The return of democracy in the 1980s and 1990s experienced by most Latin American states after decades of military rule coincided with a pivot to market-oriented economic policies, encouraged by the collapse of the Soviet Union and the perceived failure of state-led economies. To attract foreign investment, states implemented an array of budgetary and trade policies: austerity measures meant to reduce hyperinflation were introduced and Bilateral Investment Treaties (BITs) were negotiated to reduce the risks for foreign investors investing in Latin American countries. Under these treaties, investors were to be granted most-favored nation (MFN) status to compete on a level playing field with local and international competitors and granted protections against expropriation, broadly defined as measures which deprive the investor of the economic value of its investment. Investors gained the right to pursue claims against host countries due to unfair or unequal treatment at international arbitration organizations like the International Center for the Settlement of Investment Disputes (ICSID) rather than in the courts of the host government.
The negotiation of BITs came in response to a series of 10 market-oriented policy prescriptions recommended by the United States to developing economies to promote economic growth known as the Washington Consensus: including legal security for property rights and liberalization of foreign direct investment (FDI). Development economists posited the free flow of FDI through countries with untapped natural resources and labor pools would result in the development of new markets, poverty reduction, and greater integration with the world economy. While some scholarship has suggested a link between FDI and the achievement of these goals, a growing body of research has linked a larger share of FDI in a developing country’s economy to greater inequality and weaker domestic industries unable to compete with foreign firms.[1] [2] Furthermore, the attainment of the United Nations 2015 Sustainable Development Goals (SDGs) which encourage sustainable and inclusive development by taking into account the social, environmental, and political factors which most concern the citizens of the host country has become complicated as states, especially those in Latin America and the Caribbean, have sought to renegotiate their international obligations in pursuit of these goals.
States seeking to expropriate foreign investments fueled by populist rhetoric and electoral promises to reassert national sovereignty over domestic resources have clashed with aggrieved investors armed with the power of contractual legal commitments demanding compensation for allegedly violating agreements signed by their predecessors. This article will first outline the current Latin American investor-state arbitration landscape, then proceed to outline three primary approaches states have taken to avoid costly arbitration awards, and conclude with a recommendation that BITs should be renegotiated to grant greater stakeholder participation in the process of FDI if investors wish to maintain a healthy business environment and lessening the risk of sudden hostile takeovers by a resurgent political left.
2 The Current Latin American Investor-State Arbitration Landscape
Latin America is notable for its considerably higher percentage of arbitration decisions which ruled in favor of investors when compared to other regions. For example, investment arbitration decisions in the Latin American and Caribbean (LAC) ruled in favor of the state 29.7% of the time, compared to other middle and low-income regions at 42.9% and the United States, Canada, and Europe at 50%.[3] In 2012, the International Center for the Settlement of Investment Disputes (ICSID) tribunal awarded Occidental Petroleum $1.77 billion in a case against the Republic of Ecuador due to alleged breaches of the US-Ecuador BIT, the largest award ever issued by an ICSID tribunal.[4] The 2001-2002 convertibility crisis in Argentina and subsequent ICSID claims made by investors showed that politicians are more likely to answer popular demands to expropriate from the electorate rather than follow through on their BIT obligations.[5] However, the region’s largest and most populous country, Brazil, has yet to ratify a single BIT and serves as a useful point of reference for evaluating the efficacy of such agreements in achieving their goals. The high rate of successful treaty-based arbitral claims filed against LAC countries can be explained in part due to (1) the commodity-driven and extractive nature of the region’s economy and (2) the political volatility of the region.
2.1 Criticisms of the International Center for the Settlement of Investment Disputes
Bolivia was the first to denounce and withdraw from the ICSID in 2007 under socialist president Evo Morales, citing issues of national sovereignty over the country’s vast natural resources. Having rewritten the country’s constitution in 2009, Morales also started the process of denouncing and renegotiating all of Bolivia’s BITs. However, this has not stopped ICSID claims against Bolivia from being filed regarding investments made both before and after the withdrawal from the convention due to survival clauses in the previous agreements.[6] Furthermore, in 2009 Ecuador withdrew from the ICSID Convention under leftist President Rafael Correa but as of July 2021, newly elected moderate President Guillermo Lasso has since re-ratified the convention in hopes of bringing new foreign investment to the country. In 2012, Venezuela denounced and withdrew from the ICSID Convention, after it was made to pay hefty awards to oil companies which the Chavez government had expropriated.[7] When governments oscillate between their levels of commitment to their international treaty obligations, investors become weary.
2.1.1 Argentina and the ICSID
While Argentina remains a party to the ICSID Convention, it has displayed little willingness to comply with its international obligations. The nation tops the list of most frequently sued states; it refuses to comply with some of its arbitral decisions, opting instead to shift decision-making to domestic courts where it hopes for a more favorable outcome may be reached. Creditors’ lobbying efforts in the United States were successful when the U.S. withdrew trade benefits extended to Argentina and voted down World Bank and Inter-American Development Bank loans for the indebted nation. President Obama stated, “it is appropriate to suspend Argentina’s designation as a GSP beneficiary developing country because it has not acted in good faith in enforcing arbitral awards in favor of United States citizens or a corporation, partnership, or association that is 50 percent or more beneficially owned by United States citizens.” After making an example of Argentina using coercive monetary policy, Argentina eventually settled some of its disputes with disgruntled investors, leading to the reestablishment of GSP relations in 2018. As of 2022, hyperinflation caused by the devaluation of the peso as foreign investors pulled out during the pandemic, combined with a decline in commodity prices and a high level of indebtedness to international financial institutions and investors has crippled an already fragile economy.[8]
Argentina exemplifies the plight of many lower and middle-income countries in Latin America who in the 1990s adopted structural adjustment reforms to liberalize their markets and attract foreign direct investment through the signing of bilateral investment treaties. Neoliberal policies were successful in creating economic growth for the middle and upper-class elite, yet demanded cuts to social safety nets, public healthcare expenditures, and exacerbated inequality in what is already the world’s most unequal region.[9]
Considering that (86%) of investor claimants in international arbitration courts are from high-income countries and the majority (66%) of cases are brought against lower and middle-income countries, the status quo created by bilateral investment treaty agreements asserts that a multinational corporations’ right to make profit supersedes a state’s national sovereignty to enact reforms demanded by its democratically elected government.[10] Therefore, such BITs need to be renegotiated to reassert sovereignty of host nations to protect the environment, fund desperately needed social programs, maintain a sovereign monetary policy, and create a mutually beneficial relationship between FDI and the state.
3 Towards Solutions
Political upheaval brought about by acute social and economic inequality, the region’s relationship with international institutions and creditors, and the crippling impact of the pandemic fundamentally reshaped the political opportunity structure in many states: the region has been more vulnerable to democratic backsliding, more willing to rewrite existing laws and constitutions, more desperate for international investors, and more dependent than ever on high commodity prices to keep their fragile economies intact. In 2019, Latin America was the only region to register zero economic growth, and experienced the largest economic contraction due to the pandemic. Countries face the following non-mutually exclusive policy options in pursuit of a post-pandemic recovery: (1) settle ongoing arbitration cases to boost investor confidence (2) renegotiate or withdraw from BITs and ICSID conventions, or (3) boost foreign capital inflows through greater Chinese foreign direct investment.
References
[1] Herzer, Dierk, Philipp Hühne, and Peter Nunnenkamp. 2012. “FDI and Income Inequality - Evidence from Latin American Economies.” Review of Development Economics 18 (January). https://doi.org/10.1111/rode.12118.
[2] Tuman, John P., and Craig F. Emmert. 2004. “The Political Economy of U.S. Foreign Direct Investment in Latin America: A Reappraisal.” Latin American Research Review 39 (3): 9–28.
[3] Remmer, Karen L. 2019. “Investment Treaty Arbitration in Latin America.” Latin American Research Review 54 (4): 795–811. https://doi.org/10.25222/larr.154.
[4] ICSID. n.d. “Occidental v. Ecuador (II) | Investment Dispute Settlement Navigator | UNCTAD Investment Policy Hub.” Accessed March 19, 2022. https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/238/occidental-v-ecuador-ii-.
[5] Remmer, Karen L. 2019. “Investment Treaty Arbitration in Latin America.” Latin American Research Review 54 (4): 795–811. https://doi.org/10.25222/larr.154.
[6] Kluwer Arbitration Blog. n.d. “Life after ICSID: 10th Anniversary of Bolivia’s Withdrawal from ICSID.” Accessed March 19, 2022. http://arbitrationblog.kluwerarbitration.com/2017/08/12/life-icsid-10th-anniversary-bolivias-withdrawal-icsid
[7] “International Arbitration Tribunal Orders Venezuela to Pay ConocoPhillips $8.7 Billion for Unlawful Expropriation of Company’s Oil Investments.” n.d. ConocoPhillips. Accessed March 19, 2022. https://www.conocophillips.com/news-media/story/international-arbitration-tribunal-orders-venezuela-to-pay-conocophillips-8-7-billion-for-unlawful-expropriation-of-company-s-oil-investments/.
[8] González, Enric. 2021. “Argentina’s Perpetual Crisis.” EL PAÍS English Edition. March 5, 2021. https://english.elpais.com/usa/2021-03-05/argentinas-perpetual-crisis.html.
[9] Baer, Werner, Pedro Elosegui, and Andrés Gallo. 2002. “The Achievements and Failures of Argentina’s Neo-Liberal Economic Policies.” Oxford Development Studies 30 (February): 63–85. https://doi.org/10.2139/ssrn.279383.
[10] Samples, Tim. 2018. “Winning and Losing in Investor-State Dispute Settlement.” SSRN Scholarly Paper ID 3233704. Rochester, NY: Social Science Research Network. https://papers.ssrn.com/abstract=3233704.