Modernizing foreign direct investment for the 21st century

As economies around the world become increasingly connected and intertwined, we must put a global trade system in place that can adapt to this ever-changing 21st century world. Foreign direct investment (FDI) has the potential to contribute significantly to sustainable economic development but we must have trade policies that meet the needs of not just the industrialized world, but also developing economies. 

For decades, FDI has been largely guided by bilateral or multilateral investment treaties.  Currently, there are more than 3,000 bilateral and regional agreements for the protection of investments around the world. These agreements provide the underlying legal structure for the international system of investments.

However, the implementation of these treaties has increasingly led to negative consequences to developing countries like Ecuador, leading to a growing wave of criticism. Those consequences have included the outsized power of international arbitrators to interpret these treaties; the lack of transparency in the process; and the marginalization of the capacity for a state to implement oversight policies. This all can have a negative impact not only on a government but on the people it serves. 

For example, Nobel Prize-winning economist Joseph Stiglitz has correctly observed that this system has significantly hindered the ability of developing countries to protect their environment from extracting activities carried out by mining and oil companies; their citizens’ health from the tobacco companies; and their economies from the ruinous financial products that played such a large role in the 2008 global financial crisis.

In the mid-20th century, countries in Latin America often fell victim to this imperfect system as their resources were exploited by foreign companies drawn to newly discovered oil. Most of these nations at the time, like Ecuador, suffered from the lack of a cohesive structure for dealing with foreign companies and investors. We also suffered institutional weaknesses that undermined the ability to formulate appropriate public policies to regulate our markets.

Now, in 2014, countries in Latin America are seeing unprecedented growth due in part to reforms that have stabilized markets and have encouraged investments for the economic and social development of each nation. The region has experienced growth rates surpassing 4 percent for the last decade – during a time when even countries like the United States were experiencing economic difficulties.

Since being elected in 2007, Ecuadorean President Rafael Correa has been instrumental in achieving economic stability after nine presidents were dismissed from office since 1996. The steadiness during his presidency has positioned Ecuador as a regional leader, drawing recognition from the World Bank for advancing from being a middle-income economy to an upper middle-income one. Most recently, one major U.S. multinational company committed to expand by $1 billion over the next five years. Additionally, Ecuador has adopted one of the world’s most environmentally-friendly Constitutions – it provides nature with rights and a regulatory framework governing public and private operations.

On a broader scale, we convened a conference this week with the VALE Columbia Center on Sustainable Foreign Investment with world-class economists, attorneys and academics to discuss and develop solutions to improve development and investment treaties. To that end, Ecuador’s story provides an important lesson as we expand global trade initiatives and work to fix the current investor-state arbitrator system.

Oil was discovered in the Ecuadorean Amazon in the 1960s and its extraction controlled by Texaco (now owned by Chevron). Our  rainforest is considered to be one of the most bio diverse habitats, and yet its ecology has suffered devastating damages as a result of the callous techniques used under Texaco’s direction. Over the past 20 years there have been countless legal actions between harmed citizens, Texaco, Chevron and the Ecuadorean state.

Despite years of litigation – ten in the United States and ten in Ecuador – the damage is not remedied. The Chevron case is a textbook example of why the arbitration system needs overhauling – the endless litigation has yet to produce a viable resolution and our people still suffer.

Reform should address the legitimacy, consistency, and predictability of the system by instituting: 1) a transparent selection of arbitrators who only exercise this role and do not defend companies in other venues, which can result in obvious interest conflicts, 2) the establishment of an appellate body within the arbitration system, 3) the incorporation in investment treaties investors’ obligation to file claims only after local legal avenues have been exhausted, and 4) the incorporation of the right of States to exercise their regulatory capacity on issues related to health, environment and industrial policy, among others.

These needed reforms cannot happen overnight but we must have open and transparent discussions on reforming the system so that we can have a regulatory and legal framework that works in the modern, global 21st century economy. The hard lessons we painfully learned in Ecuador must be a teachable moment. We cannot let this opportunity pass us by.

Suárez is the ambassador of Ecuador to the United States.

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