Stephen Vasciannie

MUCH OF the debate about globalisation and its effects on Jamaica has been concerned with trade. As I noted in this column last week, Western countries have argued that greater liberalisation of the world economic system will work to the benefit of consumers and will allow countries and companies to flourish in an environment of free competition. Thus, free market supporters of globalisation insist on the virtues of free trade.

In the area of investment, many supporters of globalisation also argue for the application of market principles. Thus, globalisation embraces the free movement of capital, and the removal of restrictions on the ways in which capital may be invested across borders.

Historical Context

In assessing the main effects of globalisation on international investment policy, it is important to note the historical context. Developing countries, in particular, have had mixed views concerning the role of foreign investment in economic development. At one end of the spectrum, up to the early 1980s, several developing countries sought to close their doors to foreign capital, largely on the basis that foreign investments - and mainly foreign direct investments - tended to retard development.

The argument was that foreign capital was inherently exploitative, that foreign investors had no reason to care about domestic development, and that foreign investments in the extractive sectors created enclaves of wealth even as they promoted in the degradation of the environment. In addition, it was argued, with force, that foreign investments often relied on domestic capital, so they brought very little new money to the domestic economy; at the same time, these investments were said to lead to a net outflow of foreign exchange, as the investor sought to satisfy the profit maximising motive of the home corporation.

To these considerations were also added the history of relations between foreign investors and developing countries. Thus, at the time of talk about the New International Economic Order in the 1970s, the political strength of multinational corporations was seen as working contrary to the interests of developing countries. Sovereignty was said to be at bay as multinationals influenced developments, and possibly changed governments, in places that relied on foreign investment for development.

Turning Tide

Although a substantial body of opinion still views foreign direct investment with scepticism, the tide appears to have turned in most developing countries. This change has been brought about largely by the execution of more than 3,000 bilateral investment treaties, and by the pro-investment position taken by various multilateral institutions such as the World Bank and the International Monetary Fund. Arguably, too, it has been brought about by economic realities: Countries that have succeeded in attracting foreign capital have tended to fare better than those that have not.

In light of the foregoing, the present state of play concerning globalisation and investment is largely reflected in the typical bilateral investment treaty between developed and developing countries. In the typical bilateral investment treaty today, the following provisions appear almost as a matter of course:

(a) Foreign investments are entitled to the same treatment as to benefits as national companies (national treatment), the same treatment as investments from other countries (most-favoured nation treatment), and, generally, fair and equitable treatment.

(b) The host State shall not expropriate or nationalise foreign investments either directly or indirectly, except for a public purpose, and in a non-discriminatory manner.

(c) Where expropriation or nationalisation is undertaken, the host State must pay prompt, adequate and effective compensation, and must act in accordance with due process of law.

(d) The host State shall permit all transfers relating to foreign investment to be made freely and without delay into and out of the country.

Generally, therefore, the developing country in the era of globalisation faces restrictions on the way it may treat foreign investors. The treatment must allow foreign investors to work towards the goal of profit maximisation - the host country must accept the logic of the market.

Stephen Vasciannie is professor of international law at the University of the West Indies and works part time in the Attorney-General's chambers.

(e) There shall be no performance requirements in respectof foreign investments. So, for example, the host State cannot insist that the foreign investment must have a certain level of local content, or that a certain proportion of the output must be for the export market.

(f) Disputes between the foreign investor and the host State must be resolved by third party arbitration, and not by the courts of the host State.

Generally, therefore, the developing country in the era of globalisation faces restrictions on the way it may treat foreign investors. The treatment must allow foreign investors to work towards the goal of profit maximisation - the host country must accept the logic of the market.