1848441134 eco no law
TRANSCRIPT
International Economic Law, Globalization and Developing Countries
Edited by
Julio Faundez
University of Warwick, UK
Celine Tan
University of Birmingham, UK
Edward ElgarCheltenham, 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 byEdward Elgar Publishing LimitedThe Lypiatts15 Lansdown RoadCheltenhamGlos GL50 2JAUK
Edward Elgar Publishing, Inc.William Pratt House9 Dewey CourtNorthamptonMassachusetts 01060USA
A catalogue record for this bookis available from the British Library
Library of Congress Control Number: 2009941140
ISBN 978 1 84844 113 2
Printed and bound by MPG Books Group, UK
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04
v
Contents
List of contributors vii
Acknowledgements ix
1 Introduction 1
Julio Faundez and Celine Tan
2 International economic law and development: before and after
neo- liberalism 10
Julio Faundez
3 Multilateral disciplines and the question of policy space 34
Yilmaz Akyüz
4 Assessing international fi nancial reform 67
Daniel Bradlow
5 Crisis and opportunity: emerging economies and the
Financial Stability Board 94
Enrique R. Carrasco
6 The new disciplinary framework: conditionality, new aid
architecture and global economic governance 112
Celine Tan
7 Taxing constraints on developing countries and the global
economic recession 138
David Salter
8 The World Trade Organization and the turbulent legacy of
international economic law- making in the long twentieth
century 158
Fiona Macmillan
9 Holistic approaches to development and international
investment law: the role of international investment
agreements 180
Peter Muchlinski
10 Human rights and transnational corporations: establishing
meaningful international obligations 205
James Harrison
11 Core labour standards conditionalities: a means by which to
achieve sustainable development? 234
Tonia Novitz
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vi IEL, globalization and developing countries
12 Developing countries and international competition law and
policy 252
Kathryn McMahon
13 Does the globalization of anti- corruption law help developing
countries? 283
Kevin E. Davis
14 Intellectual property, development concerns and developing
countries 307
Pedro Roff e
15 Biotechnology and the international regulation of food and
fuel security in developing countries 331
Mary E. Footer
16 Environment and development – the missing link 354
Philippe Cullet
17 The UN Climate Change Convention and developing
countries: towards eff ective implementation 379
Vicente Paolo B. Yu III
Bibliography 411
Cases 477
Legislation 480
International instruments 481
Index 483
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vii
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 Roff e, Senior Fellow, Intellectual Property Programme, ICTSD,
Geneva, Switzerland
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viii IEL, globalization and developing countries
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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ix
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 compil-
ing the fi nal 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
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 develop-
ing 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 codifi cation of international trade, the proliferation
of international investment treaties, the enhanced role of international
adjudication and the dominant role played by international fi nancial
institutions, such as the World Bank and the IMF, in national economic
policymaking and governance.
The surge of international economic law and the consequent legalisa-
tion 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 rein-
forced 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 coun-
tries, as a group, have not fared as well as expected. Unlike economically
powerful countries, developing countries face enormous and often irresist-
ible pressures to adhere to rules of international economic law, some of
which signifi cantly restrict their capacity to formulate policies suitable
to their needs. The lack of eff ective 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 unqualifi ed
benefi ts to developing countries.
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2 IEL, globalization and developing countries
Indeed, some would argue that most contemporary rules of interna-
tional 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 deter-
mining 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 circum-
stances 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 infl uence in designing
meant that, historically, developing countries have had to conform to rules
and institutions established for the benefi t of and tailored to the circum-
stances of industrialised countries. Second, the continuing marginalisation
of developing countries from the locus of decision- making in contempo-
rary 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 eco-
nomic law.
Although globalization and the attendant reconfi guration of economic
relations has complicated this analysis somewhat – the economic advance-
ment of some countries, classifi ed popularly as ‘emerging economies’, has
meant that there is now a greater heterogeneity of interests in this collec-
tive 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 inter-
national economic rules and within international economic institutions
remains qualifi ed and this has signifi cant impacts for their social and eco-
nomic 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 off er a
variety of critical perspectives on a range of issues: international fi nance,
investment, trade, competition, taxation, intellectual property, the envi-
ronment, food and fuel security, human rights, international labour stand-
ards, anti- corruption laws and climate change.
Julio Faundez begins (in Chapter 2) by considering the complex theo-
retical and empirical questions arising from the sudden and unexpected
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Introduction 3
rise of international economic law as the most important fi eld of inter-
national 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 fi ve decades
and explains why, in the 1960s and 1970s, before the emergence of neo-
liberalism, 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 eff ective
enforcement mechanisms. Against this background, Faundez considers
the future of international economic law if, as expected, a new consen-
sus on development emerges in the aftermath of the 2008 international
fi nancial 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 effi cient 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 con-
siders 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 fi nance
and trade, he includes a discussion of trade- related areas such as invest-
ment 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 fi nance, 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 fl exibility 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 diff erent ways of organising their economies,
provided their policies do not discriminate against or create negative con-
sequences 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 fi nan-
cial system. In light of the fi nancial crisis of 2008 and its aftermath, these
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4 IEL, globalization and developing countries
chapters aim to sketch the contours of the current regulatory framework
for international fi nancial fl ows, including international aid transactions
which continue to make up the bulk of resource transfers to developing
countries, and consider the conditions under which such fi nancial fl ows
are taking place in the era of globalization and the question of how such
fl ows are regulated and governed.
Daniel Bradlow (Chapter 4) addresses the critical issue of international
fi nancial governance in his assessment of international fi nancial reform.
After mapping the historical context for the contemporary international
fi nancial architecture, Bradlow establishes the main purposes of interna-
tional fi nancial governance and outlines the key standards that should
be used in evaluating the effi cacy of such governance. He then tests the
current international regulatory framework against these fi ve standards
– holistic vision of development, comprehensive coverage, respect for
applicable international legal standards, coordinated specialism and good
administrative practice. Bradlow fi nds that, while some changes have
taken place, current international law and existing international organisa-
tions remain problematic in regulating international fi nancial fl ows, and
he provides some proposals for reforms to the architecture in the short
and long term.
Enrique Carrasco supplements the discussion on reform of interna-
tional fi nancial 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
fi nancial crisis in the late 1990s. He assesses how the global fi nancial crisis
provided the opportunity for emerging economies to advocate for greater
voice in international fi nancial decision- making and the reform of inter-
national fi nancial institutions by using the example of how economic and
geopolitical factors contributed to the transformation of the FSF.
The issue of international fi nancial reform is also crucial for lower
income developing countries that depend on offi cial rather than private
fi nancial fl ows as a means of resource generation. For many countries
dependent on offi cial development assistance, the discipline of the inter-
national aid architecture has signifi cant eff ects 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 – per-
ceived as a departure from the strictures of the conditionality- dominated
framework of aid delivery of structural adjustment – on developing coun-
tries’ 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 fi nancial transfers have been
altered to serve a deeper and more intrusive form of disciplinary control
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Introduction 5
over recipient countries and this has adverse impacts on their relationships
with the exterior.
Aside from fi nancial transfers, taxation is a substantial means of income
generation for developing countries. The regulatory framework of taxa-
tion 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 identifi es the various domestic and interna-
tional constraints that developing countries face in designing and imple-
menting fi scal 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 condi-
tionalities. 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- fi ts- all’ nature of the tax reforms required by the IMF,
Salter notes that the current fi nancial crisis raises serious questions as to
the sustainability and wisdom of these reforms. Indeed, the reluctance of
the various groupings of African, Caribbean and Pacifi c (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 signifi cant revenue since they
would be required drastically to reduce, and eventually eliminate, tariff s.
There is little doubt that since its establishment the WTO has rapidly
become one of the most signifi cant actors in the global economy. In many
respects it has become the emblem of the eff orts to establish a global
system of international trade based on the principle of non- discrimination,
as refl ected 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 main-
taining developing countries in a permanent state of dependency towards
more powerful economic countries. She notes that the rise of corporate
capitalism, as refl ected 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 off ered by Peter Muchlinski (Chapter 9). In his contribution,
Muchlinski asks whether international investment law, as embodied
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6 IEL, globalization and developing countries
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 interna-
tional NGOs have prepared model international investment agreements
that seek to strike a balance between their national development policies
and the guarantees and incentives they off er 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 viola-
tions. 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 diffi culties 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 devel-
opment, the social dimensions of globalization are regarded as subsidiary
social goods that are readily sacrifi ced 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
eff ective links between the economic and social aspects of globalization.
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Introduction 7
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 acknowl-
edging that imposing conditions in order to secure respect for the social
dimension of globalization is a fi rmly 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 diff erent 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 eff orts on measures to
tackle corruption. These measures have included the establishment of
anti- corruption units in developing countries, the enactment of domes-
tic 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 organisa-
tions. 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 eff ect. Davis
off ers a detailed analysis of the arguments for and against involving exter-
nal bodies in the resolution of this problem. Noting that the lack of empiri-
cal 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 intensifi ed, 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 inte-
gration 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 develop-
ing countries to the globalization of competition law and refl ects 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 Aff ecting
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8 IEL, globalization and developing countries
Telecommunications Services) and the recent US Supreme Court decision
in the case concerning F. Hoff man- 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 Roff e
off ers a succinct but comprehensive analysis that explains how the par-
ticipation 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 specifi c countries within the interna-
tional intellectual property system has been diff erent, developing countries
have tended to make their claims collectively through the United Nations
system since the establishment of UNCTAD in 1964. Roff e’s chapter also
demonstrates that, notwithstanding the proliferation of international
institutions with responsibilities over specifi c issues of intellectual prop-
erty, 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’ appli-
cation 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 rec-
onciliation of conservation and development objectives, the manifesta-
tions of notions of equity in principles of international environmental
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Introduction 9
law (notably the principle of common but diff erentiated 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 dis-
cusses the varied and contradictory trends which characterise the relation-
ship between environmental law and development.
The tensions between economic growth and development and envi-
ronmental 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 devel-
oping 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 diffi culties that developing countries have faced in securing their inter-
ests in negotiations under the UNFCCC. Yu reviews the scientifi c 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 socio-
economic 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 diff ering capacities of countries in combating the threat of
climate change.
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10
2. International economic law and development: before and after neo-liberalism
Julio Faundez*
1. INTRODUCTION
Two features have characterised international economic law (IEL) during
the recent period of rapid and seemingly unrestrained economic globaliza-
tion: its emergence as the most important fi eld 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 undemand-
ing standards of legal validity and effi cacy 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 glo-
balization, IEL underwent a massive transformation to become the most
important fi eld of international law. Its importance is confi rmed by three
diff erent measures: volume, scope and effi cacy. The volume of new inter-
national economic rules is refl ected in the large number of multilateral
and bilateral treaties on matters relating to trade, fi nance 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.
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IEL and development: before and after neo-liberalism 11
as part of the exclusive domestic jurisdiction of states. The greater effi cacy
of IEL rules is refl ected in the signifi cant improvements in their enforce-
ability, 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 policy-
making process and are taken seriously because they are more readily
enforced.
The prominence achieved by IEL in the late twentieth century is note-
worthy because, throughout the 1960s and 1970s, developing countries
tried, unsuccessfully, to make use of international legal institutions to
support their development eff orts. 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 dif-
ferent 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 refl ect
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 globali-
zation, the rapid economic integration of the world economy has made
it necessary to harmonise rules and standards in order to create a level
playing fi eld. 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 justifi ed, accord-
ing to Larry Summers – the infl uential US economist, policy- maker and
former chief economist of the World Bank – because the rules of econom-
ics 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 signifi -
cant because the set of rules that currently govern the world economy seem
to be slowly departing from traditional assumptions underlying the con-
ceptual 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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12 IEL, globalization and developing countries
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 interna-
tional 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 organisa-
tions 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 eco-
nomic 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 fi nancial 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 con-
tribute towards the clarifi cation of some of these questions. Its three main
objectives are: (1) to explain IEL’s evolving approach to development
during the past fi ve decades; (2) to identify the impact that globalization
has had on the foundations of international economic law and refl ect 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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IEL and development: before and after neo-liberalism 13
relationship between IEL and development is likely to evolve in the post-
Washington 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 (here-
after, the Bretton Woods institutions) and the General Agreement on
Tariff s 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 under-
standing 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 confl icts 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 refl ected 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 self-
determination brought about a wave of wars of national liberation that
divided members of the UN and distracted the attention of the organisa-
tion away from economic aff airs. 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 identifi ed as the Group of 77) was to enlist international
law and institutions in support of their members’ quest for social and eco-
nomic 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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14 IEL, globalization and developing countries
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 diffi cult for developing countries to import the required
capital goods. Moreover, local industries had diffi culties competing with
imported goods from more advanced countries. Most developing coun-
tries therefore began implementing, albeit in diff erent ways and at diff erent
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 aff ord, the
state should, through an array of regulatory mechanisms, provide incen-
tives for the development of local manufacturing capacity. The implemen-
tation 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 eco-
nomic 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 defi cits did not cause disruptions to the regular fl ow
of international payments. The GATT, which at the time focused mainly
on reducing tariff s 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 fl exible 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 devel-
oping 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: fi rst, strengthening their capacity to control the exploi-
tation 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 eff orts 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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IEL and development: before and after neo-liberalism 15
twentieth century (Sornarajah, 1994: 294). At the international legal level
there was no consensus on how to resolve these disputes. Although devel-
oped countries conceded that developing countries had a right to nation-
alise, they insisted, nonetheless, that international law required them to
pay prompt, adequate and eff ective compensation. They also claimed that
regulatory measures implemented by developing countries constituted
indirect expropriation and, as such, also required prompt, adequate and
eff ective 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 confl icting views. As a consequence, disputes over the regula-
tion of natural resources were largely handled diplomatically, culminating
often in diff erent 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 qualifi ed people either to run the economy or to organise modern
manufacturing fi rms. 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 classifi ed as experienced manufac-
turers (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 fi rst half of the nineteenth century. Although
some of the latter countries had made signifi cant progress in the imple-
mentation 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, unsuccess-
fully, to lobby for the adoption of new rules of international economic
law that refl ected their interests and development priorities. In this
context, the United Nations General Assembly, where developing coun-
tries 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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16 IEL, globalization and developing countries
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) reaffi rms 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 accord-
ance 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 aff airs of host states.
In the area of technology, the Charter (Art. 13) proclaims the right
of every state to benefi t 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 benefi t of developing
countries and, in particular, it calls upon developed states to support
the scientifi c and technological infrastructure of developing countries.
Transfer of technology is defi ned 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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IEL and development: before and after neo-liberalism 17
technology, such as exclusive dealing, restrictions on research and tying
arrangements.
3. TOWARDS THE WASHINGTON CONSENSUS
Attempts by developing countries to infl uence 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 produc-
tive 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 fi nancial liberalisation, complemented the prevailing fl exible
international trading system. Thus in many respects, the notion of ‘embed-
ded 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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18 IEL, globalization and developing countries
The fl exible system of international economic rules that allowed devel-
oping countries to liberalise at their own pace did not last. By the 1970s, as
the Bretton Woods system of fi xed exchange rates collapsed and competi-
tion in trade and investment among industrialised countries intensifi ed,
the institutions of the world economy came under severe stress. In addi-
tion, the emergence of multinational companies as the leading economic
agents in the world economy began to make nation states appear politi-
cally and economically outdated (Dunning, 1993). From the perspective
of multinational companies, the division of the world into territorial units
with diverse and confl icting regulatory frameworks was ineffi cient. It was
an unnecessary political barrier that impeded the free fl ow 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, invest-
ment 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
fl exible 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 increas-
ingly frustrated by the GATT’s inability to make signifi cant 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 exac-
erbated by the fact that the leading trading nations began to look for solu-
tions 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 con-
trolled the fl ow of products into certain markets through quotas.
It is thus not surprising that, at the time, this state of aff airs 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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IEL and development: before and after neo-liberalism 19
eralism embodied in the GATT. This unfortunate state of aff airs 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, unjustifi ably 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 coun-
tries 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 fi nancial clout and political infl u-
ence 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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20 IEL, globalization and developing countries
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 develop-
ing 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 con-
ditionalities, which generally involve soft loans in exchange for the imple-
mentation of policy reform. The initial programmes of policy- based lending
were embodied in the notorious Structural Adjustment Loans, which
exchanged badly needed fi nance for the implementation of policy measures
aimed at reducing the role of the state, releasing market forces and reduc-
ing 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 fi scal discipline, tax reform, inter-
est rate liberalisation, trade liberalisation, liberalisation of inward foreign
direct investment, reduction and redirection of public expenditure, deregu-
lation, 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 mecha-
nisms, 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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IEL and development: before and after neo-liberalism 21
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 intermi-
nable 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, trade-
related investment measures and intellectual property. It also established
a unifi ed dispute settlement system for all these agreements so that in any
particular dispute any of these agreements can be considered by the adju-
dicating 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, signifi cant, however, is the fact that some of the key
provisions of the Uruguay Round Agreement eff ectively made import sub-
stitution 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 eff ect of these provisions has brought about a qualita-
tive 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
fl exibly 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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22 IEL, globalization and developing countries
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 hun-
dreds 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 fi rst 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 ineffi cient mecha-
nism 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 com-
mitments 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 prop-
erty, some bilateral agreements require developing countries to intro-
duce higher standards of protection than those required by the TRIPS
Agreement (see Roff e, 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 fi elds 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 fi nd themselves subject to confl icting obligations (Baldwin,
2006: 1508; Bhagwati, 2008).
As globalization intensifi ed and the implementation of policies of eco-
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IEL and development: before and after neo-liberalism 23
nomic liberalisation in developing countries encountered diffi culties, the
agenda of the Washington Consensus expanded to include a variety of
issues that fell within the general framework of governance. The addi-
tion 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 implementa-
tion 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 prolifi c 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 benefi ciaries. The EU introduced
changes to its programme, but its revised programme is also fl awed since,
while one of the conditions for eligibility is that the countries should be
vulnerable, vulnerability is not defi ned in terms of the objective needs of
the benefi ciaries but in terms of their share of EU imports. The revised
programme also requires states that wish to benefi t 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 trea-
ties 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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24 IEL, globalization and developing countries
also known as Trade and Investment Framework Agreements (TIFAs), to
persuade countries interested in entering into RTAs to introduce legisla-
tive and institutional changes (UNCTAD, 2008b). They are very eff ective
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 eco-
nomic legal system is fl awed for the following fi ve reasons. First, most
developing countries have little or no infl uence 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 infl uence
decisions, most developing countries eff ectively have no input in the
decision- making process as developed countries employ a series of infor-
mal 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 exer-
cise 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 fl ows
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 confi rms their asymmetrical nature.
Indeed, these treaties are based on Model Treaties drafted by lawyers in
the Foreign Offi ces 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 arbi-
trators 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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IEL and development: before and after neo-liberalism 25
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 devel-
oping countries have little or no infl uence (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
benefi ts 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 benefi ted 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 unqualifi ed 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 fi gures conceal, of course, signifi cant varia-
tions. 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 struc-
tural adjustment programmes, registered average growth rates below 3
per cent (Amsden, 2007: 6, quoting World Development Report 2002
Development Indicators). These fi gures show, contrary to the views of
some observers (IMF, 2007: 135–70), that unrestrained globalization has
not been an unqualifi ed success for developing countries. It is also unclear
whether globalization has brought about an overall reduction in inequal-
ity, either in terms of the relationship between developed and developing
countries or in terms of poverty reduction within countries (Sutcliff e,
2004; Wade, 2004).
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26 IEL, globalization and developing countries
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 conditional-
ity) that do not fi t 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 globali-
zation 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 off er an overview,
albeit schematic, of the way some social scientists and legal theorists have
addressed the question concerning the wider relationship between sover-
eignty, 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 scien-
tists 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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IEL and development: before and after neo-liberalism 27
politan order (Pogge, 2002: 168; Held, 2004; Habermas, 2006). These theo-
rists, however, do not address diffi cult 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 eff ectively changing
the meaning of national sovereignty.
A more ambitious attempt to wrestle with the abundance and complex-
ity 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 princi-
ples 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 effi cient system of administrative law presup-
poses a strong and legitimate political system, something that is sadly
missing at the international level.
Some international lawyers, observing that globalization has under-
mined 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 inter-
national 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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28 IEL, globalization and developing countries
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 world-
wide economic liberalism is inevitable, it seeks to provide lawyers with a
technical perspective in order to make networks accountable, thus enhanc-
ing 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 rationalis-
ing 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 off ered a powerful
defence of the continuing validity of the notion of sovereignty (Jennings,
2002). A more qualifi ed defence of sovereignty is off ered by John Jackson,
a leading IEL specialist. He argues that sovereignty should be renamed
and redefi ned. He proposes to call it ‘sovereignty modern’ so as to take
into account the fact that not all contemporary rules of international eco-
nomic 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 redefi ning 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 ungovern-
able. 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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IEL and development: before and after neo-liberalism 29
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 coher-
ent 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 ineff ec-
tive 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 inter-
ests of the leading actors in the world economy. In the absence of a strong
international institutional framework, IEL rules are subject to the politi-
cal 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 inter-
national 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 fi eld among actors in the
world economy is frequently cited as the main justifi cation for the prolif-
eration 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
fi rst 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 ineffi cient and its political organs have no capacity to take
decisions or shape the practice of the organisation in accordance with
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30 IEL, globalization and developing countries
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 eff ective 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
eff ective WTO is often attributed to the neo- liberal distrust of bureau-
cracies and big government, this interpretation has no basis. Indeed, the
opposite is closer to the truth. The decision to opt for a model of globali-
zation that relies on self- enforcing rules stems from a lack of faith in the
possibilities of achieving economic globalization through genuine multi-
lateral 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 eff ectively creating a
more equitable process of globalization through multilateral mechanisms
is also refl ected 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 out-
comes, became instead the leading organs entrusted with the implemen-
tation 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 erad-
ication was an afterthought, incorporated into the Bank’s agenda in the
1990s, long after it had become clear that the ‘one- size- fi ts- 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
fi nancial 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 fi eld managed
through eff ective multilateral institutions. Neither the IMF nor the
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IEL and development: before and after neo-liberalism 31
World Bank has the structures or procedures to take decisions that would
remotely refl ect the interests of the majority of countries in the world.
Their voting system, designed for a diff erent era, gives privileged infl uence
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 indus-
trial 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 sub-
stantially 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 notifi ed and approved by the Committee on Regional
Trade Agreements, which includes all WTO members. Although the fi rst
of these requirements has been fulfi lled, 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 con-
sistent with the aims and objectives of the WTO. According to Jagdish
Bhagwati (2008), RTAs have eff ectively destroyed the principle of non-
discrimination and have swallowed up the trading system.
The reluctance of the leading industrial powers fully to implement the
principle of multilateralism is yet another refl ection of their half- hearted
commitment to establishing a genuine level playing fi eld for the global
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32 IEL, globalization and developing countries
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- fi ts- all’ obligations on developing countries,
as refl ected 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 infl uence in these institutions to give
preferential treatment and additional fi nancial support to their politi-
cal 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 pre-
pared 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 diffi cult for developing countries to
avail themselves of the fl exibilities 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 dis-
cipline 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 argu-
ment 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 fi eld. 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 defi cit and institutions, such as the WTO, which do not
function as genuine multilateral organisations.
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IEL and development: before and after neo-liberalism 33
7. 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 allow-
ing 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 eff ective 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 multilat-
eralism and made a mockery of the much fl aunted objective of creating a
level playing fi eld.
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, effi cient 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 eff ective
institutions for the world economy, and if there emerges a new consensus
on development that takes into account the needs and capacities of devel-
oping countries, there will then be a unique opportunity to develop new
IEL rules and procedures to steer and manage globalization. This is a dif-
fi cult 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 develop-
ment.
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34
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 circum-
scribed by their global economic integration. On the one hand, many of
the policy instruments widely used by both mature and late industrialis-
ers 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 benefi ts 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 disman-
tling 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, inter-
national 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 FONDAD- UNDESA 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.
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Multilateral disciplines and policy space 35
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 multilat-
eral disciplines. On the other hand, multilateral rules and practices weaken
the infl uence of national policy instruments over national policy objectives
by promoting liberalisation and opening up.
This chapter focuses on multilateral disciplines in fi nance 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 fi nance and trade and the question of coher-
ence between the two. In fi nance, 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 eff ects on policy autonomy in
developing countries are examined in four main areas: industrial tariff s,
industrial subsidies, investment- related policies and technology- related
policies. The need for reform in trade and fi nance is discussed with a view
to bringing coherence and fl exibility 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, suff er 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 fi nance. There are eff ectively no multilateral disciplines over
macroeconomic and exchange rate policies of countries which have a
disproportionately large impact on international monetary and fi nancial
conditions. This constitutes the single most important threat to the stabil-
ity and openness of the trading system. It is also an important source of
instability for the majority of developing countries, which are highly vul-
nerable to external fi nancial shocks.
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36 IEL, globalization and developing countries
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 diff er-
ent countries. While industrial countries escape multilateral disciplines in
money and fi nance, 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, agricul-
tural products or technology where benefi ts would be greater for develop-
ing countries. In legal terms the WTO rules and commitments provide
a level playing fi eld for all parties, yet eff ective constraints they impose
over national policies are much tighter for developing than for industrial
countries.
These asymmetries are largely refl ections of shortcomings in global
economic governance. Many developing countries have little infl uence 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 fi nance 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 tariff s, 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 environ-
ment standards. However, there is now a mercantilist off ensive 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 condition-
alities. 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 tariff s,
investment and intellectual property protection, and entail new obliga-
tions 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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Multilateral disciplines and policy space 37
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 refl ects not only the existence of room for dif-
ferent 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 fi nance, 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 fi nance, and a better balance among countries in terms
of the constraints they eff ectively 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
fi nance. It should aim at reconciling multilateral disciplines with policy
fl exibility. It is argued that this is best accomplished by incorporating fl ex-
ibility into rules rather than providing policy space as exceptions.
2. ISSUES AT STAKE
I. Economic Openness and Policy Autonomy
The autonomy of national economic policy refers to the eff ectiveness of
national policy instruments in reaching national policy objectives.1 In
conventional policy analysis it is generally assumed that national authori-
ties have command over policy instruments but not the ability to control
specifi c 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 infl uences on national objectives
but also reduces de jure sovereignty of national economic policy by sub-
jecting it to international disciplines and constraints.2
1 The distinction between instruments and targets constitutes the basis of the theory of economic policy fi rst 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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38 IEL, globalization and developing countries
National authorities do not always have full command over policy
instruments even in a closed economy insulated from external infl uences.
Policy- making is a tentative process surrounded by uncertainties. Rational
policy decisions need to rely on an implicit or an explicit model describ-
ing the structure of the economy, including the relations between instru-
ments and objectives of policy. Not only is this structure unstable, but
knowledge and information about it is highly imperfect. This means that
specifi c instruments cannot always be assigned to predetermined objec-
tives. 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 fl exibility in the policy- making process, including the
selection and application of instruments.3
While bringing certain benefi ts, economic openness aggravates policy
dilemmas. In an open economy the need for fl exibility is greater because
policy objectives are infl uenced by volatile and unpredictable external
factors including growth of, and access to, foreign markets, foreign inter-
est rates and exchange rates, availability of external fi nancing 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 actu-
ally be employed as an independent policy instrument (for the distinction
between potential and actual policy instruments, see Bryant, 1980: ch. 2).
Briefl y, with deepening integration into global markets, the range of policy
instruments shrinks as, at the same time, foreign infl uences over national
policy objectives become stronger and the trade- off s between internal and
external objectives are intensifi ed.
Economic openness and greater integration of countries into world
markets is often accompanied by their insertion into international govern-
ance systems, coming under rules and procedures of multilateral institu-
tions. 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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Multilateral disciplines and policy space 39
much to the implication of liberalisation and openness for eff ectiveness of
policy in attaining national objectives as to constraints placed on de jure sov-
ereignty 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 diff erence between
loss of autonomy to use tariff s as an industrial policy tool because of WTO
rules and loss of ability to use the exchange rate as an eff ective 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 diff erent
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 interdepend-
ence 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 con-
siderable space for sovereign autonomy vis- à- vis markets. By contrast,
current multilateral rules and practices seek to deepen economic integra-
tion through liberalisation in areas of interest to industrial countries and
restrain policy autonomy by surrendering power to global markets domi-
nated by transnational corporations (TNCs).
The design of the immediate post- war architecture was greatly infl uenced
by the interwar experience when pursuit of self- interest by many countries
through beggar- my- neighbour policies had led to the breakdown of inter-
national 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 beggar-
my- neighbour policies in trade and fi nance. 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 fl ows, 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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40 IEL, globalization and developing countries
First, markets could not always be relied on to generate economically effi -
cient and politically acceptable outcomes. Second, close linkages between
trade, fi nance and development imply that solutions should not be sought
in isolation. Finally, because of cross- border dimensions and global spillo-
vers, these policy issues cannot be left to uncoordinated individual country
actions. These principles allowed considerable room for policy interven-
tion while securing international disciplines and a reasonable degree of
coherence among multilateral rules and obligations in trade and fi nance.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- cum-
integration 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 liberalisa-
tion would generally benefi t 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 justifi cation for restric-
tions on free fl ow 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 strat-
egies for openness and the balance between private and public action,
but to promote rapid liberalisation. The unconditional most- favoured-
nation (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 lib-
eralisation 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 archi-tecture, see Akyüz (2004a, 2006b). For the historical evolution of the multilateral economic system, see UNCTAD (1984: part II).
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Multilateral disciplines and policy space 41
of multilateral fi nancial institutions. Prevention of policy distortions and
government failure through conditionalities attached to lending to devel-
oping 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 fi nancing 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
eff ective power to exert multilateral disciplines over exchange rate and
macroeconomic policies of the countries that matter most for interna-
tional economic and fi nancial stability.
Whatever the merits of the arguments about the respective roles of gov-
ernments and markets in economic matters, they cannot provide a legiti-
mate 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
aff airs provided that it does not amount to discriminatory and beggar- my-
neighbour 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- fi ts- 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 ortho-
dox 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 eff ec-
tively, there is barely any example of successful industrialisation without
government support and protection in these areas. However, the ortho-
doxy constantly downplays the role of successful industry policy inter-
ventions 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 ortho-doxy: ‘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 fi nancial 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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42 IEL, globalization and developing countries
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 eff ective multi-
lateral disciplines over exchange rate, macroeconomic and fi nancial poli-
cies, or for redress and dispute settlement regarding the negative impulses
generated by such policies. In this respect governance in money and
fi nance 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 fi ll the vacuum created by the breakdown of
the Bretton Woods arrangements despite increased international mon-
etary and fi nancial instability and recurrent crises in emerging markets. In
a way fi nance has become the vanguard of the liberal international order,
premised on the assumption that fi nancial markets can do their own disci-
plining and do not need international rules.
When currencies can move rapidly in relatively short periods from one
level to another, multilateral disciplines over tariff s 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 fl oating and free capital mobility
exchange rates of major currencies are known to have fl uctuated as much
over a matter of a couple of weeks. On the other hand, when exchange
rates remain divorced for prolonged periods from economic fundamen-
tals, arguments advanced in favour of free trade lose their rationale. In
fact, even on mainstream reasoning, there would be a strong justifi cation
for tariff s and non- tariff protection to correct distortions caused in trade
fl ows 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 fi nancial 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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Multilateral disciplines and policy space 43
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 obli-
gations of countries whose external debt is contracted in reserve currencies
and tighten the balance of payments constraint. They can also redirect
capital fl ows away from defi cit and indebted countries, aggravating exter-
nal fi nancial diffi culties. Often, these necessitate restrictions on imports
through cuts in economic activity or the introduction of tariff and non-
tariff barriers, leading to contraction in world trade.
The burden of adverse monetary and fi nancial impulses invariably
falls on the trading system because of the implicit acceptance by the
international community of the priority of meeting fi nancial obligations
over observance of commitments to free trade. Article XII of the GATT
provides that ‘any contracting party, in order to safeguard its external
fi nancial position and its balance of payments, may restrict the quantity or
value of merchandise permitted to be imported’ subject to certain provi-
sions.8 There are, however, no analogous provisions in the international
fi nancial system allowing countries facing serious payment diffi culties to
suspend their fi nancial obligations. The asymmetry between trade and
fi nance in bearing the brunt of balance- of- payments disequilibria con-
tinues unabated as recent attempts to introduce orderly debt workout
procedures, including temporary debt standstills, have been blocked by
international fi nancial markets and the United States government (Akyüz,
2002, 2005b).
Lack of multilateral disciplines in money and fi nance is a major concern
to developing countries because they are highly vulnerable to external
fi nancial shocks and such shocks are more damaging than trade shocks.
Boom–bust cycles in capital fl ows to developing countries and major
international fi nancial crises are typically connected to large shifts in
macroeconomic and fi nancial 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 fl ows in the 1990s which devastated many
countries in Latin America and East Asia was strongly infl uenced 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 coun-tries facing severe BOP diffi culties are obliged to implement austerity measures, cutting economic growth and imports.
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44 IEL, globalization and developing countries
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 fl ows which had proved so damag-
ing 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 adjust-
ment. 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
fl oating 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
Triffi n (1976: 47–8), they were ‘so general and obvious as to appear rather
superfl uous’, and the system ‘essentially proposed to legalize . . . the wide-
spread and illegal repudiation of Bretton Woods commitments, without
putting any other binding commitments in their place’.
With exchange rate obligations eff ectively gone, the only multilateral
disciplines left in monetary and fi nancial 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 diff erentiat-ing 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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Multilateral disciplines and policy space 45
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 interna-
tional transactions that were in eff ect 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 convert-
ibility by developing countries.10
The Articles of the Fund do not provide a global regime for cross-
border capital transactions with clearly defi ned 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 outfl ows, this provision has never been invoked even at times of
rapid exit of capital and fi nancial meltdown in emerging markets during
recent years. Nor do the Articles provide protection against creditor litiga-
tion 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 fl ows, in reality the Fund has encouraged
liberalisation of the capital account. In eff ect, as pointed out in a recent
report by the Independent Evaluation Offi ce, the Fund lacks not only clear
and eff ective jurisdiction over capital account issues but also a ‘clear posi-
tion’ (IMF–IEO, 2005b: 11, 50).
II. Surveillance
There has been an attempt to balance lack of specifi c 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 fi rm
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 fi scal 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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46 IEL, globalization and developing countries
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 fi nancial sector and capital fl ows, particularly after a series of
emerging market crises (IMF–GIE, 1999). Various codes and standards
established for macroeconomic policy, institutional and market structure,
and fi nancial regulation and supervision have thus become important com-
ponents 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, fi nancial 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 infl uence and veto
power over key decisions. The obligations contained in the new codes and
standards refl ect the view that the main causes of fi nancial 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 fi nancial 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 sanc-
tions (Cornford, 2002: 63–72). As one observer pointed out, this ‘new set
of external disciplines come hand- in- hand with a particular model of eco-
nomic 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 manipu-
lations.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 1977.12 The Fund has also been unable to prevent build- up of fi nancial fragility and
crises in emerging market economies under its supervision. However, this is not
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Multilateral disciplines and policy space 47
Fund, but also for non- borrowing developing countries. For its borrow-
ers 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 fi nancial markets as a main source of
liquidity.
III. Conditionality
The original rationale of conditionality was to protect the fi nancial integ-
rity 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 sustain-
able levels.13 Subsequently, however, conditionality became (and remains)
one of the most contentious issues as the balance between fi nancing and
adjustment was gradually lost. Rather than providing adequate liquidity
to weather payments diffi culties, the Fund started to impose exactly the
kind of policies that the post- war planners wanted to avoid in countries
facing payments diffi culties – that is, adjustment through austerity –
irrespective of whether these diffi culties 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 condi-
tions, 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 fi nance 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 condi-tionality, 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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48 IEL, globalization and developing countries
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 cur-
rency crises as an opportunity to force fundamental structural and institu-
tional reforms on countries’ (Feldstein, 1998).
The Bank was not spared from such temptations. On a strict defi nition
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 defi nition is adopted.
Questions have been raised by several researchers, both inside and
outside the BWIs, about the eff ectiveness of conditionality in prevent-
ing 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 improve-
ment in performance could be attributed to increased funding that accom-
panies programs (see, for example, UNCTAD, 1998b: 124–5 and table 34).
The Fund’s extensive use of structural conditions in its lending pro-
grams is widely considered a violation of the guidelines established in
1979, which explicitly state that performance criteria would normally be
confi ned to macroeconomic variables, and that they could relate to other
variables only in exceptional cases when their macroeconomic impact is
signifi cant. 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 charac-
ter, circumscribing the cases for reviews, and keeping preconditions to a
minimum. Yet, these restraining provisions have not prevented the inten-
sifi cation 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 Offi ce (see IMF–IEO, 2005a).
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Multilateral disciplines and policy space 49
There is a strong rationale for well- designed macroeconomic condition-
ality, 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 bor-
rowing and non- borrowing members. However, structural conditions, by
their nature, are diff erent. They impose a particular model of development,
entail permanent changes in institutions, and circumscribe policies in such
ways that their reversal may be extremely diffi cult. 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 rela-
tions. 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 gov-
ernance in order to defi ne 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 fi nancial stability,
leaving national structural- cum- development issues to the World Bank.
Its involvement in the latter issues is an unjustifi ed diversion and dupli-
cation. All facilities created for this purpose could be transferred to the
Bank as the Fund terminates its activities in development policy and long-
term lending. It could then focus on its core responsibility of preventing
exchange rate misalignments and gyrations, persistent global trade imbal-
ances and crises in emerging- market countries.
With its exit from development fi nance, the Fund’s lending activities
would be confi ned, as originally envisaged, to the provision of short- term
liquidity to countries facing temporary payments diffi culties. The key
reform issue here is how to strike a balance between fi nancing 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 fi nancial restruc-turing undertaken with the support of the Fund after the 1997 crisis naturally resulted in an increase in government equity in fi nancial 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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50 IEL, globalization and developing countries
and how to design performance criteria without going into micromanage-
ment in monetary and fi scal 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 fi nancial 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 fi nancial meltdown
and to restructure debt which cannot be serviced according to its original
terms and conditions. Temporary debt standstills and restrictions on
capital fl ows should thus become legitimate ingredients of multilateral
fi nancial 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 fi nancial crisis, but also prevent the burden of exter-
nal fi nancial diffi culties 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 redefi ned in order to prevent migration of the problems from one insti-
tution to another. De- linking bilateral and multilateral arrangements for
development fi nance 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
fi nancing, but these should be kept outside the multilateral system.
There is also a strong rationale for establishing global sources of devel-
opment fi nance. This could be achieved through agreements on interna-
tional 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 transac-
tions and activities concerned and pooled in the UN development fund
(for such sources of development fi nance, 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 intro-
duced into the provision of development fi nance 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 fi nance, the GATT–WTO
trade regime is organised around binding and enforceable rules and com-
mitments established on the principles of non- discrimination and reci-
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Multilateral disciplines and policy space 51
procity. These rules and commitments apply to a host of agreements which
are not all about trade, including the General Agreement on Tariff s 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 frame-
work 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 treat-
ment off ered to any country, whether or not it is a member. This rule, in
eff ect, 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 fi eld 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 diff erential 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 benefi ts
to all.16 However, parties do not usually expect to derive net benefi ts 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 princi-
ples: those that apply to all parties and special and diff erential 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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52 IEL, globalization and developing countries
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 fi rms 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 specifi c 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 ‘Diff erential and
More Favourable Treatment, Reciprocity and Fuller Participation of
Developing Countries’ provides exceptions to the MFN rule by allow-
ing developing countries to enjoy preferential market access and to off er
limited or less- than- full reciprocity. In principle, it implies recognition of
the infant- industry argument; however, in practice, special and diff erential
treatment has generally been confi ned 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 fi nancial positions and foreign exchange reserves.
Again this constitutes recognition of a vulnerability of developing countries
to occasional balance- of- payments diffi culties and their limited access to
international fi nancial markets. Article XVIIIA permits modifi cations or
withdrawal of concessions in order to support the establishment of a partic-
ular industry and Article XVIIIC permits import restrictions for similar pur-
poses, yet such provisions are rarely used because they call for compensatory
concessions to other countries adversely aff ected (Das, 1999: 100–101).
The following section will examine the economic signifi cance of WTO
rules for developing countries in three key areas: industrial tariff s, indus-
trial subsidies and investment- related policies. Given that a level playing
fi eld, defi ned legally, can have totally diff erent economic consequences
for diff erent 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 diff erent
countries, notably between developed and developing countries. The ulti-
mate 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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Multilateral disciplines and policy space 53
6. KEY WTO RESTRICTIONS ON POLICY SPACE
I. Industrial Tariff s
Until recently, WTO disciplines for industrial tariff s 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 fl exibility to these countries in setting their
industrial tariff s. During the UR negotiations agreement was reached for
reduction in average tariff s (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 fl exibility has resulted in considerable diversity among countries
regarding their binding coverage for industrial tariff s. While most devel-
oped 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 tariff s 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 choos-
ing 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 tariff s on a line- by- line basis. The main objective is
to harmonise tariff s across both products and countries. In eff ect, 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 tariff s
between developed and developing countries. On some proposals, the dif-
ference between simple average bound tariff s of these countries could fall
17 Much of the remainder of this section draws on Akyüz (2005c).
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54 IEL, globalization and developing countries
from its current level of some 23 percentage points to as little as 5 percent-
age points (Fernandez de Cordoba et al., 2004b: table 5a).
The proposed tariff cuts could have adverse consequences for develop-
ing countries on several fronts. First, to the extent that the negotiations
result in deep cuts in applied tariff s, their impact on balance of payments,
employment and income could well be negative since the evidence gener-
ally 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 gov-
ernment revenues could be particularly large.19
The immediate adverse eff ects of increasing binding coverage and low-
ering bound tariff s on balance of payments, income and employment, and
trade taxes could be expected to be moderate for those developing coun-
tries where applied tariff s 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 tariff s 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 indus-
trial upgrading. The loss of freedom to use tariff s for industrial develop-
ment carries even greater risk today because many of the more eff ective
and fi rst- 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 com-
mitments in the WTO, notably in the agreements on subsidies, TRIMs and
TRIPS. The proposals, in eff ect, remove the fl exibility 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 fi nd effi ciency gains from liberalisation. For a critique, see Akyüz (2005c).
19 Fernandez de Cordoba et al. (2004a) and South Centre (2004). These con-cerns are justifi ed since evidence shows that many low- income developing coun-tries dependent on trade taxes have been unable to recover the revenues lost from trade liberalisation (see Baunsgaard and Keen, 2005).
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Multilateral disciplines and policy space 55
policy fl exibility needed for industrial progress in developing countries.
Setting bound tariff s line- by- line at suffi ciently high levels to accommo-
date all contingencies would provide considerable fl exibility, but it would
also render multilateral commitments superfl uous. In any case, as noted,
developing countries do not need high tariff s for all sectors (and) at all
times. However, they should have the option of using tariff s on a selective
basis as and when needed for progress in industrialisation. They should
not be expected to keep moving tariff s downward from one trade round to
another but should be able to move them in either direction for diff erent
sectors in the course of industrial development.
This kind of fl exibility is best accommodated by binding average tariff s
without line- by- line commitment – that is, to leave tariff s 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 diff erent sectors
at diff erent stages of industrial maturity. Such an approach does not only
have the advantage of simplicity; it would also reconcile multilateral disci-
plines with policy fl exibility since countries would be subject to an overall
average ceiling in setting tariff s for individual products. Furthermore, for
most countries in the early and intermediate stages of industrial develop-
ment, it would result in lower average tariff s than would be the case under
line- by- line commitments. In practice it would have the eff ect of balancing
tariff increases with reductions; a country would need to lower its applied
tariff s on certain products in order to be able to raise them elsewhere. This
would encourage governments to view tariff s as temporary instruments,
and to make an eff ort to ensure that they eff ectively 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 sub-
sidies 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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56 IEL, globalization and developing countries
of action that could be taken against violating members; and specifi es 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 govern-
ment support to fi rms and industries. Restrictions are imposed not only on
export subsidies but also on those provided for domestic sales in accord-
ance 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 defi ned to include transfers by governments
and public agencies, and intra- private- sector transfers aff ected 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 agen-
cies below their market value. Benefi ts conferred by diff erential applica-
tion of certain rules to diff erent sectors and activities are also considered
to be subsidy even if they involve only intra- private transfers without any
fi nancial 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 classifi es 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 specifi c to fi rms and industries are permis-
sible or non- actionable, while specifi c 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 confi ned to export and import-
competing fi rms and industries. Thus, it should be possible to apply diff eren-
tial tax rules or public service charges to enterprises according to their size.
21 Actionable subsidies are not prohibited. However, they are subject to chal-lenge, either through multilateral dispute settlement or through countervailing action, if they cause adverse eff ects to the interests of another member.
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Multilateral disciplines and policy space 57
Direct and indirect assistance to fi rms and industries contingent on
export performance is explicitly prohibited. This is also true for import-
substitution subsidies – that is, assistance promoting the use of domesti-
cally 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 infl ict
costs on other members by causing or threatening material injury, vio-
lating 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 benefi t 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- specifi c subsidies is not always clear- cut in their incidence. A
subsidy to a specifi c sector (such as energy or education) could have sig-
nifi cant economy- wide implications when it has strong linkages. Similarly,
economy- wide subsidies can benefi t only a limited number of industries, as
in assistance to prevent industrial pollution. Since in practice it may be dif-
fi cult to determine whether a subsidy is, in fact, specifi c (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 eff ectively 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 for-
merly 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 fi nancing
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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58 IEL, globalization and developing countries
The rationale for prohibition of selective subsidies is the same as that
for the harmonisation of tariff s 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 tariff s despite the push for harmo-
nisation 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 consist-
ent rationale for permissible and prohibited subsidies. The rationale
for permitting specifi c 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 litera-
ture is replete with examples of capital market failures and externalities
which necessitate infant- industry support to fi rms 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 fi nance learning
and cover initial losses of potentially effi cient and profi table fi rms, tar-
geted credit allocation could be an eff ective 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
fi nancial 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 indus-
try. This asymmetry clearly works against developing countries. Indeed,
the role of subsidies is embedded within a broader issue concerning the
relative signifi cance of diff erent sectors and the intersectoral transfer of
resources between agriculture and industry at diff erent stages of develop-
ment. 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 fi scal con-
straints but of the availability of general resources outside agriculture to
eff ect such transfers.
23 Drawing on Hoekman and Kostecki (2001), Ayala and Gallagher (2005: 7) argue that the crafters of the agreement diff erentiated between subsidies justifi ed on market failure grounds and those that are not.
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Multilateral disciplines and policy space 59
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 indus-
trialisation. 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 agricul-
ture 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 con-
straints brought by WTO disciplines regarding industrial subsidies
because, unlike richer countries, they often lack fi nancial resources to
provide extensive support to emerging and/or declining industries. Given
that many of them already suff er from massive agricultural subsidies pro-
vided 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 fi nancial con-
straints.
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 specifi c 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 Baff es and de Gorter (2005).
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60 IEL, globalization and developing countries
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 indi-
rectly, 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 eff ort by some industrial countries to bring invest-
ment 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 quantita-
tive restrictions in the context of investment measures, yet has nothing
to say about market access or national treatment of foreign investors. It
eff ectively 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 impor-
tant 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 infl ows attributable
to investment.
Even though these provisions apply to domestic and foreign invest-
ment 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 fi rms, including for investment in export industries linked to inter-
national production networks. Such incentives provide eff ective subsidy
to foreign investors and can infl uence investment and trade fl ows as much
as domestic content requirements or export subsidies, particularly since
a growing proportion of world trade is taking place among fi rms linked
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Multilateral disciplines and policy space 61
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 poli-
cies (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 invest-
ing abroad to any signifi cant extent, the benefi ts 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
profi ts 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 fi nancially- constrained countries, notably
in Latin America and Africa, seek FDI for its potential contribution to
balance of payments and government fi nances, 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 fi nance. A large proportion of FDI in Africa
is in the exploitation of minerals; in Latin America in the form of acquisi-
tion 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 manu-
facturing 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 ineff ective there are no real negative spill overs, and if they are eff ective 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 incen-tives 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 interna-tional 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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62 IEL, globalization and developing countries
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 tariff s and/or duty drawbacks
encourage high import content. By the same token it should be possible to
use tariff s as a substitute for quantity restrictions over imports by TNCs
when they are unbound in the WTO or bound at suffi ciently high levels.
Imports by TNCs could also be discouraged by raising transaction costs
through administrative means, as practised in some East Asian late indus-
trialisers in support of domestic industries producing import- competing
goods.
As long as there are no commitments to foreign investors for unre-
stricted market access, the constraints imposed by the TRIMs agreement
could be overcome by tying the entry of foreign investors to the produc-
tion of particular goods. For instance a foreign enterprise may be issued a
licence for an automotive assembly plant only if it simultaneously estab-
lishes 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 earn-
ings 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 profi ts in value added, the extent of its reliance on imports, and the pro-portion of the fi nal 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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Multilateral disciplines and policy space 63
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 pro-
curement of services such as banking, insurance and transport can also
be set as part of entry conditions of foreign fi rms 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 fl exibility to develop-
ing countries regarding policies for commercial presence in services. It
allows them to choose the sectors in which they make liberalisation com-
mitments on a bilateral off er- request basis, and to determine the restric-
tions they would want to apply to market access and national treatment
in each sector. It eff ectively 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 specifi ed 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 pro-
posals 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 indus-
trial countries for market access and national treatment in sectors such as
fi nance, energy, telecommunications, maritime transport, computer and
engineering services where TNCs from these countries have a clear com-
petitive 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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64 IEL, globalization and developing countries
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 capac-
ity 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 indus-
try 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 fl ows 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 eco-
nomic growth and development. First, there should be coherence among
arrangements in diff erent spheres of economic activity so that they rein-
29 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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Multilateral disciplines and policy space 65
force, rather than undermine and destabilise, each other. Second, the rules
should be even- handed across countries in terms of the fl exibility and
space they allow. Both of these call for a global governance system that
secures, inter alia, voluntary, full and equal participation in the formula-
tion of multilateral disciplines.
Current multilateral arrangements barely meet these principles.
Coherence between trade and fi nance 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 fi nancial stability,
and because of the priority attached to meeting international fi nancial
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 fi nancial policies
but also on broader social and economic development strategies in devel-
oping countries, and these extend beyond what is needed for the interna-
tional economic stability and fi nancial 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, impos-
ing tighter eff ective 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 asym-
metries 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 multilat-
eral rules and obligations, there is still room for manoeuvre within the con-
fi nes 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 fi nancial 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 contribut-
ing to global economic instability. Similarly there are no hard and com-
prehensive 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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66 IEL, globalization and developing countries
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 rationalisa-
tion, rather than doing away with multilateralism. Second, for some coun-
tries there may be both the need and scope to regain the policy space and
fl exibility lost through unilateral action. It is true that policy reversal can
be quite costly, but this may be worth considering when potential benefi ts
are large. Finally, it is important to use the space that is available; some-
thing that calls for a fundamental rethinking of economic policy in many
developing countries.
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67
4. Assessing international fi nancial reform
Daniel Bradlow*
1. INTRODUCTION
The foundations for the current international fi nancial 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 fi nancial 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 fi nancial 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 fi xed 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.
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68 IEL, globalization and developing countries
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 fi t (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 inter-
national fi nancial markets or in the international allocation of credit. At
the time this makes good sense because relatively few banks operated
across national boundaries, all fi nancial regulation was national, and
international fi nancial activity was a relatively small part of the global
fi nancial scene.
The IBRD’s role was to help fi nance 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 fi nancial
support primarily for physical infrastructure projects that were not able to
raise suffi cient fi nancing from private sources.
Since that time, the world has changed dramatically. The number
of states participating in the global monetary and fi nancial system has
increased, as has the number of fi nancial 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 fl uctuating exchange rates
and liberalised fi nancial fl ows. In this environment, international fi nan-
cial fl ows exceed, by several orders of magnitude, annual international
trade volumes; international capital markets are a key component of
the global fi nancial order; and there is no fi nancial regulator in a major
economic power that is able to eff ectively regulate its fi nancial 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 fi nancial market oversight
and in reviewing its member states’ fi nancial regulatory frameworks. It
also uses the conditions attached to its fi nancial support to get its devel-
oping member states to change their monetary and fi scal 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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Assessing international fi nancial reform 69
fi nancial governance arrangements and their poverty reduction strategies
in ways that the IMF considers necessary for their future development.
Thus, in eff ect, the IMF has become an important actor in the policy
making process of those developing countries that rely on its fi nancial
support.3
The IBRD is now only one member of a group of international fi nancial
organisations, known collectively as the World Bank Group.4 Its opera-
tions 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 fi nancial payments problems.
In addition, the demands of international fi nancial 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 fi nancial
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 regula-
tory eff orts. 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 fi nancial aff airs.
As is clear from the many fi nancial crises that the world has experienced
since the 1980s, these international governance arrangements do not
always function eff ectively. In fact, at least since the 1997 Asian fi nancial
crisis, there has been general agreement that the existing arrangements for
international fi nancial governance, often referred to as the ‘global fi nancial
architecture’, need to be reformed.5 This general agreement led to the for-
mation of the G- 20 and, in 1999, to the creation of the Financial Stability
Forum (FSF), in which fi nancial 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 fi nancial architecture, see generally Alexander et al., 2006; Davies and Green, 2008).
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70 IEL, globalization and developing countries
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 fi nancial 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 eff ect. 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 fi nancial
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 interna-
tional fi nancial architecture in the short to medium term. Consequently,
it is an opportune time to assess the actual signifi cance of the reforms
that either have recently been implemented or are under consideration
and the potential they might create for further international fi nancial
governance reform. Such an evaluation requires us to answer six ques-
tions: What are the purposes of international fi nancial governance? What
standards should we use in assessing the adequacy of any set of arrange-
ments for international fi nancial governance? What are the problems with
the current international fi nancial architecture? What, in fact, has been
achieved in terms of reforming international fi nancial 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 eff ectively
functioning international fi nancial architecture?
6 See further Financial Stability Board (FSB), http://www.fi nancialstabilityboard.org/about/history.htm (accessed 7 July 2009).
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Assessing international fi nancial reform 71
2. WHAT ARE THE PURPOSES OF INTERNATIONAL FINANCIAL GOVERNANCE?
International fi nancial governance should have two objectives. The fi rst 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 fi nancial system that both protects
the interests of savers and investors around the world and allocates credit
effi ciently and fairly amongst all potential borrowers. Eff ective interna-
tional fi nancial 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 fi nancial governance will only eff ec-
tively achieve the requisite objectives if they conform to the following fi ve
sets of principles: a holistic approach to development, comprehensive cov-
erage, 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 fi nancial architecture is how eff ectively
it supports the eff orts of participating states to achieve their common
developmental objective. It follows that one standard for assessing inter-
national fi nancial 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 suffi cient
because it is now recognised that the level of development of both indi-
viduals and societies can be positively or negatively aff ected 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 defi nition of development is
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72 IEL, globalization and developing countries
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 devel-
opment cannot be separated from its social, political, environmental and
cultural aspects, all of which are components of one dynamically inte-
grated process.
The extent to which the international fi nancial governance arrange-
ments incorporate this holistic vision of development determines how
well the arrangements can account for all the economic, fi nancial, envi-
ronmental, social, cultural and political implications of the international
fi nancial system and, thus, how eff ectively it helps all states achieve their
developmental objectives.
II. Comprehensive Coverage
The principle of comprehensive coverage holds that the mechanisms and
institutions of international fi nancial governance should be applicable
to all stakeholders in the international fi nancial system and should deal
with all the methods, institutional arrangements, and instruments they
use in their fi nancial operations (Alexander et al., 2006; Davies and
Green, 2008). This means that the mechanisms of international fi nancial
governance need to be concerned with all the activities and operations of
all fi nancial intermediaries that engage in cross- border fi nancial transac-
tions; large corporate and sovereign investors and borrowers that utilise
a broad range of complex fi nancial instruments; fi nancial actors who
wish to base their fi nancial transactions, both as savers and investors, on
religious principles; small local fi nancial 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 fi nancial intermediaries that are
concerned with the problems of poverty and expanding access to fi nancial
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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Assessing international fi nancial reform 73
A. Three corollaries
There are three important corollaries that follow from the principle of
comprehensive coverage. First, the mechanisms of international fi nan-
cial governance must be suffi ciently fl exible and dynamic to adapt to the
changing needs and activities of their diverse stakeholders. For example,
as the ‘top end’ large- scale fi nancial institutions develop new fi nancial
instruments and new arrangements through which to conduct their opera-
tions, the international fi nancial architecture must have the capacity to
understand these instruments and arrangements and to determine how to
most eff ectively account for them and their impacts on the various stake-
holders in the international fi nancial system. At the same time the inter-
national fi nancial architecture must be able to accommodate the changing
needs of the ‘low end’ small and micro fi nancial institutions.
Second, the totality of international fi nancial governance arrangements
must ensure that the international community receives all the services it
requires from a well- functioning global fi nancial system. These services
are: a global lender of last resort, global monetary regulation and global
development fi nance; regulation of trade and investment in fi nancial serv-
ices; global regulation of the cross- border activity of fi nancial institutions;
coordination of national fi nancial regulation, including ensuring that all
fi nancial regulation promotes such issues as access to fi nancial services
for all (individuals, corporate entities, and states); coordinated taxation
of fi nancial transactions; arrangements for dealing with sovereign debt
problems and complex cross- border fi nancial institution and corporate
bankruptcies; and regulation of international money laundering.
The third corollary, which is intended to ensure that the international
fi nancial architecture is fl exible, effi cient 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 eff ective decision
making. Thus, the principle would require that global fi nancial governance
arrangements encourage national or even sub- national decision making to
8 ‘The principle of subsidiarity is defi ned in Article 5 of the Treaty establish-ing 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 justifi ed in the light of the possibilities available at national, regional or local level. Specifi cally, 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 eff ective 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/subsidi-arity_en.htm (accessed 7 July 2009).
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74 IEL, globalization and developing countries
the greatest extent possible, consistent with eff ective decision making and
implementation. This principle is particularly important in international
fi nancial 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 diff erent level than is the case during standard conditions. In
addition, it needs to be linked to a confl ict 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 fi nancial 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 interna-
tional fi nancial 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 fi nancial 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 stand-
ards that are applicable to international fi nancial aff airs, it does provide
the general principles that should guide the institutional arrangements
for international fi nancial governance. In particular, this means that the
decision- making bodies and institutions involved in international fi nan-
cial 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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Assessing international fi nancial reform 75
A. Sovereignty
The fi rst 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 benefi ts
of a well- functioning international system. Given the diff erent 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 eff ective global fi nancial governance.
B. Non- discrimination
The second is the general principle of non- discrimination. This means
that the institutions of international fi nancial 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 fi rst standard applicable to the treatment of states is that the insti-
tutions of global fi nancial governance, such as the IMF, should treat
similarly situated states similarly and diff erently situated states diff erently.
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 respon-
sive to the diff erent 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 signifi cantly diff erent in capacities from rich
and powerful nations. One way of implementing this principle could be
to apply the general principle of special and diff erential treatment that is
applicable in a number of international legal contexts, for example in inter-
national environment and international trade law, to international fi nan-
cial governance. In the international fi nancial context, this principle would
ensure both that weak and poor countries are given access to fi nancing 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 participa-
tion in international fi nancial decision- making structures, even when they
are based on principles like weighted voting. A consequence to this may
be that the organisation off ers some mechanism of accountability to these
states and their citizens to compensate for any participation defi cit.
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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76 IEL, globalization and developing countries
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 fi nancial governance, including national
regulatory bodies, respect their rights to housing, health care, education,
jobs, and social security. The institutions of international fi nancial govern-
ance should also respect their rights to freedom of speech and association.
Thus, one indicator of good fi nancial governance could be the level of
respect that the institutions of international fi nancial governance show for
human rights in their member countries.
C. State responsibility
The third set of international legal principles applicable to international
fi nancial governance deal with the responsibility of states for the functioning
of the fi nancial system. Based on general principles of state responsibility,10
they have an obligation to provide foreign legal persons (including fi nancial
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 fi nancial institu-
tions, regardless of their size or role in the domestic fi nancial 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 fi nancial regulators an obliga-
tion to insist that fi nancial institutions fully understand the environmental
and social impacts of their fi nancial practices and of individual transac-
tions. This is particularly relevant given the potential impact that envi-
ronmental events such as climate change can have on fi nancial risk, and
vice versa. This suggests that international fi nancial governance should be
working to ensure that the global fi nancial system promotes environmen-
tally sustainable practices and minimises the incentives for fi nancial actors
to engage in environmentally risky behaviour.
The principle of respect for applicable international law establishes a third
test for international fi nancial governance, namely to what extent do the
arrangements for international fi nancial 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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Assessing international fi nancial reform 77
national sovereignty, the environment, and the rights of all natural and
legal stakeholders in the international fi nancial 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 fi nancial governance cannot function effi -
ciently 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 fi nancial
governance must be clearly defi ned and limited to international monetary
and fi nancial aff airs. Second, the institutions of international fi nancial
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 fi nancial govern-
ance and other organisations and arrangements for global governance. The
coordinating mechanism, if it is to eff ectively resolve tensions between the
diff erent 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 fi nancial governance. This standard is that
the mechanisms of international fi nancial governance must have both spe-
cialised mandates and a means for coordinating their policies and opera-
tions with other institutions of global governance, each of which has its
own limited mandate. This means that the institutions of global fi nancial
governance must off er other institutions of global governance a meaning-
ful opportunity to raise concerns with them and that there must be some
mechanism for resolving tensions between the diff erent specialised mecha-
nisms 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 fi nancial
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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78 IEL, globalization and developing countries
governance must conduct their operations in a manner that is suffi ciently
open for their procedures, decisions, and actions to be predictable and under-
standable to all stakeholders. They must also off er 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 fi nal standard against which international fi nancial govern-
ance arrangements can be measured is the extent to which they comply
with the fi ve principles of good administrative practice stated above.
VI. Summary of the Standards for Evaluating Arrangements for
International Financial Governance
The fi ve standards that can be used for assessing the adequacy of any inter-
national fi nancial governance arrangements are:
1. Are the arrangements based on a holistic understanding of develop-
ment and how do they incorporate this vision?
2. Do the arrangements for international fi nancial 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 interna-
tional fi nancial system and do they have the capacity to adapt to the
changing interests and concerns of these stakeholders?
3. Do the mechanisms for international fi nancial 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?
4. How do the institutions of international fi nancial governance interact
with other global governance institutions?
5. Do the institutions and mechanisms for international fi nancial govern-
ance comply with the fi ve principles of good administrative practice:
transparency, predictability, participation, reasoned decision making,
and accountability?
4. 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 fi nancial architecture.
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Assessing international fi nancial reform 79
I. Holistic Vision of Development
The primary institutions of international fi nancial 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 inter-
prets as including some role in the oversight of international fi nancial
markets. However, its Articles do not make any explicit reference to
development and it has no formal responsibilities for promoting develop-
ment. Moreover, it would fi nd it diffi cult 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 considera-
tions 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 expand-
ing 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 fi nan-
cial regulatory bodies in the G- 20 countries, has a clear and relatively
narrow regulatory mandate. Its concerns are fi nancial regulation and the
coordination of such regulation among its participating members.
Thus, it is clear that regardless of how much key offi cials in these enti-
ties 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 fi nancial governance arrangements suff er from
problems of under- inclusiveness in both a regulatory and a participa-
tory sense. There are three aspects to regulatory under- inclusiveness.
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80 IEL, globalization and developing countries
First, the current multilateral regulatory bodies do not cover all the rel-
evant actors in the international fi nancial 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 fi nan-
cial system as credit rating agencies or those entities, like hedge funds,
private equity funds and sovereign wealth funds, that make up the so-
called ‘shadow banking’ system that has played such a critical role in the
creation of the 2008 fi nancial crisis. This lack of international coordina-
tion is a consequence of the fact that, currently, national regulation of the
shadow banking system is limited or non- existent. However, the net eff ect
of this situation is that the current institutional arrangements for interna-
tional fi nancial governance are incomplete and important fi nancial 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 signifi cant
fi nancial 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 fi nancial 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 fi nancial regulation
is reformed.
The fi nal aspect of regulatory under- inclusiveness is that the global regu-
latory 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 addi-
tion, by basing capital weighting decisions on the credit ratings assigned to
specifi c transactions, the guidelines eff ectively delegate this decision to the
credit rating agencies. This situation results in under- regulation because it
allows self- interested parties to make decisions that aff ect their own capital
requirements or their own relationships with their clients.
Participatory under- inclusiveness is concerned with the operating prin-
ciples 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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Assessing international fi nancial reform 81
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
fi nancial markets (Davies and Green, 2008). While its proposals are sub-
mitted 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 identifi cation 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 fi nancial
regulation and for discussion of global fi nancial regulatory policy but its
membership is limited, primarily, to regulators from the G- 20 countries.
A fi nal, more complex, example is the IMF and the Bank, which help
transmit the regulatory standards established in the more technical regula-
tory bodies to all their member states (Bradlow, 2006). While they have
universal membership, these organisations do not off er all states meaning-
ful 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 under-
inclusiveness. They are under- inclusive in the sense that that they do not
provide for eff ective participation by all relevant and interested stakehold-
ers. Consequently, in addition to the problems with state actors discussed
above, entities like the IMF, the World Bank and the FSB do not provide
eff ective means for participation by all the various non- state actors who
have an interest in fi nancial regulation and governance. This is a particu-
larly signifi cant problem at the ‘low end’ of the system at which both insti-
tutions dealing with poverty and poor people themselves have inadequate
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82 IEL, globalization and developing countries
means for participating in international fi nancial governance, despite the
profound impact of international fi nancial decisions on their lives.
As we saw above, an important corollary of comprehensive coverage
is subsidiarity. In the case of international fi nancial governance, this
means deferring to national regulators to the greatest extent possible and,
when international- level regulation is necessary, ensuring that it pro-
vides for maximum feasible national implementation and interpretation.
The current international fi nancial 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 fi nancial regulatory policies and their own monetary and fi nancial
policies. Consequently, the bodies which aff ect 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 effi cacy. 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 con-
genial for them. While there are likely to be adverse market consequences
for fi nancial 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 fi nancial gov-
ernance institutions on which they are most dependent for fi nancing – the
World Bank and the IMF – tend to support the key international regula-
tory 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 fi nancial 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 fi nancial govern-
ance. Nevertheless, there are some general considerations that are relevant
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Assessing international fi nancial reform 83
to assessing how eff ectively they are being applied in international fi nan-
cial governance.
Formal compliance with certain applicable international legal principles
is relatively non- controversial. The key institutions of international fi nan-
cial 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 fi nancial 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 environ-
mental 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 fi nancial governance. This is necessary in
order to indicate that attention has been paid to these issues and how they
aff ect fi nancial regulation and fi nancial transactions. It is very diffi cult to
fi nd 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 fi nancial institutions. The World Bank addresses envi-
ronmental 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 fi nancial 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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84 IEL, globalization and developing countries
international standards in trade in services, including fi nancial services.
Each of these entities has, prima facie, clear and well- defi ned specialised
areas of expertise and their mandates are confi ned to these limited areas.
It is diffi cult to keep each institution confi ned 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 aff ect the developmental or international monetary
aff airs of their member states. However, their concern with these issues,
because it is fi ltered through their specialised mandates, is not comprehen-
sive 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 inter-
national organisations. The reason is that these other organisations, while
they may formally have the authority to act in certain areas, lack the fi nan-
cial and political means to off er serious counterweights to the fi nancially
powerful IMF and World Bank.
The existing international order envisages that this challenge of combin-
ing 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 diff erent specialised agencies could come together to
coordinate their activities (UN, 1945: Arts 62–6). However, this coordina-
tion has not functioned eff ectively, in large part because the specialised
fi nancial agencies are able to use their fi nancial 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 eff ectu-
ate 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
fi nance, requires its member states to cut expenditures in ways that impact
on health, it indirectly exerts a key infl uence 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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Assessing international fi nancial reform 85
posed to be the UN specialised agency responsible for health. The IMF
and the World Bank have had similar eff ects in regard to other UN agen-
cies, for example those dealing with agriculture, children, and education.
The key role played by these two international fi nancial 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 fi nancial governance is further exacerbated by the fact
that some of the key actors in international fi nancial governance are not
part of the UN system. For example the FSB, which plays a key role in
coordinating the various international fi nancial regulatory bodies, is not a
UN agency. Consequently over time a distortion has appeared in the inter-
national governance system in the sense that the fi nancial institutions have
grown in power and resources while the non- fi nancial ones have declined.
The net eff ect is that international fi nancial governance is not eff ectively
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 confi dence, 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 fi nance. Similarly, at least as a general proposition, it can
satisfy the principle of reasoned decision making because all key actors
in the fi nancial system need to understand the decisions of regulators and
other key players in international fi nancial governance if they are to act
in conformity with these decisions. However, the principles of transpar-
ency, participation and accountability are more challenging for the inter-
national fi nancial governance institutions. Consequently, the remainder
of this section will focus on these three aspects of good administrative
practice.
A. Transparency
The mechanisms for international fi nancial 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 fi nancial
markets.
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86 IEL, globalization and developing countries
The IMF and the World Bank have both signifi cantly improved the
transparency of their operations in recent years. Their information disclo-
sure policies now require that many of their documents are made publicly
available as a matter of course and there is greater eff ort 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 addi-
tion, the IMF does not have a publicly available set of operational policies
and procedures, which makes it diffi cult for interested stakeholders to fully
understand how it goes about doing its business.
The other mechanisms of international fi nancial governance – the
international regulatory coordination bodies – are reasonably transpar-
ent. 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 fi nancial governance
with the requirement of participation is problematic. The World Bank
and the IMF, despite their near- universal membership, do not provide
for eff ective 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 over-
represented.
There is also a participatory defi cit in the international regulatory insti-
tutions. 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 partic-
ipation 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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Assessing international fi nancial reform 87
provide for non- state- actor participation in their decision making, they
will consult with key stakeholders. However, the lack of formal consulta-
tion 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 opportuni-
ties 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 signifi cant public consultation and
participation in regard to fi nancial regulatory and operational aff airs.
C. Accountability
In this context, accountability means that all the stakeholders in interna-
tional fi nancial 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 account-
able global fi nancial 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 fi nancial governance.
The IMF has made some eff ort to enhance its accountability through
the creation of the Independent Evaluation Offi ce. This offi ce, which con-
ducts studies of IMF operations, is similar to the Independent Evaluation
Group in the World Bank. However, it does provide for public consulta-
tion on its work plan and on the scope of its studies.
The international regulatory bodies are suffi ciently diff erent from the
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88 IEL, globalization and developing countries
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 administra-
tive procedures, to their various stakeholders. However, the more signifi -
cant 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 signifi cant
because the non- participants in these bodies tend to be the poorer and
weaker states, which nevertheless are compelled either by other multilat-
eral 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 eff orts to reform the international fi nan-
cial architecture. The current reform eff orts can be divided into three
areas.
I. Reforms Being Implemented
First, there are those reforms that have been, or are being, implement-
ed.14 Most noticeable here is that the G- 20 has emerged as the primary
forum for discussion of international fi nancial 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,
fi nance and insurance regulators from the G- 8 countries plus representa-
tives from international fi nancial institutions like the IMF met to discuss
fi nancial 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 exemplifi ed by the changing of its name to the Financial Stability Board
(FSB).15 This should result in broader participation in deliberations about
fi nancial 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.fi nancialstabilityboard.org/about/history.htm (accessed 7 July 2009).
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Assessing international fi nancial reform 89
There have also been some reforms in the IMF. The IMF has made
some eff ort 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 fi nancing. 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 qualifi ca-
tions; and raising the limits on member states’ access to IMF fi nancing
(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 fi nancial 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 pur-
chase 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 pos-
sible 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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90 IEL, globalization and developing countries
II. Reforms that Have Been Proposed but Not Implemented
The second area is reforms that have been proposed but not yet imple-
mented (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 compensa-
tion 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 signifi cant 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 fi ve largest member
states have their own Executive Director, changing the scope of IMF sur-
veillance 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 diffi cult 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 eff orts 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 typifi ed by the BRICs (that is, Brazil,
Russian, India, China), are not powerful enough to successfully demand
substantial reform of global fi nancial governance arrangements and the
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Assessing international fi nancial reform 91
‘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 impli-
cations 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, necessar-
ily only partial, will always be subject to new pressures and constraints as
the shift in global power plays itself out.
Second, the reform eff orts 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 fi nancial governance,
in addition to more traditional fi nancial issues, include the environmental
crisis and the related problems of poverty and inequality, which both
impact global fi nancial fl ows and fi nancial regulation. Consequently,
their exclusion from discussions on international fi nancial governance
undermines current eff orts to sustainably reform the international
fi nancial 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 clarifi ed 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 eff orts 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 stakehold-
ers who are interested in promoting international fi nancial governance
reform.
Given the current situation, there are only two areas in which there is
scope for additional reforms in the short run. The fi rst is fi nancial regu-
latory 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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92 IEL, globalization and developing countries
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
fi nancial governance institutions, in particular the IMF. The reason for
this is that it is currently the only major multilateral institution with a
clear fi nancial mandate that does not have some independent account-
ability 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 eff orts 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 eff orts, it is reasonable to think
more laterally and to re- imagine the international fi nancial regime.
Due to space constraints, this is not the appropriate occasion to spell
out a new international fi nancial governance regime in great detail.
Suffi ce it to say that such a regime can take many forms as long as it con-
forms 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 imple-
mentation of its specialised technical mandate and ensures that there
is an eff ective 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 administra-
tive practice, which include having transparent operational policies and
procedures, eff ective accountability mechanisms and meaningful partici-
pation by all stakeholders.
The functions that the international fi nancial regime must be able to
perform include being a global lender of last resort, a global monetary
regulator and a provider of global development fi nance; a facilitator of
fair trade in services; a sovereign debt workout mechanism, a means for
dealing with complex cross- border bankruptcies; a global fi nancial regula-
tor, which promotes, in addition to fi nancial effi ciency and innovation, fair
fi nancial systems that ensure access for all to fi nancial services and appro-
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Assessing international fi nancial reform 93
priate consideration of environmental and social risk; and an effi cient and
fair global tax system.
8. CONCLUSION
This chapter has set out a framework for assessing both the current inter-
national fi nancial architecture and the actual eff orts at reforming the
international fi nancial governance regime. Pursuant to the framework, it
is clear that the existing regime has substantial defi ciencies and that the
current reform eff orts 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 fi nancial
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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94
5. Crisis and opportunity: emerging economies and the Financial Stability Board
Enrique R. Carrasco*
1. INTRODUCTION
The current global fi nancial and economic crisis began in the subprime
mortgage sector in the United States. Through the process of securitisa-
tion, 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 fi nancial sector, by 2009 it became clear that the world was witness-
ing a full- blown economic crisis – the worst since the Great Depression.
At the outset of the crisis, most observers believed that emerging econo-
mies would not be signifi cantly aff ected 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 eco-
nomic/fi nancial crises in the 1980s and 1990s, many emerging economies
engaged in signifi cant reform of their fi nancial sectors, including signifi -
cant increases in foreign exchange reserves, which would make them less
vulnerable to external shocks. Thus they would be ‘decoupled’ from devel-
oped 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 fi nancial 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.
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Emerging economies and the FSB 95
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 cur-
rency 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 fi nancial 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 fi nance with the aim of
giving emerging economies (and developing countries in general) greater
voice in the governance of international fi nancial 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 fi nance.
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 fi nancial crisis of the late 1990s. The FSF is an inter- governmental
forum whose purpose is to promote the stability of the international fi nan-
cial system, with an eye towards reducing the type of fi nancial contagion
that marked the Asian crisis. It has fi gured 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 suff ered, 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 fi nancial
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 fi nance.
Section 2 of this chapter will identify how the crisis came to aff ect emerg-
ing economies via capital and investment outfl ows, currency depreciation,
stock market crashes, and drop in export and commodities prices. Section
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96 IEL, globalization and developing countries
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- profi le role of
the FSF in the global fi nancial 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 fi nancial system.
Globalization and development have situated emerging economies in posi-
tions of infl uence and consequence in the global economy. The expanded
FSB membership is a refl ection of this status. While it is too early to
make defi nitive judgments about the eff ectiveness of the FSB, its post-
crisis workload is meaningful and presents emerging economies with an
opportunity to increase their voice and infl uence in matters relating to the
regulation of international fi nance.
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, fi nancial institutions in emerging economies/developing countries
did not hold the toxic assets that poisoned the advanced economies, and sig-
nifi cant reforms led a good number of observers to believe in the decoupling
theory, which would insulate emerging economies from the damaging winds
of the fi nancial storm that emanated in 2007. However, about a year after the
storm commenced, fi nancial contagion made its mark when trading was sus-
pended 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 fi nancial stress from advanced to emerging economies
was stronger in emerging economies that have tighter fi nancial 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 outfl ows,
signifi cant downward pressures on emerging countries’ currencies, stock
market crashes, and declines in exports and commodity prices.
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Emerging economies and the FSB 97
I. Capital and Investment Outfl ows
Foreign capital fl owed 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 fi nancial crisis spread globally, emerging economies witnessed a sig-
nifi cant drop in capital infl ows as investors withdrew their investments
for safer havens and foreign lending declined signifi cantly. Net private
capital fl ows 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 fl ows led to concerns that emerging economies
were at increased risk of defaulting on their debt. The possibility of sov-
ereign 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 fi nancial crisis, the current crisis put heavy downward
pressure on the currencies of emerging economies as investors fl ed 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 fi nancial crisis, foreign currency loans surged in
developing countries because of low interest rates. Borrowers in emerg-
ing 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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98 IEL, globalization and developing countries
III. Stock Market Crashes
The global fi nancial 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 fl ight 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 fi rst 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 fi rst
quarter of 2009, compared with a 21.2 per cent drop in developed countries’
stock markets (Oakley, 2009). This diff erential 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 fi nancial crisis
has pushed down economic growth and consumer demand in developed
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Emerging economies and the FSB 99
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 aff ected (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 aff ected 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 aff ected by the crisis (Borchert and Mattoo, 2009: 3).
Throughout the developing world, vertical specialisation in trade con-
tributed to a boom in the 1990s, but vertical specialisation has magnifi ed
the impact of the crisis on these countries, particularly in Asia and Eastern
Europe, as the interconnectedness of suppliers and manufacturers at
diff erent levels of the trade process causes a downward spiral when one
participant fails (Pitigala, 2009: 4–5; Tanaka, 2009). Restrictions on credit
and trade fi nance are also contributing to the decline in exports, as are vol-
atile 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 aff ected 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 aff ected those countries dependent on exports of
primary products. Nearly all commodity prices began to decline dramati-
cally in July 2008 (IMF, 2009i). The fall in the price of oil has been espe-
cially 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 explora-
tion and future oilfi eld development are not profi table. 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 com-
modity 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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100 IEL, globalization and developing countries
citizens of poor countries, many emerging economies whose economies
rely on the production of commodities will experience slower growth and
have diffi culty 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 signifi cant economic and fi nancial
challenges as a result of the global crisis, there are indications of abate-
ment. 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 commod-
ity 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 infl ows have
improved. Equities markets have witnessed a signifi cant 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 signifi cant 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 fi ght against malnutrition. Because of the global recession, an addi-
tional 55 to 90 million people will suff er from extreme poverty in 2009. The
crisis has also seriously compromised eff orts to combat HIV/AIDS, mater-
nal 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 diagnos-
ing the complex causes of the crisis and proposing coordinated regulatory
eff orts 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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Emerging economies and the FSB 101
The FSF was created in 1999 to address vulnerabilities in the inter-
national fi nancial system, identify and oversee action needed to address
these vulnerabilities, and improve cooperation and information exchange
among authorities responsible for fi nancial 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 fi nance ministers and central
bank governors in February of 1999 and the FSF convened for the fi rst
time in April 1999 under Chairman Andrew Crockett.
The initial members of the FSF consisted of the fi nance 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 devel-
oping or emerging economies. Chairman Crockett’s explanation for this
lack of representation was that the FSF could be more eff ective 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 meet-
ings and working groups. There were three initial working groups, focus-
ing on Highly- Leveraged Institutions, Off shore 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 interna-
tional fi nancial 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 fi nancial 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 fi nancial
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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102 IEL, globalization and developing countries
standards among international fi nancial 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 har-
monise 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 fl agged ‘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 diff er between
principles (such as the Basel Committee’s Core Principles for Eff ective
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 diffi culty coming to agreement on tough issues means that they
are similarly toothless. Reports include recommendations that are repeti-
tive 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 identifi es. 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
fi gure prominently in international fi nance, and its presence on the global
fi nancial 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- profi le report on the crisis. The report brought the FSF out of the
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Emerging economies and the FSB 103
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 fi nancial stability of recent turbulence in global fi nancial markets and
what might need to be done going forward to strengthen fi nancial 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 fi nancial 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 fi nancial markets were adversely aff ected by a reduction in
risk- taking, risk repricing, and a liquidity squeeze. It identifi ed the US
subprime mortgage market and related structured products as the trig-
gers of the crisis that was aff ecting 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 confi dence 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
confi dence in the structured fi nance market, the report stated that there
were a number of weaknesses in the fi nancial markets, some of which were
apparent beforehand, that required the attention of national and interna-
tional fi nancial 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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104 IEL, globalization and developing countries
coordinate their reactions to market turbulence on a national and inter-
national 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 fi nancial system. Noting that
the adjustment period was likely to be prolonged and diffi cult, 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 confi dence to markets that valuation practices and related loss esti-
mates are adequate; (iii) ensuring that supervisors continue to work closely
with fi nancial institutions to assure adequate levels of capital and liquidity;
and (iv) ensuring that central banks continue to respond eff ectively and in
a coordinated fashion to developments. The Interim Report also identifi ed,
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 fi nancial fi rms of risks associated with their on-
and 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 . . . fi ve areas: (1) strengthened prudential oversight of capital,
liquidity and risk management; (2) enhancing transparency and valua-
tion; (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 fi nancial system’ (ibid: 2).
The Report set forth a number of recommendations with respect to the
fi ve 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 fi rms; 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 fi nancial 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 fi nancial reporting standards for
off - balance- sheet vehicles (ibid: 22–31).
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Emerging economies and the FSB 105
With respect to the role and use of credit ratings, the Report recom-
mended that credit rating agencies should (i) implement the revised
IOSCO Code of Conduct Fundamentals for Credit Rating Agencies to
manage confl icts of interest in rating structured products and improve
the quality of the rating process and (ii) diff erentiate 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 fi nancial institutions (ibid:
40–44). And regarding robust arrangements for dealing with stress in the
fi nancial 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 imple-
ment 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 fi nancial crisis, mitigating
sources of pro- cyclicality in the fi nancial system, and reassessing the scope
of fi nancial regulation, with a special emphasis on unregulated institu-
tions, 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 supervi-
sors 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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106 IEL, globalization and developing countries
substantially implemented by several CRAs including the three largest
agencies. And supervisory colleges had been established for most of the
global fi nancial 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 mem-
bership. A key voice in this regard was the G- 20, a forum created in the
wake of the Asian fi nancial crisis in which fi nance ministers and central
bank governors from systemically important industrialised and develop-
ing 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 fi nancial 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 fi nancial 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 fi nancial system created in July 1944 during a three- week con-
ference in Bretton Woods, New Hampshire. This was, of course, highly
unrealistic, especially since George Bush was in the twilight of his presi-
dency – 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 continua-
tion of vigorous eff orts to stabilise the fi nancial system, to use fi scal meas-
ures 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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Emerging economies and the FSB 107
and developing economies gain access to fi nance – the G- 20 leaders during
the weekend summit could only agree upon a set of principles that would
guide future reform of the fi nancial markets.
Recognising that international cooperation among national regulators
– who form the fi rst line of defence – and strengthening of international
standards are necessary in today’s global fi nancial markets, the G- 20
leaders set forth fi ve principles that would guide policy implementation:
(i) strengthening transparency and accountability; (ii) enhancing sound
regulation; (iii) promoting integrity in fi nancial markets; (iv) reinforcing
international cooperation; and (v) reforming international fi nancial insti-
tutions. As to the fi fth principle, the summit’s Declaration stated:
We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately refl ect changing economic weights in the world economy in order to increase their legitimacy and eff ectiveness. 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 mem-bership. 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 fi fth 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 exer-
cises’, by the March deadline.
The call for institutional reform is not new, of course. In the 1970s,
developing countries unsuccessfully demanded more power and infl u-
ence 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 adjust-
ment recently in voting power within the IMF – an adjustment that left the
United States and Eurozone countries fi rmly 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 incipi-
ence – early warning exercises. The collaboration anticipates that the IMF
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108 IEL, globalization and developing countries
will assess macro- fi nancial risks and systemic vulnerabilities, while the
FSF will assess fi nancial 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 immedi-
ate 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 diff er-
ences 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 fi scal 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 multilat-
eral development banks; (iv) to ensure $250 billion of support for trade
fi nance; and (v) to use additional resources from agreed IMF gold sales for
concessional fi nance for the poorest countries.
The leaders also declared that they were ‘determined’ to reform interna-
tional fi nancial institutions such as the IMF to ensure that emerging and
developing economies have greater voice and representation. The declara-
tion, however, lacked any newly agreed- upon reforms. By contrast, with
respect to strengthening fi nancial 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 institu-
tional ground’ so that it can more eff ectively assist national authorities,
standard setting bodies (SSBs) and international fi nancial institutions in
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Emerging economies and the FSB 109
addressing vulnerabilities and implementing strong regulatory, supervi-
sory and other policies in the interest of fi nancial stability.
Organisationally, the FSB consists of a Chairperson, a Steering
Committee, the Plenary with member countries, SSBs and international
fi nancial 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
fi nancial stability, maintain the openness and transparency of the fi nancial
sector, implement international fi nancial 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
aff ecting the fi nancial system, identify and oversee action needed to
address them, and promote coordination and information exchange
among authorities responsible for fi nancial 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, par-
ticularly with respect to systemically important fi rms; 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 col-
leges 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 eff ort to promote its institutional legitimacy, the FSB’s mandate
includes increased regional outreach activities to broaden the circle of
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110 IEL, globalization and developing countries
countries engaged in work to promote international fi nancial stability.
Moreover, the FSB will engage in stronger public relations outreach
to raise the visibility of its work and role in the international fi nancial
system.
Reconstituted in this way the FSB will play an integral role in strength-
ening the global fi nancial system in the context of international coopera-
tion (such as developing a framework for cross- border bank resolution
arrangements), prudential regulation (such as working with account-
ing standard setters to implement recommendations to mitigate pro-
cyclicality) and broadening the scope of regulation (such as developing
eff ective oversight of hedge funds) (G- 20, 2009b).
6. CONCLUSION
The global fi nancial 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 fi nancially in the mid- 1940s can no longer be
ignored. Consequently it is a matter of when, not if, emerging (and devel-
oping) economies will gain greater voice and representation in the govern-
ance of international fi nancial institutions.
The transformation of the FSF into the FSB with full G- 20 member-
ship 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 econo-
mies. Much will depend on whether the FSB is eff ective. The expanded
membership, while a plus for emerging economies, may compromise the
organisation’s effi ciency. Moreover, it lacks enforcement powers – it must
seek to improve the global fi nancial 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 insignifi cant. For
instance, the G- 20 has charged the FSB to develop proposals for develop-
ing a framework on corporate governance and compensation practices.
The FSB is also charged with ensuring eff ective operation of supervisory
colleges of cross- border fi nancial institutions. And it will have to develop
an eff ective relationship with the IMF. The two institutions will collabo-
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Emerging economies and the FSB 111
rate on government exit strategies as the crisis recedes. Most importantly,
the IMF and the FSB must fulfi l 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 devel-
oped economies in a multipolar global fi nancial system.
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112
6. 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 nego-
tiations for development fi nancing – including engendering a broad- based
participatory policymaking process – signifi es part of a wider concep-
tual 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 fi nancing from the World
Bank and the International Monetary Fund (IMF), this new blueprint for
offi cial development assistance (ODA) claims to move away from the pre-
scriptive legacy of conditionality which has traditionally characterised the
relationship between parties to such fi nancing.
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 fl ows to developing countries’ (IDA, 2007: para. 3). The terms ‘aid’, ‘offi cial development assistance’ (ODA) and ‘development fi nanc-ing’ will be used interchangeably in this chapter to refer to grants or concessional loans to developing countries by multilateral or bilateral donors.
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The new disciplinary framework 113
ing relationships between the disbursers and recipients of development
fi nancing. Specifi cally, this new framework is perceived of as a depar-
ture from the practice of structural adjustment fi nancing in which the
behaviour of states – with particular reference to national policymaking
and institution building – is governed by the fi nancing terms set by the
fi nanciers. Under the new aid architecture, the locus of decision- making
is ostensibly transferred back to the countries in receipt of development
fi nancing 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 instru-
ment. It contends that changes to the policies and modalities of develop-
ment fi nancing in recent years have had the eff ect of entrenching rather
than retiring the use of conditionality in development fi nancing. This, in
turn, impacts signifi cantly 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 construc-
tion 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
refi ned 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 offi cial development fi nancing. Section 3 will chart the emer-
gence 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 archi-
tecture 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 eff ect 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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114 IEL, globalization and developing countries
2. DECONSTRUCTING CONDITIONALITY
I. Conditionality as a Quasi- Legal Instrument
Conditionality represents the regulatory aspect of the relationship between
parties involved in international sovereign fi nancing, most notably between
the World Bank and the IMF and their client states. While the doctrine of
conditionality shares similar characteristics with other contractual instru-
ments, the nature and practical application of conditionality is largely
peculiar to the nature of the relationship it regulates and to the type of
fi nancing that is being regulated. The disciplinary force of conditionality
does not derive exclusively (and often not primarily) from standard con-
tractual 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 specifi c institutional or structural reforms
that is being fi nanced by the fi nancing agency or institution, at either
the national or sectoral level. Such programme or policy condition-
alities are not specifi ed in the legal agreements for fi nancing 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 fi nancial contracts, the principle of con-
ditionality contains a fi duciary component, requiring the performance
of due diligence on the part of the fi nancing institutions to minimise the
risk of a debt default or a departure from agreed fi nancing objectives.
However, the scope and scale of this exercise under the doctrine of con-
ditionality 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 fi nancial 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 fi nancing arrange-ments – 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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The new disciplinary framework 115
in government policy and institutional reform that is the subject of the
agreement.3
This is refl ective 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 fi nancing as a whole: to compel
the client state to undertake domestic reforms in pursuit of objectives
– social, economic or political – of the fi nancier state or fi nancing institu-
tion. The World Bank itself acknowledges conditionality’s disciplinary
force, admitting that conditionality ‘is involved whenever the donor has
the right to halt the fl ow 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 specifi c project under
investment or project fi nancing, 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 arrange-
ment 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 offi cial fi nancing agreement. Instead, the direct primary sanction for a
breach of conditionality is the non- disbursement of funds under the agree-
ment.
Failure to comply with programme conditionalities can also have
other fi nancial repercussions for the defaulting state. Chiefl y, failure to
3 ‘Conditionality’ must therefore be distinguished from ‘conditions of fi nanc-ing’ which comprise the terms of the legal agreement between the fi nancing entity and the client state, including fi nancial 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 fi nancing (Tan, 2006: 14, Box 2).
4 Although conditionality may sometimes be used in what is normally termed ‘investment’ or ‘project’ fi nancing – aimed at specifi c infrastructure or other ring- fenced expenditures – this particular instrument is most commonly used in fi nanc-ing 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 fi nancing.
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116 IEL, globalization and developing countries
implement a programme of reform successfully, particularly in the case
of an IMF programme, can lead to the suspension of other fi nancing
from other fi nancial institutions or donors, delay offi cial debt relief and/
or send adverse signals to private fi nancial markets and/or other offi cial
fi nanciers 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 pro-
grams’ (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 interna-
tional credit rating agencies in their assessments of countries’ investment
climates, thereby aff ecting countries’ future fi nancial solvency and access
to credit.
Moreover, as discussed further below, the proliferation of joint fi nanc-
ing frameworks, such as multi- donor budget support arrangements, has
increased the interdependence of programme conditionalities by linking
disbursements from diff erent offi cial fi nanciers 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 multi-
ple programmes administered separately by respective institutions. This
means failure to comply with conditionalities established by one donor or
fi nancier may aff ect disbursements from other fi nancial sources.
II. Conditionality and Offi cial Development Assistance
Conditionality forms a major part of offi cial development assistance
(ODA). It is the combination of fi duciary, political and policy elements
which makes conditionality particularly suited to regulating the rela-
tionship between the fi nanciers and the clients in receipt of development
fi nance. The objective of policy and institutional reform is central to
conceptualising the role of conditionality in offi cial development fi nanc-
ing.
Conditionality links the two components of an aid relationship iden-
tifi ed by Degnbol- Martinussen and Engberg- Pedersen: normative and
operational, normative activities broadly referring to infl uence 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 devel-
opment and emergency assistance (Degnbol- Martinussen and Engberg-
Pedersen, 2003: 96). Conditionality polices what the authors term ‘the
interface between normative and operational activities’ (ibid), providing
the framework to ensure that fi nanced projects and programmes in recipi-
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The new disciplinary framework 117
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 fi nancing agreements stems
primarily from the reluctance of international fi nancial institutions
(IFIs), including multilateral development banks (MDBs), and offi cial
aid agencies to apply full contractual force to an agreed programme of
policy and institutional reform. While the fi nancing agreement in itself
is usually legally binding between the two parties – a key exception
being IMF arrangements (see below) – fi nanciers 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 ‘infl uencing or interfering’ with processes which may involve
‘delicate and sensitive domestic considerations and involve internal deci-
sion 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 confl ict
with national constitutional arrangements, making compliance more
onerous for the country and enforcement politically diffi cult for the fi n-
ancier.
Second, while failure to comply with conditionality can result in similar
fi nancial penalties (see discussion above), the fi nancial ramifi cations
of subjecting such fi nancing to the rigour of conventional contractual
enforcement are much more severe. Aside from the loss of other offi cial
fi nancial support and the downgrading of the borrower’s standing in
international fi nancial 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 diffi cult.
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 fi nan-
cial diffi culties. Hence, drawing on the IMF’s general resources – made
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118 IEL, globalization and developing countries
up of members’ contributions according to their quota subscriptions – is
considered an assertion of the right of members to draw on such contrib-
uted 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 refl ects this founding ethos. This includes
fi nancial arrangements under the Fund’s concessional lending facilities,
established under trusts and subsidised by a combination of donor contri-
butions and net profi ts 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 repeat-
edly opposed recourse to external adjudication for disputes with member
states. The two institutions have reserved for themselves the right to inter-
pret 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 interpreta-
tion 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 fi nancing agreement would thus also impose corresponding
obligations on the part of the fi nanciers which the IFIs and other donors
have been unwilling to undertake. Establishing precise legal criteria both
for defi ning the scope of policy conditionality and for determining com-
5 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 classifi ed as Executive Board decisions in which members are assured of a specifi ed amount of Fund resources under certain circumstances and for a specifi ed 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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The new disciplinary framework 119
pliance with such conditionalities may expose the IFIs and other donor
agencies to legal challenge on more controversial aspects of their activi-
ties. As discussed in the following section, the remit of conditionality has
expanded signifi cantly – in terms of both content and purpose – over the
years and this legal ambiguity has enabled offi cial fi nanciers, notably
the Bretton Woods institutions, to pre- empt potential disputes over
the content and implementation of reform programmes they fi nance. It
also allows the IFIs to circumvent constitutional questions which may
arise from their engagement in policy and institutional reform, includ-
ing potential breaches of the World Bank’s constitutional limitation on
non- project fi nancing8 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 regu-
lating the relationship between parties to offi cial development fi nancing
in light of such concerns. The use of conditionality has enabled IFIs and
other donors to regulate the terms of the fi nancing and the behaviour of
the aid recipient country closely but correspondingly provided suffi cient
fl exibility 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 reg-
ulating the relationship between the subjects of international development
fi nance – including the fl exibility, deference to the notion of sovereign
autonomy – has evolved over the years to take on a conversely regressive
role, refl ective of the developments in the international political economy
but also, crucially, refl ective 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 specifi c 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 justi-fi ed 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 offi cers ‘shall not interfere in the political aff airs of any member; nor shall they be infl uenced in their decisions by the political character of the member or members concerned’.
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120 IEL, globalization and developing countries
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 offi cial development fi nance
agreements has resulted in its emergence as a key mechanism of global eco-
nomic governance. In prescribing a standard template of policy and insti-
tutional reforms – including reforms to trade, fi scal and monetary policies
and establishment of specifi c administrative and budgetary processes – to
recipient countries, the conditionalities which accompany development
fi nancing have had the eff ect of organising, harmonising and enforcing
key regulatory norms across diff erent 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 fi nancial support between two state entities (the
fi nancier 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 fi duci-
ary interests of its fi nanciers. Over the years, the remit of conditionality
has expanded dramatically towards restructuring the policy and institu-
tional framework of aid recipient countries as an end in itself rather than
as a means to an end, such as fi scal 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 mecha-
nism for governing fi nancial transactions in lieu of formal legal arrange-
ments has also accorded IFIs and other donors signifi cant autonomy (from
constitutional and external oversight) and wide discretionary powers vis-
à- vis the nature of and substance of their fi nancial 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 fi nancing condi-
tionalities, compounded by the associated fi nancial stakes, it is diffi cult for
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The new disciplinary framework 121
recipient states to challenge the validity and content of such conditionali-
ties.
The consequence of these developments has been the construction of a
highly discretionary regime of fi nancing, relying on the supervision of client
states by bureaucracies within IFIs and donor institutions with correspond-
ingly few fi xed rules of guidance. At the same time, the uniformity of the
reforms prescribed through fi nancing conditionalities – in areas such as trade
liberalisation, land tenure, intellectual property rights, fi scal and monetary
policy, and investment climates – globalizes the regulatory scope of condi-
tionality. This has meant that domestic structures of law and regulation in
diff erent jurisdictions are increasingly harmonised, not through conven-
tional channels of international norm brokerage – such as through nego-
tiation, consensus and ratifi cation of international treaties – but through
compliance with the terms of fi nancing 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 fi nancing 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 conditional-
ity 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 interna-
tional economic relations, with the potential for development and poverty
education contingent upon ensuring fi scal and monetary austerity in
developing countries and creating an enabling environment for economic
activity, including trade and fi nancial liberalisation, investment deregula-
tion 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- fi ts- all’ blueprints or boilerplates for economic plan-
ning in which the same policy and institutional reforms were prescribed
for diff erent countries regardless of diff ering 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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122 IEL, globalization and developing countries
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 conditionali-
ties do not form part of the international fi nancing agreement, which means
that, for the most part, even if such agreements require legislative authorisa-
tion, legislators are not normally familiar with the policy and institutional
reforms that may be necessitated by the fi nancing arrangement. States were
consequently inserted into the international economic order and subjected to
external regulatory authority in a manner that may not necessarily be com-
patible 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, intensifi ed by a groundswell of opposition
from global social movements and a cadre of specialist transnational non-
governmental 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 asso-
ciated with SAP reforms, coupled with a series of fi nancial 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 globali-
zation has to be politically legitimized, democratized and socialized if the
gains of the economic liberalization process are not to be lost to its benefi -
ciaries’ (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 legiti-
macy. 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 miti-
gate the social and economic dislocations of SAPs, rendered the instru-
ment complicit in a crisis of confi dence 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 effi -
cacy 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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The new disciplinary framework 123
nating from the ‘aid eff ectiveness’ agenda – academic and policy research in
the 1990s focused on evaluating ‘the role, impact and eff ectiveness’ of ODA
– had a signifi cant infl uence on the reorientation of international develop-
ment 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 appropriate-
ness of the reforms instituted through conditionality than about improv-
ing 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 effi cacy. 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 con-
ditionality 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 fi nanciers 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 allevi-
ate 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 insti-
tutional reforms associated with development policy loans and grants.
In recasting the aid relationship as one of partnership between the fi n-
ancier 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, partner-
ship 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 coopera-
tion 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 gov-
ernance. Morrow identifi es 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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124 IEL, globalization and developing countries
as conditions of fi nancing where they have been mutually agreed and/or
have ‘suffi ciently 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 – fi nancing in exchange for commitments to future
reforms – to ex ante conditionality – fi nancing 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 conditionali-
ties – conditions based on meeting set targets and objectives rather than
action – as well as non- binding monitoring instruments such as bench-
marks and triggers. At the same time, the content of conditionality has
also shifted away from purely fi scal, monetary and structural economic
conditions towards an emphasis on institutional reform, particularly a
focus on reforming public fi nancial management systems and state budg-
etary administration (see further discussion below).
From an aid fi nancier’s perspective, the shaping of conditionality in
this manner is aimed at ensuring greater success in policy implementa-
tion 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 confi guration has not
extinguished the politics of structural adjustment nor altered the dynam-
ics 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
fi nancing terms but ‘through closer involvement in state institutions and
the employment of incentive fi nance’ (ibid: 660).
4. THE RECONSTELLATION OF INTERNATIONAL ENGAGEMENT
I. Self- Regulation and the New Aid Architecture
Although the reform of the conditionality regime represents a signifi cant
part of the overhaul of international development policy and the tech-
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The new disciplinary framework 125
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 develop-
ment fi nancing instruments. Taken together, these changes refl ect a wider
reconfi guration 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 refi ning the
regulatory role of conditionality in the global economy despite claims to
the contrary.
First, the front- loading of conditionality has redefi ned the parameters
of development fi nancing. Whereas traditional conditionality is linked
to commitments to policy reform – with specifi c 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 fi nancing, 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 recipi-
ent 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 offi cial fi nancing arrange-
ment is entered into. At the World Bank and the IMF, prior actions are
normally required to be completed before a fi nancing arrangement is
presented to the respective Executive Boards for approval (IMF, 2006a:
para. 14; World Bank, 2005d: para. 13). This means that, unlike tradi-
tional conditionalities which have to be complied with after the fi nancing
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 offi -
cially and discussions on policy and institutional reforms are undertaken
largely between staff of the IFIs and the country authorities. Approvals
of fi nancing arrangements are contingent on compliance with such prior
actions.
Critics have argued that the front- loading of conditionality in this manner
signifi cantly 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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126 IEL, globalization and developing countries
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 fi nancing 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 fi nancing arrangement.
The use of ex- ante conditionality is compounded by the application of
‘country selectivity’ and the attendant use of pre- qualifi cation 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 fi nancing 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 specifi c
instrument of fi nancing – that is, it is not conditionality per se – country
selectivity does inform fi nancing decisions at a very political level.
The World Bank’s concessional lending arm, the International
Development Association (IDA), for example, relies on a performance-
based allocation (PBA) system, underpinned by a complex scorecard
known as the Country Policy and Institutional Assessment (CPIA), when
allocating fi nancing 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 fi gure for fi nancing allocations, particularly its dispropor-
tionate 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 fi nan-cial resources are channelled directly to recipient countries’ budgets, using local accounting systems and budget processes and linked to sectoral or national poli-cies rather than being ring- fenced for specifi c project activities or tied to specifi c expenditures (DFID, 2004: 3; World Bank, 2005b: 3–4).
11 Unlike the non- concessional IBRD which raises its capital from the fi nan-cial markets, resources for the IDA are derived mainly from donor contributions
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The new disciplinary framework 127
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 devel-
opment 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 eff ectively taps into international orthodoxies of develop-
ment 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 amplifi es the political
and often ideological nature of aid relationships. Countries have a fi nancial
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
fi nanciers and clients and policy reforms are clearly delineated as refl ect-
ing 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 bor-rowers. See http://go.worldbank.org/DG0REG38A0 for further details.
12 PRSPs must also focus and be developed nationally through a participa-tory process involving a cross- section of stakeholders. Aside from Bank and Fund concessional fi nancing and debt relief, PRSPs have also served as the basis of other concessional support, including multi- donor joint fi nancing 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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128 IEL, globalization and developing countries
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 confi ned to bilateral negotiations between
government ministries and donor agencies, especially if such reforms are
pre- requisites for fi nancing 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 fi nancial shocks.
This shift in responsibility downwards to recipient governments further
removes the accountability of the IFIs and other donors to the ultimate
benefi ciaries of development fi nancing – 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 fi nance 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 effi cacy of aid delivery and the successful imple-
mentation of policy reform, changes in the modalities of aid governance
over the past decade have also been aimed at standardising aid processes
across diff erent jurisdictions, both among donors and within recipient
states. The process of ‘aid harmonisation’, linked closely to the afore-
mentioned ‘aid eff ectiveness’ agenda, is increasingly formalised under the
auspices of the OECD- sponsored Paris Declaration on Aid Eff ectiveness
2005, signed by over 140 developing and donor countries and development
agencies.13 Aimed ostensibly at promoting country ownership of develop-
ment strategies, harmonising donor and creditor practices and establish-
ing ‘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 fi nancing arrangements based on the Paris
13 See OECD website, http://www.oecd.org/document/22/0,3343,en_2649_3236398_36074966_1_1_1_1,00.html (accessed 7 August 2009).
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The new disciplinary framework 129
Declaration principles have become common instruments for coordinat-
ing budget support14 fi nancing 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 fi nanciers, 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 fi nancing
agreements which are ‘compatible with the spirit and provisions’ of the
arrangement (ibid: para. 13 and Annex 1, para. 4.1).
Proponents of joint fi nancing 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. Specifi cally, the aid harmonisation
agenda has not extinguished the structural defi cits inherent in aid rela-
tionships, 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 conditional-
ity have been twofold: (1) joint fi nancing arrangements have resulted in
greater imbalance in negotiating strength between donors and recipients
and less fl exibility in the context of conditionality design and implemen-
tation; and (2) the new modalities of aid delivery accompanying such
arrangements have resulted in more intrusive conditionality, focused sig-
nifi cantly on reforming public administrative systems in developing coun-
tries. 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 fi nancing arrange-
ments have had the converse eff ect 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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130 IEL, globalization and developing countries
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 fi nancing 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 capac-
ity to negotiate on equal terms with a single donor, let alone a group of
donors and offi cial 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 streamlin-
ing 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 fl ows to a single framework for conditional-
ity design, evaluation and assessment risks countries being cut off from
fi nancial 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 offi cial creditors
and donors pivot their fi nancing decisions and disbursements on coun-
tries’ ‘on track’ implementation of the IMF’s programme of reform. Case
studies have demonstrated instances where IFIs and donors have with-
held 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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The new disciplinary framework 131
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 infl exible to respond to economic contingencies or other neces-
sary changes in the social, political and economic structure of the recipient
state (see Bissio, 2007: para. 74).
Reforms under the new aid framework signifi cantly increase donor
infl uence and presence within a country, facilitating deeper policy dialogue
between donors and offi cial creditors and country authorities. Outwardly,
budget support is viewed as promoting a country’s ownership of its devel-
opment programme – with IFIs and donors supporting diff erent 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 infl uence, donors prefer direct
budget support because relatively little money can buy signifi cant 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 offi cial creditors to infl uence national economic policymaking in
developing countries at a very strategic level, including providing capacity
building and technical assistance to countries to develop national develop-
ment 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 struc-
tures, often demanding reforms in public fi nancial management (PFM)
in exchange for the ‘autonomy’ that comes with providing fi nancial
resources directly into government coff ers. 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 fi nancial management, accounting, procure-
ment 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 govern-
ment performance and implementation of reforms (see Afrodad, 2007: 19;
Alexander, 2007: 6).
The focus on reforming public administrative systems, including budg-
etary processes and procurement practices, is not confi ned to harmonised
and the EU withheld over US$138 million of support to Zambia when it exceeded the IMF’s budget defi cit limit by 0.4 per cent (Nkombo, 2008: 2).
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132 IEL, globalization and developing countries
aid frameworks. There has been a progressive shift generally towards
standardising public fi nancial management systems in developing coun-
tries through aid conditionalities. The World Bank’s review of condi-
tionality trends and practices in 2005 showed that conditions in public
expenditure management and other fi duciary 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
fi ght corruption, strengthen fi scal 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’ fi duci-
ary processes and greater control over government expenditure.
III. Towards a Globalized Aid Regime
Changes in the policy and practice of international development fi nancing
over the past decade have had an enormous infl uence over the develop-
ment 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
fi nancing, fi scally as well as strategically and politically. As discussed
above, the new regime entails greater supervision not just of countries’
policy choices in specifi c areas but also their national policymaking frame-
works 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 offi cial
development fi nancing. In this manner, the new aid regime aims to glo-
balize aid relations across diff erent jurisdictions through institutionalising
standardised systems for economic planning and public administration in
aid recipient states. It moves beyond the universalisation of economic poli-
cies seen during the era of the Washington Consensus in which states were
conscripted into a unifi ed model of economic development and, instead,
penetrates into the heart of public policymaking and public administra-
tion in developing countries.
This is facilitated through a systematic globalization of public adminis-
trative structures and the centralised monitoring of countries’ budgetary
and other fi nancial 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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The new disciplinary framework 133
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 refl ect the economic and geo- strategic priorities and interests of
powerful donor states but also, in many ways, imitate the donors’ struc-
tures 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 donor-
supported 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 political-
economy 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 rela-
tionship between the north and south (Badie, 2000: 14–15). For Badie, this
internalisation of the western political order in what he calls the ‘periph-
eral states’ is driven by the need to prove, at least on the part of the local
political elites, their affi nity with and adherence to the norms and stand-
ards 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 condi-
tionalities in which states were overtly required to adopt such reforms in
exchange for fi nancing, the new forms of conditionality masks the dynam-
ics of power and coercion inherent in the aid relationship. The emphasis
on engagement with country authorities through a process of ‘policy dia-
logue’ enables the IFIs and other donors to extract policy commitments
and to secure support for policy and institutional reforms outside conven-
tional channels of norm brokerage and bilateral negotiations. The eff ect
of these reforms has been a signifi cant restructuring of state apparatuses
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134 IEL, globalization and developing countries
and a corresponding radical overhaul of the business of government in aid
recipient countries.
The construction of the relationship between parties to development
fi nancing 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 mecha-
nisms of accountability. As discussed previously, the design of aid policy
and aid delivery is increasingly conducted within clusters of donor-
dominated 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
fi nancial 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 lib-
eralisation and fi nancial deregulation, prescribed under structural adjust-
ment 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’ conditionali-
ties 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 fi rms 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 developmen-
tal strategy.17 By insisting on international competition for government
procurement as a condition of fi nancing – even for purchases outside the
16 In many instances, fi nancial information, such as reports on budgets and public expenditure, is prepared for and consumed by solely offi cial creditors and donors by one or two government departments, such as fi nance ministries and/or ministries of planning, and does not fi lter 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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The new disciplinary framework 135
aid- allocated budgets – donor states are securing trade reforms through
the back door, thus undermining recipient states’ positions in other inter-
national lawmaking fora.
5. CONCLUSION
The doctrine of conditionality is an integral part of development fi nanc-
ing, governing not only the terms of fi nancial support between a donor or
offi cial 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 emer-
gence of conditionality as a mechanism of global economic governance
has a signifi cant 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
refi ned with the inception of new modalities of aid delivery and policies of
development fi nancing in the past decade. While framed in the language
of engagement and autonomy, the new framework for governing the
relationships between offi cial donors and creditors and their client states
assumes a conversely stringent disciplinary eff ect 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 relation-
ships between the various actors engaged in development fi nancing.
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 pol-
itics 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 fi nancing in the fi rst instance.
Second, and relatedly, the new forms of conditionality place responsibil-
ity for social and economic development and the effi cacy 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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136 IEL, globalization and developing countries
Under the new aid regime, states shoulder the primary responsibility for
meeting developmental challenges and overcoming socio- economic exclu-
sion 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 fi nancial system or
the design and content of aid conditionalities but by: (a) the state’s own
incapacity to generate or absorb fi nancial 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 eff ect of this has been a reassignment of responsibility which fore-
closes opportunities for revision of the rules and institutions of interna-
tional 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 diff uses 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 tradi-
tional conditionalities, entailing intimate supervision of countries’ policy
choices and administrative structures above and beyond that necessary
for fi duciary oversight. The relationship between donor and recipient in a
development fi nancing 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 conditional-
ity framework continues to mask the unequal nature of the aid relation-
ship 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 ces-
sation of national control over crucial aspects of norm creation, enforce-
ment and adjudication, including dispensation with domestic ratifi cation
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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The new disciplinary framework 137
However, the politics and economics of the aid relationship mean that
this enmeshment of local and global regulatory structures has diff erent
impacts on developing countries who represent the recipients of offi cial
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 condi-
tionality framework can only serve to reinforce the systemic asymmetries
in global economic governance and international economic law.
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138
7. 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 correla-
tion 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 under-
taken of the ways in which such fi scal 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 interna-
tional 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.
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Taxing constraints on developing countries 139
to a conclusion that purveys a sense of a fi scal 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 fl ows 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 briefl y, aspects of the extent to
which a developing country may have the freedom or discretion to react
within the context of its constrained fi scal autonomy to the antithesis of
the economic growth that was anticipated by the aforementioned interna-
tional economic institutions and by the United Nations (UN) to follow
global economic integration, namely a global economic recession.
2. TAX AND FISCAL POLICY
I. 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 refl ection 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 pur-
poses 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 non-
tax revenue, such as foreign monetary aid which may be proff ered, for
example, in order to support trade and development. Further, the ability
of a government to tax and raise tax revenue is also an affi rmation of that
government’s legitimacy or its ‘right to rule’, which in the case of a devel-
oping country may refl ect a growing economic strength that is, in turn,
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140 IEL, globalization and developing countries
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 compet-
ing, 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 pro-
gressive and, if so, how progressive it should be will often diff er. Indeed,
these notions may not always be compatible with achieving optimal levels
of tax revenue (for example, where circumstances dictate that in the inter-
ests of equity tax revenue should be forgone, and they may be, au con-
traire, eschewed, in appropriate circumstances, in favour of effi ciency). 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 effi ciency, 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 effi ciency engender a certain
degree of uniformity in those instances in which, as identifi ed by Avi-
Yonah and Margalioth (2007–08: 4), taxes are necessary
to overcome the free riding inherent in the fi nancing of public goods, to control market imperfections, and to achieve social justice through redistribution. Economic growth (effi ciency) is promoted by the fi rst 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 determina-
tions such as the relative importance to be attributed to the concepts of
effi ciency and equity within that system, are essentially matters of politi-
cal and economic judgment informed by internal factors. Increasingly
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Taxing constraints on developing countries 141
however, in the present era of global economic integration and interde-
pendence of countries, these decisions are also determined by external
fi scal 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 antici-
pated domestic conditions and circumstances. It is one that is particu-
larly 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, signifi -
cant diff erences 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 pontifi cate
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 signifi cant 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 ineffi cient, ineff ective and corrupt tax administra-
tion. However, in the case of either substantive or administrative concerns,
it is, obviously, quite another matter and much more diffi cult to provide
specifi c, 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 fi scal autonomy or
sovereignty may also be constrained as a consequence of its relationship
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142 IEL, globalization and developing countries
with other countries and, as will be seen, such constraint may be consen-
sual or otherwise. This circumstance has become particularly evident in
recent times, and especially since the 1980s when global economic integra-
tion took root following the relaxation of exchange and capital controls
and the lowering of trade barriers between countries. The result is that
the defi nition of the parameters of what may be done and the consequent
confi guration of tax systems has been infl uenced, increasingly, by fi scal
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 fi scal 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 fi scal action is to some extent inevitably
constrained.’
In some instances, a constraint on a country’s freedom of fi scal 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 off er 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 off er such incentives or their equivalent. In
other cases, a country may accept a constraint on its fi scal sovereignty –
as opposed to a constraint on its ability to act fi scally – voluntarily and
formally acknowledge that acceptance within the confi nes of either a mul-
tilateral or bilateral agreement entered into with other countries. In this
latter respect, it does not follow that a decision to voluntarily accept a con-
straint on fi scal sovereignty must necessarily lead vis- à- vis other countries
to a negative outcome, that is, to a diminution of fi scal 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 fi scal
autonomy or sovereignty may be accepted voluntarily and be benefi cial.
For example, the perceived benefi ts 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
fi scal autonomy or sovereignty which membership of the union may entail.
Similarly, in a discrete tax context it may be evident that the advantages
(fi scal and/or otherwise) to be gained from agreeing to co- operate and co-
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Taxing constraints on developing countries 143
ordinate warrant some dilution of fi scal 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 fi scal
autonomy (that may not necessarily be benefi cial) may also arise in rela-
tion 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 Pacifi c countries (the ACP
countries) have agreed, in accordance with the Cotonou Agreement which
they entered into in 2000, to conclude WTO- compatible economic part-
nership 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 tariff s, 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 promo-
tion of sustainable development and poverty reduction in ACP countries
by, fi rst, 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 tariff s in EPAs, and which, as will
be seen below, may be diffi cult 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 coun-
tries and sub- groups of countries (for a recent review of EPA negotiations,
see European Centre for Development Policy Management, 2009).
Further, fi scal 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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144 IEL, globalization and developing countries
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 profi ts and also by the country in which it has a permanent
establishment (its host country) on the proportion of those profi ts that are
attributable to that permanent establishment.
In relation to bilateral DTAs, which presently operate within an exten-
sive 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
fl ows of income from one country to the other will be commonplace and
signifi cant, and that such fl ows of income will be related, predominantly,
to trade conducted by companies/entities operating within the same multi-
national 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 affi liates, with the value added activity of foreign affi liates account-
ing for 11% of global GDP, sales amounting to $31 trillion (about one
fi fth of which represents exports) and the number of employees reaching
82 million’ (UNCTAD, 2008d: 9). Moreover, the importance of such mul-
tinational 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 counter-
ing the spectre of double taxation and its negative eff ect on cross- border
transactions, is to allocate taxing rights between the countries in relation
to pertinent kinds of income – such as business profi ts, royalties, interest,
and dividends – in a manner which, in practice, will provide an ‘accept-
able’ 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 fi rst 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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Taxing constraints on developing countries 145
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, refl ects 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 above-
mentioned reciprocity is present and where the countries enjoy similar
bargaining positions.
However, where such reciprocity is absent and the respective bargain-
ing 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 aff orded 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 inves-tor’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 ver-sions of the other two Models do not . . . one of the most useful features of this Model is the enhanced rights it aff ords to developing countries to tax a part of the [business] profi ts 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 coun-
tries 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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146 IEL, globalization and developing countries
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 infl uence of
developed country governments on tax reform in developing and transi-
tional 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 signifi cant 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 eff ect 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 jurisdic-tion 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 devel-
oped 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 fi scal effi cacy 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 benefi ts 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 eff ective in attracting foreign direct investment which leads, subse-
quently, to sustainable economic growth is debateable (see Klemm, 2009).
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Taxing constraints on developing countries 147
However, the signifi cance 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” regard-
ing 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 eff ective, acknowledges, nevertheless, the following
advantages that a DTA may off er 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 benefi ts that accrue to developed countries, the main benefi ts 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 benefi ts), must make a sacrifi ce in the guise of tax revenues to win these benefi ts. (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 informa-
tion (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 agree-
ment 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 sacrifi ce 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 col-
lection 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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148 IEL, globalization and developing countries
It is clear that these instances of the interaction between countries have
a potential bearing on the fi scal autonomy of developed and developing
countries. Their signifi cance, however, is perhaps more telling for devel-
oping 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 suffi ciently outweighed
by more tangential benefi ts 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 fi scal autonomy of developing countries may be
further compromised as a result of the infl uence which international eco-
nomic institutions have had on the confi guration 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 signifi cance. In the
present context, such interaction has often involved interplay between the
achievement of economic goals set by international economic institutions
and domestic fi scal provision with, additionally, the UN and some of its
agencies having a long established interest in free market economic devel-
opment and concomitant tax issues.
Indeed, as will be seen, it is sometimes diffi cult to disentangle the diff er-
ent modes of engagement between an international economic institution
and a country when they are, principally, economically motivated (for
example, the removal of trade tariff s with a view to furthering the liberali-
sation of trade but nevertheless trespass upon national fi scal 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 profi le 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 contract-
ing parties (or words to that eff ect). More generally, the provision by the
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Taxing constraints on developing countries 149
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 fi scal 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 fi eld’ in the areas of transparency and eff ective
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 transpar-
ency, 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 fi scal autonomy is readily apparent when the rela-
tionship 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’ fi scal auton-
omy. 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 Tariff s and Trade
(GATT) and in the General Agreement on Trade in Services (GATS) and
which fi nds expression, respectively, in the ‘most favoured nation obliga-
tion’ and the ‘national treatment obligation’, either of which may apply to
internal tax obstacles to trade in goods or services with other WTO mem-
bers.3 More specifi cally 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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150 IEL, globalization and developing countries
uncollected revenue ‘that is otherwise due’. However, only those subsi-
dies 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 interna-
tional economic institutions that have had and continue to have a direct
bearing on their fi scal autonomy are those forged with the IMF and the
World Bank. As Stewart and Jogarajan opine, ‘international fi nancial
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 fi nance 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 broad- based 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 diff erent investments and activities; and the simplifi ca-tion, gradual reduction and eventual elimination of import and export tariff s. 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 eff ectively excluded their trading income from taxation in the US, was contin-gent upon export performance and, consequently, WTO- incompatible, see ibid: 748–59.
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Taxing constraints on developing countries 151
The IMF’s rationale for such a tax package is related, specifi cally, to
its mandate to ensure that governments can raise suffi cient 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 bor-
rowing. Its principal focus is on effi ciency, 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 con-
sumption taxes, particularly VAT, is geared towards furthering macr-
oeconomic activity and providing the benefi ts 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 ineffi cient because local producers who
export their goods are disadvantaged compared with foreign producers,
whilst the VAT is seen as more effi cient than import taxes because it does
not discriminate between domestic and imported goods. Moreover, the
elimination of import taxes allows local consumers to benefi t from lower
prices created by competition between domestic and foreign producers.
Further, the elimination of import taxes makes local producers become
more effi cient and focus their eff orts 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 fi scal 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 (chiefl y, through simplifi cation) 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 fi scal autonomy, par-
ticularly bilateral DTAs.
Looking ahead, these areas of fi scal 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 fi nancial 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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152 IEL, globalization and developing countries
Finally, the last substantive part of this chapter considers whether
domestic, inter- country and international economic institution- country
constraints on the fi scal autonomy of developing countries provide, indi-
vidually and/or cumulatively, suffi cient fl exibility to enable such countries
to react eff ectively 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 vul-
nerability 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 inter-
dependence 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 acknowl-
edged 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 decla-
ration 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 fl exible fi nance [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 fi scal challenge
for developing countries of how to respond to the prospect that tax rev-
enues (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 devel-
oped countries but one which such countries are far better placed to meet.
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Taxing constraints on developing countries 153
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 imper-
ative 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 fi scal 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 eff ect and thereby exacerbate the prevail-
ing economic downturn. It is also a decision that clearly has a particular
poignancy in the context of this chapter because of the constraints on
fi scal 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 fi scal action.
In this regard, expediency may suggest that the contemplated remedial
fi scal action might focus on measures that are designed to generate tax
revenue in the short term rather than on those which are likely to con-
tribute to an enhanced fi scal return over a longer period (for example, the
simplifi cation of the tax system or reforms that are designed to further the
effi ciency and eff ectiveness of a tax administration). If this is so, it follows
that general pronouncements that emanate from the international com-
munity about the prospective provision of non- monetary support in fi scal
matters to developing countries are unlikely to be regarded as a panacea
for the immediate diffi culties of straitened economic times unless related,
specifi cally, 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 fi nancing for
development in accordance with the Monterrey Consensus:
We will continue to undertake fi scal reform, including tax reform, which is key to enhancing macroeconomic policies and mobilizing domestic public resources . . . We will step up eff orts to enhance tax revenues through modernized tax systems, more effi cient tax collection, broadening the tax base and eff ectively combating tax evasion. We will undertake these eff orts 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 eff orts in these areas by
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154 IEL, globalization and developing countries
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 rev-
enues 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 fi scal constraints examined in this chapter. In this
respect, the degree of fi scal fl exibility 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, inter-
country and international institutional constraints on its fi scal 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 numer-
ous instances by the IMF tax reform ‘package’. This makes it possible to
identify elements of commonality when the impact of fi scal 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 confi nes of this chapter and, consequently, the remainder of this
section seeks simply to highlight, briefl y, 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 devel-
oping 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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Taxing constraints on developing countries 155
gation of such measures, this does not guarantee compliance generally
and/or by members of the elite. Indeed, such measures may, on the con-
trary, 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 fi nd very diffi cult 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 rev-
enues 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 eff ect, 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 eff ective VAT gener-
ally, particularly regular bookkeeping, reliable self- assessment and an
effi cient 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 defi ciencies 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 execu-
tion, 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 signifi cant.
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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156 IEL, globalization and developing countries
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 fi scal ramifi cations 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 previ-
ously the main source of tax revenue, but also to a situation in which alter-
native tax revenues, derived in particular from VAT and income tax, have
risen signifi cantly 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
effi cacy 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 profi ts 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 defi nes ‘permanent establishment’ more nar-
rowly than its UN Model counterpart, and Article 7, which provides for
the attribution of business profi ts to a permanent establishment. However,
in this instance, the pertinent constraint is the need to retain competitive-
ness 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 fi scal 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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Taxing constraints on developing countries 157
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 con-
straints that may fetter the fi scal autonomy of developing countries.
The impact of those constraints has been considered, admittedly, in nar-
rowly defi ned circumstances. Nevertheless, notwithstanding these narrow
confi nes, an impression has been created not only of the limits that may
be placed on fi scal 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 bor-
rowing requirements usually fi nds 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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158
8. 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 sug-
gesting 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 crystal-
lisation of pervasive structures and ideologies that combined and gained
particular force and impetus during the twentieth century. Specifi cally,
the chapter considers the eff ects 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 eff ect 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 develop-
ing 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 underly-
ing 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.
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The World Trade Organization 159
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 so-
called doctrine of comparative advantage. The idea of comparative advan-
tage 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
refi nement 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 ‘doc-
trine’, has been an important weapon in the crusade for the liberalisation
of world trade, of which the establishment of the WTO is a signifi cant 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
qualifi cations, 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 compara-
tive advantage to produce only the commodities that it can most effi ciently
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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160 IEL, globalization and developing countries
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 promi-
nent free trade advocates are doubtful about this proposition and accord-
ingly reluctant to hang the free trade case under this banner (Bhagwati,
2002: 41–3). Non- economic benefi ts 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 benefi ts would, it is argued, fl ow from the fact of
economic interdependence.
There are a number of diffi culties in using the doctrine of compara-
tive 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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The World Trade Organization 161
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 unjustifi able extension of a largely acceptable qualifi cation 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 effi ciency 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 contin-
ued unabated into the twenty- fi rst 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 sub-
sidiary 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 avail-
ability 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 signifi cance diff ers sub-
stantially from industry to industry (Leonard, 1998: 21–6). The impor-
tant 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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162 IEL, globalization and developing countries
3. COMPARATIVE ADVANTAGE, FREE TRADE AND DEVELOPING COUNTRIES
Cogent criticisms have been made about the ability of the doctrine of com-
parative advantage to deal with the obvious global disadvantage of devel-
oping 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 argu-
ments that explain why the doctrine of comparative advantage may be
unable to deliver its promised welfare benefi ts to developing countries.
One of the important general arguments in this context is that com-
parative advantage is created and cumulative, rather than natural, ‘being
based on historical development processes, acquired skills, cultivated
industry patterns or “fi rst mover” benefi ts, 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 compara-
tive 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 ine-
qualities 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 elas-
ticity in domestic demand for imports, then export prices relative to import
prices will result in a continuous trade defi cit (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 defi cit 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
defi cit and retarded economic development suff ered by developing coun-
tries. It is certainly the case that the adverse economic position of develop-
ing 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 fi rst is that the requirements for the global protection of intellectual
property rights,1 the large- scale benefi ts 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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The World Trade Organization 163
ing countries any comparative advantage that they may have accrued in
the processes or imitation of certain manufactured goods and in ‘incre-
mental 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
aff ected 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 allevi-
ate the trade defi cits 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 per-
ceived as a potential fl ood 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 low-
cost labour in order to achieve an advantage that gives little in the way of
welfare benefi ts 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 con-
sumers 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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164 IEL, globalization and developing countries
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 multi-
national 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 any-thing 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 maximi-
sation draws stark attention to the diffi culty 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 signifi cance 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 sacrifi ce 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 eff ects of free trade, both
positive and negative. On the positive side, both he and Ricardo cited
cosmopolitanism and international harmony as a non- economic benefi t
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The World Trade Organization 165
of free trade. However, Smith saw that the pursuit of material wealth had
less desirable eff ects:
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 confl ict between this concern and
his commitment to the expansion of wealth, cosmopolitanism and inter-
national 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 interna-
tional 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 insidi-
ous 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 justifi cation for world market liberalisation, it
is arguable that the WTO is incapable of realising the benefi ts 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 transna-
tional oligopolies’ (Amin, 1998: 97).
4. THE RISE OF CORPORATE CAPITALISM
In their attachment to the theory of comparative advantage and its pre-
sumed 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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166 IEL, globalization and developing countries
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 com-
parative advantage to ignore the importance of the joint stock corpora-
tions 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 super-
seded the Dutch, the English joint stock companies began their domina-
tion of international trade. This pattern was not a mere coincidence. As
Arrighi has noted, the ‘joint- stock chartered companies were highly mal-
leable 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 inter-
dependence with the nation state, and this relationship has considerable
political signifi cance. 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 multi-
national 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 infl uential
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 fl ourishing 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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The World Trade Organization 167
tions, while economic activities in the United States remained organically inte-grated 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 inte-
gration (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 fi rst layer is
‘an extremely elementary and mostly self- suffi cient 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 diff erent 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 anti-
market, 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 capital-
ism 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 profi tably employed by use in the development of new markets that
expand the productive capacity of the existing markets, then a switch
occurs and excess profi ts are ploughed into the trade in money. That is, a
switch is made from trade to fi nance.
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 profi t 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 fi nance (Arrighi, 2002: 215).
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168 IEL, globalization and developing countries
Drawing on Weber (1978), Arrighi argues that interstate competition
for mobile capital has been essential to the material expansion of the capi-
talist world economy. However, Arrighi’s gloss to this proposition is that
capitalist power has intensifi ed during each period of capitalist accumula-
tion (Arrighi, 2002: 12ff ).
It seems that the modern multinational enterprise is very much a crea-
ture of this intensifi cation 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 inter-
state competition for investment. Gray notes:
Today’s competition between states for investment by multinational corpora-tions allows them to exercise a leverage they did not possess in a more hierarchi-cal 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 aff ect 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 infl uence multinational corporate entities are able
to wield over the world economy has important implications for the doc-
trine of comparative advantage and its free trade concomitant, which are
concerned in essence with the eff ect 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 fi rst 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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The World Trade Organization 169
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, suscep-
tible 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 alloca-
tion.
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, signifi cance, inevitability and desirability of globaliza-
tion are legion. Structurally speaking, important diff erences 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 ‘diff er-
ences between localities, nations and regions’ because ‘[t]here would not
be profi ts to be made by investing and manufacturing worldwide if condi-
tions were similar everywhere’ (Gray, 1998: 57–8) provides an example of
this tendency. It may be that economic globalization is stimulated by dif-
ference, 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 globaliz-
ing 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 eff ect of economic glo-
balization 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 signifi cance
of this threat in terms of the exercise of sovereignty is much debated. For
some commentators sovereignty has been relocated upwards to the supra-
national 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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170 IEL, globalization and developing countries
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 particular-
ism or alternative models to rival European forms of modernisation’
(Dunkley, 2001: 16).
In terms of the social, legal and political eff ects 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 require-
ment 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 specifi -
cally of multinational corporate entities, has transcended the nation state
while the exercise of political and legal power has remained trapped within
its confi nes.
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 appro-
priately 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 infl uence government policies in countries
seeking foreign direct investment (FDI). The exercise of this power is a
prevalent feature of twenty- fi rst- 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 benefi ts fl owing 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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The World Trade Organization 171
They command enormous physical and fi nancial resources, including propri-etary 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 fi nancial 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 refl ection 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 aff airs of the host member and in its determi-nation 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 eff ects. (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 infl uence 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 infl uence 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 infl uence political developments at the international
level is perceived as comparatively limited, but are rather the most power-
ful 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 pow-
erful 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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172 IEL, globalization and developing countries
powerful and infl uential 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 infl uential states that there is a community of interest
between state and corporation had a decisive infl uence on the outcome of
the Uruguay Round.
5. THE TRANSITION FROM GATT TO THE WTO
The new institution of the WTO was the fi nal 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 agree-
ment 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 diff erences 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, diff erences 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 Tariff s and Trade, Punta del Este Declaration, Ministerial Declaration, 20 September 1986.
5 Specifi cally, the Preamble to the WTO Agreement refers to ‘allowing for the optimal use of the world’s resources in accordance with the objective of sustain-able 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 diff erent levels of economic development’.
6 Specifi cally, the Preamble to the WTO Agreement refers to the ‘need for positive eff orts 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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The World Trade Organization 173
law- making. This is not to suggest that the establishment of the WTO is
without signifi cance in the pattern and trajectory of multilateral trade
governance. On the contrary, it was a moment of great signifi cance pre-
cisely 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 con-
solidated a trend that began during the Tokyo Round, when the trading
system fi rst fi xed 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 institu-
tion (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 agree-
ment, intellectual property and services, would be most effi ciently 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 crea-
tion 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 contem-
plated in the Punta del Este Declaration, that there were longer- term sys-
temic 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 pres-
sures, 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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174 IEL, globalization and developing countries
A problem in assessing the meaning and signifi cance of the move
from the GATT to the WTO is in distinguishing between proponents
of the new institutional form and proponents of greater trade liberalisa-
tion. 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 diffi cult, if not impossible – and, in other contexts, possibly meaning-
less since the form clearly aff ects 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 lib-
eralisation 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 signifi cant presence in mul-
tilateral trade talks for the fi rst 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 fi rst, rather lukewarm in
relation to the proposed new trade organisation, preferring a more incre-
mental approach to the establishment of any new overarching institution.
By the time of the 1991 Dunkel Draft,8 which formed the basis of the fi nal
agreement for the WTO, the US position appears to have solidifi ed in
favour of the proposed new institution.
The European Communities, on the other hand, were having far more
diffi culty 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 eff ect on the French fi lm industry,
specifi cally.
In the end, it was the US that forced the issue, demonstrating coales-
cence between pressures for trade liberalisation and for the new institu-
tional 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 fi nal Uruguay Round Agreements.
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The World Trade Organization 175
expediency, it suggests that ultimately there was no intrinsic contradiction
between greater trade liberalisation and the new institution of the WTO.
Given this fi nal rapprochement between greater trade liberalisation and
the new institution of the WTO, it is tempting to argue that the greatest
signifi cance 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 fi nal
form, the institution of the WTO serves the cause of the (sectorally selec-
tive) free traders, rather than free trade serving the cause of greater institu-
tionalism 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 infl uence on the architects of the WTO’s doomed fore-
runner, the International Trade Organization, and by default the GATT,
was the conviction that liberalised trade and consequent economic interde-
pendence would reduce political confl ict 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 laud-
able 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 confl icts 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, diffi cult 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 benefi ts of trade liberalisation. Leaving aside the questions
that have been raised about these above and (especially) the question of
the distribution of these benefi ts, 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 87-
fold between 1948 and 1997, from $124 billion to $10,772 billion’ (Bello,
2000: 104, citing WTO, 1998).
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176 IEL, globalization and developing countries
Rather, as an explanation of the emergence of the WTO, it seems much
more likely that the WTO was a response to that economic interdepend-
ence 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 cor-
porate 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 fi xed 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 insti-
tutionalism. 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 eff ect on the WTO. The constitution of legitimacy is
mutual, so that the WTO has a legitimating eff ect 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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The World Trade Organization 177
view of the relationship between the structure of the world economy and
the emergence of legal institutions. Specifi cally, 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 relation-
ship 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 signifi cant 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 identifi ed 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
profi ts derived from trade became so poor that money was switched from
trade to investment capital, came as the result of the intensifi cation 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 accu-
mulation.
Further complicating the neatness of the successive cycles of capital-
ist accumulation is Arrighi’s insight that capitalist power intensifi es with
each cycle. It is this complication that causes Arrighi to doubt whether
the cycles of accumulation can continue indefi nitely (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 corpo-
rations’ and ‘the resurgence of suprastatal world fi nancial markets’ have
created a pressure to relocate state authority (Arrighi, 2002: 331; see also
Jayasuriya, 1999: 443):
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178 IEL, globalization and developing countries
In recent years, the most signifi cant 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 hur-riedly 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 refl ecting 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 com-
munity turns to international (economic) law- making, perhaps as an
alternative to war- making, in order to manage confl ict? 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 Anglo-
French 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 benefi ts of
their own expansion), the United Kingdom promoted or participated in
a range of treaty obligations designed to maintain its pre- eminent posi-
tion. 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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The World Trade Organization 179
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 diffi cult 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 refl ected
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 defi cit
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 unprec-
edented 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 confi ned 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 fi nal turbulent years of the British cycle had coincided with
an attempt to put in place a comprehensive system of world economic gov-
ernment. 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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180
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 predict-
able 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 fi rst years of the twenty-
fi rst 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 eff ects 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 invest-ment law. Prior to 2007 there was in eff ect only one major text dedicated to this subject, Sornarajah (2004) which fi rst came out in 1994, and a section in the author’s fi rst 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!
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The role of international investment agreements 181
the balance of rights and duties between investors and host and home coun-
tries. 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 signifi cant social values which can
only be secured through eff ective 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 fl ows 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 cor-
porate 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 fl ow of private capital and the economic development of the Parties
. . .’. The context is clearly that of stimulating investment fl ows 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 objec-
tives 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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182 IEL, globalization and developing countries
and internationally recognised labour rights. This is backed up by ‘best
eff orts’ clauses against lowering environmental and labour standards as an
inducement to investment (ibid: Art. 12, 13). Some agreements link tech-
nology 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 signifi cant examples, the draft Norwegian Model
BIT of 2007, has been abandoned.4 Thus IIAs say little about develop-
ment 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 defi nition of
investment in IIAs. There is no reference to development concerns in such
defi nitions (for examples see further UNCTAD, 2007: 8–10). On the other
hand some recent arbitral awards have considered whether development
concerns should aff ect 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 arrange-
ment to qualify as an ‘investment’ it should have ‘a certain duration, a
regularity of profi t and return, an element of risk, a substantial commitment
and . . . it should constitute a signifi cant 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 eff orts in liberalis-ing and promoting intra- COMESA trade and investment fl ows . . .’(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 eff orts 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 govern-ments’ 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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The role of international investment agreements 183
to criticism as it introduces an element of motivation into the defi nition. This
may not be relevant if the given defi nition of ‘investment’ in the BIT is asset-
based.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 signifi cant contribution to the development of the host
country.7 In general, the development element should be met in most cases
where the fi rst 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 ‘invest-
ment’ 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 benefi t to Malaysia’, there was not ‘a suffi cient 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 defi nition 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 jurisdic-tion of the Centre shall extend to any legal dispute arising directly out of an invest-ment, 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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184 IEL, globalization and developing countries
sole arbitrator used the approach taken in earlier awards to the interpreta-
tion 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 defi nition in
Article 1 of the BIT, there was ‘a claim to money and to performance under
a contract having fi nancial 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 eff ect of excluding small contribu-
tions, 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 fl oor in the amount of an investment, to reject specifi cation of its duration, to leave ‘investment’ undefi ned, and to accord great weight to the defi nition 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 deci-
sion.
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 per-
fectly 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
fi nancial value; (iv) intellectual property rights . . . ; (v) business concessions con-ferred . . . under contract . . .’.
12 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Annulment Decision, para. 60.
13 Ibid.14 Ibid: para. 80.
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The role of international investment agreements 185
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 set-
tlement 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 defi nition 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 eco-
nomic 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 signifi cant contribution
to development arising out of the investment may be seen as a key juris-
dictional prerequisite. It remains to be seen whether ICSID Tribunals will
follow the majority position in Malaysian Salvors and ignore the develop-
ment 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 aff ect 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 eff ect of abnormal conditions, prompted by the economic crisis in Argentina, in assessing the scope of protection aff orded to the investor by an investment treaty (para. 244).
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186 IEL, globalization and developing countries
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) fl ows.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 fl ows. However the empirical evidence is mixed. Some studies
fi nd a positive correlation between the conclusion of BITs and increases in
investment fl ows (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 diffi cult to
consider one part of a wider regulatory framework in isolation. Equally it
may be hard to exclude other factors that may aff ect the size and origin
of inward FDI fl ows. The domestic political, economic and institutional
environment may be as important in determining inward investment fl ows
as are individual BITs (Rose- Ackerman, 2009: 321), as might the eco-
nomic sector in which investment is made (Aisbett, 2009: 423).
Thus, there is still no incontrovertible evidence that BITs will deliver
increased FDI fl ows. 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 arbi-
tration 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 fl ows 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 develop-
ment, largely because IIAs tend to defi ne development in that light – in so
18 All of the major recent empirical studies on the eff ects of BITs on invest-ment fl ows are brought together in Sauvant and Sachs (eds) (2009: Part II).
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The role of international investment agreements 187
far as they off er 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 justifi ed 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 ‘fi erce’ 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 identifi ed 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 congenial-ity of the process is seen as exemplifi ed by such things as mutually benefi cial 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 combina-tion 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 Jeff rey 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, interna-
tional investment law exists within the wider framework of public inter-
national law and should be informed by its general principles (see further
McLachlan, 2008). One such principle is the duty of international co-
operation 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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188 IEL, globalization and developing countries
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; andc. 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 inter-
national law and should refl ect 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 co-
operation 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 obli-
gations 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 defi ne the scope of legal com-pliance, the broader scope of the responsibility to respect is defi ned 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 responsi-
bilities based on the concept of sustainable development. Thus the OECD
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The role of international investment agreements 189
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 inter-
pretation 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 confi ned to the discourse
of practitioners of investment arbitration or of academic commenta-
tors 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 fi eld. 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 fi eld should take on such a character. Given that the main aim of the parties to foreign investment contracts is to off er economic development for the host country in return for a reasonable rate of profi t 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 fi eld 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 benefi t from foreign investment and for investors to enjoy
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190 IEL, globalization and developing countries
a transparent, secure and predictable investment environment’ (ibid: 798).
The Committee describes international investment law as:
a fi eld 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 clarifi cation 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).21 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 Vis- Dunbar, 2009b).
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The role of international investment agreements 191
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 specifi c 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 ‘fl exibility for development’ as a
means of dealing with the need to balance the diff erent interests of stake-
holders 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 coun-
tries that may have greater diffi culties than developed countries in opening
up their economies to the full force of global competition.
According to UNCTAD, in order to reap the full benefi ts from FDI,
the developing host country may need to supplement an open approach
to inward investment with further policies. In particular, it may need posi-
tive measures to increase the contribution of foreign affi liates to the host
country through mandatory measures such as performance requirements
and through the encouragement of desired action by affi liates 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 pro-
visions of IIAs. To avoid such an outcome in cases of legitimate, non-
discriminatory regulation, IIA provisions may need to off er a degree of
fl exibility for development (Muchlinski, 2007b: 98; see further UNCTAD,
2000b, 2004b: vol. 1, ch. 2). Such fl exibility can be introduced by way of
certain changes in approach to the drafting of IIAs, including develop-
ment oriented preambular statements, a degree of special and diff erential
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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192 IEL, globalization and developing countries
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 fl exibility 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 fi rms –
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 signifi cant voice in the recalibration process.23
23 See UNCTAD (2009a: 3): Multi- year Expert Meeting on Investment for Development . . .
8. Reconfi rms UNCTAD’s role as the key focal point in the United Nations system for dealing with matters related to international investment agree-ments (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 fi eld of IIAs should meet annu-ally for the purposes of collective learning and collective advisory services, involving all stakeholders in developing countries, with a view towards facili-tating 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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The role of international investment agreements 193
II. 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 off ers what appears as an emerging international consen-
sus 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 aff ected 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 employ-ment 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, fi nancial incentives, or other issues.
6. Support and uphold good corporate governance principles and develop and apply good corporate governance practices.
7. Develop and apply eff ective self- regulatory practices and management systems that foster a relationship of confi dence 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 fi de reports to management or, as appropriate, to the compe-tent 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 clas-
sifi cation of international corporate social responsibility (ICSR) standards
is diffi cult 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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194 IEL, globalization and developing countries
regulation. By contrast, the UN Global Compact contains a more spe-
cifi c 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 signifi cant 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 aff airs 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 special-
ist 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 respon-
sibility issues will be dealt with by means that do not seek to off er detailed
provisions but, rather, provide for overall commitments to certain stand-
ards. This may be achieved in a number of ways. First a general com-
mitment 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 specifi c substantive provision. Equally, where
an issue is not yet fully developed, it can be expected that hortatory, best
eff orts 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 develop-ment 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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The role of international investment agreements 195
(i) environmental impact and social impact assessments(ii) labour standards(iii) respect for human rights(iv) conduct in confl ict zones(v) corruption(vi) subsidies.
This is the fi rst 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 specifi c 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 specifi c 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 concern-
ing 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 Maff ezini v. Spain, para. 67 (EC envi-ronmental impact assessment); Parkerings- Compagniet AS v. Lithuania, section 8.3.1, and Southern Pacifi c Properties (Middle East) Limited v. Arab Republic of Egypt (UNESCO World Cultural Heritage designation); Aguas Argentinas S.A.,
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196 IEL, globalization and developing countries
It may be added that, as an international adjudicating body, an interna-
tional 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 ineff ective, 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 inves-
tor 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 adop-
tion 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 modifi ed 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 eff orts’ commitment to contribute to the host’s development objectives
is also included. Articles 12 to 16 then detail more specifi c investor obliga-
tions. 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 uphold-
ing 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 gov-
ernance and corporate social responsibility. These provisions can be seen
as relatively uncontroversial. They restate in eff ect 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 signifi cant 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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The role of international investment agreements 197
such acts or decisions lead to signifi cant 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 eff ort 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 eff ects of the legal separation of companies in
a group would need to be altered so as to allow for jurisdiction and for a
fi nding 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 corpora-
tion 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 off ers 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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198 IEL, globalization and developing countries
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 assess-
ment 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 post-
establishment obligations listed in Article 14 and the corporate govern-
ance 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 signifi cance to the rec-
alibration 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 protec-
tion under the IIA by use of qualifying language such as ‘consistent with
27 The COMESA Investment Area Agreement (2007) includes a specifi c 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 fulfi lled its obligations under this Agreement, including the obligations to comply with all applicable domestic measures or that it has not taken all reason-able steps to mitigate possible damages’.
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The role of international investment agreements 199
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 fi de, 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 constitu-
tional 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 custom-
ary international law and general principles of international law, as an
aspect of the process of interpreting the right to regulate, can leave impor-
tant issues in the air. For example, how is the international minimum
standard of treatment of aliens and their property to fi t 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 protec-
tion 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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200 IEL, globalization and developing countries
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 specifi c approach than that off ered by the IISD. In this regard,
recent US and Canadian Model BITs explain that non- discriminatory
regulatory actions that are designed and applied to eff ectuate legitimate
public welfare objectives, such as public health, safety and the environ-
ment, 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 eff ect 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 expropria-
tion), the extent of interference with legitimate investment backed expecta-
tions and the character of the act are all of signifi cance. In addition, the
most recent US BITs contain provisions asserting that it is inappropriate
for host countries to seek investment through the lowering of environmen-
tal 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 cus-tomary 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 develop-ment, 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 role of international investment agreements 201
The Canadian model is also notable for the inclusion of a general excep-
tions clause protecting the rights of the Contracting Parties to regulate in
the fi elds 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 regula-
tion 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 intro-
duction of a proportionality test would appear to be the only eff ective way
of allowing balancing to occur in practice in that it avoids both the bias
in favour of investor protection typical of fi rst generation IIAs and the
responsive bias towards the extensive protection of regulatory discretion
exemplifi ed 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 refl ected 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 experi-
ence to date’ (ibid). The experience referred to centres on unilateral eff orts
to assist in the promotion of development oriented investment by MNEs
located in the home country. This can be achieved through the liberalisa-
tion of outfl ows, 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 fi nancial regulation, monetary credit and exchange rate poli-cies, essential security interests, the upholding of UN obligations and international peace and security interests, confi dentiality laws, cultural industries and measures taken in conformity with WTO decisions.
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202 IEL, globalization and developing countries
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 prac-
tices overseas undertaken by home based investors.
These policy prescriptions fi nd expression in the IISD Model Agreement.
Part 6 covers all of the above. Article 29 deals with assistance and facilita-
tion of foreign investment to developing and least developed countries. It
states:
(A) Home states with the capacity to do so should assist developing and least- developed states in the promotion and facilitation of foreign investment into such states, in particular by their own investors. Such assistance shall be con-sistent 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 fi nancial assistance in support of the investment or of feasibility
studies prior to the investment being established;iv) technical or fi nancial support for environmental and social impact assess-
ments of a potential investment;v) technology transfer; andvi) periodic trade missions, support for joint business councils and other
cooperative eff orts 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 diff erent investments. (Mann et al., 2005)
The language is not mandatory in that home states ‘should’ assist develop-
ing and least- developed states. This refl ects the fact that ‘it is diffi cult 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 devel-
opment 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 fi rst generation IIAs, refl ecting 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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The role of international investment agreements 203
Article 31 reinforces the need of the home state to make possible civil
litigation before its own courts against investors. This Article is the com-
panion 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 diff erent governments,
depending on the constitutional rules in place (Mann et al., 2006: 43).
Second, Article 32 covers the obligation to render acts of overseas corrup-
tion as criminal off ences 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 intro-
duced. According to UNCTAD, these may include provisions to improve
the co- ordinated delivery of fi nancial assistance for FDI promotion while
minimising ineffi cient restrictions such as ‘tied aid’ limitations that are
often found in unilateral or bilateral assistance schemes. Here the empha-
sis should be on recipient country enterprise needs not on reciprocal ben-
efi ts for donor and recipient countries alike (UNCTAD, 2001a: 58, 2004b:
vol. III, 23). These provisions could also include qualifi cations 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 develop-
ing 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 suffi cient for the
latter to comply with those obligations (UNCTAD, 2001a: 60, 2004b:
vol. III, 23–4). Further provisions could be included to promote technol-
ogy transfer, whether in general or for specifi c projects, and preferential
trade related investment measures such as rules of origin provisions,
anti- dumping protection and product certifi cation regulations favouring
imports of goods produced in developing host countries by foreign inves-
tors (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 justifi ed philosophically on the basis of a wide-
ranging conception of development, which accepts not only economic
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204 IEL, globalization and developing countries
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 off ers a useful, though by no means uncontroversial, step
forward. However, despite the growth of unease with IIAs among a sig-
nifi cant minority of countries, for the present this vision is likely not to
be fulfi lled. 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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205
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 eff ectively holding transnational corpora-
tions (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 perform-
ance of TNCs. But these suff er from signifi cant accountability gaps and
coverage problems which throw into question whether international
human rights obligations are well placed to act as a system for enhanc-
ing TNC conduct across the full range of their diverse social impacts. It
therefore focuses upon two specifi c 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’) pro-
duced 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 diff erentiation 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 ).
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206 IEL, globalization and developing countries
corporations and other business enterprises, John Ruggie (‘the Ruggie
Framework’) (Ruggie, 2008).
This chapter evaluates the respective merits and fl aws of these two
approaches in the context of existing human rights initiatives. While
they represent very diff erent methods for enhancing the accountability
of TNCs, both are international mechanisms for creating greater coher-
ence 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 justifi ed. It further contends
that Ruggie’s approach has a number of advantages in terms of its poten-
tial 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 signifi cant 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 diff erent 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 fl ows
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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Human rights and transnational corporations 207
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- profi le allegations of human rights abuses by TNCs, predomi-
nantly in developing countries, have undoubtedly fuelled calls for regula-
tion. 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 pesti-
cides 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
signifi cant 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 corpo-
rate 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 ensur-
ing 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 viola-tions, see the Business and Human Rights Resource Centre, http://www.business- humanrights.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 unwill-ing 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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208 IEL, globalization and developing countries
particular inadequacies of this form of regulatory model with regard to the
activities of TNCs?
The perceived inadequacies of traditional regulation refl ect 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 invest-
ment arbitration, or strongly infl uence 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 eff ectively regulate the actions of TNCs. Developing coun-
tries, in particular, are often competing with other countries for investment
by TNCs and are therefore not in a strong position to impose eff ective
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 tariff s 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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Human rights and transnational corporations 209
These concerns about the inherent inability of countries to eff ectively
regulate the human rights impacts of TNCs have led to alternative strate-
gies 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 eff ective reg-
ulation of their activities (Shamir, 2004: 643–4). One approach advocated
is for international human rights norms and standards to be utilised more
eff ectively to hold TNCs accountable for their conduct. The UN Draft
Norms and the Ruggie Framework represent two recent and radically
diff erent 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 fi rst exploring the effi -
cacy and defi ciencies 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 organ-
isations 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 diff erent initiatives which have attempted to formulate
some kind of supra- national corporate human rights responsibility. These
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210 IEL, globalization and developing countries
initiatives are therefore briefl y evaluated below, crudely categorised for
our purposes into four diff erent 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 diff erent
forms, reference to the human rights responsibilities of TNCs. Together
we might term these international ‘soft law’ frameworks. An early eff ort
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 defi ning the obligations of multi-
national 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
aff ected by their activities consistent with the host government’s interna-
tional 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 fi nalised 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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Human rights and transnational corporations 211
profi le 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 mecha-
nisms. The Global Compact requires only a vague commitment to human
rights with no defi ned and concrete obligations and lacks any eff ective
monitoring system (Litvin, 2003: 70; Clapham, 2006: 225). The main com-
mitment 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 eff ective 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 specifi city in human rights obliga-
tions, the requirement of only a vague commitment to human rights, the
lack of eff ective monitoring and enforcement procedures, and the inability
to diff erentiate eff ectively between diff erent levels of corporate perform-
ance have all been factors which have undermined the functioning of these
models to diff ering 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 function-ing see http://www.unglobalcompact.org (accessed 21 September 2009).
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212 IEL, globalization and developing countries
Certifi cation Scheme (KPCS) and the Extractive Industries Transparency
Initiative. Such initiatives are sector specifi c and were all driven by social
pressure with regard to particularly pressing human rights issues. The ini-
tiatives 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 ‘confl ict 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 confl ict diamonds are traded
internationally, thus depriving rebel groups of a crucial source of income.
It does this by restricting trade between Kimberley participants to certifi ed
non- confl ict 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 certifi cation criteria. The KPCS currently has 47 member
states and is credited with reducing the fl ow of confl ict 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 cre-
ating a viable accountability mechanism.
It is beyond the scope of this chapter to assess the strengths and weak-
nesses 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- profi le human rights situations, and so creating universal
coverage of all human rights issues internationally through such initia-
tives is highly unlikely. But it is important to note that if such initiatives
are structured to eff ectively 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 specifi city – 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 and transnational corporations 213
human rights issue such as confl ict diamonds, rather than human rights
generically – gives them a focus that can lead to more tangible results if
there is suffi cient pressure for the creation of meaningful accountability
mechanisms.
III. Self- regulatory Initiatives
A third set of initiatives are the self- regulatory schemes of TNCs them-
selves. 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 poten-
tial to allow a fl exible 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; Blowfi eld 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 defi nitions and remit of what is required remain
illusory (Blowfi eld and Frynas, 2005: 500–504) and only a limited minor-
ity of TNCs do, and will ever, report on their non- fi nancial 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 eff ective forms of governance
(Blowfeld and Frynas, 2005).
In such a scenario, the more universally accepted concepts and fi rmly
entrenched obligations of human rights appear to have the capacity to add
signifi cant 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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214 IEL, globalization and developing countries
rights principles in their company codes.8 Even with regard to labour
rights – clearly fundamental to all corporate activity – only a small minor-
ity 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 inde-
pendent 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 ‘anec-
dotal 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 defi ne 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 perform-
ance (Ruggie, 2006: 13, 2007a: 20–21). Overall, corporate social report-
ing 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 fi eld (Hess, 2008: generally and 448).
Independent verifi cation 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
verifi cation of performance too often involves large accounting fi rms 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 ques-
tion (Redmond, 2003: 92–3). Nor can we assume that external pressure
on companies will improve performance. Reporting ranking systems are
insuffi ciently 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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Human rights and transnational corporations 215
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 diffi cult for consumers to
diff erentiate eff ectively 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
‘diff erentiate themselves from uncertifi ed competitors’ (Steinhardt, 2005:
184), the reliance on consumers to diff erentiate the certifi ed from the non-
certifi ed is often overstated.
So, while voluntary codes and reporting practices can have some ben-
efi ts with regard to companies’ practices, those that do take on meaning-
ful human rights obligations and truly independent verifi cation 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 advo-
cate a voluntary approach (Clapham, 2006: 195–6).
IV. Cross- border Accountability Mechanisms
Finally, we can see certain forms of cross- border accountability mecha-
nisms 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 impor-
tant 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 suff ered violations of international law anywhere in the
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216 IEL, globalization and developing countries
world on the basis that the company concerned has committed the viola-
tions or been complicit in them.
There have been successes in holding fi rms accountable for violations
of human rights – most notably Unocal in Burma where the company
settled with the plaintiff s out of court. But there are signifi cant procedural
hurdles to making successful claims under the Statute (for example, forum
non conveniens), as well as limitations to the types of human rights viola-
tions (only the most serious) which can be litigated (Redmond, 2003: 83).
Of the more than forty cases fi led against corporate defendants, most have
been dismissed on pre- trial motions and none has reached a fi nal 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 diff erent
mechanisms for holding TNCs accountable for their human rights per-
formance. Each has a certain value, but each leaves signifi cant account-
ability gaps which are not necessarily fi lled by other initiatives.
International soft law initiatives and self- regulatory frameworks are
essentially voluntary in nature and require corporate buy- in for their eff ec-
tiveness. Some TNCs who are leading human rights advocates may benefi t
from this approach, but many other TNCs ignore these initiatives or make
only a vague commitment to human rights which remains ineff ectively
monitored and enforced. Lack of specifi city with regard to the underlying
human rights obligations and their application makes objective assess-
ment and diff erentiation between varying levels of corporate performance
through these mechanisms very diffi cult. For similar reasons, ‘consumer
power’ is often overstated as an accountability mechanism.
Certain multi- stakeholder initiatives (for example, the Kimberley
Process) are more context- specifi c and eff ective and include more concrete
mechanisms of enforcement, but are specifi c to particular high- profi le
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 signifi cant hurdles to
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Human rights and transnational corporations 217
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 fi nd mecha-
nisms 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 obliga-
tions 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 signifi cant accountability
gaps. This is exacerbated by very polarised views about the further meas-
ures 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 diff erent ways. Neither endeavour can
be assessed in a vacuum. We need to examine the extent to which these
two frameworks can eff ectively 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 rel-
evant and applicable.
4. UN DRAFT NORMS ON THE RESPONSIBILITIES OF TRANSNATIONAL CORPORATIONS AND OTHER BUSINESS ENTERPRISES WITH REGARD TO HUMAN RIGHTS
I. The Nature and Content of the UN Norms
The UN Norms represented a fi rst attempt to draft ‘a common global
framework for understanding the responsibilities of business enterprises
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218 IEL, globalization and developing countries
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 fi ve- 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 sub-
stantive obligations, mechanisms of implementation and key defi nitions.
The Norms start by emphasising that States have the primary responsi-
bility for human rights, but that transnational corporations and other busi-
ness enterprises also have human rights obligations ‘within their spheres of
activity and infl uence’. The Norms then go on to list the human rights obli-
gations 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 environ-
mental 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 dissemina-
tion 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, eff ective and adequate compensation’ to those
aff ected by violations of the Norms.
II. Reaction to the UN Norms
It is clear that the Norms were intended to evolve into a binding instru-
ment and they have been described by their main author as the ‘fi rst
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 polari-
sation on the issue of voluntarism versus enforceability described above,
that there were a range of diff ering opinions about the Norms. Business
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Human rights and transnational corporations 219
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 confl icting views, a Resolution was fi nally adopted
by the Human Rights Commission which requested the UN Secretary-
General to appoint a Special Representative (SRSG) on business and
human rights. Professor John Ruggie was subsequently appointed, with a
mandate which included the identifi cation and clarifi cation 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 eff ectively regulating and adjudicating the role of TNCs and other busi-
ness enterprises’. He was also asked to provide defi nitions for concepts
such as ‘complicity’ and ‘sphere of infl uence’ which had featured promi-
nently in the Norms.
The SRSG, in his fi rst report to the Commission on Human Rights,
directly attacked the UN Norms. Despite it not being part of his offi cial
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 aff ected by business, but then accused the Norms exer-
cise 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 fi rst initiative to create a broad array of interna-
tional 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 eff ect. 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 infl uence’
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 defi ning precisely
what the obligations of corporations are with regard to those rights
(Litvin, 2003: 70–71). Furthermore, included in the list of rights are pro-
visions on, for instance, consumer protection and anti- corruption whose
appropriateness within a human rights framework is highly dubious
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220 IEL, globalization and developing countries
(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 infl uence’ and ‘com-
plicity’ 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 defi nition 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 infl uence’
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 justifi ed 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 liabil-
ity in certain cases (Weissbrodt, 2005: 295). It is argued that the underly-
ing 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 infl ict or are complicit in, and that the Norms
are seen as a fi rst step in this direction’ (Kinley and Chambers, 2006: 491).
The question remains therefore whether this is simply a question of politi-
cal will or whether there are fundamental fl aws in the Norms, as Ruggie
suggests, which make them an inappropriate basis for increasing the inter-
national 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 exist-
ing TNC accountability gaps outlined in Section 2 above. They purport
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Human rights and transnational corporations 221
to create a binding legal framework with a set of codifi ed rights which are
universally applicable to all TNCs. They therefore have the potential to
reduce the problems of voluntarism and self- defi nition which have plagued
existing initiatives. They also contain specifi c 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 com-
panies, largely self- defi ned regulation of conduct and a lack of eff ective
remedies for violations. But there are signifi cant problems with the Norms
which undermine these potential benefi ts.
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, wide-
ranging 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 stand-
ards which TNCs should observe) quite appropriately states that
Governments should adopt or maintain policies that make clear the responsi-bility of the producer to ensure that goods meet reasonable demands of dura-bility, 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 inap-propriately, causing injury, but insuffi cient 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 suffi cient 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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222 IEL, globalization and developing countries
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 viola-
tions 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, includ-
ing 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 concep-
tions of human rights if the human rights framework within which they
operate is to be in any way meaningful. Novel obligations must be articu-
lated clearly and precisely in a way that builds upon existing understand-
ings of human rights. Otherwise the underlying power of human rights and
their codifi cation in international law is lost.
The inclusion of inappropriate ‘rights’ within the Norms is not a ration-
ale for abandoning the endeavour but rather for refi ning it to only include
issues appropriate to a human rights framework. But there are more fun-
damental rationales for questioning the utility of a single list approach.
What we fi nd 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 diff erent rights are going to be
more relevant to diff erent companies in diff erent 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 diffi cult to set out rights
in a way that is both applicable to all diff erent types of TNCs and compre-
hensive. 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 codifi ed under international law (Wright, 2008), it is the nature of
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Human rights and transnational corporations 223
the responsibilities which TNCs have with regard to each of those human
rights in their diff erent activities that becomes the key concern of the exer-
cise. In the Draft Norms this is primarily determined by what is within
their ‘sphere of activity and infl uence’. This approach is problematic. The
proposition that TNCs have responsibility for human rights within their
‘sphere of activity and infl uence’ is vague and can be interpreted as giving
rise to very diff erent 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 infl uence of TNCs oper-
ating in their country. Moreover, the defi nition of this concept should not
be left for future ‘concretisation’. Attempts to further defi ne the term by
supporters merely serve to demonstrate the nebulous nature of the provi-
sion. 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
infl uence’ 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 diffi culties
of utilising entirely new terminology to defi ne 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 pedi-
gree 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 diffi cult. In such a fi ercely 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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224 IEL, globalization and developing countries
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- specifi c and rights- specifi c mechanisms detailed above that
are already attempting to do this work. Given the fl aws identifi ed in many
of these initiatives, this might be considered a positive step. But the adop-
tion 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 specifi city is required to deal with the particular human
rights problems affl icting each corporate sector or activity. The Norms
risk diverting the focus from industry- and subject- specifi c human rights
compliance to a one- size- fi ts- all human rights instrument and monitoring
mechanism, thereby reducing the degree of specifi city 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 philan-
thropic 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 inter-
national, national and non- governmental bodies, again the creation of a
monitoring system for such a generic instrument may not be a step for-
wards in terms of securing better human rights performance. Would such
bodies really have the capacity and powers to eff ectively 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 eff ectively monitor and posi-
tively infl uence 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 eff ectively monitor the specifi c
human rights performance of TNCs in key areas of concern. So, although
direct implementation of the Norms seems initially attractive, careful con-
sideration needs to be given to what additional benefi ts such an approach
would be likely to bring.
The Norms are therefore fl awed on a number of counts. The ‘list’ of
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Human rights and transnational corporations 225
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 refi nement. The list approach itself is problematic given
the nature of TNCs and their wide- ranging potential to impact upon just
about all codifi ed human rights. Key terms in the Norms, and in par-
ticular ‘sphere of infl uence’, 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 per-
suasive. 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 atten-
tion from existing mechanisms that are more subject and context specifi c,
without themselves creating signifi cant 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 concep-
tual 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 eff ectively
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 eff ective one for dealing with relevant
TNC conduct.
5. THE RUGGIE FRAMEWORK
I. 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 diff ering ambitions and intended legal status. In answering in the
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226 IEL, globalization and developing countries
affi rmative, 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 diff erent ways is perhaps
an indictment of the diffi culties 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) eff ectiveness.
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 eff ective
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 neces-
sary 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 fulfi lling
this obligation and gives examples as to how this might be achieved. First
he suggests governments can foster human rights cultures in corpora-
tions by supporting and strengthening ‘market pressures on companies to
respect rights’ (Ruggie, 2008: 10). This could include government regula-
tion with regard to sustainability reporting and with regard to corporate
culture in deciding corporate accountability. He suggests ‘policy align-
ment’ 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 mar-
ginalise 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 confl ict 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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Human rights and transnational corporations 227
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 compa-
ny’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 fi nal principle is access to remedies. This includes both judicial
and non- judicial mechanisms to investigate, punish and seek redress for
abuses. Ruggie fi nds that the existing patchwork of remedies is, in many
respects, ineff ectual and requires strengthening. States should ‘strengthen
judicial capacity to hear claims and enforce remedies’ against all corpora-
tions operating in their territory and reduce barriers to justice, including
for foreign plaintiff s. Non- judicial remedies including company- level
grievance procedures, State- based non- judicial mechanisms and multi-
stakeholder and industry initiatives all need to meet certain criteria to be
credible and eff ective. Ruggie sets out a number of criteria; they must be
legitimate, accessible, predictable, equitable, rights- compatible and trans-
parent (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 fi eld. 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 diff erent 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 participa-
tory or ‘refl exive’ processes for the creation of law increase the levels of
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228 IEL, globalization and developing countries
success with regard to the standards they create and increase chances of
self- regulation (Buhmann, 2009: 17). But procedural inclusivity is not suf-
fi cient. 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 diff erent 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 eff ective 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, regu-
lation 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 ‘stand-
alone’ legal instrument.
Despite the fact that Ruggie eschews the traditional legal method, one
of the key diff erences 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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Human rights and transnational corporations 229
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 eff ective remedies for viola-
tions 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 identifi ed 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 imple-
ment 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 signifi cant 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 inter-
national 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 obliga-
tions 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 increas-
ing 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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230 IEL, globalization and developing countries
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 fl uidity 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
defi ned 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 infl uence 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
‘specifi c 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 diff erent actors (employees, governments, local communities and so on)
and in diff erent scenarios (for example, confl ict zones). It is only then that
we can really gauge whether it is a normative concept capable of coher-
ently 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 con-
centrated 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 accountabil-
ity. But where he has not focused his attention is in relation to the sub-
standard 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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Human rights and transnational corporations 231
initiatives which remain vague in conception and ineff ectively 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 signifi cant pres-
sure for change (from within the State or by other powerful States inter-
nationally). But a crucial starting point for the ability to exert signifi cant
pressure for change is methodologies which help us to eff ectively diff eren-
tiate between diff erent levels of state/corporate performance and between
the impacts of diff erent human rights initiatives.
It is to be hoped that the guidance and principles which Ruggie intends
to produce in a range of areas will fi ll 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 corporate-
related abuse in confl ict- aff ected 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 eff ectively
diff erentiating 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 refl ect upon
its usefulness. We may also want to refl ect 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 instru-
ments, 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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232 IEL, globalization and developing countries
to play a role in these endeavours. There are clearly individual companies
and/or sectors for which particular initiatives have made important dif-
ferences. But it has been argued that varying degrees of governance and
coverage gaps in existing initiatives mean that the overall value of interna-
tional 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 diff erent 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 requi-
site specifi city and enforceability that are vital to the effi cacy 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 interna-
tional human rights law discourse; a recognition of the importance of
eff ective remedies; and a focus on practical suggestions and recommenda-
tions which fl ow (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 specifi city so that they maximise their chances of
being eff ectively utilised by relevant actors.
If these issues are eff ectively addressed, could the Framework signifi -
cantly enhance the ability of international human rights norms and stand-
ards to operate as a mechanism for eff ectively holding all transnational
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Human rights and transnational corporations 233
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 eff ective domestic and/or international
pressure (or are themselves willing) to take action for whom international
human rights mechanisms have the capacity to have a signifi cant 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 infl uencing the conduct
of TNCs in developing countries (for example, enhancing national cor-
porate 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 uti-
lised in specifi c 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- specifi c 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 interna-
tional human rights mechanisms to have the requisite specifi city, applica-
bility 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 signifi cant 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 corpo-rate law provisions which fi ne companies, for example, utilising forced labour, partly on the basis of international human rights standards.
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234
11. Core labour standards conditionalities: a means by which to achieve sustainable development?
Tonia Novitz*
1. INTRODUCTION
In the twenty- fi rst 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 identifi es 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 princi-
ples and rights at work’ came to be identifi ed 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 pro-
cedural mechanisms are now receiving greater attention, but have yet to
fully permeate current modes of conditionality. Indeed, the forms of con-
ditionality 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.
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Core labour standards conditionalities 235
place, which are ostensibly designed to promote inclusion and participa-
tion in monitoring core labour standards, are fi t 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 confi dent 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 diff erent things to
diff erent 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 envi-
ronmental protection (ibid: para. 5). Indeed, by stressing the signifi cance 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 par-
ticipate 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 benefi ciary of the right to development’.
Principle 10 of the Rio Declaration (1992) likewise observed that ‘environ-
mental 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 formula-
tion, decision- making and implementation at all levels’ (para. 26).
Yet, despite this rhetorical recognition of an entitlement to participatory
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236 IEL, globalization and developing countries
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 indica-tors – infl ation, money supply growth, interest rates, budget and trade defi cits – could serve as the basis for a set of policy recommendations. Indeed, in some cases economists would fl y 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 sacrifi ced 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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Core labour standards conditionalities 237
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 com-
mentators 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, col-
lective bargaining and collective action can be regarded as constitutive of a
participatory process which gives credibility and sustainability to develop-
ment (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 par-
ticipation 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 diffi cult, even then, to see
how such consensus could be achievable, due to stark divisions of opinion
between diff erent countries (particularly the North and the South) and
between social actors (especially employers’ organisations and the inter-
national 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 effi cient manner (Cordova, 1993).
It was suggested that revision of international labour standards could
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238 IEL, globalization and developing countries
facilitate greater access to employment and, thereby, profi tability, 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 aff airs. In the Director- General’s Annual Report,
Defending Values, Promoting Change, he advocated further study of the
relevance and effi cacy of ILO standards, and suggested that the ILO as
an institution concentrate on a campaign for ratifi cation 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 affi rmed 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 infl uence. 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 consist-ent application of any coherent or compelling economic, philosophical, or legal criteria, but rather refl ects a pragmatic political selection of what would be acceptable at the time to the United States and those seeking to salvage some-thing 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 specifi c 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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Core labour standards conditionalities 239
the CLS list simply refl ects those labour practices in relation to which devel-oped 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 justifi cation comes from com-
mentators 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 signifi cant decline in their membership and infl uence (Visser,
2003; Blanchfl ower, 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 recog-
nition of the fundamental nature of health and safety standards, we fi nd
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 representa-
tives 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 eff ects 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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240 IEL, globalization and developing countries
trade- off , because they recognised this at least off ered a potential platform
for legitimising trade and aid conditionality. There are indications of this
connection between labour standards and international trade in a con-
temporaneous OECD report, which concluded that compliance with the
core labour standards identifi ed 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 unani-
mous consent at the annual International Labour Conference to a ground-
breaking Declaration on Fundamental Principles and Rights at Work.
This was a departure from mere focus on ratifi cation of and compliance
with the core ILO Conventions. Instead, Article 2 of the 1998 Declaration
set out the following rights:
(a) freedom of association and the eff ective recognition of the right to collec-tive bargaining;
(b) the elimination of all forms of forced or compulsory labour;(c) the eff ective abolition of child labour; and(d) the elimination of discrimination in respect of employment and occupa-
tion.
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 eff orts’.
The one rather sour note for those who favoured some kind of con-
ditionality was the curious reference in Article 5 to the eff ect that ‘the
comparative advantage of any country [in trade] should in no way be
called into question’ by either the Declaration or the attached follow-
up 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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Core labour standards conditionalities 241
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 con-
ditionality 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 devel-
opment’. 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 mem-
bership 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 meaning-
ful 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 benefi ciary country ‘has taken or is taking, steps to aff ord 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 agree-ment, the North American Agreement on Labor Cooperation (NAALC), is signifi cantly lengthier than that of ILO core labour standards in the 1998 ILO Declaration, but that the norms are to be determined with reference to compli-ance with national labour laws, rather than established international labour standards.
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242 IEL, globalization and developing countries
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 spe-
cifi cally 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 insti-
tutions recognise is now ILO Convention No 182 on child labour 1999,
which is regarded as an extremely signifi cant 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 aff ected by the imposi-
tion of conditionality, or whether powerful trading blocs and international
agencies follow a results- driven conception of development. My sugges-
tion 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 eff orts 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
fi nancial 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 poli-
cies. As Kaufmann (2007: 108) has observed: ‘international human rights
agreements that have been ratifi ed by Member States allow international
economic institutions to “depoliticize” human rights and to rely on them
in formulating and defi ning development standards’. These actors have
sought to apply ILO standards, often with explicit reference to the fi ndings
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 selec-
tive, 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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Core labour standards conditionalities 243
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 See http://go.worldbank.org/1JZA8B2CO0 (accessed 7 July 2009).6 Ibid.
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244 IEL, globalization and developing countries
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 aff ected their deci-
sions and the design of the strategies themselves.
Curiously, the on- line Toolkit does not refl ect more signifi cant 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 adop-
tion 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 objec-tives of each Performance Standard, followed by specifi c 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 require-ments is a consistent approach to avoid adverse impacts on workers, communi-ties, 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 doc-
ument 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 objec-
tives 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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Core labour standards conditionalities 245
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 employ-
ment’ (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 cor-
rective action where a client does not comply with performance standards,
and provides for ‘eff ective community engagement’(IFC, 2006b: para. 2),
this is not always a reality. In particular, Bakvis and McCoy (2008: 7)
observe that,
Unless complaints are fi led 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 fi nances. 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 eff ort is a ‘Better Work’ programme to facilitate com-
pliance 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 con-
sultation 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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246 IEL, globalization and developing countries
comply with ‘the International Labour Organization’s fundamental
Conventions concerning abolition of child labour, the elimination of dis-
crimination 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 justifi ed with reference to ILO
membership of all the EBRD countries, even though they may not have
ratifi ed the specifi c ILO Conventions (as per the 1998 ILO Declaration).
Finally, it may be interesting to note that an instrumental justifi cation was
off ered in the 2003 policy documentation for respect for ILO standards:
The EBRD believes that good labour practices resulting in a well- treated work-force can lower staff turnover and enhance productivity, benefi ting the busi-ness 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 redefi ned in a manner which
refl ects and improves upon IFC labour conditionality. In May 2008 the
EBRD adopted a new ‘Environmental and Social Policy’ which came into
eff ect in November 2008, although (like the IFC) the EBRD have yet to
update various parts of their website to refl ect 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 effi cient measures to avoid or, where this is not pos-sible, minimise, mitigate or off set, or compensate for adverse social and envi-ronmental impacts consistent with the PRs; (iii) to help identify opportunities for additional environmental or social benefi ts; and (iv) to monitor the projects’ compliance with its environmental and social covenants as long as the Bank maintains a fi nancial interest in the project. (EBRD, 2008: 3)
The EBRD policy now makes a specifi c commitment to the eff ect 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 diff erent 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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Core labour standards conditionalities 247
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 partici-pate, 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 infl uence 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 regard-
ing environmental and social issues associated with a client’s investments.
This is to involve ‘meaningful consultation’ during both project prepara-
tion 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 effi cacious 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 admin-istration can enforce the labour conditions unilaterally, via the Offi ce 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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248 IEL, globalization and developing countries
(Hepple, 2005). The system allows the US administration to take unilateral
action via the Offi ce 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 off er the possibility of public scrutiny
(Tsogas, 2000). A very positive picture of the operation of this mechanism
is off ered by Douglas et al. (2004) who claim that the petition procedure
available under US GSP provides ‘an eff ective confl uence 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
diff erent developing countries can be required to take diff erent 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 specifi c
enforcement measures. Examples include the EU–Chile FTA and the eco-
nomic 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 devel-
oping 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 incen-
tive arrangement for Sustainable Development and Good Governance’,
which is commonly described as ‘GSP+’. It off ers 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 classifi ed by the World Bank as a high- income country during three consecutive years, and have the fi ve largest sections of its GSP- covered
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Core labour standards conditionalities 249
which have ratifi ed and eff ectively implemented 27 specifi ed international
conventions in the fi elds of human rights, core labour standards, sustain-
able 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 benefi ciaries under GSP+ currently stands at 16.11 It is
not altogether clear why it contains some states which are clearly in the
most fl agrant 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 Tariff s 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 fi rst 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 benefi ciary countries have now qualifi ed to receive the additional preferences off ered under the GSP+ incentive arrangement (see Commission Decision 2008 L334/90, 12 December 2008). They are (cur-rently): 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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250 IEL, globalization and developing countries
reasons for their withdrawals still persist, the latter involving clear viola-
tion of principles of freedom of association, leading to specifi c identifi ca-
tion 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 fi nal determination.
Moreover, there is to be formal and appropriate notifi cation of the ben-
efi ciary country, which is to be given the option to make representations.
Also, the views and fi ndings 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 specifi c 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
aff ected in the country concerned can expect to have. Nor is this clarifi ed
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 asso-
ciation, a key procedural entitlement. This is not fully realised within the
systems for aid conditionality off ered 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 preferen-
tial 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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Core labour standards conditionalities 251
While labour conditionality is apparently fi rmly entrenched in interna-
tional 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 off ers some future hope, there is little immedi-
ate indication that this jurisprudence will evolve swiftly so as to operate
in an eff ective fashion which protects those aff ected by conditionality.
Arguably, it is here that the ILO could play a role.
After all, the danger is that the core labour standards identifi ed by the
ILO lend legitimacy to the operation of current modes of conditionality,
without ILO interpretation and application of such standards aff ecting
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 condition-
ality. Moreover, given that this is a tripartite body, consisting of govern-
ment, employer and worker representatives, which allows for signifi cant
NGO representation, the ILO off ers the greatest opportunity for partici-
patory debate. This is diffi cult, 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 condu-
cive to the participatory dimension of sustainable development.
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252
12. 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 com-
petition 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 liber-
alisation 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 com-
monly associated with the ‘Washington Consensus’, which prioritised pro-
market structural reforms, fi scal restraint and monetary controls, and the
pursuit of economic effi ciency (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 effi cient fl ow of goods, services and capital in the global economy. In
the absence of competition law the productivity and development benefi ts
from trade liberalisation could be eroded by the erection of domestic bar-
riers to competition through cartels, the structural division of markets and
* Associate Professor, School of Law, University of Warwick, Coventry, UK.
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International competition law and policy 253
the abuse of monopoly power. As a consequence there have been increas-
ing 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 abandon-
ment of the idea of adopting multilateral competition rules following the
Ministerial Conference of the WTO in Cancún are most commonly attrib-
uted to the opposition voiced by developing and least- developed coun-
tries. 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 benefi ts of a multilateral scheme, the enact-
ment 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, poten-
tial ineffi ciencies 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 some-
times confl icting national criteria in multiple jurisdictions. Cartels were
also now operating on a global scale, which had an unprecedented eff ect
on international market prices.
There were calls to harmonise or streamline domestic merger regula-
tions, eliminate multiple pre- merger notifi cation procedures, and establish
a ‘one- stop shop’ for merger and joint venture clearance and the imposi-
tion of merger remedies and undertakings. The eradication of interna-
tional 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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254 IEL, globalization and developing countries
universal membership, an existing dispute resolution mechanism and
the presence of existing competition provisions concerning telecommu-
nications 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 competi-
tion policy, including transparency, non- discrimination and procedural
fairness, and common approaches to anti- competitive practices with
signifi cant 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 enforce-
ment 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 least-
developed countries was a major factor leading to the demise of the nego-
tiations. 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 actu-
ally impose more stringent rules for the regulation of anti- competitive
behaviour and international mergers on US fi rms 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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International competition law and policy 255
applied by way of domestic US antitrust law, which recently, particularly
in some important US Supreme Court decisions,2 had been signifi cantly
infl uenced 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 devel-
oping 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 invest-
ment 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 benefi t them in the idea of a ‘global competition law’. The
impetus for some form of multilateral agreement was always fi rmly based
in trade liberalisation, foreign direct investment (FDI) and the facilitation
of market access, hence the choice of the WTO. Measures to ensure the
effi ciency of global commerce were not a priority for developing and least-
developed 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 sig-
nifi cant trade defi cits.
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 Offi ces of Curtis V. Trinko; Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co.; Pacifi c Bell Telephone Co. v. Linkline Communications, Inc.
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256 IEL, globalization and developing countries
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
aff ect 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 eff ective competition enforcement
agencies, which may not be established in developing and least- developed
countries. The TRIPS agreement off ers limited guidance on the narrowly
construed areas of intellectual property abuse which often require a com-
plicated rule of reason analysis and a certain level of competency in com-
petition 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 eff ects on global commerce. Legislation such
as the US Webb- Pomerene Act3 exempts from US antitrust laws ‘export
cartels’ created by US fi rms who gain by the ability to collude and increase
prices on international markets, as long as the conduct does not adversely
aff ect US consumers. Export cartels are predominately formed to provide
opportunities to participate in export markets for small and medium- sized
fi rms, 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 suffi cient market power to exploit foreign
markets (Bradford, 2007). But it is the aggregate eff ect of these cartels
which is likely to impact importing nations such as developing and least-
developed 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 fi nan-
cial 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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International competition law and policy 257
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 ‘effi ciency’ 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 fi gure 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 fi rst 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 com-
petition 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 diff erent circumstances of highly concen-
trated domestic markets, strong commodity based economies with exten-
sive 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 offi cials
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 fi rms so that
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258 IEL, globalization and developing countries
they can survive, be viable and develop despite their present relative weakness, so that they can successfully compete with foreign fi rms 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 infl uence. 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 fi rms and their products and services, whilst local fi rms 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 ‘non-
discrimination’ would not permit them to exempt certain fi rms from acting
in ways to benefi t 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 telecom-
munication fi rms to achieve more distributional outcomes such as uni-
versal service obligations or universal access (see discussion in Section 7
below). They wanted the autonomy to apply a more contextual, fl exible
approach to competition law – analogous to the existing ‘special and dif-
ferent 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 industrialisa-
tion. 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 fi rms which can take advan-
tage of economies of scale and productive effi ciencies so that they are
better prepared to eventually compete on the international market. This
requires more permissive scrutiny of domestic mergers and/or allows dom-
inant national fi rms 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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International competition law and policy 259
clash between the proposed obligations and national development policy
as long as these were transparent and operated for a defi ned 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, fi nan-
cial services and telephony, where foreign trade has not provided market
discipline. Ineffi cient 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 rent-
seeking by producers, whereby weak regulatory authorities adopt policies
or allow exceptions for various interests, which can impede the develop-
ment 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 effi cient 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- fi rm 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 anti-
competitive eff ects and the abuse of market power by foreign multination-
als, if unconstrained, can be hugely detrimental to consumer welfare in
these emerging and developing economies. It is also true that the welfare
benefi ts from the increased detection and eradication of global cartels go
beyond the mere facilitation of ‘market access’ (Evenett, 2007: 408). Surely
enhanced eff orts to coordinate the eradication of this behaviour would be
benefi cial for developing countries.
International cartels have a disproportionate eff ect 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 aff ect prices.
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260 IEL, globalization and developing countries
Levenstein and Suslow (2004) estimated that for 19 selected products
the value of cartel- aff ected 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- fi xed 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 pro-
market agendas than distribution concerns, it is a reality that international
cartel activity has directly increased the price of many staple commodi-
ties. 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 eff ects in social and political disruption. The anti-
competitive eff ects remain largely unregulated however because competi-
tion 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 eff orts to co- ordinate a response to international anti-
competitive 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 identifi cation 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 fi nancial support for delegations from developing coun-
tries 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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International competition law and policy 261
border mergers and the investigation of international cartels. Thus, devel-
oping 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 domi-
nated by either the EU or the US.
What is perhaps most surprising is that while developing and least-
developed countries have opposed the multilateral competition agree-
ment, 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 com-
petition law regimes and to apply these extraterritorially to cross- border
transactions which have anti- competitive eff ects. But, as Bhattacharjea
points out, there is a crucial diff erence 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
defi nition’ and would require further negotiation and domestic commit-
ment to their implementation, which is often lacking, to operate eff ectively
(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 competi-
tion 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 multi-
lateral 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 reas-
sessment of anti- dumping duties was originally on the agenda for negotia-
tion of the multilateral agreement, it was excluded from the fi nal Doha
Declaration.
Article VI of the General Agreement on Tariff s and Trade (GATT) 1994
5 Bradford (2007: 411) argues that this is another reason why developing countries would seem likely to be benefi ciaries of a future international antitrust agreement.
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262 IEL, globalization and developing countries
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 diff erent 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 meas-
ures 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 compe-
tition principles so that they can be assessed on a fi rmer economic basis,
namely the eff ect of these prices on competition in the market and con-
sumer welfare rather than the protection of domestic competitors. Many
prices which attract anti- dumping duties would not be classed as ‘preda-
tory’, 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 compli-
cated constructed value determinations6 on often historical data, is anath-
ema to competition law principles which require such assessments to be
related to an intent to harm an equally effi cient competitor and/or to gain
market power. The excessive duration of the fi nal 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 eff ective protectionist instrument for
their domestic industries which encourages market distortions and rent-
seeking. These often excessively lengthy investigations create uncertainty
and instability particularly for export fi rms in developing countries, which
often lack the technical and fi nancial 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 profi t is taken into account.
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International competition law and policy 263
lenge is suffi cient for exporting countries to alter their behaviour and with-
draw 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 applica-
tion of anti- dumping measures’, it is rarely applied. Bhattacharjea (2006:
301) argues that developed countries have abused the anti- dumping provi-
sions 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 meas-
ures 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 prior-
ity 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 leg-
islation 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, competi-
tion 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 transi-
tion 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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264 IEL, globalization and developing countries
Republic of China came into eff ect on 1 August 2008. China’s fi rst 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 reason-
ing and market defi nition 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
fi rms 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 develop-
ing 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 lucra-tive 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 fi rms
which may not be subject to competitive discipline. The presence of a large
informal market sector can also lead to narrowly drawn markets and exag-
gerated 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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International competition law and policy 265
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 eff ect 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 effi cient transportation infrastructures are a prerequisite for the inexpensive distribu-tion 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 profi ts in key export and import
sectors. Truck- drivers’ unions may also operate as a cartel to fi x 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 fi nancial resources, and rent-
seeking 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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266 IEL, globalization and developing countries
School, is not appropriate. The Chicago School goal of economic effi -
ciency 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 diff erent issues and problems facing
developing and least- developed economies with conditions of highly con-
centrated 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 profi ts will be competed away as new players enter the market.
But, as we have seen, markets are often small and fragmented in develop-
ing countries. They are also dominated by the state, which signifi cantly
raises barriers to entry. The fi nancial markets are also far from perfectly
competitive. Access to funds for a fi rm 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 concen-
trated and ‘[a]ccess to fi nance, distribution networks, information about
customers, and the necessary approvals from state bodies often frustrate
the extent to which dominant fi rms 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 fi rms have been credit- constrained by a banking system that
systematically ignores future profi tability in lending decisions’.
As Fox (2007: 213) concludes, developing economies require a competi-
tion 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 devel-
opment economics (ibid: 211) is not one where the role of the state is very
much a residual one confi ned 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 fi eld and ensuring ‘competition on the
merits’. This includes the incorporation of notions of fairness and the pro-
tection of smaller competitors from the predatory actions of larger fi rms.
These ideas are broadly in agreement with Amartya Sen’s (1999) discus-
sion of the ‘freedom to compete’, which goes beyond the purely neo- liberal
concerns of effi cient markets to link it to the broader concerns of human
rights and human fl ourishing (Kennedy, 2006). Competition law can have
a direct eff ect 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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International competition law and policy 267
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, not-
withstanding more recent attempts at modernisation which some may argue
have brought it closer to that of the US, may therefore be a more appropri-
ate 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 tradition-
ally associated with rules to safeguard the totality of the competitive process
rather than the US embrace of effi cient 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 effi ciency 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 eff ectiveness of the economy depended on its relationship to the politi-
cal and legal systems’ (Gerber, 1998: 246). It strives to maintain a system
which permits neither unconstrained private power nor discretionary gov-
ernmental 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
effi cient 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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268 IEL, globalization and developing countries
under Article 102 of the TFEU (formally Article 82 of the EC Treaty) has
been particularly concerned with the protection of small and medium-
sized fi rms and the ability of large fi rms to extract unfair prices and condi-
tions from smaller enterprises (Gerber, 1998: 368). He refers specifi cally to
notions of economic dependency developed in French and German com-
petition law where a fi rm does not have suffi cient and reasonable possibili-
ties 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 utili-
ties and networks.
Yet, as Fox (2007: 214) points out, movement away from rules and
a ‘one size fi ts 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 safe-
harbours calculated by reference to market shares. Such market share data
may be unavailable or unreliable and this increases uncertainty for the
fi rm (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 diffi cult 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- fi nanced,
relying on service fees and fi nes 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 penal-
ising ‘unfair’ behaviour in the ‘public interest’ rather than assessing the
eff ect 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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International competition law and policy 269
permits the government to exempt ‘any class of enterprises if such exemp-
tion 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 eff ect in most com-
petition 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 corpo-
ratisation, the implementation of competitive neutrality between public
and private enterprises, the enactment of sector- specifi c regulation in areas
of market failure, including access to essential facilities, and fi nally, 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 fi rms exit
the market (Bhattacharjea, 2008: 29). This may have an immediate impact
on the poor, especially in the absence of a welfare net. Competition agen-
cies 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 neutral-
ity (Hoekman and Holmes, 1999: 12; UNCTAD, 2000a; Gal, 2004: 22).
Regulatory review for anti- competitive legislation should also be imple-
mented to ensure that barriers to competition incorporated in legisla-
tion and administrative rules are assessed from an economic perspective
(UNCTAD, 2001b) but also by the ‘public interest’. In this way a com-
petition authority in a developing country can also assume some of the
broader functions normally undertaken by sector- specifi c 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 remain-
ing two sections of this chapter the impact on developing countries of
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270 IEL, globalization and developing countries
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 telecommu-
nications services on a non- discriminatory basis, a Telecommunications
Annex which contains specifi c 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’, defi ned as those
that can materially aff ect 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 specifi c obligations to trade liberalisation
may also be applied to services listed in a WTO member’s ‘Schedule of
Commitments’.
The Telecommunications Annex makes specifi c provision for meas-
ures aff ecting 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 recom-
mendations 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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International competition law and policy 271
The Telmex10 dispute between the US and the Mexican Governments
concerned potential confl icts 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 infrastruc-
ture. 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 tele-
communications 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 fi gures 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 nor-
mally on the reasonable provision of the means of access to a public tele-
communications 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 competi-
tive markets they are now identifi ed as areas of ‘market failure’ or uneco-
nomic services which cannot be profi tably provided. Developing countries
have often sought to obtain funds for the uneconomic provision of univer-
sal access from cross- subsidised funds from state- owned telecom monopo-
lies 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 account-
ing 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 telecom-munications industry.
11 The accounting rate is a wholesale rate representing the agreed cost of transmitting each unit of traffi c between the calling parties.
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272 IEL, globalization and developing countries
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 outfl ow of data from
the US to other countries). Such settlements have resulted in large pay-
ments to developing countries. These cross- subsidies and imbalances have
met resistance, as being in violation of GATS. The WTO has specifi cally
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 eff ectively permit-
ted 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 termina-
tion 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 interna-
tional 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 (includ-
ing 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 ineffi ciency and reduces output.
It is also arguable that the Mexican government may have had an inter-
est 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 profi le of Carlos Slim, see Wright (2009).
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International competition law and policy 273
lenges by Telmex by way of its considerable fi nancial resources. The deci-
sion may therefore provide valuable international backing to Mexico’s
eff orts to resist and control a domestic monopoly which can wield not only
economic power but also considerable political power and infl uence. 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 coun-
try’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 infra-
structure. 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 econo-
mies at this stage of development especially when the institutional frame-
work 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 refl ect 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 develop-
ments 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 fi xed 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 suffi cient coverage or maintain viability
in these unprofi table rural regions or to the very poor, in the absence of
cross- subsidies or signifi cant direct government funding (Shanmugavelan
and Warnock, 2004).
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274 IEL, globalization and developing countries
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 inter-
ests 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 defi ne ‘anti- competitive practices’. Those terms that are
defi ned, such as ‘major supplier’, apply to a much broader set of fi rms in
the telecommunications industry than those ‘in a dominant position’ as
identifi ed under competition law principles. The WTO Panel referred to
a dictionary defi nition 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- fi xing’, none of the forms of conduct subject to the action were
explicitly defi ned 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 competi-
tion agencies concerning the characterisation of anti- competitive conduct.
These are informed by diff ering 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
defi nitions is problematic in an international agreement and raises real
questions as to whose competition law is being applied and in whose inter-
ests (Kariyawasam, 2007: 79–80).
While eff orts to negotiate a multilateral competition agreement may
have usefully exposed these shortcomings in the interpretation of the exist-
ing competition provisions within the WTO agreements, the manner in
which these issues were determined by the Dispute Panel raises stark warn-
ings 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 dimin-
ish 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 com-
mitments made under the GATS ‘for the purpose of preventing a supplier
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International competition law and policy 275
. . . 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. Hoff man- La Roche Ltd v. Empagran
In the absence of a multilateral agreement on competition law, other inter-
national legal options, beyond the ‘soft law’ approach of the ICN, can be
harnessed in order to alleviate the eff ects of global cartels and other anti-
competitive behaviour by foreign fi rms 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 eff orts to investigate and punish
participants in global cartels have increased considerably in recent years.
There have been expanded eff orts to coordinate the exchange of informa-
tion (although much of this information remains subject to commercial
confi dentiality), strengthen civil and criminal penalties, and implement
immunity and leniency programmes to encourage participants to come
forward with information.
These eff orts have positive spill- over eff ects for developing countries
as more international cartels are deterred, investigated and eliminated.
However, an equally likely eff ect 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 eff ects for the nation’s trading partners. Evidence about the cartel’s formation and organi-zation 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 extraterrito-
rial eff ect of competition laws in developed countries to deter and prevent
the pernicious eff ect 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 eff ects 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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276 IEL, globalization and developing countries
‘commerce . . . with foreign nations’ have always had a strong extrater-
ritorial application and have been applied to any foreign conduct which
has a general domestic eff ect.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 eff ect’ on the
US market, and (b) ‘such eff ect 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 confl ict between the domestic and foreign law. A
true confl ict 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
plaintiff s. In F. Hoff man- La Roche Ltd v. Empagran SA foreign victims of
a global price- fi xing 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 com-
panies, had fi xed their prices over a number of years, earning estimated
global profi ts of US$9–13 billion (Klevorick and Sykes, 2007: 363). This
resulted in US and other competition agencies setting huge fi nes. An action
for damages was brought in the US by a class of plaintiff s which included
domestic US and foreign victims. Jurisdiction was clearly established for
the domestic US victims. The remaining foreign plaintiff s, who had suf-
fered 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 fi rst part of the test (a) was satisfi ed: the global
cartel had an eff ect on the US domestic market. It was unclear, however,
whether the second part of the test (b) required that the plaintiff s’ injury
must stem from the US market eff ects, or whether jurisdiction over foreign
claims would lie so long as the conduct generating the eff ects was action-
able under the Sherman Act. The foreign plaintiff s, who had purchased
vitamins outside the US, argued that the infl ated price due to the cartel
13 United States v. Alcoa.
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International competition law and policy 277
was the same conduct that injured US domestic commerce, so the second
part of the test was satisfi ed.
The DC Circuit court had held that where anti- competitive conduct
has the requisite eff ect on US commerce, foreigners who are injured
solely by that conduct’s eff ect 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 satisfi ed if they suff ered their
injuries outside the US market and independently from eff ects on the
domestic US market.
It was argued before the Court that the operation of global markets
means that the foreign plaintiff s would not have suff ered 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 eff ect.
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 suf-
fered abroad. The plaintiff s who purchased abroad have no cause of action
unless the challenged conduct’s domestic eff ect ‘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 plaintiff s, but the domes-
tic eff ects must cause the other. It was not enough that the injury had a
common cause with the US conduct. It was an independent foreign eff ect,
not one ‘derived from US domestic eff ect’.14
This is an example of the disjunction between law and economic rea-
soning which can arise in antitrust cases. The ‘substantial eff ect’ on US
commerce is determined by an acknowledgement of the anti- competitive
eff ects of cartel behaviour in raising prices above market price which gives
rise to the domestic plaintiff s’ action, enough to satisfy a ‘but for’ causa-
tion standard: in this way, the economic and legal arguments coincide. A
further legal argument of ‘insuffi cient causality’ and ‘proximate cause’ is
invoked to narrowly construe the statute to deny foreign plaintiff s who
have suff ered 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 plaintiff s’ damages were truly independent from the US market, the Court of Appeals dismissed the plain-tiff s’ claim: Empagran v. F. Hoff man- La Roche.
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278 IEL, globalization and developing countries
the concept of the eff ect in a ‘separate’ or purely ‘domestic’ market is often
meaningless.
Justice Breyer also invoked the international law rule of comity where
to give foreign plaintiff s 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 confl icting laws of diff erent
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 interde-pendence has any implications for the premise that the harmful foreign eff ects of the global vitamins cartel were independent of the adverse domestic ones.
The Supreme Court’s invocation of comity and deference to prosecu-
tions and private actions in foreign antitrust jurisdictions also does not
adequately account for developing countries where many of the harmful
eff ects of these cartels are felt. It was, in fact, established in the Empagran
case that countries that lacked competition agencies had higher over-
charges 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 develop-
ing countries such as Brazil have successfully prosecuted the vitamins
cartel,17 many other developing countries lack the evidential material,
resources or eff ectiveness 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 aff ect or may aff ect the Brazilian Territory’.
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International competition law and policy 279
decision?18 As Eleanor Fox stated in her Testimony before the Antitrust
Modernization Commission:
We must contemplate maximizing world welfare . . . The national law gov-erning 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 aff ected nations can be heard, can take account of outside harms, and can aff ord 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 com-
petition expertise (Klevorick and Sykes, 2007: 379). It is also true that
when the US has tried in the past to extend its extraterritorial jurisdic-
tion to foreign cartels, international comity and blocking statutes were
invoked to prevent this (ibid: 390). Amicus briefs were also fi led by the US
Department of Justice and other nations, arguing that extensive extrater-
ritorial 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 incen-
tive to prosecute or assist other competition agencies to prosecute anti-
competitive conduct where the detrimental welfare eff ects are external to
their domestic market. The conduct may also directly benefi t 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 detrimen-
tal welfare eff ects are external to the exporting country. The incentive to
irradiate global cartels only arises when the negative net welfare eff ect of
the higher prices on domestic consumers exceeds the supernormal profi ts
earned by domestic fi rms which participate in the cartel. If the net welfare
detriment is on foreign consumers rather than domestically, the individual
18 Domestic eff ects versus foreign effi ciency gains and losses, and an argument that to exclude the foreign eff ects 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 appli-cant cannot be subject to a claim for treble damages: Antitrust Criminal Penalty Enhancement and Reform Act 2004.
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280 IEL, globalization and developing countries
country may actually gain from the domestic fi rm’s participation in the
cartel through excess profi ts (Klevorick and Sykes, 2007).
Developed countries may also be disinclined to prosecute anti-
competitive practices which are external to their domestic welfare when
developing countries’ competition agencies lack the resources and techni-
cal skills to reciprocate with respect to the similar practices of their own
fi rms (Bhattacharjea, 2006: 310). Bhattacharjea notes that such ‘out-
sourced 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 market- access 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 investigat-ing 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 defer-
ence 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 appli-cants. The US prices were ‘not signifi cant 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 deter-rence goal, although not without force, is unavailing in light of the dictates of the FTAIA and the considerations of comity’.
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International competition law and policy 281
8. CONCLUSION
While developing and least- developed nations were opposed to the nego-
tiation of a multilateral agreement on competition law, it is not always
evident that such a regime would have been counter to their interests.
Greater eff orts to co- ordinate the detection and elimination of global
cartels, for example, would have been highly benefi cial 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 competi-
tion 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 defi nitions of ‘anti- competitive
conduct’ to override their attempts to achieve particular public purposes
through domestic industrial policy. Another reading of the Telmex deci-
sion, of course, may be that international rules can assist domestic govern-
ments to resist and control powerful private interests.
It is also true that markets in developing and least- developed coun-
tries 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 ineffi ciencies in crucial infrastructure
industries. While competition policies may be more directly linked to ‘pro-
market’ 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 com-
plexities 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
fl ounder or become inoperable through too many discretionary conces-
sions and exceptions.
The international community can also do more, whether through the
ICN or other initiatives, to assist with greater technical advice and capac-
ity building for domestic competition regimes in developing countries.
Developed countries may also assist by outlawing export cartels and coop-
erating more readily with foreign competition agencies for the exchange of
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282 IEL, globalization and developing countries
information on international cartels which, at present, is severely restricted
by requirements related to commercial confi dentiality.
Developed countries could also apply more liberal standing rules to the
extraterritorial application of their competition laws to permit foreign
plaintiff s the right to sue in their courts, and competition agencies could
increase their enforcement eff orts against anti- competitive action with
cross- border eff ects. But there are major obstacles to these proposals. Such
actions permit foreign countries to ‘free ride’ on the enforcement capabili-
ties 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 eff ects
are external to their domestic market (Empagran).
This is an argument for a more concerted international eff ort to pursue
the detrimental welfare eff ects of cross- border transactions through agen-
cies 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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283
13. Does the globalization of anti- corruption 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 transna-
tional anti- corruption regime that has emerged in recent years. The cen-
trepieces of that regime are dedicated treaties such as the Organisation for
Economic Co- operation and Development’s Convention on Combating
Bribery of Foreign Public Offi cials 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 fi nancial institutions, components of the international anti-
money 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 assist-
ance when their domestic counterparts are found wanting, which some
might call a form of legal globalization (others might call it ‘institu-
tional piggy- backing’), is a familiar one in modern legal thought. For
instance, the international investment regime is typically justifi ed by refer-
ence 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.
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284 IEL, globalization and developing countries
for the shortcomings of national courts in capital- importing countries.
International commercial arbitration is often justifi ed on similar grounds.
Along the same lines, Dammann and Hansmann (2008) have proposed
that countries with strong courts should allow those courts to assert juris-
diction 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. Coff ee (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 inad-
equate 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 defi ne broadly – if
somewhat vaguely – as the misuse of public power for private gain, com-
promises the integrity of the state and is widely viewed as a signifi cant
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, inter-
national wire transfers and daily inter- continental fl ights; it is a world in
which offi cials’ incentives and opportunities to engage in corruption are
shaped as much by the politics of international fi nancial 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 fi eld in which the activities of foreign legal institutions can benefi t
developing countries it is in the fi eld of anti- corruption law (for specifi c
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 fi rst 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 indiff erent 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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The globalization of anti- corruption law 285
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 benefi t 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 off ered with the best of intentions, the legal
solutions provided by foreign institutions may be incompatible with local
interests. To begin with, foreign institutions may refl ect 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 dis-
placed domestic institutions that may, even if only over time, off er 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 theoreti-
cal foundations. Consider, for example, Hirschman’s (1970) well- known
analysis of the potential trade- off s entailed in permitting the clients of an
organisation to ‘exit’ its sphere of infl uence 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 eff orts 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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286 IEL, globalization and developing countries
2. OVERVIEW OF THE TRANSNATIONAL ANTI- CORRUPTION REGIME
How international and transnational law came to be concerned with cor-
ruption is now well documented (see, for example, Abbott and Snidal,
2002; Schroth, 2002).1 It began in the United States, where investiga-
tions into ‘dirty tricks’ by the administration of President Richard Nixon
uncovered evidence that American multinational corporations were rou-
tinely making illicit payments to foreign public offi cials 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
offi cials in order to assist in ‘obtaining or retaining business’. Curiously,
the FCPA also explicitly excludes ‘facilitation payments’ – defi ned as
payments made to facilitate or expedite performance of a ‘routine govern-
mental 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 accu-
rate 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 fi rms subject to the
FCPA shared an interest in seeing other countries adopt legislation similar
to the FCPA in order to level the playing fi eld; in other words, to ensure
that the FCPA’s constraints would not place US fi rms 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 interna-
tional organisations. In the 1990s the World Bank under the leadership of
James Wolfensohn also joined the fi ght against corruption, and it adopted
1 For practical reasons the focus here is on legal instruments that are spe-cifi cally targeted at corruption. A more comprehensive analysis would include other legal instruments such as bilateral investment treaties or austerity programs imposed by international fi nancial institutions that exert signifi cant infl uence over the scope and nature of state action in developing countries and thereby, at least arguably, infl uence the nature and prevalence of corruption.
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The globalization of anti- corruption law 287
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 eff ects 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 fi rst 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 fi nancial 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 consider-
able pressure from international fi nancial institutions and other actors to
adopt international norms concerning government procurement, includ-
ing 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 signifi cant that in 2003 the Financial Action
Task Force decided to include ‘corruption and bribery’ among the predi-
cate off ences 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 conven-
tions referred to above focus on encouraging states to adopt domestic
legislation like the US FCPA prohibiting bribery of foreign public offi -
cials; 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 extra-
dition and mutual legal assistance. The regional conventions also recom-
mend various measures to be taken against domestic bribery, including
2 Individual members of FATF began to express concern about launder-ing 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 offi cial corruption or the funding of international terrorism’ (para. 43).
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288 IEL, globalization and developing countries
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 some-
what further by encouraging states to criminalise the solicitation or
acceptance of bribes by foreign public offi cials (as opposed to focusing
exclusively on the bribe- payers).3 The UN Convention also contains pro-
visions requiring parties to co- operate in the recovery of assets that qualify
as either proceeds or instruments of corruption, and in collecting compen-
satory damages for harm caused by corruption (Arts 54–9).
The anti- corruption policies of the international fi nancial 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 fi rms or governments found to have engaged in improper
activity and disqualifying guilty fi rms from receiving further funds. In
addition, though, the international fi nancial 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, compet-
itive bidding; acceptance of the lowest qualifi ed 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 infl uence on private law. In one remark-
able 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 signifi cant role it
allows foreign legal institutions to play in both preventing and respond-
ing to corruption – especially bribery – involving local public offi cials. 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 289
impose criminal liability for paying bribes to local public offi cials; ●
impose civil liability, including potential cancellation of contracts, ●
for paying bribes to local public offi cials;
impose administrative penalties for paying bribes to local public ●
offi cials;
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 fi nancial 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 corrup-
tion.
This regime clearly invites countries aff ected 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 straight-
forward 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 institu-
tions 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 aff ord to ignore the eco-
nomic 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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290 IEL, globalization and developing countries
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 eff orts 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 fl ow from fi rms’ employees, regulators, competitors or fi nanciers. 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 agen-
cies 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 specifi c aspects of the investigation or
prosecution of specifi c forms of misconduct. For instance, foreign pros-
ecutors 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 institu-
tions then foreign institutions may off er the only viable responses. Of
course a cynic might ask why anyone should expect foreign legal institu-
tions 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 eff ective schemes of monitor-
ing, 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 fi nd it
relatively diffi cult to establish illicit relationships with foreign legal institu-
tions 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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The globalization of anti- corruption law 291
organise the arguments against getting foreign legal institutions involved
in preventing, deterring or providing redress for domestic problems: indif-
ference, 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. Indiff erence
At fi rst glance the argument that draws upon concerns about indiff erence
seems like a simple application of the idea that foreign actors will gener-
ally act in accordance with their self- interest. The argument would be that,
even if they derive some benefi t from paying lip service to the fi ght 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 benefi t from
doing so.5 However, this argument rests on two contestable premises. The
fi rst premise is that foreign institutions are motivated by selfi sh 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 inter-
ests. 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
offi cials in developing countries is incompatible with foreign states’ self-
interest. This claim ignores the fact that sometimes foreign states have a
direct economic interest in combating corruption. For instance, if only
because of the diffi culty of enforcing corrupt transactions, bribery is
often an expensive and unreliable way of obtaining the services of foreign
public offi cials (Davis, 2002). The claim that foreign states have no inter-
est 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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292 IEL, globalization and developing countries
corruption in societies with which they share goods, capital, people, ideas
and culture.6 Or perhaps they see profi t in helping other societies to diag-
nose 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 indiff erence argument, is
another complication, namely the distinction between indiff erence on the
part of individual states and collective indiff erence. 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 eff orts of others.
In other words, even if states collectively have an interest – whether based
on moral or material considerations – in contributing to anti- corruption
eff orts, individual states may not have any interest in stepping up to the
plate.
Taking these considerations into account suggests that the most plau-
sible version of the indiff erence argument is that foreign actors will mani-
fest selective indiff erence in the fi ght 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 eco-
nomic 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’ anti-
corruption eff orts is that those eff orts 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 fi ght against cor-
ruption is that those resources either may not be valued by local actors or
may not be deployed in ways which, on balance, benefi t the local popula-
tion.
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
confl ict in this fashion, respect for self- rule and cultural diversity arguably
6 Edmund Burke presented an early example of this argument in his eff orts to impeach Warren Hastings for corruption while serving as Governor- General of Bengal (see Ala’i, 2000; Pavarala, 2004).
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The globalization of anti- corruption law 293
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 acknowl-
edges 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 eff orts 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 anti-
corruption regime, including those which punish fi rms for paying bribes
to foreign public offi cials, tend to discourage fi rms from doing business
in countries with corrupt offi cials. 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 interna-
tional 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 offi cials have to abuse their power. This can be done
by reducing the scope of offi cials’ 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 night-
watchman 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 off ered by Warren Hastings in his defence against Burke’s eff orts to impeach Hastings before the House of Lords for engag-ing in acts of corruption while he was Governor of Bengal. For accounts of this aff air, see Ala’i (2000) and Pavarala (2004).
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294 IEL, globalization and developing countries
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 eff ort a society devotes to analysing and
controlling corruption may reduce public bodies’ ability to pursue other
public purposes (Anechiarico and Jacobs, 1996). Crackdowns and zero-
tolerance 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 eff ects of drawing atten-
tion to corruption can be particularly perverse if nothing can be done to
eliminate it, in which case the main eff ect will be merely to undermine the
legitimacy of the state in question.
The apparent contradictions between these arguments – foreign insti-
tutions 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 anti-
corruption regime may vary is because the activities it targets pose less of a
threat to some societies than to others, perhaps because the eff ectiveness of
domestic institutional substitutes varies across societies. Alternatively, the
consequences of adopting a given legal institution may depend on the pres-
ence 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 diff erent 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 cor-
ruption in developing countries include claims that foreign institutions
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The globalization of anti- corruption law 295
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 infl uenced 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 benefi ts to be derived from the eff orts of domestic institu-
tions. For example, if American forensic accountants can be relied on to
investigate cases of transnational bribery involving public offi cials from
Country X, there will be little benefi t 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 eff ort in complaining about or pressing for the improvement of
local courts, and so on? This may not be a problem if the foreign institu-
tions are a perfect substitute for local institutions. But suppose that the
foreign institutions only serve the needs of a subset of the local popula-
tion, 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 indiff erent 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 eff ects of enabling
exit from local institutions but proceeds from a diff erent 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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296 IEL, globalization and developing countries
police offi cers 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 benefi ts
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 benefi ts a country will
derive from domestic institutions’ anti- corruption eff orts. In these situa-
tions the fl ip sides of the arguments set out above suggest that the involve-
ment of foreign institutions will increase the quality of local institutions.
For example, the fact that foreign institutions are willing to investigate
fi nancial fl ows passing through their jurisdictions and to assist in recovery
of misappropriated funds will tend to increase the benefi ts 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 ques-
tion 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 theo-
ries outlined above and to identify areas in which further data collection
and analysis is warranted.
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The globalization of anti- corruption law 297
I. 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 fi rms have been successfully prosecuted
by US and European authorities for paying bribes to public offi cials in
developing countries. In the most high- profi le proceedings, Siemens AG
and three of its affi liates paid fi nes 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
offi cials 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 proceed-
ings that have sought to use foreign courts to recover assets from corrupt
public offi cials 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 eff ect. Cuervo- Cazurra (2008) presents a statistical study which
fi nds that for countries which had implemented the OECD Convention,
investment fl ows became more sensitive to corruption in the sense that
more corrupt countries were more likely to experience diminished invest-
ment fl ows. These fi ndings are broadly consistent with the fi ndings 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 defi ciencies in parties’ implementing legislation – defi ciencies 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 rep-
resentatives 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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298 IEL, globalization and developing countries
advantageous to developing countries, the evidence might take the form
not only of improved deterrence but also improvements in the eff ective-
ness of local institutions as they obtain access to greater resources and
are exposed to the infl uence of institutions with relatively high levels of
integrity. Only a handful of countries that even arguably qualify as devel-
oping countries are parties to the OECD Convention and, aside from the
data that has been compiled on the eff ects 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 infl uenced
the eff ectiveness of local legal institutions.9 However, there are clearly
instances where the transnational anti- corruption regime has served to
enhance the eff ectiveness 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 submit-
ted 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 signifi cant role in encouraging legal actors in
South Eastern Europe and the Baltic states to invest in combating corrup-
tion (Smilov, 2009: 96–9; Dahl, 2009).10
II. Evidence of Indiff erence
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 indiff erence. This is especially
true if they look beyond the United States, which generally appears to
be an exceptionally diligent participant in international anti- corruption
eff orts.
The indiff erence 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 cor-ruption that prompted the enactment of the FCPA.
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The globalization of anti- corruption law 299
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 offi cials; perceptions that factors such as national economic
interests infl uence the investigation or prosecution of foreign bribery;
ineff ectiveness of eff orts to use fraudulent accounting off ences to uncover
eff orts to conceal bribery; and lack of reporting by providers of offi cial
development assistance and export credit agencies (OECD, 2006b).
Another manifestation of indiff erence 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 fi nding is broadly consistent with the conclusions of the
OECD’s Working Group on Bribery, though not entirely consistent with
Cuervo- Cazurra’s (2008) fi nding that the OECD Convention has reduced
investment fl ows to relatively corrupt countries.
Interestingly, Cuervo- Cazurra’s study does provide circumstantial evi-
dence that for some period of time even the United States engaged in self-
interested non- enforcement. He fi nds that although the FCPA has been
in force since 1977, fl ows 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 eff ective 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 fi rms at a competitive disadvantage. But other explana-
tions for these fi ndings are possible. For instance, it may be the case that
the US’s unilateral eff orts were sincere but limited in eff ectiveness 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) fi nds 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) fi nd, using diff erent methodologies, that after the enactment
of the FCPA but before the adoption of the OECD Convention, US inves-
tors in countries with higher levels of corruption were more reluctant than
other investors to take on local partners.
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300 IEL, globalization and developing countries
Robust and reliable data on cases in which allegations of corruption
have not been pursued is not available, and even examples of specifi c
instances of non- enforcement are hard to come by. The most promi-
nent example is the BAE aff air, 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 offi cials 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 Offi ce subsequently announced
it would seek permission to prosecute BAE for corruption associated with
its activities in Africa and Eastern Europe (Serious Fraud Offi ce, 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 corrup-
tion of the Saudi government.
It is diffi cult to say to what extent the instances of non- enforcement that
have been uncovered refl ect total as opposed to selective indiff erence 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 diffi cult 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 Offi ce announced the fi rst prosecution of a British fi rm 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 infl uence decision- makers in public contracts in Jamaica and Ghana between 1993 and 2001 (Serious Fraud Offi ce, 2009a).
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The globalization of anti- corruption law 301
that they are committed to fi ghting 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 offi -
cials who deal with foreign companies. This leaves a whole world of cor-
ruption untouched (Gathii, 2009). To some extent the lack of attention to
other forms of corruption refl ects 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 impli-
cation is that foreign actors are not concerned with ‘minor’ matters such
as schoolteachers who request bribes to allow students to take exams,
or police offi cers who extract bribes from motorists for spurious viola-
tions, or public offi cials 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 mis-
appropriated 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 eff ect on leaders of other countries,
but the direct benefi ts 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 confl ict between the interests of the creditors and local inter-
ests, imagine if litigation of this sort were directed by local actors and with
12 Similarly, there is no practical reason why international fi nancial institu-tions advising client governments on austerity policies ostensibly aimed at macro- economic 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 corrup-tion.
13 See Long Beach Ltd v. Global Witness Ltd.
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302 IEL, globalization and developing countries
a view to local interests. In that case, any assets recovered would probably
be repatriated as rapidly as possible to the Congo, where eff orts 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 aspira-
tions or interests of developing countries?
To begin with, charges of moral imperialism seem to have little foun-
dation. 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 embez-
zlement that are the focus of the transnational anti- corruption regime
(Rose- Ackerman, 1999). These forms of corruption appear to be univer-
sally 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 con-
demnation of bribe- taking by traffi c offi cers 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 offi cial
who has been bribed (OECD, 1997: Comment 8 to Art. 1).
The evidence suggests that there is more disagreement about the moral-
ity of practices such as payments to political parties, confl icts of interest,
and nepotism. Nichols et al. (2004) found signifi cant diff erences across
countries on whether to condemn a public offi cial for ‘helping to get his
relatives in getting a job/getting into schools’. Moreover, relatively few
respondents in either of the countries studied defi ned corruption to include
‘participation in commercial ventures’ or ‘assisting relatives in meeting
infl uential 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 particu-
lar, Malaysia has complained that the norms contained in the Agreement
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The globalization of anti- corruption law 303
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 evi-
dence that the anti- corruption strategies that have been rolled out in con-
nection with the emergence of the transnational anti- corruption regime
are having more tangible benign or malign eff ects on developing countries?
As a general matter, evidence that patterns of corrupt activity vary signifi -
cantly across countries tends to undermine the basis for expecting any sort
of one- size- fi ts- all legal response to be equally eff ective across countries
(Rose- Ackerman, 1999; Johnston, 2005). But there appears to be little
direct evidence on the actual eff ects of the transnational anti- corruption
regime on developing countries. Most notably, no one appears to have
undertaken a comprehensive empirical analysis of whether the transna-
tional anti- corruption regime, or any component thereof, has caused cor-
ruption in developing countries to decrease. Admittedly however, given
the diffi culties 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 coun-
tries 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 offi cials 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 eff ect of discouraging fi rms from doing
business in or with corrupt states. As far as investment fl ows are con-
cerned, 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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304 IEL, globalization and developing countries
that there has been a deterrent eff ect is also consistent with the OECD
Working Group’s qualitative evidence suggesting that large multinational
fi rms 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 medium-
sized fi rms replacing larger fi rms 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 politi-
cal 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 politi-
cal institutions (see also Smilov, 2009). De Weaver (2005) argues that a
Chinese anti- corruption campaign launched in or around 2003 was moti-
vated 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) identi-
fi ed many examples of ineff ective 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 proceed-
ings without the participation of the Director of Public Prosecutions.15
Meanwhile the Commonwealth Lawyers Association reportedly discour-
aged 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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The globalization of anti- corruption law 305
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 dis-
placed local institutions is sparse, mainly because there appears to be no
systematic eff ort 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 infl uenced the quality of those institutions over
time, including how frequently they participate in transnational proceed-
ings 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 offi cials in developing countries asking how
helpful they fi nd 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 eff orts of actors from developing coun-
tries. 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 eff ectiveness 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 develop-
ing countries. The potential advantages and disadvantages appear to
be similar to those associated with other international or transnational
regimes that aff ect 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.17 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).
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306 IEL, globalization and developing countries
the anti- corruption eff orts of foreign legal institutions have, in general,
positive or negative eff ects on developing countries. In the fi rst 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 insuffi cient 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
ramifi cations of relying on foreign legal institutions to solve the problems
of the developing world, and especially the ramifi cations for the develop-
ment of local institutions.
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307
14. Intellectual property, development concerns and developing countries
Pedro Roff e*
1. INTRODUCTION
Intellectual property (IP) has increasingly become more globalized and
economically and politically important, but it remains complex, contro-
versial 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 entertain-
ment 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) diffi cult and highly unaf-
fordable 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 devel-
oping 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 eff ect in all countries, particularly in the developing world. It off ers 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 accept-ance and utilization of IP tools means that there will be more innovation and there-fore more creative change and cultural and economic growth’ (Idris, 2003: 4).
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308 IEL, globalization and developing countries
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 most-
favoured- 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 agree-
ments (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 (Roff e 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 land-
marks 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 coun-
tries 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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IP, development concerns and developing countries 309
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 intel-
lectual 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 techno-
logical 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, unprofi table
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 mecha-
nism 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 tariff s’ (Patel, 1974).
The European anti- patent movement collapsed after an impressive propa-
ganda 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 com-
promise reassured those with apprehensions that the system would not be
responsive to the development and industrialisation needs of the import-
ing 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 Roff e (2008); Roff e and Vea (2009).
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310 IEL, globalization and developing countries
The International Convention for the Protection of Industrial Property
(the ‘Paris Convention’) was fi nally 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 for-
mally 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 fi ve
major revision conferences diluted the ‘strategic compromise’ of 1883. The
fi nal text of the Convention – part of the WTO TRIPS Agreement of 1994
– is less fl exible concerning the freedom given to countries to determine
the conditions under which local exploitation can take place. This lack
of fl exibility 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 politi-
cal 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 Roff e (2007).
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IP, development concerns and developing countries 311
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 fi ve
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 cen-
tury.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 fl exible 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 national-
treatment 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 poli-
cies. 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 coun-
tries 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 impor-tant 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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312 IEL, globalization and developing countries
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 specifi c needs of the country (see Ayyangar, 1959).
The adoption of the fi rst 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 diff erentiated 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 (Roff e, 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 regula-
tions 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 infl uenced the distribution of benefi ts
of the integration process. By dealing with various aspects of economic
foreign collaboration including foreign direct investment, licensing agree-
ments, and the treatment of intellectual property rights, the Andean
Group sought mainly to extract benefi ts from the technological skills of
transnational corporations as a springboard to the upgrading of local
fi rms. It was perceived that this could be achieved with a more selective
screening of foreign direct investment and technologies that could con-
tribute to the national development of the fi ve 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 fi rms, 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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IP, development concerns and developing countries 313
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 interna-
tional front, including the fl agging of the issue in deliberations of the UN
General Assembly (see Roff e 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 suffi cient
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 fi rst 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 dissemina-
tion 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 trans-
fer 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 diff erent working groups, resulting in the preparation
of the basic proposals fi nally submitted to the revision conference that
met for the fi rst 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 Roff e 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
eff ects of public disclosure of an invention) sidetracked the general revi-
sion process initiated at the instance of developing countries. The scope
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314 IEL, globalization and developing countries
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 sub-
sequent 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 fl exible 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 Tariff s and Trade (GATT). In this context, they argued
that WIPO, as the UN international specialised body, was the only com-
petent 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 fl exibilities 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 Ruse-
Khan, 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 fl exibilities and discretion in the imple-
mentation of its minimum standards. How fl exible the Agreement is and
11 The wider agenda included issues such as the unity of invention, the fi rst- to- fi le versus the fi rst- to- invent criterion, the minimum duration of rights, enforce-ment issues, exclusion of certain fi elds 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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IP, development concerns and developing countries 315
how free countries are to implement its provisions are important questions
that have, in many respects, infl uenced 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 fl exibility
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 fl ex-
ibilities specifi cally mentioned in the Declaration is the right to grant com-
pulsory licences, including the freedom to determine the grounds upon
which such licences are granted and the freedom to establish the appropri-
ate regime for the exhaustion of IPRs. These are not the only fl exibilities,
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 fl exibilities (see Roff e and Santa- Cruz, 2006).
Similar to the adherence to the TRIPS Agreement as a quid pro quo for
the benefi ts of WTO membership, negotiators seem to acknowledge that
the IP provisions in FTAs are the result of trade- off s in exchange for
trade concessions in areas more signifi cant 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 pro-
tection and interested in sustaining their technological edge (Roff e 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 Pacifi c (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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316 IEL, globalization and developing countries
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 eff ective implementation of the obligations
arising from’ a number of WIPO- administered treaties15 and make ‘every
eff ort to ratify and ensure an adequate and eff ective implementation of the
obligations arising from’ multilateral conventions.16 The adherence to
these agreements was reinforced by the overarching obligation of ensuring
adequate and eff ective protection to IPRs in accordance with the ‘highest
international standards’, including eff ective means of enforcing such rights
(see Roff e 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 negotia-
tions (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 pro-
vided to national authorities on the safety and effi cacy 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 modifi ed 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 Classifi cation of Figurative Elements of Marks, 1973, as amended in 1985.
17 See Roff e 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/annexes- and- 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/legal- texts/third- country- relations/republic- of- korea/fi nal- act- record- of- understanding- annexes- and/KR- Annex- XIII- IPR.pdf/view (accessed 2 September 2009)).
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IP, development concerns and developing countries 317
The agreements to which the US is a party have had a more expansive
and detailed coverage. Since 2002 they have followed the general princi-
ples 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 obli-
gations and that the provisions of any trade agreement ‘refl ect 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 ratifi cation of outstanding free trade agreements.21 As a
result of this understanding, modifi cations were introduced in the FTAs
with respect to provisions dealing with pharmaceutical products, refl ect-
ing concerns expressed in many quarters about the impact of the FTAs
on public health policies (see, for example, United States Government
Accountability Offi ce, 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 Roff e 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 ratifi cation by Congress at the time of the 2006 Congressional elec-tions.
22 The FTA with Peru entered into force in February 2009.
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318 IEL, globalization and developing countries
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 eff ectively the provisions of the agree-
ment. This aspect of the implementation process, known as the ‘certifi ca-
tion’ 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 practi-
cal terms it means that once the negotiation has been concluded and signed
by the parties, a new negotiating process begins with respect to the imple-
mentation 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 certifi cation of the implement-
ing legislation that questions the relevance of the principle of freedom of
implementation sanctioned by TRIPS (see Roff e 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 aff ect 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 fl exibilities
being in general the core of this eff ort – 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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IP, development concerns and developing countries 319
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 tech-
nological 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 infl uential 2002 report on Intellectual
Property Rights and Development of the UK- appointed Commission on
Intellectual Property Rights (CIPR). Overall, for the Commission a ‘one-
size- fi ts- 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 develop-
ment and poverty alleviation than strong levels. The CIPR presented well-
documented 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- fi ts- all approach ‘has
resulted in a “race to the top” directed by the eff orts 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 ‘fl exibilities to which countries are entitled under TRIPS. The FTAs
provisions also appear to upset an important balance between innova-
tion 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
effi cacy of products by companies seeking marketing approval for generic
products (see Roff e 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 medi-
cines (see Roff e 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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320 IEL, globalization and developing countries
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’ eff orts 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 Roff e 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 copy-
right 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 multilat-
eral 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 aff ord 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 ‘eff ective 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 proc-
esses for the production of plants or animals and plant varieties (Art.
27.3). An ‘eff ective 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 ‘eff ective 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 coun-
tries have reiterated their discomfort by emphasising the need to reconcile
TRIPS with the relevant provisions of the Convention on Biological
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IP, development concerns and developing countries 321
Diversity (CBD)26 of 1992, especially with respect to the principles of
prior informed consent and access and benefi t 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 non-
biological 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 off ers various options including an eff ective 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 devel-
oping 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 fl exible and more stringent than its previous incarna-
tions (ibid). An important diff erence 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 protec-
tion. 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 specifi c (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. 27 The Convention was fi rst 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.
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322 IEL, globalization and developing countries
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 Dutfi eld, 2008).
Countries party to FTAs undertake further commitments to make
eff orts 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 eff orts 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 fl exibility to determine the appro-
priate 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 harmoni-
sation 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 Roff e, 2004).
The FTAs signed with the US include detailed rules aimed at providing
adequate legal protection and eff ective legal remedies to fi ght against the
circumvention of eff ective 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 ‘Eff ective technological measure means any technology, device, or compo-nent that, in the normal course of its operation, controls access to a work, perform-
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IP, development concerns and developing countries 323
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 eff ective
legal remedies to protect rights management information.29
The provisions on eff ective 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 UNCTAD-
ICTSD, 2003), which state that Parties ‘shall provide adequate legal pro-
tection and eff ective 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- profi t libraries, archives, educa-
tional 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 identifi es 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 condi-tions 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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324 IEL, globalization and developing countries
Hernandez, 2009b). These trends, in general, refl ect the new enforcement
agenda (see Fink and Correa, 2009) led at the international level by these
same countries, with a clear expression in the eff orts 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 Roff e, 2004).
The new agreements provide, for example, that damages should be
paid by the infringer to compensate for the injuries suff ered by the right
holder,30 without qualifying the nature of the infringement. The equiva-
lent 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 recog-
nises that Members may adopt such measures to enable right holders, sus-
pecting that the importation of counterfeit trademark or pirated goods
(see TRIPS: Art. 51) may take place, to authorise competent authori-
ties to act even upon their own initiative (ex offi cio 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 offi cio meas-
ures 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 publica-tion 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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IP, development concerns and developing countries 325
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 defi nition to cover goods infringing all intellectual property rights’.
Thus, in the future, border measures could also embrace patent infringe-
ments 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 infringe-
ment on a commercial scale (USA–Peru: Art. 16.11.26). The new obliga-
tions disregard the quantitative ‘commercial scale’ requirement in TRIPS
and replace it with the notion of a ‘commercial advantage or fi nancial
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; specifi cally, 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 eff ect on the public
domain and its relevance to technological innovation and cultural
progress (see, for example, Boyle, 2008). The tendency for an over-
expansion 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 necessar-
ily 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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326 IEL, globalization and developing countries
‘to reduce distortions and impediments to international trade, and . . .
the need to promote eff ective 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 legiti-
mate 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 archi-
tecture have a long history and a close relationship with the genesis and
evolution of the system. The gravity of public health problems affl icting
many developing countries and the impact IP protection has on the pricing
of medicines – aggravated by the negative exposure major pharmaceutical
international fi rms had in a case brought against the South African State
challenging the use of TRIPS fl exibilities – 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 benefi ts as well as costs, depend-
ing on a country’s level of development. Action was therefore needed to
ensure that the costs do not outweigh the benefi ts, particularly in the case
of less developed countries:
A vision that promotes the absolute benefi ts of intellectual property
protection without acknowledging public policy concerns undermines
the very credibility of the IP system. Integrating the development dimen-
sion into the IP system and WIPO’s activities, on the other hand, will
strengthen the credibility of the IP system and encourage its wider accept-
ance as an important tool for the promotion of innovation, creativity and
development.34
33 See Santa- Cruz and Roff e (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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IP, development concerns and developing countries 327
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 refl ection on the development implications of current and new
approaches to diff erent 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 diff erent 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 develop-
ment considerations in all aspects of WIPO’s work. Among the most
relevant recommendations are those targeted to deepen the analysis of
the implications and benefi ts of the public domain; to initiate discus-
sions 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
fl exibilities 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 diff erent levels
of development; take into consideration a balance between costs and
benefi ts; 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 organisa-
tions and NGOs; and be in line with the principle of neutrality of the
WIPO Secretariat.
Apart from the work specifi cally 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 con-sider 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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328 IEL, globalization and developing countries
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 addi-
tion to the WTO and WIPO, there are a variety of organisations dealing
with specifi c IP matters. Today, a number of intergovernmental bodies
incorporate IP- related questions in their work programmes, including
the United Nations Educational, Scientifi c 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 fi nally entered into
force in 2004. The WHO has engaged actively on IP and health, particu-
larly 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 off spring of TRIPS. They take full advan-
tage 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 inter-
36 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 fi nal adoption in 2008 of the Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property (WHA, 2008).
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IP, development concerns and developing countries 329
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 infor-
mation) and undisclosed information, the FTAs refl ect 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
signifi cant 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 fi nally, 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 sustain-
able development objectives, where protection and enforcement goes par
to par with access to knowledge; transfer and dissemination of technolo-
gies; the promotion of innovation and competition policies; and, overall,
the recognition of the important role the public domain plays for innova-
tion and creativity.
The international system faces major challenges on how to build
37 See above notes 15 and 16. 38 There is practically no use of the Appendix of the Berne Convention on
Special Provisions regarding Developing Countries.
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330 IEL, globalization and developing countries
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 diff erent 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, com-
petition law and necessary incentives to lift the cultural and technological
conditions in developing countries, also deserve further and more consid-
ered attention.
The European Patent Offi ce (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 Offi ce, 2007: 2). The EPO identifi ed the fi ve 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 impor-
tant 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 diff erent level of development is still work in progress and a
major challenge to the international system.
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331
15. 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 sub-
Saharan Africa and Asia accounting for a large proportion of the addi-
tional 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 fi nancial 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.
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332 IEL, globalization and developing countries
Jatropha3 nut oil in order to make biodiesel.4 In some developing coun-
tries, increased production of biofuels has been at the expense of agricul-
tural 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 produc-
tion. 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 fi nd ways of increasing the agricultural
productivity, yield and nutritional quality of major crops whilst minimis-
ing potential damage to the environment. Advances in agricultural bio-
technology (or agrobiotechnology) could mean that genetic modifi cation
to plant and fi bre 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 biotech-
nology on food and fuel security in developing countries. However, in so
doing I believe such an exercise is only justifi able when all the pros and
cons of this particular relationship have been duly presented and consid-
ered.
Currently, many biotechnological innovations in the developed, indus-
trialised world are driven by the private sector in pursuit of profi t. 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- profi t insti-
tutions and the life- science industry, examples of which abound in the fi eld
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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Biotechnology and food and fuel security 333
ships in the fi eld 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 biotech-
nology and an explanation of its signifi cance 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 con-
ventional 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 triangu-
lar 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
briefl y examine open source biotechnology, which eschews traditional
forms of intellectual property protection in favour of licensing, including
humanitarian licensing. In the fi fth and fi nal section, I off er some conclud-
ing remarks.
2. BIOTECHNOLOGY AND ITS RELATIONSHIP TO FOOD AND FUEL SECURITY: SOME BASIC CONCEPTS
In this section, I defi ne 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 prod-
ucts or processes for specifi c use’.5 In a narrower sense biotechnology
is ‘a range of diff erent 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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334 IEL, globalization and developing countries
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 benefi ts 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 condi-
tions (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 signifi -
cant source of nutrition for local communities.
Another, more widespread technique is genetic engineering, which is pri-
marily aimed at crop protection. During the course of plant breeding ‘indi-
vidual 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 identifi able deoxyribonucleic acid or DNA sequences (also
known as molecular or marker- assisted breeding). These DNA sequences
are associated with a specifi c 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 modifi ed 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 dis-eases.
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Biotechnology and food and fuel security 335
impact on food security in sub- Saharan Africa, where maize is the staple
food, could prove signifi cant. So too could Bt rice, since rice is the world’s
most important food crop and the one on which some of the most popu-
lous 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 devel-
oping countries. One is embryo rescue, which involves ‘[a] sequence of
tissue culture techniques’ being used to allow ‘a fertilized immature
embryo resulting from an interspecifi c 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 fi elds, thereby
making it easier for farmers to harvest by hand and introducing cost-
savings (Glover, 2003: 2). It is therefore representative of second genera-
tion GM crops, which provide value- enhancing traits for the farmer and,
ultimately, the consumer.
The other technique is biofortifi cation, which is the deliberate develop-
ment of staple food crops that are rich in micronutrients, or ‘nutrition-
ally enhanced foods’, either through conventional breeding or genetic
modifi cation (Johns and Eyzaguirre, 2007: 2, 4–6). Crops containing
micronutrients which are capable of reducing the risk factors for dis-
eases are sometimes known as ‘functional foods’. A good example of
biofortifi cation for developing countries, especially those situated in
Southeast Asia, is the production of ‘Golden Rice’, which has the poten-
tial to help alleviate vitamin A and beta- carotene defi ciency, which can
lead to loss of eyesight, and auto- immune defi ciencies. 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 diff erently,
is large- scale agrobiotech production primarily destined for interna-
tional commodity markets or is it suffi cient 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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336 IEL, globalization and developing countries
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 diff erent 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 geneti-cally modifi ed 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 Prize- winner, 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, ratifi cation 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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Biotechnology and food and fuel security 337
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 suffi cient, 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 infl uential
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 eco-
nomic 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
fulfi l (facilitate) the right to food, which means that they must ‘pro- actively
engage in activities intended to strengthen people’s access to and utiliza-
tion 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 obli-
gation to fulfi l (provide) food directly, that is, by means of food aid (ibid:
para. 15).
Furthermore, the CESCR defi nes the meaning of ‘adequate food’ as
comprising ‘the availability of food in quantity and quality suffi cient
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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338 IEL, globalization and developing countries
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 recommenda-
tions for action that national authorities need to take in order to fulfi l 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 assess-
ments (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 eff orts remain limited in their scope and application
(Oshaug, 2007: 426–32).
Related activities in the fi eld 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 spe-
cifi cally dealing with the issue of how agricultural biotechnologies might
be focussed on . . . food security’ (FAO, 2007: 3). This is a serious omis-
sion.
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 appli-
cation of biotechnology in the fi eld 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 fi eld 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 consider-
able 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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Biotechnology and food and fuel security 339
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 commercialisa-
tion of plant breeding alongside the use of farmers’ varieties through tra-
ditional 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 emerg-
ing biofuels industry was a ‘new and signifi cant 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 aff ect 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 poten-
tially aff ecting 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 eff ects on the environ-
ment, 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 eff ects 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 feed-
stuff s. 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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340 IEL, globalization and developing countries
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 benefi ts 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 discuss-
ing 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 reproduc-
tion. 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 breed-ing 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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Biotechnology and food and fuel security 341
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 fi rst 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 fi rst 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 aus-
pices of the Consultative Group for International Agricultural Research
(CGIAR),14 has contributed signifi cantly to the breeding, release and dif-
fusion of modern varieties, with reliance on ‘access to rich stocks of genetic
resources . . . [that have drawn] on extensive breeding experience in devel-
oped 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 off spring that results from crossing two genetically diff erent 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 feedstuff s, also known as forages. The CGIAR, through its diff erent 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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342 IEL, globalization and developing countries
scientists and was suffi cient to maintain a relatively free international fl ow
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 devel-
oping 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 off set 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 dis-
cussed in the next section.
Techniques of modern biotechnology essentially allow the introduction
into organisms (including cell lines, tissues and so on) of specifi c 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 specifi c 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 off set by the accompanying risks that
genetic engineering poses. These include its eff ects 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 anti-
nutritional properties (Lacy, 2003: 191; Manshardt, 2004: 2; Kropiwnicka,
2005: 47). There are also environmental risks, including the loss of biodi-
versity 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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Biotechnology and food and fuel security 343
(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 cur-
rently 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 defi ned 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 coun-
tries, 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 scientifi c certainty, due to insuffi cient scientifi c knowledge regarding the potential adverse eff ects 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 eff ects.
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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344 IEL, globalization and developing countries
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 varie-
ties 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 subsi-
dies, including food subsidies, with international trade rules (UNCTAD,
2008a: paras 18, 20, 24). The gap has been fi lled in many developing coun-
tries by the private sector, mostly by a handful of multinational corpora-
tions 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, know-
ledge 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 insuffi ciently 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 eff ects of an over- protective IP regime.
Third, the rural poor may be further marginalised by the failure of large
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Biotechnology and food and fuel security 345
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 increas-
ing 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 diff erentiated prod-
ucts (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 fi eld 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 biotechnol-
ogy could ‘make a signifi cant 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?
Refl ecting 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 fulfi l (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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346 IEL, globalization and developing countries
relatively well in many production environments. As a result, there have
been successes, although it is not always easy to discern where biotechnol-
ogy 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 environ-
ments – 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 pro-
ducers 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 fi re up the distilleries
for ethanol production, thereby using less fossil fuel and with lower CO2
emission in the production process. Similarly, biofertilisers have been suc-
cessfully 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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Biotechnology and food and fuel security 347
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 possibil-
ity that land may be drawn away from other agricultural uses, including
food production, aff ecting both food prices and the availability of food for
domestic consumers, which fl ies in the face of a government’s obligation to
respect, protect and fulfi l (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 fi nance, poorly performing producer organisations and signifi -
cant 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 secu-
rity in developing countries is the way in which the emerging bioeconomy
is structured. Agenda 21 boldly claimed that biotechnology off ered ‘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 briefl y 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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348 IEL, globalization and developing countries
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 scien-
tifi c 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 mul-
tilateral system22 for facilitated access to a specifi ed 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 benefi ts fl owing 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 produc-
tion, 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 fi nd that public research
institutions and the private sector are joining forces in order to conduct
agrobiotech research for the benefi t of developing country farmers. Are
such partnerships global, as Agenda 21 suggests? To what extent are they
22 The Multilateral System of Access and Benefi t 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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Biotechnology and food and fuel security 349
capable of providing the scientifi c and technological advances necessary to
ensure food and fuel security in poor rural areas?
Public–private partnerships in agricultural research take a variety of
diff erent forms. While, universities or publicly funded research institutes
may link up with cooperatives of small producers, or local private com-
panies 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 biofortifi cation of rice.
Yet, while some public–private partnerships may hold out the promise
of technological advancement in the fi eld of agrobiotech, others have
drawbacks due to the confl icting incentives of the partners or the fact
that they are answerable to diff erent 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 Scientifi c 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 benefi t 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 conven-
tional breeding. Besides being in a position to develop large fi eld trials
of maize varieties for resistance to a pest known as the stem borer, the
Syngenta Foundation has been able to contribute signifi cant amounts of
fi nancial capital as well as expertise in bioregulation and business planning
to the joint venture, which is housed at KARI. Meanwhile KARI can off er
its local experience of genetic modifi cation 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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350 IEL, globalization and developing countries
the basic crop germplasm or PGRFA for insect- resistant maize together
with its scientifi c 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 necessar-
ily successful is that there may be a confl ict over the transfer of technol-
ogy, 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 pro-
grams 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 fi eld trials. ICI eventually refused
to transfer the relevant technology to the Indonesian partner.
II. Towards Open Source Biotechnology
A fi nal 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 fi eld 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 indi-
viduals do not deprive individuals of this right. More often than not in the
fi eld 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 diff erent 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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Biotechnology and food and fuel security 351
movement and aims to preserve community access to proprietary soft-
ware 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 innova-
tions – 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 institu-
tions from 12 diff erent countries, aims to decrease IP barriers and facilitate
the transfer of technology by pooling the eff orts 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 diff erent com-
panies in their research on the biofortifi cation 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 indi-
viduals 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 defi ned 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, particu-larly patents, which a company must break through in order to be able to com-mercialise a new technology.
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352 IEL, globalization and developing countries
varieties, as a way to optimize public sector benefi t 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 fulfi lling (facilitating)
the right to food and ensuring that food security needs are met in develop-
ing 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 insuffi cient empirical evidence to support this claim.
While GM technology may be available for crop improvement, or could
potentially be off ered 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 benefi ts 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 bio-
technology – 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 eff orts be undertaken to address
the challenges and opportunities posed by the introduction of biofuels in
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Biotechnology and food and fuel security 353
developing countries. The pressure that agricultural production for bio-
fuels may bring to bear on production of food and feedstuff s 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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354
16. 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 environmen-
tal 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 con-
servation 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 environ-
mental 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 environ-
mental regimes. This is refl ected in legal terms in the concept of diff erential
treatment that provides, in its most evolved form, a new basis for commit-
ments that are not based on reciprocity of obligations. This manifestation
of equity or justice concerns in international environmental law is prem-
ised for the most part on diff erent levels of economic development in the
North and South. It is also the refl ection of a political compromise and,
thus, not entirely a principle- based response to the moral concerns raised
by current environmental challenges. Indeed, diff erential treatment consti-
tutes 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.
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Environment and development – the missing link 355
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 relation-
ship 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 defi ne this relation-
ship. 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 diffi culties 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 diff erential treatment,
one of the ways in which the concerns of developing countries have been
taken into account in recent environmental law. Finally, the fi fth section
considers ways in which economic globalization has aff ected 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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356 IEL, globalization and developing countries
that have come to defi ne 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 reg-
ulation is conceived. Indeed, while an understanding of the links between
environmental protection and development issues is already clearly articu-
lated in the Stockholm Declaration,2 early environmental treaties tended
to be infl uenced more by a conservationist perspective (see, for example,
Okereke, 2008: 14). This changed signifi cantly 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 com-
ponent (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 appro-
priate 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 eff ect 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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Environment and development – the missing link 357
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 sympto-
matic of a broader trend whereby most major environmental issues over
the past couple of decades have become issues that are also major eco-
nomic development concerns, from access to biological resources to trade
in genetically modifi ed organisms.
At a conceptual level, the notion of sustainable development encom-
passes the links between environment and development. Sustainable
development is extremely useful as a catchphrase because it provided in
the fi rst 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 develop-
ment discourse today, its relative fl exibility 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 defi ning 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 specifi c 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 signifi cant 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 accept-
ability is also the cause of its irrelevance at a more specifi c 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 defi nitions (on the
diff erent understandings of sustainable development, see Blewitt, 2008).
Since the present international legal order does not provide a single specifi c
defi nition, 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 specifi c policy direction.
4 See Preamble to the Agreement Establishing the World Trade Organization (GATT, 1994a).
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358 IEL, globalization and developing countries
One of the clearest cases in favour of recognising sustainable devel-
opment as a binding principle of international law was made by Judge
Weeramantry more than a decade ago. He argued that sustainable
development ‘off ers an important principle for the resolution of tensions
between two established rights. It reaffi rms 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 recog-
nition in the 1986 Declaration has proved insuffi cient to build a consensus
over its status and its content.6 In other words, the defi nition 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 diff erent perspectives of
the North and South on environmental regulation. Sustainable develop-
ment can today alternatively be conceived as the linchpin of an interna-
tional 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 fl ows of genetic resources across borders that may be used
to develop genetically modifi ed seeds, and for organic farmers seeking
to protect their lands from the threat of genetically modifi ed 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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Environment and development – the missing link 359
notwithstanding a number of legal principles that are well established
– can be argued as constituting a more specifi c understanding of what
sustainability implies. These include, for instance, the principle of integra-
tion of environment and development concerns; the prevention and pre-
cautionary 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 signifi cant for several reasons in the context of this chapter. First,
the precautionary principle is one of the important novel conceptual devel-
opments 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 signifi cant achievement.
Second, given that the Protocol provides, in eff ect, safeguards for import-
ing state parties, the use of the precautionary principle in this context
provides a shield for developing countries that are in practice the main
benefi ciaries 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 transbound-
ary 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 environ-
mental 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 defi ne the relationship between environment and develop-
ment. 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- eff ects insofar as it may aff ect 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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360 IEL, globalization and developing countries
of mitigation and uses up the cheapest emission reduction opportunities
in developing countries that will not be able to benefi t 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 infl uence 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 regula-
tion, such as the principle of integration of environment and development.
Similarly, the rapid growth of diff erential treatment examined in the next
section is a refl ection of the importance of the South in shaping up envi-
ronmental law.
Yet, international environmental law cannot be qualifi ed as a developing-
country- focused area of international law. In fact, there exist a number of
areas of tension or confl ict that have surfaced over time.
International environmental law has now addressed a number of issues,
some of a relatively specifi c 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 defi nition 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 understand-
ing of a given principle. The sort of unity that can be identifi ed 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 fi elds 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 dif-
ferent secretariats found in diff erent regions of the world – have combined
to ensure any progress in one area may have little impact in another area.
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Environment and development – the missing link 361
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 environmen-
tal 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 iden-
tifying 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 refl ects, 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 refl ects the
importance of fi nancial 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 insignifi cant 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 defi ned.
A telling example is that of land degradation and desertifi cation. 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 organ-isation, 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 fi rst inter-national environmental treaty to have achieved universal participation in 2009.
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362 IEL, globalization and developing countries
the Rio process, with developing countries extracting the concession for
their participation in the biodiversity and climate change negotiations
(see Cullet, 2007). Even more diffi cult was the inclusion of land degrada-
tion 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
eff ective in individual countries implies that the sidelining of land degra-
dation until 2002 refl ected 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 develop-
ment concerns of the majority of the South. There are thus two sets of
issues that need to be addressed concurrently. First, international envi-
ronmental 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 suff ered 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 appar-
ently transboundary but have an international dimension. Additionally,
it is artifi cial 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 fi elds, makes it diffi cult to fi x with preci-
sion the boundaries of the fi eld.
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 specifi c 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 ben-
efi ts countries taking the initiative. This would not necessarily be prob-
lematic 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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Environment and development – the missing link 363
development make the choice of issues more signifi cant. 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 Desertifi cation
Convention has remained a poor cousin of the other conventions address-
ing ‘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 princi-
ple, more responsive to donor concerns than UNEP. This is refl ected 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 diffi cult.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, refl ected 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 pri-
orities of most developing countries when the United Nations Framework
11 See Convention to Combat Desertifi cation in Those Countries Experiencing Serious Drought and/or Desertifi cation, Particularly in Africa, Paris, 17 June 1994.
12 See, for example, Decision 1/CMP.4, Adaptation Fund (UNFCCC, 2009b).
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364 IEL, globalization and developing countries
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 signifi cant diff erence 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 signifi cantly aff ects environmental law is the fact that
it largely refl ects the main concerns of states. As a result, while interna-
tional 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 fi rst
treaty specifi cally addressing food security was negotiated, and despite
a specifi c mandate to defi ne farmers’ rights more precisely, negotiat-
ing states did everything apart from provide an eff ective farmers’ rights
regime.14 These two examples are symptomatic because water and food
are two of the most fundamental needs that are not fulfi lled 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 con-
cerns 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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Environment and development – the missing link 365
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 environ-
mental 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
refl ect 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 aff ected at the time of the negotia-
tions 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 neces-
sarily enough to make countries eff ectively engage on a specifi c issue. As a
result, more specifi c mechanisms have been needed to ensure full and eff ec-
tive cooperation of all countries on issues that could not be solved by the
actions of the North alone. The concept of diff erential 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.
Diff erential treatment off ers, 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 diff erently diff erential have also
been introduced in environmental treaties. These include varying imple-
mentation time periods, where all states take on the same commitments
but at diff erent dates,17 implementation aid, where certain states are only
legally bound to implement their commitments upon receipt of fi nancial
15 Cf Okereke (2008) arguing that ‘from the perspective of North–South rela-tions . . . distributive bargaining rather than environmental protection is the defi n-ing feature of international regime eff orts’.
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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366 IEL, globalization and developing countries
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
Diff erential 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
‘effi cient 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 ‘diff erential’
or ‘preferential’ treatment has been visible since the 1980s. The pervasive
inclusion of diff erentiation in international environmental treaties is thus
doubly noteworthy.20 First, diff erential treatment has been one of the most
eff ective 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 eff ective basis for lifting developing
countries out of poverty (cf Michalopoulos, 2000).
The concept of diff erentiation 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 gen-
erally 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 decoloni-
sation for the limits of formal legal equality to become obvious to most.
More specifi cally, diff erential treatment is a refl ection of a notion of
distributive justice that was clarifi ed a number of decades ago by Justice
Tanaka, who asserted that ‘[t]o treat unequal matters diff erently accord-
ing 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. 6.20 More generally, Okereke (2008: 29) notes that almost all global environ-
mental 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).
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Environment and development – the missing link 367
by the International Court of Justice), Justice Tanaka’s statement refl ects
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, diff erential treatment turns out to be one of the legal mecha-
nisms that provide a space to development concerns in international
law. The fact that the most successful diff erential measures over the past
couple of decades have been adopted in environmental law is, in some
way, a refl ection of the increasingly strong links between development
and environmental concerns. This is refl ected, for instance, in two prin-
ciples of the Rio Declaration. Principle 6 fi rst 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 specifi c and addresses
the diff erent contributions that developed and developing countries
have made to environmental degradation and their diff erent 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 impor-
tant 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 fl ow
from this statement are not made explicit.
Third, diff erential treatment off ers results that can be compared with
the ‘preferential’ treatment that was found earlier in international trade
and economic law. Yet, the path is diff erent. In the era of preferential
treatment between the 1950s and 1970s, the driving force behind prefer-
ences was the attempt by newly decolonised countries to reorganise the
structure of international law. As a result, in that era, developing coun-
tries 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 confronta-
tionist 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 sig-
nifi cantly since the 1970s, negotiations around international environmen-
tal 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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368 IEL, globalization and developing countries
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 diff erential treatment in international environmen-
tal law refl ects 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 benefi ting from the fact that environmental issues are
so structured that its participation is often a precondition for addressing
certain issues in an eff ective way. This has translated into ‘diff erent’ com-
mitments in several treaties, implementation aid has become a nearly nec-
essary 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 diff erential treatment is, on the whole, benefi -
cial 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 diff erential 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, signifi cant 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 ratifi ed 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 provi-
sion – 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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Environment and development – the missing link 369
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 develop-
ing 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 eff ective implementation and thus to improve environmental stand-
ards overall. It is in this context that implementation aid has become one of
the key elements of most environmental regimes as technology and fi nance
were identifi ed 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 environ-
mental 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
fl exibility. Flexibility refers to two new phenomena in international envi-
ronmental law. The fi rst is the fl exibility which is given to countries with
commitments to reduce their greenhouse gas emissions to implement part
of their international obligations through projects in a diff erent 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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370 IEL, globalization and developing countries
state. This is unprecedented because it provides a form of extra- territorial
implementation of international commitments. The environmental justifi -
cation for this new mechanism is linked to the global nature of the environ-
mental 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 diff erentiate between
action taken in the United Kingdom or in Malawi.
Secondly, fl exibility refers to the desire to ensure that environmental
aims are reached in the most economically effi cient way. This translates
into the search for the cheapest emission reduction opportunities any-
where 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 effi ciency 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 diff erent 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 eff ect, a project-
based 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 envi-
ronmental 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 fl exibility.
In practice, however, while the international legal framework makes pious
admonition for sustainability, where developing country governments fail
to take action to ensure that benefi ts 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 participa-
25 The CDM is defi ned 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 Defi ned in Article 12 of the Kyoto Protocol’ (UNFCCC, 2006: 6).
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Environment and development – the missing link 371
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 inter-
national 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 diffi cult
to conclude negotiations on issues that could not be fi nalised 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 signifi -
cant 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 environ-
ment, WTO panels have taken positions that at least indirectly aff ect
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
specifi c 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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372 IEL, globalization and developing countries
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 envi-
ronmental 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 conven-
tion and one that was negotiated without the South.29 Further, even if
the Espoo Convention was widely ratifi ed 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 refl ects the greening of the
World Bank, this remains necessarily limited because protecting the envi-
ronment 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 identifi ed 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 develop-
ment’ and eventually ‘sustainable development’ has had two diff erent
consequences. On the one hand, enshrining sustainable development at
the heart of international law reinforces on a superfi cial level the idea that
environment and development have eff ectively been integrated. On the
other hand, the vagueness of the concept of sustainable development has
had the unfortunate eff ect of making it easier for the language of neolib-
eral economic reforms to enter the domain of environmental law without
necessarily being in open confl ict with the basic tenets of the international-
level 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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Environment and development – the missing link 373
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 environ-
ment and development that has, over time, provided the basis for a weak-
ening 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 policy-
making over the past couple of years. In fact, what seems to be progres-
sively happening is that the environmental discourse is used as a tool to
reconfi gure 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 effi ciency 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 fl ex-
ibility mechanisms that give the private sector what is probably its most
direct role in the implementation of an international environmental treaty
yet, or the reconfi guration of basic development goals such as access to
drinking water as requiring the private sector for their fulfi lment, the
language of neoliberalism has increasingly infi ltrated international envi-
ronmental 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 specifi c pieces of legisla-
tion 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 specifi cally, 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 ‘inde-
pendent water regulatory authorities’ modelled on the framework used for
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374 IEL, globalization and developing countries
electricity earlier.30 The signifi cance of the interventions of the Bank is
manifold. In the context of this chapter, the following can be highlighted:
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 envi- ●
ronmental 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
affi rm that water is a tradable economic good.32 On the contrary,
various Supreme Court judgments affi rm that there is a human right
to water and that water is a public trust.33
V. 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
benefi t sharing. Access and benefi t sharing has become one of the main
mechanisms to address the inequities of the international fl ow 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).
Benefi t 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 affi rming that water is an economic good in India is
policy documents. While there has been a tendency to confl ate water policies and water laws, this is inappropriate because the two are completely diff erent instru-ments (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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Environment and development – the missing link 375
of compensation that is conceived in the context of bilateral transactions.
The recognition of the need for benefi t sharing and the adoption of the
SMTA constitute important additions to regulation since, in the absence
of legal rights, farmers did not get any benefi t when their varieties were
used.
At the same time, the framing of access and benefi t sharing in the form
of a contract mechanism that involves only the two parties signing the
contract refl ects the absence of any public power in this context. This is
particularly surprising and unwelcome in the context of benefi t sharing
because the actors signing the contract can, as a matter of principle, be
– with exceptions – expected not to be on a level playing fi eld. 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 off ers to trans-
fer something under their control to another party – such as a university
or private company – that will be largely free to use, modify and commer-
cially exploit the seed and knowledge related thereto in any way they see
fi t. In other words, the party that benefi ts 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 fulfi ls 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 Confl icts between the Economic and Environmental
Regimes
Environmental law has also been indirectly and directly aff ected by the
fact that potential or actual confl icts between the economic and environ-
mental 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 inter-
national 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 resolu-
tion to any trade and environment confl ict can be expected.
The identifi ed 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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376 IEL, globalization and developing countries
large extent does not even consider the possibility of a confl ict 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 envi-
ronment is in a narrowly construed exception to the principle that patents
must be available in all fi elds 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 fulfi lment of environmental commit-
ments and technology transfer is made but no specifi c 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 confi rms that there is a link; it does not discuss the potential impedi-
ments to technology transfer that intellectual property rights foster (for
instance, where importing countries cannot aff ord the royalty demanded).
The most direct acknowledgment in a general provision that there is a
potential confl ict 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 specifi c answer, because the broad commitments
of the Biodiversity Convention do not lend themselves easily to identifying
the point at which a confl ict of norms would arise in a concrete situation.
Environmental treaties include other provisions confi rming the pres-
ence of a confl ict. 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 harmoni-
sation, then stating that the environmental law instrument does not aff ect
other existing treaties and fi nally 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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Environment and development – the missing link 377
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 diff erent interpretations than trade/
economic treaties.
Overall, existing international law tends to disregard the very possibil-
ity of a confl ict between development law and environmental law (for
instance, in the case of the TRIPS Agreement). Where links, overlaps
and confl icts are acknowledged, no practical and specifi c solutions are
proposed, as is the case in environmental law treaties. This is problematic
because a treaty like the TRIPS Agreement has signifi cant consequences
for developing countries beyond the strict intellectual property rights
regime. Thus, in the case of benefi t 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 every-
one 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 interna-
tional law and policy making is concerned. This is, for instance, refl ected
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 conserva-
tionist agenda and has started to consider a number of links going beyond
the environment stricto sensu.
Yet, the central problem is that no specifi c 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 diff erent perspectives can
be reconciled, there exist also a number of areas of confl ict. This is made
more complex by the fact that, today, environmental law is much more
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378 IEL, globalization and developing countries
than nature protection. Conversely, the environment is a major aspect of
many other fi elds of international law. In a decentralised system there is
thus no scope for imposing a defi nition of sustainable development that
would apply in international environmental law as well as in all other
fi elds. In fact, the only reason why people working on such diverse issues
as the environment, human rights, economic development, trade and
fi nancial issues can agree on a single umbrella concept is because each can
ascribe their own understanding of the term. As a result, the seemingly all-
pervasive 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 signifi cant 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 signifi cant bias in favour of growth and eco-
nomic 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 fi g leaf to foster
further economic development activities that are either environmentally
unsustainable or socially regressive. At the international level, the devel-
opment over the past two decades of the concept of diff erential treatment
refl ects 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, diff erential 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 envi-
ronmental law and development. A much broader eff ort must be made to
ensure that diff erential treatment is eff ectively coupled with a large- scale
application of basic principles of environmental law such as the precau-
tionary 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 develop-
ment of carbon markets in the climate change regime.
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379
17. The UN Climate Change Convention and developing countries: towards eff ective 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 fi nely balanced.
It recognises the development needs of developing countries, as well as
the responsibilities and obligations that developed and developing coun-
tries1 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 fi ve ses-
sions 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 inter-changeably 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 suffi cient to tackle climate change, UNFCCC Parties in the mid- 1990s set out to establish fi rmer and more detailed commitments for developed countries in terms of binding greenhouse gas (GHG) emissions reductions, resulting in the adoption of the
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380 IEL, globalization and developing countries
The UNFCCC’s balance of obligations between developed and devel-
oping countries – one that is based on climate science, the acceptance of
common but diff erentiated responsibilities, and recognition of diff ering
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 obliga-
tions, rather than looking at the normative theoretical aspects of treaty-
related State practice.
2. BACKGROUND: GLOBAL WARMING
The UNFCCC is a science- based normative treaty instrument. It has its
roots in the scientifi c concern in the 1980s about the threats posed by
anthropogenic greenhouse gas emissions and the increased severity of
the greenhouse gas eff ect. 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 fi rst 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 UN Climate Change Convention 381
The conclusions of this fi rst IPCC report were among the considera-
tions that led the UN General Assembly to establish the intergovernmen-
tal negotiating process under the INC to prepare ‘an eff ective 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 negoti-
ating process, the work of the IPCC and the results achieved at inter-
national 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 activi-
ties, 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 emis-
sions’ (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
fi nancial 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 diffi culties in alleviating poverty as a result of their eco-
nomic situation, are especially vulnerable to the adverse eff ects 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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382 IEL, globalization and developing countries
(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 his-
torical 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, devel-
oped countries – as a result of their industrialisation process and its associ-
ated 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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The UN Climate Change Convention 383
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
fi gures 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 scientifi c 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 devel-
oping 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, eff ectively shrinks the development space of
developing countries. There remains, currently, a close correlation between
greenhouse gas emissions and development progress, although this correla-
tion 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 fi nancing and technology to developing country Parties to enable the latter to eff ect deeper and more rapid emission reductions. For more on this, see, for example, Third World Network (2008).
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384 IEL, globalization and developing countries
of life in a manner that is equitable and environmentally sustainable
– is needed, especially in developing countries. The poor in developing
countries simply cannot aff ord 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 devel-
oping countries’ adaptive capacity. Furthermore, developing countries
would be in a better position to participate in global eff orts 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 pop-
ulations 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 cur-
rently developed and patented in developed countries, developed coun-
tries under the UNFCCC are specifi cally committed to provide greatly
increased fl ows of such technology (as well as the fi nancing to acquire
such technology) and undertake actual transfers of such low carbon tech-
nology 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 ‘fi rst and overriding
priorities’ of developing countries.
Economic and population growth are both drivers entailing an increas-
ing demand for energy, goods and services with strong infl uence on GHG
emissions. Hence, emissions in developing countries are expected to grow
8 This need is recognised and refl ected in the third paragraph of the Preamble as well as in the framework of commitments in the UNFCCC itself, which does not require any specifi c mitigation obligations on the part of developing coun-tries.
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The UN Climate Change Convention 385
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 coun-
tries, 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 fi rst and primarily from developed countries
and these reductions should be large enough to off set the needed emissions
increase in developing countries.
Relative to people living in developed countries, populations in develop-
ing countries are more vulnerable to, and will be more adversely aff ected
by, climate change because they ‘have fewer resources to adapt: socially,
technologically and fi nancially’ (UNFCCC, 2007a: 6). Such impacts will
have far- reaching eff ects 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 suff er 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 overrid-
ing 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 conver-gence on average’.
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386 IEL, globalization and developing countries
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 fi nely 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 refl ects the principles ●
of equity, common but diff erentiated responsibilities and respective
capabilities;
an integrated approach to global cooperative action that links ●
developing countries’ implementation of the UNFCCC to devel-
oped countries’ implementation of their UNFCCC commitments
on fi nancing and technology transfer, taking into account that eco-
nomic development and poverty eradication are the fi rst and over-
riding priorities of developing countries.
The underlying principles of both the UNFCCC and the implementation
of its provisions (that is, equity, common but diff erentiated responsibilities
and respective capabilities) are explicitly stated in, for example, the sixth
preambular paragraph and Art. 3.1 of the UNFCCC.
B. Commitments refl ecting common but diff erentiated responsibilities and
respective capabilities
These principles are fl eshed 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- proofi ng’ 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 com-
municate information regarding the Party’s implementation of the
UNFCCC (Arts 4.1(j), 12.1);
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The UN Climate Change Convention 387
a set of ● diff erentiated commitments (in addition to the common
commitments above) applicable specifi cally for developed country
Parties relating to: mitigation (Art. 4.2(a) and (b)); communi-
cation of information regarding such mitigation (Art. 4.2(b));
fi nancing for developing countries’ national communications and
the implementation by developing countries of their UNFCCC
commitments (Art. 4.3); meeting the adaptation costs of develop-
ing 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 obliga-
tions described above revolves is Art. 4.7 of the UNFCCC, as follows:
The extent to which developing country Parties will eff ectively implement their commitments under the Convention will depend on the eff ective implementa-tion by developed country Parties of their commitments under the Convention related to fi nancial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the fi rst and overriding priorities of the developing country Parties.
This means it is the level and extent of implementation by developed
country Parties of their diff erentiated 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 fi nancing 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 eff ective implementation by developed
countries of their commitments under Art. 4.3, 4.4 and 4.5, the correspond-
ing implementation by developing countries of their commitments under
the UNFCCC cannot be expected to be full or eff ective, 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 ineff ective.
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388 IEL, globalization and developing countries
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) develop and update public national greenhouse gas invento-ries using comparable methodologies
b) formulate, implement, publish and update national and regional programmes containing measures to mitigate climate change and measures to facilitate adequate adaptation to climate change
c) promote and cooperate in greenhouse gas mitigation- related technology transfer in all relevant sectors
d) promote and cooperate in the management, conservation and enhancement of greenhouse gas sinks and reservoirs
e) cooperate with respect to adaptationf) 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
g) promote and cooperate in climate- related research and observation
h) promote and cooperate in climate- related information exchange
i) promote and cooperate in climate- related education, training and public awareness
j) 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 scientifi c assessment concerning climate change’
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The UN Climate Change Convention 389
The framework for global cooperative action on climate change estab-
lished 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 instru-
ment, both in terms of its policy or rule- making and in terms of its implemen-
tation. 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 eff ective implementation (Art. 7.2).
The COP is supported by a secretariat (Art. 8), and is assisted by two sub-
sidiary bodies – a Subsidiary Body for Scientifi c 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 sub-
sidiary bodies, the COP may make decisions and recommendations as may
be necessary for the implementation of the UNFCCC (Art. 7.2(a)–(m)).
A fi nancial mechanism with its own governance system is also estab-
lished to handle the ‘provision of fi nancial resources on a grant or
concessional basis, including for the transfer of technology’ under the
Convention (Art. 11). An operating entity for the fi nancial mechanism is
the Global Environment Facility (GEF).
The COP may establish such other subsidiary bodies as it may deem
necessary to secure the eff ective 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 specifi c 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 scientifi c and technologi-cal matters relating to the Convention’. The SBI is tasked to ‘assist the [COP] in the assessment and review of the eff ective 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).
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
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390 IEL, globalization and developing countries
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 emis-sions of greenhouse gases and enhancing greenhouse gas sinks and reservoirs;
● take the lead in modifying longer- term trends in anthro-pogenic emissions consistent with the objective of the UNFCCC;1
● periodically communicate to the COP ‘detailed information’ on their mitigation policies and measures and their green-house 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 fi nancial resources to developing countries to:
● meet the agreed full costs for the preparation and submis-sion of developing countries’ national communications;
● meet the agreed full incremental costs (including for tech-nology 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 fi nance the transfer of, or access to, environmentally sound tech-nologies 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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The UN Climate Change Convention 391
Art. 4.8 – obligation to give full consideration to what actions are needed (including fi nancing, insurance and technology transfer) to meet the specifi c 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 specifi c 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 com-munications 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 communica-tions 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 specifi c estimate of the effects of such policies and measures on anthro-pogenic 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 fi nancing, fi nancing to meet costs of adaptation, and technology transfer)
Art. 12.5 – differentiated timetable with respect to the submis-sion 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 limita-tion 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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392 IEL, globalization and developing countries
II. Implementation by Developed Countries of their Diff erentiated
Commitments
A. Article 4.2(a) and (b): taking the lead in mitigation to modify longer-
term 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
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 suffi cient to allow for ecosystems to adapt naturally to climate change, ensure food security and production, and enable economic development to proceed sustainably.2 Such fi nancing for agreed full incremental costs is supposed to be channelled through the UNFCCC’s fi nancial 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 fi nancial fl ows and in the administrative arrangements relating to such fi nancial fl ows – that the UNFCCC fi nancial mechanism is running into under the current administrative arrangement in which the Global Environmental Facility (GEF) serves as an operating entity of the UNFCCC fi nancial 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.
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
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))
Respective
capabilities
(preamble 6 and
art. 3.1)
Intra- and Inter-
generational 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)
Common
commitments
Differentiated
commitments
Balance of commitments (art. 4.7)
Figure 17.1 The UNFCCC framework
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The UN Climate Change Convention 393
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 diffi culties 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: fi g. 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 imple-
mentation 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 emis-
sions consistent with the objective of the Convention’.
This means, essentially, that reductions in developed countries’ emis-
sions must be such as would result in modifi cations of longer- term emis-
sion 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 coun-
tries by and large have also not yet complied fully and eff ectively 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 fi rst 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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394 IEL, globalization and developing countries
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 fi nancing to
developing countries
Non- EIT developed countries15 are obliged under Art. 4.3 to provide new
and additional fi nancial 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 devel-
oping country Parties that are particularly vulnerable to the adverse
eff ects of climate change in meeting costs of adaptation to those adverse
eff ects’.
Financing fl ows 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 fi nancial mechanism established under Art.
11.1 to 11.4, with such fi nancing to be ‘on a grant or concessional basis’
(Art. 11.2). The fi nancial 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 fi nancial mechanism, is sup-
posed 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, fi nancial resources through bilat-
eral, 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 fi nancial mechanism ‘shall function under the guid-ance of and be accountable to the [COP], which shall decide on its policies, pro-gramme priorities and eligibility criteria related to’ the UNFCCC.
17 These channels include, for example, bilateral offi cial development assist-ance (ODA) that is climate change related, fi nancing (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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The UN Climate Change Convention 395
required to include in their national communications the details of meas-
ures that they take to comply with their fi nancing 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 fi nancial 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 fi nancing
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 develop-
ing country NCs under the Convention.
With respect to meeting the agreed full incremental costs of develop-
ing 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 fi nancial
fl ows 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 fi nancing remain far too low to meet the scale of
the fi nancing needs of developing countries in relation to climate adap-
tation 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 fi nance 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). 19 For discussion of Annex II Parties’ reports in terms of their provision of
fi nancial 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/GEF- C22- Inf16.pdf (accessed 11 November 2009) for the text of these procedures.
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396
Table
17.
1
Est
imate
d a
nnual
fi nanci
al
requir
emen
ts f
or
adapta
tion,
mit
igati
on a
nd t
echnolo
gy t
ransf
er f
or
dev
elopin
g
countr
ies
Ad
ap
tati
on
Mit
iga
tio
nT
ech
no
log
y t
ran
sfer
US
$2
7.7
5–
58
.25
bil
lion
an
nu
all
y i
n
2030 f
or
dev
elo
pin
g
cou
ntr
ies
(calc
ula
ted
fro
m t
he
pro
po
rtio
n n
eed
ed
in d
evel
op
ing
cou
ntr
ies
as
ind
ica
ted
in
UN
FC
CC
, 2
00
8a
:
19,
Ta
ble
5).
Th
e U
NF
CC
C
esti
ma
te g
lob
all
y f
or
an
nu
al
ad
ap
tati
on
cost
s is
US
$4
9–
17
1
bil
lio
n.
US
$5
2.4
bil
lio
n a
nn
ua
lly
in
20
30
fo
r d
evel
op
ing
co
un
trie
s
(ca
lcu
late
d f
rom
th
e p
rop
ort
ion
nee
ded
in
dev
elo
pin
g c
ou
ntr
ies
as
ind
ica
ted
in
UN
FC
CC
,
20
08
a:
18
, T
ab
le 4
) w
ith
ou
t
incl
ud
ing
th
e a
mo
un
t re
qu
ired
for
inv
estm
ents
in
tec
hn
olo
gy
rese
arc
h,
dev
elo
pm
ent
an
d
dep
loy
men
t o
f cl
ima
te t
ech
no
log
y
in d
evel
op
ing c
ou
ntr
ies.
Th
e
UN
FC
CC
Sec
reta
ria
t p
ap
er s
eem
s
to a
ssu
me
that
all
th
e co
sts
for
the
tech
no
log
y t
ran
sfer
- rel
ate
d
rese
arc
h,
dev
elo
pm
ent
an
d
dep
loy
men
t fo
r cl
ima
te t
ech
no
log
y
wil
l g
o s
ole
ly t
o d
evel
op
ed
cou
ntr
ies.
US
$6
–4
1 b
illi
on
an
nu
all
y u
p t
o 2
03
0 f
or
dep
loym
ent
of
tech
nolo
gie
s
to d
evel
op
ing
co
un
trie
s (U
S$
25
–1
63
bil
lio
n g
lob
all
y)
(see
UN
FC
CC
, 2
00
8a
: 5
7,
Ta
ble
17
).
US
$1
76
–4
64
bil
lio
n a
nn
ua
lly
up
to
20
30
fo
r diff
usi
on a
nd c
om
mer
cial
tra
nsf
er i
n d
evel
op
ing
co
un
trie
s (U
S$
38
0 b
illi
on
to
US
$1 t
rill
ion
glo
ba
lly
) (s
ee i
bid
).
Fo
r re
sea
rch
an
d d
evel
op
men
t, g
lob
al
cost
est
imate
s am
ou
nt
to
US
$1
0–
10
0 b
illi
on
an
nu
all
y u
p t
o 2
03
0,
an
d f
or
tech
nolo
gy
dem
on
stra
tio
n,
US
$2
7–
36
bil
lio
n a
nn
ua
lly
up
to
2030 g
lob
all
y (
see
ibid
).
Th
e U
NF
CC
C S
ecre
tari
at
pa
per
did
no
t g
ive
an
y e
stim
ate
s o
f
the
cost
s th
at
nee
d t
o b
e fi
na
nce
d i
n d
evel
op
ing c
ou
ntr
ies
wit
h
resp
ect
to c
lim
ate
tec
hn
olo
gy
res
earc
h a
nd
dev
elo
pm
ent,
im
ply
ing
tha
t R
&D
is
do
ne
on
ly i
n d
evel
op
ed c
ou
ntr
ies.
Ho
wev
er,
for
dev
elo
pin
g c
ou
ntr
ies,
su
pp
ort
fo
r en
do
gen
ou
s R
&D
is
an
imp
ort
an
t a
nd
in
teg
ral
com
po
nen
t in
an
y t
ech
no
logy t
ran
sfer
un
der
th
e U
NF
CC
C.1
Th
e to
tal
UN
FC
CC
est
ima
ted
an
nu
al
fi n
an
cia
l re
qu
irem
ents
fo
r a
da
pta
tio
n,
mit
iga
tio
n a
nd
tec
hn
olo
gy
tra
nsf
er f
or
dev
elo
pin
g
cou
ntr
ies
– w
hic
h m
ay
sti
ll b
e o
n t
he
low
en
d i
n a
ny
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M2397 - FAUNDEZ PRINT.indd 396M2397 - FAUNDEZ PRINT.indd 396 28/9/10 11:22:3828/9/10 11:22:38
The UN Climate Change Convention 397
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 bilat-
eral initiatives and US$12.27 billion through multilateral initiatives) in
climate- related fi nancing may be forthcoming from non- EIT developed
country Parties’ individual climate fi nancing initiatives, with approxi-
mately US$4.8082 billion annually being made available as a result of
these initiatives over varying time periods. That is, climate fi nancing that
is available or may be made available by non- EIT developed country
Parties in the foreseeable future is a little over one- tenth of the minimum
estimated requirements for climate fi nancing coming from the UNFCCC
or the G- 77 and China.
As can be seen in Figure 17.2, the total of currently available or pledged
public sector fi nancing from non- EIT developed country Parties, whether
through the GEF (as an operating entity for the UNFCCC’s fi nancial
mechanism) or through bilateral or other non- UNFCCC multilateral
channels, falls far short of current estimates for annual climate fi nancing
requirements (whether based on the UNFCCC paper or the G- 77 and
China’s fi nancial mechanism proposal). Much more scaling- up of public
262.15
278.82
28.98
Estimates of what
is needed
0
50
100
150
200
250
300
What is available
or pledged
UNFCCC estimate – low end
G-77 and China proposal –
low end – 2007 GDP
Available or pledged – GEF-
UNFCCC + non-UNFCCC
channels
Source: South Centre calculations
Figure 17.2 Climate fi nancing mismatch between needs and availability
(US$ billions)
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398 IEL, globalization and developing countries
sector fi nancing from non- EIT developed country Parties therefore needs
to be undertaken in order to meet climate fi nancing requirements.
The problem is also not simply limited to the severe funding shortfall
evident in both UNFCCC (through the GEF) and non- UNFCCC chan-
nels. A major part of the problem relating to current public climate fi nanc-
ing 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 fi nancing that Annex II Parties reported in their
fourth national communications (save for Italy for some of its fi nancing)
as compliance with their UNFCCC Art. 4.3, 4.4 and 4.5 fi nancing obliga-
tions, forms part of these Parties’ overall offi cial development assistance
(ODA) programmes rather than being ‘new and additional’.21
Mixing ODA fl ows for development projects and fi nancial fl ows for
climate adaptation and mitigation makes it diffi cult to obtain a clear
picture of the extent to which Annex I Parties are complying eff ec-
tively with their UNFCCC obligation to provide new and additional
climate fi nancing to support developing country implementation of their
UNFCCC obligations.
In essence, developed countries’ fi nancial fl ows 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 fi nancing to developing countries. In this
context, therefore, such fi nancial fl ows are neither new, additional, nor,
indeed, mandatory in nature. Therefore, counting ODA fi nancing as
UNFCCC- compliant climate fi nancing is not consistent with UNFCCC
Art. 4.3 because such climate fi nancing must be new and additional. As
the G- 77 and China have stressed, climate fi nancing must be ‘new and
additional . . . which is over and above ODA’. Furthermore, ODA is,
by its very nature, voluntary. The climate fi nancing commitment under
UNFCCC Art. 4.3 is mandatory.
21 With regard to ‘new and additional’ fi nancial 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 classifi cation. Some countries merely chose to specify the total amount of bilateral and regional development assistance con-tributed without indicating all the recipients and which ones in particular are given funds for mitigation and/or adaptation.
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The UN Climate Change Convention 399
By double- counting ODA as climate fi nancing, developed countries
are essentially refl ecting and responding to their own priorities relating to
development assistance and climate fi nancing rather than to the priorities
and needs of developing countries. This undermines the balance contained
in the UNFCCC with respect to the climate fi nancing needs of developing
countries and the climate fi nancing obligations of developed countries.
As such, currently available public fi nancing 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 ade-
quacy of fi nancing that are required under Art. 4.3 of the Convention. The
nature of voluntary fi nancing is directly inconsistent with the mandatory
nature of the fi nancing commitments for developed country Parties under
the UNFCCC.
Furthermore, it is not clear to what extent such voluntary fi nancing
(again whether through the GEF or other non- UNFCCC channels)
complies with the COP’s guidelines on such fi nancing’s consistency with
COP policies, programme priorities and eligibility criteria, and on non-
introduction 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 defi ciencies in the
GEF’s performance as an operating entity for the UNFCCC’s fi nancial
mechanism continue to persist. Critiques of the GEF’s performance as an
operating entity generally relate to, inter alia, the simplicity and effi ciency
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
fi nancing 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
fi nancing fl ows. They also show a preference for relying on unpredictable
and market- driven private sector fi nancing. The public fi nancing from
developed countries for climate- change- related actions that goes through
non- UNFCCC channels and such fi nancing that does go through the
UNFCCC’s fi nancial mechanism (via the Global Environment Facility as
an operating entity) refl ect and respond to the donors’ political and eco-
nomic 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 avail-
able 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).
M2397 - FAUNDEZ PRINT.indd 399M2397 - FAUNDEZ PRINT.indd 399 28/9/10 11:22:3828/9/10 11:22:38
400 IEL, globalization and developing countries
fi nancial mechanism and the amount through bilateral and other non-
UNFCCC multilateral mechanisms (US$18.95 billion), the current total
available or pledged public fi nancing for climate- change- related actions
from Annex I Parties amounts to US$28.98 billion. Of this total amount,
34.61 per cent is through the UNFCCC (via the GEF as an operating
entity) and 65.39 per cent is through non- UNFCCC channels (see Figure
17.3).
Many non- EIT developed country Parties justify their reluctance to
channel such fi nancing through the UNFCCC by arguing that the
UNFCCC is not set up institutionally to handle massive fi nancial fl ows,
and that other multilateral institutions such as the World Bank are better
equipped and have more expertise in handling such fl ows. However, con-
sidering that the UNFCCC is the sole, virtually universal, multilateral
policy and institutional regime providing the legitimate framework for
global action on climate change, climate fi nancing should be channelled
through the UNFCCC’s fi nancial mechanism and its capacity to handle
such fl ows should be further enhanced.
There are four main consequences to this preference by Annex I Parties
to direct their public sector fi nancing for climate- change- related actions
through non- UNFCCC channels:
10.036.68
12.27
UNFCCC (GEF)
Non-UNFCCC (bilateral)
Non-UNFCCC (multilateral)
Source: South Centre calculations
Figure 17.3 Public sector climate fi nancing from some Annex I Parties –
clear preference for non- UNFCCC channels (in US$ billions)
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The UN Climate Change Convention 401
(i) The UNFCCC is institutionally weakened. The preference for non-
UNFCCC channels for climate- related public fi nancing is a step towards
weakening the UNFCCC itself and thereby undermining the eff ective-
ness 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 eff ectively lessens the normative value of the
UNFCCC itself as a binding legal regime.
(ii) The UNFCCC’s fi nancial mechanism is weakened. The fi nancial
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 fi nancing. By leaving the UNFCCC virtually unfi nanced,
and by moving public climate fi nancing to other channels, the institu-
tional ability of the UNFCCC to serve as the main conduit for public-
sector- sourced climate fi nancing 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 fi nancial mechanism as the main channel for climate
fi nancing. This would make it unfeasible for the UNFCCC’s COP, and
developing country Parties to the UNFCCC, to ensure that such fi nancing
is consistent with the provisions and objectives of the UNFCCC.
(iii) Developed countries cannot be held accountable to the UNFCCC
COP for fulfi lment of their fi nancing commitments under the UNFCCC. As
most Annex I public- sector- sourced climate fi nancing is not through the
UNFCCC under the authority of the COP, developing countries will fi nd
it diffi cult if not impossible to raise issues relating to measurement, report-
ing and verifi cation, as well as accountability, for the fl ow and the use of
such fi nancing in the COP.
The diffi culties that developing countries have experienced with the
GEF as an operating entity for the UNFCCC’s fi nancial mechanism in
terms of accessing climate fi nancing are likely to be compounded even
more with respect to climate fi nancing that goes through non- UNFCCC
channels that are not accountable to the COP. These non- UNFCCC chan-
nels (such as the World Bank and other multilateral institutions whose
governance structures and memberships are diff erent 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 eff ec-
tive role and in which the funding priorities are likely to be driven by the
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402 IEL, globalization and developing countries
donors’ interests rather than the recipients’ needs or the climate fi nancing
priorities identifi ed 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 fi nancial
mechanism and, with respect to climate change- related funds, its actions
are supposed to be subject to the guidance of the UNFCCC COP, devel-
oping countries have often raised concerns with respect to the diffi culties
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 diff erent from and not accountable to the UNFCCC COP makes it even
more diffi cult for developing countries to call the GEF to account through
the COP.
Using non- UNFCCC channels as the main conduits for public climate
fi nancing to support developing countries’ implementation of climate
change- related actions means that the fund providers – for example, devel-
oped 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 fi nancing by using non- UNFCCC
channels. This therefore also institutionally weakens the UNFCCC.
Accountability to the UNFCCC COP with respect to climate fi nancing
is explicitly stated in Art. 11 of the UNFCCC, and having such fi nanc-
ing go through the UNFCCC’s fi nancial 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 fi nancial
resources consistent with the provisions of the UNFCCC. This would
also enable the Parties, both developed and developing, to work together
to leverage such fi nancing to generate other resources outside of the
23 Part of the problem with the GEF in terms of ensuring the equitable allo-cation 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 fi nd it diffi cult 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 Pacifi c 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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The UN Climate Change Convention 403
UNFCCC context that can be used to also support the meeting of the
UNFCCC’s objective.
(iv) Climate fi nancing priorities of developing countries will not be
met. Current public fi nancing from developed countries for climate
action – whether through the GEF or through non- UNFCCC channels
– will essentially refl ect 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 fi nancing provisions
(Art. 4.3, 4.4 and 4.5) in which fi nancing from developed countries is to
respond to and meet developing countries’ needs.
Existing modalities under which climate fi nancing is being provided by
developed countries have the eff ect of weakening the UNFCCC in terms
of its eff ectiveness as a normative legal regime for global action on climate
change and in terms of the eff ectiveness of its fi nancial mechanism as a
catalyst and vehicle for climate fi nancing that is consistent with and sup-
ports 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 fi nance 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 capaci- ●
ties and technologies of developing country Parties.
The extent of compliance by developed countries with this treaty com-
mitment 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 specifi c 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
eff ective 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 identi-
fi ed fi ve themes around which such ‘meaningful and eff ective actions’
would be undertaken. These are:
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404 IEL, globalization and developing countries
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 spe-
cifi c sectors and programs (see UNFCCC, 2007d: 12). The EGTT eff ectively
implied that, to date, the UNFCCC’s technology- transfer- related provi-
sions really have not been implemented by developed country Parties.24
Developing countries have also identifi ed key concerns relating to tech-
nology transfer under the UNFCCC in the context of the climate negotia-
tions 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 refl ect, the kinds of insti-
tutional arrangements that would be needed to make technology transfer
eff ective, addressing intellectual property rights (IPR) issues, and fi nanc-
ing 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 technol-
ogy transfer provisions by developed countries, and in light of paragraphs
1(b)(ii) and 1(d) of the BAP pointing to technology transfer of climate-
related ESTs to developing countries as an essential and integral compo-
nent in enhancing the full and eff ective 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 ).
M2397 - FAUNDEZ PRINT.indd 404M2397 - FAUNDEZ PRINT.indd 404 28/9/10 11:22:3828/9/10 11:22:38
The UN Climate Change Convention 405
address all stages of the technology development cycle (including research
and development, demonstration, deployment, diff usion, and endogenous
innovation). It should be designed in such a way that it enhances devel-
oped 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 con-
ditions of the recipient country. It should also be able to encourage and
promote further innovation and development of the transferred technol-
ogy 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 diff erentiated responsibilities and the specifi c
national and regional development priorities, objectives and circum-
stances 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 fi nancing and technol-
ogy 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- proofi ng’ ●
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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406 IEL, globalization and developing countries
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 informa-
tion 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 con- ●
cerns 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 observa- ●
tion;
assessing climate change impacts and undertaking adaptation meas- ●
ures 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 quantifi ed 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 specifi c needs and development priori-
ties.
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 specifi es 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 fi nancial resources for national communica-tions provided by developed countries under Art. 4.3.
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The UN Climate Change Convention 407
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
‘infl uenced 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 fi nancial and techno-
logical 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 ineff ective and insuffi cient implementation by developed countries
of their fi nancial 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 fi nancial
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 his-
torical responsibility and specifi c obligations to take the lead in addressing
climate change under the UNFCCC through such actions as cutting their
emissions and providing fi nancing and technology to developing coun-
tries. 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 specifi ed in Art. 4.7 of
the UNFCCC.
Enforcing compliance with these obligations, however, has been one
of the major diffi culties 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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408 IEL, globalization and developing countries
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 (fi rst 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 eff ec-
tive 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 eff ects of the measures taken pursuant to the
Convention, in particular environmental, economic and social eff ects 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 eff ectively 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 discus-
sions on how to ensure eff ective compliance with developed country obli-
gations in relation to mitigation, fi nancing and technology transfer remain
at the conceptual level.27
26 This would hence include the Kyoto Protocol within the scope of such man-dated 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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The UN Climate Change Convention 409
UNFCCC Arts 13 and 14, which currently do not contemplate or
provide for binding punitive sanctions as a modality for addressing non-
compliance, 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 imple-
mentation 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 arbitra-
tion provision in Art. 14.2(b). UNFCCC Art. 14.7 mandates the COP to
adopt ‘additional procedures relating to conciliation . . . as soon as prac-
ticable, 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 diff erentiated, 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 quantifi ed mitigation obligations, while insisting on using current non- UNFCCC- compliant modalities and channels to provide climate fi nancing and technology.
M2397 - FAUNDEZ PRINT.indd 409M2397 - FAUNDEZ PRINT.indd 409 28/9/10 11:22:3828/9/10 11:22:38
410 IEL, globalization and developing countries
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 fi nancing and
technology transfer to developing countries. Developing countries, on the
other hand, which have the right to expect fi nancial support and technol-
ogy transfer from developed countries to enable their full and eff ective
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, eff ective and sustained implementation
of the UNFCCC by developed countries, taking into account its objectives
and, in particular, the obligation to mitigate emissions and the commit-
ment to provide fi nancing and to transfer appropriate technology. The
UNFCCC sets up a balanced and organic linkage between developed
country compliance and developing country compliance. Thus, develop-
ing countries will only be able to comply fully with their obligations under
this treaty if developed countries comply with theirs.
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411
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481
International instruments
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M2397 - FAUNDEZ PRINT.indd 481M2397 - FAUNDEZ PRINT.indd 481 28/9/10 11:22:4028/9/10 11:22:40
482 IEL, globalization and developing countries
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 modifi ed in 1984.
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September 2003.
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World Intellectual Property Organization Performances and Phonograms
Treaty (WPPT) 1996.
M2397 - FAUNDEZ PRINT.indd 482M2397 - FAUNDEZ PRINT.indd 482 28/9/10 11:22:4028/9/10 11:22:40
Index
Abrahamson, Rita 136accountability
for corporate human rights violations 215–17
of IMF and World Bank 86–7in international aid 135–6in international fi nancial governance
85–8Accra Agenda for Action (AAA) 128Africa 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 aidAlien Claims Tort Act 1789 (US)
215–16Alston, Philip 238, 242Alvarez, José 27American Manufacturing and Trading,
Inc. v Zaire (1997) 185–6Amin, Samir 165, 170Amsden, Alice 17anti-corruption policies
and access to information 290and colonialism 284–5and corporate social responsibility
222–3dispute settlement 283–4focus of 287–9
by foreign legal institutions/jurisdictions 284, 286–7, 305–6
advantages 289–90, 297–8and cultural diff erences 292–4,
302–5disadvantages 290–96incompatibility issues 291–4,
302–5indiff erence of 291–2, 298–302and learning by doing 285, 295–6malign eff ects of 294, 303–5motives for 290–92and national autonomy 293–4and national self-interest 290–92,
298–302objections to 284–5proposals for 284as substitutes for domestic
institutions 294–6, 305successes in, evidence of 297–305
globalization of measures for 7, 284and international arbitration 283–4law on, development of 286–9money-laundering 283, 287OECD Convention on combating
bribery (1997) 283, 287–8, 297, 299, 301, 303
OECD Working Group on bribery 297, 299, 304
political corruption, defi ning 284and privatisation 303UN Convention against corruption
(2003) 283, 287–8WTO Agreement on government
procurement 287–8, 302–3Anti-counterfeiting Trade Agreement
Act (ACTA) (2007) 324anti-dumping duties 261–3, 281arbitration see dispute settlementArgentina 311, 326, 345Arrighi, Giovanni 166–8, 177–8
483
M2397 - FAUNDEZ PRINT.indd 483M2397 - FAUNDEZ PRINT.indd 483 28/9/10 11:22:4028/9/10 11:22:40
484 IEL, globalization and developing countries
Australia 32autocentric economies 166autonomy, national
Charter of economic rights and duties of states (1974)(UN) 16–17, 19
and developing countries, international law confl icts 15–16, 26–7
and economic openness 37–42fi scal autonomy 5
IMF infl uence over 150–52, 154–6non-discrimination, principle of
149–50and foreign legal institutions,
anti-corruption role 293–4and globalization 26–9, 34–5, 38–9international economic law 3, 12,
26–7changes in multilateral emphasis
39–42limitations on 34–7over economic openness 37–42over policy instruments and goals
37–9surveillance mechanisms 45–7
and international fi nancial governance 75–6
and international institutions, infl uence 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 133Bakvis, Peter 245Banco Nacional de Cuba v Sabbatino
(1964) 15Basel Committee of Banking
Supervision 69, 86Capital adequacy guidelines 80–81Core principles for eff ective banking
supervision 102
Bello, Walden 175Berne Convention for the protection of
literary and artistic work (1886) 179, 310–11
Bhagwati, Jagdish 31, 164, 168–9Bhattacharjea, Aditaya 261, 266, 280bilateral investment treaties (BITs)
best eff orts clauses in 182corporate responsibility trends in
200–201dispute resolution under 180–86and economic development
contribution to 186–7reference to 181–2
US model, worldwide adoption of 19
biofortifi cation 335biofuels
and biotechnology 346–7demand for 331and food security 339–40use of agricultural land for 331–2,
339–40Biological Open Source (BiOS) licence
351–2biosafety, Cartagena Protocol on
(2003) 343, 359, 368, 371biotechnology, in plants/animals
African Model law on safety in biotechnology (2007) 368–9
biofortifi cation 335and biofuels 346–7biosafety, Cartagena Protocol on
(2003) 343, 359, 368, 371defi ning 334–5, 342embryo rescue 335and ethics 338in food production 352–3
advantages and disadvantages 340–47
in Africa 334–5, 349–50international agricultural research
centres (IARCs) for 341–2, 344
Multilateral system of access and benefi t sharing (MLS) 348
private sector role in 343–5, 348–9regulation 347–52
open source biotechnology 333, 350–52
M2397 - FAUNDEZ PRINT.indd 484M2397 - FAUNDEZ PRINT.indd 484 28/9/10 11:22:4028/9/10 11:22:40
Index 485
public-private sector regulation 348–50
Scientifi c and Know-How Exchange Program (SKEP) 349
genetic modifi cation 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 334and intellectual property law 8,
338–9genetic modifi cation 320–22,
342–3, 357, 376open source biotechnology 333,
350–52plant breeder’s rights 343–4plant varieties 320–22, 328, 343–4,
348, 374private sector role in 332, 348–9
Bird, Richard 142Braithwaite, John 120Braudel, Fernand 167Brazil 81
competition law regime in 278, 310–11
impact of 2008 global fi nancial crisis 99
on intellectual property protection 326
and power shift in international fi nancial governance 90–91
Bretton Woods institutions see International Monetary Fund; United Nations; World Bank
bribery see anti-corruption
BRIC countries see also Brazil; China; India; Russia
potential for change from 90–91British Imperialism 165–7Brusick, Philippe 264–5Bulgaria 301–2Burke, Edmund 293
Canada, model bilateral investment treaty 200–201
Carr, Indira 298cartels
calls for global competition law to combat 252–4
deterrence of 278–9as development protectionist
mechanism 258F. Hoff man-La Roche v Empagran
(2004)(US) 8, 275–80impact on developing countries
259–60, 264–5, 275incentives for targeting 278–9US 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 238–40conditionality in aid programs
242–4, 246Human Development Network
programs 243China
anti-corruption progress in 304competition law in 263–4impact of 2008 global fi nancial crisis
98–100and power shift in international
fi nancial governance 90–91Clean Development Mechanism
(CDM) 358–9, 370climate change 9
Clean Development Mechanism (CDM) 358–9, 370
and developing countries
M2397 - FAUNDEZ PRINT.indd 485M2397 - FAUNDEZ PRINT.indd 485 28/9/10 11:22:4028/9/10 11:22:40
486 IEL, globalization and developing countries
diff erential treatment 364–9,382–3, 386–92
environmental priorities 361–4greenhouse gas emissions in 382,
384–5, 406impact on 363–4obligations regarding 386–9,
392–4compliance with 405–9
regulatory mechanisms in 369–71economic instruments for managing
369–71Framework Convention on (1992)
(UNFCCC) 9, 363–4, 409–10Bali Action Plan (2007) 404–5Economies in Transition Annex
I 393establishment 379fi nance mechanisms under 389,
394–403aid requirements for developing
countries 395–9and alternate fi nancing channels
399–403effi ciency of 398–403
Global Environment Facility (GEF) 362–3, 368, 389,394–5, 397–403
governance mechanisms under 389
obligations and enforcementcommon commitments 387–9,
392, 405–7compliance with 393–5, 407–9for developed countries 387–9,
392–405, 407for developing countries 386–9,
392–4, 405–7diff erentiated responsibilities
and capabilities under 386–92
fi nancial aid commitments 394–403
technology transfer 396, 403–5Subsidiary Bodies, for
implementation/scientifi c 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 381–2responsibility for, historical/current
382–3and sustainable development 383–5and technology transfer 396, 403–5
Coff ee, John C. 284cold war, impact on post-war economic
settlement 13collective bargaining, as core labour
standard 237–40, 242–6colonialism see also decolonisation
and double taxation 146and international corruption 284–5and principle of self-determination
13and technology transfer 15
COMESA Agreement on a common investment area (2007) 194–5
comity, rule of 276–8, 280, 282Commission on Intellectual Property
Rights (CIPR) 319Commission 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 fi nancial crisis 98–100
comparative advantage, doctrine ofapplicability to developing
countriesas control mechanism 158–9and developed country
protectionism 159–61, 163–5fl uidity of 162in free trade policy development
159–62and corporate capitalism 165–72,
169and non-economic benefi ts 160,
164–5problems with 160–65
competition lawanti-dumping duties 261–3, 281and conditionality 252in developing countries
advantages 265, 269anti-dumping duties 261–3
M2397 - FAUNDEZ PRINT.indd 486M2397 - FAUNDEZ PRINT.indd 486 28/9/10 11:22:4028/9/10 11:22:40
Index 487
consequences of lack of 259–63, 281–2
constraints on 280discretion in 268–9global regime, views on 7–8,
255–9, 281International Competition
Network 260–61and international regulatory
agreements 269–80market exploitation 264–5models for, comparing 265–9and national champions/state
monopolies 264–5and non-discrimination, principles
of 258–9in non-traded sectors 259preferential trade and regional
trade agreements 261and protectionism 258–9as response to neo-liberal
international development policy 252
and economic growth, whether links between 263–9
extraterritorial application of 275–80and rule of comity 276–8, 280, 282
global regime for 7, 253–5, 281–2failure to establish, implications
of 259–63resistance to 7–8, 255–7, 281Telmex decision (2004) (WTO)
7–8, 261–3, 270–75United States views on 254–5,
278–80models for 265–9, 266
Chicago School 266EU model 267–8freedom to compete 266–7, 281
purpose 252–3as regulator 252soft law approaches to 260–61and taxation 142and WTO framework 7–8, 261–3,
270–75, 281compulsory licensing, in intellectual
property law 21, 25, 310, 315, 319, 329
conditionalityand competition law 252
consensual conditionality 123–4country selectivity 123–4, 126–8disciplinary force of 114–16as distinguished from conditions of
fi nancing 115governance role
consequences 121–2evolution 120–24
imposed in combating corruption 7in international aid 121
accountability in 135–6aid harmonisation programs
129–34confl icts in 132–5
and child labour 242–4, 246country selectivity 126–8criticisms of 122–4as default regulatory instrument
119ex post vs. ex ante conditionality
124–7human rights 215interference by aid organisations,
reluctance of 117–19non-compliance, fi nancial
repercussions 115–16as quasi-legal instrument 114–16and relationships for Offi cial
Development Assistance (ODA) 116–19
in international economic law 12, 32in international environmental
regulation 373–4legitimacy of, debate over 122–4modalities of 123–4normative vs. operational activities
116–17over labour standards 6–7, 243–5,
251EBRD, imposed by 245–7ILO/WTO debate over 237,
240–42as part of Offi cial Development
Assistance (ODA) 116–19purpose 114–16risk management 48–9in taxation 151–2World Bank/IMF, imposed by 36–7,
47–9, 117–18, 243–5, 251Congo, Republic of 301
M2397 - FAUNDEZ PRINT.indd 487M2397 - FAUNDEZ PRINT.indd 487 28/9/10 11:22:4028/9/10 11:22:40
488 IEL, globalization and developing countries
Conotou Agreement (2000) (EU-ACP treaty on economic partnership) 143
constitutional imitation 133Consultative 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 desertifi cation (1994)(UN) 363
corporate capitalismand capital mobility 168and comparative advantage, doctrine
of 165–72, 169and control over former colonies
158–9development 165–8
British Imperialism 165–7, 177cyclical nature 177–9US role in 166–7
and globalization 168–71and human rights 206–9state, relationships with 168–9
corporate responsibilitycorporate social responsibility (see
under multinational enterprises (MNEs))
investor obligations, under international investment agreements 193–201
corruption see anti-corruptionCountry Policy and Institutional
Assessment (CPIA)(IDA) 126country selectivity 126–8credit rating agencies, international
standards for 105–6Cuervao-Cazurra, Alvaro 297, 299, 303
Dagan, Tsilly 147Dammann, Jens 284de Schutter, Olivier 338–9
De Weaver, Mark A. 304Decision 24 (intellectual property law
development in South America) 312–13
decolonisationand concept of diff erentiation 366–7and corporate capitalism 158–9and distributive justice 366–7impact on world economy 158
Defending values, promoting change (ILO)(1994) 238
Degnbol-Martinussen, John 116developed countries, generally
income, trends in 17and non-discrimination, principle
of 31protectionism, during economic
development 13–17, 19–20, 160–63
voting/blocking powers 90–91developing countries, generally
2008 global fi nancial crisis, impact on 96–100
denial of protectionist advantages 32, 57, 128, 160–65
food consumption trends 331income, trends in 17, 25in 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 settlementeconomic development, relevance in
183–86ICSID Convention on investment
dispute settlement (2005) 183and international corruption 283–4in international environmental law
375–6and international fi nancial
governance 77in international investment
agreements 180–86, 189–90
M2397 - FAUNDEZ PRINT.indd 488M2397 - FAUNDEZ PRINT.indd 488 28/9/10 11:22:4028/9/10 11:22:40
Index 489
WTO dispute settlement policies 21, 308
double taxation see under taxationDouglas, William A. 248Drahos, Peter 120Dunkley, Graham 160, 162, 170
economic developmentattitudes to 187defi ning 187–90by developing countries
and confl icts with international economic law 13–15
import substitution policies 13–17state role, changing trends in
13–17as freedom 237as human right 235and international environmental law
377–8 (see also climate change)changing emphasis 355–6, 360confl icts between 360–64, 375–7and conservation 354, 356–7,
360equity and justice 354–5links between 8–9, 235, 354–5sustainable development 244–5,
354–60, 372–3and international investment
agreementscontribution to, level of 180,
186–7as jurisdictional requirement for
183–6relevance to concept of 181–90
and labour standards 163, 243–4protectionist 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 116environmental law see international
environmental lawEspoo Convention (Convention on
environmental impact assessment in a transboundary context)(1991)(UN) 372
European Bank for Reconstruction and Development
environmental policy 245–6labour standards, conditionality over
245–7countries withdrawn from 249–50stakeholder engagement plan 247
European Free Trade Area (EFTA)free trade agreements (FTAs), and
intellectual property 315–16European Patent Offi ce (EPO) 330European Union
accession process, impact on corruption 298
and competition law 252model 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 standards247–50
‘Everything but arms’ (EBA) arrangement 249
free trade agreements (FTAs), and intellectual property 315–16
and WTO 174Evenett, Simon J. 255, 259, 264, 275exchange rates
distortions in, trade impacts of 42IMF/World Bank controls over
44–7, 67–8exports, during 2008 global fi nancial
crisis 98–100Extended Fund Facility program
(IMF) 48Extractive Industries Transparency
Initiative 212extraterritorial application of domestic
laws 275–80, 283–4
F. Hoff man-La Roche v Empagran (2004)(US) 8, 275–80
Fiji 304–5Financial Accounting Standards Board
105Financial Action Task Force 287
M2397 - FAUNDEZ PRINT.indd 489M2397 - FAUNDEZ PRINT.indd 489 28/9/10 11:22:4028/9/10 11:22:40
490 IEL, globalization and developing countries
fi nancial crisesin Asia in 1990s 4, 95global, in 2008 4, 94–5, 98
capital and investment outfl ows 97currency depreciation 97and developing/emerging
economiesconcerns over 96impact on 4, 94–100
export and commodity price decreases 98–9
and fi scal reform 152–7IMF actions during 96recovery signs 100
and international governance mechanisms, success of 12, 69–70
oil price crises, in 1970s 19–20fi nancial governance see international
fi nancial governanceFinancial Stability Board (FSB) 4, 46,
79, 95establishment 108–10importance 110–11limitations on 81, 85purpose 108–11structure 109
Financial Stability Forum (FSF) 4, 46, 69–70
Action Plan and Declaration 107–8Compendium of Standards 102criticism of 101Implementation Task Force 102membership and structure 101,
106purpose 100–102reform 88, 103–6
London Summit 2009 108–10Washington Summit 2008 101,
106–8reform recommendations 103–6role in 2008 global fi nancial crisis
102–6Fjeldstad, Odd-Helge 151Food and Agriculture Organization
(FAO)(UN) 328on ethics in food and agriculture
338on the right to adequate food 338
food consumption trends 331–2
food productionand biotechnology 352–3
advantages and disadvantages 340–47
in Africa 334–5, 349–50international agricultural research
centres (IARCs) for 341–2, 344
Multilateral system of access and benefi t sharing (MLS) 348
open source biotechnology 333, 350–52
private sector role in 343–5, 348–9regulation 333, 348–52Scientifi c and Know-How
Exchange Program (SKEP) 349
genetic modifi cation 8, 332, 334–5, 342, 346
advantages and disadvantages 340–45
in Africa 334–5, 349–50Bt maize 334–5, 346co-existence with other crops
339–40, 345, 352Convention 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, 351–2humanitarian licensing in 333,
350–52and intellectual property law
320–322, 342–3, 357, 376international 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 benefi t sharing (MLS) 348
segregation, traceability and identity preservation (STIP) 345
orphan crops 344–6, 352
M2397 - FAUNDEZ PRINT.indd 490M2397 - FAUNDEZ PRINT.indd 490 28/9/10 11:22:4128/9/10 11:22:41
Index 491
R&D, private sector role 343–5, 348–9
and subsidies 58–9food security 8
and biofuels 339–40and biotechnology 334–5, 345–7defi ning 336–8and human rights 336–8and intellectual property 338–9and poverty 336Rome Declaration on world food
security (1996) 337and technology transfer 336
Foreign Corrupt Practices Act 1977 (FCPA)(US) 286, 297, 299
foreign direct investment (FDI)contribution to economic
development 186–7in developing countries
and competition law 264investment agreement restrictions
on 60–64globalization impact on policies for
170tax 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 Tariff s 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 165–8and economic interdependence,
confl icts of 175–6Free Trade Agreements (FTAs)
and intellectual property law 315–18, 320–22, 343–4
historical development 165–8market economy, defi ning 167
freedom of association, as core labour standard 237–40, 242–6, 249–50
fuel security 8, 352–3and biotechnology, impact on
346–7
G-20 countriesestablishment 69–70Global plan for recovery and reform
152–3and international economic law, role,
in development 25and international fi nancial
regulatory controls 70, 88–91, 95–6, 106–8, 110–11
General Agreement on Tariff s and Trade (GATT) 50–51
Agreement on subsidies and countervailing measures (1994)(WTO) 21
anti-dumping duties 261–3competition issues concerned with
270–80criticism of 18–19diff erences from WTO 21–2, 172–5and free trade in developing
countries, infl uence on 17purpose 13–14, 29and regional trade agreements 31and Telmex decision 261–3, 270–75,
281General Agreement on Trade in
Services (GATS) 63–4, 149Generalised System of Preferences
(GSP) 23–4, 240–41core labour standards 247–50
genetic engineering/modifi cation see under biotechnology
Gerber, David J. 267–8Gillespie, Kate 304Global Environment Facility (GEF)
362–3, 368, 389, 394–5, 397–403Global strategy and plan of action
on public health, innovation and intellectual property (2008)(WHO) 328
global warming see climate changeglobalization
and corporate capitalism 168–71and economic interdependence,
confl icts of 175–6and extraterritorial applicability of
domestic laws 275–80, 283–4fi nancial impact on developing
countries 25global aid regime 132–7
M2397 - FAUNDEZ PRINT.indd 491M2397 - FAUNDEZ PRINT.indd 491 28/9/10 11:22:4128/9/10 11:22:41
492 IEL, globalization and developing countries
global competition law 253–5, 281–2developing countries’ resistance to
7–8, 255–9failure to establish, implications
of 259–63and global disorder 170global economic integration 33,
39–40homogenization vs. diversity debate
169–70infl uence over government policy
170–71and international economic law
development, role in 1–2, 10–12, 26–9
legal globalization, defi ning 283and national autonomy, impact on
26–9, 34–5, 38–9self-enforcing governance over
29–32social, legal and political eff ects of
170and sustainable development 6–7,
356–7and taxation, infl uence on 142, 152and WTO, relationship between
175–6governance, generally see also
international fi nancialgovernance
international economic law role in 29–32
Gray, John 168–9greenhouse gas emissions see under
climate change
Hansenne, Michel 238Hansmann, Henry 284Harrison, Graham 127, 300Hartford Fire Insurance Co v California
(1993)(US) 276–8health
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 121Hines, James R. 299Hirschman, Albert O. 285, 295Hoekman, Bernard H. 176Hong Kong 301Human Development Network Child
Labor Program 243human rights
and aid conditionality 215basis for 206–7, 209–10child labour 238–40, 242–4, 246and consumer protection 221–2depoliticisation of 242economic development as 235and food security 336–9and global capitalism 206–9and international fi nancial
governance 75–6and international law development,
role in 1jurisdiction issues 215–16and multinational enterprises
accountability mechanisms 215–17anti-corruption provisions 7, 222corporate social responsibility 6,
188–90, 206–9, 232–3calls for regulation 207disclosure and reporting
procedures 214–15under international investment
agreements 193–201limitations 208–9, 213–14soft law/self-regulatory
mechanisms 210–215national protocols for 207policies
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 Certifi cation Scheme (KPCS) 211–13
M2397 - FAUNDEZ PRINT.indd 492M2397 - FAUNDEZ PRINT.indd 492 28/9/10 11:22:4128/9/10 11:22:41
Index 493
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
86–7anti-corruption policies 287Articles of Agreement 67–8, 79
on fi nancial assistance 117–18criticism of 30–31and developing countries
changing policies regarding 20,70
fi scal autonomy, infl uence on 150–52, 154–6
voting weighting 70, 81, 90Exogenous Shocks Facility 89fi scal reform policies 150–52, 154–6Flexible Credit Facility 89, 96jurisdiction and powers 23–4, 84
conditionality 36–7, 47–9, 117–18, 243–5, 251
enforcement, limitations on 45–7exchange rates, controls over 44–7and international coordination
84–5and national autonomy 35,
150–52, 154–6quota changes 70
risk management 48–9surveillance mechanisms 45–7
Manuel Committee (2009) 90New Agreement to Borrow (NAB)
89purpose 13–14, 39, 67–8, 84, 165
and changing policy emphasis 39–42, 68–9
reform 49–50, 89–90Stand-by Arrangements 96Zedillo Committee (2009) 90
import substitution 13–17India
challenge to EU GSP programme 23, 251
competition law in 266, 268–9impact of 2008 global fi nancial crisis
99–100intellectual property law in 311–12and power shift in international
fi nancial governance 90–91Indonesia 350intellectual 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 modifi cation 320–22, 342–3, 357, 376
open source biotechnology 333, 350–52
plant breeder’s rights 343–4plant varieties 320–22, 328, 343–4,
348, 374private sector role in 332, 348–9
clinical test data, protection of 329compulsory licensing 21, 25, 310,
315, 319, 329developing countries
applicability to 310–14challenges for 308, 329–30concerns over 311–14, 319–26denial of protectionism of
162–3
M2397 - FAUNDEZ PRINT.indd 493M2397 - FAUNDEZ PRINT.indd 493 28/9/10 11:22:4128/9/10 11:22:41
494 IEL, globalization and developing countries
expertise in 307–8role in development 8, 318
development of 307, 309–14focus of 179harmonisation approach, relevance
of 319–26and 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 313–14Intergovernmental Panel on Climate
Change (IPCC)reports on climate change 380–82
international accounting standards 105–6
international aidaid harmonisation programs 128–32
background to 122–5confl icts between 132–5developing countries’ role in
130–31donor infl uence under 130–32,
136and globalized aid regime 132–7partnership basis of 122–4, 136–7and public expenditure/
procurement reforms 134–5purpose 132restrictions resulting from 130–31and self-regulation 124–8
conditionality in 112–13accountability 135–6aid harmonisation 129–35and child labour 242–4, 246country selectivity 126–8criticisms of 122–4as default regulatory instrument
119ex post vs. ex ante conditionality
124–7human rights 215
interference by aid organisations, reluctance of 117–19
non-compliance, fi nancial repercussions 115–16
as quasi-legal instrument 114–16and relationships for Offi cial
Development Assistance (ODA) 116–19
impact on domestic/political powers of developing countries 4–5
joint fi nancing frameworks 128–32Poverty Reduction Strategy Paper
(PRSP) framework 112relationships in, defi ning 123–4Structural 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 178–9bias in 29–32conditionality 12, 32and constitutional imitation 133and developing countries
adoption/utilization of, trends in 3, 11
Asian/global fi nancial crises, impact of 4, 94–100
confl icts between 13–15involvement in development of
2, 26preferential treatment 367–8pressures of 1–2, 133as rule takers 32system fl aws 24–5technology transfer 15–17whether benefi cial to 1–2
M2397 - FAUNDEZ PRINT.indd 494M2397 - FAUNDEZ PRINT.indd 494 28/9/10 11:22:4128/9/10 11:22:41
Index 495
development of 10–11changing emphasis, impact of
39–42and globalization 1–2, 10–12, 26–9import substitution phase 13–17lack of coherence in 32, 360–63managed protectionism phase
17–19opportunities for future 33post-war settlement 13–17Washington consensus 2–3, 17–25
enforceability 11growth in, volume of 10–11and national autonomy 3, 12, 26–7
change in emphasis 39–42limitations on 34–7over economic openness 37–42over policy instruments and goals
37–9surveillance mechanisms 45–7
international environmental lawbenefi t sharing 348, 374–5Clean Development Mechanism
(CDM) 358–9, 370and conditionality 373–4Convention on environmental
impact assessment in a transboundary context (Espoo Convention)(1991)(UN) 372
and corporate social responsibility 222–3
and developing countriesdiff erential treatment 364–9,
382–3, 386–9and preferential treatment
367–8priorities of 360–64
desertifi cation 362–3and global issues 361–2
and solidarity principle 365dispute settlement 375–6EBRD policy on 245–6and economic development 377–8
changing emphasis 355–6, 360confl icts between 360–64, 375–7and conservation 354, 356–7, 360equity and justice 354–5links between 8–9, 235, 354–5sustainable development 244–5,
354–60, 372–3
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 376–7and international fi nancial
governance 76regulation
international institutions’ role in 371–4
progress in 371–2responsibility for, lack of coherent
360–63savings clauses 376–7
United Nations Environment Programme (UNEP) 360–62, 368
International Finance Corporation (IFC)
core labour standards 243–5policy and performance standards
244–5international fi nancial governance
110–11accountability and transparency
85–8and administrative practice 77–8,
85–8and applicable international law
74–8, 82–3compliance and participation 86–7comprehensive coverage, principle
of 72–4and coordinated specialisation 77,
83–5developing countries’ dependence
on 82developments in
historical background 4purpose 4
dispute settlement 77fi nancial crises, success of
mechanisms during 12, 69–70holistic approach to 71–2, 79and human rights 75–6
M2397 - FAUNDEZ PRINT.indd 495M2397 - FAUNDEZ PRINT.indd 495 28/9/10 11:22:4128/9/10 11:22:41
496 IEL, globalization and developing countries
and international environmental law 76
and national autonomy 75–6New International Financial
Architecture 101–2and non-discrimination 75–6problems with 78–88, 82–5, 90–93
exclusion of fi nancial instruments 80
global self-regulation 80regulatory under-inclusiveness
79–82transparency and accountability
85–8purpose 71reform 4, 88–90
limitations on 91–3potential 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 eff ective banking supervision 102
inequalities in 42jurisdiction over 23
and subsidiarity, principle of 73–4, 82
international investment agreements 5–6
arbitration in 180–85, 189–90balance with national investment
priorities 6bilateral investment treaties (BITs)
best eff orts clauses in 182contribution to economic
development 186–7corporate responsibility trends in
200–201dispute resolution under 180–86and economic development,
reference to 181–2US model, worldwide adoption
of 19context of 187–8
defi nitions 190development 186–7investment 60, 180–82
developing/rebalancingcorporate/investor obligations
193–201home country responsibilities
201–3UNCTAD role in 191–2
and developing countriesrestrictions imposed on 60–64special considerations for 191–2
and duties of MNEs 188–9economic development
contribution to, level of 180, 186–7
as jurisdictional requirement for 183–6
need for policy fl exibility for 191–2
relevance to concept of 181–90General Agreement on Trade in
Services (GATS) 63–4, 149IISD Model International
Agreement on Investment 181, 190, 196–201, 204
home country responsibilities 201–3
investorsinterests of, focus on 181obligations of 188–9, 193–201as stakeholders 190–91
Multilateral agreement on investment (MAI) (draft)(OECD) 22
purpose 181–2TRIMs 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 standardsbenefi ts of 240conditionalities over 6–7
ILO/WTO debate on 237, 240–42
IMF/World Bank, imposed by 243–5, 251
M2397 - FAUNDEZ PRINT.indd 496M2397 - FAUNDEZ PRINT.indd 496 28/9/10 11:22:4128/9/10 11:22:41
Index 497
Conventions on 238, 245in EU/US General System of
Preferences 247–50fundamental principles of 234identifying 237–41selectivity of 242–3
Declaration on fundamental principles and rights at work (1998) 240
and IFC performance standards 245Tripartite declaration of principles
concerning multinational enterprises 210–11
International Law Association (ILA)Committee on the international law
of foreign investment 189–90International Maize Wheat
Improvement Center 341International Monetary Fund see
IMFInternational 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 28Jogarajan, Sunita 150Johannesburg Declaration on
sustainable development (2002) 235
Jones, Jennifer S. 248
Kapur, Davesh 48Kaufmann, Christine 242Kelsen, Hans 21
Kenyaanti-corruption progress in 298,
300–301, 303genetically modifi ed crops, use in
334, 349–50Kenya Agricultural Research Institute
(KARI) 349Keynes, John Maynard 164Kimberley Process Certifi cation
Scheme (KPCS) 211–13Klevorick, Alvin K. 278Klopp, Jacqueline M. 303Kostecki, Michel 176Krastev, Ivan 303–4Kyoto Protocol (1997)(UN) 365,
369–71, 393–4, 409
labour standardschild labour 238–40, 242–4, 246collective bargaining 237–40, 242–6conditionalities 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 employment238–40, 244, 246
and economic development 163, 243–4
exploitationand ethics 163–4as protectionism 163
forced labour 242–3, 246, 249freedom of association 237–40,
242–6, 249–50fundamental principles of 234IFC labour standards toolkit and
performance standards 243–5selectivity in 242–3and sustainable development
234–5Lamy, Pascal 241Langille, Brian 239Larmour, Peter 304Levenstein, Margaret 260liberalisation see international trade
liberalisation‘logic of independence’ 133
M2397 - FAUNDEZ PRINT.indd 497M2397 - FAUNDEZ PRINT.indd 497 28/9/10 11:22:4128/9/10 11:22:41
498 IEL, globalization and developing countries
Malaysia 302–3Malaysian Historical Salvors v
Malaysia (2009) 183–5Margalioth, Yoram 140, 151Maupain, Francis 239McCoy, Molly 245medicines, access to 315, 317, 319–20Millennium Development Goals 32,
236, 257Miller, Angharad 145–6Mintz, Jack 142MNEs see multinational enterprisesmoney-laundering 283, 287Mongolia 301–2Moore, Mick 151Morrow, Daniel 123–4most favoured nation principle 5, 40,
51–2, 149Mozambique 300MSCI emerging market index 98Multilateral agreement on investment
(MAI)(draft)(OECD) 22Multilateral agreement on investment
(MAI)(WTO) 64, 171, 195multilateral rules, generally
advantages 35–6, 64–5developing countries, under-
representation 2, 26, 46failings of 65–6focus of
bias towards developed countries 35–6
emphasis of, change in 39–42, 179limitations on application to 42–3and national economic controls 34–7need for reform 37
Multilateral system of access and benefi t sharing of plant genetic resources for food and agriculture (MLS) 348
multinational enterprises (MNEs)and anti-corruption regime 7,
222–3Code of conduct on transnational
corporations (draft)(1984)(UN) 16, 210
and corporate capitalismand control over former colonies
158–9development of 165–8
corporate social responsibility 6, 222–3
and human rights 6, 188–90, 206–9, 232–3
calls for regulation of 207disclosure and reporting
procedures 214–15under international investment
agreements 193–201limitations on 208–9, 213–14
self-regulatory initiatives 213–15Draft 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 220–21problems with 218–25, 232‘sphere of infl uence’ under
219–20, 223, 225, 238impact on developing countries
170–72increasing powers of 39interdependence of 166and international investment
agreements 5–6investors obligations under 189,
193–201OECD Guidelines for 188–9, 193,
210–11powers 171–2Protect, respect and remedy: a
framework for business and human rights (2008)(UN) 6, 188–90, 205–6, 225–31
tax regime, infl uence on 156–7UN 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, 19and Washington consensus, role in
development 17–19and WTO
obligations under Multilateral agreement on investment (MAI) 170–71
and WTO, undermining of 5, 171–2
M2397 - FAUNDEZ PRINT.indd 498M2397 - FAUNDEZ PRINT.indd 498 28/9/10 11:22:4128/9/10 11:22:41
Index 499
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 302non-discrimination, principles of 31,
39–40, 51and fi scal autonomy 149–50and global competition policy
258–9and international fi nancial
governance 75–6North American Free Trade Area
(NAFTA)free trade agreements (FTAs), and
intellectual property 317Norway 182
Oats, Lynne 145–6OECD (Organisation for Economic
Co-operation and Development)on compliance with ILO core labour
standards 240Convention on combating bribery
of foreign public offi cials 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 148–9multilateral agreement on investment
(draft) 22Paris Declaration on Aid
eff ectiveness (2007) 128–32Working Group on bribery 297, 299,
304oil price crises, impact on developing
countries 19–20Okruhlik, Gwenn 304ordoliberalism 267orphan crops 344–6, 352
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 eff ectiveness (OECD) 128–32
patents, law on see intellectual propertyPetersmann, Ernst-Ulrich 28plant 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
populationgrowth forecasts 331–2, 384vulnerability of, in developing
countries 385Porter, Michael 258poverty 406
and food security 336perceptions of 136trends 17, 100
Poverty Reduction Strategy Paper 112, 127
‘Protect, respect and remedy,’ Ruggie framework (2008)(UN) 6, 188–90, 205–6
background to 225–7evaluation 227–31issues with 230–31potential advantages 228–9, 232–3principles 226–7
protectionismcartels as mechanism for 258during economic development
160–63mechanisms denied to developing
countries 32, 57, 128,160–65
exploitation of labour 163Public Intellectual Property Resource
for Agriculture (PIRPA) 351–2
regional trade agreements (RTAs) 261trends 22, 31
M2397 - FAUNDEZ PRINT.indd 499M2397 - FAUNDEZ PRINT.indd 499 28/9/10 11:22:4128/9/10 11:22:41
500 IEL, globalization and developing countries
Rennie, Jane 261Ricardo, David 159, 164–5, 167Rio 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, Johnon embedded liberalism 17on human rights responsibilities of
multinational enterprises‘Protect, respect and remedy’
framework (2008)(UN) 6, 188–90, 205–6, 225–33
on UN Draft norms 17Russia 90–91, 99
Salbu, Steven 293Scientifi c and Know-How Exchange
Program (SKEP) 349SCM Agreement see under subsidiesSen, Amartya 187, 266–7, 281Sidak, J. Gregory 273Silbey, Susan 274Singapore Ministerial Conference see
under World Trade OrganizationSinger, Hal J. 273Slaughter, Anne Marie 27–8Slovakia 301Smarzynska, Beata K. 299Smith, Adam 159, 164–6sociological institutionalism 176South America, intellectual property
law development in 311–13sovereignty, national see autonomystandards see Financial Standards
Board; Financial Standards Forum; international fi nancial standards; labour standards
Stewart, Miranda 146, 150Stiglitz, Joseph 164, 187, 236Structural Adjustment Loans 20, 30
and conditionality 121subsidiarity, principle of 73–4, 82subsidies
in agriculture 58–9classifi cation 56denied to developing countries 32
foreign investment as potential 60–61import substitution subsidies 57inconsistency in regime 58–9SCM agreement (Agreement on
subsidies and countervailing measures)(1994)(WTO) 21, 55–9, 149–50
selective subsidies 56–8WTO fl exibilities and constraints
53–7and developing countries, impact
on 57–9Summers, Larry 11surveillance mechanisms, of
multilateral organisations 45–7, 67–8
Suslow, Valerie 260sustainable development 8–9, 244–5
approaches to 6–7, 235–7and climate change 383–5and conservation 354, 356–7contradictions of 358and cultural diff erences 358defi ning 357, 359, 377–8and economic development 224–5,
354–60importance in 355–60, 372–3limitations 358–60
and globalization 6–7, 356–7IISD Model International
Agreement on investment 181, 190, 196–204
increasing scope of 355–7Johannesburg Declaration on (2002)
235and labour standards 234–7in OECD Guidelines for MNEs
188–9, 193, 210–11and social partnership 235–6target setting, problems with
235–7World Summit on (WSSD)(2002)
371, 373Sykes, Alan O. 278Syngenta Foundation 349, 351
Tanaka, Kakuei 364–9Tanzania 298, 300tariff s 42 see also General Agreement
on Tariff s and Trade
M2397 - FAUNDEZ PRINT.indd 500M2397 - FAUNDEZ PRINT.indd 500 28/9/10 11:22:4128/9/10 11:22:41
Index 501
WTO fl exibilities and constraintsand developing countries, impact
of proposed cuts on 53–7taxation
autonomy, constraints on 5domestic 140–41, 154–6inter-country 141–8
potential disadvantages 145–6by multilateral organisations
148–52voluntary acceptance 142–3
and customs regime, confl icts between 155–6
in developing countriesadvantages and disadvantages
145–8conditionality in 151–2double taxation agreements 143–8IMF infl uence on 150–52and multinational enterprises
156–7patterns of 140revenue gap 156United Nations Monterrey
Consensus (2008) 153–4and VAT regime 151, 155–6
and development, correlation between 138–9
double taxation agreements 143–8and economic objectives, correlation
between 149–52fairness and equity in 140importance 139–40on imports and exports, reform
151infl uences on 141–3and international competition 142OECD 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
reformand fi scal autonomy 150–52,
154–6multinational plans for 150–54
UN Model double tax convention (1980) 145–6, 156–7
VAT harmonisation 151, 155–6technology transfer
and climate change 396, 403–5confl icts with international economic
law 15–17and environmental law 376and food security 336intellectual property law
developments on 313–14UNCTAD 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’ 94transnational corporations (TNCs) see
multinational enterprisestransparency
of IMF and World Bank 86–7in international aid 135–6in international fi nancial governance
85–8Transparency International 286, 299Triffi n, Robert 44TRIMs 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 varieties320–22
compulsory licensing 21, 25, 310, 315, 319, 329
Declaration on the TRIPS Agreement and public health (2001) 25, 315, 317, 326
and developing countries 314and access to medicines 315, 317,
319–20objections to 256
enforcement of 308and environmental law 376and food security 338–9and free trade agreement provisions
315–18, 320–26, 328–9importance 314scope 314–15
M2397 - FAUNDEZ PRINT.indd 501M2397 - FAUNDEZ PRINT.indd 501 28/9/10 11:22:4128/9/10 11:22:41
502 IEL, globalization and developing countries
Uganda 300UNCITRAL (United Nations
Commission on International Trade Law)
Model law on procurement of goods, construction and services 287
United Kingdomanti-corruption investigations in
300corporate capitalism, development
165–7, 177United Nations
generallycoordination problems 84–5on corporate responsibility 194,
196duty of international cooperation
under 187–8human rights, regulatory powers
regarding 207–8impact of cold war on 13purpose 13–14
policiesBali 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 desertifi cation (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 Statesaggressive unilateralism,
development of policy on 18–19Alien Claims Tort Act 1789 215–16
M2397 - FAUNDEZ PRINT.indd 502M2397 - FAUNDEZ PRINT.indd 502 28/9/10 11:22:4128/9/10 11:22:41
Index 503
and corruption, role in international policies on 278–80, 286, 297, 299
criticism of GATT 18–19Foreign Corrupt Practices Act 1977
(FCPA) 286, 297, 299Foreign Trade Antitrust
Improvements Act 1982 (FTAIA) 276–8
General System of Preferences (GSP Programme) 23, 240–41
and core labour standards 247–50as global antitrust court 278–80on global competition regime 254–5,
278–80and intellectual property
development role in 309free trade agreements (FTAs)
317–18, 323–4US bilateral investment treaty (BIT)
model 19, 201Webb-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 321–2Uruguay Ministerial Conference see
under World Trade Organization
Vandemoortele, Jan 236VAT, and taxation constraints 151,
155–6Voluntary principles on security and
human rights (NGOs) 211–13
Washington Consensusand competition law, in developing
countries 252criticism of 11, 20–21, 122, 236development of 3, 11, 17–25, 23impact on developing countries 2,
20–25impact on international law
development 2–3, 17–25Webb, Richard 48Webb-Pomerene Act 1918 (US) 256
Weeramantry, Christopher 358Wei, Shang-Jin 299Wong, Michela 300World Bank
accountability and transparency 86–7
anti-corruption policy 286–7and conditionality 47–8, 117, 242–3
labour standards 243–5risk management 48–9
criticism of 30–31, 79and developing countries
Adaptation Fund 363changing policies regarding 20,
30, 70voting weighting 70, 81, 90
exchange rates controls 44–7, 67–8international environmental law,
regulatory role 372–4jurisdiction and powers 23–4, 84
impact on national autonomy 35and international coordination
84–5purpose 13–14, 41, 69, 84, 165reform 49–50, 90
World Commission on environment and development (WCED) Report (1987) 356
World Food Summit Action Plan 337World Health Organization (WHO)
328and international coordination 84–5
World Intellectual Property Organization (WIPO)
Copyright treaty (1996) 323Development Agenda 327Internet treaties (1996) 323Performance and Phonograms treaty
(1996) 323reform debates 313–14Standing Committee on patents
(SCP) 327World Summit on sustainable
development (WSSD)(2002) 371, 373
World Trade Organization (WTO) 5and core labour standards
social clause in 237, 240–42and developing countries 5
increased policy role in 174
M2397 - FAUNDEZ PRINT.indd 503M2397 - FAUNDEZ PRINT.indd 503 28/9/10 11:22:4128/9/10 11:22:41
504 IEL, globalization and developing countries
limitations on policy imposed byescape/safeguard clauses 52industrial tariff s 53–5investment policies 59–64rule exceptions for 51–2subsidies 55–9
generally 5, 50–51criticism of 29–32diff erences from GATT 21–2,
172–4and economic interdependence
175–6escape/safeguard clauses 52establishment 21, 172–8and global competition regime
7–8, 253–5, 257–9, 261Telmex decision 7–8, 261–3,
270–75, 281and globalization, relationship
between 175–6governance role 29–32most favoured nation principle 5,
40, 51–2, 149and national autonomy, infl uence
on 29–32national treatment principle 5, 40,
51, 149non-discrimination, principles of
31, 39–40, 51place in international economic
law-making 158
purpose 39–40, 50–52signifi cance 173–4, 176–9undermining by multinational
enterprises 5, 171–2and international environmental law
371–2Ministerial Conferences
Doha (2001) 25, 53, 261, 315, 317Singapore (1996) 22, 253–4Uruguay Round (1986–1994) 21
non-discrimination, principles of 31, 39–40, 51
policiesAgreement on government
procurement 287–8, 302–3Agreement on subsidies and
countervailing measures (SCM agreement)(1994) 21, 55–9, 149–50
on dispute settlement 21, 308and ILO core labour standards,
debtate over 237, 240–42on intellectual property (see
TRIPS Agreement)Multilateral Agreement on
Investment (MAI) 64, 171, 195
non-agricultural market access (NAMA) 53–4
and prevention of war 175WTO see World Trade Organization
M2397 - FAUNDEZ PRINT.indd 504M2397 - FAUNDEZ PRINT.indd 504 28/9/10 11:22:4128/9/10 11:22:41