Why developing countries are dumping investment treaties
- Uma Kollamparambil
Bilateral investment treaties have been a source of political controversy in recent years.
This is clear from the alarming increase in the number of disputes between investors and governments.
The treaties create an unequal distribution of rights and obligations between developed countries, which are the source of most foreign direct investment, and developing countries, which are mainly recipients. They lead to the increased risk of litigation and have a negative impact on the net benefit of investment to recipient countries.
Investors have initiated a large number of cases against countries that have bilateral investment treaties. Moreover, the benefit of these treaties in attracting foreign direct investments is not seen to compensate for the litigation initiated against these countries.
This is why there is a growing view that the traditional model for bilateral investment treaties needs a review. This must focus on developing a new generation foreign investment policy framework. This should, along with promoting foreign investment, also enable recipient countries to regulate foreign direct investment in line with their public policies.
What treaties were designed to do
Bilateral investment treaties provide for international arbitration of disputes between investors and governments. Arbitration can happen at the World Bank’s dispute settlement body, the Stockholm Chamber of Commerce or the International Chamber of Commerce in Paris.
Alternatively there is an ad-hoc tribunal set up under the United Nations Commission on International Trade Law. The World Bank’s body accounts for 62% of all cases, the UN’s for 28%, Stockholm’s for 5% and others, including the Paris-based organsisation, for 5%.
Cases that go to the UN body are registered publicly. This is not the case in other forums. And parties to a dispute before the UN body could until recently invoke rules that allow proceedings to be kept secret. This has been changed.
The number of bilateral investment treaties has grown from about 500 in 1980 to 2,923 in 2014. This is attributed to the competition between developing countries for foreign direct investment which, in turn, is driven by the belief that these investments promote economic growth. They do this by helping recipient countries narrow the gap between domestic savings and the size of capital they need for investment. Foreign direct investment also opens the door to the latest technology and enables developing countries to plug their economies into global export networks.
Cases before the UN body grew from 5 of 12 new arbitrations in 2000, to 12 of 14 in 2001, and a striking 15 of 19 in 2002. There were 38 cases pending in the World Bank body based on alleged violations of bilateral investment treaties in April 2003. There was a tenfold increase in just over ten years, rising to 436 cases by December 2014. This clearly points to the increased number of cases handled by the World Bank body since the proliferation of bilateral investment treaties.
Why countries thought treaties were a good idea
In the absence of a multilateral framework, bilateral investment treaties were seen by developing countries as a way to signal that they were a safe destination for investment.
So far, quantitative studies have concentrated on analysing the impact of the treaties on promoting foreign direct investment. The conclusions are not unanimous. Recent