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Rumu Sarkar
International Development Law Rule of Law, Human Rights & Global Finance Second Edition
International Development Law
Rumu Sarkar
International Development Law Rule of Law, Human Rights & Global Finance Second Edition
Rumu Sarkar General Counsel Millennium Partners Charlottesville, VA, USA
ISBN 978-3-030-40070-5 ISBN 978-3-030-40071-2 https://doi.org/10.1007/978-3-030-40071-2
(eBook)
1st edition: © Rumu Sarkar 2009 2nd edition: © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020, corrected publication 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To my grandfather, Rabindra Mohan Biswas, M.A. (Econ.), LL.B. (Calcutta); And to my great granduncle, Panchanan Biswas, The true architect of all that lies within
Foreword (In Memoriam)
I am pleased to have been invited to contribute this foreword to a work that represents an important attempt to map the contours of the subject of development law by someone who combines the discipline of an academic with the insight of a practitioner actively engaged in the field. Although there is much in this area that is controversial, Rumu Sarkar’s work manages to avoid the pitfalls of ideology that seem so often to beset writings on this subject. The work begins with what the author has termed a “fin de siècle analysis” of trends affecting the milieu of development and the evolution of legal principles involved in this movement. Indeed, this stock-taking element is a constant feature of the book, being further represented by the author’s notion of the “Janus Law Principle,” emphasizing “the importance of looking backward into the past of a developing country as well as ahead into the future,” like the Roman god Janus. While, however, this is a work that sees the past—and context more generally: economical, sociological, philosophical—as an important foundation of the law relating to development, the work recommends itself primarily as a forward-looking attempt to examine the framework within which this law is evolving. A key feature of this analysis is the link identified at the outset and reflected in the title of the work, namely, the connection between the law relating to development and that pertaining to international finance. It is in this context, in particular, that Ms. Sarkar addresses the issues in Part II of the text under the general heading of “International Financial Architecture”—namely, international borrowing and the problems of the debt crisis, the trends and implications of privatization as a development strategy, and the importance of emerging capital markets, both as concept and practical reality. This is where the meat of the subject lies. Inevitably, in a work of this nature, which attempts to present a holistic view of a subject in a state of flux, there will be elements in the analysis that will occasion debate and dispute, both for what is said and for what is not. That is a good thing. The particular merit of the work lies in its view of the horizon and its ability to identify concrete landmarks thereon. There is bound to be debate about such matters as the New International Economic Order, the status of the “right” to development, vii
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the meaning of the notion that there is an “inchoate right to become a stakeholder in the development process,” as well as many other significant concepts. This work will set the debates in context, particularly in view of the clarity of exposition that comes from the fact that the author is writing about what she is engaged in on a day-to-day basis. The book is a valuable and welcome contribution to the scholarly literature in an increasingly important area of international and transnational law. Cambridge, UK
Elihu Lauterpacht
The original version of this book was revised. An correction to this book can be found at https://doi.org/10.1007/978-3-030-40071-2_10
Preface
The study of development law is a personal journey for me since it combines the disciplines of law, political theory, and philosophy, the three subjects of inquiry that fascinate me the most. After being privileged to teach a course initially entitled, “Law and Development,” at the Georgetown University Law Center for several years, certain overarching themes gradually became more apparent to me. I realized that these issues deserved a fairly lengthy, coherent treatment that lay outside the confines of the Masters of Law (LL.M.) course offering at Georgetown Law. Writing a book, although a serious undertaking, seemed to be the only logical step in the direction of fully exploring my thoughts about the subject (and my students’ reactions to it). Further, my hope was to transform my collective thoughts into a simplified and streamlined form that could be used in teaching the subject more effectively to my students, and to others. Moreover, it was the fortuitous combination of my teaching along with the necessary practical field experience required by and developed through my former position as an attorney with the U.S. Agency for International Development (USAID), Office of the General Counsel, that fueled this effort. My objective, as I later came to more fully articulate, was to bring a sense of cohesion and discipline to a fragmented and overly diverse topic. Over time, I, along with my students, had become more and more dissatisfied with using law review articles that varied widely in their topics, treatment of the subject, and points of view. My class lectures were the first (and only) time when my students and I had the opportunity to discuss the theoretical framework and practical considerations that constituted the foundation of what I began to see as an emerging legal discipline. However, describing the contours of an emerging legal discipline was, as I discovered, quite an undertaking, since it required that I define the subject matter, describe its contents, and persuade other academicians and legal practitioners that the subject is legitimately supported by substantive law principles. Chapter 2 is devoted to this effort and required extremely focused yet creative research and writing. I relied on the public international law origins of much of this subject matter and therefore divided the chapter into a discussion of parties, substantive legal ix
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principles along with establishing and enforcing legal norms. Rather predictably as a U.S. lawyer, I relied on U.S. constitutional law principles and federal case law, where practicable, in this attempt. For the most part, this work is designed to establish a foundation of substantive law principles of international development law. The text sets forth a legal framework oriented toward graduate law students (and their professors) and is designed to give a general, basic overview of the subject. While practitioners may find the policy-oriented aspects useful, the text is not actually designed to be a practitioners’ handbook. Additionally, the concept of “international development law” as set forth herein has been expanded now to include the element of “sustainable” development. The concept was first defined in the so-called Brundtland Report, “Our Common Future,” which set forth the following seminal definition: Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.1
This is the underlying idea supporting the text. However, the word, “sustainable” was not added to the title to make it “sustainable international development law” since I felt that it would make the title somewhat cumbersome. However, the concept of sustainability is implicit throughout the remainder of the text and so I wished to make that clear at the outset.
Schematic Overview of the Text This is a brief description of the contexts and the approach the text will undertake. At the outset, as I mentioned above, I had the privilege to teach a Masters of Law (LL.M.) course originally entitled “Law and Development” at the Georgetown University Law Center in Washington, DC, for several years. During that time, certain overarching themes became apparent to me. This law course led me to research and later to publish a text on international development law. The fortuitous combination of my teaching this LL.M. course while I practiced in the field of international development gave me a unique experience and perspective in developing the principles of international development law. In fact, during the time I was as an attorney with the Office of General Counsel, U.S. Agency for International Development (USAID), I began teaching the LL.M. course at Georgetown Law. The fusion of theory (teaching) with practice (my field experience with USAID) allowed me to define the landscape of international development law and global finance from a theoretical as well as a practice-based vantage point. This dualedged perspective ultimately led me to research and to write several previously See UN General Assembly, “Our Common Future,” A/42/427 (August 4, 1987), at Chapter 2, Sec. 1. This report was prepared by the United Nations World Commission on Environment and Development.
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published texts and law review articles on the subject for the benefit of my law students and hopefully for other practitioners in the field as well. This text is the continuation of my research and writing on this critical and very dynamic subject. The main discussion of this text treats two separate but interrelated aspects of international development law. The first part deals with theoretical and policy implications of international development law. In a nutshell, Chap. 2 sets forth a theoretical framework of analysis from which two other chapters flow: Chap. 3 which describes the underlying substantive principles of international development law, and Chap. 4 which examines whether there is a human right to development. The human rights dimension of international development law is treated separately from the initial theoretical discussion since this particular topic has its own public international law and private litigation aspects. For this reason, it is legally distinct and gives the most clearly “legal” and case-driven analysis of the general subject matter. The second part of the text addresses the international financial architecture and how the process of financing international development creates its own results, problems, and dilemmas. The nature and roles of the various parties to the development process (e.g., states, multilateral institutions, corporations, nongovernmental organizations [NGOs], individuals) create its own layer of complexity. However, the focus will be on international borrowing practices and investment rather than on trade issues. In sum, the text describes the overarching legal architecture between advanced nations and emerging, developing, and transitional countries. Let me also take this opportunity to explain why the text was formulated in this manner. Most importantly, I recognize that the contours and the content of what I have termed “international development law” is not by any means a settled matter of legal discourse among academicians or practitioners. The need to formulate this emerging legal discipline was necessary not only to address the burgeoning needs of my students but also to create a stable and sustainable framework of analysis for future legal academic and practical discourse on the subject. Of course, I am very aware that the contours, even as I have defined them here at the outset, are dynamic and will change over time. Indeed, I welcome that dynamism and look forward to the contributions of others to this subject matter as a continuing dialogue extending into the future. Accordingly, I recognize that the definition of “development” itself is very fluid and ever-changing, especially so as it may apply to law. Thus, certain definitional parameters are important to establish at the outset. In quoting a passage found later in Chap. 3, I write: Distinguishing international development law questions from private international law questions may not be easy since implications of both may be present in any given fact scenario. The distinction between an international legal issue and an international development law question may be drawn by asking the following question: Does a domestic law question of a developing country have a foreseeable impact on the development of that country? For example, if a host country wishes to build a seaport in order to boost its overall economic development, this does not necessarily raise a specific development law question. If, however, a host country is building a seaport using project finance that involves joint ventures with foreign operators and requires that a new foreign investment regime be put in place, then international development law questions do arise.
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Thus, under the rubric of “international development law” one may classify any subset of law below it, say, for example, family law, investment law, banking law, environmental law, trade law, human rights law, contract law, and many other law subjects. The nexus to a desired development result, regardless of how that desired end result may be defined, is the actual starting point for international development law. Naturally, other academicians and legal commentators may disagree with that definition from the start, but I believe that it illustrates the fault line between international development law and international law per se. I describe this as a “fault line” to underscore the fragility, volatility, and changeability of this relationship and know that it will, in fact, change in an ever-moving dynamic across the coming years and decades. Indeed, we should all welcome this continuing dialogue, and I invite the readers of this text to participate actively in this dialogue as well.
What the Text Is and What It Is Not In light of the fact that the queries posed by the subject of international development law are broad and ambitious, it would be remiss on my part not to advise the reader of the limitations of this text. This text examines the relationship of certain legal, historical, and philosophic ideas to one another within the context of the international development process. It is not intended to be used as a primer for international business transactions. Nor is this text intended to be a restatement of black letter law on subjects such as bankruptcy law, secured transactions, environmental law, or intellectual property law for example, as such subjects might affect legal relations between the developed and the developing world. This text is being proffered in hopes that it may provide an overview of the legal, philosophical, and financial underpinnings of international development going forward. Therefore, in setting the general parameters of the discussion below, let me make some important clarifications at the start. First, “international development law” (IDL) itself fits under the general banner of “international law.” However, it should not automatically be classified under the subject of “international finance law” or under “international economic law.” I realize that this will be a temptation because of the way that the text is written; however, that is not my intent. Moreover, please bear in mind that “international development” actually means “sustainable international development.” Second, I specifically chose to discuss the methods and implications of “financing” international development for the focus of the text. Not only do I feel that I may have something substantive to offer in this discussion, but financing development is
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in my view also the logical starting point for embarking on any concerted effort to encourage or facilitate “international development.” By this, I simply mean that whether the development project or focus is on maternal health, child survival and nutrition, species and habitat protection, fair trade or any number of issues, the financing of development (both on a micro- and macroeconomic scale) is the means by which development goals may be achieved. I regret any confusion I may have created on this point based on my previous writings. I trust that this clarification here will be useful in going forward. (I also recognize that other approaches may be taken to the subject matter of international development law, but I sincerely hope that this starting point is a useful one, both as an academic and as a practical matter.) Third, while the text does address many topics related to international development, it is not intended to be the “theory of everything.” In other words, IDL is not, and was never intended to be, a handbook on literally every subject related to international development. Not only will this surpass any expertise I may have to offer, but the text itself would become unwieldy and unusable. Accordingly, there are many important subjects that are not dealt with in any significant way, such as trade, immigration, environment, climate change, international arbitration, intellectual property rights, women’s rights, and international human rights. While these and many other subjects do fall under the rubric of IDL, they are not dealt with in detail in light of the fact that other texts, casebooks, and treatises dealing with these subjects, as written by subject matter experts, are widely found elsewhere. It is my hope that a focus here on financing international development is the logical starting point to which other academics and practitioners may add their own analysis on specific subject matters that are part of the IDL universe. More importantly, trade issues, while critical to the international development process, have not been addressed since those debates are so abundantly addressed elsewhere. Not only would it be redundant but it would also be less ably discussed within this context. It is the hope of the author that professors who may wish to use the text will supplement it with trade discussions and other materials, as they may see fit. In addition, while the importance of dispute settlement mechanisms, especially those focused on international investment arbitration and related dispute resolution approaches, cannot be overestimated, a discussion of these approaches will also, regrettably, be omitted in order to lend more clarity and succinctness to this text. International arbitration and host government regulation of foreign investment are vast and detailed subjects of law and legal practice that deserve a more thorough treatment than may be offered in this more limited context that is clearly focused on the impact of global finance on the international development process in general. Finally, it is my hope that this work adds to the growing and fascinating legal discourse on international development generally which, in my view, is one of the most dynamic areas of international law at present.
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In-Depth Descriptions of the Text Chapter 1 provides a retrospective on international development, including looking back at certain significant historial trends. It also addresses two very important failures that form the backdrop to this analysis. The first is the failure of the state, and the second is the failure of ideology. Both have created a cauldron of discontent in many developing countries whose repercussions are still being felt globally. Chapter 2 examines the theoretical underpinnings of international development law. An understanding of the theoretical background of the subject is quite important, particularly since the impact of certain philosophies and assumptions are clearly felt in the policy framework and the development strategies pursued by both developed and developing societies. The text endeavors to give a jurisprudential overview of the philosophies underlying development law and practice. Hopefully, this theoretical framework will set the tone for more specific legal inquiries. Chapter 3 outlines the contours of an emerging body of international development law with respect to its underlying fundamental principles, certain substantive principles of law, and the institutional framework in which development law is unfolding. Further, I believe an explanation is required as to why I choose to formulate fundamental principles of development law at the outset rather than deriving the same principles and rules from the actual practice of development law. In the effort to define substantive principles of development law, I had little choice but to rely on a deductive approach (where general propositions are used to support specific conclusions) rather than on an inductive approach (where specific instances are used to derive general principles). Generally speaking, the first approach forms the foundation of many civil law traditions and the second approach is widely used in common law jurisdictions. As a common law practitioner, it would have been my preference to review case law, rather than case studies, in order to formulate (or at least suggest the formulation of) general principles of development law. However, this was not an option available to me since the requisite underlying case law does not yet exist at this writing. Judicial and adjudicatory bodies (outside of trade-based tribunals) simply are not focused on development law-oriented questions. Therefore, I took the initiative to establish a rules-based framework of analysis in hope that it will, in time, provide the underlying legal support to a more practical, case-driven methodology. Chapter 4 examines whether there is a right to development by first reviewing the historical and legal genesis of the human right to development. Human rights analysis is very specific in the law, and it is perhaps the only chapter in the first part of the text that sets forth recognizably legal analysis. Moreover, the topic of the human right to development has been broadened considerably in recent decades by a certain “judicialization” of rights to include, for example, matters such as housing, clean water, and other entitlements, which heretofore lay outside an international human rights rubric. In light of the fact that litigation on these matters has commenced in earnest, certain rulings provide a new
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perspective on a legal entitlement to the dignity of the human person that is arguably encompassed within a right to development. In particular, new case law from the African Commission and from the African Court of Human and Peoples’ Rights adds a new and exciting dimension of judicial findings and analysis upholding a human right to development. Although this new legal dialogue is still evolving, it demonstrates a fresh new movement in this arena. Further, for those who intend to use the text for pedagogical purposes, this chapter is separate from broader theoretical discussions in order to be taught separately (or not) by the professor using the text. Finally, Chaps. 5–8 of the text introduce the international financial architecture that supports international development law. Many professors and legal commentators may question the inclusion of international borrowing, debt, and investment to the exclusion of international trade. While the impact of trade on development overall is unquestioned, the subject is too vast and complicated to be treated adequately here. The omission of the topic here is being done with the hope that it will help narrow and better define the subject matter of international development law and that, further, the reader will supplement the discussion with other texts, as necessary, to account for the omission. Private international transactions can act as a catalyst for initiating structural legal reform in the financial sector and may have many downstream implications. Thus, Chap. 5 examines the role of the state in financing development through international borrowing from private commercial, and public (e.g., multilateral and bilateral) banking sources. Sovereign borrowing practices of the past have failed to yield tangible development results and have contributed to the enormous debt crisis of the early- and mid-1980s, ultimately leading to the imposition of strict structural adjustment policies by the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD or the “World Bank”). This historical context will be critically reexamined with a view to looking prospectively to the future for more efficacious and better tailored approaches to international development. The overall historical context and the case studies of the Mexican and Asian debt crises, respectively, will be reviewed in Chap. 5 and critically reexamined. Using historical case studies and extracting possible “lessons learned” from them may prove useful in creating a legal foundation for assessing what has worked and what has not. This may be especially true in terms of analyzing IMF-imposed prescriptions for economic health and capital market development. Further, post-Heavily Indebted Poor Countries (HIPC) examples of Zambia and Ghana will be examined for the latest trends in sovereign debt crises. Moreover, strategic and tactical approaches to resolving the debt crisis will be examined with a view toward focusing on measures that may effectively prevent financial contagion in the future. In addition, the policy and geopolitical implications of establishing the New Development (BRICS) Bank and the Asian Infrastructure Investment Bank (AIIB) will be explored. As a final matter, Chap. 5 examines debt relief as a critical
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development strategy, along with the overall implications of the continuing evolution in the role of the state. In light of certain complexities posed by international borrowing practices by developing countries, Chap. 6 explores the gradual withdrawal of the state from productive sectors of the economy through privatization mechanisms. The seesawing between privatization and nationalization in certain developing countries will also be discussed, and recast in the light of new brands of “nationalism” that have far-reaching implications for international development law, global finance, and the politics that underlie them. The examination of the far-reaching consequences of sovereign debt crises of the past will be centered on: (1) privatizing the economies of developing countries, thus moving away from state ownership of productive sectors of the economy and moving the state into a more regulatory role; and, (2) developing a more robust private sector in developing countries with a view toward creating “emerging market economies.” The overall implications of this recent evolution in the role of the state will also be critically reviewed in this context. Further, Chap. 6 introduces Public-Private Partnerships (P3s) as a vehicle for balancing the interests motivating nationalization (i.e., state-led production) and privatization (i.e., private sector-led production) with a view toward resolving the tensions between the two. The case study of the Queen Alia International Airport, Amman, Jordan, will also be discussed in detail. In sum, this chapter will explore the role and effectiveness of leveraging international private capital by using a P3 approach in order to foster international development. Moreover, the downstream policy implications of foreign-based control of strategic sectors, such as the energy sector, through the privatization process will also be critically examined. Chapter 7 will critically review two factors that stem from the previous discussion set forth in Chaps. 5 and 6, namely, the severe economic repercussions caused by an over-reliance on short-term sovereign borrowing and the privatization of public sector enterprises. These policy shifts have resulted in a critical reconfiguration of the state’s role in the development process. Indeed, emerging economies are beginning to rely more and more on private equity markets to finance their development needs. The implications of this, including the impact this might have on advanced nations, will be explored along with various innovative financial methods that have been deployed to address the financial needs of emerging markets. A sampling of these financial models will be discussed and will demonstrate how new platforms have been created that allow for a broader partnership among public, philanthropic, and private sources of capital. Private international transactions may also act as a catalyst for initiating structural legal reform in the financial sector. Chapter 7 will probe the implications of this, including the impact this might have on advanced nations along with various innovative financial methods that have been deployed to address the financial needs of emerging markets. For example, a sea change in investment patterns as may be discerned from sovereign wealth funds, and other related portfolio-based investments. Specifically, socially conscious investing will be explored along with a
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discussion of social impact bonds and development impact bonds, particularly in the health sector. Finally, Chap. 8 addresses corruption and its overall implications for the international development process. Most importantly, structural legal reforms undertaken by both multilateral and bilateral institutions in order to stem the flow of corruption will be critically examined. This is a complex discussion that will also address, in part, the disruptions of international capital markets by: (1) the influence of transnational organized crime; (2) the impact of Islamic-based terrorist financing; and (3) the systemic corruption by public servants in the host government in question and by private banking officials both domestically and internationally. The convergence of all three has led to what may be viewed as a “perfect storm” leading to nearly intractable problems of corruption. This has created serious issues with respect to sustaining fully functioning, accessible, and non-corrupt international capital markets. As an added dimension, Chap. 8 will trace the linkage between failed and failing states that may lead to harboring international and Islamic-based terrorism. As a matter of fact, I wrote a different text on this topic alone, and while the totality of that discussion lies outside the mainframe of this text, certain relevant parts of that prior analysis has been incorporated in Chap. 8.2 This discussion, in part, explores how financing for terrorism, particularly Islamic-based terrorism, distorts and corrupts international financial markets to the detriment of the overall development process. Chapter 8 will also closely examine corruption and its downstream consequences in hindering development and, more importantly, its impact on the international legal framework within the ambit of global finance. Corruption is not, however, limited to developing countries. Indeed, the implicit acceptance and acquiescence to corrupt practices by advanced nations or by emerging economies makes it clear that there is plenty of blame to apportion among all of the development actors. This analysis is set forth with the hope that the real-world framework in which development projects and undertakings unfold will be better enabled to understand, contain, and help remove corrupt practices. In sum, this discussion is meant to put the dramatic legal changes, in international development law that have taken place over the past few decades, into perspective and to explore the relationships, if any, between these changes to understand their significance for the future.3
2 See Rumu Sarkar, The New Soldier in an Age of Asymmetric Conflict, (Vij Books, 2013); see also Rumu Sarkar, A Fearful Symmetry: A New Global Balance of Power? Grand Prix (First Prize) for a written essay awarded by the Fondation de Saint Cyr, Paris, France (May 27, 2008), published under the title, “Une Symétrie de la Peur : Vers un Nouvel Equilibre Mondial Des Puissances ?” (Paul Wormser, trans.) (CLD Editions, November 2008). 3 In fact, this text may be read as part of a three-part analysis encompassing the discussion set forth in this text; the transactional aspects of international development law as set forth in Rumu Sarkar, Transnational Business Law: a Development Law Perspective, (Kluwer Law Int’l, 2003); and further, the relationship of international development to the specific and unique problems related to failing states that may harbor Islamic-based terrorists. See Rumu Sarkar, The New Soldier in an Age of Asymmetric Conflict, supra.
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Methodology With regard to the methodology employed here, the subject matter of International Development Law: Rule of Law, Human Rights, and Global Finance is still evolving and comprises a rather unorthodox legal study. In fact, the normal channels of discourse (e.g., case law that distills principles of law from court cases) are not easily available to apply to this type of analysis. International development law also intersects other disciplines such as economics, philosophy, and political theory, which makes legal analysis of the topic somewhat unwieldy in this respect. Empirical case studies have been used illustratively to show certain trends and to help draw certain conclusions; thus, much of this material is anecdotal in nature. It is my hope that the concept of international development law is now more widely accepted by the legal community. This acceptance was unexpectedly but directly brought to my attention in the law review authored by I. Haque & R. Burdescu, “Monterrey Consensus in Financing for Development: Response Sought from International Economic Law,” 27 B.C. Int’l & Comp. Rev. 219, 243 (2004); see also Ibid., footnotes 62, 67, and 71 where this text is specifically cited. The authors assert that two fundamental law principles that I set forth, namely, mutuality and the duty of cooperation, are a matter of recognized state practice at this point. I am delighted to have articulated legal principles that have proved useful within the context of international development law generally. However, the most interesting, sustained, and profound debates of the text have taken place in my classroom and have been initiated by my students. I have been greatly enriched by their passionate commitment to the issues that this subject matter embraces. I greatly value their views on the subject, especially in relation to the theoretical notions that I have tried to impart to them. Through my teaching experience, I have learned a more “politically correct” application of the Socratic method, which is simply to call on the student who says nothing but whose face reveals the eagerness of his or her thoughts. (This is far more productive and less intimidating than calling on students by rote or by alphabetical order, where the effect, if not the purpose, is to demean or terrify.) Teaching has also provided me with the opportunity to apply the clinical method in the classroom by requiring students to negotiate complex and intensive in-class exercises, a requirement that many of my students have later told me that they actually appreciated in their later professional life as law practitioners. In-class exercises that I have used in the past have included hypothetical examples of housing guarantees, debt-for-nature swaps, and privatizations of state-owned enterprises, and project finance undertakings, all of which succeeded beyond any expectations I may have had. Indeed, this approach even succeeded in Poland where, as a Fulbright Scholar, I taught an intensive two-week course to Polish law students. To my amazement, they did extraordinarily well with in-class exercises even though this approach is not a traditional part of their legal pedagogy. Moreover, they were forced to speak English as I do not speak Polish!
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Another pedagogical tool I used in my law classes was to introduce the fictional novel as a means to thoroughly ground my students in a better understanding of “corruption” as a structural problem in international development. Rather than starting with a legal abstraction, I adopted the novel approach of my own college professor, James Mittleman, who used African novels to teach African political theory. I had my law students read Chinua Achebe’s No Longer at Ease which narrates a simple story (that ends in a corruption trial) in order to give my students a sense of a global phenomenon that is both legal in its implications and consequences, yet very human in its dimension. Indeed, I have ventured beyond legal academia as I have begun teaching international development issues more broadly to medical students, doctors, and global health practitioners as an Adjunct Assistant Professor at the Uniformed Services University of the Health Sciences, where I am a member of the teaching faculty of the Walter Reed National Military Medical Center, Bethesda, Maryland. I am greatly appreciative of the opportunity to do so since this subject is not only crossdisciplinary but also, as it turns out, cross-professional as well! On a personal note, during my research for this volume, I came across two works exploring the role of determinism that I found noteworthy since it may be applicable, generally speaking, for nations as well as individuals. The first was David Brooks’ The Road to Character, which explores the outward-looking virtues such as those listed on a job resumé as opposed to inner virtues such as humility, restraint, reticence, temperance, respect, and soft self-discipline.4 These inner virtues may be seen in nations as well as in people and often shape the individual destinies of both. The second book that also explored determinism in an unexpected way was Andro Linklater’s Owning the Earth: The Transforming History of Land Ownership, which describes the manner in which land ownership is implemented in any particular society has a profound impact on the governance and on the actual political form of governance within that society.5 While a discussion of determinism is interesting, it falls outside the scope of this analysis. This text is firmly rooted in the notion that the freedom to choose certain laws and not others may, in fact, determine a nation’s destiny. It is my hope that making such choices in law may and will be done with a view to furthering, and not hindering development. To my surprise, much of the framework of analysis set forth here has been quite resilient, as most recently demonstrated by the use of the prior edition of the entire text by Professor James Fry for his course on Law and Development at the Fletcher School of Law and Diplomacy in 2017. While I have preserved certain ideas, many of the case examples have been updated for greater relevancy and clarity as well as to streamline the text. Of course, some in-depth discussions have been shortened or, if their historical value has diminished over time, have been eliminated altogether.
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David Brooks, The Road to Character (Random House, 2015), at xvi. Andro Linklater, Owning the Earth: The Transforming History of Land Ownership (Bloomsbury, 2013). 5
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Further, my Georgetown law class lecture that was devoted to examining the impact of failed and failing states, which may lead to harboring international and Islamic-based terrorism, has now taken a different form. Indeed, I wrote several texts on that topic alone, which may be seen as an essential part of a whole.6 While the totality of that discussion lies outside the mainframe of international development law, certain parts of that prior analysis has been incorporated in Chap. 8. That discussion, in part, explores how financing for terrorism, particularly Islamicbased terrorism, distorts and corrupts international financial markets. This text on international development law has also provided me with a clear pedagogical tool that I have used to better understand and explain the theoretical and complex multidisciplinary background of the subject. It is my sincere hope that it provides the reader with the same opportunity. However, my true hope is that the ultimate end user of the text will not be my students, other law professors, or development specialists but rather the policymakers in the developing world who might find something useful written here that guides them toward making disciplined, ethical, and conscientious choices in the international development law process. While the scope and practice of development law may not yet be well defined, the field has increasingly gained in importance and relevance for the international law practitioner. In recognition of this change, this text offers a perspective on some of the legal issues and practice-oriented questions raised by a new and unprecedented global interdependence. This discussion is designed to give private international law practitioners, in particular, and public international law specialists, in general, an overview of international development law and some insight into certain current trends and worldwide developments that have an important impact on international legal practice.
What Is International Development Law? So, what exactly is the subject of international development law? For most legal practitioners, the subject of development law is not well understood or well defined. In fact, since international development law is generally not taught in most law schools nor is it a subject on U.S. bar exams, nor is it the subject of continuing legal education courses, exposure to the subject for most U.S.-based legal practitioners tends to be limited. Further, there appear to be no agreed upon notions of what the subject is or should be comprised of. International development law, at least to most observers and commentators, seems to be a multidisciplinary mixture of certain technical aspects of international corporate practice overlaid with economics, political theory, history, and philosophy.
6
See footnote 2, supra.
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To begin with, “development” seems to be a choice—that is to say, a decision to view certain issues from the perspective of encouraging the economic, political, legal, and even the cultural development of Asia, Africa, Latin America, the Caribbean, and Central and Eastern Europe along with Central Asia (i.e., the former Soviet Bloc). For most practitioners and theorists, however, the overall objectives of alleviating poverty and human suffering and of improving the human condition more generally are the desired end product of the development process. Amartya Sen has posited that: Development can be seen, it is argued here, as a process of expanding the real freedoms that people enjoy. Focusing on human freedoms contrasts with narrower views of development, such as identifying development with the growth of gross national product, or with the rise in personal incomes, or with industrialization, or with technological advance, or with social modernization. . . . If freedom is what development advances, then there is a major argument for concentrating on that overarching objective, rather than on some particular means, or some specially chosen list of instruments. . . . Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states. . . . In [some] cases, the violation of freedom results directly from a denial of political and civil liberties by authoritarian regimes and from imposed restrictions on the freedom to participate in the social, political and economic life of the community.7
Professor Sen’s interdisciplinary approach heralds a fresh, new approach to questions of development generally. However, at this stage, it is doubtful that a final and binding definition of development and consequently of international development law will be agreed upon by its practitioners or theorists. Suffice it to say that development law is designed to address complex issues of human endeavor and change and, even more broadly speaking, of creating the context for global change. In particular, international development law is concerned with analyzing, implementing, and evaluating global legal change. The subject of International Development Law: Rule of Law, Human Rights, and Global Finance has a new relevancy for both common law-based and civil law-based legal practitioners who are struggling to understand and compete in an increasingly globalized economy. The legal practice of most international law practitioners has been profoundly affected by these changes. Not only has the potential geographic reach of common law-based legal practitioners exploded, but the complexity of the legal questions they address has increased exponentially as well. Whereas, in the past, international law practice was usually confined to transactional work and related international litigation and arbitration in Europe, Latin America, and certain parts of the Far East, this is no longer the case. Countries in previously unknown or inaccessible parts of the world have suddenly burst on the scene offering vibrant legal markets where none existed before.
7
Amartya Sen, Development as Freedom (Alfred A. Knopf, 1999) at 3.
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The relations between developing countries or transitional economies and Western Europe and North America have taken a legal dimension that affects the international or general legal practitioner with an immediacy that did not exist before. Thus, perhaps on an unprecedented scale, international lawyers are trying to grapple with the questions and challenges that are raised by the subject area of development law. International legal practitioners are now being confronted with societies with radically different legal histories, institutions, and cultures in new legal markets in developing countries that may not necessarily have compatible legal infrastructures with their European or American counterparts. Further, these societies are themselves, in most cases, undergoing tremendous transformations and upheavals. Although the scope and practice of development law may not yet be well defined, the field has increasingly gained in importance and relevance for the international law practitioner. In recognition of this change, this text offers a perspective on some of the legal issues and practice-oriented questions raised by a new and unprecedented global interdependence. This discussion is designed to give private international law practitioners, in particular, and public international law specialists, in general, an overview of development law and some insight into certain current trends and worldwide developments that have an important impact on international legal practice. Any shortcomings or inaccuracies in the analysis presented are the full responsibility of the author. Washington, DC, USA
Rumu Sarkar
Acknowledgments
Once again, I owe my grateful and humble thanks to Professor Sir Elihu Lauterpacht, CBE, QC, for setting me on the right course so long ago when I was still his law student at Newnham College, Cambridge University, and for his kind words concerning this effort. Rereading his foreword is still a delight as it remains evergreen with possibilities, and I am delighted that it has been preserved in memoriam. In addition, I am wholly indebted to Sir Eli for his visionary support in suggesting that the work be submitted as a doctoral thesis, for which, much to my surprise, I received a Ph.D. (Cantab) (2000). My thanks also go to Baroness Onora O’Neill, the former Principal of Newnham College, Cambridge University, for so kindly hosting and mentoring me during the trying few days leading up to the viva (oral examination) at Trinity College, Cambridge. Professor Amartya Sen, the former Master of Trinity College, Cambridge University, also has shown his steadfast support and enthusiasm for the subject generally and my continuing involvement in it specifically, and for this, I am deeply grateful. To Martha Hoff, former assistant dean at Georgetown University Law Center, I owe my sincere thanks for taking a leap of faith in welcoming me to the law classroom at Georgetown. This was the first step in a long journey leading to this work. Moreover, I am very happy to have had the opportunity of meeting all of my many law students at Georgetown Law, whose ideas expressed in class and whose own experiences in the development law process have added invaluably to my own. I truly respect and value their experiences and, as my former students, they are the first wave of future policymakers who have listened carefully to, absorbed, and informed the ideas expressed in this work. They sat through the lectures where I endeavored to share the experiences that have so moved me and so profoundly changed my view of the world. The perspectives offered by my students have also helped clarify my writing in order to make this text a better pedagogical tool, so that teaching this subject has been both simplified and streamlined.
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Further, I wish to express my appreciation for the support and assistance in researching this work that I received from so many of my friends, including Ana-Mita Betancourt who had many interesting insights to share with me. I especially wish to thank Colonel Zachary Kinney (DCDF) (AF) (Ret.) who has been with me every step of the way starting from the first day of law school. Many of my former colleagues at the Georgetown University Law Center, the U.S. Agency for International Development (USAID), and the Overseas Private Investment Corporation (OPIC) (now the U.S. International Development Finance Corporation) also added their support into this effort. I especially owe so much to USAID since the work and the many adventurous travels I experienced through the agency were the beginning of a long and most rewarding personal and professional endeavor that culminated in this work. In particular, I also wish to thank Father Wlodzimierz Bronski for hosting me so graciously at the John Paul II School of Law in Lublin, Poland. It was at his kind invitation to lecture under my Fulbright Scholarship that led me to present many of the ideas contained in this text to his law students, and from whom I gained a truly new perspective on international development law. Indeed, it was much to my surprise that my Fulbright lectures led me to teach medical students (for the first time!) at the Walter Reed Military Medical Center where the U.S. Department of Defense trains its active duty medical doctors and global health specialists. I am deeply grateful to Colonel Brad Boetig for his inspired leadership, and for adding me to the teaching staff there as an Adjunct Assistant Professor, Division of Global Health, Uniformed Services University of the Health Sciences. And finally, to my loving mother, who always believed in the vistas I created for myself, I give my profound thanks. It is to my mother, a former professor of medicine, and my maternal grandmother and great-grandmother, who also both taught in secondary education, that I owe my own desire to teach. This work is also dedicated to my deeply loved departed father who, while lamenting my decision not to pursue medicine, inspired me with the example of his own fearless courage to seek out new challenges wherever in the world they presented themselves. The views expressed in this book are my personal views.
Contents
1
Introduction: Setting the Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 A Look Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Significant Historical Trends . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 The Failures of the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 The Failure of Ideology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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1 1 7 13 18 26
The Rule of Law: Theoretical Principles . . . . . . . . . . . . . . . . . . . . . . 2.1 Theoretical Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 Max Weber and the Sociology of Law . . . . . . . . . . . . . . 2.1.1.1 Other Philosophical Approaches and Voices . . . 2.1.2 Discourses on Development Theories . . . . . . . . . . . . . . . 2.1.2.1 Neo-Classical Economic Theory . . . . . . . . . . . . 2.1.2.2 Challenges to Neo-Classical Thinking . . . . . . . . 2.1.2.3 The Washington Consensus . . . . . . . . . . . . . . . 2.1.3 Another Perspective on Development Theory . . . . . . . . . . 2.1.3.1 Waves of Development Assistance . . . . . . . . . . 2.2 Modernization Theory Vs. Dependency Theory . . . . . . . . . . . . . 2.2.1 Modernization Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1.1 Modernization Theory in Practice . . . . . . . . . . . 2.2.1.2 Modernization Theory Questioned by Its Own Proponents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Dependency Theory: A Contrarian Voice . . . . . . . . . . . . 2.2.2.1 New International Economic Order (NIEO) . . . . 2.2.2.2 The Kyoto Protocol and the Paris Climate Change Accord . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2.3 Common But Differentiated Responsibility . . . .
29 29 30 33 34 35 36 39 42 43 43 43 45
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The Rule of Law
48 51 52 53 55
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2.2.3 A Reconciliation of Opposites? . . . . . . . . . . . . . . . . . . . 2.2.4 The Janus Law Principle . . . . . . . . . . . . . . . . . . . . . . . 2.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4
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58 61 65 67 68
International Development Law: Substantive Principles . . . . . . . . . . 3.1 Establishing the Parameters of International Development Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Parties Under International Development Law . . . . . . . . . . . . . . 3.2.1 The Rights and Privileges of Individual Actors . . . . . . . . 3.2.2 The Duties and Responsibilities of Sovereign Actors . . . . 3.2.2.1 Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Multilateral Actors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3.1 The Rights of Sovereigns Vis-à-Vis Multiyear Lending Institutions . . . . . . . . . . . . . . . . . . . . . 3.3 Fundamental Principles of International Development Law . . . . . 3.3.1 Mutuality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Duty to Cooperate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Equitable Participation in Development . . . . . . . . . . . . . . 3.3.4 Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.5 Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Substantive Principles of International Development Law: Establishing Legal Norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Contextual Norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Absolute Legal Norms . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Taxonomy of International Development Law . . . . . . . . . . . . . . 3.5.1 Absolute Norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 Globalized Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.3 Relative Norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Institutional Framework for International Development Law: Enforcing Legal Norms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
Is There a Human Right to Development? . . . . . . . . . . . . . . . . . . . . 4.1 Historical Antecedents to the Right to Development . . . . . . . . . . 4.1.1 A New International Economic Order . . . . . . . . . . . . . . . 4.1.2 Monterrey Consensus . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 The Judicialization of Human Rights . . . . . . . . . . . . . . . . 4.1.4 Human Rights in an International Development Law Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The History of the Right to Development . . . . . . . . . . . . . . . . . . 4.2.1 Rights and Duties Under the UNDRD . . . . . . . . . . . . . . . 4.2.2 Moving Past “Third Generation” Human Rights: Lessons from Islam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76 77 79 82 83 84 87 94 94 95 98 99 101 104 105 108 109 110 113 114 115 119 120 123 124 129 139 140 144 146 151 156
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4.3
An African Perspective on the Right to Development . . . . . . . . 4.3.1 A Peoples’ Right to Self-Determination . . . . . . . . . . . . . 4.3.2 The Africanization of Human Rights . . . . . . . . . . . . . . . 4.3.3 An African View of Human Rights . . . . . . . . . . . . . . . . 4.3.4 The Role of the State . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.5 Enforcing the Banjul Charter: The African Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.6 African Court on Human and Peoples’ Rights . . . . . . . . 4.4 Prospects for the Right to Development . . . . . . . . . . . . . . . . . . 4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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158 160 163 163 165
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168 170 172 174 175
Sovereign Borrowing and Debt: Legal Implications . . . . . . . . . . . . . 5.1 International Financial Architecture . . . . . . . . . . . . . . . . . . . . . . 5.2 The Sovereign Debt Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 The Mexican Debt Crisis: Phase I . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Debt Rescheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 New Money Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 IMF Structural Adjustment . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 A Critique of IMF Structural Adjustment . . . . . . . . . . . . . 5.3.5 Initial Results of the “Containment” of the Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 The Mexican Debt Crisis: Phase II . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 The Baker Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 The Brady Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Aftermath of the Brady Initiative . . . . . . . . . . . . . . . . . . . 5.5 The Mexican Debt Crisis: Phase III . . . . . . . . . . . . . . . . . . . . . . 5.6 Asian Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 Global Financial Contagion and Its Implications . . . . . . . . . . . . . 5.7.1 The U.S. Financial Contagion as a Case Study . . . . . . . . . 5.7.2 International Consequences of Global Market Contagion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7.3 The G-20 Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 Tactical Approaches to Resolving the Debt Crisis . . . . . . . . . . . . 5.8.1 Debt-for-Debt Exchanges . . . . . . . . . . . . . . . . . . . . . . . . 5.8.2 Debt-Equity Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8.3 Securitization of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8.4 Special Financing Techniques . . . . . . . . . . . . . . . . . . . . . 5.9 Debt Relief as a Development Strategy . . . . . . . . . . . . . . . . . . . . 5.9.1 A Menu of Options for Middle-Income Countries . . . . . . 5.9.2 Additional Approaches to Debt Relief . . . . . . . . . . . . . . . 5.9.3 Debt Relief for the Most Heavily Indebted Nations . . . . . 5.9.4 Bilateral Debt Relief: The U.S. Example . . . . . . . . . . . . .
181 183 186 189 190 193 194 198
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International Financial Architecture
202 203 203 204 207 208 215 220 221 222 223 224 225 226 228 228 230 230 232 233 234
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5.9.5 Bilateral Debt Relief Through Paris Club Reschedulings . 5.9.6 Multilateral Debt Relief . . . . . . . . . . . . . . . . . . . . . . . . 5.9.7 The HIPC Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 The Debt Crisis in Perspective . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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236 237 238 243 244
Privatization as a Development Strategy . . . . . . . . . . . . . . . . . . . . . 6.1 Nationalization V. Privatization . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 The African Lens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 The Case of Venezuela . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.3 Nationalization and Ethnicity . . . . . . . . . . . . . . . . . . . . 6.2 Changing the Role of the State . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 A State-Led Approach . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 A Post-Washington Consensus View of Privatization . . . 6.2.3 Privatization in Transitional Economies in Eastern Europe and Central Asia . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Privatization Strategies and Tactics . . . . . . . . . . . . . . . . . . . . . 6.3.1 The Czech Voucher Program . . . . . . . . . . . . . . . . . . . . 6.3.2 Pension Plan Privatization in Chile . . . . . . . . . . . . . . . . 6.3.3 Non-Traditional Privatization Methods . . . . . . . . . . . . . 6.3.3.1 Bond and Equity Financing of Private Sales . . . 6.3.3.2 Initial Public Offering . . . . . . . . . . . . . . . . . . . 6.3.4 Capital Market Development in the Privatization Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 The New Face of Nationalization Today . . . . . . . . . . . . . . . . . . 6.4.1 Potential “Lessons Learned” from Past Global Financial Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 Public Private Partnerships: A Way Forward? . . . . . . . . 6.4.2.1 Queen Alia International Airport: A Case Study . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2.2 Bolivia: A Cautionary Tale . . . . . . . . . . . . . . . 6.4.2.3 Privatization Strategies: Lessons Learned . . . . . 6.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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247 248 251 253 256 264 264 267
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269 271 271 277 280 282 283
Emerging Capital Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Official Development Assistance vs. Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Structuring Capital Markets in Developing Countries . . . . . . . . 7.2.1 The Role of the Financial System in Emerging Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Macro-Economic Impediments to Capital Market Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Steps Towards Capital Market Formation . . . . . . . . . . .
. 285 . 289 . 290 . 292 . . . . .
294 297 301 303 305
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7.2.4
Capital Market Development: Components and Sequencing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Foreign Investment in Emerging Capital Markets . . . . . . . . . . . 7.3.1 Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . 7.3.2 International Bond and Equity Markets . . . . . . . . . . . . . 7.3.2.1 International Bond Market . . . . . . . . . . . . . . . 7.3.2.2 International Equity Market . . . . . . . . . . . . . . 7.3.3 Foreign Portfolio Investment . . . . . . . . . . . . . . . . . . . . 7.3.4 Sovereign Wealth Funds . . . . . . . . . . . . . . . . . . . . . . . . 7.3.5 Socially Responsible Investing: A Diverse Partnership Among Government, Private and NGO Actors . . . . . . . . 7.3.5.1 Catalytic Investment . . . . . . . . . . . . . . . . . . . . 7.3.5.2 Socially Responsible and Impact Investing . . . . 7.3.5.3 Social Impact Bonds: Definition and Structure . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Legal and Regulatory Frameworks for Emerging Capital Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Prudential Regulation of Emerging Capital Markets . . . . 7.4.2 Legal Regulation of Emerging Capital Markets . . . . . . . 7.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Corruption and Its Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Failed and Failing States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.1 A Brief Overview of the Consequences of Corruption . . 8.2 Transnational Organized Crime . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 The Definition and the Historical Background of TOCs . 8.3 Global Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Transnational Organized Crime and International Terrorism: A Convergence . . . . . . . . . . . . . . . . . . . . . . 8.3.1.1 A Law Enforcement Approach to Prosecuting TOC Criminals and Their Counterparts . . . . . . 8.3.2 International Prohibitions Against Financing for Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 Extraterritorial Reach of U.S. Anti-terrorist Finance Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.4 The Islamic State of Iraq and Syria: A Case Study . . . . . 8.4 Public Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.1 United Nations Convention Against Transnational Organized Crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.2 United Nations Convention Against Corruption . . . . . . . 8.4.2.1 Money Laundering . . . . . . . . . . . . . . . . . . . . . 8.4.3 OECD Convention Combating Bribery of Foreign Public Officials in International Business Transactions . . 8.4.4 World Bank Voluntary Disclosure Program . . . . . . . . . .
. . . . . . . .
317 321 322 323 323 325 328 329
. 334 . 334 . 335 . 339 . . . . .
343 346 349 351 352
. . . . . .
355 356 360 362 363 365
. 372 . 375 . 377 . 378 . 380 . 385 . 386 . 389 . 390 . 392 . 393
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Contents
8.4.4.1 8.4.4.2
The World Bank VDP Process . . . . . . . . . . . . . Comparison Between the World Bank VDP and the U.S. Debarment Regime . . . . . . . . 8.4.5 United Kingdom Bribery Act 2010: A Bilateral Approach to International Corruption . . . . . . . . . . . . . . . 8.4.5.1 Bribery Cases Under the UK Bribery Act 2010: A Snapshot . . . . . . . . . . . . . . . . . . . 8.4.5.2 A Comparison Between the UK Bribery Act and the FCPA . . . . . . . . . . . . . . . . . . . . . . 8.5 Corruption in the Private Sector . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.1 Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.2 Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.3 FIFA: A Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
395 396 398 400 402 404 408 411 414 416 417
Afterthought . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420
Correction to: International Development Law: Rule of Law, Human Rights & Global Finance (Second Edition) . . . . . . . . . . . . . . . . .
C1
Glossary of International Finance and Investment Terms . . . . . . . . . . . . 421 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
About the Author
Rumu Sarkar is the General Counsel of Millennium Partners, an international development consulting group based in Charlottesville, Virginia, United States. Ms. Sarkar was also the former General Counsel for the 2005 Defense Base Closure and Realignment (BRAC) Commission. She also served as the General Counsel for the Overseas Basing Commission, prior to joining the BRAC Commission. Ms. Sarkar was also the former Assistant General Counsel for Administrative Affairs for the Overseas Private Investment Corporation (OPIC), and formerly a staff attorney with the Office of the General Counsel of the U.S. Agency for International Development (USAID). She began her career as a litigation associate with two Wall Street law firms in New York. Ms. Sarkar has also had a distinguished academic career both in teaching and publishing. She is currently an Adjunct Assistant Professor at the Uniformed Services University of Health Sciences, located at the Walter Reed National Military Medical Center in Bethesda, MD. She won a Fulbright Scholarship and lectured at the John Paul II School of Law in Lublin, Poland, in 2016. Professor Sarkar was also a Distinguished Guest Lecturer and served on the Advisory Board for Loyola University Chicago School of Law. She was also an Adjunct Law Professor and a Visiting Researcher at the Georgetown University Law Center where she taught several graduate law (LL.M.) seminars. Professor Sarkar has authored three legal texts and many law review articles. xxxi
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About the Author
Dr. Sarkar completed her undergraduate studies at Barnard College, Columbia University; her law degree from the Antioch School of Law; and her Masters of Law (LL.M.) degree and her Ph.D. in Philosophy from Newnham College, Cambridge University. She is a member of the NY, DC, and U.S. Supreme Court Bars.
Abbreviations
AAEA AAfEA ACP ADB ADR ADR AfDB AFP AMEX AOJ ATC ATRR BAFECR BIS BRIC CERDS CLS CSRC DFID DSB DSU EAI EBRD EEC EFM ESAF ESOP EU Ex-Im Bank
Association of Asian Election Authorities Association of African Election Authorities African-Caribbean-Pacific Asian Development Bank Alternate dispute resolution American Depository Receipts African Development Bank Administradoras de Fondos de Pensiones American Stock Exchange Administration of Justice Agreement on Textiles and Clothing Allocated Transfer Risk Reserve Bulgarian Association for Fair Elections and Civil Rights Bank for International Settlements Brazil, Russia, India, and China Charter of Economic Rights and Duties of States Critical Legal Studies China Securities Regulatory Committee Department for International Development (UK Development Aid Agency) Dispute Settlement Body of the World Trade Organization Understanding on Rules and Procedures Governing the Settlement of Disputes Enterprise for the Americas Initiative European Bank for Reconstruction and Development European Economic Community Emergency financing mechanism Enhanced Structural Adjustment Facility Employee Stock Ownership Plan European Union U.S. Export-Import Bank xxxiii
xxxiv
FDI FPI G-20 G-7 G-8 GAO GATT GDP GDR GNMA HIPC IBRD ICCPR ICESCR IDA IDB IFC IFES IFI IMF IPO JEXIM LDC LIBOR LOI M/EBO MFN MIGA NAFTA NASDAQ NCB NEP NGO NIE NIEO NPP NSE NYSE OAS OAU ODA OECD OPEC
Abbreviations
Foreign direct investment Foreign portfolio investment Group of 20 Group of 7 Group of 8 U.S. General Accounting Office General Agreement on Tariffs and Trade Gross domestic product Global Depository Receipt Government National Mortgage Association (Ginnie Mae) Heavily Indebted Poor Countries International Bank for Reconstruction and Development (World Bank) International Covenant on Civil and Political Rights International Covenant on Economic, Social, and Cultural Rights International Development Association Inter-American Development Bank International Finance Corporation International Foundation for Elections Systems International Financial Institution International Monetary Fund Initial public offering Japan Export-Import Bank Lesser Developed Country London Interbank Offered Rate Letter of intent Management/employee buyout Most Favored Nation Multilateral Investment Guarantee Agency North American Free Trade Agreement National Association of Securities Dealers Automated Quotations National Commercial Bank New Economic Policy Nongovernmental organization Newly industrializing economy New International Economic Order National Progress Party (Mongolia) National Stock Exchange (India) New York Stock Exchange Organization of American States Organization of African Unity Official development assistance Organization for Economic Cooperation and Development Organization of Petroleum Exporting Countries
Abbreviations
OPIC OTC PEMEX PRGF PSEC ROL RUF SAL SEC SECAL SFA SOE SPA SRO STAQS TRIMs TRIPS UCC UDHR UNCITRAL UNCTAD UNDP UNDRD UNESCO UNICEF UNIDROIT UNMIK UNTAC USAID USG WTO ZPA
xxxv
Overseas Private Investment Corporation Over-the-counter Petroleos Mexicanos Poverty Reduction and Growth Facility Philippine Securities Exchange Commission Rule of Law Revolutionary United Front Structural Adjustment Loan U.S. Securities and Exchange Commission Sectoral Adjustment Loan Special Facility for Africa State-owned enterprise Special Programme of Assistance Self-regulatory organization Securities Trading Automated Quotation System WTO Agreement on Trade-Related Investment Measures WTO Agreement on Trade-Related Aspects of Intellectual Property Rights Uniform Commercial Code (UN) Universal Declaration of Human Rights UN Commission on International Trade Law UN Conference on Trade and Development UN Development Programme UN Declaration on the Right to Development UN Education, Scientific, Cultural Organization UN Children’s Fund International Institute for the Unification of Private Law UN Interim Administration Mission in Kosovo UN Transitional Authority in Cambodia U.S. Agency for International Development U.S. Government World Trade Organization Zambia Privatization Agency
Chapter 1
Introduction: Setting the Stage
1.1
A Look Back1
At the outset, there are certain historical trends that form a backdrop to the overall discussion that follows and that merit some discussion. It is appropriate to begin with a fin de siècle analysis since we have ended a momentous century and have begun a new millennium. This is a most propitious time to revisit and assess the historical and other implications of the past eventful and stressful century and to explore the lessons it may hold for the future that is already overtaking us. First, the definitional changes that have taken place over the past several decades may be somewhat confusing and misleading. For example, most readers are familiar with the phrase “Third World” as it refers to the developing world. Third World was coined from the use of the term tiers état in an article by Alfred Sauvy published in L’Observateur on August 14, 1952, referring to the marginalized poor in France prior to the French Revolution of 1789.2 The so-called Third World defies definition since both gross domestic product (GDP) and per capita income are misleading indicators. Certain Arab countries, for example, have extremely high GDP levels and per capita figures that might actually disguise significant levels of poverty and deprivation for large segments of the population. Moreover, Third World countries generally do not have a set of unifying characteristics or a common history. Macedonia, Mali, and Mongolia, for example, can all be considered to be in the process of “developing,” but they do not share any common bonds of history, geography, or ethnicity.
1 Past editions of this writing labeled this section as a fin de siècle analysis which is specifically referenced by Professor Sir Elihu Lauterpcht in his foreword. This is the section that he was referencing. 2 Lewellen (1995), p. 3.
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 R. Sarkar, International Development Law, https://doi.org/10.1007/978-3-030-40071-2_1
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2
1 Introduction: Setting the Stage
The “First World” is comprised of a fairly homogeneous group of European and North American nations, and Japan, Israel, Australia, New Zealand, and South Africa, who fall outside the geographic confines of the First World. The G-6, originally created by France in 1975, was composed of the United States, the United Kingdom, France, (West) Germany, Italy, and Japan. The G-8 is now composed of the U.S., the U.K. France, Germany, Italy, Canada, Japan and Russia (suspended in 2014 after its invasion and annexation of Crimea), and now referred to as the G-7. This term is often used as shorthand to refer to advanced, industrialized nations that are market-based, democratic societies.3 The now-defunct “Second World” consisted of the Soviet Union, Eastern Europe, and Central Asia or, in other words, the “transitional economies” of the former Soviet Bloc. Its members scrambled to join the First World, and for some countries, such as the Czech Republic this transition was fairly easy. For others, such as Albania, the transition was slower and more painstaking. The transition of the Second World into the First World has important implications that will be explored later in this text. The Second World also included other socialist nations such as China, Cuba, Vietnam, and North Korea. However, the terminology of the First, Second, and Third Worlds (and even of the “Fourth World” of nations mired in poverty, such as Bangladesh, or collapsed in a state of political chaos, such as Sierra Leone) has been largely discredited due to the demise of the so-called Second World. Accordingly, the phrase, “transitional economies” now broadly refers to postconflict societies, and has become unmoored from its original meaning with respect to former Soviet bloc countries. The idea of “development” itself is problematic in this context since the designation of “less-developed” and “lesser-developed” countries (LDCs) implies that these nations are in the process of “becoming” and therefore have a somewhat reduced international status, an implication that is both patronizing and condescending. The developing world is also referred to as the Group of 77, a term that was coined in 1964. However, this is also a misleading term since, out of the roughly 180 states of the world, almost 120 can be considered to be “developing countries” or “transitional economies.” Moreover, it could also be argued that China, India, Mexico, Brazil, South Korea, and Taiwan should be graduated from this status based on their large and expanding industrial bases. In fact, BRIC, an acronym for the economies of Brazil, Russia, India, and China, was first prominently used in a 2003 Goldman Sachs report, which speculated that by 2050 these four economies would be wealthier than most of the current major economic powers.4 Of course, BRIC has now become “BRICS” with the addition of South Africa and the creation of the New Development Bank or the so-called BRICS bank, as discussed in more detail in Chap. 5. Geography is sometimes introduced into the picture so that development is judged by the parameters of “East-West/North-South.” The East-West dichotomy
3 See Ellis (1985), pp. 647, 648 n. 7. Note that the inclusion of the European Union (EU) created the G-9. 4 Ellis (1985), p. 647, n. 1.
1.1 A Look Back
3
tends to reflect the cultural divide between the industrialized “West” and the non-industrialized, non-Western economies. However, since “East” encompasses more than just Asia and must, by definition, include Africa and Latin America (located in the Western Hemisphere), the use of this terminology can be somewhat misleading. Moreover, this division has obvious flaws since Japan, for example, is a country in the Far East geographically but is a full member of Western-styled, democratic, market economies politically and economically, and is a member of the G7. Similarly, Australia and South Africa are in the “South” geographically but are recognized members of the “North” economically speaking. In addition, the ideologically based, neo-Marxist overtone of the “North-South” dichotomy is fairly obvious, and its legitimacy has waned in recent years. To add a further layer of complexity, Australia is part of the Pacific Rim and politically now tends to identify more with its Asian neighbors than its European antecedents. Australia’s actions make it clear that it is trying to join the “East Asian Tigers” led by Japan. This configuration of Far Eastern states has also been referred to as the “flying geese” formation, with Japan in the lead followed by the Newly Industrializing Economies (NIEs), i.e., Hong Kong, Taiwan, Singapore, South Korea, and Thailand. Indonesia, Malaysia, the Philippines, and now, Vietnam, Laos, and Cambodia are following their lead. China, of course, fits into its own category in this respect. If Australia is trying to join this flock, then it truly demonstrates a new dynamic in the development process where economic success rather than ethnicity is paramount. But perhaps the most important point regarding the geography of development is its haphazard nature of favoring certain countries over others. For example, subSaharan Africa’s growth is far outpaced by that of East Asia. Poor natural resources, bad governance, poor access to transportation, and short life expectancy due to tropical diseases account, in part, for the shortfall in sub-Saharan growth.5 For sub-Saharan Africa, and other parts of the world left out of the development equation, geographical hindrances may possibly be overcome by developing its human capital and creating a solid export-oriented manufacturing base. This means, in effect, that industrialized economies must open their markets to basic manufactured goods from these disadvantaged countries if broad-based, global development is to be achieved.6 However, even following this course of action is no guarantee that sustainable development will actually take place. Indeed, commentators have argued that a similar poverty gap exists between Latin American and Caribbean nations and East Asia. The Asian Development Bank has determined, for example, that simply following neoclassical prescriptions for capitalist growth may not be enough, however, citing Bolivia’s case.7 5 Id. This has been the subject of vigorous debate at the WTO whose discussion of the so-called “Singapore issues” examines the need for greater investment, trade facilitation, and more transparency in government procurements. 6 Leipziger (2001). 7 See Lewellen (1995), p. 65.
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1 Introduction: Setting the Stage
In addition, neo-Marxist dependency theorist Emmanuel Wallerstein devised a world capitalist system whereby an international division of labor separated the world into three parts: the core, the periphery, and the semiperiphery.8 The core represents all fully industrialized nations; the periphery refers to undercapitalized societies mainly involved in agricultural production and processing; and the semiperiphery has characteristics of both and would include countries such as Mexico, Argentina, and Taiwan. However, with the decline of this type of economic analysis, this terminology has all but been abandoned. For the purposes of this text, the terms “advanced” and “developing” will be used to indicate (however imperfectly) the problems and issues confronting various nations at differing stages of economic prosperity. In addition, the directional terms of East-West and North-South are also used (despite the polemical overtones) to indicate the clash of ideas and cultures within the framework of development law and international finance. It is my hope that the continuing dialogue between the “advanced” and the so-called “developing” nations of the world will bring about a value-neutral terminology that will clearly and fairly express the differences that are the subject of this discussion. Indeed, a new terminology may already have been ushered in, and that is the emergence of global capital economies.9 This viewpoint signals a subtle change that signals the beginning of a newly formed (albeit Washington, D.C.-based) international consensus.10 Making a successful transition from being a “developing nation” to being an “emerging economy” may be the most serious challenge facing the developing world today.11 As explored later in the text, the unimpeded access to world capital markets may be the final and dispositive determinant of development success, which has been described as “relational investment, beginning with the critical financial intervention of foreign direct investment (FDI).”12 In other words, FDI can (and perhaps should) encourage relationship-oriented development between the developing country and the catalytic force of the foreign entrepreneur. In substance, this relationship may not be so very different from the original traders who were the harbingers of past colonial ambitions. But FDI, if carefully programmed and with some considerable luck, can actually be designed to create and result in an “emerging economy.” This, in turn, may ultimately attract the far more elusive and unpredictable investor embodied in foreign portfolio investment (FPI). N. Kristof and E. Wyatt, “Who Went Under in the World’s Sea of Cash,” New York Times (February 15, 1999) at Al. 9 Salacuse (1999), pp. 875, 883, n. 39. 10 See Sarkar (2001), p. 469. See also Nichols (1999), pp. 229, 235, who uses “the term ‘emerging economies’ rather than the term ‘emerging markets’ because the term ‘emerging markets’ implies that the systems under scrutiny should only be viewed only as prospective buyers, whereas the term ‘emerging economies’ suggests that such systems should be treated as integral components of the global economy.” (Citation omitted). 11 Carrasco and Thomas (1996), p. 539. 12 Id. 8
1.1 A Look Back
5
If it is true that the world is divided into three parts (Gallia est omnis divisa in partes tres, or Julius Caesar’s declaration that all of Gaul [France] is divided into three parts), then the developing world might be continuously disaggregated into three tiers, harkening back to Alfred Sauvy. • Tier I consists of the so-called emerging economies that include the economies of Central and Eastern Europe (e.g., Hungary, Latvia, the Czech Republic) and those Latin American (e.g., Chile, Mexico, Brazil) and South and East Asian countries (e.g., India, China, Indonesia, South Korea) that are able to successfully attract FDI and wide-scale FPI. Indeed, many of these countries are rapidly “graduating” from the need to receive official development assistance (ODA) from international multilateral institutions such as the World Bank and from bilateral donors (e.g., the governments of OECD nations). Gradually, financial support from international donors is diminishing in importance in terms of sustaining their economies. The final test of “graduating” from Tier I is for the subject nation to itself become a bilateral donor. (However, the faltering status of both Venezuela and Brazil as of this writing indicate how dynamic and ever changing this classification is.) • Tier II consists of the nations who are unable to attract sustained FDI investments or gain full access to world financial markets. Thus, these nations are unable to break away from their need for concessional financing and, consequently, from their dependency on international aid. These are the plurality of developing countries who are caught in the never-ending cycles of performance-based lending where below-market interest rate loans are negotiated in exchange for meeting the specific, and often difficult, terms (i.e., conditionality) of such loans. Generally speaking, the conditionality of such loans is designed to: (1) meet macroeconomic performance targets and other politically based conditions precedent before loan disbursements are authorized to be made; (2) respond to structural adjustment programs imposed for failing to meet loan repayment terms or other fiscal crises; and, possibly, (3) participate in the Heavily Indebted Poor Countries (HIPC) Initiative13 under the powerful patronage of the
13 The Heavily Indebted Poor Countries Initiative (HIPC) is an IMF-sponsored comprehensive approach to debt reduction for poor countries that requires the participation of all multilateral and bilateral creditors that was launched in 1996. It was later supplemented in 2005 by the Multilateral Debt Relief Initiative (MDRI) in support of the Millennium Development Goals. The HIPC Initiative is a two-step process that has: (1) a decision point (e.g., the eligibility to borrow from the International Development Agency (IDA) of the World Bank and completion of the Poverty Reduction Strategy Paper); and (2) a completion point whereby the host country has satisfactorily completed agreed upon reforms and implemented the PRSP for a year. As of October 2017, the following countries were expected to qualify for assistance under the enhanced HIPC Initiative as heavily indebted poor countries: Afghanistan, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Republic of Congo, Côte d’Ivoire, Democratic Republic of the Congo, Eritrea, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tomé and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, and Zambia. Three of these countries are at a pre-decision point, namely, Eritrea, Somalia and Sudan.
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1 Introduction: Setting the Stage
International Monetary Fund (IMF). (The HIPC marked its twentieth anniversary in 2016.) Moreover, the IMF has also recently initiated a form of “relational investment” by now insisting that the social, environmental, educational, health, legal, and democratic frameworks are important pillars that support the macroeconomics of the development process. • Tier III consists of nations that have collapsed under the weight of civil war, insurrection, a breakdown of law and order (e.g., Somalia, Sudan, and the problematic example of Afghanistan), or the failure of the macro-economic integrity of the nation resulting in intractable poverty (e.g., Chad),14 or who suffer from an impaired international legal status (e.g., North Korea, Iran, Syria, Cuba). The full membership of these nations in the global economy is problematic, either because it is curtailed by the imposition of international sanctions or because they simply do not have the requisite apparatus of the nation-state necessary to operate effectively as functional state actors. This proposed division is artificial as well as dynamic in that no nation is necessarily classified in or condemned to remain in a particular category. This division is meant to provide the reader with a quick overview describing some of the systemic differences and underlying themes that both unify and separate the nations of the developing world. A three-tiered developing world begs the following questions to which there may not be any real answers. With regard to Tier I, is the creation and modernization of a fully capitalist economy, and its integration into world markets, the only sure pathway to development success? Can development be measured in any other terms? Or, in other words, is a unilinear progression from modernization to globalization the sole option available at this point? In view of the colonial past histories of many of the members of Tier II, are the costs of colonialism and post-colonialism now being borne by the developed world? While the HIPC and other potential measures may represent badly needed short-term relief for debt-distressed countries, if no real market-based discipline ultimately can be imposed on these economies, then is there a true long-term solution in sight? In other words, if Tier II countries are unable to meet market-based demands for economic performance (including debt repayment), will such countries be unable to access global financial markets effectively? If not, will their participation in world capital markets as genuine players be impaired indefinitely? If so, what are the longterm consequences of their being unable to participate fully in global capital markets? And finally, should Tier III countries be accepted but ignored? More broadly, should development assistance be aimed solely at preparing Tier II countries to graduate to Tier I status? Alternatively, should development assistance be aimed at stabilizing faltering economies and democratizing post-conflict societies? If not, can we afford to let these societies exist in global isolation? The following text puts these 14 See, e.g., N. Onishi Sr N. Bannerjee, “Chad’s Wait for Its Oil Riches May be Long,” New York Times (May 16, 2001), at Al.
1.2 Significant Historical Trends
7
and other questions in a new legal framework in which to regard them. In the final analysis, the solutions may be far more political than legal in nature, but the political will to forge such solutions has not been particularly forthcoming.
1.2
Significant Historical Trends
The far-reaching implications of having entered a post-Cold War era are yet to be fathomed and fully appreciated. However, before we reach any conclusions concerning the Brave New World that we have been ushered into, a brief examination of what has transpired historically may be useful. First, it should be noted that the era of colonialism, spanning the fifteenth through the twentieth centuries, set the stage for mercantile capitalism, which later matured into more advanced states of capitalism. Indeed, if I may be permitted the use of a broad brush, it may be said that the fifteenth century belonged to the Portuguese; the sixteenth to the Spanish; the seventeenth to the Dutch; the eighteenth to the French; the nineteenth to the British; and the twentieth to the United States in terms of establishing a new global hegemony. (Of course, this raises the question of who shall establish global dominion in the twenty-first century: will it be China, a classical empire recast as an emerging global economy?) Indeed, at the time of this writing, there is growing evidence that the post-WW II world order based on a rules-based internationalist approach is fractured at best, and being dismantled, at worst. In any case, there is no clear answer at this point. In sum, however, the economic and political relations that this historical process established between the colonizers and the colonized had profound implications for “development” in the latter part of the twentieth century. The historical, economic, military, cultural, sociological, psychological, and linguistic implications of colonialism have been the subjects of a rich body of scholarly, literary, and artistic works to which I have only the following footnote to offer. In my view, the historical process of establishing colonies overseas was episodic and haphazard. For example, was there some reason why Belgians, but not the Portuguese, colonized the Congo (Zaire)? Why did the British establish themselves in India but refrain from colonizing Argentina? And why did the French colonize Indochina/Vietnam rather than South Africa? Why did the Spanish dominate the Philippines but fail to intervene in Australia? Indeed, there was nothing intrinsic to Indian society, for example, that preordained a match with the British, or vice versa. Nor was there something intrinsic to the Ethiopian character that made Italian foreign domination inevitable. In fact, the choices of cash crops such as rubber (rather than jute) from Indonesia and tea (rather than coffee) from India that fueled colonial trade relations may also have been haphazard. My point here is simply to state that much of colonial domination (and the subsequent preferential trade relations it fostered in favor of the colonizing power) may be viewed as accidents of history rather than as inevitable historical events. Indeed, the historical determinism associated with the process of
8
1 Introduction: Setting the Stage
colonization often became a self-serving, misleading premise leading inevitably to false conclusions about the past and incorrect projections for the future. The end of World War II and its aftermath marked the beginning of a new political era when Latin American, Caribbean, African, and Asian colonies became independent nation-states. However, the Cold War that followed on the heels of the end of World War II created a world stage for ongoing international conflict which was fueled, in part, by a conflict in ideology. The end of the Cold War, ushered in by the fall of the Berlin Wall in 1989, has meant that past political relations organized around two competing camps is now defunct. Over the past decade, we have also witnessed another profound transformation: the final dismantling of preferential trade relations fostered in the postcolonial era. Preferential trade relations of the past have become archaic and outmoded. And now, perhaps for the first time in world history, there has been an emphatic leveling of the playing field where any commodity, product, or service may be obtained from anywhere by anyone, notwithstanding the past historical relations of the parties or the lack thereof. Whether we consider trading goods, technology, or capital, the marketplace has become truly global. While there may be some backlash whereby preferential trade relations may be sought out again particularly as a political tool to bring about policy changes or to sanction certain conduct, these new contemplated trade tariffs and barriers are new and do not conform to the post-colonial relations of the past. Thus, trade relations and capital investments are being “rationalized” in a new international economic order that does not conform to the outlines of the postcolonialist relations of the past. Perhaps most importantly, the resources of the developed world are now accessible to the developing world on an unprecedented scale. This is dramatically illustrated by the Internet, a concept that was revolutionary at its introduction but that has now become an indispensable way of life for most people across the world, including those living in developing nations. Moreover, the Internet is also reinforcing the English language as the lingua franca in a newly globalized world, and this reinforcement has downstream cultural implications, as addressed later in this Introduction. The UN Development Program, for example, developed an idea leading to the Mobile Internet Unit, a forty-foot bus loaded with twenty personal computers traveling to the remotest corners of Malaysia to introduce young minds to the Internet. The Unit leaves behind a personal computer, modem, and access to an Internet account so that students and teachers can continue to use the Internet. Access is available even to young Muslim girls from conservative homes, who are beginning to learn to do their homework using the Internet, send e-mail messages, and design Web pages.15 As a further illustration of this point, rural Indian fishermen have effectively moved into a “wireless” world by checking sales prices for fish and seafood at different ports via mobile phones while hauling in their catches! A fisherman from 15
W. Arnold, “Malaysia’s Internet Road Show,” New York Times (August 23, 2001).
1.2 Significant Historical Trends
9
Cochin, India, remarked that, “Life without a mobile phone is unthinkable.”16 Thus, rather than perpetuating extractive and exploitative relations between the developed and the developing worlds, changing technology has resulted in a critical reconfiguration of the relationship between the two. In fact, we can now see that there is a tidal wave of investment from the developed world that is a critical (and, in some cases, catalytic) ingredient in transforming developing countries into more fully capitalistic societies. In a very important sense, the developing world now has unprecedented, new access to the investment potential of the developed world. Thus, trade and investment relations between the developed and the developing worlds have become much more of a two-way street. This clearly has important implications for political relations between the two as well. Thus, institutional or portfolio investors in the developed world, as well as in the developing world, now have a real choice of whether to invest domestically or internationally. In fact, it could be argued that every individual is now a potential investor (and a stakeholder) in development, a truly revolutionary change from the past. The means by which development takes place can become accessible to almost everyone, and the peoples of the developing world have a newly awakened potential for moving away from a passive role to a more proactive one in determining their choices for development within their societies. Although, arguably, peoples of developing countries may now establish an economic stake in the development process by exercising the option of participating in emerging capital markets as entrepreneurs and/or investors, this remains highly problematic. First and foremost, this potential is more inchoate rather than real. Obviously, not every individual is empowered to participate in the international capital markets. The restraints of poverty, the lack of education, and gender, for example, are important impediments to equitable participation in the development process. Second, if emerging capital markets in the developing world are to succeed, they must meet the expectations of the sophisticated investor. In practical terms, this means that market performance will be judged closely, if not strictly, on the basis of whether the developing country has the ability to generate expatriable profits. In particular, portfolio investments in emerging capital markets tend to be performancebased, where only the short-term profitability of the enterprise will be rewarded by future investments. But more importantly, while the dependency relations of the past may be replaced by the global interdependency of the present and future, there is an implicit risk involved. This risk may be more insidious because it is either not perceived or is simply ignored. In the past, culture determined the market. For example, the preeminence of the seafaring capabilities of the Phoenicians, Greeks, and Arabs made them superb traders, which had important ramifications in their respective cultures and in the way in which they were perceived by other cultures. Now it is the market that determines culture. For example, whether you drink Coke and wear Levi’s jeans in
16
S. Rai, “In Rural India, a Passage to Wirelessness,” New York Times (August 4, 2001).
10
1 Introduction: Setting the Stage
Boise, Idaho, or in a remote village in Papua New Guinea, the cultural imprint is still distinctly American. And perhaps over time, even that imprint will fade. A globalized economy has the potential to give a new sovereignty to the will of the individual. In other words, the individual may have a new, untrammeled freedom to exercise his or her freedom of choice. The realm of choice may vary from culture to culture but, essentially, consumerism gives individuals the exclusive right to make independent decisions on how to appease their senses. By this, I mean that whether the sensations of seeing, hearing, feeling, tasting, or smelling are being considered, the film, music, fashion, restaurant, and perfume industries have a wealth of choices to offer. The universe of choices is practically unlimited since international trade, travel, and global satellite communications make the appeasement of the senses obtainable, affordable, and practically instantaneous. Thus, the Jeffersonian ideal of an individual’s “pursuit of happiness” (at least on a materialist basis) can now occur on a truly global scale. Ironically, perhaps, the need to seek out the fundamental meaning in life is often underscored when the requisite economic practicalities are provided for. Increasingly, the astronomical creation of incalculable wealth still leaves the successful entrepreneur groping for meaning. Once one’s material existence is amply provided for, then such individuals may ask whether they are truly “happy.” Although the “pursuit of happiness” is woven into the fabric of American life, the U.S. founding fathers did not provide a roadmap of how happiness was to be achieved. In other words, the Lockean ideal of “life, liberty, and property” and the Jeffersonian ideal of “life, liberty, and the pursuit of happiness” are fraternal twins, or two sides of the same coin. One is either pursuing material acquisitions or the meanings that lie beneath the surface of such worldly and mundane endeavors. In essence, one constantly seeks to fulfill one’s acquisitive or one’s spiritual nature, perhaps in turn. Science and technology, in the age that we live in, are creating an almost unlimited access to international markets by eliminating the traditional barriers or impediments of time, space, language, religion, disabilities, age, and gender. Alvin and Heidi Toffler comment that: “The emergent Third Wave economy,17 based on knowledge-intensive manufacture and services, increasingly ignores existing national boundaries. As we already know, large companies form cross-border alliances. Markets, capital flows, research, manufacture-all are reaching out beyond national limits. . . . New technologies are simultaneously driving down the cost of
17
See Alvin and Toffler (1993), pp. 248–249. The authors set out a new paradigm whereby the world is divided (yet again) into three parts. The First Wave economies are composed of natural resources-based rural economies that rely principally on agricultural commodities for their livelihood. These economies also tend to lack industries as well as “exportable knowledge-based services.” (Id. at 248). Second Wave economies rely heavily on manual labor and mass manufacturing. They also tend to rely heavily on imports of raw materials and need export markets for their mass-manufactured goods, and tend to be more urbanized. In contrast, Third Wave economies are “post-nations” who are neither agrarian nor industrial economies, but constitute the “newest tier of the global system,” with access to knowledge that is convertible to wealth. (Id. at 249).
1.2 Significant Historical Trends
11
certain products and services to the point at which they no longer need national markets to sustain them.”18 Eliminating national boundaries and the cultures contained within also means, however, leaving culture and cultural taboos behind. While some may feel that this is an intensely liberating phenomenon, it is important to recognize that the realms of ethics, morality, law and justice, religion, symbols and iconography, language, history, mythology, art, and culture are also being left behind. The aesthetic and cultural dimensions of human life are ill-equipped to deal with the magnitude and the speed of the changes that scientific endeavors and technology are bringing about. Once the cultural parameters are lost, the loss of respect for the culture and the violation of cultural taboos are the next, very predictable steps. The potential for the progressive degradation and trivialization of the human element in this context is also deeply disturbing. If, on the other hand, we opt for a pluralistic, relativistic world that seeks to preserve cultural traditions and religions, this may be viewed in some quarters as “anti-progressive” and backward (i.e., reflecting anti-globalist sentiments). In practice, societies that are protectionist in nature (whether in terms of trade, religion, or culture) are often viewed in this light. For example, trade protectionist practices of China are deeply frowned upon by other international states and actors such as the IMF.19 Not only does this impede the unrestricted flow of international commerce, but history has proven in case after case that protectionist policies are often selfdefeating as well. Nevertheless, the price of development may be exceptionally high. A world without borders profoundly changes the terms of reference. Culture, and the uniqueness and specificity implicit therein, is becoming marginalized and may gradually become irrelevant.20 Over time, we may be headed in the direction of greater technological complexity, but cultural oversimplification. In other words, the depth, passion, particularity, and contradictions of all cultures (especially those of
18
Id. at 206. See e.g., World Bank, “Protectionist Challenges to the U.S.–China Trade Imbalance Rise,” (July 18, 2008). 20 In fact, there may be a scientific basis for this, as Dr. Richard Nesbitt, a social psychologist at the University of Michigan, has been discovering. His studies reveal that cultural differences may actually determine the way in which a person thinks. For example, there are striking dissimilarities between Japanese and American observers of an animated underwater scene as the Japanese were far more likely to describe the background and context (e.g., the bottom was rocky, and the water was green), whereas the Americans tended to focus on the largest fish or objects (e.g., there is a trout swimming on the left). In sum, the preliminary conclusions reached dealt with a profound difference in philosophical approach whereby Western-educated persons tended to exhibit and be more comfortable with adversarial debate, formal logical argument, an intolerance for contradictions, and analytical deduction. In contrast, non-Western educated persons preferred a dialectical approach where contradictions were expected and tolerated, if not encouraged, and an appreciation for complexity and context. Further, the studies concluded that “neither approach is written into the genes: many Asian-Americans, born in the United States, are indistinguishable in their modes of thought from European-Americans.” (Erica Goode, “How Culture Molds Habits of Thought,” New York Times (August 6, 2000). 19
12
1 Introduction: Setting the Stage
developing countries) may become increasingly unknowable, and may soon be lost to us. Thus, the inherent risk in entering a post-Cold War era of development is one of losing the sacred meaning of culture, religion, language, symbols, and history. In the final equation, the quid pro quo of development may be the loss of culture and that, indeed, is a high price to pay. How is tradition to be reconciled with the unrelenting pace of technology? Consumerism has an overwhelming tendency to destroy specific cultures by creating a single global market which, in turn, tends to create an increasingly universalist culture. Will Western “universalism” triumph over non-Western “multiculturalism” through the force of the international market alone? Certainly, the “end of history” has been a much-touted idea over the past several decades, but a post-Cold War hegemony of Western economic, political, and legal ideals implicitly raises the question of whether multicultural diversity will be lost in the process. Indeed, Francis Fukuyama argues forcefully that encouraging such diversity may be shortsighted and self-defeating by stating decisively that “Culture–in the form of resistance to the transformation of certain traditional values to those of democracy—thus can constitute an obstacle to democratization.”21 Further, he posits that liberal democracy is the final end product of a “Universal History” insofar as: “For Hegel, the ultimate embodiment of human freedom was the modern constitutional state, or again, what we have called liberal democracy. The Universal History of mankind was nothing more other than man’s progressive rise to full rationality, and to a self-conscious awareness of how that rationality expresses itself in liberal selfgovernment.”22 The somewhat obvious limitations to this argument are twofold: first, it naturally assumes that the progression of history is linear rather than cyclical in nature; and second, it assumes that further evolution beyond the nation-state as a liberal democracy is not possible. The first perspective is decidedly Western-oriented, as the reliance on Hegel would suggest, and it leaves out the non-Western point of view that history moves in circles and not in straight lines. The second is contradicted by the emergence of the European Union that may be seen as a new “post-nation-state” within the context of a plurality of liberal democracies. In fact, the Internet may be the potential means for expressing an individual’s political will outside the context of nation-state boundaries altogether. Thus, both examples suggest that further evolution is already underway. Moreover, if viewed in terms of social Darwinism, the lack of cultural diversity can be seen as heralding the beginning of extinction. In a strictly biological sense, the lack of diversity in genealogical codes is a fatal flaw ultimately leading to an increased probability of congenital defects and, ultimately, extinction. Although the “end of history” is a superficially appealing idea in its orderliness, finality, and
21
Fukuyama (1992), p. 215. He further identifies the following cultural factors of a nation’s national, ethnic, and racial consciousness: religion; a highly unequal social structure; and the lack of the ability to create a civil society as possible impediments to democratization. 22 Id. at 60.
1.3 The Failures of the State
13
sense of inevitability, wishing for the twilight of the gods may be a highly problematic proposition. Indeed, the principal difference between the developed and the developing worlds is most often cast in economic terms (or the so-called “haves” and “have-nots”). Again, the salient difference between the two groups is their relative economic power to pursue their individual happiness. However, there is at least another difference, which may be more significant, ultimately, in terms of the subject matter of development law. That difference lies in the absolutist objectivity of the developed world versus the relativist subjectivity of the developing world. In other words, developed societies have the demonstrated capability to create, grasp, and rely on a belief system of abstract ideals (e.g., equal justice for all, equal application of the law, due process, democratic representation and governance). The subjective, personal element where loyalties are given not to abstract concepts but to families, patrons, rulers, and ethnic or religious identities or leaders tends to be much more prevalent in developing societies. For example, a U.S. lawyer working on legal reforms in Jordan explained the following dilemma that put this issue into sharper focus for me. For illustrative purposes only, if we take a hypothetical example of, say, the failure of a corporate insider in Jordan to release confidential information to his family and friends concerning a stock offering— this may be seen as a betrayal. It may be the perceived duty of such a corporate insider to provide his family and associates with the information and the means by which to enrich themselves. After all, such gains may fund a son’s (or a daughter’s) tuition to college. Thus, adhering to a legal regime where insider trading is a criminal offense may be seen as incomprehensible, alien, bizarre, and in conflict with the mores and expectations of Jordanian society. It may be a pat assumption for Western experts and consultants to feel that such a leap of faith on the part of the Jordanians is logical, necessary, or inevitable. It may be more helpful to establish a dialogue on the rationale for criminalizing insider trading and coming to terms with the underlying cultural mores that are affected (or offended) by this proposed new legal practice. If Western consultants assume that the criminal nature of insider trading is self-evident, then the interests of their mission to bring legal change, as well as the broader interests of the Jordanians, for example, may not be well-served. The struggle between the developed and the developing worlds is not only one of economic accumulation but is also a struggle of ideas around which societies are organized. It is this struggle that is taking place, in part, on the battlefield of law which is the subject matter of this discussion.
1.3
The Failures of the State
In engaging in this analysis, let us first examine what has failed. The two most noteworthy failures are, first, certain failures of the nation-state, and second, the failure of ideology. The new global interdependence that has become an undeniable
14
1 Introduction: Setting the Stage
fact of life tends to weaken certain familiar structures like the nation-state. At one extreme, we can consider the implications of the Maastricht Treaty and the proposed unification of Europe into a regional trade, political, and finance center. A unified Europe could, therefore, be seen as the first example of discrete nation-states evolving into a new federation that can legitimately be considered to have a “postnation-state” status. At the other extreme of this spectrum, we have witnessed the collapse of states such as Sudan, Somalia, Sierra Leone, and Afghanistan. These examples show that the state is also capable of imploding altogether leaving chaos, and political and economic uncertainty in its wake, without fulfilling its promise to its people. In certain important respects, the nation-state is becoming less powerful as an international actor. State sovereignty is certainly not what it used to be. In fact, the authoritarian character of the state has been rejected in almost a wholesale fashion, as we have witnessed in the emerging economies of Eastern Europe and Central Asia, leading to a great democratic experiment in many nations. In fact, history is rife with examples of authoritarian rule that was followed by a quick, efficient transition to democratic rule (e.g., Spain, Chile, South Africa, Nicaragua, and arguably the Philippines and Indonesia, who are still struggling with their democratic transitions). Thus, the nature of governance by the state in many developing countries is changing in response to demands for more transparent and more representative forms of government.23 (The exceptions of Iran, North Korea, Syria, and Cuba, among others, of course, remain problematic in this context. And indeed, the circle seems to be moving backwards in favor of authoritarianism, as discussed in Chap. 6.) Nevertheless, examples such as the ouster of an autocratic ruler like Mobutu Sese Seko in the Congo (formerly Zaire) indicate that authoritarian regimes in developing countries, as in transitional economies, are gradually being dismantled. However, Laurent Kabila’s days as Congo’s leader, following in the wake of Sese Soko’s dictatorship, were numbered. Interestingly enough, however, no one seemed to question the ascension of Kabila’s 29-year-old son, Joseph Kabila, to the presidency in February 2001, following Kabila’s assassination,24 which seemed more of an exercise of a patrimonial right rather than a democratic choice. Although Kabila’s term in office as president officially ended in November 2016, he continued in office until January 2019. Kabila was replaced as prime minister by Felix Tshisekedi, who finally named his cabinet seven months later in August 2019.25 Western-based observers may have the tendency to assume that all nation-states are, sui generis, organized around the principles espoused by Enlightenment
23
Of course, this area is rife with contradictions since autocratic rule is not necessarily incompatible with free enterprise as demonstrated by the examples of Augusto Pinochet encouraging financial liberalism in Chile, and China establishing free trade zones along the coastline along with fully integrated local and international capital markets. 24 M. Turner, “A Glimmer of Hope for Congo,” Fin. Times (May 9, 2001), at 17. 25 Tom Wilson, “Congo forms government seven months after Kabila steps down,” Fin. Times (August 26, 2019).
1.3 The Failures of the State
15
scholars such as Charles Montesquieu (and his counterparts in the United States, the U.S. founding fathers). To wit, it is far too easy to assume that every modern state is based on a separation of powers among the executive, legislative, and judicial branches of government.26 In a developing world context, however, this may not be the case. Executive power may be understood to be, in a much more literal sense as the sovereign right of a king or, in other words, a modernized form of a postfeudal concept, where loyalty is rewarded by favoritism, cronyism, and nepotism; and where tribute may be expected in the form of kickbacks, pay-offs, and “baksheesh” resulting in a corrosive and endemic corruption.27 Further, this executive power may not be effectively divided, shared, or balanced by other branches of government (e.g., the legislative branch and the judiciary). To increase the likelihood that outside interventions (whether in the form of development assistance or other means) to be successful, it may be time to reexamine the nature of the social contract that binds the members of developing nations in Latin America, Asia, and Africa. Clearly, it is not one based on Lockean notions of protecting private property or restricting the state from interfering with personal liberties. Perhaps the fairly recent events where the former war veterans’ takeover of private property of white Zimbabweans without due process (and with the overt complicity of the government) may be an illustration that modern concepts of property ownership do not strictly apply.28 A different sense of entitlement, as sanctioned by the state, may be based on a post-feudal concept of property ownership that is not, and does not, need to be supported by the Enlightenment-influenced “modernist” need to provide due process or fair compensation for lands so seized. President Robert Mugabe finally resigned from office on November 21, 2017, after
See generally Montesquieu (1989). (The first edition was published in 1748). Many commentators have struggled with the idea of explaining and dealing with corruption in the developing world context. The only definition that l have been able to formulate may be deceptive in its simplicity, but simply posits that corruption rewards bad conduct and, in effect, punishes good conduct. Personal connections are valued over meritorious conduct, thus subverting any incentive (or even the means by which) to achieve anything worthwhile based on one’s own merit and strengths. Thus, “bad conduct” in the form of bribes, nontransparent practices, and cronyism are favored over “good conduct” or, in other words, meritorious actions. Over time, this weakens the political, economic, and ultimately, the social fabric of the society in question. 28 Former President Robert Mugabe of Zimbabwe forced the chief justice of the Supreme Court, Anthony Gubbah, to resign, since he was apparently enraged at the Court’s rulings that black Zimbabweans stop their illegal occupations of hundreds of white Zimbabwean-owned farms. These occupations have nonetheless prompted the exodus of foreign investors and local professionals, a general strike, and other unrest including bombings and arrests of opposition leaders. See R. L. Swarns, “Zimbabwe’s Judges Are Feeling Mugabe’s Wrath,” New York Times (February 4, 2001); and R. I. Rotberg, “Zimbabwe’s Spreading Misery,” New York Times (May 14, 2001). Of course, since black farmers now had the land but displaced white farmers had the experience, Zimbabwe was forced to solicit a partnership between the two. See Keith Sieff, Zimbabwe’s white farmers find their services in demand again.” The Guardian (September 25, 2015). N.B. Robert Mugabe died on 6 September 2019. See “Robert Mugabe, Zimbabwe’s Strongman Ex-President, dies aged 95,” BBC News (September 6, 2019). 26 27
16
1 Introduction: Setting the Stage
37 years of autocratic rule in Zimbabwe, and left a legacy of corruption in his wake.29 Indeed, the same scenario is being played out now in South Africa where Zimbabwe-like land seizures passing to state ownership is being strongly advocated with uncertain results.30
Hernando de Soto observed that: Extralegal social contracts on property underpin nearly all property systems and are part of the reality of every country, even in today’s United States. As Richard Posner has reminded us, property is socially constructed. This means that property arrangements work best when people have formed a consensus about the ownership of assets and the rules that govern their use and exchange. . . . Efforts to reform property rights fail because officials in charge of drafting new legal rules do not realize that most of their citizens have firmly established their own rules by social contract. . . . That is why property law and titles imposed without reference to existing social contracts continually fail: They lack legitimacy. To obtain legitimacy, they have to connect with the extra legal social contracts that determine existing property rights. . . . The only systematic way to integrate these social contracts into a formal property system is by building a legal and political structure, a bridge, if you will, so well anchored in people’s own extralegal arrangements that they will gladly walk across it to enter this new, all-encompassing formal social contract.31
This bridge-building has yet to take place in most of the developing world. Moreover, perhaps certain underlying and strictly Lockean, formalistic notions should now be softened and relaxed in order to admit the possibilities suggested by a more Rousseauan approach, thus permitting the “social contract” to be recast along the lines already established by societal, religious, familial, tribal, or clan lines. Of course, this may mean that the new face of the developing world may not culminate in the image of highly successful OECD countries, but rather take on a different persona that may offer exciting new possibilities. Second, the failure of the state in terms of its entrepreneurial function is also very important in this context. Following the independence of former colonized states after World War II, the state was usually the only creditworthy, corporate entity capable of assuming an entrepreneurial role in society to provide for the basic economic needs of its citizens. Thus, the nascent independent state generally had no choice but to take over the productive sectors in transportation, mining, agriculture, etc. The nationalization of enterprises and industries in support of the state’s efforts not only echoed national sentiment in protecting the hard-won patrimony of the developing country but also may have been the only viable option since the private sector may have been weak or nonexistent.
See e.g., David McKenzie, et al., “Robert Mugabe Resigns After 37 Years as Zimbabwe’s Leader,” CNN World (November 21, 2017); see also Columbus Mavhunga, “Zimbabwe Parliament warns Mugabe: Turn up for hearing or face jail time,” CNN World (May 29, 2018), where Mugabe was sought for questioning on the loss of $15 billion in diamond revenue. 30 See “Land reform will continue to be one of South Africa’s biggest problems,” The Economist (April 25, 2019). 31 de Soto (2000), pp. 171–172. 29
1.3 The Failures of the State
17
However, these nationalizations often led to huge, massive, and inefficient and unprofitable state-owned enterprises (SOEs), which were later privatized. The state, in many cases, is beginning to relinquish its role in the productive sectors of the economy and delegating that function, almost exclusively, to the private sector. (Even the United States, for example, initiatives to privatize schools and other traditional government functions are being experimented with, although the final results are unclear.) In the developing world, in particular, the private sector is assuming greater importance and is the increasing focus of attention of both domestic and foreign investors. Further, the state in most developing countries heavily relied on international borrowing from both commercial and multilateral sources to finance development projects. This strategy proved to be both short-sighted and ineffectual. The failure of state policies regarding international borrowing strategies in order to finance development, and the crushing debt burden caused by such borrowing practices, further impeded the development process. As developing nations became more indebted to foreign banks and institutions, development floundered. The resulting failure of the development process created severe macroeconomic imbalances that led to IMF and World Bank intervention. This intervention usually took the form of structural adjustment programs, which met short-term balance-ofpayments crises but which also led to the imposition of harsh austerity measures creating political as well as economic instability. This was particularly true in cases where adequate social safety nets were not in place. The inability to manage the economic health of the nation further debilitated the entrepreneurial function of the state and created a persistent crisis of confidence. Further, as a strategy for dealing with the huge government deficits created by sustaining inefficient and unprofitable SOEs, the IMF and other international advisors recommended that developing states privatize their SOEs. Privatization, in turn, is leading to the creation, deepening, and strengthening of domestic capital markets. As the following discussion in this text will demonstrate, the creation of these so-called emerging capital markets is a vitally important part of the global development process. These emerging capital markets are the new (and internationally favored) source of financing development. Of course, the development and regulation of emerging capital markets is a complex process of which privatization plays but a vital, contributory part. During the past decade, the emergence of these capital markets has literally exploded onto the worldwide financial scene. The implications of this, not only in financial terms but also in terms of revising the role of the state will be explored in this text. Moreover, it should be noted that these emerging economies are also a critical factor in further dismantling the preferential and predetermined trade relations of the past between the developed and the developing worlds. The opportunities to invest capital are now practically available worldwide, which has far-reaching implications. However, one cautionary note may be appropriate in this context insofar as a single-minded focus on macroeconomic reforms alone may sound the death knell
18
1 Introduction: Setting the Stage
not only for the overall process of democratization but also of the ruling party’s longevity. The example of Brazil illustrates this. Ms. Dilma Rouseff had not held elected office until her predecessor, Luiz Inácio da Silva, anointed her as his heir after other leaders in the ruling Workers’ Party were tarnished by a vote-buying scandal. The Brazilian Senate voted on August 3, 2016 to impeach Ms. Rouseff, Brazil’s first woman president, on charges of manipulating the federal budget to conceal budgetary problems of the nation. It also ended 13 years of rule by the Workers’ Party. “She simply lied through her teeth to get elected, forming a wave of national indignation,” said Antonio Risério, a historian and cultural commentator. Indeed, former Brazilian President da Silva was himself convicted on corruption charges and sentenced to nearly ten years in prison based on a corruption scheme of kickbacks related to Petrobras, Brazil’s oil company.32 Rouseff’s successor, Michel Temer, was subsequently indicted on corruption charges by Brazil’s Prosecutor General, Raquel Dodge, on December 19, 2018. President Michel Temer was charged with corruption and money laundering that was uncovered in an investigation into graft related to port concessions. He was forced out of office and on January 1, 2019, was replaced by far-right nationalist politician Jair Bolsonaro, Brazil’s new president. Bolsonaro has called on Brazilians lawmakers to help him “free the nation definitively from the yoke of corruption, crime, economic irresponsibility and ideological submission.”33 Presidents Temer, Rousseff and da Silva may have done well to learn from the example of Nelson Mandela, who ushered in the transition to an apartheid-free South Africa, and who exited the political process with the unshakable faith that the transition was complete and that he was entirely dispensable to the process. He assumed the role of senior statesman, and his unwavering faith was more than sufficient to legitimize and stabilize the transfer of power, thus rendering any further or outside intervention nugatory. In contrast, both Brazilian leaders, by exercising poor judgment in a desperate effort to retain power, only jeopardized the considerable gains that they may have forged while they were the former presidents of Brazil. Clearly, this story, and the backdrop of international development, are still unfolding.
1.4
The Failure of Ideology
The second most important failure that we have witnessed over the past several decades is the failure of ideology. World War II was fought against, and was a triumph over, fascism. The end of the Cold War marked the demise of Stalinism and
“Former Brazil President Lula sentenced to nearly ten years for corruption, Reuters (July 12, 2017). 33 “Bolsonaro sworn in as Brazil’s new president, vows to fight corruption,” PressTV (January 1, 2019). 32
1.4 The Failure of Ideology
19
Soviet-style communism adopted by the so-called Second World. Even the derivative forms of Soviet-backed socialism prevalent in certain African and Asia countries have faltered and failed. With the fall of the Berlin Wall in 1989 and the subsequent collapse of the Soviet Union ushering in a post-Cold War era, it is becoming increasingly apparent that the old policies of containment, proxy wars, traditional nuclear disarmament strategies, and seeking to enlarge political spheres of influence are now defunct. Now that the Cold War lid has been lifted off Pandora’s Box, so to speak, ethnic and religious-based conflicts have erupted with an unexpected force. For so long, these types of conflicts and issues lay buried beneath the frozen nitrogen of the Cold War, and the historical and personal enmities between peoples were overlooked, ignored, or manipulated to further other political objectives in proxy conflicts. These internecine ethnic conflicts are not, however, based on ideological differences but on very old wounds buried in history and time that are now resurfacing. For example, the massacre of thousands of Hutu in Burundi in 1972–73 were revisited upon the sons and daughters of the Tutsi a generation later.34 Unless there is a consensual, agreed upon strategic response to humanitarian crises, we will remain vulnerable to these types of conflicts. Further, political destabilization will be caused not by superpower competition for supremacy but by potential nuclear proliferation to secondary and tertiary powers such as Pakistan, Iran, and North Korea. Political conflict will no longer be drawn along strict ideological lines. Moreover civil wars and the break-up of states will continue to remain as existential threats. Samuel Huntington writes: “It is my hypothesis that the fundamental source of conflict in this new world will not be primarily ideological or economic. The great divisions among humankind and the dominating source of conflict will be cultural.” Nation states will remain the most powerful actors in world affairs, but the principal conflicts of global politics will occur between nations and groups of different civilizations. The clash of civilizations will be the battle lines of the future.”35 Edward Said takes notable exception to this position by claiming that: There are no insulated cultures or civilizations: Any attempt made to separate them into water-tight compartments alleged by Huntington does damage to their variety, their diversity, their sheer complexity of elements, their radical hybridity. The more insistent we are on the separation of cultures and civilizations, the more inaccurate we are about ourselves and others. The notion of an exclusionary civilization is, to my way of thinking, an impossible one. The real question then, is whether in the end we want to work for civilizations that are separate or whether we should be taking the more integrative, but perhaps more difficult, oath, which is to see them as making one vast whole whose exact contours are impossible for one person to grasp, but whose certain existence we can intuit and feel. In any case, a number of political scientists, economists, and cultural analysts have for some years been speaking of
34 35
Umozuike (1983), pp. 902, 903. Huntington (1993), p. 22.
20
1 Introduction: Setting the Stage an integrative world system, largely economic, it is true, but nonetheless knitted together, overriding many of the clashes spoken of so hastily and imprudently by Huntington.36
Huntington also argues that: [c]ultural and civilizational diversity challenges the Western and particularly, American belief in the universal relevance of Western culture. . . . Normatively the Western universalist belief posits that people throughout the world should embrace Western values, institutions, and culture because they embody the highest, most enlightened, most liberal, most rational, most modern, and most civilized thinking of humankind. However, he concludes that: “[i]n the merging world of ethnic conflict and civilizational clash, Western belief in the universality of Western culture suffers three problems: it is false, it is immoral and it is dangerous.” Thus, “the requisites for cultural coexistence demand a search for what is common to most civilizations. In a multicivilizational world, the constructive course is to renounce universalism, accept diversity, and seek commonalities.” Indeed, “[t]he security of the world requires acceptance of global multiculturality.”37
Not only does Huntington’s thesis reveal the peculiar Western preoccupation with the idea of universalism (of Western ideals, of course), but it also reveals the deeprooted distrust, fear, and antipathy that most Western scholars feel toward the particularism of other cultures. In other words, universalism is fine as long as it is Western ideals that are being universalized.38 Although I agree with Huntington’s conclusion, if not his means of reaching that conclusion,39 as I indicated previously, a fundamental and critical difference between Western and non-Western cultures is the ability to absorb abstract ideals.
36
Said (2000), p. 587. Huntington (1996), pp. 310, 318. 38 The resistance to Western universalism, particularly to American hegemony, was rather pointedly made clear in a nineteen-member conference held in Ottawa, Canada, on June 30, 1998. Canadian officials organized the conference (to which U.S. officials were specifically not invited) in order to facilitate closer cooperation among the invitees to protect their respective cultures from the onslaught of the U.S. entertainment industry. At the conference, the participants emphasized that culture was an important component of a nation’s identity and not simply another commodity that should be made subject to treaties on international free trade, in particular, the OECD-sponsored Multilateral Agreement on Investment. See A. de Palma, “19 Nations See U.S. as Threat to Cultures,” New York Times (July 1, 1998), at Bl. 39 Rather pointedly, Huntington states that: “Multiculturalism at home threatens the United States and the West; universalism abroad threatens the West and the world. Both deny the uniqueness of Western culture. The global monoculturalists want to make the world like America. The domestic multiculturalists want to make America like the world. A multicultural America is impossible because a non-Western America is not American. . . . The preservation of the United States and the West requires the renewal of Western identity” (Huntington 1996, p. 318). The idea that only “Western” cultural ideals can legitimately constitute what is “American” simply cannot be supported. Indeed, this argument misses the point completely since American “Westernized” culture is able to incorporate and assimilate non-Western cultures with such shocking success. In fact, immigrant cultures in America clearly assimilate with the mass culture over time, and in some cases, very speedily. This incorporation is possible because the underlying theme is to succeed in a Western-based, capitalist world. “Culture” in this context is immaterial. It is the ideals and cultural specificities of other cultures that are sacrificed in this process, not those of Western culture. 37
1.4 The Failure of Ideology
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Ethnic and religious loyalties are felt at a deeply personal level by most individuals in non-Western societies. This particularism is abated only through exposure to (and schooling in) the Western ideals of humanism and secularism. However, this is not a guaranteed result or a foregone conclusion. Certain abstract concepts tend to elevate the ideal of the common good over individual gain or domination. Secularism, in particular, permits the individual to adopt a “live and let live” approach to everyday life. This approach does not challenge or confront the differences implicit in other cultures or religious beliefs, and tends to smooth away potential areas of communal or sectarian conflict. The Western ideals of humanism and secularism, in turn, ameliorate the strictly Hobbesian view of the individual person in relation to society where “every man is Enemy to every man.” In Thomas Hobbes’s darkly apocalyptic vision, “To this warre of every man against every man . . . [t]he notions of Right and Wrong, Justice and Injustice have . . . no place. Where there is no common Power, there is no Law: where no Law, no Injustice.”40 Thus, Hobbes felt that the authoritarian state was the final solution to curb and control our destructive (and self-destructive) impulses. When we examine Hobbes’s view of the individual’s desires as being antisocial and inherently dangerous to establishing and perpetuating a peaceable social fabric, we can see that his world view is fundamentally grounded in his lack of trust in the individual, his lack of faith in an individual’s innate goodness and power to produce humanitarian results, and his morbid fear of others and their implicit desire (or overt capability) to threaten his continued existence. Thus, Hobbes felt that the essential human condition condemned man to lead a life in nature that was solitary, poor, nasty, brutish, and short.41 Thus, he urges that the baser instincts of man be subverted, usurped, and converted by the state. Thus, by repressing the will and the individual liberties of the individual and transposing the will of the individual onto the will of the state (the Leviathan), we can establish order out of chaos and stave off self-annihilation. Thus, it is the will of the state that becomes paramount and ascendant (and possibly even transcendent), and that appears to be much closer in form to the Soviet-style Stalinist manner of governance than what Marx advocated. Thus, is it now possible to attribute the spectacular failures of the Second World to flaws in Hobbes’s thinking rather than to Marx’s? Although the Soviet-style model for a state that represents a “dictatorship of the proletariat” is inextricably associated with the writings and ideals of Karl Marx, this ideal is all but defunct. Indeed, Marx’s rallying call of “from each according to his ability, and to each according to his need” seems to be fading into history when so-called Maoist-type of regimes in China, Vietnam, and even Eritrea, are adopting Western approaches to commerce and governance. In contrast, it was Adam Smith and John Locke who took a more positive view of human nature and elevated the idea of personal acquisitiveness and our natural
40 41
Hobbes (1968), pp. 186, 188. Id. Chapter 13, ¶13.9.
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1 Introduction: Setting the Stage
indifference towards the well-being of fellow human beings to the level of classical economics and liberal political theory. Charity and humanity became strictly optional. The welfare of the soul and of society became relegated to afterthoughts, forever vanquishing the medieval preoccupation with such matters. The sovereignty of individual will, the pursuit of happiness (and in the case of Locke, the pursuit of personal wealth and private property as well), became a sanctified ideal that remains untouched even today. This fairly simple idea would end up by revolutionizing the history of the world by elevating the baser instincts and natural proclivities of man to a classical ideal. It cleared the path from feudalism to mercantilism and, finally, to capitalism. While the rest of the world remained rooted in feudal ideas of loyalties to clan, tribe, village chieftain, the Western world was busily forming modern nation-states and revolutionizing economic modes of production by incorporating new technologies and inventions. This frantic economic activity both created and fed the appetites of a growing mass consumer society, first nationally and then, internationally. The ideal of the pursuit of happiness through material acquisition may, indeed, be a universal ideal. This ideal may articulate the most fundamental and deepest human desire. The reductionist force and logic of the pursuit of happiness through material acquisition is irresistible where success and happiness are measured by the single indicator of material wealth. The terrifying aspect of this “classical” ideal lies precisely in its unifying force. But perhaps the real difference between the Western classical ideal and the non-Western view of it lies in the method of achieving this ideal. From a Western perspective, this ideal is grounded in individual liberties and the protection of an individual’s right to private property by the state. In contrast, non-Western societies, by and large, failed to form similar institutions that would protect an individual’s freedom and property. Moreover, there may be a more serious and hidden problem since most of the developing world does not necessarily share Locke’s view that the state must be restrained from interfering with individual rights, property, and liberties. Indeed, their expectations may be quite the opposite. Far from imposing negative injunctions on the state, citizens living in developing world nations may expect that all rights, property, and liberties actually flow from the patrimony of the state. This may be the basis for some of the dissonance underlying the current dialogue between the developed and developing worlds, thus creating an unpredictable, volatile fault line between the two. What is revolutionizing our world today is not the adoption of a Western ideal by the developing world but the adoption of the Western methodology for achieving the ideal of the pursuit of happiness. This ideal is achieved in the West by means of private property, democratic governance, and the rule of law. The rest is up to the individual: a very serious challenge, indeed. Non-Western societies are increasingly experimenting with, and relying on, this methodology in order to accomplish the same end. It is this fundamental shift in the underlying paradigm that is truly setting the course in the new millennium. Now that we have entered into a post-modern, post-Cold War, post-ideological era, we are ushering in a new era of global
1.4 The Failure of Ideology
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interdependence. This interdependence is being expressed in economic and legal, as well as in cultural, spheres. In fact, there is a curious synchronicity between neoclassical liberalism (modernization theory) and neo-Marxism (dependency theory) insofar as the end result of both leads to a postmodern, homogenized global culture where cultural differences and potentially dangerous ethnic rivalries are leveled off. Nationalism, cultural particularism, and traditionalism will become relics of the past. For modernists, the creation of a global world culture and, for neo-Marxists, instilling a proletariatdominated communist state are the respective end visions of the development process.42 For both modernists and neo-Marxists, the ability of modern capitalism to capture and exploit technological innovations is key to the success of capitalism. The successful penetration of even the remotest markets through technology is ultimately bringing about a global capitalist market. Technology has been catalytic in this regard since the territorial nature of economic production has been vitiated. Crossborder financing, corporate subsidiaries located across the globe, and a global web of decentralized economic centers to manufacture tailored rather than mass-produced goods are all current realities. Indeed, states are less able to regulate or control such cross-border exchanges, especially as the measure of wealth moves from real property to virtual property in the form of patents, copyrights, and other non-tangible assets.43 Indeed, it may be argued that the globalization of economic production, the growth of technology and information-based societies, and cross-border financing have begun to level the playing field between developed and developing countries. Developing countries that have a base of well-educated but low-wage workers capable of generating technology-added goods that are marketed globally may have a comparative advantage. Increased global interdependence has ironically caused a backlash of fear and protectionist behavior from more advanced, industrialized nations.44 These are precisely the preconditions giving rise to the need for a new reconfiguration in the relationship between the developed and the developing worlds. If the globalization of the world economy also gives rise to the globalization of laws, this begs the question of whether the globalization of culture is inevitable in this process. Although modernists tend to view law as an abstraction, law is an expression of culture in much the same way as are art, music, or dance. Law is the organic expression of the underlying mores and legal norms that a people or society live by. While law may be an objective ideal, it has its genesis in the particularities of the culture that gave rise to it. Thus, if laws are being harmonized on a global scale, is the underlying element of culture being harmonized as well? If so, then the
See D. Kellner, “Globalization and the Postmodern Turn,” at 8. See Cao (1997), pp. 545, 558–559. 44 Id. at 559. 42 43
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1 Introduction: Setting the Stage
globalization of laws may be a harbinger of the globalization of underlying norms of truly mind-boggling proportions.45 Yet, even within the mantle of commercial transactions, there is a core of culture. For example, is insider trading a corrupt practice, or should individuals with nonpublic information be allowed to profit from such information as an expected business norm? Should women be allowed to vote at shareholder meetings in conservative Islamic countries? The downstream impact of creating international legal norms, especially as it may affect traditional cultural expectations, is yet undetermined because it is continuously evolving. As may be expected, the concept of globalization has its opponents and proponents. Its opponents fear the destruction of traditional legal norms and customs and their replacement with universal, rational and formal law. They also fear that the opportunity for seeking locally based and politically determined legal solutions to local problems may be lost.46 Indeed, globalization must be contrasted with a sudden and perhaps disturbing rise in nationalism. This anxiety is best expressed by Reza Aslan who writes: How to explain this surge in religious identities? It may have partly to do with the failure of secular nationalism—the core ideological principle of the nineteenth and twentieth centuries—to live up to its promises of global peace and prosperity. Though it is true that religion has been responsible for unspeakable crimes throughout history, it is equally true that the most bestial acts of violence in the last hundred years have been carried out in the name of
If centrifugal force is applied to “culture” in order to disaggregate it into separate components or elements, it seems certain elements of culture are “heavier” than others. For example, different ethnic food is almost universally appreciated and tends not to raise eyebrows. Therefore, international cuisines can be seen a lighter element of culture, one that can be universally shared without negative repercussions. Slightly “denser” elements of culture are literature, film (especially if subtitles are involved), music, dance, and art. The globalization (and commercialization) of these elements has helped create common ground for their understanding, sharing, and appreciation. Now, it is not uncommon to see Irish dance, view Mexican art, watch Czech films, read Japanese poetry (an English translation, of course), and listen to Caribbean music. However, there are elements to culture that do not have as much transferability as others. Fashion, for example, can be somewhat problematic. Wearing saris or other native dress in many Western countries is subtly disapproved of. The preservation of language, while valued by the ethnic enclave who claims it as part of their heritage, can be seen as overtly or vaguely threatening by others outside the culture. Religion, the rights and status of women, morality, and ethics are also very subtle indicia of culture, which also may not cross international time zones very well. 46 For an excellent discussion of the dangers of globalized legal norms, see generally Gopal (1996), pp. 231–237. Indeed, I was struck with the power of that concept while on a USAID diplomatic mission to Chile to discuss the creation of a new legal center to study both criminal and civil law changes in Latin America. This experience led me to make the following observation: “The intensity of their examination of common law systems of due process, jury trials, and the provision of court-appointed defense counsel made me shiver in realizing that this may be the end of Lex Romana. The legal conceptual framework of civil law systems that devolved from Roman conquests in Spain during the second century BCE, and which were subsequently transmitted to Spanish colonies in the New World in the fifteenth century AD, is beginning to erode. The civil law systems prevalent in Latin America are gradually, but unmistakably, succumbing to the unbearable pressure being exerted by the legal hegemony of the common law-based systems of the Anglo-Saxon legal tradition.” Sarkar (2001), p. 469. 45
1.4 The Failure of Ideology
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unabashedly secularist ideologies: fascism, Nazism, Maoism, Stalinism, socialism, even Darwinism. If secularism arose in the eighteenths and nineteenth centuries in response to to the erosion of religious certainties, perhaps the rise of religious identities can be blamed on the growing disillusionment with secularism.47
In more general terms, opponents fear that local culture and traditions will be usurped by universalist ideals and trends and, more importantly, that the larger interests of the community will succumb to the desires of the individual. Moreover, another implicit fear is that emotions, intuition, and non-rational thought will be overtaken by logical, formal, rational thought. This may have interesting implications for law since non-Western legal systems may reflect (for lack of a better word) non-rational thought, and this element may be lost to us in the globalization process. The homogenization of specific cultures and everyday life is a threatening and disagreeable prospect for neo-Marxists, traditionalists, multiculturists, and environmental protectionists alike.48 However, the relentless march toward post-modern globalization is not without a silver lining. For example, this trend may also mean that the inexorable nature of one’s birth, fate, or caste may be mitigated by exercising independent choices. It also opens up the possibility that an individual may be recognized for his or her individual merit and achievement. The exclusive domain of men may also be opened up to include women in the development equation. Moreover, a certain intolerance implicit in ethnicity may be softened by a new focus on a common humanity and by the adoption of a more cosmopolitan, secularized lifestyle. Postmodernists may argue that the creation of a global culture is not a force of “insipid homogenization and destruction,” but a force that produces progress, heterogeneity, and diversity.49 This position is highly problematic since the creation of a global culture necessarily means that the specificity and the richness of local traditions, myths, and cultures are sacrificed in the process. Although the modernist view of globalization espouses a pluralist vision, the superficiality of culture within the context of globalization makes this vision more of a hoax than a plausible reality. Nevertheless, the postmodern globalization of culture (and laws as an expression of culture) need not be an oncoming juggernaut for developing societies. Developing countries can, and should, take a proactive role in multiplying their development options and take a more discriminating stance with regard to exercising these options. In light of what has failed, what has succeeded? Has the ideology, economics, and, consequently, the law of the West triumphed? What is falling into the gap? And what does all this mean from the standpoint of international development law? The following discussion is intended to shed some light on the possibilities. However, it is increasingly clear that the competition to succeed in this new world order is fierce, precisely because the stakes are so high. 47
Aslan (2010). For a deeper dive into similar philosophic inquiries, see Herman (2013). See D. Kellner, “Globalization and the Postmodern Turn,” available at http://www.gseis.ucla.edu/ courses/ed253a/dk/GLOBPM.htm, at 2. 49 Id at 3. 48
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1 Introduction: Setting the Stage
References Alvin, Toffler H (1993) War and anti-war: survival at the dawn of the 21st century. Little, Brown & Co., pp 248–249 Aslan R (2010) Beyond fundamentalism. Random House Cao L (1997) Law and economic development: a new beginning? Tex Int Law J 32:545, 558–559 Carrasco E, Thomas R (1996) Encouraging relational investment and controlling portfolio investment in developing countries in the aftermath of the Mexican financial crisis. Colum J Transnatl Law 34:539 de Soto H (2000) The mystery of capital. Basic Books, pp 171–172 Ellis M (1985) The new international economic order and general assembly resolutions: the debate over the legal effects of general assembly resolutions revisited. Calif West Int Law J 15:647, 648 Fukuyama F (1992) The end of history and the last man. Free Press, p 215 Gopal MG (1996) Law and development: toward a pluralist vision. In: Am. Soc. Int’l L. Proceedings, 90th Ann. Mtg., pp 231–237 Herman A (2013) The cave and the light: Pluto Versus Aristotle, and the struggle for the soul of western civilization. Random House Hobbes T (1968) Leviathan. Penguin Books, pp 186, 188 Huntington S (1993) The clash of civilizations? For Aff 22 Huntington S (1996) The clash of civilization and the remaking of world order. Simon & Schuster, pp 310, 318 Leipziger D (2001) The unfinished agenda: why Latin America and the Caribbean lag behind. Fin Dev 38 (IAC-ACC-NO: 73849047) Lewellen T (1995) Dependency and development: an introduction to the third world. Bergin & Garvey, Westport, p 3 Montesquieu CL (1989) The spirit of the laws (Cohler AM et al, eds and trans). Cambridge University Press Nichols P (1999) A legal theory of emerging economies. Va J Int Law 39:229, 235 Said EW (2000) Reflections of exile, and other essays. Harvard University Press, p 587 Salacuse JW (1999) From developing countries to emerging markets: a changing role for law in the third world. Int Lawyer 33:875, 883 Sarkar R (2001) The developing world in the new millennium: international finance, development, and beyond. Vanderbilt J Transnatl Law 34:469 Umozuike UO (1983) The African Charter on Human and Peoples’ Rights. Am J Int Law 77:902, 903
Part I
The Rule of Law
Chapter 2
The Rule of Law: Theoretical Principles
The relationship between law and the process of development is highly problematic and has been the subject of intense controversy for several decades. This debate has been re-energized by the explosion of rule of law (ROL) programs being implemented in transitional economies and most developing countries. This chapter explores the theoretical foundations of development and describes a possible reconciliation of opposing viewpoints and approaches to development both in practice and in theory. This chapter also sets forth a new analytical framework for legal reform programs in light of the ROL work that has been completed since 1989. To begin with, the definition of development usually lies in the eye of the beholder: for a child nutritionist, for example, measures of development lie in birth weight, child survival, and pre-natal care. For an agronomist, they may lie in crop yields, access to export markets, and agricultural supports. But for legal practitioners, law is the key to international development. Development as a concept is too broad and complex to be viewed exclusively (or even primarily) as a legal process, but it is the starting point for this discussion.
2.1
Theoretical Background
Development theory, a post-WW II phenomenon, has been grounded in two fundamental yet opposing viewpoints as expressed by modernization theorists and dependency theorists. These two camps have widely differing views as to why and how development should be pursued by developing countries and are also at great variance on what the final outcome of the development process should be. The theoretical foundation for the modernization theory of development goes much further back to the turn of the twentieth century, evolving principally from the pivotal work of Max Weber, as described below. © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 R. Sarkar, International Development Law, https://doi.org/10.1007/978-3-030-40071-2_2
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2.1.1
2 The Rule of Law: Theoretical Principles
Max Weber and the Sociology of Law
Under a liberal theory of law, law expresses rational thought. Further, the existence of coherent, legally determined relationships between individuals in a well-ordered society provides a framework within which the individual may achieve the ideals of liberty, equality, and the pursuit of happiness. This theoretical perspective on the function of law in modern society was greatly expanded by the work of Max Weber who made two important linkages: first, between the relationship of capitalism to Protestantism and, second, between law and capitalism. Weber’s The Protestant Ethic and the Spirit of Capitalism, first published in the form of two long essays in 1904–1905,1 linked Protestantism (particularly Calvinism) with modern capitalism. Although the connection between the European Reformation and the rise of capitalism may not have been new, Weber cast it in a new light.2 Weber tied Protestantism inextricably to the ascendancy of modern capitalism. Modern capitalism rationalized the process of economic production by maximizing profits, and Weber argued that Protestantism harnessed this energy in a disciplined way by imposing the obligation of work as a moral duty. The emergence of a new capitalist “spirit” that infused the modern capitalist entrepreneurs is what, according to Weber, distinguished modern capitalism from other economic forms.3 Moreover, Max Weber addressed two other important questions first, how are Western legal systems different from those of other civilizations, and, second, what is the relationship between the unique features of Western law and the rise and expansion of the Western capitalist system?4 In his study, Weber identified several facets of Western law that were important to the supremacy of the capitalist system: (1) the contract; (2) uniformity in the rule of law and its application; and (3) the growth of an autonomous legal profession.5 Weber argued that the formal, rational, and logical characteristics of the Western legal tradition provided the basis for 1
See Giddens (1971), pp. 124, 125. Id. at 125. 3 It has also been argued that the Protestant work ethic is not the only “spirit” which motivates capitalist production. Overseas Chinese communities have been singularly successful in generating economic wealth without relying on rational laws but by relying on their traditional customs. Thus, informal relationships rather than formal laws prescribe successful capitalist behavior for them. Therefore, traditional customs need not be inimical to a rule of law framework and may effectively control behavior integral to the successful generation of capitalist wealth. See generally, Plotkin (1992), where the successes of the Chinese, Japanese, Indian, Jewish, and Protestant “tribes” are critically examined with regard to the linkages between ethnicity and capitalist success. Indeed, Max Weber may have put this type of analysis in motion by his thinking that certain ethnic enclaves by being excluded from positions of political influence “were driven with peculiar force into economic activity,” with the specific examples of Poles in Russia and Eastern Prussia; the Huguenots in France; Quakers in England; and Jews in mind (See Weber 1992). See also Chua (1998), pp. 1, 32 n. 152. 4 See M. Weber, Economy and Society, G. Roth & G. Wittich, eds. (1978). This three-volume work contains excerpts from Weber’s Sociology of Law. 5 Id. 2
2.1 Theoretical Background
31
creating a steady, predictable system that supported capitalism.6 Thus, Weber’s concept of formal, rational, modern law as instrumental to the growth and success of modern capitalism has shaped the legal analysis of development. This, of course, has been a most vexing area of inquiry for development specialists: what was it about the so-called “Anglo-Saxon” legal experience that established the best-suited relationship with capitalist production and the accumulation of wealth? The causality still remains somewhat unclear. But perhaps the following discussion of the descriptive characteristics favored by capitalism, and certain downstream effects of it, will help elucidate this line of inquiry. Arguably, the fact that the Anglo-American legal experience maintains the fewest number of market risks and imperfections while encouraging broad-based participation and transparency is an important key to its success in a capitalist-based economic system. Indeed, if the global means of production is now capitalist, why shouldn’t the legal foundation for it be so as well? Moreover, as mentioned in the Introduction, the British exercised dominion over the nineteenth century just as the United States had over the twentieth century. Both cultures were able to successfully disseminate (along with the English language) their unique, shared set of legal concepts, terminology, and systems for creating justice. Interestingly, a unique and telling characteristic of the Anglo-American legal experience is its ability to divide the indivisible, much like dividing the atom and releasing its pent-up energy that no one even knew existed. In other words, the common law tradition divides a unitary concept into separate parts. To wit, a judge decides the law, but the jury decides the facts. Thus, the jury decides questions of guilt, whereas the judge proclaims the sentence for legal transgressions. (In France, however, the judge participates with the jury in reaching a fully integrated verdict, judgment, and sentence.) The same concept is true of trusts, or even of securitized debt instruments: the legal owner is separated from the beneficial owner (a system not found in civil law jurisdictions). Often this basic concept is at the core of many sophisticated corporate finance techniques, and forms an important legal foundation for Foreign Portfolio Investment (FPI). FPI, in turn, unleashes the full torrential force of foreign investment, making a globalized economy a new and totally unprecedented kind of reality. The effect is clear. The Anglo-American legal experience is continuing to establish its hegemony on a global scale that is now strongly reverberating in light of two highly significant changes. First, overwhelming rule of law structural changes have been implemented worldwide over the past several decades; and second, these new legal norms have been “globalized” in this millennium. The fact that this remarkable achievement has taken place, fait accompli, without much strategic thought or planning, and without making an informed comparative analysis of other legal systems and norms that may be sacrificed in the process, is surprising, and perhaps a little discomforting. In the final analysis, what is the cost to be borne by eliminating different legal approaches and systems for resolving conflict? Does a global
6
Id.
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2 The Rule of Law: Theoretical Principles
harmonization of law have certain risks associated with it? Does an increasing lack of diversity in legal systems, approaches, and cultures represent true progression forward or simply the “natural selection” of the Anglo-American approach to law at the expense of other approaches? Weber’s concepts are particularly relevant in this context since much of the discourse on development centers around economic development, or raising the overall standard of living for the peoples of the developing world. With the collapse of Soviet-style, command economies, capitalism is, in effect, the most viable economic mode of production.7 Therefore, the linkage created by Weber between rational, modern law and capitalism establishes the theoretical foundation for an inquiry into the meaning of development from a legal perspective. Although the idea of development is a post-WW II phenomenon, Weber has had a profound influence on the philosophical assumptions underlying most development efforts, particularly those sponsored by donor countries. Most development efforts of the past several decades have been grounded in “modernization” or “neo-classical” economic theory.8 Modernization theorists assumed that development follows a linear process whereby a free market economy, once created, provides for the economic prosperity and liberty of all. This approach is predicated on the belief that a capitalist, free market system allocates resources through private ownership so as to maximize profits and minimize costs. Moreover, neo-classicists assume that the benefits of capitalist production will “trickle down” to the masses. On an institutional level, this translates into a donor-prescribed plan of action for developing countries, to wit: a balance-ofpayments stability, a well-managed fiscal budget, a market economy with a highly developed private business sector, and a reasonably developed and well-regulated capital market. Further, neo-classicist theorists assume that all nations and peoples are rational, and that a free market economy rewards competitive values. The liaison that Weber established between modern, rational law and the success of capitalism becomes key in the modernization context. Neo-classicists assume that every society is capable of modernization, or, in other words, is capable of gradually transforming itself into the established model of the Western-styled, modern capitalist state.9 This progression is D. Kellner, “Globalization and the Postmodern Turn,” at 7, 8. See e.g., Rostow (1960). The modern-day descendant of this type of approach is generally referred to as the “Washington consensus.” See Trubek (1996), pp. 223–224, who writes: “The ‘Washington consensus’ is a term often used to refer to the dominant paradigm in development thinking among Bretton Woods institutions [i.e., the World Bank and the IMF]. This approach is radically different from development thinking in the 1960s when the law and development idea was first articulated. Then emphasis was placed on central planning, state enterprise and inwardly oriented import substitution industrialization. The Washington consensus, on the other hand, promotes markets as allocative institutions, favors privatization and promotes closer linkages to the global economy.” 9 In fact, Rostow divides that linear process into several stages: (1) the traditional society; (2) the creation of the preconditions for capitalist development; (3) the mature capitalist state; and (4) the final stage of mass consumption. Under modernization theory, the role of an entrepreneurial class that saves and invests wisely is critical to this linear progression. Creating a consumer-based society 7 8
2.1 Theoretical Background
33
conceived of as being linear in nature, which may require replacing traditional values for modern ones. But neo-classicists believe that this is a transformation that can, and should, be undertaken by all developing nations. Thus, development can be seen as the creation of an industrialized society in the image of Western, democratic, marketbased economies. This expectation has profoundly shaped the discourse on international development. This neo-classical approach is now being highlighted in sharp relief, and its very foundation is being questioned, if not actually dismantled.
2.1.1.1
Other Philosophical Approaches and Voices
There is, however, a deeper realm of philosophy underlying this political dimension. Whereas Sir Isaac Newton argued that laws obey theories, Albert Einstein argued that theories obey laws. Whether we see laws flowing from theories or the reverse, there are at least three types of secular laws that flow from certain philosophic predispositions. First, there is the law-adverse Hobbesian stance where fear and chaos rule, leading inevitably to the Leviathan, where the state imposes its nearly unlimited power on individuals. Alternatively, and not incompatibly, the individual, perhaps best embodied in Machiavelli’s Prince, may also seek to accumulate his or her own personal power in order to survive in such a context. The markets are ruled by the “invisible hand” as argued by Adam Smith, where the law that controls markets is neither seen nor controlled by individuals or by society. Fear, greed, and power are very important elements in this environment. This type of philosophic predisposition leads to a minimalist agenda where law may be viewed as a potential impediment to the freedom of the individual and the markets. Thus, the following result may be embodied by Thomas Paine’s adage, “the government that governs least, governs best.” The second philosophic disposition is where law springs from within or, in other words, from internal sources of law. Enlightenment scholars, notably Charles Montesquieu, introduced the concept of checks and balances whereby judicial, legislative, and executive powers are divided into separate branches of government rather than concentrated solely in the sovereign. Moreover, a new social contract was forged by Jean-Jacques Rousseau in this context where predetermined relationships between the ruler and the ruled were forever transformed. In fact, the due process rights forged during the Enlightenment era created inalienable substantive rights derived from natural law principles which may not be arbitrarily denied. Over time, due process rights have been elevated to a position of supreme importance in Western legal traditions, but may be notably absent from the thinking and the legal practices of many African and Islamic traditions. These procedural rights,
is the final dictate of capitalist success. See W. W. Rostow, The Stages of Economic Growth; see also Rostow (1990), pp. 4–46.
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taken for granted in the Western context, may actually be highly problematic in those societies. Finally, we should consider the philosophic approach of a historical continuum where history moves in cycles or in upward spirals, or through a process that has been described as dialectical in nature. In this context, all dimensions of law may be seen as relativistic in nature, to be judged or measured in relation to something else. This view incorporates some of the thinking embodied in the philosophies of Hinduism, Buddhism, and Confucianism and distantly reverberates through G.W.F. Hegel’s analysis of history. This ultimately leads to a overall approach where systemic legal change is encouraged. For example, model laws that are globally promulgated and synthesized are designed, in essence, to eliminate gradually over time all contradictions offered by potentially irrational national laws. This predisposition leads to the legal globalization trends that are so evident today. This is not to say that one must choose one of the three philosophic predispositions; indeed, quite the contrary is true. Elements of all three are, in fact, found in most societies as a result of both indigenous and received law traditions. The often uncomfortable juxtaposition of all three, however, makes for a very complex legal environment that is often difficult to navigate. Now, having peeled back the layers of the onion of politics and philosophy, we come back to the layer that is the law.
2.1.2
Discourses on Development Theories
This is a difficult section to embark upon since the discourse on development is full, rich, contradictory and highly nuanced. This discourse is full of controversies as well as failed or repudiated experiments in development-related reforms. Moreover, development theories are not only theoretical in nature but practical as well since these theories are applied to real-world situations and challenges. Thus, an accurate description of the substance of the development discourse following WW II is rendered nearly impossible due to these inherent complexities. Indeed, this discussion risks omitting or overlooking the contributions of important thinkers or policymakers in this context. Nevertheless, for the sake of capturing some of the complexities of this dialogue, and reducing them to a more digestible format, this discussion will highlight (without purporting to be an accurate and full historical analysis) of certain development theories that still reverberate today. Discussing international development without an overview of the theoretical foundations unpinning it would be an ahistorical analysis. Thus, the following discussion is designed to put the evolving theories of international development into a brief historical perspective in hopes that it will deepen an understanding into the underlying philosophy and overarching goals of development policies.
2.1 Theoretical Background
2.1.2.1
35
Neo-Classical Economic Theory
Development economics, and as a related corollary and discipline, international development law, evolved out of the new world order which emerged after WW II. At the earliest stages, development meant industrialization often following the patterns established by European economies in the nineteenth century. Agricultural development was largely ignored, and the role of government in planning and directing the productive sectors of the economy as well as trade relations with other countries was emphasized. In the post-WW II era, both a point and counterpoint to economic development theory developed. In support of the capitalist paradigm,10 neo-classical theory (and its correlative legal approach, modernization theory, discussed infra,) was based on the idea that development follows a linear process. In fact, Walter Rostow, a principal theorist in this area, divides that linear process into several stages: (1) the traditional society; (2) the creation of the preconditions for capitalist development; (3) the mature capitalist state; and, (4) the final stage of mass consumption.11 Thus, a free market economy, if created, provides for the economic prosperity and liberty of all. First, this approach is predicated on the belief that a capitalist, free market system allocates resources through private ownership so as to maximize profits and minimize costs. Further, neo-classicist theorists assumed that all nations and peoples are rational, and that the free market rewards competitive values and works towards the higher good of the inhabitants of capitalist societies. In other words, every society is capable of “developing” itself into the model of the Western, modern, capitalist state. Additionally, neo-classical theorists suggested in the 1960s that if “modern” values replaced “traditional” ones, developing societies would flourish. Moreover, the role of an entrepreneurial class is integral to this linear process of advancement. Therefore, creating a consumer-based society is the final dictate of capitalist “modern” success. In fact, the state should only intervene in the economy only when required to correct market imperfections (e.g., raise taxes, reduce tariffs, etc.). In essence, neo-classicists assume that the benefits of capitalist production will “trickle down” to the masses. Thus, “development” is seen as the creation of a modern society cast in the image of Western, democratic, market-based economies/ societies.12 This thinking is widely prevalent in most scholarly work in the “law and development” movement, as explored below. This is true of donor institutions as well. On an institutional level, this neo-classical approach was translated into a plan of action for the Bretton Woods institutions: to wit, a market economy with a highly developed private business sector; a central bank and well-managed fiscal budget; a reasonably developed capital market; and balance of payments stability. Further, the only acceptable actors on the international scene were sovereign nations to the
10
This approach was based on the ground-breaking work of Walter Rostow. See Rostow (1960). Id. 12 See generally, Hunt (1989). 11
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exclusion of other participants. However, serious challenges to this approach, once looming ominously on the horizon, are now poised to radically change these assumptions.
2.1.2.2
Challenges to Neo-Classical Thinking
The neoclassical approach to development dilemmas has certainly been questioned in certain quarters. The discussion below will examine briefly the structuralist school, neo-Marxist approaches, and alternative normative challenges to neo-classicism.
Structuralist School Notably, the Latin America-based structuralist school was founded on the work of, among others, Raúl Prebisch. Post-modern structuralists are essentially Keynesian reform economists who are mainly concerned with balancing trade deficits, rural and urban growth and income redistribution, and use the State as the actor for change. The critique offered by structuralists is not that there is an inherent defect in the capitalist system but only in its flawed operation, particularly with the failure of the Bretton Woods institutions (i.e., the World Bank and the IMF) to regulate global capital, forgive world debt, and provide the means for ending global poverty. Thus, structuralists and neo-classicists are united in their belief in the free market, but structuralists advocate a more sophisticated view of state intervention for income redistribution, whereas true neo-classical theorists tend to shy away from such interventions. In essence, structuralists would argue that the shortage of capital is at the heart of the problem of underdevelopment. Further, the proper flow, distribution and use of capital exchange will result in a healthy, functioning global economy and reap “development” results. The structuralist world view is linear and stresses a homogeneous world order. While Prebisch believed that while capitalism was the pathway to development (mainly through the introduction of modern technology), he also strongly advocated self-reliance in the form of import substitution-based industrialization, or economic growth based on the domestic production of consumer goods and the imposition of tariffs and quotas as protectionist measures to keep foreign competition at bay. Governments were advised to protect critical industries with special subsidies, lower interest rates, tax holidays, and waived penalties for not paying utility and other bills related to the costs of operation.13 The basic strategy included land
13
A new economic discipline was imposed in terms of stabilizing the developing economies through structural adjustment took the form of: (1) a balance-of-payments reconciliation; (2) a realistic and often devalued foreign exchange rates; (3) restrictions on the money supply to curb
2.1 Theoretical Background
37
reform, state promotion of labor-intensive export industries often propped up by domestic high consumer prices, and an emphasis on education in creating a sophisticated workforce. Special industries were hand-picked and supported by the host government. Although the structuralist approach worked well in the 1950s in Korea, Mexico, Taiwan, Brazil and Chile, the imposition of a non-market based industrial base proved to be a fallacy for most other countries.14 The following decade of the 1960s was nevertheless heavily influenced by state-led export promotion.15 Japan was the beacon followed by Taiwan, Singapore, Brazil, Malaysia and even Australia in what is sometimes referred to as the flying geese formation.16 (In Brazil, for example, the export of natural resources was chosen; in Japan, industries requiring productive skills were emphasized a good strategy for resource-poor, labor-rich East Asian countries.) This strategy was questioned from the perspective of import substitution policies needing to be initiated by the government which may not have had the necessary political will or bureaucratic organization to do so. Further, the transition from import substitution into a global economy was not described (or perhaps even advocated) by structuralists. Further, the costs of structural economic adjustments programs, often faced by countries espousing policies of import substitution were not adequately taken into account. While structuralist approaches to economic development were extremely influential in Latin America, India and elsewhere during the 1960s, the continuing influence of Prebisch and the effectiveness of import substitutions have been questioned, if not dismissed outright.17
Marxists and Neo-Marxist Theory The main critique to neo-classical theory came for dependency theorists originating in the 1960s and who owe a great deal to the ground-breaking work of André Gunder Frank. His phrase the “development of underdevelopment”18 critiques the
inflation; (4) fiscal reform by reducing the fiscal deficit by curbing government expenditures, eliminating subsidies and increasing the tax base of the economy; (5) reforming the financial sector by introducing bank restructuring (including meaningful bank supervision and controls), privatization of state-owned enterprises (SOEs), and encouraging and stabilizing emerging capital and commodity markets; (6) opening the economy to free trade and investment and finally, (7) making necessary sectoral reforms in the agriculture, industry and the social sectors of health, education and social safety net issues. 14 Bruton (1998). 15 See generally, Fitzgerald (1995), who argues, in part, that free markets cannot compete with the successes of state-led economic growth both in Europe and the United states from 1945–1970s, and in Asia from the 1970s onwards. 16 See Furuoka (2005). 17 Rodriguez (2008), p. 39. 18 See Frank (1966). See also Rodney (1972).
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fundamental nature of capitalism. In the view of dependency theorists, the nature of mercantile capitalism and the need for raw materials led to the conquest and colonization of the Third World. The “core” and the “periphery” were inextricably linked to one another. Exports to the industrialized and consumption of manufactured goods from the raw materials exported from the developing country became the basis of the economic relationship with the West, with the rest of the world. However, technology and “modernization” was kept away from the periphery through a system of unequal exchanges between the core and the periphery. Thus, there was no potential for development but merely obstacles thereto. Economic dependency led to social dependency (e.g., economic, political, military, educational, social, cultural, and even in the peripherialization of rural areas to urban areas.) Technology, capital, capital goods and the means of production were seen as being systematically withheld from dependent economies.19 Another influential “dependency” thinker was Walter Rodney who examined the inherent inequality of colonizing and colonized countries whereby advanced nations became economically “developed” by extracting the wealth and resources of their colonized subject nations. This theory posited a “zero sum” game where de-linking the developing country from the former colonizer was very challenging, if not impossible. This theory was further extrapolated on by Immanuel Wallerstein who developed a “world systems” theory dividing the worlds into the core, periphery and the semi-periphery (e.g., southern Europe and East Asia) that acts as a buffer between the two.20 Additionally, Western forms of governance and the patronage of the local elite and other serious problems resulted from the system of the colonizer and the colonized according to dependency theorists. Dependency theorists saw capitalism as producing an inherently unequal world where the forms of exploitation came from without rather than from within. They called for strong state intervention in the economy to implement radical solutions that address the exploitative nature of world capitalism. The critique offered by neo-Marxist theorists will be examined more closely below.
Alternative Normative Challenge This school is comprised of abolitionists of the so-called Bretton Woods institutions (i.e., the World Bank and the International Monetary Fund (IMF)), and radical economists. The philosophical emphasis of this school of thought is on communal values such as self-reliance, human rights, ecological awareness, and attention to local needs and local actors. (The primary thinkers in this school are Manfred Max-Neef, George Aditjondro, Vandhana Shiva.) These theorists challenge
19
See generally, Irogbe (2005). For an overarching view and critique of dependency and world-systems theories, see generally, Kiely (2010). 20
2.1 Theoretical Background
39
modernization theory (based on neo-classical economics) on the grounds that the modernization model threatens diversity (both human and ecological), local political capacity, democratic principles and participation by non-state actors such as local NGOs and disenfranchised groups. The modernization vision for development is perceived by such theorists as a global movement towards the complete homogenization of cultures into a single monolithic one based on Western-styled capitalism. By conceptualizing development as the process of integration of developing societies into the global economy, normative challengers point out that this approach assumes that the global economy is larger that its parts (i.e., local economies), and that a single global economy should be viewed skeptically. The normative critique is based on the analysis that the satisfaction of human needs through the production of economic goods is a cultural choice, specifically, a Western cultural choice. This goes back to Adam Smith who expostulated that human happiness is achieved through the acquisition of greater economic goods, which is used to justify industrial capitalism. Normative theorists argue that it also forms the basis of the new global integration as the emerging form of neo-colonialism. Thus, normative thinkers advocate a non-hierarchical, non-linear system that is a full integration of all of its parts. By decentralizing economic and political power, true local and democratic institutions can develop and be sustained, thereby encouraging diversity. Moreover, participatory, democratic development modes can be pursued in order to achieve sustainable development which goes beyond the mere integration into the global marketplace.
2.1.2.3
The Washington Consensus
In the end, a certain intellectual paradigm became the dominant world view and approach to development. In other words, it became a synthesis of neo-classical and Keynesian economics. “The phrase ‘Washington Consensus’ is today an increasingly unpopular and often pilloried term in debates about trade and development. It is often seen as synonymous with “neo-liberalism” and “globalization.” The phrase’s originator, John Williamson, originally coined the phrase in 1990 “to refer to the lowest common denominator of policy advice being addressed by the Washingtonbased institutions to Latin American countries as of 1989.” These policies were, in effect: • Fiscal discipline • A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure • Tax reform (to lower marginal rates and broaden the tax base) • Interest rate liberalization • A competitive exchange rate • Trade liberalization • Liberalization of inflows of foreign direct investment
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• Privatization • Deregulation (to abolish barriers to entry and exit) • Secure property rights.21 Dani Rodrik argues that there is an “augmented” Washington Consensus, which in addition to the items listed above, adds: • • • • • • • • • •
Corporate governance Anti-corruption Flexible labor markets WTO agreements Financial codes and standards “Prudent” capital-account opening Non-intermediate exchange rate regimes Independent central banks/inflation targeting Social safety nets Targeted poverty reduction.22
The “death” of the Washington Consensus has been heralded by many for many years for many reasons. While the neo-liberal policy prescriptions may have failed certain countries and economies, the debate seems to sputter forth. In sum, the development paradigm has been described as unfolding in four distinct stages: (1) post-war reconstruction; (2) the synthesis of neoclassical and Keynesian economics; (3) political decolonization and economic recolonization; and (4) the globalization of the enterprise system.23 The practical application of these theoretical approaches may be summarized briefly as follows (Table 2.1). Critiques of neo-classical theory simply recognize that real economic or social transformation does not come through outside intervention or foreign aid programs but from within the society itself. These critiques also reflect the frustration felt at the failure of the development process. While it is not truly possible to systematize or empiricize the reasons development experiments failed in one country while succeeding in another, or even describe why certain development approaches worked for in one country for a different set of reasons than applicable to another, certain overall themes do emerge. The true transformation in the wealth of nations, and the conduct of relations between nations is through trade (of commodities and technology) and emerging capital markets. Thus, the new agenda for sustainable development for the next generation have been focusing more on establishing sustainable trade linkages, joint ventures and other private partnerships, the transfers of technology, and the growth of capital markets. The creation of capitalist wealth through trade, and the creation of emerging capital markets may be the key to development—and as evidenced by the
21
Williamson (2002). See Rodrik (2006), p. 973, Table 1 at 978. 23 Roxas (1996). 22
1950s Import Substitution Industrialization. Development based on the domestic production of consumer goods and the imposition of tariffs and quotas as protectionist measures to keep foreign competition at bay. Governments were advised to protect critical industries with special subsidies, lower interest rates, tax holidays, no penalties for not paying utility and other bills related to the costs of operation.
1960s State-Led Export Promotion. Japan was followed by Taiwan, Singapore, Brazil, Malaysia, and even Cote d’Ivoire. The basic strategy included land reform, state promotion of laborintensive export industries often propped up by domestic high consumer prices, and an emphasis on education in creating a sophisticated workforce. Special industries were hand-picked and supported by the government.
Table 2.1 Key development strategies
1970s Growth With Equity. The “Small is Beautiful” decade is pioneered by the World Bank, USAID and the Green Revolution. USAID shifted its emphasis from capital infrastructure growth to projectized assistance geared towards enfranchising the rural poor and disadvantaged minority groups within developing economies (including women entrepreneurs). Directed to encouraging the growth and support of “Basic Human Needs”, rural economies, microenterprise, the informal sector as the productive component of the economy, and focused on equity issues.
1980s Open Markets/ Open Societies. The decade of entitlement and democratization of development through the transformation of the process of governance. Development has meant reacting to but not controlling the massive social, political and economic transformations of Eastern Europe and the former Soviet Union. Privatization and financial sector reform are emphasized.
1990s A Return to Orthodoxy. Government planning and intervention was disastrous and failed in most cases leading to even greater inequalities, disequilibrium, a crumbling infrastructure and badly disorganized foreign trade relations and balance of payments situations. A return to the orthodoxy of laissezfaire, Adam Smith policies of a non-interventionist state evolved. Protectionist policies, regulations, trade and market barriers are disfavored. Role of the state is redefined to move it out of the productive sector and solely into regulatory issues.
2000s Rule of Law Decade. An emphasis on changing the legal landscape in lieu of infrastructure in terms of bricks and mortar. Continuing regulatory reform in diverse sectors such as energy, telecommunications, judicial reform, and foreign investment regimes. In reaction to 9/11, more focused attention on identifying, and exterminating Islamic-based terrorist activities and infiltration into transnational organized crime networks. Nation-building in collapsed states was a foreign policy prerogative.
2010s Climate Change. A view towards mitigating, if not halting, the effects of global climate change. An emphasis on renewable energy sources, habitat and species preservation, and creating sustainable development. New social impact investing platforms to encourage social and environmental outcomes as a priority over profitmaking.
2.1 Theoretical Background 41
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successes of Brazil, Russia, India, China, and South Africa (“BRICS”). Indeed, we may already have moved past a Western-based hegemonic development equation, as explored later in the text.
2.1.3
Another Perspective on Development Theory
William Easterly argues that there have been several “waves” of development theories after the end of WW II, namely: • • • • • •
Foreign aid to bridge the gap between savings and investment; Investment in technology; Investment in education; Population control; Official loans to induce policy reforms; and, Debt forgiveness to induce policy reforms.24
Douglas Arner argues that these development policies failed because they did not properly align incentives for economic growth that would reduce poverty. Further, Arner suggests that Easterly advocates a new paradigm where creating proper incentives and appropriate policies is key to encouraging economic growth leading to poverty reduction. Here, government action, a macroeconomic policy framework that is supported by appropriate institutions is regarded as the theoretical and practical solution to development woes.25 Indeed, Douglass North argues that institutions are fundamental to economic development, and that economic growth will occur if property rights are properly embedded in institutions which, in turn, provide appropriate incentives for economic growth. North further develops a theory of institutions based on three supporting pillars: • A theory of property rights that has incentives for individuals and groups embedded within it; • A theory of the state since the state is responsible for enforcing property rights, a Lockean notion; and, • A theory of ideology that discusses the perceptions of individuals regarding objective reality.26
24
Easterly (2001), Chapter 2. Arner (2007), pp. 15–16. 26 North (1981), pp. 7–8. For a broader discussion on institutionalism as the basis for legal theory, particularly with respect to formulating a new theory of “emerging economies,” see Nichols (1999), p. 229. 25
2.2 Modernization Theory Vs. Dependency Theory
2.1.3.1
43
Waves of Development Assistance
As a final background note, the theory supporting development assistance (such as those offered by the World Bank, the IMF, and other multilateral and bilateral banks and institutions) have also been described in “waves.” The first wave, roughly from 1950 to 1965, focused on building national legal systems, in the context of newly independent states. The second wave, the “law and development” movement, developed roughly from 1960 to 1975. The law and development movement focused on enabling technocracy and disabling established elites. After the gradual erosion of law and development, the third wave, roughly from 1985 to 2000, focused on human rights and constitutionalism. The fourth wave, beginning from around 1990 and still on-going, focuses on the interactions among law, markets and economics. Founded on Max Weber’s ideas of legal certainty, its leading exponents have been Douglass North and Mancur Olson. Today, this wave looks increasingly at diverse areas, including intellectual property, corporate governance and competition.27
The schematic background set forth above describes neo-classical economic theory (and its critiques), and helps set the stage for juxtaposing the more law-oriented modernization theory with dependency theory, as discussed below.
2.2 2.2.1
Modernization Theory Vs. Dependency Theory Modernization Theory
The modernization theory of development, the predominant post-WW II school of thought, holds out the belief that modernization is a progressive, evolutionary process that should result in the transformation of less developed societies into Western political, social, and legal institutions. According to modernization theory, four elements are critical in this transformative process: rationalization, nation building, democratization, and participation. Further, it is apparent that modernization theory is predicated on the Westernstyled modern state historically based on Christianity (particularly Protestantism), individualism, and the rule of law, to which the values of secularism and pluralism were later added. The modernization approach is also predicated on the belief that non-Western peoples should incorporate Western values, institutions, and laws because such values are the most rational, the most civilized, and should be considered “universal” in nature. Thus, Western “universalism” identifies Western-based indicia of modern society, i.e., individualism, the rule of law, a free market economy, and democracy as the foundation for development.
27
Arner (2007), p. 19.
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Modernization theory is based on the assumption that development is the inevitable, evolutionary result of a gradual progression led by the nation-state that results in the creation (and ascendancy)28 of Western-styled economic, political, and cultural institutions. These institutions rest on three pillars: a free market capitalist system, liberal democratic institutions, and the Rule of Law. In this context, modernization theory is anchored by two principal thinkers: first, Adam Smith’s elevation of the drive to acquire material wealth to a classical economic ideal, and second, John Locke’s demand that the State protect private property and individual liberties, thus setting the stage for liberal political theory. In other words, the pursuit of one’s own personal happiness through the material acquisition of personal wealth as well as the state’s protection of individual liberties has become a Western classical ideal. Indeed, the terrifying force of this ideal may be its universality. While Western societies developed legal structures over the centuries to protect private property—such as contract enforcement, mortgages, secured loans, liens, and bankruptcy proceedings—and to ensure the protection of individual liberties—for example, passage of a Bill of Rights, due process of law, and jury trials, non-Western societies did not, for the most part, develop similar institutions. What revolutionized our world at the end of the last millennium was not the adoption of a Western classical ideal by the non-Western world, but the adoption of the Western methodology of achieving this ideal through private property, democratic governance, and the Rule of Law. Under modernization theory, there is a clear and pronounced emphasis on constitutional, legal and regulatory reform.29 In fact, modernization theorists created the so-called “Law-and-Development” movement in the 1960s,30 espousing the idea that emulating Western legal principles and institutions lays the foundation for legal development, and therefore, supports the development process in general. A
See e.g., Fukuyama (1992) (purportedly describing man’s “universal history” by arguing that liberal democracy is the “end point of man’s ideological evolution” and thus, the final form of human government. This, in essence, constitutes the “end of history” beyond which no further evolutionary development should be expected). In response to vigorous critiques of his analysis, Fukuyama defends himself as a “former neoconservative” whose visions of the” “End of History,” present a kind of Marxist argument for the existence of a long-term process of social evolution, but one that terminates in liberal democracy rather than communism.” Francis Fukuyama, “After Neoconservatism,” New York Times Magazine (February 19, 2006). However, this “vision” still delineates a linear view of history with a predetermined Western-focused ending point. 29 Modernization theory supports the view that, “law is essential to economic development because it provides the elements necessary to the functioning of a market system. These elements include a universal rule uniformly applied, which generates predictability and allows planning; a regime of contract law that secures future expectations; and property law to protect the fruits of labor. In theory, law assists political development by serving as the backbone for the liberal-democratic state. Law is the means through which the government achieves its purposes, and it serves to restrain arbitrary or oppressive government action.” Tamanaha, supra, note 2, at 473. 30 See generally Botchway (2001), pp. 159, 177–180. 28
2.2 Modernization Theory Vs. Dependency Theory
45
modernist approach creates a solid foundation for creating a positivist, normative style of law-making with which most common law practitioners are familiar. However, the fundamental character of modernization theory seems to be, for the most part, overlooked. The theory describes an ahistorical, linear process based on the experience and cultural values of Western nations. While the value of this process and the end product that it desires to achieve may be debated, the inherent, and somewhat negative, drawback to the modernization approach is, in fact, its ahistorical perspective. The model has been criticized (albeit primarily by dependency thinkers, but also by modernization scholars themselves) as “ethnocentric”31 by steadfastly failing to recognize and acknowledge that it engenders and supports Western forms of economic production, democratic governance, and laws. As a result, the approach fails to take into account the differences in cultural values and the legal histories of developing nations. This “one style fits all” approach, in turn, may be perceived as being somewhat autocratic in its overtones.
2.2.1.1
Modernization Theory in Practice
Modernization theory thus supports, and perhaps even applauds, the demise of the former Soviet Union and the creation of Western-styled democracies in Eastern Europe, the Baltics, the Balkans, and Eurasia.32 Modernization theory creates a
31
See e.g., Shapiro (1997), pp. 14, 20: The traditional critiques about Modernization theory’s ethnocentric bias are still relevant. The assumption that Western forms of political, economic, and social organization can provide universal models requiring only minor adaptations to the cultural and historical contexts of CEE [Central and Eastern European] countries reflects Western cultural biases. At the same time, this view dismisses the anthropological conceptions of culture and postmodern understandings of context where systemized ways of organizing the world are embedded within specific cultural and social systems. . . Modernization models are derived from Western cultural and historical legacies. The specific conditions from which free markets and liberal democracies in the West emerged are not comparable to those in CEE countries, even those CEE countries that had some prior democratic and free market traditions. Further, Western political and economic systems have undergone massive changes since their inception so that the current forms barely resemble the early stages. Yet countries in the CEE region are expected to catch up to conditions that have taken decades to develop in the West. Many authors have noted that such expectations are a formula for uneven and unpredictable development. In many ways, the Modernization process in CEE is like trying to rebuild a Skoda into a Mercedes while speeding down the road at seventy miles an hour. Id. (citation omitted).
Indeed, the so-called “neoconservatives” have cautiously declared victory in war-torn Iraq, initially seen as a “neocon” policy disaster. But 17 years following the invasion of Iraq in 2003, and having defeated the Islamic State in Iraq and Syria (ISIS), ushering in democratic elections, and staving off a Kurdish move for independence, some see the invasion as “justified.” This is certainly not accepted in all quarters as, “[t]oo much blood was shed along the way in Iraq and elsewhere. America botched the occupation, touching off a brutal Sunni insurgency. Then Iraq’s politicians stoked sectarian divisions, leading to yet more violence. They must learn from these mistakes, or 32
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nexus between a free market economy and a liberal democracy. Both are seen as co-equal partners working in tandem to bring the wealth and prosperity of Western nations to the underprivileged classes of the developing world. The conceptual framework of both acting in concert is certainly an ideal worth aspiring to, but it has been clear for quite some time that the nexus may not be an absolute predeterminate of successful development. Thus, the modernization of Turkey by sacrificing more traditional Islamic-based values in favor of instituting a modern nation-state, joining NATO, and seeking European Union (EU) membership33 is also a step-by-step path to which a modernist approach would ascribe. Yet Turkey’s 2017 adoption by a contested referendum of “18 constitutional amendments promises to set the country firmly in an authoritarian direction that will be difficult to reverse. With broad new powers, Turkish President Recep Tayyip Erdogan can rule with virtual impunity.. . .” thus transforming Turkey from “a once-promising candidate for European Union membership to autocracy.”34 Indeed, under these reforms, Erdogan could serve as president for three consecutive terms until 2029 without modifying the official term limit, thus bringing his total tenure as Turkey’s leader possibly to as many as 26 years.35 In fact, by virtue of his decisive election in June 2018, Erdogan may serve until 2032.36 Turkey thus follows China’s example, rather than other liberal democracies, since China also recently removed the two-term limit for its president.37 Interestingly enough, for the past 60 years, the continent of Africa stood out as the center of “leaders for life”—politicians who managed to hold on to power for decades. But recently, African leaders have stepped aside peacefully after reaching their term limits, most notably in Sierra Leone and Liberia. “Zimbabwe, for example, instituted presidential term limits in 2013, but these limits did not apply retroactively. That meant then-President Robert Mugabe could have constitutionally remained in power until 2023. However, he resigned after a military intervention
they will waste this hopeful moment.” “Fifteen Years After America’s Invasion, Iraq is Doing Well,” The Economist, (March 28, 2018). 33 See e.g., Robert Kaplan, “Turkey’s Precarious Success,” New York Times, Feb. 27, 2001. 34 Cook (2017). See also Galston (2017); Kabouche (2018); Grimm (2017). 35 The Globalist, “Turkey’s Erdogan: Leader-for-Life?” (March 20, 2018). Of course, bear in mind that most parliamentary democracies do not have specified term limits, so that Germany’s Chancellor, Angela Merkel, for example, is in her fourth term as of this writing. Id. 36 Carlotta Gall, “Erdogan’s Victory in Turkey Election Expands His Powers,” New York Times (June 24, 2018). 37 Chris Buckley & Adam Wu, “Ending Term Limits for China’s Xi is a Big Deal. Here’s Why,” New York Times (March 10, 2018).
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in November 2017.”38 While term limits can facilitate democratization in Africa, it is not a panacea. However, adhering to term limits does allow an opportunity for opposition and minority political parties to share power and bring other voices and approaches to the political scene, thus ushering in a more robust democratization process.39 In terms of modernization theory, this descent into authoritarianism comes as an unpleasant and unpredictable surprise.40 While the gradual or even sudden transition from a democratization to authoritarianism is a complex phenomenon that lies outside the parameters of this discussion, it would be well to note that undermining a free press, eliminating terms limits for elected officials, and questioning the legitimacy and powers of an independent judiciary are but hallmarks down a slippery and arguably dangerous descent into authoritarianism. Moreover, the same lack of historical context prevents modernization theorists from predicting a case like Iran or Taliban-controlled Afghanistan where modernist principles are eschewed altogether in favor of pre-modern values, practices, and governance. As a further example of its lack of historicity, modernization theory was at a loss to explain the relative success of “soft” authoritarian regimes or illiberal democracies that have encouraged capitalist-based economic growth while at the same time repressing true democratization, respect for human rights, and certain social and religious institutions. Examples of such economic success stories include Spain under Franco, Chile under Pinochet, Malaysia, and China.41 On the other hand, it is possible to have vibrant democratic institutions without significant economic development as in the case of India until fairly recently, and in the post-Marco era Philippines. Perhaps disappointingly to modernist theorists, both nations are experiencing a populist backlash at the time of this writing. Indeed, this may be seen as a larger pattern of a rising authoritarianism including the election of Narendra Modi in India and Rodrigo Duterte in the Philippines, and more broadly, in a populist wave across Europe in Poland, Hungary, the Czech Republic and Slovakia, including strong showings in France and Germany. Commentators have noted that, “[p]opulist governments in Hungary and Poland have intensified their efforts to weaken core liberal institutions such as a free press, independent civil society, and constitutional courts.”42 In analyzing the underlying context and motivations of “populism,” commentators note that populists have a tendency to see themselves as the “only only legitimate political actors,” united against the “corrupt elites.” Thus populists
Alexander Noyes, “In Africa, presidential term limits are working,” Wash. Post (April 24, 2018). Id., see also Cheeseman (2018). 40 Sarfati (2017), pp. 395–415. 41 See e.g., Larry Rohter, “Chile’s Retirees Find Shortfall in Private Plan,” New York Times, Jan. 27, 2005; Joseph Kahn, “Democratic Hopes Test China’s Political Limits,” New York Times, Mar. 2, 2003. 42 William Galston, “The rise of European populism and the collapse of the center-left,” Brookings (March 8, 2018). 38 39
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“seek to take over the judiciary, to gain control of the media, and to co-opt other institutions.” Populists also often employ “exclusionary principles” drawing “distinctions between people along economic, religious, or moral lines. . . . But over the past 20 years, by far the most salient division has been ethnicity.” This approach certainly poses an existential threat against the foundation and institutions of democracy such as a free press and an independent judiciary, reverberations of which are still echoing.
2.2.1.2
Modernization Theory Questioned by Its Own Proponents
Under modernization theory, free market growth should be disaggregated from encouraging the growth of representational democracy and democratic institutions. However, it is becoming increasingly clear that one can be achieved without the other. Indeed, “the marriage between capitalism and democracy, although prevalent in the West, is not always an easy or happy one.”43 In the 1970s, modernization fell victim to its own “deep pessimism”44 in light of the failure of developing countries to develop economically, and by the proliferation of authoritarian and military regimes. These events seemed to negate modernization’s own prescriptions for success based on capital market development and democratization. By 1974, less than a decade after it had begun in earnest, the modernization movement was “in crisis” 45 leading to its apparent collapse, despite subsequent attempts to reform it.46 Modernization theory enjoyed a broad-based resurgence after the collapse of the Berlin Wall in 1989, and related historical events. The recent rhetoric of globalization is, in fact, grounded in modernization theory. Indeed, the introduction of democratic reforms in the Middle East is breaking new ground for modernists. While elections in Afghanistan, and Iraq signal significant, and even impressive,
43
See e.g., Shapiro (1997), pp. 14, 20. Tamanaha, supra, at 472. 45 See Trubek and Galanter (1974), p. 1062. These commentators proposed an “eclectic critique” that criticized the law and development model based on modernization theory as “ethnocentric and naïve.” Id. at 1080. They argued that this modernist view of developing a legal infrastructure did not reflect the realities of developing countries, and was potentially dangerous by attempting to export legal forms and institutions that could too easily be manipulated by and for the purposes of the controlling elites in the countries in question. Id. at 1099. 46 “These Modernization revisions included: (1) a greater focus on the role of tradition in processes of social mobilization and change; (2) an expanded methodology of case studies and historical analyses; and (3) a more sophisticated analysis of change that examined the role of multiple institutions, multilinear paths toward development, and the interaction of internal and external factors influencing change.” Shapiro, supra note 8, at 16 (citation omitted). Most importantly, modernization thinking has been revised to move away from nation-state directed growth (top-down approach) and towards civil society development (bottom-up approach). 44
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reforms, the question of whether modernization theory will prevail in these societies is an open-ended one. Clearly, these are all works in progress. From a legal perspective, modernization theory produced the law and development movement in the mid-1960s, which generated its most important legal scholarship from roughly 1965–1975.47 The law and development movement followed the basic tenets of modernization theory by espousing the belief that there is a natural, inevitable progression towards Western legal concepts, institutions, and legal structures. Law was deemed essential to the formation of a fully functioning market system. Further, the legal infrastructure of a society was seen as providing the basic foundation in support of a liberal, democratic, modern state. Indeed, the lack of a Western-styled legal infrastructure was often cited as an impediment to the legal and to the overall development within a society. Thus, the law and development movement (rather uniquely American in its adherents and its overall thrust) advocated the speedy adoption of the Western legal infrastructure. For example, the law and development movement advocated retooling legal education and the legal profession within developing countries.48 Modernization theory and its practical approaches to development, however, were not universally accepted. Two basic (and related) critiques of modernization theory will be examined here, first, that offered by the leftist critical legal studies movement of the 1970s,49 and second, the scathing attack made by the Marxist school of dependency theorists. Modernization theory came under attack for being too Eurocentric (or ethnocentric), too conservative, and too naive. Indeed, the death knell to the law and development movement was sounded by David Trubek and Marc Galanter, two American legal commentators. They announced its premature death in 1974 in a law review article entitled, “Scholars in Self-Estrangement: Some Reflections on the Crisis of Law and Development Studies in the United States.”50 After less than 10 years of legal scholarship, the obituary of the law and development movement (and the “legal liberalism” that it espoused) had been duly filed. The law and development movement collapsed in an “operatic death” after this attack, and David Trubek subsequently became a central figure during the 1970s in a uniquely U.S.-based legal movement known as critical legal studies (CLS).51 The CLS movement offered an “eclectic critique” of the rule of law approach to
47 Bilder and Tamanaha (1995), pp. 472–473. See Galanter (1966), p. 156. See also Merryman (1977), p. 457; Burg (1977), pp. 492, 496–498 nn. 17, 18, 22. 48 Bilder and Tamanaha (1995), p. 473. 49 Id. at 474. 50 Trubek and Galanter (1974), p. 1062. 51 Bilder and Tamanaha (1995), pp. 470, 474–475.
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development and warned against the dangers of exporting Western laws and legal institutions to the developing world.52 Indeed, it may be argued that Max Weber established himself as a precursor of the CLS movement for, like Weber, CLS scholars were concerned about the legal consciousness of capitalist societies. Proponents of the CLS movement wanted to change that consciousness through social transformation or, perhaps more succinctly, through law as a form of social engineering. How is this related to law and the question of development? CLS scholars examined the relationship of law to capitalism and questioned a fundamental presupposition of modernization theory: that the modern capitalist society is the desired end of all developing nations. The now defunct CLS movement made several important contributions in this area by: (1) questioning the centrality of the state in the development process; (2) questioning the Eurocentric nature of law and development; and (3) acknowledging the potential use of law to perpetuate underdevelopment in developing societies.53 Unfortunately, the CLS movement did not offer any alternative to the modernization approach to legal development.54 Indeed, it may be argued that the CLS critique was not altogether original since the seeds of it were contained in the scholarship of the law and development movement. Not all modernization proponents believed that the U.S. legal model could be easily exported to and transplanted in a developing country context. Americans rely heavily and rather uniquely on law and legal institutions, a practice that is not easily recreated in other societies.55 Moreover, the CLS movement failed to resolve the tension between legal universalists, who believed that the Western mode for development was the most logical and, ultimately, the only acceptable mode for development, and cultural relativists who believed that imperialism was the “necessary logical consequence of universalism.”56 The proponents of cultural relativism believe that there is no universal norm for human development and no fixed parameter for the end result of development. Indeed, cultural relativists argue that different cultures have differing views on what constitutes “development.”57 CLS scholars may have incorporated certain
52
Id. at 475. For a much fuller discussion on the different movements and tensions within the Law and Development movement, see Trubek and Santos (2006). Specifically, Duncan Kennedy’s essay, “Three Globalizations of Law and Legal Thought: 1850-2000,” gives an historical context to shifting forms of legal thought encompassing classical legal thought (1850–1914), social thought (1900–1968) and neoformalism (1945–2000). 53 Id. at 474–475. 54 Id. at 475. 55 See e.g., Franck (1992), pp. 18–24. 56 See S. Huntington, Clash of Civilizations, at 310. 57 Indeed, this may be a propitious time to renegotiate what constitutes “universal” or “fundamental” rights, long considered self-evident and a human entitlement to Western scholars. If, however, this effort is to be undertaken seriously, non-Western societies may need to re-examine the principles of cultural relativism that can all too easily be used to camouflage and perpetuate violations of basic human norms. Not all practices swept under the rubric of “culture” are supportable. For example,
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tenets of cultural relativists in making their critiques of modernization approaches to legal development, but the underlying tension between the two viewpoints was not satisfactorily resolved. This fissure is precisely where the fault line lies between modernization and cultural relativism.
2.2.2
Dependency Theory: A Contrarian Voice
All of the foregoing discussion takes place against a backdrop of dependency theory, which offers a fundamental critique of modernization theory. Dependency theorists helped fill the vacuum left by the demise of the law and development movement in the mid-1970s by offering their own Marxist brand of analysis.58 Rather than ascribing a backward state of development to the lack of Western-based capitalism (and supporting laws and institutions), dependency theorists argue that “underdevelopment” is caused by the system of world capitalism that perpetuates extractive and exploitative relations with the developing world. Whereas modernization theorists tend to “blame the victim” (i.e., the developing nation) for its lack of modem capitalism and a supportive ROL framework, dependency theorists tend to blame “the system.” In other words, modernists would urge developing countries to “get with the program,” whereas dependency theorists would argue that the problem lay with “the program.” While modernists were floundering in the 1970s, dependency theorists dominated the conversation about development. In contrast to modernization theory, dependency theory is not a descriptive process of change leading to broad-based economic development, but a historical analysis and critique of the root causes of underdevelopment—on this level, a comparison of the two theories has been uneven. In any case, dependency theory considers the historical nature, causes, and implications of colonialism and its aftermath. Perhaps the most important work contributed by dependency thinkers was an analysis of neo-colonialism that argued that newly independent developing countries were entering global markets at their own peril. The legacy of colonialism, they argued, left these countries without the necessary infrastructure of commerce, transportation, trade, and communications as well as supporting social, educational, and political institutions. Apart from its historical analysis, dependency theorists also argued that developing nations were trapped in self-perpetuating “dependency” relations with advanced nations by continually having a net deficit in capital, technology, and educational
many cultural forms that oppress women (e.g., dowry, female circumcision) should be critically re-examined to assess their value, as cultural norm. Despite the “imperialist” pretensions of modernists, however, past experience clearly demonstrates that any real change to cultural norms must come from within the society. Conformity to non-indigenous cultural norms cannot be imposed from the outside. See Mountis (1996), p. 113. (See the discussion on whether there is a human right to development in Chap. 4 of this text.) 58 See e.g., Greenberg (1992).
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opportunities necessary to create an educated workforce. Moreover, international laws and practices of commerce, trade, and investment were all created by and thus, skewed in favor of, industrialized nations leaving developing countries in a declining state of impoverishment and “underdevelopment.”59
2.2.2.1
New International Economic Order (NIEO)
For dependency theorists, law was secondary to economics following Marx’s thinking that law constitutes the “superstructure” to the underlying “structure” of economics. Nevertheless, dependency theory was the genesis of the so-called “international law of development”57 that underscored U.N. initiatives such as the New International Economic Order (NIEO).60 For example, the NIEO agenda advocated giving preferential trade and investment treatment to developing countries, debt relief and grants-based assistance, access to technology transfers, and the recognition to the right to development.61 Ironically, while the various U.N. resolutions and other actions taken may have lacked legal effect, the NIEO-based agenda has, nonetheless, been partially successful in practical terms. For example, the World Bank and other multilateral and, on a limited scale, bilateral institutions are implementing large-scale debt relief,62 moving away from loans and towards grants, and facilitating certain environmental technology transfers to developing countries.63 In addition, dependency legal theorists countered the “ethnocentrism” of modernists by espousing the intrinsic worth of preserving the legal values, histories, institutions, and practices of developing nations. Dependency theorists feel that the starting point for underdevelopment is colonialism and that even where harsh political repression has ended with the independence of former colonies, the exploitation of developing countries has not stopped.
59
While the relative merits of this critique lies outside the scope of this discussion, it is important to note that this theory formed the basis of certain economic models used by developing countries, the most prominent being import substitution. In another contrast with modernization, dependency theorists did not describe a single “process of development” but rather several models of development. 60 Declaration on the Establishment of a New International Economic Order, G.A. Res. 3201 (S-VI), § 4e, U.N. GAOR, 6th Spec. Sess., Supp. No. 1, at 3, U.N. Doc. A/9559 (1974). 61 Certain parts of this following analysis was originally set forth in a previously published law review article, Sarkar (2005), p. 367. 62 Widespread debt relief has not always met with approval even from a developing country perspective as there is an implicit “moral hazard” to debt relief insofar as recipient nations may appear uncreditworthy and unattractive to investors. See e.g., Barbara Crossette, “Ex-Premier of Singapore See Pitfalls in Debt Relief,” New York Times, Oct. 15, 2000, at Final 4. 63 See e.g.,15 U.S.C. § 4728(a) (2004) (stating in relevant part: “it is the policy of the United States to foster the export of United States environmental technologies, goods and services. In exercising their powers and functions, all appropriate departments and agencies of the United States Government shall encourage and support sales of such technologies, goods and services.”).
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Economic, rather than political, domination continues by way of neo-colonial relations between the former colonizer and the formerly colonized, thus perpetuating the economic dependency of the latter. Thus, dependency theory is deeply rooted in the specifics of colonial history and its aftermath. Dependency theorists view development as an intensely political process that pits advanced industrial societies against developing nations. On a practical level, dependency theorists advocate nationalization, import substitution, and other forms of protectionism in support of nascent industries in developing countries. (This is discussed at length later in the text.) As events over the past few decades have shown, these policies, while well-intentioned, have led to uneven results and generally have not reaped the concrete development benefits that were originally hoped for. Ultimately, the neo-classical economic prescriptions advocated by the International Monetary Fund (IMF) have been imposed on developing economies floundering under the weight of massive sovereign debt, crumbling infrastructure, and crushing poverty. On a legal dimension, dependency theorists do not emphasize law, following Marx’s prescription that law is secondary in importance. Thus, economics rather than law is the focal point of their discussion and analysis. Regardless of the law’s reduced status, dependency theory nevertheless led to the creation of the international law of development.64 The international law of development became the driving force in the late 1970s advocating such changes as preferential trade relations with developing counties, preferred access to development assistance from industrialized countries, and the transfer of technology to developing nations. These principles were articulated in a series of UN resolutions, declarations, reports and other documents advocating the establishment of a new international economic order (NIEO). The NIEO was designed to level the playing field between the developed and the developing world and restore the imbalances created by colonization.65 The international law of development also urged that a new “human right to development” be created, which is also addressed later in this text.
2.2.2.2
The Kyoto Protocol and the Paris Climate Change Accord
The NIEO strove to create a level playing field between advanced and developing countries in the aftermath of centuries of harsh and repressive colonial regimes. In order to address systemic inequities imposed by such regimes, the NIEO agenda imposed, in certain instances, greater legal responsibilities on advanced nations in order to make up for such past inequities. Indeed, echoes of the NIEO reverberated in the Kyoto Protocol on Climate Change, which was adopted by about 160 countries in December 1997 as parties to the UN Framework Convention on Climate Change.
64 65
Bilder and Tamanaha (1995), p. 479. See Lan Cao, Book Review of Law and Development, at 554–555.
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The Kyoto Protocol specifically required industrialized countries to use 1990 as the base year upon which to reduce their levels of toxic emissions while exempting developing countries from the same or similar requirement. Additionally, the Kyoto Protocol directed developed economies to promote, facilitate, and finance the transfer of technology for mitigating climate change.66 While European nations, Japan and Australia signed the Kyoto Protocol, the United States did not ratify it on a variety of policy grounds, including the exclusion of developing countries such as China which matched or exceeded the U.S. in terms of greenhouse emissions. Further, the general cost and utility of the treaty provisions were also questioned by U.S. policy-makers. The Kyoto Protocol (Treaty) 1997 was the first international agreement to keep the global temperature rise under check, and its commitment period was scheduled to end in 2020. From that period onward, the Paris Accord on Climate Change 2015 (the “Paris Climate Accord”) will come into effect. Both the Kyoto Protocol and the Paris Accord took place under the United Nations Framework Convention on Climate Change (UNFCCC).67 Specifically, “The Kyoto Protocol legally binds developed countries to reduce their emissions. These countries are listed in the Annex I of the UNFCCC. During the first commitment period of Kyoto Protocol (2008–2012), the developed countries were required to reduce their emissions by 5% below the 1990 level. During the current second commitment period of the Kyoto Protocol which spans 2013–2010 these nations are required to reduce the emissions by 18%. The Kyoto Protocol does not bind developing countries to cut down their GHG emissions. Thus, Kyoto Protocol maintains strict difference between the developed and the developing nations in terms of emission reduction targets.”68 Both the Kyoto Treaty and the Paris Climate Accord have the same goal: to restrict the rise in global temperature to below two degrees (2 ) Celsius. Both international agreements recognize that greenhouse gas emissions (GHGs) are a critical factor in the rise of global temperatures with devastating consequences. Further, the historical and current levels of GHGs by country vary widely (for example, compare the United States with that of Malawi.) However, unlike the Kyoto Protocol, the Paris Climate Accord does not differentiate between advanced nations (who must comply with the Kyoto Protocol) and developing countries (who may voluntarily comply with the Kyoto Protocol). The Paris Climate Accord makes all nations under UNFCCC voluntarily commit on their own domestic emission reduction targets.69 66
Conference of the Parties to the Framework Convention on Climate Change: Kyoto Protocol, Dec. 10, 1997, U.N. Doc. No. FCCC/CP/1997/L.7/Add.1, reprinted in 37 I.L.M. 32 (1998) [hereinafter Kyoto Protocol]. 67 See FNM Team, “Difference between Paris Agreement and Kyoto Protocol is in the Approach to Achieve the Ultimate Goal of Stabilizing Greenhouse Gases in the Atmosphere,” Facts N Me, (May 20, 2017). 68 Id. 69 Id.
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The Conference of Parties 19 (COP19) held in Warsaw in 2013 requested all participating countries to submit their national pledges to reduce emissions and other plans to combat the adverse effects of climate change. These were called Intended Nationally Determined Contributors (INDC). Before the Paris conference, 180 countries communicated their emission reduction targets to the UNFCCC. These countries collectively emit 90% of the total emissions worldwide.70 The Paris Climate Accord entered into effect on November 4, 2016, thirty days after the date on which at least 55 Parties to the Convention accounting in total for at least an estimated 55% of the total global greenhouse gas emissions had deposited their instruments of ratification, acceptance, approval or accession with the Depository of the UNFCCC.71 The United States announced its withdrawal from the Paris Climate Accord on June 1, 2017, stating in part that it wanted “a better deal.” However, within minutes of this pronouncement, “the leaders of France, Germany and Italy issued a joint statement saying that the Paris climate accord was ‘irreversible’ and could not be renegotiated.”72 After Syria signed the Paris Climate Accord on November 7, 2017, this left the U.S. as the only country not to sign on to it.73 However, President Trump also announced on January 11, 2018, that he would consider rejoining the Paris Climate Accord if a “fairer” deal for the United States were renegotiated.74 As of this writing, nothing has changed.
2.2.2.3
Common But Differentiated Responsibility
One persistent theme that has emerged from dependency theorists is the legal concept of equity-based relations in international law now referred to as “common but differentiated responsibility (CBDR).” While the term may be fairly new, the concept is not, as it dates as far back as the Treaty of Versailles (1919).75 Non-uniform, differentiated, non-reciprocal treatment can be found in trade76 as well as environmental regimes. However, the CBDR legal standard has imposed non-uniform legal obligations on contracting parties and has been most prevalent and systemic in international 70
Id. See UN Climate Change website listing the Status of Ratification. 72 Michael Shear, “Trump Will Withdraw U.S. From Paris Climate Agreement,” New York Times, (June 1, 2017). 73 Mythii Sampathkumar, et al., “Syria Signs Paris Agreement—leaving U.S. only country in the world to refuse climate change deal,” Independent (November 7, 2017). 74 “Climate change: Trump says US ‘could conceivably’ rejoin Paris deal,” BBC News (January 11, 2018). 75 See Stone (2004), pp. 276, 278. 76 The General Agreement on Tariffs and Trade (GATT) added nonreciprocal trade provisions in favor of developing countries in 1979, by permitting “differential and more favorable” tariff treatment. Stone, supra, at 278. 71
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environmental legal agreements stemming from the three “earth summits.” The first of these summits was the landmark Stockholm Declaration of the U.N. Conference on the Human Environment (1972) that took “into account the circumstances and particular requirements of developing countries and any costs which may emanate from their incorporating environmental safeguards into their development planning and the need to make available to them, upon their request, additional international technical and financial assistance for this purpose.”77 The second summit held in Rio de Janeiro in 1992 also produced detailed international legal agreements such as the Rio Declaration of Principles, the Statement of Forest Principles, the Convention on Biodiversity, and Agenda 21, that all contained the CBDR principle in some form. These principles were reaffirmed at the third earth summit held in Johannesburg, South Africa in 2002.78 A successful example of the use of CBDR is the Montreal Protocol (1987) which took effect on January 1, 1989. The Protocol required a 50% reduction in the production and use of ozone-depleting substances. The Protocol led to the adoption of the Helsinki Declaration and the London Amendments of 1990, which led to the virtual elimination of ozone-depleting substances by January 2000. Article 2(9)(c) of the Montreal Protocol required a two-thirds majority vote of the participating nations representing at least 50% of the total worldwide consumption, giving veto power, in effect, to both developed and developing nations.79 The Montreal Protocol’s common but differentiated responsibility standard created an equity-based legal regime persuading China, India, and Brazil to join the Protocol. The significant features of the Protocol included: (1) a ten year delay in reducing emissions permitting short-term increases in the production of ozonedepleting substances by developing countries; (2) a multilateral fund to facilitate compliance among developing countries; and (3) facilitated transfers of environmentally-friendly technologies. The Protocol has led to the virtual elimination of ozone-depleting substances. Perhaps the most well known legal document containing a CBDR principle is the Kyoto Protocol that specifically states in Article 3(1) that: “the Parties should protect the climate system. . . on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.”80 The Kyoto Protocol81 requires Annex I countries (i.e., advanced nations belonging to the Organization for Economic Cooperation and Development or “OECD”) to 77 Stockholm Declaration of the United Nations Conference on the Human Environment, Stockholm Declaration, U.N. Doc. A/CONF.48/14, princ. 12 (1972), reprinted in 11 I.L.M. 1416, 1419 (1972). 78 See Report of the World Summit on Sustainable Development, U.N. Commission on Sustainable Development, U.N. Doc. A/Conf. 199/20 (2002). 79 Montreal Protocol, art. (2)(9)(c). 80 Kyoto Protocol, supra, art. 3(1). 81 The Kyoto Protocol entered into effect on February 16, 2005 following its ratification by the Russian Parliament on November 5, 2004. Article 25 of the Protocol specifies that ratification by 55 countries representing 55% of the total worldwide greenhouse gas emissions is necessary in order for the accord to take legal effect. See Kyoto Protocol, supra, art. 25. Notably, the United
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reduce their collective greenhouse emissions by at least 5% below 1990 levels by the years 2008 to 2012. However, non-Annex I countries, including India and China, were under no similar obligation—this, in large part, fueled the United States objection to the treaty.82 Further, Art. 3(5) and 3(6) of the Protocol provide that “economies in transition” listed in Annex I may choose their base year, other than 1990, to make their emissions reduction burdens less onerous. Although the CBDR standard in the Kyoto Protocol mirrors the approach taken by the Montreal Protocol by imposing different legal standards and timelines for compliance on the signatory nations, it has been widely criticized. From one perspective, the differential treatment implicit in the Protocol seems patronizing in character, implying that developing nations lack the financial, scientific, and administrative capability to address global warming. From another perspective, it seems that onerous burdens are being placed on developing countries while advanced nations, who do emit greenhouse gases, are not being asked to change their current practices or assume any financial burdens for achieving a worldwide reduction in greenhouse gas emissions. With the passage of the Paris Climate Accord, it seems as though the CBDR standard has fallen into disuse if not actually abandoned. While the name of the underlying concept, Common But Differentiated Responsibility, implies that a differential legal norm (i.e., providing a more advantageous set of legal standards to one group over another) is being applied, it may be argued that the legal norm is actually contextual in nature (i.e., providing the same legal treatment but permitting different applications that vary based on certain factors.) A contextual norm has been described as: A norm which on its face provides identical treatment to all States affected by the norm but the application of which requires (or at least permits) consideration of characteristics that may vary from country to country. The application of a contextual norm thus typically involves balancing multiple interests and characteristics.83
Thus, if the CBDR concept could shift from common but differentiated to common and contextual responsibility (CACR), perhaps some of the divisive rhetoric can be avoided. A shift in analysis permits both the introduction of the legal concept of equity as well as the dimension of historicity missing from modernization theory. The element of equity tends to level an unequal playing field by imposing the same legal obligation to comply with international commitments, but differentiating the means by which such compliance is sought.
States and Australia have not ratified Kyoto. See Gary Thomas, “Global Warming Accord Takes Effect Minus US, Australia,” Voice of America, Feb. 14, 2005. 82 While the Kyoto Protocol excludes developing nations from making emissions reductions, Art. 12 of the Protocol establishes a Clean Development Mechanism to provide incentives to industrialized countries to finance emissions reduction projects in developing countries (e.g., emissions trading, carbon sinks). See Kyoto Protocol, supra, art. 12. 83 Magraw (1990), pp. 73, 74.
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2.2.3
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A Reconciliation of Opposites?84
It is clear that modernization theory experienced a resurgence, especially in the context of the so-called Global War on Terror initiated by the unprovoked attacks launched on September 11, 2001 on the United States. In the immediate aftermath, modernization theorists re-energized the perspective that in order to stem the flow of fundamentalist Islamic-based terrorism, societies harboring such terrorists need to introduce and systematize representational democracy and economic growth. The hope was that once the benefits that flow from these systemic changes are realized, it will stem the tide and eventually eliminate the threat of Islamic-based terrorism.85 This is a very significant development since modernization theory now became a backdrop to overarching strategic geopolitical considerations, international diplomacy, and even the prosecution of a global war on terror. This may come as a surprise to the U.S. military, intelligence, and national security communities since development issues have simply not been on their agendas heretofore, at least not in any truly significant way. The reason this development is so interesting is that it links, however tentatively, the root causes of endemic poverty and political disenfranchisement to the downstream effects that may ultimately lead to terrorist activities, political destabilization, and the emergence of asymmetric threats against the West, particularly the United States. (This issue is further discussed in Chap. 8.) Perhaps over time, this linkage will become clearer and better understood, so that the causes and effects of global poverty will be more fully integrated into geopolitical considerations that go into the formulation of national security, defense, and military strategies.86 Recognizing the past inequities among nations, and imposing different legal obligations as a result, is a difficult transition for traditional modernists or “neoconservatives” to make. It requires an acknowledgment of a non-Western history and creates a result based in equity, rather than strictly in law. Perhaps it is time to take a leap of faith. Law and equity are certainly interrelated concepts insofar as equity tends to mitigate the harshness of law by taking notions of fundamental fairness into account. By recasting differential norms as contextual norms, the elements of equity and historicity that are so notably absent from modernization theory, are introduced to it. Modernists should not fear that this will weaken or dilute their theoretical approach. Indeed, by incorporating a missing dimension, modernization theory This section is a summation of a previously published law review by the author, “Theoretical Foundations in Development Law: A Reconciliation of Opposites?” 33 Den. J. Int’l L. & Pol’y 367 (2005), and published here with the kind permission of the publisher. 85 Neil MacFarquhar, “Unexpected Whiff of Freedom Proves Bracing for the Mideast,” New York Times, March 6, 2005; Todd Purdum, “For Bush, No Boasts, but a Taste of Vindication,” New York Times, March 9, 2005; Thomas Friedman, “Arabs Lift Their Voices,” New York Times, Apr. 7, 2005. 86 For a fuller discussion on the collapse of failed and failing states and its relationship to Islamicbased terrorism, see Sarkar (2013). 84
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will be greatly strengthened. Just as law is truly balanced by equitable principles, so modernization theory can be balanced by elements of dependency theory. In the end, modernization theory’s “autocratic” edges may be softened by making it more inclusive, more equitable, more representative, and therefore, more effective in the long run. In addition, it would be well to remember that contextual norms for nations are on a sliding scale insofar as the nations themselves are dynamic and constantly changing. The international scene is constantly in flux and as the circumstances of developing nations change, so too will the legal standards that will be applied to them. Indeed, the entire point of the development process is to actually achieve development. Therefore, there is no reason to classify countries of the world into unyielding categories. It is clear that modernization and dependency theory are united in their regard of the fundamental importance of capitalism to the overall development of a society. The two theories tend to part company on where capitalism ends: with the good of the individual or the good of society. Modernization theory emphasizes the individual and the greater good of the individual. The natural proclivity of the state to restrain an individual's freedom and interfere with his/her ownership of private property is held in check. Capitalism is integral to modernization as it provides the basis upon which to pursue economic prosperity, a key element in the individual pursuit of happiness. In contrast, dependency theory that supports a socialist form of governance, elevates the good of society over the good of the individual. It is the natural acquisitiveness of the individual that is restrained by abolishing private forms of ownership. The end of the development process for modernization theorists rests with the triumph of individualism, whereas the final vision of neo-Marxist dependency theorists rests with a classless state where the will of the individual is subordinate to that of the state. Now, this may be a distinction that no longer matters. With the demise of Soviet-styled approaches to economics, politics, and law, the firmest advocates of dependency theory have been overtaken by history. It is difficult to argue with the proposition that the legacy of colonialism caused a great deal of the economic, political, and power imbalances in the post-colonial world. However truthful or compelling this analysis may be, it at best provides an explanation of certain imbalances, it does not resolve them. Therefore, in a very real sense, dependency theory results in a dead-end. Moreover, dependency theorists are wrong in a vital respect. Capitalism is viewed as a zero-sum game where the exploitation of the developing world is inextricably linked with the creation of capitalist wealth in advanced, industrial societies. This fundamentally misinterprets the nature of capital, which can be produced, in theory, ad infinitum by any entrepreneur, regardless of his or her location in the developing world. Thus, dependency theorists seriously miscalibrate the impact of creating capitalist market conditions in developing nations, the global repercussions of which are clearly being felt now. In a more globalized society, the creation of wealth in East Asia, for example, not only enriches entrepreneurs in East Asian countries but it also enriches investors in the West. Similarly, the impoverishment of East Asian economies also may result in
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the unemployment of U.S. factory workers who can no longer compete with the drastically reduced price of East Asian manufactured goods. Dependency theorists correctly identified the fact that extractive and exploitative neo-colonial economic relations between the developed and the developing world caused the underdevelopment of developing nations. It is not clear whether dependency theorists anticipated a global economy where developing countries are also able to profoundly affect the capital markets and labor conditions of the developed world. Apparently “dependency” has been viewed by dependency theorists as a one-way, not a two-way, street. By dismissing the ability of developing nations to successfully stimulate capitalist economic growth and by revealing its paternalistic view of the potential of the developing world, dependency theory bankrupted itself. Indeed, one wonders if modernization theorists have lost sight of an important dimension of their own thinking as well. The fairly new, and consistently controversial, cutting edge of foreign investments has centered around labor rights (flowing from human rights concerns) as well as on implementing environmentally safe technologies and practices. By solely emphasizing the extractive, profit-making potential of such undertakings, and by steadfastly refusing to protect interdependent ecosystems, endangered species, and the environment generally, modernists are imposing a new and completely unnecessary zero-sum game on all of us. Instituting new environmental technologies, management controls, and energy alternatives creates a wealth of new opportunities in employment, patentable technologies, and global linkages. It seems fairly obvious that corporate “polluters” can organize different wholly owned subsidiaries to deal with environmental needs. In so doing, they will create jobs and new technologies (both of which are exportable) in the process. In essence, both human and environmental elements are critical to fostering long-term and meaningful sustainable development. Whatever the shortcomings of both development approaches, there is a certain philosophical convergence regarding the role of law in the development process in both modernization and dependency theory. We are currently witnessing an unprecedented globalization of commercial laws. As the world economy becomes more integrated, commercial laws are becoming harmonized on a global scale so that business may be conducted more smoothly and efficiently without having to accommodate the particularities of different legal cultures, systems and laws. Dependency theorists may view this as an inexorable progression whereby the legal superstructure has slowly begun to reflect the underlying unity of the economic structure. (Rather unfortunately for dependency theorists, the underlying economic structure is still capitalism, and not socialism.) Modernization theorists would see this evolution as a linear progression towards a rule of law regime on a truly international scale. Thus, the rational order of law in support of world capitalism (perhaps as viewed from the perspective of Max Weber) may be seen as the wave of the future. In conclusion, why should we revisit and attempt to reconcile two theoretical perspectives on development law? Modernization theory is already taking on new dimensions of analysis, yet the equity-based differential treatment of developing nations has remained as a constant theme over the past three decades. Rather than
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continuing a stalemate between the two theoretical approaches, a slight shift in the analysis of modernization theory permits the reconciliation of the two. The merit in doing this is to create a coherent theoretical approach that reconciles the differences between the two while acknowledging the strengths and shortcomings in both. As a concluding note, it should be clear that this reconciliation is one of two Western-based theories. The truly absent voice in development law is from the developing countries themselves. Perhaps the final frontier is an exploration of the contributions that the historical experience, legal histories, and traditions that developing countries have to make in this regard. The role of consensual decision-making, conflict resolution, and truth and reconciliation of differences seem full of possibilities. As the theoretical dimensions underlying development law evolve in the future, it may lead to seeking new avenues that are more process oriented, that establish contextual relationships and legal norms, and that emphasize more cooperative and collaborative relationships.
2.2.4
The Janus Law Principle
The Janus Law Principle (JLP) is an original proposed approach to reconciling the modernization approach with the needs of the developing country in question. It takes into account two dimensions: time (looking into a country’s past and seeking out its future) and space (looking inwards into the domestic needs of the country in question as well as looking outwards in seeking full integration into the global economy). Thus, the time and space dimensions of the JLP take into account the dynamic relationship along the time and space axis that a developing country must deal with. The concept of the JLP is suggested by the Roman god Janus who looks both forwards and backwards at the same time.87
87
In an attempt to mitigate the one-sidedness of this approach, I have proposed the Janus Law Principle (JLP) after the Roman God Janus, who looks both forwards and backwards simultaneously. By this, I simply mean to suggest that there are implicit time and space dimensions to sequencing and synchronizing legal reforms. The developing country in question should plot out on a time-space axis for the multi-dimensional legal reforms it is considering. For example, on the time axis, the types of legal reforms a developing country wishes to make in terms of globalization of law efforts (future) along with maintaining its own authentic legal traditions worthy of preservation (past) should be plotted out. On the space axis, the country in question should look to its internal national needs (home) and its need to integrate more fully into the global economy (the world.) One of my students also suggested that the JLP axis also be used as the legal coordinates for a fuller analysis that could include economic data and socioeconomic criteria.
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The JLP approach stresses the importance of looking backwards into the past of a developing country as well as ahead into the future. Legal reform does not take place in a vacuum. The JLP is a solution for modifying and mitigating the impact of a fullfledged modernization approach. The modernization approach to legal development may need to be tempered in order to more effectively bring about a rule of law regime. Thus, the JLP proposes a new reconciliation between the opposing principles of Western universalism and non-Western cultural relativism. It is dangerous to treat ROL programs as if they are being imposed, tabula rasa, as if the host country has no legal history or traditions at all. It is important to understand whether existing laws are being amended, modified, modernized, abolished, or replaced with something different. In some cases, certain laws such as bankruptcy or uniform commercial codes may not exist in the first place and may need to be legislated into law for the first time. It is also important to assess how legal reform measures will affect other areas of the law. For example, how will a new bankruptcy code affect the securitization of bank loans? Will bankruptcy courts or administrative tribunals need to be created if the backlog of cases is too great? Is a bankruptcy code being adopted as part of a host government effort to privatize national industries? More generally, what regulatory regimes and institutions need to be created or changed in order to give new legal reforms true meaning and enforceability? Is institution-building and strengthening a vital component to the efficacy of making these legal changes? Does it involve a re-education effort so that other government agencies, as well as the private sector, know how to utilize this new legal and institutional framework? In addition to looking backwards into the past, it is equally important to examine the host country’s development objectives in mapping out its future. What is the purpose of enacting these legal reforms? Is the country under pressure from the IMF or other international institutions to adopt an ROL regime as part of an overall modernization process? Is the host country experiencing pressures exerted by international capital markets compelling structural legal reform of its capital markets
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and stock exchanges? Is the host country tempted to enact laws merely for the sake of impressing potential foreign institutions or foreign investors in order to obtain funding from them? What forces, from within and without, are compelling legal reform? Perhaps most importantly, is the time ripe for such reforms? Does the requisite political will and government leadership exist to make the proposed legal reforms successful? It is highly unlikely that the political will for effecting real legal change can be conjured up without the critical participation of relevant host government officials, the judiciary, and an educated legal profession. In the case of commercial legal reform, the participation of the business community in the legal reform process may also be a critical factor in ensuring its success. If these sources of critical support for law reform are not solicited, then the laws enacted as “window dressing” (usually in response to “conditionality” imposed by outside institutions) will remain unenforced, incompletely understood by the legal profession, and ultimately ignored. The final outcome will only result in frustration and confusion for all concerned parties. Thus, the objectives of legal reform must be clearly articulated and politically supported if catalytic legal change is to occur. Finally, it is also important to look inward into the society seeking legal transformation. Which segments of the population are urging legal reform? Which segments oppose such reform, and how are their vested interests affected by the proposed measures? Has there been adequate public notice and public debate surrounding the proposed measures? Is coalition and consensus building part of the overall strategy in the legal reform process? Moreover, the host country may also need to look outward to assess the expectations of the international community with regard to legal reform measures being considered by it. Do these legal reform measures help the host country integrate into the international community? Is that the objective? Or, is the objective a narrow one of simply meeting “conditionality” in order to be eligible for the next tranche of a World Bank loan? (The idea of “conditionality” will be further explored in Chap. 5.) Is the international community, including foreign investors, governments, and multilateral financial institutions, involved in and supportive of this legal reform effort? The modernization approach to instituting a rule of law regime is ahistorical in nature. In other words, it does not take any historical factors or cultural components into account when urging that legal reform take place in a developing society. However, it is important to realize that legal reform does not take place in a vacuum. Every society has indigenous legal traditions, and in the case of much of the developing world many have a tradition of “received” law from former colonizers. In addition, religious laws based on specific doctrines of Christian, Muslim, Hindu, and Buddhist faiths may also play a significant role in creating legal norms. Further, in many societies there are often quasi-institutional means for resolving disputes among its members as well as established traditions for arbitrating legal rights and entitlements. For example, the panchayat (or village council) is an established means of resolving territorial, property, and other types of disputes in rural India. A similar tradition is found in many parts of Africa.
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Indeed, the overall legal picture is often quite complex, stemming from hundreds of years of legal history, concepts, institutions, and codes. Apart from these historical factors, the legal picture in any country is constantly changing based on, at least in part, the continuous input from a vigorous legal profession and judiciary. Thus, the legal history of a developing society must first be taken into account in any effort to change the existing legal structures, institutions, or codes. Unless the historical foundation of legal reforms is clearly understood, attempted legal reforms will risk failure. For example, if incorporation of a company is difficult or the process is expensive, time-consuming, or not transparent, then businesses will not have an incentive to incorporate. As a consequence, the host government will lose a taxable business entity and a potential legal employer. Corporate tax income, as well as employer/ employee income taxes and pensions, the regulation of businesses, and the protection of consumers, the environment, and other interests will all be lost opportunities for the host government. In addition, foreign investment opportunities (e.g., joint ventures, equity ownership, or the transfer of technology) may also be lost, since there may not be a local, legitimate, legal entity with whom to do business. Thus, the host government needs to determine whether its legal bureaucracy needs to be streamlined (e.g., by eliminating excessive registration or other forms that create numerous rent-seeking opportunities). Eliminating excessive and ineffective government regulation may help liberalize the economy and make the legal process more accessible to greater numbers of people. (At least this is the hope behind most host government deregulation efforts.) Additionally, there is a spatial dimension involved in the Janus Law Principle since the developing country must assess the domestic and international implications of legal reform measures. ROL reform is a complex, domestic political process, so it is important to start off with a clear understanding of what the domestic expectations are for that process. What do individual constituencies, ruling political parties, or other stakeholders in the development process believe the end result of legal reform efforts should be? How are these concerns being articulated? Is there consensus or dissension on critical components of reform measures? Who is vested in reform, and why? Finally, what, if any, international expectations are at stake in the legal reform process? Is the developing country simply responding to international pressures, or is the will to institute legal reforms its own political goal that has broad-based support? In sum, the Janus Law Principle is meant to be a value-neutral approach by which the developing country comes to terms, on its own terms, with its past legal history as well as the future for its legal development. The Janus Law Principle simply sets forth tools of analysis that are organized on a time-space axis to help participants in the development process articulate their needs for and interests in legal reform. The country in question should carefully examine and define its priorities and goals in dealing with both its past and its future, and its role at home and in the world. There is a strong temptation to use the Hegelian framework of using the dialectic method to define modernization theory as the “thesis” and dependency theory as the “antithesis.” This, of course, begs the question of formulating a synthesis, the
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outlines of which have been sketched out in the figure illustrating as the Janus Law Principle. Of course, as modernization theory as well as dependency theory are fundamentally Western concepts, the resulting synthesis is not one between Western and non-Western approaches to development, but rather one between two distinctly Western modes of analysis. Thus, the Janus Law Principle synthesis may be false or misleading. It merely reconciles two opposing poles of Western values. Indeed, non-Western approaches to law and legal systems development were never truly present at the table for discussion. Thus, the implicit tension between the West and the East (or the North and the South) in terms of their differing approaches to law remain unresolved. Perhaps a real synthesis is no longer possible where postfeudal, non-Western styles of development have been lost to history. If this is the case, there may be no real way for addressing this question adequately. But it is my hope that any underlying tension between “received law” and indigenous legal traditions can be dealt with openly in a disciplined manner by applying the tenants of the Janus Law Principle. The tools offered by the Janus Law Principle may help develop a fresh perspective on the development process, thereby achieving a new, authentic synthesis. In the final analysis, the Janus Law Principle simply posits to developing countries the challenge of making deliberate development choices. Not all Western norms are good, viable, or even inevitable choices for non-Western societies. On the other hand, the deliberate protection of indigenous norms, in certain cases, also may not be a viable choice and may result in lost development opportunities that may be too high a price for a developing country to pay. Development choices must be exercised in a disciplined fashion, and this is a difficult task for any society.
2.3
Conclusion
Finally, we come to the overall context for these theories to unfold in, and the ethical dimension of decision making in the development law process88 cannot be emphasized enough. The substantive principles of development law may provide insight into what laws and regulations need to be created, changed, modified, or sacrificed in order to meet the demands of all development actors. However, this purely legal examination omits the ethical aspects that are involved in making these choices. What are the ethical implications of these considerations that must be weighed, and why are such ethical considerations important? In one sense, ethics can be viewed as the process through which the substantive norms created by legal codes are viewed and applied. Thus, ethics is the highly individualistic framework containing the substantive normative principles of law
Section 2.2.2 is a summarized excerpt from an earlier publication by the author, “The Developing World in the New Millennium: International Finance, Development, and Beyond.” 34 Vanderbilt L. Transnat’l L. 469 (2001).
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that have been created through popular, consensual means. One avenue of approaching the ethical dilemmas posed by development law problems is to initially adopt a sliding scale moral relativist perspective. When the process of decision making has begun to run its course, certain moral values or ethical principles will begin to reveal themselves through this empirical process.89 For example, choosing the method of expressing dissent or conflicting opinions (e.g., through a public hearing, soliciting public comments, conducting opinion surveys) is an empirical experiment in the ethical decision-making process. What method is the most effective in the decision-making dilemmas posed by this example? Are public hearings required for changes in zoning ordinances, but not the most expedient means of deciding whether (and how) displaced persons or refugees are to be compensated for their losses? Should hearings be conducted on the issue of environmental degradation, or do independent, scientific studies suffice for this purpose? Should such findings of the scientific community be publicly released and debated? Clearly, there are no right or wrong choices here. The methods for making ethical decisions will change with the circumstances, time, the sophistication of the public and interested parties, and the democratic nature of the decision-making process. Some decisions will be popular but bad, whereas other decisions will be unpopular but completely justified. It is important to recognize that the development process involves ethical and moral questions, since it intrinsically involves a balancing of and a choice between conflicting legal, cultural, and aesthetic norms. As discussed earlier, the struggle between the developed and the developing worlds is not only one for economic accumulation, but it is also a struggle of ideas around which societies are organized. The parties involved need to be patient in the process of developing ethical decision-making rules or procedures since there are no strict legal or ethical norms that clearly apply in such situations. In fact, this may be an opportune time to examine ROL programs of the past decade that have absorbed billions in foreign aid, foreign government budgets, and consulting fees. Compilation and analysis of the information generated by these programs should be geared towards understanding the trends and successes in ROL reforms, the underlying (legal) principles, the lessons learned, and a menu of best practices. The empirical approach to ROL-based structural legal reform may, over time, yield ethical norms that will emerge from this process of critical analysis and review. It is important, however, not to be too hasty in
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In fact, it may be wise to draw a distinction between ethical values and the methods of deriving such values. The Josephson Institute, for example, has developed a methodology for deriving corporate or institutional ethical values by asking participants in its sessions to name persons with admirable qualities, identify the underlying characteristics of such people, and through the process of hypothetical examples, apply such qualities to problem-solving situations. Over the course of this process, the participants are able to weight these qualities, and decide what their core ethical values are. Applying such core values to ethical problems (that cannot be answered by reference to established legal norms) helps to integrate the corporate culture with its ethical basis. See Josephson Institute for Ethics, “Ethics is Everyone’s Business!” Ethics in the Workplace Training Program.
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deciding what ethical processes should be followed. Ample room should be given in order to experiment with the possibilities.90
Appendix
Fig. 2.1 Rule of law: legal analysis template
90
Prematurely imposing legal codes and substantive law principles is something that Professor Salbu warns against by stating: “the codification of values has greater potential within highly cohesive, well-developed communities than within culturally fragmented, developing communities. Codification prior to the development of a traditional community structure becomes totalitarianism at the extremes because moral judgments are imposed absolutely without a source of democratic support. . . . As the Twentieth Century draws to a close, nations must coexist before mutual cultural assimilation can occur. It is likely that efforts to force assimilation by prematurely codifying ethical codes would be ineffective and dangerous. Laws without underlying values are meaningless to those who do not understand them because their foundations are alien. Further, the application of laws without an understanding of their purposes is a potential source of international and intercultural resentment and hostility.” Salbu (1994), pp. 327, 351–352.
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References Arner D (2007) Financial stability, economic growth, and the role of law. Cambridge University Press, pp 15–16 Bilder R, Tamanaha B (1995) Book review of law and development. Am J Int Law 89:470, 474–475 Botchway F (2001) Good governance: the old, the new, the principle, and the elements. Fla J Int Law 13:159, 177–180 Bruton HJ (1998) A reconsideration of import substitution. J Econ Lit 36(2) Burg EM (1977) Law and development a review of the literature and a critique of ‘scholars in estrangement’. Am J Comp Law 25:492, 496–498 Cheeseman N (ed) (2018) Institutions and democracies in Africa: how the rules of the game shape political developments. Cambridge University Press Chua A (1998) Markets, democracy, and ethnicity: toward a new paradigm for law and development. Yale Law J 108:1, 32 Cook S (April 20, 2017) No, Ergodan was not an authoritarian all along. Wash. Post Easterly W (2001) The elusive quest for growth: economists’ adventures and misadventures in the tropics. MIT Press, Cambridge Fitzgerald R (1995) The state and economic development: lessons from the far east. Routledge Franck TM (1992) The new development: can American law and legal institutions help developing countries? Reprinted in A Carty (ed) Law and development, vol 3. New York University Press, pp 18–24 Frank AG (1966) The development of underdevelopment. Monthly Rev 18 Fukuyama F (1992) The end of history and the last man. Penguin Furuoka F (2005) Japan and the ‘Flying Geese’ pattern of East Asian Integration. Eastasia 4(1) Galanter M (1966) The modernization of law. In: Weiner M (ed) Modernization: the dynamics of growth. Yale University Press, p 156 Galston W (April 18, 2017) Turkey leads an authoritarian trend. Wall St. J. Giddens A (1971) Capitalism and modern social theory: an analysis of the writings of Marx, Durkheim and Max Weber. Cambridge University Press, pp 124, 125 Greenberg DF (1992) Law and development in light of dependency theory. In: Law and development. New York University Press Grimm J (April 27, 2017) Convergent authoritarianism in Egypt and Turkey. Carnegie Endow. For Int’l Peace Hunt D (1989) Economic theories of development: an analysis of competing paradigms. Harvester Wheatsheaf, London Irogbe K (2005) Globalization and the development of underdevelopment of the third world. J Third World Stu Kabouche L (February 16, 2018) Why Erdogan’s popularity remains unmatched despite growing authoritarianism. Frontera Kiely R (2010) Dependency and world-systems perspectives on development. International Studies and Oxford University Press Magraw D (1990) Legal treatment of developing countries: differential, contextual, and absolute norms. Colorado J Int Environ Law Policy 1:73, 74 Merryman J (1977) Comparative law and social change: on the origins, style, decline and revival of the law and development movement. Am J Comp Law 24:457 Mountis E (1996) Cultural relativity and universalism: reevaluating gender rights in a multicultural context. Dickinson J Int Law 15:113 Nichols P (1999) A legal theory of emerging economies. Va Law Int Law 39:229 North D (1981) Structure and change in economic history. W.W. Norton, New York, pp 7–8 Plotkin J (1992) Tribes. Random House Rodney W (1972) How Europe underdeveloped Africa. Bogle-L’ouverture Publications Rodriguez O (2008) Prebisch: the continuing validity of his ideas. CEPAL Rev 75:39
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Rodrik D (2006) Goodbye Washington consensus, Hello Washington confusion? A review of the World Bank’s economic growth in the 1990’s: learning from a decade of reform. J Econ Lit XLIV:973 Rostow WW (1960) Stages of economic growth: a non-communist Manifesto. Cambridge University Press Rostow WW (1990) The stages of economic growth: a non-communist Manifesto, 3rd edn. Cambridge University Press, pp 4–46 Roxas S (1996) Principles for institutional reform. In: Development: new paradigms and principles for the twenty-first century. Pluto Press, London Salbu S (1994) True codes versus voluntary codes of ethics in international markets: towards the preservation of colloquy in emerging global communities. Pa J Int Bus 15:327, 351–352 Sarfati Y (2017) How Turkey’s slide to authoritarianism defies modernization theory. Turkish Stud. 18:395–415 Sarkar R (2005) Critical essay: theoretical foundations in development law: a reconciliation of opposites? Denv J Int Law Policy 33:367 Sarkar R (2013) The new soldier in an age of asymmetric conflict. Vij Books Shapiro I (1997) Strengthening transitional democracies through conflict resolution. Ann Am Acad Policy Soc Sci 552:14, 20 Stone CD (2004) Common but differentiated responsibilities in international law. Am J Int Law 98:276, 278 Trubek D (1996) Law and development: then and now. In: Proceedings of the 90th Annual Meeting. Am Soc Int Law, pp 223–224 Trubek D, Galanter M (1974) Scholars in self-estrangement: some reflections on the crisis in law and development studies in the United States. Wisc Law Rev 1974:1062 Trubek D, Santos A (eds) (2006) The new law and economic development: a critical appraisal. Cambridge University Press Weber M (1992) The protestant ethic and the spirit of capitalism (trans: Parsons T). Routledge Williamson J (2002) Did the Washington consensus fail? Peterson Inst Int Eco
Chapter 3
International Development Law: Substantive Principles
The preceding chapter outlines the theoretical foundations and conflicts inherent in a discussion of international development law (a term that will be used interchangeably with “development law” in order to avoid needless repetition.) This chapter outlines the contours of development law as a new legal discipline. A transition to this new discipline, however, requires a movement away from the terminology of “law and development.” As the scholarly literature on the subject definitively concludes, the law and development movement, its intellectual adherents, and its viability as a legal doctrine have long been defunct.1 It would be a critical intellectual and pragmatic error to remain wedded to this terminology or the intellectual underpinnings of the law and development approach to legal systems development. Moreover, there is an implicit stigma attached to legal disciplines that are described in a conjunctive fashion such as “law and development” or “law and literature” or “law and the rights of women.” International development law has moved past the conjunctive stage and has come of age. Further, international development law should be distinguished from the tradition of the international law of development popularized during the 1970s as part of the NIEO agenda. The international law of development advocated a constructive change in the relations between the developed and the developing worlds by attempting to establish, inter alia, a “right to development” as a new human right. However, it is with some misgivings that I have redesignated this legal discipline as “international development law,” and have done so in order to capture the international element in this discipline. I feel that this will help move it into the rubric of international law subjects generally, and my explicit hope is that it will not be confused with the international law of development from the 1970s.
1
See Cao (1997), pp. 545, 546; see also Trubek (1990), p. 1; Trubek and Galanter (1974), p. 1062.
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 R. Sarkar, International Development Law, https://doi.org/10.1007/978-3-030-40071-2_3
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In light of past inequities, the international law of development also attempted to radically restructure the relationship between the developed and developing worlds by supporting developing countries’ preferred access to credit, development assistance, trade relations, and technology transfers. In so doing, the international law of development established differential legal norms that separated advanced, industrial countries from developing nations. The following builds on the discussion set forth in Chap. 2. A differential norm has been described as a norm that “on its face provides different, presumably more advantageous, standards for one set of States than for another set.”2 Not only is this type of legal distinction politically controversial and inherently unfair, but it also became untenable and, ultimately, failed to move the development agenda forward. Indeed, the international law of development stalemated over time and eventually became extinct. Development law must move beyond its historical antecedents into a new global age. Moreover, international development law is no longer a mere paradigm with which to explain breath-taking new changes in global legal development. Jonathan Cahn writes: The case studies suggest that we are not watching the emergence of a new legal field. A legal field typically is a classificatory designation, based on compartmentalizing groups of legal rules in terms of the categories of conduct intended to be directed: Corporations law, contract law, tort law, criminal law, constitutional law, and property law are all different fields in this sense. A more appropriate analogy is to a new mode of analysis or “paradigm.” Thomas Kuhn in The Structure of Scientific Revolutions [10, 2d ed., 1970] describes a scientific paradigm as the structure of fundamental assumptions within which scientists conduct their empirical research and organize and articulate their perceptions. It defines a scientific tradition by creating consensus about the appropriate “methods” and the “legitimate problems” within the “research field.” Development governance, transactions, and enabling environments—represent a new empirical tradition in the law, defining a new array of “legitimate problems” and appropriate “methods.”3
This statement was published in 1993, and much has transpired since then. International development law has moved beyond a shared set of assumptions about a field of legal inquiry. It is no longer merely an empirical exploration of legal questions within the development context. Lan Cao dryly observes that, “[r]ather than wallowing in self-criticism, law and development scholars should work to institute a legal regime that promotes the principled application of law in the developing world.”4 International development law is, hopefully, the response to that challenge. International development law has taken the form of underlying principles and substantive legal principles that are still evolving. Development law needs a wellfocused institutional framework within which to further define these principles and enforce the rights created thereunder. This is not to say that development law has
2
Magraw (1990), pp. 69, 73. Cahn (1993), pp. 159, 193 n. 149, citing Kuhn (1970), p. 10. 4 Cao (1997), p. 553. 3
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taken its final, or even a definitive shape at this stage. Nevertheless, development law has emerged as a new legal discipline even though much work needs to be done before its full and final acceptance is secured from the wider legal community. International development law is a relative newcomer to the legal scene, and a certain amount of time will need to elapse before it will be regarded with the same legitimacy as, for example, the law of foreign investments. However, it is important to remember that even these legal subjects were not rooted in ancient medieval legal practices but have very modern genealogies in legislation passed within the past 50 years or so. This is not to say that legal reform initiatives did not exist before this time period. Indeed, certain law reform efforts are heavily steeped in the history of the Romans, the Napoleonic conquests, the “received law” traditions of the Russians and the British, and even the legal modernization efforts of Turkey and Japan. International development law, however, differs significantly from certain of these historical law reform movements insofar as it is not connected with nor does it stem from formal, imperial or military conquests. International development law is a response to recent trends in globalization that are overwhelming both in terms of the nature of its downstream implications and its overall significance. Thus, development law represents a change, in degree and in kind, in legal systems on a global scale. To put this into perspective, Barbara Nunberg formulates several generations of development assistance which may be useful in this context. The First Generation (from the end of World War II to the late 1970s) as a development assistance regime focused on large-scale infrastructure growth, building government capacity in terms of skills and institutions, and providing technical assistance to promote human resource development generally.5 Expatriate experts were often sent on long-term missions to developing country governments to carry out basic governance functions such as budgeting and civil service administration. The emphasis on infrastructure growth also occurred in the era heavily influenced by the structuralist school, and a policy emphasis on import-substitution and export-led economic growth. Thus, economic self-sufficiency was often given paramount importance by the developing nations themselves.6 The second generation emerged in the early 1980s amid gravely deteriorating economic conditions in the developing world, and in response to the newly developing Washington Consensus,7 discussed in Chap. 2. International donors called for fiscal restraint and reducing bloated government budgets and public institutions. Structural adjustment lending was introduced as a form of “tough love” that provided necessary balance-of-payments support in exchange for systemic policy reforms.8
5
Nunberg (2007). See, e.g., Love (2005), pp. 100, 103–105. 7 Nunberg (2007), supra. 8 Id. 6
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By the early 1990s, a third generation of reforms emerged in response to the disintegration of the former Soviet Union, the democratization of Eastern European and Central Asian counties, and their transition to free-market economies. Many reforms were instituted in response to the needs to join the European Union (EU) or the World Trade Organization (WTO), where the virtues of good governance and transparency in the governance process were being emphasized.9 Further, in response to the Asian financial crisis of the later 1990s (discussed further in Chap. 5), controlling financial contagion through the adoption and implementation of corporate governance was sought by donors. The fourth generation emerged in response to the September 11, 2001, crisis and is still evolving. Just as financial market security was the watchword in the late 1990s, national security in relation to stemming the threat of global terrorism emerged on the global scene. The linkage of global terrorism to development failures and fragile states is clearly felt in the Sudan, Somalia, Afghanistan, Sierra Leone, and other places. However, the policy emphasis on democratization and nationbuilding is clearly not shared by all actors on the international development assistance scene. Indeed, the linkages between good governance, democratic institutions, and the ability to stave off global terrorism is not yet well understood, and the engagements in Iraq and Afghanistan are still unfolding at this writing. Nevertheless, the World Bank has responded by creating the Fragile States Initiative in 2003, which provides for World Bank–funded support for leaders in fragile economies emerging from years of conflict. The Bank supports these initiatives through a range of instruments, including the Post-Conflict Fund, the Low-Income Countries Under Stress (LICUS) Implementation Trust Fund, IDA project funds, and country program budgets. The World Bank’s challenge for the new millennium is finishing an unfinished agenda. Generally speaking, the World Bank is now tasked with: (1) learning the lessons of the past, (2) protecting the environment, and (3) continuing to redefine the role and nature of good governance, and curb corruption. The challenge is to effectively partner with and support the private sector, yet strive to eliminate global poverty. Providing a clear and well-functioning policy and legal environment for sustainable economic growth is critical in this context. Specifically, a worldwide effort has been undertaken to implement the UN’s Millennium Goals as set forth in its Millennium Declaration entered into on September 18, 2000. Eight goals are meant to be fully implemented by 2015, to wit, (1) eradicate extreme poverty and hunger, (2) achieve universal education, (3) promote gender equality, (4) reduce child mortality, (5) improve maternal health, (6) combat HIV/AIDS, malaria, and other diseases, (7) ensure environmental stability, and (8) develop a global partnership for development.10
9
Id. UN General Assembly Res. A/Res./55/2 (Sept. 18, 2000).
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The legitimacy of international development law as a legal discipline must be judged not by its relative age but by the legal principles that give it character, meaning, and applicability to the dynamic and fast-paced world in which we now live. Indeed, international development law is meant to respond to the pressures being exerted by the entire globalization process and by the need to articulate, promulgate, and implement organizing legal principles around those needs. Thus, development law bridges the elusive gap between the laws of the developed and the developing worlds. In essence, international development law builds a bridge between the respective bodies of law that affect development issues, including contract and company law, property, securities, commodities, banking, secured transactions, bankruptcy, intellectual property rights, antitrust, criminal law, and international environmental law, to name but a few. Development law does not provide new “blackletter” law on these subjects but sets up a new frame of reference in which to evaluate, assess, and judge the impact of such national laws in a global economy. In other words, development law is a subset of international law, and is designed to specifically address the development-related impact of the previously designated legal topics, and other, legal subjects. International development law also goes beyond the traditional confines of private and public dimensions of international law. In a global economy, for instance, it may not be sufficient to simply rely on choice of law provisions in contractual agreements between private parties. Such agreements may not exist. Development law, by applying legal principles in situations where there is an absence of an agreement, an absence of privity of contract and, indeed, an absence of law, helps to bridge this gap. Finally, development is not simply a process that takes place with sovereign states being the primary, if not the exclusive, actors. Development is a complex process with many stakeholders with diverse and conflicting interests. The development process should be made as widely participatory as possible. It cannot be seen as the exclusive prerogative exercised by sovereign states, especially in light of the critical role of the private sector in creating sustainable development options. Moreover, many of the specific tenets of development law will emerge from and as a result of private transactional law practice. International transactions consummated by the private sector are fundamentally shaping both the substance and the form of development law. Accordingly, the following discussion will: (1) set forth the organizing, or “fundamental,” principles underlying development law; (2) explain the substantive content and application of development law principles; and (3) set forth the institutional framework for enforcing the rights, duties, and responsibilities created under this new legal discipline. International development law uses a problem-driven methodology so that the application of its rules and precepts helps resolve actual development problems. The ideas expressed herein provide a synthesis of what has been taking place over the past five decades that now requires a baptism by fire.
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Establishing the Parameters of International Development Law
First, it is important to define an international development law question and to distinguish it from other types of non-development related legal questions. Not all legal issues are actually development law questions. Where does the distinction lie? If, for example, a private citizen files a tax return, and the national tax authority questions certain exemptions claimed contained therein, this poses a tax question under the law of that nation on whether a lawful tax exemption has been claimed by the individual tax filer. If, however, this private national is working in Kazakhstan as an independent consultant, and he files a U.K. tax return and is also assessed local taxes, this may raise a question of public international law. This international tax question may depend, in part, on whether a mutual tax treaty exists between the U.K. and Kazakhstan and what provision is made therein for the income tax treatment of foreign nationals who are not entitled to diplomatic privileges and immunities. In the event that Kazakhstan’s tax regime does not address this matter adequately, or if it conflicts with the international tax regime in place to address such issues, thus effectively impeding Kazakhstan from dealing with this legal issue in a coherent, predictable manner, this raises a development law question. In other words, Kazakhstan may need to pass new tax laws, revise existing ones, or enter into an appropriate international tax protocol to address the new reality of foreign consultants providing professional services in-country. Distinguishing international development law questions from private international law questions may not be easy since implications of both may be present in any given fact scenario. The distinction between an international legal issue and an international development law question may be drawn by asking the following question: Does a domestic law question of a developing country have a foreseeable impact on the development of that country? For example, if a host country wishes to build a seaport in order to boost its overall economic development, this does not necessarily raise a specific development law question. If, however, a host country is building a seaport using project finance that involves joint ventures with foreign operators and requires that a new foreign investment regime be put in place, then international development law questions do arise. Similarly, the legal issue of whether women should have the right to the legal custody of their children following a separation from the marital domicile may pose a family law issue under domestic law, or an international human rights question, or, if legal reform of existing family law is contemplated in order to change the legal status of women, an international development law question. Alternatively, an international law question that may have a direct or indirect impact on the economic or social development of one party may also raise a development law question. For example, the extraterritorial application of U.S. federal copyright laws to impose penalties for the unlawful duplication of compact discs in say, Malaysia, may simply pose a question of private remedies under international law. If, however, there is a question of whether Malaysia will
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agree to comply with an international intellectual property rights regime that may actually affect the national output of the United States in a critical manufacturing sector, this may pose an international development law question. With the increasing globalization of the world economy, the impact of development law questions may not solely affect developing countries, as the above example illustrates. Repercussions are being felt in unexpected ways by advanced, industrial countries whose stakes in development are increasing exponentially. As international development law covers such a vast array of legal questions, the scope of this examination of development law principles must necessarily be narrowed. The engine of the global economy is fueled by the exchange of capital, commodities, and technology, the three pillars of transnational business law. Accordingly, for purposes of the following discussion, the examination of international development law principles must address three principal areas: (1) crossborder financing; (2) trade; and (3) technology transfers. While all three subjects have important rule of law implications, the focus of the following discussion will be on cross-border finance in support of international development. It is important to set forth the framework of international development law by, first, identifying the actors in and parties to the development process and defining the rights, privileges, duties and responsibilities of these actors; second, establishing the fundamental principles of development law; third, defining the contours of the substantive legal principles of development law; and finally, describing the institutional framework in which these rights and responsibilities are implemented and enforced.
3.2
Parties Under International Development Law
The actors in the development process who are ultimately affected by the principles of international development law fall into three categories: private, state, and institutional actors. First, private actors within the development law rubric are composed of individuals, local and international non-government organizations (NGOs), and other private entities such as corporations, associations, and cooperatives. Second, there are state actors that are indispensable parties to the international development process. Although it is customary under dependency theory principles and related doctrines to divide sovereign actors into developed and developing countries, this distinction is both misleading and anachronistic. As discussed earlier, the global capitalism that has developed over the past several decades is creating a level playing field between the more advanced industrial states and emerging capital markets. For purposes of international development law, the economic distinctions between these two categories of states are in constant flux and do not create a viable or permanent legal distinction. A further danger is posed by perpetuating a legal
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distinction in the rights and liabilities of state actors: it may create more inequities over time, thus impeding rather than furthering the development process. Moreover, the equal treatment of sovereign actors without regard to their respective economic status is more equitable, fair, and sustainable in the long run. This is especially the case since many developing countries are graduating from their developing country status and becoming “emerging markets.” Therefore, these distinctions tend to create a more confused picture over time. For example, the Czech Republic was considered to be a “transitional” economy, but is now considered to be, for all practical purposes, an industrialized state with First World (or at least quasi-First World) status. Therefore, to treat the Czech Republic differently because of its former status as a developing country or even as “transitional economy” emerging from the former Soviet bloc is confusing and misleading. In other words, there is sliding scale of development, so to speak, and countries are both emerging from and relapsing into the status of being less developed states. For example, Iraq, Syria and even Venezuela and Brazil are all examples of countries experiencing severe economic and political stresses along the road to “development,” with a resulting vacillation in their status, respectively, as developed or developing nations. The third set of actors are institutional players, such as multilateral banks, like the International Bank for Reconstruction and Development (IBRD or the “World Bank”), and regional banks, such as the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), the African Development Bank (AfDB), and the Inter-American Development Bank (IDB). Also included in this category are other international organizations, such as the United Nations Development Programme (UNDP), and international financial institutions, such as the International Monetary Fund (IMF) and the International Finance Corporation (IFC). (Multilateral banks and the IMF are often collectively referred to as International Financial Institutions [IFIs]). The New Development Bank, or the so-called “BRICS Bank,” as well as the Asian Infrastructure Investment Bank (AIIB) are both newcomers to the multilateral banking scene, and will be examined in greater detail in Chap. 5. Bilateral aid agencies, such as U.K. Department for International Development (DFID) and the U.S. Agency for International Development (USAID), and export finance agencies, such as the Japan Export-Import Bank (JEXIM), are generally state actors since such government agencies implement their country’s official aid policies and foreign assistance to developing countries. However, these bilateral lending institutions share characteristics of multilateral lending institutions such as the World Bank. Depending on what the context is, bilateral institutions may be grouped under the second category of state actors, as discussed previously, or may fall into the third category of institutional actors. In different ways, these three categories of actors are the stakeholders in the development process. The rights and responsibilities of each are discussed in the following section.
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The Rights and Privileges of Individual Actors
The issue of whether there is an individual (or human) right to development will be discussed at length in Chap. 4 and will not be reiterated here except to conclude that in order for such a right to be recognized on an international scale, a great deal of work needs to be completed.11 While arguably there may not be an actionable, affirmative “right to development,” there is nevertheless an inchoate right to become a stakeholder in the development process. This inchoate right can be analogized to the “right” to run for public office. This right is not constitutionally or legally guaranteed but, if this option is exercised, it cannot be arbitrarily deprived to a qualified individual. Similarly, a stakeholder in a development question has the “right” to actively participate in the development process. However, in order to make his or her grievances heard or to seek redress, a stakeholder needs to establish a nexus to or an interest in the outcome of a development law question, akin to establishing his or her standing as a party in a legal action. Once this nexus is concretely established, then a stakeholder may bring complaints or grievances and seek redress, compensation, restitution, and other remedies. In more general terms, a stakeholder (such as a farmer being displaced by a hydroelectric power plant) can seek to make the decision makers in the project accountable for their actions. Such decision makers may include local and national government officials, official lenders such as the World Bank, and perhaps, ultimately, commercial banks and other private financiers. Local and international NGOs also play a key role in the development process, thereby making it a more participatory one. Beginning with the dramatic demonstrations protesting the 135-nation WTO conference in Seattle, Washington, in November 1999, individuals and organized NGOs have begun voicing their unhappiness at the nebulous concept of globalization.12 In fact, anti-globalization demonstrations have practically become de rigueur at World Bank and WTO meetings as well as at G-8 summits. In January 2000, protesters blocked World Economic Forum delegates from attending the conference in Davos, Switzerland, airing a laundry list of complaints concerning maintaining farm subsidies, the environment, union workers’ rights, human rights, and international trade and its impact on local communities.13 Later, in April 2001, the same type of protests arose in relation to 1MF/World Bank meetings in Washington,
11
Id. at 556. “Demonstrations May Overshadow Seattle Trade Conference,” CNN (November 29, 1999). 13 “Seattle Finds its Way to World Forum” January 29, 2000, CHI. TRI.; “It’s Not Easy Being Global,” TIME (January 28, 2000); “Protests Mar Davos Summit,” BBC News (January 30, 2001); “Anti-Gobalization Protesters Converge in Davos,” India Times (January 26, 2000). 12
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D.C.14 More than six hundred people were arrested, and their message was unmistakable: a desire to impose accountability in the globalization process. Protests took an ugly turn when a 23-year-old protester was shot and killed by police on July 21, 2001, at a G-8 summit in Genoa, Italy.15 The IMF/World Bank meetings were canceled altogether following the attacks on the World Trade Center and the Pentagon on September 11, 2001.16 Such protests continue unabated, for example, in protests at the G-20 meeting in Hamburg Germany that took place on July 7, 2017.17 Indeed, “[t]oday, no international economic summit can be imagined without a sideshow of anti-globalization activists.”18 However, there is new commentary that suggests the following: One curious thing about the pro-globalization consensus of the 1990s and 2000s, and its collapse in recent years, is how closely the cycle resembles a previous era. Pursuing free trade has always produced displacement and inequality–and political chaos, populism and retrenchment to go with it. Every time the social consequences of free trade are overlooked, political backlash follows. But free trade is only one of many forms that economic integration can take. History seems to suggest, however, that it might be the most destabilizing one.19
Indeed, when globalization efforts experience a predictable backlash of populism, this may be the most ominous warning of all.20 Certainly, individual actors as the ultimate stakeholders in the development process have been voicing their concerns vociferously, thereby forcing institutional change, as is explored later in this chapter. NGOs have also played a pivotal role, as is discussed later, in voicing the concerns of the ultimate end-users of the development process, establishing important linkages to human rights and the environment, and in successfully instilling greater accountability by all parties to the development process. In particular, NGOs have forced the World
“Mass Arrests Mark Demonstrations,” ABC News (April 17, 2000); D. Amos, “The Agenda,” ABC News (April 16, 2000); L. Margasak, “Seattle Redux? Protesters Arrive in D.C. to Battle IMF,” ABC News (April 8, 2000); “Protests Proceed Peacefully: IMF Rallies Quiet so far, but Issues Loom Large,” ABC News (April 12, 2000); “Time for a Showdown: Thousands Assemble to Protest World Bank, IMF,” ABC News (April 16, 2000). 15 A. Stanley & D. Sanger, “Italian Protester is Killed by Police at Genoa Meeting,” New York Times (July 21, 2001); A. Stanley, “Beyond Group of 8’s Meeting Walls, Italy’s Prime Minister Steps into a Storm,” New York Times (July 23, 2001). 16 J. Kahn, “Gatherings of Leaders Now a Cause for Concern,” New York Times (September 12, 2001). 17 Scott Neuman, “Anti-Globalization Protests Spark Violence in Hamburg for a Second Day”, NPR (July 7, 2017). 18 Haque and Burdescu (2004), pp. 219, 230. 19 Nikil Saval, “Globalization: the rise and fall of an idea that swept the world,” The Guardian (July 14, 2017); see also Dani Rodrik, The Globalization Paradox: Why Global Markets, States and Democracy Can’t Coexist,” The Guardian (2011). 20 Nikil Saval, “Globalization: the rise and fall of an idea that swept the world,” The Guardian, supra, note 12. This is a well-written and provocative essay on the impact of globalization and the backlash thereto. 14
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Bank to re-evaluate its role and its development objectives, especially where the environment is concerned.21 In fact, challengers to the Bretton Woods system of world economic relations have been grouped into two camps: the “alternative normative challengers” and the “structuralists,” as discussed in the previous chapter22 The alternative normative challengers (the “free radicals”) tend to question the underlying assumptions of modernization theory-based development strategies and tend to focus on human rights, environmental concerns, indigenous peoples, and local community-based alternatives to industrialization and commercial bank financing. On the other hand, structuralists, a group composed primarily of Keynesian-influenced economists, believe that errors in capital flows lie at the heart of development problems and that a rule-based system of global economics should replace the power-based economic system of today.23 These protests staged by NGOs and private individuals, while animated and passionate, may have left the general public confused as to the specific aims and objectives of the protesters. The opposition to globalization is often expressed in vague and uncertain terms. The insistence on diffuse and disconnected agenda items promulgated during the course of such protests tend to confuse rather than clarify the core issues.24 Thus, in furtherance of a continuing dialogue between NGOs and international financial institutions, it may be worth keeping in mind that in order for any proposed change to be effective, both the proposed change (and the approach to instituting change) must be disciplined and systemic to make a long-lasting impact. Finally, the issue of whether certain “privileges” should be accorded to certain private actors within the development law context is a tricky matter. For purposes of this discussion, a narrow focus on whether there may be a limited legal justification to establish special protectorates in order to preserve “human habitats” to help certain indigenous peoples maintain their traditional lifestyles will be examined. If special privileges were accorded for this purpose, it would mean that such peoples would be entitled to certain legal exemptions and other entitlements not available to the general populace. The establishment of such protectorates, and the certification of “indigenous peoples” for this, and related purposes, if deemed necessary, have been done under the auspices of the United Nations. Indeed, the UN’s focus on indigenous peoples has a long history. The UN Commission on Human Rights has received support for establishing a permanent UN forum for indigenous peoples and for drafting a declaration of the rights of indigenous peoples, who are too often left out of the development debate.25 The Commission’s principal subsidiary, the Subcommission on Prevention of Discrimination and Protection of Minorities, established a Working Group on Indigenous Populations in 1982. The Working Group celebrated the Twentieth Anniversary of
21
Wade (1997), pp. 667, 668–675. Griesgraber and Gunter (1996), pp. 75–77. 23 Id. at Chap. 5. 24 Thomas Friedman, “Evolutionaries,” New York Times (July 20, 2001). 25 See UN Press Release HR/CN/733 (April 12, 1996). 22
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the First International Conference to Counter Discrimination Against Indigenous People on July 25, 1997, attracting more than seven hundred people from over fifty countries.26 This Working Group has drafted a declaration on the rights of indigenous peoples for review by the Commission.27 This draft, or related protocols, may be used to set forth agreed-upon principles of privileges that indigenous peoples should be entitled to under the principles of international development law. Establishing such privileges must be carefully defined, vetted, and consensually agreed to by the affected parties, however, before doctrinaire pronouncements may be offered on the subject.
3.2.2
The Duties and Responsibilities of Sovereign Actors
The development process must remain open and transparent if it is to be regarded as legitimate. It must remain accessible to the layperson and allow for equitable participation in the development process. An essential ingredient in ensuring an open and transparent development process is that government officials and other decision makers must be held accountable for their actions. This reduces the risk of arbitrary action in the development process. Further, increasing the accountability and predictability of the overall development process increases the “comfort level” of the participants. Participants will feel vested in the process of development if they know that their contributions are valid and may have a significant impact on the eventual outcome. This may mean that their continued future participation in the development process will be forthcoming. The articulation of rights, interests, and views within the development process does not dissipate the momentum of development but rather gives it the potential for expressing the needs of the people truly affected by its eventual outcome. This, in turn, further ensures the legitimacy of the development process for all stakeholders. In fact, the principles set forth in Sect. 3.3, infra, are the supporting pillars for the entire structure of development law, and must be clearly articulated. These fundamental principles define the framework of the development process, namely: mutuality, the duty to cooperate, equitable participation and transparency (e.g., openness, accessibility and accountability). Or, in other words, these are the “fundamental rights” of the stakeholders in the development process. Stakeholders need not be individuals, since these fundamental rights are not human rights as such. Stakeholders, whether they be individuals, private NGOs, corporate entities, sovereign states or public institutional actors, are entitled to certain minimum guarantees of transparency and legitimacy in the development process. Ensuring that these fundamental principles are adequately protected and upheld is, however, a duty that must be assumed by sovereign and institutional actors in the development process.
26 27
See UN Press Release HR/4332 (July 25, 1997). See UN Press Release HR/CN/733 (April 12, 1996).
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Privileges
Of course, sovereign and institutional actors may argue that information concerning development choices is subject to executive-type privileges, protecting secret, sensitive, and strategic national interests that may be adversely affected by the disclosure of such information.28 States may further argue that releasing this type of non-public information will mean relinquishing a sovereign right to protect their national security interests. While the exercise of such privileges is integral to the smooth functioning of government and governance by international organizations involved with development, such privileges should be exercised with discretion.29 Indeed, it may be argued that the most appropriate context for inviting public participation in an open debate is to address whether development options can and should be exercised. Indeed, the role of sovereignty may need some retooling in the development law context insofar as, “[s]overeignty in international law indeed is no longer the descendant of the eighteenth-century divine right of kings. Sovereignty now is the power by which a nation defines itself and enables an entire body politic to exercise some control over its destiny, to promote the general welfare, and to determine the terms on which it will live with scarcity, address deprivation, and redress disparities and injustices. Sovereignty is subject to the right of each individual and of the body politic to give informed consent to governance.”30 The use of sovereignty or executive privileges in a carte blanche manner in order to block public participation impairs the legitimacy of the development process. The more inaccessible the decision-making process is, the less accountable the responsible officials tend to become. If development-related decisions are viewed as being made in “Star Chamber” secrecy, there is no perceived transparency, accessibility, or accountability. Further, there is no way to predict the outcome of such deliberations, since there are no defining principles that govern the actual decision-making process. The fundamental backbone of the development process is thereby irreparably damaged.
28
See e.g., Articles of Agreement of the International Monetary Fund, art. IX Sec. 3, which gives the IMF immunity from judicial process unless the IMF waives its immunity, and sec. 7, which provides the IMF with the right to assert a privilege for its communications. See also Articles of Agreement of the International Bank for Reconstruction and Development, art. VII §§ 3-7, 60 Stat. 1440, 2 U.N.T.S. 134; Art. III, §§ 3-7. 29 Articles of Agreement of the International Bank for Reconstruction and Development, art. V § 2 (f), provides that the board of executive directors may adopt regulations, as necessary, to protect the confidentiality of the Bank’s business. Moreover, such internal regulations are given effect through the local law of the Bank’s members. The United States, for example, under Section 11 of the Bretton Woods Agreements Act, as codified at 22 U.S.C. § 286(h) (1988), specifies that the World Bank shall have the same rights to confidentiality under U.S. law as accorded under its Articles of Agreement. See also Exec. Order No. 12,356, 3 C.F.R. Sec. 166 (1982), reprinted in 50 U.S.C. § 401 (1988). Although protecting the confidentiality of the World Bank’s operations may be necessary at times, it should not be overused in a way that masks the accountability of its officials, or clouds the legitimacy of its policies and procedures. 30 Cahn (1993), p. 187.
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Transparency and openness can help accelerate reforms in developing countries, and with effectively designed and executed approaches, transparency can serve as a powerful driver of sustainable development. Further, transparency and accountability has the added benefits of: (1) exposing government corruption; (2) reducing the scope for government revenues to be siphoned offshore; (3) increasing the collection of domestic tax revenues, (4) increasing the accountability and effectiveness of government spending (including aid); (5) reducing dependency on foreign aid; and, (6) helping to prevent money laundering and financing terrorist activities.31 There certainly may be an argument for host governments withholding financial and other critical data that may be central to specific projects and the development process overall. However, the need for government secrecy in protecting sensitive financial information from public release should be better balanced against the public need for disclosure in support of the investment climate for development projects specifically. In the final analysis, greater transparency may also ensure the stability and smooth operation of global financial markets generally.32 Moreover, this position may be broadened beyond merely ensuring the stability of capital markets to also include transparency, disclosure of data, accountability and other issues, discussed infra. These issues are often key to ensuring the overall success of international development.
3.2.3
Multilateral Actors
Finally, multilateral actors, such as international financial institutions like the IMF and regional development banks, and development institutions such as the UNDP, UN Environmental Programme, and others, also play a critical role in facilitating the development process. The monetary stakes for both the multilateral institutions and the recipient countries are generally quite high. In fact, these institutions not only funnel enormous amounts of official assistance in furtherance of development purposes but they are also are intimately involved in the strategic planning, design, and implementation of development projects. Thus, the importance and relevance of such institutions on a worldwide scale should not be underestimated in terms of finance, resources, and critical thinking devoted to the development process. Multilateral actors are also vital stakeholders in the development process, since they facilitate development assistance policies. Their institutional viability may depend on the success of such policies to achieve institutional goals and objectives. Since these objectives may change constantly in reaction to varying political winds, multilateral actors are a dynamic component in the development process.
See Owen Barder, “Promoting the Development Power of Economic Transparency,” reprinted in The White House and the World 2016 Briefing Book (July 20, 2015). 32 See generally, Henisz and Zelner (2010). 31
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The rights of multilateral lending institutions (as well as bilateral lending institutions and development agencies) stem from individual mandates that may be set forth in their respective charters or authorizing national legislation. For instance, the World Bank was originally formed to assist in the reconstruction of post-WW II Europe and, in addition, to “assist in the reconstruction and development of territories of members.”33 This role, however, was vastly overshadowed by the U.S. Marshall Plan, which, in financial terms and political importance, had a far greater historical impact.34 Under its Articles of Agreement, the World Bank is not authorized to make loans to its members unless it is “satisfied that in the prevailing market conditions the borrower would be unable otherwise to obtain the loan under conditions which in the opinion of the Bank are reasonable for the borrower.”35 Although the World Bank made limited loans in support of development prior to the 1950s, under the leadership of Bank President Robert McNamara the World Bank firmly entrenched itself as the lender “of last resort” for developing nations by the 1970s.36 The IMF was established, inter alia, to promote international monetary cooperation, to promote international exchange stability, and to make the general resources of the IMF available to its members under “adequate safeguards.” The IMF came into official existence in December 27, 1945, when 29 countries signed its Articles of Agreement. Actual operations of the IMF went into effect on March 1, 1947.37 Most importantly, the World Bank and the IMF along with bilateral donor agencies of OECD countries are empowered to impose conditionality on the recipient countries of their loans or technical assistance. Conditionality for loans and
33 Articles of Agreement of the International Bank for Reconstruction and Development, art. I § 1. Both the World Bank and the IMF were established pursuant to the Bretton Woods conference held in New Hampshire, June 1–22, 1944, prior to the formation of the UN. The World Bank became a specialized organ of the UN through a Relationship Agreement. See Agreement Between the United Nations and the International Bank for Reconstruction and Development, Nov. 15, 1947, 16 U.N.T.S. 346. (See also Mason and Asher (1973), pp. 54–59, for a fuller discussion of this special relationship.) 34 Mason and Asher (1973), pp. 52–53, 60–61. 35 Articles of Agreement of the International Bank for Reconstruction and Development, art. III § 4 (ii). 36 See generally, Mosley et al. (1991), p. 33. In a nutshell, the World Bank’s progressive history may be seen in the following terms: (1) a reconstruction bank (1947–1948), involved in post-war reconstruction of Europe and European balance of payments issues; (2) a conservative lender (1948–1954), when the Bank began advising Japan and making small loans to Chile, India, Mexico, Yugoslavia, and Brazil; (3) a development agency (1958–1968), when the Bank formed the Aid India Consortium, a precursor to Consultative Groups, in order to assist in India’s foreign exchange crisis; (4) an advocate for the poor (1968–1980), under the dynamic leadership of Robert McNamara where World Bank lending was viewed as a means of alleviating poverty; (5) a policy reformer (1980–1989), focusing on adjustments and reforms; (6) a development partner (1989present), where debt forgiveness, democratization and ROL processes, developing human and social capital resource bases and development growth are seen as the trends for the bank’s lending practices in the new millennium, as further discussed in Chap. 5. 37 “International Monetary Fund,” Int’l Demo. Watch (2018).
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other grant-based assistance is generally set forth in an implementing legal agreement that describes the terms and conditions under which such assistance is being furnished.38 Such conditionality may, for example, require the aid-recipient country to make sectoral policy changes, to make macro-economic adjustments, or to adopt austerity measures such as cutting back on government expenditures in order to balance fiscal deficits. “Additionality” in terms of external financing or even in terms of policy changes that improve the borrowing country’s chances of success may also play a role in this development equation. Most multilateral lending institutions such as the World Bank and bilateral institutions have specific remedies against defaulting borrowers. (The IMF’s financing programs are not considered to be loans as such, and will be discussed separately.) Remedies available to international financial institutions are generally set forth in the underlying loan or another legal agreement that the institution enters into with the borrower nation. These legal provisions give lending institutions the right to seek the following remedies if the borrower defaults on repayment or otherwise violates the provisions of the agreement: (1) suspend undisbursed amounts of the loan; (2) cancel undisbursed amounts of loan; or (3) accelerate immediate repayment of the loan in full (an option that, incidentally, has never been exercised, to date to the knowledge of the author, by the World Bank).39
See Jonathan Cahn, “Challenging the New Imperial Authority,” 6 Harv. Hum. Rts. at 170–171. World Bank loan agreements, for example, have detailed provisions for the cancellation, suspension, and acceleration of loans. The World Bank's General Conditions Applicable to Loan and Guarantee Agreements Dated January 1, 1985 (3d printing March 1995), art. VI, sec. 6.02 (k) provides, in relevant part: “The right of the Borrower to make withdrawals from the Loan Account shall continue to be suspended in whole or in part, as the case may be, until the event or events which gave rise to the suspension shall have ceased to exist, unless the Bank shall have notified the Borrower that the right to make withdrawals has been restored in whole or in part, as the case may be.” Moreover, section 6.03 states, “If the right of the Borrower to make withdrawals from the Loan Account shall have been suspended with respect to any amount of the Loan for a continuous period of thirty days,. . . the Bank may, by notice to the Borrower and the Guarantor, terminate the right of the Borrower to make withdrawals with respect to such amount. Upon the giving of such notice, such amount of the Loan shall be canceled.” In addition, the Bank specifies in section 7.01 that if certain events occur and continue for specified amounts of time “the Bank, at its option, may, by notice to the Borrower and the Guarantor, declare the principal of the Loan then outstanding to be due and payable immediately together with the interest and other charges thereon and upon any such declaration such principal, together with the interest and other charges thereon, shall become due and payable immediately.” For grant-based technical and other assistance, for instance, USAID has provisions under which such assistance may be suspended or terminated to the effect of: “Either party may terminate this Agreement in its entirety by giving the other Party 30 days written notice. USAID also may terminate this Agreement in part by giving the Grantee 30 days written notice, and suspend this Agreement in whole or in part upon giving the Grantee written notice. In addition, USAID may terminate this Agreement in whole or in part, upon giving the Grantee written notice, if (i) the Grantee fails to comply with any provision of this Agreement, (ii) an event occurs that USAID determines makes it improbable that the result or related objective of this Agreement or the assistance programme will be attained or that the Grantee will be able to perform its obligations 38 39
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Thus, if the conditionality set forth in underlying loan or assistance agreements entered into by aid-recipient countries with such international financial institutions is not met or is violated, this may trigger the exercise of one or more remedies available to such institutional actors. Of course, exercising such remedies means that the underlying objective in rendering the development assistance has failed. This failure is generally attributed to both the aid-recipient country for not conforming to the agreed-upon conditionality, and to the lending institution for not successfully implementing a program of assistance. Nevertheless, the remedies that may be invoked by international lending institutions show that such institutional actors have certain clear, contactually based rights. Failure to meet the terms and conditionality of such loan and assistance agreements may be met with a sharp revocation of such assistance. It should be noted that the aid-recipient country has the mutual right to cancel a loan, as happened in the Narmada case when the Indian government opted to cancel a World Bank loan as discussed later in the text. However, other remedies that may be exercised by lending institutions are not mutual in nature—that is to say, these are remedies that can only be exercised by the institutional actor, and are not available to the borrower.
3.2.3.1
The Rights of Sovereigns Vis-à-Vis Multiyear Lending Institutions
If the rights of institutional actors are well-defined and protected, what rights do state borrowers or grant recipients have? What remedies do they have at their disposal? With regard to sovereign members who are borrowing funds from international development institutions, there are three distinct levels of engagement with the international financial community. The first, negotiating a debt work-out by developing a menu of options, is particularly effective where the host government has fairly easy access to international capital markets. The second level of engagement involves international and bilateral financial institutions and private creditors imposing fiscal discipline on a sovereign country. And the third level, which falls outside the scope of this discussion, is where bilateral governments impose economic sanctions for wrongful or politically offensive conduct. A summation is provided in the development law matrix in Table 3.1.
under this Agreement, or (iii) any disbursement or use of funds in the manner herein contemplated would be in violation of the legislation governing USAID, whether now or hereafter in effect.” See USAID Automated Directives System (ADS), Chapter 350, Section M.1(a), as may be amended. Further, USAID may also request that grant funds be refunded by the Grantee if, for example, “the failure of [the] Grantee to comply with any of its obligations under this Agreement has the result that goods or services financed or supported under this Agreement are not used effectively in accordance with this Agreement, [then] USAID may require the Grantee to refund all or any part of the amount of the disbursements under this Agreement for or in connection with such goods and services in U.S. dollars to USAID within sixty (60) days after receipt of a request therefor.” See ADS, Chapter 350, Section M.2(b), as may be amended.
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Table 3.1 Development law matrix Stakeholder Individual actors Sovereign actors
International financial institutions; bilateral lending institutions
Rights/Privileges Right to participatory development; right to seek redress Right to mutuality; right to fair dealing
Right to seek remedies; right to seek repayment of loans/financing; right to impose conditionality
Duties/Responsibilities Exercise rights responsibly; abide by local/international laws Ensure mutuality; cooperate; ensure openness, transparency, accountability; abide by local/ international laws Cooperate; ensure mutuality, openness, transparency, accountability; abide by local/international laws
First, with regard to a failure to repay loans in a timely manner, borrowing countries may exercise a menu of options in order to reach a mutually acceptable debt work-out. Those options may include, but are not limited to: (1) renegotiating the terms of repayment of the loan; (2) rescheduling the debt, there-by softening the payment terms and/or extending the time in which to repay the loan; (3) requesting debt forgiveness; or (4) seeking access to international capital markets. (World Bank loans cannot, however, be rescheduled in the same manner as government-togovernment debt, which is rescheduled by the Paris Club and discussed in further detail in Chap. 5.) It is important to note that this level of engagement with international financial actors (which may loosely be seen as the exercise of borrower remedies) is the most desirable position for a borrowing country to be in. This is particularly true if this country has fairly easy access to world capital markets. The sovereign debtor may seek out creative financial solutions to its debt-related problems such as issuing exit bonds. The borrowing country is thus able to seek tailor-made financial solutions that allow it to exercise its sovereign decision-making power in a fairly uncompromised manner. Moreover, the same type of menu of options may be exercised by the sovereign borrower with commercial lenders such as Citibank. In other words, this type of debt work-out approach is limited to circumstances where there has been a simple failure to repay a loan in a timely fashion. The lending picture between sovereign borrowers and international financial institutions as described in relation to the first level of engagement is usually not so simple and, indeed, rarely, if ever, is. This is because most international financial institutions do not act like commercial banks, who simply lend funds with the expectation of receiving repayment of the principal with interest. In contrast, international financial institutions engage in policy-based lending, which means that credit (i.e., loans) is extended on the condition that the recipient government undertake certain policy reform measures.40 Failure to meet the terms of the conditionality agreed to by the parties (e.g., structural adjustment terms for 40
Jonathan Cahn, “Challenging the New Imperial Authority,” 6 Harv. Hum. Rts. at 171.
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macroeconomic reforms) leads to the second level of engagement. The second level of engagement may result in economic and fiscal discipline being imposed on the borrower country. Accordingly, policy reforms that are imposed through the conditionality of loans and grants are generally aimed at helping the sovereign borrower regain its balanceof-payments equilibrium. In return for such financing to support external, foreign currency-denominated trade and other obligations, the sovereign borrower is generally required to reform its macroeconomic policy framework. This may mean, for example, changing host government policies in certain sectors, such as eliminating agricultural subsidies or enacting enabling legislation to privatize certain industrial sectors. In fact, a principal function of the IMF is to help its members regain their external debt repayment ability and resume their foreign exchange stability. In furtherance of this goal, the IMF instills fiscal discipline on the borrower,41 the second level of engagement. This conditionality must be met before future disbursements of IMF financing will be made available to the sovereign member seeking such financing.42 41 See Joseph Gold, Conditionality, IMF Pamphlet Series No. 31, 1979; M. Guitian, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Series No. 39, 1981. 42 Conditionality imposed by international financial institutions (IFIs) such as the World Bank has been described as a “conditionality game” that unfolds in three acts: (1) the initial negotiating process; (2) an implementation process; and (3) a decision by the lender/donor to further grant or to refuse additional financing to the borrower in light of the relative success of the implementation stage. See P. Mosley, J. Harrigan & J. Toye, Aid and Power, Vol. 1:67–69. Indeed, according to Mosley et al., condition-based lending was seen in the 1980s by the World Bank as a consolidated, strategic reaction to uncontrolled levels of balance-of-payments deficits, and the debt overhang of developing countries. These authors note that, “Projects manifestly provided too small and slowdisbursing a financial flow to deal with the debt and balance-of-payments problems, and the conditions attached to them did not touch those levers of economic control-exchange rates and agricultural prices, interest rates and trade policies-which, at least within the Bank, were widely seen as providing the key to project success and the relief to underdevelopment more generally. [Footnote omitted.] By providing quick-disbursing finance linked to understandings concerning the manner in which those levers of control were to be managed, the new instrument of policy-based lending held out the hope of killing two birds with one stone; more generous financial flows and more effective economic policy combined in the same package.” Id. at 65. The authors further point out, and is a point I believe is well taken, that conditionality “is neither new in international finance, nor in human relations more generally. Conditionality is simply a side condition designed to ensure the execution of a contract.” (Id., emphasis in original.) My own experience at USAID supports the prevalence of this type of thinking, which imposes “fiscal discipline” by focusing on changing macroeconomic conditions. The quid pro quo for instituting such change by the sovereign borrower is making generous tranches of grant or loanbased financing available in exchange for such policy changes. Indeed, a specific source of grant funding appropriated for USAID's use, the Economic Support Fund, was specifically meant to be used for precisely this purpose. The use was considered to be non-projectized, fast-disbursing assistance insofar as the funding was not specifically designed to support the outcome of a project per se but to support overall fiscal or macroeconomic policy changes in the recipient country. Over time, it became clear that this became a ceaseless cycle where the policy changes (however wellintended) did not solve the debt overhang of developing countries. The aid-recipient countries often needed to borrow more, and were made to agree to more conditions being imposed on such
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Moreover, compliance with a new policy framework, rather than simple repayment of the loan, is the real objective of policy-based lending.43 At the end of the day, however, international financial borrowings often add up to a tremendous debt overhang that further impedes development for the debtor nation. Sovereign borrowers usually only approach the IMF when a default on the debtor’s international payment obligations is fairly imminent.44 In this case, the terms of a structural adjustment program are negotiated with the IMF, the successful conclusion of which is a precondition to making an IMF stand-by facility available to the sovereign debtor.45 The facility may be used to draw down on an IMF line of credit to provide short-term financing, thus enabling the sovereign debtor to meet its immediate international payment needs. A stand-by arrangement is normally repayable within 3–5 years or, if extended, within 5–10 years. Further, an IMF structural adjustment program must be agreed to in principle before any World Bank structural or sectoral adjustment loans will be made available to the sovereign debtor.46 In addition, the sovereign debtor may not seek to have its bilateral official debt owed to donor countries rescheduled under the auspices of the Paris Club unless an IMF stand-by arrangement is in place.47 Thus, Paris Club
borrowings. Thus, the IFIs and the donor community generally bargained for and expected behavioral changes in the grant recipient or the sovereign borrower (e.g., removal of tariffs, removing foreign exchange controls). However, the conditions imposed by IFIs often conflicted with each other, or were not especially well-coordinated or well-sequenced. Moreover, success was gauged in terms of the amounts disbursed by the IFIs, not by whether the policy changes were made or whether such changes were actually successful. (See e.g., “Effective Implementation: Key to Development Impact” (R92-125, November 3, 1992), a World Bank study also known as the “Wapenhans Report.”) Most of these donor expectations may have been predicated on a “modernization” approach that supports the somewhat patronizing view that if (Tier II) developing countries could be coaxed (through generous tranches of funding) to institute certain macroeconomic changes, then development results would naturally be achieved. However, the planned policy changes either were not fully or effectively implemented or, if such changes were made, they did not have the desired development impact. Moreover, the additional loans merely entrenched the debtor status of the borrowing nations, making development progress an ever elusive goal. Thus, in the final analysis, this subtly coercive approach, which is still very much in use today, failed to meet the expectations of lender or borrower and betrayed the promise of development. 43 See Jonathan Cahn, “Challenging the New Imperial Authority,” 6 Harv. Hum. Rts. at 170–171. 44 Discussions with the IMF and a sovereign member may be initiated by the sovereign state based on its critical financing needs, or by IMF staff who are responsible for the general surveillance of the country’s economic condition, and who may undertake a special mission to the country in question regarding a proposed use of Fund resources. See IMF, Articles of Agreement, art. VI, § 1. 45 See Jonathan Cahn, supra, “Challenging the New Imperial Authority,” at 172. 46 World Bank Structural Adjustment Loans (SALs), and Sectoral Adjustment Loans (SECALs) are medium-to-long term loans that may only be entered into if IMF approval for stand-by credit has already been obtained by the borrowing country. SALs are linked to key economic reforms, and SECALs emphasize reforms in certain sectors such as trade, agriculture, industry, public finance, energy, or education. The conditionality specified in these World Bank agreements often mirror or support that set forth in the underlying IMF financing arrangement. 47 Sanford (1995), pp. 345, 359–360.
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reschedulings that, in effect, consolidate official government-to-government debt are preconditioned on IMF Executive Board approval of an official stand-by (or extended) arrangement. To make matters worse, private commercial creditors (acting through the London Club or simply as an independent syndicate of lenders) may also require an IMF stand-by agreement be entered into before making any “new money” available to the sovereign debtor. The specific terms and the negotiations surrounding structural adjustment programs often create an impenetrable wall of secrecy. In the broadest terms, a letter of intent (LOI) is normally submitted to the IMF by the sovereign member seeking IMF financing. This LOI is generally issued by the host country’s Board of Governors of the Central Bank, Minister of Finance, or another appropriate government official. The LOI describes the host government’s commitment to overcome economic structural imbalances. The letter is generally attached to an IMF staff report (i.e., a memorandum of economic policies) that discusses the nature of the structural imbalances in the borrowing country’s economy. The IMF staff report also generally describes the proposed stand-by (or extended) arrangement that states the terms and conditions of the loan which usually incorporates the LOI by reference, and sets forth the structural reform measures to be implemented by the sovereign borrower. The finalized LOI and staff report are approved by the Executive Board of the IMF, and provide the basis for approving IMF financing for the country in question. The fact that such IMF staff reviews are often cloaked in secrecy and not subject to public (or U.S. Congressional) scrutiny has faced sharp criticism from conservative members of the U.S. Congress who urge that the concept of transparency be applied to the IMF.48 LOIs are now posted on the IMF’s website, thus demonstrating that the IMF responded by creating greater transparency about its internal processes. In arranging this stand-by credit, the IMF has the option of using the streamlined procedures set forth under its emergency financing mechanism (EFM) which was adopted on September 12, 1995, following the Mexican fiscal crisis.49 Generally, financing packages of this nature are conditioned on an ambitious program of macroeconomic reform that are agreed to in principle by the borrower nation consisting of, inter alia: “A Little Transparency at the I.M.F. Too,” Wash, Times (July 8, 1998). In March 1998, for example, the U.S. Senate approved US$18 billion in funding for the IMF, but this appropriation languished in the U.S. House of Representatives, where conservative Republican members clamored for some transparency and accountability on the part of the IMF. Former Speaker Newt Gingrich and former Majority Leader Dick Armey urged then President Clinton to seek the release of the IMF’s secret operating budget and its closely held staff policy reviews. Thus, these conservative critics joined the ranks of other prominent critics of the IMF, including economists Jeffrey Sachs, Milton Friedman, and Martin Feldstein, as well as George Shultz, a former U.S. Secretary of State and of the Treasury. 49 For a discussion of the IMF’s emergency financing mechanism, see “Emergency Financing Mechanism, Summing up by the Chairman, Emergency Financing Mechanism,” Executive Board Meeting 95/85, September 12, 1995, reprinted in Selected Decisions and Selected Documents of the International Monetary Fund, Twenty-Second Issue (Washington, D.C., June 30, 1997) at 156–160. 48
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• a strong macroeconomic framework of reducing its external current account deficit, building up internal foreign exchange reserves, and controlling inflation; • restructuring, recapitalizing and reforming the financial sector, including financial audits of large firms who will also be required to incorporate new disclosure standards for financial data on non-performing loans and capitalization levels in conformity with international best practices, thus encouraging the financial sector to be more open, transparent, and sound; • trade liberalization measures, including the elimination of trade-related subsidies and restrictive import licensing; • capital account liberalization by eliminating restriction on foreign access to money market accounts and corporate bond markets and simplifying foreign direct investment approval processes.50 Thus, sovereign nations borrowing from the World Bank are expected to make complex and deep structural adjustments, and it is clear that the release of approved funding under the loan is explicitly conditioned upon making these policy changes. A stand-by arrangement with the IMF generally approves tranches of financing, generally to be disbursed within a period of 1 year. Periodic reviews of the program and post-program monitoring. may also be required. However, these tranches are not truly “loans” as such but instead permit the borrowing country to use its local currency to purchase hard currency from the IMF.51 These hard currency purchases must be repaid to the IMF by the sovereign borrower. Further, this repayment must be made in the time specified and in the hard currency denominated by the IMF. (For instance, Indonesia may wish to use its local currency, the rupiah, to obtain euro currency from the IMF. When Indonesia has a sufficient reserve of foreign exchange earnings, it is then responsible for converting its rupiahs to euros (or pound sterling as required by the IMF), in order to repay its currency purchase from the IMF.) These understandings between the sovereign borrower and the IMF are not, however, considered to be international treaties, agreements, or contracts. Indeed, the IMF’s Executive Board has issued a decision that clearly states that, “[s]tand-by arrangements are not international agreements and therefore language having a contractual connotation will be avoided in stand-by arrangements and letters of intent.”52 The stand-by arrangement, thus, is simply treated as a unilateral declaration of intent to follow the prescriptions laid out therein. Contractual remedies found in other loan documentation of the World Bank and other multilateral and/or bilateral lending institutions are specifically avoided by the IMF. Indeed, it may be argued that there is no contractual “meeting of the minds,” so to speak, that is reflected in the 50
Id. at 2–3. See generally Articles of Agreement of the International Monetary Fund, art. V, §§ 3(b)-(e). 52 IMF Executive Board Decision No. 6056-(79/38), Sec. 3, “Guidelines on Conditionality, Use of Fund’s General Resources and Stand-by Arrangements,” March 2, 1979, reprinted in Selected Decisions and Selected Documents of the International Monetary Fund, Twenty-Second Issue (Washington, D.C., June 30, 1997), excerpt on file with the author. 51
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arrangement. The arrangement simply reduces to writing the unilateral undertakings of the sovereign borrower in relation to the IMF. Further, since IMF stand-by arrangements do not have the legal status of being international agreements or accords, they do not require parliamentary approval by the host country. Thus, such arrangements are negotiated by the executive branch of the host government and generally (but not always) bypass any political oversight or approval process by the legislative branch of the host country. Although this adds to the speed in which such arrangements can be concluded with the IMF—a swiftness that may be mandated by the exigent circumstances faced by the host country—it also prevents a certain level of public scrutiny of these arrangements. The IMF’s role has been likened to a trustee in bankruptcy. However, unlike other private trustees who are appointed by and held accountable to a bankruptcy court, there is no equivalent accountability for the IMF.53 The issue of whether there should be an institutional means for holding the IMF and other international financial institutions accountable for actions taken in relation to the imminent “bankruptcies” of sovereign members is an important one, and it is addressed later in this text. Finally, the third level of engagement consists of having economic (including trade) sanctions imposed on a developing country to sanction unlawful or impolitic conduct. Unlike economic austerity measures imposed as fiscal discipline by the IMF (which may also be reflected in the conditionality required by the World Bank, the Paris Club, and private creditors), economic sanctions are imposed by governments rather than international financial institutions.54 This type of punitive action is not, however, principally designed to support development in the sanctioned state and therefore, lies outside the scope of this discussion. The structural adjustment programs (SAPs) were sharply criticized by many African countries and NGOs in the health, nutrition and education sectors, in response to which SAPs began to integrate the lessons learned and shifted towards a more flexible and gradual approach to budget cuts, with greater tolerance to shortterm deficits during the stabilization period.55 In essence, The failure of SAPs, as originally designed, to effectively address the development challenges in Africa have effectively resulted in rethinking the approach. Yet, it has not been completely abandoned; it has been repackaged in a form and manner to make it attractive to stakeholders in development in appealing to the inclusiveness, ownership, accounting for country resource heterogeneity, and more importantly addressing the most current issues, such as the Millennium Development Goals (MDGs). It is in this context that the Poverty Reduction Strategy Papers (PRSP) can be seen as the repackaged form of an SAP, with modifications in social content and emphasis on the issues of national ownership and consultation.56
Jonathan Cahn, “Challenging the New Imperial Authority,” 6 Harv. Hum. Rts. at 172. See e.g., Foreign Operations, Export Financing, and Related Programs Appropriations Act, 1997, P.L. 104–208, 110 Stat. 3009, § 570 (imposing USG sanctions against Burma), and § 540 (imposing USG sanctions against Serbia and Montenegro). 55 Heidhues and Obare (2011), p. 60. 56 Id. at 61. 53 54
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An example of the softer, more “human face” of adjustment is the Social Dimensions of Adjustment (SDA) Project of the World Bank which is an integral part of its structural adjustment program. The SDA is designed to support the Host Government in its poverty reduction strategy by: (a) improving basic services in population planning, health and education; (b) promoting job creation and facilitating job placement; (c) improving opportunities for women to participate in development; (d) providing basic social infrastructure to the poor; and (e) strengthening the institutional capability for implementing social policies.57 Whether the SDA is a sufficient interface for structural adjustment programs remains to be determined.
3.3
Fundamental Principles of International Development Law
A new globalized, international community now has the opportunity to form a social contract for their common good in the same fashion as Jean-Jacques Rousseau believed individuals formed a social pact in furtherance of their mutual interests.58 The new millennium offers an opportunity to move away from the paradigms of the “haves” and “have-nots,” of the privileged and the deprived, and of the affluent and the impoverished. Rather than fixating on the static dynamic of the past, where two worlds are inextricably locked together, it is time to break free of that concept and create a new paradigm. A world divided in two has been replaced by a dynamic continuum, a spectrum that is in constant flux. Today’s economic miracle may be tomorrow’s financial disaster, whereas today’s lost cause may come bounding back to self-sufficiency and financial gain. New constructive rules of engagement must be devised for a newly globalized economy. The following discussion will explore the substantive principles of development law that focus on mutuality, equitable participation in development, and creating a new methodology for establishing new legal norms.
3.3.1
Mutuality
First, mutuality among all sovereign and institutional actors in the development scene must be established. International development law offers the opportunity for a new kind of reciprocation or mutuality. A mutuality of obligation generally means that an “obligation rests on each party to do or permit the doing of something in consideration of the other party’s act or promise; neither party being bound unless 57 58
See World Bank website, SDA (Social Dimensions of Adjustment). See Rousseau (1964), p. 173.
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both are bound.”59 The concept of mutuality is even more narrowly tailored in the arena of international law. For example, in Hilton v. Guyot,60 the U.S. Supreme Court denied enforcement to a French court-issued judgment on grounds that French courts denied enforcement to U.S. judicial decisions. The Supreme Court held that the French judgment lacked “mutuality and reciprocity” and, therefore, could not be enforced in the United States.61 Similarly, the mutual obligations created by the development process are not simply undertaken by the developing nation receiving some form of assistance but also lie with all of the actors in the development process. Everyone has an obligation to make disciplined and careful development choices. In order to give this obligation true meaning, developing nations alone cannot be expected to fulfill this obligation. An equivalent and mutual obligation must be imposed on industrialized states, international financial institutions, private corporations, commercial banking institutions, and local and international NGOs, insofar as they, too, have a duty to cooperate with developing states in seeking equitable, sustainable, and participatory development solutions. There has been an unequal bargaining relationship in the past between industrialized nations and international financial institutions, on the one hand, and aid-recipient developing nations on the other. Moreover, most of the people actually affected by development problems, projects, and failures have had little or no bargaining power. These two factors have led to an imbalance in the development equation over time. This means that the inequities between developed and developing nations as well as the inequities between the impoverished of the world and the representatives authorized to speak on their behalf, have been exacerbated over time. International development law offers an equalizing force for both issues. Rather than imposing differential legal norms on developing countries, international development law holds the entire international community to the same legal norms, thereby helping to establish a level playing field. Thus, instead of perpetuating legal distinctions that highlight the differences between the developed and developing “worlds,” international development law offers legal parity and equitable treatment among sovereign, institutional and private actors.
3.3.2
Duty to Cooperate
The international law of development of the 1970s failed to establish a truly viable “human right to development” (as further discussed in this chapter). Since there is no
59
H. C. Black, Black’s Law Dictionary, rev. 6th ed. (1990) (Centennial Edition 1891–1991), at 1021. 60 159 U.S. 113, 210–211 (1895). See also Somportex Ltd. V. Philadelphia Chewing Corp., 318 F. Supp. 161 (E.D. Penn. 1970), aff’d 453 F2d 435 (1971), cert. den. 405 U.S. 1017 (1972). 61 159 U.S. at 227–228.
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enforceable individual right to development, there is also no independent right to development that may be exercised by developing nations at this stage. Certainly, development options may be vigorously pursued by developing states, but there is no “right” to development established as international normative law as yet. Although the New International Economic Order (NIEO) agenda advocated the preferential treatment of developing nations, this attempt was not successful. This means, in effect, that developing countries have no affirmative right to borrow funds, no right to preferred access to credit (or concessional credit), no right of preferred access to technology transfers, no right to be granted preferential trade terms or most favored nation status, no right to receive development assistance, and no right to receive such assistance free of conditionality imposed by the lender. Developing countries are, thus, not granted a special or different legal status by virtue of their state of “underdevelopment.” Development law does not make any legal distinction between developed and developing countries, and it thereby helps establish the legal parity between both. By eliminating differential norms that prescribe unequal treatment among developing and developed countries, international development law helps establish a level playing field between the two categories. While developing countries may not be entitled to preferential legal treatment or special status under the principles of development law, there is nevertheless a mutual duty to cooperate in the development process. The duty to cooperate should be equally imposed on industrialized and developing states. This simply means that both developed and developing nations should bargain with each other in good faith, and facilitate, where practicable, the development of other nations. More importantly, the act of cooperating with each other is more than joint or simultaneous action; it is the unity of action to a common end or common result.62 The common end result is the development of all nations. In fact, this concept may be broadened to include a duty to cooperate among corporate actors insofar as development is not exclusively a state undertaking but must include the private sector in order to be effective and sustainable. Thus, in recognition of the need for imposing discipline on multinational corporations, albeit voluntary in nature, the Organization for Economic Cooperation and Development (OECD) adopted “Guidelines for Multinational Enterprises” in 1976.63 These guidelines have been periodically revised and cover topics such as competition, information disclosure, taxation, employment, the environment, and science and technology. While the non-legal binding nature of these guidelines means that the provisions therein are not enforced per se, the guidelines establish the parameters of a comprehensive code of business conduct that supports and defines corporate social
H.C. Black, Black’s Law Dictionary: “Co-operate: To act jointly or concurrently toward a common end”; “Co-operation: In patent law, unity of action to a common end or a common result, not merely joint or simultaneous action,” at 334. 63 OECD, Directorate for Financial, Fiscal and Enterprise Affairs, Committee on International Investment and Multinational Enterprises, OECD Guidelines for Multinational Enterprises. 62
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responsibility within the context of development generally. Similar efforts at developing a framework for the social responsibility of transnational corporations have also been undertaken by UNCTAD64 the World Bank65 and the UN. At the 1999 World Economic Forum in Davos, Switzerland, UN Secretary General Kofi Annan asked private sector entities to demonstrate good global citizenship by agreeing to a “Global Compact” of shared principles and values.66 These principles are derived from the Universal Declaration of Human Rights, among other sources, and include: (1) protecting international human rights; (2) supporting the right to free association, including the right to collective bargaining; (3) eliminating all forms of compulsory and child labor; (4) eliminating employment-based discrimination; and (5) promoting greater environmental responsibilities, including developing environment-friendly technologies.67 The Global Compact supports the process of globalization as a critical opportunity for furthering development goals, and it was adopted at a high-level meeting of the UN on July 26, 2000.68 Further, the United Nations Millennium Development Goals (MDGs) are eight goals that all 191 UN member states agreed to try to achieve by the year 2015. These included: (1) the eradication of extreme poverty and hunger; (2) achieving universal primary education; (3) promoting gender equality and empowering women; (4) reducing child mortality, (5) improving maternal health; (6) combating HIV/AIDS, malaria, and other diseases; (7) ensuring environmental sustainability; and finally, (8) developing a global partnership for development.69 Subsequently, the UN passed the United Nations Sustainable Development Goals (SDGs) which are 17 goals that all 191 UN Member States have agreed to try to achieve by the year 2030.70 These 17 SDGs (often referred to as Global Goals) build on the successes of the Millennium Development Goals, while including new areas such as climate change, economic inequality, innovation, sustainable consumption, peace and justice, among other priorities. These goals are interconnected, inclusive
64
United Nations Conference on Trade and Development (UNCTAD), World Investment Report 1994, Transnational Corporations, Employment and the Workplace, UN Doc. UNCTAD/DTCI/10 (1994). 65 Corporate Governance: A Framework for Implementation (2001). 66 United Nations, The Global Compact: The Nine Principles. 67 Id. 68 UN, Executive Summary and Conclusions of High-Level Meeting on the Global Compact, Press Release S6/2065 ECO/18 (July 17, 2000) at 1. 69 UN, “United Nations Millennium Declaration,” Gen. Ass. Res. A/RES/55/2 (September 18, 2000). 70 UN, “Transforming our world: the 2030 Agenda for Sustainable Development.” Gen. Ass. Res. A/RES/70/1 (October 21, 2015). In building on the foundation of the MDGs, the declaration establishing the SDGs, proclaims in its Preamble that, “All countries and all stakeholders, acting in collaborative partnership, will implement this plan. We are resolved to free the human race from the tyranny of poverty and want and to heal and secure our planet. We are determined to take the bold and transformative steps which are urgently needed to shift the world on to a sustainable and resilient path. As we embark on this collective journey, we pledge that no one will be left behind.”
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and “provide clear guidelines and targets for all countries to adopt in accordance with their own priorities and the environmental challenges of the world at large.”71 Indeed, in light of the fact that the SDGs include the notion of “sustainability” to the idea of “international development,” and for purposes of this text, “international development law” shall also implicitly include the idea of “sustainability.” However, to change the title or nomenclature of the subject-matter to “international sustainable development law” is somewhat clumsy. So, the original title of “international development law” has been retained. But please note that the subject-matter now implicitly includes the notion of “sustainability” within its parameters. These above-described efforts on a bilateral and multilateral level demonstrate a growing and encouraging global commitment to corporate social responsibility. This, in turn, supports and fosters the development process overall. The linkages to human rights, labor rights, and the environment are extremely important in this context in supporting and further strengthening important development related goals. Moreover, as a concluding observation, the duty to cooperate is not intended to be state-centric in its focus but requires the full commitment of corporate entities, NGOs, and individuals acting in concert to support the mutual goal of development.
3.3.3
Equitable Participation in Development
Participatory development helps establish a nexus between the most impoverished or deprived and the most lofty decision maker in the development process. By engaging in a dialogue, a relationship is fostered between the two ends of the spectrum. This, over time, has the potential for supporting the creation of mutual insight, understanding, and respect among the development decision makers and the people whom their decisions affect. It also gives more definition and clarity to development law questions, as the affected parties may illuminate the potential human and societal impact of impersonal, bureaucratic decisions. This can only make the development process stronger, thereby better serving those that it is meant, at least in theory, to assist. Moreover, the equitable participation by persons and entities affected by the development equation need not be viewed as destructive, meddling interference. In
71 See generally, the homepage of the UN Development Programme. See also the homepage of the World Bank, Sustainable Development Goals (SDGs) and the 2030 Agenda which states in relevant part that: “2015 was a historic year with the adoption of a new approach to development finance through the Addis Ababa Action Agenda, the 2030 Agenda and the Sustainable Development Goals, a disaster risk framework in Sendai, and the Paris Climate Agreement at COP21. These efforts will guide the UN system and the UN-World Bank Group partnership through 2030. The SDGs are aligned with the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity, and the WBG is working with client countries to deliver on the 2030 agenda through three critical areas: (i) finance, (ii) data, and (iii) implementation – supporting country-led and country-owned policies to attain the SDGs.”
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fact, this type of open participation may actually make the development process more efficient and self-sustaining. Indeed, in furtherance of creating more effective opportunities for participatory development, the executive directors of the World Bank and the International Development Association (IDA), which is part of the World Bank Group, adopted parallel resolutions in 199372 establishing an independent Inspection Panel. The executive directors did so primarily in response to the environmental effects and displacement of peoples in relation to the Narmada dam project in India, as described in further detail later in this text. The support of equitable participation in the development equation is well-demonstrated by the following discussion on the World Bank Inspection Panel. By establishing the Inspection Panel, the World Bank as an institution has formalized the means for holding itself accountable to its end-users, as described below.
3.3.4
Accountability
The 1993 World Bank resolutions establishing the Inspection Panel required a Board review of the Panel 2 years after the date of appointing the first Panel members.73 This review was completed in July 1996, whereupon the Board issued certain “clarifications,” further amending the original resolution.74 Upon its second review of the Panel’s operations, the Bank’s executive directors issued additional clarifications on April 20, 1999, affirming the independence and integrity of the Panel’s function.75 The Inspection Panel provides an independent forum for an “affected party” (i.e., two or more private citizens) who believe that they have been or could be directly harmed by a project financed by the World Bank or the IDA. Such parties may request that the Panel conduct an inspection of their claims. The fact that standing to bring a request to the Panel is limited to two or more people with common interests or concerns is a significant departure from common law notions on the subject, and it has been sharply criticized as “it is not clear why the Bank can not inspect a request from one person who may claim [a] violation of material rights but carry out the inspection for the same claims if raised by this individual accompanied by someone
72 IBRD No. 93-10 and IDA 93-6, respectively, dated September 22, 1993, reprinted in The Inspection Panel: International Bank for Reconstruction and Development, International Development Association, Annual Report (August 1, 1996 to July 31, 1997) (hereinafter referred to as the “Joint Resolution”) at ¶ 23. 73 Id. at ¶ 27. 74 “Clarifications of Certain Aspects of the Resolution Establishing the Inspection Panel (R96-204),” dated September 30, 1996, as approved by the Board of Executive Directors on October 17, 1996, (hereinafter referred to as “Clarifications.”) For a detailed and fascinating description of the events and policy considerations leading up to and following the establishment of the Inspection Panel, see Shihata (2001), p. 7, et seq. 75 See “Conclusions of the Board’s Second Review of the Inspection Panel,” (April 20, 1999).
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else.”76 Further, individual executive directors, or the executive directors acting as a board may also submit requests to the Panel.77 The Inspection Panel consists of three members with staggered terms, first appointed by the Executive Board, and then elected by the Panel itself. The Panel assumed its responsibilities on August 1, 1994, and it issues annual reports that are available as public documents from the World Bank. However, the activities of IFC, MIGA, and the World Bank acting in a trustee capacity (e.g., as trustee of the Global Environmental Facility), as well as the actions of the borrower (i.e., the sovereign member of the Bank) are not subject to inspection or review by the Panel. Complaints related to the projects supported by other agencies of the World Bank Group—the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) are dealt with by the Office of the Compliance Advisor Ombudsman (CAO). However, the Inspection Panel has a fairly narrow scope of review that is limited to assessing allegations of harm to people or the environment and reviews in terms of whether the Bank followed its operational policies and procedures. This often includes issues such as: • Adverse effects on people and livelihoods as a consequence of displacement and resettlement related to infrastructure projects, such as dams, roads, pipelines, mines, and landfills; • Risks to people and the environment related to dam safety, use of pesticides and other indirect effects of investments; • Risks to indigenous peoples, their culture, traditions, lands tenure and development rights; • Adverse effects on physical cultural heritage, including sacred places; • Adverse effects on natural habitats, including protected areas, such as wetlands, forests, and water bodies.78 Thus, the Inspection Panel creates a liaison between the end-users of the development process and the critical decision makers in the World Bank (but not the IMF). The idea of an Inspection Panel advances notions of accountability, transparency, and equitable participation in the operations and governance of the World Bank: an important step forward from a development law perspective. However, the mandate of the Inspection Panel is extremely limited insofar as it does not make independent decisions about whether an investigation should be commenced. If the Panel advises the World Bank’s Executive Board that an investigation is warranted, the World Bank may authorize the Panel to conduct an investigation, the findings of which are reported back to the Board for further action. Thus, the function of the Panel is simply to report to complaints filed by participants
M. Hansungule, “Access to Panel,” at 161 n. 65. See Joint Resolution, supra, ¶ 12 n. 62. 78 World Bank, Inspection Panel website, “About Us.” 76 77
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in the development process, investigate claims, and issue findings and recommendations. Action is taken by the Executive Board of the World Bank. So, in effect, the Executive Board, not the Inspection Panel, makes a final disposition of the claim, but generally does so without much interference with the work of and the recommended course of action proposed by the Panel. Individual cases are listed on the website of the World Bank Inspection Panel, thus furthering ensuring accountability and transparency of its actions as discussed below. The World Bank itself is beginning to realize that there is a mutuality of obligation (as well as an obligation of fair dealing) that must be accepted by all development actors if sustainable development solutions are to be forged.79 In other words, the borrower, financier, and end-user are now being placed on a continuous spectrum where each, ultimately, owes certain duties to the others. These mutual obligations clearly go beyond the formal contractual remedies contained in financing agreements by now including the end-user of the development process, a radical new development. Indeed, the mutuality of obligation in the development process is key in ensuring the success of the development undertaking. Development can no longer be viewed as a linear, time-limited equation that only affects the developing nation in question. No development choice can be viewed in isolation any more, as any single development equation may profoundly affect a globalized economy.
3.3.5
Transparency
Certain aspects of the development law process must be openly shared with the end-users of the process in order to remain effective. The ultimate “customers” must be able to understand, participate in, and critique the process in order to inform it, keep it dynamic and flexible, and apply the various lessons learned in responding to changing needs. This may mean, for example, scheduling public hearings on development projects during the design phase, promulgating audited reports and evaluations of development projects on the Internet, and establishing access procedures analogous to the U.S. law-based Freedom of Information Act. In other words, certain procedural safeguards are integral to keeping the development law process focused on its end-users. In practical terms, developing states and institutional actors may need to establish the following: (1) certain procedural safeguards such as allowing public hearings for certain types of development projects while still in the design and early implementation phases; (2) public access to non-classified, non-privileged government or official documents that describe the decision-making process for development undertakings; and (3) institutional means and procedures for addressing grievances
See generally, “Accountability at the World Bank: The Inspection Panel at 15 Years,” World Bank (2009).
79
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and complaints concerning the development process with respect to individual projects. The importance of establishing procedural safeguards that involve public participation by development stakeholders was clearly demonstrated in the watershed case of the Sardar Sarovar projects on the Narmada River in western India, which led to the establishment of the World Bank Inspection Panel. The Sardar Sarovar projects (roughly totaling thirty in number) sought to provide irrigation water for droughtprone areas in the states of Gujarat and Rajasthan at a construction cost of an estimated US$5.2 billion in 1992 U.S. dollars. The project planned to submerge 245 villages housing about 41,000 families. The projects could have affected land owned by an additional 68,000 families and would have inundated forestland, changed the rate of sedimentation in the Narmada River, and would have adversely affected local fisheries.80 The project had the potential for displacing over 120,000 people from their homes.81 The World Bank’s involvement with the Narmada project began in 1985, and caused a maelstrom of controversy, especially since the livelihoods of over 140,000 people would be affected. The flooding by the Sardar Sarovar dam and the building of canals, both planned by the project, was expected to have serious negative environmental impacts as well. Vigorous criticism of the Narmada project was made by environmentalists, local activists, local and international NGOs, the media, and other interested parties, particularly since no satisfactory resettlement and rehabilitation in the Narmada Valley had taken place. In response to such criticism, the World Bank commissioned an independent review which was completed in June 1992. The independent review resulted in a report (the so-called “Morse Report”) heavily criticizing the Bank for its failure to ensure the adequate resettlement of peoples affected by the project, and for failing to comply with its own resettlement and rehabilitation procedures in relation to indigenous peoples.82 Further, the independent review found that the Narmada project disregarded the environmental regulations of both the Indian government and the World Bank. In addition, as late as 1992, 7 years following project approval, the legal conditions stipulated in underlying agreements between the parties had still not been met.83 In response to the findings of the independent review, the World Bank set forth standards of performance for the Narmada project in September 1992. In addition, the Bank’s Board of Executive Directors approved an action plan that was completed in consultation with Indian authorities. Nevertheless, on March 31, 1993, the Indian government requested the World Bank to cancel the remaining undisbursed amount
80
Operations Evaluation Department Precis No. 88, Learning From Narmada (World Bank, 1995) at 2, 12. 81 R. E. Bissell, “Institutional and Procedural Aspects of the Inspection Panel,” reprinted in The Inspection Panel of the World Bank, at 111 n. 64. 82 Id. at 2, 3. See Morse and Berger (1992). 83 Operations Evaluation Department Precis No. 88, “Learning from Narmada,” at 4.
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of the loan, and this was done. The Indian government decided to complete the Narmada project using other sources of funds, and to proceed with adequate resettlement procedures for the people affected by the project. After years of deliberations, the Indian Supreme Court “allowed the construction of the dam to proceed, provided it met with certain conditions. The foremost condition placed by the Court was that all those displaced by the increase in height of 5 meters be satisfactorily rehabilitated and that the process be repeated for every five meters increase in height.” The dam was inaugurated on September 17, 2017 by Indian Prime Minister Narendra Modi.84 The example of the Narmada project illustrates many far-reaching and profound implications. First, the public participation and advocacy that took place once the adverse effects of the project were assessed by local populations and interested parties shows the impact that a vigorous civil society can have in the development equation. Indeed, the impact of international and local NGOs on the Bank’s decision making was also clearly felt in this context. During this debate, the World Bank’s executive directors expressed their conflicting views of not wishing to “enfranchise” international NGOs, yet not wanting to “disenfranchise” local NGOs who were becoming important development partners. This is still an ongoing tension in the Bank.85 More importantly, the project forced the Indian government to realign its political priorities by requesting that the remaining, undisbursed balance of the World Bank loan be canceled. Thus, the mere offer of development assistance in this case did not mean that it was simply a “gift” that could not be scrutinized by its end-users. The open, participatory process that arose from the Narmada debacle articulated, perhaps for the first time on a scale of that magnitude, the actual human impact that development projects may have. The end-users of this project voiced their views in a politically effective manner, stopped further financing by the World Bank, and forced the Indian government to reaffirm its commitment in January 1994 to coordinate dam construction with the resettlement process.86 Thus, the people affected by the dam project created a vital link with responsible local officials and to World Bank decision makers, making such officials responsive to their immediate as well as their long-term needs. The impact of the Narmada project on the World Bank is incalculable. It made Bank officials aware of how high the stakes are in the development process and of how important an open, participatory process can be in ensuring the ultimate success of such projects. Since one of the factors identified by the independent review was the failure to adhere to World Bank policies and procedures, the Bank responded by creating an independent Inspection Panel. The Inspection Panel began its operations in September 1994, and it was given a mandate to ensure that Bank policies are being
84
Id. R. E. Bissell, “Institutional and Procedural Aspects of the Inspection Panel,” at 112–113. 86 Id. at 1, 7. 85
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fully implemented. The Panel, in effect, permits the end-user of a World Bank project to begin a dialogue and create a nexus with the Bank itself.87
3.4
Substantive Principles of International Development Law: Establishing Legal Norms
Finally, international development law as a new legal discipline requires that new, substantive legal norms be established. This has been attempted before by the international law of development which was created in the 1970s as a legal dimension of NIEO principles. As discussed above, the NIEO agenda tried to establish differential legal norms whereby developing countries would be held to a different standard than developed nations. The NIEO agenda, inter alia, advocated that developing countries be given preferential access to credit, development assistance, and technology transfers. The NIEO advocated an historical view of development where reparations for past colonial wrongs would be made and enforced through a new legal regime. Past inequities were reinforced through the imposition of unequal legal treatment of the “haves” and “have-nots.” The disparate legal treatment of these two categories of countries tended to perpetuate, rather than ameliorate the inequities between them. In any case, differential legal norms were never fully accepted by the international community and have, by the operation of history, lost much of their relevance. Dependency theorists were wedded to the historical context of under development whereas modernization theorists ignored it. Indeed, modernization theorists took an ahistorical view of the development process and believed that the values espoused by modernization were value-neutral.88 The issue of whether such modernization values are, in fact, value-neutral, is addressed in the discussion setting forth the Janus Law Principle in Chap. 2. The ahistorical basis of the modernization approach to development may, however, prove to be quite useful in a post-modern era. History now matters less where, for example, “virtual laws” must be applied to regulate and control Internet commerce and the legal rights and properties created thereunder.
87
Id. at 10–11. See also Shihata (1994). See Gopal (1996), pp. 231, 235: “The law and development movement should recognize that laws are not socially, culturally and politically neutral. Consequently, it should reevaluate, analyze and demonstrate the underlying social, cultural and political assumptions of law that are considered for adoption by developing countries, so as to facilitate informed choice by the recipient state regarding the reception of laws. The law and development movement adopted a view that the law is a neutral instrument for the resolution of economic issues, independent of the social, cultural and religious foundations of the societies in which they develop. This view was also based in part on explanations provided by Max Weber.”
88
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Contextual Norms
If the application of differential legal norms is not feasible under development law, what norms should apply? In answer to that question, the following discussion will address contextual legal norms. A contextual legal norm has been described as “a norm which on its face provides identical treatment to all States affected by the norm but the application of which requires (or at least permits) consideration of characteristics that may vary from country to country. The application of a contextual norm thus typically involves balancing multiple interests and characteristics.”89 At a conference held in Kyoto, Japan, December 1–11, 1997, the parties to the UN Framework Convention on Climate Change agreed to a historic protocol (the “Kyoto Protocol”). A total of 178 countries, including Japan, signed the Kyoto Protocol on July 23, 2001, in Bonn, Germany, committing themselves to reducing green-house gas emissions. This accord must, at a minimum, be ratified by 55 nations who are responsible for at least 55% of the 1990 carbon dioxide emissions in order to be binding on the signatories.90 The Kyoto Protocol took effect on February 16, 2005.91 This protocol requires that developed nations (listed in Annex I of the treaty)92 commit themselves to lower their greenhouse gas emissions over the course of the next 15 years. For example, EU nations were expected to reduce emissions to a level 8% below 1990 levels, the United States by 7%, and Japan to 6%.93 In essence, the Kyoto Protocol required that thirty-eight heavily industrialized countries reduce by 2012, the six most important greenhouse gas emissions to 5.2% below 1990 levels. Significantly, however, no similar commitment was required of “developing” countries, a term that, incidentally, was not given a concrete definition but includes countries such as China and India.94 By treating developed countries differently from developing countries, the Kyoto Protocol, in effect, establishes differential norms that are reminiscent of NIEO-type legal norms. A differential norm creates a facial inequity in its application based on a distinction tied to the relative economic status of the signatory countries. This approach is somewhat short-sighted insofar as a country’s economic status may 89
Magraw (1990), p. 74. Art. 25 of the Kyoto Protocol; see also Annex B of the Kyoto Protocol. 91 Shankar Vedantam, “Kyoto Treaty takes Effect Today: Impact on Global Warming May be Largely Symbolic,” Wash. Post (Feb. 16, 2005). 92 Annex B of the Kyoto Protocol lists the following nations: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, EU, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Ukraine, United Kingdom, United States. 93 Fact Sheet, “The Kyoto Protocol on Climate Change,” Bureau of Oceans & International Environmental & Scientific Affairs, U.S. Department of State (January 15, 1998). 94 A. Revkin, “178 Nations Reach Climate Accord; U.S. Only Looks On,” New York Times (July 24, 2001). 90
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change in the short-run. Moreover, differential norms tend to create and perpetuate inherent inequalities between the parties in the long-run. This approach may not be altogether workable as implementation proceeds. The U.S. Senate specifically warned that it would not ratify the treaty without the meaningful participation of developing countries95 and has been vigilant96 in barring implementation of the terms of the treaty. More importantly, differential legal treatment is unnecessary, especially in this context. By establishing objective, value-free criteria that is equitably applied to all signatories, the chances of fostering international cooperation in reducing the adverse effects of global warming is significantly increased. The 1997 Kyoto Protocol by its terms “hardened the differentiation between developed and developing countries into a kind of firewall. It was built on a platform of negotiated, legally binding targets and timetables for reducing greenhouse gas emissions, accompanied by rigorous rules for accounting, transparency and compliance – but only for developed countries.”97 This was an important “lesson learned” when it came to negotiating the Paris Climate Accord which changed the underlying legal presumptions by shifting, “the paradigm of differentiating among countries to a suppler approach, based on elements including a country’s actual capacities and its ability to determine its own target. . . . Paris shifted the paradigm from negotiated, legally binding targets for reducing emissions to a system of non-binding, nationally determined targets (so-called “NDCs”), supported by a binding, but non-punitive transparency system.”98 The Paris Climate Accord entered into effect on November 4, 2016. However, the United States announced on June 1, 2017, that it was withdrawing from the
95 Id. See also Statement of Stuart Eizenstat, former U.S. Undersecretary of State, before the U.S. House of Representatives’ International Relations Committee (May 13, 1998) at 5–8.; State Department Fact Sheet, at 4–5 n. 96, where the U.S. State Department urges participation by all parties, including developing countries, through the Clean Development Mechanism, by lowering greenhouse gas emissions through new technologies. Without such participation by all signatory parties, the Clinton Administration was not willing to send the treaty for ratification by the U.S. Senate, and ratification was indefinitely stalled. Although the U.S. signed the Protocol on November 12, 1998, the U.S. dropped out on July 23, 2001. On December 12, 2011, Canada formally withdrew from the Kyoto Protocol although it had originally ratified the treaty. See Ian Austin, “Canada Announces Exit from Kyoto Climate Treaty, New York Times (December 12, 2011). 96 See e.g., Sec. 577 of Fiscal Year 2000 Foreign Operations, Export Financing, and Related Programs Appropriations Act (P.L. 106-113) (Oct. 24, 2000), which states clearly that: “None of the funds appropriated by this Act shall be used to propose or issue rules, regulations, decrees, or orders for the purpose of implementation, or in preparation for implementation, of the Kyoto Protocol, which was adopted on December 11, 1997, in Kyoto, Japan, at the Third Conference to the Parties to the United States [Nations] Framework Convention on Climate Change, which has not been submitted for advice and consent to ratification pursuant to article II, section 2, clause 2, of the United States Constitution, and which has not entered into force pursuant to article 25 of the Protocol.” 97 Todd Stern, “The Future of the Paris climate regime,” Brookings (April 11, 2018). 98 Id.
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Paris Climate Accord leaving it in the isolated position, as of this writing, of being the only country to do so after Syria ratified the accord in 2017. 99 Thus, the Paris Climate Accord is an example of a contextual norm where identical treatment is accorded to all participants, but its practical application may vary depending on the circumstances of each country. This does not leave any room to argue that differential treatment is being granted to a certain category of countries based on their membership in that group or based on an existing legal preference. Equitable participation is encouraged by adopting this type of approach and the chances that the Protocol will be ratified by individual governments, and adhered to, is enhanced. Further, by eliminating differential basis for establishing new legal norms under development law, the possible stigma attached to being a developing country, or the additional burdens imposed on developed nations, is removed. International development law thus works to establish a more level playing field by not perpetuating inequities in the law. It is still possible to take account of differences between countries, and their relative development needs, without establishing preferential legal categories in order to do so. Creating contextual norms is very important within the framework of development law, especially in light of the Janus Law Principle. In order to develop such contextual norms, it may be useful to develop a model law approach that incorporates a menu of options. A national approach that may also serve as a model in developing contextual norms is the U.S. Uniform Commercial Code (UCC). The UCC provides a national model that articulates consistent rules or “black letter law” dealing with secured transactions and other related commercial issues. The UCC adopts a menu of options approach insofar as the practice of one state is contrasted with, and incorporated into, the practice of another. Thus, a state has choices that it may exercise within the framework of the UCC that enhances its flexibility in developing laws best suited to that state’s particular commercial needs. Thus, the independent commercial practices of various states in the United States are constantly being cross-fertilized by contributing to and being incorporated into the UCC framework.100 If this approach is taken on an international scale, different legal models can be devised for addressing asset securitization, mortgages, bankruptcies, and other legal issues underlying the secured lending transactions. Thus, a menu of options approach may create a flexible framework of legal choices. For example, just as a basket of currencies are used in determining the artificial value of Special Drawing Rights used by the IMF to determine member quotas, it may be possible to develop a “basket of laws” in developing a concrete, pragmatic Lisa Friedman, “Syria Joins Paris Climate Accord, Leaving Only U.S. Opposed,” New York Times (November 7, 2017); although there is the possibility of the U.S. rejoining at some point. See “Climate Change: Trump says U.S.’ could conceivably’ rejoin Paris deal,” BBC News (January 11, 2018). 100 See Levy (1998), p. 249. See also Bonell (1995), p. 1121; Garro (1995), p. 1149; Veytia (1995), p. 1191; Baptista (1995), p. 1209; Ferrari (1995), p. 1225; Parra-Aranguren (1995), p. 1239; Juenger (1995), p. 1253. 99
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approach to resolving development law questions. In other words, the commercial practices of France may be a useful model for Romania, whereas the commercial practices of Germany may provide useful insights to Thailand. Or, the lending practices of the Grameen Bank in Bangladesh may provide a useful microfinance model for Côte d'Ivoire who may be trying to encourage decentralized rural finance that is accessible to women. Of course, this is not to say that if a choice does not exist on the menu that it must be discarded as an option. The menu simply provides structured choices from which deviations may be made. Moreover, the menu may be added to or deleted from depending on the relative successes (or failures) of certain development options or strategies. Thus, the menu of options should be dynamic and responsive to the lessons learned from the development experiences of the participating countries. The menu of options approach exemplified by the UNCITRAL Model Law is an important means of furthering the development law process. The central idea behind this approach is not to take a balkanized view of development law principles but to realize that certain models, typologies, regional applications, and the like may have valuable lessons to teach other countries. By creating a systemic approach based on models, and variants thereon, a certain integrity to the development of legal systems may be developed over time. This is not to resuscitate the “legal imperialist” law and development approach that only took account of Anglo-American legal traditions but to make legal systems development more pluralist in their vision and application. After all, the needs of Niger in rural banking may be closer to Bangladesh than to France, its former colonial ruler. Moreover, building an international consensus is extremely important in this context, especially with regard to creating a kind of “infrastructure” of globalized emerging capital markets. Over time, consensus-building may lead to the development of contextual norms in the area of international development law. Indeed, the seminal work of UNCITRAL, the International Institute for the Unification of Private Law (UNIDROIT), and other international law efforts may already be leading us in that direction.
3.4.2
Absolute Legal Norms
Finally, international development law may need to impose absolute norms in order to impose universal legal discipline in certain areas. An absolute norm has been described as, “a norm that provides identical treatment to all countries and does not require or permit consideration of factors that vary between countries. . . . No bright line thus exists between absolute and contextual norms. . . . Absolute norms have the capacity for being very precise. . . . Precision is often desirable as a general matter because of easier application, more predictable outcomes, and [a] lower risk of manipulated, unprincipled third-party decision-making.”101
101
Magraw (1990), p. 76.
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Absolute norms should be applied, for example, to protect fundamental, inalienable human rights, such as the right to be free from torture and cruel and inhuman treatment. Of course, as discussed earlier, there may need to be a redefinition of which international human rights are fundamental, but certainly there should be satisfactory international accord to impose some absolute norms in the human rights arena. The struggle to define internationally accepted absolute norms that permit imposing international trade sanctions for environmental offenses102 and human rights violations103 has already begun. Absolute norms are applied equally to all international actors. Individual circumstances are not taken into account in the same way that the application of a contextual norm would require. Torturing prisoners, for example, may be considered to be a violation of an international human right that is not legally justifiable under any circumstance.104 Therefore, the prohibition of this type of conduct would be absolute. Absolute norms form the “bottom line” of international legal norms, below which no conduct is permissible. Thus, absolute norms are equally applied, without distinction to developed or developing countries, for acts or omissions that are deemed unlawful based on an international consensus. In sum, the substantive principles of development law are grounded in the mutuality of obligation, the duty of cooperation, equitable participation, accountability and transparency in the development process. Further, much effort needs to be dedicated to developing new, contextual legal norms using a menu-based, model format as a starting point. Finally, absolute norms, particularly in the context of fundamental human rights, need to be established and enforced.
3.5
Taxonomy of International Development Law
The following discussion will set forth a classification of laws that may be used to disaggregate development law principles into three categories: • Absolute norms; • Globalized laws; and • Relative norms.105 The reason for creating this classification is to put the bewildering array of development-related laws into perspective. There is also an underlying linkage between this legal taxonomy and the philosophic origins of such laws or legal approaches. This
102
See generally, Feddersen (1998), p. 75; Meier (1997), p. 241. See generally, Popovic (1996), p. 487. 104 See e.g., Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, adopted Dec. 10, 1984, S. Treaty Doc. No. 100-20 (1988), 1465 U.N.T.S. 85. 105 See generally Magraw (1990), p. 69. 103
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linkage may also prove useful in more fully understanding the origins and organic growth of such laws, and the relationship of each category to the other.
3.5.1
Absolute Norms
The international legal community may wish to consider establishing “absolute norms” in certain areas of legal jurisprudence in order to ensure that the individual dignity of the human person is respected. These norms will help establish certain legally recognized (and hopefully in future, enforceable) rights to preserve that human dignity. The legal need to so is, of course, predicated on the political will to do so, and that perceived need is not equally felt in all quarters. Therefore, this is the beginning of a dialogue, not a finished debate on the subject. With this in mind, however, the following discussion sets forth a certain philosophic backdrop to this debate. In the post-modern context of international development law, the legal descendant, so to speak, of the doctrine of natural “rights” seems to be “absolute legal norms.” These norms are slowly evolving, particularly in the area of human rights, and seem to fall into two types: negative and positive. “Negative” injunctions enjoin the respective party from depriving the human person of certain basic liberties and his fundamental human dignity. An example would be the right to a freedom from torture—the respective party is enjoined from torturing a person protected under this right, and if the norm becomes absolute, it will be universally applied.106 In contrast, “positive” norms are affirmative rights to, for example, a right to development, a right to peace, a right to education. While negative absolute norms tend to address more procedural rights connected to the International Covenant on Civil and Political Rights (ICCPR),107 positive norms are more connected to the substantive rights outlined in the International Covenant on Economic, Social and Cultural Rights (ICESCR),108 and other third generation “aspirational” rights. Absolute norms in the context of international human rights will be explored in more detail in Chap. 4 discussing whether there is a right to development. While it is tempting to believe that these absolute norms stem from an idealist’s vision of human dignity and the rights to be accorded in order to ensure that this state is preserved, I would argue that the origin of absolute norms actually stem from “natural rights,” as discussed by Locke and others. Unlike Aristotle who believed 106
See e.g., Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, adopted Dec. 10, 1984, S. Treaty Doc. No. 100-20 (1988), 1465 U.N.T.S. 85. 107 International Covenant on Civil and Political Rights, UN G.A. res. 2200A (XXI), 21 U.N. GAOR Supp. (No. 16) at 52, U.N. Doc. A/6316 (1966), 999 U.N.T.S. 171, entered into force March 23, 1976. 108 International Covenant on Economic, Social and Cultural Rights, UN G.A. res. 2200A (XXI), 21 U.N.GAOR Supp. (No. 16) at 49, U.N. Doc. A/6316 (1966), 993 U.N.T.S. 3, entered into force January 3, 1976.
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that certain peoples or conquered nations were “naturally” slaves, Locke believed that no “English gentleman” could support the idea of slavery as a natural (or unnatural) state of man.109 Individual freedom is the expected, bargained for outcome of the Lockean social contract; however, the starting point is the natural, unquestioned equality of all human persons. To believe that all men are endowed by their Creator with certain inalienable rights, and that all men are created equal as a self-evident proposition of “natural law” is highly attractive in this context for the following reasons. First, it does not necessarily rely on nor is it dependent on pre-existing religious doctrine. Moreover, while this genre of natural law certainly embodies a moral ideal, its “self-evident” character gives it legitmacy. Natural law presupposes that there is a deep connection between morality and law and further, that law has moral content.110 Moreover, natural law develops a system of universal moral and ethical principles that are either derived from God (Aquinas) or inherent in human nature (Aristotle) which can be discovered by the exercise of human reason (Locke).111 In the post-modern context, law is almost exclusively associated with the State, whereas morals are associated with the individual.112 However, the “relationship between law and morals is the crux of all natural law theory. . . . The problem is no longer one of form or of structure. It is a problem of content. The content of law is a moral one.”113 However, Hobbes was a forerunner of a theory or so-called “modernist” approach to law, that ignores natural law altogether.114 This theoretical approach known as
109 Aristotle’s theory of slavery is found in Book I, Chapters iii through vii of the Politics. and in Book VII of the Nicomachean Ethics, and states that, “But is there any one thus intended by nature to be a slave, and for whom such a condition is expedient and right, or rather is not all slavery a violation of nature? There is no difficulty in answering this question, on grounds both of reason and of fact. For that some should rule and others be ruled is a thing not only necessary, but expedient; from the hour of their birth, some are marked out for subjection, others for rule.” In contrast, in The Second Treatise of Civil Government, Locke does not believe in natural slaves or in the conventional view that all prisoners of war can be legitimately enslaved. See John Locke, Second Treatise on Government, Chap. 19. 110 George Christie, Jurisprudence: Text and Readings in the Philosophy of Law at 84 states, “Two principal positions have been taken as to why natural law is binding on the human conscience. The first is the ‘voluntarist theory.’ The natural law is binding on human beings because it is the product of God’s will. The other position is the ‘intellectualist theory.’ The natural law binds men because it is rational. The advantage of the intellectualist theory is that it enables one to separate a belief in the natural law from a necessary connection with a belief in God. The trouble with the intellectualist theory; however, is that it really does not explain why the natural law is morally binding on the individual because it depends on the self-evident premise that whatever is in accordance with reason is morally binding. One might ask himself whether a belief in natural law necessarily requires a belief in God.” 111 A.P. d’Entrèves, Natural Law: An Introduction to Legal Philosophy at 122, “Locke certainly accepted the view that the essence of law is not will but reason.” 112 Id., at 87. 113 Id. at 79. 114 Id. at 122.
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“legal positivism” does not find any necessary connection between law and morality, and is predicated on the belief that the only legitimate sources of law are laws and regulations that are written, promulgated, passed, adopted or otherwise duly enacted by a properly constituted and duly authorized form of government. Moreover, as there is no “higher law,” positivist laws must be obeyed even if they appear unjust or contrary to the precepts of natural law. (In the view of natural law proponents, however, “while positive law may add to natural law or even restrict it, it is prohibited from contradicting it.”115) In other words, under positivism, there is no requirement that law produce justice or even just outcomes-a deeply cynical view. Positivism thus maintains that the legal order (however much it may arguably be influenced by the moral order) is “analytically self-contained.”116 The legitimacy of law stems directly from the political authority of the political order (government), an idea raised by Hobbes in The Leviathan. Legal positivism is associated with the rise of the European modern nation-state in the nineteenth–twentieth centuries, and its main exponent is considered to be John Austin who was deeply influenced by Hobbes.117 Nevertheless, the axiomatic nature of a “natural rights” Lockean-based legal regime cuts against the grain of a more Hobbesian-influenced positivist expression of law. In fact, it is this implicit tension that may make the articulation and adoption of absolute norms related to international human rights more problematic. In other words, “legislating” the moral context of law (in the form of international human rights, for example) requires a political choice and a concrete act—this is far more difficult than simply believing in its validity implicitly as a “natural right.” The implicit tension between what implicitly flows from a notion of “natural rights” and what must explicitly be legislated into law is a critical dimension of international development law. Fundamentally, the tension between a natural law foundation and post-modern positivist traditions is part of this legal discourse. Indeed, the influence of post-modern “positivism” may be felt in ongoing Rule of Law regimes that emphasize legal reforms duly passed by government authorities. However, if these laws do not stem from or relate to an underlying framework of moral values and shared customary practices and expectations, these laws may end up failing, or at least failing to accomplish their stated objective. The tension between natural law precepts and a more positivist legal regime is one of the many fault lines that may be felt in the volatile and ever-changing legal architecture of international development law.
115
George Christie, Jurisprudence: Text and Readings in the Philosophy of Law at 251. Id. at 292. 117 Id. at 292–293. “From Hobbes to Austin and from Austin to the present-day ‘positivist’: the line seems as continuous and unbroken as it is from Cicero to the Founding Fathers.” A.P. d’Entrèves, Natural Law: An Introduction to Legal Philosophy at 123. 116
3.5 Taxonomy of International Development Law
3.5.2
113
Globalized Laws
This category of positivist law forms the basis of Rule of Law reforms and are predicated for the most part on “modernization” theory, addressed in Chap. 2. However, while globalizing national laws into a universal set of legal norms may be an attractive option in order to increase the stability, coherency, transparency and predictability in creating and enforcing an international development law regime, there are certain coercive elements in a “modernization” approach to the globalization of laws whose effects need to be recognized and, if possible, mitigated. The first element of coercion stems from the colonial experience of most developing countries where “received law” traditions were forcibly imposed by former colonial rulers. While revisiting such received law traditions may or may not be feasible at this point, it is important to realize that such legal traditions form an important legal backdrop to this discussion. Thus, when developing countries are faced with making Rule of Law reforms, perhaps a complicating factor to instituting new reforms may be that they are perceived as an additional layer of “received law” imposed by outside sources. This may be particularly so in cases where such legal reforms are imposed as “conditionality” for loans by multilateral development banks and institutions such as the International Monetary Fund (IMF) the World Bank, an issue addressed in further detail in Chap. 5. Moreover, the globalization of laws has another implicitly destructive element insofar as it may compromise the underlying, pre-existing legal culture, institutions and practices of the developing country in question. The homogenizing and hegemonic influence of a globalized legal regime needs to be strictly scrutinized and perhaps viewed with a certain degree of skepticism as discussed in Chap. 2. (This may be another arena in which to apply the Janus Law Principle.) Nevertheless, there may be a great deal of merit in establishing a coherent international legal regime in subject-matter areas such as trade-related issues, environmental protection, the laws of war, the protection of children. Indeed, there may be certain legal areas that are better suited to “globalization” because of their necessarily international character. In an earlier discussion on the UNCITRAL’s Model Law on Procurement provides an example of using an integrated menu of options to create a tailored approach to developing procurement codes in individual countries. This way, the JLP can be integrated into the law creation process so as to best capture a developing country’s needs and aspirations. In fact, in the area of good corporate governance, a trend in that direction is already taking place. For example, the World Bank’s Voluntary Disclosure Program (VDP) launched on July 20, 2006, is designed to address and correct corrupt behavior in public officials (and where relevant, private individuals). The VDP is administered by the Bank’s Department of Institutional Integrity, and permits a party to a World Bank procurement to voluntarily disclose past misconduct in exchange for the payment of a “financial obligation” for its sanctionable conduct.118 118
See generally, Rogers (2007), p. 709.
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Thus, international law regimes (and enforcement practices) in trade, corporate conduct and many other areas are now effectively establishing globalized legal norms, legal standards and expected ethical conduct. In contrast, globalizing the law in other legal areas (such as social entitlements, tax regimes, education, health, resources management) may be more problematic in this context. In conclusion, these opposing views and approaches to the globalization of law process creates, in part, the continuing and volatile dynamic in international development law.
3.5.3
Relative Norms
Finally, relative norms are predicated on the existing laws, legal institutions and customs of the developing state in question. These laws are relativistic, particular, and culturally specific. Relativistic norms also encompass “revealed law” traditions in religious law paradigms. Relativistic norms, practices, traditions and informal legal structures (especially for informal village-based or religious-based dispute resolution) powerfully shape expectations and established practices in a developing country context. Simply disregarding such relativistic norms may be a dangerous course of action. For a fuller discussion of the underlying philosophic foundation for relative norms, please see the discussion of Max Weber in Chap. 2. In conclusion, there are three types of laws under the development law rubric: absolute norms, globalized laws, and relative norms. As described above, these types of laws are like tectonic plates moving beneath the surface and often clashing with each other. Moreover, these types of laws encompass both law and philosophy. Perhaps this is both strength and a weakness, but I believe it reflects the complexity of the development equation that is still evolving today. Indeed, if the ideal of law is seen as producing justice—or more broadly speaking, justice tempered by equity (mercy), then perhaps international development law captures an element of equity in ameliorating human want. Thus, the goal of development law may be seen broadly as perfecting the law in order to produce “better justice.”119 (“Better justice” is certainly an awkward term that is meant to indicate “fundamental fairness” and “substantial, not perfect, justice.”)120 While other areas of law may be more strictly aimed at producing legal outcomes that may be considered “just,” international development law also broadly captures an underlying element of equity that is directed towards poverty alleviation in order to elevate the human condition. And in so striving, international development law is ambitious, indeed.
Harry Blair & Gary Hansen, “Weighing in on the Scales of Justice: Strategic Approaches for Donor-Supported Rule of Law Programs,” USAID Program and Operations Assessment Report No. 7 (February 1994). 120 Id. 119
3.6 Institutional Framework for International Development Law: Enforcing Legal Norms
3.6
115
Institutional Framework for International Development Law: Enforcing Legal Norms
The enforcement of contextual norms may be done by pursuing one of three courses of action: conciliation (the parties negotiate their dispute privately); litigation (bringing a justiciable claim in a court or forum of competent jurisdiction for the formal resolution of disputes); or arbitration (the parties voluntarily submit to the decisionmaking of a third party). These options are currently available to stakeholders in the development process, but this discussion will be devoted to outlining a new institutional framework for development law by building on these options. Going back to the original three pillars of this discussion, namely, international development law principles underscoring the exchange of capital, commodities, and technology, the institutional framework for establishing the substantive law of these areas is vitally important. By way of contrast, there is no mechanism for addressing capital transfer issues that arise from the official lending practices of the World Bank and the IMF. In addition, there is no international protocol that members of these institutions have agreed to that sets forth the substantive legal principles of sovereign lending practices of the Bank and the IMF. The only option open to IMF and World Bank members is to seek conciliation of their disagreements, if any, with the lending institution in question. There are no institutional means for seeking redress for any disputes, as such, regarding the enormous capital transfers that take place in furtherance of development purposes.121
121
The Articles of Agreement of the International Bank for Reconstruction and Development, art. IX(a), provides that questions regarding the interpretation of the Articles of Agreement shall be submitted to the executive directors of the World Bank. Members of the Bank may refer a decision made by the executive directors that interprets the agreement to the board of governors whose decision in the matter shall be final (See art. IX(b), and art. V, § 2[b][iv]). The same basic institutional arrangement regarding the interpretation of the Articles of Agreement of the IMF and appeals of executive directors’ decisions to the IMF board of governors, is set forth in art. XXIX of the IMF’s Articles of Agreement. However, this arrangement is limited to decisions regarding the interpretation of the Articles of Agreement of each institution, and therefore is very narrow in scope. Here, I argue for the ability to appeal all decisions of the executive directors of the Bretton Woods institutions, without limitation with regard to content. Further, both the World Bank and the IMF provide for an arbitration of disagreements that may arise between a member and the respective institution under two circumstances: when the member has withdrawn from the institution in question and “during the permanent suspension of the Bank” or “during the liquidation of the Fund” (See art. IX(c) of the Bank’s, and art. XXIX of the IMF’s Articles of Agreement). These articles call for the establishment of a tribunal of three arbitrators, one appointed by the member, one by the respective institution, and one by the Permanent Court of International Justice or another such authority. Although this establishes a means for sovereign members to arbitrate disputes they may have with either institution, it still leaves a serious gap. The text addresses questions raised by current members in good standing, and not those raised by a member who has withdrawn from its membership or in a situation where either the World Bank or the IMF is dissolving.
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Most importantly, the “law-making”122 function of the World Bank and the IMF in terms of requiring internal policy changes, governance changes, macro-economic reforms, and institution-building in official borrowers is phenomenal. Although the World Bank’s Articles of Agreement provide that the Bank shall not interfere with the political affairs of any of its members,123 the Bank exercises wide latitude in this area. The World Bank has interpreted this provision to mean that, as long as governance issues are related to economic development, Bank-imposed conditionality on governance issues in furtherance of development purposes is permissible.124 Thus, by imposing complex matrices of conditionality, the IMF and the World Bank often require sovereign borrowers to agree to change their macroeconomic, legal, and institutional framework. Sovereign members must, therefore, often make profound structural changes as part of the requirements imposed by World Bank conditionality before any financing is made available to them. Similarly, the conditionality imposed by the IMF’s structural adjustment programs can require profound structural changes. These changes may affect the manner of governance, may require the passage of new legislation, and may require that public and private industries and government agencies be fundamentally restructured. In fact, such changes need not be limited to financial sector reform but may extend to other governance issues such as controlling corruption in the host country. The conditionality imposed by the IMF, the World Bank, and other bilateral agencies can be very detailed and burdensome. The cause for concern here is that the IMF and World Bank’s power to affect changes in governance of its members is, by and large, unaccounted for.125 Accountability, an important constitutional principle of international development law, can be encouraged by considering the following options. For example, since the World Bank Inspection Panel may investigate requests brought in relation to adjustment credits issued by the World Bank,126 the scope of its investigatory authority can be enlarged to include the structural adjustment activities of the IMF. (Of course, the World Bank Inspection Panel should be renamed accordingly and might better be known simply as the “Joint Inspection Panel” or the “Bretton Woods Inspection Panel.”) By expanding its coverage to jointly cover the Bank and the IMF’s structural adjustment activities, the Inspection Panel is the first step in investigating the potential complaints brought by participants in the development process. 122
See Cahn (1993), p. 167. Perhaps this function can be better termed as the law-giving function of the Bretton Woods institutions, since these institutions are not responsible for actually legislating such changes into effect in the borrower country. 123 See Articles of Agreement of the International Bank for Reconstruction and Development, art. I, § 10. 124 See Cahn (1993), p. 163 n. 20. See also Shihata (1991), pp. 79–80. 125 See Cahn (1993), pp. 164–165. 126 See Inspection Panel, Request No. 8: Bangladesh: Jute Sector Adjustment Credit, Inspection Panel, Annual Report (August 1, 1996 to July 31, 1997) at 13.
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However, investigating these complaints is not enough. Although this represents a very important step towards making development more participatory in nature, the Inspection Panel is only authorized to investigate. It is not a law-making, administrative body with independent enforcement powers like an administrative tribunal. The Panel is only empowered to render factual findings, not legal opinions. Delegating investigative power to an independent panel is an important first step, but it still does not adequately address the underlying need for accountability. Even if official action in response to these investigations is taken by the Executive Board of the IMF, this still may not be legally adequate. The only remedy that a borrower has against the IMF is to continue to negotiate further to reach an acceptable solution, which may not always be politically feasible. This creates an accountability gap with the IMF, and thereby violates a fundamental principle of international development law.127 As was discussed previously, the scope of the World Bank Inspection Panel can be enlarged to include investigations of adjustment credits made by the IMF but, as an institutional response, this is not sufficient. There should be some consideration to establishing an independent, adjudicatory body empowered to render legal opinions on the legal validity of such complaints. Leaving this to the discretion of the executive boards of the World Bank and the IMF still leaves an accountability gap. Before an independent body can be established to adjudicate capital transfer disputes arising between the World Bank, the IMF, and respective members, the legal principles and procedural practices underlying the sovereign lending practices of these institutions need to be fully articulated. This may be a propitious time to initiate such a discussion since the policy ground-work is already being established. It should be noted however that the World Bank has, in effect, created a right of legal recourse that is truly far-reaching and even revolutionary in a sense. By creating the Inspection Panel, the World Bank has established a legal nexus between the end-user of the development project or undertaking and the Executive Directors
Indeed, the IMF’s “accountability gap” is very wide in certain circles. For example, the IMF has been disfavored by political conservatives as an institution that is the “enemy of free markets.” (See Peter Passell, “Economic Scene: The I.M.F. must go, critics say, but who will cope with crises?” New York Times (February 12, 1998). Further, political liberals have also roundly criticized the IMF for taking a “one-size-fits-all approach to financial distress,” and inflexibly insisting on debt repayments from economically struggling economies that make the IMF into little more than a “collection agency for international bankers.” (Id.) Thus, Walter B. Wriston, the former chairman of Citicorp concluded that the IMF was “ineffective, unnecessary and obsolete.” (Id.) In light of the IMF’s failure to predict and contain the Asian currency crisis of late 1997-early 1998, it has lost part of its political credibility. Although none but the most radical of free market ideologues believe that the world monetary system can function without the watchdog function of the IMF, the secrecy that surrounds its proceedings and its, at times, authoritarian prescriptions for macroeconomic reform may have to change in response to a new political climate. Indeed, Peter Passell reports that “first among the demands of the I.M.F.’s newly empowered critics is an end to the secrecy that shrouds everything from routine country status reviews to emergency bail-out plans.” The following discussion suggests a novel approach to resolving the underlying accountability and credibility crisis being faced by the IMF now.
127
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of the World Bank.128 By giving a private party a legal right of action, the World Bank has effectively exited the state-centric world of public international law—and entered a new, privately enforceable dimension of public international administrative law. Perhaps it is more accurate to say that the World Bank has actually created that new dimension of law by recognizing and giving legal legitimacy to the claims of private end-users of a World Bank project.129 The World Bank Inspection Panel was created by a resolution of its Executive Directors dated September 22, 1993, to ensure that the Bank adheres to its operational policies and procedures during the design, preparation, appraisal and implementation phases of its projects.130 The Panel is authorized to accept requests for inspection filed by an affected party (who is not an individual but an organization, society or grouping of individuals) in the territory of the borrowing country. The Chairperson of the Inspection Panel then informs the President and the Executive Directors of the World Bank that a request for inspection has been received. Within 21 days of notification by the Chairperson of the Inspection, the Management of the Bank is required to provide a statement on whether it has complied or intends to comply with the Bank’s operational policies and procedures that allegedly have been breached. Within 21 days of receiving the Management’s response, the World Bank Inspection Panel must recommend to the Executive Directors whether the matter meets the eligibility criteria as set forth in the resolution establishing the Panel,131 and should be investigated. The World Bank Executive Directors then decide whether to accept the Panel’s recommendation. If accepted for investigation, the Panel may consult with the Bank’s Legal Department132 and the Bank’s staff as appropriate, and may visit the borrower country. Upon completion of its investigation, the Panel is required to issue its report to the President and the Executive Directors, setting forth its findings and conclusions of all relevant facts. The Bank’s Management has 6 weeks to respond to the Panel’s report. Information concerning the Executive Board’s final decision as well as the Panel’s report and the Management’s response are posted on the Panel’s official World Bank-hosted website. Bradlow (1996), p. 247. “The [Inspection] Panel is the first forum in which private parties can seek to hold international organizations directly accountable for their actions.” 129 “Professor Bradlow heralds the creation of the [Inspection] Panel as ‘the first formal acknowledgment that international organizations have a legally significant non-contractual relationship with private parties that is independent of either the organization’s or the private actor’s relationship with a member state.” Weidner (2001), pp. 193, 215. 130 See Resolution No. IBRD 93–10; Resolution No. IDA 93-6, The World Bank Inspection Panel (Sept. 22, 1993) at ¶ 12. 131 Id. 132 Bradlow (1996), p. 292. “With regard to matters related to the Panel, the Legal Department’s advice to the Board, at least from the perspective of the requester and other outside observers, has the appearance of a conflict of interest. The conflict arises because the Legal Department is providing advice to the decision-maker about a matter in which some of the issues to be determined by the decision-maker are likely to relate to the Legal Department’s prior advice to Bank Management and staff or to decisions in which the Legal Department participated.” 128
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In contrast, to the outside observer the IMF may seem impervious to external scrutiny or internal controls.133 Nevertheless, as a first step, the IMF may wish to consider entering into a general protocol describing the principles of its lending practices. It is only when the IMF decides to establish a legal connection with the member state itself or with the end-user of IMF-financed assistance that establishing its own Inspection Panel, or using the one established by the World Bank, becomes relevant. If it decides to follow this course of action, the IMF would be following clear precedent established by the World Bank (and other multilateral development banks).134
3.7
Conclusion
In conclusion, why should we be concerned about establishing international development law as a separate field of legal inquiry? The need for doing so is dictated by the urgency with which legal systems now need to react to fast-moving current events. There is an absence of an existing legal framework in which to consider international development law questions. Lawyers and lawmakers must react to the changing economic needs by forging legal solutions that support resolutions of complex development questions. If lawyers and policymakers fail to react, law will be left out of the development equation, and that it is too high a risk to assume. This is particularly true if a rule of law regime is to be implemented, maintained, and strengthened over time on a worldwide basis. If not, then there will be an increasing discord between the laws and legal systems of the world and the important and complex development needs that such laws are intended to support. In light of the new legal needs posed by the globalization process, existing laws may be-come so inadequate or contradictory that the current legal scheme may risk systemic failure and collapse. The time to act decisively in formulating the new tenants of development law is now. In light of this discussion, what critical components of development law are missing? First, there needs to be some overall understanding and acceptance of the fundamental principles of development law: mutuality of obligation, the duty of cooperation and fair dealing, and the right to participatory development, accountability and transparency (e.g., openness, and accessibility). Second, the international legal community must come to terms with the substantive principles of development law, in other words, create and refine legal norms in a dynamic national and global context. In giving this basic legal framework substance
Apparently, the reason for a lack of an internal quasi-judicial function within the IMF and, “[o]ne reason why the IMF Executive Board was given the power of authoritative interpretation was because the original drafters of the Bretton Woods Agreement could not agree on the composition of the tribunal.” Pan (1997), pp. 503, 514–515. 134 See Bradlow (2005), p. 409. 133
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and meaning, the international community needs to work towards the development of new contextual norms on a variety of subjects, not the least of which are the substantive legal principles of capital transfers (e.g., loans) in support of development that are made available by the Bretton Woods institutions and other public and private financiers. Finally, the institutional framework for enforcing such rights under development law and the constructive rules of engagement need to be strengthened. It may be advisable to refine and enlarge the investigatory powers of the World Bank Inspection Panel, and include in its mandate the adjustment programs of the IMF in an effort to ensure the transparency and accountability of both Bretton Woods institutions. In the end, the aim is to make the international development process more accessible to sovereign and other institutional participants and more accountable to the ultimate end-beneficiaries of the development process.
References Baptista LO (1995) The UNIDROIT principles for international commercial law project: aspects of international private law. Tulsa Law Rev 69:1209 Bonell MJ (1995) The UNIDROIT principles of international contracts: Why? What? How? Tulsa Law Rev 69:1121 Bradlow D (2005) Private complainants and international organizations: a comparative study of the independent inspection mechanisms in international financial institutions. Geo J Int Law 36:409 Bradlow DD (1996) A test case for the World Bank. Am Univ J Int Law Policy 11:247 Cahn J (1993) Challenging the new imperial authority: the world bank and the democratization of development. Harv Human Rights J 6:159, 193 Cao L (1997) Book review of law and economic development: a new beginning? Tex Int Law J 32:545, 546 Feddersen C (1998) Focusing on substantive law in international economic relations: the public morals of GATT’s Article XX(A) and ‘conventional’ rules of interpretation. Minn J Global Trade 7:75 Ferrari F (1995) Defining the sphere of application of the 1994 UNIDROIT principles of international commercial contracts. Tulsa Law Rev 69:1225 Garro AM (1995) The gap-filling of the UNIDROIT principles in international sales law: some comments on the interplay between the principles and the CISG. Tulsa Law Rev 69:1149 Gopal M (1996) Law and development: toward a pluralist vision. Am Soc Int Law Proc., pp 231, 235 Griesgraber JM, Gunter BG (eds) (1996) Development: new paradigms and principles for the twenty first century, vol 1. Pluto Press, pp 75–77 Haque I, Burdescu R (2004) Monterrey consensus on financing for development: response sought from international economic law. Boston College Int Comp Law Rev 27:219, 230 Heidhues F, Obare G (2011) Lessons from structural adjustment programmes and their effect in Africa. Quart J Int Agric 1:60 Henisz W, Zelner B (2010) The hidden risks in emerging markets. Harv Bus Rev 88(4):88–95 Juenger FK (1995) Listening to law professors talk about good faith: some afterthoughts. Tulsa Law Rev 69:1253 Kuhn TS (1970) The structure of scientific revolutions, 2nd edn. University of Chicago Press, Chicago, p 10
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Levy D (1998) Contract formation under the UNIDROIT principles of international commercial contracts, UCC, restatement and CISG. Unif Commer Code Law J 30:249 Love J (2005) The rise and decline of economic structuralism in Latin America: new dimensions. Latin Am Res Rev 40:100, 103–105 Magraw DB (1990) Legal treatment of developing countries: differential, contextual, and absolute norms. Colordo J Int Environ Law Policy 1:69, 73 Mason ES, Asher R (1973) The World Bank since Bretton Woods. Brookings Institute, pp 54–59 Meier M (1997) GATT, WTO and the environment: to what extent do GATT/WTO rules permit member nations to protect the environment when doing so adversely affects trade? Colordo J Int Policy 8:241 Morse B, Berger TR (1992) Sardar Sarovar: the report of the independent review. Resources Futures International Mosley P, Harigan J, Toye J (1991) Aid and power: the World Bank and policy-based lending. Routledge, p 33 Nunberg B (2007) Generational shifts in international governance assistance: the World Bank and state-building after 911. Int J Eco Dev 9(1–2):59 Pan EJ (1997) Recent development: authoritative interpretation of agreements: developing more responsive international administrative regimes. Harv Int Law J 38:503, 514–515 Parra-Aranguren G (1995) Conflict of law aspects of the UNIDROIT principles of international commercial contracts. Tulsa Law Rev 69:1239 Popovic NAF (1996) In pursuit of environmental human rights: commentary on the draft declaration of principles of human rights and the environment. Columbia Human Rights Law Rev 27:487 Rogers S (2007) The World Bank voluntary disclosure program (VDP): a distributive justice critique. Columbia J Transnatl Law 46:709 Rousseau J-J (1964) The social contract (1762), reprinted. In: Hirschfeld C (ed) Classics of Western thought III, the modern world. Harcourt Brace Jovanovich, Inc., p 173 Sanford J (1995) Foreign debts to the U.S. Government: recent reschedulings and forgiveness. Geo Wash J Int Law Econ 28:345, 359–360 Shihata I (1991) The World Bank and ‘Governance’ issues in its borrowing members. In: Tschofen F, Parra AR (eds) The World Bank in a changing world. Martinus Nijhoff, pp 79–80 Shihata I (1994) The World Bank’s inspection panel. Oxford University Press Shihata I (2001) The World Bank inspection panel its historical, legal and operational aspects (reprinted). In: Alfredsson G, Ring R (eds) The inspection panel of the World Bank: a different complaints procedure. Kluwer Law International, p 7 Trubek D (1990) Back to the future: the short, happy life of the law and society movement. Florida State Univ Law Rev 18:1 Trubek D, Galanter M (1974) Scholars in self-estrangement: some reflections on the crisis in law and development studies in the United States. Wis Law Rev 4:1062 Veytia H (1995) The requirement of justice and equity in contracts. Tulsa Law Rev 69:1191 Wade R (1997) Greening the Bank: the struggle over the environment, 1970–1995, (as reprinted) In: Kapur D, Lewis JP, Webb R (eds) The World Bank, its first half century. Brookings Institution Press, pp 667, 668–675 Weidner JN (2001) Note, World Bank study. Buffalo Human Rights Law Rev 7(193):215
Chapter 4
Is There a Human Right to Development?
As this analysis has proceeded, it has become clear that profound shifts have occurred since the collapse of the former Soviet Bloc in late 1989. As the Second World (i.e., Eastern Europe and the former Soviet Union) began to merge with the First World through the adoption of radical legal, political, and macro-economic reforms, the “three worlds” have collapsed into two. In significant ways, the division between the two reconfigured worlds of the “haves” and the “have-nots” continues to widen and deepen. Indeed, the fault lines between the developed and developing worlds have become more apparent. The clash of ideals is nowhere more apparent than in the arena of human rights. The public international law aspect of development law has been included in this text since the human rights dimension reveals the deep political divisions and the wide differences in perspective between the developed and the developing worlds. In some ways, this legal subject can be seen as a reflection of the philosophical underpinnings of the two. The severe political and ideological divides during the Cold War era heavily impeded the creation and enforcement of a workable human rights regime. The collapse of the Soviet Union offers a new opportunity to engage in a fresh, renewed dialogue concerning the human right to development that is relatively free from the polemical hostilities of the past. However, it has also been argued that the demise of the Second World may actually “undermine important dimensions of the discourse of international human rights.”1 However, Russia as the successor to the Soviet Union is changing its priorities, and thus its traditional support for social and economic rights may be wavering, as explored below. As the countries of Eastern Europe and the former Soviet Union have, for the most part, graduated to First World status, this leaves the developing world without a traditional alliance (both political and ideological) that supports the inclusion of
1
Cossman (1991), pp. 339, 345.
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 R. Sarkar, International Development Law, https://doi.org/10.1007/978-3-030-40071-2_4
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social and economic values in the discourse on human rights. The loss of the Second World’s significant, forceful, and different voice regarding the human rights agenda may mean that important dimensions of a human rights dialogue have lost a very powerful advocate. This makes the role of the developing world in advocating and legitimizing such considerations more difficult and problematic. The political will (and the political need) to do so also remains open to question. The challenge of a new dialogue on human rights lies in a redefinition of the legal, economic, social and cultural values by developing countries, and in seeking common ground with the developed world. The possible demise of the former Soviet Bloc’s traditional emphasis on recognizing social and economic rights as “human” rights may herald a new and different discourse on the human right to development. Before this potential change for the future is addressed, however, let us revisit what has taken place in the past.
4.1
Historical Antecedents to the Right to Development
The subject of international development law, and international development finance in support of it, is a post-World War II phenomenon. The subject, as a legal discourse, emerged from the overwhelming historical, economic, political, and legal changes that followed the conclusion of WW II. In the aftermath of WW II, colonial regimes were gradually dismantled. It was in that climate that the idea of development was first articulated, and the development potential of newly independent, non-Western states began to be examined seriously. The first serious articulation of a worldwide concern with the subject of human rights, especially as it may give rise to a human right to development, was set forth in the Universal Declaration of Human Rights (UDHR), adopted by the General Assembly of the United Nations (UN) on December 10, 1948.2 The UDHR has now assumed the normative force of law, and it became a universally accepted part of customary international law, even though at the time of its passage in 1948, most of the developing world was still under colonial rule.3 Technically, the UDHR is a non-binding declaration/proclamation concerning an individual’s rights against the state. It gives international legal stature to an individual’s freedom from torture, slavery, and inhuman treatment. The UDHR also purports to give, inter alia, an individual the entitlement to equal protection under the law as well as the freedom of opinion, expression, and peaceful assembly.
2 UN G.A. Res. 217 A (III), U.N. Doc. A/810 at 71 (December 10, 1948). Although the UDHR was adopted by a vote of 48 to 0, eight member countries abstained, namely, Byelorussia, Czechoslovakia, Poland, Soviet Union, Ukraine, Yugoslavia, Saudi Arabia, and South Africa. See Mutua (1996), p. 589, n. 1. See also Cassesse (1992), pp. 25, 31 n. 22. 3 Mutua (1996), p. 590 n. 1, 605.
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The UDHR specifically addresses the right to development. Article 22 of the UDHR states that, “Everyone, as a member of society . . . is entitled to realization . . . of the economic, social and cultural rights indispensable for his dignity and the free development of his personality” (emphasis added).4 Further, Article 26(2) states that “[e]ducation shall be directed to the full development of the human personality and to the strengthening of respect for human rights and fundamental freedoms.” (Emphasis added.) In addition, Article 29(1) of the UDHR states that “[e]veryone has duties to the community in which alone the free and full development of his personality is possible.” (Emphasis added.) Moreover, Article 28 states unequivocally that “[e] veryone is entitled to a social and international order in which the rights and freedoms set forth in this Declaration can be fully realized.”5 The definition of development will probably never be completely agreed to by the various state and non-state actors in the international development scene, but it is clear that under the terms of the UDHR, development was meant to include more than simply the economics of development—it also encompassed the free and full development of the personality of the human actor. Thus, the terms of the UDHR clearly recognize that man/woman does not live by bread alone. The inclusion of the “development of the human personality” within the provisions of the UDHR gives the right to development a place under the rubric of human rights law. Not surprisingly, the UDHR reflects the Western bias of the states that formulated its tenets, especially since the majority of the developing world did not participate in the deliberations and debate surrounding the creation of the UDHR in 1948. Moreover, even a cursory review of its provisions reveals that it tends to mirror, in substance as well as in style, the Bill of Rights to the U.S. Constitution.6 The Western liberal democratic tradition is clearly expressed in the UDHR through the preservation of the fundamental balance between an individual’s liberties and rights, and the limited power of the state to deprive an individual of these rights. Thus, John Locke’s philosophy7 of ensuring certain freedoms for the individual against the interference and tyranny of the state is clearly articulated in the text and philosophy of the UDHR. Locke further refined the relationship of the individual to the state. Certain liberties and rights may not be denied to the individual by the state without the consent of that individual. In other words, the state is prohibited from interfering with or infringing upon liberties granted to the individual (generally understood, at least by Locke, to be a European, land-owning male). Those liberties ensured the integrity of a person and his property. These basic tenets which are derived from and attributable to the Western liberal tradition are clearly reflected in the UDHR.8
4
See generally, Bunn (2000), p. 1425. See also Nanda (1985), pp. 431, 436; Paul (1995), p. 307. 6 See Alston (1990), pp. 365, 381. 7 See generally, Locke (1988). 8 See Donnelly (1990), p. 31. 5
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In any case, the UDHR is now recognized as the foundation for establishing world-wide consensus on a “‘universal’ jurisprudence of human rights.”9 The UDHR has been combined with two other UN covenants to form the International Bill of Rights.10 The two subsequent covenants, both promulgated by the UN General Assembly in 1966, are the International Covenant on Civil and Political Rights (ICCPR),11 and the International Covenant on Economic, Social and Cultural Rights (ICESCR).12 The ICCPR reflects the values and tenets of the Western liberal tradition by restating important prohibitions against government interference with the individual’s right to self-expression and the accumulation of private property.13 The ICESCR, on the other hand, reflects the values and priorities of the now defunct Second World, stressing social and economic rights that the state has the positive duty to provide to the individual. Whereas the ICCPR sets forth the rights and liberties of the individual against the state, the ICESCR delineates the positive duties of the state towards the individual. This difference in approach to human rights was considered to be irreconcilable. In recognition of this, the two covenants were drafted as separate documents in 1966 in order to permit the ratification of one, but not the other, by participating states. The two International Covenants reflected the ideological rift between the laissez-faire economies of the West, and socialist economies of the former Soviet bloc.14 The United States has characterized social and economic rights as “aspirations” rather than rights and has questioned the legal validity and separate existence of such rights.15 Even though there is no legal impediment to the United States becoming a party to the ICESCR, ratification of the ICESCR since its submission by the Carter Administration to the U.S. Senate for its advice and consent in 1978, remains elusive.16 Partly, the reluctance to ratify the ICESCR stemmed from Congressional concern that its provisions setting forth the human right to food, clothing, housing,
9 Mutua (1996), p. 589 n. 1. See also Brownlie (1992); Lauterpacht (1950); Lillich and Newman (1979). 10 Cossman (1991), p. 352 n. 7; Mutua (1996), p. 593 n. 10. See also Optional Protocol to the International Covenant on Civil and Political Rights, reprinted in The International Bill of Rights at 31, cited in Rajagopal (1993), pp. 81, 95 n. 73. 11 G.A. Res. 2200 A, (XXI) U.N. GAOR, 21st Sess., Supp. No. 16, at 52, U.N. Doc. A/6316 (1966) (entered into force on Mar. 23, 1976). See also Optional Protocol to the International Covenant on Civil and Political Rights, G.A. Res. 2200 (XXI), U.N. GAOR, 21st Sess., Supp. No. 16 at 59, U.N. Doc. A/6316 (1966) (entered into force on Mar. 23, 1976). 12 G.A. Res. 2200 (XXI), U.N. GAOR, 21st Sess., Supp. No. 16 at 49, U.N. Doc. A/6316 (1966) (entered into force on Jan. 3, 1976). 13 See Mutua (1996), pp. 592–593. 14 Cossman (1991), pp. 344, 352 n. 19. See also Humphrey (1973); Schachter (1985). 15 Cossman (1991), p. 352 n. 19. See also Vierdag (1978), p. 69. 16 Alston (1990), p. 366 n. 10.
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education, and access to physical and mental health care may require the U.S. government to take some action to guarantee these rights.17 Philosophically, however, former Assistant Secretary of State Elliott Abrams made the distinction between the category of rights that no government is entitled to violate, and the social and economic rights that governments should do their best to secure.18 This reflects the unease that the U.S. government felt and may still feel about the obligations of a government towards its citizenry. There is no doubt that there is a diverse, complex, and well-entrenched legal framework for providing social, welfare, medical, and other human services and benefits by the U.S. federal and state governments. However, raising this polyglot of legal entitlements (which are constantly shifting in accordance with the priorities of the U.S. Congress and individual state legislatures) to the level of an internationally guaranteed human right requires a leap of faith that most U.S. Government officials are unwilling to take. Perhaps more importantly, an entitlement to social and economic rights goes against the grain of Lockean-inspired legal jurisprudence. From that perspective, the state is prohibited from interfering with an individual’s self-expression, but the state does not have a positive duty to support an individual’s right to benefit from social and economic entitlements. If, indeed, these economic and social benefits are to be treated as international human rights, this puts an inordinate strain on a domestic legal system that is already near the breaking point. On a practical level, it may be questioned whether the human rights agenda actually moves forward by elevating such social benefits to the international legal status of being “human rights.” Philip Alston provocatively points out that the division between civil and political liberties and the “Soviet-Third World” concept of social and economic rights is a false dichotomy.19 Alston argues that, in fact, U.S. President Franklin Delano Roosevelt legitimized and legalized social and economic rights as “rights.”20 Paul Brietzke perceptively states that: “Advocates of the right to development can properly gore the oxen of both sides evenhandedly. For example, it costs the United States government little to permit meaningful freedom of speech, while guaranteeing the right to a job would be extremely expensive; job guarantees cost the Soviet government little—a bit of additional inefficiency from overmanning—but true free speech might cause the regime to collapse.” (1985, pp. 560, 586). Further, as Brietzke noted, the Soviet system, while guaranteeing “work,” could not guarantee a living wage or a participatory method of governance, and simply collapsed from within. On the other hand, in the United States, and other industrialized Western European nations, expected guarantees of a certain standard of living and opportunities for full employment have become more problematic. Changing demographics through the influx of immigrants and changes in international trade patterns often threaten job security or actually result in increased unemployment in many of these nations. 18 Alston (1990), p. 373. 19 Alston points put that this type of philosophical resistance to the idea of social and economic rights does not reflect the current welfare commitments of Western democracies such as France, Germany, Great Britain, and others, who have made significant commitments to their citizenry to provide for their economic security, physical and mental health needs, and recreational interests. See Alston (1990), pp. 375–376. 20 Id. at 387. Moreover, Louis Sohn argues forcefully that FDR’s Four Freedoms, to wit, the freedom of speech and expression, the freedom of worship, the freedom from want, and the freedom 17
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(Indeed, it may also be argued that President Johnson’s Great Society initiative further legalized and legitimized such economic and social rights.) Therefore, Alston feels that the U.S. reluctance to ratify the ICESCR cannot be supported. He concludes that the persistent philosophical divide on this issue is misleading, and should be abandoned. From a different perspective, in the well-researched views of two commentators, they point out that: It is well known that the two Covenants [ICESCR and ICCPR], along with the first Optional Protocol to the ICCPR, were adopted on the same day in 1966 in a single General Assembly resolution, and that they share many features, including a common preamble, several common general principles, and concluding articles. But it is also well known that the General Assembly’s original conception has been for a single covenant, setting forth all human rights in the same document. That objective did not prove achievable, and the result was the adoption of two separate instruments. [Footnotes omitted.]21
The commentators point out that the provisions of the ICCPR requires ratifying states to guarantee the enumerated civil and political rights directly by adopting appropriate legal provisions. To the contrary, the provisions of the ICESCR were not legal rights to be guaranteed by states but rather goals to be achieved progressively. The commentators go on to state that: A careful review of the negotiating record demonstrates that this view [that the ICCPR reflects Western liberal democratic notions of limited government and free markets, while the ICESCR rests on more Eastern or Soviet authoritarian principles] is flawed and misleading. The differences between the Covenants did not result from oversight or from an inability to agree because of political or ideological confrontations—although there is no denying that such conflicts did exists and did influence the debates. Because of their appreciation of practical differences between the two sets of rights, the negotiators intended the implementation provisions to be different. It is simply wrong, as a historical matter, to ascribe all of these decisions to ideological cleavage.22
Therefore, the commentators forcefully conclude that: Nothing persuades us that the inspirational goals set forth in the ICESCR can be achieved— or can be achieved more effectively—only by means of an international adjudicative mechanism for complaints. . . . We see no convincing evidence that a legally binding
from fear, also provide the foundation for economic rights. See Lois Sohn, “The Human Rights Movement: From Roosevelt’s Four Freedoms to the Interdependence of Peace, Development and Human Rights.” March 8, 1995, lecture delivered at Harvard Law School (Harvard Law School Human Rights Programme, 1995) at 8–13. Charles Merriam, then vice-chair of the National Resources Planning Board, expanded the Four Freedoms into a revised “Economic Bill of Rights,” including, inter alia, the right to work; the right to adequate food, clothing, shelter and medical care; the right to education; the right to personal growth and happiness; and the opportunity to enjoy life and take part in an advancing civilization (Id.). The resemblance of these rights and those articulated in the ICESCR is unmistakable. 21 Dennis and Stewart (2004), pp. 462, 476. 22 Id. at 477.
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adjudicative mechanism would lead to greater compliance by states with their ICESCR obligations. [Footnotes omitted.]23
Although the future of the ratification of the ICESCR remains uncertain, it is clear that the status of social and economic rights as legal or human “rights” has not been fully accepted by certain Western democracies, most notably, the United States.24 With the dissolution of the Soviet Bloc (and the realignment of their political and economic priorities accordingly), it is unclear whether there will be any real political pressure from any source to shepherd the ICESCR to full ratification and implementation as an international treaty.25 The burden tends to fall to the developing world. Therefore, it is imperative to understand what perspectives on and philosophical approaches to the human right to development are offered by the developing world.
4.1.1
A New International Economic Order
At the Sixth Special Session of the UN General Assembly on May 1, 1974, two important resolutions were adopted. The first General Assembly resolution was entitled “Declaration on the Establishment of a New International Economic Order,”26 and the second was entitled “Programme of Action on the Establishment of a New International Economic Order [NIEO].”27 The NIEO Declaration was adopted by the UN General Assembly without a vote. The underlying principles set forth in the NIEO Declaration and the NIEO Programme of Action were later rearticulated and supplemented by a subsequent UN General Assembly Resolution entitled “Charter of Economic Rights and Duties of States” (CERDS), which was adopted on December 12, 197428 by a vote of 120 for, and 6 against (namely, Belgium, Denmark, the German Federal Republic, Luxembourg, United Kingdom, and the United States), with 10 abstentions. The significance of these UN resolutions in a discussion of a human right to development is twofold: first, these resolutions are cited in the preamble of the UN Declaration of the Right to Development and, therefore, are important antecedents to
23
Id. at 466. N.B. The social and economic rights set forth in the UDHR, as ratified under the Truman Administration in 1948, has the force of customary international law. To some, this may negate the necessity of having the U.S. ratify the ICESCR. Others may argue that this is a cynical view! 25 Philip Alston himself recognizes this by stating that “there is little reason to expect that [the] challenge will be taken up by many of the scholars, or activist groups, currently working in the human rights field.” (Alston 1990, p. 392). 26 U.N. General Assembly Res. 3201 (S-VI), 29 U.N. GAOR Supp. No. 1, p. 3, U.N. Doc. A/9559 (1974) [hereinafter “NIEO Declaration”]. 27 U.N. General Assembly Res. 3202 (S-Vl), 29 U.N. GAOR Supp. No. 1, p. 5, U.N. Doc. A/9559 (1974) [hereinafter “NIEO Programme of Action”]. 28 UN General Assembly Res. 3281, 29 U.N. GAOR Supp. No. 30, p. 50, U.N. Doc. A/9631 (1974) [hereinafter “CERDS”]. 24
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the principles set forth in that Declaration; and second, NIEO Declaration principles form the foundation of the ACP-EEC Convention of Lomé II, and its predecessor treaties, creating the backdrop to a new formulation of an African human rights regime.29 The African perspective on the right to development is important insofar as it sheds some light on how that right is viewed within a developing country perspective. The dialogue between the developed and the developing worlds took a very significant turn with NIEO discussions, the implications of which will be explored below. The concepts and principles underlying the NIEO Declaration and CERDS are controversial both in substance and in the manner of their adoption. In a postcolonial era, developing countries discovered that their hard-won political independence did not guarantee their economic independence. Developing countries were left struggling to establish their economic self-sufficiency. In recognition of the continuing disparities between the developed and the developing worlds, the NIEO Declaration states: The developing countries, which constitute 70 per cent of the world’s population account for only 30 per cent of the world’s income. The gap between the developed and the developing countries continues to widen in a system which was established at a time when most of the developing countries did not even exist as independent States and which perpetuates inequality.30
A serious concern of the developing world centered on the overwhelming economic power exercised by transnational corporations that controlled commodities markets for agricultural and other raw materials that many developing countries relied so heavily on.31 The influence exerted by such foreign corporations over the natural resources, state sovereignty, and national identities of developing countries caused great concern to the leadership of the developing world. Thus, there was a concerted effort to level the playing field by creating the terms of a new international economic system. To this end, Article 4 of the NIEO Declaration declared that developing countries had the right to: (1) the sovereign equality of all states, and the self-determination of all peoples (without discrimination based on what economic or social systems adopted by developing countries in furtherance of their development); (2) the full and permanent sovereignty of every state over its natural resources and all its economic activities (including the right to nationalize such resources); (3) the preferential and non-reciprocal treatment of developing countries; (4) the extension of development assistance by the international community free of political or military conditions; (5) the promotion of the transfer of technology and the creation
29 See generally, Gunther (1992), pp. 61, 78; Arts (2000); Comment, “Title V of the 2nd Lomé Convention Between the EEC and ACP States: A Critical Assessment of the Industrial Cooperation Regime as it Relates to Africa,” 5 J. Int’l L. Bus. 352 (1983). 30 U.N. General Assembly Res. 3201 (S-VI), 29 U.N. GAOR Supp. No. 1, p. 3; U.N. Doc. A/9559, Preamble, 111 (1974). 31 Ellis (1985), pp. 647, 652–653.
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of indigenous technology for the benefit of developing countries; and (6) the strengthening of mutual economic, trade, financial, and technical cooperation with developing countries on a preferential basis. CERDS further articulated these principles by stating that: (1) all states are juridically equal and have the right to participate fully and effectively in international decision-making processes (Art. 10); (2) each state has the sovereign and inalienable right to choose its economic, political, social, and cultural systems in accordance with the will of its people, and has the primary responsibility for promoting the economic, social and cultural development of its peoples (Art. 1); (3) each state has full permanent sovereignty over its wealth, natural resources and economic activities (Art. 2); (4) it is the individual and collective right of all states to eliminate colonialism, apartheid, racial discrimination, and neo-colonialism as a prerequisite for development (Art. 16); (5) developed countries should grant generalized, preferential, non-reciprocal and non-discriminatory treatment to developing countries in order to meet the trade and development needs of the developing world (Art. 18); and (6) all states should promote the international transfer of technology and scientific and technical cooperation (Art. 13). Apart from these revolutionary tenets, the developing world also revolutionized international legal practice by effectively using General Assembly resolutions, namely the NIEO Declaration, to create customary international law. The NIEO Declaration was adopted, albeit without a formal vote, by the UN General Assembly. Professor Louis Sohn, for example, has argued that NIEO Declaration resolutions adopted by the General Assembly do create new customary international law, and should be recognized as such.32 While the earlier Universal Declaration on Human Rights assumed the normative force of customary law without the participation of the developing states, the tables were now reversed. Under the provisions of the UN Charter, however, the General Assembly does not have any formal legislative authority. Although commentators may make distinctions between General Assembly resolutions and solemn declarations (generally accorded greater weight than mere resolutions), neither create binding legal obligations on UN members.33 Yet despite its lack of formal law-creating powers, General Assembly resolutions can arguably create customary international law for the reasons discussed below. Customary international law may be created if the following two elements can be demonstrated: (1) state practice and (2) opinio juris. State practice, for example, would constitute a state’s acts which rely on a UN declaration for the interpretation and resolution of disputes. This indicates the functional operation of the declaration as a rule of customary international law. Opinio juris is the sense of legal obligation
32 Sohn (1978), p. 1. Professor Sohn writes, “there is wide consensus that these [NIEO] declarations actually established new rules of international law binding upon all States. This is not treaty making but a new method of creating customary international law.” (Id. at 16.) 33 Ellis (1985), pp. 664, 665, 666. See also Asamoah (1966); Falk (1966), p. 782; Bleicher (1969), pp. 444, 445.
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under international law compelling the state “to act in a particular manner.”34 However, state practice takes precedence over opinio juris since actions speak louder (and more clearly) than intent.35 Moreover, state practice that establishes an international legal norm does not depend on the unanimous consent of all nations to be bound by such a rule in order to make the rule operative.36 Instead, all that is required is a “general acceptance or consensus,” even if the state to be bound by the rule comes into existence after the norm is established. Since the international acceptance of such a rule is dependent on state practice, not on the formal normative power of the public international body issuing such a rule, the lack of legislative or law-making powers of the UN General Assembly becomes irrelevant in this context.37 The UDHR, in fact, is a case in point illustrating this doctrine. The UDHR, adopted as a General Assembly resolution in 1948, is now customary international law along with other UN General Assembly declarations such as the Declaration of Granting of Independence and the Declaration of Elimination of Discrimination Against Women.38 Indeed, there is even some scholarly speculation that the UDHR has risen to the level of jus cogens.39 Jus cogens is defined by Article 53 of the Vienna Convention on the Law of Treaties as a “preemptory norm of general international law [that] is . . . accepted and recognized by the international community of States as a whole as a norm from which no derogation is permitted and which can be modified only by a subsequent norm of general international law having the same character.”40 Under Article 38 of the Statute of the International Court of Justice, legitimate sources of law include international conventions, international custom, general principles of law, and judicial decisions and teaching.41 Thus, if the UDHR is considered an international legal custom, or even a general principle of law, under 34
Ellis (1985), p. 688, see also Kunz (1953), pp. 662, 665, 667. Simma and Alston (1992), pp. 82, 88. 36 Lauterpacht (1958), p. 191. 37 See Ellis (1985), pp. 670–671, 672. Ellis correctly points out that the mere fact that the UN General Assembly is a highly political body (where many controversial views may be expressed) should not detract from its rule-making authority or from the legal effect of its resolutions. Clearly, the legislatures (or parliaments) of other countries are all highly political bodies that are designed to elicit and express a wide variety of political opinion within the legislative process. 38 Id. at 667 n. 126, 699. 39 Id. 40 Vienna Convention of the Law of Treaties, 1155 U.N.T.S. 331, reprinted in 63 Am. J. Int’l L. 875, 891 (1969). It has been argued that Article 53 of the Vienna Convention provides the basis to void the operation of treaties which conflict with peremptory international norms. Further, developing country support of the inclusion of a jus cogens doctrine in the Convention stemmed from the desire to mitigate the effect of pacta sunt servanda, or the doctrine requiring that international obligations be observed by the signatories. The jus cogens doctrine was adopted in the Vienna Convention despite reservations concerning the vagaries of state practice in defining peremptory international norms. See Charlesworth and Chinkin (1993), pp. 63, 64–65. 41 Statute of the I.C.J., art. 38, 59 Stat. 1055, T.S. No. 993, 3 Bevans 1179. 35
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the doctrine of jus cogens, the legal standing of the UDHR can be raised to the level of an international legal norm. In essence, “The theory of jus cogens or peremptory norms posits the existence of rules of international law that admit no derogation and that can be amended only by a new general norm of international law of the same value.”42 Although the notion of jus cogens was originally conceived of as a limitation on the freedom to conclude international treaties (or contracts) such that a treaty will be void “if, at the time of its conclusion, it conflicts with a peremptory norm of general international law,”43 there are nevertheless differing perspectives on this. For example, if Article 53 of the 1969 Vienna Conference on the Law of Treaties is relied on, then a peremptory norm of international law must be established, and also be accepted by the international community as a whole as being a norm from which no derogation is permitted. So, while an individual veto by an objecting state may not be sufficient to overrule a peremptory norm, state consent is key under this view.44 There has been a subtle yet noticeable shift in modern jurisprudence to move away from customary state practice to treaty formation as the preferred means of international law creation, with a consequent reliance on positive law. However, there is a strong belief that such positivist pronouncements ultimately derive from natural law precepts—or, in other words, “a common reservoir of universal principles governing ‘civilized nations’.”45 This viewpoint is especially prevalent in the jurisprudence of international human rights. The derivation of human rights from natural law sources is seen as a higher obligation regardless of whether the concerned state has formally agreed to accept the underlying peremptory norm. For example, the Inter-American Court of Human Rights declares that, “[a]ll persons have attributes inherent to their human dignity that may not be harmed; these attributes make them the possessors of human rights that may not be disregarded and, which are, consequently, superior to the power of the State, whatever its political structure.”46 Gradually, a hierarchical order of legal norms recognized either by customary state practice or by treaty obligations has gradually been evolving and such norms, in essence, may not be contravened by national or international law. Certain international human rights have now acquired the status of jus cogens norms and include, to
42
Shelton (2006), pp. 291, 297. Id. at 300, footnotes omitted. 44 Id. 45 Id. at 295. Other sources of peremptory norms include not only state consent and natural law but also necessity, international public order, and constitutional principles. Id. at 302. Moreover, there is an evolutionary tendency to move from non-law to soft law, and from soft law to hard law, with various customary and treaty norms becoming peremptory norms over time. Id. at 322. 46 Inter-American Ct. Hum Rts. Advisory Op., “Juridical Condition and Rights of Undocumented Aliens,” (ser. A) No. 18 (2203). 43
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date, prohibitions against slavery, forced disappearances, torture or cruel, inhuman or degrading treatment or punishment.47 Without definitively deciding the jus cogens nature of the UDHR, its normative power has been expressed in U.S. domestic law. For example, in a case brought by Paraguay citizens for the death of their son by torture, the U.S. Second Circuit (Federal Court of Appeals in New York) in Filartiga v. Pena-Irala held that torture of an individual under the color of official authority violates universally accepted norms of international human rights. The Court of Appeals held that, “the right to be free from torture. . . . has become part of customary international law, as evidenced and defined by the Universal Declaration of Human Rights.”48 Further, the Court found that: U.N. Declarations are significant because they specify with great precision the obligations of member nations under the [UN] Charter. Since their adoption, “[m]embers can no longer contend that they do not know what human rights they promised in the Charter to promote.” Sohn, “A Short History of the United Nations Documents on Human Rights,” in The United Nations and Human Rights, 18th Report of the Commission (Commission to Study the Organization of Peace, 1986). . . . Accordingly, it has been observed that the Universal Declaration of Human Rights “no longer fits into the dichotomy of ‘binding treaty’ against ‘non-binding pronouncement,’ but is rather an authoritative statement of the international community.” [Citation omitted.] . . . Indeed, several commentators have concluded that the Universal Declaration has become, in toto, a part of binding, customary, international law.49 [Citations omitted.]
U.S. Courts have also been willing to consider NIEO provisions in resolving claims for compensation for the expropriation of private property. For example, The U.S. Court of Appeals in Banco Nacional de Cuba v. Chase Manhattan Bank stated that, “actions taken by the General Assembly of the United Nations on this subject since 1962, while they do not have the force of law, see U.N. Charter, art. 10, are of considerable interest.”50 The Court duly noted that the U.S. delegate’s request, inter alia, that the CERDS provision on expropriation be amended to include a provision providing for just compensation in the event of nationalization, was rejected. The United States voted against the CERDS (along with five others), and the Court
47
See e.g., Michael Domingues (United States), Case 12.285, Inter-Am. C.H.R. Rep. No. 62/02 OEA/Ser.L/V/II.117, doc.1, rev. 1, para. 49 (2003). See also International Criminal Tribunal for the Former Yugoslavia (ICTY) which states, “[c]learly, the jus cogens nature of the prohibition against torture articulates the notion that the prohibition has now become one of the most fundamental standards of the international community.” Prosecutor vs. Furundzija, No. IT-95-17/1-T, PP 153-54 (December 10, 1998). 48 630 F. 2d 876, 882 (2d Cir. 1980). 49 Id. at 883. See also Simma and Alston (1992), p. 91 (noting that governments conferred the UDHR with the status of customary international law). Cf. Shelton (2006), pp. 291, 316, pointing out that this federal case did not discuss jus cogens norms and simply found the act in question to violate “the law of nations.” 50 Banco Nacional de Cuba v. Chase Manhattan Bank, 658 F.2d 875, 889 (2d Cir. 1981); rev’d on other grounds, 462 U.S. 611, 103 S. Ct. 2591, 77 L.Ed. 2d 36 (1983); remanded 744 F.2d 237 (2d Cir. 1984).
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concluded that “This overview of the actions of members of the [UN] General Assembly presents at best a confused and confusing picture as to what the consensus may be as to the responsibilities of an expropriating nation to pay ‘appropriate compensation,’ and just what that term may mean. The resolutions, the views of commentators, and the positions taken by individual states or blocs are varied, diverse, and not easily reconciled.”51 Similarly, U.S. federal courts have considered the substance of NIEO provisions in determining whether the acts of sovereign nations constitute commercial activities and, therefore, are not entitled to sovereign immunity under the provisions of the Foreign Sovereign Immunities Act of 1976.52 In International Assn. of Machinists and Aerospace Workers v. Organization of Petroleum Exporting Countries,53 the plaintiff brought an action against the Organization of Petroleum Exporting Countries (OPEC) seeking monetary and injunctive relief for OPEC’s alleged price-fixing of crude oil prices as a per se antitrust violation of the Sherman Act.54 The U.S. district court deciding this case construed the commercial activities of sovereign nations narrowly and cited to the NIEO in its opinion, stating that: In determining whether the activities of the OPEC members are governmental or commercials in nature, the Court can and should examine the standards recognized under international law. The United Nations, with the concurrence of the United States, has repeatedly recognized the principle that a sovereign state has the sole power to control its natural resources. See e.g., Resolution 1803, G.A. Res., § I(1), 17 U.N. GAOR, 2d Comm. 327, U.N. Doc. A/C/2/5 R 850 (1962). . . . Accord, Charter of Economic Rights and Duties of States, G.A. Res. 3281, Ch. II, Art. 2(1). U.N. Doc. A/RES/3281 (XXIX) (1974); Declaration on the Establishment of a New International Economic Order in 1974, G.A. Res. 3201(S-VI) § 4e, U.N. GAOR, 6th Spec. Sess., Supp. (No. 1) 3, U.N. Doc. A/9559; Resolution 3171, G.A. Res. 3171, 28 U.N. GAOR 30 (Vol. 1) at 52, U.N. Doc. A/9030 (1973); Resolution 3016, G.A. Res. 3016, Preamble and § 1, 27 U.N. GAOR, Supp. (No. 30), U.N. Doc. A/8730; Resolution 2158, G.A. Res. 2158 § I(1), 21 U.N. GAOR, Supp. (No. 16) 29, U.N. Doc. A/6316 (1966). The United States’ endorsement of this principle derives from its control, as a sovereign, of the development of its own land and resources. See e.g., U.S. Constitution, art. 4, sec. 3, cl. 2. (Emphasis supplied.)55
51
Banco Nacional de Cuba v. Chase Manhattan Bank, 505 F. Supp. 412 (S.D.N.Y. 1980), aff’d as modified, 658 F.2d 875, 891 (2d Cir. 1981). 52 28 U.S.C. § 1602, et seq. 53 477 F. Supp. 553 (C.D. Ca. 1979); aff’d 649 F.2d 1354 (9th Cir., 1981); cert. den. 454 U.S. 1163, 102 S. Ct. 1036, 71 L. Ed. 2d 319 (1982). 54 15 U.S.C. § 1 et seq. 55 See 477 F. Supp. at 567-78. The Court determined that the activities of OPEC nations with regard to the taxation and the imposition of royalties for the extraction of crude oil from their respective territories did not constitute commercial activities and that the defendants were entitled to sovereign immunity under 28 U.S.C. § 1604. As a consequence, the court lacked subject-matter jurisdiction over the complaint. In reaching its decision, the Court also found that: “In view of our own State and Federal domestic crude oil activities, there can be little question that establishing the terms and conditions for removal of natural resources from its territory, when done by a sovereign state, individually and separately, is a governmental activity. (Footnote omitted.) Plaintiff, however, asserts that, while this may be true, the actions of the OPEC nations in coming together to conspire to fix prices is
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Of course, the United States voted against CERDS despite the fact that it may have agreed with the principle set forth in CERDS that a sovereign state has the sole authority to control the disposition of its own natural resources. Despite the legal stature that the NIEO Declaration and CERDS may have assumed in international law, the provisions of these declarations were never fully accepted or implemented by developed nations.56 Even though the NIEO Declaration was adopted without a vote by the UN General Assembly, it clearly has not been accepted as an international customary norm by many industrialized states. It is true that unanimous acceptance of a General Assembly resolution is not required under international law, nor is a single negative vote sufficient to defeat consensus. Nevertheless, even if a resolution is adopted by an overwhelming majority, negative votes cast by even a few powerful states may ultimately defeat consensus. Thus, in light of the six votes against CERDS cast by industrialized nations (including the United States), and the ten abstentions made by other nations, the requisite consensus for the adoption of CERDS (and even the NIEO Declaration) as normative legal instruments may not exist.57 Despite the failings of the NIEO-CERDS agenda, the NIEO Declaration precepts supported negotiations for the African-Caribbean-Pacific (ACP) and European Economic Community (EEC) pact for economic assistance known as the ACP-EEC Convention of Lomé II Convention (“Lomé II”)58 Lomé II was the fourth convention signed between EEC countries and newly independent nations of Africa, the Caribbean, and the Pacific. The Treaty of Rome, Part IV, Arts. 131–36 (governing the EEC),59 established the association system to govern economic relations with European colonies or dependent states with special relations with European countries for the purpose of furthering the development of such states. Under terms of the association, free trade areas were established along with preferential trade treatment in exchange for EEC countries and nationals being permitted to establish themselves in ACP countries.60
commercial and, thus, not immune. Plaintiff’s position, however, is untenable. It is ridiculous to suggest that the essential nature of an activity changes merely by the act of two or more countries coming together to agree on how they will carry on that activity. The action of sovereign nations coming together to agree on how each will perform certain sovereign acts can only, itself, be a sovereign act.” 477 F. Supp. 568-69. 56 See Ellis (1985), p. 660. 57 Id. at 693, 695. 58 ACP-EEC Convention of Lomé (II), Oct. 31, 1979, reprinted in The Courier (Nov. 1979) [hereinafter Lomé II Convention], cited in Young-Anawaty (1980), p. 63 n. 1. For a thorough discussion of why human rights concerns were not included in Lomé I, executed in February 1975, see Arts (2000), pp. 167–169 n. 27. 59 Treaty Establishing the European Economic Community, March 25, 1957, Pt. IV, 298 U.N.T.S. 11, reprinted in Office for Official Publications of the European Communities, Treaties Establishing the European Communities, 163 (1973) [hereinafter “Treaty of Rome.” 60 Young-Anawaty (1980), pp. 64–74. (Note that Lomé trade preferences are not consistent with the General Agreement on Tariffs and Trade [GATT] preferences.)
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With the independence of ACP states and territories in the 1960s, however, the association was rendered obsolete since these newly independent states now fell outside the jurisdiction of the Treaty of Rome. New negotiations between the EEC and these newly formed nations clarifying their new legal and economic status and relations were concluded with Yaoundé I and II, as well as Lomé I and II.61 At the time, European socialists lobbied to include a strong commitment to human rights within the framework of Lomé II, particularly in light of massive human rights abuses in Ethiopia, Uganda, and the Central African Republic.62 Formal renegotiations for Lomé II began in July 1978, four years after the NIEO Declaration had been adopted. EEC members wanted to incorporate a reference to human rights by citing to the UN Charter and the UN Declaration on the Right to Development (UNDRD) in the preamble of the Lomé II Convention.63 The fiftyeight ACP nations remained adamant in their opposition to such a measure based on the following grounds: first, that the Lomé II Convention was an economic instrument and that the UN (not the Convention) was the appropriate forum in which to air concerns about human rights; second, that conditioning trade agreements on human rights observances was unfair and inappropriate; third, that this was a Cold War ploy; and, fourth, whereas condemnations of apartheid in South Africa were acceptable, other types of human rights “violations” in ACP countries were considered an internal affair that did not warrant international scrutiny or intrusion.64 After many heated sessions, no mention of human rights was made in Lomé II. Despite the fact that the fiercely debated human rights issues did not appear in Lomé II, the Organization of African Unity (OAU) (now the African Union (AU)) nevertheless carefully examined the political stance taken by the ACP countries in the Lomé II debate. The OAU passed a resolution to draft an “African Charter on Human and Peoples’ Rights” during its July 17–20, 1979 meeting in Monrovia.65 This Charter will be the subject of later discussion. The human rights agenda, still facing major opposition from ACP countries (rather than EEC countries), nevertheless was mentioned in the Preamble and the
61 Convention of Association between the European Economic Community and the African and Malagasy States Associated with that Community (Yaoundé I), Jan. 6, 1964, 7 J.O. Comm. Eur. 1431 (1964); Convention of Association between the European Economic Community and the African and Malagasy States Associated with that Community (Yaoundé II), July 29, 1969, 13 J.O. Comm. Eur. 1 (No. L 282) (1970); ACP-EEC Convention of Lomé (I), Jan. 30, 1976, 6 Collection of the Agreements Concluded by the European Communities 1003 (1976) (Official Publications of the European Communities), reprinted in 12 Comm. Mkt. L. Rev. 463 (1975), cited in YoungAnawaty (1980), pp. 64 n. 4, 75 n. 47, 76 n. 50. 62 Young-Anawaty (1980), pp. 63, 79, 95–96. 63 Id. at 87. 64 Id. at 80. See also Arts (2000), p. 175 n. 27; see generally at 169–175. 65 Decision on Human and Peoples’ Rights in Africa, Organization of African Unity Assembly of Heads of State and Government, 16th Sess. (July 17–20, 1979), reprinted in 34 U.N. GAOR, Annex (Agenda Item 23), U.N. Doc. A/34/552 (1979) at 92.
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Annexes to Lomé III, signed in December 1984. In general terms, ongoing commitments to fundamental human rights, the dignity of the human person, and the equal rights of men and women were reaffirmed.66 However, it was not until negotiations for Lomé IV began in October 1988 that a clear linkage was forged between development cooperation and human rights. Article 5(1) clearly provided that, “Cooperation shall be directed to-wards development centred [sic] on man, the main protagonist and beneficiary of development, which entails respect for and promotion of all human rights.”67 The revised Lomé IV Convention was formally adopted in Mauritius in November 1995, and entered into force on June 1, 1998.68 Despite making this important linkage between human rights and development, Karin Arts nevertheless concludes that: First of all, the Lomé IV Convention failed to clearly define its understanding of human rights. Article 5 only made rather general references to it and was far from formulating a concrete set of rights to be respected under any circumstance. It did not define any criteria for application. Therefore, it might not always have been possible to substantiate that human rights violations had indeed taken place to the extent that a breach of Article 5 had occurred. Secondly, for a party or group of parties to the Lomé Convention to resort lawfully either to Article 60 or to Article 62 of the Vienna Conventions, it seems appropriate and just to demand application of another basic rule of international law as well, the non-discrimination principle.69
Thus, in light of the very small progress made, what is the relevance of the objectives of the NIEO Declaration, NIEO Programme of Action, the Lomé IV Convention and CERDS in this context? Unlike the Universal Declaration of Human Rights which treats the individual’s right to development, the NIEO Declaration and CERDS formulated the rights of developing states within the development process. The NIEO Declaration and CERDS fundamentally changed the terms of development to incorporate the interests, priorities, and needs of the developing world. Most importantly, the NIEO Declaration addressed the inherent inequality in the juridical stature and economic bargaining power of developing countries and stressed their need for preferential, non-reciprocal treatment.70 These considerations were not couched in human rights language as such, but highlight the fundamental concerns of developing nations regarding the ongoing development process which, in their view, both contributes to and perpetuates key inequalities and injustices. 66
Arts (2000), pp. 175–181. Id. at 183. 68 Id. at 189 n. 65. See The Courier, No. 170, July–August 1998, at 7. 69 Arts (2000), p. 197 n. 27. Despite additional clarifications offered by Articles 5 and 366a(3) of Lomé IV-bis, it is not clear that a framework for clear definitions of human rights (and what triggers a violation thereof) or enforcement of such rights has been determined and agreed upon (Id. at 198, 200). 70 This type of preferential treatment has been termed a “differential norm” insofar as such a legal norm “on its face provides different, presumably more advantageous, standards for one set of States than for another set.” See Magraw (1990), pp. 69, 73. In this case, the NIEO Declaration, and related UN resolutions, set forth differential norms that provide for different and inherently unequal legal treatment that has the effect of distinguishing developed countries from developing ones. 67
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Additionally, CERDS set forth the parameters of a proposed new relationship with the developed world by requiring highly industrialized states to grant generalized, preferential, non-reciprocal and non-discriminatory treatment to developing countries in order to meet the trade and development needs of the developing world. This can be translated into practical terms by granting preferential treatment to developing nations in three areas: trade, capital, and technology transfers. In other words, many developing countries were seeking Most Favored Nation (MFN) status, removing trade barriers erected by advanced nations, granting debt relief in terms of preferential capital transfers from the West, and agreeing to a new regime for intellectual property rights that adequately addresses the needs of developing countries. Negotiations surrounding the Lomé II Convention initiated an ongoing debate of whether trade relations or foreign assistance should be conditioned on human rights observances. The threat of imposing economic sanctions for lapses thereon continues to be a battleground between the Western industrialized countries and the rest of the world. This confrontation is often viewed in terms of imposing “neo-colonialist” values on other countries, as discussed below.
4.1.2
Monterrey Consensus
The UN-sponsored International Conference on Financing for Development (the “Monterrey Conference”) was held in Mexico in March 2002, and may be characterized as a watershed event that has successfully moved the global community beyond the NIEO agenda. The resulting consensus both expanded and refined the respective duties and responsibilities of advanced nations and developing countries. The Monterrey Consensus consisted of six elements: (1) domestic resource mobilization; (2) mobilizing international resources in the form of private capital flows for development-related purposes; (3) trade; (4) international financial cooperation in the form of official development assistance (ODA); (5) debt; and, (6) systemic issues.71 The author is deeply grateful that two constitutional law principles described in Chap. 3, namely, mutuality and the duty of cooperation, were cited with approval by legal commentators who noted first, that: Even those in developed countries who dispute the legal entitlement of developing countries to preferential treatment cannot deny the existence of a mutual duty to cooperate in development efforts. As Rumu Sarkar aptly elaborates: “More importantly, the act of cooperating with each other is more than joint or simultaneous action, it is the unity of
71 Haque and Burdescu (2004), pp. 219, 243. Under the consensus, developing countries are required to mobilize resources for poverty reduction, promote sound macroeconomic policies and a good investment climate in accordance with the rule of law. In return, affluent countries are required to provide an enabling environment for development, enhance market access, including the phasing out of agricultural subsidies, support the flow of private capital as well as ODA along with effective debt relief to developing countries. Id. at 241–242.
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action to a common end or common result. The common end result is the development of all nations.”72
And noting that the Monterrey Consensus has the potential for nations to enter into a new social contract to facilitate common and mutual global interests, further states that: Mutuality has been the essence of the process. It represents a significant change from the New International Economic Order (NIEO) movement in the 1970s, where developing countries in their quest for economic equality were noticeably influenced by their historical experience, essentially wishing reparations for past colonial wrongs.73
In conclusion, the commentators assert that: The [Monterrey] Consensus document is also profoundly different from other U.N. documents such as [the NIEO and CERDS]. Both developed and developing countries have traveled a long way since the era of NIEO. Developing countries, owing to a variety of reasons, have become more realistic, responsible and mature. Developed countries – having witnessed the tragic events of September 11th and become cognizant of indivisibility of development and security, as well as having become aware of public opinion in their countries clearly favoring visible poverty reduction in the world – have exhibited a new spirit of accommodation. All this has been manifested in the Monterrey Consensus. As a consequence, a new partnership between developing and developed countries came into existence. This partnership is anchored on mutual responsibility and accountability to achieve measurable improvements in areas that are overwhelmingly critical for the good of mankind.74
If the concepts of mutuality and the duty to cooperate have moved into the area of recognizable state practice, then it is a clear marker that development law principles are beginning to be clearly defined not just as theory but also as practice.
4.1.3
The Judicialization of Human Rights
While commentators cited previously strenuously argues that the “rights and obligations contained in the ICESCR were never intended to be susceptible to judicial or quasi-judicial determination,”75 they nevertheless “strongly support the inclusion of human rights considerations in development activities and do not reject out of hand the notion that some economic and social rights may be domestically justiciable. The question is whether a new international complaints mechanism would help to bridge the still growing gap between human rights commitments and concrete action. We
72
Id. at 238–239. Id. at 243. 74 Id. at 254–255. See also Arts (2016), pp. 221, 228, pointing out that the Millennium Development Goals reinvigorated the right to development discourse along with the commitment to achieve it through international cooperation. 75 Dennis and Stewart (2004), p. 515. 73
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think not.”76 While this view may not necessarily be dispositive,77 let us explore a new dimension of litigating international social, economic and cultural rights in domestic courts. In 1980, the Second Circuit ruled in Filartiga v. Peňa-Irala,78 that the Alien Tort Claims Act (ATCA) could provide the jurisdictional basis for bring federal court subject-matter jurisdiction for an action brought by a Paraguayan citizens against a Paraguayan official for torture committed in Paraguay. The Court of Appeals found that torture violated customary international law and specifically ruled that, “an act of torture committed by a state official against one held in detention violates established norms of international law of human rights, and hence the law of nations.”79 This watershed case deserves a closer examination. In 2004, the U.S. Supreme Court addressed the scope and validity of the Alien Tort Statute (1789),80 for the first time, and held that the ATCA may be used by foreign victims of egregious human rights abuses to sue for damages in U.S. courts, thus affirming over 20 years of federal court under the so-called “Filartiga paradigm.”81 Although the ATCA was originally passed by Congress to provide redress for acts of piracy and for offenses committed against ambassadors, the Supreme Court found in Sosa v. AlvarezMachain,82 that international law is part of US law and that, consequently, accountability may be sought for alleged violations of human rights. However, the extraterritorial reach of the ATCA does not extend to foreign corporations who may not be held liable for torts committed in violation of international law. In Kiobel v. Royal Dutch Petroleum Co.,83 Nigerian plaintiffs brought claims under the ATCA for extrajudicial killings, torture, crimes against humanity, and prolonged arbitrary arrest and detention. The plaintiffs alleged that the Shell Petroleum Development Company of Nigeria, Ltd. collaborated with the Nigerian government to commit these violations to suppress the plaintiffs’ lawful protests against oil exploration. The U.S. Supreme Court held that there is a presumption
76
Id. This view may reflect the “[c]autious and conservative U.S. attitude towards domestic implementation of international human rights norm[s] is also reflected in the ideas often expressed in its political and judicial circles that human rights issues are a matter for the states to secure for their citizens, and that treaties are not appropriate devices to provide for the protection of human rights within state territories.” Sha Alam (2001), pp. 27, 30. 78 630 F.2d 876 (2d Cir. 1980). 79 Id. at 884. 80 28 U.S.C. 1250. 81 See generally, Norberg (2006), p. 387. 82 542 U.S. 692 (2004). Dr. Humberto Alvarez-Machain was brought to trial in the United States for the alleged torture and murder of a U.S. Drug & Enforcement Agency (DEA) agent. AlvarezMachain was acquitted, but before that happened, he had taken to the Supreme Court a claim that the United States violated a Mexico-US extradition treaty and international law in his capture. The Supreme Court rejected his claims. 83 569 U.S. 108 (2013). See also “Kiobel v. Royal Dutch Petroleum.” Oyez, (September 4, 2018). 77
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against extraterritorial application of U.S. law which serves to protect against clashes between U.S. law and the law of other nations. The Court reasoned that nothing within the text, history, or purpose of the ATCA statute indicates that it was intended to apply extraterritorially. In order to rebut this presumption, the petitioners’ claim would have to touch and concern the territory of the United States with “sufficient force.”84 In Jesner v. Arab Bank,85 the Arab Bank, based in Jordan, was accused of processing financial transactions through a branch in New York for groups linked to terrorism. The plaintiffs in the case sought to hold the bank liable for attacks in Israel and in the Palestinian territories by Hamas and other groups. However, the U.S. Supreme Court held that “foreign corporations may not be defendants in suits brought under the ATS [ATCA].”86 Thus, lawsuits against foreign officials (but not foreign corporations) in U.S. courts may be brought under the ACTA for offenses such as genocide, torture, summary execution and disappearances as it is now acknowledged that foreign states and officials are bound by customary international law for which the ACTA provides legal jurisdiction.87 Procedural defenses such as sovereign immunity, the act of state doctrine, forum non conveniens, and the impossibility of enforcing judgments lie outside the scope of this discussion, but scores of human rights plaintiffs now stand to benefit by this new development in international law.88 The Sosa decision is particularly significant not only because lawsuits may be brought against sovereign states (the enforceability of such judgments notwithstanding),89 but also because torture was recognized as violating a “norm” of international human rights. As argued earlier in the text, absolute legal norms may be evolving in the sphere of international human rights, and this case is an example of international jurisprudence moving in that direction. While the U.S. Supreme Court noted with caution the prospect of creating private rights of action, it nevertheless affirmed the Filartiga paradigm of using international norms of human rights as a basis for private redress. Moreover, the U.S. Congress cited the Filartiga decision with approval in passing the Torture Victim Protection Act of 1991,90 designed to provide similar remedies to U.S. victims of torture. A second arena in which there is a newly emerging judicialization of human rights is beyond the sole individual and towards classes of plaintiffs. Indeed, the
84
See 133 S.Ct. 1659, 1669 (2013). 584 U.S. ____ , 138 S.Ct. 1386 (2018), Petition No. 16-499. 86 Id. at 27 of the slip opinion. See also Adam Liptak, “Supreme Court to Weigh if Firms Can Be Sued in Human Rights Cases,” New York Times (April 3, 2017). 87 Boyd (1999), pp. 1139, 1151–1152. 88 Id. at 1151–1152. 89 Doubt was cast on the prospect of enforcing ACTA claims against sovereign states in a comment made by Professor Philip Greenwood at the Lauterpacht Conference held in Cambridge England, from July 9–10, 2008. 90 106 Stat. 73 (1992). 85
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certification of class action lawsuits for “mass tort” transnational litigation in the areas of international human rights, Holocaust cases, collective economic rights, “cultural genocide” rights of preserving ethnic identities, and the rights of holders of indigenous lands and cultural values have all provided grounds for ACTA-based litigation.91 A third arena in which Filartiga-based litigation is being increasingly directed is towards private corporations rather than sovereign states. Since human rights instruments apply generally to governments, and not to non-state actors, transnational corporations “have operated in a virtual legal and moral vacuum.”92 Nevertheless there may be a convergence of private action with state action as in Occidental Petroleum acting in concert with the Colombian Air Force, and Unocal acting with complicity in the murder of Cambodians.93 As the international human rights obligations of private parties are becoming more defined and in time, perhaps more enforceable, there has been a recent push to adopt corporate codes of conduct to prescribe unlawful conduct by corporations and by other means, described below.94 Indeed, the adoption of the UN Global Compact by multinationals in 1999 which include principles of human rights, labor standards and environmental protection, corporations have arguably become partners with the UN. Thus, the downstream legal implications of the Filartiga paradigm are being felt not only in terms of creating a private cause of action, but in mass tort litigation and in the ability to sue private entities as well as sovereign states. Since human rights regimes tend to be state-centric, “it places duties on states to respect the rights of individuals and creates few or no private duties. In other words, human rights law is aligned vertically, not horizontally.”95 Nevertheless, there is some movement to make such human rights regimes to be more horizontal rather than vertical whereby “private actors would have duties as well as rights, and they would owe those duties to society as a whole or to individuals within it. The draft Declaration on Human Social Responsibilities (Declaration) would identify duties that all individuals owe to their societies; and the Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (draft Norms) would set out duties of businesses under human rights law.”96
91 See generally, Boyd (1999). See Doe v. Karadzic, 176 F.R.D. 458, 460 (S.D.N.Y 1997); see also Settlement Agreement at 9, 13–14, In re Holocaust Victims Assets, No. CV-96-4849 (E.D.N.Y., Settlement Jan. 26, 1999). 92 Boyd (1999), p. 1193. 93 Norberg (2006), pp. 396–407. 94 Boyd (1999), p. 1194. 95 Knox (2008), p. 1. The author makes an in-depth examination of the private duties, if any, contemplated by different human rights legal instruments. 96 Id.
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The draft Norms were adopted by the UN Sub-Commission on Human Rights, a body of nominally independent experts.97 One commentator notes that: A common belief used to be that international law cannot place such duties on private actors because, unlike governments, they are not subjects of international law, and only subjects of international law can hold rights and duties under it. If this conception of international law was ever valid, it is not now. Private actors certainly enjoy rights under international law: human rights law itself demonstrates that. And private actors have duties as well, such as duties not to commit war crimes, crimes against humanity, or genocide. International law has the legal capacity to place direct horizontal duties on all private actors not to violate one another’s human rights. What it lacks is the practical and political capacity to enforce those duties. As a practical matter, international law could not possibly replicate the vast domestic resources devoted to regulating private invasions of interests denominated as human rights by international law, and as a political matter, it would be impossible even to try. . . . All of these considerations militate toward leaving private violations of human rights to domestic law. But powerful reasons argue against leaving private violations entirely to domestic law. . . . [O]n the other hand, [there is the] practical and political need to use domestic institutions wherever possible; and on the other [hand], the need to use international law where domestic institutions are inadequate.98
The above discussion clearly points to the development of a new human rights legal regime that imposes duties as well as confers rights. Further, it will purport to make private actors the bearers of such duties and rights—the so-called “horizontalization” of such human rights. The significant changes that can be felt in this area of international human rights law are both in the judicialization of such international human rights using domestic legislation and courts as the means of enforcing customary international human rights. Perhaps more importantly for this century, those international human rights are being defined (along with duties) for both states and private actors. The equalization of the “playing field” is a new phenomenon, and it will be interesting to see where it leads.
4.1.4
Human Rights in an International Development Law Context
The critical question posed by this debate is how fundamental are certain basic human rights and dignities? Are certain human rights truly universal and inalienable? If so, then should we expect less from developing countries because of their poverty? Does poverty legally deprive an individual of certain human rights? If so,
97
See Sub-Commission on the Promotion and Protection of Human Rights, Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, UN Doc. E/CN.4/Sub.2/2003/12/Rev.2 (2003). 98 Knox (2008), pp. 19–20.
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then are certain human rights obtainable only by virtue of the relative wealth of an individual or a society or should the development process be held captive until the offending country complies with international human rights norms? This is a classic example of where the glass can be seen as both half empty and half full. On the one hand, one should be careful of overbroad platitudes with regard to human rights especially since such judgments may reflect the specific cultural values and priorities of a nation or culture. The imposition of such values, especially through the threat of economic sanction, trade embargoes, and other punitive conditionality, makes the glass appear to be half empty. Yet, on the other hand, one should also be careful about establishing a lower tier of expectations for developing countries. If certain fundamental rights are deemed inalienable, (and, clearly an international consensus on this has not yet been formulated), then these rights should not be deprived to individuals merely because they live in the developing world. This is an opportunity for developing countries to shape the definition of and the agenda for human rights, rather than deny the entitlement of their citizens to these basic rights. Otherwise, development becomes even more problematic and elusive. Basic human dignity should not be the exclusive prerogative of those living in economically prosperous nations. Negotiating more diverse and multicultural understanding of human rights, and its purposes, helps to move the debate forward. Developing countries need to participate in the international dialogue concerning which rights are truly universal, and which transcend the vagaries of culture. Constructive participation in this discussion will help mold and shape the new legal parameters of these human rights and make them truly universal (as opposed to Western) in character. Indeed, using the argument of state sovereignty as a shield for failing or refusing to meet internationally recognized norms of basic human rights protections may be a self-serving strategy. Likewise, prioritizing economic development over civic and political development takes a very narrow view of development which may ultimately be self-defeating in the end. Development is a very complex picture, and developing countries should strive to achieve more than just economic progress, particularly if we are to believe that “man/woman does not live by bread alone.” Conditioning human rights on the relative wealth of a country or dismissing the concept as Western-styled legal imperialism may do a real injustice to the needs and aspirations of the peoples of a developing country. Assuring fair and equal treatment in the criminal justice system, minimal due process rights, and other basic human rights, for example, may be a vital component in the overall scheme for development. This is especially true if development as a concept is meant to incorporate more than economic growth.
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The History of the Right to Development
At the 1972 inaugural lecture of the Third Session of Instruction of the International Institute for Human Rights in Strasbourg, Keba M’Baye, first president of the Senegal Supreme Court, gave an address entitled, “The Right to Development as the Right of Man.”99 In this presentation, he set forth a basic outline of the human right to development; the ultimate justification for that right being that man cannot exist without development.100 As chairman of the Commission on Human Rights in 1977, M’Baye further elaborated on the newly coined “human right to development” in a paper delivered at the UNESCO Meeting of Experts on Human Rights, Human Needs and the Establishment of a New International Economic Order.101 The Commission adopted Resolution 4 (XXX-III) recommending that a study of a right to development be undertaken.102 Further, in 1977 the UN General Assembly linked human rights and development by stating, “[h]uman rights questions should be examined globally, taking into account both the overall context of the various societies in which they present themselves as well as the need for the promotion of the full dignity of the human person and the development and well-being of the society.”103 Additionally, Karel Vasak, director of the Human Rights and Peace Division of UNESCO in 1977, espoused the theory of three “generations” of human rights.104 The first generation of human rights are the political and civil rights of the individual which the state is prohibited from interfering with or infringing upon. These liberties correlate to the “negative” freedoms such as the right to self-expression, the practice of religion, and other liberties that John Locke thought may be unjustifiably abridged
99
M’Baye (1972), pp. 503, 505. See also Arts (2016), pp. 223–230; Espiell (1981), pp. 189, 192; Donnelly (1984), pp. 261–62; Donnelly (1985), pp. 473, 474; Bulajie (1988), p. 359; de Vey Mestdagh (1981). 100 M’Baye (1972), pp. 528, 530. See also Bulajie (1988), p. 359. 101 The UNESCO meeting took place from June 19–23, 1978, and M’Baye’s presentation was reprinted in UNESCO Doc. SS-78/CONE.630/8, at 1. (See also Donnelly 1985, p. 474 n. 3.) 102 “Commission on Human Rights, Report on the Thirty-Third Session, 62 U.N. ESCOR Supp. (No. 6), U.N. Doc. E/5927 (1978). Jack Donnelly notes with distaste that the right to development moved through the UN system with unprecedented speed with practically no opposition. He also notes that despite the lack of precedent for the right and the lack of scholarly discussion, the right to development was proclaimed in the Declaration of the Preparation of Societies for Life in Peace, U.N. General Assembly Res. 33/73 (1978), and in the UNESCO Declaration on Race and Racial Prejudice, adopted by the General Conference of UNESCO on November 27, 1978. (See Donnelly 1985, pp. 474–475.) 103 UN General Assembly Res. 2626, para. 5, 25 U.N. GAOR Supp. (No. 28), at 39, U.N. Doc. A/8028 (1970). 104 Karel Vasak, “A 30-Year Struggle,” UNESCO Courier (November 1977) at 29. See also Marks (1981), pp. 435, 441; Olowu (2004), pp. 179, 188.
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by the state. These freedoms are eloquently expressed in the Bill of Rights to the U.S. Constitution and are set forth, in substance, in the ICCPR.105 The second generation of human rights are the social, economic, and cultural rights whose implementation is the primary responsibility of the state and that roughly correspond to the ICESCR. These rights include the right to work, the right to health, and the right to education. These rights are not simply liberties that the state cannot arbitrarily deprive the individual from exercising. Rather, the state has the affirmative duty to provide certain social and economic rights to the individual. The third generation of human rights are comprised of the so-called solidarity rights which include not only the right to development but also the right to peace, the right to a healthy environment, and the right to own the common heritage of mankind.106 Additional candidates for solidarity rights included the right to communicate, the right to be different, and the right to humanitarian assistance.107 Paul Brietzke points out that these three generations of human rights correspond to the French revolutionary cry for liberté, égalité, and fraternité.108 The first generation of civil and political rights can be traced to the historical antecedents of the American and French Revolutions. The second generation of social and economic rights can be traced back to the revolutionary socialist traditions beginning with the Russian Revolution. Finally, the third generation of so-called solidarity rights is still emerging from the decolonization experience of the developing world.109 According to Brietzke, “[f]irst generation rights emphasize form, while second and third generation rights look more to substance.”110 Jack Donnelly goes a step further by stating that, “[t]here is not merely a difference in substance—in the object
Simma and Alston write that, “there is a remarkable correlation between the norms identified as customary rules, and the range of rights which has been incorporated into the U.S. Bill of Rights. This correlation may, of course, be considered to be coincidental. Alternatively, it might be seen as a tribute to the foresight and perceptiveness of the drafters of the U.S. documents or as a reflection of the dominant influence of American values in the world. It is also possible, however, to view it as an instance of what might be termed normative chauvinism, albeit of an unintentional or sub-conscious variety.” See Simma and Alston (1992), p. 94. (See also ICCPR, art. 18.) 106 de Vey Mestdagh (1981), pp. 33–34. See also Espiell (1981), p. 193 n. 17. Note that the first three rights enumerated in the text have been recognized in art. 23, for example, of the African Charter on Human and Peoples’ Rights, discussed infra. (See e.g., Alston 1984, pp. 607, 610–611.) 107 Alston (1984), p. 610. 108 Brietzke (1985), p. 587. See also Donnelly (1984), p. 263. 109 See Brietzke (1985), p. 582. 110 Id. Moreover, as the earlier discussion of Ms. Cossman’s analysis pointed out, the traditional support for the social and economic rights that came from the Soviet Bloc is now jeopardized in light of the realignment of the First and Second Worlds. The emphasis on the collective nature of the right to development where social and economic rights implicit therein are paramount is clear from the Soviet standpoint, whereas the individual nature of the right was clearly emphasized by the U.S. delegate to the fifteen-member working group established by the UN Social and Economic Council in drafting a declaration of the right to development. See Nanda (1985), pp. 431, 435–436. 105
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of the right-from the first two “generations” of rights, but a fundamental qualitative difference between solidarity rights and all (other) ‘human rights,’ based on radically different sources for the rights.”111 Indeed, the notion of the individual is cast in three separate molds. The first generation of human rights sees the individual as the independent entrepreneur; the second, as the revolutionary worker; and the third, as the oppressed, colonized individual. A study of the right to development, requested in Resolution 4 passed by the Commission on Human Rights, was issued by the UN Secretary-General in January 1979 in preparation for the Strategy for the Third UN Development Decade.112 The authority and authenticity of the legal antecedents to the right to development are varied and venerated. The legal sources for the human right to development include, as discussed in the Secretary-General’s Report, Articles 55 and 56 of and the preamble to the UN Charter; Articles 22, 26(2), 28, and 29(1) of the Universal Declaration of Human Rights; Article 1 of the ICCPR; and Articles 1(1), 2(1), and 11 of the ICESCR.113 Indeed, the Vienna Declaration and Program of Action adopted at the World Conference of Human Rights held in Vienna, Austria on June 25, 1993, boldly declared that, “all human rights derive from the dignity and worth inherent in the human person, and that the human person is the central subject of human rights and fundamental freedoms.”114 And in reaffirming the right to development, clearly states: the right to development, as established in the Declaration on the Right to Development, as a universal and inalienable right and an integral part of fundamental human rights. As stated in the Declaration on the Right to Development, the human person is the central subject of development. While development facilitates the enjoyment of all human rights, the lack of development may not be invoked to justify the abridgment of internationally recognized human rights.115
The UN Secretary-General’s Report defined the right to development as: (i) The realization of the potentialities of the human person in harmony with the community should be seen as the central purpose of development; (ii) The human person should be seen as the subject and not the object of the development process; . . . (iii) Respect for human rights is fundamental to the development process;
111
Donnelly (1984), p. 271. The International Dimensions of the Right to Development as a Human Right in relation with other Human Rights was based on International Cooperation, including the Right to Peace, taking into account the Requirements of the New International Economic Order and the Fundamental Human Needs. See Report of the Secretary-General, U.N. Doc. E/CN.4/1334 (1979) [hereinafter, “Secretary-General’s Report”]. See also Nanda (1985), p. 433; Espiell (1981), pp. 194–195. 113 Donnelly (1984), p. 262. 114 Vienna Declaration and Program of Action adopted at the World Conference of Human Rights held in Vienna, Austria on June 25, 1993, Preamble. 115 Id., art. 10. 112
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(iv) The human person must be able to participate fully in shaping his own reality; ... (v) [A] degree of individual and collective self-reliance must be an integral part of the process.116 The UN General Assembly recognized the Right to Development in U.N. G.A. Res. 34/46 adopted on November 23, 1979.117 Since that time, the right to development has been reiterated a number of times.118 However, in considering the declaration on the right to development at a UN meeting of the Third Committee convened on November 28, 1986, the comments of the participating UN delegates shed some light on their reservations. For example, the U.S. delegate, in declining to join the consensus on the declaration on the right to development, expressed her concerns that the declaration as adopted by the Committee was “imprecise and confusing” and tended to “dilute and confuse the existing human rights agenda of the United Nations.”119 Additionally, the U.K. delegate did not accept the linkage between human rights violations and development, nor did she accept the linkage between protecting human rights and establishing the new international economic order. Further, she expressed reservations regarding the right to development being the “human right of peoples,” a sentiment echoed by the Japanese delegate who abstained from the consensus on the declaration, in part, because the “[h]uman rights were rights of individuals.”120 Finally, on December 4, 1986, the UN General Assembly adopted the Declaration on the Right to Development (UNDRD) by a roll-call vote.121 The United States was the sole nation to vote against the UNDRD. What impact does the sole dissenting vote of the United States in opposition to the UNDRD have? In order for a UN General Assembly resolution to create customary international law upon its passage, the resolution must have been adopted by a “consensus” of the members of the General Assembly.122 Although unanimity in the passage of such
116
The Secretary-General’s Report, U.N. Doc. E/CN.4/1334 (1979). The Report also explains that the right to development arises from the duty of solidarity (§ 42); the moral duty of reparation for colonial and neo-colonial exploitation (§ 54); and world peace (§§ 50–51). See Donnelly (1984), p. 262. 117 See U.N. Doc. A/C.3/34/SR at 24–30, 33–38, 41. 118 See, e.g., G.A. Res. 174, 35 U.N. GAOR (1980); G.A. Res. 133, 36 U.N. GAOR (1981); G.A. Res. 199, 37 U.N. GAOR (1982); G.A. Res. 124, 38 U.N. GAOR (1983), and the draft resolutions adopted by the Third Committee on November 30, 1984, U.N. Doc. A/C3/39/L36. 119 See Draft UN resolution A/C.3/41/L.4 adopting a declaration on the right to development by the Third Committee on November 28, 1986, U.N. Doc. A/C.3/41/SR.61 at 32. 120 Id. at 31, 33. 121 U.N. GA Res. 41/128 (December 4, 1986), adopted by 146 to 1 (United States voted against it), with eight abstentions (namely, Denmark, Finland, the Federal Republic of Germany, Iceland, Israel, Japan, Sweden, and the United Kingdom). 122 See Ellis (1985), p. 694. In fact, consensus on an issue may be regarded as evidence of opinio juris, thus supporting the inference that the resolution is legally binding on General Assembly members (Id.).
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General Assembly resolutions is not required, “near-unanimity with a few abstentions or dissents” is necessary. Whereas a single negative vote may not be sufficient to destroy consensus in the matter, a few negative votes or a bloc of abstentions may be sufficient in this regard.123 Therefore, does the single negative vote cast by the United States have sufficient legal force to prevent a consensus, thereby preventing the UNDRD from achieving the force of customary international law? Perhaps not in a technical legal sense, but nevertheless, the possibility of its universal recognition, and implementation, seems dim.124 The prospect of fully accepting and implementing a right to development still seems remote. Indeed, there is a general recognition that the ICESCR has been relegated to the “lower rank of ‘second generation’ rights,” and that the “right to development, which recognizes the collective rights of people is assigned to the even more removed category of a ‘third generation’ solidarity right.”125 Even though the Maastricht Guidelines on Violations of Economic, Social, and Cultural Rights states that, “[i]t is now undisputed that all human rights are indivisible, interdependent, interrelated and of equal importance for human dignity,”126 nevertheless, in practice, these categories of rights are treated separately and often delegated an inferior legal status. While the procedurally-based civil and political rights set forth in the ICCPR tend to be emphasized by Western nations, the more substantive rights of the so-called second and third generation of human rights tend to reflect the priorities and realities of developing countries. As Professor Amartya Sen points out, “economic unfreedom in the form of extreme poverty, can make a person helpless prey in the violation of other kinds of freedom. . . .Economic unfreedom can breed social unfreedom, just as social or political unfreedom can also foster economic unfreedom.”127 Thus, if the desired outcome of the development process is seen as being “freedom,” a substantive ideal rather than a procedural guarantee, then greater importance needs to be given the so-called second and third generations of human rights.
123
Id. at 694–695. Ellis points out that CERDS was passed by the General Assembly by a vote of 120 for, 6 against, with 10 abstentions. Ellis concludes that the ten abstentions, even if the six votes against are not considered, were sufficient to defeat a consensus on CERDS being reached by the General Assembly. 124 Cao (1997), pp. 545, 556. 125 Laplante (2007), pp. 141, 151. This article explores Peru’s truth and reconciliation commissions as a means of demonstrating the indivisibility and symbiotic relationship of human rights. The article also points out that the development process is often confused with making collective reparations for wrongs committed by the state. In other words, the Peruvian government confused its separate obligations: to make reparations for wrongs it has committed, and to provide essential services to its population. However, one is not a substitute for the other. Id. at 175. 126 Maastricht Guidelines on Violations of Economic, Social, and Cultural Rights, art. 1, reprinted in 20 Hum. Rts. Q. 691, 691–692 (1998). 127 Sen (1999), p. 8.
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Rights and Duties Under the UNDRD
The revolutionary character of the UNDRD is apparent at the outset. Article 1 of the UNDRD states: “The right to development is an inalienable human right by virtue of which every human person and all peoples are entitled to participate in, contribute to and enjoy economic, social, cultural and political development, in which all human rights and fundamental freedoms can be fully realized.” (Emphasis added.)128 In classical Western legal tradition, individual rights, as discussed earlier, were articulated in the form of “negative freedoms” or, that is to say, freedom from interference by the government in the exercise of such rights. Thus, the individual is accorded certain rights and freedoms, and the government is prescribed certain duties, chiefly, to respect the freedoms accorded to the individual and to protect a citizen’s private property. Since Western theorists, such as John Locke, view government as a fiduciary trust that is delegated certain responsibilities and duties by the people,129 there is no room to accord governments any rights as such, other than to curb the criminal or antisocial behavior of its members for the overall good of the polity. The state is delegated certain duties (and powers) by the individuals residing within it. Of course, Western societies did not come to a full halt at John Locke’s doorstep. Since that time, the state has assumed a number of positive duties in addition to its original duty to refrain from interfering with the pursuit of happiness by the individual. The government in Western societies has assumed an important, delegated role in providing for the social welfare of its citizenry. The redistribution of wealth through taxation; establishing social safety nets to provide unemployment, health, medical, and pension benefits; providing educational opportunities and facilities; and supporting the infrastructure needs of the population in terms of transportation, power, and communications are all examples of important duties that have been assumed by Western governments. Indeed, over the course of the last century, there has been an explosion of positive duties assumed by Western states to provide for the welfare of its citizens. Yet, despite the serious and complex nature of the legal obligations assumed by Western industrialized nations to ensure the social welfare of its members, there is still a philosophical and legal reluctance to impose an actual legal duty on the state to provide these entitlements to its citizens as part of an international human rights regime. Thus, there is a certain hesitation, on the part of certain Western states, to elevate economic and social rights to the same level as the civil and political freedoms that are set forth as human rights in the ICCPR. For example, the U.K. delegate to the UN Third Committee stated that the U.K., “as one of the largest donors of development assistance, agreed that States should take steps to promote development, including that of developing countries, but could
128 129
UNDRD, art. 1. Locke (1952), pp. 61, 55–58.
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not agree that that should become an obligation under international law.”130 This debate is not a new one: it requires that a clear distinction be drawn between a right or an entitlement and a mere aspiration. Although developed nations have shown their interest in and commitment to the development of other countries, there is a clear reluctance to transform the desire to facilitate the development of other countries into an actual legal obligation to do so. In light of the previous discussion, the legal problems associated with the UNDRD fall into several categories. First, the recognition of economic, social, cultural, and political development as an inalienable human right is highly problematic. The philosophical reorientation that is required to accept this proposition goes against the grain of centuries of Western political thought, ideology, and practice. The pursuit of economic and social development is traditionally viewed as the prerogative of the individual in Western society, and the state is expressly forbidden to interfere with an individual’s choices, inclinations, and desires. Second, the right to development has both individual and collective aspects, creating further confusion and chaos in traditional Western legal thinking.131 Under the provisions of the UNDRD, the right to development is held not only by all individuals worldwide but also by collective entities, such as “peoples” and developing states. The UNDRD purports to give certain rights to states (and human rights at that), a non sequitur in the classical tradition of Western law. In Western human rights regimes, human rights can only be held by human beings, not by states. Moreover, since human rights violations are generally committed by and are actionable against the state, giving developing countries a “human” right, some would argue, is a nonsensical proposition. Third, the duties imposed by the UNDRD are to be assumed by the developed nations, the international community, and world institutions who address development problems. These duties are imposed on advanced industrial nations in recognition, in part, that the past exploitation of developing countries did, in fact, contribute to their present state of underdevelopment. These duties may also be regarded as a subtle form of restitution for the colonial histories of the past. Thus, the implicit confrontational, polemical overtones between the right-holders (developing countries) and the duty-bearers (developed nations) has resulted in an impasse between the two. The intellectual divide between the proponents and opponents of the right to development is clearly expressed by Jack Donnelly who writes: All traditional human rights, civil and political and economic, social and cultural, are rights primarily held against the state; whether the duties correlative to these rights require forbearance, protection or positive assistance, the state is the principal duty-bearer. Human rights are essentially instruments to protect the individual against the state or to assure that the state guarantees to each individual certain minimum goods, services and opportunities. Other legal, moral and social principles or practices aim to protect the legitimate interests of
130
See Draft UN resolution A/C.3/41/L.4 adopting a declaration on the right to development by the Third Committee on November 28, 1986, U.N. Doc. A/C.3/41/SR.61 at 33. 131 Cao (1997), pp. 545, 556.
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society in instances of conflict between the individual and the community. To confuse the two seriously risks undermining the protections provided by human rights. (Emphasis in original.)132
Jack Donnelly’s strictly Lockean view of human rights is very useful since he delineates the fault line between the industrialized Western states’ view and the developing world perspective on human rights. The right to development, however, does not confuse rights and duties, it reformulates them in unexpected and unprecedented ways that move far beyond the Lockean paradigm. The human right to development no longer preserves the static and hostile relationship between the individual and the state. It endows the states with rights (not just duties) and purports to establish a framework of human rights that includes nation-states as both rightholders and duty-bearers to one another as well as to individuals. To further confuse the picture, the international human rights scene has expanded well beyond the familiar confines of the lone individual locked into an adverse relationship to the potentially tyrannical state. Thomas Hobbes’s stark worldview, where the state (i.e., the Leviathan) is imposed on the individual to create order and prevent anarchy, has been tempered over time. His philosophy (bordering on a kind of panicked hysteria) has evolved into a Western liberal tradition, where the individual is still an atomized unit, both alienated from and pitted against the tyrannical and overwhelming force of the state. Hobbes thus viewed the state as a “necessary evil.” Over time, the highly structured Newtonian universe of human rights with predictable laws and relationships has been transformed into an Einsteinian universe where the actors, rights and duties are fluid, unpredictable, and unstructured. This has largely been the result of concerted efforts to include the legal traditions and political views toward human rights of and expressed by developing countries themselves. This may have been met with some degree of resistance and distrust, primarily from Western legal practitioners, whose own legal traditions tend to be more structured and rigid with a stricter view towards the enforceability of rights. Thus, expressing rights as “aspirational” in nature is a subtle means to ensure that such rights do not become legally binding. For example, Jack Donnelly writes that, “solidarity, which is often advanced as the single most important moral argument for a right to development, is merely a variant on this basic conceptual error of confusing rights and duties. . . . While solidarity may establish strong moral obligations to assist the underdeveloped, it does not establish a right to assistance, let alone a right to development. ‘The innate responsibility to help one’s fellow man’ establishes at most a moral obligation to act to promote development, not a right to development.” (Emphasis in original.)133 If this viewpoint is accepted, then this may be a technical flaw in the way in which the right to development has been articulated: it lacks legal sufficiency and therefore, can be seen as aspirational in nature. In other words, it fails to impose a concrete duty
132 133
Donnelly (1985), p. 499. Id. at 491.
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on duty-bearers and fails to confer rights that are enforceable by the respective parties to the “right to development.”134 In addition, the human right to development has both individual and collective aspects. If it is seen as an individual right, then the right-holders are all individuals. If it is viewed in its collective aspect, then the right-holders are states (particularly developing states), and other collective entities such as municipalities, districts, communities, and provinces.135 The duty-bearers are developed nations, the international community, and world institutions addressing development problems.136 With regard to the individual aspect of this human right, the state owes individuals within its borders the positive duty to promote their development. In its collective aspect, advanced nations and the international community also owe duties to developing countries. In light of this, Jack Donnelly argues that, “[i]f the right to development is a human right, then it is universal right, a right held by all. If it is equally a right of individuals, minorities, peoples, and states, it is a right of each and every individual, minority, people and state. This can only lead to countless and refractory conflicts of rights.”137 However, a “problem with imposing the right to development on the World Bank is that, at the present time, remedies against IFIs [International Financial Institutions] like the World Bank do not yet exist in any formalized manner in international law. Of course, the lack of remedies in international law does not mean that the right at issue has not achieved legal status. However the key difference between the right to development and other IHRL [International Human Rights Law] rights without remedies is that the content of the right to development is not at all clear. Without a generally-agreed upon working definition, implementation and monitoring of this supposed right is difficult to say the least.”138 Donnelly further argues that states cannot have “human” rights and that if collective rights are to be included in the right to development, then a distinction should be made between human rights and peoples’ rights (as found in the Banjul Charter, discussed below). Moreover, “the right to development is significantly different from a rights-based approach to development. The right to development is a much broader concept than rights-based development. . .The right to
134
Other obstacles to the full realization to the right to development also may include: (1) insufficient foreign aid; (2) sovereign debt and structural adjustment; (3) the activities of transnational corporations; (4) unilateral coercive measures; (5) unfair trading rules; and (6) the negative consequences of globalization. See Bunn (2000), pp. 1451–1460. 135 Espiell (1981), p. 198. 136 See e.g., MacNaughton (2015), p. 537; Knox (2015), p. 517; “Corruption, Human Rights, and Development: Sovereignty and State Capacity to Promote Good Governance,” 99 Am. Soc’y Int’l L. Proc. 416 (2005). 137 Donnelly (1984), p. 266. 138 Totaro (2008), p. 740. See also, Uriz (2001), p. 197, examining the World Bank’s Cameroon project; Darrow and Arbour (2009), p. 446; Leube (2017), p. 1243.
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development not only declares development as a means of achieving other rights, but also declares development itself as a separate right.”139 Further, the “distinct mark of a rights-based approach, compared to other approaches to human development, is its contingency upon legal foundations.”140 These foundations lie within international, regional and host country legal treaties and domestic laws. However, the ratification and the enforcement of such legal instruments (international, regional and domestic) differ from country to country, thus creating a very refracted picture of the current legal state of the human right to development. As a final admonition, Donnelly summarily dismisses the peoples’ rights aspect, concludes that there can only be an “individual” right to development (thereby preserving the Lockean relationship of the individual to the state), and finally states that “we must carefully distinguish between a human right to pursue development, to strive for self-actualization in conditions of dignity, and a human right to be developed. The latter is extravagant and even dangerous; one does not have a right to be a fully developed person simply because one is a human being. A right to pursue personal development is on its face at least substantively plausible. But does it serve any real purpose?”141 This question is certainly worth asking. Let us explore this conclusion futher by starting with the concept of the right to participate in development.142 The right to participation is no longer limited to states but is now inclusive of individuals and non-state actors. For example, the executive directors of the World Bank and the IDA, respectively, adopted parallel resolutions authorizing the creation of an independent, three-member Inspection Panel, which was formed in 1993.143 The Inspection Panel provides an independent forum to private citizens (or groups) who believe that they have been harmed by a project or undertaking financed by the World Bank. Private complaints may be filed with the Inspection Panel which may conduct investigations into the complaint lodged. Findings and recommendations are made to the Executive Board, and the Board’s final decision is made publicly available. This establishes an important legal nexus between the World Bank and the ultimate beneficiaries of its projects. The Inspection Panel is meant to encourage participatory development and ensure transparency in the development process.
139
Alam and Karim (2011), pp. 345, 354. See also Olawuyi (2015), p. 13. Olowu (2004), p. 192. See also Seppänen (2017), p. 389; Agusti-Panaveda (2008), p. 23. 141 Donnelly (1985), pp. 498–499, 500–501. 142 See generally, Totaro (2008), pp. 714, 737, who writes, “The fundamental problem with according the right to participatory development status as a customary international law, however, is that there are to many unknowns with respect to what constitutes this purported right. The primary unanswered question asks, ‘What exactly is participatory development?’” 143 See IBRD No. 9340, and IDA 93-6 (resolutions of the Executive Boards of the World Bank and the IDA, respectively). See also Annual Report, The Inspection Panel (IBRD, IDA), dated August 1, 1994–July 31, 1996. 140
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Thus, development is no longer a question reserved to the narrow confines of an individual’s relationship with the state. Development involves the dynamic continuum of all nations and all individuals. The formation of the World Bank Inspection Panel is concrete evidence of the sea change in the international community’s approach to development. No one and no entity is excluded from the equation. In fact, some have viewed the right to development as a synthesis of all human rights.144
4.2.2
Moving Past “Third Generation” Human Rights: Lessons from Islam
The foregoing section addressed the tension between rights and duties under the rubric of the UNDRD. Specifically, the technical legal difficulties with imposing duties on institutional stakeholders in the “right to development” which include states, NGOs, “peoples” and other collective entities has been addressed. In fact, the reserve expressed from a Western perspective has been highlighted in this context. However, is there a way of moving past this dilemma? One legal commentator has presented highly thought-provoking views in discussing the nature of “duties” from a Western philosophical perspective on natural law as well as from “duties” imposed by the Qur’an. Jason Morgan-Foster argues that while the role of duties has played a very important role in Western philosophic tradition, the existence and nature of such duties has been lost in the modern human rights paradigm which exalts “rights” and diminishes “duties.”145 For example, Aristotle considered human beings to be intrinsically social in nature with duties implicit in being a member of the city-state, or the political entity of which the individual forms a part. Moreover, Aristotle believed that human reason permits an individual to discern and understand natural law consisting of “universally valid rules of natural law or natural justice which transcend local laws and customs. . . . arising from the shared or common features of human nature.”146 The duties of a citizen in the Aristotelian scheme therefore may be seen as foreshadowing the solidarity rights of the third generation human rights (including the right to development)—where both concepts combine rights with duties. Thomas Aquinas relied heavily on Aristotle, and discovered a significant compatibility in the writings of Aristotle with the teachings of the Catholic Church. However, Aquinas elevated the role of human beings from being a strictly secular one under Aristotle to having a divine destiny under God. Like Aristotle, Aquinas believed that human rationality allows human beings to identify natural law principles, but he goes further in positing that natural law is a “rational participation in the 144
Id. at 264; Espiell (1981), p. 205; de Vey Mestdagh (1981), p. 49. Morgan-Foster (2005), pp. 67, 72. 146 Aristotle, I The Politics 9 (T.A. Sinclair, trans.) (1962). 145
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eternal law of God.”147 Morgan-Foster asserts that this idea of man’s relation to the divine is also echoed in Islam, as explained further below. Previous chapters have examined the philosophic changes brought about by John Locke and Thomas Hobbes in terms of moving the human subject to the central philosophic inquiry while at the same redefining the underlying social contract. However, the idea of preserving individual liberties while still assuming civic duties was a cornerstone of both thinkers—especially Locke who believed that certain freedoms could only be effectively exercised collectively rather than individually, and may only be relinquished through individual consent.148 Moreover, Jean-Jacques Rousseau retooled the social contract by requiring public service to be the principal duty of citizens. While the preservation of individual liberties was considered vitally important, Rousseau also recognized that such freedoms may need to be subordinated or subjugated to the greater collective good.149 The legal dialogue on the nature of “duties” within the context of natural law generally or with regard to negotiating and implementing international human rights treaties specifically seems to have been lost or dissipated.150 However, a fresh look may be worthwhile at this point. The temptation to qualify third generation “solidarity” rights as aspirational, hortatory, unenforceable and non-justiciable is very strong in light of the foregoing discussion objecting to the right to development in particular. However, it may be argued that certain tenets of Islam, for example, provide doctrinal support for the right to development. Indeed, one of the five pillars of Islam is the sacred duty of alms giving (zakat) where “whoever sleeps whilst his neighbor is hungry does not belong to our community.”151 This provides the basis of a clear duty to support the individual’s physical needs perhaps even along with the full development of the human personality, a sentiment reflected in the UDHR. By couching the need to support the needs of another person in the community in terms of a “duty” of the alms giver rather than a right of the alms recipient, the frame of reference changes completely. Thus, Jason Morgan-Foster argues that: The West’s difficulty with accepting ‘duties’ language within the international human rights movement is not due to a cultural ignorance of the individual duty itself. Rather, just as the individual in Islam is the vice regent of God, a steward responsible for the interests of the community, individual rights in the West are based on a social contract of individual duty to serve the common good. The move towards solidarity rights is remarkable, not because the West is theoretically devoid of individual duties, but because after years of using ‘rights’ as
147
See Shelbourne (2001), p. 11. Hodgson (2003), pp. 15–16. 149 Id. at 19; see also J.J. Rousseau, The Social Contract (C. Frankel, trans.) (1947) at Book III, Chapter 15. 150 Morgan-Foster (2005), p. 81, “Human rights advocates were concerned that duties would be overpowering rather than complementary to rights, that they would be used as an alternative force for evil, rather than as an additional force for good.” 151 Id. at 94–95. 148
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its paradigm-establishing fundamental word, it has finally begun to incorporate ‘duties’ – the fundamental word of Islamic law, Jewish law, Hinduism and Confucianism – into it language and logic. In so doing, it has begun an important revival of its theoretic past which is a highly advantageous event for the future of human rights. . . . Rather than criticizing the development of third-generation solidarity rights, international human rights commentators should therefore be interested in further developing them.152
Indeed, first and second generation rights may be strengthened by engaging in a further legal discourse on the recognition and implementation of duties along with rights. Not only is an Islamic perspective important here, but there is also much to be gained from an African perspective, discussed below.
4.3
An African Perspective on the Right to Development
The African Charter on Human and Peoples’ Rights (also referred to as the Banjul Charter on Human and Peoples’ Rights153 (hereinafter the “Banjul Charter”)154 was adopted by the 18th Assembly of Heads of State and Government of the Organization of African Unity (OAU) now reconstituted as the African Union (AU),155 in Nairobi, Kenya, in June 1981. Five years later, the Banjul Charter entered into force on October 21, 1986, upon the 26th ratification by a member state, as required by Article 63(3) thereof. With ratifications by over 50 African states, the Banjul Charter is, to date, the largest regional human rights instrument in effect.156 The Banjul Charter is divided into three parts, the first part of which consists of twenty-nine articles. The first twelve articles delineate the expected norms of the individual’s rights and freedoms (e.g., equal protection of the law, freedom of conscience and religion, freedom of assembly). Articles 13–18 set forth the 152
Id. at 115. The term Banjul Charter derives from Banjul, Gambia, the venue for the two Ministerial Conferences where discussions led to the final draft of the Charter. (This charter should not be confused with the Charter of the OAU.) See Swanson (1991), p. 307, note 1; Gittleman (1984), p. 152. 154 OAU Doc. CAB/LEG/67/3/Rev. 5 (1981), reprinted in 21 I.L.M. 59 (1982). 155 OAU, Constitutive Act of the African Union (replacing the Charter of the OAU), July 11, 2000, 2000 AFR.Y.B. Int’l L. 479. The AU was officially launched on July 9, 2002 in Durban, South Africa. 156 Kiwanuka (1988), pp. 80, 81. The African Charter is not self-executing since ratifying members are required to adopt domestic legislative measures to give legal effect to the Charter. Article 62 provides that each ratifying member shall submit reports at two-year intervals from the date the Charter enters into force describing the legislative or other measures being taken to give legal effect to the provisions contained in the Charter. Ironically, the African Charter is considered to be self-executing by African francophone nations, but under a theory of reciprocity, it will not be given legal effect until all Anglophone nations have enacted it under their domestic laws. Since this has not occurred, the Charter is not legally effective with either side. See Welch (1992), pp. 43, 60. See also Swanson (1991), p. 327; Peter Mutharika (1995), pp. 1706, 1717. 153
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individual’s economic and social rights, which include the rights to work, education, the best attainable physical and mental health, and to freely take part in the cultural life of the community. Articles 19–24 of the Banjul Charter apply to “peoples,” including Article 22 which sets forth the right to development. Part II of the Charter deals with the establishment of the African Commission on Human and Peoples’ Rights, and Part III contains general provisions of a housekeeping nature. Further, Article 18 of the Banjul Charter describes the state’s special duty of care towards the family, women, and children as well as the aged and disabled. In contrast, Part I, Chap. II, Arts. 27–29, set forth the duties of the individual towards his family, society, and national community. This is a marked departure from the Western view where duties are incumbent upon the state, not on the individual. Article 22 of the Banjul Charter establishes the right to development and provides that: (1) All peoples shall have the right to their economic, social, and cultural development with due regard to their freedom and identity and in the equal enjoyment of the common heritage of mankind and (2) States shall have the duty, individually or collectively, to ensure the exercise of the right to development. The Banjul Charter along with the European Convention for the Protection of Human Rights and Fundamental Freedom157 and the American Convention on Human Rights158 are the three existing regional human rights instruments as of this writing. The Banjul Charter is significant in a number of different respects. First, it establishes the right to development as a legal, not a human right. Further, it establishes the right to development as the right of “all peoples,” not of individuals solely. Most importantly, however, the multicultural (or at least, the non-Western) imprint of the Banjul Charter, and its possible implications, is an important dimension in the dialogue on international human rights. Unlike the UNDRD which proclaims the right to development to be an “inalienable human right,” the Banjul Charter sets forth the right to development as a legal right. In some ways, the articulation of the right to development as a simple legal right (rather than a human right) simplifies matters by eliminating the confusion caused by conferring human rights on states and other non-human actors. As the previous discussion illustrates, much of the confusion in the minds of Western human rights scholars, commentators, and skeptics is caused by the question of whether human rights can be vested in the state. Certainly, certain individual freedoms such as the freedom of assembly or association are both an individual and collective right, but should this be extrapolated as a right of the state or other collective entities? Although, logically, human rights can only be exercised by human beings, Louis Sohn reminds us that, “[i]t is not surprising, therefore, that international law not only recognizes inalienable rights of individuals, but also recognizes certain collective rights that are exercised jointly by individuals grouped into larger communities,
157
213 U.N.T.S. 222 (entered in force, September 3, 1953). O.A.S. Treaty Series No. 36, p. 1, O.A.S. Off. Rec. Doc. OEA/ser.L/V/II.23, doc. rev. 2, reprinted in 9 I.L.M. 99 (1970).
158
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including peoples and nations. These rights are still human rights; the effective exercise of collective rights is a precondition to the exercise of other rights, political, economic or both. If a community is not free, most of its members are also deprived of many important rights.”159 Article 22 of the Banjul Charter, articulating the right to development, is different from the UNDRD in another important respect. The right to development under the Banjul Charter is a right of “all peoples,” rather than the right of all individuals. Thus, the right to development is not set forth as an individual right (or as a right of states), but a right of peoples. As discussed earlier, in 1979 Karel Vasak referred to collective rights, such as the right to development as the third generation of “solidarity” rights.160 Therefore, the Banjul Charter’s definition of the right to development as a right of peoples is in keeping with this characterization. The following section will explore the linkage between the right to development as a right of peoples.
4.3.1
A Peoples’ Right to Self-Determination
The legal concept of “peoples” has its genesis in the right to self-determination.161 The evolution of the legal concept of self-determination is divided into two historical periods: the post-WW I period of redrawing the map of Europe and the post-WW II period of decolonization.162 The concept of peoples was introduced by former U.S. President Woodrow Wilson at the League of Nations in Versailles in 1919, following the conclusion of WW I. President Wilson described self-determination as the “right of every people to chose the sovereign under which they live, to be free of alien masters, and not to be handed about from sovereign to sovereign as if they were property.”163 Although Wilson proposed the inclusion of self-determination as a principle of the Covenant of the League of Nations, the risk it posed in terms of supporting secessionist movements in a polyglot Europe (not to mention applying the principle to European colonial possessions) was regarded as too dangerous and, as a result, his proposal was rejected.164 Nevertheless, Wilson’s unflagging efforts ultimately brought international recognition to the right to self-determination of ethnic, reli-
159
Sohn (1982), pp. 1, 48. Vasak (1977), p. 29. 161 Kiwanuka (1988), p. 86. 162 See Hill (1995), pp. 119, 121. 163 Cass (1992), pp. 21, 23–24. 164 Cooper (1996), pp. 531, 540 n. 28. See also Buchheit (1978), p. 14. 160
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gious, or other minorities, and the doctrine eventually became an established part of international law.165 The second most important context for self-determination was formulated in the aftermath of decolonization following the conclusion of WW II. The principle of self-determination formed the legal basis for the decolonization effort and was incorporated into Arts. 1(2) and 55 of the UN Charter.166 Although the principle of self-determination constitutes a founding principle of the UN Charter, it does not have precise legal definition.167 The principle of self-determination has been rearticulated in the UDHR, in Article 1 of the ICCPR, and the ICESCR, respectively, and in the Definition of Aggression.168 More important, it is the subject of two important UN declarations, namely, the Declaration on the Granting of Independence to Colonial Countries and Peoples (the 1960 Declaration)169 and the Declaration on Principles of International Law Governing Friendly Relations and Co-operation Among States in Accordance with the Charter of the United Nations (the 1970 Declaration).170 The 1960 Declaration expressly stated that “[a]ll peoples have the right to selfdetermination; by virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development.”171 Article 1 of the Declaration states that “[t]he subjection of peoples to alien subjugation, domination and exploitation constitutes a denial of fundamental human rights, is contrary to the Charter of the United Nations and is an impediment to the promotion of world peace and cooperation.” The 1960 Declaration along with the two International Covenants only conceived of self-determination in the context of colonial liberation, and did not extend the right to minorities wishing to secede from UN member states.172 Under the Banjul Charter, the right of all peoples to pursue their economic and social development has its source in Article 22 (right to development) as well as in Article 20 (right to self-determination). Article 20 of the Banjul Charter recognizes
165 Cass (1992), pp. 24–25, 26. (The right to self-determination of religious and ethnic minorities is set forth in art. 27 of the ICCPR.) 166 Hill (1995), p. 124. 167 Cass (1992), p. 24. 168 G.A. Res. 3314, 29 U.N. GAOR Supp. (No. 31) at 142, U.N. Doc. A/9631 (1974). 169 G.A. Res. 1514, U.N. GAOR Comm., Sess. Supp. No. 21 at 166, U.N. Doc. A/4684 (1960). 170 G.A. Res. 2625, Annex, 25 U.N. GAOR Supp. (No. 17) at 66, U.N. Doc. A/5217 (1970). 171 Hill (1995), p. 125, quoting the 1960 Declaration. 172 Simpson (1996), pp. 255, 256, 268–269. See also Wilson (1996), pp. 433, 460. Paragraph seven of the 1970 Declaration, however, opened the door to legitimizing secessionist movements within an established nation-state. This idea goes back to Wilson’s original conception that the legitimacy of government stems from its representation of all segments of the population. (See Hill 1995, p. 129. See also Cass 1992, p. 36.) Therefore, the territorial integrity and the national unity of such a state will only be protected when the government governs “with the consent of the governed” (Hill 1995, p. 129). Thus, an unrepresentative government may provide the necessary justification for an oppressed minority to claim its own self-determination, thus seceding on this basis (See Wilson 1996, pp. 460–461. See also Cass 1992, pp. 36–37).
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the inalienable right of all peoples to self-determination. Specifically, Article 20 (1) states that all peoples “shall freely determine their political status and shall pursue their economic and social development according to the policy they have freely chosen.” This, combined with the right to “freely dispose of their wealth and natural resources” under Article 21, gives all African peoples the right to political and economic self-determination. However, the Banjul Charter does not expressly define peoples. Moreover, Article 20(2) of the Banjul Charter, setting forth the right to self-determination, limits its application to “colonized or oppressed” peoples. Thus, it has been argued that the rights of peoples attach only to the ex-colonial population as a whole, and not to its constituent ethnic groups. Thus, some conclude that “peoples’ rights” serve the function of supporting decolonization without threatening the stability and unity of post-colonial states and that, accordingly, “international law in its present form does not accommodate claims to self-determination by ethnic groups in the postcolonial context.”173 If this interpretation is accepted, however, the application of the principle of self-determination is rendered meaningless in a post-colonial context.174 In contrast, Richard Kiwanuka argues that the definition of peoples in the Banjul Charter goes beyond its original context for the liberation from colonial rule. In his view, “peoples” under the Banjul Charter may mean: (1) all persons in a geographically pre-defined area awaiting political liberation; (2) minorities; (3) the state (although the state is rarely a true representative of “all peoples”) or (4) all persons within a state.175 Moreover, in relation to the right to development set forth in Article 22 of the Banjul Charter, more than one of these definitions may apply. Yet, he warns that, “[p]eoples’ rights cannot be a substitute for individual human rights.”176 If we accept this expansive definition, then the legal notion of “peoples” in the Banjul Charter goes well beyond the post-WW II concept of political selfdetermination for colonized or minority peoples. Indeed, commentators have argued that there is a growing international acceptance of a new, post-colonial right to selfdetermination that includes the right to limited secession177 as we have witnessed in Eritrea and South Sudan. Thus, by declaring the right to development as an intrinsic right of all peoples, the Banjul Charter gives this right yet another dimension of complexity. It takes the human rights focus off the individual and onto “peoples,” a notion that is both collective and subjective. But who decides which individuals constitute a people?
173
Wilson (1996), pp. 463, 476. Simpson (1996), p. 275. 175 Kiwanuka (1988), pp. 86–88. See also Kunig (1982), pp. 138, 156–159. 176 Kiwanuka (1988), pp. 100–101. 177 Simpson (1996), pp. 285–286. Simpson discusses four potential “models” for self-determination, namely, national (the Basque separatist movement, the Aceh in Indonesia, and Tibet); democratic aspiration (South Africa, Portugal, Spain); devolutionary practice (Quebec, Scotland); and secession (Biafra, Bangladesh). 174
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4.3.2
163
The Africanization of Human Rights
Finally, with regard to the African cultural imprint of the Banjul Charter, the Charter has several noteworthy aspects. First, it moves towards reconciling Western human rights traditions with the African experience. The Charter incorporates Western liberal thought that pervades traditional human rights law while changing the context to an African one. This is an important step since Western liberal tradition provides the philosophical support underlying the UDHR, the two International Covenants (all three of which are collectively referred to as the International Bill of Rights), and the European and American regional human rights instruments.178 Secondly, the Charter re-defines the role of the state in the context of shaping human rights. Thirdly, it delineates an enforcement mechanism that differs significantly from Western legal practice. And finally, while recognizing that individuals have rights, the Charter also imposes duties on the individuals claiming such rights.
4.3.3
An African View of Human Rights
The liberal tradition of political and legal thought is a “received” tradition in colonized Africa; it was not part of the African traditional worldview.179 In the Hobbesian worldview, for example, the individual is an atomistic entity, constantly threatened by (yet in need of) the overreaching state (the Leviathan). This desperate need for as well as deep distrust of the state is still an important underpinning of Western societies today. The Lockean tradition of liberal political thought firmly moved the individual to center stage and restrained the potentially harmful interference of the state by setting aside certain spheres of life into which the state could not intrude. The sanctity of those civil rights and liberties that may be exercised by the individual free of government intrusion is unquestioned even today. Over time, the feudalistic context for the individual as an inseparable member of society gradually eroded under the force of this new thinking of the European Enlightenment. The single revolutionary idea of positing the individual as the sole arbiter of his political and economic fate paved the way to capitalism and advanced industrial societies.180
178
See Swanson (1991), pp. 324–326. See Cobbah (1987), pp. 309, 323 n. 41. See also Mutua (1995), pp. 339, 342. Mutua argues that since the modern African state was forcibly imposed by European colonizers without regard to existing African political and ethnic entities, the modern African state “did not result from the natural progression or evolution of those societies.” Thus, he concludes “that the traditional liberal conception of the relationship between the state and the individual is of limited utility in imagining a viable regime of human rights.” 180 Swanson (1991), p. 325. 179
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Has the Banjul Charter incorporated what may be regarded as a quintessentially Western-based philosophy and, if so, has it done so successfully? In other words, should the “received” traditions of Western thought and political philosophy be accepted, and if so, has the Banjul Charter done so successfully? Second, are there African traditions that should act to change, ameliorate or reject certain Western traditions in a quest to formulate a distinctly African regime for human rights? It has been argued that without the catalytic force of the Hobbesian-Lockean worldview, a society tends to remain static, that is to say, in a pre-capitalist, feudalistic mode.181 In this context, there is no differentiation between the rights of the individual that are separate and apart from the larger village, community, society, or ethnic, religious, or linguistic group. The traditional human rights regime that accords the individual certain important protections against an intrusive and dangerous state is deeply rooted in a Hobbesian worldview. In fact, unless a Hobbesian viewpoint is taken and firmly embedded as a cornerstone in an entrepreneurial, truly capitalistic state, human rights as such cannot come into being. After all, traditional civil and political liberties are grounded in the individual’s antagonistic relationship to the state. Thus, human rights as understood in the West are only possible in a post-feudal, capitalist, modern state. In effect, therefore, all human rights regimes, concepts, and practices that lie outside this context are ineffectual or, at least, met with deep skepticism by Western scholars.182 However, pre-capitalist, feudalistic societies characterize the vast majority of the developing world. In this context, the individual tends to be both defined and contained by his relationship to larger groups. Unlike the nuclear family that dominates Western tradition, the extended family and the collective, communitarian basis for most African (and, indeed, most developing world) societies tends to predominate.183 Thus, the stark individualism of Hobbes goes against the grain, and it is not an easily digestible ideal for most African societies or, indeed, most societies in the developing world. In fact, Hobbes did not address family, society, or cultural parameters, but only the state as the Leviathan. This is a stark contrast to the African view of the individual’s place in and relationship to society. Of course, the Enlightenment scholars also included Jean-Jacques Rousseau whose formulation of the social contract is a marked departure from the Hobbesian-Lockean view of society and the state and may be somewhat closer to the African viewpoint. Rousseau writes: The question, then, is to distinguish clearly between the respective rights of the citizen and of the sovereign, as well as between the duties which the former have to fulfill in their capacity as subjects and the natural rights which they ought to enjoy in their character as men. It is admitted that whatever part of his power, property, and liberty each one alienates by the social compact is only that part of the whole of which the use is important to the
181
Mutua (1995), pp. 354–355. Mutua gives an excellent discussion of this issue concerning pre-colonial African societies. 182 Id. at 355, 357. 183 Id. at 362–363.
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community; but we must also admit that the sovereign alone is the judge of what is important.184
However, I would argue that even this Rousseauan world view differs substantially from the African standpoint insofar as the relationship of the Rousseauan individual with society is by means of a social contract. This implies that the relationship is that of the individual solely with “society,” which is an abstraction, and that further, this is a bargained-for contractual relationship. Although this bargain may include rights of as well as duties to the state by the individual, the contractual nature of this bargain differs from the African perspective. The relationship between an individual living in an African society can be seen as being more organic and familial, rather than contractual in nature. The Banjul Charter has incorporated the traditional human rights regime of negative freedoms as well as the economic and social rights that are set forth, in principle, in the ICESCR. However, it is not simply an amalgamation of the two International Covenants for human rights. Articles 27–29 of the Banjul Charter define the specific duties of the individual, a concept that lies outside the traditional Western human rights regime.185 The Charter recognizes the role and function of the individual in African society, who both contributes to and is an integral part of that society. Thus, the rights of the individual against the state are balanced by the duties of that individual to society. The Hobbesian view of the individual as the “Lone Ranger” is mitigated under the Banjul Charter by imposing duties and legal responsibilities on that individual. Thus, the Banjul Charter begins to close the gap (perhaps not completely) between the Western, post-Hobbesian capitalist state and the human rights regime that evolved from it and the neo-feudal, proto-capitalist, quasi-modern African society. It articulates a new human rights regime that incorporates multicultural elements of the particular history, sociology, and modern dilemmas of the African individual. Certainly, the Banjul Charter recognizes that the African man and woman on the street may be just as, if not more, interested in the right to work and the right to education as he or she is in political expression and religious freedom. Individual rights and entitlements as expressed in the Charter are, however, balanced by the duties owed by the individual to a much larger context and society of which the individual forms an integral part. The hostility, alienation, and antagonism of the Hobbesian individual in relation to the modern state is thus abated.
4.3.4
The Role of the State
The Banjul Charter also changes the role of the state. The state has many positive duties to perform in ensuring that the economic and social rights of its members are 184 185
Rousseau (1964), p. 183. Umozurike (1983), pp. 902, 907; Gittleman (1984), pp. 154, 155.
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realized. Article 22(2) of the Banjul Charter specifies that the “States shall have the duty, individually and collectively, to ensure the exercise of the right to development.”186 Whereas the state in Western society is admonished from interfering with the political and civic freedoms of an individual, the Banjul Charter views the state in very different terms. In particular, the Charter contains several “clawback” clauses that permit the state to encroach upon certain individual rights and freedoms contained in Part I of the Charter, to the extent permitted under domestic law. Specifically, Article 6 states, in relevant part: “Every individual shall have the right to liberty and to the security of his person. No one may be deprived of his freedom except for reasons and conditions previously laid down by law.”187 A similar provision may be found in Article 5(1) of the European Convention, Article 7(5) of the American Convention, and in Article 9 of the ICCPR.188 However, these Conventions set forth the specific conditions under which such liberties may be denied to the individual, and establish comprehensive procedural safeguards (along the lines of due process) which provide clear restraints on arbitrary government action. The Banjul Charter, in contrast, does not limit the conditions under which liberties may be denied, “except for reasons and conditions previously laid down by law.”189 These reasons and conditions are not discussed or defined. Second, unlike its other human rights instrument counterparts, the Banjul Charter does not provide any procedural safeguards against government abuse. Richard Gittleman suggests that the provisions of the Banjul Charter may be clarified to avoid possible confusion and misinterpretation, “by enumerating a specific list of exceptions to the right to liberty and by setting forth appropriate procedures to be followed.”190 (Article 9 of the ICCPR,191 for example, may provide a model for establishing the types of procedural protections against the arbitrary deprivation of liberty and unwarranted state intrusion onto personal freedoms.) Other examples of clawback clauses include Article 11 of the Banjul Charter, which provides that every individual shall have the right to assemble freely but that the exercise of this right “shall be subject only to necessary restrictions provided for by law in particular those enacted in the interests of national security, the safety, health, ethics, rights and freedoms of others.”192 The scope of this clawback clause and the vagueness of the term “necessary restrictions” does not provide any real restraint on the state from significantly curtailing the right to free assembly or even legislating away certain freedoms associated with it.
186
African (Banjul) Charter on Human and Peoples’ Rights, art. 22(2). Id., art. 6. 188 Gittleman (1984), pp. 158–159, 161–162. 189 African (Banjul) Charter on Human and Peoples’ Rights, art. 6. 190 Gittleman (1984), p. 159. 191 International Covenant on Civil and Political Rights, art. 9. 192 African (Banjul) Charter on Human and Peoples’ Rights, art. 11. 187
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Similarly, Article 14 of the Banjul Charter guarantees the right to property that “may only be encroached upon in the interest of public need or in the general interest of the community and in accordance with the provisions of appropriate laws.”193 There is no specified right to compensation or restitution for property seized or nationalized by the state. Once again, the breadth and the vagueness of this provision may give the state carte blanche in appropriating privately held property and, consequently, seriously compromise the free exercise of this right. Moreover, the Banjul Charter does not contain a derogation clause that would permit the state to “derogate” from its obligations under the Charter.194 A derogation clause permits a right, granted under the Charter, to be temporarily suspended under certain circumstances. For example, Article 15(1) of the European Convention specifies that derogation may occur “in time of war or other public emergency threatening the life of the nation.”195 A derogation clause is thus intended to define the circumstances during which individual rights and liberties may be curtailed (e.g., a national emergency). More important, a derogation clause also specifies which rights are “non-derogable.” These rights may not be infringed upon even in times of national crisis when states are most apt to curtail personal freedoms. The purpose of a derogation clause is quite different from a clawback clause. A derogation clause suspends previously granted rights, whereas, a clawback clause restricts rights from the outset and therefore, is far more discretionary in nature. The inclusion of so many clawback clauses in the Banjul Charter without putting adequate procedural safeguards in place, tends to weaken individual rights while strengthening the power of the state.196 The absence of a derogation clause also means that non-derogable rights are not specified, nor are the conditions under which such rights may be temporarily suspended. Insofar as adequate procedural protections are not established in the Charter, individual liberties may be subordinated to the powers of the state. Very little protection is offered to the individual against arbitrary state action. The patrimonial character of the state is apparent, and the state-centric character of the Banjul Charter has been criticized for this reason. The role of the individual and the state in the Banjul Charter is seen in remarkably different terms. The individual is far more integrated into society and owes certain duties to society. Thus, the Banjul Charter begins to reformulate the Hobbesian world view by moving the individual into a larger context with duties and responsibilities as well as rights and liberties. The adversarial nature of the individual’s relationship to the state is ameliorated by making it more cooperative rather than
193
Id. at art. 14. Umozurike (1983), pp. 909–910. 195 European Convention on Human Rights, art. 15(1). 196 Clawback clauses in the Banjul Charter include art. 6 (right to liberty), art. 8 (freedom of conscience and religion), art. 9 (right to express opinions), art. 10 (right to free association), art. 11. (right to free assembly), art. 12 (right to freedom of movement), art. 13 (right to participate in government), and art. 14 (right to property). See Gittleman (1984), p. 162. 194
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confrontational. The state also has recognized duties towards the individual, family, and community and is accorded far more powers and duties than in traditional human rights regimes. Additionally, the evolution of the right to development from an inalienable human right to a legal right of peoples, not just individuals, is important. The notion of peoples under the Banjul Charter has been expanded beyond the traditional confines of self-determination for oppressed minorities or ethnic groups. Further, the enforcement mechanisms, while flawed, also represent a clear departure from the traditional, adversarial posture of the individual asserting his rights against the state. Although the poor enforcement mechanisms and state-centric nature of the Banjul Charter may jeopardize individual rights by not addressing the potential for state abuse, this need not be an irreparable problem.
4.3.5
Enforcing the Banjul Charter: The African Commission
Finally, the Banjul Charter did not originally establish a human rights court. Unlike the European Court of Human Rights (established under the European Convention) or the Inter-American Court of Human Rights (established by the American Convention), initially there was no African court of human rights. This was the specific intent of the framers who wanted to establish the means for settling disputes or claims through amicable, diplomatic negotiations rather than adversarial court proceedings.197 This reflects the departure of the Banjul Charter from its European and American counterparts insofar as the violation of an individual right by the state does not give rise to a right of action against the state in an adversarial proceeding. Instead, conciliation and bilateral negotiations are stressed as the traditional African means of dispute settlement. Instead, the OAU established an eleven-member commission under Article 64 (1) of the African Charter in 1987. The Commission was established “to promote human and peoples’ rights and ensure their protection in Africa,” as set forth in Art. 30 of the Charter. Further, the Commission was set up to receive communications from member states who believe that a fellow member has violated the provisions of the Charter. The member state whose conduct has been questioned has three months in which to respond to the state expressing such concerns. If bilateral negotiations between the parties fail, the matter is formally referred to the commission. Based on such a communication from the parties, the Commission may make reports and recommendations to the OAU, now AU, Assembly of Heads of State and Government.198 Whereas the courts under the European and American Conventions 197 198
Swanson (1991), p. 330; Umozurike (1983), p. 909. See African (Banjul) Charter on Human and Peoples’ Rights, arts. 47–53.
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can review matters considered by their respective commissions, the AU cannot take any independent action. It may merely request the African Commission to make reports, findings, or recommendations.199 As of June 2018, the African Commission has decided more than 96 cases on the merits. Since the Commission was set up as a quasi-judicial supervisory body rather than an actual court, the findings and recommendations of the Commission are not legally binding as such.200 In cases where violations of the African Charter were found, the Commission listed the articles violated and the party concerned, and also made recommendations. However, the Commission did not establish a follow-up or monitoring system to gauge whether offending states had complied with its recommendations.201 However, the Commission, “can only issue recommendations; it does not have any enforcement mechanisms and cannot order reparation or other compensation payments. In addition, the final report to the state concerned, a copy of which is also provided to the assembly of heads of state and government, is not made public.”202 This omission was addressed, in part, by the establishment of the African Court on Human and Peoples’ Rights, discussed below. Nevertheless, the Commission’s contribution through its body of quasijurisprudence in interpreting Article 22 of the Banjul Charter is notable. For example, in the Endorois case involving the forced removal in the 1970s of the Endorois (a pastoral group) from their ancestral land in order to set up a national game reserve and tourist facilities, the Commission held that the Kenyan Government had violated Art. 22, and stated: the right to development is a two-pronged test, that it is both constitutive and instrumental, or useful as both a means and an end. A violation of either the procedural or substantive element constitutes a violation of the right to development. Fulfilling only one of the two prongs will not satisfy the right to development. The African Commission notes the Complainants’ arguments that recognizing the right to development requires fulfilling five main criteria: it must be equitable, non-discriminatory, participatory, accountable, and transparent, with equity and choice as important, overarching themes in the right to development. Freedom of choice must be present as a part of the right to development.203
In sum, the Banjul Charter represents a philosophical and institutional departure from the legal orthodoxy of other human rights conventions. In fact, the value of the
199
Umozurike (1983), p. 909. Viljoen and Louw (2007), p. 2. This article gives a highly structured analysis of state compliance with Commission recommendations that are divided into five broad categories of full compliance, noncompliance, partial compliance, sui generis compliance or partial compliance, and unclear cases. 201 Id. 202 Zimmerman and Baumler (2010), pp. 38, 49. 203 African Commission on Human and Peoples’ Rights, Case Centre for Minority Rights Development (Kenya) and Minority Rights Group International on behalf of the Endorois Welfare Council v. The Republic of Kenya, Communication No. 276/2003, 25 November 2009, ¶¶ 277–278; see also Arts (2016), p. 245. 200
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Banjul Charter may lie in its distinctly different regional, philosophical, and institutional approach, which may offer important lessons. The Banjul Charter may be the first real evolution towards formulating a new human rights regime in a post-Cold War global world. The fact that the fairly narrow confines of human rights concepts and practice as understood by Western nations are broadened in the Banjul Charter by incorporating multicultural dimensions of the African perspective should be seen as a positive step forward.
4.3.6
African Court on Human and Peoples’ Rights
In light of the positive intent to incorporate a distinctly African view of a human rights regime, the AU established the African Court on Human and Peoples’ Rights. The draft protocol had been under consideration since 1998.204 The Court was established by virtue of Article 1 of the Protocol to the African Charter on Human and Peoples’ Rights on the Establishment of an African Court on Human and Peoples’ Rights (the “Protocol”), which was adopted by Member States of the then Organization of African Unity (OAU) in Ouagadougou, Burkina Faso, in June 1998. The Protocol entered into force on January 1, 2004, upon its ratification by 15 African states. The Court officially started its operations in Addis Ababa, Ethiopia in November 2006, and in August 2007 it moved to its seat to the Arusha International Conference Centre in Arusha, Tanzania. The Court is currently composed of eleven judges who are all nationals of Member States of the African Union. The eleven-judge court is empowered to consider cases submitted by the Commission, AU state members, states against which complaints have been lodged, NGOs with observer status at the AU, and individuals wishing to bring complaints before the Court.205 As at April 2018, the 30 States which have ratified the Protocol are: Algeria, Benin, Burkina Faso, Burundi, Cameroon, Chad, Côte d’Ivoire, Comoros, Congo, Gabon, Gambia, Ghana, Kenya, Libya, Lesotho, Mali, Malawi, Mozambique, Mauritania, Mauritius, Nigeria, Niger, Rwanda, Sahrawi Arab Democratic Republic, South Africa, Senegal, Tanzania, Togo, Tunisia and Uganda. Further, the Court has jurisdiction over all cases and disputes submitted to it concerning the interpretation and application of the African Charter on Human and
204
Arts. 5–7 of the Draft (Nouakchott) Protocol to the African Charter on Human and Peoples’ Rights on the Establishment of an African Court on Human and Peoples’ Rights (OAU/LEG/EXP/ AFCHPR/PROT(2), Second Government Legal Experts Meeting on the Establishment of an African Court on Human and Peoples’ Rights (1997), Nouakchott, Mauritania. 205 Arts. 5–7 of the Draft (Nouakchott) Protocol to the African Charter on Human and Peoples’ Rights on the Establishment of an African Court on Human and Peoples’ Rights (OAU/LEG/EXP/ AFCHPR/PROT(2), Second Government Legal Experts Meeting on the Establishment of an African Court on Human and Peoples’ Rights (1997), Nouakchott, Mauritania.
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Peoples’ Rights, (the Charter), the Protocol and any other relevant human rights instrument ratified by the States concerned. Specifically, the Court has two types of jurisdiction: contentious and advisory.206 However, the Court does not exercise criminal jurisdiction over cases such as crimes against humanity, war crimes, and genocide. Its decisions, once issued, however, are binding, With regard to interpreting the right to development, the Court most notably on May 26, 2017, issued its decision in the expulsion of the Ogiek people, a Kenyan hunter-gatherer community, from their ancestral lands in the Mau forest. As the African Commission on Human and Peoples’ Rights (African Commission) did not settle the conflict, the case was transferred to the African Court in 2012. The Court concurred in principle with the African Commission’s application, and found that the eviction of the Ogiek without consultation resulted in several rights violations, among them being the right to development under Art. 22 of the Banjul Charter. As the respondent, the Kenyan Government’s argument that the eviction was justified by the need to protect the Mau forest was dismissed by the Court.207 In fact, the Court held that the Ogiek people had an affirmative right to development, and that their continuous eviction from the Mau Forest by the Kenyan government without effective consultation “adversely impacted their economic, social and cultural development.” Thus, the Court’s jurisprudence has been both interpreting and enforcing the right to development. Indeed, this particular case illustrates that the Court’s decision, in effect, supported the Commission’s proceedings below. With regard to the relationship of the African Court to the African Commission on Human and Peoples’ Rights overall however, one commentator has noted that, “Pursuant to Article 2 of the Protocol, the ACHPR [African Court] is intended to complement and support the work of the [African] Commission. However, the fact that the ACHPR is not bound by decisions of the Commission and can reach a different decision in the same case indicates that a hierarchical structure in favor of the Commission is by no means intended. The legal policy expectations range from the hopes for intensive cooperation on the one hand, to fears of potential mutual blockades on the other. In contrast to European human rights protection, there have not to date been any efforts to fuse the two institutions.”208 This story is still unfolding as of this writing.
206
See generally, the homepage of the African Court on Human and Peoples’ Rights. African Court on Human and Peoples’ Rights, African Commission on Human and Peoples’ Rights vs. Republic of Kenya, Application No. 006/2012 (May 26, 2017), ¶¶ 208, 210. 208 Zimmerman and Baumler (2010), p. 50. 207
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4 Is There a Human Right to Development?
Prospects for the Right to Development
In light of the preceding discussion, is there a right to development? The sole dissenting vote of the United States in the UN roll call vote for the UNDRD may not be legally sufficient to bar the necessary legal consensus to create a legal norm. Therefore, we may conclude, based on the previous discussion, that technically speaking, a human right to development has been established. Under the African Charter, there is clearly a legal right to development; however, its enforceability is regional in nature, and even that is somewhat questionable. The dissenting vote of the United States, while not dispositive, nevertheless reveals that there are strong reservations to the UNDRD. Thus, universal acceptance of its doctrines is not as yet a fait accompli. Much of the dismay with the right to development centers on its lack of an appropriate legal pedigree. The right to development is often grouped with other “new” human rights (including the right to rest, the right to leisure and even the right to tourism). Such rights are usually met with skepticism since their proliferation diminishes the importance of the human rights regime, distances the possibility of enforcing these purported rights, and trivializes the human dimension in the international dialogue on these issues. There has been some attention given to making the right to development more respectable by rationalizing it after the fact. It has been suggested that new human rights be subject to the following criteria: (1) that the new right be compatible with and not devalue existing rights; (2) that the desired new legal norm cannot be achieved through the progressive realization of existing rights; and (3) that the new right is recognized as being authoritative insofar as it creates an expectation that it will be complied with.209 Philip Alston examines potential legal criteria that may be applied in determining the legitimacy of a proposed new human right, yet concludes in his final analysis that “[t]he application of a formal list of substantive requirements is . . . an unworkable approach. He remarks that “the normative validity of rights recognized by the [UN] General Assembly cannot be made dependent upon their validity in terms of philosophical or any other supposedly ‘objective’ criteria.”210 Further, he recognizes that there are no real safeguards against manipulation or circumvention of such legal criteria by a determined majority of the General Assembly.211 Since there are no effective legal impediments to opening the floodgate to new, yet frivolous human rights, the direction of a new dialogue on human rights is entirely dependent on the integrity, sincerity, and commitment of the individuals and international actors involved in it. After this long digression, we finally return to Jack Donnelly’s question of whether the right to development serves any real purpose. The strength, utility, 209
Alston (1982), pp. 307, 321; Alston (1984), p. 621. Alston (1984), p. 617. 211 Id. at 621. 210
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and purpose of a new right to development may not lie in its practical effectiveness in halting human rights abuses, but in giving a new voice to the concerns and philosophical orientation of non-Western human rights thinkers and activists. The fact that the Banjul Charter, in particular, offers a different, multicultural perspective on the roles of the individual and the state both broadens and deepens this international discourse on the subject. That is not to say that all the legal and philosophical contradictions of the past have been resolved, but the right to development is a significant evolution in this regard. However, notwithstanding the potential contribution that a right to development may make in a new international discourse on human rights, this potential has not been fully achieved. Although adopting a multidimensional approach to international legal questions in a post-Cold War era is necessary to meet the needs of a less polarized, yet more confusing, world, the right to development may need to address both legal and practical concerns in order to achieve its full potential as a “right”. First, by adopting a diffuse approach in setting forth the terms and conditions of a right to development, the right to development ends up being a grab bag for individuals, peoples, and developing states. The right to development loses clarity, precision, and legal discipline in the process of structuring the duties and responsibilities of the international actors in such a diffuse fashion. Thus, any attempt to implement the right to development naturally tends to be a confusing and contradictory exercise, especially since the developing state is both a right-holder and a duty-bearer. Defining the right to development as having both individual and collective aspects is certainly an acceptable starting point; however, further articulation of these different aspects, and the duties and entitlements that stem from them, may help clarify matters. Second, the foundation of the right to development rests on certain “self-evident” propositions. Accepting some of these concepts is quite problematic for some Western states, all of whom are important duty-bearers. In light of the confused antecedents of the right to development, its definition as an inalienable human right as set forth in Article 1 of the UNDRD is problematic even for its supporters.212 The international community, especially Western industrialized states, continues to be unwilling to accept this statement as a self-evident proposition. These nations have not been convinced that the right to development is inalienable in the same fashion as the right to the freedom of expression is considered to be. Notwithstanding the historical and philosophical explanations for this, the UNDRD (as it is currently worded) lacks the power to convince its skeptics. This may be due, in part, to the fact that the inalienable human right to development may be invoked by peoples as well as by developing states.
212
See Draft UN resolution A/C.3/41/L.4 adopting a declaration on the right to development by the Third Committee on November 28, 1986, U.N. Doc. A/C.3/41/SR.61 at 31–32. The delegate from Ireland supported the adoption of the right to development but found that the assertion of the right as an “inalienable human right” to be “unconvincing” in the text as adopted.
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One can appreciate that the proponents of the right to development are undertaking a revolutionary task by attempting to change the frame of reference for a human rights agenda. Shifting the exclusive human rights focus off the individual and onto broader, collective entities is a daunting task indeed. However, the task has not yet been fully accomplished, and many skeptics remain unconvinced that such a shift has adequate legal support within the framework of the UNDRD. Third, another example of the resistance faced by the right to development in achieving full acceptance by the international community is based on NIEO principles that are still highly problematic. As discussed above, the UNDRD cites the NIEO Declaration in its preamble, thereby invoking the NIEO agenda in a new human rights context. The NIEO Declaration is highly controversial, if not a failed agenda, particularly with regard to its provisions requiring preferential and non-reciprocal treatment of developing states, promoting technology transfers to developing countries, and making development assistance available without conditioning such assistance on political or military reforms. Again, it is highly unlikely that the nexus between an NIEO approach to development and a human right to development will be accepted as a self-evident proposition by Western, industrialized countries. This is not to say that the NIEO Declaration is irremediably flawed at the outset, or that it lacks relevancy in the context of development. However, what is clear is that developing countries have not made a compelling case for the acceptance of NIEO principles, nor has its relationship to the UNDRD been made in a convincing manner. However, perhaps the Monterrey Consensus is a step in the right direction, as discussed earlier.
4.5
Conclusion
The twenty-first century has ushered in a new millennium that is full of boundless possibilities for new actors in the developing world who may now engage in a dialogue on the right to development. The opportunity for changing the conversation on the subject of human rights and development is becoming manifest daily. Developing countries are becoming more politically powerful as they become more economically powerful, as China’s example amply demonstrates. Rather than walking away from the right to development based on an outdated and polemical stance, developing countries can now actively change the nature of the dialogue and, indeed, they must change it if this new international legal right is to be given real meaning. Perhaps the developing world has both time and history on its side in this regard. A more practical concern is, of course, whether the right to development will have any impact in the real world, particularly in the world of intractable poverty where most individuals who may seek to exert that right actually live. The enforceability of the right to development, as discussed earlier, remains somewhat uneven. Even if the African Commission’s approach under the Banjul Charter is adopted so that the right to development is enforced through consensual rather than litigious means, the method for doing so may be problematic as African Union states are beginning to
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realize. However, new jurisprudence from the African Court on Human and Peoples’ Rights is a significant movement forward in both clarifying the definition of and the means for enforcing the right to development. Merely adopting a legal right to development, of course, does not mean that actual development will occur for an individual or a state. Achieving the promise of development is far more than a legal or human right can, in practical terms, confer. It is a means, however, of moving the discourse between the developed and the developing world forward. The pluralist approach and the non-Western orientation of the right to development is a noteworthy element in a legal evolution that has just begun in earnest. Insofar as the dialogue continues in a principled manner and within a legitimate legal framework, the right to development continues to have something new and important to offer.
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Cassesse A (1992) The general assembly: historical perspective 1945–1989. In: Alston P (ed) The United Nations and Human Rights: a critical appraisal, vol 25. Clarendon Paperbacks, p 31 Charlesworth H, Chinkin C (1993) The gender of jus cogens. Hum Rights Q 15:63, 64–65 Cobbah J (1987) African values and the human rights debate: an African perspective. Hum Rights Q 9:309, 323 Cooper E (1996) Comment on ‘transitional constitutionalism’: politics and law in Russia since 1993. Wis Int Law J 14:531, 540 Cossman B (1991) Reform, revolution or retrenchment? International human rights in the post-cold war era. Hum Int Law J 32:339, 345 Darrow M, Arbour L (2009) The pillar of glass: human rights in the development operations of the United Nations. Am J Int Law 103:446 de Vey Mestdagh K (1981) The right to development. Sijthoff & Norordhoff International Publishers Dennis M, Stewart D (2004) Justiciability of economic, social and cultural rights: should there by an international complaints mechanism to adjudicate the rights to food, water, housing and health? ASIL 98 Donnelly J (1984) The ‘right to development’: how not to link human rights and development. In: Welch C, Meltzer R (eds) Human rights and development in Africa. SUNY Press, pp 261–262 Donnelly J (1985) In search of the unicorn: the jurisprudence and politics of the right to development. Calif West Int Law J 15:473, 474 Donnelly J (1990) Human rights and western liberalism. In: An-Na’im A, Deng F (eds) Human rights in Africa: cross-cultural perspectives. Brookings Institute, p 31 Ellis M (1985) The new international economic order and general assembly resolutions: the debate over the legal effects of general assembly resolutions revisited. Calif West Int Law J 15:647, 652–653 Espiell HG (1981) The right of development as a human right. Tex Int Law J 16:189, 192 Falk R (1966) On the quasi-legislative competence of the general assembly. Am J Int Law 60:782 Gittleman R (1984) The Banjul Charter on Human and Peoples’ Rights: a legal analysis. In: Welch C, Meltzer R (eds) Human rights and development in Africa. SUNY Press Gunther K (1992) The domestic policy function of a right of peoples to development: popular participation a new hope for development and a challenge for the discipline. In: Chowdhury SR, Denters E, de Waart P (eds) The right to development in international law. Kluwer Law International, pp 61, 78 Haque I, Burdescu R (2004) Monterrey consensus on financing for development: response sought from international economic law. Boston Coll Int Comp Law Rev 27:219, 243 Hill M (1995) What the principle of self-determination means today. ILSA J Int Comp Law 1:119, 121 Hodgson D (2003) Individual duty within a human rights discourse. Ashgate Publishing, pp 15–16 Humphrey (1973) The international law of human rights in the middle of the twentieth century. In: Bos M (ed) The present state of international law. Kluwer Kiwanuka R (1988) The meaning of ‘people’ in the African Charter on Human and Peoples’ Rights. Am J Int Law 82:80, 81 Knox J (2008) Horizontal human rights law. ASIL 102:1 Knox J (2015) Human rights, environmental protection and the sustainable development goals. Wash Int Law J 24:517 Kunig P (1982) The protection of human rights by international law in Africa. German Yearb Int Law 25:138, 156–159 Kunz J (1953) The nature of customary international law. Am J Int Law 47:662, 665, 667 Laplante L (2007) On the indivisibility of rights: truth commissions, reparations and the right to development. Yale Hum Rights Dev Law J 10:141, 151 Lauterpacht H (1950) International law and human rights. Shoe String Press Lauterpacht H (1958) The development of international law by the international court. Frederick A. Prager, p 191
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Leube K (2017) Can the European Union be held accountable for financing development projects that violate human rights? Geo J Int Law 48:1243 Lillich RB, Newman (1979) International human rights. Scott Foresman Locke J (1952) An essay concerning the true original extent and end of civil government. In: Hutchins R (ed) Great books of the western world, vol 35. Encyclopedia Britannica, pp 61, 55–58 Locke J (1988) In: Laslett P (ed) Two treatises of government. Cambridge University Press M’Baye K (1972) Le Droit au Developpement comme un droit de l’Homme. Revue Des Droits de L’Homme 5:503, 505 MacNaughton G (2015) Human rights education for all: a proposal for the post-2015 development agenda. Wash Int Law J 23:537 Magraw DB (1990) Legal treatment of developing countries: differential, contextual, and absolute norms. Colo J Int Environ Law Policy 1:69, 73 Marks S (1981) Emerging human rights: a new generation for the 1980’s? Rutgers Law Rev 33:435, 441 Morgan-Foster J (2005) Third generation rights: what Islamic law can teach the international human rights movement. Yale Hum Rights Dev Law J 8:67, 72 Mutua MW (1995) The Banjul Charter and the African cultural fingerprint: an evaluation of the language of duties. Va J Int Law 35:339, 342 Mutua MW (1996) The ideology of human rights. Va J Int Law 36:589 Nanda V (1985) The right to development under international law-challenges ahead. Calif West Int Law J 15:431, 436 Norberg N (2006) The US Supreme Court affirms the Filartiga paradigm. J Int Crim Just 4:387 Olawuyi D (2015) The emergence of a rights-based approach to governance in Africa: false start or new dawn? Sustain Dev Law Policy 15:13 Olowu D (2004) Human development challenges in Africa: a rights based approach. San Diego Int Law J 50:179, 188 Paul J (1995) The United Nations and the creation of an international law of development. Harv Int Law J 36:307 Peter Mutharika A (1995) The role of international law in the twenty-first century: an African perspective. Fordham Int Law J 18:1706, 1717 Rajagopal B (1993) Crossing the Rubicon: synthesizing the soft international law of the IMF and human rights. Boston Univ Int Law J 11:81, 95 Rousseau JJ (1964) The social contract. In: Hirschfeld C (ed) Classics of western thought 111. Harcourt Brace Jovanovich, Inc., p 183 Schachter O (1985) International law in theory and practice: general course in public international law. Martinus Nijhoff Sen A (1999) Development as freedom. Alfred A. Knopf, p 8 Seppänen S (2017) From substance to absence: argumentative strategies in the implementation of the human rights-based approaches to development. N Y Univ J Int Law Policy 49:389 Sha Alam M (2001) Enforcement of international human rights law by domestic courts in the United States. Ann Surv Int Comp Law 10:27, 30 Shelbourne D (2001) The principle of duty: an. essay on the foundations of the civic order. SinclairStevenson, p 11 Shelton D (2006) Normative hierarchy in international law. Am J Int Law 100:291, 297 Simma B, Alston P (1992) The sources of human rights law: custom, jus cogens, and general principles. Aust Yearb Int Law 12:82, 88 Simpson G (1996) The diffusion of sovereignty: self-determination in the postcolonial age. Stan J Int Law 32:255, 256, 268–269 Sohn L (1978) The shaping of international law. Ga J Int Comp Law 8:1 Sohn L (1982) The new international law: protection of the rights of individuals rather than states. Am Univ Law Rev 32:1, 48
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Swanson J (1991) The emergence of new rights in the African Charter. N Y Law School J Int Comp Law 12:307 Totaro M (2008) Legal positivism, constructivism, and international human rights law: the case of participatory development. Va J Int Law 48:714, 737 Umozurike UO (1983) The African Charter on Human and Peoples’ Rights. Am J Int Law 77:902, 907 Uriz G (2001) To lend or not to lend: oil, human rights and the world bank’s internal contradictions. Harv Hum Rights J 14:197 Vasak K (1977) A 30-year struggle. UNESCO Courier. November, p 29 Vierdag EW (1978) The legal nature of rights granted by the international covenant on economic, social and cultural rights. Neth Yearb Int Law 9:69 Viljoen F, Louw L (2007) State compliance with the recommendations of the African Commission on Human and Peoples’ Rights, 1994–2004. Am J Int Law 101:2 Welch C Jr (1992) The African Commission on Human and Peoples’ Rights: a five-year report and assessment. Hum Rights Q 14:43, 60 Wilson J (1996) Ethnic groups and the right to self-determination. Conn J Int Law 11:433, 460 Young-Anawaty A (1980) Human rights and the ACP-EEC Lomé II Convention: business as usual at the EEC. N Y Univ J Int Law Policy 13:63 Zimmerman A, Baumler J (2010) Current challenges facing the African Court on Human and Peoples’ Rights. KAS Int Rep 7:38, 49
Part II
International Financial Architecture
Chapter 5
Sovereign Borrowing and Debt: Legal Implications
The following discussion of the international financial architecture explores four separate areas of international finance that are fundamentally interconnected: international borrowing practices, privatization, emerging capital economies, and the corruption of international capital markets. Considered together, these are the fundamental aspects of the underlying international financial architecture that supports (and undercuts) the development process globally. From a larger perspective, this part of the text is also dedicated to the idea of structural legal reform. Accordingly, this section focuses on global finance and the underlying legal structures that support it (or not, as the case may be). Changes in the legal architecture greatly affect the process and potential success of development, and the state plays a pivotal role in this. The successes or shortfalls in the underlying legal architecture supporting the financing of development will emphasize investment rather than trade. While trade forms a large part of this examination the subject, it has been omitted in the interests of brevity, clarity and in hopes that this text will be supplemented, as necessary, by the reader to account for this gap. As a further caveat, the domain of international arbitration and litigation, while integral to a discussion of this nature has also been omitted again, in hopes that narrowing the focus of this discussion will make it more succinct and therefore, more useful in the long run. The wealth of legal texts and related materials on international arbitration, including those examining investmentrelated arbitration in depth, greatly supplement this discussion. The key elements of a new international financial architecture have been described as transparency, crisis prevention, freedom of capital flows, global standards, and a code of practice.1 But how is this new financial architecture to be put in Michel Camdessus, “Stable and Efficient Financial Systems for the 21st Century: A Quest for Transparency and Standards,” Address at the IOSCO Annual Meeting (May 1999); see also Sheng (1999), pp. 855, 857; OECD, “Reports on the International Financial Architecture” (October 1998), wherein G-7 countries agreed in principle in 1998, particularly in response to the Asian financial
1
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2020 R. Sarkar, International Development Law, https://doi.org/10.1007/978-3-030-40071-2_5
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place, and what is the role of developing countries in this process? In order to respond to some of these questions, this Second Part on the International Financial Architecture is divided into an examination of sovereign borrowing practices, privitization, emerging capital markets, and corruption. Chapter 5 addresses sovereign borrowing practices and the resulting international debt crisis. The strategies and specific tactics of resolving the debt overhang of the developing world, a critical impediment to long-term development, is analyzed along with future prescriptions for debt relief. In particular, this analysis will focus on the dilemmas of development of emerging countries that are not able to fully access global markets and thus, remain dependent on international financial assistance. Chapter 6 reviews recent trends in privatization. Removing the state from productive sectors of the economy has been a key strategy for development during the past several decades. The implications of changing the state’s role from being a provider of basic goods and services to that of being a regulator of the economy is also discussed. Additionally, the manner in which privatizations are being accomplished also provides valuable insights into what strategies are working, for whom, and why. Innovative techniques for small and large-scale privatizations will be also addressed in this context. Further, strengthening the private sector in developing countries and creating new capital markets is explored in Chap. 7. Many transitional economies and emerging capital markets that are nearing graduation to becoming emerging nations, are rethinking strategies for financing their development needs. These countries with proven economic track records are beginning to rely more heavily on private capital markets, but unexpected impediments to full integration into private capital markets are explored in this context. Finally, corruption and its consequences are explored in Chap. 8. The nexus of corruption to International Development Law (IDL) is primarily through the collapse of failed and failing states which create a (perceived) safe harbor for all manner of illicit activities, free from government interference or disruption. This is the fertile ground in which corruption unfolds and thrives, unchecked and unpunished, particularly in ungoverned territories like parts of the Maghreb in Saharan Africa, and other places. Corruption as a structural impediment to economic development is explored with three different facets in mind: (1) the impact of transnational organized crime (TOC); (2) the impact of financing terrorism, with particular regard to Islamic-based terrorism, and its convergence, in some cases with TOC; and (3) corruption by host country government officials generally, along with public and private banking officials specifically. This vicious circle of corruption will be explored along with crisis, by: (1) enhancing transparency and accountability; (2) strengthening domestic financial systems; and (3) managing international financial crises. For a fuller discussion on the underlying philosophical principles and legal implications of moving from a state-ordered system of global economic relations to a private, contractually ordered one and its impact on indigenous legal systems, see generally, Salacuse (1999), p. 875.
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anti-corruption measures undertaken on an international, regional and bilateral scale by state actors and international financial institutions (IFIs). In sum, this text is intended to provide the reader with an overall view of key developments in financial sector reform, particularly as such reforms have influenced legal changes in developing countries and transitional economies. Indeed, the importance of the underlying international financial architecture cannot be underestimated in terms of integrating developing nations into a global economy, and providing for their sustained and sustainable economic success.
5.1
International Financial Architecture
Now that we have established the context of why the international financial architecture is critically important to the development equation overall, let us now turn to the specific elements comprising it. At the outset, it is important to define the critical functions of a financial system which are comprised of four separate but interrelated elements: • Mobilizing savings into productive investments; • Allocating capital (presumably to profit-making enterprises); • Monitoring the use of financial resources so that economic growth and benefits are captured; and, • Reallocating financial and market risks to parties best able to bear them.2 While studies suggest that overall financial market development tends to accelerate economic growth, and that financial markets become more market-oriented as they increase their market volume,3 for most lawyers, this observation is not a particularly useful starting point. The following description may prove more useful. Preconditions for financial sector development and economic growth rest on three pillars: the first, institutional and legal; the second, largely legal; and the third, largely related to policy and implementing institutions. First, a market economy and a market-based financial system cannot exist if certain legal and institutional supports are not in place, namely a system of governance which establishes property rights and enforcement of contracts. It is also important to provide for the development of human capital; this has special connotations for the financial sector. On the basis of these institutional foundations, for a modern marketbased financial system to function, a number of legal underpinnings must be available, including the means to use property rights for finance (such as collateral and leasing), law supporting companies or corporations (“company law”), and a supportive fiscal system. To
2 Patrick Honohan, “Financial Development, Growth and Poverty: How Close Are the Links?” World Bank Policy Research Working Paper 3203 (2004), p. 9. See generally, Sudreau and Bohoslavsky (2015), p. 613, assessing in part the need for stakeholder participation on sovereign borrowing transactions. Further, the continuity of sovereign debt obligations from one ruling party to the next also poses a legal and political conundrum for many developing countries. See e.g., Weidemaier and Gulati (2015), p. 395. 3 Demirg-Kunt and Levine (2001), pp. 11–12.
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support effectiveness, in addition to enforcement of contracts, the governance system should also provide a wider system of the rule of law. Third, a financial sector functions best in the context of an appropriate institutional framework for financial and macroeconomic policy directed towards financial and macroeconomic stability. . . Policy choices, while largely outside legal and institutional concern[s], operate best in the context of an appropriately designed and transparent institutional framework.4
With this somewhat broader and more expansive starting point, it becomes clear that a principal cause of underdevelopment is the lack of access to capital by developing countries.5 Whereas the industrialized nations have mobilized capital savings and investments over the course of centuries, the picture has been very different for developing countries.6 In particular, during the course of colonial and post-colonial relations, profits generally have not been reinvested in developing country enterprises (except in support of transportation and communication networks to facilitate the export of raw materials or finished goods), nor have profits been returned to local investors as dividends. Instead, profits have generally been expatriated to private investors in European nations during the colonial and postcolonial eras. The generic failure to reinvest profits in strategic sectors in developing country economies has resulted in the severe undercapitalization of developing country enterprises. Moreover, the failure to fully incorporate developing economies into the international monetary system has skewed their incipient financial markets. Capital accumulation is very difficult to accomplish in cash-poor economies. This is particularly true in developing economies that produce largely agricultural and other basic commodities and raw materials. Global prices for such commodities are often set at artificial, non-market rates or sold at devalued prices in inelastic world markets. Thus, there is little opportunity for developing countries that produce exportable raw materials and other goods to generate foreign exchange (i.e., hard currency). Moreover, since much of the industrial manufacturing has been done in the North, little emphasis, if any, has been placed on generating value-added commodities in the resource-rich, but technology-poor, South.7 What little cash and foreign exchange may be available in cash-depleted developing economies is generally used to pay for imported goods in order to meet basic needs, and for external debt servicing. (This will be contrasted with the commodities boom experienced in certain developing countries later in the text.) Since there has been little capital accumulation, there has been very little capital mobilization of individual savings in most developing countries. In light of the fact that capital markets are underdeveloped, or non-existent, in most developing countries, stock market investment initially had not generally been available as an option of creating capital wealth. 4
Arner (2007), p. 91. Boyd (1988), pp. 461, 464. 6 Certain scholars, such as Andre Gunder Frank and other dependency theorists, argue that many developing economies were drained of capital during the colonial era. See Frank and Cockcroft (1972). See also Sweezy (1942). 7 For this type of analysis, see e.g., Frank (1967). 5
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Yet, developing countries need large amounts of capital investment to finance undertakings that should eventually lead to the production of exportable goods generating hard currency earnings. Since indigenous capital mobilization is so difficult, developing countries have had no other option but to attract capital investment from industrialized nations. Developing nations have several options for doing so, including: (1) negotiating for foreign aid on a grant basis; (2) borrowing from official sources such as multilateral organizations (such as the World Bank), or borrowing from bilateral donors (such as the United States, the United Kingdom, or France)8; (3) negotiating loans from private commercial banking sources (such as Citicorp); (4) attracting foreign direct investment (FDI); or (5) attracting foreign portfolio investment (FPI) in the form of foreign equity investments (e.g., shares in mutual funds or direct equity holdings in private companies in the developing country).9 Since infrastructure development projects often have such heavy capital investment needs, the option of using foreign aid is not an attractive one. Foreign assistance tends to make small amounts of heavily conditioned aid available for jointly agreed-upon uses. Moreover, much of the assistance tends to be programmed for making technical assistance, rather than unrestricted sources of capital, available to the developing country in question. Foreign direct investment is a desirable form of investment principally because it establishes a medium-to-long term relationship between the investor and the developing country. In fact, FDI may be catalytic in improving the marketability of the sector and country involved. However, this form of investment involves close supervision and oversight from private entrepreneurs and financiers from industrialized countries. In addition, FDI is often resisted by many developing countries on political grounds. For many developing countries, the politics of making their financial dealings and accounts accessible to foreign investors is too risky a proposition, both financially and politically. In fact, rather than opening their economies to foreign investors, many developing countries instituted protectionist policies to shield their economies from outside access from the 1950s through the 1970s. Indeed, many Latin American and other developing countries reformulated their development strategies to follow the reasoning set forth by structuralist thinker, Raúl Prebisch.10 Prebisch argued that developing countries mainly produced and exported raw materials and unprocessed commodities, and that the prices of such commodities were artificially depressed or devalued on world commodities markets. Therefore, developing countries’ economies tended to deteriorate over time. Prebisch argued that the world “free trade”
8
For a fuller discussion of borrowing from official lending sources, see generally, Sarkar (2003), Chapter 4, “Mobilization of International Capital: Multilateral and Bilateral Sources of Financing.” 9 Boyd (1988), p. 465. 10 Id. at 466. See also Prebisch (1971); Jova (1975), p. 455.
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system was inherently biased against the developing world and contributed in a systemic way to perpetuating its underdevelopment. Following this logic, many Latin American countries such as Argentina, Brazil, Colombia, and Peru, for example, developed import substitution and other protectionist policies throughout the 1970s. These and other developing countries, including India and South Korea, imposed stiff trade barriers and tariffs in order to protect and cultivate their infant industries and compete with industrialized nations.11 (Of course, Japan had followed this course of action several decades earlier with extremely successful results.) In addition, many formerly foreign-owned industries were nationalized by developing countries following their independence. In spite of these policies and the distrust or unease that many developing countries may have felt with direct foreign investment, FDI nevertheless was the dominant form of transferring capital between industrialized nations and developing countries during the 1950s and 1960s.12 However, an abrupt change in lending patterns followed the 1973 oil shock.
5.2
The Sovereign Debt Crisis
The foregoing discussion sets the stage to a remarkable series of events that began with oil revenues collected in the 1970s. The Organization of Petroleum Exporting Countries (OPEC), principally composed of Arab oil-exporting nations, earned much of its cash revenues in U.S. dollars, which were deposited in dollardenominated “petrodollars” in U.S. or European commercial banks. The hike in oil prices in 1973 consequently generated a glut of hard currency reserves that were deposited by OPEC nations in international commercial banks. These banks, in turn, were forced to seek borrowers who would pay interest on loans. This would enable these commercial banks to profit from this sudden excess liquidity. Although private commercial banks had been wary of lending to the developing world, the 1973 oil shock forced them to reevaluate their portfolios. Commercial banks began to seriously look at developing countries as potential borrowers, especially since they believed that such sovereign borrowers could never be bankrupted.13 Moreover, recycling petrodollars in the global economy by lending to sovereign borrowers in the developing world eased the recessionary conditions of the West that were caused, in part, by the 1973 oil shock.14 Additionally, syndication fees in multilender sovereign loans accrued as an immediate profit to the lead bank in the loan
11
Boyd (1988), p. 496 n. 23. See also Prebisch (1971); Jova (1975), p. 455. Boyd (1988), pp. 466, 467. 13 Id. See also Santos (1991), pp. 66, 73; Carrasco and Thomas (1996), pp. 539, 550. 14 Boyd (1988), pp. 467, 468. 12
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syndication, further enhancing the attractiveness of making sovereign loans.15 By 1976, foreign direct investment had shrunk to 20% of net capital inflows going to developing countries. In the same period, commercial lending outstripped official aid sources as the principal means of funding development.16 Further, in an effort to combat the inflationary effects of rising oil (and other commodity prices), the U.S. Federal Reserve Board raised real interest rates in the United States. This had a two-pronged effect: first, it made U.S. dollar deposits more attractive, thereby exacerbating capital flight from the developing world. Second, the cost of servicing commercial loans that charged floating interest rates increased substantially, since the value of the U.S. dollar increased rapidly.17 Since the commercial loans to developing countries were made on “hard,” market-based terms rather than on “soft” or concessionary terms, the interest rates and maturity lengths of commercial loans were negotiated at market rates. Thus, interest payments on these commercial loans increased exponentially as a result of the U.S. interestrate hike. Although oil prices did drop in response to the worldwide recession and the dwindling demand for oil, that did not improve the economic condition of oil-importing developing countries. As a result of the recession, the demand for developing country exports fell correspondingly, cutting off potential revenue sources for these countries.18 Moreover, the drop in oil prices adversely affected oil-exporting countries such as Nigeria, Mexico, and Venezuela who lost an important source of hard currency earnings with which to service their debt.19 Although the debt crisis of the 1980s was caused by a number of significant, external economic factors, it was also precipitated by a failure of bank regulation in industrialized countries as well as the short-sighted uses of commercial loan proceeds by developing countries. First, commercial banks in industrialized countries relaxed their lending standards since they were under the mistaken impression that, should debt servicing problems arise, the central banks of the sovereign borrowers would make up for any shortfall. In other words, commercial bank lenders believed that it was impossible for sovereign borrowers to default on their loans.20 Further, by paying little attention to their overall loan exposure and the risks involved in lending to developing countries, commercial lenders simply recycled petrodollars. Commercial banks later realized that their failure to exercise adequate 15
Santos (1991), p. 73. World Bank, World Development Report (1988) at 27–29. See also Carrasco and Thomas (1996), p. 550. 17 Santos (1991), pp. 72–73. See also Carrasco and Thomas (1996), p. 551. 18 MacMillan (1995a), pp. 305, 311; see also Tanzi (1986), pp. 88–90. 19 Boyd (1988), p. 472. 20 Id. at 469. See also Buchheit and Reisner (1988), pp. 493, 496, n. 6. The authors point out that the lack of information concerning sovereign borrowers that may be available to commercial lenders contributed to the debt servicing problem. In other words, it was nearly impossible for commercial lenders to gauge whether sovereign borrowers had become overextended without knowing how much credit other banks had extended to the debtor country or to its public enterprises. 16
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supervision over the use of these funds for sovereign lending purposes was a mistake. Supervised lending based on conditionality, which required developing countries to meet specific economic targets and institute policy-based reforms, was a duty delegated to the IMF.21 This soon led to a vicious cycle of unrestricted commercial lending followed by painful periods of structural adjustment imposed by the IMF. Throughout the 1980s, many developing countries relied heavily on foreign commercial loans to meet their domestic import demands, especially for oil and other hard currency based imports. Rather than using the loan proceeds strategically to support export industries, much of the loan proceeds were devoted to inefficient state-owned enterprises (SOEs). These SOEs failed to generate profits domestically or abroad, further increasing the reliance on foreign imports by developing countries.22 This led to disastrous consequences since paying for imports and meeting increased debt servicing obligations drained sovereign debtors of their foreign exchange reserves. These reserves were, in fact, desperately needed for investment in strategic, export-oriented sectors of developing country’s economies. Investing in capital equipment and technology in critical sectors could have boosted exports, thereby strengthening these economies. Soon, developing nations were faced with a crushing burden of external debt, overvalued currencies, inflationary conditions (as well as severe fiscal deficits), rising real interest rates, and domestic capital flight. These conditions were compounded by the belt-tightening policies of industrialized nations, who reacted to the recession by cutting down on foreign imports. Thus, dwindling exports in a recessionary world market left developing countries with fewer foreign exchange reserves to meet their debt servicing requirements.23 Certainly, there was enough blame to go around, for reasons ranging from adverse external economic conditions to quick profit-making without adequate bank regulation and the short-sighted use of commercial loan proceeds by developing countries. However, commercial creditors are not all to blame. The developing world’s (particularly Latin America’s) heavy dependence on foreign capital to finance imports, rather than expanding export-oriented industries, also led to a critical shortfall in foreign exchange with which to service debt obligations.24 The
Lichtenstein (1994), pp. 1943, 1947, writes that: “The [International Monetary] Fund is an exemplar of the theory of familial relations called ‘tough love.’ The Fund will promise the availability of funds, but the applicant country must demonstrate that it will embark on policies that, in the Fund’s view, will enable the applicant country to repay the borrowing as soon as possible. Moreover, the Fund has sought to enforce the applicant’s adherence to the agreed-upon economic policies by dribbling out its loans.” 22 Santos (1991), p. 74. 23 See Asherman (1984), p. 235. 24 Commercial borrowing by developing countries during this time frame was a window of opportunity in terms of unprecedented access to international lenders. Essentially, the loans did not prescribe the uses the loan should be applied to. In other words, there was no conditionality attached. Rather than being used to invest in capital improvements in export-oriented industries, 21
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“perfect storm” of internal and external factors contributed to the impending crisis and, by 1982, the debt crisis was in full swing.
5.3
The Mexican Debt Crisis: Phase I
The following lengthy discussion will describe the disparate elements constituting what is now known as the Mexican debt crisis. This example is chosen partly because it is so well-documented, but also because it illustrates several of the underlying issues in relation to the debt overhang faced by many emerging economies, and the debt reduction strategies that were developed in response to it. Additionally, the follow-on debt crises in Asia and Russia are also discussed. The last financial crisis, as of this writing, took place in 2008–2009, and originated in the United States and is also addressed later in the text. Indeed, the Mexican example and the follow-on case studies are particularity insightful in this context. As the following discussion will illustrate, Mexico faced the “perfect storm” of a boom-and-bust cycle of oil exports, over reliance on external borrowing, expending available foreign exchange reserves, a currency devaluation, political assassination, and excessive reliance on foreign portfolio investment.25 Despite all of these precipitating factors, Mexico made a remarkable recovery by issuing floating rate bonds, and repaying its debt. The Mexican case study was regrettably followed by yet another financial crisis, this time originating in Asia. An examination in to the phenomenon of financial contagion, and final perspectives on the sovereign debt crisis concludes this discussion. The sovereign debt crisis formally began on August 22, 1982, when Mexico declared a moratorium on its debt repayments and announced that it could no longer service its external debt.26 Mexico’s external debt exceeded US$80 billion, over 30% of which was due in 1982. Moreover, Mexico had exhausted its foreign exchange reserves. Thus, Mexico informed the International Monetary Fund (IMF), the U.S. Secretary of the Treasury, and the U.S. chairman of the Federal Reserve Board that it could no longer service its external debt.27 (This was the first domino to fall in a debt crisis of enormous proportions. Brazil, Venezuela, Argentina, the Philippines, and Chile followed in short order with similar debt crises.28)
much of the loan proceeds were used to pay deficit accounts of non-performing SOEs. In Mexico’s case, almost half of the funds borrowed in 1981 were expatriated abroad, rather than invested in-country. See Asherman (1984), p. 297, who concludes that, “on the whole, however, the developing nations invested their borrowings in growth oriented industries.” 25 See generally, Head (2010), pp. 43, 80–81, 84–86. 26 Buchheit (1990a), Santos (1991), Buchheit and Reisner (1988), p. 493, at 66; see also Carrasco and Thomas (1996), p. 551; Schirano (1985), pp. 17, 20. See generally Arner (2007), pp. 63–69. 27 Cohen (1988), pp. 86, 94–95. 28 Carrasco and Thomas (1996), pp. 551, 571–572; see also Buchheit (1992a), p. 11. By July 1983, more than forty countries had applied for debt reschedulings. Asherman (1984), p. 295.
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Mexico undertook painful structural adjustment measures which created a decline in real wages, increased unemployment, and slowed economic growth.29 Mexico began dismantling its protectionist policies of imposing tariffs and import restrictions, to bolster the growth of incipient domestic industries. Between 1982 and 1987, the Mexican government devalued the peso, liberalized trade and investment under the North American Free Trade Agreement (NAFTA), relaxed exchange controls, and began privatizing SOEs, including commercial banks.30 As we will see later, these stopgap measures staved off the first financial crisis for Mexico but future financial woes loomed on the horizon. As the previous discussion sets forth, the conditions that precipitated the debt crisis are fairly simple to understand, although the ramifications are complex. Sovereign debt problems were initially handled on a case-by-case basis by commercial bank lenders and the IMF. During the initial phase of the sovereign debt crisis from 1982 to 1985, the United States did not formulate an official debt policy, relying instead on commercial bank creditors and the IMF to resolve the crisis on an ad hoc basis.31 The inadequacy of this initial response contributed to the subsequent 1994–1995 Mexican debt crisis which ultimately necessitated a US$50.8 billion bail-out package by the U.S. government. From 1982 to 1985, the immediate response to the sovereign debt crisis was to impose a policy of containment32 which had three separate components: (1) rescheduling the debt owed and overdue; (2) commercial lending of “new money” loans; and (3) imposing IMF structural adjustment programs. The containment policy allowed debtor countries to continue to service their external debt but had a slightly panicked edge to it since U.S. and European commercial banks were dangerously overexposed in their sovereign borrower debt portfolio. The first priority, therefore, was to avoid an international banking collapse.
5.3.1
Debt Rescheduling
A sovereign debt crisis is created when the net inflow of foreign exchange is insufficient to meet a country’s external debt load. Generally, this liquidity crisis ends when foreign exchange inflows are sufficient to meet external debt obligations through such means as rescheduling or forgiving certain debt obligations, reducing imports and stimulating exports, or further borrowing from foreign sources.33
29
Lovett (1996), pp. 143, 148. Carrasco and Thomas (1996), p. 558. 31 Power (1996), pp. 2701, 2709 [hereinafter “Sovereign Debt”]. 32 Boyd (1988), pp. 475–476. 33 Buchheit (1988a), p. 401. 30
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In the initial stages, the sovereign debt crisis was regarded as a liquidity crisis rather than an insolvency crisis.34 In other words, the debt crisis was seen as being a short-term cash shortage that would be remedied through fast-paced economic growth. Increased exports would generate the foreign exchange needed to allow debtor countries to resume their loan repayments. No one anticipated that such economic growth would stall indefinitely in some cases, or not materialize at all in others. When a sovereign debtor is unable to meet its debt servicing requirements, the potential default on the underlying loan affects all syndicated lenders. (Syndication simply means that several private commercial bank creditors have lent their funds to one borrower through a single loan document.) In cases where a loan default is imminent, the debtor country usually approaches the lead bank (usually with the participation of the IMF, the implications of which will be explored later) to help renegotiate the terms of the syndicated loan in question.35 The syndicated banks form a steering or advisory committee, generally composed of ten to fourteen banks, to renegotiate the terms of repayment of the original loan instrument. Pari passu clauses, which may appear in the original debt instrument, ensure that all creditors are treated equally.36 However, the number of parties involved in rescheduling sovereign debt can be unmanageable for large loan syndications. For example, in the case of its 1982 debt crisis, Mexico had more than five hundred commercial lenders of record.37 In the initial stage of the debt crisis, commercial banks rescheduled loans with maturity dates falling due within 1 year, which meant that rescheduling took place every year. It quickly became clear, however, that the debt crisis would not be resolved within a year or two, so multi-year rescheduling agreements were entered into. The first such agreement was negotiated with Mexico whose external public sector debt with maturities of up to 5 years was rescheduled over a period of 14 years. Parallel restructuring agreements were concluded for each underlying syndicated loan, but all the parallel agreements may have been contained in a single document.38 34
MacMillan (1995a), p. 322. For a fuller discussion of a private commercial debt work-out, see Sarkar (2003), pp. 197–200. 36 Boyd (1988), p. 507. Pari passu clauses simply ensure that all creditors will be treated equally and ratably in the event that the loan is paid by the debtor. In other words, the repayment will be equally shared by all the syndicated lenders in accordance with the percentage of the loan made by each individual lender. Other clauses that may appear in the original debt instrument also ensure the equal and fair treatment among the lenders, and may include such provisions as: (1) sharing clauses (all creditors share the funds originating from repayment, set-offs, or secured interests); (2) mandatory prepayment clause (each creditor is entitled to a rateable portion of a prepayment of a loan that is paid earlier than contemplated by the loan or rescheduling agreement); (3) cross-default clause (a default of the instant loan agreement may be called if the debtor defaults on another loan to a third party); and, (4) negative pledge clause (prohibits the debtor from granting security interests on its assets or property in favor of third parties). 37 Buchheit and Reisner (1988), pp. 505–506. 38 Ebenroth (1989), pp. 629, 633. 35
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Under U.S. banking law at the time, principal payments may be rescheduled to decrease overall debt service amounts and loan maturity dates may be lengthened, however, interest payments on the loan must be kept current. This means that interest payments must be made within 90 days of the due date.39 If interest payments were allowed to lapse for more than 90 days, the debt may be declared non-performing, and charged against the bank’s reserves. This write-off is reflected on the asset side of the bank’s balance sheet. Once loan reserves are exhausted, there is a corresponding reduction in the bank’s earnings. If bank earnings are insufficient to sustain the loss, then the bank’s net worth is reduced accordingly.40 Therefore, if the loan is actually written off, the profitability of the bank’s operations will suffer commensurately, thus gradually eroding its capital base. In the worst case scenario, this may lead to the bank’s insolvency and, finally, to its bankruptcy. More importantly, rescheduling debt does not “forgive” any portion of the debt; it simply extends the time in which repayment must be made in order to better enable the borrower to repay the loan. Thus, the original rate of interest on the loans in question was not lowered by the commercial banks. Since most interest payments on dollar-denominated debt were at floating market rates rather than fixed concessional rates, the strong U.S. dollar in the mid-1970s added to the volatility of the equation. The immediate concern of commercial banks was to preserve the income stream generated by interest payments on the loan. In order to avoid defaults on interest payments, commercial banks soon realized that quick infusions of “new money” would be necessary in order for sovereign debtor countries to keep making current interest payments. Moreover, U.S. commercial banks knew that U.S. bank regulators would not penalize them for lending additional money to sovereign borrowers. This would enable foreign borrowers to make current interest payments on the original loan.41 Thus, U.S. bankers adopted a policy of so-called “throwing good money after bad.”
39
See MacMillan (1995a), p. 321; Monteagudo (1994), pp. 59, 62; see also Link (1984), p. 75. Monteagudo (1994), p. 62. During the period for restructuring sovereign loan agreements, banks had a general reserve fund called the Allowance for Loan Losses, or the loan-loss reserve (Id. at 65). The loan-loss reserve was considered to be part of the bank’s capital and surplus so that a deduction made against the reserve resulted in a corresponding loss to the bank’s capital. Under the U.S. law, the International Lending Supervision Act, 12 U.S.C. §§ 3901-12 (1988), as may be amended, a special reserve called the Allocated Transfer Risk Reserve (ATRR) was established. The ATRR is not part of the general capital and surplus of the bank but is established with regard to specific loans that are officially classified according to the amount of country risk assessed by the Inter-agency Country Exposure Review Committee. These country risk classification levels are strong, moderately strong, weak, substandard, value-impaired, and loss. (Id. at 65–66). The ATRR must also be established with respect to a specific loan that is past due in interest or principal for more than ninety days. Once a loan is subject to the ATRR, the interest income from the loan, if any, cannot be reported as bank income, which has the same effect as writing down the loan (Id. at 65). See also Buchheit (1988b), pp. 371, 379–381; Lichtenstein (1985), p. 401. 41 Burlock (1985), pp. 543, 549–551. 40
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5.3.2
193
New Money Lending
“New money” loans were aimed at filling the financing gap,42 thereby enabling the debtor country to meet its balance-of-payments shortfall. The new money loans took into account any additional official funds (made available by multilateral banks or bilateral donors) that would help ease the credit squeeze. However, another problem immediately came to the surface. Although many banks had participated in the syndicated loans to sovereign borrowers during the 1970s, not all of them had the same amount of exposure. Whereas larger banks with maximum exposure had a vested interest in funding new money to enable the debtor country to continue interest payments, this dire need may not have been shared by the smaller banks participating in their lending syndicates. Smaller banks (or, at least, banks with minimal exposure on sovereign loans) showed a natural reluctance to being forced to extend additional credit to nearly insolvent sovereign debtors.43 This became increasingly problematic since the concurrence of smaller bank was sometimes critical to the equation. Many loan documents contained restrictive covenants ensuring that all creditors be treated equally and be given pro rata shares of loan repayments made by the borrower. These restrictive clauses may have also required unanimity among the syndicated lenders before the loan instrument could be amended. For example, a sharing clause in the original loan agreement may have required that disproportionate payments to one creditor be shared among the other creditors. However, this created a “free rider” problem insofar as the smaller creditors could benefit from the loan packaging arranged by larger creditors and the IMF. Lee Buchheit has commented that: “[i]n the context of sovereign debt restructuring, a free rider is a bank which desires to be paid interest on its credit exposure to a sovereign borrower but which declines to participate in the new financings that effectively fund those interest payments. From the standpoint of the sovereign borrower, such a bank wants to ride on the bus which keeps interest payments current, but apparently does not fancy buying a ticket. Even worse, the sovereign’s other lenders, whether official or commercial bank, may see themselves as indirectly paying for a fellow creditor who wants the benefits, but does not wish to share the burdens that attend consensual debt workouts.”44
42
Santos (1991), p. 75. Buchheit (1988b), pp. 374, 375: “The verb ‘invite’ when used to describe a request directed to a commercial bank to participate in a new money loan, is euphemistic. Any bank that flirts with the idea of not participating is reminded that the proceeds of the new money loan will be used largely (if not entirely) to pay current interest due on commercial bank debt.” 44 Buchheit (1989). The author also suggests various approaches to the free rider problem, including, the “scorched earth” policy where the majority lenders exchange their interest in the original loan agreement for a parallel facility that requires their participation in a new financing, thereby leaving the so-called free riders with the basically worthless original loan agreement. Another approach would be to pass an amendment to the loan agreement preventing free riders from assigning their interests, or from charging stiff fees for such assignments. Amending sharing clauses permitting the non-pro rata share of repayments would require the unanimous agreement of all 43
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Examples of restrictive clauses that were probably contained in the original loan documents include: (1) sharing (requiring the unanimous consent of all creditors); (2) mandatory prepayment (prohibiting the borrower from paying one instrument of indebtedness before the others); (3) pari passu (requiring the debtor to treat all creditors equally, thereby preventing the creation of senior indebtedness); (4) crossdefault (the default of one loan agreement triggers the default of another, unrelated one); and (5) negative pledge (restricting or preventing the borrower’s ability to pledge assets or revenues in favor of one creditor without also doing the same for the other creditors). Thus, the quid pro quo became amply clear. All new money financing (or so-called bridge loans) were to be used to service current interest payments falling due in the rescheduling consolidation period. Smaller banks were made to choose between the risk of being cut out of the equation and being forced to list the loan in question as non-performing, on the one hand, or financing new money loans on the other hand. For smaller banks, this must have seemed like a choice between Scylla and Charybdis. Moreover, as the debt crisis struggled on, the yearly or biannual exercise of rescheduling debt owed by nearly insolvent sovereign debtors began to exhaust the parties involved.
5.3.3
IMF Structural Adjustment
Apart from new money lending designed to help sovereign debtors repay interest due on their loans, the long-term structural adjustment of their economies also became a factor in the rescheduling process. The IMF began playing a pivotal role in debt restructurings from 1982 onwards.45 The IMF assumed a role in providing funds to ease the repayment crunch by helping its members meet their external debt obligations and, thus, easing the liquidity crisis. An IMF structural adjustment program is intended to address the underlying macro-economic problems of the debtor country.46 A structural adjustment program
lenders, including the free riders, whose possibilities of being repaid under the loan may become nullified under this arrangement. See also Patton (2014), p. 221. 45 MacMillan (1995a), p. 317. For a discussion of the IMF and structural adjustment conditionality, see “A Survey of the IMF and the World Bank: Sisters in the Wood,” Economist (October 12, 1991); see also Lichtenstein (1994), pp. 1943, 1949. 46 The IMF’s policy behind instituting stabilization measures is to “cool an overheated economy” by cutting public expenditures, devaluing the host country’s currency, and reducing the money supply. This generally also meant a drastic cut in public infrastructure growth in terms of building roads, bridges, and dams, laying off state employees, cutting health, education and welfare subsidies which were often disproportionately felt by women, children and minorities in the affected state. This is why the 19080s (especially in Latin America), is often referred to as the “lost decade for development.” See Enrique Carrasco “The 1980s: The Debt Crisis and the Lost Decade,” (July 21, 2008).
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agreement was generally concluded in the form of a stand-by, extended fund, or enhanced credit arrangement that established clear and rigorous economic performance criteria. The legal authority to make IMF stand-by commitments to its member nations is contained in Article I, “Purposes,” subdivision (v) of the IMF’s Articles of Agreement.47 If economic indicators set forth in the stand-by arrangement are not met by the sovereign borrower, and if economic growth falters, the availability of new financing may be jeopardized.48 Further these arrangements do not have the status of international agreements,49 and they generally do not require ratification by the parliaments of developing countries. However, as the debt crisis continued throughout the mid-1980s, it became increasingly clear that the IMF had neither sufficient resources to cover the shortfall in sovereign lending to Latin America, nor the desire to become the lender of last resort.50 Thus, as a precondition to making IMF loans (or stand-by arrangements) available for a sovereign debt workout, the IMF began requiring that commercial banks make new monies available.51 In order to avoid these types of debt crises in the future, commercial lenders were required to provide new financing to the debtor country before the IMF would approve the underlying structural adjustment program, and an associated structural adjustment loan. Therefore, “involuntary lending” by commercial banks became a standard feature of these debt workouts. Moreover, the reciprocality of the arrangements between the commercial banks and the IMF also became a standard feature. The IMF would only approve a structural adjustment program (and accompanying loan) if the bank creditors provided new commercial lending. The commercial banks, on the other hand, conditioned their new loans on IMF approval of an adjustment program. In addition, the IMF structural adjustment program required the sovereign debtor country to implement far-reaching and often draconian economic stabilization and liberalization measures very quickly. The entire rescheduling process became a circular one, where IMF-imposed austerity measures were conditioned on new commercial
The section provides, in relevant part: “The purposes of the International Monetary Fund are to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” (art. I (v), Articles of Agreement of International Monetary Fund, adopted December 27, 1945, 60 Stat. 1401, T.I.A.S. 1501, 2 U.N.T.S. 39, 20 U.S.T. 2775, 29 U.S.T. 2203, as amended). See also Lichtenstein (1994), p. 1946. The World Bank also engages in structural adjustment lending, and, while the legal authority for doing so is less clear, the special circumstances exception provided in the World Bank’s Articles of Agreement is relied on for this purpose. (See Levinson 1992, pp. 47, 49–50). 48 Gold (1982), pp. 11–24. 49 Jayagovind (1992), pp. 353, 355. See also Sarkar (2003), pp. 168–173, which describes the legal status of such international agreements at length. 50 MacMillan (1995a), pp. 318–319. 51 C. Farnsworth, “A Dramatic Change at the IMF,” New York Times (January 9, 1983). 47
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loans being in place, and new money lending was conditioned on an approved IMF structural adjustment program being in place.52 It may be noteworthy to highlight the fact that IMF adjustment programs have a number of similar features that address balance-of-payments crises. IMF-mandated macro-economic adjustments may include, for example: (1) devaluing the currency, thereby encouraging exports and discouraging imports; (2) cutting subsidies, including agricultural supports for farmers; (3) eliminating price controls; (4) reducing the government’s fiscal deficit by sharply cutting back on government expenditures; (5) raising tax revenues; (6) reducing government-funded social programs; (7) privatizing certain industries or sectors; and (8) liberalizing trade and attracting new foreign investment. IMF structural adjustment programs are meant to provide short-term supervision, and are not expected to remain in place in perpetuity. Indeed, once the initial economic targets of economic stabilization, currency devaluations, eliminating price controls and subsidies, restricting the money supply, lowering government expenditures, and reducing the fiscal deficit are met, IMF austerity measures have been fairly ineffective in stimulating long-term economic growth.53 IMF economic stabilization measures also usually include sharp cutbacks in imports to stop the drain on foreign exchange reserves. This generally means that capital equipment imports from industrialized nations drop significantly. Since these capital imports can be used to support fledgling, export industries in developing countries, the cutback on imports tends to further stall the growth of export-oriented sectors. This, in turn, tends to reduce gross domestic product levels. Moreover, sharp reductions in government spending tend to lead to recessionary conditions.54 The human cost of adjustment policies can be measured in terms of sharply increased unemployment levels, reductions in real wages, and drastically reduced social services to the most vulnerable segments of the population, namely, women, children, and the disabled.55 Rioting in Venezuela in 1989 in protest over the government’s austerity measures left more than three hundred people dead.56 Thus, an IMF structural adjustment program is no laughing matter. It has been suggested that if commercial lenders need some comfort in terms of making additional lending available to sovereign borrowers, this should take some form other than an IMF structural adjustment program that may remain in place indefinitely.57 Conditioning all debt rescheduling by commercial creditors (including those rescheduling private commercial debt under the auspices of the London
52
MacMillan (1995a), p. 320. See also Gold (1983), p. 28; Power (1996), p. 2712. Buchheit (1988b), pp. 376–377. See also Kahn and Knight (1985), p. 30. 54 Santos (1991), p. 76. 55 Boyd (1988), pp. 477–418. 56 “After 32 Years of Democracy, Fears of a Coup in Venezuela,” New York Times (August 10, 1990). 57 Buchheit (1988b), p. 377. 53
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Club)58 and by official creditors (acting through the Paris Club)59 on the imposition of an IMF structural adjustment program has been over burdensome on developing countries. The cartelized nature of commercial and official lenders has given them an unfair advantage in negotiating loan agreements and reschedulings. Over time, it became clear that the IMF’s strategy for imposing austerity measures in an attempt to stabilize, liberalize, and restructure the debtor nation economy was too short-sighted. Macro-economic imbalances were seen only in the narrow context of the debtor country–not in terms of the macro-adjustment of world economic conditions. For example, the devaluation of developing country currencies is often advocated by the IMF as a means of promoting the free convertibility of the currency, increasing exports, and decreasing imports (that would thereby become more expensive to purchase). However, many developing countries rely heavily on exporting raw materials and commodities, and the demand for such goods is not necessarily increased by lowering export prices. Thus, the efficacy of devaluing the currency of developing countries has been questioned in certain cases.60 In addition, while cutting food subsidies and other basic services were designed to reduce government deficits and stabilize the economy, the social and political impacts of such spending cuts were not necessarily taken into account. Imposition of IMF austerity measures led to riots in Peru, Egypt, Ghana, and Brazil.61 Further, these measures did not take into account the fact that trade protectionism and decreased production in industrialized nations severely cut back on export markets available to developing countries.62 The IMF’s narrow view of structural adjustment problems is, nevertheless, somewhat predictable. Lord John Maynard Keynes, head of the British delegation to the 1944 Bretton Woods Conference, lost a critical argument to Harry Dexter White, representing the U.S. Treasury. Keynes argued that the burden for balanceof-payments adjustments should be borne equally by surplus nations as well as deficit nations.63 Keynes suggested that surplus nations open up their markets to imports from trade deficit countries and spend their surplus foreign currency.64 This
58
See e.g., Sarkar (2003), pp. 206–208 for a fuller discussion of London Club rechedulings. Id. at 200–205 discusses Paris Club reschedulings. 60 Asherman (1984), p. 264 n. 166. 61 Id. at 288. 62 Id. at 288 n. 284, 289. 63 Id. at 236, 245, 254, 271. Asherman severely criticizes the IMF policy of requiring adjustments of deficit countries, but not from surplus countries. Unless surplus nations are required to make adjustment, as well, she suggests that structural adjustments will continue to be “harsher” and ultimately, “destructive of national and international prosperity.” (Id. at 301). See also Mikesell (1994), p. 13. Mikesell, as a former economist in the U.S. Treasury Department, Division of Monetary Research 1942–1947, gives a personal account of the debates surrounding the creation of the Bretton Woods institution, in particular, his personal account of the interaction between Lord Keynes and Harry Dexter White. 64 See Asherman (1984), pp. 245–246. 59
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would reduce the need for debtor nations to make painful adjustments in terms of devaluing their currencies, reducing fiscal deficits, and cutting social services. White, however, successfully argued that the burden of correcting any disequilibrium in the international monetary system should fall squarely on the shoulders of debtor nations. He reflected the U.S. position that creditor (or surplus) nations should not be required to adjust their economies or revalue their currencies, even if this means a long-term net flow of capital resources from economically weaker nations to stronger nations.65 Moreover, devaluation of their currencies (i.e., by adjusting the exchange rate) was viewed with suspicion by most surplus countries since they were wary of creating conditions leading to inflation and unemployment.66 Surplus nations wished to keep, rather than spend, their excess foreign currency reserves, and they shared White’s belief that adjustment should be borne solely by deficit nations. Since White won that argument, the policies of the IMF and the World Bank, created as a result of the 1944 Bretton Woods Conference in New Hampshire, have reflected that position ever since. This policy ultimately culminated in a debt crisis of enormous proportions which still continues to be “in crisis.”
5.3.4
A Critique of IMF Structural Adjustment
Former World Bank chief economist, Joseph Stiglitz’s, critique67 of IMF’s structural adjustment policies are trenchant, but nevertheless highlight certain considerations within this context. He argues, first, that in dealing with the international debt question, the principal actors (i.e., developing countries, commercial banks, multilateral institutions, IFIs, and the USG), may be well-advised to refocus the debt question along different lines. At the outset, all debtor countries cannot be treated equally for a number of reasons. The composition and competitiveness of their economies differ, their past credit histories and present creditworthiness vary, and their overall development objectives differ tremendously. For example, many East Asian countries are considered to be very strong international economic actors with a different set of goals and priorities than most other developing nations. Indeed, most Eastern European countries are considered to be market-based economies, whereas many sub-Saharan countries have deeply entrenched political and economic problems that cannot be solved by imposing IMF structural adjustment programs. 65
Id. at 271. See also Articles of Agreement of the International Monetary Fund (July 22, 1944), 60 Stat. 1401, T.I.A.S. No. 1501, 2 U.N.T.S. 39, reprinted in III The International Monetary Fund 1945-1965, (J. K. Horsefield, ed.) (IMF, 1969) at 8. 66 Asherman (1984), p. 271. 67 Joseph Stiglitz, former Chief Economist of the World Bank, has been quite strident in his criticism of how the Bank and the IMF fails the global poor. See generally, Stiglitz (2002); BBC, “IMF Critic Hits Out,” (August 14, 2002).
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Second, a critique of structural adjustment lending must necessarily focus on the following concerns. IMF structural adjustment programs are, first of all, designed to operate solely within a country context. However, this ignores the fact that developing country economies do not function in isolation but are an integral part of a much wider and more complex economic fabric. By dogmatically insisting that certain macro-economic adjustments be made in isolation from global economic developments, the IMF’s approach can be very short-sighted. While others would argue that many economic developments (and political ones as well) cannot be forecast adequately, this is all the more reason for the IMF to seek to be more tailored and responsive in their approach so as to better instill the economic stability and capture the economic gains it wishes to facilitate. As discussed earlier, IMF conditionality is predicated on the notion that the panacea for all economic woes is to resolve the balance-of-payments crisis by: (1) depreciating the currency and making it freely convertible; (2) cutting subsidies, including agricultural supports, and eliminating price controls and ceilings; (3) reducing the government’s fiscal deficit by curbing government expenditures and raising tax revenues; (4) reducing social programs for the poor, women and children, the elderly, and other vulnerable social groups, although IMF thinking on this is shifting somewhat; (5) privatizing certain industries or sectors; and (6) liberalizing the trade and investment scheme to permit freer cross-border movement of capital. In short, the objective of structural adjustment programs is to improve the macro-economic balance-of-payments. IMF officials often urge developing countries in crisis to improve their domestic fiscal deficits by removing price distortions, opening up competition, and deregulating the economy.68 Moreover, the macro-economic policy influence exerted by the IMF and the World Bank may unduly infringe on the ultimate bargaining position of developing nations. Further, as mentioned above, there is too little regard for external economic factors outside the control of developing countries (e.g., the oil shock of 1973, or increases in the prime rate of interest by the U.S. Federal Reserve). Finally, and perhaps most importantly, there can be too little regard paid to the social and political impact of structural adjustment on the poor. Indeed, the chances of the political survival of the ruling party that is entrusted with making such drastic economic reforms is often a volatile and open-ended question. IMF structural adjustment programs tend to focus on external economic indicators in a complete vacuum and, accordingly, are often criticized for paying little or no consideration to the social, political, or human impact of the actions taken at the IMF’s behest.69 In fact, structural adjustment can have an alarming effect, as is evidenced by a precipitous drop in child immunizations and birth weights, and the simultaneous rise in infant mortality, child malnutrition, illiteracy and school drop-out rates, as
See generally, Enrique Carrasco “The 1980s: The Debt Crisis and the Lost Decade,” (July 21, 2008). 69 Id. See also Buckley (2006), p. 121. 68
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reported by UNICEF in its seminal study.70 Adjustment policies assume their harshest form at the cost of the weakest and most vulnerable groups. Moreover, poor coordination between multilateral and bilateral institutions often results in confusion and duplicative policy-based lending programs that may be at crosspurposes with each other. The narrow objective of correcting trade imbalances has not served poorer developing countries well. Indeed, by imposing harsh conditionality on developing countries, the IMF may have unwittingly perpetuated the economic and social inequities between the developed and the developing world.71 Indeed, the IMF’s cookie-cutter approach to debt-related problems has been promulgated by bilateral donors as well as by commercial creditors. An IMF structural adjustment program must be in place before related IMF loans or World Bank structural adjustment or sectoral loans can be made, or even before new money commitments will be extended by commercial bank lenders. Further, official creditors acting under the auspices of the Paris Club and commercial lenders acting through the London Club will not consider debt rescheduling before an IMF structural adjustment program is in place. This stringent and cartelized type of conditionality turns the debt resolution process into a vicious circle. For example, the IMF agreed to lend US$8 billion in emergency assistance to Argentina on August 22, 2001, specifically conditioned on Argentina restructuring US$128 billion in foreign debt with its creditors. (The IMF had already loaned US $13.7 billion to Argentina a short 8 months before in January 2001.) Argentina was scheduled to receive US$5 billion of the new loan in September 2001, but an 70
UNICEF (1987). It should be noted that structural adjustment programs do not strictly apply to industrialized nations for several reasons. In response to the Kennedy Administration’s proposal in 1961 that it may seek access to IMF resources, the G-10, composed of the United States, the United Kingdom, France, Germany, Japan, Canada, Italy, the Netherlands, Belgium and Sweden, was formed. The G-10, made up of the most highly industrialized nations, agreed to form the IMF General Arrangement to Borrow in 1961, permitting G-10 members to borrow only short-term credit supplied by other G-10 members in order to overcome currency fluctuations or problems. No conditionality is attached to the General Arrangement to Borrow. See Asherman (1984), pp. 269–270. Thus, G-10 nations are not subject to structural adjustment programs as long as they have access to the General Arrangement. Second, the United States tends to avoid the General Arrangement preferring to use currency swaps made available by the central banks of other nations, completely outside the rubric of the IMF, in order to overcome any short-term currency problems. (Id. at 270). Finally, an IMF member can draw up to roughly 25% of its membership quota, a practice known as a reserve tranche drawing. A borrowing above this level is known as a credit tranche drawing and is made under a stand-by arrangement with conditionality attached (Jayagovind 1992, p. 355). Further, the membership quotas contributed by G-10 countries are significantly higher than those contributed by developing nations. Since borrowings within the quota (or reserve amount) are not subject to adjustment programs, developing countries tend to be subject to adjustment programs whereas fully industrialized nations are not. Asherman (1984), p. 272. Thus, drawings made by developing countries generally exceed their quotas, and are made subject to performance criteria to ensuring repayment of the IMF loan. Notably within this context, developing countries do not have access to the General Arrangement to Borrow, open-ended currency swaps, or unconditioned borrowings from the IMF. Id. 71
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additional tranche of US$3.1 billion was delayed until Argentina rescheduled at least a portion of its external debt.72 While the IMF and the former U.S. Treasury Secretary, Paul H. O’Neill, were sensitive to the impact that debt write-offs (colloquially referred to as “haircuts” on Wall Street)73 may have on foreign (including U.S. creditors), Argentina had to meet this condition before IMF emergency funding will be made available to it, a requirement that Argentina was still balking at 3 years later.74 This is an explicit example of a new type of reciprocity whereby creditors expect to see an IMF structural adjustment package in place, and the IMF expects that the recipient country will coordinate fully with its foreign debtors before additional tranches of loans will be released by the IMF. Additional expectations imposed by the IMF include requiring Argentina to reduce its fiscal expenditures in the face of a slump in exports, improve its tax collection procedures and strengthen its banking system.75 However, World Bank economists David Dollar and Paul Collier have warned that economic reform efforts can be rewarded, but they can not be demanded as a “prior condition” of aid.76 Structural adjustment goals are both legitimate and extremely important. However, correcting balance-of-payments imbalances in a vacuum has been counterproductive in many cases. The “one-size-fits-all” structural adjustment philosophy needs to be modified to take into account the important differences in economic conditions, history and culture, and development goals of IMF borrower nations. (Perhaps this is another opportunity to apply the Janus Law Principle.) A more gradualist approach may need to be taken to avoid the human and political costs of imposing an economic discipline that requires the recipient country to produce more than it consumes, to export more than it imports, and to save and invest more than it spends-while acknowledging that this may be the desired end-goal. In response to these critiques, the IMF has become more lenient in terms of enlarging the time for repayment of its loans by borrower nations, and it has been more sensitive in addressing social safety net issues before requiring that draconian, short-term economic adjustments be made.77 The IMF has launched debt relief packages for qualifying member countries, as discussed above in describing the HIPC Initiative. Yet in spite of the gradual movement of the Bretton Woods institutions towards reform and giving structural adjustment a “human face,” there J. Kahn, “Argentina Gets US$8 Billion Aid from I.M.F.,” New York Times (August 22, 2001). J. Fuerbringer, “I.M.F. Aid Package Buoys the Argentine Markets, For Now,” New York Times (August 23, 2001). See also J. Kahn, “From No Aid to a Bailout for Argentina,” New York Times (August 23, 2001). 74 See e.g., Tony Smith, “Argentina Threatening to Default on Payment to I.M.F.,” New York Times (March 9, 2004). 75 J. Fuerbringer, “I.M.F. Aid Package Buoys the Argentine Markets, For Now,” New York Times (August 23, 2001). See also J. Kahn, “From No Aid to a Bailout for Argentina,” New York Times (August 23, 2001). 76 “IMF and the World Bank to Learn from Africa,” Fin. Times (February 16, 2001), at 5. 77 Rajagopal (1993), p. 81. See also Lichtenstein (1994), p. 1943. 72 73
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may still need to be a fundamental reassessment of the philosophy underlying structural adjustment programs.
5.3.5
Initial Results of the “Containment” of the Financial Crisis
The initial response of “containment” from 1982 until 1985 provided some initial relief to the debt crisis. During that time period, more than US$140 billion in commercial loans were rescheduled, and the IMF provided US$31 billion in structural adjustment loans to 72 developing countries. Involuntary lending by commercial banks accounted for an additional US$27 billion in new money. The balance-ofpayments deficit for the developing world declined from US$110 billion, in 1982, to US$44 billion, in 1985. A US$50 million trade deficit in 1982 among developing countries actually grew to a trade surplus of an astonishing US$7 billion in 1985.78 (Perhaps this is less astonishing now!). The provision of new money by commercial banks enabled sovereign debtors to meet current interest payments falling due within the period of rescheduling, but it was ultimately self-serving. Commercial banks needed to provide new money to help the sovereign debtors meet current interest payments in order to avoid bank failures, or worse, an imminent collapse of the entire international banking system. Moreover, commercial banks did not want to create a moral hazard by reducing or forgiving the debt obligations of sovereign borrowers. This would have the effect of penalizing other debtors who were servicing their debt obligations, and it would further reduce the creditworthiness of sovereign debtors who were not. In the long run, however, additional new money loans only worsened the debt load of the borrower. The undeniable fact is that the underlying balance of payments problems of debtor countries were being exacerbated by incurring additional debt. Developing countries’ foreign reserves continued to be depleted by servicing their burgeoning national debt, while the downstream impact of IMF austerity measures were expressed in increasing social unrest and unstable political conditions. The “containment” policy was short-sighted in that it treated the debt crisis as a short-term cash flow problem without seeing the long-term issues with regard to sustained economic growth and solvency. As such, the initial response to the debt crisis was only to provide the means for commercial banks (acting in concert with the IMF) to negotiate additional time in which to build up their reserves, or dispose of their sovereign debt holdings as quickly as possible.79 Mexico’s debt rescheduling negotiations in 1984, which affected approximately US$50 billion in public sector debt, were resolved by the extension of an IMF
78 79
Boyd (1988), p. 477. Id. at 478.
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enhanced stand-by credit arrangement.80 However, the relative futility of rescheduling debt, issuing new money loans, and imposing harsh IMF austerity measures, became clear as the debt crisis persisted. Stop-gap measures only exacerbated the situation. The underlying problems needed to be addressed in a strategic fashion, and the failure to do so ultimately led to a far deeper debt crisis.
5.4
The Mexican Debt Crisis: Phase II
In response to donor fatigue, and the endless round of debt reschedulings, it became clear that a more strategic approach was necessary since the debt crisis, and its downstream implications continue to persist over time. Thus, the following discussion will examine the strategic responses to the sovereign debt crisis by the IMF, the U.S. Treasury Department, and commercial lenders.
5.4.1
The Baker Plan
The failure of “gap” or “bridge” financing to meet loan repayment terms by sovereign debtors became apparent by 1985. Continuing high real interest rates, the reluctance to provide additional new monies by commercial banks, and weak commodity prices all contributed to this failure.81 In response to the continuing debt crisis, the United States proposed a new policy that was announced by Secretary of the Treasury James Baker III at the joint annual meeting of the IMF and the World Bank in Seoul, Korea, on October 9, 1985.82 The so-called “Baker Plan” proposed the following: (1) to provide official support to finance debt repayment; (2) to provide additional commercial bank new monies; and (3) to condition such increased lending levels upon the adoption of market-based policies by the recipient sovereign nations. In other words, the Baker Plan did not offer a new approach but merely continued the containment strategy that had been pursued by commercial banks and the IMF since 1982. The Baker Plan simply expanded what had been an ad hoc containment policy into a more structured, strategic approach. The Baker Plan initially addressed 15 countries (the “Baker Fifteen”), ten of which were Latin American countries. Specifically, the Baker Plan called for US$9 Lee Buchheit, “Comity, Act of State, and the International Debt Crisis: Is There an Emerging Legal Equivalent of Bankruptcy Protection for Nations?” ASIL Proceedings, 79th Annual Meeting (April 25, 1985), p. 135. 81 Santos (1991), p. 76. 82 James Baker III, “Statement,” Treasury News, October 8, 1985, at 9, reprinted in Foreign Debts in the Present and a New International Economic Order, Detlev Dicke, ed. (Westview Press, 1987), p. 291. See also Power (1996), pp. 2701, 2714. 80
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billion in official loans from multilateral banks (primarily the World Bank) and bilateral donors (primarily Japan) over a 3 year period from 1985–1988. Additionally, commercial banks were asked to lend US$20 billion over the same time period.83 The proposal was predicated on the belief that restructuring the economies of the most heavily indebted nations along market-oriented lines would create strong internal economies, thereby resolving the debt crisis. Unfortunately, despite its good intentions, the Baker Plan did not work as hoped. Instead of net cash inflows, the Baker Fifteen experienced negative capital inflows. Servicing the loans extended by international financial institutions resulted in a negative net outflow of US$4.32 billion from 1985 to 1988. Although commercial banks extended new lending that exceeded the US$20 billion requested under the Baker Plan over the period of 1985–1988, the net capital outflow in interest payments for 1988 alone exceeded this amount.84 In fact, the position of sovereign debtors became even more precarious in 1985 than it had been in 1982.85 When Citicorp, the largest lender to the developing world, announced in May 1987 that it was setting aside US$3 billion in loan-loss reserves, a full quarter of Citicorp’s total debt holdings,86 this was an acknowledgment that the debt crisis had gone beyond the limits of the Baker Plan. By increasing the ratio of its capital to its loan-loss reserves, Citicorp would eventually be better able to absorb future losses, and would maintain a stronger bargaining position with sovereign borrowers. Citicorp and other commercial banks drastically reduced their exposure to potential sovereign debtor default.87 This was a clear signal that the debt crisis required longterm resolutions that went beyond adjusting mere bank balances.
5.4.2
The Brady Initiative
James Baker’s successor as secretary to the U.S. Treasury, Nicholas Brady, announced the Brady Initiative in a speech on March 10, 1989, thus marking a momentous turn of events in the debt crisis.88 This was the first time that the U.S. government (USG) lent its official support for voluntary debt reduction (in both principal and interest). More importantly, the USG withdrew its objections to using IMF and World Bank official credits to facilitate such debt reductions.89
83
MacMillan (1995a), p. 326 n. 112. See also Santos (1991), p. 76. Santos (1991), p. 77. 85 Id. See also Monteagudo (1994), p. 67. 86 Buchheit (1992b), p. 10, 11. 87 Monteagudo (1994), pp. 67–68. 88 N. Brady, “Remarks to the Brookings Institute and Bretton Woods Conference on Third World Debt,” (March 10, 1989). 89 Buchheit (1990b), p. 2. 84
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Further, the Brady Initiative offered a way of securitizing sovereign loans by converting commercial loans into bonds. These bonds, which later became known as Brady bonds, pooled together all the commercial bank loans owed by a sovereign debtor, repackaged them, and offered them to the public.90 The proceeds generated from the sales of these bonds were then used to retire the original debt. The sovereign debtor makes interest payments on the bonds to an indenture trustee, and those payments are later distributed to the bondholders.91 Thus, the Brady Initiative allows the original debt instrument to be transformed into bond obligations, thereby releasing the sovereign debtor from endless rounds of debt reschedulings. The choices available under a Brady Initiative menu of options were: (1) direct cash buy-backs of the debt by the sovereign debtor; (2) the exchange of the original debt for Brady bonds or so-called exit bonds at a below-market rate of interest (par bonds) or, alternatively, exit bonds with a lower face value but at the market rate of interest (discounted bonds); or (3) temporary interest rate reduction bonds.92 Par bonds initially had the same face value of the existing debt, but they had a discounted, fixed rate of interest of 6.25%. Discounted bonds were discounted by 35% from the original face value of the debt, but they charged a market rate of interest (generally a spread of 13/16% over the London Interbank Offered Rate (LIBOR) (now defunct).93 Temporary interest rate reduction bonds are bonds that have a below-market rate of interest for a specified number of years, at the conclusion of which the interest rate reverts to the market rate. If the option chosen (e.g., buy-back or exit bond) reduces the interest or principal amount of the original loan, then the difference between the original book value and the new discounted value of
90 For a discussion of the treatment of Brady bonds as securities under securities and bank regulatory schemes, see Buckley (1998), p. 47. 91 Power (1996), p. 2720. 92 Santos (1991), p. 78 n. 95. See also Buchheit (1990c), pp. 77, 81; Monteagudo (1994), p. 73. 93 Monteagudo (1994), p. 72. Note also that the LIBOR is no more! For more than 50 years, LIBOR was used by banks and other financial institutions as a global floating reference rate. As a result of well-publicized scandals involving the manipulation of LIBOR by panel banks, the subjective nature of panel bank submissions, and the lack of actual transactions to support LIBOR, in 2014, the Federal Reserve convened the Alternative Reference Rates Committee (AARC) to identify a set of alternative reference interest rates that could serve as an alternative to LIBOR for use in new derivative and other financial contracts that are more firmly based on actual transactions. In June 2017, AARC selected the Secured Overnight Funding Rate (SOFR), a fully-transactional based rate, as its recommended replacement for the U.S. Dollar LIBOR. The SOFR is a secured rate based upon U.S. Treasury securities. Further, SOFR is an overnight rate only, whereas the U.S. Dollar LIBOR is currently published in seven tenors: overnight, one week, one month, two months, three months, six months and one year. After AARC’s recommendation, in July 2017, the UK Financial Conduct Authority, is planning to phase-out LIBOR by 2021. As LIBOR is phased out and SOFR is phased in, the Federal Reserve Bank of New York began publication of SOFR on April 2, 2018 at the initial rate of 1.80% based upon US$849 billion in overnight transactions from April 1 to April 2. See Lisa Love, “The Phase-Out of Libor and Impact on Financial Transactions,” (May 15, 2018).
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the loan is calculated as a loss. That difference, in theory, is chargeable against the commercial bank’s loan-loss reserve.94 The most common form of Brady bonds are issued at the same face value as the original principal amount but with a reduced, fixed rate of interest. These bonds normally mature 30 years from the date of conversion, which is much longer than normal market maturities. Thus, the concessionality element is found in the reduced rate of interest, and the long maturity length. Additionally, Brady bonds were generally collateralized by the sovereign debtor who agrees to purchase zero-coupon U.S. Treasury bonds (or comparable securities). Cash for the interest due on Brady bonds for the first 12–18 months is also usually paid in advance by the sovereign debtor at the time of the transaction.95 Thus, the Brady Initiative contemplated that commercial banks would agree to modest reductions in the principal and/or interest of loans to sovereign debtors. In exchange for the debt reduction, “enhanced credit” would be provided by the IMF, the World Bank, and perhaps certain bilateral donors such as the Japanese. The net result of the Brady Initiative was that commercial lenders were able to set aside a certain portion of the loans in anticipation of the enhanced credit support provided by multilateral and bilateral sources. Of course, only countries that had adopted or were well on their way to adopting market-based policies of economic growth were eligible to participate in the new program. Within a few weeks of Secretary Brady’s announcement, Mexico approached its commercial bank advisory group to negotiate a single, integrated debt reduction proposal to provide it with immediate and significant debt relief.96 Out of its total outstanding debt of US$70 billion, the Mexico agreement covered approximately US$54 billion in short- and long-term debt owed by Mexico. Mexico’s proposal gave commercial banks one of three options: (1) exchange the loans for exit bonds at a 35% discount (or, in other words, at 35 cents on the dollar) at a market rate of interest; (2) exchange the loans for exit bonds at face value but with a reduced, fixed rate of interest of 6.25%; or (3) provide new money in an amount equal to 25% of the amount owed to the bank by Mexico over a 4 year period and at a market rate of interest.97 As collateral for the bonds, Mexico pledged USG zero-coupon bonds that, upon maturity, would be equal to the principal amount of the new exit bonds and a cash amount for the interest payments on the new bonds for an 18-month period.98 Mexico’s commercial creditors opted for debt reduction (of both principal and interest) with only a modest new money component. However, in light of the fact
94
Buchheit (1990c), p. 81. Power (1996), p. 2721. Certain so-called “stripped” Brady bonds are not collateralized by any security interest in the principal or interest of the original loan that is being converted. (Id. at 2722). 96 Buchheit (1990b), p. 2. 97 “Mexico and Banks Agree on Debt Accord Language,” New York Times (September 14, 1989), at D6. 98 Buchheit (1990c), p. 83. 95
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that Mexico’s current account deficit in 1989 alone was US$5.5 billion, the Brady Initiative, while laudable, was not enough to fully resolve Mexico’s debt crisis.99 While the Brady Plan recognized (unlike its predecessor, the Baker Plan) that debt reduction was critical to exiting the crisis, it did not go far enough in terms of writing down the debt.100
5.4.3
Aftermath of the Brady Initiative
After the Mexican debt conversion in 1990, Costa Rica, Venezuela, Uruguay, Argentina, and Brazil all followed suit by converting their loans into Brady bonds.101 In fact, Brazil sold US$3 billion of unsecured 30-year bonds in exchange for Brady bonds, reducing its future interest payments by at least US$160 million.102 Moreover, Bulgaria, Ecuador, Panama, and Peru executed Brady bonds.103 Ecuador, however, has the dubious distinction of being the first country to seek to reschedule its Brady bonds following its defaults on Brady bond and Eurobond debt of an aggregate amount of US$6.46 billion in the wake of the bizarre El Niño weather patterns, low oil prices, and the collapse of its banking system. Ecuador offered to exchange its Brady bonds and Eurobonds for new, uncollateralized “Republic” bonds with a maturity date of 2030, along with a cash payment to each creditor equivalent to the overdue interest coupons that it held. The Republic bonds were issued with interest coupons beginning at 4% for the first year, increasing by 1% each following year until a 10% premium is reached in.2006 and continued until the maturity date of 2030 is reached.104 But by 2008, Ecuador had defaulted on its $30.6m payment due on its 2012 bonds arguing that, “$3.8bn in foreign debt negotiated by previous administrations is illegitimate, [as] it was authorized without executive decree.”105 The 2015 and 2030 bonds were also called into question. Although the Brady Initiative marked a sea change in the thinking of the USG in terms of permitting the use of official assistance in support of debt and debt service reduction, it did not provide a long-term solution to the worldwide debt crisis. As illustrated by Ecuador’s example, the Brady Initiative was not a panacea for
99
Santos (1991), p. 80. Aggarwal V (1990). 101 Power (1996), p. 2722. 102 P. Truell, “Brazilians Sell 53 Billion of Unsecured 30-Year Debt: Brady Bond Exchange is Well Received,” New York Times (November 27, 1997). 103 Power (1996), p. 2723. 104 Buchheit (2000), pp. 17, 18. 105 Naomi Mapstone, “Ecuador Defaults on Sovereign Bonds,” Fin. Times (December 12, 2008). For a fuller discussion, see Porzacanski (2010), pp. 251–271. 100
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economic woes. The Brady debt reduction scheme of providing US$20 billion in IMF and World Bank resources and the US$4.5 billion provided by the Japanese were insufficient to reduce, collateralize, or guarantee developing country debt that, in Latin America alone, amounted to US$7 trillion in 1987.106 The reluctance of commercial banks to provide new money under the Brady Initiative also meant that a significant source of capital became less accessible by developing countries. However, the Brady Initiative marks the beginning of official recognition by the US Government (USG) that an element of debt forgiveness needs to be an integral part of any long-term solution to the debt crisis. But, perhaps more importantly, it was the first concrete step in terms of converting non-performing syndicated loans into securitized debt assets in the form of Brady bonds. The Brady Initiative also gave a window of time to U.S. and other commercial banks to re-capitalize their reserves in order to better absorb loan losses. It also provided the means by which commercial lending institutions could convert debt from a non-performing liability to a securitized asset. However, the Brady Initiative did not go far enough. The debt overhang and the constant depletion of foreign exchange reserves to service external debt continued to impede development efforts. As a footnote, Brady bonds are a nearly extinct asset class. The first Brady bonds were issued by Mexico in 1990. According to the IMF, the stock of dollardenominated Brady bonds grew to reach a peak of $156bn in March 1997. With governments increasingly buying back or exchanging the bonds for new ones, the volume of outstanding Brady bonds is shrinking faster than ever. Mexico, for instance, retired all of its Brady debt by 2003 as the discussion below will show, with Venezuela and Brazil following suit by also retiring most of their large holdings of Brady bonds.107 This trend is largely a result of two factors: (1) plentiful liquidity in world financial markets has encouraged investors to seek the higher yields available on riskier investments such as emerging market bonds; and (2) there has been an improvement in the creditworthiness of many emerging market countries.108 As this was the final aim of sovereign debt restructurings, perhaps this story has a somewhat happy ending.
5.5
The Mexican Debt Crisis: Phase III
Mexico’s oil boom of the late 1970s and early 1980s was expected to give it a real chance at economic self-sufficiency leading to economic prosperity. Heavy international borrowing from commercial banking institutions was supported by a belief (on both sides) in the surging growth of Mexico’s economy based on its oil exports.
106
Santos (1991), p. 79. Joanna Chung, “Brady Bonds Shrinking Fast,” Fin. Times (February 26, 2006). 108 Id. 107
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However, when oil prices slipped, and floating interest rates moved up relentlessly, Mexico was caught in a vice of using its dwindling foreign reserves to service its ever increasing international debt. The bubble burst in August 1982 when Mexico depleted its available foreign currency reserves, thus initiating the debt crisis of the 1980s. Despite undertaking painful structural adjustment measures, another financial crisis was looming on the horizon for Mexico. The increase in the U.S. prime rate by nearly three percentage points by the U.S. Federal Reserve between 1993 and 1994 made U.S. capital markets more inviting for international investors. Moreover, U.S. investors began investing more heavily in U.S. markets. The high U.S. interest rates attracted Mexican flight capital as well. By 1994, foreign capital investment in Mexico was drying up. This left Mexico to choose between raising interest rates to attract dwindling foreign investment into the country or devaluing the peso. Since Mexico let its stand-by arrangement with the IMF lapse in 1993, it was less restricted in making this choice. Despite the urging of the U.S. Treasury Department’s recommendation to devalue the peso, Mexico opted to raise the interest rate.109 Nevertheless, in order to assure nervous international investors about the stability of Mexican investments, Mexico issued nearly US$5 billion in tesobonos, which are short-term, dollar-indexed securities, repayable in pesos. The risk of any foreign exchange rate movement is thereby absorbed by the Mexican government rather than the investor. Tesobono debt burgeoned tenfold as a result.110 Following the election of President Ernesto Zedillo on August 21, 1994, Mexico’s political fate caught up with it. Beginning from the assassination of Jose Francisco Ruiz Massieu, second in command to President Zedillo,111 on September 28, 1995, the political condition of Mexico deteriorated. Mexico’s political climate further worsened as internal unrest in the Chiapas region began in December 1994.112 The Mexican Finance Minister finally announced a 14% devaluation of the peso on December 20, 1994, but the next day, President Zedillo announced that the peso would be allowed to float.113 The peso entered into a free fall, devaluing 15% over the course of the next day alone, and devaluing 54% by March 1995. By the end of December 1994, US$4 billion in capital left Mexico, and capital reserves plummeted. Short-term, portfolio investors, faced with a drop of 15% or more in the value of their investments, redeemed their Mexican stocks and bonds rather than allowing the securities to roll over.114 109
Carrasco and Thomas (1996), pp. 561, 562 n. 127, 562. Id. at 562–563 nn. 131–32. 111 Id. 112 Lovett (1996), p. 154. See also “Armed Indians Attack Four Towns in Mexico,” Wash. Times (January 2, 1994), at 1.; J. Rice, “Rebels March Into the Heart of Mexico City,” USA Today (March 12, 2001), at 5A. 113 Id. 114 Carrasco and Thomas (1996), pp. 563, 564–566. (See also A. DePalma, “Crisis in Mexico: The Overview with Peso Freed, Mexican Currency Drops 20% More,” New York Times (December 23, 1994), at Al.). 110
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Although Zedillo’s administration took immediate stabilization measures, such as freezing wage and price increases for 60 days, the peso devaluation continued.115 Health, education, and food subsidies were cut from government budgetary allocations, and 40% of the population slipped below the poverty line. Moreover, the constant peso devaluations and high interest rates were causing hyper-inflationary conditions. Faced with an imminent collapse of the Mexican economy and the real possibility that Mexico would default on payments due on outstanding tesobonos, the U.S. government intervened. The USG announced an US$18 billion emergency stabilization package for Mexico on January 2, 1995. The package consisted of US $9 billion from the United States, US$1 billion from Canada, US$5 billion from the Bank for International Settlements (BIS), and US$3 billion from foreign commercial banks.116 But the foreign exchange drain on Mexico reserves continued despite this emergency rescue package. On January 12, 1995, the Clinton Administration proposed a US$40 billion loan guarantee program that required U.S. Congressional approval.117 The proposal met with political resistance when Democrats in the Congress became alarmed at the adverse impact the economic bail-out of Mexico would have on U.S. jobs. Shrinking export markets for U.S. goods following a devaluation of the Mexican peso were also a cause for concern. Some in Congress were more concerned with illegal immigration and drug trafficking, while still others were reluctant to provide U.S. taxpayer relief to wealthy investors who had lost their investments in Mexican securities markets.118 In light of the mounting political resistance and likelihood of its failure to gain Congressional approval, the Clinton Administration reformulated the emergency bail-out so that Congressional approval would not be required. The subsequent US $50 billion loan package was comprised of the following: (1) US$20 billion in U.S. loans and loan guarantees funded by the Treasury’s Exchange Stabilization Fund; (2) US$18 billion from the IMF (or 600% of Mexico’s IMF quota); (3) US$10 billion from the BIS; and (4) US$3 billion from commercial banks.119 In exchange for the bail-out package, on March 9, 1995, Mexico agreed to and announced a new IMF austerity program that imposed strict economic targets restricting domestic
115
Id. at 565. Id. at 567. 117 Id. See also Carrington et al. (1995), p. Al. 118 See Carrasco and Thomas (1996), pp. 567–568. 119 Id. at 568. The Exchange Stabilization Fund (ESF), established by Section 10 of the Gold Reserve Act of 1934, 31 U.S.C. § 5302, as amended, permits the purchase and sale of U.S. dollars to stabilize the U.S. currency and allows that they may also be used for short-term loans to other countries without Congressional approval. The use of the ESF loans, which operate as a revolving account, is limited to a six-month period based on a presidential determination that emergency circumstances warrant such a use (Id. at 568 n. 176). See also Wertman (1995), pp. 19, 22–23; Lichtenstein (1995), p. 1771. 116
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credit, the internal money supply, fiscal spending by the government, and foreign borrowing.120 Further, repayments of the US$20 billion in U.S. loans and loan guarantees were collateralized by oil revenues generated by PEMEX (Petroleos Mexicanos), the state-owned oil refinery. Oil export revenues, less operating costs, were deposited directly into a separate account in the Federal Reserve Bank of New York. The oil exports proceeds facility set up under this arrangement required notification to and consultation with the U.S. Treasury Department by Mexico if its oil export income dropped below agreed-upon levels.121 These oil export proceeds would have been automatically seized if Mexico defaulted on its loan obligations to the United States. The US$20 billion in U.S. loans and loan guarantees was tied to six agreements. The U.S.-Mexico Framework Agreement (the so-called “umbrella agreement”) was signed on February 21, 1995. It earmarked funds to be used to assist Mexico in stabilizing its foreign exchange and to ease the volatility of its short-term debt markets. The Framework Agreement was designed to help Mexico move from short-term financing to longer-term financing, and it helped retire US$16 billion in tesobonos by the end of 1995.122 The Framework Agreement remained in effect for a year, and it was renewable for 6 months thereafter. Five additional financing agreements were framed in accord with the Framework Agreement.123 Despite the gravity of the debt crisis and the seriousness of its immediate consequences, Mexico made a remarkable recovery. Mexico floated a US$1 billion 2-year floating rate bond issue on July 10, 1995. These bonds carried a spread of 5.375% over LIBOR. Banks were given an opportunity to earn a modest 0.25% fee for subscribing to the issue or to redeem the note for face value by buying a share interest in a Mexican bank or a SOE that was being privatized.124 The issue was oversubscribed, attracting buyers in European, Asian, and American markets. In addition, Mexico re-entered international capital markets without drawing down on any U.S. loan guarantees. On January 16, 1997, in a signing ceremony at the White House, the Mexican government repaid the US$13.5 billion it owed the USG, a remarkable 3 years ahead of schedule. The early repayment helped Mexico save about US$100 million per year in interest payments to the U.S. Treasury. Further, the U.S. Treasury profited by US$580 million on interest payments on the loan package to Mexico.125 120
Carrasco and Thomas (1996), p. 568 n. 177. Wertman (1995), pp. 9, 13. Proceeds of oil exports from PEMEX and its two subsidiaries, PMI Comercio Internacional S.A. de C.V. and PMI Trading Ltd., were deposited into the same special account. 122 Wertman (1995), pp. 15, 20. 123 Those additional agreements are: (1) the Medium-Term Exchange Stabilization Agreement (Feb. 21, 1995); (2) the Guarantee Agreement (Feb. 21, 1995); (3) the North American Framework Agreement (Apr. 26, 1994); (4) the Exchange Stabilization Agreement (Apr. 26, 1994); and (5) the Temporary Exchange Stabilization Agreement (Jan. 4, 1995) (Wertman 1995, pp. 20–21). 124 Wertman (1995), p. 12. See also Carrasco and Thomas (1996), p. 569, n. 184. 125 Wessel and Torres (1997), p. A10. 121
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Although this discussion will not address the impact that the Mexican debt crisis had on other Latin American economies, particularly that of Argentina and Brazil, the human cost to Mexico alone was high. The Mexican labor secretary estimated that close to six million Mexicans lost their jobs,126 and the depletion of savings has impoverished many Mexicans. Moreover, the privatization process, undertaken as part of the structural adjustment effort, contributed to widening the gap between the rich and the poor. What are the lessons to be learned from the Mexico debt crisis? First, it is important to distinguish between Mexico’s debt crisis of the 1980s from the peso crisis of the 1990s. By the mid-1990s, Mexico’s economy was more competitive and less protectionist. Although painful structural adjustments had to be absorbed by Mexico in the interim, it did create a more balanced and competitive economy. Second, although the debt crisis was caused, in part, by the heavy dependence on external borrowing, the peso crisis was also precipitated by Mexico’s heavy reliance on foreign portfolio investment. Portfolio investment usually takes the form of crossborder stock market purchases of highly liquid, high-yielding debt and equity securities.127 These purchases are made by foreign individual (retail) investors or by large foreign institutional investors. The nature of portfolio investment is that such capital investment flows are highly volatile and may be quickly reversed.
126
Carrasco and Thomas (1996), p. 570. Securities markets provide liquidity to both investors and corporate enterprises, and facilitate efficient prices in economic and financial terms. For a discussion of how law impacts the creation of strong securities markets viz, the definition of property rights, the enforcement of contracts, the protection of minority shareholders, see Ahdieh (2003), pp. 277, 284, 322–328. For a further discussion on the “law matters” theory of securities markets formation and regulation, see Paredes (2004), pp. 1055, 1072–1074, who explicitly warns that, “U.S. corporate law might be inappropriate for promoting equity markets in developing countries. Transplanting the law of the United States, or any other country, has the benefit of being relatively easy and inexpensive, in comparison to crafting statutes, rules, and regulations from scratch. There are, however, dangers with legal transplants. As a result of any number of differences between the ‘importing’ and ‘origin’ countries, including different economies, political systems, and social structures, as well as unique value systems and priorities, an ‘importing’ country might not be ready to receive the transplant. Further, the ‘importing’ country simply might not understand the law it is importing and how it is supposed to work. As a result, the transplant might not take root or might evolve differently in the ‘importing’ country than in the ‘origin’ country. In any case, the transition to a new regime can be socially disruptive and is likely to be rife with ongoing challenges and unanticipated consequences for better and for worse. . . . To recast this point, a market-based model of corporate governance will not adequately protect shareholders in developing countries unless a host of other institutions exist that complement the law holding insiders accountable. If the entire U.S. governance system, or something approaching it, cannot be recreated, simply transplanting one piece of it (i.e., the law) might do more harm than good especially when the ‘importing’ country’s foregone the opportunity to adopt a different regime is considered. . . . When developing a corporate governance reform agenda, focusing on a simplified model of governance that emphasizes formal legal rules is problematic.” Id., at 1072–1074. For a discussion on the dilemmas facing emerging capital markets and economies in terms of regulating capital market growth, including addressing the need for substantive legal rules, the effective enforcement of judgments, and the choice of law, see Guzman (1998), p. 607.
127
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High domestic interest rates generally attract large-volume investment flows in the first place; however, this dynamic may ultimately prove to be counterproductive since high interest rates may dampen domestic borrowing and stifle the growth of export-oriented industries. (Further, high foreign capital inflows may contribute to inflationary conditions and decreased internal rates of savings).128 Moreover, emerging markets are especially vulnerable to the volatility of portfolio investment. Outflows of portfolio investment can be potentially destabilizing, if not devastating to an emerging market economy. These outflows may be sudden and unanticipated if the cause lies in external economic factors. For example, a rise in U.S. interest rates may persuade U.S. investors to invest at home rather than abroad. Portfolio investment is also very sensitive to internal political and economic conditions in the developing country. This was demonstrated, for example, by the run on the peso following political assassinations and other political turmoil in Mexico.129 Thus, portfolio investment may be wildly unpredictable. Although restructuring the economy to provide a solid industrial and export base and liberalizing the trade and investment scheme are important components in creating a stable economy,130 excessive reliance on foreign portfolio investment to finance development is a dangerous policy. The impact of foreign currency flows has to be contained within the framework of the economy so that the nation is not held hostage to the vagaries of foreign portfolio investors. Finally, Enrique Carrasco and Randall Thomas argue forcefully that Mexico should encourage relational investment or, in other words, FDI.131 Relational investors bear the risk of their investment (unlike portfolio investors), and they tend to stay vested in the developing country for the long-run. A developing country can better control the entry and exit of such investors, unlike portfolio investors, whose presence or departure from the economy is effected by a retail stock broker executing a trade in New York, London, or Singapore. Further, by orienting FDI investment towards management and long-term growth issues, there is less volatility and more focus on the development of an enterprise. For example, FDI may facilitate technology transfers, open up new markets, and impose more rigorous standards for corporate governance of the local enterprise. This, of course, leads us right back to where we started. Many post-independence developing countries resisted FDI as a form of economic imperialism, and they placed greater emphasis on encouraging and protecting domestic industries under policies of import substitution. Perhaps there truly is nothing new under the sun, and developing nations should consider reformulating the terms of this familiar dilemma.
128
Carrasco and Thomas (1996), p. 576. Id. at 563. 130 Vernava (1996), pp. 89, 112. Mexico rewrote its investment law by legislation effective on January 1, 1994, eliminating, inter alia: (1) the need for advance approvals on certain types of transactions; (2) restrictions on the movement of investment capital in and out of Mexico; and (3) controls on the repatriation of earnings on capital. 131 Carrasco and Thomas (1996), pp. 579–582. 129
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By encouraging strategic, long-term, illiquid, management-oriented FDI investments, a developing nation may help foster its own integration into a global economy. This requires that developing countries reassess the importance of safeguarding certain industries and sectors from foreign ownership, management, and oversight. If developing countries are assured that the veil of neo-colonialism has lifted for them, then this may provide a window of opportunity to seek out new development options and partnerships. Nevertheless, Mexico’s example is a warning that heavy reliance on international borrowing from commercial sources, or depending on volatile portfolio investments, can lead the economy to a boiling point. While the Mexican bail-out by the U.S. was based on strategic U.S. political considerations, it is unlikely that these political considerations will be similarly compelling for other developing nations, or even for Mexico for a second time.132 Thus, Mexico’s example may not establish a model, but it can be used to draw important lessons and gain valuable insights for the future.133 The Mexican debt crisis did, however, change international monetary management in a very important respect. At the urging of U.S. Treasury Secretary Robert Rubin at the G-7 meeting in 1995, the IMF has set aside emergency funds so that emergency loans would not be so dependent on American financing that may require U.S. Congressional approval.134 In fact, the IMF has instituted an early warning system to detect arrears owed to it by potentially defaulting countries.135 Thus, the Mexican fiscal crisis has left a lasting imprint on the global financial scene.136
David Sanger, “Treasury Chief Rules Out U.S. Move to Rescue Asian Economies,” New York Times (October 27, 1997), at A8. 133 See e.g., Schwarcz (2012), p. 95, where a contractual or “free market” approach is contrasted to a statutory means of doing sovereign debt reschedulings through the adoption of an international treaty or convention in order to bind sovereign debtors and their creditors. See also Anne Krueger, “A New Approach to Sovereign Debt Restructung,” IMF (November 27, 2002), giving a proposed IMF model in 2002 that would take a two-prong approach. First, a statutory approach that would create a legal framework allowing a qualified majority of a country’s creditors to approve a restructuring agreement which would be binding on all. In order to make the agreement binding on all creditors, the enactment of a universal statutory framework would be necessary. And second, an approach that would incorporate comprehensive restructuring clauses, so-called “collective action clauses,” in debt instruments. Collective action clauses, found in sovereign bond contracts, limit the ability of dissident creditors to block a widely-supported restructuring on an individual bond issue. 134 Steve Erlanger, “To Ease Crisis, I.M.F. Makes Philippines Emergency Loan,” New York Times (July 21, 1997), at Al. 135 See e.g., Chickako Oka, “Anticipating Arrears to the IMF: Early Warning Systems” (IMF Working Paper WB/03/19, 2003). 136 For another perspective on the ramifications of the Mexican bailout on IMF policies (to wit, turning the IMF into a debt management agency), see Ian Velázquez, “A Retrospective on the Mexican Bailout,” 21 Cato J. (Winter 2002). Moreover the consequences of Mexico’s debt crisis are still being felt. Opposition politicians (and other critics) in Mexico are accusing the Mexican government of supporting the local political elite since the government will not release the names or identities whose unpaid loans have been bailed out by the government following the peso 132
5.6 Asian Financial Crisis
5.6
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Asian Financial Crisis
As a necessary corollary to the foregoing discussion, a brief examination into another financial crisis that began almost as soon as the Mexican bailout had been completed is in order. This time the situs moves from Latin America to the Far East. Four significant issues or questions stemming from the Asian financial crisis have subsequently been identified, namely: (1) a shortage of foreign exchange that caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically; (2) inadequately developed financial sectors and mechanisms for allocating capital in troubled Asian economies; (3) the effects of the crisis on both the United States and the world, and (4) the role, operations, and replenishment of funds of the International Monetary Fund.137 In this scenario, certain countries faced a significant financing gap in servicing their external debt which meant that new money as well as debt reduction measures had to be negotiated at the same time in order to keep them from falling into arrears on current interest payments falling due. This was the situation confronted by the Philippines during 1989–1990 following a period of impressive economic growth, but where debt reduction was also sorely needed to consolidate such economic gains. The Philippine government reached an agreement with two significant components with its commercial bank advisory committee in August 1989. First, new financing was arranged through the issuance of transferable bonds that would be sold to the Philippine’s commercial bank creditors. Second, the Philippine government arranged a debt buy-back of over US$3.1 billion, or 20% of its short- and medium-term external debt, from its commercial bank creditors who did not wish to purchase the transferable bonds. The buy-back was steeply discounted, and it was sold for cash by the Philippine government at 50% of its face value. The Philippine government’s single debt buy back eliminated a good portion of Philippine external debt and, in addition, the conversion of loans into exit bonds met the new financing needs of the Philippines.138 The IMF approved a US$1 billion emergency loan to the Philippines on July 20, 1997, to help stabilize the Philippine peso. The IMF’s Executive Board approved the Philippine government’s request to draw down on an existing US$600 million loan program, and an additional line of credit for US$435 million.139 This US$1 billion loan to the Philippines is certainly dwarfed by the US$17 billion loan to Mexico, but it demonstrates the IMF’s much more rapid response time to such crisis situations. devaluation in 1994 (See S. Dillon, “The Debate on Banks Gets Nasty in Mexico,” New York Times (August 7, 1998), at A7. 137 Dick Nanto, “The 1997-1998 Asian Financial Crisis,” CRS Report (February 6, 1998). This report gives a day-by-day overview of significant developments in the crisis. 138 Buchheit (1990b), p. 3. 139 Id.
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The IMF also needed to react quickly in Thailand’s case following its currency devaluation. The devaluation occurred after the Thai government decided to de-link its currency from the U.S. dollar and other hard currencies on July 2, 1997.140 The economic conditions leading up to the devaluation are complex and stemmed, in part, from borrowing heavily from foreign sources (mainly in relation to speculative real estate projects).141 Unpaid loans began accumulating, and interest rates rose causing the economy to slow down. Since stock portfolios were earning less, this prompted overseas investors to sell off Thai stock, which culminated in a general financial and political crisis.142 In desperation, the Thai government dismissed the country’s central bankers and turned to the IMF, which organized a US$17.2 billion rescue package, including a US$1 billion bridge loan extended by the Swiss-based Bank for International Settlements, US$250 million of which will be provided by the US. Treasury Department’s Exchange Stabilization Fund.143 In exchange for the financial bailout, the IMF has required Thailand to agree to strict fiscal controls such as imposing higher taxes, and closing financial institutions that had made failed loans.144 The Thai crisis turned out to be part of a larger regional economic maelstrom. When the U.S. dollar rose, Southeast Asian “tigers” were forced to increase their E. Gargan, “The Thai Slump at Ground Level,” New York Times (September 19, 1997). See also “Many Asian Stock Markets Fall Sharply: Currencies Also Lower; Trading Rule Change by Malaysia Faulted,” New York Times (August 29, 1997), at C2. By August 21, 1997, the Thai baht had dropped in value by over 20 percent. See David Sanger, “First Part of Thai Bailout Is Authorized by the I.M.F.: US$4 Billion Loan to Stem the Currency Crisis,” New York Times (August 21, 1997), at D2. 141 “A combination of inadequate financial sector supervision, poor assessment and management of financial risk, and the maintenance of relatively fixed exchange rates led banks and corporations to borrow large amounts of international capital, much of it short-term, denominated in foreign currency, and unhedged. As time went on, this inflow of foreign capital tended to be used to finance poorer-quality investments.” Fact sheet, “The IMF’s Response to the Asian Crisis,” (July 21, 2008). 142 “Many Asian Stock Markets Fall Sharply: Currencies Also Lower; Trading Rule Change by Malaysia Faulted,” New York Times (August 29, 1997), at C2. (See also E. Gargan, “The Thai Slump at Ground Level,” New York Times (September 19, 1997). 143 Ibid. See also David Sanger, “The Overfed Tiger Economies,” New York Times (August 3, 1997). See also David Sanger, “First Part of Thai Bailout Is Authorized by the I.M.F.: US$4 Billion Loan to Stem the Currency Crisis,” New York Times (August 21, 1997), at D2. 144 David Sanger, “First Part of Thai Bailout Is Authorized by the I.M.F.” New York Times (August 21, 1997) at D2. However, the IMF's role in the Thai financial crisis has been sharply criticized by observers who claim that the IMF’s prescription to Thailand to devalue its currency was a “poison pill” that started the Asian financial crisis. See S. Forbes, “Be Wary of Bailing Out the IMF,” Wash. Times (July 27, 1998) at A19. Mr. Forbes argues that when a country will not defend its currency, the currency effectively collapses, causing rampant inflation, wages reduced in value by one-half, bankruptcy, unemployment, and a precipitous rise in political and ethnic tensions. Further, he urges that the IMF’s cut-off of social safety nets, including food and other subsidies, can be calamitous for the people living in the affected economy. He urges strict adherence to four cardinal principles: sound money, low taxes, the rule of law, and restricted bureaucratic interference with running businesses, along with eliminating all tax-free incomes for IMF employees. 140
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interest rates.145 Most of the Southeast Asian economies fought valiantly to defend their currencies, but serious competition from China and shrinking export markets for their goods meant that their currencies needed to be devalued in order to maintain their competitive value. This, in turn, meant that the short-term borrowing binge from 1993 to 1996, in support of long-term investments in real estate and other non-export sectors, was a financial crisis in the making. Rental income from real estate ventures, for example, was being earned in local currency, but dollardenominated loans in support of these investments had to be repaid in hard currency by converting devalued currencies.146 Beleaguered by currency crises stemming from a variety of complex reasons, the Philippine, Indonesian, Malaysian, Singaporean, Thai, South Korean, and Hong Kong stock markets began collapsing like a house of cards, necessitating emergency bail-out packages for Thailand (US$17.2 billion); Indonesia (US$22 billion); and South Korea (US$20 billion).147 Moreover, international investors panicked at the collapsing stock market prices in Southeast Asia, and they withdrew US$1.4 billion in 2 days alone in October 1997 from international equity funds. (This amount represents about 4% of the total US$380 billion held by such international funds.)148 In light of the fact that massive dollar-denominated debts needed to be paid back using devalued local currencies, Thailand, Malaysia, the Philippines, and Indonesia felt financially squeezed.149 The IMF-led prescription for economic recovery was to follow Mexico’s example by exporting goods that are now cheaper on the world market because of the drop in currency value.150 The price that Mexico and these other East Asian economies paid was a severe recession.151
“Many Asian Stock Markets Fall Sharply: Currencies Also Lower; Trading Rule Change by Malaysia Faulted,” New York Times (August 29, 1997), at C2. 146 Jeffrey Sachs, “The Wrong Medicine for Asia,” New York Times (November 3, 1997), at A30. 147 A. Pine, “Unsettled Markets: U.S. to Join the IMF Rescue of Indonesia Asia: Its US$3 Billion Contribution is part of a US$22-Billion Contingency Package,” LA Times (October 31, 1997), at Dl. See also J. Burton, “Korean Pride Battered by Plea for US$20bn IMF Rescue,” Fin. Times (November 22, 1997), at 3. 148 T. Smart, “Money Flowing Out of Global Mutual Funds,” Wash. Post (October 31, 1997), at Cl. See also S. Pearlstein, “At Economic Summit on Asia, A Search for the ‘Right’ Policy,” Wash. Post (November 21, 1997), at Cl. 149 See Fact sheet, “The IMF’s Response to the Asian Crisis,” (July 21, 2008). 150 R Lewis, “For Asia, Austerity and Exports: Seeing Mexican Parallel, Economists Stress Market Freedom, New York Times (September 9, 1997), at D3. Robert Rubin, former Secretary of the U.S. Treasury, also suggested that central banks in developing countries disclose financial information concerning their activities in currency markets. See David Sanger, “Asia’s Economic Tigers Growl at World Monetary Conference: Say Opening of Markets Hands Wall Street Too Much Power,” New York Times (September 22, 1997), at Al. Secretary Rubin also suggested that commercial banks also report their non-performing loans. See David Sanger, “Rubin to Press Central Banks to Disclose Financial Data,” New York Times (September 19, 1997), at C5, citing that Japan’s failure to do so resulted in a crisis of failing banks which had to be closed. 151 P. Lewis, “For Asia, Austerity and Exports: Seeing Mexican Parallel, Economists Stress Market Freedom,” New York Times (September 9, 1997), at D3. 145
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East Asian economies need to worry about something else as well. China devalued its currency by 35% against the U.S. dollar from 1994, and received US $52 billion in private capital flows-or about one-fifth of the total amount to developing countries in 1997. The price of China’s exports in the late 1990s fell by 25%,152 and this has posed some very tough economic competition for other East Asian economies. Even at this stage, it was becoming clear that the close cooperation between government and industry and long-term investment planning for critical sectors of the economy that were long considered to be sources of strengths for the Southeast Asian tigers153 have also meant less transparency and accountability.154 The underregulation of capital markets in these emerging markets has also been a systemic problem.155 In order to avoid the moral hazard posed by such financial crises requiring international rescue plans, former U.S. Treasury Secretary Robert Rubin urged that more financial information be disclosed by the governments of these emerging market economies.156 Rubin specifically urged that central and commercial banks report their financial assets and liabilities, claiming that such disclosure could prevent financial crises in the future by warning creditors and investors of impending financial squeezes.157 Indeed, the IMF has instituted an early warning system to ward off economic crises that is targeted at twenty-three emerging capital economies, including Brazil, China, South Korea, Malaysia, Mexico, Peru, and Thailand, who borrow most heavily from international capital markets.158 The IMF also created the 152 Observers of China’s economic scene argue that further devaluation is unlikely. See Seth Faison, “Even as Asians Worry, China is Unlikely to Devalue,” New York Times (August 11, 1998), at D4. 153 In the view of the IMF, the Southeast Tigers include Hong Kong, South Korea, Singapore and Taiwan. See David Burton, et al, “Asia’s Winds of Change,” 43 Fin. & Dev. (June 2006). 154 “Asian Economies: More Myth Than Miracle? New Problems Causing Some of Region’s Nations to Rethink Reliance on Japanese Model,” Wash. Post (November 25, 1997), at Al. 155 Jeffrey Sachs, “The Wrong Medicine for Asia,” New York Times (November 3, 1997), at A30. 156 David Sanger, “Asia’s Economic Tigers Growl at World Monetary Conference: Say Opening of Markets Hands Wall Street Too Much Power,” New York Times (September 22, 1997), at Al. 157 David Sanger, “Rubin to Press Central Banks to Disclose Financial Data,” New York Times (September 19, 1997), at C5. Secretary Rubin also urged the Thais to follow the IMF’s prescriptions for economic recovery. While acknowledging that such measures will cause enormous hardships on the Thai people, Secretary Rubin attributed such difficulties to the financial crisis itself rather than to IMF-backed reforms. See M. Landler, “Rubin Hoping Thais Back Requirements of the I.M.F.,” New York Times (July 1, 1998), at A9. For a discussion of the merits of requiring the U.S. Congress to pass domestic legislation that would require detailed disclosures by overseas mutual funds on the types of equities being invested in along with a requirement that all portfolio assets meet accounting and reporting standards established by the International Accounting Standards Committee, see Krider (1998), p. 427. For a discussion on enhancing the quality of financial systems as a means of preventing future financial crises, see Douglas Arner, Financial Stability, Economic Growth, and the Role of Law, supra, at 71–88. 158 “IMF Proposes Plan for Early Warning of Economic Crises,” Wall St. J. (February 12, 1996), at C18.
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Supplemental Reserve facility (SRF) to create a funding mechanism for its members experiencing exceptional balance of payments difficulties.159 IMF officials now urge developing nations to publish periodic financial reports providing accurate information on inflation, money supply, and foreign exchange reserves, so that economic warning signs can be detected early on. Shock waves from the Asian financial crisis may still be reverberating; however, certain analytical conclusions are already being set forth by the IMF as well as its critics. The IMF attributes the Asian financial crisis not to macro-economic imbalances but to systemic weakness in the financial and banking systems in affected East Asian countries, as well as to poor governance in general.160 Poor governance covers the lack of transparency in financial dealings (particularly by the respective host governments involved), “crony capitalism,” and poor supervision of banking and financial systems. In a fact sheet issued by the IMF on the Asian financial crisis, it attributes the crisis to, among other things: [systemic] weaknesses in financial systems and, to a lesser extent, governance. A combination of inadequate financial sector supervision, poor assessment and management of financial risk, and the maintenance of relatively fixed exchange rates led banks and corporations to borrow large amounts of international capital, much of it short-term, denominated in foreign currency, and unhedged. As time went on, this inflow of foreign capital tended to be used to finance poorer-quality investments. Although private sector expenditure and financing decisions led to the crisis, it was made worse by governance issues, notably government involvement in the private sector and lack of transparency in corporate and fiscal accounting and the provision of financial and economic data.161
In response, the IMF made US$35 billion in its own financial resources available to support the Indonesian, Korean, and Thai economies, and mobilized over US$77 billion in additional resources for these countries. Further, the IMF moved quickly to institute structural financial reforms, including tightening monetary policies to ease the balance-of-payments crunch, closing nonviable financial institutions, and addressing poor governance issues by urging the liberalization of capital markets and insisting that governments disengage from businesses.162 Nevertheless, the IMF’s approach, while perhaps laudable in intent, has been the subject of serious criticism. The IMF’s insistence on its stand-by policy of tightening fiscal controls by sharply decreasing government spending ignored the fact that most of the affected East Asian economies had budget surpluses (not the usual developing See Fact sheet, “The IMF’s Response to the Asian Crisis,” (February 11, 2009). Id. 161 Id. The IMF details its responses to the crisis, including establishing the Supplemental Reserve Facility (SRF) for use when the IMF’s members experience exceptional balance of payments difficulties owing to a large short-term financing need resulting from a sudden loss of market confidence. The IMF also issues certain admonitions for the future in order to avert such crises from reoccurring. 162 Id. at 2–3. 159 160
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country malaise of huge government deficits), high savings accumulations, and relatively little inflation. The huge currency devaluations may not serve the region well unless there is a prompt recovery in these economies. “Crony capitalism” and under-regulated banking systems are elements in a contagion that has affected Russia, Mexico, and Australia,163 and it is clear that the IMF’s prescriptions have not been fully effective in containing it. Brazil, for example, in reaction to this contagion was forced to devalue its currency by 40% in 1998, and to borrow US$15 billion in fresh loans from the IMF on August 5, 2001. In sum, there is a new recognition of and emphasis on the importance of social safety nets as well as on the role of Japan in absorbing exports from the affected East Asian economies.164 In closing, it may be well to draw some preliminary conclusions in a “compare and contrast” exercise looking at both financial crises in Mexico (Latin America) and Thailand (East Asia). The first is that Latin America has lagged behind East Asia in three important respects since the 1980s (or the so-called “lost decade for development”), namely: (1) by being slower to institute macroeconomic stability needed to facilitate long-term sustained economic growth; (2) by not integrating into the global economy through exports at the same rate at East Asian countries; and (3) by lagging behind in its technological capacity, intra-regional trade linkages and transportation. In contrast, East Asian success had been seen to flow from its stable macroeconomic environment combined with stable political conditions. The national commitment of East Asian countries to economic growth, despite challenges in instituting marketbased institutions and legal frameworks, also facilitated long-term economic stability.165 Nevertheless, Latin American and East Asian countries were not expecting nor completely prepared for the financial contagion beginning in the United States in 2008.
5.7
Global Financial Contagion and Its Implications
As a final codicil to this discussion, a study was conducted by the RAND Corporation on why certain markets appear to be vulnerable to financial contagion, while others do not.166 The study found that the Mexican peso crisis of December 1994 and the Thai baht crisis of July 1997 were, in fact, contagious. “Financial contagion” is defined as “the loss of confidence in local financial assets due to an external
See Fareed Zakaria, “Will Asia Turn Against the West?” New York Times (July 10, 1998), at A17. 164 L. Rohter, “Brazilians Uneasy Despite Help by I.M.F.,” New York Times (August 6, 2001), at A1. See also P. Blustein, “Rubin Heads Home After Prescribing Bitter Medicine for Asia,” Wash. Post (July 2, 1998), at El. 165 Elson (2006). 166 Lowell et al. (1998). 163
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financial collapse,” and while external indicators such as inflation, interest and unemployment rates may be indicators, they are not dispositive.167 So, let us be cautiously optimistic that the early warning systems and other mechanisms designed to detect financial collapse will work as intended, thus averting any such future contagions from recurring in the future.168
5.7.1
The U.S. Financial Contagion as a Case Study
The test of this preparedness against global financial contagion came in 2008–2009 that ironically began in the floundering U.S. real estate market rather than in an emerging or developing economy. This crisis was precipitated by U.S. banks and financial institutions lending to lower-income mortgage-seekers with potentially lower credit scores. However, there was a systemic lack of due diligence in the way in which these “subprime” loans were made. Rather than exercising more caution in evaluating potential borrowers, setting higher standards for collateral requirements, and charging higher interest rates on the mortgages that reflect the true risk to the lender, mortgage lenders failed to exercise the necessary prudence and caution that was required.169 With respect to subprime and “Alt-A” loans (i.e., loans with risks between prime and subprime), many subprime loans were so-called “ninja” loans–or loans based on “no income, jobs or assets.” Moreover, many borrowers were lured into the mortgage market with “teaser” interest rates or interest-only rates that expired when the principal payment on the loan was required to be paid back.170 Thus, what initially seemed affordable, quickly became unaffordable, forcing such home-owners towards foreclosure and even homelessness. Perhaps the underlying assumption spurring such lackadaisical screening of these loan applications was the solid belief that the U.S. housing market would only appreciate in value over time. In fact, this has been the case since the 1930s. Therefore, if the borrower failed to pay a mortgage payment on time, the home’s increase in market value could more than compensate for a refinancing or, in the event of a foreclosure, pay for the loan, with accrued interest and penalties. This underlying belief (or optimism) was seriously eroded when the U.S. housing market began slipping.171 Refinancings were simply not possible with many subprime borrowers who had limited equity and collateral.
167
Id. See e.g., Head (2010), p. 43. 169 Dodd and Mills (2008), p. 14. 170 Id. at 15. 171 Hannes Androsch, “The financial contagion now spreading worldwide,” Europe’s World (Summer 2008), at 23. 168
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Finally, it is axiomatic that spreading the financial risk of a loan is a prudent course of action for a banker to take. The manner is which this risk allocation was done, however, has now raised serious questions. Securitization is the process whereby mortgages are transformed into tradeable securities. Mortgage-backed securities (MBSs) issued by the U.S. Government sponsored enterprises, Fannie Mae and Freddie Mac, have standard underwriting standards. However, for other types of securitizations, this was not the case. Home loans became an asset-backed security that formed part of a collaterialized debt obligation (CDO). The CDO was packaged (or bundled with many other such instruments), rated by an independent credit rating agency, and then sold to third party investors. These agencies rated more than 90% of securitized subprime loans being converted into securities as AAA, the top rating.172 (Perhaps it would have been wiser to give them junk bond ratings in light of the implicit financial risk of such CDOs.)173 Investors in these securities and credit derivatives included international purchasers, among them being the Swiss-based UBS, the UK-based Northern Rock, and the German-based Landesbank Sachsen.174 This new financial contagion jumped across national borders through international securities sales. Contamination of European capital markets became unavoidable, adding to an international crisis in confidence in global capital markets.
5.7.2
International Consequences of Global Market Contagion
In August 2007, the French bank, BNP Paribas, announced that it was suspending withdrawals from certain of its money market funds. At that point, many banks became seriously concerned about their exposure in terms of their lending commitments to other banks, hedge funds, and other corporate entities. Banks became reluctant to lend to each other (i.e., inter-bank lending). Moreover, loan securitization was slowing down and, as a result, many banks were retaining more loans on their books. The result was “unprecedented illiquidity in interbank markets.”175 This reluctance to lend became a “credit crunch” which also led, in part, to a collapse of municipal bond, student loan and credit card-related markets.176 The dominoes started to fall with the failures of Lehman Brothers, Bear
172 Dodd and Mills (2008), p. 17, who note that the then two largest credit rating agencies, Ambac and MBIA were estimated to have lost US$23 billion. 173 Peter Hatges, “Containing the Financial Contagion,” CA Magazine (January-February 2009). 174 Hannes Androsch, “The financial contagion now spreading worldwide,” supra. In fact, the former Austrian Finance Minister, Hannes Androsch, argues that unsuitable financial products were sold to unsuspecting customers. 175 Dodd and Mills (2008), p. 17. 176 Id.
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Stearns, Fannie Mae, Freddie Mac, IndyMac, and others from Spring through the Fall of 2008.177 In a panic, the U.S. Government began enacting legislation and taking extraordinary measures in response to the credit crunch which fall outside of the scope of this discussion.
5.7.3
The G-20 Response
For purposes of this discussion, perhaps the most interesting and notable aspect of this financial crisis is the international political response to the U.S. financial contagion of 2008–2009. The G-20 met in Washington, DC on November 15, 2008, to discuss reforming the international financial architecture. While the meeting was hailed as “Bretton Woods II,” most commentators agree that it did not live up to its expectations.178 Two points related to this meeting merit discussion here. First, the meeting was not called for by former President Bush, but by former French President Nicolas Sarkozy and former U.K. Prime Minister, Gordon Brown.179 Second, this was not a G-7 summit (i.e., Canada, France, Italy, Japan, the U.K. and the U.S.), or a G-8 meeting (the G-7, plus Russia), but a G-20 meeting. The G-20 includes the G-8 and adds certain emerging economies such as Brazil, India, China, Argentina, Turkey, South Africa, Mexico and Indonesia. Australia, South Korea and the EU have also been added along with Saudi Arabia.180 The G-20 reaffirmed its commitment to an open global economy, free market principles, open trade and investment, and respect for the Rule of Law. The G-20 also rejected protectionism as a course of action under these circumstances. While stating its guiding principles for ensuring accountability and transparency, imposing regulatory regimes and prudential oversight, the G-20 also: underscored that the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have [a] greater voice and representation in these institutions.181
While the former World Bank’s President, Robert Zoellick, admitted that, “the G7 is not working,” he dismissed the G-20 by calling it valuable, but “too unwieldy in moving from discussion to action.”182 This dismissive attitude was not helpful as
See e.g., Ashley Seager, “US Mortgage Giants Taken into Public Ownership,” The Guardian (September 7, 2009). 178 “G-20 heads of state meeting 15th November 2008: summary and analysis of Washington meeting,” Bretton Woods Project (November 17, 2008). 179 Lex Rieffel, “The G-20 Summit: What’s It All About?” Brookings (October 27, 2008). 180 See Ed Pilkington, “The G 20: Who is there and how desperate are they?” The Guardian (November 15, 2008). 181 Statement for G-20 Summit, November 2008, Council on For. Rels. (November 15, 2008). 182 “International economic architecture: cleaning up the mess?” Bretton Woods Project (November 27, 2008). 177
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it failed to recognize that U.S. capital markets and bank regulation actually affects the rest of the world. Indeed, it may be argued that this signals in a very concrete way that a non-polar world has been ushered in. Viewing this development in a broader historical context, Fareed Zacharia identifies three tectonic power shifts. The first began in the fifteenth century and accelerating through the eighteenth century, culminating in the idea of modernity (nation-states, capitalism, scientific rationality, technology). The second shift began in the end of the nineteenth century, culminating in the rise of the United States. The bipolar symmetry of the Cold War was replaced by the unipolarity of U.S. dominance from 1991 onwards in ideas, culture, governance and economics.183 While this “unipolar moment” only lasted for about 15–20 years,184 Zacharia argues that such U.S. dominance was unprecedented in history, an argument that may not necessarily be universally accepted. He also rather dramatically announced that, “[t]here really is not a Third World anymore.”185 Zacharia further observes that: On every dimension other than military power–industrial, financial, social, cultural–the distribution of power is shifting, moving away from U.S. dominance. That does not mean that we are entering an anti-American world. But we are moving into a post-American world, one defined and directed from many places and by many people. . . . The world is changing, but it is going the United States’ way. The rest that are rising are embracing markets, democratic government (of some form or another), and greater openness and transparency. It might be a world in which the United States takes up less space, but it is one in which American ideas and ideals are overwhelmingly dominant. The United States has an opportunity to shape and master the changing global landscape, but only if it first recognized that the post-American world is a reality–and embraces and celebrates that fact.186
This story is still unfolding.
5.8
Tactical Approaches to Resolving the Debt Crisis
The following section examines specific tactics for dealing with the debt crisis, namely debt exchanges (or swaps); the securitization of debt through the issuance of exit bonds; and special financing techniques such as co-financings and growth facilities.
183
Zacharia (2008). Haass (2008). 185 “G-20 heads of state meeting 15th November 2008: summary and analysis of Washington meeting,” supra. 186 Id. 184
5.8 Tactical Approaches to Resolving the Debt Crisis
5.8.1
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Debt-for-Debt Exchanges
Beginning in 1982, a small market for inter-bank trading of sovereign debt assets began to develop.187 For example, if a bank wanted to consolidate its portfolio of loans in Mexico in exchange for another bank’s portfolio in the Philippines, an interbank swap would be arranged.188 These informal inter-bank arrangements gradually developed into a secondary market for trading sovereign debt. This market developed over time in final recognition of the fact that certain debts would never be collected in the full amount of their face value. Sovereign debt began to be traded at a discount, the discount reflecting, in part, the eventual likelihood of repayment. In other words, the deeper the discount, say, 20 cents on the dollar, the less likely it is that the debt will ever be repaid. Purchasing discounted sovereign debt in a “swap” attracts several different types of players. First, by repurchasing its own debt in a debt buy-back, a sovereign debtor can avoid future interest payments (and the drain on its foreign reserves), and reduce its overall debt liability. The lending bank would also realize an immediate return, albeit heavily discounted from the original face value of the loan. A debt buy-back liquidates the loan, and permits the lending bank to remove the loan from its portfolio. Interestingly, the principal means of debt reduction under the Brady Initiative was by way of debt-for-debt exchanges, rather than by cash buy-backs by debtor nations. Discounted bonds, par bonds, and temporary interest rate reduction bonds were all classified as debt-for-debt exchanges under the Brady Initiative.189 In fact, if cash buy-backs by sovereign debtors had been attempted, such buy-backs may have triggered restrictive covenants in the original loan agreements. For example, if an original loan agreement contained a sharing clause, it would force a debtor nation to obtain the unanimous consent of all the creditors before amending the agreement. This means that a single creditor can withhold consent for any Brady-type transaction, potentially holding the entire debt restructuring process hostage. Debt-for-debt exchanges avoid this possibility in a very clever way. The debt-for-debt exchange first came into being in Mexico’s debt restructuring agreement entered into in 1987. By offering to issue new debt instruments in exchange for outstanding credits, Mexico was negotiating for greater flexibility with its creditors. If the new debt instruments had a “weighted life to maturity”’ equal to or longer than the outstanding loans, Mexico was not obligated to make its offer to exchange the debt to all its creditors on an equal basis. If the new debt instruments had a weighted life to maturity less than the outstanding loans, then Mexico would have been obligated to treat all of its creditors equally and make the offer available to them all. Thus, by offering new bonds with a weighted life to
187
Monteagudo (1994), p. 68. See also Sperber (1988), p. 377. Power (1996), p. 2715. 189 Buchheit L (1991), pp. 13, 14. 188
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maturity equal to the original loans, Mexico avoided the operation of restrictive clauses contained in the original loan agreements.190 Therefore, using debt-for-debt exchanges means that restrictive covenants in the original loan instrument do not necessarily apply to the new exit bonds being issued. A sovereign debtor, for example, can pay off certain debtors before others. This meant that creditors were no longer being treated equally. This also gave sovereign debtors the leverage to work outside the confines of the Banking Advisory Committee.191
5.8.2
Debt-Equity Swaps
Foreign investors interested in purchasing equity also became very interested in secondary market trading of sovereign debt. Many transnational corporations became interested in debt-equity swaps whereby a foreign corporation would use its dollar-denominated funds to purchase sovereign debt at a discount on the secondary market. The commercial bank extinguishes the underlying debt, and the corporation exchanges the debt instrument with the Central Bank of the sovereign debtor for local currency. The local currency is then applied towards equity (share) purchases in private companies or in state-owned enterprises (SOEs) that are in the process of being privatized. If a debt-equity swap is involved in an SOE privatization, then the initial purchase by a foreign investor may be in the form of a joint venture, a joint-stock company, or some preliminary form of a public-private partnership. Generally, local currency proceeds generated by a debt-equity swap are exchanged for the local currency equivalent to the face value of the original debt. Thus, if US$100 worth of debt is bought for US$80 in hard currency, it is exchanged for the equivalent of US$100 worth in local currency. By purchasing sovereign debt at a discount on the secondary market and exchanging it for equity shares in a local enterprise, the foreign corporation becomes a direct equity participant in the local economy. The release of local currency into the local economy pursuant to a debt-equity swap has to be carefully tranched, however. Too much local currency flooding the market will cause inflationary conditions. However, this can be avoided by converting the debt instrument into an equity holding immediately, without monetizing the debt into local currency.192 Critics have argued that these types of swaps do not bring in new foreign direct investment, but this may be a viable strategy for initially attracting foreign investors to the local economy.
190
Id. Id. at 14. 192 Vernava (1996), pp. 89, 96. 191
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With regard to debt-equity swaps, however, there are usually restrictions imposed by the developing country’s central bank on “roundtripping.” Round-tripping uses a debt-equity swap to purchase debt at a discount, and exchange it for local currency. The local currency is then reconverted into hard currency and repatriated out of the country. This not only leads to a loss of the developing country’s foreign currency reserves, but also contributes to the expatriation of flight capital out of the country. The foreign corporation profits from the swap by taking advantage of the discount to obtain more local currency. In other words, the swap enables the foreign investor to acquire more local currency than is available through a straight exchange of hard currency at normal foreign exchange rates. Currency speculators have also showed an interest in secondary market debt conversions, buying steeply discounted debt in hopes that the discount would improve, thus permitting the speculator to profit from the difference. Clearly, the sovereign debtor needs to regulate or restrict unlimited arbitrage opportunities made available through the vehicle of debt-equity swaps.193 Apart from corporations interested in debt-equity swaps, non-profit organizations have also expressed a strong interest in debt conversions. Many organizations, following the lead of the Conservation International’s debt-for-nature swap in Bolivia in 1987,194 use local currency proceeds to finance conservation activities or biodiversity protection. The non-profit organization purchases the dollardominated debt at a discount, and redeems the debt instrument for local currency. (The hard currency price of the debt may even be donated by a third party, based on tax write-off considerations.) Generally, the non-profit organization bargains for the local currency equivalent of the full face value of the debt. The local currency proceeds are generally paid by the central bank of the developing country in exchange for extinguishing the hard currency-denominated debt. The local currency proceeds are then used by the NGO in support of in-country, agreed-upon uses. Moreover, such swaps need not be limited to debt-for-nature uses, but have many creative outlets in so-called debtfor-development swaps in support of environmental conservation and habitat protection, education, artistic endeavors, historic preservation, and other uses. Thus, debt-equity swaps help reduce the debt overhang of developing countries, liquidate non-performing debt from the loan portfolios of commercial banks, and transform public debt into private equity holdings. Since there are no formal reporting requirements for secondary debt trading, official records of the amounts being traded do not exist; however, the World Bank estimated that secondary market sovereign debt sales approximated US$7 billion in 1986. By 1993, that amount had burgeoned to US$273 billion.195 Despite these impressive figures, Chile, Mexico, the Philippines, and perhaps a handful of other developing countries have exchanged only US$10 billion in the face value of sovereign debt in debt-equity swaps, and Chile accounts for roughly a third
193
See generally, Power (1996), pp. 2718–2719. Chamberlin et al. (1994), pp. 525, 533. 195 Power (1996), p. 2719. 194
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of this figure. Chile reduced its debt stock by 10% through debt-equity swaps. By 1986, debt-equity swaps had liquidated a mere US$5 billion out of the staggering US $800 billion in developing country debt.196 Although debt-equity swaps are an innovative technique for the transformation and reduction of debt, this approach is by no means a panacea.
5.8.3
Securitization of Debt
A novel feature of the Brady Initiative was its ability to transform sovereign debt into bonds. This debt-for-debt exchange is different from a debt-equity swap since the debt is not being traded for an equity investment in a developing country enterprise or for local currency proceeds. Rather, the original debt is traded at a discount for a negotiable instrument (e.g., a bond). In other words, the debt is securitized. These so-called Brady bonds or exit bonds permit the commercial bank to “exit” from the loan instrument as well as the country risk of the loan. (Under the Brady Initiative, the risk of non-payment is assumed by the IMF or the USG through enhanced credit guarantees).197 Swapping sovereign debt for high-yielding securities has been a tactic in managing the debt crisis that has met with mixed success.198 Another approach to securitizing debt is to transfer the loan assets to a third party who then pools the assets and sells the pass-through interests to outside investors.199 The discount of the loans can also be “passed through” to the ultimate investor, making the security an attractive investment vehicle. This “Fannie Mae” type of investment greatly expands the potential number of investors (i.e., bondholders). However, a large number of bondholders may prove to be unwieldy in cases where the underlying debt has to be restructured.200
5.8.4
Special Financing Techniques
Co-financing is another means of providing enhanced credit or guarantees of debt instruments. Under a co-financing arrangement, commercial banks lend monies in conjunction with official loans extended by the World Bank or other official donors.
196
Boyd (1988), pp. 481–482, 484. For a general discussion of debt-equity swaps, see Maktouf (1989), p. 909. 197 Monteagudo (1994), p. 72. 198 For a discussion on the 1988 Morgan Guaranty/Mexican Plan to securitize Mexican foreign debt holdings by issuing U.S. Treasury zero-coupon notes and various “junk bond” schemes, see Plehn (1989), p. 161. 199 Buchheit (1988b), p. 395. 200 MacMillan (1995b), pp. 57, 67.
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The official creditor may extend a loan in a separate credit agreement or pursuant to a parallel credit agreement with commercial banks.201 The enhanced credit portion of the loan may be blended with the market rates offered by the commercial lenders to make the entire financing package slightly more concessional in nature. A sovereign borrower can also refinance its debt by issuing capital market instruments. Once these securities are purchased by third parties, the sale proceeds can be used to retire outstanding debt or existing new money loans. The advantage of this approach is that the sovereign borrower can directly raise funds from international capital markets by issuing its own securities.202 So long as the underlying debt restructuring is satisfactory and the sovereign borrower does not run afoul of restrictive covenants in existing debt instruments, this could be a constructive means of regaining the borrower’s financial health. Another means of recovering from severe balance-of-trade imbalances is to use stand-by credit facilities that operate on a revolving fund basis. These credit or growth facilities were developed in response to the increasing alarm being expressed by sovereign borrowers concerning IMF adjustment programs. These structural adjustment programs, originally conceived as emergency measures to jump start the economy, were becoming long-term strait-jackets. Thus, a proposed solution was to release disbursements from a credit facility when the sovereign borrower met specific, agreed-upon economic targets. Further, where a developing country is heavily dependent on one or two commodities (such as oil) to generate foreign exchange, a loan facility may be indexed. This means that the amount that can be drawn down under a new money commitment is linked to the international market price for that commodity. In Mexico’s case, the IMF stand-by arrangement provided for IMF contingency payments in case the export price of Mexico’s oil fell below US$9 per barrel. The availability of new money would be commensurately reduced if the price of Mexican oil rose to above US$14 per barrel. As additional financial support, commercial bank lenders were asked to help fund a US$1.2 billion Contingent Investment Support Facility from which Mexico could draw down funds in the event of slipping oil prices.203 However, this type of indexing has been criticized insofar as it does not encourage the sovereign borrower country to make necessary macro-economic adjustments.204 As a codicil, in most cases, initial funding for the credit facility is deposited in a special account in the central bank of the borrowing country. Funds from the facility are disbursed by the central bank once agreed-upon, eligible trade transactions are completed. Once the foreign creditor is paid, the funds must be redeposited in the central bank special account or used to fund another trade transaction. In addition to
Id. at 384. See also M. Stumpf & W. Debevoise, “Overview of Techniques: Raising New Money, Growth Facilities, Cofinancing and Collateralized Borrowings,” in International Borrowing: Negotiating and Structuring International Debt Transactions, supra, at 522. 202 Buchheit (1988b), pp. 396–397. 203 Id. at 387–388. 204 See Ebenroth (1989), p. 649. 201
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trade transactions, agreed-upon investment (or capital) projects can be used so that the sovereign borrower can draw down from the stand-by credit facility once internal benchmarks under the program have been met.205 All this having been said, commercial lenders and multilateral banking institutions need to come to terms with the fact that market-based commercial lending for certain countries and for certain sectors in particular developing countries is simply not workable. More realistic targets for debt repayment by developing countries need to be negotiated in seeking a long-term resolution of the debt crisis.
5.9
Debt Relief as a Development Strategy
The debt crisis, both in terms of its magnitude and its prolonged time frame, led to the mutual reinforcement of commercial banks’ and IMF agendas. However, this may be an opportune time to consider restructuring the World Bank’s lending portfolio in light of radically different global conditions and development policies. Specific options are set forth for discussion purposes below.
5.9.1
A Menu of Options for Middle-Income Countries
Middle-income countries, while still in need of debt relief measures (as contemplated by the Brady Initiative, for example), should creatively make use of the menu of options available to them to effectively write down their debt. The previous discussion addressed securitization and collateralization of debt, as well as specific techniques, such as swaps, co-financing, on-lending, and indexed facilities, which will not be repeated here.206 Formulating a menu of options for debt and debt service reduction is critical to encourage the continued economic growth of middleincome countries. Economic growth through capital investment in emerging capital markets is an important factor as well, and this will be addressed in Chap. 7. The restrictive clauses found in many loan agreements are designed, as in the case of pari passu207 and sharing clauses, to ensure the equal treatment of creditors. Each
MacMillan (1995b), pp. 57, 67. See also M. Stumpf & W. Debevoise, “Overview of Techniques: Raising New Money, Growth Facilities, Cofinancing and Collateralized Borrowings,” in International Borrowing: Negotiating and Structuring International Debt Transactions, supra, at 522. 206 See S. Claessens et al., “Market-Based Debt Reduction for Developing Countries: Principles and Prospects,” World Bank Paper No. 16 (1990). 207 See generally, Newfield (2016), p. 175. The case involved the economic crisis in 2001, where the Republic of Argentina (Argentina) failed to make payments on bonds owned by foreign investors. One bondholder, NML Capital, Ltd. (NML), later prevailed in several actions it filed against Argentina in federal district court, which entered judgments totaling more than US$2 billion in NML's favor. In order to execute the judgments against Argentina, NML served subpoenas on two 205
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creditor is thus guaranteed that it will receive its pro rata share of loan repayments. Other restrictive clauses, such as negative pledge, mandatory prepayment, and crossdefault clauses, ensure that the interests of unsecured creditors are not subordinated to other lenders who enter into subsequent loan agreements with the same borrower. These types of restrictive clauses tend to exert a prospective or injunctive effect on future indebtedness by prohibiting the borrower from pledging assets or revenues to subsequent creditors. Alternatively, the borrower may be penalized for its prepayment of the loan or deemed to be in default if the borrower defaults on another, unrelated loan. But the equal treatment of all creditors is a critical legal assumption that has been changed by the debt crisis of the 1980s. The debt-for-debt approach of the Brady Initiative changed the legal effect of sharing and negative pledge clauses by permitting the debtor to repay its creditors in a preferential, selective way. The “menu” approach of the Brady Initiative requires that each commercial bank creditor choose a menu option. The options can be tailored to permit each bank to meet its own capital, tax, and other constraints. This encourages efficiency and coordination between syndicated lenders, and it tends to minimize “free rider” problems. In the final analysis, however, choosing from a menu of options means that the conservative and orthodox legal notions treating all creditors equally has been vitiated. Further, the inclusion of restrictive clauses, such as the negative pledge clause, in loan agreements by the World Bank in the context of sovereign lending can severely affect the borrower country’s ability to obtain additional financing. This is especially so in cases where the sovereign borrower owns a great deal of capital assets and needs to pledge the use of these assets in secured lending arrangements with other creditors. Although the pledge of sovereign assets may technically be a breach of contract and entitle the multilateral lender to seek an acceleration of payment on the original loan or to seize the pledged assets, this “right” is rarely, if ever, exercised.208 This would lead to a politically awkward situation were the World Bank to foreclose its loans and seize the assets of a member country. The World Bank and other multilateral lenders have granted waivers from negative pledge clauses, but the utility of such restrictive clauses in sovereign loan agreements and their continued inclusion therein should be carefully re-examined.
banks requesting information about Argentina’s assets held worldwide. Argentina moved to quash the subpoenas and argued that they violate the Foreign Sovereign Immunities Act (FSIA) by requiring the disclosure of assets that are immune from collection by NML. The U.S. Supreme Court held that while NML and Argentina may disagree as to whether property within the United States is covered by the FSIA’s immunity, the fact that some property may be immune from attachment does not mean the property is also immune from discovery. As the scope of FSIA only grants immunity to property held within the United States, NML may be able to find foreign property held outside the United States that is attachable under the law of the foreign jurisdiction, but that would be immune from attachment if held in the United States. See Republic of Argentina v. NML Capital, Ltd., 134 S.Ct. 2250 (2014). (See also “Argentina v. NML Capital, Ltd.” Oyez, 5 June 2018). 208 Hurlock (1994), pp. 347–350, 356.
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5.9.2
5 Sovereign Borrowing and Debt: Legal Implications
Additional Approaches to Debt Relief
An additional approach to resolving the debt problems of developing countries would be to monetize debt repayments to the World Bank or bilateral donors in local currency. If local currency were used rather than hard currency (i.e., foreign exchange reserves generated by exports), the most heavily indebted nations could ease their debt burden. The local currency repayments could be deposited in a special account in the central bank of the debtor country, and programmed for agreed-upon uses with the multilateral bank or bilateral donor. Potential uses for local currency would be to support human resource development, education, and developing non-traditional exports and markets. Tranching the release of the local currency needs to be done carefully in order to avoid inflation becoming a problem by flooding local markets with cash. A more structured approach would be to set up an endowment or special trust fund to oversee the uses of the local currency. Rather than replenishing the capital stock of the World Bank, the local currency generated could be used in-country for purposes agreed to by the World Bank. Alternatively, the local currency deposits could be used to support internal government fiscal deficits.209 To avoid the inflationary impact of such deposits, the local currency could be “sterilized” or simply taken out of circulation in accordance with IMF structural adjustment measures. This way, the drain on outgoing foreign exchange is halted, and external debt repayable in hard currency becomes internal debt repayable in local currency. The precedent for doing so lies in the Enterprise for the Americas Initiative (EAI)210 enacted in 1990 and 1992, providing limited debt relief for eligible Latin American countries. EAI provides that eligible Latin American and Caribbean countries, whose governments are democratically elected, who do not support international terrorism, and who cooperate in international drug trafficking matters, may be eligible for debt forgiveness. Upon entering into an Americas Framework Agreement, the debtor country deposits principal repayments in U.S. dollars into a special account. Interest payments are to be deposited in local currency into an interest-bearing Americas Fund account. The local currency is held in that account until it is disbursed for programmed uses in conservation, the sustainable use of natural resources linked to local community development, or child development activities. Based on an appropriation by the U.S. Congress of US$90 million, the Bush I Administration forgave US$611.1 million owed by six countries in Fiscal Year 1993.211
209
It is unlikely that such local currency deposits could be securitized by issuing Treasury-like bonds denominated in local currency. The sales of such bonds to local pension funds or institutional investors would only generate additional local currency and create inflationary conditions, or result in worthless bonds. See Hurlock (1994), pp. 347–350, 356. 210 See Jobs Through Exports Act of 1992, Pub. L. No. 102-549, § 602(a), 106 Stat. 3664 (1992), as codified, and as amended, at 22 U.S.C. § 2430, et seq. 211 Sanford (1995), p. 372.
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By 1995, the USG had forgiven over US$2.3 billion owed to it by the most heavily indebted nations.212 Despite the modest progress made in the last decade, it is clear that the political obstacles to debt relief for the most heavily indebted countries are highly problematic. Before debt relief can become a feasible option for the poorest, most heavily indebted countries, there has to be a new political awareness of the stakes involved. As previously discussed, the possibility of these countries slipping into intractable poverty and political instability makes them highrisk targets for military or fundamentalist take-overs, terrorism, or even political disintegration and genocide. Therefore, debt relief should be seen as a political opportunity to stabilize economies and avoid potential calamities.
5.9.3
Debt Relief for the Most Heavily Indebted Nations
In returning to the original proposition, the past several decades has shown that debtor countries are not on a “level playing field,” and cannot be treated equally. Imposing market discipline on heavily indebted nations such as sub-Saharan countries has not been successful.213 Structural adjustment reforms, such as eliminating subsidies and market distortions and correcting interest rates, are difficult to implement, even in industrial nations. These types of market corrections are especially burdensome in developing countries. These countries often have unstable and vulnerable economic and political systems that are further unbalanced by conditions of endemic poverty.214 Therefore, rather than narrowly focus on correcting balance-of-payments imbalances, macroeconomic reforms should be more broadly directed at export market creation (perhaps by developing non-traditional exports for regional trade),215 poverty reduction, and human resource development. Additionally, programs that address the development of human capital should, inter alia, address democracy and governance issues. It is unclear whether foreign aid or policy-based lending that conditions grant assistance and loans on meeting agreed-upon economic targets or policy changes are a successful means of promoting sustainable growth in very poor societies. The fairly dismal results after more than six decades of development effort do not inspire much confidence. Therefore, a “Sub-Saharan African Marshall Plan” may not be the best approach. What is clear, however, is that some societies are ill-equipped to absorb the structural reforms imposed on them by the IMF and the World Bank. Perhaps this is because they lack sophisticated markets, civil societies, or a democratic political fabric but, in any case, this type of approach is simply not working in many cases.
212
Id. at 389–390. Levinson (1992), pp. 47, 48. 214 E. Stern, “Prospects of Development Financing in the 1980’s,” supra, at 152–153. 215 For a scathing critique on the failure of African trading regions or areas, see Matua (1995), pp. 1113, 1170–1175. 213
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For heavily indebted countries, debt relief seems to be the only remaining option. Holding their economies hostage to the repayment of non-performing debt does not help stabilize or strengthen their economies. Indeed, the actors in the international debt scene fall into two camps: those in favor of debt relief, and those opposed to it. The camp in favor of debt relief, particularly for heavily indebted nations (referred to in some circles as the Fourth World), believes that oppressive debt repayment schedules stifle short- and long-term economic growth. The opponents of debt relief, however, are very powerful. Debt forgiveness has long been resisted by the U.S. Treasury Department, the U.S. Federal Reserve Board, U.S. commercial bankers, and official lending institutions.216 The argument against debt relief is persuasive: it would create a moral hazard by penalizing countries that have been repaying their debt, damage the sovereign debtor countries’ future credit ratings, and weaken world financial markets. Additionally, it would force commercial bank lenders to incur heavy losses, and it would decrease the possibility of opening up new channels of credit to sovereign borrowers who may be thereby forced to operate on an unworkable cash-only basis. And finally, it would not provide any real incentives for sovereign borrowers to adopt and implement better economic and fiscal policies.217 Notwithstanding these arguments, the case for constructive debt relief is explored in the next section.
5.9.4
Bilateral Debt Relief: The U.S. Example
The passage of the Federal Credit Reform Act of 1990 (the “Federal Credit Reform Act”)218 changed the method of calculating and forgiving U.S. government loans and loan guarantees beginning in 1992. Before the passage of the Federal Credit Reform Act, one dollar appropriated by the U.S. Congress was necessary in order for a U.S. agency to forgive one dollar’s worth of debt. Section 661a(5) of the Federal Credit Reform Act, as may be amended,219 requires U.S. agencies to calculate the “net present value” of a debt obligation owed to the USG, rather than using the debt’s face or book value. Factors such as the likelihood of default and the interest rate, and maturity period are also taken into account in determining the debt’s net present value. The equivalent amount of the present net value of the debt sought to be forgiven must be appropriated for the fiscal year in which debt relief is sought. 216
Sanford (1995), p. 353. Boyd (1988), p. 485, n. 123. 218 Pub. L. No. 101-508, 104 Stat. 1388, 1388–1610 (1990), codified as amended, 2 U.S.C. § 661 (Supp. V 1994). 219 2 U.S.C. § 661a(5)(B), as may be amended. In other words, below-market interest rates and long maturity periods (both reflecting the concessionality element in loans) decrease the overall present net value of the debt. The concessionality element, in combination with the debtor country’s inability to pay, further decreases the value of the debt and, in effect, increases the discount on the debt. 217
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Much of developing country sovereign debt is heavily discounted because the debtor is unable to repay the debt. This means that the present net value of such debt is far less than its actual face value. Thus, a one dollar’s worth of current fiscal year funds can relieve several dollars’ worth of old, non-performing debt. Current year appropriations must be set aside for debt relief purposes, and that amount is charged against the U.S. agency’s operating account. Thus, debt relief becomes a political choice for both the U.S. and the developing country in question. Performance-based disbursements on loans is an important means for supporting important foreign policy objectives. Further, conditioning debt relief on meeting specified economic or political targets is also a strategic tool in enforcing policy goals. Transforming non-performing and uncollectible debt into grant assistance through debt forgiveness is not as costly to the U.S. taxpayer as it has been in the past, and may serve important policy goals. Moreover, debt relief may serve the interests of debtor nations by relieving them of their repayment obligations, thus enhancing their future borrowing power and enabling donor countries to extend more credit to them. For example, from 1990 to 1995, the USG forgave US$12.93 billion in debts owed by sovereign borrowers-debts owed by Egypt, Poland, and Jordan accounted for over 70% of the total amount.220 In 1990, the USG canceled US$6.7 billion in military debt owed to the United States by Egypt, and canceled 70% of the US$3.8 billion owed to it by Poland. In 1994, the United States canceled US$99 million owed to it by Jordan. Although debt relief served U.S. strategic interests vis-à-vis these particular countries, conditionality was imposed before forgiveness was granted. Poland, for example, was required to pursue certain economic reforms.221 Apart from special political circumstances of Egypt, Poland, and Jordan, the United States has also passed legislation appropriating US$14 million to use in Paris Club reschedulings to help the most heavily indebted countries.222 By 1992, 28 countries that were eligible for debt reduction through the Paris Club owed a total of US$4.08 billion to the United States. Over half of this amount was owed by four countries: Liberia, Somalia, Congo (Zaire), and Sudan.223 The other 24 countries owed US$1.27 billion to the United States. At the same time, these 24 countries owed a total of US$83.6 billion to official creditors (i.e., multilateral and bilateral donors). Since the U.S. debt made up less than 2% of the total debt owed by these countries,224 forgiving this debt may have 220 Sanford (1995), p. 363. The author gives a detailed description of the terms of debt forgiveness to these countries and their relationships to Paris Club reschedulings and to structural adjustment requirements. 221 Section 579(a) of the Foreign Operations, Export Financing, and Related Programs Appropriations Act, 1991, Pub. L. No. 101-513, 104 Stat. 2045 (1990), as may be amended. See also Sanford (1995), p. 387, 388. 222 Section 570 of the Foreign Operations, Export Financing, and Related Programs Appropriations Act, 1994, Pub. L. No. 103-87, title II, 107 Stat. 931 (1993), as may be amended. 223 Sanford (1995), p. 387. 224 Id. at 390.
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been as insignificant for the United States as it was for the debtor nations. Debt service of the amount owed to the United States is also insignificant since most heavily indebted counties generally choose to service multilateral debt owed to the World Bank, rather than debt that is owed to United States or other bilateral donors. This way, these debtor countries remain eligible for future World Bank loan disbursements. Thus, the U.S. bilateral approach, while highly political in nature, gives concrete examples of how debt relief can still be a politically viable but limited option.
5.9.5
Bilateral Debt Relief Through Paris Club Reschedulings
Most official debt, that is, developing country sovereign debt that is owed to bilateral donors such as the United States, France, Germany, and other OECD countries, is rescheduled under the auspices of the Paris Club when default is imminent on the underlying loan(s).225 The Paris Club is an informal, inter-government organization that is hosted in Paris by the French Ministry of Finance. The IMF, the World Bank, the OECD, and the UN Conference on Trade and Development (UNCTAD) have observer status. Based on a G-7 meeting in Toronto in June 1988, the Paris Club approved a plan for limited debt forgiveness. The menu of options, known as the Toronto Terms, permits forgiveness of up to one-third of the debt owed, lower interest rates, and longer rescheduling terms. By September 1990, the Paris Club had approved the Houston Terms permitting longer debt repayment terms and the exchange of up to 10% of market-rate debt through debt swaps. Although the Paris Club rejected the U.K. proposal of the Trinidad Terms in July 1991, which would have canceled two-thirds of all outstanding debt stock and rescheduled the remaining one-third over 25 years, it did accept Enhanced Toronto Terms (also referred to as the “London Terms”) in December 1991, permitting official lenders to cancel up to one-half of outstanding eligible debt owed by sovereign borrowers. In December 1994, the Paris Club agreed to the Naples Terms permitting the cancellation of up to 67% of eligible debt, which will be discussed in more depth later in this text. A Paris Club meeting is normally initiated at the request of the debtor country, and rescheduling is only considered if an IMF stand-by arrangement is already in place. The objective of the meeting is to ensure that all official creditors are treated equally for debt repayment purposes so that preferential treatment of one at the expense over the others does not take place.
225
Non-Paris Club creditors include China, Russia, Saudi Arabia, and Libya. See A. Boote & K. Thugge, “Debt Relief for Low-Income Countries and the HIPC Initiative,” IMF Working Paper No. 24 (March 1997), at 19, n. 2 and chart.
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Rescheduling debt, however, does not forgive it; it merely lengthens the repayment schedule to better enable the debtor country to meet its debt obligations. Generally, the debtor nation reschedules payment of debt that has already fallen in arrears with maturities falling due in the consolidation period (i.e., the twelve-eighteen months immediately following the execution of the rescheduling agreement). Paris Club loan rescheduling agreements agreed to by all participating bilateral donor governments for the sovereign debtor in question are called “agreed minutes.” Both principal and interest may be rescheduled, but debt payments becoming due after the consolidation period, or due after a specific date known as the contract cut-off date, may not be rescheduled. Between January 1980 and September 1993, 60 countries negotiated 204 agreed minutes rescheduling US$210 billion in sovereign debt.226
5.9.6
Multilateral Debt Relief
The World Bank has been in the process of reassessing its views and policies concerning official development assistance (ODA) debt. Although the International Development Association (IDA) was formed in 1960 as part of (or rather, as a program of) the World Bank group to make concessional lending available to the poorest members, it soon became clear that IDA loans were insufficient to address the capital needs of the poorest countries. The World Bank designed the Special Programme of Assistance (SPA) in 1983 in order to help relieve the debt crisis. By 1987 the IMF, the World Bank, and IDA concentrated SPA resources on debt-distressed countries, particularly sub-Saharan nations. Increased IDA disbursements and reflows (i.e., repayment of interest and principal on such loans) for structural adjustment lending, credits from the IMF’s Enhanced Structural Adjustment Facility, co financing with other donors, and certain debt relief measures were made available through the SPA. The World Bank also set up the Special Facility for Africa (SFA) in 1985 in order to provide bilateral donors with the means of co-financing structural adjustmentbased lending to sub-Saharan countries. Additionally, the World Bank established the Debt Reduction Facility in 1989 with an initial funding of US$100 million to be contributed by World Bank, IMF, African Development Bank, and bilateral donor contributions.227 The Facility has already extinguished over US$981 million in external commercial debt (principal), and over US$500 million in interest and arrears on such commercial debt.228 Debt reduction takes place through cash buy-backs of discounted commercial debt, with a certain amount of the facility’s resources being available for 226
Sanford (1995), pp. 359–360. Sanford (1995), p. 400, n. 276. Ernest Stern points out that the World Bank’s lending ratio is extremely conservative since its outstanding and disbursed loans cannot exceed its capital reserves. This may need to be re-examined in forging new means of addressing the debt question. See also E. Stern, “Prospects of Development Financing in the 1980’s,” supra, at 151. 228 World Bank Policy Research Bulletin, Vol. 4, No. 5, Debt Reduction Facility. 227
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collateralizing debt exchange transactions. There is, however, a clear emphasis on short-term balance-of-payments corrections through structural adjustment measures without providing actual debt relief. Thus, the debt reduction facility has been designed to avoid writing off these debts by the World Bank, which would negatively impact on the Bank’s credit rating.229
5.9.7
The HIPC Initiative
Finally, in September 1996, the Interim and Development Committees of the World Bank and the IMF jointly proposed the Heavily Indebted Poor Countries (HIPC) Initiative. In recognition of the fact that the traditional means of dealing with the debt overhang of developing countries, including structural adjustment programs, Paris Club debt reschedulings, bilateral donor debt forgiveness, and new money loans by commercial creditors, have not provided a comprehensive, enduring solution to the debt question, the HIPC Initiative was approved.230 The HIPC Initiative provides for faster and more comprehensive debt relief along with strategic poverty reduction (e.g., spending resources on the recipient country’s social infrastructure such as health and education). Additionally, the IMF now believes that good governance (particularly where transparency and full monitoring of government budgets are concerned) is an integral part of the Initiative. The HIPC Initiative provides for a three-stage process whereby the developing country enters into a 3-year process of policy reforms and uses the Paris Club’s Naples Terms to relieve up to 67% of outstanding, eligible bilateral debt. After the completion of the first stage lasting 3 years (the “Preliminary Period”), the applicant’s eligibility under the HIPC Initiative is decided (the “Decision Point”) based on a Debt Sustainability Analysis prepared by World Bank and IMF staff. In order to be eligible for the HIPC Initiative a country must: 1. Face unsustainable debt situation after the full the full application of the traditional debt relief mechanisms (such as the application of Naples terms under the Paris Club agreement). A country’s debt level is considered unsustainable if debtto-export levels are above a fixed ratio of 150%; or, where countries have very open economies where the exclusive reliance on external indicators may not adequately reflect the fiscal burden of external debt the debt-to-government revenues are above of 250%. 2. Be only eligible for highly concessional assistance from the International Development Association (IDA), the part of the World Bank that lends on highly
P. Blustein, “Debt Relief for Poor Nations Weighed,” Wash. Post (September 15, 1995), at F3. World Bank, The HIPC Debt Initiative webpage. See also A. Boote & Kamau Thugge, “Debt Relief for Low-Income Countries and the HIPC Initiative,” IMF Working Paper No. 24 (March 1997).
229 230
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concessional terms, and from the IMF’s Poverty Reduction and Growth Facility (PGRF). 3. Establish a track record of reform and develops a Poverty Reduction Strategy Paper(PRSP) that involves civil society participation. In order to reach the Decision Point, a country should have a track record of macroeconomic stability, have prepared an Interim Poverty Reduction Strategy Paper, and cleared any outstanding debt arrears. At which point, staffs of the World Bank and IMF carry out a loan by loan debt sustainability analysis to determine the level of indebtedness of the country and the amount of debt relief it may receive. Countries begin receiving interim relief on a provisional basis at this time. The interim period between a country’s decision and completion points varies, according to how rapidly a country can implement its poverty reduction strategy and maintain macroeconomic stability. For a country to reach completion point it must maintain macroeconomic stability under a PGRF-supported program, carry out key structural and social reforms as agreed upon at the decision point, and implement a PRSP satisfactorily for 1 year. Once a country reaches the Completion Point, it receives the full amount of debt relief which now becomes irrevocable. If the external debt ratio for the country is above 150% of the present value of debt to exports, it qualifies for assistance under the HIPC Initiative. If the effort to date has been successful, the debtor country exits the program and is not eligible for further debt relief under the HIPC Initiative. (Borderline cases are given additional time to reach the decision point on a case-by-case basis during an Interim Period.) Any further remaining debt-related assistance is defined at the Decision Point and is provided through the Completion Point for a reduction of up to 90% of eligible debt in present value terms by the Paris Club (or more, as may be determined), and as subject to appropriate burden sharing by other creditors. If the Paris Club reschedulings under the Naples Terms at the second stage have been deemed to be insufficient, then a final determination will be made at the completion point with regard to the eligibility of the country to participate under the HIPC Initiative. Additional debt relief may be provided by Paris Club creditors up to 80% under the Lyons Terms, with comparable debt relief provided by commercial creditors as well. The second stage anticipates that strong policy reforms leading to debt sustainability will occur within 3 years, although this time frame may be shortened by the IMF. Once completed, the country exits from the HIPC Initiative and the debt rescheduling process.231 If, in addition to bilateral and commercial debt relief, the debt sustainability point of the applicant country is not achieved, then there is an additional mechanism that has been put in place. The World Bank has set up the Multilateral HIPC Trust Fund, initially funded with US$500 million from the World Bank, which will be
231
See IMF, Multilateral Debt Relief Initiative (MDRI) Fact Sheet.
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administered by IDA. By September 1999 the HIPC Trust Fund had received approximately US$330 million from bilateral donors and pledges of nearly US $1.8 billion.232 The HIPC Trust Fund, now called the Debt Relief Trust Fund, will either prepay or purchase part of the debt owed to a multilateral creditor (i.e., the World Bank, the IMF, or a regional multilateral development bank such as the African Development Bank), or pay the debt as it becomes due. The IMF estimates the net cost of funding the HIPC Trust will be US$3.5 billion. The IMF will also provide grants or highly concessional loans from its Enhanced Structural Adjustment Facility (ESAF)-HIPC Trust, recently re-named the Poverty Reduction and Growth Facility (PRGF)-HIPC Trust Fund, established in February 1997. These funds will be made available only to cover debt service to the IMF.233 Accordingly, on December 8, 1999, the IMF’s Executive Board authorized the off-market sales of 14 million ounces of the IMF’s gold reserves. Sales of 7.7 million ounces of gold have already taken place.234 The investment income generated by profits from these sales of gold will be used to provide debt relief under the HIPC Initiative. The Debt Relief Trust Fund provides encouraging new progress in adopting a comprehensive, strategic approach to resolving the debt crisis and permitting developing country participants to exit from the debt rescheduling process on a permanent basis. Additionally, in June 2005, the G-8 group of major industrialized countries proposed the Multilateral Debt Relief Initiative (MDRI) whereby the World Bank, the International Development Association (IDA)(i.e., the soft loan arm of the Bank) and the African Development Bank (AfDB) may cancel 100% of their debt claims on countries that have reached or will eventually reach their respective Completion Points under the Enhanced HIPC Initiative.235 The MDRI is geared towards advancing the UN’s Millennium Development Goals aimed at reducing poverty by 2015. Unlike the HIPC Initiative, however, the MDRI does not include any parallel debt relief by official bilateral or private creditors or other multilateral institutions. In early 2007, the Inter-American Development Bank (IDB) decided to provide similar debt relief to countries located in the Western Hemisphere.236 In December 2005, the IMF’s Executive Board determined that 19 countries were immediately eligible for MDRI participation as they were, inter alia, found to be current on their IMF obligations. MDRI relief is expected to reach US$4.1 billion, of which US$3.3 billion has been delivered as of August 2007.237 As A. Boote & Kamau Thugge, “Debt Relief for Low-Income Countries and the HIPC Initiative,” supra, at 22. 233 See generally, IMF, The Poverty Reduction and Growth Facility (PRGF) Fact Sheet (July 31, 2009). 234 See generally World Bank, Fact Sheet, “Heavily Indebted Poor Countries’ (HIPC) Initiative.” 235 IMF, “Overview: Transforming the Enhanced Structural Adjustment Facility (ESAF) and the Debt Initiative for the Heavily Indebted Poor Countries (HIPCs),” (February 9, 2000). 236 Id. 237 Id. See also IMF Board Discusses the Enhanced HIPC Initiative Creditor Participation Issues, Public Information Notice (PIN No.03/44)(April 3, 2003). MDRI Annual Report (August 4, 2017). 232
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of January 9, 2018, 36 countries—30 of them in Africa—have received the full amount of debt-relief for which they were eligible through HIPC and the MDRI, and now considered post-completion point countries. Eritrea, Somalia and Sudan are potentially eligible for debt relief, but have not yet started the process.238 On a related note, the IMF and the IDA have been monitoring and tracking the debt relief given by non-Paris Club creditors under the Enhanced HIPC Initiative. As of 2007, there were 58 non-Paris Club creditors (including countries such as Algeria, Argentina, India, Morocco, Nigeria, Oman, Peru, and Venezuela) of whom 50 members have claims on post-completion participants in the HIPC Initiative.239 In a report issued in September 2007, the staffs of the IMF and IDA determined that non-Paris Club creditors have provided only about one-third of the expected HIPC Initiative relief expected from them. Factors inhibiting the delivery of full debt relief include an impartial understanding of the HIPC Initiative and how it functions on the part of both non-Paris Club creditors and eligible debtors, as well as a misunderstanding on the part of creditors that contributions to the IMF’s PRGFHIPC Trust Fund is equivalent to providing HIPC Initiative debt relief.240 It is too early to measure the success of such debt relief undertakings, but it does give hope for the future. It is especially encouraging that support for the social infrastructure of a developing country is targeted by the HIPC Initiative. This broadens the scope of the development process by including concepts of good governance. As a note of caution, the example of Zambia provides an interesting, if worrying, prospective view on the long-term implications of the HIPC Initiative. Zambia officially reached its completion point in the HIPC program on July 7, 2005, giving it debt relief of US$ 224 million in nominal terms.241 This is effectively meant that Zambia was eligible for and encouraged to seek commercial financing on world capital markets. However, this resulted in an unsustainable overall debt burden, leading the Zambian Minister of Finance to suspend all new non-concessional (i.e., commercial) financing. Further, the Minster also required that treasury authority be obtained in order to enter into any commercial contracts that may require debt financing.242 This example also highlights the fact that most lending, whether concessional or commercial in nature, is denominated in U.S. dollars, thus exerting a lot of pressure on developing countries to earn and expend hard currencies in order to meet external 238 World Bank Brief, “Heavily Indebted Poor Country (HIPC) Initiative,” (January 9, 2018). See also World Bank, HIPC Initiative and MDRI Annual Report (August 4, 2017). 239 See IMF & IDA, “Enhanced Heavily Indebted Poor Countries (HIPC) Initiative–Status of Non– Paris Club Official Bilateral Creditor Participation,” (September 10, 2007). 240 Id. See also IMF, Update on the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Member Countries,” (September 12, 2007). 241 African Development Bank Group, “Zambia Reaches Completion Point in HIPC Initiative: Obtains major debt relief from the AfDB,” (July 7, 2005). 242 “Zambia has resolved to suspend new non-concessional borrowing-Mutati,” Lusaka Times (November 24, 2017).
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debt servicing requirements. If, on the other hand, local capital markets effectively mobilized domestic capital, it might have the effect of easing foreign exchange needs by allowing local entrepreneurs and businesses to source capital locally for use in-country. The World Bank and the IMF jointly introduced the Debt Sustainability Framework (DSB) in April 2005, and after periodic reviews, was formally adopted by both institutions’ executive boards in September 2017. The DSB has been implemented since July 2018, and analyzes both external and public sector debt. DSB analysis consists of: (i) an analysis of a country’s projected debt burden over the next 10 years and its vulnerability to economic and policy shocks—baseline and stress tests are calculated; and (ii) an assessment of the risk of external and overall debt distress. External public debt is analyzed and rated into one of four categories: (1) low; (2) moderate; (3) high and (4) in debt distress.243 Low income countries are encouraged to use the DSF as a first step toward developing medium-term debt strategies. Creditors are also encouraged to incorporate debt sustainability assessments into their lending decisions. In this way, the framework is intended to help affected countries raise the finance they need in order to meet the Sustainable Development Goals (SDGs).244 This is still a work in progress. Nevertheless, this still begs the question of whether development results are actually achieved when full integration into the global economy (along with the market discipline that is required in order to attract foreign investors) is not an end result of the HIPC Initiative, or of other debt relief measures. The end result of the debt relief process has not been the integration of Tier II countries into the international mainstream of market economies, but simply the provision of short-term financial support. This may facilitate achieving short-term sustainable debt levels for both creditors and the sovereign debtor, thereby permitting the recipient nation to exit from the debt rescheduling treadmill, but is this a lasting development solution? It is certainly a necessary step towards that goal, but it should not be mistaken as a final, or even a lasting solution since it is merely a component of a complex development equation. In conclusion, this discussion is meant to provide a historical perspective on several important debt crisises and their impact on development. This discussion is also meant to provide some insight into possible approaches to ameliorating and finally resolving the debt overhang of developing countries. A menu of options should be used constructively and flexibly by debtor countries, and policy changes should be considered and implemented by creditor countries. Clearly, a partnership between the two is necessary if the debt question is to be resolved in the foreseeable future.
IMF Fact Sheet, “Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries,” (March 19, 2019). 244 Id. 243
5.10
5.10
The Debt Crisis in Perspective
243
The Debt Crisis in Perspective
Although the debt crisis of the 1980s is over, debt-related problems for developing countries continue. First and foremost, it is important to recognize that a sustainable, long-term solution to the debt problem is to generate trade surpluses that will allow the servicing of external debt by developing countries. There does not seem to be any way of avoiding the fact that international trade is the basis for maintaining stable flows of foreign exchange reserves. These reserves may be used to service debt obligations and, more importantly, may be used to finance critical inputs into the economy in the form of capital equipment, technology, and access to international markets. While import substitution and the protectionist policies of the past held nationalistic allure in the past, simply meeting domestic needs (without producing exportable goods) will not generate the volume of hard currency needed to regenerate and strengthen the economies of developing countries. Global integration is a fact of life, and ignoring this reality to serve short-term political priorities is a dangerous undertaking. Incurring debt should be regarded as a legitimate strategy for economic growth, but the reasons for incurring international debt, the purposes for which the debt will be used, and the sources and type of debt to be incurred are all critical political considerations that must be made in a disciplined fashion. Relying on international commercial credit to finance imports without simultaneously building up an export base, as we have seen in the case of many Latin American countries, is simply an invitation to disaster. Developing countries can source their capital needs by two principal means: by entering into loans or by attracting equity investment. If debt obligations are to be incurred, there are two principal sources of international lending: commercial banks and multilateral development banks. As the previous discussion illustrates, relying too heavily on either source can cause severe imbalances to a developing country’s economy. Although debt work-outs are inevitable, ultimately, they are unsatisfactory. Indeed, the decade of the 1980s has been termed the “lost decade for development,”245 in large part because the debt crisis wastefully consumed so much time, resources, and energy. A developing country that chooses equity investments as a pathway to financing development needs to make disciplined decisions on how to balance and structure FDI investment as well as portfolio investment. Both avenues of equity investment have their uses and priorities. Developing countries need to craft strategies that reflect their national priorities and development goals, and they need to sequence various options for attracting capital investment wisely. This is no small task, and it requires that the existing debt overhang also be taken into account. Finally, strengthening the international financial architecture is key not only in averting future financial crises but also in ensuring that the overall development process is not stalled. Strengthening this architecture is based not only on IMF 245
Carrasco and Thomas (1996), p. 553. See also Ngenda (1995), p. 179.
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surveillance, but also on good faith negotiating by creditors, and the maintenance of sound macroeconomic policies by the host governments, not of least of which involves instituting a legal framework ensuring transparency, accountability, and reporting. Clearly, this is a massive undertaking for all actors, including sovereign states, multilateral lending institutions, private commercial banks, NGOs, and others, all of whom create a complex debt picture that is an integral part of the international development story.
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Newfield D (2016) “Pari Passu as a weapon and the changes to sovereign debt boilerplate after Argentina v. NML. Univ Miami Bus Law Rev 24:175 Ngenda B (1995) Comparative models of privatization: a commentary on the African experience. Brooklyn J Int Law 21:179 Paredes T (2004) A systems approach to corporate governance reform: why importing U.S. corporate law isn’t the answer. William Mary Law Rev 45:1055, 1072–1074 Patton J (2014) Mitigating the problem of vulture holdout: international certification board for sovereign debt restructurings. Texas Int Law J 49:221 Plehn R (1989) Securitization of third world debt. Int Lawyer 23:161 Porzacanski A (2010) When bad things happen to good sovereign debt contracts: the case of Ecuador. Law Contemp Probl 73:251–271 Power P (1996) Sovereign debt: the rise of the secondary market and its implications for future restructurings. Fordham Law Rev 64:2701, 2709 Prebisch R (1971) Change and development Latin America’s great task. Praeger/Pall Mall, New York/London Rajagopal B (1993) Crossing the Rubicon: synthesizing the soft international law of the IMF and human rights. Boston Univ Int Law J 11:81 Salacuse JW (1999) From developing countries to emerging markets: a changing role for law in the third world. Int Lawyer 33:875 Sanford J (1995) Foreign debts to the U.S. Government: recent reschedulings and forgiveness George Wash J Int Law Econ 28:345, 359–360 Santos A (1991) Beyond baker and Brady: deeper debt reduction for Latin American sovereign debtors. N Y Univ Law Rev 66:66, 73 Sarkar R (2003) Transnational business law: a development law perspective. Kluwer Law International Schirano A (1985) A Banker’s view. In: Eskridge W Jr (ed) A dance along the precipice: the political and economic dimensions of the international debt problem. Lexington Books, pp 17, 20 Schwarcz S (2012) Sovereign debt restructuring options: an analytical comparison. Harv Bus Law Rev 2:95 Sheng A (1999) The new international architecture: is there a workable solution? Int Lawyer 33:855, 857 Sperber S (1988) Debt-equity swapping: reconsidering accounting guidelines. Columbia J Transnatl Law 26:377 Stiglitz J (2002) Globalization and its discontents. W.W. Norton & Company Sudreau M, Bohoslavsky J (2015) Sovereign debt, governance, legitimacy, and the sustainable development goals: examining the principle of responsible sovereign lending and borrowing. Wash Int Law J 24:613 Sweezy P (1942) The theory of capitalist development. Oxford University Press Tanzi V (1986) Fiscal policy responses to exogenous shocks in developing countries. Am Econ Rev 76:88–90 UNICEF (1987) In: Comia GA, Jolly R, Stewart F (eds) Adjustment with a human face: protecting the vulnerable and promoting growth, vol 1. Clarendon Press Vernava A (1996) Latin American finance: a financial, economic and legal synopsis of debt swaps, privatizations, foreign direct investment law revisions and international securities issues. Wis Int Law J 15:89, 96, 112 Weidemaier WM, Gulati M (2015) The relevance of law to sovereign debt. Am Rev Law Soc Sci 11:395 Wertman P (1995) The Mexican support package: a survey and analysis. Mex Trade Law Rep 5 (9):19, 22–23 Wessel D, Torres C (1997) Mexico will close out its debt to U.S.: earlier repayment marks both livelier economy, access to bond markets. Wall St J, p A10 Zacharia F (2008) The future of American power: how America can survive the rise of the rest. Foreign Aff
Chapter 6
Privatization as a Development Strategy
This chapter explores the implications of privatization as a development strategy. To begin with, the historical implications of the cycle of nationalization followed by privatization will be explored in this context. Nationalization was often associated with import substitution policies that tied into self-determination and an end to dependency, a hallmark of the post-colonial era. Moreover, the underpinnings of protectionist, nationalist and often tribalist sentiments motivating nationalization impulses, policies and programs will be critically examined. Privatization is often associated with encouraging free markets and developing the private sector as the engine of growth for the economy, but has downsides as well. However, this discussion has necessarily been complicated by the fact that privatization as a tool for the marketization of a developing country economy following the dictates of the so-called “Washington consensus” has been seriously called into question. In recent history, several European countries and the United States have uncharacteristically nationalized private concerns, thus opening up new questions on the viability of privatization as a development strategy overall. While this new (and unexpected) dimension of analysis will be addressed, specific techniques of privatization and their most advantageous application within a developing country context will be discussed below. Finally, the impact of privatization on emerging capital markets, an important trend for the future, is considered below. There has been a great deal of attention given to privatization efforts in Eastern Europe, Latin America, and Asia over the past several decades. Global privatization activities proceeded at a frenzied pace. More than one hundred countries have privatized certain of their state-owned enterprises (SOEs), generating revenues in excess of US$80 billion in 1994–1995 alone).1 If measured in terms of dollar value, 57% of all privatizations in 1995 took place in Latin America, and 18.7% took place
1
Guislain (1997), p. 1.
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in Eastern Europe and Central Asia.2 However, the reason why privatization is being pursued with such vigor and enthusiasm may not be quite clear. This discussion will attempt to give a “big picture” analysis of privatization as a strategic tool in the development process. Privatization simply means the transfer of ownership or control of enterprises or assets from the government to private individuals or entities. Ownership is thus transferred from the public sector to the private sector. Privatization is the opposite of nationalization, which is the transfer of ownership of assets and productive enterprises from private owners to the host government.3 As the following discussion will highlight, privatization has many profound implications. Most importantly, perhaps, the privatization process can be instrumental in transforming the role of the state from being a provider of goods and services to being a regulator of commerce and private enterprise. Removing the state from being a primary actor in productive sectors of the economy (e.g., oil production, mineral extraction, transportation, power, water use) requires a fundamental reorientation in the underlying notions of governance. The privatization process can be catalytic in helping the state redefine its responsibilities towards the populace it governs. A change in a developing state’s approach towards governance has many varied and complex practical implications. For example, debt management, taxation, the growth and viability of the private sector, the creation of legal regulations and regulatory institutions, corporate governance, and a rule of law regime may all be deeply affected by the privatization process. Although it is not possible to address the full implications of privatization in all contexts, the following discussion will attempt to put certain aspects of privatization into perspective.
6.1
Nationalization V. Privatization
As mentioned previously, privatization is at the opposite end of the spectrum from nationalization. Nationalization of private assets has often been associated with a certain ideological fervor and idealistic optimism during the period from the 1950s until the 1970s, following many independence movements in the developing world. In fact, nationalization often coincides with periods of renewed interest in public policy, import substitution as a means of economic development, and governance issues generally. Privatization, on the other hand, tends to follow a period of disillusionment with nationalistic ideals, and it typically leads to a retreat to the
2
International Finance Corporation, Privatization: Principles and Practice, Lessons of Experience Series, No. 1 (IFC and World Bank, 1995), at 9. Privatizations in Africa and the Middle East were only a minimal percentage of the total amount. 3 Chua (1995), pp. 223, 226–227; IFC, Privatization at 13. See also Guislain (1997), p. 10.
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private pursuit of material gain.4 However, a desire to privatize certain industries or sectors of the economy may also signal a newly burgeoning confidence in international and domestic capital markets, in partnering with external groups, and in the rewards that supporting private sector growth may bring. Thus, generally speaking, nationalization is inward-looking whereas privatization tends to be outward-looking. Nationalization often leads to the adoption of inward-looking policies such as import tariffs and trade protectionist measures. Economic protectionism, in general, is designed to foster the growth of nascent industries in order to ensure selfsufficiency in developing countries. Therefore, imports from the outside world are discouraged. In contrast, privatization is often much more outwardly focused. Private entrepreneurs may be motivated to seek joint ventures with foreign firms and explore new markets for capitalist expansion. Thus, there seems to be a unity of opposites between nationalization and privatization. However, it is important to remember, as Amy Chua points out, that in developing countries, “nationalization and privitization cannot, respectively, be equated with idealism and self-interest.”5 Further, Professor Chua contends that developing countries tend to oscillate between nationalization and privatization, and she supports her theory with case studies and anecdotal evidence from certain Latin American and Southeast Asian countries. For example, Mexico began nationalizing its industries around 1917, reprivatized beginning in 1940, nationalized again beginning in 1958, and began privatizing yet again in the mid-1980s.6 Similarly, Malaysia followed a fairly laissez-faire policy from its independence in 1957. However, increasing ethnic tensions led to the adoption of the New Economic Policy (NEP) in 1971. The NEP set aside minority ownership interests for the Malay population (Bumiputras) in private enterprise undertakings and education. The subsequent decline in Malaysia’s economy by 1980 spurred its government to institute a massive privatization program. The government’s privatization scheme nevertheless preserved NEP goals by permitting foreign ownership of Malaysian enterprises, but stipulating that at least 70% of the enterprises must be owned by Malaysians–40% of which may be owned by non-Bumiputra Malaysians, and 30% of which must be owned by the Bumiputra.7 Indeed, there seems to be a degree of truth in the observation that developing countries move in cycles between nationalistic fervor and privatization zeal.8 Postindependence movements towards nationalization were often fueled by a heady reaction to decades, if not centuries, of foreign domination. Reclaiming national assets and resources, formerly expropriated by foreign powers, formalizes the independence of the new nation. Moreover, by transferring the ownership of
4
Chua (1995), p. 258. Id. 6 Id. at 230–237, 256–259. 7 Id. at 246–247; see also Adam and Cavendish (1995), pp. 11, 14. 8 See generally, Kapoor (2015), p. 1. 5
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foreign-owned private enterprises to the public sector, the entire population becomes automatically vested, at least nominally, in the economic production and survival of the newly independent country. Nationalization helps legitimize the goals of independence by making all citizens a stakeholder in the new order. Apart from ideological or sentimental reasons for nationalization, there were more practical considerations fueling the nationalization process during the 1950s and 1960s. In the aftermath of the post-independence era, there may have been no real choice but to nationalize critical export industries and industrial sectors of national importance. The domestic private sector may have been too weak, or even non-existent, in many developing countries to support the type of sophisticated economic activity required to produce consumer goods and services on a national scale. Moreover, goods and services had to be of exportable quality in order to generate foreign exchange through international sales. Additionally, borrowing from commercial sources by private, indigenous companies may not have been feasible immediately after independence. Therefore, it may have been a risky proposition to stake a country’s future on private sector support of the economy. Thus, the state may have been the only national actor capable of borrowing from international sources, engaging in international trade and commerce on a broad enough basis to meet national import/export needs, and undertaking large capital infrastructure projects in critical sectors such as power, telecommunications, waste water disposal, and transportation. Further, borrowing from the World Bank on concessional terms (rather than from commercial banks on market terms) underscored the powerful economic role of the state. Moreover, World Bank lending is only available to its member governments (and to private entities whose borrowing is supported by sovereign guarantees extended by a member state). Thus, sovereign borrowing tended to reinforce the economic power of the state. This limitation is also reflected in the policies of other multilateral lending institutions in addition to the World Bank. In 1990, for example, 98% of all Asian Development Bank (ADB) loans were made to member governments or to parastatals whose loans were supported by sovereign guarantees. The fact that the World Bank will not make loans to private parties without sovereign guarantees provided an additional incentive for developing states to borrow directly from multilateral banking sources, especially since most of these governments were reluctant to guarantee private obligations. As a further observation in the context of privatization, once commentator argues that weak executive power makes privatization more likely and lasting: executives with relatively weak executive powers are likely to sanction swift changes in private property rights, constitutional provisions, and longstanding practices. Thus, weak executive power may decrease the likelihood that a country cycles between privatization and nationalization. Moreover, if a country has already privatized, weak executive power may also lead to entrenchment. Entrenchment, in turn, promotes economic liberties: if the executive cannot unilaterally modify existing law, then a country is more likely to ‘enshrine’ certainty in its legal system, increasing investment and property ownership. Hence, in order to avoid renationalization, countries adopting privatization policies should simultaneously curb executive power. Restraints on executive power need not be
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all-encompassing: instead, the restraint should only limit the executive’s unilateral ability to modify preexisting legal and constitutional provisions. Such limitations on executive power are more likely to entrench privatization policies. If privatization becomes more of a permanent fixture—as opposed to a policy to be adopted and discarded at each executive’s discretion—then privatization is more likely to foster certainty, increase investment, and promote economic liberties. . . Therefore, strong executive power does not necessarily make privatization a more likely outcome; instead strong executive power increases the likelihood that a country will cycle between privatization and nationalization. (Citations omitted.)9
Although nationalization has been inextricably intertwined for many Western policy-makers with the idea of socialism, this association can be very misleading. Of course, nationalization may superficially resemble a socialist redistribution of national assets to the public and may also conveniently fit into the rhetoric of empowering the working classes against the entrepreneurial, capitalist classes. However, for most developing countries, nationalization is not directed at bringing about a Marxist revolution (see footnote 11, infra). Nationalization is aimed at realizing two completely different goals: ending foreign domination and control of economic assets, and achieving economic self-sufficiency.10 Whether these goals have been achieved through the policies and practices of nationalization will be explored below.
6.1.1
The African Lens
For a wide angle view of privatization in Africa, one legal commentator notes that: Relying on theoretical and doctrinal imports from Latin America, African countries sought to pursue economic growth through policies of “import substitution industrialization,” and “nationalization” or “indigenization” of sectors of the economy. Invoking the motif of
9
Id., at 27. For a remarkably insightful, thorough and thought-provoking analysis of the historical and philosophic underpinnings of the ideas and experiences motivating “nationalist” sentiments, see Rajan (2019). In sum, Rajan states that: The three pillars that support society–the state, markets, and the community–are in constant flux, buffeted by economic and technological shocks. . . . Moreover, in reaction to the competition generated by global markets, those who can, such as large corporations and professionals, have created protected enclaves for themselves, further enhancing the benefits of being part of the higher meritocracy. For the rest, outside the walled and moated enclaves, competition from man and machine from across the globe has been fierce. . . . As economic activity has moved away from rural and semi-urban communities, despair and social disintegration has moved in. . . .The demagogues of the left and the right propose answers that people want to hear, not what they should hear. All too often, there is someone else or something else to blame, which then imposes the burden of change elsewhere. This is comforting to the audiences but dangerously misleading. The reality is that we are all part of the problem, and we all can be part of the solution.” Id. at 393–394. 10
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centralized planning of the national economy, African governments deluded themselves with the illusions that the central government could effectively manipulate the economy to yield specified results during identified periods of time. Little attention was paid to the availability of necessary managerial skills or of sufficient internally generated savings to meet capital demands. Nor did these policies take account of external shocks such as those represented by inflation in the price of oil and of manufactured imports, and of dramatic declines in the terms of trade for the raw products that were the main exports of African economies.11
And further, With the arguable exception of the small southern African country of Botswana, every single sub-Saharan African country experienced relative and absolute decline in the standard of living of the typical member of its society during the 1980s. While civil war, drought, and internal political instability accounted for some of this underperformance, it was also clear that pervasive economic mismanagement, the existence of poor infrastructure and the organizational incompetence of its state and civil servants contributed to the continent’s woes. Finally, there was the issue of debt overhang. As was the case with Latin America, many African countries had sought to meet the added burdens to their new economies through extensive borrowings in the international financial markets. Unlike Latin American countries, however, most of that borrowing came in the form of concessional loans and stand-by arrangements with the World Bank, the International Monetary Fund and the various development agencies of the wealthier industrialized economies. When capital dried up in the 1980s, negotiating these arrangements was a political as well as an economic undertaking. [Citations omitted.]12
Thus, as economic conditions in Africa grew progressively worse in the 1970s– 1980s: Privatization appeared to African policymakers as a viable tool of economic growth. . . . Privatization, in its various incarnations, was thus embraced by the renascent Africa of the 1990s. Not only did it find acceptance among traditionally conservative polities like Côte d’Ivoire, Kenya and Nigeria, but it was also adopted by hitherto self-proclaimed socialist societies like Tanzania, Zambia and Zimbabwe. Not surprisingly, some if its strongest adherents were those societies that experienced revolutionary transformation such as Ethiopia and Eritrea. For those countries, privatization genuinely marked a symbolic break with the past, a means of obtaining foreign assistance from the West, and the possibility for a restructured and differently functioning society.13
For example, Nigeria issued Decree No. 25, dated July 25, 1988, that provided for the full or partial privatization of 111 entities, and full or partial commercialization of 35 additional entities.14 The decree also created an independent commission, the Technical Committee on Privatization and Commercialization (TCPC), to report directly to the President, and to determine the best method of privatization for the entities involved.15 In 1993, the TCPC concluded its assignment and submitted a final report having privatized 88 out of the 111 enterprises listed in the decree. Based 11
Chibundu (1997), pp. 1, 20. Id. at 17–18. 13 Id. at 21. 14 Id. at 30. 15 Id. at 34. 12
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on the recommendation of the TCPC, the federal military government promulgated the Bureau for Public Enterprises (BPE) Act 1993 which repealed the 1988 Act, and set up the Bureau for Public Enterprises (BPE) to implement the privatization program in Nigeria.16 Although the TCPC privatized about 88 of the 111 enterprises scheduled for privatization, the privatization effort was viewed as a mixed success.17 Elements comprising the mixed review include, among other things, the fact that over 600 enterprises were eligible for privatization, but were not included; there was no role for private foreign investors in the legal decree; there were limited reemployment opportunities made available to displaced workers; there was no established safety net regulation of unemployment compensation, retirement or retraining of displaced employees; and only multilateral and bilateral sources (rather than commercial banking sources) were made available to underwrite the privatization process. Thus, “no Nigerian, not even employees of TCPC, look back to the privatization process with unalloyed praise, and virtually no Nigerian today posits it as a solution to any of the country’s numerous socio-political or economic difficulties.”18
6.1.2
The Case of Venezuela
Venezuela’s President Nicolás Maduro, re-elected to a second 6-year term in 2018, was handpicked by former President Hugo Chávez of Venezuela to be his successor. However, his election was met by stiff opposition, culminating in Juan Guaidó, the head of the National Assembly, declaring himself interim President, and who pledged to alleviate Venezuela’s humanitarian crisis. The U.S. Government recognized Guaidó as Venezuela’s President, and escalated pressure on Maduro by imposing sanctions on the state-owned oil firm Petróleos de Venezuela.19 The continuing political unrest triggered a humanitarian crisis, including citizens fleeing to neighboring Colombia and Brazil. Further, the Maduro government blocked aid relief, thereby exacerbating the crisis, and prompting defections in his support by members of the Venezuelan military.20 This crisis is still unfolding as of this writing, but a look back may shed some light on the origins of this crisis. 16 See Asore E.P., “Vision and Mission of Privatization in Nigeria, Patricia global issues (July 23, 2014); see generally, Ugorji (1995), pp. 537–560; Gberevbie et al. (2015). 17 Chibundu (1997), p. 37. 18 Id. at 40. For other case study descriptions and analyses of the privatization experience in Guyana, see Reid (2004), p. 733; in Costa Rica, see also Garro (2000/2001), p. 359; in Kazakhstan, see also Mitrofanskaya (1999), p. 1399. 19 Stephania Taladrid, “Venezuela’s Food Crisis Reaches a Breaking Point,” New Yorker (February 22, 2019). 20 Id., see also BBC NEWS, “Venezuela crisis: Defectors fear for families under Maduro,” (February 25, 2019).
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Indeed, many of Venezuela’s current economic woes and political instability may be traced back to Chávez’s 2007 nationalization of Venezuela’s largest telecommunications firm, electrical companies and four lucrative oil projects run by foreign companies (such as ExxonMobil, Chevron and ConocoPhillips) in the Orinoco River basin.21 Skittish investors promptly sold off Venezuelan stocks the next day where C.A. Nacional Telefonos de Venezuela (CANTV) lost US$285.7 million in market capitalization on January 9, 2007 alone, with a total loss of almost 19% market value on the Venezuelan stock exchange.22 Former White House Press Secretary, Tony Snow, dryly commented that, “[n]ationalization has a long and inglorious history of failure around the world. We support the Venezuelan people and think this is an unhappy day for them.”23 Venezuela has traditionally relied heavily on its oil exports in order to inject much-needed cash into the government’s coffers, and to bolster the government’s social safety programs. But a slip in oil prices in 2014, and a lack of investment in its infrastructure resulted in dwindling outputs for the state-owned oil company PDVSA.24 Moreover, in 2017, more than 50 PDVSA and oil industry officials were arrested on charges of embezzlement and corruption.25 The gross mismanagement and cronyism of the state-run oil company, and the imposition of price controls along with the adoption of more authoritarian measures has exacerbated poverty, violence and precipitated an ongoing humanitarian crisis in Venezuela. Indeed, on July 30, 2017, Maduro’s government held, and won all the seats, in an election to replace the National Assembly with a constituent assembly that would have sweeping authority to rewrite the country’s laws and constitution. (This outcome has been disputed by the opposition and independent observers.)26 In an insightful discussion of Venezuela’s socialism woes (as further exacerbated by President Chávez and now the Maduro administration), Tina Rosenberg comments that, “the urge to nationalize is, at its core, a political one,” noting further that: While other oil producers, like Russia and Nigeria, are piling up surpluses, Venezuela is spending everything it gets. Venezuela once had a US$6 billion oil fund to be saved for lean years; Chávez has spent all but US$700 million of it. The vast majority of Chávez’s new missions and worker cooperatives are dependent on state handouts and are unsustainable
Natalie Pearson, “Analysts Hit Venezuela Nationalization,” Wash. Post (January 9, 2007). Id. See also Simon Romero & Clifford Krauss, “Venezuela’s Nationalization Plan Alarms Market,” Int’l Herald Tri, (January 10, 2007). 23 Natalie Pearson, “Analysts Hit Venezuela Nationalization,” Wash. Post, supra, (January 9, 2007). 24 Christopher Woody, “The industry keeping Venezuela afloat is under pressure from both inside and outside the country,” Bus. Insider (March 1, 2018), which also states that, “[l]ast summer, Mexico began looking at ways it could replace Petrocaribe, the Venezuelan oil program that has provided cheap fuel to Caribbean and Central American countries since 2005.” President Maduro has promised to restore 70% of the decline in oil output, but this remains to be seen, of course. See Reuters, “Venezuela’s Maduro says to recover 70 percent of oil output decline,” (February 24, 2018). 25 Danielle Renwick, “Venezuela in Crisis,” Council For. Aff. (March 23, 2018). 26 Id. 21 22
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when government revenue falls. A devaluation of the currency would wipe out the income gains of the poor. This is [a] classic oil curse,27 and Venezuela has seen it before. In 1973, and in 1981, Venezuela spent oil money wildly without controls. Each time a boom ended, it left Venezuela worse off than when it began; per capital income in 1999 was the same as in 1960. Chávez has quite likely intensified these cycles, and the country is less able to produce anything but oil.28
While transparency in reporting and using oil revenues is urged, this is only a partial answer as Ms. Rosenberg acknowledges.29 The use of oil proceeds, and accountability and transparency in good governance practices may be at the heart of the dilemma facing developing countries with formidable natural resources, but who still find themselves struggling. As an unhappy footnote to this discussion, at the time of this writing, The company [PDVSA] and the Venezuelan government are in default on more than $50 billion in bonds after failing to make interest payments since late last year. China has refused to continue lending Venezuela money in return for future payments in oil.
And further, courts have ruled that ConocoPhillips, an American oil company, could seize Venezuelan shipments at refineries and export terminals in several Dutch Caribbean islands. The action stemmed from Venezuela’s decision to nationalize foreign oil assets a decade ago. Desperate oil workers and criminals are also stripping the oil company of vital equipment, vehicles, pumps and copper wiring, carrying off whatever they can to make money. The double drain — of people and hardware — is further crippling a company that has been teetering for years yet remains the country’s most important source of income.30
This is a severe political crisis for the repressive Maduro government in light of the corruption, food and medical shortages, hunger and over one million people fleeing the country. And the crisis is still unfolding. However, there is more to the story behind the continuing oscillation between nationalization and privatization, as discussed below.
The term “Dutch disease” was coined by The Economist magazine in 1977, in relation to a crisis that occurred in the Netherlands following discoveries of vast natural gas deposits in the North Sea in 1959, and may also be referred to as a “resource curse.” The economic term refers to the negative consequences arising from large increases in the value of a country’s currency, primarily associated with a natural resource discovery, However, it may result from any large influx of foreign currency into a country, including foreign direct investment, foreign aid or a substantial increase in natural resource prices. “Dutch Disease,” Investopedia (2018). 28 Tina Rosenberg, “The Perils of Petrocracy,” New York Times MAG. (November 4, 2007). 29 Id. 30 Neuman and Krauss (2018). 27
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Nationalization and Ethnicity
Professor Chua has broadly undertaken a systemic study to establish the interplay between the forces of markets, democracy, and ethnicity, particularly focusing on establishing the link between markets and ethnicity.31 She argues forcefully that ethnicity has been a second, important factor in nationalization programs since, “[f]ree-market policies in the developing world, including privatization and liberalized foreign investment schemes, have tended to disproportionately benefit not only Western foreigners, but also certain resented ‘internal foreigners,’ vis-à-vis the rest of the population.”32 These internal foreigners are identified by Professor Chua as the Chinese (or the “Jews of the Orient”) in Southeast Asia and the Indians in Burma, East Africa, and the Caribbean. Indeed, there seems to be a certain synchronicity between Professor Chua’s internal foreigners and “tribes” (i.e., the Protestants, Jews, Chinese, Indians, and Koreans) that have been analyzed for their entrepreneurial zeal by Joel Plotkin.33 Moreover, Professor Chua notes that in Southeast Asia the political power is held by the indigenous majority, while economic power lies with the internal foreigner. However, in Latin America, both political and economic powers are concentrated in the hands of the descendants of former conquistadors. Thus, she concludes that, “[c] onsequently, throughout South East Asia, movements against the market-in favor of restrictive trade and investment policies, nationalization, redistribution have historically been far more expressions of ethnic nationalism than of Marxism or socialism. . . . In other words, anti-market reactions in Southeast Asia have principally been attempts by certain self-proclaimed ‘indigenous’ groups to reclaim resources and economic power from other groups identified as ‘foreigners.’ These foreigners include not only Western ‘imperialist’ foreigners, but also the ‘foreigners within.’34 Thus, anti-foreigner, anti-imperialist, and anti-market platforms were successfully launched by Peron (Argentina), Vargas (Brazil), Baffle y Oronez (Uruguay), and Allende (Chile), as well as Sukarno (Indonesia) and U Nu (Burma, now Myanmar).35 In other words, during times of privatization (generally seen as times of economic expansion and prosperity), certain ethnic groups tend to fare better than others. Thus, nationalization can also be directed at domestic groups (the “internal foreigner”), not just foreign corporate interests. Nationalization is a means of leveling the playing field by usurping private profits and profit-making from a domestic economic elite
31
See Chua (1999), p. 17; Chua (1998), p. 1; Chua (1995), p. 223. Chua (1999), pp. 17, 20. 33 Plotkin (1993). 34 Chua (1999), pp. 20, 21. 35 Id. 32
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(and, in the case of many Latin American countries, from a social, cultural and intellectual elite class as well).36 “Nationalization” as a government policy and plan of action may have waned in popularity in recent decades, but the forces underlying the impulse to nationalize may now have resurfaced in a deeply disturbing way. The undertow of populism is often difficult to understand and interpret. One commentator makes the insightful analysis that: Left-wing populism . . . tends to set up a dichotomy between the people and the elite, pitting the bottom of society against the top in a clean match-up. By contrast, right-wing populism sets up a triadic antagonism between the people, the elite, and a third segment of the population that is supposedly being coddled by the political establishment: Muslims, immigrants, effete intellectuals, and so on.37
And further that: Even today, the populist label is applied to Turkey’s Recep Tayyip Erdogan as well as to Venezuela’s Nicolás Maduro, to Italy’s Beppe Grillo as well as to France’s Marine Le Pen. Yet the movements they lead are united by no clear policy agenda. Some favor state ownership of the means of production, while others want to privatize prisons; some seek to put politics under religious tutelage, while others are stridently secular. But all these populists do share one important trait: a common political imagination.38
And moreover, “‘[u]nlike a century ago, today’s insurgent leaders aren’t interested in nationalizing industries. Instead, they promise to nationalize their elites.’ And, “[i]n fact, what is truly notable about these movements is that, on both politics and economics, the new crop of populists ultimately wants to overthrow rather than to fix the current order.”39 It may also be useful to make a distinction between “globalization” and “globalism.” Spencer Morrison writes: that globalization has three distinct parts: (1) economic globalization which means increasing movement (trade) of goods, services, intellectual property, and people between economies which can have positive or negative consequences, depending on where you are; (2) cultural globalization which refers to the spread of ideas and cultural memes throughout the world, regardless of political divides, specifically referring to the erosion of cultural and language barriers; and, (3) political globalization which refers to the formation of international governing bodies (supra-national entities), like the United Nations or the European Union. “Globalism” is the moral, or ideological component of
36 Chua (1995), p. 272. The sociological implications and potential causes explaining why certain ethnic groups become economically dominant regardless of the cultures they are harbored in is explored in Joel Plotkin’s book, supra. The reasons why certain ethnic minorities are “accepted” and other retain their “foreignness” is outside the scope of this discussion, but is another layer of complexity that the law is ill-adapted to handle. See generally, Giridharadas (2018). 37 Yascha Mounk, “European Disunion: What the rise of populist movements means for democracy,” New Rep. (July 19, 2017). 38 Id. 39 Id.
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globalization.40 While the impact of globalization may be positive or negative, depending on the position of the onlooker, for those that feel left out of the equation, their simmering sense of disenfranchisement may lead to unexpected political consequences. Specifically, in the Eastern European context, “the common denominator” is seen ‘as mass resentments about one thing or another,’ but those issues can vary country to country. A significant segment of the population in each of these countries feels that they have been robbed of something, been misled and cheated. . . But while Americans may resent its loss of dominance and the rise of China, and Britain the end of the glory days of empire, . . . ‘the resentments in the former Soviet bloc are the missed opportunities of the freedom they received in 1989.’ No one regrets the disappearance of communism. . . but ‘they do resent the way the new order was founded and where the benefits went, mostly to a narrow elite.’”41 And further, Populist governments in Hungary and Poland have intensified their efforts to weaken core liberal institutions such as a free press, independent civil society, and constitutional courts. Majorities in both countries increasingly are defining their national identity in exclusionary ethnic and religious terms, and anti-Semitism in on the rise. . . .Because President Vladimir Putin’s embrace of ethno-nationalism and religious traditionalism has proved attractive to populist movements, their rise has strengthened Russian influence throughout Europe. He offers an attractive model of renewed, unapologetic patriotism and national confidence. He has shown that when liberal democracy is not deeply rooted, democratic governance failures can open the door to authoritarianism that enjoys widespread support, despite the erosion of individual liberties and the rule of law.42
In Latin America, for example, the ethnic backlash against a ruling political and social elite with clear ties to European and/or American antecedents may be a further expression of the desire to remove the influence of foreigners from the local culture.43 For some South and Southeast Asian as well as African cultures, certain nationalization efforts have been directed towards ethnic minorities. Such minorities Spencer Morrison, “What is globalism and globalisation? What is the difference between them, and their impact on world?” Quora (December 24, 2016). 41 Steven Erlanger, “In Eastern Europe, Populism Lives, Widening a Split in the E.U.,” New York Times (November 28, 2017); see also Kanchan Chandra, “Authoritarian India: The State of the World’s Largest Democracy,” For. Aff. (June 16, 2016). 42 William Galston, “The rise of European populism and the collapse of the center-left,” Brookings (March 8, 2018). See e.g., Marc Santora, “Poland Purges Supreme Court, and Protesters Take to the Streets,” New York Times (July 3, 2018). At this writing, Poland’s ruling party, the Law and Justice Party, passed a law requiring all judges retire at the age of 65, unless they appeal to the Polish President. This law passed by parliament has been called into question, and would require that 27 of 72 Supreme Court justices retire, including the Chief Justice. This prompted tens of thousands in over 60 cities in Poland to demonstrate in the streets, fearing that the judiciary is being made subservient to the executive branch. In response to this measure, the European Union announced on July 2, 2018, that it was initiating an “infringement procedure” against Poland, “which could result in the matter being referred to the European Court of Justice. The court could declare the judicial overhaul unconstitutional, but it cannot stop it.” Id. 43 Chua (1995), pp. 276–277. 40
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may have been targeted despite their presence in the indigenous culture for many generations. In those instances, therefore, the foreigner is perceived as someone who is ethnically distinct, rather than a representative of a former colonizer as such. This is especially true in the efforts to rein in Chinese entrepreneurs in Malaysia, Indonesia, Thailand, and Burma (Myanmar).44 This is equally true of Idi Amin’s campaign to rid Uganda of Africans of Indian origin in the late 1970s. Thus, past nationalization efforts have been directed at eliminating (or neutralizing) the foreigner, whether within or without the indigenous culture. The anti-foreign, protectionist, and inward-looking character of certain nationalization efforts can be very thinly veiled. In its current form, this nationalist fervor may be felt in strict antiimmigration policies and in a renewed sense of “tribalism.” The continual contraction and expansion between nationalization and privatization in many developing countries is often difficult to understand. This is particularly true in instances where nationalization efforts have led to disastrous consequences as in Tanzania, Zambia, and other African countries, leading to the creation of a “predatory state.”45 Inefficient SOEs, mounting external debt, capital flight, and the failure to develop robust export-oriented industries are but a few factors that all inevitably lead to a gradual economic decline. Internal corruption, and the failure of the state to deliver on the ideals of nationalization, often lead to wide-scale disillusionment. Alienation from the nationalization process and its underlying ideals can spur a movement towards privatization. However, privatization attempts may also lead a state to reassert its political power by nationalizing industries and privately owned assets further.46 The return to nationalization policies, despite their proven failure to produce economic prosperity and self-sufficiency, starts the cycle over again. The movement back and forth between nationalization and privatization points to a deeper underlying cause: the desire to seek equilibrium between our outwardlooking and inward-looking natures. On the one hand, privatization encourages the entrepreneur to seek linkages with the outside world, whether they be in the form of joint ventures, technology transfers, developing new regional and international markets, or creating innovative advertising campaigns for international markets. On the other hand, nationalization seeks to reassert or preserve a sense of national integrity as expressed by shared cultural norms, history, language, religion, and customs. (As such, this may be yet another dimension where it would be appropriate to apply the Janus Law Principle in order to make principled choices that balance these two essential desires.) Indeed, in an information age where marketing and sales can be done via internet and other electronic or satellite transmissions, the ethnicity of the two parties
44 Id. at 269–270, 271–272. This may be equally true of the attempts to curtail the economic success of Indians living in Malaysia, Sri Lanka, and Kenya, for example. 45 Lai (1987), pp. 273, 277. 46 Chua (1995), pp. 264–265.
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transacting business tends to becomes irrelevant. Thus, privatization tends to soften (and may finally eradicate) the differences in ethnic or national origin, religion, age, gender, disabilities, and all other immutable human characteristics. By trivializing such differences, capitalism on an international scale offers the first real glimpse into a truly global culture where cultural differences become immaterial. The specificity of different cultures may be rendered obsolete in the final equation. In fact, such ethnic differences may become an impediment to commerce and international transactions in the not-so-distant future. Nationalization may also be seen as a backlash against the idea of “foreignness.” It is in this context that the uncomfortable question may be raised as to why certain ethnic groups, while present in recipient cultures for generations, are not perceived as indigenous peoples. Though this query lies outside this text, it may be argued that nationalization efforts speak to the desire to remain within-one’s-self (i.e., within the confines of national culture). National culture is given seemingly arbitrary limits and is defined in such a way as to exclude others, sometimes regardless of national boundaries. This is especially true in many of the anti-immigration policies being promulgated throughout Europe, and even the United States at the time of this writing, that are designed to block the entry of “foreigners” however that term is defined, expressed or felt. The fact that this sentiment may be politicized in a way to exclude, punish or demean certain ethnic religious or other minorities may become highly problematic. At times, this may result in dire political and economic consequences writ large for the society in question (e.g., Uganda, Zimbabwe, Iraq).47 If foreign entrepreneurs are targeted, then this exclusionary tendency is expressed in economic terms through protectionist measures such as international trade barriers and barriers. These purportedly protectionist measures have the perceived effect of shielding the “national” culture from foreign intervention and domination on the international or macro-level. If, on the other hand, ethnic minorities within the country are the implicit target of nationalization, this form of cultural protectionism tends to occur on the national or micro-level. Thus, nationalization efforts can be seen as a form of protectionism against foreign intervention from without or against ethnic economic domination from within. Nationalization may, therefore, be viewed as an attempt to level the playing field ethnically between peoples, whether they lie inside or outside the culture. There may, in fact, be an element of fear and anxiety implicit in such a strategy. An example of the distrust of former colonial powers and the use of nationalistic sentiment for political gain is Zimbabwe. Beginning in 2000 with the seizure of
47
One should also bear in mind that national boundaries in many former colonies were arbitrarily drawn by European powers with no regard for the ethnic groupings in the lands they conquered, but with a view to maximizing their profit and political influence. This in some cases has led to decades, if not centuries, of internal strife in many developing countries such as Iraq, Syria, Lebanon, and many others. See e.g., “130 Years Ago: Carving Up Africa in Berlin. In 1885 European leaders met at the infamous Berlin Conference to divide Africa and arbitrarily draw up borders that exist to this day,” DW.com (2018).
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12 million acres (4.8 million hectares) of white-owned land, Zimbabwe announced a program to nationalize all farms in the country after forcing 5000 white farmers from their property in an often violent forcible land redistribution program.48 The deeds to all productive farmland will be abolished and replaced with 99-year leases issued by the State.49 The land redistribution policy was considered necessary in order to restore productive land to the black majority who were dispossessed of such holdings when the British began colonizing Zimbabwe more than 100 years ago. Not only is the abolition of freehold tenure a violation of Zimbabwe’s Constitution which guarantees private ownership of property, but it ironically displaces black property owners who purchased such properties with large sums of money and are now the title holders to land deeds.50 More than 20 years later, this policy has now been acknowledged as a failed attempt at agrarian reform by providing land ownership to black Zimbabweans since it did so by displacing many white commercial farmers without compensation. President Emmerson Mnangagwa of Zimbabwe is now trying to “reassure investors [that] his administration is restoring respect for property rights and investment protection.” Further, this “new policy to compensate farmers is aimed at drumming up economic support from the international community through correction to bad policy implementation. Mnangagwa has all but scrapped the indigenization policy that sought to put the control of foreign firms in the hands of black Zimbabwean groups although platinum and diamond miners will still be required to cede majority shares to local groups.”51 While capitalism remains the only viable means of economic production for the foreseeable future, it appears that certain cultures and ethnic groups have been historically favored in this process. This is hardly a new idea, since Max Weber laid the foundation for this type of thinking in the early 1900s with his view that the Protestant Ethic supported the creation and preservation of strong capitalist institutions.52 However, this is rapidly changing as a result of the very nature of capitalism itself. In other words, capitalism does not per se favor certain ethnicities or religions: in fact, those cultural particularities do not matter, and perhaps it may be argued, never mattered. Capitalism tends to reward certain kinds of behavior, regardless of who is demonstrating it. Thus, capitalist success may rest on demonstrating certain common characteristics that may include, for example: a general thriftiness and the ability to
“Zimbabwe Says It Will Nationalize Every Farm,” World Bank Staff Connections (December 18, 2007). 49 Id. 50 Id. 51 Tawanda Karomba, “Zimbabwe’s white farmers will get compensation but they’re not getting their land back,” Quartz Africa (December 9, 2017). 52 Max Weber, The Protestant Ethic and the Spirit of Capitalism (Talcott Parsons, trans.) (Scribner, 1958). 48
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accumulate savings; a reliance on family bonds and ethnic cohesiveness for borrowing and credit practices; strong educational backgrounds in general; the mastery of technology as a tool in capital wealth creation; and the identification of capitalist needs and the fulfillment of these needs on a local, regional, national, and international levels. Calculated risk-taking is also essential to any capitalist enterprise and may be a core value ensuring the long-term success of entrepreneurs. Indeed, a primary risk undertaken by most, if not all, of these entrepreneurial ethnic groups (e.g., Jews, Protestants, Chinese, Indians, Koreans) is movement into the diaspora, and seeking fortunes outside of naturally existing ethnic enclaves. Perhaps the “sink or swim” mentality and the heavy emphasis on education in moving from solely entrepreneurial ventures to professional classes may also be determinants of capitalist success, resulting in a new-found “techno-affluence.” Interestingly enough, however, these specific groups do not necessarily succeed as a result of their ethnicity per se, but as a result of expressing the characteristics favored by the capitalist “ethic.” Clearly, this ethic is no longer strictly Protestant in nature. On a practical level, however, privatization does not provide equal opportunities to all peoples in their quest to achieve material prosperity. In fact, privatization and expanded opportunities for capitalist activities may tend to exacerbate implicit ethnic tensions. In many instances, certain racial groups (e.g., Chinese, Indians, Jews, and Arabs) tend to achieve a disproportionate amount of economic success in a more liberalized economy.53 So, while privatization opens up new opportunities for the unencumbered pursuit of capitalist ideals, the danger of exacerbating underlying ethnic conflicts in this process is very real. The next logical question is whether the state should intervene to help certain ethnic groups achieve economic parity with others. This, of course, opens up the discourse on the relative merits of affirmative action-type policies that attempt to boost the standing and opportunities of certain groups over others. As may be expected, the Malaysian NEP and other like-minded national policies aimed at restricting ownership along ethnic lines have been severely criticized (primarily by neo-classical economists, who object to government interference with free market principles). It may be difficult to judge the efficacy of NEP-like policies, but if such policies are motivated by short-term anxieties they are unikely to succeed in the long-run. In the final analysis, viewing nationalization in a vacuum is both self-serving and self-defeating. The preservation and propagation of culture (however narrowly it is defined) is a very important factor in any development story. Ignoring the impulse to preserve culture (or national identity), however this is defined, may be politically risky especially where a backlash cannot be anticipated or controlled.
53 See Chua (1995), pp. 284, 303. Generally, the peoples that succeed at capitalism are not the ones urging that nationalist measures be taken by the host government. The issue of preserving culture is framed differently for those who succeed within a capitalist framework: they can create or participate in a new global culture or pursue their own subculture.
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As the following discussion will show, liberalizing developing country economies by eliminating trade barriers to the outside may, indeed, be necessary in order to compete effectively in international markets. Thus, certain developing countries may need to give serious consideration to whether nationalization and protectionist measures on the macro-level are appropriate development strategies at their stage of development. In addition, developing states may need to decide whether to give disadvantaged ethnic and minority groups a preferential stake in the privatization process. The more marginalized certain ethnic, racial or religious groups become, the greater the potential for ethnic conflict and political destabilization. (The conflagrations in the Sudan, Iraq, Rwanda, Burundi, and the former Yugoslavia, for example, are grim reminders of how serious a danger ethnic and religious conflicts can be.) But if such preferences are to be given, how is this to be accomplished? Are set-asides and other measures appropriate and viable in this context? What about the backlash, if any, on the part of the majority ethnic group or religion in response to state-sponsored efforts to favor certain minority groups? These are all controversial questions within the development process, and there are no simple answers.54 On a more philosophical level, David Brooks has espoused “personalism” which may be viewed as a way forward from the dialectic tensions underlying nationalism and privatization. He argues that the “uniqueness and depth of each person” are being ignored and that: At the extreme, evolutionary psychology reduces people to biological drives, capitalism reduces people to economic self-interest, modern Marxism to their class position and multiculturalism to their racial one. Consumerism treats people as mere selves — as shallow creatures concerned merely with the experience of pleasure and the acquisition of stuff.
He further adds that: “The big point is that today’s social fragmentation didn’t spring from shallow roots. It sprang from worldviews that amputated people from their own depths and divided them into simplistic, flattened identities. That has to change.” He then counsels that the “first responsibility of personalism is to see each other person in his or her full depth. This is astonishingly hard to do.”55
In moving back from philosophy to law, the text below will explore achieving a new law-based equilibrium between the two very strong impulses of nationalization and privatization. Perhaps a new synthesis in the form of public-private partnerships where the state and private actors act in concert in order to promote projects for the public good may be useful in this context. The most obvious examples of this are
It may be well to end on Professor Chua’s own optimistic note: “Over and over, throughout American history, waves of new immigrants have come to our shores, always met with suspicion and fear that the nation’s character will be endangered, its streets made unsafe, its values lost. Every time, we’ve overcome this fear, prospered, and grown stronger.” See Amy Chua, “One nation, divided: Making America Great again means putting an end to political tribalism,” NBC News (June 12, 2018), excerpted from Chua (2018). 55 David Brooks, “Personalism: The Philosophy We Need,” New York Times (June 14, 2018). 54
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infrastructure projects (e.g., ports, seaports, airports, roads, telecommunications networks, school and hospitals). While this may not allay the underlying philosophical and emotional underpinnings of the political urges to nationalize or privatize, it may put the actors involved in both in a more mutually-supportive and positive setting.
6.2
Changing the Role of the State
The previous discussion described certain historical reasons giving rise to the strong economic role of post-independence governments of many developing countries. The absence of a strong private sector was, in most cases, the primary reason for the de facto assumption of this role by the state. Additionally, policies of nationalization and import-substitution based industrialization also fueled the development of a strong public sector.56
6.2.1
A State-Led Approach
Government-directed planning policies tended to emphasize the creation and support of heavy industries, mineral and oil extraction, and large public works in sectors deemed by the state to be critical to the national interest.57 From the 1950s to the 1970s many developing countries adopted policies where the state owned, controlled, and managed key enterprises as well as important sectors including agriculture, telecommunications, petrochemicals, banking, hotels, airlines, air and seaports, and tourism. Finally, as mentioned earlier, a critical source of investment capital came not from commercial banking sources but from multilateral banking sources such as the World Bank, which required that sovereign guarantees be in place before loan approvals were granted. All these factors contributed to the development of a burgeoning public sector that provided large-scale employment opportunities. This, in turn, helped popularize the ruling party in power, who could thereby provide stable sources of public sector employment to its constituents. However, the state-led approach to economic growth and the institution of import-substitution policies adopted by many Latin American, Caribbean, African, and Asian countries, began to unravel in the early 1970s. The creation of state
56 Baer and Birch (1992), pp. 3, 5, 7. Import substitution is an industrialization policy that emphasizes the domestic production and consumption of goods. These goods generally have been previously imported, usually under preferential trade relations with former colonial powers, and import-substitution has been directed at producing economic self-sufficiency. 57 Id. at 5.
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monopolies in those countries had led to many inefficient practices.58 In fact, the monopolistic status of SOEs was reinforced by establishing market entry barriers, thereby discouraging private sector competition for the production of the same goods and services. The lack of a profit motive for most SOEs also meant that there was no real incentive to produce export-quality products and services efficiently. Redundant employees added to the inefficiencies of SOEs and tended to encourage corrupt practices and rent-seeking.59 The ineffective regulation of SOEs by the state also meant that environmental controls, fiscal discipline, and accountability were not observed. Additionally, state resources were budgeted to support SOEs via hidden subsidies, tax holidays, and exemptions from paying utility bills and customs duties. Thus, carrying the debt load of inefficient SOEs added to government budget deficits. The support for nationalization began to waiver, however, during the debt crisis of the early 1980s when many developing nations became desperate to finance their foreign exchange needs with additional borrowing from international sources.60 The rationale for privatization under these circumstances is immediately obvious.61 Government expenditures to support nonprofitable SOEs would be reduced by eliminating subsidies and other price supports. Over time, lowered government deficits will reduce the government’s overall debt burden. This tends to lower inflationary pressures on the economy and stabilize economic conditions. As a result, the government can begin reallocating tax revenues and ensure that its fiscal funds will not be disproportionately spent on keeping inefficient SOEs afloat. Moreover, by creating new, taxable private corporate entities, the tax base may actually broaden over time.62 Further, eliminating trade barriers to foreign investors and companies on an international level and dismantling market entry barriers on a domestic level tend to create more competition. Increased competition may eventually lead to new foreign investment, technology transfers, and an increased number of firms. However, it is important not to transform public monopolies into private ones through the privatization process.63 Attracting new investment (domestic and foreign) also translates into a renewed potential for export development and creating new international markets. In the end, privatization is intended to produce better quality, lower-priced goods and services
58
Ngenda (1995), pp. 179–180. See Baer and Birch (1992), pp. at 13–14. 60 Id. at 11–12. See also Ngenda (1995), pp. 179–180. 61 See IFC, Privatization, at 1–2. 62 Baer and Birch (1992), pp. 17–18. (Note, however, that tax revenues could be less than the revenues generated if the state still owned the enterprise.) 63 Id. at. 17. See also Ngenda (1995), p. 182. 59
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with export potential that will generate foreign exchange revenues. Further, privatization may actually provide increased employment opportunities by introducing better technology, opening up new markets, and creating new investment opportunities. Moreover, the recapitalization of SOEs through the private sales of shares usually provides a new source of funds available for making capital improvements, introducing new technology, and training workers to be more efficient. Eliminating excessive bureaucracy and reducing the number of redundant employees also tends to make the overall enterprise more profitable and more responsive to market demands in the long-run. Nevertheless, privatization is always a political process that involves critical decision making by the government of the developing country.64 In essence, privatization is a political process that is initiated, controlled, and implemented by the state. The transfer of government-owned assets and productive enterprises to private hands is an important and complex decision. Reducing the size of the public sector has immediate economic and political consequences, especially in developing economies that have historically been heavily dependent on the public sector for the provision of goods, services, and employment. In many African countries, for example, the public sector has been exploited for political patronage purposes, thus perpetuating the political power and survival of the ruling elite.65 For such leaders, reducing the power base often means making personal sacrifices. Since privatization inevitably raises the specter of lay-offs of redundant employees, sacrifices may be required of more than just the ruling political elite. Thus, an important lesson of experience with privatization is that it will not succeed unless there is the political will to make it succeed. Imposing privatization programs and goals from the outside is a meaningless exercise unless the broad-based polity within the developing country wants privatization to succeed. Moreover, privatization is an opportunity for the state to change the nature of its governance. The state can and should use the privatization process as an opportunity to redefine and clarify its responsibilities to the governed. Redrawing the line between the public and private sectors requires clear and well thought-out government policy determinations on which industries should be privatized and which should remain in the public sector—and why. Thus, privatization may liberate the state by allowing it to move away from the direct production of goods and services and towards the regulation of commerce, international trade, and the environment. Privatization permits the state to move out of the productive sectors of the economy and to focus more on regulating the economy. The government may also use the privatization process to set new political and economic priorities. Tax revenues, for example, can more easily be devoted to social safety net issues, capital infrastructure development, and human resource development. The state can also begin to devote more energy in providing greater
64 65
IFC, Privatization, at 1. Ngenda (1995), pp. 179–180.
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accountability and transparency in governance. This process may also encourage the state to adopt good governance practices overall. Thus, privatization may be designed to reduce the size of the public sector, but the role of the state in the privatization process cannot afford to remain static.
6.2.2
A Post-Washington Consensus View of Privatization
The so-called “Washington consensus” as a paradigm that framed the manner in which development questions were set forth was discussed to in Chap. 2, along with a discussion of the decline of this approach. Nevertheless, for purposes of this discussion, an integral part of the Washington consensus was the recommendation to privatize. One of the most succinct and useful statements on the relative merits of privatization was made in a 1992 World Bank publication that posits the question: “Why privatize?” 66 In stating eight seminal reasons in support of the “substantial and enduring benefits” of privatization, the World Bank enumerates the following: 1. Privatization works best when it is part of a larger program to encourage fiscal and budgetary efficiency; 2. Regulation is essential to the successful privatization of monopolies; 3. Host countries may benefit from privatizing management through management contracts, concessions and leases without actually privatizing government-owned assets; 4. The sale of large state-owned enterprises require considerable preparation; 5. Transparency (especially in terms of government procurements) is critical for economic and political success; 6. Governments must consider establishing social safety nets to soften the immediate impact of lost jobs; 7. Transitional economies (i.e., the former Soviet Union) must explore all available means of privatization; 8. Privatization should not be used to hinder the growth of a vibrant private sector economy, Rather than belaboring these points, it may be useful to examine some overarching theoretical and practical critiques of privatization as a strategic approach to development. Without diminishing the potential benefits of privatization, there are certain downstream implications that merit discussion here with a view to further refining the agenda for privatization rather than dismissing it altogether. First and foremost, it is highly doubtful whether following a “one-size-fits all” approach to privatization will yield optimal results. The foundation for a program of privatization is “the framework of political and social institutions, traditions and history and the state of economic growth of the particular country.” Moreover,
66
Kikeri (1992), see Excerpt, World Bank Research Bulletin, Vol. 3, No. 4 (Aug-Oct 1992).
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“[e]mpirical evidence reveals that the success of privatization in terms of revenues and stakes sold requires suitable legal institutions and developed capital markets.”67 In fact, post-Keynesians have argued that “the privatization model in the neoclassical model was formulated independently of any macroeconomic, political, bureaucratic and structural considerations. . . . The privatization schemes of the neoclassical model did not provide any form of assistance to enterprises to overcome the difficulties associated with the introduction of market relations.”68 Thus, studies support the conclusion that the lack of necessary indigenous private capitalists resulted in corrupt cronyism or “cherry-picking” by foreign investors who chose the most economically viable state-owned enterprises to buy shares in.69 In effect, state-owned enterprises are not effectively restructured, leaving in place the possibility of replacing state monopolies with private ones.70 Nor is there a direct result in alleviating poverty through privatization.71 As an alternative, post-Keynesians argue for a different type of privatization agenda that modifies the neoclassical model by adopting a different underlying set of presumptions. While agreeing with their neoclassical counterparts that a welldesigned privatization strategy is important, post-Keynesians argue that the goal of privatization is not simply to change ownership from the government to private ownership. Rather, privatization requires a fundamental change in the socioeconomic system in order to enable meaningful privatization to take place. Essentially, this means that establishing or restructuring the regulatory framework must be done first. Thus, a change in the regulatory and institutional structures is seen as more important in creating a framework for privatization rather than simply transferring property rights to the private sector. Adding to neoclassical prescriptions would be the following post-Keynesian ones: 1. Increasing institutional capacity (e.g., investing in human capital, worker skills and training, management capability); 2. Increasing regulatory capacity by correcting flaws in regulation and their enforcement; 3. Increasing competition to avoid replacing state monopolies with private ones; 4. Developing more robust financial markets and effective means of financial intermediation; 5. Increasing public sector governance capacity by correcting policy failures, incompetence, corruption and cronyism in the host government; 6. Encouraging social safety protections to contain the disequilibrium in the workforce caused by privatizations;
67
Marangos (2002), pp. 573, 577. Id. at 579. 69 Id. at 582. 70 Id. at 580. 71 Parker and Kirkpatrick (2005), pp. 513–541. 68
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7. Encouraging more transparent and enforceable property rights.72 Let us now turn to certain examples of the fomer Soviet bloc “transitional economies” to see if this series of post-Keynesian prescriptions add value to the privatization process.
6.2.3
Privatization in Transitional Economies in Eastern Europe and Central Asia
Of course, privatization is a far more complex question in the so-called “transitional economies” of Eastern Europe and the former Soviet Union.73 (The term “transitional economies” has been overtaken by historical events. It no longer refers to the former Soviet Bloc countries whose integration into the First World is now considered complete. The term “transitional economies” now refers to post-conflict societies, as discussed in further detail in Chap. 8. However, the term is used in this section, despite its anachronism, to explain certain concepts.) An examination into this course of privatization by several Eastern European countries is being preserved in this context not just for its historical value, but also because it highlights a systemwide privatization program that its both economic and political in nature. Whereas most Latin American, Caribbean, African, and Asian countries have a certain legal infrastructure and institutional framework to base a privatization program on, transitional countries faced the complex challenge of developing such a framework before the privatization process could commence. Rather than focusing on ways in which to improve the imperfections and shortcomings of the privatization framework of developing countries, let us turn to the challenges faced by formerly Soviet bloc transitional countries in the privatization process. The influence of Anglo-American neo-classical economists in devising prescriptions for the economic recovery of Eastern Europe and the former Soviet Union has been heavily criticized in retrospect.74 Nevertheless the three-pronged policy directive to these countries issued by Western economists and consultants was clear: liberalization, stabilization, and privatization.75 Despite disagreements concerning the sequencing of these economic reforms, most economists believed that these reforms should be undertaken simultaneously rather than sequenced one after the other.76
72
Id. See generally, Bogdan (1996), p. 43. Eastern and Central European countries began transitioning towards becoming democratic, market-driven societies beginning in late 1989. By 1991, the Soviet Union had disintegrated into fifteen sovereign states (Id. at 43). 74 Brietzke (1994), p. 35; Bogdan (1996), pp. 46–47; Murrell (1992), Kornai (1990), Kregel et al. (1992), Kolodko (1993), p. 123. 75 Rutland (1995), pp. 1, 2. See also Sachs (1993). 76 Rutland (1995), pp. 2–3. 73
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Liberalization simply means the elimination of market constraints on the free flow of commerce, e.g., removing tariffs, export and price controls, and market barriers.77 Stabilization involves macro-economic policy changes, usually along the lines of making balance-of-payments adjustments, controlling inflation, restricting the money supply, and devaluing the currency.78 Liberalization and stabilization tend to make transitional economies more responsive to the demands of traditional market-driven forces, but privatization is what truly transforms centrally planned (or socialist) economies into functioning market economies. Privatization moves state ownership of productive enterprises and industries into private hands, and thereby abolishes a state-directed, planned economy that is impervious to market forces.79 Unfortunately, the implementation of a “Big Bang” or shock therapy involving the simultaneous deregulation of the economy, macro-economic adjustment, and privatization led to rampant inflation, unemployment, and higher prices on imports in transitional economies.80 Not only were major economic reforms implemented, but a full-fledged, immediate transition to democratic, civil societies was also expected by Western donors, policy-makers, multilateral institutions, and consultants. Moreover, the economic and political prescriptions for transforming these societies were grounded on a narrowly based modernization approach of Western advisors. The underlying idea was to recreate transitional societies in the image of the post-modern, democratic, market-driven nation-state that was modeled principally on the AngloAmerican experience and echoed the precepts of modernization theory.81 Indeed, the failure to focus on the essentially European character and history of these transitional economies, and ignoring their aspirations to join the EU as new members, revealed the short-sighted approach of many U.S.-based advisers. Moreover, many Eastern European nations have legal customs and codes that follow the civil law (rather than the common law) tradition embodied in the French or Austro-German civil codes. Therefore, imposing a strict, almost dogmatic form of Anglo-American liberal capitalism created artificial tensions, further complicating and delaying the transition process.82
The transition to democratic, capitalist societies could have been eased, in some cases, by using European models of social democratic states. Scandinavia, Germany, and Holland, for example, who have mixed economies incorporating a large degree of socialist-type state planning that more closely resemble post-communist states.83 The neo-classical, Anglo-American economic and legal perspective tends to emphasize the Hobbesian role of the lone individual in a deregulated free market economy. This viewpoint is predicated on notions and institutions that have not taken root in transitional societies.
77
Id. at 4; Philbrick (1994), pp. 539, 541. Rutland (1995), p. 4; Philbrick (1994), p. 541. 79 Rutland (1995), pp. 4–5. 80 Philbrick (1994), pp. 540–541. 81 See generally, Brietzke (1994), p. 35. 82 Id. at 38–40, 48, 58–60. 83 See also Rutland (1995), p. 3; Brietzke (1994), p. 62. See also Dahl (1990), pp. 224, 227. 78
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In fact, the neo-liberal approach may always remain foreign to these societies that have vastly different histories, institutions, and social values. In any case, rather than plunging into the cold waters of shock therapy, a more gradualist, Europeanized approach to economic and structural legal reform may have served post-communist transitional societies better. Despite the shortcomings of neo-liberal approaches to privatization issues, however, the twin economic and political goals of transforming themselves into market-based, democratic societies has been adopted wholesale by post-communist states.84 The next section examines a form of mass privatization (or “popular capitalism”) to effect this transition. The following case study of the Czech Republic’s voucher program discusses the large-scale distribution of vouchers to all eligible Czech citizens as a means of privatizing state-owned assets and enterprises.
6.3
Privatization Strategies and Tactics
There are many considerations that may be relevant in formulating a privatization strategy, including the needs to “corporatize” SOEs into appropriate legal forms, enact new legislation, and ensure that an appropriate regulatory framework is in place.85 There has been sustained academic and practical scrutiny of various progressive steps needed in order to formulate a privatization framework.86 Rather than describe (and reiterate) these abstract considerations, this section will examine two case studies: voucher privatization in the Czech Republic and pension fund privatization in Chile. These historical case studies are designed to highlight certain issues with regard to privatization efforts undertaken in the past several decades. In addition, specific privatization techniques that may be appropriate in countries with poorly developed capital markets will be discussed.
6.3.1
The Czech Voucher Program
Mass privatization (or popular capitalism) was instituted by the Czech government as a means of pushing through important economic and political reforms. Mass privatization involved the wide distribution of vouchers or coupons to eligible citizens representing shares (i.e., equity interests) in the SOEs that were being privatized. The public sales of SOEs can be done directly through public auctions or indirectly through the use of investment funds. Investment funds trade
84
Rutland (1995), p. 4. See Guislain (1997), pp. 15–32. 86 Id. For a complete study of small-scale privatization in Russia that illustrates unique problems, see IFC (1992). 85
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privatization vouchers for shares in the companies being privatized, and thereby function like Western-styled mutual funds. Speed was of the essence in this case since Czech policy-makers (and their international advisers) feared that the longer privatization took, the weaker the resolve to make economic reforms would become.87 Indeed, the political objectives of the state in initiating a privatization program may include one or more of the following: (1) seeking budgetary relief from keeping unprofitable, heavily debt-ridden SOEs afloat; (2) reallocating tax revenues for purposes other than maintaining SOEs in their current condition; (3) increasing the efficiency of SOEs by providing cheaper, better-made goods and more efficient services for public use and consumption; (4) fostering more competitive and productive enterprises; (5) removing market entry barriers to permit foreign competition or to encourage foreign participation in the privatization process; (6) breaking up public monopolies; or (7) supporting the development of the private sector and encouraging public participation in the privatization process. Voucher privatization takes place through the wide dissemination of shares of privatized SOEs. This means that the average person may become easily vested in the new economic fortunes of the private sector. Moreover, the transparency of the voucher method, and the distribution of shares by democratic means, effectively prevented the entrenched elite (or “nomenklatura”) from surreptitiously acquiring the assets of SOEs scheduled for privatization. Thus, voucher privatization was designed to create a diverse, new private sector using democratic principles. The Czech government initiated a privatization program in phases, the first phase of which involved the transfer of state property to municipalities. In the second phase, one hundred thousand individual properties were restituted to their pre-1948 owners.88 These properties were principally comprised of houses, small shops, and factories. The third phase involved a small privatization campaign launched in February 1991. In this phase, 5-year leases on about twenty-two thousand shops and workshops were auctioned to Czech (i.e., non-foreign) private bidders.89 Finally, the Czechoslovak Federal Assembly passed an Act on the Conditions of Transfer of State Property to Other Persons (referred to as the “Large-Scale Privatization Law”) on February 26, 1991.90 The law took effect on April 1, 1991, and directed the Federal Ministry of Finance to issue investment coupons or vouchers for a nominal price of about one thousand crowns, or US$35, to every Czechoslovakian citizen over 18 years of age.91 Each voucher booklet was worth one thousand “investment points.”92 87
Bogdan (1996), pp. 59, 60. Ceska (1993), pp. 84, 88, 89–90. 89 Rutland (1995), p. 11. 90 Bogdan (1996), pp. 50. The Czech Large Privatization Law was later supplemented with the Decree on the Issuance and Use of Investment Coupons, adopted September 5, 1991, and the Law on Investment Companies and Investment Funds, enacted on April 28, 1992. Id., at 52. These laws were designed to regulate the activities of investment funds, which were prohibited from owning more than 20 percent of the shares of any company. 91 Id. at 50; Philbrick (1994), p. 554; Rutland (1995), p. 12. 92 Bogdan (1996), p. 50. 88
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The voucher holders were entitled either to bid for shares of Czech SOEs being privatized in public auctions or to invest their vouchers in one of nearly four hundred private investment funds. If the Czech investor chose an investment fund, the fund would invest the vouchers or investment points in shares of joint-stock companies being privatized and receive shares in the companies. The investment fund would then issue its own shares to the individual investor.93 The actual monetary value of the shares purchased through the use of investment points was later determined through the secondary trading of these shares on the Prague Stock Exchange.94 The first wave (or tranche) of voucher privatization took place on May 18, 1992, in which the shares of nearly fifteen hundred companies were sold.95 Apparently, there was little interest in the voucher program until January 1992, when several investment funds offered to purchase voucher coupons for up to fifteen times their original cost, payable 1 year following the transfer of actual shares in the privatizing SOE.96 The first wave officially ended on January 31, 1993, after five rounds of bidding had taken place.97 The shares of the privatized companies were actually distributed in May 1993.98 The second tranche began with the distribution of voucher booklets in late 1993, with actual bidding beginning in March 1994. The second wave of voucher privatization was limited to about nine hundred Czech firms. (It should be noted that Slovak firms did not participate since the federal union of Czechoslovakia had dissolved in 1992.) Shares were distributed in early 1995, and nearly 80% of the Czech economy was transferred to private ownership through the voucher privatization program.99 Although the Czech voucher program was generally hailed as a success, the voucher method of mass privatization did not actually help raise additional capital for heavily indebted and undercapitalized enterprises.100 However, the mass privatization method ensured that vouchers were widely distributed to the Czech population. The IMF initially warned against the risk of diffusing the ownership of privatized companies to so many individuals, rendering effective shareholder control nearly impossible.101 This, however, was a specious objection, since shareholder ownership in many large international companies is widely diffused. Moreover, by 1992, 72% of the vouchers distributed were invested
93
Philbrick (1994), p. 554; Ceska (1993), p. 99. Philbrick (1994), p. 554. 95 Rutland (1995), p. 12; Bogdan (1996), pp. 50–51. 96 S. Bell, Sharing the Wealth: Privatization Through Broad-Based Ownership Strategies, World Bank Discussion Paper No. 285 (1995), p. 14. 97 Triska (1993), pp. 104, 112. 98 Rutland (1995), p. 12. 99 Id. at 12; Bogdan (1996), p. 51. 100 Rutland (1995), p. 12. 101 Id. at 12; Philbrick (1994), p. 558. See also G. Pohl et al., Creating Capital Markets in Central and Eastern Europe, World Bank Tech. Paper No. 295 (1995) at 7. 94
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with 220 Czech investment funds.102 By the end of the second wave of voucher privatization in 1994, 64% of all investment points were invested with investment funds.103 Thus, the voucher method created strong institutional investors in the form of Czech investment funds. In fact, criticism of the Czech voucher privatization program centers on the concentration of investment points in the hands of nine investment funds who control about 50% of the total investment points. Seven of these nine investment funds are state-owned banks and insurance companies.104 The fear that the small number of large investment funds may lead to oligopolistic and potentially anticompetitive business practices has already been voiced.105 Moreover, many of the former SOEs are heavily indebted to these banks and financial institutions, so there is a conflict of interest, since these banks are reluctant to force these privatized firms into bankruptcy.106 For these banks, this could mean writing off the bad debts of former SOEs and being left holding worthless securities in dissolved firms. In addition, the investment funds themselves are quite illiquid since the underlying shares may be equity interests in nearly bankrupt SOEs.107 This means that private investors are not easily able to liquidate their shares in investment funds. In order to successfully privatize the state-owned banks that manage the Czech investment funds, several sequenced steps needed to be taken. First, these banks need to negotiate debt work-outs on the loans they made to SOEs whose stock they now own through the investment funds. Once this is completed, the banks need to restructure their own portfolios in preparation for privatization.108 To date, Czech banking reform efforts have met with mixed results.109 Despite the Czech government’s attempt to regulate investment funds, there has been a significant lack of capable investment fund management.110 Inexperienced fund managers were tempted to make misleading or confusing misrepresentations concerning vouchers to unsophisticated investors. Nevertheless, it is important to recognize that these once fledging Czech investment funds did help establish a large private ownership base for many small and medium local enterprises. Whereas new securities laws and the creation of an effective regulatory environment of investment
102
Rutland (1995), p. 12. Philbrick (1994), p. 562. 104 Bogdan (1996), pp. 52–53, 54. 105 See Coffee (1994). 106 Bogdan (1996), p. 54; Rutland (1995), p. 13. 107 Bogdan (1996), p. 54. See also Philbrick (1994), p. 570. 108 Bogdan (1996), p. 54. Bogdan suggests that the Czech government may wish to follow the type of corporate governance established under the German system where banks do control investment companies. This is another example where U.S. models may not be appropriate in the privatization process in Eastern European countries. 109 Takla (1994), p. 154. 110 Philbrick (1994), pp. 564, 569–570. 103
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funds may still be evolving in the Czech Republic, these funds nevertheless offered an excellent means of mobilizing equity capital from local investors. In fact, investment funds have been instrumental in mobilizing “under the mattress-type” savings and encouraging equity participation in the private sector by broad segments of the population. Investment funds also offer diversified ownership in many different enterprises which lowers the individual investor’s risk. Further, once fund management becomes more sophisticated, these investment funds will become an easily accessible source of obtaining expert investment advice. The lesson that the Czech experience may hold for other developing countries considering privatization options is that mass privatization may be effected in both a speedy and transparent manner. If the Czech voucher scheme for enfranchising the population in the private sector is opted for, then it is important to examine the relationship between the nominal and the market worth of the vouchers issued. The Czech government allowed the Prague Stock Exchange to make this valuation, but for those countries without secondary markets (i.e., stock exchanges or over-thecounter exchanges) in place, this may be problematic. Nevertheless, certain cautionary notes based on the Czech privatization scheme should be considered. For example, it may be wise for the government involved in privatization to protect against the likelihood of a concentration of voucher/stock ownership by investment funds. Therefore, certain protections guarding against anticompetitive behavior in stock acquisition may need to be put in place even before the shares are publicly released. Moreover, the regulation of such investment funds in terms of disclosure requirements, licensing brokerage activities, protecting against insider trading, capital requirements, liquidity, and other related issues also need to be carefully considered and planned before the investment funds are created. The Czech example proves that a fairly quick and effective transfer of ownership from the government to the private sector can be made by encouraging broad public participation. The development of local institutional investors, and the mobilization of local sources of capital into newly created equity markets are also positive downstream results.111 The speed of mass privatization is key, and the success of such programs is wholly dependent on the political, economic, legal, regulatory, and institutional environment in which they take place. A supportive climate for mass privatization should have the following elements: • Political will, including the support of top political leadership and a commitment from the entire citizenry to participate in the process and make it a success, is key. Public support can only be mustered through an aggressive publicity campaign
111
For a discussion of the potential negative downstream impact of the Czech voucher schemes, see Tomas Richter, “The Voucher Privatization and its Impacts on the Governance and Financing of Czech Stock Corporations,” SSRN (2002). Richter argues, in part, that the voucher scheme undermined the initial investor confidence in the domestic capital market and that inadequate corporate and securities laws were not enforced, both of which added to the disruption caused by the program.
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•
•
•
•
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and widely disseminated public information on the availability of vouchers, the steps in the privatization process, and the location and times of public auctions, if scheduled. Technical support is particularly important since privatization involves complex legal, banking, accounting, and other consultant expertise. Pricing the assets and valuing the stock of privatizing SOEs is a difficult process that requires foresight and good judgment. Legal infrastructure must be built up so that property ownership rights, transfers, and enforcement of such rights are established well before privatization begins. In addition, corporatizing the legal forms of SOEs as well as instituting rules of corporate governance, may be a critical first step in the privatization process. Training government bureaucrats, lawyers, judges, and other professionals to meet the demands of a market-driven economy also requires tremendous institutional and technical support. Regulatory regimes generally need to be restructured in most developing and transitional economies in order to accommodate new rule of law regimes. In many cases, for example, monopolistic or oligopolistic concerns have to be dismantled and anti-competitive protections have to be removed. Often regulatory agencies have to be established to oversee the entire process, ensure market competition, and remove market entry barriers. Additionally, new environmental concerns may also need to be addressed and may require that appropriate regulations be legislated. Financial sector reform is also critical since the financial sector supports critical linkages between domestic capital mobilization and the sales of SOE shares.112 Financial sector reforms in bank supervision and regulation, and the creation of new financial intermediaries such as credit unions, micro-enterprise institutions, and other financial institutions and products may need to be instituted.
Privatization may be viewed as a many-act play with many different actors and scenes involved in the production. If successful, privatization will create broad based public support for and ownership of formerly state-owned enterprises, including so-called “mom and pop” stores. More importantly, however, this type of privatization method will accomplish two important goals: (1) the depoliticization of decision-making by state-owned enterprises; and (2) a change in corporate governance encouraging profit-making by the enterprise.113
112
OECD (1995). G. Korsun & P. Murrell, “Ownership and Governance on the Morning After: The Initial Results of Privatization in Mongolia,” Working Paper No. 95, Center for Institutional Reform and the Informal Sector, University of Maryland at College Park (January 1994), p. 1.
113
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6.3.2
277
Pension Plan Privatization in Chile
The well-known case study of Chile’s privatization of its national pension plans has been chosen here to illustrate the potential downstream benefits that privatization programs may have on capital markets. This unlikely story begins with a military coup. Chile’s political and economic fortunes changed forever when General Augusta Pinochet overthrew the Allende government in a bloody coup in 1973.114 General Pinochet used his authoritarian government to quash any objections voiced by interest groups, and he began instituting free market economy reforms in 1980. Among his reform package was the wholesale privatization of SOEs.115 Pinochet’s minister of Labor and Social Security, Jose Pinera, successfully transformed Chile’s pay-as-you-go pension system (still used in the United States), into a system of privately funded and managed individual retirement accounts.116 Ultimately, pension fund privatization and reform proved to be instrumental in Chile’s economic recovery.117 On November 4, 1980, Pinochet created a new system of individual retirement pensions where today each worker makes mandatory contributions of 13% of their wages into a private pension fund.118 These twenty or so pension plans were known as Administradoras de Fondos de Pensiones (AFPs). AFPs are capitalized by individual worker contributions in what is known under U.S. law as a “defined contribution system.” These AFP accounts follow the worker from job to job and, at retirement, the savings can be used directly by the pensioner, or can be used to purchase an annuity.119 Self-employed workers have the option of joining an AFP, but are not required to do so.120 The AFPs are private entities functioning much like mutual funds, but are heavily regulated by the state. The government guarantees a minimum pension to retirees to cover their subsistence costs, and it requires that AFPs take minimal market risks in protecting the nest eggs of pensioners. As of February 1997, the AFPs’ US$30 billion portfolio was invested in the following manner: 40% of all pension assets were invested in government-backed debt; 25% in interest-bearing bank deposits; and, 35% in Chilean stocks. Over the previous 15 years, AFPs averaged a 13% return (over inflation).121
114
Paskin (1994), pp. 2199, 2207. Id. at 2207. 116 P. Passell, “How Chile Farms Out Nest Eggs: Can Its Private Pension Plan Offer Lessons to the U.S.?” New York Times (March 21, 1997), at D1. 117 Paskin (1994), p. 2207. 118 Id. at 2207; P. Passell, “How Chile Farms Out Nest Eggs,” at D4. (In 1983, the required contribution was 10%). See Paskin (1994), p. 2207. 119 P. Passell, “How Chile Farms Out Nest Eggs,” supra, at D4. 120 Paskin (1994), p. 2207. 121 P. Passell, “How Chile Farms Out Nest Eggs,” supra, at D4. Paskin (1994), p. 2208. 115
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Another unexpected gain in privatizing the pension fund system was the jump in the domestic savings rate from 16% in 1980, to 28% in 1997.122 Individuals could increase the amounts in their pension accounts by simply contributing more from their current wages. This had the additional advantage of providing pensioners with greater tax-deferred savings. The increased pension savings means that this capital is being mobilized by investing in current government securities as well as in private stocks and bonds traded on the Santiago Stock Market. In 1985, the Chilean law on pension funds was changed to permit AFPs to invest up to 30% of their holdings in the equity of private companies.123 The diversification of AFP portfolio holdings into private equities and bond holdings, which, by 1994, constituted 35% of total holdings, was a significant improvement over the old system which only permitted investments in government securities.124 Thus, investors were able to assume more risk by acquiring equity stakes in private companies where the potential for returns is greater than returns from government securities. For future pensioners trying to create nest eggs to fund college tuition for their children, support aging parents with special medical and other needs, or trying simply to build a more secure financial future for themselves, diversified investments in their pension plans can be a plus. Moreover, AFPs became the largest institutional purchasers of the shares of SOEs that were privatized by the Chilean government between 1985 and 1990.125 The significant amount of savings being captured by AFPs has spurred the development of capital markets in Chile as well.126 In fact, the pension funds invested by AFPs has contributed to a boom on the Chilean stock market.127 The transformation of the pension plan system into a defined contribution system where workers make individual contributions to a private pension fund of their choice is very significant. It means, in effect, that the Chilean government is no longer required to support current pensioners on social security-type tax withholdings. Further, the government is able to move out of directly providing pension plans for retirees to regulating the private industry that. does so. Thus, the Chilean government has now assumed a public watchdog role. The picture is not entirely rosy since there are economic inefficiencies generated by the heavy marketing campaigns used by AFPs to attract new pensioners to their fund. Since workers can change their pension funds every six months, the competition to keep old contributors and attract new ones can be fierce. In fact, one-third of all contributors switch their pension accounts every year.128 Although a large percentage of overhead costs may be devoted to free gifts and introductory offers
P. Passell, “How Chile Farms Out Nest Eggs,” supra, at D4. Guislain (1997), p. 79. 124 Paskin (1994), p. 2209. 125 Guislain (1997), p. 79. See also Rubinstein (1990), p. 16. 126 P. Passell, “How Chile Farms Out Nest Eggs,” supra, at D4. 127 Paskin (1994), p. 2209. 128 Guislain (1997), p. 79. 122 123
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to attract new pensioners, the competitive nature of AFPs means that they are forced to react to market demands and cannot afford to be complacent. Moreover, since the Chilean government guaranteed a minimum pension, a decline in investment return levels may have put pressure on the government to subsidize pensions. In fact, at this point, for the first time in their history, AFPs made negative real returns of 2.5% in 1995. Despite this decline in AFP earnings, Chile’s deficit with regard to social security payouts fell in 1997 by a remarkable two-thirds.129 Most importantly, a good macro-economic environment of reduced government expenditures, controlled inflation levels, and reduced tax distortions have all added to the success of private pensions in Chile.130 Workers have been given strong incentives to save. Additionally, low inflation rates mean that capital market investments have retained their value, thereby decreasing the likelihood of capital flight. Notably, these pension plan reforms were instituted by Pinochet’s military dictatorship, but his tenure ended in 1990 when Chile adopted a democratic form of government.131 Chile’s case study illustrates two important points: first, by investing in private pension funds, workers can provide for their own retirement security without too much dependence on government support or intervention. And secondly, by mobilizing domestic savings by investors and encouraging the growth of institutional investors, capital markets can be both broadened (by the number of new participants) and deepened (by capturing greater savings). In other words, Chile’s economic recovery was more or less self-financed. Chile’s example is now studied as a model by other Latin American countries (e.g., Colombia, Peru, and Argentina)132 in devising new strategies to fuel their economic growth. AFPs demonstrate that institutional investors can be a strong catalyst for capital market development even if stock market listings are limited. By investing in government commercial paper and other government-backed securities, institutional investors add a great deal of stability to financial markets. Moreover, by privatizing AFPs and allowing them to invest in the shares of private companies local capital markets are both broadened and deepened. Rather than continue the pensioners’ 129
Id. The same types of issues faced by Chilean government officials in reforming its pension system are being faced by other developing countries. Zambia, for example, has statutory pension schemes for private sector employees (Zambia National Provident Fund, the largest pension fund); for civil servants, military personnel, and teachers (Civil Service Pension Fund); and for local government employees (Local Authorities Superannuation Fund). However, there is no single government regulatory agency overseeing these funds. There are also two non-statutory pension schemes: the Zambia State Insurance Corporation, which manages about seventy-five private pension funds, and the Mukaba Pension Fund, which is owned and managed by the Zambia Consolidated Copper Mining Company, a Zambian SOE. Bailey et al. (1997). 131 J. Briggs, “A Political Miracle,” Forbes, at 108 (May 11, 1992). Although it is convenient to argue that strong macro-economic conditions create a foundation for and may even precipitate a democratic revolution, this argument is beyond the scope of this limited discussion. 132 See e.g., IFC (1996), p. 46. 130
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dependence on government taxes and budgetary allocations, private pension plans relieve the government of that responsibility while still preserving a very important social safety net. For many years, institutions like the World Bank held up Chile’s definedcontributions pension system as an example to follow, and it has been copied by more than 30 countries across Latin America, Southeast Asia and Eastern Europe. In fact, Chile’s pension funds are now worth about US$170bn, or around 70% of Chile’s GDP. This played a key role in turning Chile into the richest country in the region, lifting millions out of poverty. Aside from the need to increase the actual contributions made by workers, reforms were introduced in 2008 by moving towards a mixed public-private system by introducing a tax-funded “solidarity” scheme that supplemented the pensions of the lowest income workers.133 Additional reforms include: (1) companies being required to contribute 5% of their workers’ pay to the solidarity fund; (2) the introduction of a state-run AFP to increase competition; and, (3) the introduction of measures to keep fund managers’ commissions under control. Another element of success is that, unlike many other countries where governments have racked up enormous debts to pay promised pensions to public employees, that debt does not exist in Chile.134 In comparing the Chilean model of private pension funds with the Czech model of private investment funds following a mass privatization program, it is clear that institutional investors in both scenarios can add to the depth and stability of domestic capital markets. Institutional investors can be instrumental in capturing and mobilizing domestic savings and investing these savings in domestic capital markets. Thus, by encouraging private sector development, the state is able to assume a strategic role in private sector and capital market development. Government participation is not rendered irrelevant in this context, but instead becomes a strategic tool in a sustainable public-private partnership.
6.3.3
Non-Traditional Privatization Methods
A commonly cited reason for the lack of privatization opportunities in many developing nations is the lack of capital markets.135 Although this may affect an Initial Public Offering (IPO) of the stock of an SOE being privatized, this is by no means an absolute impediment to privatization. In fact, the privatization of the National Commercial Bank in Jamaica, discussed below, is a clear-cut example of the successful use of IPOs even where capital markets are shallow or non-existent.
Benedict Mander, “Chile pension reform comes under word spotlight,” Fin. Times (September 12, 2016). 134 Id. 135 Zank et al. (1991), p. 3. 133
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However, privatization will not succeed in a policy vacuum, as the Chilean example demonstrates. In other words, if the macro-economic framework is not conducive to financial sector development, privatization alone will not improve the economic condition of the country. Thus, macro-economic reforms (e.g., establishing positive real interest rates, controlling the government deficit, maintaining low inflation, and encouraging a freely convertible currency136) may all be critical factors in ensuring that equity investments made in local enterprises will retain their value over time. Second, other macro-economic prescriptions may include: (1) reducing government-directed credit towards certain industries or sectors; (2) making credit (i.e., loans) available on market terms; (3) removing excess reserve requirements for central and commercial banks; (4) lifting interest rate ceilings; (5) and creating a functional bank supervisory and regulatory framework.137 Without these important financial sector reforms, privatization has little chance of succeeding. In addition, tax reform, removing market barriers to foreign and domestic competitors in the banking and securities industries, and establishing a clear and coherent framework of government supervision through independent bank examiners may also be required.138 Privatization, as discussed earlier, can be accomplished by a number of different, but complementary, mechanisms tailored to the government’s political and economic objectives. In fact, most privatization programs in Africa and other parts of the developing world make use of several different methods of privatization, thereby maintaining a diversified privatization portfolio. This section explores alternative means of privatizing state-owned enterprises in countries with poorly developed capital markets. Of course, if the developing country has deep and broad functioning capital markets (e.g., Chile), then IPOs may be used to publicly float the shares of an SOE to be privatized. A prospectus is issued, the par value of the classes of stock being offered is set, and the shares are sold to the public.139 Alternatively, more
136
Id. at 2. Id. 138 Deregulating banking activities within an overall framework of liberalizing the economy can be a very effective tool in financial sector reform, but only if banks are adequately supervised by an independent agency. Ideally, banks should strive to be self-regulatory (as in the German system), but this requires that bank staffs be well-trained and fairly sophisticated (Zank et al. 1991, p. 52). 139 Id. at 26, 58–61. See also SRI International, Worldwide Experience in Alternative Privatization Financing Methods, prepared for USAID (February 1996), at 11–13. Of course, this description is an oversimplification. There are several, important steps that must be taken before privatization may take place. First, the past financial performance of the entity being privatized has to be audited to determine the financial health of the enterprise. If the SOE is in bad financial shape, it may be wiser to negotiate its sale to a private party, or enter into a management contract or lease to try to make its operations profitable in the short-term. Secondly, converting the SOE into a corporate legal form is the next step. Finally, restructuring the SOE by transferring or writing off bad loans or debts, dissolving non-performing portions of the SOE, or fragmenting it into smaller units for sale to the public are all pre-privatization steps that have to be implemented by the host government. 137
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sophisticated developing countries may seek access to international equity and bond markets in order to finance their privatization activities. However, in developing countries with poor capital markets, privatization may need to be sequenced. Thus, certain pre-privatization steps need to be planned and executed.
6.3.3.1
Bond and Equity Financing of Private Sales
If a private sale is being negotiated between the host government and an interested buyer, financing questions will arise immediately. The purchaser in a private sale of the equity of an SOE may finance the transaction in several ways: namely, by using debt financing, equity financing, or a combination of the two. If debt financing is chosen as the preferred option, the buyer will simply enter into a loan to purchase the equity of the SOE in a so-called leveraged buy out (i.e., where credit is used to finance the transaction). This means that the purchaser must have access to international banking institutions to negotiate a loan if domestic banking sources are unable to finance this type of transaction. However, caution must be exercised in this approach. If the purchaser offers the SOE’s equity and assets as collateral for the loan, in the event of a loan default, these assets may be seized by or forfeited to the lending institution.140 This means that the SOE will be effectively dissolved. Therefore, the government may wish to insist that the private (foreign) purchaser seek a loan from outside sources using separate collateral. Another approach to debt financing is to issue bonds. A purchaser may issue bonds (representing a form of indebtedness) that can be floated domestically or, if domestic bond markets are not well-developed, sold internationally. Where host country bond markets are not well-developed, private banks are usually required to underwrite, distribute, and guarantee repayment of such bonds.141 The bonds can then be purchased domestically by the general public or by local institutional investors (e.g., local pension plans or mutual funds). Bond markets can mobilize domestic savings (particularly if local pension plans or domestic institutional investors are available to purchase the bonds). However, a bond issuance is usually appropriate only where large sums of money need to be raised in order to effect the sale of an SOE. The fairly complex financial, accounting,
Once the SOE is readied for an IPO, then certain protections for new stockholders have to be instituted so that an accurate record of their names, registration of stock certificates, and resales of shares are duly recorded. Bylaws governing shareholder voting, payment of dividends, and corporate governance issues must also be addressed. Additionally, the stocks must be issued, valued, and priced. Once the prospectus is prepared by investment bankers and lawyers and is made available, it is often a useful tool in marketing the shares to the public. 140 SRI International, Worldwide Experience in Alternative Privatization Financing Methods, supra., at III-27. 141 Id. at VII-68-69. The lead underwriter (usually a merchant or investment bank) generally forms a consortium of other banks to spread the risk of the bond issuance. The bonds are then offered to potential (local) investors in much in the same way as an initial public offering of stock.
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and legal structuring is costly and may affect the speed in which the private sale is carried out. Therefore, the underlying financing for a private sale must be carefully evaluated to ascertain whether this transaction meets the government’s demand for a speedy sale of the SOE. A second type of financing that may be used to finance private sales is equity financing whereby the shares of the SOE are acquired by the private purchaser in tranches. This is particularly useful when an SOE is being recapitalized, i.e., where additional shares are being issued pursuant to the private sale. Recapitalization is especially valuable where an SOE has insufficient working capital, and needs capital investment to update its machinery, technology, market delivery systems, etc. Depending on the identity and nationality of the private purchaser, the amount of equity made available for purchase through a recapitalization effort can be a delicate political question, since equity holdings represent the private purchaser’s ownership in the SOE. Thus, the host government may need to achieve a certain comfort level before recapitalization occurs. If an SOE is heavily indebted, then a debt work-out for the SOE may be the government’s first priority. If, however, a private investor is lined up to purchase the equity of the SOE in question, then a hybrid of debt-equity financing may be considered. Debt-equity swaps permit an investor to purchase sovereign debt at a discount and exchange it for an equity position in the newly privatized SOE. Generally, such investors tend to be foreign firms with access to hard currency. Thus, a debt-equity swap enables the government to reduce its external debt overhang while privatizing an SOE at the same time. The ministry of finance and, even more importantly, the central bank of the developing country are critical players in debt-equity swap negotiations, since they are responsible for setting the rules governing such swaps. Further, if the host government is anxious to avoid the issuance of private bonds (which may need to be guaranteed by the government), debt-equity swaps may be preferable to issuing private bonds or other debt instruments.
6.3.3.2
Initial Public Offering
Another accessible, equitable, and traditional means of privatizing SOEs in a transparent fashion is by making an initial public offering (IPO). However, public flotations of stock are usually only appropriate for companies that are large, wellmanaged, and profitable. Since IPOs are technically complex transactions from legal, investment banking, and accounting standpoints, the transaction costs and the time involved generally need to be carefully justified before undertaking an IPO. Although IPOs have been criticized as a limited option for countries that do not have well-developed capital markets, this has not been the case in Jamaica, Pakistan, India, and other developing countries where IPOs have been heavily oversubscribed. If the publicity campaign is geared appropriately, there may be quite a bit of “moneyunder-the mattress” type of savings that potentially can be mobilized from the informal to the formal financial sector. Although functioning stock markets may
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not be a necessary precondition to a successful IPO, accumulated domestic savings may be a critical factor.142 Indeed, IPOs may be instrumental to emerging markets who wish to successfully join international capital markets. For example, Africa-based Vivo Energy PLC, a leading retailer and marketer of Shell-branded fuels and lubricants in Africa, launched its stock on the London Stock Exchange on May 4, 2018, with a valuation of nearly GBP 2 billion (US$2.71 bn). This was the largest London initial public offering (IPO) to date in 2018, and the largest Africa-focused IPO in more than a decade. JPMorgan, Citigroup and Credit Suisse led the listing. The initial offer price for about 30% of the company floated was set at US$ 2.24 per share.143 Vivo Energy PLC is a joint venture of energy trading house Vitol and Helios Investment Partners. The Vivo Energy IPO creates liquidity for its primary shareholders, and according to Vivo Chief Executive Christian Chammas, “[i]t’s a success. The offer was seriously oversubscribed.” Adding that, “Our success comes from the success of Africa,” noting that the average growth rate in the countries, where the company operates, is roughly 4% per year. Chammas said the listing would allow Vivo Energy PLC to join the benchmark FTSE [Financial Times Stock Exchange] 250 index.144 Even where a well-developed capital market does not exist, an IPO may still be successful. For example, the Jamaican government sold 51% of the shares of the National Commercial Bank (NCB) in a public offering of US$16.5 million. The public offering of the NCB shares took place over a 10 day period in November and December 1986 following an intensive publicity campaign. Shares could be obtained from post offices, and the prospectus was reproduced, in its entirety, in the national newspaper 1 week prior to the offering.145 More than thirty thousand individuals and institutions applied for applications, and the offering was oversubscribed by 170%! More than one hundred seventy thousand NCB shares were traded for the first time on the Jamaican Stock Exchange on December 23, 1986. Although the shares prices were seriously undervalued, the government nevertheless collected US$16.5 million in revenues from an extremely successful IPO that still serves as a model today. The Jamaican example demonstrates that a successful IPO may take place even where a well-developed capital market is absent. Careful and detailed planning, adequate publicity and information campaigns, wide distribution and easy share
142
SRI International, Worldwide Experience in Alternative Privatization Financing Methods, supra, at 11–13. 143 Libby George, “Vivo Energy, Vitol’s Africa Venture, Floats with 2 billion pound valuation,” Reuters (May 4, 2018); Launches “African-Focused Vivo Energy IPO Launches Successfully in London,” F&L Daily (May 8, 2018); see also David Pilling, “Vivo Energy Closes Biggest AfricaFocused IPO In a Decade,” Fin. Times (May 3, 2018), noting that, “The transaction could unlock other African-focused IPOs that had been waiting until a company successfully tested the market.” 144 Libby George, “Vivo Energy, Vitol’s Africa Venture, Floats with 2 billion pound valuation,” supra. 145 Zank et al. (1991), pp. 125, 132, 134.
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access, and the provision of credit, where appropriate, are all important factors that contribute to the success of an IPO in a developing country context. Thus, the lack of capital market development is not an insurmountable obstacle to initial public offerings or other means of privatization (such as voucher schemes). In fact, IPOs can ensure transparency thus building public trust in and access to the overall privatization process.
6.3.4
Capital Market Development in the Privatization Process
Another important government objective in the privatization process is encouraging the growth of capital markets and ensuring broad-based ownership of the equity in the productive enterprises of a developing country. Although the lack of capital markets is often cited as an impediment to public stock flotations or to public offerings of bonds,146 the Jamaican example demonstrates that a well-orchestrated IPO can be very successful and can deepen emerging financial markets. Moreover, the role of institutional investors, such as investment funds in the Czech Republic and pension plans in Chile, also add to the depth and liquidity of capital markets. These financial intermediaries provide the individual, retail investor with the means of diversifying his/her portfolio and of obtaining investment advice from experienced fund managers. Moreover, domestic institutional investors are often reliable purchasers of the shares of SOEs being privatized. This is an important factor since international buyers of such equity may be difficult to source. Thus, the government may wish to create a local institutional investor framework before beginning the large-scale privatizations of SOEs. Specifically, investment funds (or mutual funds)147 can be set up specifically for privatization purposes. Investment funds can buy large blocks of shares of SOEs being privatized and then sell the investment fund’s shares to individuals, functioning much like a mutual fund. Alternatively, if the voucher method is used, then individuals purchase shares in investment funds with vouchers, and then the investment funds bid for shares in SOEs on behalf of the investor. Privatization Trust Funds are often used in African countries (e.g., Tanzania, Uganda, Kenya) to warehouse or “park” shares in SOEs to be sold to the public at a later date. These types of funds act as a bridge between government and private
146
Ngenda (1995), p. 182. Mutual funds or unit trusts are usually open-ended stock portfolios, meaning that shares can be liquidated into cash upon demand. Moreover, mutual funds do not generally participate in the management of the companies whose shares are held by the fund. In contrast, closed-ended funds, such as venture capital funds or investment trusts, involve more management control and involve high-risk investments. See SRI International, Worldwide Experience in Alternative Privatization Financing Methods, at VI-52-53.
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control. The shares are managed through a private trust which removes them from government control. Zambia had an ambitious privatization program, and planned to divest its ownership in some one hundred fifty SOEs in a 5 year period. Majority equity ownership in these SOEs was often reserved for strategic private investors. A maximum of 30% equity interest in these SOEs may by offered through IPOs floated on the Lusaka Stock Exchange.148 Minority shares are reserved for interested Zambian stockholders and are parked in a trust fund. In fact, the Zambian government passed legislation and regulations to establish the Zambian Privatization Trust Fund (PTF) under a 5-year trust deed. The PTF, itself an SOE, acquires shares in privatizing SOEs and holds them for local shareholders during the transitional period.149 Further, share prices for minority shares being held for local investors are deeply discounted. In fact, Zambians may receive bonus shares and have access to installment plans for share purchases. Although the Zambian government issued ceilings on the number of minority shares individuals or local institutions may purchase, at the end of the trust, any remaining shares will be sold or distributed free of charge. Thus, the Zambian privatization plan involves the innovative use of a privatization trust fund that transfers control of minority shares to a government holding company. Additionally, incentives and discounts are provided to the local investors in order to facilitate share purchases.150 Another example of capital market development within the context of mass privatization is afforded by Romania. In August 1991, the Romanian Parliament passed Law 58, the privatization law, whereby close to six thousand five hundred state-owned commercial enterprises were opened for privatization. The newly established State Ownership Fund was to hold 70% of the privatized shares, and five private ownership funds were slated to own 30% of such shares.151 However, this attempt was not particularly successful, as the State Ownership Fund was reluctant to sell off profitable enterprises and failed to meet its privatization targets, and the five private funds were highly politicized entities that failed to operate efficiently. The Romanian government made a second, more successful, attempt at privatization when it initiated the Mass Privatization Programme in 1995, reducing the State Ownership Fund’s share from 70 to 40%, and increasing the private funds’
148
See S. Bell, Sharing the Wealth: Privatization through Broad-Based Ownership Strategies (World Bank Discussion Paper No. 285, April 1995) at 27. 149 “Privatization in Africa: Lessons and Opportunities.” (Price Waterhouse & Abt Associates, 1994). 150 For a fuller discussion on the Zambia privatization, see “African Economic Outlook: Zambia,” ABD/OECD (2003). 151 “Developing Romania’s Capital Market,” USAID No. PN-ACA-921 (CDIE Impact Evaluation No. 4, 1998), at. 2. The private ownership funds are similar in structure to U.S.-style closed-end mutual funds where investment companies with a fixed level of capitalization trade shares of individual investments on the stock market.
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share from 30 to 60%. The State Ownership Fund was tasked with gradually selling off its 40% share of the privatizing companies. Further, the Romanian government issued privatization vouchers to 16 million adult Romanians out of a population of 21 million.152 Transfer of the ownership of nearly 5600 companies to private hands was a daunting task, no less so since at the time of the voucher distribution practically no infrastructure existed for registration, quotation, trading, and share transfers after the vouchers were initially distributed. Moreover, the basic infrastructure of the hardware and software required to run the stock exchange, a nation-wide telecommunications system, and a broker-dealer self-regulatory organization (a foreign concept to Romania’s legal system) did not exist at the time.153 Further, there were no pre-existing money market instruments, private debt markets (e.g., corporate bonds), municipal finance markets, mortgage bonds, secondary government debt markets, or government long-term bonds. In addition, the Romanians needed to develop a supportive legal framework of stock market laws and regulations and to create the National Securities Commission (modeled after the U.S. Securities and Exchange Commission) in order to provide market surveillance and enforcement. But perhaps most importantly, Romanian citizens had little understanding of the nature of share ownership or the role of the capital market. Despite these impediments, almost three million people invested in private ownership funds, whereas thirteen million others opted for direct share ownership in individual privatizing companies.154 Romania’s capital market institutions were established in 1995, and did not become fully operational until 1996. The Bucharest Stock Exchange was established in November 1995, with strategic assistance from the Canadian government, and by 1998 it had 89 listed blue chip companies, a market capitalization of US$875 million, a monthly trading volume of US$20 million, and 156 broker members.155 The stock exchange is supported by depository, clearance and settlement institutions. The Romanian Automated Stock Display and Quotation system (known as RASDAQ), modeled on the U.S. NASDAQ system, received critical support from USAID. RASDAQ uses an automated, electronic screen-based trading system that links brokers throughout the country. RASDAQ trading is supported, like the stock exchange, by depository, clearance, and settlement systems, along with an independent share registry. It opened for trading in October 1996, and by January 1998 it had more than 5600 companies listed, a US$1.5 billion market capitalization, monthly turnover of US$23 million, and 199 broker members. By 1998 the Bucharest Stock Exchange and the RASDAQ, with a joint capitalization of US$875 million, represented approximately 7% of Romania’s gross domestic product.156
152
Id. at 3. Id. at 8, 11, 14. 154 Id. at 3. 155 Id. at 5. 156 Id at 8. 153
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Indeed, the success of the Bucharest Stock Exchange may also be measured by the fact that the European Bank for Reconstruction and Development (EBRD) acquired a 4.99% stake in it in 2014, demonstrating its support for Romania’s comprehensive efforts to strengthen local capital markets. Through this equity interest, the EBRD is supporting the Romanian government’s comprehensive capital market development program, which aims to improve the functioning of the local capital markets, enhance liquidity and increase availability of debt and equity offerings in the local capital markets.157 The primary lesson learned from the Romanian experience is that a stock exchange alone (i.e., providing for the secondary trading of private shares of companies) does not create a capital market.158 Although effective capital markets institutions may exist, the underlying capital markets (e.g., money market instruments, municipal bonds) may be in their incipient stages making it so that capital market institutions cannot function up to their full capacity. Moreover, such institutions will not be able to successfully allocate commercial credit if such credit decisions are made by administrative fiat rather than based on market-based needs. Thus, the old pattern of credit being directed by the government to certain institutions or end-users has and must be changed over time in order for a capital market to achieve its full potential. The examples discussed above illustrate potentially effective approaches to privatization that can be effected in a developing country that lacks the benefit of its own well-established capital markets. Developing country governments should plan their privatization activities from a menu of options that are tailored to the specific industry, enterprise, or sector being privatized. The examples illustrate that there are many techniques that may be used to privatize an enterprise, including management or employee buy-outs or so-called M/EBOs, voucher schemes, IPOs, and private placements. These options, perhaps in conjunction with each other or sequenced properly, can effect a privatization that is efficient, speedy, transparent, thus facilitating a smoother transition to private ownership. While careful and meticulous planning cannot ensure an absolute degree of success, it can rationalize the privatization process and optimize it as a tool available to the developing country government. The influence of privatization on emerging capital markets is further explored in the next chapter.
Olga Rosca, “EBRD Acquires an Equity Stake in the Bucharest Stock Exchange,” EBRD website (November 19, 2014). 158 “Developing Romania’s Capital Market,” USAID No. PN-ACA-921 (CDIE Impact Evaluation No. 4, 1998), supra., at 20. 157
6.4 The New Face of Nationalization Today
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The New Face of Nationalization Today
The global financial contagion of 2008–2009 originating in the United States from its subprime mortgage crisis raises some interesting questions in this context. In response to that crisis, there have been a series of bank failures, bank nationalizations and other extraordinary measures taken not only by the U.S. Government but also by European governments.159 The old orthodoxies of the past are certainly worth a critical re-examination in this context. The 200