17th Otto Riese Lecture, Université de Lausanne - Reforming international investment governance: fostering sustainable development in Africa
Good afternoon and thank you very much for your invitation.
It is an honor for me to be here today and deliver the Otto Riese Lecture.
As you know, the topic of my presentation is reforming international investment governance: fostering sustainable development in Africa.
What you do not know is that it is a special pleasure to talk about this topic with you. And it is special not only because you study law, but also because you are YOUNG.
When talking about breaking the status quo, young people are not a passive audience, they are, or they will be, the authors of change.
Young people understand well that tradition and inertia are never a good reason to maintain an inefficient system. And this is the case of the current investment regime.
As the young people that you are, let me start by asking you a question as a means to an analogy.
Have you ever had to deal with the unintended consequences of a positive action that you took in the past?
You may be wondering why I pose such a question. And the reason is that this is similar to what happened to Investment Agreements.
Couples of decades ago, we all were excited about the positive effects FDI could bring to our own countries. And as a consequence of this, most countries began to sign agreements to "unleash the power of FDI".
This led to a heterogeneous proliferation of agreements- sometimes refer as a spaghetti bowl- which as in all contracts, came with rights and obligations.
And one of the unintended consequences of this proliferation was the heterogeneity of obligations it created, opening a wide legal front to be covered by signatory countries, especially the poorest developing nations.
We let the international systems of agreements grow on its own, and it time to change this we aspire to have a more effective and efficient system that reduces the scope for legal battles. This is why we cannot wait. This is why we need to reform now.
My lecture today is about two things: 1) about breaking the status quo in international investment governance and 2) about how this change could foster development in Africa -- the poorest continent, but one with immense potential.
To be frank with you, I do not think my challenge today is to convince you that the status quo is no longer an option in investment agreements. My goal is to convince you about the urgency of the change and propose ways forward for such a reform.
Let's start and see if I succeed in my mission.
[TWO REASONS THAT MAKE FDI CRUCIAL IN OUR WORLD]
Before I start talking about the importance of reform, let me talk briefly about the importance of Foreign Direct Investment - or FDI as we call it.
And I would like to concentrate on two features that make FDI fundamental for development - especially now in the context of the new Sustainable Development Goals, the new global benchmarks to eradicate poverty from earth.
The first feature is the importance of FDI as a source of financing. FDI can provide resources that may not be available in a country.
And when we talk about global FDI, we are not talking about small numbers. In 2014, global FDI amounted to USD $1.2 trillion, which is more or less equivalent to twice the GDP of Switzerland.
The main recipients of these flows are developing countries. In fact, FDI inflows to this group reached their highest level ever in 2014, at USD $681 billion. This means that developing economies captured 55% of global FDI, with China leading the group.
This makes FDI the main source of external financing for the developing world, surpassing other sources, including official development assistance or remittances.
I should clarify: In the poorest nations, such as the LDCs, official development assistance or remittances remain the primary sources of external financing.
My main point, however, still stands: FDI is a very important source of financing all over the globe.
The second feature I would like to highlight is the power of FDI to act as a catalyst for structural change.
In other words, FDI can, if properly harnessed, contribute to a long-term shift in the fundamental structure of an economy, fostering growth and development.
In fact, many developing countries have experienced such a change, even in your lifetime. Take for instance, Thailand or Vietnam, or China.
But think for a moment about whether this change would have been possible without FDI.
Would China be producing the ipads and iPhones you have with you?
Would Costa Rica be exporting electronic equipment and semiconductors, instead of the coffee it was famous for?
Would Mexico have become the world's largest exporter of flat screens?
Most likely, the answer would be no. One can be pretty sure that FDI has played an important role in enabling the structural change these countries experienced.
Then to recapitulate, FDI is crucial not only as an important source of external financing, it is also an enabler for the structural change needed for growth and development.
And because FDI is so critical, we must reform the rules that govern it. The world needs more and better FDI.
[REFORMING INTERNATIONAL INVESTMENT AGREEMENTS, INCLUDING INVESTOR-STATE DISPUTE SETTLEMENT CLAUSES]
This brings me to the next part of my presentation: reforming international investment agreements, including investor-state dispute settlement clauses.
Lately, this subject has been a source of controversy. As you are no doubt aware, ISDS threatens to become a bone of contention in the proposed TTIP agreement between the US and the EU.
But my focus is not TTIP. As a matter of fact, ISDS is becoming a bone of contention pretty much everywhere. And the way this subject is handled on both sides of the Atlantic will have far-reaching global consequences. TTIP will shape the future of reforms to international investment governance, which will have controversial implications for poorer developing countries.
But controversy is not a factor that should deter us from addressing the issues that matter.
We need to address them with open eyes, taking into account the global context of investment policy and the full range of issues raised and concerns expressed.
And we also need to address these issues in an inclusive and sustainable manner.
Let me start with the global context.
Today we have a truly global regime for investment. But the regime is based on a patchwork of bilateral and regional legal arrangements, NOT on multilateral rules. In fact, the number of bilateral and regional investment agreements continues to swell. In 2014, thirty-one new investment treaties were concluded. In total, there are now over 3000 international agreements covering investment issues.
Today, the overwhelming majority of countries are party to at least one international investment agreement. Some have signed over 100-- Switzerland for instance has 115 active agreements.
Moreover, at least 53 international investment agreements - including a few mega-regionals - are under negotiation, with the participation of over 100 countries. In short, everyone has a stake in the international investment regime because everyone is using it.
For many - if not most - countries, this is their main international tool to promote FDI, be it outflows or inflows. As such, these agreements have become an important tool for promoting jobs and building productive capacities, especially for developing countries.
And the EU plays a critical role in this system.
A handful of EU countries created this system at the end of the 1950s. And much of the historical evolution of international investment agreements was driven by EU countries, reflecting their role as global investors.
The real boom in international investment agreements, however, occurred in the early 1990s as a result of a historical achievement in Europe: the fall of the Berlin Wall and the end of Europe's tragic division between West and East.
For the investment regime, this paved the way for a truly global recognition of respect for private property. Today, the EU and its Member States are still party to 53% of the Bilateral Investment Treaties (or BITS) in the world.
While practically everyone is part of the international investment regime, and has a real stake in it, no one seems really satisfied with it. This leads, at least in my view, to a clear conclusion: the status quo is not an option.
We are truly at a crossroads with the current investment regime.
The real question is not whether the regime should change, but rather how and - more controversially - to what extent.
Responses to the need for reform vary across countries. Some have moved quicker on new agreements with marginal adjustments. Some have pursued bigger reforms while remaining in the current system. Still others have disengaged altogether.
At least 50 countries and regions have been engaged in reviewing and revising their models.
For instance, Brazil, India, Norway and the European Union (EU) published novel approaches. South Africa and Indonesia have cancelled existing treaties and formulated new strategies. Others are moving very fast with their reforms. So, if anything, the EU is a late-comer to this game.
These varying approaches and speeds run the risk of fragmenting the system further.
There is a pressing need for a systematic and holistic reform of the global investment regime. This is in the long-term interest not only of States, but also of investors.
At UNCTAD, we offer a complete action menu for such a reform.
When talking about potential reforms, we, at UNCTAD, would propose five main objectives:
Safeguarding the right to regulate in the public interest to ensure that limits on the sovereignty of States do not unduly constrain legitimate public policymaking.
Reforming investment dispute settlement to address the legitimacy crisis of the current system.
Promoting and facilitating investment by effectively expanding this dimension in international agreements;
Ensuring responsible investment to maximize the positive impact of foreign investment and minimize potential negative effects; and
Enhancing the systemic consistency of the global investment regime to overcome the gaps, overlaps, and inconsistencies of the current system.
We acknowledge that these objectives are ambitious, especially as local circumstances vary tremendously.
This is why UNCTAD's action menu invites countries to define their own road maps. Countries can pick and choose the options needed to formulate their own reform packages, in line with individual objectives.
Now let me draw the connection between reform of the international investment architecture, and fostering sustainable development in Africa. Reforming for the sake of reforming is pointless. Any reform effort has to aim at a specific target: more and better FDI. And more and better FDI is one of the things that Africa needs most.
As I mentioned earlier, and as you probably already know, next week the countries of the world will gather in New York, to formally endorse the Sustainable Development Goals, the so called SDGs.
These goals are probably the most comprehensive set of global aspirations in the history of human kind. They are bold and they are ambitious. And their attainment will require determination, cooperation, among other things… and also, and very importantly, M O N E Y.
The reform should not hinder but rather channel resources towards sectors and regions that need them most. As such, reform is important for everyone and can have an important impact on the poorest nations - those who are in urgent need of financial resources to propel their economies.
And this is not at all a minor issue.
We, at UNCTAD, estimate that at current levels of investment in SDG's relevant sectors, developing countries face an annual financing gap of USD $2.5 trillion. For reference, this amount is equivalent to four times the GDP of Switzerland.
So we need to make sure that reforms facilitate investment.
We need to make sure that reforms help investment to flow where it is most needed. And Africa is one of those places.
Let me then shed light on the current international legal framework for investment in African countries.
These countries have been actively engaged in international investment rule making since the 1980s. By the end 2014, close to 800 BITs had been concluded by African countries, representing 27 per cent of the total number BITs worldwide. This is in addition to over 50 other economic agreements with investment provisions.
The bulk of these BITs were concluded in the 1990s. Therefore, they do not yet reflect most recent trends in modern investment treaty making.
Only few African agreements include clarifications of key BIT protection standards, such as most-favoured-nation treatment (MFN), fair and equitable treatment (FET) or indirect expropriation. Nor do they include options that strengthen the right to regulate (e.g., exceptions for public policies or national security), or options that improve investment dispute settlement (clauses for improving investor-State dispute settlement (ISDS), State-State dispute settlement or dispute prevention). They also lack clauses aimed at promoting and facilitating investment and clauses aimed at ensuring responsible investor behaviour.
Over time, African treaties have resulted in a substantial number of investor-State disputes. This has resulted in an evolving body of "case law" that is increasingly difficult to overlook, and not without inconsistencies.
As a matter of fact, by the end of 2014, African countries had responded to over 55 treaty-based investor-State claims, out of a total of 608 known cases.1
Beyond bilateral treaties, a large number of African countries are parties to regional investment agreements, for instance, the COMESA Common Investment Area and the SADC Finance and Investment Protocol.
And many African nations are also engaged in negotiating comprehensive Economic Partnership Agreements (EPAs) with the EU.
Finally, the proposed COMESA-EAC-SADC Tripartite Free Trade Area aims at harmonizing rules in the areas of trade, investment, customs, the free movement of people, and infrastructure development. COMESA, the EAC and the SADC2 comprise half of the African Union's (AU) population and half of its economic output
Given the rise of the so-called mega-regionals negotiated by some of the world's most advanced economies, the successful conclusion of the Tripartite agreement is crucial.
This is because some of these mega-regionals under negotiation could impact the structure of international trade and investment rules. And yes, as you can imagine, I am referring to the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP).
The successful implementation of Africa's own mega-regional agreement is thus very important. It could help ensure that the continent is not left behind in these important areas of international economic cooperation.
There is pressing need for systematic reform of the global regime of international investment agreements. The need is especially urgent for African countries that are still party to "old" BITs that include investor-State disputes settlement mechanisms.
Africa's international investment framework must be made more conducive to the sustainable development objectives.
One of the key challenges for African countries is their capacity to negotiate investment agreements that reflect their interests and needs.
Overcoming this challenge is also crucial in the context of global reform. In reforming their investment regimes, African countries need to ensure policy coherence between their various investment commitments, including those at the bilateral and regional levels.
And last but not least, there is the need to ensure technical capacity to analyse policy options and craft legal language that meets the desired policy objectives.
This is one of the reasons why for UNCTAD, capacity building is a core element of our work. In this way, we support countries wishing to reform their investment regimes to bring them in line with today's sustainable development imperative.
In conclusion, there are 3 things I hope you can take home today.
that the reform to the IIA regime is badly needed. The status quo is simply not an option.
that reform is urgent, as it can help to foster sustainable development by channelling resources to countries and sectors that need it most: Africa is a case in point.
that the current reform wave of the global investment regime must promote multilateral convergence, not fragmentation
I would like to stop here and thank you very much for your attention. I am open to any question or comments you may have.
