Renegotiating bilateral treaties should not scare off investors

Published Nov 4, 2013


Back in the early 1990s, a newly unshackled South Africa wanted to send a strong signal to financial markets that the country was not hostile to foreign capital.

Why was it keen to send that message? Because South Africa saw – and continues to see – foreign companies as a key to bringing to its formerly oppressed population access to 21st century technology, jobs and prosperity.

One signal South Africa sent at the time was to sign numerous bilateral investment treaties. However, these treaties unknowingly tied South Africa’s hands once again. The “little” secret buried in these investment treaties is that they allow foreign companies to directly file claims against governments.

That sounds innocent enough – until one realises that these claims are handled in secretive private tribunals that yield huge sums for private companies, at the expense of governments.

This procedure completely bypasses the usual route, which is to have disputes settled among nation states within the World Trade Organisation. One would assume that no nation state would have the audacity to file such a claim against a post-apartheid country that has been widely held up as a model for the world.

That, however, didn’t stop European firms from filing claims under their bilateral investment treaties. Worse, they went right at the core of South Africa’s post-apartheid transformation plan.

The reason the country was taken to these private tribunals was an attempt to shoot down South Africa’s policy to seek greater equality in its lucrative mining sector. South Africa had required that these companies be partly owned by “historically disadvantaged persons”.

As a consequence of this unfortunate experience, South Africa is now trying, understandably and responsibly, to extricate itself from these treaties. This process should not be seen as hostile to foreign capital, but rather a responsible rebalancing of the rights and responsibilities of states and markets in modern economies.

After foreign firms attacked the black empowerment law, South Africa put in process an all-inclusive multi-stakeholder review of all its bilateral investment treaties. The government concluded that these treaties were inconsistent with its new constitution that aimed to restore the human rights and improve the employment prospects of South Africans.

Bilateral investment treaties, the review found, “pose risks and limitations on the ability of the government to pursue its constitutional-based transformation agenda”.

Since this review South Africa has further concluded that “bilateral investment treaties were now outdated and posed growing risks to policymaking in the public interest”. On that basis, the government has recently moved to terminate many of its bilateral investment treaties.

South Africa is far from thumbing its nose at foreign capital. Alongside the carefully negotiated withdrawal from its treaties, South Africa is willing to renegotiate them.

The government has been deliberating a foreign investment act that enshrines many of the key elements of bilateral investment treaties, but also strikes the right balance so that South Africa can honour its constitution.

All this stands on top of the strong property and investment protection offered under the South African constitution and in domestic law. Indeed, the bulk of economic research on the topic globally shows that bilateral investment treaties alone are not the key to attracting foreign direct investment in the first place.

The rule of law, macro-economic and political stability, as well as the proximity to key markets are the major reasons that foreign capital locates to a particular country. South Africa performs well on all these fronts. The evidence shows that if a nation signs a treaty and does not have these attributes it will be less likely to receive more foreign investment.

The results in South Africa support these general findings. South Africa actually receives far more capital inflows from nations with which it does not have bilateral investment treaties than from nations with which it has a treaty.

Therefore, renegotiating them should not cause capital flight.

South Africa’s efforts should not be seen in isolation. India is also undergoing a national review of its bilateral investment treaties. A group of 12 Latin American nations has recently convened to rethink the benefits of bilateral investment treaties, and the subject is under discussion at the AU.

Brazil, a country that did its homework ahead of time and does not negotiate bilateral investment treaties, is putting forth an alternative model for negotiating treaties that may serve as a template for others.

Over the next several years, we will thus see an increasing number of nation states withdrawing from their investment treaties and offering more balanced alternatives.

As this rebalancing process unfolds, it is important to remember that this is good economics and sound law for emerging market and developing countries. South Africa should not have to pay the price for taking the lead.

Kevin Gallagher is the co-director of the Global Economic Governance Initiative at Boston University. He is a regular contributor to – and part of the Ford Foundation’s project, Reforming Global Financial Governance. Follow theGlobalist on Facebook – or on Twitter @theglobalist.

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