As much of the world economy struggles to find firm footing, it is an important time to remember that foreign direct investment and commercial development work best when rule of law is placed front and center, especially in developing countries.
Without proper safeguards and the enforcement of treaties, foreign investors often find themselves marginalized to the benefit of domestic industries. When this occurs, other investors frequently pull out of the host country, taking with them valuable capital, expertise, training and improvements in infrastructure.
The result can be devastating to the host country’s economy, and a blow to the standard of living of its people.
One country that currently is heading down this perilous path is Ecuador. In recent months, the country has set several dangerous precedents against free trade and the rule of law.
First, the International Center for Settlement of Investment Disputes, a World Bank arbitration panel, ruled in early October that Ecuador must pay $1.77 billion plus interest to Occidental Petroleum as compensation for unilaterally canceling the U.S. company’s operating concession and seizing its assets in 2006.
Ecuador’s response? President Correa defiantly announced, "We will continue fighting to not pay a penny.”
Second, in another well-publicized case, in 2011 a provincial court in Ecuador handed down an unprecedented $19 billion judgment against Chevron in a local pollution lawsuit. The judgment has been called the largest of its kind in history. Seven U.S. courts have recognized the fraudulent activities by plaintiffs’ attorneys and agents in this case, and Ecuador appears to be violating orders of a tribunal operating under the authority of the U.S.-Ecuador Bilateral Investment Treaty that seeks to deliberate over aspects of the litigation.
Now we see that Ecuador’s National Congress has passed a bill that will effectively nationalize the vital credit reporting industry and expropriate the private assets — most notably private consumer data — of foreign credit reporting agencies operating in the country. The bill is currently on President Correa’s desk.
Not only is this bill anathema to the principles of free trade and democracy, it is a direct violation of the World Trade Organization’s General Agreement on Trade in Services (GATS), of which Ecuador is a signatory party. The GATS agreement explicitly states that signatory countries will not place any market restrictions or national limits on the provision of foreign credit reference services.
The trend in Ecuador is unmistakable and unsettling.
The good news is that President Correa still has time for a course correction. In lieu of nationalizing Ecuador’s credit reporting system by consolidating all reporting under a single, government-run bureau, he can instead propose changes to the legislation so that the new public registry operates alongside private credit bureaus. This would prevent any interruption in a critical economic service, encourage competition and promote stable “bankerization” of the economy.
Public and private enterprises can and do coexist well in many developing countries because they serve different needs. A strong and reliable credit reporting system is fundamental to gaining access to affordable and stable financing and is an essential element to a country’s economic growth and prosperity.
Ecuador should know. It tried in the past to operate its economy under an entirely public credit bureau system and it was a dismal failure. In the years since it has allowed private credit bureaus, the country has experienced substantial increases in micro-borrowing (a 194 percent increase from 2006-2010), micro-lending (209 percent increase from 2006-2010) and decreases in delinquency rates.
If Ecuador is committed to creating a marketplace that has the best possible safeguards in place for buyers and sellers, and one that will attract foreign investment rather than repel it, private credit bureaus must be allowed to operate and continue to serve as a cornerstone of Ecuador’s ongoing financial development.
The road toward greater economic prosperity and the rule of law is in front of President Correa. Will he take it?
Bill Reinsch is president of the National Foreign Trade Council, which advocates for more open international trade and investment regimes.