Latin America Investing to its Own Tune?

On 5 March 2013 the world’s headlines were filled with reports of the death of Venezuelan President Hugo Chavez.  A controversial leader, Chavez’s legacy is to have not only divided Venezuela from the West, but also to have unified some Latin American countries with his personality and anti-Western sentiment. One area where this is particularly apparent is international investment law. 

In 2012, Chavez controversially withdrew Venezuela’s membership from the World Bank’s International Centre for Settlement of Investment Disputes, or ICSID. Established by treaty and created to provide facilities for the settlement of international investment disputes, ICSID’s credibility has been questioned in recent years due to a perception that it, and the “club” of arbitrators it produces, is pro-Western.

Chavez’s actions were motivated by his belief in the pro-Western prejudice of ICSID and his desire to ensure that his government had control over Venezuela’s economy.  This was particularly at a time when Venezuela was increasingly defending its actions in international investment disputes. Many in the West were critical of Chavez’s withdrawal as being an anti-Western stunt.  However, these actions seem to have been part of a growing movement in Latin America away from international investment law and dispute settlement.

International investment disputes arise when a foreign investor alleges that a country, which is a party to an international investment treaty with the foreign investor’s national country, has breached its treaty terms. Commonly, international investment treaties are bilateral, between two countries, but can also be multilateral and provide protections for investors.  One of the most famous international investment treaties – in multilateral, not bilateral, form – is contained in Chapter 11 of the North American Free Trade Agreement (NAFTA).

International investment treaties include a standard set of protections for foreigner investors, designed to encourage investment between the countries that are party to the treaty.  These are:

• the guarantee that the investor will be afforded ‘fair and equitable treatment’ by the foreign government;
• the guarantee that the foreign investor will be afforded national treatment - equal to that provided to a country’s own nationals;
• the guarantee that the investor will be given most favored nation treatment, that is, treatment equal to, or greater than, that provided to investors from other foreign governments; and
• the guarantee that the investor’s assets will not be expropriated, or taken by the government. 

Controversially, these international investment treaties – although entered into between two or more different countries – generally allow an aggrieved private foreign investor to initiate arbitration proceedings against a country it alleges has breached the protections in the treaty as long as the investor is a national of, or has been incorporated in, a country that is a party to the treaty.  This aspect, many argue, erodes the power of sovereign, often democratically elected, countries to act in their country’s interests in favor of private investors, predominantly multinational corporations.

Adding to the controversy surrounding these treaties is the fact that the vast majority exists between developed countries (capital exporting states) and developing countries (capital importing states) – therefore between two parties in vastly different bargaining positions.  The treaties are often established with the intention of ensuring that foreign investors from developed countries are protected in less stable developing country regimes around the world.  Essentially this has meant that the majority of international investor arbitrations have been brought against developing country governments – particularly Latin American countries.

Venezuela, under Chavez’s leadership, is not the first country in Latin America to have objected to ICSID and the international investor law system – nor will it be the last.  This is because Latin American countries are increasingly facing international investment arbitral damages awards in the hundreds millions of dollars.

Argentina, a country that has been involved in a significant amount of international investment disputes, following on from the country’s economic collapse in 2003, announced its plans to withdraw from ICSID in January 2013, joining Bolivia and Ecuador who withdrew their ICSID memberships in 2007 and 2009 respectively.  Similarly Ecuador has withdrawn from a number of its bilateral investment treaties – thereby ceasing its obligations to foreign investors under these treaties. 

Chavez’s issues with ICSID were not part of a general rejection of international law – he was instrumental in developing the multilateral 2008 treaty that established the Union of South American Nations, UNASUR.  This body, a regional institution, like the European Union, aims to economically unify the region.

In fact, it was a selection of these UNASUR countries that recently met to consider the current impact of international investment law on Latin American countries.  What came out of that meeting was a proposal for the development of a new form of international investment dispute settlement for Latin America. 

The proposal advocates shifting international investment arbitration from ICSID to a body set up by UNASUR, which would then be overseen by a state-funded observatory.  The observatory would not only ensure fair and equitable investment treaty results, but also generally facilitate legal cooperation and harmonization amongst UNASUR countries to facilitate trade – both within and outside of Latin America.  The states that have developed the proposal – including Venezuela – are set to meet again in Venezuela in July to consider the issue further.

While it is unclear whether this proposal will amount to a final solution, it is clear that the anti-ICSID and international investment law system sentiment is not going away with the death of Chavez.  As a result, Western policy makers, international lawyers and investors will need to start seriously considering how to bridge the growing wedge on international investment law in Latin America if relationships on this issue are to be fostered in the future.