximisation as the ultimate measure of human happiness and attainment. As Keynes (1932) famously wrote: If it were true that we should be a little richer, provided that the whole country and all the workers in it were to specialise on half-a-dozen mass-produced products, each individual doing nothing and having no hopes of doing anything except one minute, unskilled repetitive act all his life long, should we all cry out for the immediate destruction of the endless variety of trades and crafts and employments which stand in the way of the glorious attainment of this maximum degree of specialised cheapness? Of course we should not – and that is enough to prove the case for free trade . . . has left something out. Our task is to redress the balance of the argument.

The critique of free trade based upon the rejection of wealth maximisation draws stark attention to the difficulty in attempting to divide the political and the economic. The decision to embrace a free trade regime is not, and can never be, a purely economic one. Rather, it is a political choice involving, amongst other things, economic considerations. Joseph Stiglitz underlines the significance of this point: There are important disagreements about economic and social policy in our democracies. Some of these disagreements are about values – how concerned should we be about our environment (how much environmental degradation should we tolerate, if it allows us to have a higher GDP); how concerned should we be about the poor (how much sacrifice in our total income should we be willing to make, if it allows some of the poor to move out of poverty, or to be slightly better off); or how concerned should we be about democracy (are we willing to compromise on basic rights, such as the rights to association, if we believe that as a result, the economy will grow faster). (Stiglitz, 2002a: 218–19)

Overall, the debate on the non-economic merits and de-merits of the comparative advantage doctrine is one that even the most thoughtful modern proponents of free trade, such as Bhagwati, seem to have trouble joining. In this, as in so much else, modern free trade theorists appear to be embracing a type of intellectual foreclosure that dates back to the work of Adam Smith. Smith postulated non-economic effects of free trade, both positive and negative. On the positive side, both he and Ricardo cited cosmopolitanism and international harmony as a non-economic benefit


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of free trade. However, Smith saw that the pursuit of material wealth had less desirable effects: These are the disadvantages of a commercial spirit. The minds of men are contracted, are rendered incapable of elevation. Education is despised, or at least neglected, and the heroic spirit is almost utterly extinguished. (Hirschman, 1977: 106–7)

He was, however, unable to resolve the conflict between this concern and his commitment to the expansion of wealth, cosmopolitanism and international harmony through international trade. He thus concludes that the primary motivation of humankind is to better its material condition. This conclusion set the parameters to the post-Smithian debate about international trade, which has been conducted around the question of whether, and to what extent, international trade is capable of improving material well-being (Hirschman, 1977: 112). Somewhere along the way, the insidious idea that the maximisation of material wealth is the ultimate human attainment seems to have become a foundational principle in this debate (Alessandrini, 2005: 60). This rather messy theory of comparative advantage starts to look even more problematic when it is located in the terrain of this chapter’s central object of consideration, the WTO. Despite its appeal to the doctrine of comparative advantage as a justification for world market liberalisation, it is arguable that the WTO is incapable of realising the benefits suggested by advocates of the doctrine because, rhetoric aside, it is not really concerned with removing barriers to international trade. Rather, the argument may be made that the WTO is a pretext for keeping up protectionist barriers in some areas.3 Thus, Amin has remarked that ‘the function of the IMF and the World Bank, and also GATT, masquerading behind the discourse of free trade, is the protection of market control by the dominant transnational oligopolies’ (Amin, 1998: 97).

4.

THE RISE OF CORPORATE CAPITALISM

In their attachment to the theory of comparative advantage and its presumed concomitant of a world market economy under which economic

3 See above note 2. See also, for example, US – Transitional Safeguard Measures on Combed Cotton Yarn from Pakistan; US – Rules of Origin for Textiles and Apparel Products; European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries; US – Subsidies on Upland Cotton.


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welfare would be maximised, neither Adam Smith nor David Ricardo appear to have foreseen the meteoric rise of the multinational corporate entity. This is not particularly surprising. Like all of us, their intellectual horizons were shaped by their times and, in their case, by the prevailing pattern of capitalist development. It would, of course, have been impossible for the early theorists of comparative advantage to ignore the importance of the joint stock corporations in opening up lucrative avenues of foreign trade. Since at least the establishment of the English East India Company in 1600 and its Dutch counterpart, the Verenigde Oost-Indische Compagnie (VOC), in 1602, these corporations had been features of the international trade landscape. The trade ascendancy of the VOC in the seventeenth century was, like the power of the Dutch Empire, on the wane by the middle of the eighteenth century (Arrighi, 2002: 139ff). At this time, as the British Empire superseded the Dutch, the English joint stock companies began their domination of international trade. This pattern was not a mere coincidence. As Arrighi has noted, the ‘joint-stock chartered companies were highly malleable instruments of expansion of state power’ (Arrighi, 2002: 307). In other words, these corporations were not just part of the trade landscape, they were also part of the political landscape in a way that directly allied them to the interests of their originating nation state. Today’s multinational corporate enterprise has a certain type of interdependence with the nation state, and this relationship has considerable political significance. However, despite its interdependence with the state, the modern multinational enterprise is not an instrument of state power. Rather, it has come to constitute ‘the most fundamental limit of that power’ (Arrighi, 2002: 307). This is because, in many respects, the multinational corporation wields power quite independently of the state and of state constraints. Viewed through the lens of the ‘extroverted’ national economy (Amin, 1974: 599) that characterised the period of British dominance, during which both Adam Smith and David Ricardo were writing their influential works, this development in the nature of corporate power would have been far from predictable. It was the shift from Britain as the dominant global state power to the period of US dominance, associated with the move from a leading extroverted national economy to a leading ‘autocentric’ national economy (Amin, 1974: 599), which provided the conditions necessary for the flourishing of the multinational corporate enterprise: In the US regime . . . the autocentric nature of the dominant and leading national economy (the US) became the basis of a process of ‘internalization’ of the world market within the organizational domains of giant business corpora-


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tions, while economic activities in the United States remained organically integrated into a single national reality to a far greater extent than they ever were in nineteenth-century Britain. (Arrighi, 2002: 281)

The key feature of these new ‘organisational domains’ was vertical integration (Chandler, 1977: 244), which was the complete opposite of the approach taken by British trading concerns during the height of Britain’s colonial and trade domination (Arrighi, 2002: 287). With the advantage of increased historical perspective, Braudel enjoyed an insight denied to Smith, Ricardo and their ilk. He saw that the economy (in its broadest sense) was composed of three layers: the material life, the market economy and capitalism (Braudel, 1982: 10–11). The first layer is ‘an extremely elementary and mostly self-sufficient economy’ (Arrighi, 2002: 10), which Braudel also referred to as ‘the non-economy’ (Braudel, 1982: 229). The second layer of the economy is characterised by ‘its many horizontal communications between the different markets’, where ‘a degree of automatic coordination usually links supply, demand and prices’ (Braudel, 1982: 229). It seems likely that Smith, Ricardo and their fellow free trade enthusiasts not only were concerned with this second layer of the economy but also would not have distinguished it from Braudel’s third layer (Arrighi, 2002: 10). As the market economy has its roots in the material life, so Braudel’s top layer emerges from the market economy. This is ‘the zone of the antimarket, where the great predators roam and the law of the jungle operates. This – today as in the past, before and after the industrial revolution – is the real home of capitalism’ (Braudel, 1982: 229–30). The real home of capitalism is, however, an unstable structure; and in its instability it threatens the stability of the lower layers of the economy, especially the market economy. Arrighi has argued that this inherent instability of the capitalist system has led to a cyclical series of paradigm shifts. When capital can no longer be profitably employed by use in the development of new markets that expand the productive capacity of the existing markets, then a switch occurs and excess profits are ploughed into the trade in money. That is, a switch is made from trade to finance. The switch is the expression of a ‘crisis’ in the sense that it marks a ‘turning point’, a ‘crucial time of decision’, when the leading agency of systemic processes of capital accumulation reveals, through the switch, a negative judgment on the possibility of continuing to profit from the reinvestment of surplus capital in the material expansion of the world economy, as well as a positive judgment on the possibility of prolonging in time and space its leadership/dominance through a greater specialisation in high finance (Arrighi, 2002: 215).


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Drawing on Weber (1978), Arrighi argues that interstate competition for mobile capital has been essential to the material expansion of the capitalist world economy. However, Arrighi’s gloss to this proposition is that capitalist power has intensified during each period of capitalist accumulation (Arrighi, 2002: 12ff). It seems that the modern multinational enterprise is very much a creature of this intensification of capitalist power. The pre-conditions of the ascendancy of the multinational enterprise were the twentieth-century processes of vertical integration and internalisation of international trade, but the dominance of multinational enterprises is crucially linked to interstate competition for investment. Gray notes: Today’s competition between states for investment by multinational corporations allows them to exercise a leverage they did not possess in a more hierarchical world order. At the same time such competition limits the freedom of action of sovereign states. The leverage that states can exercise over corporations must be exercised in a global environment in which most of the competitive pressures that affect them work to limit the control of governments over their economies within a narrow margin. (Gray, 1998: 70)

Thus, the evolution of the relationship between state and international corporate enterprise has been characterised by a move along the spectrum from an identity to an opposition of interest. The relationship remains interdependent, but the nature of that interdependence has altered. The phenomenon of corporate capitalism has produced multinational corporate entities of considerable size and economic power (Anderson and Cavanagh, 2000). The influence multinational corporate entities are able to wield over the world economy has important implications for the doctrine of comparative advantage and its free trade concomitant, which are concerned in essence with the effect of market forces on trading advantages between nation states and do not take into account the massive market power exercised by members of the international corporate sector. Indeed, one of the strangest aspects of Bhagwati’s thoughtful advocacy of the free trade position is the way in which he ignores both the impact of corporate power on the underlying assumptions of the comparative advantage doctrine and the fact that free trade has become an instrument of the augmentation of corporate power. One of Bhagwati’s foundational arguments is that ‘[i]n the presence of market failure (or distortion), free trade is not necessarily the best policy . . . Where the distortion is external, free trade must be departed from as part of the suitable first best trade policy addressed to that distortion’ (Bhagwati, 2002: 28). Bhagwati does not seem to take into account even the possibility that the dominating market power of multinational enterprises, which allows them ‘to manipu-


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late world prices and supplies (and often demands as well) in their own private interests’, might constitute an external distortion (Alessandrini, 2005: 17–19). He does not, therefore, respond to the argument, noted above, that corporate entities pursue and achieve absolute advantage. The distortion caused by corporate power constitutes more than a serious dent in Bhagwati’s argument. Because the power of multinational corporate entities is not, precisely as a result of its transnational character, susceptible to national government control, Bhagwati’s solution of tackling the external distortion through government action is not really a practicable one. In any case such action, even assuming such a distortion could be cured in this way, seems to compromise the theoretical foundations of free trade theory, which relies on markets as the best form of resource allocation. Associated with the fact that corporate capitalism has undermined the basis of the doctrine of comparative advantage is its responsibility for structural change in the world economy. It is common to describe aspects of this under the rubric of economic globalization. Views on the meaning, depth, significance, inevitability and desirability of globalization are legion. Structurally speaking, important differences exist between those who perceive globalization as promoting diversity and those who perceive it as the harbinger of homogenisation. Advocates of the former view often appear to be confusing the means of globalization with its ends. Gray’s argument, for example, that globalization is stimulated by ‘differences between localities, nations and regions’ because ‘[t]here would not be profits to be made by investing and manufacturing worldwide if conditions were similar everywhere’ (Gray, 1998: 57–8) provides an example of this tendency. It may be that economic globalization is stimulated by difference, but its end result is homogenisation. Ultimately, the ability to sell the same or substantially the same product or service in as many markets as possible not only seems to make the most economic sense for globalizing corporate interests but also appears to be the obvious intention behind their worldwide marketing campaigns (Levitt, 1983). If homogenisation of markets is the object or effect of economic globalization then it seems almost axiomatic that this will have an impact on cultural, social, legal and political life. Again, the precise nature of this impact is much disputed. It is, for example, common to perceive in globalization a threat to national sovereignty. However, the significance of this threat in terms of the exercise of sovereignty is much debated. For some commentators sovereignty has been relocated upwards to the supranational level and downwards to the sub-national level (Jayasuriya, 1999); for others, multinational corporations have usurped the role of the nation state, yet others argue that the global market ‘has weakened and hollowed


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out’ both nation states and multinational corporations (Gray, 1998: 63, 74–7). Some consider the nation state to retain vitality and take the view that arguments to the contrary are propaganda for the proposition that complete globalization is inevitable (Hirst and Thompson, 1996; Dunkley, 2001: 234–7). Many bemoan the decline in the power and autonomy of the nation state, but not all. There are those (Hardt and Negri, 2000) who, as Dunkley notes, ‘see globalisation as allowing . . . ideological diversity to combat narrow nationalisms, broad outlooks to supersede particularism or alternative models to rival European forms of modernisation’ (Dunkley, 2001: 16). In terms of the social, legal and political effects of globalization, Amin has argued that globalization has produced ‘global disorder’ because, amongst other things, the global system ‘has not developed new forms of political and social organization going beyond the nation state – a requirement of the globalized system of production’ (Amin, 1998: 2). This is, of course, intimately connected with one of the most persistent constitutional problems of the modern era, which is that the power of capital, and specifically of multinational corporate entities, has transcended the nation state while the exercise of political and legal power has remained trapped within its confines. Despite all the competing views on the nature of the structural changes consequent on globalization, almost no one seems to deny that the rise of the multinational or transnational corporate enterprise is both a cause and a predominant feature of our globalized world. This power is not appropriately characterised as simply economic. It also has an explicitly political character. One manifestation of this political power is the way in which corporate interests are able to influence government policies in countries seeking foreign direct investment (FDI). The exercise of this power is a prevalent feature of twenty-first-century political life precisely because of the importance of interstate competition for mobile capital. However, the leverage that such corporate interests are able to exert in this respect is obviously directly proportional to the needs of countries seeking FDI – the greater the need, the greater the potential power that may be wielded. The fact that certain countries are vulnerable to such leverage shows that there are considerable perceived benefits flowing from FDI. However, it is becoming clear that where the conditions for FDI are particularly onerous this has developmental implications for the recipient country. That this type of behaviour sticks in the craw of developing countries is evidenced by a Communication from China, Cuba, India, Kenya, Pakistan and Zimbabwe to the WTO Working Group on the Relationship between Trade and Investment (2002). Of multinational enterprises, the Communication notes:


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They command enormous physical and financial resources, including proprietary technology and world-wide recognition of their brand or trade names. Their global scale of operations give them unique ability to respond to exchange rate movements in any part of the world, minimize their global tax bill and circumvent financial restrictions imposed by governments, ability to minimize the political risks, access to information on world markets and the ability to bargain with the potential host countries from a position of strength arising from their global position. (ibid: para. 1)

In a clear reflection on the way in which at least some corporate entities use their power, the Communication calls for the imposition, within the context of a WTO Multilateral Investment Agreement, of obligations on multinational enterprises based on four general principles, as follows: ●

● ●

●

foreign investors would respect the national sovereignty of the host member and the right of each member government to regulate and monitor their activities; non-interference in internal affairs of the host member and in its determination of its economic and other priorities; adherence to economic goals and development objectives, policies and priorities of host members, and working seriously towards making a positive contribution to the achievement of the host members’ economic goals, development policies and objectives; adherence to socio-cultural objectives and values, and avoiding practices, products or services that may have detrimental effects. (WTO Working Group on the Relationship between Trade and Investment, 2002: para. 12)

Another aspect of the political power of multinational corporate entities is the way in which they are also able to influence structural change and institution building at the supranational level. Because states are generally the formal actors at this level, corporate entities need to use their power and influence with states in order to achieve desired changes. The states implicated in this exercise of power are not just developing countries, the ability of which to influence political developments at the international level is perceived as comparatively limited, but are rather the most powerful states in the current world order (Dryden, 1995; Odell and Eichengreen, 2000: 200–206). For example, there is extensive evidence for the proposition that a powerful alliance of cross-sectoral multinational corporate interests operating under the auspices of the US Intellectual Property Committee procured both the inclusion of intellectual property as a trade issue within the Uruguay Round of trade talks and the eventual conclusion of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (Blakeney, 1996: ch. 1; Sell, 2003). In doing this, they exercised leverage not only with the US government but also on the governments of other


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powerful and influential states (especially those of the European Union and Japan) by mobilising corporate interests based in those countries (Sell, 2003: 46). It is, accordingly, arguable that the general perception by the most powerful and influential states that there is a community of interest between state and corporation had a decisive influence on the outcome of the Uruguay Round.

5.

THE TRANSITION FROM GATT TO THE WTO

The new institution of the WTO was the final product of the long Uruguay Round of trade negotiations that commenced at Punta del Este in September 1986.4 A resounding chorus of commentators appears to embrace the view that the move from a regime predicated on an agreement to one predicated on an intergovernmental institution constitutes a quantum shift in the nature of multilateral trade relations. Looked at in the cold light of day, however, the differences between the world trading regime before and after the establishment of the WTO might appear rather less monumental (Macmillan, 2005). In a move that might be regarded as emphasising either continuity or the minimal nature of the shift from agreement to organisation, the Agreement Establishing the World Trade Organization (hereafter, the WTO Agreement) contains a Preamble that substantially reproduces the Preamble of the 1947 GATT with the addition of some remarks directed towards the importance of sustainable development5 and of securing ‘economic development’.6 That constitutive agreement also makes it clear that important GATT principles, such as being member-driven and proceeding by consensus, have been carried over from GATT into the WTO. So much (and more) can be said for the similarities between GATT and the WTO. There are, of course, differences between the two, but it seems unlikely that they are such as to amount to a rupture in the pattern of international economic 4

General Agreement on Tariffs and Trade, Punta del Este Declaration, Ministerial Declaration, 20 September 1986. 5 Specifically, the Preamble to the WTO Agreement refers to ‘allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development’. 6 Specifically, the Preamble to the WTO Agreement refers to the ‘need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development’.


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law-making. This is not to suggest that the establishment of the WTO is without significance in the pattern and trajectory of multilateral trade governance. On the contrary, it was a moment of great significance precisely because it marked the culmination of a long process of international economic law-making. As is commonly noted, the Uruguay Round marked a move to a more focused concern with non-tariff barriers to international trade. This consolidated a trend that began during the Tokyo Round, when the trading system first fixed its eye in a more organised way on the importance of non-tariff issues. As the post-Tokyo Round consequence of this was a plethora of smaller, often plurilateral, agreements, there was considerable fragmentation in the legal system governing international trade. It seems clear that this created a pressure for consolidation to which one possible response was the creation of an overarching institution. This seems to have been one of the factors that, in April 1990, motivated the suggestion by Canada’s trade minister for the establishment of just such an institution (Preeg, 1995: 113; Odell and Eichengreen, 2000: 188; Hoekman and Kostecki, 2001: 40), which was followed by the formal proposal of the European Communities in July 1990 for a so-called Multilateral Trade Organization (see GATT, 1990b). There also seems to have been a strong view that the integration of the two new major areas of multilateral agreement, intellectual property and services, would be most efficiently achieved under the auspices of an institution (UNCTAD, 1994: 8). These types of explanations for the emergence of what became the WTO may cast some light on the immediately proximate pressures for the creation of an institution, although it is interesting that a number of GATT members found them less than compelling at the time.7 It seems possible, however, despite the fact that an institutional approach was not contemplated in the Punta del Este Declaration, that there were longer-term systemic pressures behind the creation of the WTO as an institution. If this is so, it means that the movement from GATT to the WTO is unlikely to be a quantum shift. If the creation of the WTO was due to longer-term pressures, rather than being a moment of gestalt in 1990, this tends to suggest a process of gradual change in the world trading system rather than a sudden alteration. The creation of the institution may, in this sense, be no more than a recognition or legitimation of changes already occurring.

7 Switzerland, for example, preferred the option of retaining GATT and strengthening its links to the Bretton Woods institutions (see GATT, 1990a), while the US, at that stage, preferred a more gradual consideration of the need for a new institutional approach (see GATT, 1990c), and see UNCTAD (1994: 8–9 and 9n).


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A problem in assessing the meaning and significance of the move from the GATT to the WTO is in distinguishing between proponents of the new institutional form and proponents of greater trade liberalisation. While one might be tempted to argue that the quest to distinguish between the form of the organisation and the content of its trade rules is difficult, if not impossible – and, in other contexts, possibly meaningless since the form clearly affects the content – it seems to be the case that this distinction did exist during the Uruguay Round negotiations. While it was the US government that was pressing for greater trade liberalisation and the inclusion of an agreement on intellectual property, the initial proposal for a multilateral institution did not emanate from the US, either formally or informally. Rather, as noted above, the formal impetus came from the European Communities following on from a Canadian proposal. Developing countries, which had become a significant presence in multilateral trade talks for the first time during the Uruguay Round (Krueger, 2000: 1, 7), also seem to have supported an institutional framework on the basis that it would have greater potential to constrain aggressive US bilateralism – a consideration that was equally attractive to most of the developed world, including the European Communities (Odell and Eichengreen, 2000: 188; Hoekman and Kostecki, 2001: 34). Possibly for connected reasons, the US seems to have been, at first, rather lukewarm in relation to the proposed new trade organisation, preferring a more incremental approach to the establishment of any new overarching institution. By the time of the 1991 Dunkel Draft,8 which formed the basis of the final agreement for the WTO, the US position appears to have solidified in favour of the proposed new institution. The European Communities, on the other hand, were having far more difficulty with the proposed content of the agreements that would make up the operating rules for the institution. The particular sticking point for the European Communities was the issue of agricultural liberalisation, which was central to the US negotiating position. Additionally, the French government resisted services liberalisation owing to its fears about US cultural imperialism, generally, and its effect on the French film industry, specifically. In the end, it was the US that forced the issue, demonstrating coalescence between pressures for trade liberalisation and for the new institutional form. While this may have been, at least in part, a matter of strategic

8 This was a consolidated draft by Arthur Dunkel, Director-General of GATT, which formed the basis of the final Uruguay Round Agreements.


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expediency, it suggests that ultimately there was no intrinsic contradiction between greater trade liberalisation and the new institution of the WTO. Given this final rapprochement between greater trade liberalisation and the new institution of the WTO, it is tempting to argue that the greatest significance of the WTO lies in its free trade credentials. This argument gains strength from the fact that it was the US, consistently standing for the interests of trade liberalisation in selected sectors, that drove the process that concluded the Uruguay Round. Given this US dominance, it does not seem unreasonable to go even further and suggest that, in its final form, the institution of the WTO serves the cause of the (sectorally selective) free traders, rather than free trade serving the cause of greater institutionalism in multilateral trading relations. If this is so, then we need to ask: what motivated the free trade warriors of the late twentieth century? A considerable influence on the architects of the WTO’s doomed forerunner, the International Trade Organization, and by default the GATT, was the conviction that liberalised trade and consequent economic interdependence would reduce political conflict and make a repeat of the carnage of the First and Second World Wars more unlikely (Penrose, 1953). In this, they showed themselves to be the intellectual heirs of Adam Smith. There does not seem, however, to be any obvious connection between this laudable objective and the transition from GATT to the WTO. Certainly, the carnage of war – if not world war – continued unabated during the second half of the twentieth century. However, none of the armed conflicts of this period seem obviously trade-related (Bello, 2000: 104). This may, or may not, mean that the GATT was doing a good job in this respect. It does, on the other hand, seem to undermine an argument that the movement to a new trade regime was stimulated by the desire to secure more peaceful multilateral political relations. Further, it is notable that the period since the establishment of the WTO has not witnessed a particular diminution in war. On the contrary, humanity has managed to enter the new century with an apparent appetite to relive many of the horrors of the old one. It is, therefore, difficult to place much emphasis on the prevention of war as a reason for the transition from GATT to the WTO. Casting around for other explanations, it is notable that, rhetorically at least, the late-twentieth-century trade warriors placed considerable emphasis on the economic benefits of trade liberalisation. Leaving aside the questions that have been raised about these above and (especially) the question of the distribution of these benefits, it seems that the WTO was not essential to the expansion of world trade. As Bello remarks, on the basis of the WTO’s own statistics ‘[w]orld trade did not need the WTO to expand 87fold between 1948 and 1997, from $124 billion to $10,772 billion’ (Bello, 2000: 104, citing WTO, 1998).


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Rather, as an explanation of the emergence of the WTO, it seems much more likely that the WTO was a response to that economic interdependence to which GATT had so successfully contributed. That is, the WTO was a response to the rise of so-called globalization in the form of corporate capitalism. Globalization as a vehicle of corporate capitalism was considerably inhibited by a range of non-tariff measures introduced after the ‘exogenous shocks’ (Hoekman and Kostecki, 2001: 43), including the collapse of the fixed exchange rate system established under the auspices of the Bretton Woods institutions and the OPEC crisis, of the 1970s and 1980s (Odell and Eichengreen, 2000: 187–9; Hoekman and Kostecki, 2001: 41–4). Hoekman and Kostecki note that ‘[m]atters were compounded by international political developments such as détente that reduced the primacy of foreign policy considerations in maintaining cooperation in trade’ (ibid: 43). The rise of the WTO, therefore, with its emphasis on the removal of non-tariff barriers, is a response to the interruption of the process of corporate-led globalization.

6.

TOWARDS TURBULENCE?

Perspectives emerging from structuralist theory tend to reinforce the idea of an interdependent relationship between globalization, corporate capitalism and the emergence of the WTO as an institution. Sociological institutionalism (Nichols, 1998: 482), for example, which focuses on the interaction of individual actors and institutions in the light of the political, social and cultural environment in which those interactions take place, posits ‘that institutions are created or changed because the new institution will confer greater social legitimacy on the organisation or its individuals’ (ibid: 485). Indeed, this concern with legitimacy in the context of the wider cultural, political and social milieu is a key feature of sociological institutionalism. From this theoretical perspective, the mutually constitutive relationship between globalization and international organisations like the WTO can be explicitly recognised. It is also apposite to note that it is not merely the case that globalization has a legitimating effect on the WTO. The constitution of legitimacy is mutual, so that the WTO has a legitimating effect on globalization. That is, there is a compelling argument that the legalisation and juridicialisation of the trade regime through the framework of the WTO is a legitimisation of the processes of globalization (Davis and Neacsu, 2001: 737; Picciotto, 2003: 386; cf Teubner, 1997). Remaining within the structuralist tradition, post-Marxist accounts tend to build upon this type of approach by taking a longer and more nuanced


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view of the relationship between the structure of the world economy and the emergence of legal institutions. Specifically, these accounts draw attention to a range of structures of varying depth and longevity. In the present context, at the deep and long end, the structural development of capitalism is relevant to an account of the origins of the WTO. Occupying a median position is the birth of the Westphalian system and its relationship to the structure of international trade relations. The post-World War Two bifurcated system of international law, especially its management of international economic relations and the associated rise of corporate capitalism, occupies significant space at the shallower and shorter end of the spectrum. The structural role of capitalism and its relationship to international trade relations are the key components of Arrighi’s (2002) argument that capitalism is a history of cycles of capitalist accumulation dominated by a leading agency of capital accumulation in the form of a state. The current dominant agency of capital accumulation is, of course, the US. The current cycle is the fourth of those identified by Arrighi and was preceded by the Genoese, Dutch and British dominated cycles. For the British dominated cycle, the so-called signal point, when the profits derived from trade became so poor that money was switched from trade to investment capital, came as the result of the intensification of competition from Germany and the US consequent upon the depression of 1873 to 1896. For the Americans, the signal point arrived after a similar depression in the 1970s and 1980s, when it was economically challenged by Japan. These signal points and their accompanying switches are autumnal and generally inaugurate a period of economic turbulence. They do not, however, spell the immediate end of the dominant regime of capital accumulation. Further complicating the neatness of the successive cycles of capitalist accumulation is Arrighi’s insight that capitalist power intensifies with each cycle. It is this complication that causes Arrighi to doubt whether the cycles of accumulation can continue indefinitely (Arrighi, 2002: 330). Arrighi suspects that in the post-switch phase of US capitalist dominance we may be entering into the terminal stage of capitalism. In the current turbulent, and possibly terminal, stage Arrighi argues that a combination of structural changes in the form of ‘the withering away of the modern system of territorial states as the primary locus of world power’, ‘the internalization of world-scale processes of production and exchange within the organizational domains of transnational corporations’ and ‘the resurgence of suprastatal world financial markets’ have created a pressure to relocate state authority (Arrighi, 2002: 331; see also Jayasuriya, 1999: 443):


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In recent years, the most significant pressure to relocate authority upward has been the tendency to counter escalating systemic chaos with a process of world government formation. In a wholly unplanned fashion, and under the pressure of events, the dormant suprastatal organizations established by the Roosevelt administration of the closing years of the Second World War have been hurriedly revitalized to perform the most urgent functions of world governance which the US state could neither neglect nor perform single-handed . . . But the problems that have driven it to seek inter-statal forms of world governance remained. (Arrighi, 2002: 331)

Following this account it might be argued that the creation of the WTO as an institution can be located as part of the escalating process of world government formation. This might account for the otherwise somewhat perplexing transition in the governance of the world trading system from agreement to institution. Going further and reflecting on the nature and ideology of the WTO, do these represent an attempt on the part of the US, in its death throes as the dominant agency of capitalist accumulation, and its allies to control interstate competition for mobile capital? Certainly, the chronological coincidence between Arrighi’s post-switch phase of the US cycle of capital accumulation and the Uruguay Round negotiations is striking, as is the fact that the two new Uruguay Round agreements, the TRIPS Agreement and the GATS, are quite conceivably conceptualised as being essentially concerned with investment (Macmillan, 1999, 2005: 178–80). Added to this, a drive to control competition for mobile capital might explain the obsession with the conclusion of a global investment agreement (Macmillan, 1999, 2004: 77–9). Might we go even further than this and argue that at a more general level, during the turbulent post-switch phase, the international community turns to international (economic) law-making, perhaps as an alternative to war-making, in order to manage conflict? Certainly, the post-switch period of the British period of dominance was characterised by the intensive making of trade treaties (McGillivray et al., 2001). The multilateral free trade regime that was established in 1860 by the AngloFrench Treaty of Commerce was a dead duck by the end of the 1870s as a result of German protectionism (Arrighi, 2002: 55). From around this time on, as the Germans vied with the British for economic and political dominance (and the Americans waited in the wings to reap the benefits of their own expansion), the United Kingdom promoted or participated in a range of treaty obligations designed to maintain its pre-eminent position. While not all the ‘trade’ treaties are centrally concerned with the control of investment, it is possible to discern a new concern with aspects of investment during this period. In particular, arguably as a result of the patent law policies adopted by the German government, the European


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nations turned their attention to the conclusion of multilateral treaties in relation to intellectual property. The Paris Convention for the Protection of Industrial Property (1883) and the Berne Convention for the Protection of Literary and Artistic Works (1886), the two founding conventions of modern intellectual property law, were negotiated in this period. Of course, it may be argued, as the dominant discourse of intellectual property still has it today, that these conventions were concerned with international innovation not investment. But, looking at the corporate stranglehold over intellectual property today, it seems difficult to contest the argument that it is as much about investment as it is about anything else. If this phase of multilateral intellectual property law-making reflected a new concern about international investment, then we should not be surprised to see exactly the same concerns manifested in the Uruguay Round. This would explain the rather anomalous position of the TRIPS Agreement within the suite of WTO agreements (Bhagwati, 2002: 75–6), along with the privileged position of intellectual property obligations in the current spate of US bilateral investment treaties (Drahos, 2002). Further, as has already been noted, the joined hands of the US government and various powerful corporate sectors were fundamental to the existence and shape of the TRIPS Agreement (Blakeney, 1996: ch. 1; Sell, 2003). But it is particularly interesting to note that when the US government went into battle for the TRIPS Agreement it was not just advancing the interests of its corporate sector. It was also seriously concerned about the trade deficit and Japan’s economic potential (Sell, 2003: ch. 4) – the very indicators that it had reached its signal point or autumnal moment as the dominant agency of capital accumulation. Of course, the implications of this account are not happy. The unprecedented phenomenon of almost one hundred years of European peace from the time of the Treaty of Vienna in 1815 was shattered by the onset of the First World War – the moment when the great European powers turned from law to war. The next thirty-odd years of history marked an epoch of astounding horror that may have been focused on Europe but was certainly not confined to it. At the end of this period at least one thing was clear: the time of British dominance was past and the US was calling the shots. The final turbulent years of the British cycle had coincided with an attempt to put in place a comprehensive system of world economic government. In the same way, perhaps the current attempt to avert systemic chaos through world government formation, including the establishment of the WTO, is doomed as we enter yet another period of international turbulence. Might this projected death of the WTO mark the moment in which the process of decolonisation is truly completed?


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9.

Holistic approaches to development and international investment law: the role of international investment agreements Peter Muchlinski*

1.

INTRODUCTION

This chapter discusses the contribution made by ‘international investment law’ to the process of economic and social development in developing countries. This area is based on the myriad of international investment agreements (IIAs), especially bilateral investment treaties (BITs), which have existed in their broad current form for at least 50 years. In that time they have been seen as vehicles for development so far as they provide for improvements in the regulatory environment that could, in turn, facilitate the attraction of new foreign investment. Such agreements are said to secure the legitimate expectations of investors for a stable, transparent and predictable investment environment. More recently, IIAs have been subjected to extensive interpretation in arbitral awards as a result of the sharp increase in investor–state disputes under such treaties in the first years of the twentyfirst century (see UNCTAD, 2009b). This has led to the development of a new ‘international investment law’.1 Concerns have been expressed as to the adverse effects of such agreements, and how they have been interpreted, on

* Professor of International Commercial Law, School of Law, School of Oriental and African Studies, London, UK. 1 This has led to the production of many recent works on international investment law. Prior to 2007 there was in effect only one major text dedicated to this subject, Sornarajah (2004) which first came out in 1994, and a section in the author’s first edition of his treatise Multinational Enterprises and the Law (Muchlinski, 1995: Part III; see now 2007b: Part IV). Since 2007 we have: McLachlan et al. (2007); Dolzer and Schreuer (2008); Dugan et al. (2008); Muchlinski et al. (2008); Subedi (2008); Binder et al. (2009); Newcombe and Paradell (2009). A remarkable explosion of expert literature! 180


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the balance of rights and duties between investors and host and home countries. It is the purpose of this chapter to examine such concerns. In particular it has been argued that investors’ interests are too readily protected at the expense of other significant social values which can only be secured through effective governance. Indeed it is arguable that investors’ legitimate expectations need to be delimited by reference to the social context in which they operate (see Muchlinski, 2008: 640–41). Accordingly, new generations of IIAs may have to provide for a revised balance of rights and responsibilities for investors alongside the already existing responsibilities of host states. In addition, home states may have responsibilities to ensure adequate flows of investment to developing states and to police the behaviour of their investors. A new approach to IIAs is becoming evident in some more recent model treaties and in the Canadian based International Institute for Sustainable Development (IISD)’s Model International Agreement on Investment. This will be used in Section 3 to illustrate how the above concerns can be placed on a more legal footing. Before this, however, Section 2 will set the scene through an examination of the concept of ‘development’ as it appears in relation to international investment law. A narrow economic focus may be inadequate to grasp the rich assortment of factors that may contribute to ‘development’. Indeed a wider concept of development, one that is both social and economic, may be required so as to capture the various discourses that seek to reform existing IIAs where the idea of corporate social responsibility and home country responsibility for ensuring development-friendly investment is prominent.

2.

THE CONCEPT OF ‘DEVELOPMENT’ IN INTERNATIONAL INVESTMENT LAW

In general IIAs do not refer to the concept of development in any detail. IIAs that do refer to development will usually do so in the Preamble. For example the Preamble of the US–Rwanda BIT (2008) recognises ‘that agreement on the treatment to be accorded such investment will stimulate the flow of private capital and the economic development of the Parties . . .’. The context is clearly that of stimulating investment flows and it stems from the greater economic co-operation between the contracting parties under the BIT itself (US–Rwanda BIT, 2008). The treaty is, as such, silent on any social aspect of development. However the Preamble does stress the need to achieve the economic objectives of the treaty in a manner consistent with the protection of health, safety and the environment and the promotion of consumer protection


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and internationally recognised labour rights. This is backed up by ‘best efforts’ clauses against lowering environmental and labour standards as an inducement to investment (ibid: Art. 12, 13). Some agreements link technology transfer with human development,2 while other agreements stress that development should be sustainable but there are few examples.3 Indeed one of the most significant examples, the draft Norwegian Model BIT of 2007, has been abandoned.4 Thus IIAs say little about development save for generally accepting that a quantitative increase in foreign investment equates with development. This stress on the quantitative aspect of investment for development is reinforced by the predominant use of a broad, asset-based definition of investment in IIAs. There is no reference to development concerns in such definitions (for examples see further UNCTAD, 2007: 8–10). On the other hand some recent arbitral awards have considered whether development concerns should affect their interpretation of whether an ‘investment’ has taken place for the purposes of establishing the jurisdiction of an arbitral panel under the International Centre for Settlement of Investment Disputes (ICSID). According to certain decisions on jurisdiction, for an arrangement to qualify as an ‘investment’ it should have ‘a certain duration, a regularity of profit and return, an element of risk, a substantial commitment and . . . it should constitute a significant contribution to the host State’s development’.5 The contribution to development requirement may be open 2 See Brunei–Darussalam–Republic of Korea BIT 2000: ‘Recognising the importance of the transfer of technology and human resources development arising from such investments . . .’ (cited in UNCTAD, 2007: 4). 3 One such reference can be found in the Preamble to the Investment Agreement for the CCIA: Legal Tool for Increasing Investment Flows within the COMESA: ‘REAFFIRMING the importance of having sustainable economic growth and development in all Member States and the region through joint efforts in liberalising and promoting intra-COMESA trade and investment flows . . .’(COMESA, 2007: 1, original emphasis). 4 The Preamble to the Norwegian Model states inter alia: ‘Recognising that the promotion of sustainable investments is critical for the further development of national and global economies as well as for the pursuit of national and global objectives for sustainable development, and understanding that the promotion of such investments requires cooperative efforts of investors, host governments and home governments . . .’ (see http://ita.law.uvic.ca/investmenttreaties.htm (accessed 25 September 2009)). The Draft Model Agreement was abandoned due to the polarisation of views upon it, with business interests fearing it did not protect investors enough and civil society groups fearing that it would restrain governments’ ability to regulate in the public interest (see Vis-Dunbar, 2009a). 5 Joy Mining Machinery Limited v. Egypt, para. 53; Salini Construtorri S.p.A. and Italstrade S.p.A. v. Morocco, para. 52; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, paras 122–38.


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to criticism as it introduces an element of motivation into the definition. This may not be relevant if the given definition of ‘investment’ in the BIT is assetbased.6 Nonetheless some tribunals have used the development element to deny jurisdiction over a dispute on the ground that the transaction involved failed to make a significant contribution to the development of the host country.7 In general, the development element should be met in most cases where the first three elements are shown to exist (Dolzer and Schreuer, 2008: 69). More recently, the validity of introducing the development criterion as a jurisdictional requirement has been criticised by the Annulment Committee in the case of Malaysian Historical Salvors v. Malaysia.8 The question at issue was whether the salvage contract between the Government of Malaysia and Malaysian Historical Salvors was an ‘investment’ for the purposes of Article 25(1) of the ICSID Convention (2006), which governs the jurisdiction of an ICSID Tribunal.9 The original sole arbitrator held that it was not, on the ground that, ‘while the Contract did provide some benefit to Malaysia’, there was not ‘a sufficient contribution to Malaysia’s economic development to qualify as an ‘investment’ for the purposes of Article 25(1) or Article 1(a) of the BIT’.10 The Annulment Committee disagreed. They felt that the arbitrator had failed to take into account the fact that Article 1 of the BIT between the United Kingdom and Malaysia, under which the claimant – a British majority shareholder in the Malaysian incorporated contracting company – brought his claim, contained a broad asset-based definition of investment whose purpose was to give a wide range of investments protection under the BIT.11 Instead the 6 Saluka Investments BV (The Netherlands) v. The Czech Republic, paras 209–11. 7 See Malaysian Historical Salvors, SDN, BHD v. Malaysia, Award on Jurisdiction; and Patrick Mitchell v. Democratic Republic of the Congo, Decision on the Application for Annulment of the Award, paras 25–33 and 39. 8 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Annulment Decision. 9 Article 25(1) of the ICSID Convention (2006) provides that: ‘[t]he jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State . . .) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre’. 10 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Award on Jurisdiction, para. 143. 11 By Article 1: ‘For the purpose of this Agreement (1)(a) ‘investment’ means every kind of asset and in particular, though not exclusively, includes: . . . (ii) shares, stock and debentures of companies or interests in the property of such companies; (iii) claims to money or to any performance under contract having a


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sole arbitrator used the approach taken in earlier awards to the interpretation of ‘investment’ under Article 25(1) of the ICSID Convention as the basis for interpreting the same term in the BIT as well. According to the Annulment Committee, the contract was an investment as it was a ‘one of a kind of asset’ and, in accordance with the definition in Article 1 of the BIT, there was ‘a claim to money and to performance under a contract having financial value’.12 Furthermore, ‘the contract involves intellectual property rights; and the right granted to salvage may be treated as a business concession conferred under contract’.13 The Annulment Committee went on to criticise the elevation, by the sole arbitrator, of the development criterion as a jurisdictional requirement under the ICSID Convention. To do so would have the effect of excluding small contributions, and contributions of a cultural and historical nature. It also failed to take account of the preparatory work of the ICSID Convention and, in particular, reached conclusions not consonant with the travaux in key respects, notably the decisions of the drafters of the ICSID Convention to reject a monetary floor in the amount of an investment, to reject specification of its duration, to leave ‘investment’ undefined, and to accord great weight to the definition of investment agreed by the Parties in the instrument providing for recourse to ICSID.14

Accordingly, the majority of the Annulment Committee concluded that the sole arbitrator had manifestly exceeded his powers in making this decision. The majority decision was strongly criticised by Judge Mohamed Shahabuddeen in his dissenting opinion. He felt that the ICSID Convention set certain ‘outer limits’ to the meaning of an ‘investment’ based on the fact that a major aim of the Convention was to encourage the economic development of member countries by way of investment. Thus it was perfectly reasonable to read that term as being bound by a requirement that the investment should contribute to the economic development of the host country. Judge Shahabuddeen stated: In this connection, it is possible to conceive of an entity which is systematically earning its wealth at the expense of the development of the host State. However much that may collide with a prospect of development of the host State, it

financial value; (iv) intellectual property rights . . . ; (v) business concessions conferred . . . under contract . . .’. 12 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Annulment Decision, para. 60. 13 Ibid. 14 Ibid: para. 80.


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would not breach a condition – on the argument of the Applicant. Accordingly, such an entity would be entitled to claim the protection of ICSID. Host States which let in purely commercial enterprises would have something to worry about. Correspondingly, ICSID would seem to have lost its way: it is time to call back the organization to its original mission.15

That original mission was, in the Judge’s view, to provide a dispute settlement mechanism for investments that made a positive contribution to the economic development of the host country. Accordingly it was Article 25(1) that governed the definition of investments for the purposes of taking the dispute to ICSID, not the terms of the BIT. Otherwise the parties could determine the jurisdiction of ICSID and Article 25(1) would be rendered meaningless.16 The disagreement between the majority of the Annulment Committee and Judge Shahabuddeen encapsulates the dilemma in international investment law as to whether it is a law of investment protection, pure and simple, in which case the notion of investment must be given as wide a compass as possible so that access to dispute settlement procedures is made easier for the investor, or whether it is a law of international economic co-operation, in which case the need for a balancing of the private interests of the investor and the public interests of the host country may be essential. On this approach the requirement of a significant contribution to development arising out of the investment may be seen as a key jurisdictional prerequisite. It remains to be seen whether ICSID Tribunals will follow the majority position in Malaysian Salvors and ignore the development criterion or continue to apply it. Another context in which arbitral tribunals have discussed the concept of development concerns the question whether the level of development of the host country can act as a mitigating circumstance in relation to a claim made by the investor. Some tribunals have taken into account exceptional circumstances that might affect the content of the investor’s legitimate expectations as to treatment.17 However the general trend has been not to take into account the developing host country’s level of development (see further Gallus, 2005). On the other hand, in American Manufacturing and Trading, Inc. v. Zaire the issue was considered relevant to the 15

Malaysian Historical Salvors, SDN, BHD v. Malaysia, ‘Dissenting Opinion of Judge Mohamed Shahabuddeen’, Annulment Decision, para. 22. 16 Ibid: paras 43–7. 17 See for example CMS Gas Transmission Company v. The Argentine Republic, where the tribunal held that account should be taken of the effect of abnormal conditions, prompted by the economic crisis in Argentina, in assessing the scope of protection afforded to the investor by an investment treaty (para. 244).


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determination of compensation, where the claimant was found to have been aware of local conditions (para. 7.14–7.15). Discussion of ‘development’ in arbitral awards is therefore very limited. By reason of the narrow economic scope of the treaties that tribunals have to apply, they inevitably focus only on economic development. This is also the case in the academic literature that considers how far IIAs contribute to development. A number of studies have been made as to the correlation between the conclusion of, in particular, BITs and increases in foreign direct investment (FDI) flows.18 Historically the aim of BITs has been to strengthen the protection of foreign investors, especially in developing and transitional country markets, in return for increased inward foreign investment flows. However the empirical evidence is mixed. Some studies find a positive correlation between the conclusion of BITs and increases in investment flows (notably Neymeyer and Spess, 2005, 2009: 225; Salacuse and Sullivan, 2005, 2009: 109); others do not (see in particular UNCTAD, 2009e, originally 1998a: ch. IV; Hallward-Driemeier, 2009, originally 2003; Rose-Ackerman, 2009). This is perhaps to be expected as it is difficult to consider one part of a wider regulatory framework in isolation. Equally it may be hard to exclude other factors that may affect the size and origin of inward FDI flows. The domestic political, economic and institutional environment may be as important in determining inward investment flows as are individual BITs (Rose-Ackerman, 2009: 321), as might the economic sector in which investment is made (Aisbett, 2009: 423). Thus, there is still no incontrovertible evidence that BITs will deliver increased FDI flows. Yet developing host countries continue to sign up to them even though there are clear sovereignty and welfare costs involved, given the responsibilities host countries assume concerning the protection of investor rights and given the increased recent risk of investor–state arbitration resulting in an award of damages (see further Sauvant and Sachs, 2009: xli; Guzman, 2009). The true reasons for concluding BITs are many and varied, ranging from the ‘state visit’ treaty – where something concrete has to come out of such a visit and the signing of a BIT may be such a thing – to an indication that the host country is willing to provide a good regulatory environment for FDI. However, the enhancement of economic development through increased FDI flows may not be the most important of these reasons nor the most likely consequence of the signing of a BIT. So far the discussion has emphasised the economic aspects of development, largely because IIAs tend to define development in that light – in so

18 All of the major recent empirical studies on the effects of BITs on investment flows are brought together in Sauvant and Sachs (eds) (2009: Part II).


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far as they offer any contribution to this concept. However this chapter argues that a wider, socially rooted conception of development is needed to understand the true impact of IIAs on the communities to which these agreements relate. That this approach should be taken can be justified by reference to contemporary thinking on the meaning of ‘development’. According to Amartya Sen (1999: 35) a distinction can be made between two attitudes to development: One view sees development as a ‘fierce’ process, with much ‘blood sweat and tears’ – a world in which wisdom demands toughness. In particular, it demands calculated neglect of various concerns that are seen as ‘soft-headed’ [including] social safety nets that protect the very poor, providing social services for the population at large, departing from rugged institutional guidelines in response to identified hardship and favouring – ‘much too early’ – political and civil rights and the ‘luxury’ of democracy . . . This hard-knocks attitude contrasts with an alternative outlook that sees development as essentially a ‘friendly’ process. Depending on the particular version of this attitude, the congeniality of the process is seen as exemplified by such things as mutually beneficial exchanges (of which Adam Smith spoke eloquently), or by the working of social safety nets, or of political liberties, or of social development – or some combination or other of these supportive activities.

Sen is persuaded by the latter approach, from which he builds his thesis that development can only occur as a process of expanding ‘the real freedoms that people enjoy’ (ibid: 36). Such freedoms include the provision of elementary capabilities for life but also run to political freedoms, access to economic facilities, social opportunities such as access to education or health care, transparency guarantees allowing for freedom to deal with one another in conditions of disclosure and lucidity, and protective security based on essential welfare support against abject misery (ibid: 38–40). Not only Sen but others, including Joseph Stiglitz (1998b, 2002a: ch. 9) and Jeffrey Sachs (2001), see development as a holistic process including not only economic growth but also societal transformation along the lines suggested by Sen. What are the implications of this approach to the further evolution of international investment law? Two points may be made. First, international investment law exists within the wider framework of public international law and should be informed by its general principles (see further McLachlan, 2008). One such principle is the duty of international cooperation embodied in Article 56 of the UN Charter.19 This duty is given substance by Article 55 of the Charter (UN, 1945) which states: 19

By Article 56: ‘All Members pledge themselves to take joint and separate action in co-operation with the Organization for the achievement of the purposes set forth in Article 55’ (UN, 1945).


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With a view to the creation of conditions of stability and well-being which are necessary for peaceful and friendly relations among nations based on respect for the principle of equal rights and self-determination of peoples, the United Nations shall promote: a. higher standards of living, full employment, and conditions of economic and social progress and development; b. solutions of international economic, social, health, and related problems; and international cultural and educational cooperation; and c. universal respect for, and observance of, human rights and fundamental freedoms for all without distinction as to race, sex, language, or religion.

The duty of co-operation between UN members is rooted in a wider conception of development such as that advocated by Sen. That duty can extend to relations based on IIAs in that they are treaties based in international law and should reflect its policies, though, as shown above, this is not made expressly clear in many existing IIAs. Given the list of issues covered by the duty in Article 55, it is clear that home and host countries could and, indeed, should co-operate to bring about an investment process and regulatory regime that seeks, as far as possible, to embody these wider social goals. This may require the development of certain new duties of cooperation on the part of home countries, in addition to the existing duties of host countries to protect investors and their investments, in new IIAs. Second, the wider conception of development may require certain obligations from private investors. In this regard it should be noted that the UN Secretary-General has appointed a Special Representative on Business and Human Rights, Professor John Ruggie. In his work Ruggie has made clear that corporations have duties to respect human rights in the course of their operations and states have duties of protection (for the most recent restatement of this position see Ruggie, 2009). In his 2008 Report to the Human Rights Council, for example, the UN Special Representative made clear that the failure of companies to meet their responsibility to respect human rights can subject companies to the courts of public opinion – comprising employees, communities, consumers, civil society, as well as investors – and occasionally to charges in actual courts. Whereas governments define the scope of legal compliance, the broader scope of the responsibility to respect is defined by social expectations – as part of what is sometimes called a company’s social licence to operate. (Ruggie, 2008: para. 54)

Ruggie clearly sees a social context for the operations of corporate investors in host countries. This echoes numerous ‘soft law’ instruments that also extend social responsibilities to corporations, including responsibilities based on the concept of sustainable development. Thus the OECD


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Guidelines for Multinational Enterprises state as one of their General Policies: Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders. In this regard, enterprises should: 1. Contribute to economic, social and environmental progress with a view to achieving sustainable development. (OECD, 2000: 14)

Such statements could of course be disregarded as irrelevant to the interpretation of IIAs, and, on strict cannons of interpretation, they most probably are unless the treaty in question actually refers to corporate obligations. Thus in relation to investors, whether corporate or natural persons, new IIAs may have to include language of this kind so as to make certain that the growing body of standards of international corporate social responsibility is not ignored in the context of IIAs. The question of home country duties and investor duties under new generation IIAs is an issue that naturally emerges from current discourses on international investment law. These are not confined to the discourse of practitioners of investment arbitration or of academic commentators on that process. The discourse of international investment law has always been much wider than that. Indeed it is to be hoped that the current fashion for litigated solutions to investor–state disputes is no more than that and that a narrow focus on investor protection alone does not dominate the field. As noted in the Final Report of the International Law Association (ILA) Committee on the International Law on Foreign Investment: The rise in investment arbitration in the opening decade of the 21st century has pushed international investment law towards a more litigious character. While this may be a welcome and interesting development for international lawyers, it has to be asked whether this field should take on such a character. Given that the main aim of the parties to foreign investment contracts is to offer economic development for the host country in return for a reasonable rate of profit for the investor, disputes should not form the ‘leitmotif’ of this subject. Rather co-operation and long term collaboration should play this role. Indeed co-operation and collaboration have been the principal characteristics of the field for many years and it is to be hoped that it will continue to operate in such a fashion. (International Law Association Committee on the International Law on Foreign Investment, 2008: 799)

Indeed the ILA Committee’s Report also notes that a balancing of rights and obligations between the main actors could be required, given that the aim of international investment law is ‘to allow host countries to attract and to benefit from foreign investment and for investors to enjoy


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a transparent, secure and predictable investment environment’ (ibid: 798). The Committee describes international investment law as: a field that combines both commercial and public law concerns and requires a balancing of rights and obligations to ensure that these complementary aims are achieved. This may require the highlighting of the social and economic consequences of investment activity upon host countries, as through increased awareness of the need to ensure that corporate social responsibility standards are respected by investors, through the possible introduction of new investor and home country obligations in new generations of agreements, and through the clarification of the scope of the host country’s right to regulate alongside the existing rights of investors for protection of their assets. Equally a more development oriented approach may be needed. (ibid: 798–9)

How such a rebalancing should work out in new generation IIAs is the subject of the next section of this chapter.

3.

RECALIBRATING IIAs20

The recalibration of IIAs to achieve greater balance between the rights and obligations of the main stakeholders in the investment process will be hard to operationalise given the general absence, at present, of a political will to change such agreements substantially. Apart from certain civil society groups and some academics few are actively engaged in such a debate.21 Of these one body deserves special mention. The Canadian based IISD has put forward a draft IIA which seeks to redress the balance of rights and responsibilities between the host country and the investor to ensure that the latter also carries a measure of responsibilities (see Mann et al., 2006; for the Model Agreement see Mann et al., 2005. See further, Mann et al., 2006: 84; UNCTAD, 2003a: ch. VI ). This model agreement will be referred to below in more detail. A further point to note by way of introduction to this section is that not only host countries, investors and home countries should be considered stakeholders in the investment process but also the local communities in which investment takes place. So much is clear from the wider approach to development outlined above. Accordingly any recalibration of rights and obligations for investors and home countries will need to be undertaken

20

This section of the chapter draws on Muchlinski (2007a, 2007c). For example the views of a group of academics at Columbia Law School calling for President Obama to initiate a review of IIAs along these lines (see VisDunbar, 2009b). 21


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in this context. Under international law the task of safeguarding local community interests will fall on the host country. Thus its approach to the issue of home country and investor obligations will be important. Before the specific issues of investor and home country obligations are discussed, given the abovementioned international duty for UN members to co-operate in the pursuit of certain key social and developmental goals, it is interesting to note how far the UN itself has come in advocating reform of IIAs. I.

The Role of the UN

The principal body responsible for discussion of IIAs is UNCTAD.22 In recent years it has evolved the concept of ‘flexibility for development’ as a means of dealing with the need to balance the different interests of stakeholders in the investment treaty universe. The risk that IIA provisions will restrict national policy space and the sovereign right to regulate has caused UNCTAD to consider how this possibility could be mitigated (see UNCTAD, 2003a: ch. V). This is especially the case for developing countries that may have greater difficulties than developed countries in opening up their economies to the full force of global competition. According to UNCTAD, in order to reap the full benefits from FDI, the developing host country may need to supplement an open approach to inward investment with further policies. In particular, it may need positive measures to increase the contribution of foreign affiliates to the host country through mandatory measures such as performance requirements and through the encouragement of desired action by affiliates through, for example, incentives to transfer technology and to create local research and development (R&D) capacity. Such policy measures entail a degree of regulation. This may involve some measure of intervention in the freedom of action of the foreign investor and controls over the manner in which the investment can evolve. Such regulatory instruments could infringe the investor protection provisions of IIAs. To avoid such an outcome in cases of legitimate, nondiscriminatory regulation, IIA provisions may need to offer a degree of flexibility for development (Muchlinski, 2007b: 98; see further UNCTAD, 2000b, 2004b: vol. 1, ch. 2). Such flexibility can be introduced by way of certain changes in approach to the drafting of IIAs, including development oriented preambular statements, a degree of special and differential

22 See generally the UNCTAD IIA programme, http://unctad.org/Templates/ StartPage.asp?intItemID=2310&lang=1 (accessed 9 September 2009).


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treatment for developing country parties to the agreement, substantive provisions drafted in a manner that allows for the recognition of special considerations for developing countries, including the use of exception clauses and variations in the normative force of certain obligations, and by the introduction of mechanisms through which development concerns can be articulated, such as intergovernmental commissions and interpretative mechanisms (see further UNCTAD, 2003a: ch. V, 2000b: Part Two). UNCTAD’s recommendations on flexibility in IIAs pertain to the drafting of the IIA but they do not mention the balance of rights and obligations between the parties. This is not to say that UNCTAD has ignored these issues. They are discussed in certain other research papers and in the World Investment Report 2003 (see in particular: UNCTAD, 2001c, also found in 2003a: ch. VI, and 2004b: vol. III, ch.22; 2001a: 55–61, also found in 2004b: vol. II, 148–50). However, this policy option is presented as one among many options. UNCTAD does not commit itself unequivocally to the advocacy of this position. While suggesting that future IIAs should contain commitments for home country measures, based on existing national experience of unilateral initiatives (UNCTAD, 2003a: 163), on the question of including measures addressed to corporate actors, UNCTAD says no more than that ‘good corporate citizenship – especially when it combines the interests of host countries and firms – deserves a careful examination in future IIAs’ (ibid: 167). Thus UN policy in this area still needs further development. The establishment of a regular UNCTAD annual expert meeting to discuss developments in IIA practice is a welcome development in this regard and it is hoped that it will become a significant voice in the recalibration process.23

23 See UNCTAD (2009a: 3): Multi-year Expert Meeting on Investment for Development . . .

8. Reconfirms UNCTAD’s role as the key focal point in the United Nations system for dealing with matters related to international investment agreements (IIAs), and as the forum to advance understanding of issues related to IIAs and their development dimension; 9. Endorses the suggestion that experts in the field of IIAs should meet annually for the purposes of collective learning and collective advisory services, involving all stakeholders in developing countries, with a view towards facilitating increased exchanges of national experiences and sharing best practices; 10. Welcomes the utilization of UNCTAD’s existing online IIA network as a platform for continued sharing of experiences and views on key and emerging issues; 11. Requests that UNCTAD, within its mandate, continue to analyse trends in IIAs and international investment law, and provide research and policy analysis on key and emerging issues, development implications and impact


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II.

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Investor Obligations

A good starting point for a list of applicable obligations comes from the OECD Guidelines for Multinational Enterprises section on ‘General Policies’, which offers what appears as an emerging international consensus on the social obligations of multinational enterprises (MNEs): Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders. In this regard, enterprises should: 1. Contribute to economic, social and environmental progress with a view to achieving sustainable development. 2. Respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments. 3. Encourage local capacity building through close co-operation with the local community, including business interests, as well as developing the enterprise’s activities in domestic and foreign markets, consistent with the need for sound commercial practice. 4. Encourage human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees. 5. Refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, financial incentives, or other issues. 6. Support and uphold good corporate governance principles and develop and apply good corporate governance practices. 7. Develop and apply effective self-regulatory practices and management systems that foster a relationship of confidence and mutual trust between enterprises and the societies in which they operate. 8. Promote employee awareness of, and compliance with, company policies through appropriate dissemination of these policies, including through training programmes. 9. Refrain from discriminatory or disciplinary action against employees who make bona fide reports to management or, as appropriate, to the competent authorities, on practices that contravene the law, the Guidelines or the enterprise’s policies. 10. Encourage, where practicable, business partners, including suppliers and sub-contractors, to apply principles of corporate conduct compatible with the Guidelines. 11. Abstain from any improper involvement in local political activities. (OECD, 2000)

As may be apparent from this wide-ranging list of issues, the precise classification of international corporate social responsibility (ICSR) standards is difficult as, potentially, the phrase could cover all aspects of corporate of technical assistance and capacity-building in this area, in accordance with paragraphs 149 and 151 of the Accra Accord.


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regulation. By contrast, the UN Global Compact contains a more specific set of standards. The Ten Principles on which the Global Compact is founded concern the areas of human rights, labour, the environment and anti-corruption. These are said to enjoy universal consensus and are derived from a number of significant international instruments.24 From the above, it is clear that social responsibility may take both an economic and a social and ethical dimension in that MNEs are expected to conduct their economic affairs in good faith and in accordance with proper standards of economic activity, while also observing fundamental principles of good social and ethical conduct (for a fuller discussion, see Muchlinski, 2008). If extensive provisions were to be included on all of the issues that could possibly come within the ICSR rubric, multilateral, regional or bilateral investment agreements would probably be impossible to adopt, let alone apply, given the extensive subject matter. There would also be the problem of institutional overlap, given that many of these matters are already being dealt with by specialised intergovernmental organisations or other specialist bodies. Thus the drafters of IIAs will have to think very carefully as to how corporate responsibility provisions should appear. Given the abovementioned problems, it is likely that corporate responsibility issues will be dealt with by means that do not seek to offer detailed provisions but, rather, provide for overall commitments to certain standards. This may be achieved in a number of ways. First a general commitment on the part of the signatory states to further the observance by corporate investors of corporate responsibility standards could be included in the preamble and/or in a specific substantive provision. Equally, where an issue is not yet fully developed, it can be expected that hortatory, best efforts provisions may be used. For example the European Free Trade Area–Singapore Agreement of 2002 includes a preambular paragraph, ‘REAFFIRMING their commitment to the principles set out in the United Nations Charter and the Universal Declaration of Human Rights’. A further example of the inclusion of a commitment to respect for human rights and other social issues can be found in Article 7.2.d of the revised COMESA Agreement on a Common Investment Area (COMESA, 2007). This enables the COMESA Committee for the Common Investment Area to consider and make: recommendations to the [COMESA] Council on any policy issues that need to be made to enhance the objectives of this Agreement. For example the development of common minimum standards relating to investment in areas such as: 24

See further http://www.unglobalcompact.org/ (accessed 9 September

2009).


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environmental impact and social impact assessments labour standards respect for human rights conduct in conflict zones corruption subsidies.

This is the first time that any investment agreement has expressly included human rights issues related to investment as a possible future working item under the agreement (see Mann, 2008: 10, from which the examples are taken). Second, international instruments and agreements that already contain a more extensive treatment of specific social responsibility issues could be incorporated as part of the new investment rules, in the manner that existing international minimum standards of treatment for intellectual property contained in the Paris and Berne Conventions were incorporated by reference into the TRIPS Agreement (see GATT, 1994b: Art. 2). A third possibility would be to follow the practice under NAFTA and use ‘side-agreements’ on specific social issues or to follow the precedent of the negotiations over the ill-fated MAI, where some delegations favoured appending the OECD Guidelines on Multinational Enterprises to the text of that agreement in a non-binding appendix (see Muchlinski, 2007b: 667). Whatever approach is taken, one matter remains of central importance. So long as investor–state tribunals have their subject-matter jurisdiction controlled by the contents of IIAs, then such agreements will need to have some form of reference to and/or inclusion of standards found in other international agreements and instruments so as to make clear their relevance and applicability to the interpretation and development of the IIA in question. The current situation, where the vast majority of IIAs remain silent on home country and corporate responsibilities, leaves open to doubt whether an international tribunal is required to take account of wider international obligations contained in other instruments concerning these actors. While there are some examples of investment tribunals referring to issues covered by other international agreements, including the issue of whether human rights standards can govern the outcome of an investment dispute,25 a clear indication in an IIA that other instruments apply is desirable in the interests of clarity and procedural certainty.

25 See further Mann, 2008: 26–9 citing Maffezini v. Spain, para. 67 (EC environmental impact assessment); Parkerings-Compagniet AS v. Lithuania, section 8.3.1, and Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt (UNESCO World Cultural Heritage designation); Aguas Argentinas S.A.,


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It may be added that, as an international adjudicating body, an international investment tribunal is under a duty to apply international law, and that failure to do so may amount to an error of law capable of rendering the award ineffective, but such a conclusion may involve much dispute and further litigation. It would appear much better simply to develop a practice of reference by inclusion to relevant agreements outlining home country and corporate responsibilities. A possible approach to the inclusion of home country and investor responsibilities into IIAs is given by the IISD Model International Agreement on Investment for Sustainable Development (Mann et al., 2005). This agreement commits the parties, in the Preamble, to the adoption of a balance of rights and obligations as between the home and host countries and the investor. Accordingly it contains separate Parts dealing with the rights and obligations of each actor. In addition, existing investor rights are modified to take into account the rights of home and host states to regulate their activities. Part 3 contains key provisions concerning investor obligations. Article 11 of Part 3 begins with a general obligation of subjection to the laws and regulations of the host state; compliance with any formalities required by host state regulations as a condition of establishment; and provision of information required by the host state for purposes of decision-making. A ‘best efforts’ commitment to contribute to the host’s development objectives is also included. Articles 12 to 16 then detail more specific investor obligations. These include a pre-investment environmental and social impact assessment based on the more demanding of the host or home country law; a prohibition on participation in corrupt practices; a commitment to upholding environmental management systems in accordance with the ISO 14001 standard, human rights, and ILO labour standards; and a duty to comply with nationally and internationally accepted standards of corporate governance and corporate social responsibility. These provisions can be seen as relatively uncontroversial. They restate in effect what investors should already observe in terms of existing legal standards in national law and in international ‘soft law’ instruments such as the UN Global Compact. By contrast Article 17 adds a significant new obligation. It states: Investors shall be subject to civil actions for liability in the judicial process of the home state for the acts or decisions made in relation to the investment where

Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, para. 19 (on whether human rights standards can be invoked in an investment dispute); Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, para. 52. See further UNCTAD (2009c).


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such acts or decisions lead to significant damage, personal injuries or loss of life in the host state (Mann et al., 2005).

This provision seeks to institutionalise, at the level of an IIA obligation, the process of foreign direct liability litigation that has emerged during the last twenty years or so (on the meaning of foreign direct liability see, for example: Ward, 2001). Such litigation is brought by claimants located in the host country of a subsidiary against the parent company in home country courts where the subsidiary is alleged to have caused harm to victims of wrongful corporate acts, for which the parent company should be held responsible by reason of its control over the subsidiary. The major problems arising out of such litigation have evolved out of the corporate separation between the parent and its subsidiaries. First, this separation can create jurisdictional barriers to the litigation. This is so because the parent is formally absent from the host country jurisdiction, even though it may operate there in fact through its subsidiary. Second, corporate separation can allow for the avoidance of liability for the acts of the subsidiary by reason that the acts of the subsidiary are not, in legal terms, the acts of the parent. In an apparent effort to counter such problems, the IISD Model Agreement contains, in Part 6 on Home State Rights and Obligations, a duty on the part of home states to ensure that their legal systems and rules allow for, or do not prevent or unduly restrict, the bringing of court actions on their merits before domestic courts relating to the civil liability of investors for damages resulting from alleged acts or decisions made by investors in relation to their investments in the territory of other Parties.26

This provision would appear to require reform in the national laws of the Parties. In particular, the effects of the legal separation of companies in a group would need to be altered so as to allow for jurisdiction and for a finding of liability based on control. Whether states would be willing to do this is very much open to doubt. Indeed the trend in more recent years has been to narrow down the cases in which the corporate veil may be lifted and to restrict such cases to instances where the separation between the corporation and its owners is being used as a vehicle for fraud. Thus there is little 26

Mann et al. (2005: Art. 3.1). It goes on to specify the doctrine of forum non conveniens – whereby the court may decline jurisdiction over a case because it feels that another jurisdiction offers a more appropriate forum – in a footnote to the relevant provision as an example of a jurisdictional rule that can impede such litigation. On this, see further Muchlinski (2007b: 153–60).


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sympathy at the level of national law for a more liberal doctrine of corporate responsibility based on control (Muchlinski, 2007b: 308–13). By contrast the UN Special Representative on Business and Human Rights advocates the strengthening of national remedies for breaches of the corporate duty to respect human rights and even considers the possibility of establishing some sort of international review mechanism (Ruggie, 2009: paras 106–14). Finally, Part 3 of the IISD Model Agreement ends with a provision on dispute settlement (Mann et al., 2005: Art. 18). Unlike existing provisions which give to the investor an unconditional right to bring a claim based on an alleged breach of an IIA protection standard, the IISD Model introduces certain requirements based on investor compliance with key standards. Thus, breach of the anti-corruption obligation in Article 13 bars any dispute settlement rights for the investor. A failure to undertake the required pre-investment environmental and social impact assessment under Article 12 will not bar a claim but may mitigate or off set the merits of the claim of the amount of damages payable to the investor. The same is true where the investor is shown to have breached the main postestablishment obligations listed in Article 14 and the corporate governance obligations in Article 15. A further change from existing IIA dispute settlement provisions is an express right of action granted to the host or home state. This can arise as a result of a breach of the anti-corruption provision or for persistent failure on the part of the investor to observe its obligations under Articles 14 or 15. Furthermore, the host state may bring a counterclaim before any tribunal established pursuant to the Agreement.27 Finally, the right to bring an action against the investor, for breach of Part 3 obligations, before the courts of the home or host state on the part of one or other state is included. A further element in the IISD Model that is of significance to the recalibration of the balance of rights and obligations under an IIA concerns the host country’s ‘right to regulate’. According to one of the principal authors of the IISD Model Agreement, current formulations of such a right in an IIA tend to subject it to the requirements of investor protection under the IIA by use of qualifying language such as ‘consistent with

27 The COMESA Investment Area Agreement (2007) includes a specific provision allowing counterclaims against investors who initiate the investor–state process in Article 28.9: ‘A Member State against whom a claim is brought by a COMESA investor under this Article may assert as a defence, counterclaim, right of set off or other similar claim, that the COMESA investor bringing the claim has not fulfilled its obligations under this Agreement, including the obligations to comply with all applicable domestic measures or that it has not taken all reasonable steps to mitigate possible damages’.


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this Agreement’.28 As a result the provision tends to be ‘legally useless in terms of reinforcing the right to regulate’ (Mann, 2008: 19). To remedy this limitation the IISD Model Agreement formulates the right to regulate on the basis of a right of the host state to pursue its own development objectives and priorities, subject only to customary international law and general principles of international law. This right may be protected by way of express exceptions to the obligations of the Model Agreement, but where such exceptions are not taken, it is to be ‘understood as embodied within a balance of the rights and obligations of investors and investments and host states, as set out in this agreement, and consistent with other norms of customary international law’ (Mann et al., 2005: Art. 25(C)). So as to protect exercises of regulatory discretion under other treaties, the IISD Model adds that ‘bona fide, non-discriminatory measures taken by a Party to comply with its international obligations under other treaties shall not constitute a breach of this Agreement’ (ibid: Art. 25(D)). Finally, host states may, through their applicable constitutional processes, fully incorporate the Model Agreement into their own domestic law so as to make its provisions enforceable before domestic courts or other appropriate processes (ibid: Art. 25(E)). This provision is aimed at changing the nature of how the investor rights contained in an IIA impact upon the right to regulate. It makes those rights subject to the legitimate exercise of the right to regulate, rather than the other way round. However, the actual wording of the IISD provision leaves much room for speculation. In particular the reference to customary international law and general principles of international law, as an aspect of the process of interpreting the right to regulate, can leave important issues in the air. For example, how is the international minimum standard of treatment of aliens and their property to fit into this provision? Although it is an aspect of customary international law, it is also a highly contentious issue which not all states have accepted. Indeed IIAs exist in part because this standard is not universally accepted as customary law. Equally, general principles of international law may favour the protection of private property and contractual obligations as well as procedural fairness. In other words they may reinforce the investor’s rights and not subject them to regulatory control. Thus the reference to international law, while appearing to balance rights and obligations between state and 28

See Mann (2008: 19), citing Article 43 of the EFTA–Singapore FTA 2002 entitled ‘Domestic Regulation’ which states: ‘Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure consistent with this Chapter that is in the public interest, such as measures to meet health, safety or environmental concerns’ (see also Mann et al., 2006: 38).


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non-state actors, begs the question ‘which version of international law?’ or ‘whose international law?’ In practice it may be invoked precisely to do what the IISD draft seeks to avoid, namely, to subject the state’s right to regulate to investor rights. The main way around this problem would be to give the concept of sustainable development, which appears to qualify the reference to international law in the way that the IISD provision is drafted, a core meaning that seeks to reinforce the right to regulate over investor rights.29 In addition there is a catch-all reference to ‘other social and economic policy objectives’ which is very vague and open ended. It could mean that any regulatory policy at all can trump investor rights, thereby making the investor protection standards in the Model Agreement legally useless as they will always be subject to this overriding discretion. It appears that a provision on the right to regulate may have to take a more specific approach than that offered by the IISD. In this regard, recent US and Canadian Model BITs explain that non-discriminatory regulatory actions that are designed and applied to effectuate legitimate public welfare objectives, such as public health, safety and the environment, do not constitute expropriations except in rare circumstances.30 The Canadian model adds that such rare circumstances will exist where ‘a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith . . .’(Canada Model BIT, 2004: Annex B 13(1)). Both Models add that, in determining whether a regulatory act has an effect equivalent to expropriation, the economic impact of the act (though the mere loss of economic value in itself does not show that the act is an indirect expropriation), the extent of interference with legitimate investment backed expectations and the character of the act are all of significance. In addition, the most recent US BITs contain provisions asserting that it is inappropriate for host countries to seek investment through the lowering of environmental or labour standards, while the Canadian counterpart applies to health, safety and the environment.31 29

Article 25(b) of the IISD Model Agreement states: ‘In accordance with customary international law and other general principles of international law, host states have the right to take regulatory or other measures to ensure that development in their territory is consistent with the goals and principles of sustainable development, and with other social and economic policy objectives’ (Mann et al., 2005). 30 These paragraphs draw on Muchlinski (2007b: 693). See The Republic of Uruguay and the United States of America BIT (2005: Annex B); Canada Model BIT (2004: Annex B 13(1)). 31 The Republic of Uruguay and the United States of America BIT (2005: Art. 12, 13); Canada Model BIT (2004: Art. 11). The areas covered are: protection of human animal and plant life and health, compliance with laws not inconsistent


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The Canadian model is also notable for the inclusion of a general exceptions clause protecting the rights of the Contracting Parties to regulate in the fields mentioned by its terms. The clause follows the general pattern of Article XX GATT 1994 by listing areas in which regulation is consistent with the provisions of the BIT and adds a ‘chapeau’ requiring such regulation not to be arbitrary, discriminatory or a disguised restriction on trade and investment (Canada Model BIT, 2004: Art. 10). By contrast the US model reserves only measures aimed at the maintenance or restoration of international peace or security, or the protection of essential security interests (The Republic of Uruguay and the United States of America BIT, 2005: Art. 18). These provisions are by no means perfect answers to the balancing issue and they do rely heavily on a case-by-case analysis. That said, the introduction of a proportionality test would appear to be the only effective way of allowing balancing to occur in practice in that it avoids both the bias in favour of investor protection typical of first generation IIAs and the responsive bias towards the extensive protection of regulatory discretion exemplified by the IISD Model Agreement formulation. III.

Extending IIAs to Home Country Responsibilities

In its World Investment Report 2003, UNCTAD (2003a: 163) examined what types of home country responsibilities could be developed in relation to international investment. It asserted that dealing with home country measures ‘is a new but potentially important aspect of how to make the evolving structure of IIAs more development friendly’ and that this would be consistent with the call in the Doha Declaration for an investment framework that reflected in a balanced manner the interests of home and host countries. It concludes that this ‘suggests that future IIAs should contain commitments for home country measures, building on the experience to date’ (ibid). The experience referred to centres on unilateral efforts to assist in the promotion of development oriented investment by MNEs located in the home country. This can be achieved through the liberalisation of outflows, the provision of information on investment opportunities in host countries, encouraging technology transfers, providing incentives to outward investors and mitigating risk through investment insurance with the agreement, the conservation of living or non-living exhaustible natural resources, prudential financial regulation, monetary credit and exchange rate policies, essential security interests, the upholding of UN obligations and international peace and security interests, confidentiality laws, cultural industries and measures taken in conformity with WTO decisions.


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schemes (ibid: 155–6). In addition the courts of the home country could be used to bring corporate conduct to account, as already seen above, and home country laws and regulations could be used to control corrupt practices overseas undertaken by home based investors. These policy prescriptions find expression in the IISD Model Agreement. Part 6 covers all of the above. Article 29 deals with assistance and facilitation of foreign investment to developing and least developed countries. It states: (A) Home states with the capacity to do so should assist developing and leastdeveloped states in the promotion and facilitation of foreign investment into such states, in particular by their own investors. Such assistance shall be consistent with the development goals and priorities of the countries in question. Such assistance may include, inter alia: i) capacity building with respect to host state agencies and programs on investment promotion and facilitation; ii) insurance programs based on commercial principles; iii) direct financial assistance in support of the investment or of feasibility studies prior to the investment being established; iv) technical or financial support for environmental and social impact assessments of a potential investment; v) technology transfer; and vi) periodic trade missions, support for joint business councils and other cooperative efforts to promote sustainable investments. (B) Home states shall inform host states of the form and extent of available assistance as appropriate for the type and size of different investments. (Mann et al., 2005)

The language is not mandatory in that home states ‘should’ assist developing and least-developed states. This reflects the fact that ‘it is difficult to compel assistance between states’ (Mann et al., 2006: 42). Thus the IISD Model Agreement takes a programmatic approach based on institution building that seeks to further inter-state co-operation. On the other hand the assistance given by the home state shall be consistent with the development goals and priorities of the host states. Thus the latter are to set the policy agenda, not the home states – which may be said to be the case with first generation IIAs, reflecting as they do the home state’s interest in securing the best possible protection for investors and investments coming out of the home state. The IISD Model Agreement then deals with the implication of the duty to provide information on the part of the home state. Thus Article 30 requires home states to give information to the host state to enable it to perform its obligations under the Agreement and to give details of home state standards that may apply to the investment in question. The IISD Model Agreement adds two further obligations for home countries. First,


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Article 31 reinforces the need of the home state to make possible civil litigation before its own courts against investors. This Article is the companion article to Article 17 on liability of investors. It seeks to remove any barriers that preclude a hearing of such a case on the merits, as discussed above. In some states, this may require action by different governments, depending on the constitutional rules in place (Mann et al., 2006: 43). Second, Article 32 covers the obligation to render acts of overseas corruption as criminal offences under home country law. The IISD Model does not address all possible home country measures that could be included in an IIA. Certain further measures could be introduced. According to UNCTAD, these may include provisions to improve the co-ordinated delivery of financial assistance for FDI promotion while minimising inefficient restrictions such as ‘tied aid’ limitations that are often found in unilateral or bilateral assistance schemes. Here the emphasis should be on recipient country enterprise needs not on reciprocal benefits for donor and recipient countries alike (UNCTAD, 2001a: 58, 2004b: vol. III, 23). These provisions could also include qualifications upon the MFN principle so as to ensure preferential treatment of certain recipient countries. A second set of provisions might involve tax preferences for developing countries as a means of stimulating FDI, and controls over transfer pricing practices which could divert taxable income from developing host countries (UNCTAD, 2001a: 59, 2004b: vol. III, 23). A third type of provision goes a step beyond the co-operative IISD Model’s position and makes a developing country’s obligations under the IIA contingent upon the actual provision of technical assistance that is sufficient for the latter to comply with those obligations (UNCTAD, 2001a: 60, 2004b: vol. III, 23–4). Further provisions could be included to promote technology transfer, whether in general or for specific projects, and preferential trade related investment measures such as rules of origin provisions, anti-dumping protection and product certification regulations favouring imports of goods produced in developing host countries by foreign investors (UNCTAD, 2001a: 61–2, 2004b: vol. III, 24).

4.

CONCLUDING REMARKS

This chapter has shown that a holistic development oriented approach to international investment law may be achievable by way of a rebalancing of rights and obligations in IIAs so as to include investor and home country duties. In particular, it has shown that an extension of obligations to these two groups of actors can be justified philosophically on the basis of a wideranging conception of development, which accepts not only economic


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growth through increased investment but also the creation of sustainable development based on community freedoms that can be furthered by way of a greater balance of rights and obligations between host and home countries as well as investors. It has also shown that it is possible to draft provisions that seek to capture the essence of such a rebalancing. In this the IISD Model Agreement offers a useful, though by no means uncontroversial, step forward. However, despite the growth of unease with IIAs among a significant minority of countries, for the present this vision is likely not to be fulfilled. On the other hand, as the issue of rebalancing continues to be talked about, this in itself represents a major change in the continuing debate. The UNCTAD annual expert group meeting is one forum where this debate can take on a more robust content. It may well bear fruit in the future with a new generation of revised IIAs that contain provisions of the kind outlined in this chapter.


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10.

Human rights and transnational corporations: establishing meaningful international obligations James Harrison*

1.

INTRODUCTION

This chapter considers the value of international human rights norms and standards as mechanisms for effectively holding transnational corporations (TNCs)1 accountable for their broader social impacts, particularly in the context of developing countries. It argues that there are a number of existing human rights initiatives directed at the human rights performance of TNCs. But these suffer from significant accountability gaps and coverage problems which throw into question whether international human rights obligations are well placed to act as a system for enhancing TNC conduct across the full range of their diverse social impacts. It therefore focuses upon two specific methodological frameworks which are addressed to all TNCs internationally to assess how they might contribute to the establishment of more meaningful obligations: the Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (‘the UN Draft Norms’) produced by the UN Sub-Commission on the Promotion and Protection of Human Rights; and ‘Protect, Respect and Remedy: a Framework for Business and Human Rights’ produced by the Special Representative of the Secretary-General on the issue of human rights and transnational

* Associate Professor, School of Law, University of Warwick, Coventry, UK. 1 This article will use the term ‘transnational corporation’ (TNC) to describe a company with operations in more than one country. No differentiation is intended between this term and others such as ‘transnational enterprise’ or ‘multinational corporation/enterprise’. For a more nuanced discussion of these terms, see Muchlinski (2007a: 5ff). 205


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corporations and other business enterprises, John Ruggie (‘the Ruggie Framework’) (Ruggie, 2008). This chapter evaluates the respective merits and flaws of these two approaches in the context of existing human rights initiatives. While they represent very different methods for enhancing the accountability of TNCs, both are international mechanisms for creating greater coherence and responsibility for all TNCs with regard to all their human rights conduct. It is the holistic approach adopted by both mechanisms that makes them worthy of comparative evaluation. Since the Ruggie Framework now appears to have replaced the UN Draft Norms as the focus of international action on human rights in the corporate sphere, it is an apposite time to compare and contrast the two approaches. In assessing these initiatives, the chapter argues that criticism of the Draft Norms by Ruggie and others is largely justified. It further contends that Ruggie’s approach has a number of advantages in terms of its potential to create a positive impact on the human rights performance of TNCs. But it also argues there are limitations to the Ruggie Framework and that it requires significant further work if it is to be fully operationalised. Finally it is stressed that there are limits to what any international human rights framework can achieve in altering behaviour of relevant actors. We must therefore continue to monitor the Ruggie Framework to make sure that it is part of the solution to the problems, rather than, at worst, an unhelpful distraction from meaningful action.

2.

THE RATIONALE FOR INTERNATIONAL HUMAN RIGHTS REGULATION OF TRANSNATIONAL CORPORATIONS

Conceptions of human rights on the one hand and conceptions of global capitalism (which underpin the activities of TNCs) on the other arise from very different theoretical and normative frameworks. The foundations of human rights are strongly deontological, mandating certain actions (for example, fair trials, fair working conditions) and prohibiting other actions (for example, torture, arbitrary detention) on the basis of a set of requirements due to each human being by virtue of their humanity. Human rights law is viewed as being in the realm of ‘public’ law, and flows from international legal obligations which regulate government conduct, requiring governments to take action with regard to these rights. Global capitalism on the other hand rests on strongly consequentialist grounds: that individuals pursuing their own self-interests can be harnessed in order to create a greater public good (Freeman, 2006: 20ff). Regulation


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of the activities of TNCs has largely been part of the ‘private realm’ and governed by the rules of the market place, focusing upon concepts such as corporate governance and shareholder value. The underlying ideologies of these two normative frameworks and their translation into systems of regulation appear to be poles apart. But over the last few decades there have been steadily increasing calls for TNCs to be subjected to the norms and standards of international human rights law. High-profile allegations of human rights abuses by TNCs, predominantly in developing countries, have undoubtedly fuelled calls for regulation. These have included labour conditions in the apparel and footwear industries in Asia, Shell’s actions in the Niger Delta in Nigeria, the complicity of Unocal and Total in forced labour in Burma, Google and Yahoo’s acceptance of censorship in China, Coca Cola’s deprivation of local communities of water in India, and the use of highly poisonous pesticides in banana plantations by Chiquita, Dole, and Del Monte in Central and South America. These activities have all been widely characterised as (alleged) human rights violations for which a TNC bears responsibility. A significant number of other TNCs have, over the years, been accused of violating a wide range of human rights in their operations.2 But the question remains – why does such conduct require deviation from standard regulatory models? Traditionally, individual governments regulate the human rights conduct of TNCs in their jurisdiction through their own national legal systems, primarily through provisions of corporate law, criminal law and so on. Those governments are then responsible, inter alia, to international human rights supervisory mechanisms, such as the UN Human Rights Treaty Monitoring Bodies (TMBs), for ensuring that the human rights of those within their jurisdiction are protected, including with respect to TNC conduct. With regard to all governmental conduct, relevant UN supervisory bodies generally have very limited powers to unilaterally compel governments to take actions with regard to human rights violations (Tomasevski, 1994: 92, 98).3 But what are the 2

For a more detailed examination of many such alleged human rights violations, see the Business and Human Rights Resource Centre, http://www.businesshumanrights.org/Home (accessed 21 September 2009). 3 For instance, the UN Treaty Monitoring Bodies which monitor the UN Covenants (ICCPR, ICESCR and so on) require governments to report on their implementation of the human rights instrument in question. But they are limited in their response to producing concluding observations on the State’s performance. A number of the TMBs have individual complaint mechanisms but, again, the TMBs have no power to enforce judgments which the State in question is unwilling to accept. Some regional human rights mechanisms have stronger powers. The European Convention on Human Rights is generally perceived to be the strongest


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particular inadequacies of this form of regulatory model with regard to the activities of TNCs? The perceived inadequacies of traditional regulation reflect concerns about the changing nature of corporations in our increasingly globalized world. Fifty years ago, most companies operated within a single country. Today, we live in a world of some 77,000 transnational companies, with approximately 770,000 subsidiaries and millions of suppliers (Ruggie, 2007a: 18). An increasingly large share of global trade is now conducted within multinational corporations and is internalised within their supply chains. TNCs are therefore increasingly powerful actors in our globalized economy. TNCs have also increased their power within the international legal system through expansion of the legal obligations imposed on States through the international trade regime, and increased levels of direct legal protection through bilateral and regional investment treaties. So, a foreign company can win millions of dollars’ worth of damages through international investment arbitration, or strongly influence countries to bring cases under the international trading system so as to promote their access to markets.4 It is in this globalized regulatory environment that questions are raised about the ability of governments individually, particularly in developing countries, to effectively regulate the actions of TNCs. Developing countries, in particular, are often competing with other countries for investment by TNCs and are therefore not in a strong position to impose effective regulatory measures unilaterally. This situation is exacerbated by other factors; for example, by weak governance structures in many developing countries, by the fact that TNCs have hugely complicated networks of subsidiaries and suppliers, and by the fact that corporations may become complicit in the human rights violations of governments (Ratner, 2001: 461ff; Ruggie, 2008: 5–6, 9). Assessment of the policies and practices by which governments in developing countries actually regulate with regard to the human rights conduct of multinational companies supports these concerns; studies indicate that legislation is virtually non-existent and States largely rely on voluntary initiatives. Such regulatory frameworks are widely perceived as inadequate for holding TNCs accountable for their conduct (Muchlinski, 2007a: 526; Ruggie, 2007a: 6–7).

mechanism, but regional mechanisms in developing countries are generally much weaker. Compare this with the enforcement powers of international trade and investment dispute mechanisms which are much stronger. 4 For instance, with regard to Chiquita’s lobbying the US to bring a case against the EU for its system of quotas and tariffs on bananas, see Alter and Meunier (2006: 369ff); and with regard to Argentina’s liabilities with regard to the investment tribunal cases brought against it, see Burke-White (2008).


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These concerns about the inherent inability of countries to effectively regulate the human rights impacts of TNCs have led to alternative strategies to address such conduct. A host of international campaigning groups have appeared wanting to take action with regard to the negative social impact of multinationals – organising consumer boycotts, protests, and naming and shaming of misbehaving TNCs and pressing for effective regulation of their activities (Shamir, 2004: 643–4). One approach advocated is for international human rights norms and standards to be utilised more effectively to hold TNCs accountable for their conduct. The UN Draft Norms and the Ruggie Framework represent two recent and radically different approaches to increasing that accountability. But they cannot be properly evaluated in isolation. Rather, they must be viewed in the context of numerous previous initiatives to engage TNCs with regard to their international human rights responsibilities. By first exploring the efficacy and deficiencies of these previous initiatives, we are assisted in better understanding the strengths and weaknesses of the UN Draft Norms and the Ruggie Framework and determining whether they are capable of enhancing TNC conduct in developing countries.

3.

THE HISTORY OF ENGAGEMENT: TNCs AND HUMAN RIGHTS

There is now a considerable amount of scholarship arguing that, like other private actors, TNCs do have obligations under international law, and these can include human rights obligations (Steinhardt, 2005: 197–8; De Schutter, 2006: 29, 33; Kinley and Chambers, 2006: 480; Muchlinski, 2007a: 516–17; Ruggie, 2007a: 7–14). From the trials at Nuremburg, private actors have been held directly legally accountable for various actions under international law (Ratner, 2001: 466ff). Furthermore, there are a number of international legal instruments which target corporate behaviour (Clapham, 2006: 247ff). A number of commentators and organisations have argued that the Universal Declaration of Human Rights is addressed to corporations and that corporations may be held accountable in international law ‘at least for gross human rights violations’ (Clapham, 2006: 227–8, 246). But, despite these assertions of the potential for TNCs to be held accountable for their human rights conduct under international law, as yet there is no fully formed and overarching international framework relating to the human rights performance of TNCs. Instead, there have been a plethora of different initiatives which have attempted to formulate some kind of supra-national corporate human rights responsibility. These


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initiatives are therefore briefly evaluated below, crudely categorised for our purposes into four different types: international ‘soft law’ frameworks, multi-stakeholder initiatives, self-regulatory frameworks, and national cross-border accountability mechanisms. By considering the positives and negatives of these initiatives, it is hoped that we may reach a better understanding of the situation which the UN Draft Norms and the Ruggie Framework are seeking to address. I.

International Soft Law Frameworks

There have been various guidelines, codes and principles produced by international organisations which have included, in various different forms, reference to the human rights responsibilities of TNCs. Together we might term these international ‘soft law’ frameworks. An early effort in this regard was the Guidelines for Multinational Enterprises of the OECD, originally set up in 1976 and most recently revised in 2000. This is still the ‘most widely used instrument defining the obligations of multinational enterprises’ (De Schutter, 2006: 4). The Guidelines cover a wide range of corporate conduct and make only general reference to human rights, stating that enterprises should ‘respect the human rights of those affected by their activities consistent with the host government’s international obligations and commitments’ (OECD, 2001: Section II). There are in addition some more detailed provisions covering labour rights (OECD, 2001: Section IV). Another such soft law framework is the International Labour Organization (ILO)’s Tripartite Declaration of Principles Concerning Multinational Enterprises, which is primarily concerned with labour rights and contains detailed provisions on a range of labour rights issues. More generally, it proclaims at Article 8 that TNCs should ‘respect the [UDHR] and the corresponding international covenants’. A further initiative was the UN Draft Code of Conduct on Transnational Corporations, which was finalised in 1990 and included a provision requiring that transnational companies shall respect human rights. But this was never adopted, partly because of opposition from business and western governments (Buhmann, 2009: 28). All of the above instruments are intended to apply to all TNCs equally. An alternative approach has been the creation of a set of standards to which TNCs voluntarily sign themselves up. This was the approach taken by the United Nations with the Global Compact, launched in 1999 by Kofi Annan. The Global Compact includes a set of ten principles, two of which concern human rights and four of which concern labour rights issues. This initiative has had relatively widespread appeal amongst high-


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profile TNCs. Thus far, several thousand TNCs have signed up to the Compact.5 A number of commentators have argued that each of these initiatives has had value in terms of enhancing corporate conduct, including in respect of protection and promotion of human rights (see for example Clapham, 2006: 207–9). But many others have noted the limitations of these mechanisms. The Global Compact requires only a vague commitment to human rights with no defined and concrete obligations and lacks any effective monitoring system (Litvin, 2003: 70; Clapham, 2006: 225). The main commitment of companies is that they must report on their enactment of the Compact, but a large number of companies are either non-communicating or inactive, and while there is some shame in being listed as such, this is clearly not a great deterrent against inertia (MacLeod, 2007: 700). The OECD Guidelines similarly lack detailed provisions on human rights and an effective enforcement mechanism that requires companies to take them seriously (De Schutter, 2006: 9; Kinley and Chambers, 2006: 456). The OECD Guidelines do include National Contact Points (NCPs) where complaints can be brought. But, while there are examples of complaints brought to these NCPs having a positive impact on corporate behaviour (Clapham, 2006: 208–9), their performance has also been widely criticised (see for example De Schutter, 2006: 8). The ILO Declaration includes a similarly vague commitment to human rights and, although it does include more detailed obligations for TNCs with regard to labour rights, little work has been done on its implementation (Clapham, 2006: 218). Overall, a combination of lack of specificity in human rights obligations, the requirement of only a vague commitment to human rights, the lack of effective monitoring and enforcement procedures, and the inability to differentiate effectively between different levels of corporate performance have all been factors which have undermined the functioning of these models to differing degrees. II.

Multi-stakeholder Initiatives

A second set of initiatives operate outside the institutional architectures of the international legal regime. They are multi-stakeholder initiatives which involve complex ‘collaborative networks’ between states, NGOs, and business groups (Ruggie, 2007a: 16). They include the Voluntary Principles on Security and Human Rights, the Kimberley Process

5 For more details on the Global Compact, its membership and its functioning see http://www.unglobalcompact.org (accessed 21 September 2009).


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Certification Scheme (KPCS) and the Extractive Industries Transparency Initiative. Such initiatives are sector specific and were all driven by social pressure with regard to particularly pressing human rights issues. The initiatives are all voluntary in that participants are free to decide whether or not to sign up to them, but they can have ‘harder’ law features of varying degrees of strength. One of the most widely lauded initiatives is the KPCS, which is a system developed by civil society organisations, states and relevant corporations to deal with the issue of ‘conflict diamonds’. That is, diamonds produced by rebel groups, mostly in developing countries, who use the proceeds of sales to fund their campaigns and often commit horrendous human rights abuses. The KPCS aims to ensure that no conflict diamonds are traded internationally, thus depriving rebel groups of a crucial source of income. It does this by restricting trade between Kimberley participants to certified non-conflict diamonds only, and prohibiting trade between Kimberley participants and non-Kimberley participants, since the latter have not agreed to certify that their diamonds do not originate from the targeted rebel groups.6 Participants can be suspended or expelled if they do not comply with certification criteria. The KPCS currently has 47 member states and is credited with reducing the flow of conflict diamonds from about 3–4 per cent to around 1 per cent of the total diamonds market (Ruggie, 2007a: 17). One can therefore see that this ‘soft law’ mechanism actually does have the ability to deprive countries of an important source of income by suspending or expelling them from the scheme, thereby creating a viable accountability mechanism. It is beyond the scope of this chapter to assess the strengths and weaknesses of each of the very varied multi-stakeholder initiatives which exist. Some are certainly more heavily critiqued than others.7 Looking at these types of mechanisms in the round, they tend to be responsive to particularly high-profile human rights situations, and so creating universal coverage of all human rights issues internationally through such initiatives is highly unlikely. But it is important to note that if such initiatives are structured to effectively incentivise good conduct and/or penalise bad conduct, such as in the case of the KPCS, they can have advantages over the more generic international soft law frameworks described above. The fact that they tend to have greater specificity – dealing with a particular

6 For a detailed examination of the functioning of the scheme, see Wright (2004); Grant and Taylor (2004). 7 For instance, on the limitations of the Extractive Industries Transparency Initiative, see Hilson and Maconachie (2009).


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human rights issue such as conflict diamonds, rather than human rights generically – gives them a focus that can lead to more tangible results if there is sufficient pressure for the creation of meaningful accountability mechanisms. III.

Self-regulatory Initiatives

A third set of initiatives are the self-regulatory schemes of TNCs themselves. These take the form of voluntary codes or policies, which broadly speaking can be seen as part of TNCs’ corporate social responsibility (CSR) agendas. Increasingly such codes and policies are accompanied by some form of reporting on the company’s social and environmental impact across all the countries in which they operate. Such initiatives can be undertaken in accordance with principles such as the Global Compact and other relevant codes and standards, but it is up to the individual TNC to interpret and implement them. There is the potential therefore for these initiatives to foster corporate accountability for human rights without the need to negotiate binding regulatory frameworks and their merits have been highlighted by a number of commentators. They have the potential to allow a flexible focus on the particular social and environmental impacts of each business, to foster ownership and responsibility for the issues and to allow comparison with others in the sector by consumers, workers and other key stakeholders (Redmond, 2003: 90; Blowfield and Frynas, 2005: 502). However, the limitations of what can be achieved through CSR and corporate reporting have also been widely highlighted. With regard to CSR more generally, the definitions and remit of what is required remain illusory (Blowfield and Frynas, 2005: 500–504) and only a limited minority of TNCs do, and will ever, report on their non-financial performance on a voluntary basis (Hess, 2008: 468). There remain substantial doubts about whether the CSR movement, and corporate self-reporting of it in particular, is in fact giving us a reliable picture of a company’s social and environmental impacts (Hess, 2008). There are particular worries about the impact of CSR on developing countries and how CSR initiatives may be diverting attention away from more effective forms of governance (Blowfeld and Frynas, 2005). In such a scenario, the more universally accepted concepts and firmly entrenched obligations of human rights appear to have the capacity to add significant value to CSR frameworks. But, although CSR initiatives have dealt with many human rights concerns (most prevalently workers’ rights) they have not traditionally been framed in human rights terms (Wettstein, 2009: 142) and only a relatively small number of TNCs include human


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rights principles in their company codes.8 Even with regard to labour rights – clearly fundamental to all corporate activity – only a small minority of company codes actually refer to ILO core labour conventions and even then they are very selective in the conventions they cite (Redmond, 2003: 91–2; Clapham, 2006: 215). Where codes do reference human rights, the codes are often vague in respect of the human rights obligations they impose and lack implementation and enforcement mechanisms and independent monitoring (Weissbrodt 2005: 293; Kinley and Chambers, 2006: 491–2; Ruggie, 2007a: 20). Reporting procedures, for the most part, lack robust methodologies for assessing human rights impacts (Clapham, 2006: 198); instead ‘anecdotal descriptions of isolated projects and philanthropic activity prevail’ (Shamir, 2004: 656; Ruggie, 2007a: 21; Wettstein, 2009: 131). TNCs tend to concentrate on their positive social, environmental and human rights impacts rather than providing a balanced report of their activities (Hess, 2008: 462–3). In human rights terms, companies themselves define the content of the rights they identify, so that such rights become so elastic in meaning that they lose their value as measures of a company’s performance (Ruggie, 2006: 13, 2007a: 20–21). Overall, corporate social reporting is not achieving the objectives it aspires to, including the protection and promotion of human rights, other than perhaps with regard to a few industry leaders in each field (Hess, 2008: generally and 448). Independent verification of human rights performance should guard against some of the problems described above. In general terms, empirical studies show that companies who sign up to independent codes of practice and independent monitoring of their activities are better at protecting and promoting labour rights than those who do not (Barrientos and Smith, 2006; Nelson et al., 2007). Reporting and assurance standards assist in attesting to a certain objectivity and independent monitoring of the reporting process, but very few companies fully utilise such procedures (Redmond, 2003: 93; Hess, 2008: 470–71; Ruggie, 2007a: 21–2). External verification of performance too often involves large accounting firms who have little expertise on the issues and who often do other work for the TNC in question meaning that their impartiality is therefore open to question (Redmond, 2003: 92–3). Nor can we assume that external pressure on companies will improve performance. Reporting ranking systems are insufficiently intrusive into a company’s actual social and environmental

8

For an updated list of companies, see the Business and Human Rights Resource Centre, http://www.business-humanrights.org/Documents/Policies (accessed 21 September 2009).


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performance and instead often simply focus on the amount of disclosure against key indicators (Chatterji and Levine, 2006: 47; Hess, 2008: 463). Furthermore, a proliferation of ethical codes in certain sectors, such as the apparel and footwear industry, can make it difficult for consumers to differentiate effectively between brands, some of whom may be adhering to far weaker standards than others (Chatterji and Levine, 2006: 34–40). Therefore, despite claims that independent assurance allows companies to ‘differentiate themselves from uncertified competitors’ (Steinhardt, 2005: 184), the reliance on consumers to differentiate the certified from the noncertified is often overstated. So, while voluntary codes and reporting practices can have some benefits with regard to companies’ practices, those that do take on meaningful human rights obligations and truly independent verification can end up being those that get penalised, while those that ignore or distort such schemes are more likely to be able to commit violations with impunity (Litvin, 2003: 71; Kinley and Chambers, 2006: 491–2). These problems with CSR have led to campaigning organisations declaring CSR to be a sham and pressing for international regulatory standards, while TNCs, supported by many home governments, have tended to continue to advocate a voluntary approach (Clapham, 2006: 195–6). IV.

Cross-border Accountability Mechanisms

Finally, we can see certain forms of cross-border accountability mechanisms at the national level. These are government initiatives which buck the voluntary trend and impose harder forms of regulation on corporate conduct internationally with regard to human rights obligations. Such initiatives include human rights conditionality in export credit guarantees, consideration of human rights compliance in investment decision-making and requirements that companies disclose certain aspects of their social and environmental performance (Dhooge, 2004; Blowfeld and Frynas, 2005: 502–3; Clapham, 2006: 197). Such initiatives are potentially important mechanisms for incentivising corporate adherence to human rights standards globally, but they have been undertaken by only a very few countries. Another form of trans-border accountability mechanism is that in a number of jurisdictions claims can be brought in national courts for human rights violations committed by TNCs in another country. Most prominent has been the case law of the Alien Claims Tort Act in the US. ACTA allows for claims against companies incorporated in, or with a continuous business relationship with, the US. Claims can be brought by victims who have suffered violations of international law anywhere in the


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world on the basis that the company concerned has committed the violations or been complicit in them. There have been successes in holding firms accountable for violations of human rights – most notably Unocal in Burma where the company settled with the plaintiffs out of court. But there are significant procedural hurdles to making successful claims under the Statute (for example, forum non conveniens), as well as limitations to the types of human rights violations (only the most serious) which can be litigated (Redmond, 2003: 83). Of the more than forty cases filed against corporate defendants, most have been dismissed on pre-trial motions and none has reached a final judgment (Steinhardt, 2005: 202). Future use of ACTA is likely to be highly contested. Early cases led to an orchestrated campaign by hundreds of TNCs against the use of ACTA for holding companies liable for their actions overseas (Shamir, 2004: 650–55). Similar types of claims can be made in other jurisdictions (Redmond, 2003: 80). But some include more procedural bars than others and we are a long way from seeing an appropriate model in a wide range of jurisdictions. V.

Assessment of Existing Mechanisms

Overall, reviewing the current situation of human rights protection at the international level, what we are faced with is a patchwork of different mechanisms for holding TNCs accountable for their human rights performance. Each has a certain value, but each leaves significant accountability gaps which are not necessarily filled by other initiatives. International soft law initiatives and self-regulatory frameworks are essentially voluntary in nature and require corporate buy-in for their effectiveness. Some TNCs who are leading human rights advocates may benefit from this approach, but many other TNCs ignore these initiatives or make only a vague commitment to human rights which remains ineffectively monitored and enforced. Lack of specificity with regard to the underlying human rights obligations and their application makes objective assessment and differentiation between varying levels of corporate performance through these mechanisms very difficult. For similar reasons, ‘consumer power’ is often overstated as an accountability mechanism. Certain multi-stakeholder initiatives (for example, the Kimberley Process) are more context-specific and effective and include more concrete mechanisms of enforcement, but are specific to particular high-profile human rights issues. National cross-border accountability mechanisms of governments and litigation through the courts are ‘harder law’ options but are only available in certain countries, have significant hurdles to


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access and currently are only utilised to pursue a tiny minority of the most extreme human rights abuses. An overarching theme of debates around increasing accountability with regard to all these mechanisms has been the very polarised views about the best forms of regulation. In general terms, business lobby groups, supported by governments, have been in favour of governmental responsibility for human rights and purely voluntary frameworks for TNCs. Campaigning groups on the other hand have sought to find mechanisms for creating direct accountability of TNCs for their actions which negatively impact upon human rights (Shamir, 2004: 650–55 and 659; MacLeod, 2007: 681). Any new attempt to create more meaningful obligations at the international level has to attempt to bridge the gaps between these actors if it is to have any hope of success. We are therefore faced with a world of multiple codes, initiatives, and other measures aimed at addressing the human rights performance of TNCs, most of which are not binding and leave significant accountability gaps. This is exacerbated by very polarised views about the further measures that are required to close the gaps which exist. Questions therefore remain about the extent to which international human rights obligations have the potential to become standards by which every TNC could be held accountable for the full range of its broader social impacts with regard to the developing countries in which it operates. It is in the context of these questions that we need to assess the Draft Norms and the Ruggie Framework. Both initiatives attempt to develop a normative framework for the human rights obligations of all transnational corporations, but they do so in very different ways. Neither endeavour can be assessed in a vacuum. We need to examine the extent to which these two frameworks can effectively address the existing ‘governance gaps’ in the regulation of TNCs and thereby make human rights obligations more meaningful across the broad range of TNC conduct where they are relevant and applicable.

4.

I.

UN DRAFT NORMS ON THE RESPONSIBILITIES OF TRANSNATIONAL CORPORATIONS AND OTHER BUSINESS ENTERPRISES WITH REGARD TO HUMAN RIGHTS The Nature and Content of the UN Norms

The UN Norms represented a first attempt to draft ‘a common global framework for understanding the responsibilities of business enterprises


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with regard to human rights’ (Statement of Support for the UN Human Rights Norms for Business, 2004). The Norms, with an accompanying Commentary, were produced by the UN Sub-Commission on the Promotion and Protection of Human Rights, after a five-year period of consultation and development (Kinley and Chambers, 2006: 456–7). The Draft Norms essentially present themselves as a restatement of the existing human rights obligations with regard to multinational corporations in international law (De Schutter, 2006: 11; Buhmann, 2009: 44). They are set out in a form which will be familiar to those accustomed to UN legal documents – a lengthy preamble and a set of operative provisions which specify the substantive obligations, mechanisms of implementation and key definitions. The Norms start by emphasising that States have the primary responsibility for human rights, but that transnational corporations and other business enterprises also have human rights obligations ‘within their spheres of activity and influence’. The Norms then go on to list the human rights obligations for which transnational corporations have direct responsibility, including equal opportunity and non-discriminatory treatment, security of persons, workers’ rights, the prohibition of corruption, obligations with regard to consumer protection and obligations with regard to environmental protection. There is also a general obligation on TNCs to respect and contribute to the realisation of civil, cultural, economic, political, and social rights, with a number of these rights particularly highlighted. The Norms then set out modes of implementation, including dissemination by TNCs; the creation of internal rules of compliance with the Norms by TNCs; the application of the Norms in contracts with third parties; provisions for monitoring of the Norms; provisions requesting States to establish legal and administrative frameworks to ensure the Norms are implemented; and a requirement that TNCs and other business enterprises ‘shall provide prompt, effective and adequate compensation’ to those affected by violations of the Norms. II.

Reaction to the UN Norms

It is clear that the Norms were intended to evolve into a binding instrument and they have been described by their main author as the ‘first non-voluntary initiative accepted at the international level’ (Weissbrodt and Kruger, 2005: 318, 339). It has been further pointed out that the application of the Norms in contracts with third parties would also make them contractually binding and justiciable under relevant national law (Clapham, 2006: 233). It is therefore hardly surprising, given the polarisation on the issue of voluntarism versus enforceability described above, that there were a range of differing opinions about the Norms. Business


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organisations were very critical of the Norms and very opposed to their adoption, while many human rights and other campaigning organisations were supportive of this endeavour (Kinley and Chambers, 2006: 458–9). In the context of such conflicting views, a Resolution was finally adopted by the Human Rights Commission which requested the UN SecretaryGeneral to appoint a Special Representative (SRSG) on business and human rights. Professor John Ruggie was subsequently appointed, with a mandate which included the identification and clarification of ‘corporate responsibility and accountability for TNCs and other business enterprises with regard to human rights’ as well as to elaborate on ‘the role of states in effectively regulating and adjudicating the role of TNCs and other business enterprises’. He was also asked to provide definitions for concepts such as ‘complicity’ and ‘sphere of influence’ which had featured prominently in the Norms. The SRSG, in his first report to the Commission on Human Rights, directly attacked the UN Norms. Despite it not being part of his official mandate, the SRSG felt it necessary to critique the Norms in order to advance discussions he felt had become deadlocked (Ruggie, 2006: 14). He recognised that there was some usefulness in producing a summary list of rights that may be affected by business, but then accused the Norms exercise of becoming ‘engulfed by its own doctrinal excesses’ and a distraction to the debate, focusing on two particularly problematic issues (Ruggie, 2006: 15–17). First, he argued that the Norms, despite maintaining that they were merely restating existing international human rights law in respect of TNCs, were in fact the first initiative to create a broad array of international human rights obligations attach[ing] directly to corporations. While this was perhaps desirable, the SRSG argued that it was a long way from the current position and considerable state action was needed to bring the proposition into effect. Second, the SRSG took issue with the lack of precision for allocating human rights responsibilities to States on the one hand and businesses on the other. The concept of ‘spheres of influence’ carried the burden of this allocation of responsibility, but the term had no recognised legal history through which principles could be derived to determine its application in any given situation. It was therefore not a ‘suitable basis for establishing binding obligations’ (Ruggie, 2006: 18). Ruggie has not been alone in his criticism of the Norms. It has been argued that they contain a long list of rights without defining precisely what the obligations of corporations are with regard to those rights (Litvin, 2003: 70–71). Furthermore, included in the list of rights are provisions on, for instance, consumer protection and anti-corruption whose appropriateness within a human rights framework is highly dubious


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(Muchlinski, 2007a: 524). In terms of enforcement, there is no discussion of where claims can be brought for reparations (Muchlinski, 2007a: 534–5) and various NGOs even criticised the lack of monitoring and compliance system in the Norms (MacLeod, 2007: 694–5). The Norms have also had a considerable number of supporters. Such supporters admit that key terms such as ‘sphere of influence’ and ‘complicity’ are vague terms without clear and established legal meanings (De Schutter, 2006: 12–13). But it is argued that Ruggie is misplaced in seeking a definition of such key terms. Their vagueness in terms of the duties they impose is inevitable in any kind of international instrument of this nature. The Norms should rather be a starting point from which future concretisation of the terms can be derived (Kinley and Chambers, 2006: 466, 471; Buhmann, 2009: 40). The term ‘spheres of activity and influence’ is defended as necessary to cover gaps in human rights coverage, most obviously when a government is failing in its human rights duties (Kinley and Chambers, 2006: 467–8). It is argued in support of the human rights listed in the Norms that, although they cover rights which are not covered traditionally in human rights law, infringements of such rights could either amount to or lead to human rights violations. So violations of consumer rights could amount to violations of human rights if death or serious injury were the consequence. Violations of norms on anti-corruption could squander resources, which could lead to violations of economic, social and cultural rights. The inclusion of these norms is fundamentally justified by ‘the importance of such matters’ (Kinley and Chambers, 2006: 472). It is therefore argued that the Norms can be built upon to clarify the obligations of TNCs and to set up monitoring mechanisms to ensure compliance (De Schutter, 2006: 21), and that the norms could be used by legislatures and courts at national level as the basis for determining liability in certain cases (Weissbrodt, 2005: 295). It is argued that the underlying reason for the rejection of the Norms is that ‘business alliances, in the main, do not want TNCs to be held legally accountable for the human rights abuses that they may inflict or are complicit in, and that the Norms are seen as a first step in this direction’ (Kinley and Chambers, 2006: 491). The question remains therefore whether this is simply a question of political will or whether there are fundamental flaws in the Norms, as Ruggie suggests, which make them an inappropriate basis for increasing the international accountability of TNCs for their human rights performance. III.

Evaluation of the UN Norms

The Norms do have a number of positives in terms of tackling the existing TNC accountability gaps outlined in Section 2 above. They purport


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to create a binding legal framework with a set of codified rights which are universally applicable to all TNCs. They therefore have the potential to reduce the problems of voluntarism and self-definition which have plagued existing initiatives. They also contain specific implementation mechanisms to be undertaken by the company itself and by relevant international and national bodies and provisions on redress to victims. This, again, has the potential to reduce the problems of individual implementation by companies, largely self-defined regulation of conduct and a lack of effective remedies for violations. But there are significant problems with the Norms which undermine these potential benefits. The Norms adopt the approach of so many other UN human rights instruments in focusing the main part of their attention on the list of rights that are applicable, followed by provisions on implementation. So why is this approach problematic here? There are a number of reasons. First, there were clearly misjudgements in the list produced. For instance, wideranging consumer protection obligations are included within the Norms. Some violations of consumer protection may be grave enough to have the potential to become human rights violations (for example, endangering the physical safety of consumers in particular ways9), but this is not a reason to elevate all issues of consumer protection to the status of human rights. For example, the UN Guidelines for Consumer Protection (cited in the commentary on the UN Draft Norms as relevant international standards which TNCs should observe) quite appropriately states that Governments should adopt or maintain policies that make clear the responsibility of the producer to ensure that goods meet reasonable demands of durability, utility and reliability, and are suited to the purpose for which they are intended.

It is clearly important that the ‘durability, utility and reliability’ of goods is the subject of consumer protection legislation, but it would be absurd to argue that breaches of such provisions should be considered human rights

9 Even where products do cause serious injuries to consumers, there will still need to be a case made that this represents a human rights violation. This may be somewhat easier to establish where the producer is guilty of clear and gross negligence in the production of the product and serious injury or death results. But is it a human rights violation where the consumer has utilised a product inappropriately, causing injury, but insufficient instructions on the product are partly to blame? It is beyond the scope of this chapter to consider such questions. For our purposes, it is sufficient to note that the nuances and coverage of consumer protection legislation are not going to be (nor should they be) synonymous with human rights law.


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violations in all but the most extreme of scenarios. To do otherwise is to devalue the human rights regime and the core set of important values it represents. Anti-corruption provisions are even more problematic in that they do not seem at all well captured by a human rights approach – it is not violations to the dignity of the individual person which are the reason for acting against corruption, but rather destructive tendencies with regard to wider society. Broadly worded environmental provisions (for example, including an obligation to act in accordance with the precautionary principle) are equally problematic. If they are to be captured by a human rights approach, a human rights orientated environmental framework must be carefully constructed. They cannot simply be tacked on to a generalised human rights instrument. The fundamental underlying mistake is the attempt to include within a human rights instrument a number of issues simply because they are important to society and they are within the scope of corporate activity. Obligations must be compatible with basic conceptions of human rights if the human rights framework within which they operate is to be in any way meaningful. Novel obligations must be articulated clearly and precisely in a way that builds upon existing understandings of human rights. Otherwise the underlying power of human rights and their codification in international law is lost. The inclusion of inappropriate ‘rights’ within the Norms is not a rationale for abandoning the endeavour but rather for refining it to only include issues appropriate to a human rights framework. But there are more fundamental rationales for questioning the utility of a single list approach. What we find in the Norms is a more detailed exposition of rights which its authors appear to see as more fundamental to corporate activity, such as workers’ rights, while others are mentioned only in passing, such as freedom of expression and opinion. But different rights are going to be more relevant to different companies in different sectors. For instance freedom of expression may be the most important right for a particular sub-set of companies (for example, Yahoo or Google operating in China) who may be less likely to breach, for example, workers’ rights. A single list approach to the creation of a framework makes it difficult to set out rights in a way that is both applicable to all different types of TNCs and comprehensive. What the Norms therefore produce is uneven, although generally brief, reference to a wide range of rights whose full normative content is only found in the relevant international covenants (for example, the International Covenant on Civil and Political Rights or the International Covenant on Economic, Social and Cultural Rights). Given that TNCs can potentially impact upon the full range of human rights codified under international law (Wright, 2008), it is the nature of


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the responsibilities which TNCs have with regard to each of those human rights in their different activities that becomes the key concern of the exercise. In the Draft Norms this is primarily determined by what is within their ‘sphere of activity and influence’. This approach is problematic. The proposition that TNCs have responsibility for human rights within their ‘sphere of activity and influence’ is vague and can be interpreted as giving rise to very different levels of liability depending upon subjective views about what TNCs do or should do. For example, it is arguable that all actions of a government fall within the sphere of influence of TNCs operating in their country. Moreover, the definition of this concept should not be left for future ‘concretisation’. Attempts to further define the term by supporters merely serve to demonstrate the nebulous nature of the provision. For instance it has been suggested that [t]he phrase ‘sphere of activity’ . . . might be reasonably assumed to encompass such actors as workers, consumers, members of the host community as well as the environment in which the company operates. (Kinley and Chambers, 2006: 469)

In particular, the idea that TNCs should reasonably have some form of responsibility for the environment in which they operate demonstrates the imprecise contours of the landscape which the term ‘sphere of activity or influence’ is attempting to map. Other authors have attempted to argue for varied obligations of TNCs, based on, for example, the leverage the company has with regard to the abuse or the nexus between abuse and the company (Ratner, 2001: 465; Jagers, 2002: 79; Steinhardt, 2005: 216–17). But nowhere has this been done with conceptual clarity, which demonstrates the inherent difficulties of utilising entirely new terminology to define legal responsibility with regard to contested and ambiguous areas of responsibility. We cannot ignore the fact that we are not painting a rights landscape onto a blank canvas here, but rather attempting to delineate areas of responsibility that are already greatly populated both by human rights initiatives and various corporate governance mechanisms. Areas of responsibility are also greatly contested and so utilising terms with no recognised legal meaning or pedigree will mean that key actors cannot in any way predict what they could be conceding liability for. This is bound to make agreement to the Norms as a whole far more difficult. In such a fiercely contested environment as TNC responsibility for human rights, everything must be done to reduce the conceptual uncertainties of key provisions. With regard to implementation, the Norms opt for direct incorporation of the substantive provisions of the Norms themselves into the policies of TNCs and their contractors. Implementation will then be monitored


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by international and national regulatory mechanisms and be the basis of providing redress to victims of abuses. The Norms appear to bypass the many industry-specific and rights-specific mechanisms detailed above that are already attempting to do this work. Given the flaws identified in many of these initiatives, this might be considered a positive step. But the adoption of a new overarching human rights instrument would create as many problems as it solves. First, it has been demonstrated through existing initiatives that a great degree of specificity is required to deal with the particular human rights problems afflicting each corporate sector or activity. The Norms risk diverting the focus from industry- and subject-specific human rights compliance to a one-size-fits-all human rights instrument and monitoring mechanism, thereby reducing the degree of specificity which human rights can achieve in any given setting. This situation is exacerbated by the fact that the Norms are intended to be implemented primarily according to the rigour and application of individual companies. As has been shown, all but the very best performing TNCs have a tendency to focus on areas of good performance or philanthropic activity rather than utilising codes and principles to unearth bad practice. A single overarching human rights instrument such as the Norms is highly unlikely to lead to strict adherence to the key human rights that are particularly relevant to an individual company (for example, freedom of expression for Google, freedom of association for Walmart, and so on) because TNCs would be able to gloss over particularly problematic areas of their conduct. Although implementation is intended to be monitored by relevant international, national and non-governmental bodies, again the creation of a monitoring system for such a generic instrument may not be a step forwards in terms of securing better human rights performance. Would such bodies really have the capacity and powers to effectively review the human rights performance of TNCs across the full range of their activities? As mentioned above, international human rights monitoring bodies are greatly limited in the extent to which they can effectively monitor and positively influence State conduct with regard to human rights (Tomasevski, 1994: 92, 98). There appear to be grave dangers that a further ‘light touch’ review mechanism might be created for a generic and broadly framed set of Norms which therefore does little to effectively monitor the specific human rights performance of TNCs in key areas of concern. So, although direct implementation of the Norms seems initially attractive, careful consideration needs to be given to what additional benefits such an approach would be likely to bring. The Norms are therefore flawed on a number of counts. The ‘list’ of


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rights contains a number of rights which should never have been included in a human rights instrument and others that required substantial further elaboration and refinement. The list approach itself is problematic given the nature of TNCs and their wide-ranging potential to impact upon just about all codified human rights. Key terms in the Norms, and in particular ‘sphere of influence’, are asked to carry too much of the normative burden of the exercise. Although such terms may be capable of future ‘concretisation’, there are no real indicators of how this process should happen. Given the contested nature of the debate, these terms require clear signposts for how they might develop in future if they are to be persuasive. Furthermore, the implementation mechanisms suggested seem to be unlikely to create added value beyond schemes already in existence. Finally, the fact that the Norms would become a distinct, free-standing and generic human rights instrument means that they may divert attention from existing mechanisms that are more subject and context specific, without themselves creating significant added value. The rejection of the Norms by TNCs and supportive governments cannot therefore simply be blamed on a wish to avoid any kind of direct legal responsibility for human rights violations (although this may well be part of the reason). On balance, the Norms do not provide a clear conceptual framework for determining what corporate conduct will be considered a human rights violation in any particular situation, or a mechanism for enhancing the ability of human rights norms and standards to effectively tackle negative social impacts, particularly in developing countries. The question therefore remains whether the alternative approach advocated by Ruggie provides a better model for attempting to make the international human rights framework a more effective one for dealing with relevant TNC conduct.

5. I.

THE RUGGIE FRAMEWORK Introducing the Ruggie Framework

Ruggie concluded that no single ‘silver bullet’ could resolve the human rights and business paradigm (Ruggie, 2007a: 24, 2008: 4). He did not attempt to produce a (quasi-)legal instrument of regulation, but rather a ‘principles-based conceptual and policy framework’ as a foundation upon which a more coherent, systemic and commensurate response could be built (Ruggie, 2008: 3–4). It may sensibly be asked whether it is reasonable to compare the Ruggie Framework with the Draft Norms at all, given their differing ambitions and intended legal status. In answering in the


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affirmative, it is suggested that it is the universality of the two initiatives which makes them comparable – both represent visions for creating greater coherence and accountability for all TNCs with regard to all their human rights conduct. The fact that they do so in very different ways is perhaps an indictment of the difficulties of harnessing existing international human rights norms and standards towards that endeavour, a subject we will return to in concluding this chapter. First, however, we will examine the Framework itself and evaluate its (potential) effectiveness. The Framework consists of three underlying principles – the State duty to protect against human rights abuses by third parties, including business; the corporate duty to respect human rights; and the need for more effective remedies. The State duty to protect is an obligation which is a cornerstone of international human rights law and is regularly utilised by the United Nations TMBs in describing the obligations of States with regard to all substantive human rights. The duty to protect is the most relevant to the conduct of TNCs because it includes obligations on the State with regard to violations by third parties such as TNCs (Human Rights Committee, 2004: para. 8; Ruggie, 2007a: 5). On the basis of its usage by the TMBs, Ruggie argues that this imposes an obligation on States to take ‘all necessary steps to protect against such abuse, including to prevent, investigate, and punish the abuse and provide access to remedies’ and to regulate and adjudicate on abuses (Ruggie, 2008: 7). Ruggie suggests that States can take a variety of approaches to fulfilling this obligation and gives examples as to how this might be achieved. First he suggests governments can foster human rights cultures in corporations by supporting and strengthening ‘market pressures on companies to respect rights’ (Ruggie, 2008: 10). This could include government regulation with regard to sustainability reporting and with regard to corporate culture in deciding corporate accountability. He suggests ‘policy alignment’ by taking measures to achieve greater coherence between human rights obligations on the one hand and trade and investment obligations on the other. He argues for instance that action is required with regard to stabilisation clauses in investment agreements which may prevent States (particularly developing countries) from regulating to protect and promote human rights (Ruggie, 2009: 11–12). He also argues that action is required with regard to untransparent investment procedures which marginalise issues of public interest including human rights. Ruggie further argues that the State duty to protect can be enhanced by various forms of international co-operation, for instance more extensive use of Security Council sanctions to target abuses in conflict zones. The second principle is the corporate duty to respect human rights; put simply, to do no harm. But it is not a purely negative obligation. The duty


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to respect ‘in essence means to act with due diligence in order to avoid infringing on the rights of others’ (Ruggie, 2009: 3) and therefore requires taking action to discover and then act upon any (potential) human rights violations. Ruggie gives various examples of the implementation of the duty to respect, including: the creation of corporate human rights policies with detailed guidance where necessary; impact assessments of a company’s existing and proposed activities; integration of human rights policies throughout the company; and monitoring and auditing of human rights performance utilising the Global Compact and other relevant instruments (Ruggie, 2008: 17–19). The final principle is access to remedies. This includes both judicial and non-judicial mechanisms to investigate, punish and seek redress for abuses. Ruggie finds that the existing patchwork of remedies is, in many respects, ineffectual and requires strengthening. States should ‘strengthen judicial capacity to hear claims and enforce remedies’ against all corporations operating in their territory and reduce barriers to justice, including for foreign plaintiffs. Non-judicial remedies including company-level grievance procedures, State-based non-judicial mechanisms and multistakeholder and industry initiatives all need to meet certain criteria to be credible and effective. Ruggie sets out a number of criteria; they must be legitimate, accessible, predictable, equitable, rights-compatible and transparent (Ruggie, 2008: 24–7). II.

Evaluating the Ruggie Framework

How do we assess this framework in terms of the added value it creates with regard to holding TNCs accountable for their human rights conduct? Thus far, the response to Ruggie’s Framework has been cautious optimism from the vast majority of actors, including both campaigning groups and business groups. This in itself is quite an achievement, given the polarised opinions of these two groups on the issue with regard to many previous initiatives in the field. Part of the reason for its widespread acceptance must be the participatory nature of Ruggie’s work. He has conducted meetings with a huge range of different actors, and this has undoubtedly enhanced the reception given to his work (Ruggie, 2007a: 6, 2008: 3). The degree of consultation, particularly with business, was much higher than for the UN Norms (Buhmann, 2009: 42, 45–7). Even those who were great supporters of the UN Norms have been relatively muted in their criticism of his rejection, and his alternative proposal for a conceptual framework has been widely accepted by key stakeholders from the business and campaigning communities. It is suggested that these kinds of participatory or ‘reflexive’ processes for the creation of law increase the levels of


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success with regard to the standards they create and increase chances of self-regulation (Buhmann, 2009: 17). But procedural inclusivity is not sufficient. To ascertain whether the Ruggie Framework can establish more meaningful obligations for TNCs, more in-depth analysis is needed of the substantive proposals themselves. As noted above, Ruggie’s policy framework is a very different beast from the more traditional (quasi)-legal approach of the Draft Norms. One’s view of Ruggie’s approach will therefore depend partly on the extent to which one believes that existing initiatives are worth empowering, as well as the degree to which Ruggie’s Framework is capable of taking on this empowerment function. We will discuss this further below. But it is important to make clear at the outset that the Framework should not be viewed as promoting voluntarism and self-regulation. There is recognition in the third principle that without effective and appropriate remedies no mechanism is going to be able to create meaningful obligations for TNCs. Enforcement mechanisms of existing schemes and initiatives are therefore potentially open to scrutiny, which, as explored above, is an important aspect of many of their failings. Such an approach is also in line with the approach of NGOs in the European arena, who are dropping calls for strictly legally binding instruments in favour of strengthening existing mechanisms through, for example, ‘mandatory social and environmental reporting, redress mechanisms, extra-territorial application of human rights and labour standards and a duty of care upon companies and their directors regarding social and environmental impacts’ (MacLeod, 2007: 686). In fact, the adoption of a policy framework has allowed Ruggie to concentrate primarily on the procedural mechanisms (for example, regulation with regard to sustainability reporting, impact assessments and so on) through which to create more meaningful obligations for TNCs, rather than become engulfed in discussions about the nature of the rights at issue or the precise remit of the responsibilities of TNCs with regard to human rights. The Framework thus has the potential to operate in a wide variety of ways, dependent on the particular instrument or business sector to which it is applied. It can therefore build on existing initiatives and be utilised to reinforce them as opposed to starting afresh with a new ‘standalone’ legal instrument. Despite the fact that Ruggie eschews the traditional legal method, one of the key differences of his approach is that it draws upon the existing terminology of international human rights law. The terms ‘protect’ and ‘respect’ have been well utilised by the UN treaty bodies in relation to a wide range of issues and actors. Much background research has been done to carefully build up a holistic picture of how these terms have been


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utilised and therefore how they can be applied to the current context (Ruggie, 2007a: 5–7, 2007b). By adopting this terminology, Ruggie can draw upon this body of work and lessons learnt from how the terms have been applied with regard to other human rights issues. It thereby creates some degree of certainty with regard to key actors, and in particular corporations, about the range of conduct which might be covered by the terms in the future. This has been central to allowing Ruggie to maintain near-universal support for his proposals; TNCs and states are not going to dispute the fact that they have an obligation to respect and protect human rights respectively. On the other hand, campaigning organisations perceive that the protect, respect and remedy framework may provide them with the starting point for enhancing existing obligations of TNCs in a wide variety of policy areas and create more effective remedies for violations by TNCs. The question remains the extent to which the Ruggie Framework is capable of creating real value with regard to the governance and coverage gaps which were identified in Section 2 above. To begin to answer this question we have to consider how the Framework has been applied to those gaps. Ruggie’s strategy thus far has been to augment his Framework utilising a discursive narrative style, providing examples of the kind of actions that could be taken by States, TNCs and others in order to implement their obligations, enhance existing initiatives and improve existing practice. This approach is generally adopted rather than the development of more formal substantive content for his Framework (for example, by means of a set of sub-principles which operate with regard to each of the three main principles). There are significant advantages of this approach. It has provided Ruggie with the space to explore particular human rights issues in a diverse range of policy areas – from the human rights impacts of international investment agreements to the human rights policies of Fortune Global 500 Firms.10 Alongside this, it has allowed him to make a series of practical and workable (if disparate) suggestions for how the three obligations could be utilised in order to enhance existing initiatives and improve existing practice. Because of the broadness of his principles, it has been relatively simple to connect each of the suggestions to the principles in a coherent way. Third, it has allowed him to focus primarily on increasing knowledge among key actors about relevant human rights issues and

10

For the repository of all studies conducted, see the Business and Human Rights Resource Centre, http://www.business-humanrights.org/Gettingstarted/ UNSpecialRepresentative (accessed 21 September 2009).


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how they can be addressed and to conduct a range of capacity building and research activities to support this endeavour. For instance, he has conducted detailed research into the (potential) human rights impact on developing countries of stabilisation clauses in investment agreements and a number of further studies are promised (Ruggie, 2009: 12). But the fluidity of both the Framework and its application by Ruggie also has potential weaknesses. First there is the issue of the conceptual uncertainty inherent in such a broad framework. In spite of the fact that protect and respect have been widely used by the TMBs in other policy areas, their application in the context of TNCs needs to be more precisely defined before we can understand what kind of impact the Framework will have. Most crucial in this regard is the corporate duty to respect human rights. There are clear ambiguities about the ambit of this obligation in particular circumstances. For instance, to what degree does the duty to respect place an obligation on companies to use their influence to protect individuals from human rights abuses committed by other employees, by contractors or by the government in the country in which the TNC is operating? Ruggie argues that such responsibilities should be considered a ‘specific operationalization of the responsibility to respect’ (Ruggie, 2009: 7). But what work can the ‘respect’ obligation do in creating a principled rationale for delineating the limits of TNC liability in such scenarios? Currently Ruggie does not provide us with the principles by which such a task can be undertaken. His unpacking of the respect obligation has largely been restricted to providing examples of the procedural obligations which a company has (for example, due diligence, impact assessment, integration of human rights policies throughout a company, and so on). At some point he will need to articulate how the respect obligation allows us to delineate the nature of a TNC’s substantive obligations with respect to different actors (employees, governments, local communities and so on) and in different scenarios (for example, conflict zones). It is only then that we can really gauge whether it is a normative concept capable of coherently dealing with the full range of corporate conduct for which TNCs should bear some human rights responsibility. A second issue is in the application of the Framework. Ruggie has concentrated largely on capacity building and research activities which have increased the knowledge of key actors (for example, TNCs, governments) regarding the human rights problems faced. He has in addition suggested various actions they could take to enhance human rights accountability. But where he has not focused his attention is in relation to the substandard initiatives and laggard TNCs which litter the human rights and business landscape; for instance, those TNCs who ignore all human rights initiatives or make only a vague commitment to human rights and those


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initiatives which remain vague in conception and ineffectively monitored and enforced. One might reasonably ask whether any international human rights mechanism would have the power to change such conduct. Existing human rights conventions and their treaty monitoring bodies have had little impact upon laggard States where there has not been significant pressure for change (from within the State or by other powerful States internationally). But a crucial starting point for the ability to exert significant pressure for change is methodologies which help us to effectively differentiate between different levels of state/corporate performance and between the impacts of different human rights initiatives. It is to be hoped that the guidance and principles which Ruggie intends to produce in a range of areas will fill some of these gaps. As described above, guidance has already been provided in relation to standards for non-judicial grievance mechanisms. Further guidance or principles are promised in a number of other areas such as the conduct of due diligence, the drafting of investment agreements and the prevention of corporaterelated abuse in conflict-affected areas (Ruggie, 2009: 12, 13 and 19). The further guidance which Ruggie produces should not simply be a detailed narrative which can be followed by TNCs and States which are already committed to the underlying principles. Such guidance needs to provide clear, precise and mutually reinforcing mechanisms which can be taken up by campaigners and even citizens/consumers as a tool for effectively differentiating between TNCs, States and human rights initiatives which are at the forefront of creating broader accountability for wide-ranging social impacts and those that are at the rear. To the extent that the Ruggie Framework fails to provide this, we may want to critically reflect upon its usefulness. We may also want to reflect on the extent to which we can expect Ruggie to be able to utilise broadly framed and weakly enforced obligations, such as those contained in international human rights instruments, to create a universal framework which imposes truly meaningful and widespread obligations on TNCs and their wide-ranging activities in developing countries.

6.

CONCLUSION

Over recent years international human rights norms and standards have increasingly become viewed as important mechanisms for holding TNCs accountable for some of their wider social impacts. International ‘soft law’ frameworks, multi-stakeholder initiatives, self-regulatory frameworks, and national cross-border accountability mechanisms have all purported


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to play a role in these endeavours. There are clearly individual companies and/or sectors for which particular initiatives have made important differences. But it has been argued that varying degrees of governance and coverage gaps in existing initiatives mean that the overall value of international human rights norms and standards in holding TNCs accountable for their broader social impacts, particularly in developing countries, must be seriously questioned. Two initiatives have been evaluated here in order to assess the future potential for human rights to create more meaningful and widespread obligations for TNCs at the international level. While very different in design and vision, they are worthy of comparison because both initiatives have universal application – attempting to enhance the accountability of TNCs generally with regard to all their human rights responsibilities. It has been argued that the UN Draft Norms are a misguided mechanism for creating greater human rights accountability for TNCs for a variety of reasons. Many of these relate to problems in the way the Norms have been drafted and the terminology utilised. But it has also been questioned whether a single stand-alone (quasi-)legal instrument is the right approach to enhancing accountability. It is suggested that it might lack the requisite specificity and enforceability that are vital to the efficacy of such an endeavour. The question remains whether the Ruggie Framework will fare any better. The Framework has, in various respects, greater potential. Positive aspects in this regard include: a potential to enhance existing initiatives, rather than operate as a stand-alone generic instrument; widespread endorsement by relevant stakeholders; strong roots in existing international human rights law discourse; a recognition of the importance of effective remedies; and a focus on practical suggestions and recommendations which flow (albeit disparately) from the substantive principles of the framework. But there are also limits to what the Framework, as currently conceived, can achieve. Some of these may be remedied by the kind of further work suggested above, including: explanation of how the conceptual framework can coherently capture the full range of substantive issues which arise with regard to the human rights responsibilities of TNCs; a strengthening of the linkages between the broad policy framework and the concrete suggestions made for increasing accountability; and ensuring that future guidance and principles have optimal specificity so that they maximise their chances of being effectively utilised by relevant actors. If these issues are effectively addressed, could the Framework significantly enhance the ability of international human rights norms and standards to operate as a mechanism for effectively holding all transnational


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corporations more accountable? As has already been argued, we can certainly expect no more of international human rights standards in the context of TNCs than we can in the context of governments. It is those governments/TNCs who are under effective domestic and/or international pressure (or are themselves willing) to take action for whom international human rights mechanisms have the capacity to have a significant impact. But we also need to bear in mind that there are a variety of other legal and non-legal, international and national strategies for influencing the conduct of TNCs in developing countries (for example, enhancing national corporate law codes, campaigning on the basis of investment or trade law obligations, and so on). While these strategies may well be reinforced by a human rights approach,11 previous experience suggests that we need to monitor carefully whether generic overarching human rights principles and standards, such as the Ruggie Framework, are capable of being utilised in specific contexts in a way that creates real added value. If relevant actors focus their energies upon the international human rights regime as a mechanism for enhancing more universalised accountability, this is likely to be at a certain cost to the focus on alternative and perhaps more context-specific mechanisms for change. A case was made in Section 2 above for why international human rights norms and standards are potentially a key mechanism in dealing with the current accountability problems. Rationales were provided in Section 3 for why many existing initiatives have failed to increase accountability in the way we might have hoped. The Ruggie Framework represents an innovative and potentially exciting model for addressing those concerns. But it needs to demonstrate that it can overcome habitual concerns over the underlying capacity of generalised and universally applicable international human rights mechanisms to have the requisite specificity, applicability and enforceability to create real added value in the corporate sphere. We therefore need to continue to monitor whether the Framework is in fact playing a significant role in enhancing TNC conduct in developing countries, rather than becoming a distraction from other endeavours.

11

For instance, one might campaign in a particular country for new corporate law provisions which fine companies, for example, utilising forced labour, partly on the basis of international human rights standards.


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Core labour standards conditionalities: a means by which to achieve sustainable development? Tonia Novitz*

1.

INTRODUCTION

In the twenty-first century, ‘core’ labour standards have emerged as an apparently legitimate subject for trade and aid conditionality in the pursuit of sustainable development. This chapter explains how this situation has come about and challenges current complacency on this issue. The second section of the chapter contrasts results-led and participatory views of sustainable development and identifies how, despite the tendency of policy-makers to focus on a results-based approach, the protection of labour standards could be associated with a participatory orientation. The third section considers how a very limited number of ‘fundamental principles and rights at work’ came to be identified as ‘core’ by the International Labour Organization (ILO) and considers critically the pros and cons of this selective approach. The fourth section of the chapter discusses the use of core labour standards in conditionality, including an overview of this practice in lending institutions and under the Generalised System of Preferences (GSP). It is suggested that promotion of labour standards could prove a useful means by which to achieve sustainable development, but that this requires opportunities for inclusive dialogue and participatory strategies. Such procedural mechanisms are now receiving greater attention, but have yet to fully permeate current modes of conditionality. Indeed, the forms of conditionality that have emerged have done so despite vocal resistance from governments and civil society (including some trade unions) in developing states. This is likely to limit the extent to which the procedures currently in

*

Professor of Law, School of Law, University of Bristol, Bristol, UK. 234


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place, which are ostensibly designed to promote inclusion and participation in monitoring core labour standards, are fit for purpose. There needs to be further inclusive debate as to the ways in which conditionality should be applied, and criteria for genuine participation established, before we can be confident that sustainable development can be achieved through these means.

2.

APPROACHES TO SUSTAINABLE DEVELOPMENT

It has been observed that ‘one of the most striking characteristics of the term sustainable development is that it means so many different things to different people and organizations’ (Robinson, 2004: 369). For example, environmentalists associate the term with ‘a dualistic relationship between nature and humanity’ (Hopwood et al., 2005: 38), while in an industrial setting, labour lawyers understand the term as being connected to the achievement of durable social objectives. An attempt to reconcile these divergent understandings was made via the ‘three pillars’ approach adopted in the Johannesburg Declaration on Sustainable Development 2002, which states that we have ‘a collective responsibility to advance and strengthen the interdependent and mutually reinforcing pillars’: economic development, social development and environmental protection (ibid: para. 5). Indeed, by stressing the significance of collective participation in the enterprise of promotion of development, the Johannesburg Declaration continued a tradition, drawing on both the UN Declaration on the Right to Development of 1986 and the Rio Declaration on Environment and Development 1992. Article 1(1) of the UN Declaration stressed not only that development is a human right, but that it is one ‘by virtue of which every human person and all peoples are entitled to participate in, contribute to, and enjoy economic, social, cultural and political development, in which all human rights and fundamental freedoms can be fully realized’. This is because, as Article 2(1) of the UN Declaration (1986) established, ‘the human person is the central subject of development and should be the active participant and beneficiary of the right to development’. Principle 10 of the Rio Declaration (1992) likewise observed that ‘environmental issues are best handled with participation of all concerned citizens, at the relevant level’. This perspective was reiterated again in the Johannesburg Declaration (2002), which recognised ‘that sustainable development requires a long-term perspective and broad-based participation in policy formulation, decision-making and implementation at all levels’ (para. 26). Yet, despite this rhetorical recognition of an entitlement to participatory


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involvement in the process of development, development has historically been assessed in practice in terms of outcomes. Targets for progress have been set, the achievement of which are empirically ascertainable, whether via economic or other statistical indicators. For example, the Washington Consensus, which came to govern the operations of the International Monetary Fund (IMF) and World Bank Group, may be regarded as having fallen into that trap. As Stiglitz has observed: The success of the Washington consensus as an intellectual doctrine rests on its simplicity: its policy recommendations could be administered by economists using little more than simple accounting frameworks. A few economic indicators – inflation, money supply growth, interest rates, budget and trade deficits – could serve as the basis for a set of policy recommendations. Indeed, in some cases economists would fly into a country, look at and attempt to verify these data, and make macroeconomic recommendations for policy reforms all in the space of a couple of weeks. (1998a: 5)

Arguably, the quest for achievement of the Millennium Development Goals (MDG) raises similar issues, in that targets are set from on high, regardless of local priorities (Satterthwaite, 2003; Black and White, 2006; Saith, 2006). Even one of the original architects of this ambitious project, Vandemoortele (2009), has voiced concern that there has been a capture of the MDG process, such that money-metric and donor-centric views of development are prominent. He sees a need for social partnership if the MDGs are to be met (Vandemoortele, 2008). Within a results-based framework for development, social and labour standards tend to be seen as subsidiary social goods which promote and sustain economic growth or other humanitarian objectives. It follows that they can readily be sacrificed where they would obstruct the achievement of these objectives, because they are purely instrumental. The establishment of objectives and their implementation are determined by experts, often through the operation of international organisations, a prime example being structural adjustment programmes which have been imposed by the IMF and the World Bank Group. While following the neo-liberal market-led policies associated with the Washington Consensus, these international economic institutions saw little point in the promotion of socio-economic rights, including labour standards. The objective was to facilitate competitiveness of exports on international markets and, to this end, the aim was to deregulate labour markets, so as to reduce the cost of labour (for example, abolishing minimum wages). In such a context, collective organisation and participatory representation aimed at raising wages and constraining managerial discretion were viewed as rigidities that were best avoided (Morgan-Foster, 2003; Kaufmann, 2007: 102).


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By way of contrast, the notion that development is a process which has to be understood in procedural terms can be allied to the view that commentators such as Sen (1999) and Nussbaum (2000) take of ‘development as freedom’, according to which the role of development is to enhance the human capabilities of present and future generations. Such a perspective would suggest that labour standards are not merely a by-product of other development objectives, nor are they merely a means to achieve economic or other goals. Rather, such labour rights as freedom of association, collective bargaining and collective action can be regarded as constitutive of a participatory process which gives credibility and sustainability to development (Novitz, 2003: ch. 1; Bogg, 2009). One might therefore suppose that enhanced protection of labour standards through trade and aid conditionality could conceivably assist in sustainable development, given that such standards could promote participation in the establishment and maintenance of policies which promote development, not only at the site of the workplace, but regionally and nationally. However, it is argued below that, in practice, this ideal has yet to be fully realised.

3.

IDENTIFICATION OF CORE LABOUR STANDARDS AS A BASIS FOR CONDITIONALITY

In the period after the end of the Cold War, there emerged debate within both the International Labour Organization (ILO) and the new World Trade Organization (WTO) as to the inclusion of labour standards as conditions in trade and aid agreements. The response of the tripartite ILO Governing Body was, in 1994, to establish a ‘Working Party’ on the social dimension of the liberalisation of international trade. The aim was to discover whether consensus could be reached on the viability of a ‘social clause’ in trade agreements. However, it was difficult, even then, to see how such consensus could be achievable, due to stark divisions of opinion between different countries (particularly the North and the South) and between social actors (especially employers’ organisations and the international trade union movement). Simultaneously, the ILO was placed under pressure to reform and retreat from the ways in which international labour standards had been set. There was a view that the ILO had witnessed an ‘overproduction’ of labour standards, which made it near impossible for the labour markets of ILO Member States to operate in an efficient manner (Cordova, 1993). It was suggested that revision of international labour standards could


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facilitate greater access to employment and, thereby, profitability, foreign direct investment and export share for ILO Member States. The then ILO Director-General, Michel Hansenne, took the views of government and employer representatives very seriously, as it was vital that the ILO re-establish its credibility in this crucial juncture in international affairs. In the Director-General’s Annual Report, Defending Values, Promoting Change, he advocated further study of the relevance and efficacy of ILO standards, and suggested that the ILO as an institution concentrate on a campaign for ratification of seven ‘core Conventions’. These were ILO Conventions Nos 87 and 98 on freedom of association and collective bargaining (1948 and 1949); Conventions Nos 29 and 105 on the elimination of all forms of forced and compulsory labour (1930 and 1957); ILO Convention No 138 on the minimum age for admission to employment (1973); and ILO Conventions Nos 100 and 111 on the elimination of discrimination in respect of employment and occupation (1957 and 1958). The selection of core labour standards was affirmed in the Final Declaration of the World Social Summit at Copenhagen.1 This was, in many respects, a controversial reduction of the ILO’s potential sphere of influence. The subject matter covered by the itemised ILO conventions was narrower than the list of fundamental labour rights advocated previously by commentators, excluding for example such matters as health and safety (Bartolomei de la Cruz, 1994: 211–13; Hepple, 1997: 358). The reasons for selection of this list of core labour rights are unclear. Alston has speculated that the choice of standards to be included in the CLS was not based on the consistent application of any coherent or compelling economic, philosophical, or legal criteria, but rather reflects a pragmatic political selection of what would be acceptable at the time to the United States and those seeking to salvage something from what was seen as an unsustainably broad array of labour rights. (2004: 485)

He cites (ibid: 487) Bhagwati as having taken the even more extreme view that 1

Final Declaration, World Social Summit held at Copenhagen, 6–12 March 1995, Commitment 3: ‘The debate over how to refer to workers’ rights was resolved with a general reference to relevant ILO conventions, followed by references to specific ILO conventions on forced and child labour, freedom of association, the right to organize and bargain collectively, and non-discrimination.’ See also the Programme of Action adopted by the Copenhagen Social Summit (para. 54(b)). See for acknowledgement ILO Doc GB.267/LILS/5: para. 16.


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the CLS list simply reflects those labour practices in relation to which developed countries are thought to perform well and on which at least some of the major exporting developing countries are thought to perform poorly.

A more generous construction of their justification comes from commentators such as Langille (2005) and Maupain (2005). Langille (2005: 431) has asserted that These rights are best conceived as a set of restrictions on the rights of the other party to the bargain as to whom it will bargain with, while saying nothing in the abstract about the substantive outcome of any bargain.

In other words, these are aimed at the protection of process rights, which will enhance substantive outcomes (ibid: 435). Maupain (2005: 448) goes further, identifying a sort of common ‘Kantian’ thread running through their diversity. As pointed out in one of the early documents submitted to the ILO Governing Body in 1994, freedom from forced and child labour as well as non-discrimination relate to the autonomy of will and freedom of association and collective bargaining are the extrapolation of this autonomy from the individual to the collective level.

This may be so, and certainly the inclusion of freedom of association and collective bargaining must be welcomed, especially given the challenge to trade unionism globally over the last twenty years, in which we have witnessed a significant decline in their membership and influence (Visser, 2003; Blanchflower, 2007). The aim would seem to be to give workers some basis on which to organise and collectively protect their interests, which seems likely to contribute to any sustainable development project. However, what is left out would seem to be troubling. Without any recognition of the fundamental nature of health and safety standards, we find workers exposed to egregious practices, which allow them little rest or respite in which to participate in any real way in collective activities, such as trade union meetings.2 One might speculate that certain government and worker representatives accepted the limited scope of the ‘core’ labour standards as a

2

See, for example, the comments made by the members of the ILO Conference Committee regarding lack of UK compliance with ILO Convention No 180, in relation to the effects of the extensive hours permitted in respect of seafarers (and their implications in the context of absence of permission to contact a trade union).


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trade-off, because they recognised this at least offered a potential platform for legitimising trade and aid conditionality. There are indications of this connection between labour standards and international trade in a contemporaneous OECD report, which concluded that compliance with the core labour standards identified by the ILO Director-General would not harm but could even assist developing countries engaged in international trade (OECD, 1996). Strategically, however, the WTO was not prepared to accept a global ‘social clause’, that is, compliance with even the minimal core ILO Conventions as a precondition for access to international trade relations. In a Ministerial Declaration issued in 1996 at Singapore, the position was taken that WTO members did advocate protection of ‘core international labour standards’ but saw the ILO as the appropriate vehicle for setting such standards and monitoring compliance (WTO, 1996: para. 4). In 1998, the ILO seized the momentum by preparing and gaining unanimous consent at the annual International Labour Conference to a groundbreaking Declaration on Fundamental Principles and Rights at Work. This was a departure from mere focus on ratification of and compliance with the core ILO Conventions. Instead, Article 2 of the 1998 Declaration set out the following rights: (a) (b) (c) (d)

freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced or compulsory labour; the effective abolition of child labour; and the elimination of discrimination in respect of employment and occupation.

This provision also stated that these principles were embedded in the very fabric of the ILO Constitution and, as such, constituted obligations to which all ILO Member States were obliged to adhere. Moreover, the Declaration does not only acknowledge the obligations of Member States, but also the obligation of the ILO to take action to assist its members, inter alia, ‘by encouraging other international organisations . . . to support these efforts’. The one rather sour note for those who favoured some kind of conditionality was the curious reference in Article 5 to the effect that ‘the comparative advantage of any country [in trade] should in no way be called into question’ by either the Declaration or the attached followup procedure (Langille, 1999). This provision clearly did not satisfy one of the most enthusiastic proponents of the use of labour standards conditionality, namely the US, which already employed this device in


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the context of its Generalized System of Preferences3 and, to a lesser extent, in the context of NAFTA (Alston, 2004: 499–503).4 However, the attempt made by the Clinton administration to raise labour conditionality as an agenda item at the WTO Seattle talks failed, amidst government boycotts of such discussion and mounting civil unrest (Summers, 2001). Today, the matter has been simply omitted from the Doha agenda. Indeed, the statement of the WTO Director-General, Pascal Lamy, is interesting in this regard. Without mentioning labour standards, he has said that ‘the WTO is concerned with trade and it does not seek to go beyond this although, of course, it recognizes that WTO members must deal with policies and international obligations that go beyond trade’; the WTO will recognise certain key exceptions to the principles of trade liberalisation, such as environmental protection and ‘sustainable development’. The scope of such exceptions, as for example under Article XX of the GATT, remains unclear (Howse and Langille, 2006). We are told by Lamy that they will be narrowly construed, but that a balance will be struck between WTO obligations and those which arise by virtue of membership of other specialist institutions, of which we can assume the ILO is one (see Lamy, 2008). Recently, the ILO and the WTO have engaged in a joint study of the relationship between trade and labour standards (ILO and WTO, 2007). Nevertheless, this exercise has been criticised as largely ‘administrative’, providing a summary of the literature to date, rather than a meaningful endeavour to engage in fresh theoretical and empirical analysis (Charnowitz, 2008). Any consultative element was also lacking from the study.

3

Since 1984 the US has conditioned eligibility for GSP on whether a beneficiary country ‘has taken or is taking, steps to afford to workers in that country (including any designated zone in that country) internationally-recognized workers’ rights’. This was a labour rights amendment to US GSP adopted by Congress and signed by Reagan (the GSP Renewal Act 1984, Pub L No 98-577, 98 Stat 3019). For a useful overview of US practice, see Tsogas (2000) and Hepple (2006: 93). 4 Note that the list of labour standards referred to in the NAFTA side agreement, the North American Agreement on Labor Cooperation (NAALC), is significantly lengthier than that of ILO core labour standards in the 1998 ILO Declaration, but that the norms are to be determined with reference to compliance with national labour laws, rather than established international labour standards.


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4.


CONDITIONALITY IN PRACTICE

The political rejection of a ‘social clause’ within the sphere of WTO negotiations should not be regarded as conclusive of the omission of labour standards conditionality in trade and aid agreements. Rather, key economic powers such as the US and the EU have continued to act unilaterally in this regard, taking the view that the WTO cannot prevent them from doing so. Moreover, certain international agencies, such as the World Bank’s International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), have specifically made the terms of aid conditional on compliance with ILO core labour standards with reference to the notion of sustainable development. Notably, added to the list of fundamental Conventions that these institutions recognise is now ILO Convention No 182 on child labour 1999, which is regarded as an extremely significant instrument for the purposes of imposing conditionality. The question, then, is whether labour conditionality is imposed in a manner which allows a voice to workers and others affected by the imposition of conditionality, or whether powerful trading blocs and international agencies follow a results-driven conception of development. My suggestion is that we are witnessing a gradual transition towards a process-based conception of development, but that this transition is far from complete. In 2004, Alston expressed concern that ‘an important consequence of the Declaration has been to facilitate or validate the efforts of actors external to the ILO who seek to develop alternatives to the ILO’s own monitoring system’ (Alston, 2004: 510), but the outcome does not seem to have been as stark as this. Rather, various economic actors, whether an international economic organisation such as the IFC or a European financial institution such as the EBRD, or a regional trading bloc, such as the EU, have sought to use ILO standards to lend legitimacy to their policies. As Kaufmann (2007: 108) has observed: ‘international human rights agreements that have been ratified by Member States allow international economic institutions to “depoliticize” human rights and to rely on them in formulating and defining development standards’. These actors have sought to apply ILO standards, often with explicit reference to the findings of key ILO supervisory bodies. Nevertheless, there are at least two concerns which arise from the manner in which they have done so. First, they have tended to be selective, such that ILO labour standards concerning child and forced labour have been given greater priority than procedural entitlements to freedom of association and collective bargaining. This is arguably at odds with the rhetoric of ‘country ownership’ and the stress these organisations


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seek to place on participative engagement with civil society. Secondly, although we are told that the views of ILO supervisory bodies are taken into account, the way in which ILO standards have been applied is not altogether transparent. I.

World Bank

The World Bank Group has substantially revised its practices as regards the inclusion of requirements regarding labour standards in its terms of lending. Experts within World Bank institutions would seem to have struggled with the notion that legal protection of freedom of association and collective bargaining could be anything other than obstructive of development. It is only since 2002 that the Bank’s position would seem to have shifted, and even then, the controversial report Doing Business seemed to prize deregulation of labour markets and praise states which were known as ‘egregious violators of workers rights’ (Bakvis and McCoy, 2008: 7–8). Moreover, the Bank would seem to have been further inhibited by a desire not to appear ‘politicised’, based on a restrictive interpretation of the IBRD Articles of Agreement (Darrow, 2003: ch. 4). The evolution towards recognition of ILO core labour standards within the World Bank Group has been slow and incremental. It could be said to have begun with the initiation of the Human Development Network’s Child Labor Program, created in 1998, at a time when this issue was receiving considerable attention within the ILO (which one year later culminated in the adoption of ILO Convention No 182). In 2003, the International Finance Corporation (IFC), which facilitates private sector lending, took the initiative in terms of linking lending conditions to ILO core labour standards. To this end, they have developed a ‘Core Labor Standards Toolkit’, which has been made available on the World Bank website.5 That document states: Compliance with core labor standards is not a condition for lending or technical assistance in client countries. The IFC and MIGA, however, do have policies forbidding the use of harmful child or forced labour in investor projects.6

This suggests a priority at least initially given to those facets of ILO core labour standards other than freedom of association and collective bargaining. The Toolkit does, however, suggest that all four of the core labour standards listed in the 2008 Declaration should be considered in the 5 6

See http://go.worldbank.org/1JZA8B2CO0 (accessed 7 July 2009). Ibid.


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International Development Agency (IDA) Country Assistance Strategies (CAS) as a route towards development, and it provides extracts from CAS which demonstrate that IDA staff have taken note of these issues, although it is much less clear how this information has affected their decisions and the design of the strategies themselves. Curiously, the on-line Toolkit does not reflect more significant recent developments, such as the inclusion of a freedom of association condition in an IFC loan to a clothing manufacturer in the Dominican Republic in 2004 (Bakvis and McCoy, 2008: 6). Nor does it mention the adoption by the IFC of its Policy and Performance Standards on Social and Environmental Sustainability in 2006. In this policy document, the IFC combines its commitment to social and environmental sustainability. ‘Labor and Working Conditions’ arise as the second of eight ‘Performance Standards’ (PS). As the document states: Performance Standards are essential documents to help IFC and its clients manage and improve their social and environment performance through an outcomes-based approach. The desired outcomes are described in the objectives of each Performance Standard, followed by specific requirements to help clients achieve these outcomes through means that are appropriate to the nature and scale of the project and commensurate with the level of social and environmental risks (likelihood of harm) and impacts. Central to these requirements is a consistent approach to avoid adverse impacts on workers, communities, and the environment, or if avoidance is not possible, to reduce, mitigate, or compensate for the impacts, as appropriate. The Performance Standards also provide a solid base from which clients may increase the sustainability of their business operations (IFC, 2006b: para. 4).

While phrased in the familiar language of ‘outcomes’, the 2006 policy document does at least anticipate engagement with workers and communities so as to avoid the potential adverse impact of IFC-funded projects. However, PS 2 ‘Labor and Working Conditions’, set out in greater detail in a further document attached to the 2006 policy, is curious in that, while it purports to be based on all eight core ILO Conventions, its objectives are limited as follows: § §

To establish, maintain and improve the worker–management relationship To promote the fair treatment, non-discrimination and equal opportunity of workers, and compliance with national labor and employment laws § To protect the workforce by addressing child labor and forced labor § To promote safe and healthy working conditions, and to protect and promote the health of workers. (IFC, 2006b: PS 2)

There is no explicit mention of freedom of association and collective bargaining. Instead, the policy document is cautiously respectful of state


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autonomy in this regard, stating that IFC clients are obliged to respect national law regarding workers’ organisations, and that where a state places restrictions on the activities of such organisations the IFC client is to ‘enable alternative means for workers to express their grievances and protect their rights regarding working conditions and terms of employment’ (ibid: PS 2, para. 9). It is thereby evident that access to collective bargaining is not regarded as an essential condition of funding and indeed is the poor relation of the core labour standards otherwise utilised in this policy. Moreover, the International Trade Union Confederation (ITUC) reports that, although the 2006 policy document makes provision for corrective action where a client does not comply with performance standards, and provides for ‘effective community engagement’(IFC, 2006b: para. 2), this is not always a reality. In particular, Bakvis and McCoy (2008: 7) observe that, Unless complaints are filed by trade unions or other parties about violation, the IFC relies largely on borrowing countries’ self-reporting; IFC’s own information-gathering and monitoring mechanisms only cover a small portion of the activities it finances. Also, unions have only a short period of time – 30 or 60 days depending on the type of project – between the public announcement of a loan and its submission to the Bank’s board for approval, to react to potential violations of PS2 . . . Global Unions have urged IFC to improve its information and consultation processes so as to allow earlier input from unions about risks of CLS in each project . . .

That is not to say that the IFC does not co-operate with the ILO. Its most recent collaborative effort is a ‘Better Work’ programme to facilitate compliance with ILO core labour standards in developing countries (see ILO and IFC, 2009). Nevertheless, its activities to date demonstrate a degree of reluctance to place the same emphasis on ILO Conventions Nos 87 and 98 as on other ILO Conventions and to fully engage in community consultation which involves trade unions, let alone other civil society actors, such as workers in the informal economy who are poorly organised and even more vulnerable (see the Commission on Legal Empowerment of the Poor, 2008; for discussion, see Faundez, 2009). II.

European Bank for Reconstruction and Development

In many respects, the policies regarding sustainable development and conditionality adopted by the EBRD mirror those of the IFC. The EBRD ‘Environmental Policy’ established in 2003 required that, where the EBRD invests directly in a project, that project must, among other requirements,


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comply with ‘the International Labour Organization’s fundamental Conventions concerning abolition of child labour, the elimination of discrimination at the workplace; and the elimination of forced and compulsory labour’ (EBRD, 2003). Freedom of association and collective bargaining were omitted from these requirements. However, conditionality regarding the other three core labour standards was justified with reference to ILO membership of all the EBRD countries, even though they may not have ratified the specific ILO Conventions (as per the 1998 ILO Declaration). Finally, it may be interesting to note that an instrumental justification was offered in the 2003 policy documentation for respect for ILO standards: The EBRD believes that good labour practices resulting in a well-treated workforce can lower staff turnover and enhance productivity, benefiting the business of EBRD countries. It also improves their position in the market, where increasingly international companies require their suppliers to comply with the core labour standards.7

This policy has since been revisited and redefined in a manner which reflects and improves upon IFC labour conditionality. In May 2008 the EBRD adopted a new ‘Environmental and Social Policy’ which came into effect in November 2008, although (like the IFC) the EBRD have yet to update various parts of their website to reflect this change. The 2008 policy, similar to that of the IFC, utilises a system of ‘Performance Requirements’ (PR), the second of which is ‘Labour and Working Conditions’. This is not a crude form of conditionality, whereby on proof of non-compliance funding will end. Rather: The Bank’s role is: (i) to review the clients’ assessment; (ii) to assist clients in developing appropriate and efficient measures to avoid or, where this is not possible, minimise, mitigate or offset, or compensate for adverse social and environmental impacts consistent with the PRs; (iii) to help identify opportunities for additional environmental or social benefits; and (iv) to monitor the projects’ compliance with its environmental and social covenants as long as the Bank maintains a financial interest in the project. (EBRD, 2008: 3)

The EBRD policy now makes a specific commitment to the effect that projects are required to comply, at a minimum, with not only health and safety standards but also all four ILO Conventions. However, on closer reading the commitments as regards PR 2: ‘Labour and Working Conditions’ are not so very different from those of the IFC: 7 Notably, this policy followed from the agreement reached between the EBRD and the ILO in 1992 (see EBRD and ILO, 1992).


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11. The client will not discourage workers from forming or joining workers’ organisations of their choosing or from bargaining collectively, and will not discriminate or retaliate against workers who participate, or seek to participate, in such organisations or bargain collectively. In accordance with national law, the client will engage with such workers’ organisations and provide them with information needed for meaningful negotiation in a timely manner. Where national law substantially restricts the establishment or functioning of workers’ organisations, the client will enable means for workers to express their grievances and protect their rights regarding working conditions and terms of employment. These means should not be under the influence or control of the client. (EBRD, 2008: 23)

What is potentially an improvement on the IFC 2006 policy document is the adoption within the EBRD ‘Environmental and Social Policy’ of a separate and distinct PR 10 on ‘Information Disclosure and Stakeholder Involvement’. The ‘stakeholder engagement plan’ is a procedure whereby interested parties have had opportunity to contribute their views regarding environmental and social issues associated with a client’s investments. This is to involve ‘meaningful consultation’ during both project preparation and implementation. Moreover, a grievance mechanism has to be established by the client, so as to ensure that stakeholder concerns are addressed. One can only hope that this proves more efficacious than the IFC processes have done to date. III.

US and EU GSP

As regards trade agreements, the US and the EU, both powerful trading partners, have sought to include ILO core labour standards in bilateral trade agreements. One example is the use of this requirement in free trade agreements (FTAs). Once again, this does not always allow for stakeholder engagement. For example, the US–Jordan FTA contains reference to ILO core labour standards, but is notorious for a review process for violations of labour clauses which does not allow for a public complaint, thereby excluding trade unions from involvement (Bakvis and McCoy, 2008: 3). By way of contrast, US GSP requires compliance with certain labour standards without reference to core ILO Conventions8 and its operation has been criticised on the basis that it is inconsistent and highly politicised 8 GSP Renewal Act 1984, Pub L No 98-577, 98 Stat 3019. The US administration can enforce the labour conditions unilaterally, via the Office of the US Trade Representatives (USTR). In the alternative, NGOs and trade unions can put forward their own petition to the USTR. It is only if the USTR accepts the petition that a public hearing will be held (see Hepple, 2006: 93; Grossman and Sykes, 2007: 258).


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(Hepple, 2005). The system allows the US administration to take unilateral action via the Office of the US Trade Representatives (USTR), but there is also potential for petition by private organisations such as NGOs and trade unions. If the USTR accepts the petition, a public hearing will be held. Thereby, US GSP does at least offer the possibility of public scrutiny (Tsogas, 2000). A very positive picture of the operation of this mechanism is offered by Douglas et al. (2004) who claim that the petition procedure available under US GSP provides ‘an effective confluence of forces’, whereby the US trade union lobby can ‘give teeth’ to ILO criticism of state practices, which itself arises in response to complaints made by unions and NGOs operating within developing countries (ibid: 297–9). Jones (2006) is more sceptical, observing that a ‘subjective criterion’ is applied by the USTR when determining the outcome of any public hearing, such that there is scope to act ‘in a discriminatory manner’, with the result that different developing countries can be required to take different steps to accord internationally recognised rights to their workers (ibid: 28–9). By way of comparison with US bilateral conduct, EU FTAs do make reference to core labour standards, but tend to do so without citing specific enforcement measures. Examples include the EU–Chile FTA and the economic partnership agreement concluded in 2007 with the Cariforum group of Caribbean states (Bakvis and McCoy, 2008: 4). The latter did follow a process of consultation under a ‘Sustainability Impact Assessment’ contracted out to PriceWaterhouseCoopers, which indicates ‘lessons to be learnt’ for future consultative exercises (see PricewaterhouseCoopers, 2007). It is in the context of EU GSP that compliance with ILO core Conventions is likely to have the greatest impact on trade for the developing countries that make use of the system, given that the EU reports that the value of preferential imports has now increased to EURO 58.6 billion.9 The EU now utilises a three-pronged approach to GSP. Firstly, there is the common-or-garden variety ‘standard GSP’, which provides preferences to 176 developing countries. Secondly, there is a ‘special incentive arrangement for Sustainable Development and Good Governance’, which is commonly described as ‘GSP+’. It offers a carrot, in the form of additional tariff preferences for those ‘vulnerable’ developing countries10 9 Council Regulation (EC) No 732/2008, 22 July 2008, applying a scheme of generalised tariff preferences. 10 Note that ‘vulnerability’ is a technical requirement set out in Article 8(2) of Council Regulation (EC) No 732/2008. In order to be ‘vulnerable’ countries need to (a) not be classified by the World Bank as a high-income country during three consecutive years, and have the five largest sections of its GSP-covered


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which have ratified and effectively implemented 27 specified international conventions in the fields of human rights, core labour standards, sustainable development and good governance. The third limb to EU GSP is the ‘Everything But Arms (EBA)’ arrangement, which provides duty-free, quota-free access for all goods from the 50 least-developed countries (or LDCs). The list of beneficiaries under GSP+ currently stands at 16.11 It is not altogether clear why it contains some states which are clearly in the most flagrant breach of ILO core labour standards, particularly freedom of association in countries such as Columbia (Novitz, 2009: 35). The suspicion may well be that, with the termination of the EU GSP Drugs regime, after a challenge from India within the WTO dispute settlement procedure,12 the EU has merely transferred the access of certain South and Central American states to trade preferences across by this alternative avenue. This suggests that the lack of transparency highlighted in that case as a violation of the Enabling Clause and thereby the WTO General Agreement on Tariffs and Trade (the GATT) has not altogether been cured by the current EU GSP regime. Preferences under any of the three GSP regimes can be temporarily withdrawn where there is ‘serious and systematic’ violation of any of a number of key human rights conventions, including the eight core ILO Conventions.13 This is a notable improvement on the first use of labour standards conditionality in GSP, whereby withdrawal was only possible on grounds of slave labour, forced labour or export of goods made by prison labour.14 It is on such a basis that two countries (Myanmar and Belarus) remain temporarily withdrawn from GSP preferences, as the imports into the Community represent more than 75 per cent in value of its total GSP-covered imports; and (b) have the GSP-covered imports into the Community represent less than 1 per cent in value of the total GSP-covered imports into the Community. 11 For the period 2009–11, 16 beneficiary countries have now qualified to receive the additional preferences offered under the GSP+ incentive arrangement (see Commission Decision 2008 L334/90, 12 December 2008). They are (currently): Armenia, Azerbaijan, Bolivia, Colombia, Costa Rica, Ecuador, Georgia, Guatemala, Honduras, Sri Lanka, Mongolia, Nicaragua, Peru, Paraguay, El Salvador, Venezuela. This is subject to review of the inclusion of Sri Lanka, El Salvador and Venezuela, which may not meet the necessary criteria. 12 European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WTO Appellate Body Decision, adopted 7 April 2004. 13 Council Regulation (EC) No 732/2008, 22 July 2008: Reg. 15. See also Annex III, Part A, in which the core ILO Conventions are listed. 14 See previously Council Regulation (EC) No 2820/98, discussed by Tsogas (2000).


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reasons for their withdrawals still persist, the latter involving clear violation of principles of freedom of association, leading to specific identification of its violations in a ‘special’ paragraph at the 95th and 96th ILO International Labour Conferences.15 In carrying out the task of an investigation into grounds for temporary withdrawal, the EU Commission is placed under a series of procedural responsibilities.16 For example, the investigation is to be completed within one year before it goes to the Council for final determination. Moreover, there is to be formal and appropriate notification of the beneficiary country, which is to be given the option to make representations. Also, the views and findings of the ILO and other UN supervisory bodies are to be taken into account. However, there is no formal account made public of the Commission’s reasoning or that of the Council. It does not seem to be contemplated that the process could be reviewed by the European Court of Justice, although this should in theory be possible. Moreover, there seems to be no specific scope under the Regulations for representations to be made by interested civil society actors. However, in practice, the Commission on announcement of a violation, for example that in El Salvador relating to ILO Convention No 87 on freedom of association and the right to organise, invites ‘interested parties’ to send relevant information and comments within four months. It is unclear what kind of a hearing civil society actors, including trade unions, and those affected in the country concerned can expect to have. Nor is this clarified on the public website which the EU has at its disposal.

5.

CONCLUSION

What seems to emerge from these examples of labour conditionality in trade and aid is a richer and more comprehensive conception of core labour standards, which is gradually beginning to include freedom of association, a key procedural entitlement. This is not fully realised within the systems for aid conditionality offered by the IFC and the EBRD, but some progress is being made in this direction. What is still lacking is meaningful participation in determining how aid and trade conditionality is applied, whether in the context of preferential lending through IFIs or of preferential tariff rates through GSP.

15

These were decisions previously made under Council Regulations (EC) No 552/97 and No 1933/2006 respectively. 16 See, for example, Council Regulation (EC) No 732/2008: Reg. 18.


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While labour conditionality is apparently firmly entrenched in international commercial and trade relations, the ways in which it operates are open to criticism. It is here that consensus is lacking. There would seem to be a case for greater scrutiny of this practice and the question remains where the locus of such control should lie. De facto, where conditionality is trade-related, the most obvious means for supervisory control lies with the WTO and its dispute settlement process. Yet, while the case brought by India regarding EU GSP offers some future hope, there is little immediate indication that this jurisprudence will evolve swiftly so as to operate in an effective fashion which protects those affected by conditionality. Arguably, it is here that the ILO could play a role. After all, the danger is that the core labour standards identified by the ILO lend legitimacy to the operation of current modes of conditionality, without ILO interpretation and application of such standards affecting how those core labour standards are applied. Having established the list of core labour standards, it would seem that the onus is on the ILO to act again, to provide a steer on how they are used in aid and trade conditionality. Moreover, given that this is a tripartite body, consisting of government, employer and worker representatives, which allows for significant NGO representation, the ILO offers the greatest opportunity for participatory debate. This is difficult, since some developing countries and social actors will fear that such an initiative amounts to endorsement of existing practices to which they have always been opposed. However, the political reality may be that it is too late to block such initiatives and that the most sensible tactical strategy is to shape their operation in ways that are conducive to the participatory dimension of sustainable development.


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Developing countries and international competition law and policy Kathryn McMahon*

1.

INTRODUCTION

In the last 20 years the number of countries with some form of competition law has almost doubled. Approximately 100 countries now have a competition law and as many as 75 per cent of these are developing countries (Fox, 2007: 104; Stewart et al., 2007: 4; Evans and Jenny, 2009: 10). Many other developing countries are in the process of enacting legislation and establishing competition authorities. Much of this activity can be traced to global trends towards the liberalisation of markets and the privatisation of government utilities (OECD, 1992). As the state contracts, competition law is viewed as a last bastion of regulation required to umpire imperfectly competitive markets or residual pockets of ‘market failure’: the idea of ‘competition as the regulator’. In developing countries the enactment of competition laws was also a response to neo-liberal international development policies most commonly associated with the ‘Washington Consensus’, which prioritised promarket structural reforms, fiscal restraint and monetary controls, and the pursuit of economic efficiency (Williamson, 1990a). Some countries, such as Indonesia, adopted competition law as a direct condition of the receipt of funding from the International Monetary Fund. For other post-Soviet and transitional economies in Eastern Europe its adoption was seen as preparation for eventual membership of the European Union (EU). At the international level, competition policy was perceived as integral to the efficient flow of goods, services and capital in the global economy. In the absence of competition law the productivity and development benefits from trade liberalisation could be eroded by the erection of domestic barriers to competition through cartels, the structural division of markets and * Associate Professor, School of Law, University of Warwick, Coventry, UK. 252


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the abuse of monopoly power. As a consequence there have been increasing calls for the international harmonisation of competition laws and in 1996 the idea of a ‘global competition law’ was placed on the agenda of the World Trade Organization (WTO) as one of the ‘Singapore issues’. The eventual breakdown of these negotiations in 2004 and the abandonment of the idea of adopting multilateral competition rules following the Ministerial Conference of the WTO in Cancún are most commonly attributed to the opposition voiced by developing and least-developed countries. Of course the reality is somewhat more complicated. So-called global competition laws, while strongly supported by the European Union, were never fully endorsed by the United States. This chapter will examine some of these issues within the context of the utility of global and domestic competition law and policy for developing and least-developed countries. While developing countries may have been right to question the overall benefits of a multilateral scheme, the enactment of a domestic competition law which is mindful of the contextual issues at stake in these economies may make an important contribution to economic development.

2.

THE IDEA OF A ‘GLOBAL COMPETITION LAW’

The liberalisation and globalization of trade has brought with it a number of issues for competition law and policy. On the one hand, the enactment of competition law strengthened international trade by protecting market access opportunities against anti-competitive practices. However, potential inefficiencies were also brought about by increased transaction costs, as scrutiny of cross-border mergers and the potentially anti-competitive conduct of transnational corporations was required according to sometimes conflicting national criteria in multiple jurisdictions. Cartels were also now operating on a global scale, which had an unprecedented effect on international market prices. There were calls to harmonise or streamline domestic merger regulations, eliminate multiple pre-merger notification procedures, and establish a ‘one-stop shop’ for merger and joint venture clearance and the imposition of merger remedies and undertakings. The eradication of international cartels would also need a co-ordinated, international response to information exchange and investigation (Sokol, 2007). After the consideration of a number of proposals, the WTO was regarded as best placed to negotiate a set of multilateral competition rules due to the close relationship among competition, market access and non-discrimination issues. The WTO also had the advantages of almost


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universal membership, an existing dispute resolution mechanism and the presence of existing competition provisions concerning telecommunications and intellectual property in the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Geradin and Kerf, 2004). In 1996, as a result of the Ministerial Conference in Singapore, the WTO established a Working Group on the Interaction between Trade and Competition Policy,1 and in 2001 the idea of a ‘global competition law’ was placed on the agenda of the WTO as one of the ‘Singapore issues’ of the Doha Ministerial Declaration (WTO, 2001a). The focus of this agreement was to be on the core principles of competition policy, including transparency, non-discrimination and procedural fairness, and common approaches to anti-competitive practices with significant impact on international trade. These included provisions on hardcore cartels, international co-operation between antitrust authorities and dispute settlement to ensure domestic competition law and enforcement structures were in accordance with provisions agreed multilaterally. There was also an explicit statement regarding the need to ‘recognize the needs of developing and least-developed countries for enhanced support for technical assistance and capacity building in this area’ (WTO, 2001a: para. 24). But in the ensuing discussions no real consensus emerged on the form and scope of a multilateral agreement (Hoekman and Holmes, 1999) and, as noted, the negotiations broke down in 2003 at the Ministerial Conference of the WTO in Cancún. A Decision was adopted by the General Council of the WTO on 1 August 2004 to abandon the Interaction between Trade and Competition Policy as part of the Work Programme set out in the Doha Declaration (WTO, 2004b). The opposition to the agreement voiced by developing and leastdeveloped countries was a major factor leading to the demise of the negotiations. But the United States, who had a fundamental objection to the idea that trade and competition concerns could be combined, also failed to support the idea. Negotiated multi-party agreements face co-ordination problems and outcomes can be weakened by compromise and concession. In this case, however, the US feared that a global competition agreement might actually impose more stringent rules for the regulation of anti-competitive behaviour and international mergers on US firms than those currently

1 See http://www.wto.org/english/tratop_e/comp_e/comp_e.htm#documents (accessed 11 November 2009).


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applied by way of domestic US antitrust law, which recently, particularly in some important US Supreme Court decisions,2 had been significantly influenced by the pro-market rules of the Chicago School (Bork, 1978; Posner, 2001). The US expressed uncertainty concerning what a global regime would look like and fears that a harmonised model would more closely resemble the more interventionist EU competition law, which had been the preferred competition model adopted in many countries (Fox, 2000; Bradford, 2007: 408). At a fundamental level the US did not want its sovereignty in domestic and extraterritorial competition matters to be jeopardised or curtailed by an international regime. It is not however possible to place all the blame on the US and developing countries. Multiple factors were at work, including a more simple explanation of bad political strategy. As Evenett (2007: 400) has argued, it may have been unwise to link competition as a coherent package with the other ‘Singapore issues’ such as the interaction between trade and investment and government procurement transparency. These issues were also eventually dropped from the Doha Work Programme.

3.

THE OBJECTIONS TO A MULTILATERAL AGREEMENT RAISED BY DEVELOPING COUNTRIES

It was not surprising that developing and least-developed countries could not see much to benefit them in the idea of a ‘global competition law’. The impetus for some form of multilateral agreement was always firmly based in trade liberalisation, foreign direct investment (FDI) and the facilitation of market access, hence the choice of the WTO. Measures to ensure the efficiency of global commerce were not a priority for developing and leastdeveloped countries who were not active participants in global mergers or joint ventures. They were also wary of yet further international measures to facilitate access to their domestic markets when they already faced significant trade deficits. Some believed it was hypocritical for developed countries to pursue another market access scheme when they failed to dismantle their own agricultural subsidies and industrial state aid which severely impacted

2 See, for example, Brooke Group v. Brown and Williamson Tobacco Corp; Verizon Communications Inc v. Law Offices of Curtis V. Trinko; Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.; Pacific Bell Telephone Co. v. Linkline Communications, Inc.


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access to global commodity markets for developing countries. They were suspicious too of the possibility of yet another global agreement through the WTO and the proposed safeguards for developing nations, when agreements such as TRIPS and the WTO dispute settlement process were perceived as unfair by many developing countries. TRIPS strengthened the rights of the owners of intellectual property rights, the majority of which are from developed countries, to impose restrictive conditions on licensing (including purchaser and distributional restrictions) which may adversely affect competition. While the TRIPS agreement does permit members to take appropriate measures to prevent abuse of intellectual property rights, these are dependent on functioning and effective competition enforcement agencies, which may not be established in developing and least-developed countries. The TRIPS agreement offers limited guidance on the narrowly construed areas of intellectual property abuse which often require a complicated rule of reason analysis and a certain level of competency in competition issues (Bhattacharjea, 2006: 302). The pursuit of a global competition agreement by developed countries was also regarded as somewhat disingenuous when they had in place export cartels which had detrimental effects on global commerce. Legislation such as the US Webb-Pomerene Act3 exempts from US antitrust laws ‘export cartels’ created by US firms who gain by the ability to collude and increase prices on international markets, as long as the conduct does not adversely affect US consumers. Export cartels are predominately formed to provide opportunities to participate in export markets for small and medium-sized firms, sometimes within trade associations, who individually would not have the resources to engage in this activity (Hoekman and Holmes, 1999: 4). They are therefore thought incapable of raising competition concerns because they would not have sufficient market power to exploit foreign markets (Bradford, 2007). But it is the aggregate effect of these cartels which is likely to impact importing nations such as developing and leastdeveloped countries who are often unable to protect themselves against this activity. At the very least, the exemption for export cartels sends a symbolic message that developed countries are only concerned about the impact of cartels on their own domestic markets (see discussion in Section 7 below). The merits of the wholesale pursuit of the pro-market, neo-liberal agenda of the Washington Consensus, even before the current global financial crisis, were also already beginning to be questioned when the promised outcomes for developing countries did not readily materialise (Kennedy,

3

15 USC 61-65 2000.


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2006). This free market approach could entrench inequalities and wealth transfers from consumers to producers in the highly concentrated markets in developing countries and in circumstances where consumers had little relative power (Stewart et al., 2007). The ‘efficiency’ or ‘aggregate wealth’ goals of competition law were regarded by developing nations as perhaps ‘inappropriate to their context because of the tendency of free-market policies to disproportionately advantage the already advantaged in every game played’ (Fox, 2007: 215). Where 20 per cent of the world’s population (and in sub-Saharan Africa this figure rises to more than 40 per cent) live on less than one dollar a day (Fox, 2007: 218), developing and least-developed countries had other priorities such as access to water and the right to an adequate standard of living, including food, clothing and housing. Competition law was seen to have little to say about distribution issues and inequalities and it was these other non-competition policy aims, such as that represented by the first of the United Nations’ (eight) Millennium Development Goals (MDGs) – to halve the percentage of the world’s severely poor by 2015 – which would need to be prioritised (UNGA, 2000).

4.

THE REJECTION OF A ‘ONE SIZE FITS ALL’ MODEL OF COMPETITION LAW FOR DEVELOPING COUNTRIES

Developing countries were primarily concerned about the model of competition law this proposed multilateral agreement could impose on them. They questioned how institutional models of competition law, enacted over long periods in globalised and fully developed economies such as the EU and the US, would translate to markets in developing economies which faced arguably wholly different circumstances of highly concentrated domestic markets, strong commodity based economies with extensive non-traded sectors, weak institutional governance structures and enforcement mechanisms, and poor technical capacity. These concerns were expressed at a Workshop organised by the Southern and Eastern African Trade Information and Negotiations Institute (SEATINI) in April 2003 in Tanzania. African trade officials from Angola, Kenya, Lesotho, Malawi, Mozambique, Tanzania, Uganda, Zambia and Zimbabwe set out a statement opposing negotiations on the competition issues: Our understanding of competition policy from the development perspective is that there is a need for government to assist and promote local firms so that


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they can survive, be viable and develop despite their present relative weakness, so that they can successfully compete with foreign firms and their products . . . If negotiations begin, it is likely that the developed countries’ market access approach may eventually win out, due to their higher negotiating capacity and influence. There could then be a competition agreement in WTO that would oblige our governments to give almost total freedom and market access rights for foreign firms and their products and services, whilst local firms would not be able to receive assistance or subsidies and many of them may not survive. (SEATINI, 2003)

Developing countries were concerned that the WTO principle of ‘nondiscrimination’ would not permit them to exempt certain firms from acting in ways to benefit the economy and grant concessions to particular state owned monopolies (Stewart, 2004; Bradford, 2007: 411–12). It could also prevent them from imposing duties on essential utilities such as telecommunication firms to achieve more distributional outcomes such as universal service obligations or universal access (see discussion in Section 7 below). They wanted the autonomy to apply a more contextual, flexible approach to competition law – analogous to the existing ‘special and different treatment’ regime of the WTO (Bradford, 2007: 420). The retention of the right to formulate exceptions more conducive to their stage of development was partly derived from what developing countries had observed in the operation of competition law throughout history in developed countries. For example, the current global priority being given to the detection, prosecution and criminalisation of cartel activity is only a recent occurrence in developed countries (other than the US) (Evans and Jenny, 2009: 10). In the early part of the twentieth century, European cartels were not merely tolerated but embraced as a necessary aid to the stabilisation of market prices during industrialisation. Successive European governments encouraged and even participated in cartel behaviour through public enterprises in order to stabilise markets or control them through means such as the ‘total cartels’ of Nazi Germany (Harding and Joshua, 2003: ch. 3). Developing countries maintain that at their stage of industrialisation they prefer a competition policy which protects, and thereby permits, the development of national champions: larger firms which can take advantage of economies of scale and productive efficiencies so that they are better prepared to eventually compete on the international market. This requires more permissive scrutiny of domestic mergers and/or allows dominant national firms special freedoms or exemptions to exercise market power (Gal, 2003). It was always acknowledged however that WTO members could seek exceptions from any binding agreement in the event of any substantial


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clash between the proposed obligations and national development policy as long as these were transparent and operated for a defined period (Evenett, 2007: 405). The economic argument for special protection has also been questioned. A fair portion of economic activity in developing countries relates to the non-traded sector, such as electricity, water, financial services and telephony, where foreign trade has not provided market discipline. Inefficient monopolies may be protected and entrenched by concessions or the failure to regulate the abuse of market power. These exemptions can also be the direct result of regulatory capture and rentseeking by producers, whereby weak regulatory authorities adopt policies or allow exceptions for various interests, which can impede the development of fully competitive markets (Bhattacharjea, 2008). It is also not self-evident that economies of scale in small or developing nations will always require highly concentrated markets. Any assessment will depend on the particular product and the minimum efficient scale for the market (Elhauge and Geradin, 2007: 1108). Porter (1990), in his extensive study of competitiveness in small economies, argues that strong domestic rivalry is more important to innovation and economic development than industrial policy designed to foster national champions. Evenett concludes that ‘the conceptual arguments and the available empirical evidence by and large supports the view that promoting inter-firm rivalry enhances the dynamic economic performance of developing economies’ (Evenett, 2003: 7).

5.

THE CONSEQUENCES OF REJECTION OF THE AGREEMENT

What were the consequences for developing countries of the failure of the multilateral negotiations? International cartels, mergers which create anticompetitive effects and the abuse of market power by foreign multinationals, if unconstrained, can be hugely detrimental to consumer welfare in these emerging and developing economies. It is also true that the welfare benefits from the increased detection and eradication of global cartels go beyond the mere facilitation of ‘market access’ (Evenett, 2007: 408). Surely enhanced efforts to coordinate the eradication of this behaviour would be beneficial for developing countries. International cartels have a disproportionate effect on developing countries because they are highly exposed to international trade. This is partly due to the fact that many import substitution schemes have been unsuccessful. Developing countries are also generally ‘price takers’ on world markets (Hoekman and Holmes, 1999: 10; Gal, 2004), that is, they have no real buyer market power which they can use to affect prices.


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Levenstein and Suslow (2004) estimated that for 19 selected products the value of cartel-affected imports to developing countries in 1997 was $US51.1 billion (an amount which exceeded the amount of all foreign aid to developing countries that year – $US39.4 billion) and that the price of these imports by reason of the price-fixed overcharge was elevated by at least 10 per cent (ibid: 813–16). These goods represented 6.7 per cent of imports and 1.2 per cent of GDP in developing countries. While it is true that competition policies are more directly linked to promarket agendas than distribution concerns, it is a reality that international cartel activity has directly increased the price of many staple commodities. This has had a real impact on the consumer purchasing power and thereby the poverty levels of developing countries. At its most extreme, excessive pricing of essential commodities can create shortages, which have potential spill-over effects in social and political disruption. The anticompetitive effects remain largely unregulated however because competition laws are under-enforced by developing countries which either do not have a competition regime or lack the resources to enforce it (Bradford, 2007: 389). The abandonment of negotiations to formulate a global agreement also meant that efforts to co-ordinate a response to international anticompetitive behaviour were transferred to strengthening bilateral or regional competition agreements for the exchange of information, issues of comity and co-ordinated enforcement, and voluntary soft law options such as the International Competition Network (ICN).4 The ICN was established in 2001 as a forum for competition agencies to cooperate and exchange information concerning ‘best practice’ and the identification of frameworks for the harmonisation of competition rules and procedures. Today its membership includes 107 competition agencies and hundreds of non-governmental advisors (NGAs). The ICN has assisted with financial support for delegations from developing countries and ensured that they have a role in heading working groups within the organisation such as those on Competition Policy Implementation (Brazil) and the Judiciary (Brazil and Chile) (Sokol, 2007: 106). It has also implemented a pilot project whereby volunteering agencies agree to provide a partnership role or to be on call to answer questions and provide information for less experienced and newer agencies. Its major policy work programme, however, has tended to focus on issues of most concern to developed countries such as reducing the regulatory burden for cross-

4 See http://www.internationalcompetitionnetwork.org/ (accessed 11 November 2009).


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border mergers and the investigation of international cartels. Thus, developing countries still participate largely as ‘recipients’ of technical advice and capacity building rather than directly contributing to the development of an optimum model of competition law, where the debate is still dominated by either the EU or the US. What is perhaps most surprising is that while developing and leastdeveloped countries have opposed the multilateral competition agreement, they have been willing to enter into preferential trade agreements and regional trade agreements which, in many cases, impose just as onerous competition related provisions in return for preferential trade terms and market access (UNCTAD, 2005a; Bhattacharjea, 2006: 314, 315). These agreements often require signatories to adopt domestic competition law regimes and to apply these extraterritorially to cross-border transactions which have anti-competitive effects. But, as Bhattacharjea points out, there is a crucial difference between these agreements and the one proposed by the WTO, which partly explains the willingness of developing countries to participate, in that there is no mandatory dispute settlement mechanism (ibid: 315). Rennie argues that the competition provisions in these regional trade agreements largely lack ‘functional definition’ and would require further negotiation and domestic commitment to their implementation, which is often lacking, to operate effectively (Rennie, 2009b: 11, 71). Developing countries often lack the institutional support of a strong domestic competition agency to take an active part in reciprocal information sharing and enforcement which forms part of these competition agreements.5 But, as Bhattacharjea argues, ‘once competition laws are in place, there will be an increasing pressure for them to be enforced’ which may result in a de facto multilateral agreement which has the potential to undermine opposition to a future multilateral agreement by developing countries (Bhattacharjea, 2006: 323). Developing countries may have also been reluctant to support a multilateral agreement on competition law which failed to address one of the fundamental issues which impacts unfairly on their ability to engage in international trade: the imposition of anti-dumping duties. While a reassessment of anti-dumping duties was originally on the agenda for negotiation of the multilateral agreement, it was excluded from the final Doha Declaration. Article VI of the General Agreement on Tariffs and Trade (GATT) 1994

5

Bradford (2007: 411) argues that this is another reason why developing countries would seem likely to be beneficiaries of a future international antitrust agreement.


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permits the imposition of duties on imported goods ‘when the export price is below the “normal value” given by the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country’. Anti-dumping duties are intended to counter ‘unfair competition in the domestic market arising from price discrimination between different geographical markets’ (Neufeld, 2001: 1). Developing countries are subject to 42 per cent of all anti-dumping investigations, an increase from 20 per cent in the 1980s (Neufeld, 2001: 4). Developed countries are increasingly taking advantage of these measures to protect their domestic industries against lower priced imports (often the result of currency devaluations) from developing countries. There have long been calls to align these anti-dumping duties with competition principles so that they can be assessed on a firmer economic basis, namely the effect of these prices on competition in the market and consumer welfare rather than the protection of domestic competitors. Many prices which attract anti-dumping duties would not be classed as ‘predatory’, and therefore illegal, under competition law principles because they do not amount to ‘price discrimination’ or ‘predatory pricing’ (Vermulst, 1999). The assessment of the anti-dumping duty on technical, narrow and administratively burdensome price comparisons, with reference to complicated constructed value determinations6 on often historical data, is anathema to competition law principles which require such assessments to be related to an intent to harm an equally efficient competitor and/or to gain market power. The excessive duration of the final measures, which can remain in force for an average of six to nine years (Neufeld, 2001: 8–9), is also contrary to competition law principles where courts favour structural over behavioural and price setting remedies in order to avoid the ongoing supervision of the commercial transaction. The failure to assess these prices under competition principles grants those countries with the requisite technical expertise and legal resources to successfully invoke them an effective protectionist instrument for their domestic industries which encourages market distortions and rentseeking. These often excessively lengthy investigations create uncertainty and instability particularly for export firms in developing countries, which often lack the technical and financial capability to successfully defend these investigations (Neufeld, 2001: 14). Often the mere threat of a chal-

6

In instances where there is no comparable reference, the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit is taken into account.


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lenge is sufficient for exporting countries to alter their behaviour and withdraw from markets. While Article 15 of the WTO Anti-dumping Agreement requires that ‘special regard must be given by developed country Members to the special situation of developing country Members when considering the application of anti-dumping measures’, it is rarely applied. Bhattacharjea (2006: 301) argues that developed countries have abused the anti-dumping provisions and that these actions are spiralling out of control. The multilateral agreement on competition may have provided an opportunity to expose the apparent unfairness, economic unsoundness and somewhat arbitrary application of these duties. The increasing use of these protectionist measures by developed countries against developing countries also exposes, once again, the somewhat disingenuous nature of their simultaneous calls for greater market access and trade liberalisation.

6.

A COMPETITION POLICY FOR DEVELOPING COUNTRIES

After the failure of the multilateral competition agreement the question remains: should the enactment of domestic competition laws be a priority for developing countries? A number of studies, particularly those in transition economies, have concluded that strong competition policy is conducive to economic growth (Cook et al., 2007). A study of the two countries which have experienced the most rapid recent growth, China and India, may prove otherwise. China did not have a competition law until 2008 and India experienced its highest-ever growth rates during the period (2003–08) when its competition law was in abeyance while new legislation was being drafted (Bhattacharjea, 2008: 27, n 62). It has also been argued that, because domestic antitrust enforcement is generally ‘designed to maximise consumer welfare and excludes producer surplus, it is not clear one would expect desirable antitrust enforcement to increase GDP’ (Elhauge and Geradin, 2007: 1110). Nevertheless, strong competition law and policy in developing countries should provide the necessary incentive for foreign and domestic investment. In this way, as Fox argues, competition law operates in the opposite direction to regulatory competition in tax or corporation law as states are not in direct competition to have the most desirable competition law (Fox, 2000: 1788–9). In the absence of a multilateral agreement, developing and transition economies have, of course, the autonomy to determine their own competition rules even if these are considered contrary to the interests of foreign companies. For example, the Anti-Monopoly Law of the People’s


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Republic of China came into effect on 1 August 2008. China’s first major ruling under its new competition law was to reject Coca-Cola’s US$2.4 billion bid to buy the Chinese juice-maker Huiyuan. The economic reasoning and market definition applied by the Chinese Ministry of Commerce (MOFCOM) drew much criticism from the US. The potential market share of the merged company was estimated to be 20.3 per cent of the Chinese juice market. It was argued that this would present no competition issues in the US or the EU, which would require a market share of at least 40 per cent before concerns could be raised. The decision was considered to be one which merely protected Chinese domestic juice producers from a foreign competitor (Chovanec, 2009). It is unclear whether the Chinese authority would retain the right to make a similar decision if it signed up to a multilateral competition agreement or whether, according to Fox’s argument, this decision will also discourage further foreign merger activity and investment in China. Foreign direct investment has not only increased the presence of foreign firms but also strengthened domestic rivalry in developing countries. But anti-competitive practices have been observed in many markets (UNCTAD, 2004a, 2008c). Fox (2007) notes that there is evidence of rampant buying cartels and bidding cartels for state contracts in developing countries in staple commodities. Such arrangements exploit domestic small farmers and producers: Seller cartels target basic necessities, including staples of diets. In Peru, poultry farms and their trade association conspired to eliminate competitors and prevent entry . . . In Kenya, owners of minivans sought monopolies over lucrative routes . . . [and] the fertilizer manufacturers organized a secret bidding cartel in their tenders to the government buying authority, which impoverished the farmers who needed an increasing number of supplies. In many countries, numerous vertical agreements have tied up scarce channels of distribution. (ibid: 225)

Markets in developing countries are highly concentrated, which makes them particularly susceptible to abuses of dominance or monopolisation. As Brusick and Evenett (2008) point out, concentrations of market power are frequent because geographical conditions and poor transport links often result in small and fragmented markets. Merger policy conducive to the creation of national champions may also produce dominant firms which may not be subject to competitive discipline. The presence of a large informal market sector can also lead to narrowly drawn markets and exaggerated measurements of market power. In many countries, one may also encounter a failure to restructure and introduce contestability to elements of state monopolies prior to privati-


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sation. The state monopoly may have been merely transferred to private hands to maximise treasury receipts (Brusick and Evenett, 2008: 276). The sale may have been to the highest bidder rather than one following an assessment of any anti-competitive effect on existing markets. There may also have been instances of non-competitive bidding and/or corruption where the sale was made to interests associated with the government. The close relationship between the new owners and government may facilitate the exploitation of market power in key infrastructure industries such as transport (ports, freight) or communications (control of local loop access), which is particularly detrimental to development. As Brusick and Evenett (2008) point out: many poor countries are either island or landlocked countries, and efficient transportation infrastructures are a prerequisite for the inexpensive distribution of domestic- and foreign-produced goods and for fast exportation, both of which foster economic development. (ibid: 275)

There may be very little competition between ports and each may be served by a single shipping line which enables them, and the port authorities, to extract excessive charges and monopoly profits in key export and import sectors. Truck-drivers’ unions may also operate as a cartel to fix prices for freight transportation (ibid). Foreign multinational companies may also be monopsony (or sole) buyers in key sectors such as supermarkets where they can impose restrictive conditions on, and extract lower prices from, local suppliers. This has a huge impact on developing countries because of the large numbers engaged in the agriculture sector (ibid: 284, 291). The strong presence of the state in public services and utility ownership means it can intervene in the bidding process for public works and the awarding of contracts. The powerful position of the state may also mean that it is able to negotiate extremely favourable contracts for the provision of services from utilities (ibid: 277) leaving them undercapitalised or near bankruptcy. Competition regulation could be used to establish discipline in these domestic markets. Certainly, there has been a huge growth in recent years in the number of competition regimes in developing countries but many of these laws remain unenforced. As noted, any domestic competition policy faces the major political challenges of weak institutional capacity and governance, lack of technical expertise and financial resources, and rentseeking by public and private enterprises. Given these complex issues, the key question remains what model of competition law is best suited to developing countries. What is clear from an examination of the political and economic context is that a model of competition law based on US antitrust, as dominated by the Chicago


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School, is not appropriate. The Chicago School goal of economic efficiency as ‘total welfare’ (whereby producer surplus and consumer surplus are maximised within a utilitarian calculus) and belief in ‘self-correcting markets’ are not appropriate to the different issues and problems facing developing and least-developed economies with conditions of highly concentrated markets and specially protected sectors. The Chicago School idea of ‘self-correcting’ markets is based in the idea that monopoly power is fragile and temporary. As barriers to entry are considered minimal and the capital market is perfectly competitive, monopoly profits will be competed away as new players enter the market. But, as we have seen, markets are often small and fragmented in developing countries. They are also dominated by the state, which significantly raises barriers to entry. The financial markets are also far from perfectly competitive. Access to funds for a firm trying to adopt a counter-strategy in response to predation (such as predatory prices), or to gain entry to a new market, is severely limited. The banking sector is highly concentrated and ‘[a]ccess to finance, distribution networks, information about customers, and the necessary approvals from state bodies often frustrate the extent to which dominant firms will be disciplined in this manner’ (Brusick and Evenett, 2008: 277). In India, for example, Bhattacharjea (2008: 24) observes that the ‘capital market is far from perfect, and small and medium firms have been credit-constrained by a banking system that systematically ignores future profitability in lending decisions’. As Fox (2007: 213) concludes, developing economies require a competition policy which is mindful of ‘the opacity, blockage and political capture of . . . [their] markets, and includes some measure of helping to empower people economically to help themselves’. A model consistent with development economics (ibid: 211) is not one where the role of the state is very much a residual one confined to regulating instances of ‘market failure’. Competition law in the context of developing economies should not be on the side of liberalised markets which may protect entrenched interests and inequality, but should attempt to impose market discipline and increase incentives for entrepreneurship for small and medium-sized businesses by levelling the playing field and ensuring ‘competition on the merits’. This includes the incorporation of notions of fairness and the protection of smaller competitors from the predatory actions of larger firms. These ideas are broadly in agreement with Amartya Sen’s (1999) discussion of the ‘freedom to compete’, which goes beyond the purely neo-liberal concerns of efficient markets to link it to the broader concerns of human rights and human flourishing (Kennedy, 2006). Competition law can have a direct effect in this area, not through the implementation of ‘command and control’ mechanisms to control prices or by the protection of small


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enterprises for their own sake but by, for example, providing access to telecommunications networks for smaller mobile operators, which, by facilitating communications, can also have important democratic and cultural implications (Clarke and Wallsten, 2002; McMahon, 2009), the prising open of vertical distribution channels, and the challenging of bid rigging and predatory strategies (Bolton et al., 2000). A competition law model more closely resembling that of the EU, notwithstanding more recent attempts at modernisation which some may argue have brought it closer to that of the US, may therefore be a more appropriate one for developing countries. The EU model, as embedded in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) (formally Articles 81 and 82 of the EC Treaty), is more traditionally associated with rules to safeguard the totality of the competitive process rather than the US embrace of efficient outcomes and ‘total welfare’. EC competition law has its theoretical foundations in the political and economic ideas of ‘ordoliberalism’, which originated in the 1930s in the University of Freiburg, Germany (Gerber, 1998: ch. 7). The state has an important but limited role in safeguarding individual economic freedom against the exercise of private power (Gormsen, 2007). Under this view, competition is a value in itself and allocative efficiency is ‘but an indirect and derived goal’ (Möschel, 2001: 4). Competition law has an essential role in the maintenance of the ideal of an ‘economic constitution’ whereby ‘the effectiveness of the economy depended on its relationship to the political and legal systems’ (Gerber, 1998: 246). It strives to maintain a system which permits neither unconstrained private power nor discretionary governmental intervention in the economy (Jones and Sufrin, 2008: 34–5). The EC focus is on preserving rivalry, preventing foreclosure and ensuring ‘competition on the merits’ (OECD, 2005) and is derived from an institutional and political history which prioritised market integration and set out a system ensuring that competition in the internal market was not distorted (formally Article 3(1)(g) of the EC Treaty, cf Article 3(1)(b) of the TFEU; Schweitzer, 2008: 119). Its rules aim to achieve short-run competitive rivalry rather than the Chicago School goal of economically efficient outcomes based on ‘self-correcting’ markets. For example, a competition rule designed to facilitate the licensing of intellectual property may increase competition in the short run by introducing new products to the market but may be ultimately detrimental to investment incentives in the long run.7 As Gerber notes, the development of the ‘abuse’ concept

7 See, for example, the EU Court of First Instance decision in Case T-201/04Microsoft v. Commission.


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under Article 102 of the TFEU (formally Article 82 of the EC Treaty) has been particularly concerned with the protection of small and mediumsized firms and the ability of large firms to extract unfair prices and conditions from smaller enterprises (Gerber, 1998: 368). He refers specifically to notions of economic dependency developed in French and German competition law where a firm does not have sufficient and reasonable possibilities to shift to another purchaser, supplier or distributer (ibid: 315–16). Certainly it is this more interventionist EU model of competition law which has been more readily adopted over the US model in post-liberalised and developing economies (Fox, 2000). They see it as better suited to their more complex and highly concentrated economies as they dismantle state monopolies and/or require closer regulation of previously privatised utilities and networks. Yet, as Fox (2007: 214) points out, movement away from rules and a ‘one size fits all’ model, to a more contextual, discretionary one, can increase regulatory costs and requires a level of technical expertise which may be absent in developing countries. This may be true, for example, if the authority wishes to establish block exemptions based on safeharbours calculated by reference to market shares. Such market share data may be unavailable or unreliable and this increases uncertainty for the firm (Bhattacharjea, 2008: 29). Competition agencies need institutional support through technical training and capacity building so that they can make independent and transparent decisions (Gal, 2004). Adequate public funding, which is difficult when there are so many competing demands on public expenditure, is essential to the autonomy of these agencies. The Peruvian competition agency, for example, is required to be self-financed, relying on service fees and fines as its sources of revenue. This in turn results in business dissatisfaction with excessive fees and the apprehension of bias in decision-making (OECD, 2006a: 385). Too much discretion also potentially opens the door to regulatory capture by vested producer interests and/or corruption resulting in extensive or particularised exemption for private interests. India’s new Competition Act,8 for example, has been criticised for permitting too many discretionary exceptions and the insertion of vague criteria penalising ‘unfair’ behaviour in the ‘public interest’ rather than assessing the effect of behaviour on competition (Bhattacharjea, 2008). It also permits broad exceptions for conduct such as ‘hard-core’ cartels which are usually treated as illegal per se in most jurisdictions (s19(3)). Section 54 also

8 Act 12 of 2003 (India), see http://www.competition-commission-india.nic.in (accessed 11 November 2009).


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permits the government to exempt ‘any class of enterprises if such exemption is necessary in the interest of security of the State or public interest’ (Bhattacharjea, 2008: 21, 29). ‘Unfair’ and ‘discriminatory’ prices and ‘unfair contract terms’ are also proscribed in circumstances where they would not be considered to have an anti-competitive effect in most competition law regimes. Competition rules based on preserving competitive rivalry and fair competition will also fail to be useful if they are not placed within market conditions conducive to competition more generally, that is, within the broader context of competition policy. Competition policy includes: the restructuring of government utilities and their privatisation and/or corporatisation, the implementation of competitive neutrality between public and private enterprises, the enactment of sector-specific regulation in areas of market failure, including access to essential facilities, and finally, the enactment of competition law (Hoekman and Holmes, 1999). Fostering competition is not always politically expedient in developing countries because it may result in loss of employment as some firms exit the market (Bhattacharjea, 2008: 29). This may have an immediate impact on the poor, especially in the absence of a welfare net. Competition agencies can therefore have an important role in ‘competition advocacy’ where they can promote the development of government policy to reassess and dismantle highly interventionist industrial policy and anti-competitive state measures, such as restrictive licensing, and implement competitive neutrality (Hoekman and Holmes, 1999: 12; UNCTAD, 2000a; Gal, 2004: 22). Regulatory review for anti-competitive legislation should also be implemented to ensure that barriers to competition incorporated in legislation and administrative rules are assessed from an economic perspective (UNCTAD, 2001b) but also by the ‘public interest’. In this way a competition authority in a developing country can also assume some of the broader functions normally undertaken by sector-specific regulators in many other countries of licensing, standard-setting, access to essential facilities and consumer protection legislation (Gal, 2004: 35).

7.

EXISTING INTERNATIONAL AGREEMENTS WHICH REGULATE COMPETITION

Competition provisions are of course already enforced internationally through the extraterritorial reach of domestic competition laws and are incorporated in particular international agreements such as GATS and TRIPS, in addition to regional and bilateral agreements. In the remaining two sections of this chapter the impact on developing countries of


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some of these existing mechanisms will be examined in the context of two cases: the WTO decision in Telmex and the US Supreme Court decision in Empagran. I.

The Telecommunications Annex and the Telmex decision

The 2004 Telmex (George, 2004; WTO, 2004d; WTO Panel Report, 2004) decision by the Dispute Settlement Panel of the WTO concerning the interpretation of the Telecommunications Annex9 of GATS provides a useful context for the apparent opposition between the application of international competition law provisions and an attempt by a developing country to provide concessions or protection to a monopolist to achieve distributional or other public aims. The GATS agreement includes, in addition to general obligations that apply to all WTO members to liberalise and open access to telecommunications services on a non-discriminatory basis, a Telecommunications Annex which contains specific commitments to market access, full national treatment and pro-competitive regulatory principles (Reference Paper). The Reference Paper commits members to maintain appropriate measures to prevent anti-competitive practices by ‘major suppliers’, defined as those that can materially affect the terms of participation in the relevant market for basic telecommunications services as a result of control over essential facilities or use of their position in the market to achieve ‘anti-competitive cross-subsidization’. Additional specific obligations to trade liberalisation may also be applied to services listed in a WTO member’s ‘Schedule of Commitments’. The Telecommunications Annex makes specific provision for measures affecting access to and use of public telecommunications networks and services. Members may only impose conditions that are necessary to safeguard the public service responsibilities of the suppliers of public networks, such as a universal service obligation. WTO members who fail to make the necessary legislative or regulatory changes to implement their commitments, or permit acts, policies or practices in their markets that run counter to those commitments, are subject to an action. Parties may request the establishment of a Panel by the Dispute Settlement Body (DSB) of the WTO, which, while not a judicial body, can make recommendations where the actions of a Member State are inconsistent with the terms of the relevant agreement.

9 The Fourth Protocol to the GATS, generally referred to as the WTO Basic Telecommunications Agreement, 5 February 1998.


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The Telmex10 dispute between the US and the Mexican Governments concerned potential conflicts between the competition commitments under the GATS and an attempt by a developing economy to build a universal service fund for the cross-subsidisation of telecommunications infrastructure. Universal service obligations in the telecommunications industry are those obligations which are imposed on public or private operators or on the industry as a whole to provide a minimum standard of basic telecommunications service. In developed countries this obligation includes: reasonable and equitable access to standard voice telephone services, a uniform price for local calls, operator assistance and directory services, public pay phones, specialist services for persons with disabilities and special tariff packages for lower socio-economic groups. In developing countries where tele-density figures are only 1 to 5 per cent (Clarke and Wallsten, 2002; Gasmi and Recuero Virto, 2005: 22, n5) and three billion people do not have access to basic telecommunications, the focus is normally on the reasonable provision of the means of access to a public telecommunications network, usually referred to as ‘universal access’ rather than ‘universal service’ (Intven and Tétrault, 2000: 6.1.1). When domestic utilities were largely publicly owned these universal service obligations were not separately costed but were merely funded as part of the government funded budget. In newly privatised and competitive markets they are now identified as areas of ‘market failure’ or uneconomic services which cannot be profitably provided. Developing countries have often sought to obtain funds for the uneconomic provision of universal access from cross-subsidised funds from state-owned telecom monopolies or privatised national champions. As developing countries have been encouraged to liberalise and privatise state-owned utilities, funds available for the provision of uneconomic services from cross-subsidies and tariff rebalancing have been reduced. In the context of international markets, developing countries have sought to obtain these cross-subsidised funds from favourable accounting rates for the termination of international calls.11 These rates are an attempt to provide an equitable payment to the terminating operator for the termination of an international call and to any transit operators that have handled the call. The rates are usually determined on a bilateral basis through mutual agreement. But the imbalance of calls originating

10 It is, to date, the only WTO dispute panel decision dealing with the telecommunications industry. 11 The accounting rate is a wholesale rate representing the agreed cost of transmitting each unit of traffic between the calling parties.


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in developed countries, such as the US, and terminating in developing countries requires the US to pay a large above-cost subsidy to foreign carriers. Similar apparent imbalances are perceived by US operators for internet peering settlements (due to the large net outflow of data from the US to other countries). Such settlements have resulted in large payments to developing countries. These cross-subsidies and imbalances have met resistance, as being in violation of GATS. The WTO has specifically promoted the move towards International Benchmarks, transparent tariff conditions and more ‘cost-oriented’ accounting rates. In the Telmex case the US claimed that the Mexican legislative rules for the termination of cross-border telephone calls had effectively permitted Telmex (the privatised monopoly telecommunications company) to impose a uniform and excessive settlement rate on its competitors and thereby operate a cartel contrary to the competition law principles in the Reference Paper. The US argued that the Mexican provisions on termination were not in accordance with the principles of ‘cost-orientation’ and were in breach of Section 1.1 of the Reference Paper, which requires that appropriate ‘measures shall be maintained for the purpose of preventing suppliers who . . . are a major supplier from engaging in or continuing anti-competitive practices’. Mexico argued a ‘state action’ defence but the WTO Dispute Panel stated that this could not be used to insulate a national champion and permit it to harm cross-border trade by discriminating against international competitors. Mexico further argued that regulatory sovereignty permitted it to adopt rules to protect and promote Mexican investment in domestic infrastructure and advance its economic development (including universal service provision) (Kariyawasam, 2007: 75–80). However the Panel ultimately ruled that this outcome could not be achieved by anti-competitive measures, and that the price charged for terminating incoming international calls was not in accordance with the principles of ‘cost-orientation’ and was contrary to the competition principles in the Reference Paper (WTO, 2004d; WTO Panel Report, 2004). Fox claims the decision is a victory for ‘cosmopolitan antitrust over narrow nationalism’ (Fox, 2006a: 77, 2006c) because exploitative pricing and protection from competition induces inefficiency and reduces output. It is also arguable that the Mexican government may have had an interest in granting favours and concessions to Telmex’s billionaire owner, Carlos Slim.12 Previous attempts by the Mexican competition authority to regulate Telmex’s abuse of dominance had often been subject to chal-

12

For a profile of Carlos Slim, see Wright (2009).


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lenges by Telmex by way of its considerable financial resources. The decision may therefore provide valuable international backing to Mexico’s efforts to resist and control a domestic monopoly which can wield not only economic power but also considerable political power and influence. But there is another, potentially broader, issue at stake here: is the decision an appropriate international response to protective and anti-competitive state action or is it an unwarranted interference with a developing country’s legitimate use of regulatory mechanisms to foster growth in local telecommunications markets? The protection of national champions in developing countries can serve useful purposes including the provision of funding for much needed infrastructure. Higher termination rates on international calls can be used to subsidise the cost of the local telephone service in Mexico. The application of competition laws and strict cost-oriented pricing through international agreements to override ‘state action’ doctrine can be detrimental to economies at this stage of development especially when the institutional framework and technological expertise may still be in their infancy. As Sidak and Singer (2004: 17–18) argue: In seeking Mexico’s rapid elimination of its cross-subsidy policy, the U.S. Government ignores its own lengthy transition to cost-based pricing. Before the introduction of competition in most countries, telecommunications prices have typically embodied large cross-subsidies that reflect public policy preferences. In particular, access to the network for residential customers has generally been priced below cost. The preponderance of network costs have been recovered through high usage rates for domestic and international long-distance calling . . . Fifteen years after the AT & T divestiture, the FCC was still concerned about too rapid a transition to cost-orientated rates . . . [Universal service funding mechanisms] would ease Mexico’s transition to a fully rebalanced rate structure. Without such measures, however, Mexico would be called upon to complete in a few years what the United States has failed to complete in nearly nineteen years.

It is undeniable that fostering market forces and technological developments has the potential to bridge the digital divide in developing countries. The number of mobile subscribers, for example, is growing rapidly and the increased use of wireless and satellite services also reduces reliance on fixed line provision (ITU–UNTCAD, 2007: 8). But huge problems remain in developing countries and tele-density levels are only improving marginally in rural and remote communities where access is limited or non-existent and levels of technological skill are low. These private market initiatives may never provide sufficient coverage or maintain viability in these unprofitable rural regions or to the very poor, in the absence of cross-subsidies or significant direct government funding (Shanmugavelan and Warnock, 2004).


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The use of competition provisions within international trade agreements to mandate the implementation of ‘cost-oriented’ accounting rates and the removal of cross-subsidies may ultimately prove detrimental to the interests of developing countries in key sectors such as telecommunications. As Silbey (1997: 227–8) argues, ‘the conventional narratives of globalization erode the possibilities of justice’. Criticism was also directed at the WTO Dispute Panel for the manner in which they dealt with the substantive competition law issues. The Reference Paper does not define ‘anti-competitive practices’. Those terms that are defined, such as ‘major supplier’, apply to a much broader set of firms in the telecommunications industry than those ‘in a dominant position’ as identified under competition law principles. The WTO Panel referred to a dictionary definition of ‘anti-competitive’ as ‘actions that lessen rivalry or competition in the market’. The Panel also referred to other secondary documents, such as OECD recommendations which classed cartels as a particularly pernicious form of anti-competitive conduct. Apart from ‘price-fixing’, none of the forms of conduct subject to the action were explicitly defined or prohibited in the Agreement and therefore arguably were not subject to agreement by the parties. The competition provisions in the Reference Paper therefore applied to much broader categories of conduct than that regulated by competition law. There are legitimate disputes among courts, legislators and competition agencies concerning the characterisation of anti-competitive conduct. These are informed by differing views as to the economic theory to be applied, the context of the particular market under investigation and the political theory governing the relationship between the state and the market. To ignore these issues and determine these terms by dictionary definitions is problematic in an international agreement and raises real questions as to whose competition law is being applied and in whose interests (Kariyawasam, 2007: 79–80). While efforts to negotiate a multilateral competition agreement may have usefully exposed these shortcomings in the interpretation of the existing competition provisions within the WTO agreements, the manner in which these issues were determined by the Dispute Panel raises stark warnings for any future proposals concerning a global agreement. Developing countries may have been right, in the wake of the Telmex decision, to be wary of an international competition regime which may ultimately diminish their ability to prioritise domestic industrial policy over competition concerns, including the right of monopolists to price discriminate and provide cross-subsidies for distributional or other public purposes. For example, as para. 7.244 of the Panel Report sets out, international commitments made under the GATS ‘for the purpose of preventing a supplier


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. . . from engaging in or continuing anti-competitive practices are . . . designed to limit the regulatory powers of WTO Members’ (WTO Panel Report, 2004). II.

The Extraterritorial Application of Competition Laws and the Decision in F. Hoffman-La Roche Ltd v. Empagran

In the absence of a multilateral agreement on competition law, other international legal options, beyond the ‘soft law’ approach of the ICN, can be harnessed in order to alleviate the effects of global cartels and other anticompetitive behaviour by foreign firms in developing countries as they seek to enact their own competition regimes, develop technical capacity and strengthen enforcement. While developed countries could, of course, be encouraged to do more to eradicate export cartels, international efforts to investigate and punish participants in global cartels have increased considerably in recent years. There have been expanded efforts to coordinate the exchange of information (although much of this information remains subject to commercial confidentiality), strengthen civil and criminal penalties, and implement immunity and leniency programmes to encourage participants to come forward with information. These efforts have positive spill-over effects for developing countries as more international cartels are deterred, investigated and eliminated. However, an equally likely effect of this increased scrutiny will be the movement of these illegal activities and their anti-competitive impact to developing countries where they are more likely to escape detection. As Evenett (2007: 408) points out: Failure to enforce a national cartel law can make a jurisdiction a safe haven for organizing regional or worldwide cartels, creating adverse knock-on effects for the nation’s trading partners. Evidence about the cartel’s formation and organization can be stored in the safe haven without risk of seizure and being sent to competition agencies abroad.

Many have argued that greater use could be made of the extraterritorial effect of competition laws in developed countries to deter and prevent the pernicious effect of global cartels on foreign markets. Can victims of international cartels, and other anti-competitive behaviour, sue in foreign courts with more developed competition regimes to claim redress against the harmful effects of this behaviour? The US courts with the prospect of treble damages, criminalisation and strong procedural remedies are very attractive for foreign victims of anti-competitive conduct. The US antitrust provisions which apply to


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‘commerce . . . with foreign nations’ have always had a strong extraterritorial application and have been applied to any foreign conduct which has a general domestic effect.13 The doctrine was given a statutory basis in the Foreign Trade Antitrust Improvements Act 1982 (FTAIA) which provides that the Sherman Act only applies to foreign conduct if (a) such conduct has a ‘direct, substantial, and reasonably foreseeable effect’ on the US market, and (b) ‘such effect gives rise to a claim under the provisions of’ the Sherman Act. In cases such as Hartford Fire Insurance Co. v. California the US Supreme Court has generally applied the FTAIA to permit these foreign actions notwithstanding the international law rules on comity which require reciprocal deference to the sovereign interests of other countries. These rules on comity have been construed narrowly and applied only where there was a true conflict between the domestic and foreign law. A true conflict was deemed not to exist if a person subject to regulation by two statutes could comply with the laws of both. More recently, however, the Supreme Court has construed the FTAIA more narrowly and reasserted the importance of comity to limit the extraterritorial application of US antitrust law and deny suit to foreign plaintiffs. In F. Hoffman-La Roche Ltd v. Empagran SA foreign victims of a global price-fixing vitamin cartel brought an action before the US courts for antitrust injury under section 1 of the Sherman Act, which prohibits agreements in restraint of trade. Vitamin manufacturers, which included US and other foreign companies, had fixed their prices over a number of years, earning estimated global profits of US$9–13 billion (Klevorick and Sykes, 2007: 363). This resulted in US and other competition agencies setting huge fines. An action for damages was brought in the US by a class of plaintiffs which included domestic US and foreign victims. Jurisdiction was clearly established for the domestic US victims. The remaining foreign plaintiffs, who had suffered their injuries outside the US market (namely in Ecuador, Ukraine, Panama and Australia), had to establish their claim under the FTAIA. It was clear that the first part of the test (a) was satisfied: the global cartel had an effect on the US domestic market. It was unclear, however, whether the second part of the test (b) required that the plaintiffs’ injury must stem from the US market effects, or whether jurisdiction over foreign claims would lie so long as the conduct generating the effects was actionable under the Sherman Act. The foreign plaintiffs, who had purchased vitamins outside the US, argued that the inflated price due to the cartel

13

United States v. Alcoa.


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was the same conduct that injured US domestic commerce, so the second part of the test was satisfied. The DC Circuit court had held that where anti-competitive conduct has the requisite effect on US commerce, foreigners who are injured solely by that conduct’s effect on foreign commerce may sue under US antitrust. On appeal, however, the US Supreme Court held that the second part of the FTAIA test was not satisfied if they suffered their injuries outside the US market and independently from effects on the domestic US market. It was argued before the Court that the operation of global markets means that the foreign plaintiffs would not have suffered loss but for the supra-competitive prices maintained in the US. The way in which global markets are interdependent and the easy transportability of the product in question (vitamins) means that the cartel could not raise prices in foreign markets without raising them in the US and therefore the injury was not independent of the cartel’s domestic effect. However, Justice Breyer, who gave the judgment for the US Supreme Court, relied on a narrow statutory interpretation of the FTAIA, stating that Congress could not have intended to give a remedy for injuries suffered abroad. The plaintiffs who purchased abroad have no cause of action unless the challenged conduct’s domestic effect ‘gives rise’ to their claim, which requires a direct causal relationship. The same global cartel caused the high prices paid by the foreign and domestic plaintiffs, but the domestic effects must cause the other. It was not enough that the injury had a common cause with the US conduct. It was an independent foreign effect, not one ‘derived from US domestic effect’.14 This is an example of the disjunction between law and economic reasoning which can arise in antitrust cases. The ‘substantial effect’ on US commerce is determined by an acknowledgement of the anti-competitive effects of cartel behaviour in raising prices above market price which gives rise to the domestic plaintiffs’ action, enough to satisfy a ‘but for’ causation standard: in this way, the economic and legal arguments coincide. A further legal argument of ‘insufficient causality’ and ‘proximate cause’ is invoked to narrowly construe the statute to deny foreign plaintiffs who have suffered as a result of the same conduct, notwithstanding that it was clearly caused by that conduct in economic terms. The reasoning fails to recognise, however, the interdependent nature of global markets whereby

14

On remand for further inquiry into whether the plaintiffs’ damages were truly independent from the US market, the Court of Appeals dismissed the plaintiffs’ claim: Empagran v. F. Hoffman-La Roche.


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the concept of the effect in a ‘separate’ or purely ‘domestic’ market is often meaningless. Justice Breyer also invoked the international law rule of comity where to give foreign plaintiffs an action could undermine, and fail to give due deference to, the competition laws of foreign jurisdictions. Justice Breyer stated that comity ‘helps the potentially conflicting laws of different nations work together in harmony – a harmony particularly needed in today’s highly interdependent commercial world’ (164–5). Yet, as Klevorick and Sykes (2007: 371) point out, this view does not take into account an outcome which would maximise deterrence of global cartels: the Court never pauses to ask whether that high degree of commercial interdependence has any implications for the premise that the harmful foreign effects of the global vitamins cartel were independent of the adverse domestic ones.

The Supreme Court’s invocation of comity and deference to prosecutions and private actions in foreign antitrust jurisdictions also does not adequately account for developing countries where many of the harmful effects of these cartels are felt. It was, in fact, established in the Empagran case that countries that lacked competition agencies had higher overcharges due to the cartel than those that had agencies (Clarke and Evenett, 2003: 692).15 The principles of international comity require the US to take account of ‘the extent to which enforcement by either state can be expected to achieve compliance’.16 While some competition regimes in developing countries such as Brazil have successfully prosecuted the vitamins cartel,17 many other developing countries lack the evidential material, resources or effectiveness to prosecute them and this ultimately leads to global under-deterrence. The Empagran decision may therefore be categorised as a victory for international cartels where their global gains exceed those in the US with particular adverse impact on developing countries. Should the US Supreme Court have been more mindful of ‘global welfare’ in its

15 For a critique of the methodology used in this study however, see Bhattacharjea (2006: 305–6). 16 Timberlane Lumber Co. v. Bank of America (1976: 611–15). 17 Decision of the Conselho Administrativo de Defesa Econõmica (CADE), Administrative Proceedings No 08012.004599/1999-18 (see http://www.cade.gov. br/ (accessed 11 November 2009)). Section 2 of the Brazilian Competition Act 2000 extends its jurisdiction to include ‘foreign acts that affect or may affect the Brazilian Territory’.


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decision?18 As Eleanor Fox stated in her Testimony before the Antitrust Modernization Commission: We must contemplate maximizing world welfare . . . The national law governing jurisdiction and remedies should be broadened so that, for example, national authorities in a jurisdiction with the greatest contacts or the largest consumer market can provide a forum in which smaller affected nations can be heard, can take account of outside harms, and can afford relief that covers those harms. (Fox, 2000: 8)

This is not an argument that the US courts should become some sort of surrogate ‘global antitrust court’, because to do so would permit other countries to free ride on the enforcement costs absorbed by the US. It could also prove to be a disincentive for others to develop their own competition expertise (Klevorick and Sykes, 2007: 379). It is also true that when the US has tried in the past to extend its extraterritorial jurisdiction to foreign cartels, international comity and blocking statutes were invoked to prevent this (ibid: 390). Amicus briefs were also filed by the US Department of Justice and other nations, arguing that extensive extraterritorial jurisdiction could interfere with their own antitrust enforcement policies, especially immunity and leniency programs. Participants in cartels, it is argued, are less likely to come forward if doing so may expose them to multiple treble damage suits.19 But, perhaps more importantly, US competition agencies have no incentive to prosecute or assist other competition agencies to prosecute anticompetitive conduct where the detrimental welfare effects are external to their domestic market. The conduct may also directly benefit their domestic markets. Export cartels clearly fall into this category as they enable small domestic producers to gain access to the export market and the detrimental welfare effects are external to the exporting country. The incentive to irradiate global cartels only arises when the negative net welfare effect of the higher prices on domestic consumers exceeds the supernormal profits earned by domestic firms which participate in the cartel. If the net welfare detriment is on foreign consumers rather than domestically, the individual

18 Domestic effects versus foreign efficiency gains and losses, and an argument that to exclude the foreign effects could be contrary to the Canadian international obligations of non-discrimination under NAFTA and GATT, were considered in the context of a Canadian merger decision in Commissioner of Competition v. Superior Propane Inc. 19 This possibility has been removed and now a successful leniency applicant cannot be subject to a claim for treble damages: Antitrust Criminal Penalty Enhancement and Reform Act 2004.


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country may actually gain from the domestic firm’s participation in the cartel through excess profits (Klevorick and Sykes, 2007). Developed countries may also be disinclined to prosecute anticompetitive practices which are external to their domestic welfare when developing countries’ competition agencies lack the resources and technical skills to reciprocate with respect to the similar practices of their own firms (Bhattacharjea, 2006: 310). Bhattacharjea notes that such ‘outsourced enforcement’ by developed countries could be obtained in return for market-access concessions by developing countries, but also notes the fatal asymmetry in the enforceability of this proposal. Violations of marketaccess commitments can be detected and proved with relative ease. But how can a developing country, which may not even be aware of the existence of a foreign cartel or lacks the evidence to prove it, establish before a WTO panel that the antitrust agency in the relevant country is not serious about investigating it? (ibid: 313)

Even competition authorities in developing countries which are well placed to prosecute this anti-competitive conduct are often constrained if they require evidence within the exporting jurisdiction, or are dependent on remedies only the exporting jurisdiction can impose because that is where the assets or management are located (Elhauge and Geradin, 2007: 1012). A developing nation may also not want to pursue enforcement against an international cartel if it does not want to discourage the cartel from selling and investing in its country (ibid: 1014). In Empagran it may ultimately have been the Supreme Court’s deference to the comity issues which led it to depart from its earlier, more liberal approach to jurisdiction in these actions. Yet, at the same time, when the court invokes comity it needs to ask the right questions and conduct the right balancing in order to achieve optimal deterrence of global cartels, including the disparity between the antitrust enforcement capacity of developed and developing countries.20

20 The Supreme Court decision was followed by the Eighth Circuit of the US Court of Appeals in In re Monosodium Glutamate Antitrust Litigation (2007) to deny foreign victims of a cartel a remedy. In that case there was only an indirect connection between the domestic prices and the prices paid by the foreign applicants. The US prices were ‘not significant enough to constitute the direct cause of the appellants’ injuries, as they constituted merely one link in the causal chain . . . While such an indirect connection may be enough to satisfy a ‘but for’ causation, it is too remote to satisfy the proximate cause standard . . . the Sherman Act’s deterrence goal, although not without force, is unavailing in light of the dictates of the FTAIA and the considerations of comity’.


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281

CONCLUSION

While developing and least-developed nations were opposed to the negotiation of a multilateral agreement on competition law, it is not always evident that such a regime would have been counter to their interests. Greater efforts to co-ordinate the detection and elimination of global cartels, for example, would have been highly beneficial to developing countries where these cartels have a disproportionate impact. Negotiations for an agreement may have also exposed the apparently unfair imposition of anti-dumping duties on developing countries, and permitted them to be placed on a sounder economic basis through convergence with competition principles. Developing countries may have been right however, in the wake of the Telmex decision, to be wary of an international competition regime which may apply dictionary and non-consensual definitions of ‘anti-competitive conduct’ to override their attempts to achieve particular public purposes through domestic industrial policy. Another reading of the Telmex decision, of course, may be that international rules can assist domestic governments to resist and control powerful private interests. It is also true that markets in developing and least-developed countries often bear the brunt of anti-competitive practices (both global and domestic) which extract monopoly rents and diminish competitive rivalry, resulting in productive and allocative inefficiencies in crucial infrastructure industries. While competition policies may be more directly linked to ‘promarket’ policies, these anti-competitive practices can have a real impact on the price of essential goods and services with clear and detrimental distributional outcomes. Domestic competition laws which are therefore mindful of the complexities of markets in these developing and least-developed countries can have a positive impact on fostering enterprise and providing a basis for the ‘freedom to compete’. The suggested model is one which rejects notions of a diminished role for the state and ‘self-correcting’ markets, as commonly associated with the US model of competition law. At the same time it is important to ensure that competition agencies do not become subject to regulatory capture by public or private interests and that these laws do not flounder or become inoperable through too many discretionary concessions and exceptions. The international community can also do more, whether through the ICN or other initiatives, to assist with greater technical advice and capacity building for domestic competition regimes in developing countries. Developed countries may also assist by outlawing export cartels and cooperating more readily with foreign competition agencies for the exchange of


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information on international cartels which, at present, is severely restricted by requirements related to commercial confidentiality. Developed countries could also apply more liberal standing rules to the extraterritorial application of their competition laws to permit foreign plaintiffs the right to sue in their courts, and competition agencies could increase their enforcement efforts against anti-competitive action with cross-border effects. But there are major obstacles to these proposals. Such actions permit foreign countries to ‘free ride’ on the enforcement capabilities of developed countries. Yet, perhaps more importantly, these agencies have no incentive to prosecute or assist other competition agencies to prosecute anti-competitive conduct where the detrimental welfare effects are external to their domestic market (Empagran). This is an argument for a more concerted international effort to pursue the detrimental welfare effects of cross-border transactions through agencies such as the ICN. It is also an argument for domestic courts and competition agencies in their interpretation of extraterritoriality and the international rules on comity to understand that ‘global welfare’ is often inextricably linked to ‘domestic welfare’ in global markets.


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Does the globalization of anticorruption law help developing countries? Kevin E. Davis*

1.

INTRODUCTION

What role do foreign institutions play in combating political corruption in developing countries? This chapter attempts to shed light on this question by examining the impact on developing countries of the elaborate transnational anti-corruption regime that has emerged in recent years. The centrepieces of that regime are dedicated treaties such as the Organisation for Economic Co-operation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (‘OECD Convention’) and the United Nations Convention against Corruption (‘UN Convention’). However, the regime also encompasses a range of other legal instruments, including the anti-corruption policies of international financial institutions, components of the international antimoney laundering regime, international norms governing government procurement, and private law norms concerning enforcement of corruptly procured contracts. The idea that foreign legal institutions can step in and be of assistance when their domestic counterparts are found wanting, which some might call a form of legal globalization (others might call it ‘institutional piggy-backing’), is a familiar one in modern legal thought. For instance, the international investment regime is typically justified by reference to the idea that investor–state arbitration can usefully compensate

* Beller Family Professor of Business Law, New York University School of Law. I am grateful for comments on an earlier version from Indira Carr, Robert Howse, James Jacobs, Guillermo Jorge, and Benedict Kingsbury, as well as Julio Faundez and Celine Tan (the editors). I am also grateful for the support of the Filomen D’Agostino and Max E. Greenberg Research Fund at NYU School of Law. 283


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for the shortcomings of national courts in capital-importing countries. International commercial arbitration is often justified on similar grounds. Along the same lines, Dammann and Hansmann (2008) have proposed that countries with strong courts should allow those courts to assert jurisdiction over disputes to which they have no tangible connection in order to enable litigants in developing countries (and elsewhere) to break the monopolies enjoyed by dysfunctional local courts. Coffee (1999) makes the case for allowing issuers from countries with weak securities regulators to rely on foreign securities laws. Finally, proponents of extra-territorial application of labour and environmental laws argue that this is the best means of securing protection for the inhabitants of countries with inadequate labour and environmental regimes. The idea of calling on foreign legal institutions to buttress domestic institutions is particularly appealing when what is at stake is the very integrity of the state. Political corruption, which I will define broadly – if somewhat vaguely – as the misuse of public power for private gain, compromises the integrity of the state and is widely viewed as a significant obstacle to development (see generally Rose-Ackerman, 1999). At the same time, the advent of globalization has made political corruption a transnational phenomenon. We live in a world of structural adjustment programs, multinational corporations, international supply chains, international wire transfers and daily inter-continental flights; it is a world in which officials’ incentives and opportunities to engage in corruption are shaped as much by the politics of international financial institutions as by local politics, bribes can be paid by foreign as well as local actors, and the proceeds of corruption can be moved overseas at a moment’s notice. Under the circumstances it seems reasonable to believe that if there is any field in which the activities of foreign legal institutions can benefit developing countries it is in the field of anti-corruption law (for specific recommendations, see ibid: 177–97). In other words, globalization of the causes of corruption may demand globalization of the institutional responses. At the same time, it is important to recognise that there are powerful objections to the idea of relying on foreign legal institutions to perform roles that might, at least in principle, be played by domestic ones. Framed in general terms, those objections fall into three main categories. The first category of objections focus on the motivations that are likely to drive the behaviour of foreign institutions and the possibility that they may be less than pure. The concern is that foreign institutions and the actors who inhabit them will generally tend to be indifferent or even hostile to the welfare of distant populations and so will not be reliable guardians of those populations’ interests. The strongest versions of these arguments


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draw on colonial experiences in which international law and the legal institutions of colonisers were expressly designed to facilitate exploitation of colonial populations for the benefit of colonisers. Objections in the second category focus on the potential outcomes of relying on foreign legal institutions. They represent elaborations on the theme that, even if they are offered with the best of intentions, the legal solutions provided by foreign institutions may be incompatible with local interests. To begin with, foreign institutions may reflect foreign values that are incompatible with local values. Alternatively, foreign institutions may rely on the presence of complementary institutions that are missing in the new context. A third rather disparate set of objections are united by concerns about the longer-term development of societies that rely heavily on foreign legal institutions – and, in particular, their long-run institutional development. The concern is that foreign institutions will serve as substitutes for displaced domestic institutions that may, even if only over time, offer equal or even superior performance. When scratched these objections often turn out to be little more than the idea that local institutions are inherently superior to foreign ones. But sometimes they rest on more secure theoretical foundations. Consider, for example, Hirschman’s (1970) well-known analysis of the potential trade-offs entailed in permitting the clients of an organisation to ‘exit’ its sphere of influence as opposed to relying on their ‘voice’ to motivate organisational change. In this context the relevant argument would be that permitting the members of a society to exit local legal institutions and rely on foreign ones may reduce their incentive to use ‘voice’ to lobby for improvements in local institutions. A second basis for concern about displacing local institutions relies on another insight from economics, namely, the value of learning-by-doing. The argument here is that, if given enough opportunities to address challenging problems, over time local institutions will acquire increasing expertise and legitimacy, to the point where, eventually, their performance may surpass that of foreign institutions. This chapter begins with an overview of the transnational regime that governs the extent to which foreign institutions participate in preventing, sanctioning, or providing redress for corruption in developing countries. The next two sections set out the potential advantages and disadvantages respectively of permitting foreign institutions to operate in this fashion. The subsequent section surveys the evidence supporting those theoretical claims. The conclusion emphasises the need for concerted efforts to collect data bearing on the validity of one potential disadvantage, namely the possibility that the activities of foreign institutions might undermine the development of local institutions.


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2.

OVERVIEW OF THE TRANSNATIONAL ANTICORRUPTION REGIME

How international and transnational law came to be concerned with corruption is now well documented (see, for example, Abbott and Snidal, 2002; Schroth, 2002).1 It began in the United States, where investigations into ‘dirty tricks’ by the administration of President Richard Nixon uncovered evidence that American multinational corporations were routinely making illicit payments to foreign public officials out of secret slush funds. In response, the US Congress passed the Foreign Corrupt Practices Act (FCPA). The most prominent feature of the FCPA was a prohibition – backed by stiff criminal and civil penalties – on payments to foreign public officials in order to assist in ‘obtaining or retaining business’. Curiously, the FCPA also explicitly excludes ‘facilitation payments’ – defined as payments made to facilitate or expedite performance of a ‘routine governmental action’ – from the scope of its prohibition on bribery (15 U.S.C. § 78dd-1). Just as important but somewhat less prominent were the FCPA’s recordkeeping obligations, which require public companies to keep accurate books and records, and requirements to maintain internal controls designed to ensure the integrity of those books and records (15 U.S.C. § 78m(b)(2)). The FCPA is, of course, a creature of domestic law. Anti-corruption norms inspired by the FCPA became part of international law as a result of a campaign that involved a number of constituencies (Abbott and Snidal, 2002). To begin with, the US government and firms subject to the FCPA shared an interest in seeing other countries adopt legislation similar to the FCPA in order to level the playing field; in other words, to ensure that the FCPA’s constraints would not place US firms at a competitive disadvantage. Another important actor was Transparency International, a non-governmental organisation established in 1993 and dedicated to combating corruption. Transparency International, through both its international organisation and various national chapters, lobbied for the adoption of anti-corruption laws both at the domestic level and in international organisations. In the 1990s the World Bank under the leadership of James Wolfensohn also joined the fight against corruption, and it adopted 1 For practical reasons the focus here is on legal instruments that are specifically targeted at corruption. A more comprehensive analysis would include other legal instruments such as bilateral investment treaties or austerity programs imposed by international financial institutions that exert significant influence over the scope and nature of state action in developing countries and thereby, at least arguably, influence the nature and prevalence of corruption.


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an anti-corruption policy in 1997. These actors were joined by a range of human rights activists and development experts from both developed and developing countries who were concerned about the corrosive effects of corruption in many parts of the world. In fact, the global anti-corruption campaign displays many of the characteristics of a mass movement, very much like the movements that campaigned for the abolition of the slave trade around the beginning of the nineteenth century and which continue to campaign for initiatives such as fair trade, Third World debt relief, and respect for various sorts of human rights. The anti-corruption movement began to bear fruit in the late 1990s. The first and most notable success was the conclusion in 1997 of the OECD Convention. There were also advances at the regional level, in the form of anti-corruption conventions produced by the African Union, the Council of Europe and the Organization of American States. Meanwhile, international financial institutions such as the World Bank, the regional development banks and the International Monetary Fund all adopted anti-corruption policies. Developing countries also came under considerable pressure from international financial institutions and other actors to adopt international norms concerning government procurement, including those set out in instruments such as the UNCITRAL Model Law on Procurement of Goods, Construction and Services and the World Trade Organization’s Agreement on Government Procurement (McCrudden and Gross, 2006). It is also significant that in 2003 the Financial Action Task Force decided to include ‘corruption and bribery’ among the predicate offences to money laundering, thereby instantly creating pressure for countries to bring their elaborate anti-money laundering regimes to bear against corruption (Financial Action Task Force, 2003).2 Activity at the global level culminated in 2003 with the adoption of the UN Convention. The OECD Convention and most of the other anti-corruption conventions referred to above focus on encouraging states to adopt domestic legislation like the US FCPA prohibiting bribery of foreign public officials; prohibiting laundering of the proceeds of transnational bribery; ensuring that bribes are not tax deductible; and co-operating with foreign governments in investigating and prosecuting bribery through both extradition and mutual legal assistance. The regional conventions also recommend various measures to be taken against domestic bribery, including 2

Individual members of FATF began to express concern about laundering of the proceeds of corruption somewhat earlier. See, for example, Financial Action Task Force (1999): ‘Written submissions from some of the members also mentioned an increase in the number of cases in which laundering was related to official corruption or the funding of international terrorism’ (para. 43).


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preventive measures such as transparency in public administration, codes of conduct for civil servants, and requirements that public procurement processes be open, competitive and accountable. The UN Convention covers much of the same ground but goes somewhat further by encouraging states to criminalise the solicitation or acceptance of bribes by foreign public officials (as opposed to focusing exclusively on the bribe-payers).3 The UN Convention also contains provisions requiring parties to co-operate in the recovery of assets that qualify as either proceeds or instruments of corruption, and in collecting compensatory damages for harm caused by corruption (Arts 54–9). The anti-corruption policies of the international financial institutions focus on ensuring that the proceeds of their grants or loans are not used for corrupt purposes. Those policies include procedures for cancelling agreements with firms or governments found to have engaged in improper activity and disqualifying guilty firms from receiving further funds. In addition, though, the international financial institutions have pressed for the adoption of international norms concerning government procurement that are designed to prevent all forms of corruption. For instance, the Agreement on Government Procurement generally requires open, competitive bidding; acceptance of the lowest qualified tender; the establishment of procedures for bringing challenges to the procurement process before an independent tribunal; and abandonment of discrimination in favour of local suppliers. All of this activity in the areas of public international law and domestic criminal law has begun to have an influence on private law. In one remarkable decision, after an extensive review of the international law on point, a distinguished arbitral panel declared that condemnation of bribery is a provision of international public policy that is automatically incorporated into the law that governs private contracts.4 For present purposes the most striking feature of the regime that has been constructed through these various initiatives is the significant role it allows foreign legal institutions to play in both preventing and responding to corruption – especially bribery – involving local public officials. In particular, the foreign institutions may ●

press the government to adopt measures designed to minimise opportunities for corruption;

3 UN Convention: Art. 16(2). The UN Convention also goes beyond the other conventions by extending to corruption of private actors, a topic that is beyond the focus of this chapter. See UN Convention: Arts 12, 21 and 22. 4 World Duty Free v. Kenya


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The globalization of anti-corruption law ● ● ● ● ● ●

● ● ●

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impose criminal liability for paying bribes to local public officials; impose civil liability, including potential cancellation of contracts, for paying bribes to local public officials; impose administrative penalties for paying bribes to local public officials; impose criminal or civil liability for laundering proceeds of bribery; impose criminal liability for soliciting or accepting a bribe; impose record-keeping and reporting obligations on potential payers of bribes as well as financial intermediaries and other actors who deal with them; extradite suspected bribe-payers; provide mutual legal assistance in the course of investigations of corruption; assist other actors in recovering assets used in or derived from corruption, or which are required to compensate victims of corruption.

This regime clearly invites countries affected by corruption, especially when it takes the form of transnational bribery, to look to foreign legal institutions for assistance. The question now becomes: should developing countries accept the invitation?

3.

POTENTIAL ADVANTAGES OF INVOLVING FOREIGN LEGAL INSTITUTIONS

The theoretical arguments in favour of allowing foreign institutions to play a role in combating corruption in developing countries are straightforward and reasonably compelling. They all stem from the proposition that foreign legal institutions may bring to the table valuable resources that local institutions are unable to match. To begin with there is the obvious point that relying on foreign institutions allows local actors to save money. Investigating and prosecuting white-collar crime can be expensive in terms of both money and human capital, especially when defendants can use their ill-gotten gains to hire the best lawyers and accountants money can buy to help cover their tracks and defend their activities. Foreign actors do not typically insist on payment for these services and so no poor country can afford to ignore the economic value of this kind of assistance. It is also important to understand that foreign institutions may provide not only additional resources but resources that local institutions cannot


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obtain at any price. The most obvious example of such a resource is the ability to deploy coercive force in the foreign territory. Foreign courts, law enforcement agencies and other branches of the state typically regulate the use of force within their territory and so may be indispensable in efforts to arrest individuals or seize assets located overseas. Another consideration is that foreign legal institutions may have access to superior information. Information about corporate misconduct tends to flow from firms’ employees, regulators, competitors or financiers. With the advent of globalization, those sources can just as easily be located outside the jurisdiction of the bribe-recipient as inside. Courts and law enforcement agencies in a bribe-recipient’s jurisdiction are less likely to have access to foreign sources than the courts and law enforcement agencies in the jurisdictions where the employees, and so on, are located. A related point is that foreign institutions may have superior expertise, either across the board or in relation to specific aspects of the investigation or prosecution of specific forms of misconduct. For instance, foreign prosecutors may possess special expertise in forensic accounting, or they may have special insight into the tactics that will induce local whistleblowers to come forward. Last, but certainly not least, is the possibility that foreign institutions may have greater integrity. If corruption has infected local legal institutions then foreign institutions may offer the only viable responses. Of course a cynic might ask why anyone should expect foreign legal institutions to be less corrupt than local ones. As a theoretical matter there are several possible answers. One response is that some foreign actors may be inherently less corruptible – whether because they have been selected more carefully or because they are subject to more effective schemes of monitoring, rewards and punishments. A second response to the cynic is that, even if they are no less corruptible than local institutions, foreign institutions are less likely to have been corrupted in a way that impairs their ability to deal with the local problem. It seems plausible that local actors will find it relatively difficult to establish illicit relationships with foreign legal institutions that allow to them to subvert the course of justice.

4.

POTENTIAL DISADVANTAGES OF INVOLVING FOREIGN LEGAL INSTITUTIONS

Although there are many plausible advantages that come with relying, at least to some extent, on foreign legal institutions to address the problem posed by corruption, there are also some plausible disadvantages. The disadvantages fall quite neatly into the general categories used above to


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organise the arguments against getting foreign legal institutions involved in preventing, deterring or providing redress for domestic problems: indifference, incompatibility and institutional displacement. It is convenient to begin by spelling out the arguments in theoretical terms and to hold off for a few more pages before turning to the evidence. I.

Indifference

At first glance the argument that draws upon concerns about indifference seems like a simple application of the idea that foreign actors will generally act in accordance with their self-interest. The argument would be that, even if they derive some benefit from paying lip service to the fight against corruption, self-interested foreign institutions will not dedicate their resources to combating corruption in developing countries because they, and the societies to which they belong, receive no material benefit from doing so.5 However, this argument rests on two contestable premises. The first premise is that foreign institutions are motivated by selfish material interests. But what if foreign actors are motivated by values rather than interests? The question of what motivates state behaviour is the subject of a raging debate in international relations and the right answer is unlikely to be clear cut. Moreover, in many cases the individual state is not the relevant actor. In practice the individuals or organisations that form sub-components of a state’s legal system often have substantial amounts of autonomy and in many cases there is no reason to presume that their actions will be motivated or guided by their home state’s material interests. In other cases, the relevant actors are international organisations or non-governmental organisations, which also often operate autonomously from states. The second contestable premise is that combating corruption of public officials in developing countries is incompatible with foreign states’ selfinterest. This claim ignores the fact that sometimes foreign states have a direct economic interest in combating corruption. For instance, if only because of the difficulty of enforcing corrupt transactions, bribery is often an expensive and unreliable way of obtaining the services of foreign public officials (Davis, 2002). The claim that foreign states have no interest in combating corruption in developing countries may also ignore the reality of the incentives created by international interdependence. Perhaps enlightened states perceive an interest in helping to eradicate political

5 For a considerably more sophisticated version of this argument, see Reisman (1979).


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corruption in societies with which they share goods, capital, people, ideas and culture.6 Or perhaps they see profit in helping other societies to diagnose their corruption problems so as to boost demand for anti-corruption consulting services and technology (Rajagopal, 1999: 505). Cutting in the other direction, in favour of the indifference argument, is another complication, namely the distinction between indifference on the part of individual states and collective indifference. Even states that have some sort of motivation to dedicate resources to combating corruption in the developing world have an incentive to free-ride on the efforts of others. In other words, even if states collectively have an interest – whether based on moral or material considerations – in contributing to anti-corruption efforts, individual states may not have any interest in stepping up to the plate. Taking these considerations into account suggests that the most plausible version of the indifference argument is that foreign actors will manifest selective indifference in the fight against corruption in the developing world. So, for instance, states may focus on combating bribery as a means of obtaining legitimate government contracts in jurisdictions whose economic development they consider uniquely important, while turning a blind eye to bribes paid to obtain otherwise-unobtainable goods such as illegal logging concessions in jurisdictions which are of less strategic importance or in which other states have equally strong interests (Davis, 2002). II.

Incompatibility

A second set of arguments against relying on foreign institutions’ anticorruption efforts is that those efforts may be incompatible with local needs or desires. Or to put it another way, the response to the claim that foreigners bring invaluable resources to the table in the fight against corruption is that those resources either may not be valued by local actors or may not be deployed in ways which, on balance, benefit the local population. One form of incompatibility stems from a clash of values: foreign actors may wish to impose harsh penalties on activity that local actors either would not condemn or would not condemn very severely. When values conflict in this fashion, respect for self-rule and cultural diversity arguably

6

Edmund Burke presented an early example of this argument in his efforts to impeach Warren Hastings for corruption while serving as Governor-General of Bengal (see Ala’i, 2000; Pavarala, 2004).


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weighs against foreign intervention. This is the argument that Edmund Burke once dismissively referred to as ‘geographical morality’.7 Steven Salbu (1999), for example, suggests that campaigns against transnational bribery risk degenerating into a form of moral imperialism. He acknowledges the fact that by all accounts bribery is universally condemned but argues that the meaning of bribery in any given context can be subjective – one man’s culturally appropriate gift may be another man’s morally reprehensible bribe – and the views of locals and foreigners may diverge systematically. Foreigners’ anti-corruption efforts may also be incompatible with the material interests, as opposed to the moral values, of local actors. This problem stems from the fact that many aspects of the transnational anticorruption regime, including those which punish firms for paying bribes to foreign public officials, tend to discourage firms from doing business in countries with corrupt officials. Cutting off those countries’ access to trade and investment obviously threatens to undermine their development prospects (Sparling, 2009). Of course anti-corruption advocates hope that the economic incentive created by the threat of economic isolation, together with the ideological pressure generated by international organisations, will encourage corrupt states to take steps to reduce corruption. Sceptics worry that the cures might be worse than the disease. Some scholars claim that the international anti-corruption campaign threatens to work fundamental and potentially pernicious changes in relationships between state and societies in developing countries (Kennedy, 1999; Rajagopal, 1999). For example, one commonly prescribed ‘cure’ for corruption is to reduce the number of opportunities public officials have to abuse their power. This can be done by reducing the scope of officials’ authority, which may in turn require reducing the extent of state control over the economy (Klitgaard, 1988). The concern is that this kind of anti-corruption strategy will indirectly weaken and delegitimise the kind of developmental state that (some would argue) is so desperately needed in poor countries in favour of a nightwatchman state that eschews excessive ‘intervention’ in the economy. Ironically, there is also reason to be concerned that anti-corruption strategies will unduly enhance state power. If we leave aside the idea of reducing the extent of state intervention in the economy, the most intuitive

7 The reference is to an argument offered by Warren Hastings in his defence against Burke’s efforts to impeach Hastings before the House of Lords for engaging in acts of corruption while he was Governor of Bengal. For accounts of this affair, see Ala’i (2000) and Pavarala (2004).


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anti-corruption strategy is to enhance surveillance and increase penalties. The problem is that, in addition to curbing corruption, this may serve to bolster the authority of otherwise undesirable leaders or factions and permit violations of civil liberties (Rose-Ackerman, 1999: 207–9). And even if paying more attention to corruption does not involve repression, any increase in the amount of effort a society devotes to analysing and controlling corruption may reduce public bodies’ ability to pursue other public purposes (Anechiarico and Jacobs, 1996). Crackdowns and zerotolerance approaches can even be counter-productive if, for example, they discourage actors involved in corruption from coming forward with information that can be used to prosecute other actors (Davis, 2009). Alternatively, foreign-supported crackdowns that focus on one form of corruption to the exclusion of others may simply lead to increased levels of the forms subject to less scrutiny. Finally, the effects of drawing attention to corruption can be particularly perverse if nothing can be done to eliminate it, in which case the main effect will be merely to undermine the legitimacy of the state in question. The apparent contradictions between these arguments – foreign institutions may either weaken or strengthen the state – are consistent with the more basic proposition that any particular set of anti-corruption resources may be valuable in the context of one society but not in another. One straightforward reason why the impact of the transnational anticorruption regime may vary is because the activities it targets pose less of a threat to some societies than to others, perhaps because the effectiveness of domestic institutional substitutes varies across societies. Alternatively, the consequences of adopting a given legal institution may depend on the presence of some complementary feature of the society, that is to say, a feature that enhances the value of the institution in question. In the absence of that complementary feature, the institution may have little value, and may even be harmful. For example, in some jurisdictions allowing local actors to use foreign courts to pursue allegations of corruption may be useful because there are institutional mechanisms in place to ensure that the allegations are well-founded. The impact would be different though in a society in which local politicians are free from any meaningful constraints on their ability to use legal proceedings to pursue political vendettas. In that setting it is not obvious that the international community ought to be helping to expand the local politicians’ arsenal. III.

Institutional Displacement

The arguments in favour of permitting foreign institutions to address corruption in developing countries include claims that foreign institutions


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are simply more competent than local institutions in the sense that they possess superior integrity or expertise. The idea of allocating responsibility according to relative institutional competence presumes that institutional competence is an exogenous variable in the analysis. In other words, it presumes that institutional competence is not influenced by the allocation of responsibility. The objection is that institutional quality may actually be endogenous. This objection rests on the premise that foreign institutions can serve as substitutes for domestic institutions. That is to say, the greater the extent to which foreign institutions become involved in combating corruption, the fewer the benefits to be derived from the efforts of domestic institutions. For example, if American forensic accountants can be relied on to investigate cases of transnational bribery involving public officials from Country X, there will be little benefit to Country X in building up local forensic accounting capacity. So how might the use of foreign institutions as substitutes for domestic institutions diminish the competence of the latter? Hirschman’s claim that permitting people to exit an institution generally reduces their incentives to exercise voice seems directly applicable here. Suppose that victims of corruption could rely on foreign police forces, prosecutors, lawyers, and courts to investigate, prosecute and adjudicate complaints of bribery and to levy criminal or civil sanctions. In that case, why would those victims invest any effort in complaining about or pressing for the improvement of local courts, and so on? This may not be a problem if the foreign institutions are a perfect substitute for local institutions. But suppose that the foreign institutions only serve the needs of a subset of the local population, perhaps only people – such as foreign investors – who are victimised by transnational bribery as opposed to corruption with no international aspect. Suppose that the local prosecutors and courts would serve both constituencies. Suppose that the voices of victims of local corruption are too weak to prompt change and the guardians of local institutions are indifferent to the prospect of losing jurisdiction over cases involving transnational bribery. In these circumstances it is quite plausible that permitting foreign institutions to respond to corruption will retard the development of local institutions. A separate argument can be made that foreign institutions may prevent local institutions from learning-by-doing. This argument leads to the same conclusion as the argument about the deleterious effects of enabling exit from local institutions but proceeds from a different starting point. The premise of the learning-by-doing argument is that local institutions improve by experience rather than as a result of pressure from vocal constituents. The intuition is that professionals such as judges, lawyers,


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police officers and accountants, as well as the organisations to which they belong, may need to cut their teeth on at least a few cases before they can be expected to perform at the same levels as more experienced foreign institutions. On this view, the fact that at some point in time local legal institutions lack expertise or integrity may be a consequence rather than a cause of their disuse. To the extent that victims of corruption can rely on foreign lawyers, prosecutors, courts and police forces to respond to their claims, local institutions will face diminished opportunities to acquire the requisite experience. This is sub-optimal whenever the long-term benefits of enhancing the quality of local institutions would outweigh the costs borne by victims who are poorly served while local institutions are in the process of acquiring expertise. Again, the conclusion is that limiting the role that foreign legal institutions play in combating corruption may, over time, better serve the interests of local actors. Of course, in some cases it will be reasonable to conclude that foreign institutions serve as complements to local institutions, not substitutes. In other words, the greater the extent to which foreign institutions are involved in combating political corruption, the greater the benefits a country will derive from domestic institutions’ anti-corruption efforts. In these situations the flip sides of the arguments set out above suggest that the involvement of foreign institutions will increase the quality of local institutions. For example, the fact that foreign institutions are willing to investigate financial flows passing through their jurisdictions and to assist in recovery of misappropriated funds will tend to increase the benefits to a developing country of initiating proceedings against corrupt actors and, by extension, of building local institutions capable of initiating such proceedings. The competence of those local institutions may very well increase as they attract the critical attention of local constituencies and accumulate experience.

5.

EVIDENCE

It is all well and good to list theoretical claims about the advantages and disadvantages of a particular legal regime, but when the regime in question has been in place for a number of years it seems reasonable to ask whether there is any supporting evidence. It is not possible at this point to undertake a comprehensive analysis of the impact of the transnational anti-corruption regime on developing countries. Even if space would permit it, the available data would not. Canvassing the available evidence will, however, help us to develop tentative views about some of the theories outlined above and to identify areas in which further data collection and analysis is warranted.


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I.

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Evidence of Advantages

The good news about the transnational anti-corruption regime begins with the fact that it is being used. The clearest indications are that a number of large multi-national firms have been successfully prosecuted by US and European authorities for paying bribes to public officials in developing countries. In the most high-profile proceedings, Siemens AG and three of its affiliates paid fines or penalties totalling over $1.7 billion to authorities in the United States and Germany, and the World Bank, to settle allegations that for over a decade it had paid substantial bribes to officials in countries including Argentina, Bangladesh, Iraq and Venezuela (US Department of Justice, 2008; World Bank Group, 2009). Moreover, since 2001 the US Department of Justice has made visible commitments to strengthen its enforcement of the FCPA (US Department of Justice, 2009: 31). In addition, there have been some encouraging successes in proceedings that have sought to use foreign courts to recover assets from corrupt public officials such as Sani Abacha (Basel Institute on Governance, 2007) and Frederick Chiluba.8 There is also evidence that at least one prominent component of the transnational anti-corruption regime, the OECD Convention, is having a deterrent effect. Cuervo-Cazurra (2008) presents a statistical study which finds that for countries which had implemented the OECD Convention, investment flows became more sensitive to corruption in the sense that more corrupt countries were more likely to experience diminished investment flows. These findings are broadly consistent with the findings of the OECD Working Group on Bribery, which the OECD Convention charges with performing regular reviews of the parties’ compliance (OECD Convention: Art. 12 and associated commentary). In 2006 the Working Group on Bribery reported on the 21 Phase 2 evaluations that had been conducted by the end of 2005 (OECD, 2006b). The report enumerated many deficiencies in parties’ implementing legislation – deficiencies which, taken as a whole, call into question their commitment to the objectives of the Convention (more on this below). On the other hand, the Working Group reported that awareness of anti-corruption legislation among representatives of large multinational companies operating in those countries was ‘acceptable’ and that many of the companies had adopted codes of conduct or codes of ethics that addressed corruption (OECD, 2006b: 128). If it is true that having foreign legal institutions combat corruption is

8

Attorney General of Zambia v. Meer Care and Desai.


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advantageous to developing countries, the evidence might take the form not only of improved deterrence but also improvements in the effectiveness of local institutions as they obtain access to greater resources and are exposed to the influence of institutions with relatively high levels of integrity. Only a handful of countries that even arguably qualify as developing countries are parties to the OECD Convention and, aside from the data that has been compiled on the effects of the Convention on its parties, there does not appear to be any particularly systematic examination of the extent to which the transnational anti-corruption regime has influenced the effectiveness of local legal institutions.9 However, there are clearly instances where the transnational anti-corruption regime has served to enhance the effectiveness of anti-corruption institutions in developing countries. For example, in Kenya, pressure from foreign donors and lenders clearly drove the adoption of new anti-corruption legislation. At one point the Attorney General indicated that anti-corruption legislation had to be vetted by the International Monetary Fund before being submitted to either Cabinet or Parliament (Kibwana et al., 2001). Carr (2009) reports that donors have played a similar role in Tanzania. Meanwhile, the accession process has allowed the European Union along with other foreign actors to play a significant role in encouraging legal actors in South Eastern Europe and the Baltic states to invest in combating corruption (Smilov, 2009: 96–9; Dahl, 2009).10 II.

Evidence of Indifference

Although there is some evidence that the transnational anti-corruption regime has been successfully put into operation, there is also a fair amount of evidence that local actors who look to foreign institutions for assistance in combating corruption are often met with indifference. This is especially true if they look beyond the United States, which generally appears to be an exceptionally diligent participant in international anti-corruption efforts. The indifference of foreign institutions can be manifested in a number of ways. To begin with, foreign countries may be reluctant to take the steps

9

The 38 parties to the OECD Convention include seven countries that are not members of the OECD, namely Argentina, Brazil, Bulgaria, Chile, Estonia, Slovenia and South Africa. It is also worth noting that the OECD members include a few relatively poor countries such as Mexico (OECD, 2009). 10 Going further back in time, Gillespie and Okruhlik (1991: 89) report that a clean-up campaign in Saudi Arabia was prompted by the same revelations of corruption that prompted the enactment of the FCPA.


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necessary to ensure that they comply with both the letter and the spirit of the obligations they have assumed under international instruments such as the OECD Convention. According to the OECD’s Working Group on Bribery, recurring problems include: failure to enact laws that make it likely that legal persons such as corporations will be held liable for bribery; the low level of monetary sanctions imposed on legal persons for bribery of foreign public officials; perceptions that factors such as national economic interests influence the investigation or prosecution of foreign bribery; ineffectiveness of efforts to use fraudulent accounting offences to uncover efforts to conceal bribery; and lack of reporting by providers of official development assistance and export credit agencies (OECD, 2006b). Another manifestation of indifference is failure to enforce anti-corruption laws after they have been enacted. Transparency International (Heimann and Dell, 2009) reports that only four of the 38 parties to the OECD Convention (Germany, Norway, Switzerland and the United States) have actively enforced their anti-corruption laws, while 21 have seen little or no enforcement. This finding is broadly consistent with the conclusions of the OECD’s Working Group on Bribery, though not entirely consistent with Cuervo-Cazurra’s (2008) finding that the OECD Convention has reduced investment flows to relatively corrupt countries. Interestingly, Cuervo-Cazurra’s study does provide circumstantial evidence that for some period of time even the United States engaged in selfinterested non-enforcement. He finds that although the FCPA has been in force since 1977, flows of foreign direct investment from the US were sensitive to levels of corruption in the host country after the adoption of the OECD Convention, but not before. The implication is that the FCPA only became an effective deterrent to investment in corrupt countries after the OECD Convention was adopted. This is consistent with the hypothesis that the United States engaged in limited enforcement of the FCPA prior to the adoption of similar legislation by other OECD countries in order to avoid placing US firms at a competitive disadvantage. But other explanations for these findings are possible. For instance, it may be the case that the US’s unilateral efforts were sincere but limited in effectiveness by the absence of co-operation from law enforcement agencies in other OECD countries. Moreover, Cuervo-Cazurra’s empirical claims are not fully consistent with other evidence. For instance, Hines (1995) finds that more corrupt countries attracted less US foreign direct investment in the period between 1977 and 1982. In addition, both Smarzynska and Wei (2000) and Hines (1995) find, using different methodologies, that after the enactment of the FCPA but before the adoption of the OECD Convention, US investors in countries with higher levels of corruption were more reluctant than other investors to take on local partners.


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Robust and reliable data on cases in which allegations of corruption have not been pursued is not available, and even examples of specific instances of non-enforcement are hard to come by. The most prominent example is the BAE affair, in which the government of the United Kingdom closed an investigation into allegations that a British company, BAE Systems plc, paid bribes to members of the Saudi royal family and government officials in connection with a massive sale of airplanes from the United Kingdom to Saudi Arabia. BAE was the prime contractor (Rose-Ackerman and Billa, 2008). The UK government cited ‘the need to safeguard national and international security’ as the main reason for closing the inquiry. There was also speculation that the government feared that any penalties imposed on BAE would force the company into insolvency, which would have been politically unacceptable (Alexander, 2009). However, the UK’s Serious Fraud Office subsequently announced it would seek permission to prosecute BAE for corruption associated with its activities in Africa and Eastern Europe (Serious Fraud Office, 2009b). In any event, it is clear that the UK took its own interests – though not necessarily its economic interests – into account in determining whether to permit its courts and prosecutorial agencies to be used to pursue corruption of the Saudi government. It is difficult to say to what extent the instances of non-enforcement that have been uncovered reflect total as opposed to selective indifference on the part of foreign legal institutions. For instance, it is unclear whether the UK government would have turned a blind eye to bribery if the allegations had involved a country that was less strategically important than Saudi Arabia.11 Occasionally, interviews with key actors are able to uncover evidence of selectivity. For instance, Harrison (2001: 673) reports that donors operating in Uganda, Tanzania and Mozambique were inclined to turn a blind eye to known instances of corruption in order preserve their ability to use the countries as showcases for their development projects. Wrong (2009) makes similar allegations about donors operating in Kenya. In general though, it is difficult to say what motivates non-enforcement or under-enforcement of anti-corruption norms. Of course, even if countries enact and enforce anti-corruption laws targeting overseas bribery, that does not amount to conclusive evidence 11 The UK’s Serious Fraud Office announced the first prosecution of a British firm for transnational bribery on 10 July 2009 (there was at least one earlier case of an individual prosecution). The prosecution arose from the company’s voluntary disclosure to the SFO of evidence that it had sought to influence decision-makers in public contracts in Jamaica and Ghana between 1993 and 2001 (Serious Fraud Office, 2009a).


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that they are committed to fighting corruption in developing countries. To begin with, the major components of the transnational anti-corruption regime focus on only a subset of the activities that could be labelled corrupt – mainly, bribery of and embezzlement by high-level public officials who deal with foreign companies. This leaves a whole world of corruption untouched (Gathii, 2009). To some extent the lack of attention to other forms of corruption reflects practical considerations such as lack of access to the relevant actors. But practical considerations do not explain why the OECD Convention explicitly excludes ‘facilitation payments’ made by multinational actors from its prohibition on bribery.12 The implication is that foreign actors are not concerned with ‘minor’ matters such as schoolteachers who request bribes to allow students to take exams, or police officers who extract bribes from motorists for spurious violations, or public officials who facilitate irregular allocations of public land. Meanwhile, reports from countries such as Bulgaria, Mongolia, Kenya and Slovakia suggest that members of the general public regard these forms of corruption as being at least as harmful as grand corruption (Klopp, 2000; Lajcakova, 2003; Nichols et al., 2004). It is also true that not every instance in which foreign actors activate the transnational anti-corruption regime can be taken as a manifestation of desire to protect the interests of local actors. This is most evident in cases where private actors launch allegations of political corruption in foreign courts in order to serve their private economic interests. Take for example the proceedings that were launched in Hong Kong to recover assets misappropriated by the ruling family of the Republic of the Congo.13 They were initiated by a vulture fund trying to enhance the value of Congolese sovereign debt it bought at a discount, presumably on the theory that the assets uncovered would probably be located outside the Congo and thus be relatively amenable to attachment and execution. If successful this kind of litigation might have a deterrent effect on leaders of other countries, but the direct benefits to the population of the Congo will be limited. The primary motivation of the vulture fund is to line its own pockets. To see the potential conflict between the interests of the creditors and local interests, imagine if litigation of this sort were directed by local actors and with

12

Similarly, there is no practical reason why international financial institutions advising client governments on austerity policies ostensibly aimed at macroeconomic stabilisation should not take into account the potential impact on levels of corruption; Klitgaard (1988: 197; 1989) suggests that austerity policies have, by reducing levels of public sector wages, contributed to increased levels of corruption. 13 See Long Beach Ltd v. Global Witness Ltd.


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a view to local interests. In that case, any assets recovered would probably be repatriated as rapidly as possible to the Congo, where efforts could be made to shield them from foreign creditors. III.

Evidence of Incompatibility

Turning now from motivations to consequences, is there any evidence that the transnational anti-corruption regime has worked against the aspirations or interests of developing countries? To begin with, charges of moral imperialism seem to have little foundation. Though there may be disagreement about the boundaries of the concept of corruption, there does not seem to be much disagreement about the moral status of the kinds of high-level bribery and embezzlement that are the focus of the transnational anti-corruption regime (Rose-Ackerman, 1999). These forms of corruption appear to be universally criminalised and condemned. It is not clear, however, that they are condemned with equal force in all societies. For instance, in a survey of students in Bulgaria and Mongolia, Nichols et al. (2004) found that condemnation of bribe-taking by traffic officers was ‘soft’. They report that the students ‘seemed resigned to this small-scale corruption as a fact of everyday life and even joked about it and the small salaries earned by civil servants’ (ibid: 237). The presence of these kinds of disagreements does little to undermine the legitimacy of the transnational anti-corruption regime, though, because that regime has devoted relatively little attention to practices other than bribery and embezzlement. Moreover, the central feature of that regime, the OECD’s prohibition on transnational bribery, does not apply to actions that are lawful in the jurisdiction of the official who has been bribed (OECD, 1997: Comment 8 to Art. 1). The evidence suggests that there is more disagreement about the morality of practices such as payments to political parties, conflicts of interest, and nepotism. Nichols et al. (2004) found significant differences across countries on whether to condemn a public official for ‘helping to get his relatives in getting a job/getting into schools’. Moreover, relatively few respondents in either of the countries studied defined corruption to include ‘participation in commercial ventures’ or ‘assisting relatives in meeting influential people’. Again though, these activities are generally not the focus of the transnational anti-corruption regime. The one exception may be in the area of government procurement, where some developing states have argued that the kinds of transparency and non-discrimination demanded by international norms are incompatible with their desire to use government procurement to achieve important social policies. In particular, Malaysia has complained that the norms contained in the Agreement


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on Government Procurement are incompatible with the value it attaches to the practice of using preferences in government procurement to mitigate ethnic inequalities (McCrudden and Gross, 2006). Leaving aside the concerns about moral imperialism, is there any evidence that the anti-corruption strategies that have been rolled out in connection with the emergence of the transnational anti-corruption regime are having more tangible benign or malign effects on developing countries? As a general matter, evidence that patterns of corrupt activity vary significantly across countries tends to undermine the basis for expecting any sort of one-size-fits-all legal response to be equally effective across countries (Rose-Ackerman, 1999; Johnston, 2005). But there appears to be little direct evidence on the actual effects of the transnational anti-corruption regime on developing countries. Most notably, no one appears to have undertaken a comprehensive empirical analysis of whether the transnational anti-corruption regime, or any component thereof, has caused corruption in developing countries to decrease. Admittedly however, given the difficulties inherent in measuring the incidence of corruption in a way that enables comparison across space or time, such a study may not even be feasible. There are, however, a few instances in which a worsening of corruption has been tied to externally driven anti-corruption strategies. The principal complaints have involved the idea of reducing state intervention in the economy as a means of reducing opportunities to engage in corruption. The process of shrinking the state through privatisation has led to some of the most egregious examples of corruption in recent history (see, for example, Rose-Ackerman, 1999: 35–8; Johnston, 2005: 125–9); and once the state has been shrunk it is not clear from the evidence that it is likely to be any less corrupt. As Krastev (2004) points out, the Nordic countries have some of the most interventionist states in the world but are also regarded as the least corrupt. There is also at least one case in which international scrutiny of one set of corrupt practices is reported to have induced officials to switch to equally pernicious corrupt practices that attracted less international attention. Klopp (2000) claims that during the 1990s the Kenyan government resorted to irregular allocation of public lands as a form of patronage in order to avoid international scrutiny of other forms of corruption such as irregular appointments to para-statal organisations. There is more evidence bearing on the claim that the anti-corruption regime will have the short-term effect of discouraging firms from doing business in or with corrupt states. As far as investment flows are concerned, and at least for the period from 1996 to 2002, this hypothesis is squarely supported by Cuervo-Cazurra’s (2008) statistical study. The idea


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that there has been a deterrent effect is also consistent with the OECD Working Group’s qualitative evidence suggesting that large multinational firms are highly aware of anti-bribery legislation and have incorporated its tenets into their in-house compliance programs. On the other hand, the OECD’s research does leave open the possibility of small and mediumsized firms replacing larger firms in niches that involve doing business in relatively corrupt environments. Finally, there is the concern that it may be dangerous to provide foreign backing for anti-corruption initiatives in situations where complementary institutions such as constraints on politically motivated prosecutions are missing. There is little direct evidence that foreign anti-corruption institutions have been abused, but there is certainly evidence of domestic anti-corruption institutions being used in a partisan fashion. For instance, Larmour (2009) describes how the leader of a military coup in Fiji in December 2006 tried to use an anti-corruption campaign to disable political opponents and shore up his legitimacy without always presenting clear evidence of corruption on the part of the targeted individuals. Similarly, Krastev (2004) reports that in post-communist Eastern Europe allegations of corruption slung at one another by political opponents have led both politicians and the public to obsess about corruption to the exclusion of other important policy considerations, and to reduce public trust in political institutions (see also Smilov, 2009). De Weaver (2005) argues that a Chinese anti-corruption campaign launched in or around 2003 was motivated in part by a desire ‘to remove people loyal to former party chairman Jiang Zemin’. Finally, going further back in time, in a study focused on the Middle East and North Africa, Gillespie and Okruhlik (1991) identified many examples of ineffective anti-corruption campaigns that were either public relations exercises or designed primarily to target political opponents.14 At the same time, the Fijian example suggests that legal institutions are capable of avoiding co-optation by self-interested politicians. For instance, the Fijian High Court initially questioned whether the coup leader’s newly created anti-corruption commission could initiate criminal proceedings without the participation of the Director of Public Prosecutions.15 Meanwhile the Commonwealth Lawyers Association reportedly discouraged at least one foreign lawyer from participating in the Commission’s

14 To be fair, however, they also found many other examples of campaigns that appeared to be motivated by a genuine desire to alleviate corruption. 15 Compare Fiji Independent Commission Against Corruption v. Devo with Fiji Independent Commission Against Corruption v. Kumar.


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activities, suggesting that resistance to politicisation of the anti-corruption regime may also come from the broader international legal community (Fiji Times Online, 2007). IV.

Evidence of Institutional Displacement

Evidence on whether the transnational anti-corruption regime has displaced local institutions is sparse, mainly because there appears to be no systematic effort to collect it. Ideally we would have comprehensive data on the institutional integrity and competence of local institutions involved in combating corruption. It would also be nice to have data on various factors that might have influenced the quality of those institutions over time, including how frequently they participate in transnational proceedings and the extent to which they play a leadership role. Even data on how local actors perceive the transnational anti-corruption regime – perhaps a survey of law enforcement officials in developing countries asking how helpful they find foreign institutions – would be enlightening. To end on a positive note though, there are certainly cases in which foreign institutions appear to have served as complements of rather than substitutes for the anti-corruption efforts of actors from developing countries. The prime examples are the proceedings that states have brought – not always with success – against former leaders such as Ferdinand Marcos,16 Jean-Claude Duvalier17 and Frederick Chiluba18 to recover embezzled assets.19 The time is ripe for a comprehensive assessment of not only the prevalence and effectiveness of such proceedings but also their long-term impact on the development of local institutions.

6.

CONCLUSION

The primary purpose of this chapter is to explore the advantages and disadvantages of the transnational anti-corruption regime for developing countries. The potential advantages and disadvantages appear to be similar to those associated with other international or transnational regimes that affect developing countries. At this stage it does not seem prudent to go further and attempt to draw any conclusions about whether 16

Republic of the Philippines v. Marcos. Republic of Haiti v. Duvalier. 18 Attorney General of Zambia v. Meer Care and Desai. 19 For regularly updated data on such cases, see http://www.assetrecovery.org (accessed 30 October 2009). 17


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the anti-corruption efforts of foreign legal institutions have, in general, positive or negative effects on developing countries. In the first place, it is unclear whether any general claims would be helpful because there are strong reasons to believe that the answers to this question will be highly context-dependent. Second, there is insufficient data to assess many of the relevant hypotheses. In fact, in my view the principal lesson to be drawn from this exercise is that too little attention is being paid to some of the ramifications of relying on foreign legal institutions to solve the problems of the developing world, and especially the ramifications for the development of local institutions.


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Intellectual property, development concerns and developing countries Pedro Roffe*

1.

INTRODUCTION

Intellectual property (IP) has increasingly become more globalized and economically and politically important, but it remains complex, controversial and divisive. IP emerges often and prominently in discussions on trade, innovation, transfer of technology, public health, food security, education, climate change, biodiversity, the Internet or the entertainment industry. Its role and complexities in the context of less developed economies have not been unambiguous. Some argue that a strong system of protection is a prerequisite for economic and cultural development.1 Others blame the system for all possible sins, including making access to public goods (such as health, education, food) difficult and highly unaffordable for poor countries. Some even contend that the system is an expression of ‘legislative colonisation’ imposed by rich countries on poor ones (Stallman, 2009). Intellectual property laws established primarily in Europe and in the United States spread to almost all developing countries, particularly former colonies and new, independent states. However, not many developing countries have had much direct experience with IP instruments and policy, even in cases where such legal systems have existed for many years.

* Senior Fellow, Intellectual Property Programme, ICTSD, Geneva. The chapter draws on recent work and publications by the author, as duly noted. The author is grateful for comments and insights provided by Xavier Seuba, Christoph Spennemann and David Vivas on an earlier version but he is solely responsible for its content. 1 ‘IP is a “power tool” for economic development that is not yet being used to optimal effect in all countries, particularly in the developing world. It offers the possibility of growth and economic development in a way that is not a “zero sum game”, where if some win, others will lose. On the contrary, international acceptance and utilization of IP tools means that there will be more innovation and therefore more creative change and cultural and economic growth’ (Idris, 2003: 4). 307


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For many, IP is an entirely new subject. Indeed, traditionally, it has been the exclusive domain of specialists. Paradoxically, particularly over the past few years, IP has become an area in which developing countries have come under pressure to reform and to become more vigilant regarding the protection and enforcement of intellectual property rights (IPRs). This has been in many respects one of the main outcomes of the 1994 World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).2 The substantive obligations set forth in TRIPS are now widely accepted as the centerpiece of the new international IP architecture. IPRs being an integral part of the new international trading system implies that the failure to implement and enforce the TRIPS standards constitutes a cause of action for commercial retaliation or cross-retaliation under the WTO Dispute Settlement Understanding (see Abbott, 2009a). In addition, by placing IP issues within the scope of the WTO, Members are obliged to implement IP laws consistent with the national-treatment and mostfavoured-nation principles, meaning that IP protection and enforcement must be non-discriminatory as to the nationality of rights holders and that Members must extend any advantage they grant to nationals of one country to the nationals of all other WTO Members (UNCTAD-ICTSD, 2005). The subsequent emergence of bilateral and regional free trade agreements (FTAs) with comprehensive and robust IP chapters has added new complexities and challenges for developing countries. The IP obligations in these agreements are notable for expanding the standards of protection and enforcement laid out in the TRIPS Agreement (Roffe and Santa-Cruz, 2006). This chapter will focus on the IP system and the developing countries; how their participation has evolved since the inception of the international system; the challenges faced by the newcomers; and the extent to which the system has accommodated their needs. The chapter reviews the main landmarks in the evolution of the system, particularly with respect to patents since the establishment in the last quarter of the nineteenth century of the classical conventions (such as the Paris Convention for the Protection of Industrial Property of 1883 and the Berne Convention for the Protection of Literary and Artistic Work of 1886). The exposure of developing countries to the international system has not been homogeneous but they have

2

See Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, which was concluded on 15 April 1994 and entered into force on 1 January 1995 (GATT, 1994b).


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tended to make their claims and vindications in a collective form, as has been the practice in the United Nations system since the creation of the United Nations Conference on Trade and Development (UNCTAD).3

2.

THE INTERNATIONAL SYSTEM4

In the nineteenth century, the industrial revolution in Europe and North America, and the growth of international trade, marked a critical moment in the birth of the modern but still embryonic international system of intellectual property. In 1873, coinciding with the world exhibition in Vienna, the US seized the opportunity to propose an international convention on industrial property based on the premise that at a time of major technological progress, such as in steam and electricity and the magnitude of the exchange of goods, it was not possible that ‘the Patent granted for an invention in one country becomes in fact a restriction, unprofitable and obstructive, if that invention without limitation or increase in price, becomes in an adjoining country common property’ (Kronstein and Till, 1947). The US initiative found Europe in the middle of a major controversy on the merits of the patent system. The critics regarded the patent mechanism as one that restricts, rather than promotes, trade. They argued that it distorts the market by protecting certain economic interests over others. Some critics asserted that national patent laws, by granting temporary monopolies, acted in the same way as ‘prohibitive tariffs’ (Patel, 1974). The European anti-patent movement collapsed after an impressive propaganda campaign by patent protection advocates (Machlup and Penrose, 1950; Machlup, 1958). It ended in the negotiations on the international treaty, during which countries reached a ‘strategic compromise’ around the working of the invention in the country of importation. In this form, the pro- and anti-patent advocates accommodated their views by leaving the option to the country of importation to impose or not a conditional working requirement on the importer of the patented invention. This compromise reassured those with apprehensions that the system would not be responsive to the development and industrialisation needs of the importing country, unfairly favouring more advanced economies.

3 See United Nations General Assembly, 19th Session, 1314th Plenary Meeting, 30 December 1964, Resolution 1995 (XIX), Establishment of the United Nations Conference on Trade and Development. 4 See Roffe (2008); Roffe and Vea (2009).


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The International Convention for the Protection of Industrial Property (the ‘Paris Convention’) was finally adopted in 1883. The second major international IP treaty, dealing with the protection of Literary and Artistic Work (the Berne Convention), was signed in 1886. The Paris Convention was subsequently revised in diplomatic conferences, the last held in Stockholm in 1967. The original signatories to the Paris Convention were Belgium, Brazil, Ecuador, El Salvador, France, Guatemala, Great Britain, Italy, the Netherlands, Portugal, Serbia, Spain, Switzerland and Tunisia. In subsequent years, Ecuador, El Salvador and Guatemala withdrew from the Convention (see Patel, 1974), only returning almost 100 years later, as a result of the coming into being of the TRIPS Agreement. The original conception of ‘local working’ evolved during the various revision conferences, and ‘compulsory licensing’ was subsequently formally incorporated5 as one of the measures that countries could adopt to remedy possible abuses resulting from the exclusive rights conferred by patents, including, for example, failure to work. By and large, the five major revision conferences diluted the ‘strategic compromise’ of 1883. The final text of the Convention – part of the WTO TRIPS Agreement of 1994 – is less flexible concerning the freedom given to countries to determine the conditions under which local exploitation can take place. This lack of flexibility was one major point of contention in the incorporation of developing countries into the system and has been a continuous divisive issue among parties.

3.

THE EMERGENCE OF DEVELOPING COUNTRIES: THE CASE OF LATIN AMERICA6

The membership of the Paris Convention grew steadily. It increased to 47 by 1958 and to 80 in the early part of the 1970s. Today, membership is more than 170. If by the end of the nineteenth century the developing countries membership was limited to three countries, the number grew consistently: to 9 by 1934; 15 by 1958 and 44 by 1973 (see UNCTAD, 1975). More than half of the current African membership joined the Paris Convention during the 1960s and 1970s coinciding with their political independence. Some of the largest developing countries – including Bangladesh, China, India, Malaysia, Pakistan, the Republic of Korea,

5

The formal incorporation of compulsory licensing into the text of the Convention was the outcome of the Hague Revision Conference of 1925. 6 See Roffe (2007).


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Sudan, and Thailand – are relative newcomers. Their adherence to the Convention began in the 1980s. India, for example, became a member in 1998, and Pakistan as recently as 2004 – both in many respects as a result or condition of their adherence to the TRIPS Agreement. Latin America provides an interesting case study. The adoption of national IPR laws began in the early part of the nineteenth century but spread massively throughout the region in the late nineteenth and early twentieth centuries. However, the spread of national laws was not the result of membership of international conventions and membership of international instruments was not widespread. In the mid-1960s, only five countries were members of the Paris Convention.7 Such a major country as Argentina became a member in the middle of the 1960s and Venezuela joined as recently as 1995 (again, as a result of the TRIPS Agreement). Similarly, Latin American countries were also uncommitted to the Berne Convention. In the mid-1960s, Brazil was its only member (since 1922). The majority became members in the last decade of the twentieth century.8 In short, beginning in the late 1960s, Latin American countries became part of the international IP architecture slowly and warily. They became unequivocally part of it after the adoption of the TRIPS Agreement in 1994 by joining, among others, the two classical conventions of the nineteenth century (Paris and Berne). Why were Latin American and other developing countries particularly cautious with respect to the implications of their adherence to the classical IP conventions? With respect to the Paris Convention, the general view at the time was that it was not in the national interest to join an international instrument that was cumbersome and not flexible enough to facilitate the local exploitation of foreign inventions as a means to contribute to the dissemination and transfer of technology. It was also felt that the nationaltreatment principle constituted a barrier to the design of national regimes duly suited to local conditions. Furthermore, the prevailing economic thinking in those days favoured import substitution industrialisation policies. Under these premises, local production was a key ingredient to this approach: ‘Instead of being used in production an overwhelming majority of patents granted to foreigners through national laws of developing countries have been used to secure import monopolies’ (UNCTAD, 1975: 64). 7 This was the case of Brazil – founding member of the Paris Convention – Cuba, Mexico, the Dominican Republic, and Trinidad and Tobago. 8 It should be noted, however, that in the case of copyright, an important number of countries were already members of the Universal Copyright Convention (UNESCO) of 1952, together with the US, which only joined the Berne Convention in the late 1980s.


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The reservations towards the spread of the IP system reached their climax in the last quarter of the twentieth century. A wave of legal reforms translated into important changes in IP-related legislation in a number of countries. The national reforms included, for example, the strengthening of the working requirement in the case of patents, and the expansion of measures to prevent patent abuses and promote the transfer of technology through the establishment of special national regimes to screen transfer of technology transactions.9 Immediately after independence, India commissioned a number of enquiries on how to make the patent system more suitable for the specific needs of the country (see Ayyangar, 1959). The adoption of the first Indian Patent Law in 1970 represents, in many respects, the thinking that prevailed in those days in terms of law reform. For example, the law differentiated in areas of social concern (health and food) where, for instance, patents would be granted only to processes and not products, and only for seven years as opposed to 14 years in other areas (Roffe, 2000). The case of the Andean Group also provides an interesting illustration of how developing countries dealt with patent reform in those years.10 As one of its foundations, the Group adopted common rules for the treatment of foreign capital, trademarks, patents, licences, and royalties. These rules were embodied in the well-known Decision 24, and subsequent regulations and decisions on the treatment of IP and the transfer of technology (Abbott, 1975). The framers conceived the Decision as an important step in contributing to the integration of the Andean community by regulating international capital in a way that influenced the distribution of benefits of the integration process. By dealing with various aspects of economic foreign collaboration including foreign direct investment, licensing agreements, and the treatment of intellectual property rights, the Andean Group sought mainly to extract benefits from the technological skills of transnational corporations as a springboard to the upgrading of local firms. It was perceived that this could be achieved with a more selective screening of foreign direct investment and technologies that could contribute to the national development of the five countries. Toward that aim, the Andean Group set forth performance requirements for foreign capital, such as to facilitate access to foreign technology and train local firms, as a 9 This was the case in Latin American countries, particularly Argentina, Brazil, Mexico, and the countries of the Andean Group. 10 The Andean Group was established in 1969 between Bolivia, Chile, Colombia, Ecuador, and Peru. Venezuela joined four years later. Of the original six countries, two left the Community (Chile and Venezuela). Chile withdrew from the Pact after serious disagreements concerning Decision 24.


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condition of their establishment in the region. The accompanying patent agenda reform was large and multifaceted (see Remiche, 1982). The general tendency of national reforms had an impact on the international front, including the flagging of the issue in deliberations of the UN General Assembly (see Roffe and Vea, 2009). Debates on reform in WIPO gained momentum, as membership in international conventions increased. Many of the new members expressed concern about the lack of sufficient access to information and knowledge and how the prevailing international system was not well adapted to their needs. Led by India, developing countries demanded, in the context of the Berne Convention, ‘that unless some major copyright concessions were made for developing countries, they would have to make drastic changes in their international copyright arrangements’ (Yu, 2004). The 1967 WIPO Stockholm conference became the venue for these countries ‘to adjust the system of protection under the Berne Convention to [their] economic, social and cultural needs’ (ibid). With respect to the Paris Convention, the idea of a possible revision was first advanced in June 1974 when the Director General of WIPO was instructed to create and convene an Ad Hoc Group of Governmental Experts, which in 1977 adopted a Declaration which served as the basic document for the Sixth Diplomatic Conference on the revision of the Paris Convention. Access to technology, transfer of technology, and dissemination of knowledge were at the heart of the Declaration. It should be noted here that a conspicuous element of the broad developing countries’ reform agenda was improving the conditions for the transfer of technology, leading to an agreement on an international code of conduct on the transfer of technology that would establish a framework for cooperation and would lay out general principles on commercial technology transactions, including the use of fair terms and conditions in contractual relationships (see Patel et al., 2000). The preparatory work for the Sixth Revision of the Paris Convention was entrusted to different working groups, resulting in the preparation of the basic proposals finally submitted to the revision conference that met for the first time in 1981. One of the centrepieces of the revision was the attempt to fundamentally reshape the Convention by revisiting the notions of local working and remedies to abuses. It was indeed the most radical attempt to revise the Convention in its entire history (see Roffe and Vea, 2009). To the frustration of developing countries, in the middle of the revision process a WIPO secretariat proposal made in 1983 for a complementary treaty to the Paris Convention (which included aspects such as the legal effects of public disclosure of an invention) sidetracked the general revision process initiated at the instance of developing countries. The scope


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of the 1983 initiative was subsequently widened to include other issues of concern to major developed countries.11 The latter initiative ran counter to developing countries’ views on reforming the main tenets of the Convention. Ultimately, the two initiatives were turned aside by the subsequent move to incorporate IPRs as an integral part of the world-trade regime in the new Round of Multilateral Trade Negotiations launched in Punta del Este in 1986 (see Sell, 2003).

4.

TRIPS, FTAs AND THEIR IMPLICATIONS

The WTO TRIPS Agreement marked a major event in the evolution of the international IP system. It moved international policymaking from a flexible bottom-up approach as in the Paris Convention to a new set of minimum international standards of protection and enforcement of IPRs in the new broader forum of the WTO (see Okediji, 2008). In contrast to developing countries’ activism in the preceding period, their role in the drafting and negotiation of the Agreement was entirely defensive. Initially, they took the position that, except for counterfeiting and anticompetitive behaviour, the subject was not apt for the General Agreement on Tariffs and Trade (GATT). In this context, they argued that WIPO, as the UN international specialised body, was the only competent body on these matters. Finally, developing countries adhered to TRIPS as part of the single-undertaking concept that prevailed in the Uruguay Round negotiations.12 In exchange, in the context of TRIPS, they obtained some modest concessions in terms of flexibilities in the implementation of its provisions. Within the policy space recognised by the Agreement, Members are free, for example, to apply more extensive protection – provided that such protection does not contravene the provisions of the Agreement (see RuseKhan, 2009). In its implementation, Members are free to determine the appropriate method of implementing those standards ‘within their own legal system and practice’ (TRIPS: Art. 1.1). The Agreement also recognises flexibilities and discretion in the implementation of its minimum standards. How flexible the Agreement is and 11 The wider agenda included issues such as the unity of invention, the firstto-file versus the first-to-invent criterion, the minimum duration of rights, enforcement issues, exclusion of certain fields of technology from patentability, and the rights and obligations of patentees. 12 A deal comprising a single package of issues on improved access to market, in general, agriculture and textile goods, services, and investment.


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how free countries are to implement its provisions are important questions that have, in many respects, influenced the evolution of TRIPS and have dominated multilateral discussions in the WTO, WIPO and the World Health Organization (WHO). In the context of the WTO, the flexibility issue reached a climax in the process and follow-up to the adoption of the 2001 Doha Declaration on TRIPS and Public Health.13 Among the flexibilities specifically mentioned in the Declaration is the right to grant compulsory licences, including the freedom to determine the grounds upon which such licences are granted and the freedom to establish the appropriate regime for the exhaustion of IPRs. These are not the only flexibilities, implicitly or explicitly, included in the Agreement.14 FTAs elaborate on the TRIPS minimum standards, further advancing the process of upward harmonisation of IP law and diluting the options of making use of the TRIPS flexibilities (see Roffe and Santa-Cruz, 2006). Similar to the adherence to the TRIPS Agreement as a quid pro quo for the benefits of WTO membership, negotiators seem to acknowledge that the IP provisions in FTAs are the result of trade-offs in exchange for trade concessions in areas more significant to their national commercial interests. In the case of developed countries – namely the United States, the European Union and the country members of EFTA – the driving forces behind the incorporation of comprehensive and robust IP chapters in FTAs have been those industrial sectors highly dependent on IP protection and interested in sustaining their technological edge (Roffe and Spennemann, 2009). In broad terms, compared with the agreements sponsored by the US, the EFTA and EU agreements have been less comprehensive. However, the EU has recently launched a series of negotiations that include stronger and more extensive IP chapters. These include the new Economic Partnership Agreements (EPAs) with six regional groupings of the African, Caribbean and Pacific (ACP) states (see Santa-Cruz, 2007), and Free Trade Agreements and Association Agreements with, for example, members of the Andean Community (see Seuba Hernandez, 2009b) and Central American countries. All these agreements put greater emphasis on IP provisions, particularly with respect to enforcement. In the recent past, the IP chapters in the FTAs signed by the EU and EFTA have placed general emphasis on reinforcing the existing international IP architecture

13 Declaration on the TRIPS Agreement and Public Health, adopted on 14 November 2001 (WTO, 2001b). 14 See UNCTAD-ICTSD (2005) for a detailed consideration of the policy options compliant with TRIPS.


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by committing the parties to become party to a number of multilateral IP-related agreements (see Santa-Cruz, 2007). For example, in the case of the Agreement between Chile and the EU, the Parties have ‘to accede to and ensure an adequate and effective implementation of the obligations arising from’ a number of WIPO-administered treaties15 and make ‘every effort to ratify and ensure an adequate and effective implementation of the obligations arising from’ multilateral conventions.16 The adherence to these agreements was reinforced by the overarching obligation of ensuring adequate and effective protection to IPRs in accordance with the ‘highest international standards’, including effective means of enforcing such rights (see Roffe and Santa-Cruz, 2006). A major shift in the emphasis of the FTAs signed by the EU has taken place recently with the signature of the Economic Partnership Agreement (EPA) with the countries of the CARIFORUM (CARIFORUM–EC, 2008). The EPA and the prototype being used in current ongoing negotiations (see Santa-Cruz, 2007; Seuba Hernandez, 2009b) show that the EU is now following an approach closer to that of the US. EFTA has followed the EU approach very closely, but expands the protection in the case of pharmaceutical products with respect to data provided to national authorities on the safety and efficacy of those products – either by way of exclusive protection for an adequate number of years or by adequate compensation payable to the data originator by those making use of the data.17 The protection of undisclosed information is also a new pattern in the FTAs being negotiated by the EU (see Seuba Hernandez, 2009b). 15 For example, the World Intellectual Property Organization Copyright Treaty (WCT), 1996; the World Intellectual Property Organization Performances and Phonograms Treaty (WPPT), 1996; the Patent Cooperation Treaty, 19 June 1970, the Washington Act amended in 1979 and modified in 1984. 16 For example, the Protocol to the Madrid Agreement Concerning the International Registration of Marks; the Madrid Agreement Concerning the International Registration of Marks, Stockholm Act 1967, as amended in 1979; and the Vienna Agreement Establishing an International Classification of Figurative Elements of Marks, 1973, as amended in 1985. 17 See Roffe and Santa-Cruz (2006). In the case of the Chile–FTA with EFTA, see Article 4 of Annex XII Referred to in Article 46 Intellectual Property Rights (see http://www.efta.int/content/legal-texts/third-country-relations/chile/annexesand-protocols/CL-FTA-Annex-XII.pdf/view (accessed 2 September 2009)). The option to protect undisclosed data by adequate compensation is found in the FTA between EFTA and the Republic of Korea (see Article 3, Annex XIII Referred to in Article 46 Intellectual Property Rights, http://www.efta.int/content/legaltexts/third-country-relations/republic-of-korea/final-act-record-of-understandingannexes-and/KR-Annex-XIII-IPR.pdf/view (accessed 2 September 2009)).


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The agreements to which the US is a party have had a more expansive and detailed coverage. Since 2002 they have followed the general principles and objectives set in the Trade Promotion Authority Act of 2002 that guide the negotiations towards the achievement of a number of objectives. These include the accelerated and full implementation of the TRIPS obligations and that the provisions of any trade agreement ‘reflect a standard of protection similar to that found in US law’.18 Before the completion of the TRIPS Agreement, the US concluded a bilateral agreement with Canada in which IP features prominently.19 Again, in NAFTA,20 the Chapter on IP is an important component of the treaty. Following NAFTA a number of other bilateral agreements with comprehensive IP chapters were signed by the US. As in the case of TRIPS, the breadth and scope of the agreements sponsored by the US relate to all major IP disciplines. An important development in the evolution of US policies is the change introduced in May 2007, after the expiration of the Trade Promotion Authority of 2002 and as a result of a bipartisan understanding with respect to the ratification of outstanding free trade agreements.21 As a result of this understanding, modifications were introduced in the FTAs with respect to provisions dealing with pharmaceutical products, reflecting concerns expressed in many quarters about the impact of the FTAs on public health policies (see, for example, United States Government Accountability Office, 2007). The amendments relate to issues such as extensions of the patent term, data exclusivity, the patent–data protection linkage and the appropriate treatment of the Doha Declaration on Health (see Roffe and Vivas, 2007: 15). Subsequently the texts of the agreements negotiated with Colombia, Panama and Peru were respectively amended and, shortly afterwards, the Peruvian Trade Promotion Agreement was approved by Congress and signed by the President of the US.22 Notwithstanding this interesting change in US policies, in a common 18 See, among others, Section 2102 of the Trade Promotion Authority, Trade Act of 2002. 19 The Canada–US Free Trade Agreement entered into force on 1 January 1989 (see http://wehner.tamu.edu/mgmt.www/nafta/fta/ (accessed 2 September 2009)). 20 See http://www.nafta-sec-alena.org/DefaultSite/index_e.aspx?DetailID=78 (accessed 2 September 2009). 21 Four bilateral trade agreements negotiated and signed by the Executive, respectively, with the Republic of Korea, Panama, Peru and Colombia were still subject to ratification by Congress at the time of the 2006 Congressional elections. 22 The FTA with Peru entered into force in February 2009.


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provision in all US FTA implementation bills23 the entry into force of the Agreements is set ‘at such time as the President determines that countries . . . have taken measures necessary to comply with the provisions of the Agreement . . .’.24 This determination conditions the entry into force upon the satisfaction expressed by the President that the other Party has taken the necessary measures to implement effectively the provisions of the agreement. This aspect of the implementation process, known as the ‘certification’ act, commits the other Party to adopt the necessary implementation legislation that meets the expectations of the US. This process adds major hurdles to the implementation in good faith of these agreements. In practical terms it means that once the negotiation has been concluded and signed by the parties, a new negotiating process begins with respect to the implementation legislation, which demands a major redesign of the legal and institutional base. In brief, this aspect of the US legal system puts partner countries under the obligation to take measures to adjust their internal IP regimes to the new FTA standards, prior to the entry into force of the Agreement, initiating a complex process of certification of the implementing legislation that questions the relevance of the principle of freedom of implementation sanctioned by TRIPS (see Roffe and Spennemann, 2009). Consequently, few could contest the fact that the IP chapters have been one of the most contentious aspects of the negotiations of the FTAs. The general critique is that while the agreements build on the TRIPS minimum standards, they tend to affect the general balance of the Agreement by overemphasising the protection aspects of IP while reducing policy spaces otherwise available for the protection of the broader public interest.

5.

REVISITING THE DEVELOPMENT CONCERNS

The genesis and the evolution of the Paris Convention – one central pillar of the international IP architecture – were marked by the tension of how the system impacted local industrialisation and transfer of technology. We have highlighted that the local working requirement was diluted through the various revision conferences. The attempt by developing countries to recast the Convention to their needs – the local working and flexibilities being in general the core of this effort – did not bear fruit.

23 See, for example, Dominican Republic–Central American–United States Free Trade Agreement Implementation Act, Pub L 109-53, 109th Cong, 1st session (2005). 24 Ibid, section 101.


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As a result of TRIPS and consequent developments, a number of reports have revisited past preoccupations by raising concerns about the one-sided nature of the evolution of international IP architecture; among other things, for failing to contribute to the very objectives that the TRIPS Agreement was intended to achieve. Namely, these objectives include the promotion of technological innovation and transfer and dissemination of technology ‘to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations’ (Art. 7). Prominent among these criticisms was the influential 2002 report on Intellectual Property Rights and Development of the UK-appointed Commission on Intellectual Property Rights (CIPR). Overall, for the Commission a ‘onesize-fits-all’ approach to IPR protection simply does not work, especially when the required levels of protection are as high as they are today, or are likely to become in the near future. At certain stages of development, weak levels of IPR protection are more likely to stimulate economic development and poverty alleviation than strong levels. The CIPR presented welldocumented historical evidence to support this view. Available empirical data is, as the Commission reveals, somewhat lacking at present, but what does exist points to the same conclusion (Commission on Intellectual Property Rights, 2002). This quest for harmonisation based on a one-size-fits-all approach ‘has resulted in a “race to the top” directed by the efforts and self-interest of the countries that have had the strongest property rights’ (see Khan and Sokoloff, 2009: 241). In a public letter addressed to US authorities, a group of congressmen has argued that recent trends have meant stripping away ‘flexibilities to which countries are entitled under TRIPS. The FTAs provisions also appear to upset an important balance between innovation and access by elevating intellectual property at the expense of public health’.25 In the case of health, recent developments are marked by the extension of the duration of patents beyond 20 years, restricting the use of compulsory licensing, and prohibiting the use of test data on the safety and efficacy of products by companies seeking marketing approval for generic products (see Roffe et al., 2006). These measures have been a major source of concern for countries attempting to tailor policies according to their development needs, particularly those aimed at improving access to medicines (see Roffe et al., 2007). Apprehensions expressed at the expansive exclusive rights on pharmaceutical products extend also to the building of

25 Public letter dated 12 March 2007 addressed to the USA Trade Representative, signed by 12 members of the US Congress.


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technological capacities in developing countries. Overly broad exclusive rights may threaten the ability of local innovators to engage in research and development (R&D) through reverse engineering and the creation of functional generic equivalents and improvements. Expansive rights might discourage generic investors from investing in existing local production plants, thus denying important opportunities for technology transfer to local producers. Thus, the implementation of international standards without due regard to their potential impact on innovation may seriously hamper developing countries’ efforts at technological catching-up. The issues related to access to medicines have been the focus of most of the attention on the impact and pervasiveness of recent developments (see Roffe and Spennemann, 2009). But a number of other matters have been singled out as being as controversial and harmful to less advanced countries. This is a result of expanding the system to new frontiers and upsetting the structural balance reached at the time of the conclusion of the TRIPS Agreement. Other issues that come forth prominently include: genetic resources and the protection of life forms; the expansion of copyright protection in the digital environment, including the circumvention of technological measures; and enforcement of IPRs. In the case of genetic resources, FTA provisions intensify the ‘race to the top’ process interfering in many respects with ongoing multilateral deliberations. The TRIPS Agreement allows for the exclusion from patentability of ‘plants and animals’ in general. Members may exclude plants as such (including transgenic plants), plant varieties (including hybrids), as well as plant cells, seeds and other plant materials. They may also exclude animals (including transgenic) and animal races. TRIPS provides that Members need to afford patent protection for the following: micro-organisms, non-biological processes and microbiological processes. Furthermore, Members need to provide protection to plant varieties either by patents or by an ‘effective sui generis system’ or by any combination of the two. At the same time, TRIPS provides that Members may exclude from patent protection: plants, animals, and essentially biological processes for the production of plants or animals and plant varieties (Art. 27.3). An ‘effective sui generis system’ in this context could imply the breeders’ rights regime, as established in the UPOV Convention, but the text very deliberately does not refer to UPOV. The possibility is open to combine the patent system with a breeders’ rights regime, or to develop other ‘effective sui generis’ forms of protection. In the context of the review process contemplated by TRIPS on this provision of the Agreement (Art. 27.3b), a number of developing countries have reiterated their discomfort by emphasising the need to reconcile TRIPS with the relevant provisions of the Convention on Biological


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Diversity (CBD)26 of 1992, especially with respect to the principles of prior informed consent and access and benefit sharing (see Bragdon et al., 2008). For instance, the African Group has consistently been of the view that patents should not be granted on micro-organisms or on nonbiological and microbiological processes for the production of plants and animals because this ‘is contrary to the fabric of their society and culture’ (WTO Secretariat, 2006: paras 28–9). The FTAs in a number of ways preclude parties from taking advantage of the options and exclusions acknowledged in TRIPS. For example, FTAs, in general, list the 1991 Act of the UPOV Convention as one of the international treaties that Parties should subscribe to or endeavour to adhere to as the modality of protection for plant varieties. The TRIPS Agreement, as noted, obliges countries to prescribe protection of plant varieties but offers various options including an effective sui generis system of protection. UPOV provides a framework for the protection of plant varieties27 but has been criticised on the grounds that plant breeders’ rights regimes better respond to conditions prevailing in industrialised countries and thereby risk undermining the food security of communities in developing countries (see UNCTAD-ICTSD, 2003: 105). There are two versions of the Convention: UPOV 1978 and UPOV 1991. The FTAs oblige countries to opt for the 1991 version of UPOV, which is seen as less flexible and more stringent than its previous incarnations (ibid). An important difference between the two acts is that in the 1978 version species eligible for plant breeders’ rights cannot be patented whereas the 1991 version tacitly permits the possibility of double protection. Further, in the 1978 version there is no reference to the right of farmers to re-sow seed harvested from protected varieties for their own use (often referred to as the ‘farmers’ privilege’). Thus, countries that are members of the 1978 version are free, but not obliged, to uphold the farmers’ privilege. While under UPOV 1991 governments can also use their discretion to decide whether to uphold farmers’ rights, the 1991 version is more specific (and restrictive) on the scope of these farmers’ rights. It provides for an optional exception that allows parties ‘within reasonable limits and subject to the safeguarding of the legitimate interests of the breeder, [to] restrict the breeder’s right in relation to any variety in order to permit farmers to use for propagating purposes, on their own holdings, the 26

Convention on Biological Diversity, Rio de Janeiro, 5 June 1992. The Convention was first signed in 1961 and revised in 1972, 1978 and 1991. It entered into force in 1968. It established the International Union for the Protection of New Varieties of Plants, based in Geneva and associated with WIPO. 27


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product of the harvest which they have obtained by planting, on their own holdings, the protected variety or a[n essentially derived] variety’ (UPOV, 1991: Art. 15.2). This means that the farmers’ privilege no longer includes the right to use seeds for free (see Dutfield, 2008). Countries party to FTAs undertake further commitments to make efforts to introduce legislation concerning the patenting of plants and animals which is not, as we have seen, mandatory under TRIPS. For example, in the CAFTA–DR Agreement, plants and animals may be excluded from patentability, but any Party that does not provide patent protection for plants by the date of entry into force of the agreement shall undertake all reasonable efforts to make such patent protection available (CAFTA–DR: Art. 15.9.2). In addition, any Party that provides patent protection for plants and animals as of, or after, the date of entry into force of the agreement shall maintain such protection (ibid). This means a practical derogation from the TRIPS flexibility to determine the appropriate method of implementation by ‘locking-in’ countries to maintain such protection without alteration. This is no doubt a clear indication of the pervasive nature of these agreements that as a matter of principle would not allow Parties to amend their national legislation if conditions and circumstances changed. Contrary to this best endeavour clause, in the case of the agreement between the US and Morocco, the Parties assume the obligation to grant patents to inventions on animals and plants (Morocco–USA: Art. 15.9.2). An intermediary approach is followed in the agreement with Bahrain that makes mandatory the patenting of ‘plant inventions’ and not of animals (Bahrain–USA: Art. 14.8.2). As alluded to, the FTAs have deepened the process of upward harmonisation started by TRIPS, with important consequences in the evolution of the IP architecture. This is the case with FTA provisions on the protection and enforcement of copyright and related rights which are quite rigorous and precise. One manifestation of this is the expansion of the duration of copyright and related rights by 20 years, in addition to the 50 years as generally established in TRIPS (see Roffe, 2004). The FTAs signed with the US include detailed rules aimed at providing adequate legal protection and effective legal remedies to fight against the circumvention of effective technological protection measures (TPMs) used by authors, performers and the producers of phonograms to protect their works, performances and phonograms protected by copyright and related rights.28 In a common provision that can be found with minor varia-

28 ‘Effective technological measure means any technology, device, or component that, in the normal course of its operation, controls access to a work, perform-


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tions in all FTAs signed with the US, Parties are obliged to provide for a detailed system of protection from circumvention that practically exports the US law into the domestic legislation of its partners. In addition, the FTAs provide for the obligation to make available adequate and effective legal remedies to protect rights management information.29 The provisions on effective TPMs in US FTAs go beyond the WIPO ‘Internet treaties’ of 1996 (the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT) (see UNCTADICTSD, 2003), which state that Parties ‘shall provide adequate legal protection and effective legal remedies’ against the circumvention of TPMs (WCT: Art. 11; WPPT: Art. 18), leaving it to each Party to decide the way in which it will implement the provisions and whether it will apply civil and/or criminal sanctions to infringers. Both the prohibition to circumvent TPMs and the prohibition to produce and distribute circumvention tools do not apply to a number of public interest institutions (non-profit libraries, archives, educational institutions, or public non-commercial broadcasting entities) and are subject to some exceptions. Despite these exceptions, it has been observed that these measures, while providing protection to digital content, go far beyond what is necessary in this regard and are causing avoidable ‘collateral harm’ by imposing, inter alia, undue restrictions of fair and other legitimate uses of digital content, unnecessary obstacles to competition within the content industry, and inappropriate obstacles to competition in the market for TPMs (see Samuelson and Scotchmer, 2001: 57). Finally, one important feature of US agreements has been their strong articulation of enforcement measures. However, the European approach has considerably changed in recent years and its new prototype resembles in many respects the approach taken by the US and suggests an even more ambitious and drastic approach to enforcement issues (see Seuba

ance, phonogram, or any other protected material, or that protects any copyright or any rights related to copyright, and cannot, in the usual case, be circumvented accidentally’ (USA–Chile: Art. 17.7.5(f)). 29 ‘Rights management information means: (i) information that identifies a work, performance, or phonogram; the author of the work, the performer of the performance, or the producer of the phonogram; or the owner of any right in the work, performance, or phonogram; (ii) information about the terms and conditions of the use of the work, performance, or phonogram; or (iii) any numbers or codes that represent such information, when any of these items is attached to a copy of the work, performance, or phonogram or appears in connection with the communication or making available of a work, performance, or phonogram, to the public’ (USA–Peru: Art. 16.7.5(c)).


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Hernandez, 2009b). These trends, in general, reflect the new enforcement agenda (see Fink and Correa, 2009) led at the international level by these same countries, with a clear expression in the efforts being made to adopt an Anti-Counterfeiting Trade Agreement (ACTA) (see Sell, 2008) with a view to consolidating gains obtained in recent FTAs and transforming even more severely the international IP architecture. In general, the enforcement provisions of the FTAs negotiated with the US have the same structure as the TRIPS Agreement. Accordingly, they contain General Provisions; Civil and Administrative Procedures; Provisional Measures; Border Measures; and Criminal Procedures. Perhaps the most important achievement in this area for the US has been to make many of the TRIPS discretionary remedies mandatory. An important novelty of the FTAs, as far as TRIPS and the WIPO Internet Treaties are concerned, is that they provide for ‘Limitations on Liability of Internet Service Providers’ (see Roffe, 2004). The new agreements provide, for example, that damages should be paid by the infringer to compensate for the injuries suffered by the right holder,30 without qualifying the nature of the infringement. The equivalent provision in the TRIPS Agreement limits damages to a contravention of the rights by an infringer who ‘knowingly, or with reasonable grounds to know, engaged in infringing activity’ (Art. 45.1). Therefore, innocent infringement according to TRIPS may be excluded; however, it is not apparent whether that possibility is open in the FTAs. As far as border measures are concerned, the FTAs once again go beyond TRIPS, particularly in one aspect. The TRIPS Agreement recognises that Members may adopt such measures to enable right holders, suspecting that the importation of counterfeit trademark or pirated goods (see TRIPS: Art. 51) may take place, to authorise competent authorities to act even upon their own initiative (ex officio action) (Art. 58) in suspending the release of goods when, prima facie, intellectual property rights might be infringed. The application of border measures to goods being exported and to goods in transit is optional.31 The FTAs expand these minimum TRIPS requirements by providing for ex officio measures for goods being imported, as well as for those destined for export

30

In a similar provision in the FTA with Chile, Parties, however, are free to provide that the presumption will only be valid on two conditions: that the work appears on its face to be original and that it bears a publication date not more than 70 years prior to the date of the alleged infringement. The 70 years from publication term is the equivalent to the term of protection granted to legal persons (see USA–Chile: Art. 17.11.6(b)). 31 See Article 51, TRIPS Agreement.


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or moving in transit (see USA–Peru: Art. 16.11.23; CARIFORUM–EC Agreement: Art. 163). Border measures are also an important feature of recent agreements signed by the EC, as in the case of the one signed with CARIFORUM that goes even beyond the agreements sponsored by the US.32 The latter stick to the minimum standard of TRIPS, in the sense that border measures apply to counterfeit trademark or pirated copyright goods only. In the case of CARIFORUM, border measures apply in general to ‘goods infringing an intellectual property right’. CARIFORUM States also agree ‘to collaborate to expand the scope of this definition to cover goods infringing all intellectual property rights’. Thus, in the future, border measures could also embrace patent infringements that are not covered under TRIPS minimum standards (see Seuba Hernandez, 2009a). The FTAs expand also the TRIPS provisions on criminal measures. According to the latter, for example, criminal measures apply to cases of wilful trademark counterfeiting or copyright piracy on a commercial scale. The FTAs broaden the scope of what is considered a wilful infringement on a commercial scale (USA–Peru: Art. 16.11.26). The new obligations disregard the quantitative ‘commercial scale’ requirement in TRIPS and replace it with the notion of a ‘commercial advantage or financial gain’ element, which focuses more on the purpose of the infringement, even if it is not made on a commercial scale. Other examples of provisions that go beyond TRIPS deal with criminal procedure; specifically, the detailed rules on seizure, forfeiture and destruction of infringing goods and elements used in the infringements (see, for example, USA–Peru: Art. 16.11.17). Overall, this ‘race to the top’ has an important effect on the public domain and its relevance to technological innovation and cultural progress (see, for example, Boyle, 2008). The tendency for an overexpansion of private rights, both under the TRIPS Agreement and even more so under the new generation of FTAs, has been supported by the belief in many countries that stronger exclusive rights will necessarily yield higher levels of creativity and innovation, despite the lack of concrete empirical evidence in this regard (see ibid). Taken together, these trends have upset the balance between private rights and the free dissemination of knowledge that appears to be one of the main tenets of TRIPS. Precisely, one premise of the TRIPS Agreement is the desire

32

The idea of expanding IPRs covered by border measures appears to be a recent feature of the proposals made in the negotiations initiated by the EC with Andean countries and India (see Seuba Hernandez, 2009b).


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‘to reduce distortions and impediments to international trade, and . . . the need to promote effective and adequate protection of intellectual property rights, and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade’ (see TRIPS: Preamble). But also high in the underpinning of the Agreement is the acknowledgement of the ‘underlying public policy objectives of national systems . . . including developmental and technological objectives’ (see ibid, its objectives: Art. 7, and principles: Art. 8).

6.

THE WIPO DEVELOPMENT AGENDA33

As noted, attempts to integrate development concerns in the IP architecture have a long history and a close relationship with the genesis and evolution of the system. The gravity of public health problems afflicting many developing countries and the impact IP protection has on the pricing of medicines – aggravated by the negative exposure major pharmaceutical international firms had in a case brought against the South African State challenging the use of TRIPS flexibilities – prompted governments to adopt the 2001 Declaration on the TRIPS Agreement and Public Health (see Abbott, 2009b). A more ambitious attempt to bring back development issues to the IP debate, namely in WIPO, has been the initiative for a development agenda. In support of such agenda, Argentina and Brazil argued that IP protection is a public policy instrument involving benefits as well as costs, depending on a country’s level of development. Action was therefore needed to ensure that the costs do not outweigh the benefits, particularly in the case of less developed countries: A vision that promotes the absolute benefits of intellectual property protection without acknowledging public policy concerns undermines the very credibility of the IP system. Integrating the development dimension into the IP system and WIPO’s activities, on the other hand, will strengthen the credibility of the IP system and encourage its wider acceptance as an important tool for the promotion of innovation, creativity and development.34

33 See Santa-Cruz and Roffe (2009). See also detailed discussions on the WIPO Development Agenda in De Beer (2009); Netanel (2009: 79–109). 34 Proposal by Argentina and Brazil for the establishment of a Development Agenda for WIPO, 2004.


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One important objective of the WIPO Development Agenda was to mainstream the development dimension into all activities of the Organization. The proponents sought to promote, among other things, ‘a deeper reflection on the development implications of current and new approaches to different IP policy choices and international norm setting, as well as a more accurate and pervasive discussion on the consequences of their adoption by countries at different stages of social, economic and technological development’ (see WIPO, 2005). After three years of intensive deliberations and negotiations, WIPO Members agreed on 45 recommendations aimed at integrating development considerations in all aspects of WIPO’s work. Among the most relevant recommendations are those targeted to deepen the analysis of the implications and benefits of the public domain; to initiate discussions on how to further facilitate access to knowledge and technology; to promote pro-competitive licensing practices to foster creativity, innovation and the transfer of technology; and to promote the use of flexibilities in the TRIPS Agreement. Finally, in an attempt to redress former practices, the Agenda recommends that norm-setting activities shall be inclusive and member-driven; take into account different levels of development; take into consideration a balance between costs and benefits; be a participatory process, which takes into consideration the interests and priorities of all WIPO Member States and the viewpoints of other stakeholders, including accredited intergovernmental organisations and NGOs; and be in line with the principle of neutrality of the WIPO Secretariat. Apart from the work specifically related to the Development Agenda, another important recent development in WIPO has been the resumption of the work of the Standing Committee on the Law of Patents (SCP) after a three-year paralysis due to the failure in negotiating a new substantive patent law treaty. The failure stemmed from tensions around the further upward expansion of the IP system, which was seen by many developing countries as a process adding new layers of protection and enforcement without the necessary safeguards within a system perceived as lacking adequate balance.35

35

The SCP resumed its work in June 2008. Following a proposal by the Chair of the Committee, the Members of the SCP unanimously agreed to consider a set of new issues under its new revised agenda (for example by including issues such as dissemination of patent information, the relation between patents and standards, the client-attorney privilege and exclusions from patentable subject matter and exceptions and limitations to exclusive rights) (see WIPO, 2008).


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7.


FINAL REFLECTIONS: IS THE IP SYSTEM MORE GLOBAL AND ATTUNED WITH DEVELOPMENT?

Since the early beginnings of the modern international IP system almost 130 years ago, the system has certainly evolved, becoming more universal and covering a wide spectrum of countries and growing in a direction of upward expansion. The WTO and WIPO have been the major multilateral institutions overseeing recent changes in the international architecture. But, in addition to the WTO and WIPO, there are a variety of organisations dealing with specific IP matters. Today, a number of intergovernmental bodies incorporate IP-related questions in their work programmes, including the United Nations Educational, Scientific and Cultural Organization (UNESCO), the CBD and other UN agencies, such as UNCTAD and the United Nations Development Programme (UNDP). For example, the WHO and the Food and Agriculture Organization of the United Nations (FAO) have become more involved in IP-related questions. Members of FAO spent a number of years negotiating an International Treaty on Plant Genetic Resources for Food and Agriculture that finally entered into force in 2004. The WHO has engaged actively on IP and health, particularly since the report of the Commission on Intellectual Property Rights, Innovation and Public Health, and the adoption in 2008 of the Global Strategy and Plan of Action on public health, innovation and intellectual property.36 The chapter has attempted to show that while the system has grown and expanded, the new trends appear to have tilted the balance in favour of private interests. For example, the impact generated through FTAs on access to essential products, such as medicines or knowledge in general, narrowing down the public domain of essential information and further reducing a pro-competitive environment, should be a source of concern and a major challenge to policy makers. The FTAs are a legitimate offspring of TRIPS. They take full advantage of the ambiguities of the Agreement, constituting at the same time a major step in the expansion of the IP international architecture, not only in terms of adherence by new members to an important number of inter36

See Commission on Intellectual Property Rights, Innovation and Public Health (2006); the follow-up work of its Intergovernmental Working Group on Public Health, Innovation and Intellectual Property (IGWG); and the final adoption in 2008 of the Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property (WHA, 2008).


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national treaties37 but also by rendering mandatory a number of WIPO soft law instruments (such as well-known marks) becoming hard law in the context of the FTAs. On questions such as stricter enforcement measures, expansion of copyright protection particularly in the digital environment (duration, technological protection measures, rights management information) and undisclosed information, the FTAs reflect a new set of norms and standards that build on the TRIPS Agreement, enlarge its scope and set precedents on its future evolution marked by, among other things, the consequences of the WTO-TRIPS most-favoured-nation principle. One of the most notable features is the ‘importation’ of foreign schemes of protection in the case, for example, of the protection of clinical test data. The upward movement towards stronger protection – as the case of TRIPS and FTAs shows – constitutes, in general, a case of importation of foreign regimes that prove appropriate for advanced economies but untested in less advanced countries. The serious challenge for developing countries is the fact that when importing those foreign systems includes sophisticated pieces of legislation (such as, for example, the US Digital Millennium Copyright Act), they do it without the necessary checks and balances (see Abbott, 2006) that do exist in the ‘exporting’ countries who have experienced IPRs incrementally through a lengthy period of time (see Kim, 2003). Less developed countries have major shortcomings in terms of weak judiciary and administrative systems and an almost non-existent critical academic and professional bar community. This implies a lack of significant capacity and boldness to implement, for example, legitimate TRIPS-compliant exclusions, exceptions and limitations;38 scarce resort to public policy instruments such as compulsory licensing; and finally, a limited experience of the use of competition policies (see Correa, 2007). The new IP architecture represents major challenges, among them the challenge of modernisation that demands major investments in various areas. To face those challenges, IP alone would not be the answer. IP reform should be part of a major design anchored in wide-ranging sustainable development objectives, where protection and enforcement goes par to par with access to knowledge; transfer and dissemination of technologies; the promotion of innovation and competition policies; and, overall, the recognition of the important role the public domain plays for innovation and creativity. The international system faces major challenges on how to build

37

See above notes 15 and 16. There is practically no use of the Appendix of the Berne Convention on Special Provisions regarding Developing Countries. 38


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partnerships with the developing world in terms of better understanding the needs of technologically backward countries. This would require a fresh and candid look at the role of different instruments and policies that could be adapted to particular circumstances and conditions. Property rights also have an important and crucial role; however, new business methods, including open source schemes, non-proprietary regimes, competition law and necessary incentives to lift the cultural and technological conditions in developing countries, also deserve further and more considered attention. The European Patent Office (EPO) acknowledged in a pioneering project that ‘there are many pressures impacting on the patent system – political, economic, societal, environmental, technological and historical – over which its guardians and stakeholders have little or no control’ (European Patent Office, 2007: 2). The EPO identified the five most important driving forces that will create the greatest uncertainty causing the system to become more complex and unpredictable, namely power, the global jungle, the rate of change, systemic risks and the knowledge paradox. Based on its analysis, EPO foresees four main drivers in possible scenarios for the future: business (‘market rules’); geo-politics (‘whose game?’); society (‘trees of knowledge’); and technology (‘blue skies’). One important conclusion of the project is that the patent system ‘is far too complex, and the issues far too diverse for any single group of stakeholders to decide its future’ (ibid). Such an open and candid view of the IP system is more than urgent and necessary in the case of developing countries. In brief, IP has become more globalized and more economically and politically important, but it remains complex, controversial and divisive. How the system would better respond to the needs and requirements of countries at different level of development is still work in progress and a major challenge to the international system.


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Biotechnology and the international regulation of food and fuel security in developing countries Mary E. Footer*

1.

INTRODUCTION

According to the United Nations, the world’s population is set to grow from the current 6.8 billion to surpass 9.1 billion in 2050, with subSaharan Africa and Asia accounting for a large proportion of the additional increase of 2.3 billion (UN, 2009c: vii, ix–x, 1). Already there is evidence that shows not only a rise in per capita food consumption but also changes in the geography of consumption. As household incomes around the world have risen, the current financial crisis notwithstanding, there has been a dietary shift in many developing countries away from vegetables and pulses to greater consumption of meat and dairy, with increased reliance on grain-fed livestock (Stamoulis et al., 2004: 155–8, 165). Additionally, some developing countries face high demand for biofuels1 from industrial countries where fossil fuels are being rapidly depleted. Increasingly, biofuels are being produced in developing countries like Brazil, China, India and Nigeria, with sugar cane and sweet sorghum as the basis for bioethanol.2 Meanwhile, Indonesia and Malaysia are turning acreage previously used for rubber production over to palm oil and

* Professor of International Economic Law, School of Law, University of Nottingham, Nottingham, UK. 1 ‘Biofuels’ means any solid, liquid or gaseous fuel produced from ‘biomass’ for use in transport. 2 ‘Bioethanol’ (or simply ethanol) is a gasoline-type fuel made by fermenting sugars found in sugar-rich plants, such as sugar cane, maize, beet, cassava, wheat, sorghum or starch, into alcohol. 331


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Jatropha3 nut oil in order to make biodiesel.4 In some developing countries, increased production of biofuels has been at the expense of agricultural food production, as demonstrated by rising food prices (Dufey, 2007: 3; FAO, 2008b: 72–86). As the global population continues to rise agricultural communities are coming under increasing pressure to increase global food production. Conservative estimates anticipate that food production will need to double in the next 15 years in order to meet such demand. Not only is there a mounting need for staple crops to provide the basis for food, feed and fuel but also in the case of developing countries those crops will need to produce better yields and, where possible, be high in nutritional value. It therefore becomes paramount to find ways of increasing the agricultural productivity, yield and nutritional quality of major crops whilst minimising potential damage to the environment. Advances in agricultural biotechnology (or agrobiotechnology) could mean that genetic modification to plant and fibre will become a vital element in combating human, animal and plant disease and could even curb certain types of pollution (Harmsen et al., 2004: 233; Lacy, 2003: 188). In light of these developments, I argue for a fresh approach towards evaluating and understanding the potential impact of modern biotechnology on food and fuel security in developing countries. However, in so doing I believe such an exercise is only justifiable when all the pros and cons of this particular relationship have been duly presented and considered. Currently, many biotechnological innovations in the developed, industrialised world are driven by the private sector in pursuit of profit. The pattern is not necessarily repeated in developing countries where public sector universities and research institutions play a more prominent role. Alternatives to either of these models exist in the form of public–private partnerships between academic research institutions, not-for-profit institutions and the life-science industry, examples of which abound in the field of human genetics. Despite legal obstacles, such as intellectual property protection and the need to control anti-competitive behaviour, a ‘common good’ approach, upon which forward-looking public–private partner-

3

‘Jatropha’ is ‘mainly Jatropha curcas, an evergreen shrub found in Asia, Africa and the West Indies. Its non-edible seeds contain a high proportion of oil which can be used to produce biodiesel’ (Zaid et al., 2001). 4 ‘Biodiesel’ – as its name suggests – is a diesel-type fuel, which is made by separating glycerine from animal and vegetable oil (such as palm oil, oilseed, rapeseed, Jatropha and soybean), animal fats or algae in order to create methyl esters.


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ships in the field of agrobiotechnology could be based, may have a role to play in developing countries. Additionally, ‘open source biotechnology’, which involves open source licensing of technologies (including so-called ‘humanitarian licensing’) may provide a way forward. If so, what are its implications in terms of the future of food and fuel security in developing countries? Beginning with the next section, I provide a brief overview of biotechnology and an explanation of its significance for crop development. This is followed by an elaboration of what is currently understood by food and fuel security in terms of policy within the human rights discourse and the food and agriculture community. In the third section, I consider how conventional breeding, as opposed to biotechnology, has dealt with the issue of food and fuel security before discussing the gains and losses of each approach and the particular plight of developing countries in this triangular relationship. The fourth section reviews the public sector universities/ research institutions model of regulating biotechnology and the private sector life sciences model before discussing the role of public–private partnerships in biotechnology and agricultural food production. I then briefly examine open source biotechnology, which eschews traditional forms of intellectual property protection in favour of licensing, including humanitarian licensing. In the fifth and final section, I offer some concluding remarks.

2.

BIOTECHNOLOGY AND ITS RELATIONSHIP TO FOOD AND FUEL SECURITY: SOME BASIC CONCEPTS

In this section, I define what I understand by biotechnology, explain its relevance to crop germplasm and agricultural production, and place this in the context of the current food and fuel security debate. I.

What is Biotechnology and How is it Linked to Crop Development?

Biotechnology is the ‘technological application that uses biological systems, living organisms, or derivatives thereof, to make or modify products or processes for specific use’.5 In a narrower sense biotechnology is ‘a range of different molecular technologies such as gene manipulation

5 Convention on Biological Diversity, Rio de Janeiro, 5 June 1992, 1760 United Nations Treaty Series 79, (1992) 31 ILM 818: Art. 2.


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and gene transfer, DNA typing and cloning of plants and animals’ (FAO, 2000). When such molecular technologies are applied to crop germplasm and the novel use of plants, animals and micro-organisms, they may result in the improvement of crops and livestock in terms of yield and nutritional quality (Borlaug, 2002: 7–8). What types of technologies are being used in order to develop crops and what benefits do they provide? Further, to what extent are they used by developing countries? Currently, in so-called green biotechnology,6 there are several techniques at work. One is cell or tissue culture, which is ‘the in vitro culture’ of cells or tissues in a nutrient medium under sterile conditions (Zaid et al., 2001). It allows for the micropropagation and breeding of a plant from very small amounts of its parts, such as roots, leaves or stems, or even a single plant cell, under laboratory conditions. Both plant cell and plant tissue culture have been used in Kenya for the development of crops such as banana, potato and cassava. The latter crops are known in the bioindustry as pro-poor crops since they are found mostly in middle to lower income developing or least-developed countries and are a significant source of nutrition for local communities. Another, more widespread technique is genetic engineering, which is primarily aimed at crop protection. During the course of plant breeding ‘individual genes or sections of chromosomes from a particular genome’ are selected and deliberately transferred from one organism to another under laboratory conditions in order to create new plant species or to improve the yield of existing ones (Kropiwnicka, 2005: 47). Sometimes, selection is based on a related technique, using molecular or genetic markers in plants that comprise identifiable deoxyribonucleic acid or DNA sequences (also known as molecular or marker-assisted breeding). These DNA sequences are associated with a specific trait in a gene, which can then be selected for its high yield, resistance to disease or tolerance of climatic conditions such as cold or drought. Examples of genetically engineered crops (sometimes known more commonly as genetically modified or GM crops) are cotton, maize and soybean. Molecular breeding is prevalent in the production of Bt maize, which has been grown not only for its high-yielding qualities but also for its resistance to such abiotic7 stresses as drought. It is anticipated that its 6 ‘Green (or agri-food) biotechnology’ refers to a collection of technologies using plant organisms and plant cells for the transformation of food, biomaterials and energy (Zaid et al., 2001; Scoones, 2002: 12). 7 So-called ‘abiotic stresses’ include such things as drought, salinity or extreme temperature in contrast to ‘biotic stresses’ such as pests, weeds or diseases.


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impact on food security in sub-Saharan Africa, where maize is the staple food, could prove significant. So too could Bt rice, since rice is the world’s most important food crop and the one on which some of the most populous regions of Asia are dependent (James, 2008: 11–12). There are two other techniques which may have a role to play in the application of biotechnology to agricultural food production in developing countries. One is embryo rescue, which involves ‘[a] sequence of tissue culture techniques’ being used to allow ‘a fertilized immature embryo resulting from an interspecific cross to continue growth and development, until it can be regenerated into an adult plant’ (Zaid et al., 2001). Embryo rescue has been used with some success for the purposes of cross-breeding by the West African Rice Development Association (WARDA) in Côte d’Ivoire in order to achieve earlier maturity and improved pest resistance as well as tolerance to drought and acid soils. It also allows the rice to grow to a greater height in the fields, thereby making it easier for farmers to harvest by hand and introducing costsavings (Glover, 2003: 2). It is therefore representative of second generation GM crops, which provide value-enhancing traits for the farmer and, ultimately, the consumer. The other technique is biofortification, which is the deliberate development of staple food crops that are rich in micronutrients, or ‘nutritionally enhanced foods’, either through conventional breeding or genetic modification (Johns and Eyzaguirre, 2007: 2, 4–6). Crops containing micronutrients which are capable of reducing the risk factors for diseases are sometimes known as ‘functional foods’. A good example of biofortification for developing countries, especially those situated in Southeast Asia, is the production of ‘Golden Rice’, which has the potential to help alleviate vitamin A and beta-carotene deficiency, which can lead to loss of eyesight, and auto-immune deficiencies. After almost 20 years, two Swiss scientists succeeded in inserting the relevant genes into rice to produce a beta-carotene-rich species and thereby contributed to a nutritionally higher food source (Krattiger and Potrykus, 2007: CS. 11). The question is whether any of the techniques for commercialised crop production are being used in order to meet the food security needs of the developing countries which are growing them. Or, put differently, is large-scale agrobiotech production primarily destined for international commodity markets or is it sufficient to feed local populations as well? This is an issue to which I return in Section 3 when considering the impact of biotechnology on food and fuel security in developing countries.


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II.

The Current Debate about Food and Fuel Security in Policy Terms

At various points over the past thirty years food security8 has taken on different meanings depending upon where the policy debate was taking place. From the mid-1970s onwards, spurred on by the Green Revolution9 with its emphasis on ‘high productivity while preserving or improving the resource base of agriculture and the environment’ (Welch and Graham, 2000: 362), policy-makers emphasised the availability of food and its supply at the global level. By the beginning of the 1990s the emphasis had shifted from supplying food to the issue of access to food and the importance of the well-being that food security brings. As a result, food security has come to form part of the overall focus of policy-makers concerned with the alleviation of poverty, as an element in the broader approach to ‘livelihood security’ (Scoones, 2002: 11). At the same time, it is of fundamental importance to human rights policy and forms part of the international human rights discourse (Marks and Clapham, 2005: 168–74). The right to adequate food is taken up in the Universal Declaration of Human Rights, which states that everyone has the right ‘to a standard of living adequate for the health and well-being of himself and of his family, including food’ (UNGA, 1948: Art. 25). Similarly, the International Covenant on Economic, Social and Cultural Rights (ICESCR)10 endorses the right to adequate food (Art. 11(1)) and records the commitment of

8 While food safety forms part of the broader concept of food security it is not one of the primary objectives of the regulatory instruments addressed in this chapter. Therefore, the legal regulation of the transboundary movement of genetically modified organisms (GMOs) under the Cartagena Protocol on Biosafety to the Convention on Biological Diversity, 2000, the legal regime for pest control, disease and contamination in plants as provided for under the International Plant Protection Convention, and the work of the FAO/WHO Codex Alimentarius Commission are not discussed here. 9 The Green Revolution refers to ‘the dramatic increase in crop productivity during the third quarter of the twentieth century, as a result of integrated advances in genetics and plant breeding, agronomy, and pest and disease control’ (Zaid et al., 2001). It is often associated with the American Scientist and Nobel Prizewinner, Norman Borlaug, who successfully increased yields of wheat in Mexico during the 1950s and 1960s using the aforementioned advances in plant science and technology. 10 International Covenant on Economic, Social and Cultural Rights, adopted and opened for signature, ratification and accession by United Nations General Assembly, 16 December 1966, Resolution 2200A (XXI), 21 UN GAOR Supplement, No 16, 49; UN Doc A/6316 (1966), 999 UNTS 3, 6 ILM 360 (entered into force 3 January 1976).


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state parties to take measures to ensure that everyone is free from hunger (Art. 11(2)). Furthermore, the right to adequate food encompasses the ‘minimum standard of nutrition and other basic necessities’ (Eide, 2001: 134). Heads of State and Governments which are Members of the FAO placed food security at the heart of the organisation’s work when they adopted the Rome Declaration on World Food Security at the World Food Summit in 1996. According to the World Food Summit Action Plan, food security exists ‘when all people at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life’ (FAO, 1996: para. 1). Contemporaneously, the World Food Summit Action Plan called upon states ‘to clarify the content of the right to adequate food and the fundamental right of everyone to be free from hunger’ (FAO, 1996: para. 61, obj. 7.4). The Committee on Economic, Social and Cultural Rights (CESCR) responded to the FAO’s concern in 1999 by elaborating an influential analysis of the right to adequate food in its General Comment No 12 (Marks and Clapham, 2005: 170–71; Mechlem and Raney, 2007: 134). Accordingly, the normative content of paragraphs 1 and 2 of Article 11 ICESCR means that ‘[T]he right to adequate food is realized when every . . . [individual], alone or in community with others, has physical and economic access at all times to adequate food or means for its procurement’ (CESCR, 1999: para. 6). In accordance with Article 11, states are under an obligation to respect existing access to adequate food, which means that they are required ‘not to take any measures that result in preventing such access’. They have an obligation to protect, which means they must ‘ensure that [multinationals and other business] enterprises or individuals do not deprive individuals of their access to adequate food’. Lastly, states are under an obligation to fulfil (facilitate) the right to food, which means that they must ‘pro-actively engage in activities intended to strengthen people’s access to and utilization of resources and means to ensure their livelihood, including food security’. Where necessary, for reasons beyond the control of their people, including victims of natural and other disasters, states have another obligation to fulfil (provide) food directly, that is, by means of food aid (ibid: para. 15). Furthermore, the CESCR defines the meaning of ‘adequate food’ as comprising ‘the availability of food in quantity and quality sufficient to satisfy dietary needs of individuals, free from adverse substances, and acceptable within a given culture’ (ibid: para. 8). While many commentators consider the obligations in General Comment No 12 to be


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authoritative, there are also a fair number of detractors who argue that the CESCR has overreached its mandate in interpreting Article 11 so broadly (Downes, 2007: 627). In November 2004, the FAO Council adopted Voluntary Guidelines on the Progressive Realization of the Right to Adequate Food in the Context of National Food Security (FAO, 2005), which go a step further in making the right to adequate food essential to FAO food policy. These right to food guidelines stem from the aspirations set out in the 2002 Declaration of the World Food Summit: Five Years Later (FAO, 2002) and build upon existing international law – in particular the CESCR’s (1999) General Comment No 12. Despite some scepticism as to their legal value (Downes, 2007: 625), the guidelines are intended to provide practical recommendations for action that national authorities need to take in order to fulfil the right to adequate food (Donati and Vidar, 2008: 56). Operationalisation of this right at national level, by means of a right to food impact assessments (Voluntary Guideline 17), is already taking place, spurred on by the FAO’s adoption of practical methods for monitoring the right to adequate food, although such efforts remain limited in their scope and application (Oshaug, 2007: 426–32). Related activities in the field of biotechnology and ethics at the FAO are also relevant to food security and the right to adequate food. However, progress on a Draft Code of Conduct on Biotechnology as it Relates to Genetic Resources for Food and Agriculture, which began in 1991, has been slow. It is currently subject to a broad review, which has revealed inter alia that ‘there are currently no international policy instruments specifically dealing with the issue of how agricultural biotechnologies might be focussed on . . . food security’ (FAO, 2007: 3). This is a serious omission. Meanwhile, an independent Panel of Eminent Experts on Ethics in Food and Agriculture was established in 2000 by the FAO Director General in order to advise Members on ethical issues related to the application of biotechnology in the field of food and agriculture. In its third report, the Panel has stated that ‘[W]hile most innovation for food and agriculture does not depend on IPRs’ [intellectual property rights] their ‘acquisition and exercise . . . in this field raise a variety of ethical concerns’ (FAO, 2006b: 21). Along similar lines, Olivier de Schutter, the second UN Special Rapporteur on the Right to Food, in his Interim Report to the UN General Assembly, has noted that the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement ‘will have considerable implications across the food system’ (UN, 2008b: para. 24). He is concerned that the TRIPs Agreement and the protection of other IPRs


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on plant varieties ‘remain fully compatible with the obligation to protect the right to food, including the right of farmers to produce food under conditions that ensure an adequate standard of living’ (ibid: para. 28). In furtherance of this goal, he has produced a report on the commercialisation of plant breeding alongside the use of farmers’ varieties through traditional seed systems, examining inter alia how these two systems might coexist in pursuit of the realisation of the right to food (UN, 2009a: paras 26–7, 42–3, 52). The issue of co-existence, in the context of food security, is an issue to which I return in Section 3 below. Within the international community the issue of food security has taken on another dimension owing to concerns about fuel security in the context of global warming and climate change. Increased biofuels production is capable of diverting output from staple crops like sugar cane, maize and oilseeds from food (agricultural) to non-food (non-agricultural) uses. In 2008, when food prices rose dramatically, it was conceded that the emerging biofuels industry was a ‘new and significant user of [such] agricultural commodities’, which had driven up prices in world markets and in turn had led to higher food prices (FAO, 2008a: para. 18). However, the evidence to demonstrate a direct link between increased biofuels production and food insecurity is inconclusive. The FAO has acknowledged that ‘[B]iofuels may affect the utilization dimension of food security’ and, by way of example, cites the diversion of substantial water supplies away from households for use in feedstock production as potentially affecting the health of individuals and their food security status. Even so, there may be a positive outcome if new sources of bioenergy replace existing energy sources that pollute and there is an expansion in available energy to the rural poor, with positive effects on the environment, health and food utilisation in developing countries (FAO, 2008b: 79). The FAO has noted that biofuels have emerged as a major new source of demand for agricultural commodities, which could help revitalise agriculture in developing countries and have positive effects on economic growth, poverty reduction and food security (ibid). Yet only a handful of developing countries, including Brazil, China, India and Nigeria followed by Indonesia and Malaysia, are capable of this. In these countries, with plantation-style economies, the balance of agricultural production has been tipping in favour of crops for biofuels alongside food and animal feedstuffs. With the advantage of almost year-round growing seasons, cheap agricultural labour and high crop yields based on sugar cane, soybean, Jatropha nut oil and palm oil, they are able to produce bioethanol and biodiesel both for domestic consumption and for export. Additionally, the cost-savings that these countries make by producing crops for biofuels


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means that they can compete domestically with petroleum-based products, thereby providing greater fuel security for their own people (ibid).

3.

TRIANGULATING BIOTECHNOLOGY, FOOD AND FUEL SECURITY AND DEVELOPING COUNTRIES

Despite some successes many developing countries are not necessarily reaping any real gains from biotechnology when it comes to food and fuel security and, where they are, those benefits may be distributed unevenly. This is largely due to asymmetric information about, and lack of access to, technology as well as general resource problems, which hamper many farming communities in the developing world. This section begins by looking at how conventional breeding of crop germplasm is the norm although modern biotechnology is making inroads, especially in the middle to higher income developing countries, which are growing staple crops commercially for food and fuel production. I examine the gains and losses from conventional breeding and genetic engineering in developing countries, as well as the issue of ‘co-existence’, before discussing the impact of all three methods on food and fuel security. I.

Conventional Breeding versus Genetic Engineering in Developing Countries: Gains and Losses

Conventional breeding of plant genetic resources for food and agriculture (PGRFA)11 has relied primarily on the propagation of improved crop germplasm through traditional methods of conservation and reproduction. Since time immemorial farmers have been saving and exchanging the seeds they have harvested from traditional landraces12 and seeking out new varieties, which are essential for improving basic crops such as maize, millet, rice and wheat and ensuring sustainability. They have done so without asserting individual or collective ownership over their seeds and without claiming any form of intellectual property (IP) protection. Instead, they have sought to improve upon existing varieties through the 11 This sort of genetic material is used for plant conservation and breeding since it is linked to crops, which are referred to collectively as plant genetic resources for food and agriculture or PGRFA (Zaid et al., 2001). 12 Landraces are early, cultivated forms of a crop species, which have evolved from a wild population and are adapted to the natural and cultural environment from which they originated or in which they are found.


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informal exchange of seed. Other more formal means, such as village grain markets, are also commonplace in many developing countries even if the quality of seed cannot be assured (Smale et al., 2009: 3; UN, 2009a: para. 42). By continuously deriving new or modern varieties from PGRFA, production levels of all major staple crops around the world have risen, leading to greater food security and increased incomes for farmers in both the developed and developing world. High-yielding crop varieties were first introduced into conventional breeding from the late 1950s and mid-1960s onwards, with particular success in hybrid13 forms of rice and wheat in Asia and Latin America respectively. Such introductions were assisted by the establishment of the first two publicly funded international agricultural research centres (IARCs) in the developing world. One was the Centro Internacional de Mejoramiento de Maíz y Trigo (CIMMYT) or International Maize and Wheat Improvement Center in Mexico. The other was the International Rice Research Institute (IRRI) in the Philippines. Over the past four decades, the impact of these two IARCs, which operate under the auspices of the Consultative Group for International Agricultural Research (CGIAR),14 has contributed significantly to the breeding, release and diffusion of modern varieties, with reliance on ‘access to rich stocks of genetic resources . . . [that have drawn] on extensive breeding experience in developed countries’ (Evenson and Gollin, 2003: 758). An important feature of the establishment and management of these IARC genebanks, nearly all of which are located in the germplasm rich countries of the southern hemisphere, was their understanding that PGRFA belongs to humanity’s collective ‘genetic estate’; that is, it forms part of the common heritage of mankind, and is not subject to individual appropriation. Essential crop germplasm or PGRFA has always been freely available – the only cost being that of its actual collection. The free exchange paradigm was the norm among plant breeders and other 13 A hybrid is the offspring that results from crossing two genetically different pure-bred varieties. 14 The Consultative Group on International Agricultural Research or CGIAR supports 18 international agricultural research centres or IARCs, 12 of which are concerned with the genetic improvement and conservation of major food crops and animal feedstuffs, also known as forages. The CGIAR, through its different IARCs, currently holds the world’s largest international ex situ collection of PGRFA with more than 500,000 accessions, representing some 3,000 species that are vital for crop improvement and the maintenance of global food security. Besides being centres for the storage of germplasm, the IARCs also function as centres of international research and testing of crop germplasm and they assist with the training of scientists for national agricultural research programmes.


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scientists and was sufficient to maintain a relatively free international flow of plant genetic material stored in the genebanks at IARCs around the world (Footer, 2000: 57). And so the Green Revolution, to which I referred earlier, was born. It had a broad and deep impact on agricultural production in many developing countries, which went well beyond the original success of wheat in Latin America and rice in Asia, although overall production began to decline everywhere, except sub-Saharan Africa, from 1981 onwards (Evenson and Gollin, 2003: 760). In fact, the negative aspects of the Green Revolution eventually came to outweigh the positive gains. The gains that were made from introducing modern varieties of high-yielding varieties of corn and wheat in developing countries’ crops were offset by the gradual abandonment of diverse, relatively low-yielding landraces, or traditional cultivars, and with it the loss of biodiversity. There were other far-reaching consequences for the rural poor, in terms of food security, which are discussed in the next section. Techniques of modern biotechnology essentially allow the introduction into organisms (including cell lines, tissues and so on) of specific genes that can bring about new traits in crop germplasm, as mentioned in Section 2. The essential point about genetic engineering is that ‘it preserves the integrity of the parental genotype, inserting only a small additional piece of information that controls a specific trait’ (Manshardt, 2004: 1). It is seen as superior to forms of conventional breeding because ‘it allows for a quicker, more precise and more reliable transfer of traits, and draws on a wider variety of genetic material’ (Lacy, 2003: 189). Yet, the gains from biotechnology in terms of higher yields and/or pest/ herbicide resistant crops may be offset by the accompanying risks that genetic engineering poses. These include its effects on human, animal and plant health because of the potential transfer of toxins from one life form to another, including substances responsible for allergic reactions, or the possibility that the products of biotechnology might contain antinutritional properties (Lacy, 2003: 191; Manshardt, 2004: 2; Kropiwnicka, 2005: 47). There are also environmental risks, including the loss of biodiversity in favour of new GM food crops, the potential contamination of the world’s PGRFA and the appearance of a whole new generation of more aggressive weeds with basic resistance to both diseases and pesticides (Lacy, 2003: 192; Kropiwnicka, 2005: 47). Uncertainty about the risks to health and the environment surrounding the use of GM technology means that an approach which advocates its application in dealing with the problems of food security in developing countries is bound to face resistance. Yet, while several major multilateral environmental agreements, including the Convention on Biodiversity


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(CBD) 15 and the Cartagena Protocol on Biosafety (CBP),16 endorse the precautionary principle,17 there is still no global consensus about the risks that attach to new technologies in general or to GMOs in particular. Instead, there is evidence that the precautionary principle – even in the area of food safety – is becoming susceptible to a policy of moderation, particularly in developing countries where highly precautionary policies may come at the expense of eradicating hunger (Wiener, 2007: 610–11). Another aspect of modern biotechnology is that the current structure of the agrobiotech industry is dominated by the private sector and currently revolves around patent-protected crop germplasm or PGRFA that is either herbicide resistant (such as Monsanto’s Roundup Ready®18 soybean) or engineered to produce its own insecticide (such as Bt (Bacillus thuringiensis)19 crops). The emergence of a new generation of IP rights – in the form of plant variety protection (PVP) – over the germplasm of sexually reproducing plants, including most commercial agricultural crops, grants to breeders of new plant varieties an exclusive property right on the basis of a set of uniform and clearly defined principles, known as a plant breeder’s right (PBR). Additionally, patents, which formerly only applied to the inventions of industrial processes and not to discoveries of the natural laws, are increasingly tolerated in the agricultural sector. Many countries, including an increasing number of developing countries, have adopted some type of PVP legislation, conforming either to the 1978 or the 1991 version of the UPOV Convention (International

15 See the ninth preambular paragraph to the Convention on Biological Diversity, Rio de Janeiro, 5 June 1992, 1760 United Nations Treaty Series 79; (1992) 31 ILM 818. 16 See the fourth preambular para., Arts 1, 10.6 and 11.8 to the Protocol on Biosafety to the Convention on Biological Diversity, Cartagena, 29 January 2000, 39 ILM 1027, entered into force 11 September 2003. 17 The precautionary principle is understood as meaning that lack of scientific certainty, due to insufficient scientific knowledge regarding the potential adverse effects of biotechnology on the conservation and sustainable use of biological diversity, taking into account the risks to human health, shall not be used as a reason for inaction; instead action should be taken to avoid or minimise such adverse effects. 18 RR® or Roundup Ready is the proprietary name of the herbicide or weed killer developed by Monsanto. Its active ingredient is glyphosate, mixed with other chemicals, or adjuvants, which allow the product to stick to the leaves, or other plant parts, thereby helping the active ingredients to enter the plant cells and kill the entire plant. 19 Bt or Bacillus thuringiensis is ‘a bacterium that produces a toxin against certain insects, particularly Coloeptera and Lepidoptera, and a major insecticide approved for use in organic farming’ (Mechlem and Raney, 2007: 133, fn. 8).


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Convention for the Protection of New Varieties of Plants). In most cases, this allows for the exclusive grant of IP protection over crop germplasm or PGRFA, by means of patents or plant breeders’ rights (PBRs), which are sought after by multinational corporations that produce GM food crops commercially. The consequence is that there has been a move towards standardisation of crop germplasm or PGRFA for many staple food crops, with the possibility of genetic erosion (Footer, 2000: 52). Additionally, and in contrast to the Green Revolution, while new varieties were previously developed with public sector research funding, there has been a decline in agricultural capacity in many developing countries. This is symptomatic of the retreat of the state from agricultural research and development (R&D), as a result of various conditionalities under structural adjustment programmes and the incompatibility of state subsidies, including food subsidies, with international trade rules (UNCTAD, 2008a: paras 18, 20, 24). The gap has been filled in many developing countries by the private sector, mostly by a handful of multinational corporations with large injections of private capital, which cannot be matched in terms of public funding. The amount spent by the private sector on R&D in agrobiotechnology far outweighs that of the IARCs under the CGIAR system and of individual countries, including the three largest national agricultural research programmes of Brazil, India and China (Mechlem and Raney, 2007: 145). In the meantime, there are three troubling consequences of the private sector domination of agrobiotech for developing countries. First, knowledge accumulated in the private sector about the quality of a particular seed, based on its genetic performance characteristics, is invariably not shared between seed suppliers and poor farmers. Besides, where a private seed industry has become established in a developing country, farmers may be insufficiently informed to distinguish among varieties and those providing agricultural inputs, such as fertilisers, may lack capacity (Tripp, 2001: 252, 260–61). Second, private-sector-led R&D in agrobiotechnology tends to focus on those technologies which are the most suitable for large-scale commercial agricultural production and which enjoy strong intellectual property (IP) protection. The encroachment of patents and PBRs, notwithstanding legitimate research exemptions and the farmers’ privilege to save and exchange seed under international instruments, is a considerable cause for concern (UN, 2009a: paras 27–30). I return to this issue in Section 4, where I also discuss the role that open source biotechnology might play in the transfer of technology in developing countries, thereby mitigating some of the worst effects of an over-protective IP regime. Third, the rural poor may be further marginalised by the failure of large


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agrobiotech companies to conduct research on improvements to orphan or pro-poor crops like cassava, millet and sorghum, upon which many people rely for their very survival (Mechlem and Raney, 2007: 147; UN, 2009a: para. 34). Finally, following the lead of Argentina, Brazil and China, an increasing number of developing countries in the southern hemisphere are beginning to approve the growing of GM crops on a commercial scale, following biosafety and environmental impact assessments, and despite the high costs of compliance. The emerging picture of crop production in the developing world is increasingly likely to be one where conventional and GM crops co-exist (possibly also with organic production) in order to furnish both domestic and international markets with differentiated products (Falck Zepeda, 2006: 1200–3, 1206). However, initial research on the issue of co-existence has shown that there may be limited opportunities to implement such systems on the Asian continent, and even less in sub-Saharan Africa, due to a lack of knowledge about innovations in the field of biotechnology and the inappropriate agricultural infrastructure faced by many poor farmers (Tripp, 2001: 252–4). Additionally, many developing countries are unable to support a well-managed system of segregation, traceability and identity preservation (STIP), which is vital for distinguishing between conventional breeding and crops that have been genetically engineered, other than through the intermediation of private standard-setting by the agrifood industry. Many of them have not established appropriate frameworks for liability and redress in order to deal with the risks of commingling during planting, harvesting, storage and transportation (Falck Zepeda, 2006: 1202, 1204). II.

The Impact of Biotechnology on Food and Fuel Security in Developing Countries

Nearly two decades ago Agenda 21 held out the promise that biotechnology could ‘make a significant contribution in enabling the development of . . . enhanced food security through sustainable agricultural practices’ (UN, 1993: 16.1). To what extent has that promise been achieved? What impact has the regulation of biotechnology had on food and fuel security in developing countries? Reflecting the global importance of cereals as staple foods, and spurred on by private sector investment, governments have put extensive public money into breeding high-yielding, well-adapted varieties of the major cereal crops alongside the production of GM crops, thereby giving content to the duty to fulfil (facilitate) the right of their peoples to adequate food. This has enabled modern varieties of rice, wheat and maize to perform


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relatively well in many production environments. As a result, there have been successes, although it is not always easy to discern where biotechnology has helped in the commercialisation of food crops and where, if at all, it has been directed at eradicating hunger or addressing fuel poverty in developing countries. For example, over the past 13 years there has been a steady increase in the number of developing countries planting high-yielding Bt maize (Argentina, Brazil, Chile, Egypt, Honduras, Philippines, South Africa and Uruguay), pest-resistant Bt cotton20 (Argentina, Brazil, Burkina Faso, China, Colombia, India, Mexico and South Africa), and Roundup Ready® herbicide resistant soybean (Argentina, Bolivia, Brazil, Chile, Mexico, Paraguay, South Africa and Uruguay). In 2008, six of the top eight countries with more than one million hectares of GM crops were developing countries – Argentina, Brazil, China, India, Paraguay and South Africa – with the largest concentration of such crops being in the southern cone of Latin America where Argentina and Brazil combined accounted for more than 37 million hectares of soybean, maize and cotton (James, 2008: 4–6). While agricultural production using GM technology may have expanded in some developing countries, this still represents only approximately 30 per cent of GM crops planted globally (Falck Zepeda, 2006: 1200; James, 2008: 4–5). Another point to note is that in semi-arid and arid environments – particularly in the non-industrialised agricultural economies of sub-Saharan Africa – tubers such as cassava or cereals like sorghum and millet predominate, rather than rice, wheat or maize. The private sector should be encouraged to invest more in these orphan crops (UN, 2009a: para. 35). As for fuel security, the picture in both major developing country producers of biofuels for feedstock and other developing countries is more complex. In some developing countries, like Brazil, biofuels production has led to further savings by using parts of the sugar-cane plant to fertilise the crops which provide the raw ingredients and to fire up the distilleries for ethanol production, thereby using less fossil fuel and with lower CO2 emission in the production process. Similarly, biofertilisers have been successfully piloted in Bangladesh, Brazil, Kenya, Tanzania, Zimbabwe and Zambia. While they could assist farmers to increase domestic production, by enhancing crop yields of legumes and cereals, they could also increase

20

Bt cotton is principally developed in order to suppress infestations of a pest known as the cotton bollworm or Helicoverpa zea, which bores into cotton before it has matured.


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the export capacity in biofertilisers from those countries, thereby leading to increased export revenues (UNCTAD, 2004d: 5–6, 90). However, where biofuel production levels are high there is the possibility that land may be drawn away from other agricultural uses, including food production, affecting both food prices and the availability of food for domestic consumers, which flies in the face of a government’s obligation to respect, protect and fulfil (facilitate) the right to adequate food. Likewise, intensive cultivation of crops for biofuels may trigger or exacerbate common environmental problems such as deforestation, monocropping, over-usage of water and land degradation (Dufey, 2007: 2). A further issue is that while some of the world’s poorest countries may be well placed to become major producers of biomass21 for liquid food production, many of their farmers are smallholders and cannot keep pace with large-scale plantation-style production. Other constraints that these farmers face arise from poorly functioning commodity markets, lack of access to finance, poorly performing producer organisations and significant problems with access to seed and fertiliser, especially in sub-Saharan Africa (FAO, 2008b: 79, 82).

4.

DIFFERENT MODELS FOR THE REGULATION OF BIOTECHNOLOGY IN AGRICULTURAL PRODUCTION

Another aspect of the relationship of biotechnology to food and fuel security in developing countries is the way in which the emerging bioeconomy is structured. Agenda 21 boldly claimed that biotechnology offered ‘new opportunities for global partnerships, especially between the countries rich in biological resources . . . but lacking the expertise and investments needed to apply such resources . . . and the countries that have developed the technological expertise to transform biological resources’ (UN, 1993: 16.1). In other words, the claims that were made for biotechnology were what it could achieve not just in terms of improving human welfare but also in terms of forging new forms of cooperation between North and South. In this section I discuss how the public and private sectors have joined forces in the regulation of biotechnology before briefly examining the

21

‘Biomass’ is any sort of organic material found above or below ground, either living or dead, such as trees, crops, grasses, tree litter, and roots (Zaid et al., 2001).


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potential for open source biotechnology, which some have advocated as a way of addressing intractable IP issues in public–private partnerships. I.

Public–Private Sector Regulation of Biotechnology

When it comes to the regulation of biotechnology in developing countries, many governments have traditionally made a choice between a public sector model approach (which broadly supports public funding of scientific research, coupled with the development of essential technologies) and a private sector model approach (which fosters a free-market approach and includes strong intellectual property protection) or, alternatively, have chosen some combination of the two (Richards, 2004: 273). Since coming into force in 2004 the International Treaty on Plant Genetic Resources for Food and Agriculture (ITPGRFA) has played an important role in public research. Its presence ensures that there is a multilateral system22 for facilitated access to a specified list of PGRFA of 64 food crops which are (a) under the permanent management and control of the 120 states parties to it, and (b) only accessible for the purpose of ‘utilization and conservation for research, breeding and training’ (Art. 12(3)(a)). Any attempts to appropriate this essential crop germplasm for more general commercial purposes are strictly limited and royalties earned must be paid into a common fund, with benefits flowing back primarily to farmers. To the extent that states are parties to this treaty arrangement and using the Multilateral System (MLS), they are in a position to secure sources of crop germplasm or PGRFA for conventional breeding of all essential crops, with the exception of soybean. However, when it comes to GM technology in agricultural crop production, many of the tools which are needed for research are in the private sector, while the genetic material for sustaining crops which are essential for survival of the poorest are in the public sector, often in the very same CGIAR centre genebanks that are exchanging crop germplasm through the MLS. It is hardly surprising therefore to find that public research institutions and the private sector are joining forces in order to conduct agrobiotech research for the benefit of developing country farmers. Are such partnerships global, as Agenda 21 suggests? To what extent are they

22

The Multilateral System of Access and Benefit Sharing, or Multilateral System (MLS) for short, was established under Articles 11, 12 and 13 of the International Treaty on Plant Genetic Resources for Food and Agriculture, adopted on 3 November 2001, FAO Conference, 31st Session, Rome 2–13 November, Resolution 3/01, entered into force 29 June 2004.


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capable of providing the scientific and technological advances necessary to ensure food and fuel security in poor rural areas? Public–private partnerships in agricultural research take a variety of different forms. While, universities or publicly funded research institutes may link up with cooperatives of small producers, or local private companies may partner with national agricultural research centres (NARCs), increasingly the most visible, and sometimes controversial, partnerships are between large, international life science companies and national or CGIAR institutions. For example, the Golden Rice project, to which I referred earlier, led Potrykus and Beyer, the two scientists from the ETH Zurich and the University of Freiburg, Germany, to partner with Zeneca (which later merged with Novartis to form Syngenta) in order to advance their research into the biofortification of rice. Yet, while some public–private partnerships may hold out the promise of technological advancement in the field of agrobiotech, others have drawbacks due to the conflicting incentives of the partners or the fact that they are answerable to different stakeholders. Similarly, the costs of managing such relationships and achieving true partnerships in the sense of technology and knowledge transfer can be high. One example of a successful public–private partnership is the Scientific and Know-How Exchange Program (SKEP), which is an initiative of the World Bank and CGIAR’s Private-Sector Committee that was launched in 2005. Under the SKEP umbrella, Bayer CropScience entered into an agreement with the International Food Policy Research Institute (IFPRI), one of the CGIAR centres, to explore ways of supporting public–private innovation processes in biotechnology for the benefit of developing countries. Another successful public–private partnership is the work of the CIMMYT, the Kenya Agricultural Research Institute (KARI), a national agricultural research centre, and the Syngenta Foundation in developing insect-resistant maize23 for Africa (IRMA), using both GM and conventional breeding. Besides being in a position to develop large field trials of maize varieties for resistance to a pest known as the stem borer, the Syngenta Foundation has been able to contribute significant amounts of financial capital as well as expertise in bioregulation and business planning to the joint venture, which is housed at KARI. Meanwhile KARI can offer its local experience of genetic modification and provide extension systems to farmers, based on its research and testing, while the CIMMYT provides

23

The work involves developing a maize variety that is resistant to the stem borer – a pest which, until recently, has been responsible for causing 15 per cent or more of losses in maize yields in Kenya.


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the basic crop germplasm or PGRFA for insect-resistant maize together with its scientific and training expertise. Even so, in terms of food security for poor rural communities, such a partnership may prove irrelevant if there are no local seed companies and markets to distribute the new forms of insect-resistant maize seeds to rural farming communities or if there is widespread opposition to such collaborative partnerships, especially if they involve the pursuit of GM innovations in agricultural production. A further reason that not all public–private partnerships are necessarily successful is that there may be a conflict over the transfer of technology, which is encumbered by IP protection. For example, ICI Seeds, an American seed company (later Zeneca and now Syngenta), entered into a partnership with Indonesia’s Central Research Institute for Food Crops (CRIFC), another national agricultural research centre, between 1995 and 1998, in order to develop insect-resistant tropical corn. The partnership succeeded in training the Indonesian researchers in techniques like genetic engineering and molecular mapping. When the time came to transfer the company’s technologies to CRIFC for use in the institute’s breeding programs the partnership fell apart. This was due to Indonesia’s weak system of patent protection combined with a lack of biosafety regulation for testing genetically engineered plants in field trials. ICI eventually refused to transfer the relevant technology to the Indonesian partner. II.

Towards Open Source Biotechnology

A final issue that arises when dealing with the complexities of food and fuel security is the degree to which the private partner is willing to relinquish its claim to IP protection over new agrobiotech applications in which it has invested so much R&D. Given the dramatic expansion of IP protection in the field of biotechnology research there is an obvious worry that further innovation which is vital to the maintenance and development of certain crop germplasm or PGRFA could be blocked. Action needs to be taken to preserve access to biotechnology innovations in order to protect the right to adequate food which, as we have seen in Section 2, means governments must ensure that multinational and other business enterprises and/or individuals do not deprive individuals of this right. More often than not in the field of agrobiotechnology this is manifested in an undue restriction by the private partner on technological innovations through IP protection, as happened in the case of CRIFC. Three different approaches to reversing this trend are open source licensing, IP clearing house mechanisms and the use of humanitarian licensing. It has been suggested that open source licensing, which is a form of intellectual property management that evolved out of the Free Software


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movement and aims to preserve community access to proprietary software tools without discouraging commercial development, could be applied to biological innovations, although there is some uncertainty about this (Hope, 2009: 173–84). Already, experiments in open source biotechnology have been attempted. For example, the Biological Open Source (BiOS) licence – pioneered by the Centre for the Application of Molecular Biology to International Agriculture (CAMBIA) in Canberra in order to reverse the trend of private sector companies taking out overly broad patents, or demanding exclusive licences, on agrobiotech innovations – has put certain technologies freely at the disposal of researchers. The only condition is that any improvements should be shared with other researchers under the BiOS open source licence regime and any patented improvements granted back to the licensor, BiOS (Berthels, 2009: 194–6; UN, 2009a: para. 31). Another mechanism known as the Public Intellectual Property Resource for Agriculture (PIPRA), consisting of an alliance of more than 40 institutions from 12 different countries, aims to decrease IP barriers and facilitate the transfer of technology by pooling the efforts of individual researchers. PIPRA is a one-stop IP clearing house for access to public sector patented technologies in order to deal with ‘patent thickets’24 that might otherwise stymie the dissemination of innovations in staple and speciality crops (Bennett and Boettiger, 2009: 139–41; UN, 2009a: para. 31). Finally, to return to the example of Golden Rice, Potrykus and Beyer used proprietary technologies belonging to half a dozen different companies in their research on the biofortification of rice. After completing their initial research, the next step was to arrange for free licences for these technologies so that Potrykus and Beyer could use them to further develop Golden Rice varieties. The private sector partner, Syngenta, then arranged for the IP rights to be transferred to a group called the Golden Rice Humanitarian Board, chaired by Potrykus and made up of individuals from various public and private organisations. The Board in turn granted royalty-free sublicences in the Golden Rice technology to public research institutions in order for them to develop locally adapted varieties in places like Bangladesh, China, India, and the Philippines. According to the licence, ‘[H]umanitarian use is defined as use in developing countries by resource-poor farmers (earning less than US$10,000 per year from farming’. Moreover, ‘the technology must be introduced into public seed

24

A ‘patent thicket’ is a dense web or tangle of overlapping IP rights, particularly patents, which a company must break through in order to be able to commercialise a new technology.


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varieties, as a way to optimize public sector benefit and use’ and ‘[F]armers are allowed to reuse harvested seeds’ (Krattiger and Potrykus, 2007: CS. 12).

5.

CONCLUSIONS

It is clear that in order to maintain existing levels of access to adequate food there is an urgent need to increase food production. Biotechnology, despite its detractors, has a potential role to play in fulfilling (facilitating) the right to food and ensuring that food security needs are met in developing countries, by expanding the overall supply of food. Possibly, the same is true for the role of biotechnology with respect to fuel security, although presently there is insufficient empirical evidence to support this claim. While GM technology may be available for crop improvement, or could potentially be offered alongside conventional breeding in some form of co-existence, it remains beyond the reach of many in developing countries. This is due to lack of public and private funding, inadequate regulatory procedures, poorly functioning markets and fragile seed distribution systems, weak domestic plant breeding capacity, inadequate research capacities and various IP restrictions. In terms of food and fuel security, the extent to which any benefits from agricultural biotechnology will be felt by the poorest sectors of society will depend, to some extent, on whether transfer of that technology to poor farmers is unencumbered by IP rights and other restrictive practices. Current trends are worrying. Private sector investment in agricultural biotechnology – other than through public – private partnerships – is often primarily aimed at large-scale commercial production. Small farmers in poor rural areas, many of whom rely on orphan crops such as cassava, millet and sorghum, are likely to be overlooked. The situation is not helped by a serious lack of public sector funding in many developing countries, which could ensure biotechnological innovations are developed and applied to orphan crops and indigenous farming systems in poor rural communities in ways which would enhance their food security. Likewise, very few biotechnology research institutions have addressed ways in which research exemptions on their proprietary technologies might be used to promote food security. However, the BiOS open source licence, the PIPRA clearing house mechanism and the Golden Rice humanitarian licence all demonstrate that it is possible to come up with more creative ways of addressing restrictive IP practices. Finally, it is essential that renewed efforts be undertaken to address the challenges and opportunities posed by the introduction of biofuels in


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developing countries. The pressure that agricultural production for biofuels may bring to bear on production of food and feedstuffs should not be dismissed lightly. A deeper understanding of how biofuels can be made economically, environmentally and socially sustainable in developing countries is well overdue.


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Environment and development – the missing link Philippe Cullet*

1.

INTRODUCTION

International environmental law has grown at a rapid pace over the past few decades and now covers a range of issues of relevance to developed and developing countries (see generally Birnie et al., 2008). Further, a number of environmental problems addressed in environmental treaties are of global relevance; in other words, not amenable to solution at the national or regional level. There are at least three ways to approach the link between environmental law and development at the international level. First, international environmental law has developed in the space of relatively few years into an area of law that is now fundamentally based on attempting to put conservation and economic development side by side and, ideally, reconcile the two objectives. The legally unclear umbrella notion of sustainable development provides the general framework within which all environmental issues are conceived today. Second, the link between environment and development in international law is in large part underpinned by considerations of equity that have come to dominate the engagement of the South in a variety of environmental regimes. This is reflected in legal terms in the concept of differential treatment that provides, in its most evolved form, a new basis for commitments that are not based on reciprocity of obligations. This manifestation of equity or justice concerns in international environmental law is premised for the most part on different levels of economic development in the North and South. It is also the reflection of a political compromise and, thus, not entirely a principle-based response to the moral concerns raised by current environmental challenges. Indeed, differential treatment constitutes the middle ground where the North and South meet: between devel* Professor of International and Environmental Law, School of Law, School of Oriental and African Studies, London, UK. 354


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oping countries having sought ‘preferential’ treatment since independence, and developed countries seeking the engagement of the South in tackling global environmental problems caused mostly by the North, as in the case of global warming and the ozone layer depletion. Third, international environmental law has had an ambiguous relationship with the growth of environmental law in developing countries. It has, without doubt, contributed to the transmission of what are now basic principles of environmental law in many countries of the world and in this way may have sped up certain aspects of environmental protection in certain countries.1 At the same time, the priorities set at the international level, which have not necessarily been dictated by developing countries, have often de facto become core concerns of environmental law and policy at the national level, regardless of the actual environmental situation of particular countries. The relationship between environmental law and development needs to be understood through its varied and partly contradictory trends. This chapter highlights some of the main issues that define this relationship. The following section considers the link between environment and development through the lens of the notion of sustainable development, examining the general issues that arise in this regard. The third section considers some of the difficulties that have arisen in the development of international environmental law with regard to developing countries; in particular, the impact of economic development issues on environmental law. The fourth section then examines the notion of differential treatment, one of the ways in which the concerns of developing countries have been taken into account in recent environmental law. Finally, the fifth section considers ways in which economic globalization has affected international environmental law.

2.

SUSTAINABLE DEVELOPMENT: ENVIRONMENTAL LAW’S CONCEPTUAL FRAMEWORK FOR THE 21st CENTURY

International environmental law has developed remarkably fast since its formal beginning in the early 1970s (see, for example, UNGA, 1972). Apart from the great number of legal instruments adopted, environmental law is also noteworthy for the development of a corpus of notions and principles

1 See, for example, the integration of the precautionary principle by the Indian Supreme Court in Vellore Citizens’ Welfare Forum v. Union of India.


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that have come to define not only the way in which environmental issues are addressed but also how they have impacted other areas of law. One of the most remarkable developments that have taken place over the past few decades is the changing premises on which environmental regulation is conceived. Indeed, while an understanding of the links between environmental protection and development issues is already clearly articulated in the Stockholm Declaration,2 early environmental treaties tended to be influenced more by a conservationist perspective (see, for example, Okereke, 2008: 14). This changed significantly over time and since the publication of the World Commission on Environment and Development (WCED) report in 1987, environmental issues have in principle not been considered in international law in isolation from their development component (World Commission on Environment and Development, 1987). Thus the 1992 Rio Conference was tasked by the UN General Assembly to address ‘environmental issues in the developmental context’.3 The link between the use and conservation of the environment provided the bedrock for the changes that have led environmental law to be an area of international law that covers a huge spectrum: it includes not only environmental issues strictly speaking, but many other issues related to the core environmental issues addressed, such as human rights, health, trade, economic development, intellectual property protection and agriculture. The expansion of the scope of environmental law was due in large part to developing country concerns that conservation did not provide an appropriate angle to approach issues that were directly linked to livelihoods. In that sense, poverty has been an integral part of environmental law for the past couple of decades. Yet, at the same time as it was the poverty of developing countries that provided the trigger for broadening the scope of environmental law, the actual poverty of the majority of poor people in developing countries has not become the core concern of environmental law. The acknowledgment of the intrinsic links between environmental issues and economic development from the local to the global levels has had a dramatic effect on the growth of environmental law. Indeed, if it was not for the fact that global warming is intrinsically linked to the basic economic development framework of most countries, it is doubtful that it would have acquired the prominence that it has been given over the past

2 Declaration of the United Nations Conference on the Human Environment, Stockholm, 16 June 1972 (UNGA, 1972). 3 United Nations Conference on Environment and Development, Resolution 44/228 (UNGA, 1989: para. 15).


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few years. Even a key conservation treaty like the Biodiversity Convention owes its prominence at least as much to the links between conservation and use as to concerns for nature protection. These examples are symptomatic of a broader trend whereby most major environmental issues over the past couple of decades have become issues that are also major economic development concerns, from access to biological resources to trade in genetically modified organisms. At a conceptual level, the notion of sustainable development encompasses the links between environment and development. Sustainable development is extremely useful as a catchphrase because it provided in the first place the background for understanding that environmental issues cannot be considered in isolation from their development impacts. While it is the economic dimension that still dominates the sustainable development discourse today, its relative flexibility has allowed social issues also to be considered a key component of sustainability. The open nature of the notion of sustainable development has also meant that it has progressively become one of the key defining elements of the international legal order. This is, for instance, illustrated by the fact that even an organisation like the World Trade Organization (WTO) that has no specific environmental mandate sees the fostering of ‘the objective of sustainable development’ as an overarching goal of the organisation.4 The widening acceptance of sustainable development as a key element of international law in general is a significant step forward because it provides a recognition that the links between, for example, trade and environmental protection cannot be ignored. Yet, at the same time, its widespread acceptability is also the cause of its irrelevance at a more specific level. There have been debates for a long time as to whether sustainable development can be deemed to be a principle of international (environmental) law. While there are strong arguments in favour of such recognition, this only shifts the tasks at hand. Indeed, the very reason why those involved in social movements, NGOs, the United Nations Environment Programme (UNEP), the WTO and the World Bank agree on the goal of sustainable development is because it is a malleable notion that can be given a multiplicity of definitions (on the different understandings of sustainable development, see Blewitt, 2008). Since the present international legal order does not provide a single specific definition, sustainable development remains at present an umbrella term that serves a useful purpose in drawing attention to the broad scope of the challenges at hand but does not point towards any specific policy direction.

4 See Preamble to the Agreement Establishing the World Trade Organization (GATT, 1994a).


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One of the clearest cases in favour of recognising sustainable development as a binding principle of international law was made by Judge Weeramantry more than a decade ago. He argued that sustainable development ‘offers an important principle for the resolution of tensions between two established rights. It reaffirms in the arena of international law that there must be both development and environmental protection, and that neither of these rights can be neglected’ (Gabčíkovo-Nagymaros Project, 1997: 95). Judge Weeramantry sees sustainable development as the mechanism that provides an avenue to solve tensions between the two rights. To people who believe in the existence of a right to development and a right to a clean environment, this may be a simple extension of the right. This is not, however, the position of all states (see generally Bosselmann, 2008: ch. 2). While a majority of states have, in some way, integrated the right to a clean environment in their legal framework,5 its recognition at the international level remains a distant prospect (see, for example, Shelton, 2007). With regard to the right to development, its explicit recognition in the 1986 Declaration has proved insufficient to build a consensus over its status and its content.6 In other words, the definition that Judge Weeramantry proposed is a well-argued position, but one that would be disputed by a number of developed states. This highlights the underlying North–South tension that can be found in a number of documents. Yet, the noteworthy aspect of ‘sustainable development’ is that it has transcended what could be seen as its original North–South context that sought to bridge the different perspectives of the North and South on environmental regulation. Sustainable development can today alternatively be conceived as the linchpin of an international organisation promoting free trade around the world like the WTO and an organisation seeking to foster stronger environmental regulation like UNEP. Similarly, it can provide the conceptual basis for an NGO advocating free flows of genetic resources across borders that may be used to develop genetically modified seeds, and for organic farmers seeking to protect their lands from the threat of genetically modified organism (GMO) contamination. This is what explains its wide appeal rather than its focus on the development concerns of developing countries or its focus on the situation of the most marginalised and the poorest. The limitations of the umbrella notion of sustainable development –

5 According to the list of constitutional provisions compiled by Earthjustice, 119 countries have a right to a clean environment (Earthjustice, 2008). 6 Declaration on the Right to Development, 4 December 1986 (UNGA, 1986).


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notwithstanding a number of legal principles that are well established – can be argued as constituting a more specific understanding of what sustainability implies. These include, for instance, the principle of integration of environment and development concerns; the prevention and precautionary principles; and participation, in particular that of women, and intra- and inter-generational equity.7 The precautionary principle has, for instance, been integrated as a core element of the Biosafety Protocol.8 This is significant for several reasons in the context of this chapter. First, the precautionary principle is one of the important novel conceptual developments that have taken place in international environmental law. Its inclusion in a treaty seeking to regulate a new technology where economic and commercial stakes are extremely high is a significant achievement. Second, given that the Protocol provides, in effect, safeguards for importing state parties, the use of the precautionary principle in this context provides a shield for developing countries that are in practice the main beneficiaries of the measures adopted. Third, while the Protocol is clearly an environmental law treaty, it is in no way a classical conservation treaty. In fact, the Biosafety Protocol is an instrument that regulates transboundary trade in GMOs. In other words, it is one of the environmental law treaties that focus on trade as the point of entry for introducing environmental safeguards. Overall, the Biosafety Protocol uses the precautionary principle to foster objectives that fall directly under the broader umbrella of sustainability in a context that is centred on conservation through the regulation of trade. Sustainable development has on the whole become so important that it has come to define the relationship between environment and development. This is helpful in bringing out the links between the environment and the overall process of development. At the same time it can have unwanted side-effects insofar as it may affect the core environmental values of environmental law in favour of approaches that may eventually not be environmentally sound. Since there is no exact legal standard by which to judge ‘sustainability’, it pushes back the debate to the level of broader questions of environmental values. Thus, whereas it can be argued that the Clean Development Mechanism (CDM) fosters sustainability because it contributes to the global goal of climate change mitigation, the CDM can also be seen as a simple economic mechanism that redistributes the cost 7

Rio Declaration on Environment and Development, adopted at the UN Conference on Environment and Development, Rio de Janeiro, 14 June 1992 (UNGA 1992: Annex 1). 8 See the Cartagena Protocol on Biosafety to the Convention on Biological Diversity (Secretariat of the Convention on Biological Diversity, 2000).


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of mitigation and uses up the cheapest emission reduction opportunities in developing countries that will not be able to benefit from them the day they have to cap or reduce their emissions (see Section 5 below).

3.

ENVIRONMENTAL LAW AND DEVELOPING COUNTRIES: FOCUS AND PRIORITIES

The shift from what could be seen as a more conservationist agenda to the broader agenda of sustainable development is in principle a testimony to the fact that the position of the South has had an important influence on the development of environmental law. This also seems to be borne out by the fact that some of the basic principles of international environmental law directly refer to the development dimension of environmental regulation, such as the principle of integration of environment and development. Similarly, the rapid growth of differential treatment examined in the next section is a reflection of the importance of the South in shaping up environmental law. Yet, international environmental law cannot be qualified as a developingcountry-focused area of international law. In fact, there exist a number of areas of tension or conflict that have surfaced over time. International environmental law has now addressed a number of issues, some of a relatively specific nature like wetland protection, some of an immense complexity like global warming. Yet, there is a lack of unity overall. This is due, in part, to the fact that there is no set of principles that apply by definition to all international environmental treaties. While it is hoped that a number of the Stockholm and Rio Declaration principles may have or will attain the status of customary law, this is only partly helpful because individual treaty regimes can have their own understanding of a given principle. The sort of unity that can be identified in contexts such as those of the WTO or the International Labour Organization (ILO) is largely absent in environmental law. Indeed, the ‘cement’ that binds environmental law are those soft law instruments, in particular the conference declarations, that provide the most evolved statements on the structure of international environmental law. The fragmented nature of international environmental law is reinforced by the fact that UNEP has never had as strong a mandate as specialised agencies of the UN in their own fields or institutions like the WTO. Additionally, for a combination of reasons, the multiplicity of negotiating forums and the multiplicity of institutional setups – in particular, the different secretariats found in different regions of the world – have combined to ensure any progress in one area may have little impact in another area.


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Further, while the setting up of UNEP as the only major UN programme in the South was a huge step forward, the last three decades have seen at least another three strong centres of environmental governance emerge in Europe and North America – Geneva, Bonn and Montreal – that have diluted the leadership role that Nairobi should have ideally played. The absence of either a specialised agency dealing with environmental issues within which all environmental negotiations would take place and that would administer all treaties or an international covenant on environmental law has had negative impacts on the overall development of international environmental law from the point of view of the South and of the integration of the concerns and rights of the poorest and most marginalised.9 Indeed, the development of international environmental law has taken place, in part, according to the priorities of the states identifying a new issue of concern and, in part, according to the availability of resources to implement new treaties. In both cases, the priority given to ‘global environmental issues’ is revealing in terms of the choice of issues addressed. The case of the ozone layer regime reflects, for instance, the push by developed countries having nearly exclusively contributed to an environmental problem with global consequences to develop a legal regime that would bind polluters and non-polluters alike (see, for example, Benedick, 1998). What is at stake is not the reality of the environmental issue but the fact that the same priority was not – and has not been – given to the impacts of economic development (in particular in the phase of economic globalization) on the poor (in particular the majority of the poor people in the South). The case of the ozone layer also reflects the importance of financial issues in the development of the environmental law regime since universal membership was only achieved after the cost of compliance for the South was made insignificant through implementation aid and technology transfer.10 The issue is not the extent to which developing countries were able to extract concessions in the negotiations of environmental treaties that did not constitute immediate priorities at the national level (such as in the case of the ozone regime or climate change) at the time of the adoption of the treaties. What matters is the way in which priorities were defined. A telling example is that of land degradation and desertification. In terms of the legal regime, its development only happened as an afterthought of 9

On the debates concerning the need for an international environment organisation, see Biermann and Bauer (eds) (2005). With regard to the proposal for an international covenant, see IUCN (2004). 10 See, for example, Gallagher (1992). The Montreal Protocol is the first international environmental treaty to have achieved universal participation in 2009.


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the Rio process, with developing countries extracting the concession for their participation in the biodiversity and climate change negotiations (see Cullet, 2007). Even more difficult was the inclusion of land degradation as a ‘focal area’ in the Global Environment Facility. While this has nothing to do directly with environmental law priorities, the importance that implementation aid has acquired in making environmental treaties effective in individual countries implies that the sidelining of land degradation until 2002 reflected its lower priority for the global community of states despite its critical importance in a number of developing and least developed countries (see GEF, 2002). The politics of the legal agenda is not an innocuous concern because addressing environmental issues cannot be separated from the development concerns of the majority of the South. There are thus two sets of issues that need to be addressed concurrently. First, international environmental law is tasked with addressing transboundary environmental issues. Most people would probably identify global warming as an issue that is intrinsically global in scope and perceive the need for cooperation on issues such as migratory species. The same level of agreement may not be apparent concerning an issue like biodiversity conservation or land degradation since most of the direct negative impacts are suffered within the country under whose jurisdiction the problem is taking place. Yet, today biodiversity conservation and land degradation are overwhelmingly understood as being issues that have important international aspects. In fact, there are a growing number of problems that may not be apparently transboundary but have an international dimension. Additionally, it is artificial to make a distinction between local air pollution and global warming since it is the same harmful emissions that are the subject matter of both. This, together with the fact that environmental law is concerned with the various links with related fields, makes it difficult to fix with precision the boundaries of the field. Second, there is no institution which has been tasked with prioritising environmental issues at the international level. Given the multiplicity and variety of issues that qualify as international environmental issues, and given the absence of any framework treaty allocating priorities, this has happened largely in an ad hoc fashion. In practice, this has meant that law making is related to a specific policy proposal in one forum or another by a determined group of countries. The skewed priority list of international environmental law has arisen from this inchoate policy process that benefits countries taking the initiative. This would not necessarily be problematic if environmental issues had no links to the development process because this sectoral approach would simply imply that the international community is slowly covering issues one after the other. The links with


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development make the choice of issues more significant. Indeed, in the case of land degradation, not only was it a subsidiary priority at the time of the Rio Conference and a subsidiary issue for the GEF, but the Desertification Convention has remained a poor cousin of the other conventions addressing ‘global’ issues such as biodiversity and climate change.11 Further, the relative weakness of UNEP in the UN system cannot be ascribed only to its ‘decentralised’ location and the emergence of other centres of international environmental governance. Indeed, the power that has never been given to UNEP has not necessarily been left to an institutional vacuum. This is illustrated by the following two examples. First, while funding for the implementation of environmental treaties has played a key role in the success of environmental regimes, this funding has routinely been channelled through institutions that are, at least in principle, more responsive to donor concerns than UNEP. This is reflected even in the case of the GEF, which is credited with being more responsive to developing country concerns than its parent institution the World Bank. Second, the case of climate change illustrates the lack of commitment of the donor community to the global regime. On the one hand, attempts by developing countries to have adaptation given more importance led to the setting-up of the Adaptation Fund but its full operationalisation has proved to be difficult.12 On the other hand, several special funding mechanisms have been established directly under the authority of the World Bank, from the early Prototype Carbon Fund to the recent Climate Investment Funds: the Clean Technology Fund and the Strategic Climate Fund. The latter include a sunset clause to avoid prejudicing ongoing climate change negotiations but at the same time propose that they may continue operation if the outcome of the negotiations so indicates (World Bank, 2008c: paras 53, 55, 2008d: paras 56, 58). There is thus an important degree of independence for these funds. The policy preferences of developed countries, reflected in their push for certain regimes in preference to others, have resulted in a legal landscape that gives much more prominence to certain issues than others. Typically, over the past few years, climate change has become the environmental issue subsuming everything else. Interestingly, climate change was one of those global issues that bore no direct relationship to the environmental priorities of most developing countries when the United Nations Framework 11

See Convention to Combat Desertification in Those Countries Experiencing Serious Drought and/or Desertification, Particularly in Africa, Paris, 17 June 1994. 12 See, for example, Decision 1/CMP.4, Adaptation Fund (UNFCCC, 2009b).


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Convention on Climate Change was being negotiated, with the obvious exception of countries facing, for instance, the threat of submergence. In the meantime, adaptation concerns have become widespread in most countries. Yet, while global warming is a major challenge for each and every country, an overwhelming majority of developing countries have much more pressing environmental and development concerns to address. This is not to say that developing countries are not concerned by global warming. There is, however, a significant difference in approach where the need to reduce air pollution at the local level for health and environmental reasons is addressed with a local rationale in mind from where it is done in the context of a global issue. Another issue that significantly affects environmental law is the fact that it largely reflects the main concerns of states. As a result, while international environmental law fails to prioritise environmental concerns of the South, it is even less responsive to the concerns of the majority of the poor in the South. Thus, the only existing international treaty on water only addresses transboundary watercourse issues.13 Similarly, when the first treaty specifically addressing food security was negotiated, and despite a specific mandate to define farmers’ rights more precisely, negotiating states did everything apart from provide an effective farmers’ rights regime.14 These two examples are symptomatic because water and food are two of the most fundamental needs that are not fulfilled for hundreds of millions of people. There are good international law reasons explaining the failure of states to negotiate on issues that actually matter to people, such as sovereignty concerns with regard to water, yet the result is that international environmental law is not particularly responsive to the concerns of the poorest and most marginalised.

4.

ADDRESSING THE NORTH–SOUTH GAP: THE DIFFERENTIAL TREATMENT ANSWER

As analysed in the previous section, international environmental law has, in certain respects, failed to respond to the development needs of the South. At the same time, international environmental law has been one of the most dynamic and responsive areas of international law in 13

Convention on the Law of the Non-navigational Uses of International Watercourses, Resolution 51/229, 21 May 1997 (UNGA, 1997). 14 International Treaty on Plant Genetic Resources for Food and Agriculture, approved by the Food and Agriculture Organization (FAO) Conference, 31st Session, Resolution 3/2001, 3 November 2001.


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recent decades with regard to its engagement with the South. This can, for the most part, be explained by the fact that while law making has often been driven by concerns of the North, the issues addressed could only be solved with the active participation and engagement of the South. This pragmatic realisation that cooperation was required, and that the South had often no particular interest in collaborating, has led to the development of a series of new bases for international environmental law.15 At the broadest level, developed countries have appealed to the basic principle of solidarity to enlist the cooperation and participation of a majority of developing countries in legal regimes that did not necessarily reflect their own priorities (McDonald, 1996). This could be the case of climate change, where they had made only a minor contribution to the problem at hand and were not much affected at the time of the negotiations in the early 1990s; or GMOs, where one of the primary concerns was to avoid losing out on export markets for conventional or organic crops. The principle of solidarity may be widely accepted, but it is not necessarily enough to make countries effectively engage on a specific issue. As a result, more specific mechanisms have been needed to ensure full and effective cooperation of all countries on issues that could not be solved by the actions of the North alone. The concept of differential treatment, which recognises that all international law measures need not be strictly based on the principle of formal legal equality, has been one of the main conceptual vehicles for ensuring developing country participation. Differential treatment offers, in its most developed form, an avenue to adopt international measures that do not impose the same obligations on all states. This is, for instance, the case of the Kyoto Protocol.16 A number of other mechanisms that are differently differential have also been introduced in environmental treaties. These include varying implementation time periods, where all states take on the same commitments but at different dates,17 implementation aid, where certain states are only legally bound to implement their commitments upon receipt of financial

15 Cf Okereke (2008) arguing that ‘from the perspective of North–South relations . . . distributive bargaining rather than environmental protection is the defining feature of international regime efforts’. 16 See Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto 10 December 1997 (UNFCCC, 1998b: 7). 17 Montreal Protocol on Substances that Deplete the Ozone Layer (Protocol to the Vienna Convention for the Protection of the Ozone Layer), Montreal, 16 September 1987.


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or technological aid;18 and legally less clear contextual provisions, where states are allowed to interpret the commitments they take according to their development situation.19 Differential treatment remains controversial and it has, for instance, been argued by a leading environmental lawyer that even if redistribution is necessary, it should not be undertaken by exempting the poor from ‘efficient environmental and resource standards – giving them a “right to pollute” – rather than through a more straightforward step-up in aid and development assistance’ (Stone, 2004: 294). Indeed, in international trade and economic law, a massive backlash against the granting of ‘differential’ or ‘preferential’ treatment has been visible since the 1980s. The pervasive inclusion of differentiation in international environmental treaties is thus doubly noteworthy.20 First, differential treatment has been one of the most effective ways that states negotiating global environmental regimes have found to address the persistent inequalities among states forming the UN. Second, this has happened more or less at the same time as the scope for granting preferences in international trade law diminished to the point where the Uruguay Round was largely premised on returning to the principle of legal equality as a more effective basis for lifting developing countries out of poverty (cf Michalopoulos, 2000). The concept of differentiation has several noteworthy features. Firstly, at a conceptual level it is a manifestation of equity. In fact, it constitutes an acknowledgment at the international law level of the principle that formal equality does not necessarily lead to substantive equality (see generally Cullet, 2003). While this should not have been a major discovery, because of the vast gap in economic development between the North and the South, it took more than three centuries and the process of decolonisation for the limits of formal legal equality to become obvious to most. More specifically, differential treatment is a reflection of a notion of distributive justice that was clarified a number of decades ago by Justice Tanaka, who asserted that ‘[t]o treat unequal matters differently according to their inequality is not only permitted but required’.21 While this is not the conception of justice that is generally accepted today (for instance,

18

Convention on Biological Diversity, Rio de Janeiro, 5 June 1992: Art.

20(4). 19

See, for example, ibid: Art. 6. More generally, Okereke (2008: 29) notes that almost all global environmental agreements since 1972 contain at least one reference to international justice and equity. 21 South West Africa (Ethiopia v. South Africa; Liberia v. South Africa) (1966: 306). 20


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by the International Court of Justice), Justice Tanaka’s statement reflects the fact that the need for a progressive evolution of the understanding of equality and equity has been felt at various levels in the decades following decolonisation. Second, differential treatment turns out to be one of the legal mechanisms that provide a space to development concerns in international law. The fact that the most successful differential measures over the past couple of decades have been adopted in environmental law is, in some way, a reflection of the increasingly strong links between development and environmental concerns. This is reflected, for instance, in two principles of the Rio Declaration. Principle 6 first recognises, in general, the fact that there is a need for UN member states to give special attention to economic and environmental vulnerability, singling out the position of least developed countries. Principle 7 is more specific and addresses the different contributions that developed and developing countries have made to environmental degradation and their different capacity to address these problems. While this is not necessarily always linked to levels of economic development, in the case of some of the most important global problems such as global warming there is an intrinsic link between levels of economic development and contribution to the global problem. The acknowledgment of the link between the environment and development is thus direct, even though the legal consequences that flow from this statement are not made explicit. Third, differential treatment offers results that can be compared with the ‘preferential’ treatment that was found earlier in international trade and economic law. Yet, the path is different. In the era of preferential treatment between the 1950s and 1970s, the driving force behind preferences was the attempt by newly decolonised countries to reorganise the structure of international law. As a result, in that era, developing countries were often pitted against developed countries. This yielded some results, in particular in political terms in the context of the call for a New International Economic Order; however, in strict legal terms, relatively little of substance was achieved.22 As opposed to the relatively confrontationist path of the post-decolonisation years, international environmental law has developed in a much more consensual way. This is due to the fact that, while the relative power equations have not necessarily evolved significantly since the 1970s, negotiations around international environmental issues brought to the fore a new ‘strength’ of developing countries. The

22 Declaration on the Establishment of a New International Economic Order, Resolution 3201 (S-VI), 1 May 1974 (UNGA, 1974).


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necessity for the North to include them in the regimes negotiated implies that the South was in a much better position to extract concessions. These concessions can be analysed in conceptual terms as a manifestation of equity, but their genesis owes at least as much to hard practical realities as to lofty concepts. The development of differential treatment in international environmental law reflects to a large extent the development concerns of developing countries. Yet, unlike in the era of preferential treatment, the South is not trying to engage the North in restructuring the international legal order. The South is here benefiting from the fact that environmental issues are so structured that its participation is often a precondition for addressing certain issues in an effective way. This has translated into ‘different’ commitments in several treaties, implementation aid has become a nearly necessary part of any treaty, and most treaties include a variety of contextual provisions which meet the concerns of countries that are unsure about their capacity to implement the commitments they take. While the development of differential treatment is, on the whole, beneficial to the South, this is not necessarily the case in all its aspects. The case of capacity building under the Biosafety Protocol illustrates this point. From a differential treatment perspective, the biosafety regime provides procedural safeguards for an importing country and thus strengthens developing countries’ position in negotiations with GMO exporters.23 At the same time, one of the impacts of the Protocol is to ensure that all member states have a legal regime in place that regulates – but does not prohibit – the transboundary movement of GMOs. This restricts the options that developing countries have with regard to banning GMOs. In addition, significant capacity building was undertaken in the context of a relatively large UNEP/GEF project whose main intent was to ensure that developing countries that had ratified the Protocol had the actual capacity to deal with import requests (see, for example, GEF Council, 2000). In this case, capacity building ends up indirectly limiting the range of options that developing countries consider in adopting biosafety laws. This is, for instance, illustrated by the fact that while the African Model Law on Safety in Biotechnology had a strong liability and redress provision – something that is clearly positive for an importing country – some countries, like Cameroon, having drafted their laws in the context of the UNEP/GEF project, ended up with very weak liability and redress frame-

23

See Articles 7–10 of the Cartagena Protocol on Biosafety to the Convention on Biological Diversity (Secretariat of the Convention on Biological Diversity, 2000).


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works.24 In other words, even an instrument that is very progressive from an environmental point of view – since it uses the precautionary principle as its main operative principle – and an instrument that, in substance, builds up procedural safeguards in favour of developing countries does not necessarily lead to results that are unequivocally positive for developing countries.

5.

ENVIRONMENTAL LAW AND RECENT ECONOMIC REFORMS

Environmental law entered a phase of consolidation after a period of rapid development in the 1980s and 1990s. This is partly due to the realisation that the constant addition of new instruments was doing little to ensure their effective implementation and thus to improve environmental standards overall. It is in this context that implementation aid has become one of the key elements of most environmental regimes as technology and finance were identified as key stumbling blocks in the process of implementing international commitments in the South. The end of the ‘growth’ can also be ascribed to an increasing disenchantment with the way environmental policy had been conceived in the 1970s and 1980s, linked in large part to the changing economic policy environment. This section examines some of the main impacts of the neoliberal reforms on international environmental law. I.

Economic Instruments and the Climate Change Regime

One of the important trends that can be noticed from the 1990s is the increased visibility of economic instruments in international environmental law. The Kyoto Protocol marks some sort of a watershed in this context. Indeed, the introduction of economic instruments became one of the key points that United States negotiators insisted upon in the Kyoto Protocol negotiations. This led to the inclusion of what we now know as flexibility. Flexibility refers to two new phenomena in international environmental law. The first is the flexibility which is given to countries with commitments to reduce their greenhouse gas emissions to implement part of their international obligations through projects in a different member

24

See Organisation of African Unity (2002: Art. 14); Law to Lay down Safety Regulations Governing Modern Biotechnology in Cameroon, Law No 2003/006, 21 April 2003: s. 11.


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state. This is unprecedented because it provides a form of extra-territorial implementation of international commitments. The environmental justification for this new mechanism is linked to the global nature of the environmental issue that is addressed. Indeed, it matters neither where a given ton of greenhouse gas is emitted nor where emissions are reduced or avoided. As a result, where the frame of reference is the global environment good that is climate change mitigation, there is no need to differentiate between action taken in the United Kingdom or in Malawi. Secondly, flexibility refers to the desire to ensure that environmental aims are reached in the most economically efficient way. This translates into the search for the cheapest emission reduction opportunities anywhere on the planet, regardless of the origin of the pollution. This has led to the development of what we now know as carbon markets. While this was not necessarily directly stated at the outset, one of the implications of the search for efficiency has been that the private sector plays an important and direct role in the implementation of the climate change regime. This is also novel in international environmental law. Of the two different market mechanisms that have been set up under the Kyoto Protocol, the more important in a North–South context is the Clean Development Mechanism (CDM).25 The CDM is, in effect, a projectbased market mechanism that seeks to redistribute the cost of compliance with Kyoto commitments by providing a framework for undertaking emission reduction activities where they are cheaper than in the country with the commitment.26 In other words, extra-territorial implementation of commitments is directly linked to an economic rationale – reducing the cost of compliance for countries with commitments – even though an environmental cloak has been put around the issue, as indicated in the previous paragraph. Additionally, the CDM includes a sustainable development veil that is meant to counterbalance the economic rationale for flexibility. In practice, however, while the international legal framework makes pious admonition for sustainability, where developing country governments fail to take action to ensure that benefits of the CDM are ploughed back into climate change mitigation or adaptation measures it turns into another commercial instrument for businesses in the North and the South. The introduction of economic instruments was crucial for the participa25 The CDM is defined in the Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto, 10 December 1997 (UNFCCC, 1998b: 11, Art. 12). 26 See generally Decision 3/CMP.1 ‘Modalities and Procedures for a Clean Development Mechanism, as Defined in Article 12 of the Kyoto Protocol’ (UNFCCC, 2006: 6).


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tion of the United States in the Kyoto Protocol in the mid-1990s. In the meantime, economic instruments have been adopted by many countries as a key element of any climate change deal. In fact, they have come to play such a central role that they can be described as the linchpin of any global agreement on climate change mitigation. The CDM, joint implementation and emissions trading have thus turned out to be much more than a new supplemental way to implement an international treaty. They have led to a completely new outlook on the way international environmental treaties are shaped. II.

Limited Overall Progress in Environmental Law

Since the 1992 Rio Conference, the conceptual development of international environmental law seems to have tapered off. The 2002 World Summit on Sustainable Development (WSSD) failed, for instance, to take international environmental law beyond what had been achieved in 1992 (see, for example, Galizzi, 2006). Further, it has been increasingly difficult to conclude negotiations on issues that could not be finalised at the time of the adoption of a particular treaty, as in the case of the liability and redress regime of the Biosafety Protocol.27 Similarly, where liability and redress regimes have been adopted, states have been increasingly slow in ratifying these instruments.28 In international environmental law per se, there has been no significant weakening of standards adopted earlier. The same cannot be said, however, of the overall environmental dimension of international law. This is true, in particular, with regard to the international trade regime. In the context of a fast-evolving jurisprudence on trade and the environment, WTO panels have taken positions that at least indirectly affect environmental instruments. This is partly related to the way in which environmental treaties are considered by WTO panels, making them at best a relevant consideration in a decision that does not apply norms of international environmental law. It is also partly due to the often more specific nature of trade obligations, which may lead to an assessment of

27 For the most recent version of the text under negotiation, see, for example, Group of the Friends of the Co-Chairs on Liability and Redress in the Context of the Cartagena Protocol on Biosafety (2009). 28 This is, for instance, the case of the Basel Protocol on Liability and Compensation for Damage Resulting from Transboundary Movements of Hazardous Wastes and their Disposal, Fifth Conference of Parties, Basel, 10 December 1999, UNEP/CHW.5/29, Annex III, which has not yet entered into force.


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norms that implicitly privileges trade rules over environmental norms with a frequent in-built potential for a broader interpretation. Additionally, it is symptomatic that some of the most important environmental instruments, such as environmental impact assessments, are for all practical purposes not covered in international law as far as the South is concerned. This is due to the fact that the Espoo Convention remains, despite the opening-up of its membership to all states, a regional convention and one that was negotiated without the South.29 Further, even if the Espoo Convention was widely ratified in the South, it would not cover some of the most important issues of relevance to the South, in particular aid and foreign investment. The result is that one of the key impact assessment frameworks at the international level ends up being the World Bank’s operational policy applicable to its lending activities. This is positive because it ensures that at least some projects get assessed. The major shortcoming is that this is not a framework that has ever been debated and negotiated in the form of an international treaty. Additionally, while it reflects the greening of the World Bank, this remains necessarily limited because protecting the environment is not, and maybe can never be, the core mandate of the Bank. There are also concerns that the Bank may be instrumental in certain cases in fostering the weakening of existing frameworks for impact assessment, as identified in the case of India by the independent people’s tribunal on the World Bank (Independent People’s Tribunal on the World Bank in India, 2007). III.

Sustainable Development and Neoliberal Reforms

The progressive shift from ‘environment’ to ‘environment and development’ and eventually ‘sustainable development’ has had two different consequences. On the one hand, enshrining sustainable development at the heart of international law reinforces on a superficial level the idea that environment and development have effectively been integrated. On the other hand, the vagueness of the concept of sustainable development has had the unfortunate effect of making it easier for the language of neoliberal economic reforms to enter the domain of environmental law without necessarily being in open conflict with the basic tenets of the internationallevel orthodoxy. Thus, whereas environmental law was viewed for some time as a relatively new and innovative branch of international law that

29 Convention on Environmental Impact Assessment in a Transboundary Context, Espoo, 25 February 1991.


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had the potential to challenge some of the orthodoxy prevalent in other branches of international law, the past decade seems to indicate that this is not the case any more. This can be partly related to the linking of environment and development that has, over time, provided the basis for a weakening of the environmental part in favour of an economic development discourse. It can also be linked to the neoliberal discourse that is generally averse to governmental intervention. The preceding remarks may appear out of place in a context where global warming has been given a central place in all areas of policymaking over the past couple of years. In fact, what seems to be progressively happening is that the environmental discourse is used as a tool to reconfigure economic policies under the guise of a broader environmental aim such as global warming mitigation. Thus, the shift in international environmental policy is, for instance, illustrated by the WSSD Plan of Action’s frequent call for private sector participation and public–private partnerships in a variety of areas, including a reliance on the private sector to deliver integrated water management and water efficiency that ‘give priority to the needs of the poor’ (World Summit on Sustainable Development, 2002: 22, para. 26(g)). In other words, whether it is flexibility mechanisms that give the private sector what is probably its most direct role in the implementation of an international environmental treaty yet, or the reconfiguration of basic development goals such as access to drinking water as requiring the private sector for their fulfilment, the language of neoliberalism has increasingly infiltrated international environmental law. IV.

Increasing Role of International Institutions in Shaping Environmental Law in the South

The link between environmental law and development is increasingly shaped by international actors. Thus, over the past decade, the World Bank has, for instance, taken a pro-active view of law making in the South. This is illustrated in the context of water in India where the Bank has, for instance, imposed on several Indian states the adoption of specific pieces of legislation as part of a water sector loan. The resurgence of conditionality in the context of economic globalization is in itself very important and a worrying development. More specifically, recent water-law-related conditionality reinforces the view that economic reforms prevail over the environment, as well as, for instance, the realisation of human rights. In the case of water, the main premise for law reform is that water must be seen as an economic good. The prescriptions of the Bank include the setting up of new ‘independent water regulatory authorities’ modelled on the framework used for


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electricity earlier.30 The significance of the interventions of the Bank is manifold. In the context of this chapter, the following can be highlighted: ●

●

●

V.

First, the water law interventions of the Bank do not have a strong environmental component. This is surprising in general and more so in the Indian context where a general environmental perspective to water law is missing despite a piece of legislation focusing on water pollution.31 Second, water is a multi-faceted issue that includes a major environmental dimension. This is sidelined by the focus on issues of ‘management’ in the water sector and on the conception of water as an economic good. Third, from a legal perspective, the single-minded focus on water as an economic good as a premise for law making in India is at best inappropriate. This is due to the fact that there is no basis in law to affirm that water is a tradable economic good.32 On the contrary, various Supreme Court judgments affirm that there is a human right to water and that water is a public trust.33 Deregulation in the Name of Stronger Regulation

Where international environmental law has been strengthened in recent years, the additional ‘regulation’ often comes in the form of indirect or hidden deregulation. This is, for instance, illustrated by the case of benefit sharing. Access and benefit sharing has become one of the main mechanisms to address the inequities of the international flow of genetic resources. This has been taken up in the context of several regimes but the only binding regime at present is that of the 2001 International Treaty on Plant Genetic Resources for Food and Agriculture. In furtherance of the Treaty provisions, the Governing Body adopted a standard material transfer agreement (SMTA) (see FAO, 2006a: app. G). Benefit sharing, as conceived under the Treaty and the SMTA, is a form

30

See, for example, World Bank (2001b) and Uttar Pradesh Water Management and Regulatory Commission Act 2008. 31 India, Water (Prevention and Control of Pollution) Act 1974. 32 The main basis for affirming that water is an economic good in India is policy documents. While there has been a tendency to conflate water policies and water laws, this is inappropriate because the two are completely different instruments (see, for example, Cullet, 2009). 33 See, for example, Subhash Kumar v. State of Bihar and others (on the human right to water) and MC Mehta v. Kamal Nath (public trust).


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of compensation that is conceived in the context of bilateral transactions. The recognition of the need for benefit sharing and the adoption of the SMTA constitute important additions to regulation since, in the absence of legal rights, farmers did not get any benefit when their varieties were used. At the same time, the framing of access and benefit sharing in the form of a contract mechanism that involves only the two parties signing the contract reflects the absence of any public power in this context. This is particularly surprising and unwelcome in the context of benefit sharing because the actors signing the contract can, as a matter of principle, be – with exceptions – expected not to be on a level playing field. Problems arise, for instance, from the fact that it is in most cases the weaker party to the contract – such as a farmer or a group of farmers – that offers to transfer something under their control to another party – such as a university or private company – that will be largely free to use, modify and commercially exploit the seed and knowledge related thereto in any way they see fit. In other words, the party that benefits most from the contract – usually a legal entity – is also the one who most often proposes the transaction and has better resources to ensure that the contract fulfils all their interests. Some countries like South Africa have recognised the dangers posed by purely private transactions and propose at least a form of monitoring by a public authority.34 VI.

Unresolved Conflicts between the Economic and Environmental Regimes

Environmental law has also been indirectly and directly affected by the fact that potential or actual conflicts between the economic and environmental regimes are not given concrete solutions in the environmental law regime. This is damaging, for instance, in the context of any dispute that has a trade angle, as is the case of many issues that may arise at the international level. In a context where there is little by way of binding dispute settlement provisions in international environmental law, this leads to the dispute being brought nearly by default to the WTO, rather than, say, the International Court of Justice. This is not the place where a neutral resolution to any trade and environment conflict can be expected. The identified problem in terms of dispute settlement is made worse by the fact that the international economic and trade law regime to a

34 See, for example, South Africa, National Environment Management: Biodiversity Act 2004: s. 82.


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large extent does not even consider the possibility of a conflict with other international law regimes. There is thus very little to work from. This is illustrated, for instance, by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), whose single mention of the environment is in a narrowly construed exception to the principle that patents must be available in all fields of technology (GATT, 1994b: Art. 27(2)). On the environmental law front, some attempts have been made to consider the links that exist and the problems that can arise. The primary link is in terms of technology transfer, which has been a key demand of the South in most international environmental law treaties since the 1970s. In most cases, the link between the fulfilment of environmental commitments and technology transfer is made but no specific mention is made of intellectual property rights as being of central importance to technology transfer. In a few cases, the link has been acknowledged.35 This, however, only confirms that there is a link; it does not discuss the potential impediments to technology transfer that intellectual property rights foster (for instance, where importing countries cannot afford the royalty demanded). The most direct acknowledgment in a general provision that there is a potential conflict between the environment and intellectual property rights is found in Article 16(5) of the Biodiversity Convention.36 Article 16(5) is an important provision because it does what no trade treaty does. It does not, however, provide a specific answer, because the broad commitments of the Biodiversity Convention do not lend themselves easily to identifying the point at which a conflict of norms would arise in a concrete situation. Environmental treaties include other provisions confirming the presence of a conflict. This is, for instance, the case of the so-called ‘savings clauses’. These clauses typically found in preambles tend to sidestep the real issue by emphasising the need for mutual supportiveness or harmonisation, then stating that the environmental law instrument does not affect other existing treaties and finally asserting that the present treaty is not subordinate to any other treaty.37 The end result is that such clauses do not actually give any new guidance since they only restate things that are derived from existing principles of international law. Further, by empha-

35 See, for example, ‘Decision VII/22, Review of the Financial Mechanism (Annex V, Action 21)’ (Seventh Meeting of the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer, 1995). 36 See Convention on Biological Diversity, Rio de Janeiro, 5 June 1992: Art. 16(5). 37 See, for example, Preamble to Cartagena Protocol on Biosafety to the Convention on Biological Diversity (Secretariat of the Convention on Biological Diversity, 2000).


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sising mutual supportiveness, as stated above, they tend to favour the trade/economic regime because environmental law provisions are usually more amenable to a broader array of different interpretations than trade/ economic treaties. Overall, existing international law tends to disregard the very possibility of a conflict between development law and environmental law (for instance, in the case of the TRIPS Agreement). Where links, overlaps and conflicts are acknowledged, no practical and specific solutions are proposed, as is the case in environmental law treaties. This is problematic because a treaty like the TRIPS Agreement has significant consequences for developing countries beyond the strict intellectual property rights regime. Thus, in the case of benefit sharing mentioned above, the TRIPS Agreement recognises neither farmer/healer knowledge nor what is now known in policy circles as traditional knowledge as forms of knowledge that can be protected by legal rights. This implies that all this knowledge is part of the public domain that can be freely used by any- and everyone because it is knowledge that does not meet the criteria for protection under existing intellectual property rights frameworks. Since intellectual property rights protect knowledge only in the context of its commercial exploitation, this leaves out all other rationales for protection, including any social, cultural, religious or environmental grounds for the protection of certain forms of knowledge. The end result is that in a context where knowledge can only be protected through what are recognised forms of intellectual property rights, all other knowledge is seen as hierarchically inferior, in practical and in legal terms.

6.

CONCLUSION

Environment and development are today inseparable as far as international law and policy making is concerned. This is, for instance, reflected in the central role played by the notion of sustainable development. The understanding that the two are linked is most welcome and has, for instance, ensured that environmental law has evolved beyond a conservationist agenda and has started to consider a number of links going beyond the environment stricto sensu. Yet, the central problem is that no specific legal meaning can be ascribed to sustainable development at the international level today. It can be used alternatively to justify neoliberal economic policies, welfare state measures and conservationist agendas. While some of the different perspectives can be reconciled, there exist also a number of areas of conflict. This is made more complex by the fact that, today, environmental law is much more


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than nature protection. Conversely, the environment is a major aspect of many other fields of international law. In a decentralised system there is thus no scope for imposing a definition of sustainable development that would apply in international environmental law as well as in all other fields. In fact, the only reason why people working on such diverse issues as the environment, human rights, economic development, trade and financial issues can agree on a single umbrella concept is because each can ascribe their own understanding of the term. As a result, the seemingly allpervasive link between environment and development is in fact, at least in part, a front that lacks in depth. This is not to say that the links between environment and development have not been made in various contexts. However, where the links are made, it has often been in a context which privileges an understanding of development as focusing on economic development. In other words, despite significant developments in conceptual terms over the past couple of decades, the practice of international law, as well as the practice of international institutions directly involved in ‘development’ (such as the World Bank), still indicates a significant bias in favour of growth and economic development as the core measure of development. This has in fact been reinforced over the past two decades with the sweeping neoliberal economic reforms that most countries of the world have witnessed. Overall, much work remains to be done to ensure that the ‘development’ discourse does not use environmental arguments as a fig leaf to foster further economic development activities that are either environmentally unsustainable or socially regressive. At the international level, the development over the past two decades of the concept of differential treatment reflects a broad realisation of the need to take into account ‘development’ as a factor in environmental law making and implementation. Yet, much more needs to be done. Indeed, differential treatment per se does no more than address some of the basic inequalities that are in-built in the structure of international law. It does not necessarily lead to norms that intrinsically integrate environmental and human rights principles as core issues in environmental law and development. A much broader effort must be made to ensure that differential treatment is effectively coupled with a large-scale application of basic principles of environmental law such as the precautionary principle. It is only once such a broader framework is adopted that environmental protection will stop being in some cases an excuse for the promotion of certain economic agendas, as is the case with the development of carbon markets in the climate change regime.


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The UN Climate Change Convention and developing countries: towards effective implementation Vicente Paolo B. Yu III*

1.

INTRODUCTION

There is currently one multilateral treaty that addresses climate change. This is the United Nations Framework Convention on Climate Change (hereafter UNFCCC). The structure of the UNFCCC is finely balanced. It recognises the development needs of developing countries, as well as the responsibilities and obligations that developed and developing countries1 have to implement in order to address such needs in the context of climate change. The negotiations in the Intergovernmental Negotiating Committee (INC)2 that eventually resulted in the UNFCCC took place in five sessions between February 1991 and May 1992, in which more than 150 States participated. The UNFCCC was adopted and opened for signature in May 1992 and entered into force on 21 March 1994.3

* AB, LLB, LLM; Programme Coordinator, Global Governance for Development Programme South Centre 1 For the purposes of this chapter, the phrase ‘developed countries’ refers to States Parties listed in Annex I of the UNFCCC and may be used interchangeably with the phrase ‘Annex I Parties’. The phrase ‘developing countries’ refers to those States Parties not so listed in Annex I of the UNFCCC and may be used interchangeably with ‘non-Annex I Parties’. 2 The mandate for the INC was established by the United Nations General Assembly pursuant to Resolution No 45/212, 21 December 1990, Protection of Global Climate for Present and Future Generations of Mankind, (UNGA, 1990). 3 Aware that the UNFCCC’s provisions may not in themselves be sufficient to tackle climate change, UNFCCC Parties in the mid-1990s set out to establish firmer and more detailed commitments for developed countries in terms of binding greenhouse gas (GHG) emissions reductions, resulting in the adoption of the 379


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The UNFCCC’s balance of obligations between developed and developing countries – one that is based on climate science, the acceptance of common but differentiated responsibilities, and recognition of differing capacities arising from varying developmental conditions – establishes the UNFCCC as one of the prime examples of how global cooperation to address a global problem may be structured. However, the extent to which there are failures in the implementation of the UNFCCC, especially from those countries that are both expected and obligated to take the lead and to support others in its implementation, is an example of the all too common gap that exists between multilateral policy intent and actual action. This chapter looks at the UNFCCC as a policy case study in how a multilateral treaty instrument that could be a model for guiding global cooperation between developed and developing countries to address a global problem falls short of realising such potential. The discussion in this chapter takes off from a policy practitioner perspective in looking at actual State practice in relation to the implementation of treaty obligations, rather than looking at the normative theoretical aspects of treatyrelated State practice.

2.

BACKGROUND: GLOBAL WARMING

The UNFCCC is a science-based normative treaty instrument. It has its roots in the scientific concern in the 1980s about the threats posed by anthropogenic greenhouse gas emissions and the increased severity of the greenhouse gas effect. In 1988 and 1989, the UN General Assembly recognised that climate change is a common concern of mankind.4 Also in 1988, the World Meteorological Organisation (WMO) and the United Nations Environment Programme (UNEP) established the Intergovernmental Panel on Climate Change (IPCC), which completed, in 1990, its First Assessment Report. This first IPCC report concluded that human activities were responsible for climate change.

Kyoto Protocol at the 3rd Conference of the UNFCCC Parties in Kyoto, Japan, in 1997. It sets out basic rules for binding GHG emissions reductions for developed countries and has provisions intended to assist developing countries in voluntarily reducing their own GHG emissions. The Kyoto Protocol entered into force on 16 February 2005. 4 See Protection of Global Climate for Present and Future Generations of Mankind, 6 December 1988, Resolution No 43/53 (UNGA, 1988); and Protection of Global Climate for Present and Future Generations of Mankind, 22 December 1989, Resolution No 44/207 (UNGA, 1989).


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The conclusions of this first IPCC report were among the considerations that led the UN General Assembly to establish the intergovernmental negotiating process under the INC to prepare ‘an effective framework convention on climate change, containing appropriate commitments, and any related instruments as might be agreed upon, taking into account proposals that may be submitted by States participating in the negotiating process, the work of the IPCC and the results achieved at international meetings on the subject, including the Second World Climate Conference’.5 Global warming, and its associated climate changes, is now undeniable (IPCC, 2007: 30). The temperature increase is globally spread in terms of both land and ocean surface temperatures, with higher levels of increases in high northern latitudes (ibid). Current global warming is due primarily to the emissions of greenhouse gases (GHGs) arising from human activities, which ‘have grown since pre-industrial times, with an increase of 70% between 1970 and 2004’ (ibid: 36), mostly from ‘energy supply, transport and industry, while residential and commercial building, forestry (including deforestation) and agriculture sectors have been growing at a lower rate’ (ibid). On a per capita basis in 2004, developed countries, while having only 20 per cent of global population, ‘accounted for 46% of global GHG emissions’ (ibid: 37). The IPCC projects that ‘with current climate change mitigation policies and related sustainable development practices, global GHG emissions will continue to grow over the next few decades’ (ibid: 44).The human and financial costs to countries of coping with extreme weather events, crop failures and other emergencies related to climate are growing and will continue to grow higher. Developing countries, especially least developed countries (LDCs) and small island developing states (SIDS), who are already facing difficulties in alleviating poverty as a result of their economic situation, are especially vulnerable to the adverse effects of climate change. Unless current rates of GHG emissions are drastically cut and reversed, global average temperatures will rise by at least 2oC by 2050, according to the IPCC. This will result in, among other things, the creation of hundreds of millions of environmental refugees mostly from developing countries, acute water shortages for large proportions of the global population

5

See Protection of Global Climate for Present and Future Generations of Mankind, Resolution No 45/212, 21 December 1990 (UNGA, 1990: para. 1), which established the INC as the negotiating forum.


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(again mostly in developing countries), food shortages as agricultural production goes down all over the world, sea level rises, and the extinction of a third of the world’s species. Even before that, the expected 1oC rise by 2020 and the 1.3oC rise by 2025 will already have devastating impacts on the lives and livelihoods of people, especially the poor and especially in developing countries.

3.

UNFCCC: AN EQUITY-BASED TREATY

The UNFCCC sets up an equity-based normative framework for global action on climate change centred on: (i) a clear recognition and allocation of both historical and current responsibility for anthropogenic greenhouse gas emissions; and (ii) a deep understanding of the relationship between greenhouse gas emissions and economic development, especially insofar as developing countries are concerned. I.

Historical and Current Responsibility for Anthropogenic Emissions

Developed countries have used up and still continue to use more than their fair share of the global atmospheric space (with respect to greenhouse gas concentrations in the atmosphere) relative to the size of their populations. This leaves developing countries at a disadvantage – both in economic and atmospheric terms – as their populations grow (while the populations of developed countries generally remain stable) and, consequently, their need to improve and increase economic productivity also grows. The attribution of historical and current responsibility with respect to global warming and climate change is explicitly set out in the UNFCCC. The third paragraph of the Preamble notes that ‘the largest share of historical and current global emissions of greenhouse gases has originated in developed countries, that per capita emissions in developing countries are still relatively low and that the share of global emissions in developing counties will grow to meet their social and development needs’. This attribution of responsibility is science-based. Historically, developed countries – as a result of their industrialisation process and its associated production and consumption patterns – have accounted for around three-fourths of total anthropogenic emissions of greenhouse gases into the atmosphere since the start of the Industrial Revolution (that is, from around 1850 to the present). Developing countries – despite their larger populations, but as a result of their lower industrialisation levels – have contributed much less to such anthropogenic emissions (Baumert et al., 2005: 32; UNDP, 2007: 40).


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Currently, developed countries, with just 15 per cent of the world population, account for 45 per cent of CO2 emissions (UNDP, 2007: 42). By 2030, ‘developing countries are projected to account for just over half of total emissions’ from less than half in 2004 (ibid), largely as a result of increasing populations and economic growth.6 However, these aggregate figures hide a wide disparity in per capita emissions. Current per capita emissions in developed countries (with a population of approximately 1.2 billion) is almost four times higher (at 16.1 tons of CO2 equivalent) than in developing countries (with a population of approximately 5.6 billion and per capita emissions of 4.2 tons of CO2 equivalent). Essentially, given the historical responsibility of developed countries, as recognised in the UNFCCC and in scientific assessments, for almost three-fourths of historical GHG emissions and their share of more than half of current GHG emissions, developed country Parties clearly need to undertake steep and rapid emission reductions that should be more than the overall minimum mitigation targets for developed country Parties described above (possibly even leading to ‘negative emissions’7) – especially for the period between now and 2050 – in order to limit the committed warming to the lower end of the range rather than the upper end. Such actions would help mitigate to some extent the climate adaptation impacts and costs that developing countries will have to bear as a result of the committed warming. The over-use by developed countries of the global atmospheric space and the global carbon budget, with the adverse climate impacts that such over-use is now bringing forth, effectively shrinks the development space of developing countries. There remains, currently, a close correlation between greenhouse gas emissions and development progress, although this correlation may change as a result of technological shifts or other factors. II.

Climate Change and Sustainable Development

Sustainable economic development – that is, a development pathway that provides adequate economic opportunities and a decent quality

6

See UNDESA (2009) projecting developing country population growth from 5.67 billion in 2010 to 7.03 billion in 2030. 7 This concept implies going beyond 100 per cent emission reductions below 1990 levels by essentially transforming economies to be carbon-negative (and not simply carbon-neutral) – for example, undertaking actions to create and expand carbon sinks in addition to eliminating carbon emissions, combined with actions to provide financing and technology to developing country Parties to enable the latter to effect deeper and more rapid emission reductions. For more on this, see, for example, Third World Network (2008).


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of life in a manner that is equitable and environmentally sustainable – is needed, especially in developing countries. The poor in developing countries simply cannot afford to see development in their countries be constrained by climate change. Development is also urgently needed in order to minimise and mitigate climate change risks by improving developing countries’ adaptive capacity. Furthermore, developing countries would be in a better position to participate in global efforts to address climate change if the basic economic needs of their populations were already met. Developing countries’ populations are predicted by the United Nations to grow by almost half by 2050 (see UNDESA, 2009). This means, unavoidably, that developing countries’ GHG emissions will also need to grow if they are to secure adequate economic and social development.8 With a limited global carbon budget, developed countries (whose populations are expected to remain stable, up to 2050, at around 1.2 billion) will need to make even deeper emission reductions in order to provide developing countries with the additional emissions budgets. However, at the same time, the growth of emissions in developing countries could be lowered if their economic development could be generated using low carbon technologies. Since such technologies by and large are currently developed and patented in developed countries, developed countries under the UNFCCC are specifically committed to provide greatly increased flows of such technology (as well as the financing to acquire such technology) and undertake actual transfers of such low carbon technology to developing countries. The UNFCCC unequivocally embraces the principle of sustainable development. It states (Art. 3.4) that Parties should promote sustainable development. It stresses (Art. 3.5) the need for cooperation to promote an open international economic system that would lead to growth and development in all Parties. It also recognises (Art. 4.7) that ‘economic and social development and poverty reduction’ are the ‘first and overriding priorities’ of developing countries. Economic and population growth are both drivers entailing an increasing demand for energy, goods and services with strong influence on GHG emissions. Hence, emissions in developing countries are expected to grow

8 This need is recognised and reflected in the third paragraph of the Preamble as well as in the framework of commitments in the UNFCCC itself, which does not require any specific mitigation obligations on the part of developing countries.


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as a result of their high population growth rates and their need to grow in economic terms to address poverty and development concerns. It is important to emphasise that emissions in most developing countries, in particular LDCs and small states, are minuscule and do not add important pressure to the climate system. Most developing countries combined contribute only 10 per cent of annual global GHG emissions. Thus, although global GHG emissions need to be reduced in order to avoid surpassing ‘safe levels’ of GHG concentration in the atmosphere, the reduction has to come first and primarily from developed countries and these reductions should be large enough to offset the needed emissions increase in developing countries. Relative to people living in developed countries, populations in developing countries are more vulnerable to, and will be more adversely affected by, climate change because they ‘have fewer resources to adapt: socially, technologically and financially’ (UNFCCC, 2007a: 6). Such impacts will have far-reaching effects on the sustainable development of developing countries including the attainment of the Millennium Development Goals and other internationally agreed development goals by 2015. For example, more people living in developing countries are at risk of, and suffer from, climate-related disasters (such as extreme weather events, storm surges, droughts) than in developed countries. These climate impacts compound the major development challenges that continue to exist and addressing these continues to be the overriding priority of developing countries. On 2000 to 2005 growth trends, the UNDP in 2005 suggested that it will still take India until 2106 to catch up with high-income countries. For other countries and regions convergence prospects are even more limited. Were high-income countries to stop growing today and Latin America and Sub-Saharan Africa to continue on their current growth trajectories, it would take Latin America until 2177 and Africa until 2236 to catch up. (UNDP, 2005: 37)

Other than for the fast-growing Asian developing countries, most other developing countries are falling behind, rather than catching up, with developed countries in terms of income growth, with Africa’s share of the income-poor projected to increase by 2015 (ibid).9

9 See also the World Bank (2007: 42) which projects that ‘[t]here would be a further falling behind in Sub-Saharan Africa with its modest per capita growth below the high-income average, and Latin America would see little if any convergence on average’.


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4.

THE UNFCCC: A BALANCED LEGAL FRAMEWORK FOR GLOBAL COOPERATIVE ACTION ON CLIMATE CHANGE

I.

A Balance of Principles and Obligations

A. A principles-based framework The UNFCCC is a finely balanced multilateral policy regime in terms of the framework that it establishes to mandate and guide global cooperative action on climate change. This framework is characterised by: ●

●

a system of obligations and commitments that reflects the principles of equity, common but differentiated responsibilities and respective capabilities; an integrated approach to global cooperative action that links developing countries’ implementation of the UNFCCC to developed countries’ implementation of their UNFCCC commitments on financing and technology transfer, taking into account that economic development and poverty eradication are the first and overriding priorities of developing countries.

The underlying principles of both the UNFCCC and the implementation of its provisions (that is, equity, common but differentiated responsibilities and respective capabilities) are explicitly stated in, for example, the sixth preambular paragraph and Art. 3.1 of the UNFCCC. B. Commitments reflecting common but differentiated responsibilities and respective capabilities These principles are fleshed out in the framework of commitments and obligations contained in Arts 4.1, 4.2, 5, 6, 10 and 12. In essence, this framework provides for: ●

a set of common commitments to: provide and communicate climate change-related information (Art. 4.1(a)); adopt and implement mitigation and adaptation measures (Art. 4.1(b)); cooperate in technology transfer, adaptation, ‘climate-proofing’ economic, social and environmental policies and actions, research and observation, information exchange, education, training and public awareness (Arts 4.1(c)–(i), 5, 6); consider and take into account the needs and concerns of developing country Parties (Art. 4.8–4.10); and communicate information regarding the Party’s implementation of the UNFCCC (Arts 4.1(j), 12.1);


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a set of differentiated commitments (in addition to the common commitments above) applicable specifically for developed country Parties relating to: mitigation (Art. 4.2(a) and (b)); communication of information regarding such mitigation (Art. 4.2(b)); financing for developing countries’ national communications and the implementation by developing countries of their UNFCCC commitments (Art. 4.3); meeting the adaptation costs of developing countries (Art. 4.4); and technology transfer to developing countries (including supporting the development in developing countries of endogenous technologies and technological capacity) (Art. 4.5).

Summaries of these commitments are provided in Boxes 17.1 and 17.2. C. Article 4.7 the fulcrum for the balance in the framework The fulcrum around which the framework of commitments and obligations described above revolves is Art. 4.7 of the UNFCCC, as follows: The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties.

This means it is the level and extent of implementation by developed country Parties of their differentiated commitments under Art. 4.3, 4.4 and 4.5 that determines the extent to which developing countries will implement their common obligations under Arts 4.1 and 12.1. That is, the more that developed countries provide climate change mitigation and adaptation-related financing and technology to developing countries, the more that developing countries will be able to do in order to implement their common obligations under the UNFCCC and thereby contribute more to address climate change. In the absence of the full and effective implementation by developed countries of their commitments under Art. 4.3, 4.4 and 4.5, the corresponding implementation by developing countries of their commitments under the UNFCCC cannot be expected to be full or effective, for this would be dependent on what developing countries can do by themselves. In such a situation, the framework of cooperation on climate change between developed and developing countries as envisioned under the UNFCCC becomes marginalised, and global cooperative action on climate change becomes disjointed and ineffective.


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BOX 17.1

SUMMARY OF COMMON PROVISIONS (FOR BOTH DEVELOPED AND DEVELOPING PARTIES)

Art. 2 – common obligation to meet the objective of the UNFCCC Art. 4.1 – common obligations to: a) b)

c) d) e) f)

g) h) i) j)

develop and update public national greenhouse gas inventories using comparable methodologies formulate, implement, publish and update national and regional programmes containing measures to mitigate climate change and measures to facilitate adequate adaptation to climate change promote and cooperate in greenhouse gas mitigation-related technology transfer in all relevant sectors promote and cooperate in the management, conservation and enhancement of greenhouse gas sinks and reservoirs cooperate with respect to adaptation take climate change considerations into account in social, economic and environmental policies and undertake actions to minimise adverse impacts of climate-related measures on the economy, public health and environmental quality promote and cooperate in climate-related research and observation promote and cooperate in climate-related information exchange promote and cooperate in climate-related education, training and public awareness communicate to the UNFCCC Conference of the Parties (COP) information related to the Party’s implementation of the UNFCCC

Art. 5 – obligation to cooperate in research and systematic observation Art. 6 – obligation to cooperate in education, training and public awareness Art. 10.2(a) – consideration by the SBI of all Parties’ national communications ‘to assess the overall aggregated effect of the steps taken by the Parties in the light of the latest scientific assessment concerning climate change’


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Art. 12.1 – obligation to communicate to the COP, through national communications, a national greenhouse gas inventory, a general description of steps taken or to be taken to implement the UNFCCC, and other relevant information The framework for global cooperative action on climate change established by the UNFCCC can therefore be visualised as in Figure 17.1. D. The governance architecture of the UNFCCC The UNFCCC is institutionally designed to be a Party-driven treaty instrument, both in terms of its policy or rule-making and in terms of its implementation. All Parties to the UNFCCC are represented in its Conference of the Parties (COP), ‘the supreme body of this Convention’, which is mandated to ‘keep under regular review the implementation of the Convention and any related legal instruments’ that it may adopt, and to make the decisions needed to promote the UNFCCC’s effective implementation (Art. 7.2). The COP is supported by a secretariat (Art. 8), and is assisted by two subsidiary bodies – a Subsidiary Body for Scientific and Technological Advice (SBSTA) and a Subsidiary Body for Implementation (SBI) (see Arts 9, 10).10 On the basis of the reports, advice and recommendations from its subsidiary bodies, the COP may make decisions and recommendations as may be necessary for the implementation of the UNFCCC (Art. 7.2(a)–(m)). A financial mechanism with its own governance system is also established to handle the ‘provision of financial resources on a grant or concessional basis, including for the transfer of technology’ under the Convention (Art. 11). An operating entity for the financial mechanism is the Global Environment Facility (GEF). The COP may establish such other subsidiary bodies as it may deem necessary to secure the effective implementation of the UNFCCC (Art. 7.2(i)). These bodies may include expert groups (such as the Expert Group on Technology Transfer (EGTT) and the Least Developed Countries Expert Group (LEG) with respect to adaptation) and ad hoc working groups of the Parties to discuss specific issues (such as the Ad Hoc Working Group on Long-Term Cooperative Action (AWG-LCA)11). 10 The SBSTA is tasked to ‘provide [the COP] and, as appropriate, its other subsidiary bodies with timely information and advice on scientific and technological matters relating to the Convention’. The SBI is tasked to ‘assist the [COP] in the assessment and review of the effective implementation of the Convention’. Both subsidiaries are open to participation by all Parties. 11 See COP decision 1/CP.13: para. 2 (UNFCCC, 2008c: 5).


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BOX 17.2

SUMMARY OF DIFFERENTIATED PROVISIONS (ONLY FOR DEVELOPED PARTIES)

Art. 4.2(a) and (b) – obligation to: ●

●

●

adopt national policies and take corresponding measures to mitigate climate change by limiting anthropogenic emissions of greenhouse gases and enhancing greenhouse gas sinks and reservoirs; take the lead in modifying longer-term trends in anthropogenic emissions consistent with the objective of the UNFCCC;1 periodically communicate to the COP ‘detailed information’ on their mitigation policies and measures and their greenhouse gas national inventories, ‘with the aim of returning individually or jointly to their 1990 levels’ such greenhouse gas emissions.

Art. 4.3 – obligation to provide new and additional financial resources to developing countries to: ● ●

meet the agreed full costs for the preparation and submission of developing countries’ national communications; meet the agreed full incremental costs (including for technology transfer) of developing countries to implement their obligations under Art. 4.1.2

Art. 4.4 – obligation to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation to such adverse effects3 Art. 4.5 – obligation to: ●

●


take all practicable steps to promote, facilitate and finance the transfer of, or access to, environmentally sound technologies and know-how to developing country Parties to enable implementation of the UNFCCC; support the development and enhancement of endogenous capacities and technologies of developing country Parties

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Art. 4.8 – obligation to give full consideration to what actions are needed (including financing, insurance and technology transfer) to meet the specific needs and concerns of developing country Parties arising from the adverse effects of climate change and/or the impact of the implementation of response measures Art. 4.9 – obligation to take full account of the specific needs and special situations of least developed countries in relation to funding and technology transfer Art. 4.10 – obligation to take into consideration the situation of Parties, particularly developing country Parties, with economies that are vulnerable to the adverse effects of the implementation of response measures (notably fossil fuel income dependent economies) Art. 10.2(b) – consideration by the SBI of the national communications of Annex I Parties in the context of the review by the COP under Art. 4.2(d) of the adequacy of the mitigation target for developed countries under Art. 4.2(a) and (b) in the light of the implementation by such Parties of their obligation to take the lead in mitigation in order to modify longer-term trends in GHG emissions Art. 12.2 – obligation to include in their national communications a detailed description of policies and measures to mitigate greenhouse gas emissions or enhance removals to implement their mitigation obligation under Art. 4.2(a) and (b), and a specific estimate of the effects of such policies and measures on anthropogenic emissions by sources or removals by sinks Art. 12.3 – obligation to include details of measures taken in accordance with Art. 4.3, 4.4 and 4.5 (provision of agreed full incremental financing, financing to meet costs of adaptation, and technology transfer) Art. 12.5 – differentiated timetable with respect to the submission of national communications (more frequent for developed country Parties) Notes: 1 The obligation of developed countries under Art. 4.2(a) is not simply the limitation of greenhouse gas emissions and enhancing removals but rather doing so in ways that will: (i) show that they are leading in ‘modifying longer-term trends’ – that is, that they are changing the underlying production and consumption patterns in their societies that result in longer-term trends of anthropogenic emissions or removals; and (ii) lead to the achievement of the objective of the UNFCCC – that


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is, the stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference in the climate system, to be achieved within a timeframe sufficient to allow for ecosystems to adapt naturally to climate change, ensure food security and production, and enable economic development to proceed sustainably. 2 Such financing for agreed full incremental costs is supposed to be channelled through the UNFCCC’s financial mechanism set up under Art. 11.1. To date, however, there is no agreement on what constitutes ‘agreed full incremental costs’. Furthermore, there are many implementation problems – both in terms of actual financial flows and in the administrative arrangements relating to such financial flows – that the UNFCCC financial mechanism is running into under the current administrative arrangement in which the Global Environmental Facility (GEF) serves as an operating entity of the UNFCCC financial mechanism (see, for example, South Centre, 2008b). 3 These developing country Parties that are ‘particularly vulnerable’ to the adverse effects of climate change would be those developing countries that have one or more of the vulnerability characteristics listed in Art. 4.8.

Common commitments All countries (art. 4.1) Mitigation (voluntary for developing countries) Information provision and exchange Cooperation in technology transfer, R&D, adaptation, education and training, GHG sink and reservoir conservation and management

Figure 17.1 II.

Differentiated commitments

Balance of commitments (art. 4.7)

Respective capabilities (preamble 6 and art. 3.1) Intra- and Intergenerational equity (art. 3.1 and 3.2) Sustainable development, in particular of developing countries, within an enabling international economic system (art. 3.4 and 3.5)

Developed countries Common commitments (art. 4.1) + Mitigation (mandatory, art. 4.2) Financing UNFCCC implementation (art. 4.3) Financing adaptation (art. 4.4) Technology transfer (art. 4.5) Provide detailed information (arts. 12.2, 12.3 and 10.2(a) and (b))

The UNFCCC framework

Implementation by Developed Countries of their Differentiated Commitments

A. Article 4.2(a) and (b): taking the lead in mitigation to modify longerterm trends in emissions and returning to 1990 levels Developed countries, by and large, have not yet complied with their commitment under Art. 4.2(b) – to return ‘individually or jointly to their 1990 levels’ their anthropogenic greenhouse gas emissions – in order to


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demonstrate, under Art. 4.2(a), that they are taking the lead in modifying longer-term trends in human-made greenhouse gas emissions. It is, in fact, largely the Economies In Transition (EIT) Annex I Parties that were able to do so, mainly because of the economic difficulties that they faced in the 1990s that resulted in the collapse of many industrial activities. Non-EIT developed countries, by and large, except for a few, have not managed to return to their 1990 levels (see UNFCCC, 2008b: fig. 4). The developed countries’ commitment under Art. 4.2(a) is not simply about limiting anthropogenic emissions of greenhouse gases (as well as protecting and enhancing sinks and reservoirs). The adoption and implementation of mitigation policies and measures by developed countries under Art. 4.2(a) is to enable these countries to demonstrate that they are ‘taking the lead in modifying longer-term trends in anthropogenic emissions consistent with the objective of the Convention’. This means, essentially, that reductions in developed countries’ emissions must be such as would result in modifications of longer-term emission trends; that is, result in long-term downward trends in emissions arising from changes in the production and consumption patterns that underlie such trends. In this context, it is quite clear that developed countries by and large have also not yet complied fully and effectively with their commitment under Art. 4.2(a). In fact, as of 2003–07, 19 (mostly non-EIT Annex Parties) of the 40 Annex I Parties to the UNFCCC have GHG emissions that are still above their 1990 levels. These are Australia, Austria, Belgium, Canada, Finland, Greece, Ireland, Italy, Japan, Liechtenstein, Monaco, the Netherlands, New Zealand, Norway, Portugal, Slovenia, Spain, Turkey12 and the United States of America. Of the 39 Annex I Parties that are Parties to the Kyoto Protocol,13 21 have not yet, as of the period 2003–07, met their Kyoto Protocol Annex B mitigation commitments nor have they ‘made demonstrable progress’ in achieving such commitments.14 These are Australia, Austria, Belgium,

12 Turkey’s GHG emissions rose from 170.1 million tons to 296.6 million tons CO2 equivalent between 1990 and 2004 (see Republic of Turkey, 2007). 13 The only Annex I Party that is not a Party to the Kyoto Protocol is the United States. 14 It should be noted, however, that the first commitment period of the Kyoto Protocol under which the Annex I Parties are supposed to comply with their targets under Annex B of the Kyoto Protocol covers only the period 2008 to 2012. However, Art. 3.2 of the Kyoto Protocol expressly provides that ‘[e]ach Party included in Annex I shall, by 2005, have made demonstrable progress in achieving its commitments under this Protocol’.


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Canada, Denmark, the European Community, Finland, Greece, Ireland, Italy, Japan, Liechtenstein, Monaco, the Netherlands, New Zealand, Norway, Portugal, Slovenia, Spain, Sweden, and Switzerland. B. Article 4.3 and 4.4: providing new and additional financing to developing countries Non-EIT developed countries15 are obliged under Art. 4.3 to provide new and additional financial resources to developing countries to: ● ●

meet the agreed full costs for the preparation and submission of developing countries’ national communications; meet the agreed full incremental costs (including for technology transfer) of developing countries to implement their obligations under Art. 4.1.

Additionally, such developed countries as are listed in Annex II of the UNFCCC also have, under Art. 4.4, the obligation to ‘assist the developing country Parties that are particularly vulnerable to the adverse effects of climate change in meeting costs of adaptation to those adverse effects’. Financing flows under the UNFCCC from developed (Annex II) Parties to developing countries, pursuant to Art. 4.3, 4.4, and 4.5, are supposed to go through the UNFCCC’s financial mechanism established under Art. 11.1 to 11.4, with such financing to be ‘on a grant or concessional basis’ (Art. 11.2). The financial mechanism is currently being operated by the GEF, on behalf of the COP and subject to review by the COP every four years. The GEF, as an operating entity of the financial mechanism, is supposed to comply with the guidance issued by the COP for its operation.16 Optionally, under Art. 11.5, developed countries may also provide, and developing countries avail themselves of, financial resources through bilateral, regional, or multilateral channels.17 Annex II developed Parties are

15 These are the developed countries that are listed in Annex II of the UNFCCC, often referred to as ‘Annex II Parties’. 16 Under Art. 11.1, the financial mechanism ‘shall function under the guidance of and be accountable to the [COP], which shall decide on its policies, programme priorities and eligibility criteria related to’ the UNFCCC. 17 These channels include, for example, bilateral official development assistance (ODA) that is climate change related, financing (such as loans or grants) obtained through multilateral agencies such as the World Bank, UNDP, or UNEP, or through regional institutions such as the Asian Development Bank, African Development Bank, etc.


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required to include in their national communications the details of measures that they take to comply with their financing obligations under Art. 4.3, 4.4 and 4.5 (Art. 12.3). Such measures are taken into account in the context of the COP’s review of the financial mechanism that takes place every four years.18 Compliance by developed countries with the obligations above has been far from adequate.19 With respect to the obligation to meet the agreed full costs for developing countries’ national communications (NCs), the GEF has adopted operational procedures for the expedited financing of national communications from developing country Parties to assist eligible countries to formulate and submit proposals based on COP 8 guidelines.20 Under these operational procedures, up to US$405,000 is made available to each developing country Party for the preparation of its NC. The GEF also provides an additional US$15,000 per country for stocktaking and stakeholder consultations in preparation of the project proposals. That such amounts should be determined by the GEF alone is contrary to the obligation of developed countries to provide ‘agreed full cost’ funding for the preparation of NCs. This has been one of the most contentious issues under continued negotiations on the matter of developing country NCs under the Convention. With respect to meeting the agreed full incremental costs of developing countries to implement their common commitments under Art. 4.1, the UNFCCC secretariat’s estimated annual cost requirements to fund adaptation, mitigation and technology transfer for developing countries were detailed in an update of its 2007 report on investment and financial flows to address climate change (UNFCCC, 2008a). These are outlined in Table 17.1. The amounts pledged or to be committed from non-EIT developed countries for climate financing remain far too low to meet the scale of the financing needs of developing countries in relation to climate adaptation and mitigation. The UNFCCC estimates that US$262.15–615.65 billion will be needed annually by 2030, while the G-77 and China in their August 2008 climate finance proposal have suggested that initially at least US$278.82–557.64 billion (based on the 2007 GDP of Annex I Parties) will be needed. 18

See Annex of COP decision 3/CP.4 (UNFCCC, 1998a: 9). For discussion of Annex II Parties’ reports in terms of their provision of financial resources pursuant to the UNFCCC see, for example, UNFCCC (2007b: para. 27ff; 2007c: para. 27ff). 20 See http://www.thegef.org/Documents/Enabling_Activity_Projects/GEFC22-Inf16.pdf (accessed 11 November 2009) for the text of these procedures. 19


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US$52.4 billion annually in 2030 for developing countries (calculated from the proportion needed in developing countries as indicated in UNFCCC, 2008a: 18, Table 4) without including the amount required for investments in technology research, development and deployment of climate technology in developing countries. The UNFCCC Secretariat paper seems to assume that all the costs for the technology transfer-related research, development and deployment for climate technology will go solely to developed countries.

US$27.75–58.25 billion annually in 2030 for developing countries (calculated from the proportion needed in developing countries as indicated in UNFCCC, 2008a: 19, Table 5). The UNFCCC estimate globally for annual adaptation costs is US$49–171 billion.

US$6–41 billion annually up to 2030 for deployment of technologies to developing countries (US$25–163 billion globally) (see UNFCCC, 2008a: 57, Table 17). US$176–464 billion annually up to 2030 for diffusion and commercial transfer in developing countries (US$380 billion to US$1 trillion globally) (see ibid). For research and development, global cost estimates amount to US$10–100 billion annually up to 2030, and for technology demonstration, US$27–36 billion annually up to 2030 globally (see ibid). The UNFCCC Secretariat paper did not give any estimates of the costs that need to be financed in developing countries with respect to climate technology research and development, implying that R&D is done only in developed countries. However, for developing countries, support for endogenous R&D is an important and integral component in any technology transfer under the UNFCCC.1

Technology transfer

Notes:

1

See, for example, the G-77 and China’s August 2008 proposal for a technology transfer mechanism that clearly states that financing should also be provided for technology research and development in developing countries.

The total UNFCCC estimated annual financial requirements for adaptation, mitigation and technology transfer for developing countries – which may still be on the low end in any case due to omissions with respect to technology R&D and demonstration – would be US$262.15 billion–US$615.65 billion annually by 2030.

Mitigation

Estimated annual financial requirements for adaptation, mitigation and technology transfer for developing countries

Adaptation

Table 17.1


397

300

278.82 262.15 250 UNFCCC estimate – low end 200

G-77 and China proposal – low end – 2007 GDP

150

Available or pledged – GEFUNFCCC + non-UNFCCC channels

100

50 28.98 0 Estimates of what is needed Source:

What is available or pledged

South Centre calculations

Figure 17.2

Climate financing mismatch between needs and availability (US$ billions)

Currently, climate-related funds under the GEF amount to US$10.03– 10.25 billion, while US$18.95 billion (including US$6.68 billion in bilateral initiatives and US$12.27 billion through multilateral initiatives) in climate-related financing may be forthcoming from non-EIT developed country Parties’ individual climate financing initiatives, with approximately US$4.8082 billion annually being made available as a result of these initiatives over varying time periods. That is, climate financing that is available or may be made available by non-EIT developed country Parties in the foreseeable future is a little over one-tenth of the minimum estimated requirements for climate financing coming from the UNFCCC or the G-77 and China. As can be seen in Figure 17.2, the total of currently available or pledged public sector financing from non-EIT developed country Parties, whether through the GEF (as an operating entity for the UNFCCC’s financial mechanism) or through bilateral or other non-UNFCCC multilateral channels, falls far short of current estimates for annual climate financing requirements (whether based on the UNFCCC paper or the G-77 and China’s financial mechanism proposal). Much more scaling-up of public


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sector financing from non-EIT developed country Parties therefore needs to be undertaken in order to meet climate financing requirements. The problem is also not simply limited to the severe funding shortfall evident in both UNFCCC (through the GEF) and non-UNFCCC channels. A major part of the problem relating to current public climate financing from developed countries is that, regardless of the delivery channel, these are voluntary and are not directly accountable to the UNFCCC COP. Virtually all of the financing that Annex II Parties reported in their fourth national communications (save for Italy for some of its financing) as compliance with their UNFCCC Art. 4.3, 4.4 and 4.5 financing obligations, forms part of these Parties’ overall official development assistance (ODA) programmes rather than being ‘new and additional’.21 Mixing ODA flows for development projects and financial flows for climate adaptation and mitigation makes it difficult to obtain a clear picture of the extent to which Annex I Parties are complying effectively with their UNFCCC obligation to provide new and additional climate financing to support developing country implementation of their UNFCCC obligations. In essence, developed countries’ financial flows that go towards meeting their internationally agreed goal of providing at least 0.7 per cent of their annual gross national income (GNI) as ODA are double-counted as also going towards meeting their treaty obligations under UNFCCC Art. 4.3, 4.4 and 4.5 to provide climate financing to developing countries. In this context, therefore, such financial flows are neither new, additional, nor, indeed, mandatory in nature. Therefore, counting ODA financing as UNFCCC-compliant climate financing is not consistent with UNFCCC Art. 4.3 because such climate financing must be new and additional. As the G-77 and China have stressed, climate financing must be ‘new and additional . . . which is over and above ODA’. Furthermore, ODA is, by its very nature, voluntary. The climate financing commitment under UNFCCC Art. 4.3 is mandatory.

21

With regard to ‘new and additional’ financial contributions, no universal interpretation of the term appears to exist, as seven Annex II parties considered their contributions to the GEF as part of this category, while two linked their new and additional contributions to pledges made in Bonn Agreements. Two other parties chose to report certain contributions as ‘new and additional’ without identifying the reasons behind such a classification. Some countries merely chose to specify the total amount of bilateral and regional development assistance contributed without indicating all the recipients and which ones in particular are given funds for mitigation and/or adaptation.


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By double-counting ODA as climate financing, developed countries are essentially reflecting and responding to their own priorities relating to development assistance and climate financing rather than to the priorities and needs of developing countries. This undermines the balance contained in the UNFCCC with respect to the climate financing needs of developing countries and the climate financing obligations of developed countries. As such, currently available public financing for climate action from developed countries (whether channelled through the GEF or not) does not, and cannot, be compliant with the criteria of predictability and adequacy of financing that are required under Art. 4.3 of the Convention. The nature of voluntary financing is directly inconsistent with the mandatory nature of the financing commitments for developed country Parties under the UNFCCC. Furthermore, it is not clear to what extent such voluntary financing (again whether through the GEF or other non-UNFCCC channels) complies with the COP’s guidelines on such financing’s consistency with COP policies, programme priorities and eligibility criteria, and on nonintroduction of new forms of conditionalities.22 For example, in relation to the GEF, the COP has had to issue additional guidance at virtually every session to the GEF, thereby indicating that qualitative deficiencies in the GEF’s performance as an operating entity for the UNFCCC’s financial mechanism continue to persist. Critiques of the GEF’s performance as an operating entity generally relate to, inter alia, the simplicity and efficiency of its funding procedures and the equitable distribution of GEF funding to developing country Parties, especially LDCs and SIDS. Developed countries also show a great reluctance to channel climate financing sourced from their governmental funds through the UNFCCC, preferring to use either their own bilateral channels or other multilateral channels such as the World Bank as their vehicles for public sector climate financing flows. They also show a preference for relying on unpredictable and market-driven private sector financing. The public financing from developed countries for climate-change-related actions that goes through non-UNFCCC channels and such financing that does go through the UNFCCC’s financial mechanism (via the Global Environment Facility as an operating entity) reflect and respond to the donors’ political and economic priorities and interests rather than to the sustainable development priorities of developing countries. Counting the low-end estimate of US$10.03 billion channelled or available through the GEF as an operating entity of the UNFCCC’s Art. 11

22

See COP Decision 11/CP.1: para. 2(a) (UNFCCC, 1995: 34).


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UNFCCC (GEF) Non-UNFCCC (bilateral)

12.27

Non-UNFCCC (multilateral)

6.68

10.03

Source: South Centre calculations

Figure 17.3

Public sector climate financing from some Annex I Parties – clear preference for non-UNFCCC channels (in US$ billions)

financial mechanism and the amount through bilateral and other nonUNFCCC multilateral mechanisms (US$18.95 billion), the current total available or pledged public financing for climate-change-related actions from Annex I Parties amounts to US$28.98 billion. Of this total amount, 34.61 per cent is through the UNFCCC (via the GEF as an operating entity) and 65.39 per cent is through non-UNFCCC channels (see Figure 17.3). Many non-EIT developed country Parties justify their reluctance to channel such financing through the UNFCCC by arguing that the UNFCCC is not set up institutionally to handle massive financial flows, and that other multilateral institutions such as the World Bank are better equipped and have more expertise in handling such flows. However, considering that the UNFCCC is the sole, virtually universal, multilateral policy and institutional regime providing the legitimate framework for global action on climate change, climate financing should be channelled through the UNFCCC’s financial mechanism and its capacity to handle such flows should be further enhanced. There are four main consequences to this preference by Annex I Parties to direct their public sector financing for climate-change-related actions through non-UNFCCC channels:


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(i) The UNFCCC is institutionally weakened. The preference for nonUNFCCC channels for climate-related public financing is a step towards weakening the UNFCCC itself and thereby undermining the effectiveness of the UNFCCC’s legal regime and institutional architecture as the international community’s main vehicle for global action on climate change. Such weakening also effectively lessens the normative value of the UNFCCC itself as a binding legal regime. (ii) The UNFCCC’s financial mechanism is weakened. The financial mechanism established under Art. 11 of the UNFCCC serves as the sole multilaterally recognised channel through which developed countries can comply with their obligations under Art. 4.3, 4.4, and 4.5 to provide new and additional financing. By leaving the UNFCCC virtually unfinanced, and by moving public climate financing to other channels, the institutional ability of the UNFCCC to serve as the main conduit for publicsector-sourced climate financing is severely weakened. Furthermore, once non-UNFCCC funding channels are built up and adequately funded, developed countries might become even more reluctant to further enhance the UNFCCC’s financial mechanism as the main channel for climate financing. This would make it unfeasible for the UNFCCC’s COP, and developing country Parties to the UNFCCC, to ensure that such financing is consistent with the provisions and objectives of the UNFCCC. (iii) Developed countries cannot be held accountable to the UNFCCC COP for fulfilment of their financing commitments under the UNFCCC. As most Annex I public-sector-sourced climate financing is not through the UNFCCC under the authority of the COP, developing countries will find it difficult if not impossible to raise issues relating to measurement, reporting and verification, as well as accountability, for the flow and the use of such financing in the COP. The difficulties that developing countries have experienced with the GEF as an operating entity for the UNFCCC’s financial mechanism in terms of accessing climate financing are likely to be compounded even more with respect to climate financing that goes through non-UNFCCC channels that are not accountable to the COP. These non-UNFCCC channels (such as the World Bank and other multilateral institutions whose governance structures and memberships are different from the UNFCCC COP’s – not to mention the fact that the governance of the World Bank and most of the other regional development banks is heavily dominated by developed countries) are likely to have governance and accountability mechanisms in which developing country recipients play little or no effective role and in which the funding priorities are likely to be driven by the


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donors’ interests rather than the recipients’ needs or the climate financing priorities identified by the UNFCCC COP. The example of the GEF can be highlighted because, even though it was designated to be an operating entity for the UNFCCC’s financial mechanism and, with respect to climate change-related funds, its actions are supposed to be subject to the guidance of the UNFCCC COP, developing countries have often raised concerns with respect to the difficulties encountered in terms of having the GEF’s operational decisions be fully consistent with COP guidance.23 The fact that the GEF’s governance body is different from and not accountable to the UNFCCC COP makes it even more difficult for developing countries to call the GEF to account through the COP. Using non-UNFCCC channels as the main conduits for public climate financing to support developing countries’ implementation of climate change-related actions means that the fund providers – for example, developed countries – need not and would not be bound by UNFCCC COP guidelines, nor be accountable to the UNFCCC COP. Furthermore, there is greater room for donor control over the scale, direction, objectives, recipients, and objectives of climate financing by using non-UNFCCC channels. This therefore also institutionally weakens the UNFCCC. Accountability to the UNFCCC COP with respect to climate financing is explicitly stated in Art. 11 of the UNFCCC, and having such financing go through the UNFCCC’s financial mechanism will ensure that all the UNFCCC Parties, both developed and developing alike, will be able through the COP to participate fully and transparently (and hold each other accountable) in the process of guiding and using such financial resources consistent with the provisions of the UNFCCC. This would also enable the Parties, both developed and developing, to work together to leverage such financing to generate other resources outside of the

23 Part of the problem with the GEF in terms of ensuring the equitable allocation of funding resources to developing country Parties is that ‘higher levels of funding have typically been assigned to the countries with the highest overall potential for GHG mitigation’, which means that many other developing country Parties whose priority is adaptation more than mitigation (because of their low emission levels or low mitigation capabilities) often find it difficult to obtain GEF funding. Many African countries, for example, are sinks rather than sources of emissions. Some of the GEF’s stakeholders, particularly in the Pacific region, have, in fact, suggested that ‘the GEF must fund activities in the area of adaptation to climate change because it is in the guidance from the UNFCCC and, because they are smaller emitters, the mitigation of GHG emissions is not a high national priority’ (see GEF, 2005: 36–40).


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UNFCCC context that can be used to also support the meeting of the UNFCCC’s objective. (iv) Climate financing priorities of developing countries will not be met. Current public financing from developed countries for climate action – whether through the GEF or through non-UNFCCC channels – will essentially reflect and respond to their own strategic political and economic interests and priorities rather than the sustainable development priorities of developing countries. This is clearly inconsistent with the needs-focused approach implicit in the UNFCCC’s financing provisions (Art. 4.3, 4.4 and 4.5) in which financing from developed countries is to respond to and meet developing countries’ needs. Existing modalities under which climate financing is being provided by developed countries have the effect of weakening the UNFCCC in terms of its effectiveness as a normative legal regime for global action on climate change and in terms of the effectiveness of its financial mechanism as a catalyst and vehicle for climate financing that is consistent with and supports the objectives of the UNFCCC. C. Article 4.5: transferring technology to developing countries Article 4.5 commits developed countries to: ●

●

take all practicable steps to promote, facilitate and finance the transfer of, or access to, environmentally sound technologies and know-how to developing country Parties to enable implementation of the UNFCCC; support the development and enhancement of endogenous capacities and technologies of developing country Parties.

The extent of compliance by developed countries with this treaty commitment has also been the subject of much discussion among the Parties. The UNFCCC COP has, in various sessions, discussed the issue of the implementation of Art. 4.5, with various decisions coming out that laid down specific actions to be undertaken by Parties, the Secretariat, and the subsidiary bodies. Of particular importance is COP Decision 4/CP.7 (see UNFCCC, 2002: 22) which established a framework for ‘meaningful and effective actions to enhance the implementation’ of UNFCCC Art. 4.5 ‘by increasing and improving the transfer of and access to environmentally sound technologies (ESTs) and know-how’. The decision’s annex identified five themes around which such ‘meaningful and effective actions’ would be undertaken. These are:


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404 ● ● ● ● ●


Technology needs and needs assessments; Technology information; Enabling environments; Capacity building; Mechanisms for technology transfer.

In its 2007 report, the UNFCCC Expert Group on Technology Transfer (EGTT) concluded that discussions relating to technology transfer in the UNFCCC ‘should evolve to more practical, results-oriented actions in specific sectors and programs (see UNFCCC, 2007d: 12). The EGTT effectively implied that, to date, the UNFCCC’s technology-transfer-related provisions really have not been implemented by developed country Parties.24 Developing countries have also identified key concerns relating to technology transfer under the UNFCCC in the context of the climate negotiations currently taking place pursuant to the Bali Action Plan agreed to by the thirteenth COP in Bali, Indonesia, in December 2007. These include, inter alia, concerns about the general principles that mechanisms for technology transfer under the UNFCCC need to reflect, the kinds of institutional arrangements that would be needed to make technology transfer effective, addressing intellectual property rights (IPR) issues, and financing for technology transfer (see UNFCCC, 2009a: para. 127–34). Developed countries, on the other hand, tend to stress that technology transfer should be done in the context of commercial transactions that will be subject to normal cross-border trade regulations as well as through foreign investment rather than through non-commercial modalities. In this context, developed countries have stressed that robust and strong compliance with IPR regimes (such as the WTO TRIPS Agreement) is necessary. Given the shortfalls in the implementation of the UNFCCC’s technology transfer provisions by developed countries, and in light of paragraphs 1(b)(ii) and 1(d) of the BAP pointing to technology transfer of climaterelated ESTs to developing countries as an essential and integral component in enhancing the full and effective implementation of the UNFCCC, establishing a strong, adequately funded, transparent and participatory mechanism for technology transfer operating under the authority of, and accountable to, the UNFCCC COP is essential. The mechanism should be comprehensive in coverage so as to be able to

24

For a discussion of Annex I Parties’ reports on their compliance with Art. 4.5 as contained in their national communications, see, for example, UNFCCC (2007c: para. 45ff).


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address all stages of the technology development cycle (including research and development, demonstration, deployment, diffusion, and endogenous innovation). It should be designed in such a way that it enhances developed country compliance with the provisions of UNFCCC Art. 4.3 and 4.5 on technology transfer. The transfer modalities must be focused on direct, concrete, and on-the-ground approaches that will actually result in technology transfer taking place. The mechanism should also ensure the technology transferred under its modalities is appropriate and adapted to, or may be adapted to, the unique environmental and developmental conditions of the recipient country. It should also be able to encourage and promote further innovation and development of the transferred technology in the recipient country. III.

Implementation by Developing Countries of their Common Commitments

As pointed out above, developing countries have commitments in common with developed countries under Art. 4.1 of the UNFCCC. However, what is important to note is that in implementing such common commitments, the principle of common but differentiated responsibilities and the specific national and regional development priorities, objectives and circumstances of the Parties should be taken into account (Art. 4.1 chapeau). Additionally, the extent to which developing countries implement such common commitments would depend on the extent to which developed countries implement their commitments to provide financing and technology transfer for the implementation of Art. 4.1 by developing countries (Art. 4.7 in relation to Art. 4.3, 4.4 and 4.5). These common commitments of developing countries include having to: ● ● ●

●

provide and communicate climate-change-related information (Art. 4.1(a)); adopt and implement mitigation and adaptation measures (Art. 4.1(b)); cooperate in technology transfer, adaptation, ‘climate-proofing’ economic, social and environmental policies and actions, research and observation, information exchange, education, training and public awareness (Arts 4.1(c)–(i), 5 and 6); communicate information regarding the Party’s implementation of the UNFCCC (Arts 4.1(j), 12.1).

With respect to providing climate change-related and UNFCCC implementation-related information, developing countries have by and


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large done so within the limits their respective capacities. As of 1 April 2005, 122 developing country Parties have already submitted their initial national communications.25 Developing countries Parties have provided vast amounts of information in their national communications. Their implementation of Art. 4.1 has been largely in the following areas: ● ● ● ● ● ●

sustainable development and the integration of climate change concerns into medium- and long-term planning; preparation of inventories of anthropogenic emissions by sources and removals by sinks of greenhouse gases; undertaking measures contributing to addressing climate change; undertaking and cooperating in research and systematic observation; assessing climate change impacts and undertaking adaptation measures and response strategies; education, training and public awareness (see, for example, UNFCCC, 2005a).

For many developing country Parties, poverty reduction continues to be their overriding aim (ibid: para. 24). In doing so, they have noted that their emissions are still likely to grow commensurate with economic growth. Developing countries do not have quantified emission reduction targets linked to a base year similar to what developed countries have under Art. 4.2(a) and (b). Instead, developing countries are committed under Art. 4.1(b) to formulate and implement national mitigation and adaptation measures, taking into account their specific needs and development priorities. As of 1994, the total greenhouse gas emissions, excluding LULUCF (land use, land-use change and forestry), reported by 122 developing country Parties amounted to 11.7 billion tons CO2 equivalent (ibid: para. 36; see also, UNFCCC, 2005b: para. 23). Most developing countries reported that they were net greenhouse gas emitters, but 29 countries reported that they were net greenhouse gas sinks and 36 indicated that their removals of greenhouse gases by sinks exceeded their total emissions (UNFCCC, 2005b: para. 21).

25 Art. 12.5 specifies that developing country Parties shall make their initial national communications within three years from the entry into force of the UNFCCC or of the availability of financial resources for national communications provided by developed countries under Art. 4.3.


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Developing countries also reported a wide range of measures to address climate change, with most indicating that ‘the principles of sustainable development were used to guide the assessment of options for abating the increase of GHG emissions and enhancing sinks’ (UNFCCC, 2005a: para. 42). In this regard, developing countries’ choice of measures was ‘influenced by key national circumstances relating to population, natural resource endowment, geography, and political and economic structures as well as national priorities such as poverty alleviation, and provision of access to basic facilities and health issues, as well as financial and technological considerations’ (ibid). These measures were undertaken in various sectors, as reported by developing countries. Most developing countries that submitted national communications indicated that their technical and institutional capacities were inadequate for meeting their reporting obligations under the UNFCCC regarding national GHG inventories (ibid: para. 86). The ineffective and insufficient implementation by developed countries of their financial and technology transfer commitments under Art. 4.3, 4.4, and 4.5, and in respecting Art. 4.7, can be clearly seen in developing countries’ national communications that stressed the need for financial and technological support (see, for example, UNFCCC, 2005a: paras 86, 89, 90, 93, 95, 98, 100). IV.

Enforcement and Compliance: Multilateral Governance Issues in UNFCCC Implementation

The UNFCCC as it currently exists has great potential in serving as the multilateral policy framework under which the global community can build a fair, equitable and low-carbon sustainable common future. However, the record of its implementation since its entry into force on 21 March 1994 belies this great potential, largely as a result of failures in implementation on the part of many developed countries that bear the historical responsibility and specific obligations to take the lead in addressing climate change under the UNFCCC through such actions as cutting their emissions and providing financing and technology to developing countries. Implementation of these obligations by developed countries is an essential condition for the full implementation of the UNFCCC, including by developing countries in the context of their sustainable development processes. This balancing of obligations is clearly specified in Art. 4.7 of the UNFCCC. Enforcing compliance with these obligations, however, has been one of the major difficulties faced by the UNFCCC given that, as a treaty regime, it is not sanction-based in terms of its enforcement and compliance


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mechanism. It relies on a regime of transparency through a system of reporting – that is, the national communications under Arts 4.1(h) and 12 – and review (first by the SBI under Art. 10 and then by the COP). The COP’s power to review the implementation of the UNFCCC is principally grounded on Art. 7.2, which requires a ‘regular review’ of ‘the implementation of the Convention and any related legal instruments’26 so that the COP can make ‘the decisions necessary to promote the effective implementation of the Convention’. All decisions that need to be taken with respect to the implementation of the UNFCCC have to be made by the COP under its Art. 7 powers. This essentially means, given the consensus-based decision-making practice in the COP, that all of the Parties have to agree on a decision, and each and every decision has to be politically negotiated among all the Parties before a decision can be made. Among other things, such regular review should include assessing, ‘on the basis of all information made available to it in accordance with the provisions of the Convention, the implementation of the Convention by the Parties, the overall effects of the measures taken pursuant to the Convention, in particular environmental, economic and social effects as well as their cumulative impacts and the extent to which progress towards the objective of the Convention is being achieved’ (Art. 7.2(e)). Such information would include the national communications to be provided by the Parties under Art. 12; the consideration of the information in such national communications by the SBI under Art. 10; and the review by the COP pursuant to Art. 4.2(d) of whether developed countries’ mitigation actions under Art. 4.2(a) and (b) are adequate in meeting the UNFCCC’s objective. To date, however, the COP has not yet undertaken any formal review of the implementation of the UNFCCC pursuant to Art. 7.2(a) and (e) in order to assess how it may be more effectively implemented by the Parties. Developed countries have generally sought to focus attention on the need for developing countries to do more in terms of mitigation, while discussions on how to ensure effective compliance with developed country obligations in relation to mitigation, financing and technology transfer remain at the conceptual level.27 26 This would hence include the Kyoto Protocol within the scope of such mandated regular review by the COP of the implementation of the Convention. 27 This can be clearly seen in, for example, the climate negotiations taking place pursuant to the Bali Action Plan (see COP Decision 1/CP.13 (UNFCCC, 2008c)). In these negotiations, developed countries are generally pushing for a revision or replacement of the UNFCCC, including the demand to have develop-


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UNFCCC Arts 13 and 14, which currently do not contemplate or provide for binding punitive sanctions as a modality for addressing noncompliance, could be amended in order to explicitly provide for such binding punitive sanctions. It is important to note that, even under the Kyoto Protocol’s Art. 18, addressing non-compliance issues by modalities that would have ‘binding consequences’ would need to be done pursuant to an amendment to the KP. Article 13 states that ‘the resolution of questions regarding the implementation of the Convention’ can be done by the Parties through the establishment of a ‘multilateral consultative process’ which would be available to the Parties on their request (Art. 13). The COP adopted Decision 10/CP.4 (see UNFCCC, 1998a) establishing the multilateral consultative process (MCP). However, the MCP has not yet been made operational due to continuing disagreements among the Parties on the governance structure for the MCP. Article 14.2(b) mandates the COP to adopt arbitration procedures ‘as soon as practicable, in an annex on arbitration’ to supplement the arbitration provision in Art. 14.2(b). UNFCCC Art. 14.7 mandates the COP to adopt ‘additional procedures relating to conciliation . . . as soon as practicable, in an annex on conciliation’ in order to supplement the provisions on conciliation contained in Art. 14.5 and 14.6. However, with respect to conciliation, any conciliation commission established under Art. 14.6 can render only a ‘recommendatory award, which the parties shall consider in good faith’. To date, however, no such annex on conciliation has been adopted.

5.

CONCLUSION

The UNFCCC incorporates a set of obligations and commitments that take into account the common, but differentiated, responsibilities and capabilities of developed and developing countries in relation to climate change. As a governance regime, the UNFCCC has already prompted many actions on the part of its Parties to address climate change. However, these actions have not yet been enough to stop anthropogenic greenhouse gas emissions from increasing since 1990.

ing countries assume binding quantified mitigation obligations, while insisting on using current non-UNFCCC-compliant modalities and channels to provide climate financing and technology.


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While the urgency of the climate change crisis is now acknowledged more than ever as a serious international public policy issue, the UNFCCC’s provisions have not yet been fully or adequately implemented, especially by developed countries that have both the greater responsibility and greater capacity for doing so. In particular, there are failures of implementation in relation to developed countries’ commitments to provide financing and technology transfer to developing countries. Developing countries, on the other hand, which have the right to expect financial support and technology transfer from developed countries to enable their full and effective implementation of the UNFCCC, are doing what they can in the midst of their limited resources to comply with their own treaty obligations. The global community can do much more in order to address climate change through ensuring the full, effective and sustained implementation of the UNFCCC by developed countries, taking into account its objectives and, in particular, the obligation to mitigate emissions and the commitment to provide financing and to transfer appropriate technology. The UNFCCC sets up a balanced and organic linkage between developed country compliance and developing country compliance. Thus, developing countries will only be able to comply fully with their obligations under this treaty if developed countries comply with theirs.


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482


to the Vienna Convention for the Protection of the Ozone Layer), Montreal, 16 September 1987. (No 26369), 1522 United Nations Treaty Series 3. Patent Cooperation Treaty, 19 June 1970, Washington Act, amended in 1979 and modified in 1984. Protocol on Biosafety to the Convention on Biological Diversity (CBP), Cartagena, 29 January 2000, 39 ILM 1027, entered into force 11 September 2003. United Nations Convention against Corruption, adopted on 31 October 2003 entered into force 14 December 2005. United Nations Commission on International Trade Law, UNCITRAL Model Law on Procurement of Goods, Construction and Services, 15 June 1994. World Intellectual Property Organization Copyright Treaty (WCT) 1996. World Intellectual Property Organization Performances and Phonograms Treaty (WPPT) 1996.


28/9/10 11:22:40

Index Abrahamson, Rita 136 accountability for corporate human rights violations 215–17 of IMF and World Bank 86–7 in international aid 135–6 in international financial governance 85–8 Accra Agenda for Action (AAA) 128 Africa 81 food production, and genetic engineering 334–5, 349–50 Model Law on safety in biotechnology (2007) 368–9 Agreement on subsidies and countervailing measures (1994) (WTO) 21, 55–9, 149–50 Agreement on trade-related aspects of intellectual property rights (TRIPS) see TRIPS Agreement Agreement on trade-related investment measures (TRIMs) see TRIMs Agreement agriculture see biofuels; food production; plant varieties aid see international aid Alien Claims Tort Act 1789 (US) 215–16 Alston, Philip 238, 242 Alvarez, José 27 American Manufacturing and Trading, Inc. v Zaire (1997) 185–6 Amin, Samir 165, 170 Amsden, Alice 17 anti-corruption policies and access to information 290 and colonialism 284–5 and corporate social responsibility 222–3 dispute settlement 283–4 focus of 287–9

by foreign legal institutions/ jurisdictions 284, 286–7, 305–6 advantages 289–90, 297–8 and cultural differences 292–4, 302–5 disadvantages 290–96 incompatibility issues 291–4, 302–5 indifference of 291–2, 298–302 and learning by doing 285, 295–6 malign effects of 294, 303–5 motives for 290–92 and national autonomy 293–4 and national self-interest 290–92, 298–302 objections to 284–5 proposals for 284 as substitutes for domestic institutions 294–6, 305 successes in, evidence of 297–305 globalization of measures for 7, 284 and international arbitration 283–4 law on, development of 286–9 money-laundering 283, 287 OECD Convention on combating bribery (1997) 283, 287–8, 297, 299, 301, 303 OECD Working Group on bribery 297, 299, 304 political corruption, defining 284 and privatisation 303 UN Convention against corruption (2003) 283, 287–8 WTO Agreement on government procurement 287–8, 302–3 Anti-counterfeiting Trade Agreement Act (ACTA) (2007) 324 anti-dumping duties 261–3, 281 arbitration see dispute settlement Argentina 311, 326, 345 Arrighi, Giovanni 166–8, 177–8

483


28/9/10 11:22:40

484


Australia 32 autocentric economies 166 autonomy, national Charter of economic rights and duties of states (1974)(UN) 16–17, 19 and developing countries, international law conflicts 15–16, 26–7 and economic openness 37–42 fiscal autonomy 5 IMF influence over 150–52, 154–6 non-discrimination, principle of 149–50 and foreign legal institutions, anti-corruption role 293–4 and globalization 26–9, 34–5, 38–9 international economic law 3, 12, 26–7 changes in multilateral emphasis 39–42 limitations on 34–7 over economic openness 37–42 over policy instruments and goals 37–9 surveillance mechanisms 45–7 and international financial governance 75–6 and international institutions, influence over 29–32, 35, 75, 150–52, 154–6 macroeconomic conditions, multilateral controls of 34–6, 41–3, 45–50, 65, 151–3 and market liberalisation, impact on 34–5 Resolution on permanent sovereignty over natural resources (1962)(UN) 16 Avi-Yonah, Reuven S. 140, 151 Badie, Betrand 133 Bakvis, Peter 245 Banco Nacional de Cuba v Sabbatino (1964) 15 Basel Committee of Banking Supervision 69, 86 Capital adequacy guidelines 80–81 Core principles for effective banking supervision 102


Bello, Walden 175 Berne Convention for the protection of literary and artistic work (1886) 179, 310–11 Bhagwati, Jagdish 31, 164, 168–9 Bhattacharjea, Aditaya 261, 266, 280 bilateral investment treaties (BITs) best efforts clauses in 182 corporate responsibility trends in 200–201 dispute resolution under 180–86 and economic development contribution to 186–7 reference to 181–2 US model, worldwide adoption of 19 biofortification 335 biofuels and biotechnology 346–7 demand for 331 and food security 339–40 use of agricultural land for 331–2, 339–40 Biological Open Source (BiOS) licence 351–2 biosafety, Cartagena Protocol on (2003) 343, 359, 368, 371 biotechnology, in plants/animals African Model law on safety in biotechnology (2007) 368–9 biofortification 335 and biofuels 346–7 biosafety, Cartagena Protocol on (2003) 343, 359, 368, 371 defining 334–5, 342 embryo rescue 335 and ethics 338 in food production 352–3 advantages and disadvantages 340–47 in Africa 334–5, 349–50 international agricultural research centres (IARCs) for 341–2, 344 Multilateral system of access and benefit sharing (MLS) 348 private sector role in 343–5, 348–9 regulation 347–52 open source biotechnology 333, 350–52

28/9/10 11:22:40

Index public-private sector regulation 348–50 Scientific and Know-How Exchange Program (SKEP) 349 genetic modification 8, 334–5, 342, 346 advantages and disadvantages 340–45 co-existence with other crops 339–40, 345, 352 Convention on biological diversity (CBD Convention)(1992) 320–21, 342–3, 357, 376 humanitarian licensing in 333, 350–52 International Treaty on plant genetic resources for food and agriculture (seed treaty) (2001) 328, 348, 374 segregation, traceability and identity preservation (STIP) 345 green/cell/tissue biotechnology 334 and intellectual property law 8, 338–9 genetic modification 320–22, 342–3, 357, 376 open source biotechnology 333, 350–52 plant breeder’s rights 343–4 plant varieties 320–22, 328, 343–4, 348, 374 private sector role in 332, 348–9 Bird, Richard 142 Braithwaite, John 120 Braudel, Fernand 167 Brazil 81 competition law regime in 278, 310–11 impact of 2008 global financial crisis 99 on intellectual property protection 326 and power shift in international financial governance 90–91 Bretton Woods institutions see International Monetary Fund; United Nations; World Bank bribery see anti-corruption


485

BRIC countries see also Brazil; China; India; Russia potential for change from 90–91 British Imperialism 165–7 Brusick, Philippe 264–5 Bulgaria 301–2 Burke, Edmund 293 Canada, model bilateral investment treaty 200–201 Carr, Indira 298 cartels calls for global competition law to combat 252–4 deterrence of 278–9 as development protectionist mechanism 258 F. Hoffman-La Roche v Empagran (2004)(US) 8, 275–80 impact on developing countries 259–60, 264–5, 275 incentives for targeting 278–9 US domestic law exemptions on 256 Central Research Institute for Food Crops (CRIFIC) 350 Centre for the Application of Molecular Biology to International Agriculture (CAMBIA) 351 Centro Internacional de Mejoraamiento de Maiz y Trig (CIMMYT) 341, 349–50 child labour 238–40 conditionality in aid programs 242–4, 246 Human Development Network programs 243 China anti-corruption progress in 304 competition law in 263–4 impact of 2008 global financial crisis 98–100 and power shift in international financial governance 90–91 Clean Development Mechanism (CDM) 358–9, 370 climate change 9 Clean Development Mechanism (CDM) 358–9, 370 and developing countries

28/9/10 11:22:40

486


differential treatment 364–9, 382–3, 386–92 environmental priorities 361–4 greenhouse gas emissions in 382, 384–5, 406 impact on 363–4 obligations regarding 386–9, 392–4 compliance with 405–9 regulatory mechanisms in 369–71 economic instruments for managing 369–71 Framework Convention on (1992) (UNFCCC) 9, 363–4, 409–10 Bali Action Plan (2007) 404–5 Economies in Transition Annex I 393 establishment 379 finance mechanisms under 389, 394–403 aid requirements for developing countries 395–9 and alternate financing channels 399–403 efficiency of 398–403 Global Environment Facility (GEF) 362–3, 368, 389, 394–5, 397–403 governance mechanisms under 389 obligations and enforcement common commitments 387–9, 392, 405–7 compliance with 393–5, 407–9 for developed countries 387–9, 392–405, 407 for developing countries 386–9, 392–4, 405–7 differentiated responsibilities and capabilities under 386–92 financial aid commitments 394–403 technology transfer 396, 403–5 Subsidiary Bodies, for implementation/scientific and technological advice 389 Intergovernmental Panel on Climate Change (IPCC) reports on 380–82


Kyoto Protocol (1997)(UN) 365, 369–71, 393–4, 409 predicted impacts 381–2 responsibility for, historical/current 382–3 and sustainable development 383–5 and technology transfer 396, 403–5 Coffee, John C. 284 cold war, impact on post-war economic settlement 13 collective bargaining, as core labour standard 237–40, 242–6 colonialism see also decolonisation and double taxation 146 and international corruption 284–5 and principle of self-determination 13 and technology transfer 15 COMESA Agreement on a common investment area (2007) 194–5 comity, rule of 276–8, 280, 282 Commission on Intellectual Property Rights (CIPR) 319 Commission on intellectual property rights, innovation and health (2006)(WHO) 328 Committee on Economic, Social and Cultural Rights (CESCR) 337–8 commodities, prices during 2008 global financial crisis 98–100 comparative advantage, doctrine of applicability to developing countries as control mechanism 158–9 and developed country protectionism 159–61, 163–5 fluidity of 162 in free trade policy development 159–62 and corporate capitalism 165–72, 169 and non-economic benefits 160, 164–5 problems with 160–65 competition law anti-dumping duties 261–3, 281 and conditionality 252 in developing countries advantages 265, 269 anti-dumping duties 261–3

28/9/10 11:22:40

Index consequences of lack of 259–63, 281–2 constraints on 280 discretion in 268–9 global regime, views on 7–8, 255–9, 281 International Competition Network 260–61 and international regulatory agreements 269–80 market exploitation 264–5 models for, comparing 265–9 and national champions/state monopolies 264–5 and non-discrimination, principles of 258–9 in non-traded sectors 259 preferential trade and regional trade agreements 261 and protectionism 258–9 as response to neo-liberal international development policy 252 and economic growth, whether links between 263–9 extraterritorial application of 275–80 and rule of comity 276–8, 280, 282 global regime for 7, 253–5, 281–2 failure to establish, implications of 259–63 resistance to 7–8, 255–7, 281 Telmex decision (2004) (WTO) 7–8, 261–3, 270–75 United States views on 254–5, 278–80 models for 265–9, 266 Chicago School 266 EU model 267–8 freedom to compete 266–7, 281 purpose 252–3 as regulator 252 soft law approaches to 260–61 and taxation 142 and WTO framework 7–8, 261–3, 270–75, 281 compulsory licensing, in intellectual property law 21, 25, 310, 315, 319, 329 conditionality and competition law 252


487

consensual conditionality 123–4 country selectivity 123–4, 126–8 disciplinary force of 114–16 as distinguished from conditions of financing 115 governance role consequences 121–2 evolution 120–24 imposed in combating corruption 7 in international aid 121 accountability in 135–6 aid harmonisation programs 129–34 conflicts in 132–5 and child labour 242–4, 246 country selectivity 126–8 criticisms of 122–4 as default regulatory instrument 119 ex post vs. ex ante conditionality 124–7 human rights 215 interference by aid organisations, reluctance of 117–19 non-compliance, financial repercussions 115–16 as quasi-legal instrument 114–16 and relationships for Official Development Assistance (ODA) 116–19 in international economic law 12, 32 in international environmental regulation 373–4 legitimacy of, debate over 122–4 modalities of 123–4 normative vs. operational activities 116–17 over labour standards 6–7, 243–5, 251 EBRD, imposed by 245–7 ILO/WTO debate over 237, 240–42 as part of Official Development Assistance (ODA) 116–19 purpose 114–16 risk management 48–9 in taxation 151–2 World Bank/IMF, imposed by 36–7, 47–9, 117–18, 243–5, 251 Congo, Republic of 301

28/9/10 11:22:40

488


Conotou Agreement (2000) (EU-ACP treaty on economic partnership) 143 constitutional imitation 133 Consultative Group for International Agricultural Research (CGIAR) 341, 344 Convention on biological diversity (CBD Convention)(1992) 320–21, 342–3, 357, 376 Convention on environmental impact assessment in a transboundary context (Espoo Convention)(1991) (UN) 372 Convention on the settlement of investment disputes between states (2005) (ICSID Convention) 183 Convention to combat desertification (1994)(UN) 363 corporate capitalism and capital mobility 168 and comparative advantage, doctrine of 165–72, 169 and control over former colonies 158–9 development 165–8 British Imperialism 165–7, 177 cyclical nature 177–9 US role in 166–7 and globalization 168–71 and human rights 206–9 state, relationships with 168–9 corporate responsibility corporate social responsibility (see under multinational enterprises (MNEs)) investor obligations, under international investment agreements 193–201 corruption see anti-corruption Country Policy and Institutional Assessment (CPIA)(IDA) 126 country selectivity 126–8 credit rating agencies, international standards for 105–6 Cuervao-Cazurra, Alvaro 297, 299, 303 Dagan, Tsilly 147 Dammann, Jens 284 de Schutter, Olivier 338–9


De Weaver, Mark A. 304 Decision 24 (intellectual property law development in South America) 312–13 decolonisation and concept of differentiation 366–7 and corporate capitalism 158–9 and distributive justice 366–7 impact on world economy 158 Defending values, promoting change (ILO)(1994) 238 Degnbol-Martinussen, John 116 developed countries, generally income, trends in 17 and non-discrimination, principle of 31 protectionism, during economic development 13–17, 19–20, 160–63 voting/blocking powers 90–91 developing countries, generally 2008 global financial crisis, impact on 96–100 denial of protectionist advantages 32, 57, 128, 160–65 food consumption trends 331 income, trends in 17, 25 in multilateral organisations, representation/involvement 2, 26, 46 natural resources, exploitation of 13–16 population growth forecasts 331–2, 384 post-war settlement protectionism policies of 13–17, 19–20 development assistance see international aid dispute settlement economic development, relevance in 183–86 ICSID Convention on investment dispute settlement (2005) 183 and international corruption 283–4 in international environmental law 375–6 and international financial governance 77 in international investment agreements 180–86, 189–90

28/9/10 11:22:40

Index WTO dispute settlement policies 21, 308 double taxation see under taxation Douglas, William A. 248 Drahos, Peter 120 Dunkley, Graham 160, 162, 170 economic development attitudes to 187 defining 187–90 by developing countries and conflicts with international economic law 13–15 import substitution policies 13–17 state role, changing trends in 13–17 as freedom 237 as human right 235 and international environmental law 377–8 (see also climate change) changing emphasis 355–6, 360 conflicts between 360–64, 375–7 and conservation 354, 356–7, 360 equity and justice 354–5 links between 8–9, 235, 354–5 sustainable development 244–5, 354–60, 372–3 and international investment agreements contribution to, level of 180, 186–7 as jurisdictional requirement for 183–6 relevance to concept of 181–90 and labour standards 163, 243–4 protectionist mechanisms denied to developing countries 32, 57, 128, 160–65 economic openness, and national policy autonomy 37–42 emerging market bond index (EMBI) 98, 100 Engberg-Pedersen, Poul 116 environmental law see international environmental law Espoo Convention (Convention on environmental impact assessment in a transboundary context)(1991) (UN) 372


489

European Bank for Reconstruction and Development environmental policy 245–6 labour standards, conditionality over 245–7 countries withdrawn from 249–50 stakeholder engagement plan 247 European Free Trade Area (EFTA) free trade agreements (FTAs), and intellectual property 315–16 European Patent Office (EPO) 330 European Union accession process, impact on corruption 298 and competition law 252 model for 267–8 Conotou Agreement (2000) (EU–ACP treaty on economic partnership) 143 economic partnership agreements with 143–4 General System of Preferences (GSP Programme) 23, 247–51 and core labour standards 247–50 ‘Everything but arms’ (EBA) arrangement 249 free trade agreements (FTAs), and intellectual property 315–16 and WTO 174 Evenett, Simon J. 255, 259, 264, 275 exchange rates distortions in, trade impacts of 42 IMF/World Bank controls over 44–7, 67–8 exports, during 2008 global financial crisis 98–100 Extended Fund Facility program (IMF) 48 Extractive Industries Transparency Initiative 212 extraterritorial application of domestic laws 275–80, 283–4 F. Hoffman-La Roche v Empagran (2004)(US) 8, 275–80 Fiji 304–5 Financial Accounting Standards Board 105 Financial Action Task Force 287

28/9/10 11:22:40

490


financial crises in Asia in 1990s 4, 95 global, in 2008 4, 94–5, 98 capital and investment outflows 97 currency depreciation 97 and developing/emerging economies concerns over 96 impact on 4, 94–100 export and commodity price decreases 98–9 and fiscal reform 152–7 IMF actions during 96 recovery signs 100 and international governance mechanisms, success of 12, 69–70 oil price crises, in 1970s 19–20 financial governance see international financial governance Financial Stability Board (FSB) 4, 46, 79, 95 establishment 108–10 importance 110–11 limitations on 81, 85 purpose 108–11 structure 109 Financial Stability Forum (FSF) 4, 46, 69–70 Action Plan and Declaration 107–8 Compendium of Standards 102 criticism of 101 Implementation Task Force 102 membership and structure 101, 106 purpose 100–102 reform 88, 103–6 London Summit 2009 108–10 Washington Summit 2008 101, 106–8 reform recommendations 103–6 role in 2008 global financial crisis 102–6 Fjeldstad, Odd-Helge 151 Food and Agriculture Organization (FAO)(UN) 328 on ethics in food and agriculture 338 on the right to adequate food 338 food consumption trends 331–2


food production and biotechnology 352–3 advantages and disadvantages 340–47 in Africa 334–5, 349–50 international agricultural research centres (IARCs) for 341–2, 344 Multilateral system of access and benefit sharing (MLS) 348 open source biotechnology 333, 350–52 private sector role in 343–5, 348–9 regulation 333, 348–52 Scientific and Know-How Exchange Program (SKEP) 349 genetic modification 8, 332, 334–5, 342, 346 advantages and disadvantages 340–45 in Africa 334–5, 349–50 Bt maize 334–5, 346 co-existence with other crops 339–40, 345, 352 Convention on biological diversity (CBD Convention)(1992) 320–21, 342–3, 357, 376 in developing countries, gains and losses 340–45 and food production, in Africa 334–5, 349–50 ‘golden rice’ 335, 349, 351–2 humanitarian licensing in 333, 350–52 and intellectual property law 320–322, 342–3, 357, 376 international agricultural research centres (IARCs) for 341–2, 344 International Treaty on plant genetic resources for food and agriculture (seed treaty) (2001) 328, 348, 374 Multilateral system of access and benefit sharing (MLS) 348 segregation, traceability and identity preservation (STIP) 345 orphan crops 344–6, 352

28/9/10 11:22:41

Index R&D, private sector role 343–5, 348–9 and subsidies 58–9 food security 8 and biofuels 339–40 and biotechnology 334–5, 345–7 defining 336–8 and human rights 336–8 and intellectual property 338–9 and poverty 336 Rome Declaration on world food security (1996) 337 and technology transfer 336 Foreign Corrupt Practices Act 1977 (FCPA)(US) 286, 297, 299 foreign direct investment (FDI) contribution to economic development 186–7 in developing countries and competition law 264 investment agreement restrictions on 60–64 globalization impact on policies for 170 tax incentives for attracting 146–7 Foreign Trade Antitrust Improvements Act 1982 (FTAIA)(US) 276–8 Fox, Eleanor 263–4, 266, 268, 272, 279 free trade policies see also General Agreement on Tariffs and Trade; TRIPS Agreement; World Trade Organization comparative advantage, doctrine of 159–62, 165–72, 169 applicability to developing countries 159–61, 163–5 and corporate capitalism 165–8 and economic interdependence, conflicts of 175–6 Free Trade Agreements (FTAs) and intellectual property law 315–18, 320–22, 343–4 historical development 165–8 market economy, defining 167 freedom of association, as core labour standard 237–40, 242–6, 249–50 fuel security 8, 352–3 and biotechnology, impact on 346–7


491

G-20 countries establishment 69–70 Global plan for recovery and reform 152–3 and international economic law, role, in development 25 and international financial regulatory controls 70, 88–91, 95–6, 106–8, 110–11 General Agreement on Tariffs and Trade (GATT) 50–51 Agreement on subsidies and countervailing measures (1994) (WTO) 21 anti-dumping duties 261–3 competition issues concerned with 270–80 criticism of 18–19 differences from WTO 21–2, 172–5 and free trade in developing countries, influence on 17 purpose 13–14, 29 and regional trade agreements 31 and Telmex decision 261–3, 270–75, 281 General Agreement on Trade in Services (GATS) 63–4, 149 Generalised System of Preferences (GSP) 23–4, 240–41 core labour standards 247–50 genetic engineering/modification see under biotechnology Gerber, David J. 267–8 Gillespie, Kate 304 Global Environment Facility (GEF) 362–3, 368, 389, 394–5, 397–403 Global strategy and plan of action on public health, innovation and intellectual property (2008) (WHO) 328 global warming see climate change globalization and corporate capitalism 168–71 and economic interdependence, conflicts of 175–6 and extraterritorial applicability of domestic laws 275–80, 283–4 financial impact on developing countries 25 global aid regime 132–7

28/9/10 11:22:41

492


global competition law 253–5, 281–2 developing countries’ resistance to 7–8, 255–9 failure to establish, implications of 259–63 and global disorder 170 global economic integration 33, 39–40 homogenization vs. diversity debate 169–70 influence over government policy 170–71 and international economic law development, role in 1–2, 10–12, 26–9 legal globalization, defining 283 and national autonomy, impact on 26–9, 34–5, 38–9 self-enforcing governance over 29–32 social, legal and political effects of 170 and sustainable development 6–7, 356–7 and taxation, influence on 142, 152 and WTO, relationship between 175–6 governance, generally see also international financial governance international economic law role in 29–32 Gray, John 168–9 greenhouse gas emissions see under climate change Hansenne, Michel 238 Hansmann, Henry 284 Harrison, Graham 127, 300 Hartford Fire Insurance Co v California (1993)(US) 276–8 health and access to medicines 315, 317, 319–20 Commission on intellectual property rights, innovation and health (2006) (WHO) 328 Declaration on the TRIPS Agreement and public health 25, 315, 317


Global strategy and plan of action on public health, innovation and intellectual property (2008) (WHO) 328 and intellectual property 25, 315, 317, 320–23, 326 Higgott, Richard 121 Hines, James R. 299 Hirschman, Albert O. 285, 295 Hoekman, Bernard H. 176 Hong Kong 301 Human Development Network Child Labor Program 243 human rights and aid conditionality 215 basis for 206–7, 209–10 child labour 238–40, 242–4, 246 and consumer protection 221–2 depoliticisation of 242 economic development as 235 and food security 336–9 and global capitalism 206–9 and international financial governance 75–6 and international law development, role in 1 jurisdiction issues 215–16 and multinational enterprises accountability mechanisms 215–17 anti-corruption provisions 7, 222 corporate social responsibility 6, 188–90, 206–9, 232–3 calls for regulation 207 disclosure and reporting procedures 214–15 under international investment agreements 193–201 limitations 208–9, 213–14 soft law/self-regulatory mechanisms 210–215 national protocols for 207 policies Draft norms on the responsibilities of transnational corporations (UN) 6, 205–6, 217–25, 232 Global Compact, ten principles of (UN) 194, 210–11, 213 Kimberley Process Certification Scheme (KPCS) 211–13

28/9/10 11:22:41

Index OECD Guidelines for 188–9, 193, 210–11 Ruggie framework (UN) 6, 188–90, 205–6, 225–33 Tripartite declaration of principles concerning (ILO) 210–11 Universal declaration of human rights (1948)(UN) 336 Voluntary principles on security and human rights (NGO) 211–13 ICSID (International Centre for Settlement of Investment Disputes) 182 Convention on the settlement of investment disputes (2005) 183 IISD (International Institute for Sustainable Development) Model international agreement on investment 181, 190, 196–201, 204 home country responsibilities 201–3 IMF (International Monetary Fund) accountability and transparency 86–7 anti-corruption policies 287 Articles of Agreement 67–8, 79 on financial assistance 117–18 criticism of 30–31 and developing countries changing policies regarding 20, 70 fiscal autonomy, influence on 150–52, 154–6 voting weighting 70, 81, 90 Exogenous Shocks Facility 89 fiscal reform policies 150–52, 154–6 Flexible Credit Facility 89, 96 jurisdiction and powers 23–4, 84 conditionality 36–7, 47–9, 117–18, 243–5, 251 enforcement, limitations on 45–7 exchange rates, controls over 44–7 and international coordination 84–5 and national autonomy 35, 150–52, 154–6 quota changes 70


493

risk management 48–9 surveillance mechanisms 45–7 Manuel Committee (2009) 90 New Agreement to Borrow (NAB) 89 purpose 13–14, 39, 67–8, 84, 165 and changing policy emphasis 39–42, 68–9 reform 49–50, 89–90 Stand-by Arrangements 96 Zedillo Committee (2009) 90 import substitution 13–17 India challenge to EU GSP programme 23, 251 competition law in 266, 268–9 impact of 2008 global financial crisis 99–100 intellectual property law in 311–12 and power shift in international financial governance 90–91 Indonesia 350 intellectual property law 8 see also TRIPS Agreement; World Intellectual Property Organization Anti-counterfeiting Trade Agreement Act 2007 (ACTA) (US) 324 Berne Convention for the protection of literary and artistic work (1886) 179, 310–11 and biotechnology, in plants/animals 8, 338–9 genetic modification 320–22, 342–3, 357, 376 open source biotechnology 333, 350–52 plant breeder’s rights 343–4 plant varieties 320–22, 328, 343–4, 348, 374 private sector role in 332, 348–9 clinical test data, protection of 329 compulsory licensing 21, 25, 310, 315, 319, 329 developing countries applicability to 310–14 challenges for 308, 329–30 concerns over 311–14, 319–26 denial of protectionism of 162–3

28/9/10 11:22:41

494


expertise in 307–8 role in development 8, 318 development of 307, 309–14 focus of 179 harmonisation approach, relevance of 319–26 and health issues, in developing countries 25, 315, 317, 320–23, 326, 328 and international environmental law 376–7 Paris Convention for the protection of industrial property (1883) 179, 310–11, 313, 318 protection, as pre-requisite for development 307 technological protection measures (TPMs) 322–3 and technology transfer 313–14 Intergovernmental Panel on Climate Change (IPCC) reports on climate change 380–82 international accounting standards 105–6 international aid aid harmonisation programs 128–32 background to 122–5 conflicts between 132–5 developing countries’ role in 130–31 donor influence under 130–32, 136 and globalized aid regime 132–7 partnership basis of 122–4, 136–7 and public expenditure/ procurement reforms 134–5 purpose 132 restrictions resulting from 130–31 and self-regulation 124–8 conditionality in 112–13 accountability 135–6 aid harmonisation 129–35 and child labour 242–4, 246 country selectivity 126–8 criticisms of 122–4 as default regulatory instrument 119 ex post vs. ex ante conditionality 124–7 human rights 215


interference by aid organisations, reluctance of 117–19 non-compliance, financial repercussions 115–16 as quasi-legal instrument 114–16 and relationships for Official Development Assistance (ODA) 116–19 impact on domestic/political powers of developing countries 4–5 joint financing frameworks 128–32 Poverty Reduction Strategy Paper (PRSP) framework 112 relationships in, defining 123–4 Structural Development Loans 20 International Association of Insurance Administrators 69 International Bank for Reconstruction and Development (IBRD) 67–9 International Competition Network (ICN) 260–61 international cooperation, duty of 187–8 International Covenant on Economic, Social and Cultural Rights (ICESCR) 336–7 International Development Association (IDA) 126 international economic law see also competition law; intellectual property law; multilateral rules; taxation as alternative to war 178–9 bias in 29–32 conditionality 12, 32 and constitutional imitation 133 and developing countries adoption/utilization of, trends in 3, 11 Asian/global financial crises, impact of 4, 94–100 conflicts between 13–15 involvement in development of 2, 26 preferential treatment 367–8 pressures of 1–2, 133 as rule takers 32 system flaws 24–5 technology transfer 15–17 whether beneficial to 1–2

28/9/10 11:22:41

Index development of 10–11 changing emphasis, impact of 39–42 and globalization 1–2, 10–12, 26–9 import substitution phase 13–17 lack of coherence in 32, 360–63 managed protectionism phase 17–19 opportunities for future 33 post-war settlement 13–17 Washington consensus 2–3, 17–25 enforceability 11 growth in, volume of 10–11 and national autonomy 3, 12, 26–7 change in emphasis 39–42 limitations on 34–7 over economic openness 37–42 over policy instruments and goals 37–9 surveillance mechanisms 45–7 international environmental law benefit sharing 348, 374–5 Clean Development Mechanism (CDM) 358–9, 370 and conditionality 373–4 Convention on environmental impact assessment in a transboundary context (Espoo Convention)(1991)(UN) 372 and corporate social responsibility 222–3 and developing countries differential treatment 364–9, 382–3, 386–9 and preferential treatment 367–8 priorities of 360–64 desertification 362–3 and global issues 361–2 and solidarity principle 365 dispute settlement 375–6 EBRD policy on 245–6 and economic development 377–8 changing emphasis 355–6, 360 conflicts between 360–64, 375–7 and conservation 354, 356–7, 360 equity and justice 354–5 links between 8–9, 235, 354–5 sustainable development 244–5, 354–60, 372–3


495

fragmented and ad hoc nature 360–61 Global Environment Facility (GEF) 362–3, 368, 389, 394–5, 397–403 global issues 354, 356–7 (see also climate change) and developing countries, impact on 361–4 and intellectual property 376–7 and international financial governance 76 regulation international institutions’ role in 371–4 progress in 371–2 responsibility for, lack of coherent 360–63 savings clauses 376–7 United Nations Environment Programme (UNEP) 360–62, 368 International Finance Corporation (IFC) core labour standards 243–5 policy and performance standards 244–5 international financial governance 110–11 accountability and transparency 85–8 and administrative practice 77–8, 85–8 and applicable international law 74–8, 82–3 compliance and participation 86–7 comprehensive coverage, principle of 72–4 and coordinated specialisation 77, 83–5 developing countries’ dependence on 82 developments in historical background 4 purpose 4 dispute settlement 77 financial crises, success of mechanisms during 12, 69–70 holistic approach to 71–2, 79 and human rights 75–6

28/9/10 11:22:41

496


and international environmental law 76 and national autonomy 75–6 New International Financial Architecture 101–2 and non-discrimination 75–6 problems with 78–88, 82–5, 90–93 exclusion of financial instruments 80 global self-regulation 80 regulatory under-inclusiveness 79–82 transparency and accountability 85–8 purpose 71 reform 4, 88–90 limitations on 91–3 potential for 90–93 regulatory institutions (see IMF; World Bank; WTO) standards for 4, 23, 71–8, 102, 131–2 (see also Financial Stability Board; Financial Standards Forum) Code of conduct fundamentals for credit rating agencies (IOSCO) 105–6 Core principles for effective banking supervision 102 inequalities in 42 jurisdiction over 23 and subsidiarity, principle of 73–4, 82 international investment agreements 5–6 arbitration in 180–85, 189–90 balance with national investment priorities 6 bilateral investment treaties (BITs) best efforts clauses in 182 contribution to economic development 186–7 corporate responsibility trends in 200–201 dispute resolution under 180–86 and economic development, reference to 181–2 US model, worldwide adoption of 19 context of 187–8


definitions 190 development 186–7 investment 60, 180–82 developing/rebalancing corporate/investor obligations 193–201 home country responsibilities 201–3 UNCTAD role in 191–2 and developing countries restrictions imposed on 60–64 special considerations for 191–2 and duties of MNEs 188–9 economic development contribution to, level of 180, 186–7 as jurisdictional requirement for 183–6 need for policy flexibility for 191–2 relevance to concept of 181–90 General Agreement on Trade in Services (GATS) 63–4, 149 IISD Model International Agreement on Investment 181, 190, 196–201, 204 home country responsibilities 201–3 investors interests of, focus on 181 obligations of 188–9, 193–201 as stakeholders 190–91 Multilateral agreement on investment (MAI) (draft) (OECD) 22 purpose 181–2 TRIMs Agreement (Agreement on trade-related investment measures)(1994)(WTO) 59–63 US bilateral investment treaty (BIT) model 19, 201 International Labour Organization (ILO) core labour standards benefits of 240 conditionalities over 6–7 ILO/WTO debate on 237, 240–42 IMF/World Bank, imposed by 243–5, 251

28/9/10 11:22:41

Index Conventions on 238, 245 in EU/US General System of Preferences 247–50 fundamental principles of 234 identifying 237–41 selectivity of 242–3 Declaration on fundamental principles and rights at work (1998) 240 and IFC performance standards 245 Tripartite declaration of principles concerning multinational enterprises 210–11 International Law Association (ILA) Committee on the international law of foreign investment 189–90 International Maize Wheat Improvement Center 341 International Monetary Fund see IMF International Organization of Securities Commissions (IOSCO) 69, 81, 86 Code of conduct fundamentals for credit rating agencies 105–6 International Rice Research Institute (IRRI) 341 international trade disputes see dispute settlement international trade liberalisation see World Trade Organization International Trade Union Confederation (ITUC) 245 International Treaty on plant genetic resources for food and agriculture (seed treaty)(2001) 328, 348, 374 International Union for the Protection of New Varieties of Plants see UPOV Jackson, John 28 Jogarajan, Sunita 150 Johannesburg Declaration on sustainable development (2002) 235 Jones, Jennifer S. 248 Kapur, Davesh 48 Kaufmann, Christine 242 Kelsen, Hans 21


497

Kenya anti-corruption progress in 298, 300–301, 303 genetically modified crops, use in 334, 349–50 Kenya Agricultural Research Institute (KARI) 349 Keynes, John Maynard 164 Kimberley Process Certification Scheme (KPCS) 211–13 Klevorick, Alvin K. 278 Klopp, Jacqueline M. 303 Kostecki, Michel 176 Krastev, Ivan 303–4 Kyoto Protocol (1997)(UN) 365, 369–71, 393–4, 409 labour standards child labour 238–40, 242–4, 246 collective bargaining 237–40, 242–6 conditionalities over 6–7 ILO/WTO debate over 237, 240–42 IMF/World Bank, imposed by 243–5, 251 and corporate social responsibility 214, 222 discrimination in employment 238–40, 244, 246 and economic development 163, 243–4 exploitation and ethics 163–4 as protectionism 163 forced labour 242–3, 246, 249 freedom of association 237–40, 242–6, 249–50 fundamental principles of 234 IFC labour standards toolkit and performance standards 243–5 selectivity in 242–3 and sustainable development 234–5 Lamy, Pascal 241 Langille, Brian 239 Larmour, Peter 304 Levenstein, Margaret 260 liberalisation see international trade liberalisation ‘logic of independence’ 133

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498


Malaysia 302–3 Malaysian Historical Salvors v Malaysia (2009) 183–5 Margalioth, Yoram 140, 151 Maupain, Francis 239 McCoy, Molly 245 medicines, access to 315, 317, 319–20 Millennium Development Goals 32, 236, 257 Miller, Angharad 145–6 Mintz, Jack 142 MNEs see multinational enterprises money-laundering 283, 287 Mongolia 301–2 Moore, Mick 151 Morrow, Daniel 123–4 most favoured nation principle 5, 40, 51–2, 149 Mozambique 300 MSCI emerging market index 98 Multilateral agreement on investment (MAI)(draft)(OECD) 22 Multilateral agreement on investment (MAI)(WTO) 64, 171, 195 multilateral rules, generally advantages 35–6, 64–5 developing countries, underrepresentation 2, 26, 46 failings of 65–6 focus of bias towards developed countries 35–6 emphasis of, change in 39–42, 179 limitations on application to 42–3 and national economic controls 34–7 need for reform 37 Multilateral system of access and benefit sharing of plant genetic resources for food and agriculture (MLS) 348 multinational enterprises (MNEs) and anti-corruption regime 7, 222–3 Code of conduct on transnational corporations (draft)(1984)(UN) 16, 210 and corporate capitalism and control over former colonies 158–9 development of 165–8


corporate social responsibility 6, 222–3 and human rights 6, 188–90, 206–9, 232–3 calls for regulation of 207 disclosure and reporting procedures 214–15 under international investment agreements 193–201 limitations on 208–9, 213–14 self-regulatory initiatives 213–15 Draft norms on the responsibilities of transnational corporations with regard to human rights (UN) 205–6, 217–25, 232 incorporation and implementation 223–4 positives of 220–21 problems with 218–25, 232 ‘sphere of influence’ under 219–20, 223, 225, 238 impact on developing countries 170–72 increasing powers of 39 interdependence of 166 and international investment agreements 5–6 investors obligations under 189, 193–201 OECD Guidelines for 188–9, 193, 210–11 powers 171–2 Protect, respect and remedy: a framework for business and human rights (2008)(UN) 6, 188–90, 205–6, 225–31 tax regime, influence on 156–7 UN Declaration on international investment and multinational enterprises (1977) 16 UN Global Compact, ten principles of 194, 210–11, 213 UN resolutions on conduct of 16, 19 and Washington consensus, role in development 17–19 and WTO obligations under Multilateral agreement on investment (MAI) 170–71 and WTO, undermining of 5, 171–2

28/9/10 11:22:41

Index national treatment principle 5, 40, 51, 149 natural resources, developing countries control over 13–16, 26 new aid architecture see aid harmonisation under international aid Nichols, Philip 302 non-discrimination, principles of 31, 39–40, 51 and fiscal autonomy 149–50 and global competition policy 258–9 and international financial governance 75–6 North American Free Trade Area (NAFTA) free trade agreements (FTAs), and intellectual property 317 Norway 182 Oats, Lynne 145–6 OECD (Organisation for Economic Co-operation and Development) on compliance with ILO core labour standards 240 Convention on combating bribery of foreign public officials in international business transactions (1997) 283, 287–8, 297, 299, 301, 303 Guidelines for multinational enterprises 188–9, 193, 210–11 Model agreement on the exchange of information on tax matters (2002) 149 Model tax convention 144–5, 156–7 motivation for following 148–9 multilateral agreement on investment (draft) 22 Paris Declaration on Aid effectiveness (2007) 128–32 Working Group on bribery 297, 299, 304 oil price crises, impact on developing countries 19–20 Okruhlik, Gwenn 304 ordoliberalism 267 orphan crops 344–6, 352


499

Panel of eminent experts on ethics in food and agriculture (FAO) 338 Paris Convention for the protection of industrial property (1883) 179, 310–11, 313, 318 Paris Declaration on aid effectiveness (OECD) 128–32 patents, law on see intellectual property Petersmann, Ernst-Ulrich 28 plant varieties protection 320–22, 328, 343–5, 348, 374 UPOV (International Union for the Protection of New Varieties of Plants) 320–21, 343–4 Policy and performance standards on social and environmental sustainability (IFC) 244–5 population growth forecasts 331–2, 384 vulnerability of, in developing countries 385 Porter, Michael 258 poverty 406 and food security 336 perceptions of 136 trends 17, 100 Poverty Reduction Strategy Paper 112, 127 ‘Protect, respect and remedy,’ Ruggie framework (2008)(UN) 6, 188–90, 205–6 background to 225–7 evaluation 227–31 issues with 230–31 potential advantages 228–9, 232–3 principles 226–7 protectionism cartels as mechanism for 258 during economic development 160–63 mechanisms denied to developing countries 32, 57, 128, 160–65 exploitation of labour 163 Public Intellectual Property Resource for Agriculture (PIRPA) 351–2 regional trade agreements (RTAs) 261 trends 22, 31

28/9/10 11:22:41

500


Rennie, Jane 261 Ricardo, David 159, 164–5, 167 Rio Conference and Declaration on environment and development (1992)(UN) 235, 356, 367, 371 risk management, and IMF/World Bank conditionality 48–9 Rome Declaration on world food security (1996) 337 Ruggie, John on embedded liberalism 17 on human rights responsibilities of multinational enterprises ‘Protect, respect and remedy’ framework (2008)(UN) 6, 188–90, 205–6, 225–33 on UN Draft norms 17 Russia 90–91, 99 Salbu, Steven 293 Scientific and Know-How Exchange Program (SKEP) 349 SCM Agreement see under subsidies Sen, Amartya 187, 266–7, 281 Sidak, J. Gregory 273 Silbey, Susan 274 Singapore Ministerial Conference see under World Trade Organization Singer, Hal J. 273 Slaughter, Anne Marie 27–8 Slovakia 301 Smarzynska, Beata K. 299 Smith, Adam 159, 164–6 sociological institutionalism 176 South America, intellectual property law development in 311–13 sovereignty, national see autonomy standards see Financial Standards Board; Financial Standards Forum; international financial standards; labour standards Stewart, Miranda 146, 150 Stiglitz, Joseph 164, 187, 236 Structural Adjustment Loans 20, 30 and conditionality 121 subsidiarity, principle of 73–4, 82 subsidies in agriculture 58–9 classification 56 denied to developing countries 32


foreign investment as potential 60–61 import substitution subsidies 57 inconsistency in regime 58–9 SCM agreement (Agreement on subsidies and countervailing measures)(1994)(WTO) 21, 55–9, 149–50 selective subsidies 56–8 WTO flexibilities and constraints 53–7 and developing countries, impact on 57–9 Summers, Larry 11 surveillance mechanisms, of multilateral organisations 45–7, 67–8 Suslow, Valerie 260 sustainable development 8–9, 244–5 approaches to 6–7, 235–7 and climate change 383–5 and conservation 354, 356–7 contradictions of 358 and cultural differences 358 defining 357, 359, 377–8 and economic development 224–5, 354–60 importance in 355–60, 372–3 limitations 358–60 and globalization 6–7, 356–7 IISD Model International Agreement on investment 181, 190, 196–204 increasing scope of 355–7 Johannesburg Declaration on (2002) 235 and labour standards 234–7 in OECD Guidelines for MNEs 188–9, 193, 210–11 and social partnership 235–6 target setting, problems with 235–7 World Summit on (WSSD)(2002) 371, 373 Sykes, Alan O. 278 Syngenta Foundation 349, 351 Tanaka, Kakuei 364–9 Tanzania 298, 300 tariffs 42 see also General Agreement on Tariffs and Trade

28/9/10 11:22:41

Index WTO flexibilities and constraints and developing countries, impact of proposed cuts on 53–7 taxation autonomy, constraints on 5 domestic 140–41, 154–6 inter-country 141–8 potential disadvantages 145–6 by multilateral organisations 148–52 voluntary acceptance 142–3 and customs regime, conflicts between 155–6 in developing countries advantages and disadvantages 145–8 conditionality in 151–2 double taxation agreements 143–8 IMF influence on 150–52 and multinational enterprises 156–7 patterns of 140 revenue gap 156 United Nations Monterrey Consensus (2008) 153–4 and VAT regime 151, 155–6 and development, correlation between 138–9 double taxation agreements 143–8 and economic objectives, correlation between 149–52 fairness and equity in 140 importance 139–40 on imports and exports, reform 151 influences on 141–3 and international competition 142 OECD Model agreement on the exchange of information on tax matters (2002) 149 OECD Model tax convention 144–5, 156–7 political judgement in developing 141 reform and fiscal autonomy 150–52, 154–6 multinational plans for 150–54 UN Model double tax convention (1980) 145–6, 156–7


501

VAT harmonisation 151, 155–6 technology transfer and climate change 396, 403–5 conflicts with international economic law 15–17 and environmental law 376 and food security 336 intellectual property law developments on 313–14 UNCTAD Code of conduct on the regulation of transfer of technology (2001)(draft) 16–17 Telmex decision (2004) (WTO) 7–8, 261–3, 270–75 ‘toxic assets’ 94 transnational corporations (TNCs) see multinational enterprises transparency of IMF and World Bank 86–7 in international aid 135–6 in international financial governance 85–8 Transparency International 286, 299 Triffin, Robert 44 TRIMs Agreement (Agreement on trade-related investment measures) (1994)(WTO) 59–63 TRIPS Agreement (Agreement on trade related aspects of intellectual property rights) (WTO) (1994) 21, 179 and animals/plant varieties 320–22 compulsory licensing 21, 25, 310, 315, 319, 329 Declaration on the TRIPS Agreement and public health (2001) 25, 315, 317, 326 and developing countries 314 and access to medicines 315, 317, 319–20 objections to 256 enforcement of 308 and environmental law 376 and food security 338–9 and free trade agreement provisions 315–18, 320–26, 328–9 importance 314 scope 314–15

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502


Uganda 300 UNCITRAL (United Nations Commission on International Trade Law) Model law on procurement of goods, construction and services 287 United Kingdom anti-corruption investigations in 300 corporate capitalism, development 165–7, 177 United Nations generally coordination problems 84–5 on corporate responsibility 194, 196 duty of international cooperation under 187–8 human rights, regulatory powers regarding 207–8 impact of cold war on 13 purpose 13–14 policies Bali Action Plan (2007) under Climate Change Convention (UNFCCC) 404–5 Charter of economic rights and duties of states (1974) 16–17, 19, 187–8 Code of conduct on transnational corporations (draft)(1984) 16, 210 Convention against corruption (2003) 283, 287–8 Convention on environmental impact assessment in a transboundary context (Espoo Convention)(1991) (UN) 372 Convention to combat desertification (1994) 363 Declaration of the establishment of a new economic order (1974) 16 Declaration on international investment and multinational enterprises (1977) 16 Declaration on the right to development (1986) 235


Draft norms on the responsibilities of transnational corporations with regard to human rights (2003) 6, 205–6, 217–25, 232 Framework Convention on Climate Change (1992) (UNFCCC) 9, 363–5, 379–80, 382–3, 386–410 Global Compact, ten principles of 194, 210–11, 213 Kyoto Protocol to Climate Change Convention (UNFCCC)(1997) 365, 369–71, 393–4, 409 Model double tax convention (1980) 145–6, 156–7 Monterrey Consensus (2008) 153–4 Protect, respect and remedy: a framework for business and human rights (2008) (UN) 6, 188–90, 205–6, 225–33 Resolution on permanent sovereignty over natural resources (1962) 16 Rio Conference and Declaration on environment and development (1992) 235, 356, 367, 371 United Nations Environment Programme (UNEP) 360–62, 368 Universal declaration of human rights (1948) 336 United Nations Centre on Transnational Corporations (UNCTC) 19 United Nations Conference on Trade and Development (UNCTAD) 6, 8, 19 Code of conduct on the regulation of transfer of technology (2001) (draft) 16–17 Trade and Investment Framework Agreements (TIFAs) 24, 191–2 United States aggressive unilateralism, development of policy on 18–19 Alien Claims Tort Act 1789 215–16

28/9/10 11:22:41

Index and corruption, role in international policies on 278–80, 286, 297, 299 criticism of GATT 18–19 Foreign Corrupt Practices Act 1977 (FCPA) 286, 297, 299 Foreign Trade Antitrust Improvements Act 1982 (FTAIA) 276–8 General System of Preferences (GSP Programme) 23, 240–41 and core labour standards 247–50 as global antitrust court 278–80 on global competition regime 254–5, 278–80 and intellectual property development role in 309 free trade agreements (FTAs) 317–18, 323–4 US bilateral investment treaty (BIT) model 19, 201 Webb-Pomerene Act 1918 256 Universal declaration of human rights (1948)(UN) 336 UPOV (International Union for the Protection of New Varieties of Plants) and free trade agreements 320–21, 343–4 scope of 321–2 Uruguay Ministerial Conference see under World Trade Organization Vandemoortele, Jan 236 VAT, and taxation constraints 151, 155–6 Voluntary principles on security and human rights (NGOs) 211–13 Washington Consensus and competition law, in developing countries 252 criticism of 11, 20–21, 122, 236 development of 3, 11, 17–25, 23 impact on developing countries 2, 20–25 impact on international law development 2–3, 17–25 Webb, Richard 48 Webb-Pomerene Act 1918 (US) 256


503

Weeramantry, Christopher 358 Wei, Shang-Jin 299 Wong, Michela 300 World Bank accountability and transparency 86–7 anti-corruption policy 286–7 and conditionality 47–8, 117, 242–3 labour standards 243–5 risk management 48–9 criticism of 30–31, 79 and developing countries Adaptation Fund 363 changing policies regarding 20, 30, 70 voting weighting 70, 81, 90 exchange rates controls 44–7, 67–8 international environmental law, regulatory role 372–4 jurisdiction and powers 23–4, 84 impact on national autonomy 35 and international coordination 84–5 purpose 13–14, 41, 69, 84, 165 reform 49–50, 90 World Commission on environment and development (WCED) Report (1987) 356 World Food Summit Action Plan 337 World Health Organization (WHO) 328 and international coordination 84–5 World Intellectual Property Organization (WIPO) Copyright treaty (1996) 323 Development Agenda 327 Internet treaties (1996) 323 Performance and Phonograms treaty (1996) 323 reform debates 313–14 Standing Committee on patents (SCP) 327 World Summit on sustainable development (WSSD)(2002) 371, 373 World Trade Organization (WTO) 5 and core labour standards social clause in 237, 240–42 and developing countries 5 increased policy role in 174

28/9/10 11:22:41

504


limitations on policy imposed by escape/safeguard clauses 52 industrial tariffs 53–5 investment policies 59–64 rule exceptions for 51–2 subsidies 55–9 generally 5, 50–51 criticism of 29–32 differences from GATT 21–2, 172–4 and economic interdependence 175–6 escape/safeguard clauses 52 establishment 21, 172–8 and global competition regime 7–8, 253–5, 257–9, 261 Telmex decision 7–8, 261–3, 270–75, 281 and globalization, relationship between 175–6 governance role 29–32 most favoured nation principle 5, 40, 51–2, 149 and national autonomy, influence on 29–32 national treatment principle 5, 40, 51, 149 non-discrimination, principles of 31, 39–40, 51 place in international economic law-making 158


purpose 39–40, 50–52 significance 173–4, 176–9 undermining by multinational enterprises 5, 171–2 and international environmental law 371–2 Ministerial Conferences Doha (2001) 25, 53, 261, 315, 317 Singapore (1996) 22, 253–4 Uruguay Round (1986–1994) 21 non-discrimination, principles of 31, 39–40, 51 policies Agreement on government procurement 287–8, 302–3 Agreement on subsidies and countervailing measures (SCM agreement)(1994) 21, 55–9, 149–50 on dispute settlement 21, 308 and ILO core labour standards, debtate over 237, 240–42 on intellectual property (see TRIPS Agreement) Multilateral Agreement on Investment (MAI) 64, 171, 195 non-agricultural market access (NAMA) 53–4 and prevention of war 175 WTO see World Trade Organization

28/9/10 11:22:41

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