1848441134 eco no law

International Economic Law, Globalization and Developing Countries

Edited by

Julio Faundez

University of Warwick, UK

Celine Tan

University of Birmingham, UK

Edward ElgarCheltenham, UK • Northampton, MA, USA

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© The Editors and Contributors Severally 2010

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher.

Published byEdward Elgar Publishing LimitedThe Lypiatts15 Lansdown RoadCheltenhamGlos GL50 2JAUK

Edward Elgar Publishing, Inc.William Pratt House9 Dewey CourtNorthamptonMassachusetts 01060USA

A catalogue record for this bookis available from the British Library

Library of Congress Control Number: 2009941140

ISBN 978 1 84844 113 2

Printed and bound by MPG Books Group, UK

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04

v

Contents

List of contributors vii

Acknowledgements ix

1 Introduction 1

Julio Faundez and Celine Tan

2 International economic law and development: before and after

neo- liberalism 10

Julio Faundez

3 Multilateral disciplines and the question of policy space 34

Yilmaz Akyüz

4 Assessing international fi nancial reform 67

Daniel Bradlow

5 Crisis and opportunity: emerging economies and the

Financial Stability Board 94

Enrique R. Carrasco

6 The new disciplinary framework: conditionality, new aid

architecture and global economic governance 112

Celine Tan

7 Taxing constraints on developing countries and the global

economic recession 138

David Salter

8 The World Trade Organization and the turbulent legacy of

international economic lawmaking in the long twentieth

century 158

Fiona Macmillan

9 Holistic approaches to development and international

investment law: the role of international investment

agreements 180

Peter Muchlinski

10 Human rights and transnational corporations: establishing

meaningful international obligations 205

James Harrison

11 Core labour standards conditionalities: a means by which to

achieve sustainable development? 234

Tonia Novitz

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vi IEL, globalization and developing countries

12 Developing countries and international competition law and

policy 252

Kathryn McMahon

13 Does the globalization of anti- corruption law help developing

countries? 283

Kevin E. Davis

14 Intellectual property, development concerns and developing

countries 307

Pedro Roff e

15 Biotechnology and the international regulation of food and

fuel security in developing countries 331

Mary E. Footer

16 Environment and development – the missing link 354

Philippe Cullet

17 The UN Climate Change Convention and developing

countries: towards eff ective implementation 379

Vicente Paolo B. Yu III

Bibliography 411

Cases 477

Legislation 480

International instruments 481

Index 483

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vii

Contributors

Yilmaz Akyüz, Special Economic Advisor, South Centre, Geneva,

Switzerland

Daniel Bradlow, SARCHI Professor of International Development Law

and African Economic Relations, University of Pretoria, and Professor

of Law, Washington College of Law, American University, Washington

DC, USA

Enrique R. Carrasco, Professor of Law, College of Law, University of

Iowa, Iowa, USA

Philippe Cullet, Professor of International and Environmental Law,

School of Law, School of Oriental and African Studies, London, UK

Kevin E. Davis, Beller Family Professor of Business Law, School of Law,

New York University, New York, USA

Julio Faundez, Professor of Law, School of Law, University of Warwick,

Coventry, UK

Mary E. Footer, Professor of International Economic Law, School of

Law, University of Nottingham, Nottingham, UK

James Harrison, Associate Professor, School of Law, University of

Warwick, Coventry, UK

Fiona Macmillan, Corporation of London Professor of Law, School of

Law, Birkbeck, University of London, London, UK

Kathryn McMahon, Associate Professor, School of Law, University of

Warwick, Coventry, UK

Peter Muchlinski, Professor of International Commercial Law, School of

Law, School of Oriental and African Studies, London, UK

Tonia Novitz, Professor of Law, School of Law, University of Bristol,

Bristol, UK

Pedro Roff e, Senior Fellow, Intellectual Property Programme, ICTSD,

Geneva, Switzerland

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viii IEL, globalization and developing countries

David Salter, Associate Professor, School of Law, University of Warwick,

Coventry, UK

Celine Tan, Lecturer in Law, Birmingham Law School, University of

Birmingham, Birmingham, UK

Vicente Paolo B. Yu III, Programme Coordinator, Global Governance for

Development Programme, South Centre, Geneva, Switzerland

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ix

Acknowledgements

Thank you to all the authors who contributed to this project. We are

grateful to Anna Farmer who compiled the bibliography, liaised with our

contributors and provided essential administrative support to this project.

We are also grateful to Paul Trimmer for his technical support in compil-

ing the fi nal version of the manuscript. A special thanks to Ben Booth

at Edward Elgar Publishing for his guidance and advice throughout this

project.


January 2010

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1

1. Introduction


The ongoing process of economic globalization has been accompanied by

a comprehensive and ambitious agenda aimed at incorporating develop-

ing countries into the global economy. A critical feature of this agenda is

the prominent role played by international economic law as a vehicle for

bringing together the complex and seemingly disparate components of

economic globalization. The prominent role played by law is manifested

in the comprehensive codifi cation of international trade, the proliferation

of international investment treaties, the enhanced role of international

adjudication and the dominant role played by international fi nancial

institutions, such as the World Bank and the IMF, in national economic

policymaking and governance.

The surge of international economic law and the consequent legalisa-

tion and judicialisation of international economic relations would suggest

that the weaker members of the interstate system have fared well during

the past three decades of economic globalization. After all, as a corollary

to assumptions about the rule of law, it would be reasonable to expect

that the development and application of international legal rules would

protect the rights and interests of weaker states. This expectation is rein-

forced by two parallel processes that have taken place in recent years: the

widespread democratisation experienced by most states in the developing

world and the new prominence achieved by the international human rights

movement.

Yet, despite these seemingly auspicious conditions, developing coun-

tries, as a group, have not fared as well as expected. Unlike economically

powerful countries, developing countries face enormous and often irresist-

ible pressures to adhere to rules of international economic law, some of

which signifi cantly restrict their capacity to formulate policies suitable

to their needs. The lack of eff ective participation of most developing

countries in the elaboration of many international economic rules and the

often asymmetric content of these new rules suggest that the legalisation of

international economic relations may not have brought about unqualifi ed

benefi ts to developing countries.

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2 IEL, globalization and developing countries

Indeed, some would argue that most contemporary rules of interna-

tional economic law are not development- friendly as they are largely

aimed at promoting a one- sided view of globalization – embodied in the

so- called Washington Consensus – which is meant to be applied by all

developing countries, regardless of local economic, political and social

conditions. Under this approach, the rules of international economic law

neither provide states in the developing world with greater voice in deter-

mining the content and orientation of the international economic system,

nor do they empower them to determine the direction of their economic

policies.

International economic law’s lack of responsiveness to the circum-

stances of developing countries can be attributed to two main factors.

First, the incorporation of developing countries in the postwar period into

an international legal system which they had limited infl uence in designing

meant that, historically, developing countries have had to conform to rules

and institutions established for the benefi t of and tailored to the circum-

stances of industrialised countries. Second, the continuing marginalisation

of developing countries from the locus of decision- making in contempo-

rary economic relations and international economic law has hindered their

ability to redress these asymmetries. In many ways, developing countries

have remained the ‘objects’ rather than the ‘subjects’ of international eco-

nomic law.

Although globalization and the attendant reconfi guration of economic

relations has complicated this analysis somewhat – the economic advance-

ment of some countries, classifi ed popularly as ‘emerging economies’, has

meant that there is now a greater heterogeneity of interests in this collec-

tive known as ‘developing countries’ – the common issues which bind this

group have remained largely the same. The participation of developing

countries in the formulation, implementation and enforcement of inter-

national economic rules and within international economic institutions

remains qualifi ed and this has signifi cant impacts for their social and eco-

nomic development, political governance and ecological sustainability.

The objective of this volume is to investigate and assess the impact of

international economic law and international economic institutions on

topics of special interest to developing countries. It does not represent an

agreed position, nor does it purport to be exhaustive, but it does off er a

variety of critical perspectives on a range of issues: international fi nance,

investment, trade, competition, taxation, intellectual property, the envi-

ronment, food and fuel security, human rights, international labour stand-

ards, anti- corruption laws and climate change.

Julio Faundez begins (in Chapter 2) by considering the complex theo-

retical and empirical questions arising from the sudden and unexpected


Introduction 3

rise of international economic law as the most important fi eld of inter-

national law in recent years. He argues that international economic law’s

rise to prominence is closely linked to its association with the Washington

Consensus, hitherto the prevailing development paradigm. In order to

understand international economic law’s rise in status, Faundez examines

international law’s approach to development over the past fi ve decades

and explains why, in the 1960s and 1970s, before the emergence of neo-

liberalism, developing countries failed to enlist the international legal

system in support of their development objectives. He provides a brief

explanation of the various political and economic factors that led to

the consolidation of the Washington Consensus and the proliferation

of international economic rules, most of which are backed by eff ective

enforcement mechanisms. Against this background, Faundez considers

the future of international economic law if, as expected, a new consen-

sus on development emerges in the aftermath of the 2008 international

fi nancial crisis. His answer is that the future of international economic

law looks promising, but this optimism is based on a negative assessment

of the current international institutional framework. Indeed, he concludes

that, because international economic rules are not deeply embedded in a

dynamic and effi cient institutional framework, this will not stand in the

way of major reform.

Faundez’s discussion is complemented by an economist’s perspective

on international economic law in Chapter 3. Here, Yilmaz Akyüz con-

siders the issue of national autonomy and asks whether – and if so how

– existing multilateral rules restrict the capacity of countries to formulate

national policies. While his focus is mainly on multilateral rules in fi nance

and trade, he includes a discussion of trade- related areas such as invest-

ment and technology. Akyüz argues that there is an urgent need to reform

multilateral disciplines so as to bring about more coherence between the

rules of international trade and international fi nance, and a better balance

between countries’ international obligations and their national autonomy.

In his view, this balance can be achieved if multilateral rules are combined

with policy fl exibility at the national level. Akyüz’s argument for greater

policy space does not favour a particular type of economic policy. It is

simply a plea for a framework of international rules that would enable

states to experiment with diff erent ways of organising their economies,

provided their policies do not discriminate against or create negative con-

sequences for other countries.

Following on from general analysis of international economic rules

and institutions, the subsequent three chapters address the critical role of

international law and international organisations in a globalized fi nan-

cial system. In light of the fi nancial crisis of 2008 and its aftermath, these



chapters aim to sketch the contours of the current regulatory framework

for international fi nancial fl ows, including international aid transactions

which continue to make up the bulk of resource transfers to developing

countries, and consider the conditions under which such fi nancial fl ows

are taking place in the era of globalization and the question of how such

fl ows are regulated and governed.

Daniel Bradlow (Chapter 4) addresses the critical issue of international

fi nancial governance in his assessment of international fi nancial reform.

After mapping the historical context for the contemporary international

fi nancial architecture, Bradlow establishes the main purposes of interna-

tional fi nancial governance and outlines the key standards that should

be used in evaluating the effi cacy of such governance. He then tests the

current international regulatory framework against these fi ve standards

– holistic vision of development, comprehensive coverage, respect for

applicable international legal standards, coordinated specialism and good

administrative practice. Bradlow fi nds that, while some changes have

taken place, current international law and existing international organisa-

tions remain problematic in regulating international fi nancial fl ows, and

he provides some proposals for reforms to the architecture in the short

and long term.

Enrique Carrasco supplements the discussion on reform of interna-

tional fi nancial governance in Chapter 5 by examining the evolution of

the Financial Stability Forum (FSF), now the Financial Stability Board

(FSB), the intergovernmental forum established in the wake of the Asian

fi nancial crisis in the late 1990s. He assesses how the global fi nancial crisis

provided the opportunity for emerging economies to advocate for greater

voice in international fi nancial decision- making and the reform of inter-

national fi nancial institutions by using the example of how economic and

geopolitical factors contributed to the transformation of the FSF.

The issue of international fi nancial reform is also crucial for lower

income developing countries that depend on offi cial rather than private

fi nancial fl ows as a means of resource generation. For many countries

dependent on offi cial development assistance, the discipline of the inter-

national aid architecture has signifi cant eff ects not only on their domestic

economies but also on their social and political organisation. In Chapter 6,

Celine Tan considers the impact of the new regime of aid governance – per-

ceived as a departure from the strictures of the conditionality- dominated

framework of aid delivery of structural adjustment – on developing coun-

tries’ engagement with the global economy and the international economic

law which sustains it. She argues that, instead of departing from policies of

the past, the new modalities of concessional fi nancial transfers have been

altered to serve a deeper and more intrusive form of disciplinary control


Introduction 5

over recipient countries and this has adverse impacts on their relationships

with the exterior.

Aside from fi nancial transfers, taxation is a substantial means of income

generation for developing countries. The regulatory framework of taxa-

tion is therefore a crucial one for these countries and one considered in

Chapter 7. Here, David Salter examines the issue of policy autonomy in

the context of taxation. He identifi es the various domestic and interna-

tional constraints that developing countries face in designing and imple-

menting fi scal and taxation policies and notes that, in recent years, the

autonomy of many developing countries has been compromised by the

requirement to implement tax reform packages prompted by IMF condi-

tionalities. Salter argues that these conditionalities follow a similar pattern

and generally include the replacement of sales or turnover taxes by a

broad- based value added tax, low rates of corporate and personal income

taxes and the gradual elimination of import and export taxes. Quite apart

from the ‘one- size- fi ts- all’ nature of the tax reforms required by the IMF,

Salter notes that the current fi nancial crisis raises serious questions as to

the sustainability and wisdom of these reforms. Indeed, the reluctance of

the various groupings of African, Caribbean and Pacifi c (ACP) countries

to conclude the new Economic Partnership Agreements (EPAs) with the

EU can be explained, in part, by the fact that, under these new agreements,

developing country partners stand to lose signifi cant revenue since they

would be required drastically to reduce, and eventually eliminate, tariff s.

There is little doubt that since its establishment the WTO has rapidly

become one of the most signifi cant actors in the global economy. In many

respects it has become the emblem of the eff orts to establish a global

system of international trade based on the principle of non- discrimination,

as refl ected in its two fundamental rules: the most- favoured nation clause

and the principle of national treatment. In her contribution to this volume,

Fiona Macmillan in Chapter 8 acknowledges the importance of the WTO,

but does not see it as a vehicle for furthering developing country interests.

Instead, she argues that the organisation serves as a mechanism for main-

taining developing countries in a permanent state of dependency towards

more powerful economic countries. She notes that the rise of corporate

capitalism, as refl ected in the powerful role of multinational companies,

undermines the doctrinal foundations of the WTO. Indeed, in her view,

today the policy of free trade and its underlying doctrine of comparative

advantages have become devices used by multinational companies to

secure absolute advantage.

An alternative viewpoint on the role of transnational corporations

(TNCs) is off ered by Peter Muchlinski (Chapter 9). In his contribution,

Muchlinski asks whether international investment law, as embodied



mainly in bilateral investment treaties, should be redesigned to take into

account the development interests of host states. This proposition raises

an important question since there are many who assume that the only way

to achieve good development outcomes is through full and unrestrained

investment liberalisation. Nevertheless, as Muchlinski shows, this view

has recently been challenged. In recent investment disputes, some arbitral

tribunals have been asked to consider whether issues relating to national

development priorities should be taken into account in the interpretation

of bilateral investment treaties. UNCTAD has urged developing countries

to negotiate development- friendly investment treaties, and some interna-

tional NGOs have prepared model international investment agreements

that seek to strike a balance between their national development policies

and the guarantees and incentives they off er to foreign investors.

The enormous power that transnational corporations acquired under

the current process of globalization raises the question whether private

companies have direct international responsibility for human rights viola-

tions. The traditional answer to this question has been negative, both in

terms of the nature of international law – which applies mainly to state

actors – and in terms of jurisdiction – as there is no international forum

to judge human rights violations by non- state actors, except to a limited

extent in the area of international criminal law. This traditional view,

however, is slowly changing. In Chapter 10, James Harrison critically

reviews a range of recent initiatives aimed at securing TNCs’ compliance

with international human rights standards. Focusing on the 2003 UN

Draft Norms on the Responsibilities of Transnational Corporations and

the alternative framework prepared by Professor John Ruggie, Special

Representative of the Secretary- General on the Issue of Human Rights

and Transnational Corporations, Harrison evaluates both approaches in

the context of the limitations of the international framework in altering

the behaviour of TNCs generally.

The diffi culties in implementing international human rights standards

in the current context of unrestrained globalization is as much a structural

problem related to the nature of international law as it is an ideological

problem regarding the nature of development. Indeed, as Tonia Novitz

shows (Chapter 11), under the prevailing results- based approach to devel-

opment, the social dimensions of globalization are regarded as subsidiary

social goods that are readily sacrifi ced if perceived to stand in the way of

achieving measurable economic outcomes. This approach does not allow

any room for notions such as sustainable or participatory development. In

the area of core international labour standards, Novitz is hopeful that a

process- based approach to development will make it easier to forge more

eff ective links between the economic and social aspects of globalization.


Introduction 7

She proceeds to explain the origins of the notion of core international

labour standards and reviews the way in which labour conditionalities are

employed in multilateral and bilateral instruments. Although acknowl-

edging that imposing conditions in order to secure respect for the social

dimension of globalization is a fi rmly established practice, she argues that

such conditionality would yield better development outcomes if they were

the product of a more participatory process, one that takes into account

the interests of all relevant stakeholders.

Conditionality has also been pursued in diff erent international arenas

to achieve other objectives, such as combating corruption. For more

than two decades, international organisations, such as the World Bank,

and bilateral donor agencies have focused their eff orts on measures to

tackle corruption. These measures have included the establishment of

anti- corruption units in developing countries, the enactment of domes-

tic legislation in developed countries aimed at discouraging so- called

‘foreign corrupt practices’ and the conclusion of various anti- corruption

Conventions under the aegis of the UN and other international organisa-

tions. Kevin Davis in Chapter 13 turns his attention to the globalization of

anti- corruption measures, and, in particular, whether the intervention of

foreign legal institutions in resolving questions that, arguably, should be

resolved by domestic institutions has a positive or a negative eff ect. Davis

off ers a detailed analysis of the arguments for and against involving exter-

nal bodies in the resolution of this problem. Noting that the lack of empiri-

cal evidence on the impact of the transnational anti- corruption regime

makes it impossible to draw general conclusions, he argues however that

it is often the problem of the lack of political will to combat corruption

that poses the biggest obstacle to addressing corruption, particularly when

important economic and political interests are at stake.

As the process of economic globalization has intensifi ed, there are

many who favour the establishment of a competition law regime at the

international level. Recently, the argument has focused on the advantages

and disadvantages of establishing a global competition regime within the

framework of the WTO. In theory, as the process of global economic inte-

gration moves forward, the argument in favour of establishing a global

regime on competition is attractive. Developing countries, however, have

strongly resisted the idea of establishing a global competition law regime.

In Chapter 12, Kathryn McMahon analyses the objections of develop-

ing countries to the globalization of competition law and refl ects upon

the consequences of not having such a regime. She discusses alternative

mechanisms to coordinate international responses to anticompetitive

behaviour and analyses the impact of two key landmark cases, the

WTO’s 2004 Telmex decision (Panel Report: Mexico – Measures Aff ecting



Telecommunications Services) and the recent US Supreme Court decision

in the case concerning F. Hoff man- La Roche Ltd v. Empagran.

Aside from competition policy, the regulation of intellectual property

represents one of the other most controversial and divisive issues on the

current international lawmaking agenda. In Chapter 14, Pedro Roff e

off ers a succinct but comprehensive analysis that explains how the par-

ticipation of developing countries has evolved, since the inception of the

international intellectual property system in the nineteenth century. He

notes that, while the experience of specifi c countries within the interna-

tional intellectual property system has been diff erent, developing countries

have tended to make their claims collectively through the United Nations

system since the establishment of UNCTAD in 1964. Roff e’s chapter also

demonstrates that, notwithstanding the proliferation of international

institutions with responsibilities over specifi c issues of intellectual prop-

erty, the intellectual property regime, as a whole, is tilted in favour of

private interests and, as a consequence, does not adequately respond to the

needs and interests of developing countries.

The issue of intellectual property rights is also considered by Mary

Footer (Chapter 15) in the context of biotechnology and the international

regulation of food and fuel security. Here, Footer considers the challenges

posed by the twin problems confronting the world today – the growing

demand for food and fuel – and evaluates one of the most contentious

solutions to both: the use of biotechnology in agriculture to facilitate

greater yield and quality of produce to meet these demands. She maintains

that, while there is still scepticism over the use of biotechnology to secure

food and fuel security, the main hurdle facing developing countries’ appli-

cation of such technology in agricultural production remains the problem

of access. Footer thus argues that there is a need not only to develop a

fresh methodological approach towards evaluating the potential use and

impact of biotechnology in developing countries but also to consider new

innovative models of technology ownership and cooperation to overcome

the access barriers posed by the current intellectual property regime.

The last two chapters of this volume tackle the crucial link between

international economic law and the environment. Traditionally viewed

as separate spheres of international lawmaking, the relationship between

economic law and protection of the environment is becoming a crucial

aspect of negotiations in both international trade and investment regimes

and multilateral environmental agreements.

In Chapter 16, Philippe Cullet addresses the three main links between

international environmental law and economic development – the rec-

onciliation of conservation and development objectives, the manifesta-

tions of notions of equity in principles of international environmental


Introduction 9

law (notably the principle of common but diff erentiated responsibilities)

and the implementation of international environmental law in developing

countries. In particular, Cullet examines the evolution of the concept of

sustainable development, a yet legally unclear umbrella notion, and dis-

cusses the varied and contradictory trends which characterise the relation-

ship between environmental law and development.

The tensions between economic growth and development and envi-

ronmental protection are similarly highlighted by Vicente Paolo B. Yu

III (Chapter 17) in his discussion of the international climate change

regime. Yu presents a policymaker’s perspective on the United Nations’

Framework Convention on Climate Change (UNFCCC) from a devel-

oping country’s standpoint. Arguing that the Convention represents

the only multilaterally agreed, legally binding agreement governing the

international community’s actions vis- à- vis climate change, he evaluates

the diffi culties that developing countries have faced in securing their inter-

ests in negotiations under the UNFCCC. Yu reviews the scientifi c basis

underpinning the lawmaking process within the regime, particularly as

it relates to the notion of historical responsibility of developed countries

for carbon emissions, and the links between climate regulation and socio-

economic development in developing countries, reiterating the principle

of equity underlying the Convention. Yu argues for the establishment of

a balanced framework for global cooperative action on climate change

guided by a fair and equitable apportionment of responsibility and taking

into account diff ering capacities of countries in combating the threat of

climate change.


10

2. International economic law and development: before and after neo-liberalism

Julio Faundez*

1. INTRODUCTION

Two features have characterised international economic law (IEL) during

the recent period of rapid and seemingly unrestrained economic globaliza-

tion: its emergence as the most important fi eld of international law and its

close association with the ruling paradigm of development, as embodied in

the celebrated Washington Consensus.

The rise to prominence of IEL is a novel development. Indeed, until

recently, IEL rules were not regarded as real law, even by the undemand-

ing standards of legal validity and effi cacy applied by most international

lawyers. As a consequence, courses devoted to general international law

rarely covered IEL. Most international law treatises and textbooks either

ignored it or dedicated only a short chapter noting that there were few

rules in this area and that most of them were either not binding (such as

the numerous rules in the GATT Agreement) or highly contested (such as

those in the area of international investment law).

From the 1980s, however, after the outbreak of the current wave of glo-

balization, IEL underwent a massive transformation to become the most

important fi eld of international law. Its importance is confi rmed by three

diff erent measures: volume, scope and effi cacy. The volume of new inter-

national economic rules is refl ected in the large number of multilateral

and bilateral treaties on matters relating to trade, fi nance and investment

and in the numerous decisions by international economic organisations and

other bodies that set standards and voluntary codes in areas as varied as

banking, corporate governance and food standards. The scope of IEL

rules, perhaps one of its most novel and distinctive characteristics, is

related to the extent to which the rules address matters hitherto regarded

* Professor of Law, School of Law, University of Warwick, Coventry, UK.


IEL and development: before and after neo-liberalism 11

as part of the exclusive domestic jurisdiction of states. The greater effi cacy

of IEL rules is refl ected in the signifi cant improvements in their enforce-

ability, due to the establishment of numerous international tribunals with

jurisdiction to resolve international economic law disputes. Thus, today,

there are more IEL rules and they reach deeper into the national policy-

making process and are taken seriously because they are more readily

enforced.

The prominence achieved by IEL in the late twentieth century is note-

worthy because, throughout the 1960s and 1970s, developing countries

tried, unsuccessfully, to make use of international legal institutions to

support their development eff orts. At the time, most developing countries

relied on a development model in which the state played a leading role

in steering the economy. By the 1980s, however, developing countries

began to embrace a set of IEL rules predicated upon a radically dif-

ferent model: one that is based on the principles of neo- liberalism and

drastically restricts the role of the state and transfers control over key

economic decisions to international agencies or to markets. This model

of development is generally known as the Washington Consensus. In the

areas of trade and investment liberalisation, economic deregulation and

protection of property rights, IEL rules and institutions faithfully refl ect

the Washington Consensus. This is precisely the reason why today most

governments and international legal scholars take IEL seriously and

why anti- globalization activists deride it. This set of principles has also

provided the basis for the emergence of a new economic paradigm for

developing countries. Indeed, according to leading proponents of globali-

zation, the rapid economic integration of the world economy has made

it necessary to harmonise rules and standards in order to create a level

playing fi eld. These rules and standards – largely derived from economic

science – have been applied to all states across the world regardless of

their level of economic development. This approach is justifi ed, accord-

ing to Larry Summers – the infl uential US economist, policymaker and

former chief economist of the World Bank – because the rules of econom-

ics are like laws of engineering: one set of rules works everywhere (Klein,

2009). IEL has thus become the main vehicle through which the principles

of the Washington Consensus have been translated into international

binding rules and policies.

The recently acquired status of IEL in international law is also signifi -

cant because the set of rules that currently govern the world economy seem

to be slowly departing from traditional assumptions underlying the con-

ceptual framework of international law. While hitherto international law

has relied on the consent of states to legitimise its rules and institutions,

today IEL rules and practices have become increasingly removed from



the notion that the consent of states is a prerequisite for the validity and

enforceability of international law. A more powerful source of legitimation

for IEL rules seems to be the imperative of global economic integration

and the needs and interests of the leading developed states and interna-

tional power brokers. Thus, for example, today it is not easy to discern

a clear link between the profuse number of conditionalities imposed on

developing countries and the traditional view that under international law

states are only bound by rules that they freely accept.

Regardless of whether this development signals the demise of state

sovereignty, as some observers suggest, it is interesting to note that the

current transformation of IEL has been accompanied by a revealing shift

in the description of states and the content of IEL rules. States are now

often no longer referred to as actors, but merely as economies; those that

are successful are described as emerging economies and those that are not

are either ignored or described as failing or fragile. Likewise, IEL rules,

along with numerous decisions of questionable legal validity, are described

as disciplines, thus suggesting that states no longer enjoy the prerogative

of opting out of international rules. It is also revealing that the rhetoric

employed by developed states and by international economic organisa-

tions suggests that one of the main purposes of IEL rules is to ‘lock in’ the

process of structural reform that these states are supposed to implement so

as to ensure that chronically volatile developing states do not undermine

the predictability and stability of the word economy.

This view of IEL rules as a straightjacket could well be a reasonable eco-

nomic expectation for leading private international economic actors; but

its political and legal implications are, if not dangerous, at least a matter

for serious concern. The notion of IEL as a straightjacket for developing

countries also raises the inevitable question of what will happen to IEL

if, as is likely, the fi nancial crisis of 2008 gives way to a new development

paradigm. Will IEL shift back towards a more state- centred approach to

development? If so, will developing countries be in a position to make use

of international legal institutions to further their interests? Or, will they

focus instead on politics and diplomacy rather than law?

The rapid ascent of IEL and its link to the prevailing development

paradigm undoubtedly raises an array of complex and highly contested

theoretical and empirical questions. The purpose of this chapter is to con-

tribute towards the clarifi cation of some of these questions. Its three main

objectives are: (1) to explain IEL’s evolving approach to development

during the past fi ve decades; (2) to identify the impact that globalization

has had on the foundations of international economic law and refl ect upon

its likely impact on developing countries; and (3) to identify contemporary

legal and political trends that may provide clues to discerning how the



relationship between IEL and development is likely to evolve in the post-

Washington Consensus period.

2. THE POST- WAR SETTLEMENT AND IMPORT SUBSTITUTION (1950–80)

The postwar settlement brought about the establishment of the United

Nations, the World Bank and the International Monetary Fund (here-

after, the Bretton Woods institutions) and the General Agreement on

Tariff s and Trade (GATT). This institutional framework was based upon

two main pillars: the prohibition of the use of force (UN Charter: Art. 2

(4)), unless duly authorised by the UN Security Council; and the notion

that the international community had a duty to promote peaceful social

and economic change, in order to maintain peace and security. Under the

Charter, the prohibition of the use of force is balanced by a clear under-

standing that the international community has a special responsibility for

improving social and economic conditions throughout the world so as to

create conditions for political stability and thus prevent confl icts between

and within states. Seen from this perspective, the political and economic

objectives of the postwar settlement were inseparable, which explains

why the UN Charter is committed to achieving both objectives at the same

time. Economic and social development was thus an essential component

of the postwar settlement.

The grand political objectives refl ected in the UN Charter were not

achieved. The cold war, which divided the world into two irreconcilable

camps, undermined the ideal that the UN would centralise the use of

force and generated instead a network of regional security pacts that were

concerned with political stability rather than development. Moreover,

the reluctance of some colonial powers to accept the principle of self-

determination brought about a wave of wars of national liberation that

divided members of the UN and distracted the attention of the organisa-

tion away from economic aff airs. After the completion of the process of

decolonisation, however, the newly independent states in Africa, Asia and

the Caribbean, together with other developing countries, joined forces to

create a powerful political bloc at the United Nations. The objective of this

bloc (later loosely identifi ed as the Group of 77) was to enlist international

law and institutions in support of their members’ quest for social and eco-

nomic development.

Between 1950 and 1980 most developing countries assigned to the state

a strong role in economic development. In this capacity, the state was

actively involved in promoting the establishment of a manufacturing base



and modernising the agricultural sector, often through the redistribution

of land. These goals were not easy to achieve. Chronic shortage of foreign

exchange made it diffi cult for developing countries to import the required

capital goods. Moreover, local industries had diffi culties competing with

imported goods from more advanced countries. Most developing coun-

tries therefore began implementing, albeit in diff erent ways and at diff erent

speeds, an economic policy that came to be known as import substitution.

This policy was based on the simple idea that, rather than wasting scarce

foreign exchange on imported products that only the rich could aff ord, the

state should, through an array of regulatory mechanisms, provide incen-

tives for the development of local manufacturing capacity. The implemen-

tation of this policy required a commercial policy that today would be

regarded as protectionist but which was then regarded as essential in order

successfully to secure national development objectives.

The Bretton Woods institutions, though ultimately committed to a

liberal international economic system (Frieden, 2006), did not stand in

the way of the implementation of import substitution strategies. On the

contrary, the World Bank actively contributed to strengthening the eco-

nomic capacity of states through technical assistance and grants aimed

at strengthening the economic infrastructure of developing countries.

The IMF, which allowed and encouraged countries to maintain capital

controls, ensured, through pegged but adjustable exchange rates, that

balance of payments defi cits did not cause disruptions to the regular fl ow

of international payments. The GATT, which at the time focused mainly

on reducing tariff s in industrial goods, was not overly concerned with

the plight of developing countries. Indeed, in the 1950s, the GATT was

described as a rich man’s club. In any event, GATT rules on subsidies and

other forms of state support were both vague and fl exible and thus did

not stand in the way of import substitution policies. Moreover, by the late

1960s, new GATT rules were adopted that exempted products from devel-

oping countries from the most- favoured- nation principle so that those

countries could enjoy preferential access to the markets of industrialised

countries (Bartels, 2007).

During this period, developing countries focused their attention on two

major objectives: fi rst, strengthening their capacity to control the exploi-

tation of their natural resources and consequently to assert their right to

regulate multinational companies operating in the sector; and second,

ensuring access to modern technology in order to support and further

develop their eff orts to implement the policy of import substitution.

Disputes over the right of developing countries to control their natural

resources, and in particular whether they could nationalise the assets of

companies operating in this sector, were prevalent during most of the



twentieth century (Sornarajah, 1994: 294). At the international legal level

there was no consensus on how to resolve these disputes. Although devel-

oped countries conceded that developing countries had a right to nation-

alise, they insisted, nonetheless, that international law required them to

pay prompt, adequate and eff ective compensation. They also claimed that

regulatory measures implemented by developing countries constituted

indirect expropriation and, as such, also required prompt, adequate and

eff ective compensation (Weston, 1975). The views between developed

and developing countries on this issue remained far apart throughout

this period. Indeed, in 1964, the US Supreme Court, in the celebrated

Sabbatino case,1 candidly acknowledged that this was an area in which the

law was unsettled since capital exporting and capital importing countries

held widely confl icting views. As a consequence, disputes over the regula-

tion of natural resources were largely handled diplomatically, culminating

often in diff erent forms of external intervention, which sometimes led to

the overthrow of governments that insisted on their right to nationalise

foreign- owned property (Iran 1952, Guatemala 1954, Chile 1973).

Transfer of technology was another issue that concerned developing

countries. The devastating political and economic impact of colonialism

on countries that had recently become independent was felt sharply in the

area of technology. Colonial powers were not, in general, concerned with

education and as a result, upon independence, there was a dramatic lack of

suitably qualifi ed people either to run the economy or to organise modern

manufacturing fi rms. Indeed, during the period of colonialism before the

Second World War, only 12 out of more than 100 developing countries

had achieved enough know- how to be classifi ed as experienced manufac-

turers (Amsden, 2007: 37). The urgent need to have access to technology

was also sharply felt by Latin American countries, even though they had

achieved independence in the fi rst half of the nineteenth century. Although

some of the latter countries had made signifi cant progress in the imple-

mentation of state- led import substitution policies, they soon found that

their capacity to further develop their manufacturing base was impeded by

their lack of technology.

During the 1960s and 1970s developing countries tried, unsuccess-

fully, to lobby for the adoption of new rules of international economic

law that refl ected their interests and development priorities. In this

context, the United Nations General Assembly, where developing coun-

tries held the majority of seats, provided them with a unique platform to

discuss and promote their views. This process resulted in the adoption

1 Banco Nacional de Cuba v. Sabbatino (1964) 376 US 398.



of several General Assembly resolutions, including the Resolution on

Permanent Sovereignty over Natural Resources, the Declaration of the

Establishment of a New Economic Order, the Charter of Economic Rights

and Duties of States and the Declaration on International Investment and

Multinational Enterprises (Cox, 1979; Weston, 1981). These Resolutions

and Declarations were not formally binding, and not one made its way

into the labyrinth of customary international law. Nonetheless, these

Declarations and Resolutions provided the basis for the development

of more structured charters on the regulation of multinationals (Draft

Code of Conduct on Transnational Corporations, prepared by the UN

Economic and Social Council) and on the regulation of transfer of

technology (prepared by UN Conference on Trade and Development,

UNCTAD). These two Codes underwent interminable discussions within

the UN, but were never formally approved (for the text of these draft

codes and declarations, see Weston et al., 1990).

The provisions on natural resources, foreign investment and technology

transfer contained in the Charter of Economic Rights and Duties of States

capture the essence of the aspirations of developing countries during this

period (Weston et al., 1990: 568). Article 2 (1) reaffi rms the principle that

states can freely exercise full sovereignty over their natural resources and

economic activities. Article 2 (2) sets out in detail the rights that derive

from a state’s sovereignty over natural resources and economic activity.

These rights include the right to regulate foreign investment in accord-

ance with its own laws; the right to regulate the activities of multinational

companies operating within its jurisdiction; and the right to nationalise

foreign- owned property, subject to appropriate compensation determined

by its own laws and reviewed by its own courts. Article 2 also provides

that no state shall be required to grant preferential treatment to foreign

investment and that multinationals should refrain from intervening in the

internal aff airs of host states.

In the area of technology, the Charter (Art. 13) proclaims the right

of every state to benefi t from advances in technology for the purpose

of furthering its economic and social development. It calls upon states

to facilitate the transfer of technology for the benefi t of developing

countries and, in particular, it calls upon developed states to support

the scientifi c and technological infrastructure of developing countries.

Transfer of technology is defi ned in the UNCTAD Draft (1.2) as ‘the

transfer of systematic knowledge for the manufacture of a product, for

the application of a process or for the rendering of a service and does

not extend to the transactions involving the mere sale or mere lease of

goods’ (Weston et al., 1990: 585). The UNCTAD Draft also purported to

prohibit restrictive business practices often associated with the transfer of



technology, such as exclusive dealing, restrictions on research and tying

arrangements.

3. TOWARDS THE WASHINGTON CONSENSUS

Attempts by developing countries to infl uence the content of IEL were

unsuccessful. Today, the UN Resolutions and Codes drafted during this

period have long been forgotten and many observers would probably

regard them as politically quaint, economically barmy or the product of

misguided economic nationalism (Krasner, 1985: 6–11, 299; Pauwelyn,

2005b: 42; Finger, 2008). Yet, it is worth remembering that in terms of

economic outcomes the policy of import substitution was quite successful.

Indeed, between 1950 and 1980, the period when this policy was applied,

developing countries experienced an unprecedented expansion in living

standards and per capita income that brought about an important decline

in levels of poverty. During this period income in developing countries

grew at a rate of 5 per cent. During this same period income in developed

countries grew at a rate of 4 per cent (Amsden, 2007: 6; Yusuf, 2009: 9–11).

It is therefore necessary to ask whether IEL rules played any role in the

achievement of these good economic outcomes.

It is clear from the account in the previous section that IEL rules did not

play a direct role in securing the positive economic outcomes during the

period 1950–80. Ironically, however, these positive outcomes can be rightly

attributed to the fact that international economic institutions and rules

provided developing countries with space to experiment with a variety of

economic policies aimed at securing a more solid and competitive produc-

tive base. As Alice Amsden notes, the GATT allowed developing countries

to deviate from the principles of free trade in order to build their national

economies (Amsden, 2007:48). Thus, although the international trading

system was liberal, developing countries were allowed to customise their

policies and formulate their own industrial policies, protect the industries

that they wanted to promote and exercise strict controls on foreign direct

investment. The international monetary system, which did not require or

encourage fi nancial liberalisation, complemented the prevailing fl exible

international trading system. Thus in many respects, the notion of ‘embed-

ded liberalism’ used by John Ruggie to describe the postwar settlement

among developed countries also applies to developing countries because,

although the rules of IEL adhered in principle to liberal multilateralism,

the prevailing system allowed developing countries to deviate from this

principle for the sake of strengthening their economies and ensuring the

stability of their political institutions (Ruggie, 1982: 397, 413).



The fl exible system of international economic rules that allowed devel-

oping countries to liberalise at their own pace did not last. By the 1970s, as

the Bretton Woods system of fi xed exchange rates collapsed and competi-

tion in trade and investment among industrialised countries intensifi ed,

the institutions of the world economy came under severe stress. In addi-

tion, the emergence of multinational companies as the leading economic

agents in the world economy began to make nation states appear politi-

cally and economically outdated (Dunning, 1993). From the perspective

of multinational companies, the division of the world into territorial units

with diverse and confl icting regulatory frameworks was ineffi cient. It was

an unnecessary political barrier that impeded the free fl ow of capital and

goods. Since calling for the elimination of national legal systems was not

practical, multinationals lobbied vigorously and successfully to secure

uniform international standards in key areas of international trade, invest-

ment and intellectual property. Along with the spread of multinationals,

other factors, such as the revolutionary developments in information

technology and improvements in transport and telecommunications, also

contributed to strengthening the demand for a more uniform system of

economic regulation throughout the world.

Changes in the organisation of production and the emergence of new

technology were undoubtedly critically important in making the relatively

fl exible and benign rules of IEL of the postwar settlement appear out of

date. Nevertheless, there were also a variety of political decisions that, in

combination with other developments, contributed to bringing about a

new set of rules. By the late 1970s the United States had become increas-

ingly frustrated by the GATT’s inability to make signifi cant progress in

the elimination of non- tariff barriers or to develop a robust approach in

the regulation of unfair trade practices (dumping and subsidies). Instead

of comprehensive regulations in these areas, the GATT had developed a

series of Codes that were binding only on countries that chose to accept

them. The regulatory fragmentation generated by this approach was exac-

erbated by the fact that the leading trading nations began to look for solu-

tions to their urgent commercial policy problems outside the framework

of the GATT, resorting to a variety of devices including voluntary export

restrictions, orderly marketing arrangements and special treaties that con-

trolled the fl ow of products into certain markets through quotas.

It is thus not surprising that, at the time, this state of aff airs was

described by some commentators as managed protectionism, and one of

the leading trade law scholars argued that the institutions of world trade

were crumbling (Jackson, 1978). Whether or not these assessments were

correct, there is little doubt that by the late 1970s and early 1980s the

world trading system was rapidly moving away from the ideal of multilat-



eralism embodied in the GATT. This unfortunate state of aff airs was made

worse by the policy of the US Government to resort to unilateral measures

in order to protect its economic interests by imposing or threatening the

imposition of sanctions on countries that had laws or practices which, in

the view of the US President, unjustifi ably restricted US commerce. This

policy, characterised as aggressive unilateralism (Bhagwati and Patrick,

1990), was vigorously used to open up markets to US exports and to

protect intellectual property rights held by US multinationals (Chorev,

2005: 333).

4. BRINGING IN NEW RULES

The United States policy of aggressive unilateralism was combined with a

more positive and dynamic policy aimed at persuading developing coun-

tries to accept the longstanding views held by the US and other capital

exporting countries regarding the protection of foreign- owned property.

This policy led to the establishment of an extensive network of bilateral

investment treaties (BITs) with developing countries (Vandevelde, 2000).

The US policy on BITs was soon replicated by most capital exporting

countries and by the end of 2007 there were over 2,600 BITs in force. This

process brought about a major shift away from the views that developing

countries had supported during the period leading up to the approval of

the Charter of Economic Rights and Duties of States.

The US and other developed countries did not, however, focus only on

bilateral solutions. They also used their fi nancial clout and political infl u-

ence within the United Nations to prevent developing countries using the

UN as a political platform to rally support for their views on development.

Thus, for example, the New York based UN Centre on Transnational

Corporations (UNCTC) – which, since 1974, had been instrumental in

supporting developing countries in their negotiations with multinational

companies and had taken an active role in preparing the draft Code of

Conduct on Multinationals – was transferred to UNCTAD in Geneva in

1993 with a smaller budget and reduced staff .2 UNCTAD itself, which had

been established by developing countries to ensure that the international

trade agenda did not neglect the overriding importance of development

issues, was marginalised as the IMF and the World Bank began to assume

a prominent role in steering the process of development (Love, 2001).

The two large oil price increases in the 1970s, which were followed

2 See http://unctc.unctad.org/aspx/index.aspx (accessed 28 August 2009).



by the debt crisis of the 1980s, exposed, once again, the vulnerability of

developing countries to the vagaries of the world economy. The sequence

of events is well known. The large OPEC surpluses (petro- dollars) were

recycled by the private banking system in the form of low- interest- rate

loans to developing countries. Since the loans were cheap, many develop-

ing countries borrowed excessive amounts and were not careful to ensure

that the investments procured by the loans would generate adequate

surpluses. Thus, when in the late 1970s interest rates shot up and there

was a second sharp rise in oil prices, the world economy faced a serious

recession, which had a devastating impact on developing countries (Cline,

1995). These circumstances provided the IMF and the World Bank with

a unique opportunity to persuade developing countries to abandon their

state- led development polices and to embrace instead market- friendly

policies (Woods, 2006: 53).

The mechanisms used by the Bretton Woods institutions have varied over

the years (see Tan, Chapter 6 in this volume), but they have all included con-

ditionalities, which generally involve soft loans in exchange for the imple-

mentation of policy reform. The initial programmes of policy- based lending

were embodied in the notorious Structural Adjustment Loans, which

exchanged badly needed fi nance for the implementation of policy measures

aimed at reducing the role of the state, releasing market forces and reduc-

ing the discretion of politicians (Mosley et al., 1991a: 40–45; Babb, 2005).

These structural adjustment policies soon became the new paradigm for

development and, in the 1990s, were christened the Washington Consensus

by an insightful economist (Williamson, 1990b). The policies prescribed

by the Washington Consensus included fi scal discipline, tax reform, inter-

est rate liberalisation, trade liberalisation, liberalisation of inward foreign

direct investment, reduction and redirection of public expenditure, deregu-

lation, privatisation and security of property rights. These policies were

never agreed by all states, but they enjoyed the support of the US Treasury,

the US Federal Reserve Board and the two Bretton Woods institutions

(Williamson, 2000: 257). They were imposed on developing countries by the

Bretton Woods institutions through a range of formal and informal mecha-

nisms, which some observers describe as soft law (Alvarez, 2005).

Political and economic pressure on developing countries by the United

States and other developed countries also played an important role in

spreading Washington Consensus policies throughout the world. The

World Bank claimed that these policies were a sound alternative to the

policies of import substitution, which had given far too much discretion

to corrupt politicians, usually captured by narrow interest groups (World

Bank, 2005a: 6). Despite its obscure political origins, its problematic mode

of implementation and questionable rationalisation, the Washington



Consensus soon became the overriding constitutional framework for

IEL. In the terminology used by Hans Kelsen’s positivist legal theory,

the Washington Consensus became the ‘basic law’ of the world economy

(Kelsen, 1967).

The completion of the Uruguay Round and the establishment of the

WTO is a landmark in the process of implementation of the Washington

Consensus. Indeed, after a long period of bitter wrangling and intermi-

nable arguments the international community approved, in 1995, several

related agreements that brought to an end debates that had plagued the

GATT for several years. The Single Undertaking brought under one roof

the reformed GATT Agreement of 1947, and agreements regulating unfair

trade practices, safeguards, non- tariff barriers, trade in services, trade-

related investment measures and intellectual property. It also established

a unifi ed dispute settlement system for all these agreements so that in any

particular dispute any of these agreements can be considered by the adju-

dicating bodies – Panels and Appellate Body. The Uruguay Round also

made it easier for complaining parties to establish a Panel and, through a

reverse consensus rule, made the adoption of Panel and Appellate Body

reports virtually automatic.

The judicialisation of international trade disputes is generally regarded

as the single most important achievement of the Uruguay Round (Jackson,

2008: 444). Equally, signifi cant, however, is the fact that some of the key

provisions of the Uruguay Round Agreement eff ectively made import sub-

stitution policies illegal: the Agreement on Subsidies and Countervailing

Measures prohibits subsidies contingent upon the use of domestic over

imported products; the Agreement on Trade Related Investment Measures

prohibits states to require foreign enterprises to use products produced

locally or to set limits to the importation of products linked to the value or

volume of local products that they export; and the TRIPS Agreement does

not allow compulsory licensing for the purpose of furthering home- grown

industrial policies.

The cumulative eff ect of these provisions has brought about a qualita-

tive change that clearly distinguishes the WTO from the old GATT. While

obligations under the old GATT were based on the reciprocal exchange of

concessions among the Contracting Parties, the WTO has moved towards

a more regulatory stance under which its rules are more prescriptive and

not subject to negotiation. Thus, not surprisingly, WTO obligations are

now referred to as disciplines, underlining the fact that the possibility of

fl exibly opting in and out of rules and procedures – a typical feature of the

old GATT – is no longer available. This is one of the reasons why even

ardent advocates of free trade have come to regard WTO structures as

unworkable (Sally, 2007: 39).



The determination to deepen the implementation of the Washington

Consensus did not come to an end with the approval of the WTO

Agreements in 1995. Indeed, such was the perceived success of the single

undertaking approach employed at the Uruguay Round that the OECD

attempted to replicate it in the area of international investment. This

attempt took the form of a draft multilateral agreement on investment

(MAI) that was meant to consolidate, in a single treaty, the rules and

principles designed to protect foreign investors currently scattered in hun-

dreds of bilateral investment treaties. In theory, securing the approval of

the MAI initiative should have been easy, since the proposed treaty was

intended, in the fi rst instance, to include only members of the OECD and

the vast majority of its provisions were no longer controversial, having

already been accepted by most states in the numerous BITs. Unexpectedly,

however, the MAI initiative generated such enormous controversy that its

sponsors decided to abandon it (Henderson, 1999).

This setback did not, however, diminish the zeal of those who were

keen to further pursue the implementation of the Washington Consensus.

Indeed, since the WTO turned out to be a hopelessly ineffi cient mecha-

nism for negotiating new rules, developed countries opted for the bilateral

route. A massive wave of Regional Trade Agreements (hereafter RTAs)

therefore emerged, which, as well as further liberalising trade between

treaty partners, introduced new rules (disciplines) in areas where the WTO

had been unable to make progress. These new obligations, also known

as Singapore issues – which developing countries refused to accept at

the Singapore Ministerial Conference in December 1996 – include com-

mitments in areas such as the environment, competition policy, labour

standards, international investment and intellectual property (Whalley,

2006: 16; Heydon and Woolcock, 2009). In the area of intellectual prop-

erty, some bilateral agreements require developing countries to intro-

duce higher standards of protection than those required by the TRIPS

Agreement (see Roff e, Chapter 14 in this volume). For example, the

US–Jordan Treaty of 2000 establishes a free trade area and also provides

for extensive protection of inventions in all fi elds of technology without

taking into account the exceptions envisaged in the TRIPS Agreement

(Art. 27.3(b)) (UNCTAD- ICTSD, 2003: 52, 60). This process has led to

the emergence of a vastly complex network of bilateral treaties – described

by some as a Spaghetti Bowl – that create special bilateral regimes, which

are slowly eroding the WTO’s cherished principle of multilateralism and

have the potential to create considerable political and legal confusion as

many states fi nd themselves subject to confl icting obligations (Baldwin,

2006: 1508; Bhagwati, 2008).

As globalization intensifi ed and the implementation of policies of eco-



nomic liberalisation in developing countries encountered diffi culties, the

agenda of the Washington Consensus expanded to include a variety of

issues that fell within the general framework of governance. The addi-

tion of governance to the original Washington Consensus has further

widened the jurisdictional domain of international economic law, thus

bringing about a further reduction of what international lawyers generally

regard as areas that are primarily within the domestic jurisdiction of states

(Faundez, 2003). Indeed, today, the World Bank and other international

organisations have unilaterally assumed jurisdiction to decide whether

the quality of governance in individual states is consistent with accepted

minimum international standards. These minimum standards have not

been agreed by states and are based broadly on Anglo- American notions

of law and administration (Kapur, 1998: 8). Following this newly acquired

power, the World Bank and other international organisations have began

to judge whether domestic institutions are adequate for the implementa-

tion of the policies prescribed by the Washington Consensus. Although

IEL rules have not yet formally authorised the World Bank or the IMF to

determine when a complete overhaul of domestic institutions is required

(regime change), the persistent use of concepts such as fragile and failed

states suggests that this could well be the next stage in the process. In

any event, regardless of whether or not the World Bank has the power to

compel countries to follow standards of governance consistent with the

original principles of the Washington Consensus, industrialised countries

have already made use of their superior economic power to persuade

developing countries to make changes in their standards of governance.

To this end, developed countries have made prolifi c use of the Generalised

System of Preferences, which dates back to the 1970s, to ensure that

developing countries comply with governance standards. India recently

challenged some aspects of the EU preferential trade programme that it

deemed discriminatory. The Appellate Body upheld India’s challenge on

the ground that the EU’s programme did not represent a positive response

to an objective development need of the benefi ciaries. The EU introduced

changes to its programme, but its revised programme is also fl awed since,

while one of the conditions for eligibility is that the countries should be

vulnerable, vulnerability is not defi ned in terms of the objective needs of

the benefi ciaries but in terms of their share of EU imports. The revised

programme also requires states that wish to benefi t from the programme

to ratify several human rights conventions, which are not linked to any

objective development need (Bartels, 2007: 742). The United States also

uses its GSP programme to persuade developing countries to sign trea-

ties and adopt legislation that they would not have otherwise accepted or

enacted (Jones, 2006). It also makes use of pre- negotiation agreements,



also known as Trade and Investment Framework Agreements (TIFAs), to

persuade countries interested in entering into RTAs to introduce legisla-

tive and institutional changes (UNCTAD, 2008b). They are very eff ective

since conditions imposed through bilateral treaties are tailored to suit the

trading and commercial interests of the US. They are also easy to monitor

and verify. Bilateral conditionalities therefore complement and reinforce

the policies pursued by the World Bank and the IMF.

From a developing country perspective, the current international eco-

nomic legal system is fl awed for the following fi ve reasons. First, most

developing countries have little or no infl uence in the decision- making

processes of international economic organisations, especially in the

IMF and the World Bank. Moreover, even in organisations such as the

WTO, in which all countries formally have the same power to infl uence

decisions, most developing countries eff ectively have no input in the

decision- making process as developed countries employ a series of infor-

mal devices and subterfuges to exclude them (Jawara and Kwa, 2003: 305;

Gathii, 2006).

Second, today, international economic institutions, such as the World

Bank and the IMF, have assumed an inordinate amount of control over

key economic policy and governance decisions of developing countries

through the imposition of various forms of conditionalities and the exer-

cise of surveillance powers (Woods, 2006).

Third, even in cases where developing countries are formally equal

counterparts in the formulation of IEL rules (as is the case of bilateral

investment treaties between developed and developing countries), the

reciprocal obligations established by these treaties are, in fact, vastly

unequal. Indeed, while both parties agree to protect the investment of

the other party’s nationals in their territory, in reality, investment fl ows

in only one direction – from developed to developing country. These

treaty obligations, though formally symmetrical, therefore ensure that the

standards of one of the parties are respected by the other. The process of

negotiation of these treaties further confi rms their asymmetrical nature.

Indeed, these treaties are based on Model Treaties drafted by lawyers in

the Foreign Offi ces of developed countries and leave developing countries

very little room for negotiation (Schneiderman, 2000; Singh, 2001).

Fourth, the recent expansion of IEL- based international adjudication

has been loaded in favour of private- sector actors, as key decisions in

international investment and trade disputes are mainly handled by arbi-

trators and panellists whose expertise is mainly in private and commercial

law (as is the case of ICSID) or in specialised areas of international trade

(as is the case of WTO Panels). These experts often lack the necessary

knowledge, experience or inclination fully to assess the wider national and



international public policy implications of the issues arising from cases

submitted to them.

Fifth, in the absence of explicit IEL rules, many areas of international

economic relations are governed by standards that are designed either by

small groupings of powerful states, such as the G- 7, the G- 8, and more

recently the G- 20, or by intergovernmental organisations in which devel-

oping countries have little or no infl uence (Schneider, 2005).

There is little doubt that under the current international economic

legal system developing countries are, in general, ‘rule takers’, rather

than active agents in framing legal rules. There are, of course, many

areas in which developing countries have made good use of and achieved

benefi ts from the new IEL rules. Indeed, some countries have successfully

defended their rights through the WTO dispute settlement mechanism

(such as the case of Brazil and cotton subsidies; see Cross, 2006); others

have benefi ted from the use of provisions of the GATS to exploit their

comparative advantages (such as India and outsourcing; see Jensen and

Kletzer, 2008); and developing countries successfully campaigned to

persuade the WTO to adopt a Declaration on the TRIPS Agreement

and Public Health that restates that countries have the right, under the

TRIPS Agreement, to grant compulsory licences to protect public health

(UNCTAD- ICTSD, 2003: 16).

Yet, for developing countries as a whole, the current framework of

IEL rules is not an unqualifi ed success. The economic performance of

developing countries during the upsurge of globalization in 1980 has

been disappointing, especially when compared with the levels of growth

achieved during the preceding thirty years. Indeed, while developing

countries’ income grew at an average rate of 5 per cent between 1950 and

1980, average growth rates dropped to barely 3 per cent between 1980

and 2000. These average fi gures conceal, of course, signifi cant varia-

tions. India and China, which opened their economies but did not apply

the Washington Consensus, have registered spectacular growth rates,

while other developing countries in Latin America and Africa, which

followed the Washington Consensus and/or were subjected to strict struc-

tural adjustment programmes, registered average growth rates below 3

per cent (Amsden, 2007: 6, quoting World Development Report 2002

Development Indicators). These fi gures show, contrary to the views of

some observers (IMF, 2007: 135–70), that unrestrained globalization has

not been an unqualifi ed success for developing countries. It is also unclear

whether globalization has brought about an overall reduction in inequal-

ity, either in terms of the relationship between developed and developing

countries or in terms of poverty reduction within countries (Sutcliff e,

2004; Wade, 2004).



5. HAS IEL GONE TOO FAR?

The fact that developing countries have not played a major role in shaping

the form and content of IEL rules is not surprising. After all, they have

never played a major role in shaping events in the world economy. In

recent years, however, developing countries have been under enormous

political and economic pressure to ‘globalize’, and IEL rules have played a

crucial role in this process. The problem, however, is that many of the new

IEL rules have come into being through mechanisms (such as conditional-

ity) that do not fi t comfortably with the traditional notion that binding

rules of international law are created by the consent of states. Also, many

of the new IEL rules have penetrated so deeply into the fabric of what has

previously been considered the domestic jurisdiction of states (the issue of

policy space) that questions are rightly raised about the impact of globali-

zation on the foundations of international law and state sovereignty.

These questions have been widely debated among social scientists

and legal theorists and no consensus has yet emerged on this issue. This

debate is relevant to this chapter because it is premised on the problematic

assumption that IEL is a coherent and systematic system of rules. Before

testing this assumption, however, it is necessary to off er an overview,

albeit schematic, of the way some social scientists and legal theorists have

addressed the question concerning the wider relationship between sover-

eignty, globalization and international law.

The impact of globalization on state sovereignty has been noted by most

international relations specialists, political economists and international

lawyers. While economists do not generally address issues relating to

international law or state sovereignty, some ideologues of globalization

regard the advent of globalization as inevitable, thus highlighting the

economic logic of this process while downplaying the role of international

law and political bargaining (Friedman, 1999; Wolf, 2004). Political scien-

tists and lawyers sceptical about normative concepts such as sovereignty

argue that the focus for a proper understanding of the world economy

should be on the political and economic interests of the leading players in

the world economy, rather than on empty normative concepts (Krasner,

1999; Goldsmith and Posner, 2005). Those who hold this view about

international relations are also sceptical about international law and, as a

consequence, are not overly concerned about the impact of globalization

on its foundations.

There are, of course, many social scientists who take more seriously the

impact of globalization on sovereignty and international law. Within this

group, some regard globalization as a positive factor insofar as it may be

the prelude to a world order in which citizens are part of a larger cosmo-



politan order (Pogge, 2002: 168; Held, 2004; Habermas, 2006). These theo-

rists, however, do not address diffi cult issues such as the sources of law or

the structure of the institutions in the new cosmopolitan order. Theorists

who take a less sanguine approach to the current process of international

economic norm setting describe the process as coercive socialisation

(Hurrell, 2007: 212), neo- colonialism (Mutua, 2000; Anghie, 2006) or

simply a new form of imperialism (Chimni, 2004).

International lawyers have adopted a variety of approaches to interpret

and conceptualise the impact of globalization on IEL and international

law generally. Most of these approaches have been pragmatic insofar as

they attempt to incorporate the momentous changes that have taken place

in recent years into the current international law discourse. José Alvarez

(2005), for example, in an extremely well- documented study, provides

unambiguous evidence that, in recent years, international organisations

have taken an expansive and often careless approach to the creation of

international law rules and notes that this process is eff ectively changing

the meaning of national sovereignty.

A more ambitious attempt to wrestle with the abundance and complex-

ity of new international economic rules is found in the work of lawyers

who have sought to apply principles and techniques of administrative law

to interpreting the emerging IEL regulatory framework (Kingsbury et al.,

2005). This approach is valuable insofar as it provides enormous data on

the rapid spread of IEL rules and raises important questions about overall

political and legal implications. The weakness of this approach is that it

assumes that the political problem of legitimacy generated by the current

process of economic globalization can be resolved by applying princi-

ples and techniques of domestic administrative law originating mainly

in Europe and the United States. It thus fails to take into account that,

although in domestic settings administrative law is an essential feature of

the rule of law, a good and effi cient system of administrative law presup-

poses a strong and legitimate political system, something that is sadly

missing at the international level.

Some international lawyers, observing that globalization has under-

mined the old- fashioned, state- led diplomatic process for making and

interpreting international law, have opted for pragmatic solutions that

change the focus of analysis. Thus, Anne Marie Slaughter (2004a, 2004b),

for example, points out that the role of established professional diplomats

has now been taken over by governmental and non- governmental experts

who are controlling and driving the process of norm creation at the inter-

national level. In order to ensure that the leading actors in this network

do a good job, international lawyers should develop creative mechanisms

of accountability to control their activities. This approach does not,



however, address the issue regarding the transformation of sovereignty

under the impact of globalization nor the impact of this transformation

on the role of developing countries in the emerging international economic

legal order. Instead, working on the assumption that the spread of world-

wide economic liberalism is inevitable, it seeks to provide lawyers with a

technical perspective in order to make networks accountable, thus enhanc-

ing the legitimacy of this process.

Not all lawyers, however, take such a complacent view. Ernst- Ulrich

Petersmann (2002b, 2008), for example, is keenly aware that the legal and

political foundations of the current process of economic globalization are

weak. Noting that there is a manifest incoherence between the principles

of the WTO that focus on free trade and some international human rights

instruments that have a distinct anti- market bias, he calls for a radical

approach to ensure simultaneous and timely respect of all human rights

– economic, political and social – both at national and international

levels. He calls this approach multi- level constitutionalism and argues

that in order to achieve it the international community should adopt

the European Union’s approach to economic integration. Petersmann’s

proposal has provoked a lively and unexpectedly acrimonious response

from prominent members of the international human rights community

(Alston, 2002; Howse, 2002; Petersmann, 2002a; see also Picciotto, 2003).

Most international lawyers have focused their attention on rationalis-

ing and explaining international legal development and have refrained

from directly addressing the delicate question of state sovereignty (but

see Schachter, 1997; Lauterpacht, 1997). One of the most prominent

international lawyers, the late Robert Jennings, has off ered a powerful

defence of the continuing validity of the notion of sovereignty (Jennings,

2002). A more qualifi ed defence of sovereignty is off ered by John Jackson,

a leading IEL specialist. He argues that sovereignty should be renamed

and redefi ned. He proposes to call it ‘sovereignty modern’ so as to take

into account the fact that not all contemporary rules of international eco-

nomic law can trace their origin to the consent of states (Jackson, 2003,

2006). Jackson’s argument, though interesting, is unpersuasive. He does

not clearly explain which international rules do not require the consent

of all the states, nor does he explain where and how these rules originate.

Thus, his objective of redefi ning sovereignty does not succeed. It amounts

to little more than a gentle plea for the peaceful coexistence of traditional

international law with a so- called ‘modern’ international law that has to be

accepted because otherwise the world economy would become ungovern-

able. In this respect, Jackson’s argument comes close to those who argue

that the economic rules of the global economy should not be subjected to

political bargaining.



Regardless of whether political or legal theorists welcome, or deplore,

the demise of national sovereignty, they all seem to share the same

assumption: that current IEL rules are part of a comprehensive and coher-

ent system of rules. In formal terms this assumption is reasonable because,

as explained in earlier sections of this chapter, most of the new rules of IEL

are consistent with the principles of the Washington Consensus. Yet, on

close inspection the new rules of IEL are more fragile, less predictable and

not as uniformly applied as either pro- or anti- globalization activists and

scholars assume. Indeed, a close analysis of the application of IEL rules

would probably show that, at the point of implementation, the variety of

increasingly intrusive forms of international regulation are either ineff ec-

tive or their implementation is partial and selective.

The fragility of international economic law rules stems – as I argue

below – from the absence of adequate international institutions with the

capacity to transcend genuinely the narrow political and economic inter-

ests of the leading actors in the world economy. In the absence of a strong

international institutional framework, IEL rules are subject to the politi-

cal and economic vagaries of powerful nation states. Thus, in terms of

the question raised by the title of this section, IEL rules have not gone far

enough because they are not embedded within a coherent system of inter-

national institutions. This may greatly facilitate the renewal of IEL rules

once market fundamentalism, as embodied in the Washington Consensus,

gives way to another development paradigm.

6. IEL RULES AND INTERNATIONAL GOVERNANCE

The objective of establishing a level playing fi eld among actors in the

world economy is frequently cited as the main justifi cation for the prolif-

eration of IEL rules. In terms of international law, this sound objective is

embodied in the ideal of multilateralism, which is in turn based upon the

principles of equal treatment and non- discrimination. The GATT was the

fi rst international economic instrument to take this principle seriously,

and the WTO, as its successor, is the main vehicle entrusted with the

implementation of this important objective.

Yet, despite the rhetoric of multilateralism, the main proponents of

the WTO have not taken this commitment seriously either when they

designed the WTO or in their practice within the institution. Indeed, as

numerous observers have noted, the political mechanisms of the WTO

are hopelessly ineffi cient and its political organs have no capacity to take

decisions or shape the practice of the organisation in accordance with



changing economic circumstances. The persistent failure to develop new

rules and policies in successive Ministerial meetings is directly related to

the inadequacy of the WTO as a political institution. The principle of

unanimity, inherited from the GATT and described by some as medieval,

is not at the heart of the problem. The main problem is that developed

countries are not genuinely committed to the principle of multilateralism

because of their distrust arising from the need to protect and further their

own national economic interests. The WTO thus contains a labyrinth of

complex rules that are interpreted by an adjudicatory mechanism, yet

it does not have an eff ective mechanism to provide timely and dynamic

responses to the ever- changing global economic environment (Pauwelyn,

2005a, 2005b).

Although the reluctance to establish a more coherent and politically

eff ective WTO is often attributed to the neoliberal distrust of bureau-

cracies and big government, this interpretation has no basis. Indeed, the

opposite is closer to the truth. The decision to opt for a model of globali-

zation that relies on self- enforcing rules stems from a lack of faith in the

possibilities of achieving economic globalization through genuine multi-

lateral channels and not from a genuine belief in the virtues of unregulated

markets. This explains why the patently naïve belief that unregulated

markets would rule the world was so readily embraced by the leading

industrial countries in the world.

The reluctance to establish institutions capable of eff ectively creating a

more equitable process of globalization through multilateral mechanisms

is also refl ected in the policy of the major industrial powers towards the

Bretton Woods institutions. These institutions, which should have played

a critical role in providing guidance to achieve equitable economic out-

comes, became instead the leading organs entrusted with the implemen-

tation of the now discredited Washington Consensus. In the 1980s, the

World Bank pushed the structural adjustment agenda, with no concern for

its social and economic impact (Onis and Senses, 2005: 284). Poverty erad-

ication was an afterthought, incorporated into the Bank’s agenda in the

1990s, long after it had become clear that the ‘one- size- fi ts- all’ Washington

Consensus policies were not yielding good development outcomes and

were causing serious domestic political problems. The IMF’s appalling

record in applying Washington Consensus principles for the resolution of

fi nancial crisis in developing countries in the 1990s is well documented and

has been widely criticised (Stiglitz 2002a; Woods, 2006).

The poor performance of these two major institutions can again be

traced back to the failure by the leading proponents of globalization to

take seriously the importance of creating a level playing fi eld managed

through eff ective multilateral institutions. Neither the IMF nor the



World Bank has the structures or procedures to take decisions that would

remotely refl ect the interests of the majority of countries in the world.

Their voting system, designed for a diff erent era, gives privileged infl uence

to western powers, especially the United States. Paradoxically, the failure

to introduce a timely redesign of the Bretton Woods institutions called for

an approach to globalization that played down its political edge by relying

on the technical language of economics. Thus, the Washington Consensus

became a useful mechanism which, while empowering the Bretton Woods

institutions, concealed the disagreements and tensions among the leading

proponents of globalization.

Against this background, it is not surprising that the leading indus-

trial nations have all but ignored the principle of non- discrimination in

international trade – one of the pillars of the ideal of multilateralism. In

recent years, Regional Trade Agreements (RTAs) have become the most

popular international instrument to manage trade and other international

economic relations at the bilateral or regional level. Indeed, such is the

popularity of these agreements – which at the last count numbered over

200 – that today they account for 50 per cent of world trade. The rationale

for entering into these agreements is that they are building blocks aimed at

facilitating economic integration among partners.

Although these agreements are not prohibited by the WTO, they are

closely regulated by the treaty (GATT 1947: Art. XXIV). Under this

provision RTAs are intended to further trade liberalisation, but must not

raise trade barriers in relation to WTO members that are not parties to the

agreements. This basic principle requires members of RTAs to eliminate

duties and other restrictive regulations of commerce with respect to sub-

stantially all trade and not to introduce more restrictive trade regulations

in respect of trade with third parties. Under the rules of Article XXIV,

all RTAs must be notifi ed and approved by the Committee on Regional

Trade Agreements, which includes all WTO members. Although the fi rst

of these requirements has been fulfi lled, the second has not. Indeed, the

Committee has only approved one RTA (the customs union between the

Czech Republic and the Slovak Republic) because its members disagree

on the interpretation of Article XXIV. As a consequence, all but one of

the RTAs in force exist in a virtual legal limbo because WTO members

have been unable to decide whether their aims and objectives are con-

sistent with the aims and objectives of the WTO. According to Jagdish

Bhagwati (2008), RTAs have eff ectively destroyed the principle of non-

discrimination and have swallowed up the trading system.

The reluctance of the leading industrial powers fully to implement the

principle of multilateralism is yet another refl ection of their half- hearted

commitment to establishing a genuine level playing fi eld for the global



economy. Their own national political and economic interests have

made it impossible to achieve this objective. This has not prevented them

from imposing ‘one- size- fi ts- all’ obligations on developing countries,

as refl ected in most IEL rules. Thus, while developing countries are

prevented from using subsidies to develop local industries, developed

countries employ subsidies to protect their agricultural sectors; while

developing countries are required unconditionally to open up their

economies to foreign investors, developed countries carefully screen

investment from sources that they deem politically sensitive (Mattoo and

Subramanian, 2009); while most developing countries have no choice

but to accept tough conditionalities from the IMF and the World Bank,

some developed countries use their infl uence in these institutions to give

preferential treatment and additional fi nancial support to their politi-

cal allies (Stone, 2008); while the Millennium Development Goals were

agreed with great fanfare, their implementation has provided developed

countries with yet another opportunity to compel developing countries

to adopt policy changes (Soederberg, 2004); while developing countries

that enter into trade agreements are required to make sweeping changes

to their tariff structures, their developed country partners are not pre-

pared to commit themselves to even a minimum level of foreign aid

(Hinkle and Schiff , 2004; South Centre, 2008a); while preferential trade

agreements are described as building blocks to further integration, some

of these agreements have made it diffi cult for developing countries to

avail themselves of the fl exibilities of the TRIPS Agreement (Stiglitz,

2008: 1701).

Thus, one of the features of international governance in recent years

is that international economic law has been used largely to impose dis-

cipline only on developing countries. Indeed, it is quite revealing that,

in a recent negotiation of a free trade agreement with the US, Australia

refused to accept a state- investor arbitration clause, claiming that it has a

well- established legal system that can fairly and equitably handle claims

from the private sector (Gagné and Morin, 2006: 372). Australia’s argu-

ment underlines the one- sided nature of most IEL rules. While developing

countries are rule- takers, developed countries retain enormous discretion

to decide whether and how to comply with rules that are meant to create

a so- called level playing fi eld. The lack of coherence of IEL rules stems

largely from the fact the promoters of the Washington Consensus failed

to create institutions capable of directing and managing the process of

globalization. Instead, they chose to introduce massive structural change

through institutions, such as the IMF and the World Bank, which have a

huge legitimacy defi cit and institutions, such as the WTO, which do not

function as genuine multilateral organisations.



7. CONCLUSION

This chapter has shown that either directly or indirectly IEL has been

concerned with economic development. From the immediate postwar

period until the 1980s, IEL was weak and almost irrelevant, thus allow-

ing developing countries space to formulate their own economic policies.

During the recent period of unrestrained globalization, IEL has played a

crucial role as a vehicle for implementation of the Washington Consensus

in the developing world. Developing countries have been required to

implement a strict set of rules, while developed countries, especially those

that have played a leading role in the promotion of globalization, have

embraced these rules half- heartedly. Instead of tackling the urgent need

to reform old international institutions and build eff ective new institutions

to manage the process of globalization, these countries have pursued,

through a range of bilateral and regional arrangements, a strategy that

gives them ample political space to secure advantages over their close

economic competitors. This process has undermined the ideal of multilat-

eralism and made a mockery of the much fl aunted objective of creating a

level playing fi eld.

Paradoxically, the weakness of the prevailing international institutional

framework bodes well for the future of IEL. Indeed, because IEL rules are

not deeply embedded in dynamic, effi cient or legitimate institutions, they

cannot stand in the way of major reform. Indeed, if the world’s leading

powerbrokers take seriously the task of building new and more eff ective

institutions for the world economy, and if there emerges a new consensus

on development that takes into account the needs and capacities of devel-

oping countries, there will then be a unique opportunity to develop new

IEL rules and procedures to steer and manage globalization. This is a dif-

fi cult task which will succeed only if it is carried out in consultation with

all interested parties. One reason to be optimistic is that, today, developing

countries will not be taken by surprise as they have learned the hard way

that IEL rules, even the most technical, have a major impact on develop-

ment.


34

3. Multilateral disciplines and the question of policy space

Yilmaz Akyüz*

1. INTRODUCTION

After a relatively short- lived, win- win hype about globalization, there is

now a widespread concern among developing countries that their ability

to control their economic and social development is increasingly circum-

scribed by their global economic integration. On the one hand, many of

the policy instruments widely used by both mature and late industrialis-

ers to reach their current levels of development are no longer available

because of international rules and obligations and rapid liberalisation

and opening up. On the other hand, increased reliance on global markets

is not generating broad- based improvements in living conditions. This

concern has grown as the promises of free market reforms advocated by

the Bretton Woods institutions (BWIs) and the benefi ts claimed from the

rules- based multilateral trading system have failed to materialise for large

segments of the population in the developing world.

Rapid integration into the global economic system diminishes national

policy autonomy in two ways. First, liberalisation of markets and disman-

tling of restrictions over cross- border movements of goods and services,

money and capital render economic performance highly susceptible to

conditions abroad and weaken the impact of national policy instruments

over macroeconomic and development policy objectives. Second, inter-

national rules and obligations diminish sovereign control over national

* Special Economic Advisor, South Centre, Geneva, Switzerland. This chapter is an abridged version of Akyüz (2009) as a background paper for Trade and Development Report, 2006. The author is grateful to Bhagirath Das, Martin Khor, Richard Kozul- Wright, Chakravarthi Raghavan and the participants of the Third World Network workshop on Global Economic Developments and National Development Strategies, Geneva, 6–12 August 2006, and of the FONDAD- UNDESA Conference on Policy Space for Developing Countries in a Globalized World, New York, 7–8 December 2006, and especially to Zdenĕk Drábek, for helpful comments and suggestions. They are not responsible for remaining errors.


Multilateral disciplines and policy space 35

policy instruments. These two sources of external constraints overlap and

reinforce each other. On the one hand, liberalisation of markets reduces

the number of instruments controlled by policymakers in much the same

way as sovereign policy autonomy is circumscribed by enhanced multilat-

eral disciplines. On the other hand, multilateral rules and practices weaken

the infl uence of national policy instruments over national policy objectives

by promoting liberalisation and opening up.

This chapter focuses on multilateral disciplines in fi nance and trade.

These include not only negotiated rules and obligations as contained in

several WTO agreements and the Articles of Agreement of the BWIs,

but also conditionalities attached to lending by the latter. The following

section will focus on the concept of national policy autonomy and the

rationale for multilateral disciplines. This will be followed by a discussion

of multilateral disciplines in fi nance and trade and the question of coher-

ence between the two. In fi nance, attention is on International Monetary

Fund (IMF or Fund) surveillance over macroeconomic and exchange

rate policies and loan conditionality. In trade, the rationale and nature

of WTO rules and obligations and their eff ects on policy autonomy in

developing countries are examined in four main areas: industrial tariff s,

industrial subsidies, investment- related policies and technology- related

policies. The need for reform in trade and fi nance is discussed with a view

to bringing coherence and fl exibility without undermining multilateral

disciplines. Attention is also paid to the space that is available and the

extent to which alternative policy instruments could be deployed in order

to overcome the constraints entailed by multilateral rules and obligations.

The chapter concludes with a discussion of the extent to which the existing

policy space is used by developing countries and a summary of the main

policy proposals.

There can be little doubt that, in an interdependent world, there is a

strong rationale for multilateral disciplines as a global collective action

designed to prevent discriminatory and beggar- my- neighbour policies

and to promote international economic stability. Current arrangements,

however, suff er from a number of shortcomings. First of all, they lack

coherence. While international trade is organised around a rules- based

system with enforceable commitments, this is not the case in international

money and fi nance. There are eff ectively no multilateral disciplines over

macroeconomic and exchange rate policies of countries which have a

disproportionately large impact on international monetary and fi nancial

conditions. This constitutes the single most important threat to the stabil-

ity and openness of the trading system. It is also an important source of

instability for the majority of developing countries, which are highly vul-

nerable to external fi nancial shocks.



The choice of which interactions should be brought under multilateral

disciplines and the design of rules and practices are not neutral in the

extent to which they accommodate the development trajectories of diff er-

ent countries. While industrial countries escape multilateral disciplines in

money and fi nance, developing countries borrowing from the BWIs face

conditionalities that circumscribe not only their macroeconomic policies

but also their broader development strategies. Existing multilateral rules

and practices seek to promote free movement of industrial goods, capital

and enterprises which favour advanced countries, but not labour, agricul-

tural products or technology where benefi ts would be greater for develop-

ing countries. In legal terms the WTO rules and commitments provide

a level playing fi eld for all parties, yet eff ective constraints they impose

over national policies are much tighter for developing than for industrial

countries.

These asymmetries are largely refl ections of shortcomings in global

economic governance. Many developing countries have little infl uence in

the formulation of WTO rules or the conditionalities of the BWIs. Nor are

they adequately represented in fora which set standards for harmonisation

of policies and practices.

However, multilaterally negotiated rules in trade and fi nance are not

always the most important constraints on policy autonomy in developing

countries, and they often leave more space than is sometimes portrayed.

In several areas brought under the WTO legislation there is room for

manoeuvre, notably in industrial tariff s, intellectual property rights and

trade in services. On the other hand, many areas of policy remain outside

existing multilateral legislation, including not only exchange rate and

capital account regimes but also development- policy issues such as foreign

direct investment (FDI), competition policy, and labour and environ-

ment standards. However, there is now a mercantilist off ensive by major

industrial countries to tighten existing WTO rules and to subject many

development- policy issues to WTO disciplines.

The space left by existing multilateral legislation has been lost in other

ways. Many low- income countries dependent on aid have seen much of

their policy space eroded by donor, IMF and World Bank condition-

alities. There has also been widespread unilateral liberalisation of trade,

investment and capital account regimes. Several developing countries have

undertaken commitments in bilateral or regional agreements with major

industrial countries which typically extend WTO disciplines in tariff s,

investment and intellectual property protection, and entail new obliga-

tions in areas left outside multilateral legislation such as capital account

regimes and environment and labour standards.

It is notable that despite widespread acceptance of market- based,



outward- oriented development strategies, and proliferation of multilateral

rules and obligations, there is still considerable diversity in national policy

regimes in the developing world. The degree of harmonisation of national

policies and practices is limited, and the demise of the nation- state is wildly

exaggerated. This diversity refl ects not only the existence of room for dif-

ferent policies and practices, but also variations in the extent to which

countries are willing or able to use the space available in order to align

their policies to suit their own objectives and priorities, rather than to go

along with the neoliberal model of development. This is particularly true

in fi nance, as demonstrated by considerable diversity in capital account

regimes.

The central conclusion of this chapter is that there is a need to reform

the existing multilateral disciplines in order to bring greater coherence

between trade and fi nance, and a better balance among countries in terms

of the constraints they eff ectively face and the autonomy they enjoy. This

should be an exercise of rationalisation which could entail tighter, rather

than looser, multilateral disciplines in some areas, notably in money and

fi nance. It should aim at reconciling multilateral disciplines with policy

fl exibility. It is argued that this is best accomplished by incorporating fl ex-

ibility into rules rather than providing policy space as exceptions.

2. ISSUES AT STAKE

I. Economic Openness and Policy Autonomy

The autonomy of national economic policy refers to the eff ectiveness of

national policy instruments in reaching national policy objectives.1 In

conventional policy analysis it is generally assumed that national authori-

ties have command over policy instruments but not the ability to control

specifi c national goals precisely in the way desired; that is, there is a gap

between de jure sovereignty of national economic policy and de facto

control over national economic development. Economic openness not

only widens this gap by allowing foreign infl uences on national objectives

but also reduces de jure sovereignty of national economic policy by sub-

jecting it to international disciplines and constraints.2

1 The distinction between instruments and targets constitutes the basis of the theory of economic policy fi rst elucidated by Tinbergen (1952); see also Hansen (1967) and Bryant (1980: ch. 2).

2 The impact of openness on policy autonomy goes back to Tinbergen (1956); see also Cooper (1968). For the distinction between de facto control over national



National authorities do not always have full command over policy

instruments even in a closed economy insulated from external infl uences.

Policy- making is a tentative process surrounded by uncertainties. Rational

policy decisions need to rely on an implicit or an explicit model describ-

ing the structure of the economy, including the relations between instru-

ments and objectives of policy. Not only is this structure unstable, but

knowledge and information about it is highly imperfect. This means that

specifi c instruments cannot always be assigned to predetermined objec-

tives. Rather, a pragmatic approach would be needed, based on solving

problems as they emerge in the achievement of the goals pursued. This

calls for considerable fl exibility in the policymaking process, including the

selection and application of instruments.3

While bringing certain benefi ts, economic openness aggravates policy

dilemmas. In an open economy the need for fl exibility is greater because

policy objectives are infl uenced by volatile and unpredictable external

factors including growth of, and access to, foreign markets, foreign inter-

est rates and exchange rates, availability of external fi nancing and debt

servicing obligations. On the other hand, economic opening often has the

implication of losing control over certain instruments. For instance, under

an open capital account regime the exchange rate and the interest rate are

both potential policy instruments, yet, at most, only one of them can actu-

ally be employed as an independent policy instrument (for the distinction

between potential and actual policy instruments, see Bryant, 1980: ch. 2).

Briefl y, with deepening integration into global markets, the range of policy

instruments shrinks as, at the same time, foreign infl uences over national

policy objectives become stronger and the trade- off s between internal and

external objectives are intensifi ed.

Economic openness and greater integration of countries into world

markets is often accompanied by their insertion into international govern-

ance systems, coming under rules and procedures of multilateral institu-

tions. These rules and procedures narrow policy autonomy by reducing de

jure sovereignty of national economic policy. It is often in this latter sense

that ‘policy space’ is used in its popular expressions; that is, it refers not so

development and de jure sovereignty of national economic policy see Bryant (1980: ch. 10–12).

3 This seems to be the reasoning behind the argument by Rodrik (2004: 3) that ‘the analysis of industrial policy needs to focus not on policy outcomes – which are unknowable ex ante – but on getting the policy process right. We need to worry about how . . . private and public actors come together to solve problems in the productive sphere, . . . and not about whether the right tool for industrial policy is, say, directed credit or R&D subsidies’.



much to the implication of liberalisation and openness for eff ectiveness of

policy in attaining national objectives as to constraints placed on de jure sov-

ereignty of national economic policy by international rules and obligations.

However, liberalisation can have similar consequences for policy autonomy

as international obligations. For instance, there is little diff erence between

loss of autonomy to use tariff s as an industrial policy tool because of WTO

rules and loss of ability to use the exchange rate as an eff ective instrument

for external adjustment because of capital account liberalisation. In fact,

these two sources of constraint on national economic policy are not always

independent since multilateral rules and practices now generally push in the

direction of faster liberalisation and greater openness.

II. Shifting Objectives of Multilateral Disciplines

The objectives of current multilateral disciplines are crucially diff erent

from those pursued by the planners of postwar international economic

architecture which helped produce the golden age in the industrial world

and allowed considerable advances in developing countries. The postwar

architecture was premised on the recognition that economic interdepend-

ence among nations called for a certain degree of international disciplines

over policymaking, particularly with a view to reducing the scope for

discriminatory and beggar- my- neighbour policies. But it also left con-

siderable space for sovereign autonomy vis- à- vis markets. By contrast,

current multilateral rules and practices seek to deepen economic integra-

tion through liberalisation in areas of interest to industrial countries and

restrain policy autonomy by surrendering power to global markets domi-

nated by transnational corporations (TNCs).

The design of the immediate postwar architecture was greatly infl uenced

by the interwar experience when pursuit of self- interest by many countries

through beggar- my- neighbour policies had led to the breakdown of inter-

national trade and payments. The outcome was a deep global economic

crisis and progressive disintegration of the international economy.

It was thus agreed that the prevention of a recurrence of such an

outcome called for international cooperation in policy making, including

multilateral mechanisms designed to restrict discriminatory and beggar-

my- neighbour policies in trade and fi nance. This was the rationale for the

creation of the International Monetary Fund to ensure an orderly system

of exchange rates and multilateral payments under conditions of strictly

limited international capital fl ows, and for the proposal to establish a

rules- based framework for international trade on the core principle of

non- discrimination.

These arrangements were based on a broad agreement on three issues.



First, markets could not always be relied on to generate economically effi -

cient and politically acceptable outcomes. Second, close linkages between

trade, fi nance and development imply that solutions should not be sought

in isolation. Finally, because of cross- border dimensions and global spillo-

vers, these policy issues cannot be left to uncoordinated individual country

actions. These principles allowed considerable room for policy interven-

tion while securing international disciplines and a reasonable degree of

coherence among multilateral rules and obligations in trade and fi nance.4

While the current approach to the organisation of the international

economic system is driven by a desire to achieve a deep and broad global

economic integration compared with the shallow integration sought

by postwar planners (Ostry, 2000), the ongoing liberalisation- cum-

integration process does not cut across all sectors but is highly selective.

Deep integration is pursued in three areas where advanced countries have

the upper hand: free movement of industrial products, money and capital,

and enterprises. By contrast the lid is kept on three areas where liberalisa-

tion would generally benefi t the developing world; namely, agricultural

goods, labour mobility and technology transfer. Social considerations are

invoked for leaving labour and agriculture out, and protection of property

rights and incentives for innovation are used as justifi cation for restric-

tions on free fl ow of technology. This selective approach to liberalisation

has the consequence that existing multilateral rules and practices exert

greater constraints on the ability of developing countries to move forward

in their development trajectory than on that of advanced countries.

For liberal orthodoxy the principal rationale of the WTO is not to

provide a framework for an orderly, non- discriminatory, rules- based

system of international trade in recognition of diversity in national strat-

egies for openness and the balance between private and public action,

but to promote rapid liberalisation. The unconditional most- favoured-

nation (MFN) principle that governed the postwar arrangements has

increasingly been replaced by market access and national treatment as

liberalisation and ‘non- distortion’ have become the organising principles

of international trade and investment. In fact, the drive to seek greater lib-

eralisation of markets than would be feasible at the multilateral level has

eroded the MFN principle by giving rise to proliferation of bilateral and

regional free trade and investment agreements.

Liberalisation has also become the central concept in the operations

4 On how these principles shaped the postwar international economic archi-tecture, see Akyüz (2004a, 2006b). For the historical evolution of the multilateral economic system, see UNCTAD (1984: part II).



of multilateral fi nancial institutions. Prevention of policy distortions and

government failure through conditionalities attached to lending to devel-

oping countries has come to be considered the principal rationale for the

continued existence of the World Bank, even though international capital

markets could assume the task of provision of external fi nancing to many

developing countries.5 Again the Fund is seen as a useful instrument for

disciplining governments in developing countries, even though it has no

eff ective power to exert multilateral disciplines over exchange rate and

macroeconomic policies of the countries that matter most for interna-

tional economic and fi nancial stability.

Whatever the merits of the arguments about the respective roles of gov-

ernments and markets in economic matters, they cannot provide a legiti-

mate basis for organising the international economic order. To the extent

that countries are responsible for their own destiny, they have the right to

choose or experiment with any system of organisation of their economic

aff airs provided that it does not amount to discriminatory and beggar- my-

neighbour policies or create large negative spillovers beyond their borders.

Arguing for policy space is not arguing for a particular stance in industrial,

trade and technology policies, but denying it amounts to one- size- fi ts- all

prescriptions based on the requirements of the development trajectories of

industrially advanced countries.

In any case, there is considerable doubt about the credibility of ortho-

dox arguments. Neither economic theory nor historical evidence provides

a strong causal link between openness and economic development. While

trade, technology and industrial policies have not always been used eff ec-

tively, there is barely any example of successful industrialisation without

government support and protection in these areas. However, the ortho-

doxy constantly downplays the role of successful industry policy inter-

ventions in East Asia.6 It also disregards the fact that many of the trade,

technology and industrial policy instruments now denied to developing

5 This has been argued even by economists who are otherwise critical of ortho-doxy: ‘it is more plausible to locate the Bank’s comparative advantage in assisting developing countries in the presence of weaknesses and distortions in member countries’ domestic political processes than in overcoming the international capital market imperfections’ (Gavin and Rodrik, 1995: 311; see also Rodrik, 1995; Gilbert et al., 1999). For a discussion of the rationale for multilateral fi nancial institutions, see Akyüz (2006b).

6 The orthodox explanation of the East Asian experience has gone through phases. Originally, there was a tendency to ignore selective industrial policy interventions and portray it as a market- based experiment. Subsequently, such interventions had to be recognised but were discarded on grounds that they did not matter or that the conditions that allowed them to make a contribution to



countries were successfully employed by today’s developed countries

during their industrial transformation.7

3. MULTILATERAL CONSTRAINTS ON POLICY AUTONOMY

The existing system of global economic governance lacks eff ective multi-

lateral disciplines over exchange rate, macroeconomic and fi nancial poli-

cies, or for redress and dispute settlement regarding the negative impulses

generated by such policies. In this respect governance in money and

fi nance lags behind that for international trade. It is particularly notable

that, while recent years have seen considerable tightening of international

disciplines in trade and several other areas of policy addressed in the WTO,

there has been no attempt to fi ll the vacuum created by the breakdown of

the Bretton Woods arrangements despite increased international mon-

etary and fi nancial instability and recurrent crises in emerging markets. In

a way fi nance has become the vanguard of the liberal international order,

premised on the assumption that fi nancial markets can do their own disci-

plining and do not need international rules.

When currencies can move rapidly in relatively short periods from one

level to another, multilateral disciplines over tariff s would not provide

a predictable trading environment since such swings easily alter relative

competitive positions. It takes several years of negotiation to achieve

10 to 20 per cent tariff cuts, but under fl oating and free capital mobility

exchange rates of major currencies are known to have fl uctuated as much

over a matter of a couple of weeks. On the other hand, when exchange

rates remain divorced for prolonged periods from economic fundamen-

tals, arguments advanced in favour of free trade lose their rationale. In

fact, even on mainstream reasoning, there would be a strong justifi cation

for tariff s and non- tariff protection to correct distortions caused in trade

fl ows and resource allocation by exchange rate misalignments.

industrialisation do not exist in other countries. For a recent critical assessment of these propositions, see Wade (2003a).

7 This neglect is particularly notable in view of the existence of a vast literature on the history of trade, investment, technology and fi nancial policies in mature and late industrialisers. For an overall assessment see Chang (2002). On trade barriers, see Hufbauer (1983), UNCTAD (1984), Bairoch (1993), O’Rourke and Williamson (2000) and Akyüz (2005c); on investment policies, see Chang (2003) and Kumar (2005); and on technology policies and patent rights, see Bercovitz (1990), Chang (2001), Gerster (2001) and Kumar (2003).



Adverse impulses for trade are also generated by unpredictable and

large swings in interest rates on major reserve currencies that dominate

international transactions. Hikes in interest rates raise debt servicing obli-

gations of countries whose external debt is contracted in reserve currencies

and tighten the balance of payments constraint. They can also redirect

capital fl ows away from defi cit and indebted countries, aggravating exter-

nal fi nancial diffi culties. Often, these necessitate restrictions on imports

through cuts in economic activity or the introduction of tariff and non-

tariff barriers, leading to contraction in world trade.

The burden of adverse monetary and fi nancial impulses invariably

falls on the trading system because of the implicit acceptance by the

international community of the priority of meeting fi nancial obligations

over observance of commitments to free trade. Article XII of the GATT

provides that ‘any contracting party, in order to safeguard its external

fi nancial position and its balance of payments, may restrict the quantity or

value of merchandise permitted to be imported’ subject to certain provi-

sions.8 There are, however, no analogous provisions in the international

fi nancial system allowing countries facing serious payment diffi culties to

suspend their fi nancial obligations. The asymmetry between trade and

fi nance in bearing the brunt of balance- of- payments disequilibria con-

tinues unabated as recent attempts to introduce orderly debt workout

procedures, including temporary debt standstills, have been blocked by

international fi nancial markets and the United States government (Akyüz,

2002, 2005b).

Lack of multilateral disciplines in money and fi nance is a major concern

to developing countries because they are highly vulnerable to external

fi nancial shocks and such shocks are more damaging than trade shocks.

Boom–bust cycles in capital fl ows to developing countries and major

international fi nancial crises are typically connected to large shifts in

macroeconomic and fi nancial conditions in the major industrial countries.

The sharp rise in the United States interest rates and the appreciation of

the dollar was a main factor in the debt crisis of the 1980s. Likewise, the

boom–bust cycle of capital fl ows in the 1990s which devastated many

countries in Latin America and East Asia was strongly infl uenced by shifts

in monetary conditions in the United States and the exchange rates among

the major reserve currencies (UNCTAD, 1998b: ch. IV, 2003b: ch. II).

8 It should, however, be noted that in practice this provision is rarely applied. India failed to invoke it after the Fund expressed the view that its reserves were adequate (see Raghavan, 1999). In reality the burden still falls on trade as coun-tries facing severe BOP diffi culties are obliged to implement austerity measures, cutting economic growth and imports.



4. INTERNATIONAL MONETARY AND FINANCIAL DISCIPLINES

I. What Disciplines?

The Bretton Woods system was designed to close two main channels of

exchange rate instability. First, it sought to limit the scope for markets

to generate unexpected and erratic movements in exchange rates through

restrictions over short- term arbitrage fl ows which had proved so damag-

ing in the interwar period. Second, it restricted the ability of governments

to manipulate exchange rates of their currencies by subjecting them to

multilateral disciplines. However, it also provided considerable space for

national policy when underlying conditions called for exchange rate adjust-

ment. Thus, countries undertook obligations to maintain their exchange

rates within a narrow range of their agreed par values, but they were

allowed to change their par values under fundamental disequilibrium. An

unauthorised change in par value would enable the Fund to withhold the

member’s access to its resources and even to force the member to withdraw

(Dam, 1982: 90–93).

The demise of the Bretton Woods system changed all that. While

fl oating was adopted with the understanding that its stability depended

upon orderly underlying conditions, obligations regarding exchange rate

arrangements under Article IV failed to strike a balance between national

policy autonomy and multilateral disciplines. Indeed, as pointed out by

Triffi n (1976: 47–8), they were ‘so general and obvious as to appear rather

superfl uous’, and the system ‘essentially proposed to legalize . . . the wide-

spread and illegal repudiation of Bretton Woods commitments, without

putting any other binding commitments in their place’.

With exchange rate obligations eff ectively gone, the only multilateral

disciplines left in monetary and fi nancial matters concern current account

convertibility and currency practices. According to Article VIII members

are obliged to avoid restrictions on current payments and discriminatory

currency practices.9 They are required to obtain the approval of the Fund

to impose restrictions on the making of payments and transfers for current

account transactions. Members failing to comply with these obligations

can become ineligible to use the general resources of the Fund. These

9 It is notable that, originally, multiple exchange rate practices diff erentiat-ing between current and capital transactions were not considered to be violation of obligations regarding current account convertibility in Articles VII and XIV (Dam, 1982: 133).



obligations are subject to the provisions of the scarce currency clause of

Article VII which permit countries to impose exchange controls on current

transactions against a currency declared to be scarce, and the provisions

of transitional arrangements under Article XIV which allow a country to

maintain the restrictions on payments and transfers for current interna-

tional transactions that were in eff ect on the date it became a member.

The scarce currency clause, which was originally designed with the United

States in mind and which could help put pressure on surplus countries,

has never been implemented, while transitional arrangements have been

rapidly dismantled with widespread adoption of current account convert-

ibility by developing countries.10

The Articles of the Fund do not provide a global regime for cross-

border capital transactions with clearly defi ned rights and obligations of

recipient and source countries and international debtors and creditors.

Although they allow the Fund to request members to exercise control on

capital outfl ows, this provision has never been invoked even at times of

rapid exit of capital and fi nancial meltdown in emerging markets during

recent years. Nor do the Articles provide protection against creditor litiga-

tion against countries imposing unilateral standstills at such times, even

though the Board recognised that such action might be needed (Akyüz,

2005a: 10–11, 16–17). While the Articles recognise the right of members

to regulate international capital fl ows, in reality the Fund has encouraged

liberalisation of the capital account. In eff ect, as pointed out in a recent

report by the Independent Evaluation Offi ce, the Fund lacks not only clear

and eff ective jurisdiction over capital account issues but also a ‘clear posi-

tion’ (IMF–IEO, 2005b: 11, 50).

II. Surveillance

There has been an attempt to balance lack of specifi c obligations with

respect to exchange rate policies with increased emphasis on surveillance

over national policies in the context of Article IV consultations. With the

second amendment of its Articles, the Fund was charged to exercise fi rm

surveillance over members’ policies at the same time as members were

allowed the right to choose their own exchange rate arrangements. Initially,

surveillance focused primarily on the sustainability of exchange rates and

external payments positions and on monetary and fi scal policies as their

10 In 1970 only 34 countries out of a total of 115 members of the Fund had accepted current account convertibility. This was 143 out of 186 in 1997 (Dailami, 2000: table 15.2).



principal determinants. The guidelines established in 1977 made an explicit

reference to the obligations of members to avoid manipulating exchange

rates to gain an unfair competitive advantage over other members.11 The

scope and coverage of surveillance has expanded over time into structural

policies, the fi nancial sector and capital fl ows, particularly after a series of

emerging market crises (IMF–GIE, 1999). Various codes and standards

established for macroeconomic policy, institutional and market structure,

and fi nancial regulation and supervision have thus become important com-

ponents of the surveillance process (Cornford, 2002: 31–3).

The increased coverage of surveillance has not been accompanied by

measures to make it more symmetrical and balanced between developed

and developing countries. First of all, fi nancial codes and standards are

determined in fora where developing countries either are unrepresented,

as in the Financial Stability Forum (now the Financial Stability Board),

or they have limited representation, as in the Bank for International

Settlements and the Basel Committees, or limited power, as in the IMF

itself where the concentration of voting rights in the hands of major

industrial countries allows them to have a determining infl uence and veto

power over key decisions. The obligations contained in the new codes and

standards refl ect the view that the main causes of fi nancial instability and

crises are to be found in the policies and institutions of emerging markets,

but entail neither a fundamental change in policies and practices in the

source countries nor improvement in the transparency and regulation of

currently unregulated cross- border fi nancial operations. Indeed, as they

are established on the basis of best practices or benchmarks appropriate

to major industrial countries, their implementation would require little

change in policies and practices in industrial countries while necessitating

fundamental reforms in developing countries. Despite the emphasis on

voluntary participation, the implementation of such codes and standards

is backed by an extensive system of externally applied incentives and sanc-

tions (Cornford, 2002: 63–72). As one observer pointed out, this ‘new set

of external disciplines come hand- in- hand with a particular model of eco-

nomic development of doubtful worth’ (Rodrik, 1999: 3).

More importantly, the Fund is unable to exert meaningful disciplines

over the policies of its non- borrowing members and prevent unsustainable

exchange rates and balance of payments positions, and currency manipu-

lations.12 This is true not only for developed- country creditors of the

11 See Executive Board Decision no 5392- (77/63), adopted on 29 April 1977.12 The Fund has also been unable to prevent build- up of fi nancial fragility and

crises in emerging market economies under its supervision. However, this is not



Fund, but also for non- borrowing developing countries. For its borrow-

ers the policy advice given by the IMF in Article IV consultations often

provides the framework for conditions to be attached to any future Fund

program (IMF–GIE, 1999: 20). But its surveillance of the policies of the

most important players in the world economy has lost any real meaning

with the breakdown of the Bretton Woods system, the establishment of

universal convertibility of the currencies of major industrial countries,

and the emergence of international fi nancial markets as a main source of

liquidity.

III. Conditionality

The original rationale of conditionality was to protect the fi nancial integ-

rity of the Fund and the revolving nature of its resources. This called

not only for relatively short repayment periods but also macroeconomic

adjustment in borrowing countries to bring external imbalances to sustain-

able levels.13 Subsequently, however, conditionality became (and remains)

one of the most contentious issues as the balance between fi nancing and

adjustment was gradually lost. Rather than providing adequate liquidity

to weather payments diffi culties, the Fund started to impose exactly the

kind of policies that the postwar planners wanted to avoid in countries

facing payments diffi culties – that is, adjustment through austerity –

irrespective of whether these diffi culties were due to excessive domestic

spending, distortions in the price structure, or external disturbances such

as terms of trade shocks, hikes in international interest rates or trade

measures introduced by another country.

More importantly, the Fund has become increasingly involved in

broader development issues and moved rapidly towards structural condi-

tions, including those related to governance. Consequently there has been

a proliferation of structural performance criteria and governance- related

conditionalities in the past two decades, covering a wide area of policy,

ranging from trade and fi nance to public enterprises and privatisation, and

because it did not have leverage over policies in these countries, but because of shortcomings in its diagnosis of the underlying problems and recommendations (see Akyüz, 2005a).

13 For the original rationale and the subsequent evolution of IMF condi-tionality, see Dell (1981). See also Polak (1991); Jungito (1994); Kapur (1997); Mohammed (1997); Goldstein (2000); Kapur and Webb (2000); Buira (2003); Babb and Buira (2005); and IMF–IEO (2005a). Much of what is discussed here also applies to conditionality by multilateral development banks, notably the World Bank.



even labour market institutions and social safety nets (Goldstein, 2000;

Kapur and Webb, 2000; Buira, 2003). The average number of structural

conditions doubled between the 1970s and 1980s and at the end of the

1990s it was more than 50 for a typical Extended Fund Facility program

and between 9 and 15 for standby programs. The number of structural

performance criteria in the IMF programs with the three Asian countries

hit by the 1997 crisis was four times the average for all Fund programs

over 1993–99, leading to concerns that there was a ‘temptation to use cur-

rency crises as an opportunity to force fundamental structural and institu-

tional reforms on countries’ (Feldstein, 1998).

The Bank was not spared from such temptations. On a strict defi nition

of conditionality used by Kapur and Webb (2000: 5–7), the number of

conditions attached to lending at the end of the 1990s by the Fund and

the Bank together ranged between 15 and 30 for sub- Saharan Africa

and 9 and 43 for other regions. These numbers go up to 74–165 for SSA

and 65–130 for other regions if a less strict defi nition is adopted.

Questions have been raised by several researchers, both inside and

outside the BWIs, about the eff ectiveness of conditionality in prevent-

ing policy failure and improving economic performance (Gilbert et al.,

1999; Kapur and Webb, 2000; Meltzer Commission, 2000; Ocampo, 2001;

Stiglitz, 2002b). More importantly, there is very little correlation between

compliance and economic performance, and often much of the improve-

ment in performance could be attributed to increased funding that accom-

panies programs (see, for example, UNCTAD, 1998b: 124–5 and table 34).

The Fund’s extensive use of structural conditions in its lending pro-

grams is widely considered a violation of the guidelines established in

1979, which explicitly state that performance criteria would normally be

confi ned to macroeconomic variables, and that they could relate to other

variables only in exceptional cases when their macroeconomic impact is

signifi cant. As argued by a former Research Director of the IMF, these

guidelines aimed at making conditionality ‘less intrusive by limiting the

number of performance criteria, insisting on their macroeconomic charac-

ter, circumscribing the cases for reviews, and keeping preconditions to a

minimum. Yet, these restraining provisions have not prevented the inten-

sifi cation of conditionality in every direction that the guidelines attempted

to block’ (Polak, 1991: 53–4).14

14 In response to mounting criticism the Fund management issued new guidelines in 2002 (IMF, 2005c). However, they do not address the fundamental problem of intrusiveness of structural conditionality, an issue now evaluated by the Independent Evaluation Offi ce (see IMF–IEO, 2005a).



There is a strong rationale for well- designed macroeconomic condition-

ality, not only as a device for risk management by the IMF as a lender

(Kapur and Webb, 2000: 1–2) but also for securing orderly international

payments, notwithstanding the uneven treatment in this respect of bor-

rowing and non- borrowing members. However, structural conditions, by

their nature, are diff erent. They impose a particular model of development,

entail permanent changes in institutions, and circumscribe policies in such

ways that their reversal may be extremely diffi cult. By doing so, they can

create asymmetry between program and non- program countries, and even

change the balance of power between them in international economic rela-

tions. Unilateral trade liberalisation undertaken by developing countries

with Fund programs put them at a disadvantage in multilateral trade

negotiations. A country liberalising unilaterally acquires no automatic

rights in the WTO, yet it could become liable if it needs to take measures in

the context of Fund programs in breach of its obligations in the WTO.15

IV. Reform of the Bretton Woods Institutions

Any reform of the BWIs should start with questions of mandate and gov-

ernance in order to defi ne clearly their role in the multilateral economic

architecture, rather than the terms and conditions of their lending (for an

elaboration of the proposals discussed in this section, see Akyüz, 2005a).

There is a strong case for the Fund to go back to its original mandate

and focus on safeguarding international monetary and fi nancial stability,

leaving national structural- cum- development issues to the World Bank.

Its involvement in the latter issues is an unjustifi ed diversion and dupli-

cation. All facilities created for this purpose could be transferred to the

Bank as the Fund terminates its activities in development policy and long-

term lending. It could then focus on its core responsibility of preventing

exchange rate misalignments and gyrations, persistent global trade imbal-

ances and crises in emerging- market countries.

With its exit from development fi nance, the Fund’s lending activities

would be confi ned, as originally envisaged, to the provision of short- term

liquidity to countries facing temporary payments diffi culties. The key

reform issue here is how to strike a balance between fi nancing on the one

hand and macroeconomic and exchange rate adjustment on the other,

15 For a discussion of this issue see WTO (2004a). In Korea fi nancial restruc-turing undertaken with the support of the Fund after the 1997 crisis naturally resulted in an increase in government equity in fi nancial institutions. This became a basis for a legal challenge in the WTO on grounds that such measures constituted actionable subsidies (see WTO, 2003c: para. 8–10).



and how to design performance criteria without going into micromanage-

ment in monetary and fi scal matters. Greater automaticity in access to the

Fund’s resources would certainly be helpful in both respects.

The Fund should not be allowed to bail out lenders and investors in

countries facing fi nancial crises since such operations create a moral

hazard for creditors and shift the burden on to debtors. Instead, it should

help develop orderly workout mechanisms to prevent fi nancial meltdown

and to restructure debt which cannot be serviced according to its original

terms and conditions. Temporary debt standstills and restrictions on

capital fl ows should thus become legitimate ingredients of multilateral

fi nancial arrangements. These would not only bring a better balance

between debtors and creditors and limit the abuse of the Fund’s power

over countries facing fi nancial crisis, but also prevent the burden of exter-

nal fi nancial diffi culties being placed on the trading system.

While transfer of development issues to the Bank would create a better

division of labour between the BWIs and address the problems associated

with IMF structural conditionality, the role of the Bank would also need to

be redefi ned in order to prevent migration of the problems from one insti-

tution to another. De- linking bilateral and multilateral arrangements for

development fi nance should be an important step in broadening the policy

space of countries borrowing from multilateral organisations. Certainly,

it is up to sovereign nations to enter into bilateral agreements on debt and

fi nancing, but these should be kept outside the multilateral system.

There is also a strong rationale for establishing global sources of devel-

opment fi nance. This could be achieved through agreements on interna-

tional taxes, including a currency transactions tax (the so- called Tobin

tax), environmental taxes and various other taxes such as taxes on the

arms trade, to be applied by all parties to the agreement on the transac-

tions and activities concerned and pooled in the UN development fund

(for such sources of development fi nance, see Atkinson, 2005).

An advantage of such arrangements over present aid mechanisms is that

once an agreement is reached, a certain degree of automaticity is intro-

duced into the provision of development fi nance without going through

politically charged and arduous negotiations for aid replenishments and

national budgetary processes often driven by narrow interests.

5. WTO RULES AND OBLIGATIONS

Unlike multilateral arrangements in money and fi nance, the GATT–WTO

trade regime is organised around binding and enforceable rules and com-

mitments established on the principles of non- discrimination and reci-



procity. These rules and commitments apply to a host of agreements which

are not all about trade, including the General Agreement on Tariff s and

Trade (GATT), the General Agreement on Trade in Services (GATS), and

the agreements on Trade- Related Aspects of Intellectual Property Rights

(TRIPS), Trade- Related Investment Measures (TRIMs) and Subsidies

and Countervailing Measures (SCM) (for a lucid analysis of the frame-

work for international trade, see Das, 1999).

The core principle of non- discrimination has two basic components.

First, the MFN rule which requires that the ‘like products’ of all members

be treated in the same way, with the benchmark being the best treat-

ment off ered to any country, whether or not it is a member. This rule, in

eff ect, prohibits granting more favourable treatment to certain countries

and requires extension of tariff concessions to all members. The second

component of non- discrimination is national treatment which provides

a level playing fi eld between foreign and domestic goods in domestic

markets: after entering a member country, foreign goods should enjoy

treatment not less favourable than applied to domestic products. This rule

is designed to ensure that within- border treatment of foreign goods does

not diminish or remove the concessions accorded to them on the MFN

rule by diff erential application of domestic measures such as taxes. In the

same vein, as in TRIMs, it also prohibits regulations favouring utilisation

of domestic products over foreign products. With the establishment of the

WTO there has been a tendency to extend the application of the national

treatment principle from trade in goods to the non- trade areas of TRIPS

and GATS. There have also been proposals by developed countries to

extend it further to investment and competition policy.

Unlike orthodox rhetoric that unilateral trade liberalisation is always

welfare- enhancing for the country undertaking it, the GATT–WTO

framework is essentially based on the recognition that trade concessions

could lead to costs which need to be reciprocated so that there are benefi ts

to all.16 However, parties do not usually expect to derive net benefi ts from

each and every agreement taken separately, but from the package as a

whole – something that provides the rationale for cross- bargaining and

‘the single undertaking’.

There are basically two sets of exceptions to these rules and princi-

ples: those that apply to all parties and special and diff erential treatment

accorded to certain members. In the former respect the most important

16 It has also been argued that reciprocity helps to mobilise gaining sectors and segments in support of trade liberalisation, thereby balancing the opposition of losers (see Finger and Winters, 2002).



exception is the so- called escape clause which allows a member to suspend

its obligations under certain conditions in order to safeguard its industry

against import surges. Safeguards are designed as temporary emergency

measures, to be accompanied by adjustment, not as instruments of

protection to establish competitive fi rms and industries. There are also

exceptions to the MFN rule. Perhaps the most important ones are the

provisions which allow free trade agreements and custom unions among

members, and the exemptions granted to specifi c commitments under

GATS. Government procurement and certain types of subsidies are also

exempted from the national treatment rule.

Second, there are exceptions granted to developing countries. The

so- called enabling clause introduced in 1979 under ‘Diff erential and

More Favourable Treatment, Reciprocity and Fuller Participation of

Developing Countries’ provides exceptions to the MFN rule by allow-

ing developing countries to enjoy preferential market access and to off er

limited or less- than- full reciprocity. In principle, it implies recognition of

the infant- industry argument; however, in practice, special and diff erential

treatment has generally been confi ned to longer transition periods – albeit

not long enough to allow infant industries to mature and become viable in

competition with early starters from advanced industrial countries.

Another important exception for developing countries is provided by

the 1994 balance- of- payments provisions of Article XVIIIB of the GATT,

which allow them to deviate from their obligations on a temporary basis

and use import restrictions, including quantitative barriers, in order to

safeguard their external fi nancial positions and foreign exchange reserves.

Again this constitutes recognition of a vulnerability of developing countries

to occasional balance- of- payments diffi culties and their limited access to

international fi nancial markets. Article XVIIIA permits modifi cations or

withdrawal of concessions in order to support the establishment of a partic-

ular industry and Article XVIIIC permits import restrictions for similar pur-

poses, yet such provisions are rarely used because they call for compensatory

concessions to other countries adversely aff ected (Das, 1999: 100–101).

The following section will examine the economic signifi cance of WTO

rules for developing countries in three key areas: industrial tariff s, indus-

trial subsidies and investment- related policies. Given that a level playing

fi eld, defi ned legally, can have totally diff erent economic consequences

for diff erent countries according to their levels of development, attention

will be paid to the extent to which legally equally binding constraints also

provide economically equally biting constraints on policies in diff erent

countries, notably between developed and developing countries. The ulti-

mate purpose is to determine the nature of constraints on policy autonomy

in developing countries and the space that is still available.



6. KEY WTO RESTRICTIONS ON POLICY SPACE

I. Industrial Tariff s

Until recently, WTO disciplines for industrial tariff s were not considered a

major source of constraint on commercial policy in developing countries.

This was, largely, because the modalities adopted in the Uruguay Round

(UR) had provided substantial fl exibility to these countries in setting their

industrial tariff s. During the UR negotiations agreement was reached for

reduction in average tariff s (by 30 per cent by developing countries and

40 per cent by developed countries), but freedom was left for the choice

of product lines to be bound and the extent of tariff reduction to be made

in each product line. There was no wholesale liberalisation that applied to

all tariff lines.

This fl exibility has resulted in considerable diversity among countries

regarding their binding coverage for industrial tariff s. While most devel-

oped countries have almost full binding coverage, in the developing world

this is the case only for some countries, notably in Latin America. Further,

even though bound tariff rates are high in many developing countries,

applied rates are much lower because of trade liberalisation undertaken

voluntarily or as a result of conditionalities imposed by the BWIs. Simple

average applied tariff s in developing countries in 2001 stood at around 11

per cent compared with an average bound rate of some 29 per cent. The

corresponding numbers for developed countries were lower, at 5.7 and 4.7

per cent respectively.

This diversity and freedom enjoyed by developing countries in choos-

ing which tariff lines to bind and where to bind them can disappear in the

negotiations of the Doha Work Programme on non- agricultural market

access (NAMA).17 The proposed non- linear Swiss formula advocated

by developed countries aims to bind almost all industrial tariff lines

and reduce bound tariff s on a line- by- line basis. The main objective is

to harmonise tariff s across both products and countries. In eff ect, such

a procedure would, for many developing countries, translate unilateral

liberalisation into WTO commitments. In some cases the application of

the Swiss formula could bring the newly bound rates below the current

applied rates, forcing the latter to be lowered even further.

The proposed cuts would imply a drastic narrowing of bound tariff s

between developed and developing countries. On some proposals, the dif-

ference between simple average bound tariff s of these countries could fall

17 Much of the remainder of this section draws on Akyüz (2005c).



from its current level of some 23 percentage points to as little as 5 percent-

age points (Fernandez de Cordoba et al., 2004b: table 5a).

The proposed tariff cuts could have adverse consequences for develop-

ing countries on several fronts. First, to the extent that the negotiations

result in deep cuts in applied tariff s, their impact on balance of payments,

employment and income could well be negative since the evidence gener-

ally shows that rapid liberalisation tends to raise imports much faster than

exports, particularly in low- income countries.18 Second, they would also

lead to sharp declines in government revenues from trade taxes in poorer

countries where such taxes account for an important part of the budget.

Since it is unlikely that tariff cuts would bring a rapid increase in imports

in these countries because of balance- of- payments constraints, and value

added taxes could rarely make up for lost trade taxes, the decline in gov-

ernment revenues could be particularly large.19

The immediate adverse eff ects of increasing binding coverage and low-

ering bound tariff s on balance of payments, income and employment, and

trade taxes could be expected to be moderate for those developing coun-

tries where applied tariff s are already at very low levels. By contrast their

longer- term implications for industrialisation and development could be

more serious. An irreversible commitment to low tariff s across a whole

range of sectors would carry the risk of locking developing countries into

the prevailing international division of labour, since many of them would

need to provide support and protection to new sectors needed for indus-

trial upgrading. The loss of freedom to use tariff s for industrial develop-

ment carries even greater risk today because many of the more eff ective

and fi rst- best policy options successfully used in the past for industrial

upgrading by today’s mature and newly industrialised countries are no

longer available to developing countries because of their multilateral com-

mitments in the WTO, notably in the agreements on subsidies, TRIMs and

TRIPS. The proposals, in eff ect, remove the fl exibility provided during the

Uruguay Round to developing countries for their industrial progress.

The key issue here is how to reconcile multilateral disciplines with the

18 See Santos- Paulino and Thirlwall (2004), UNCTAD (2004e) and Kraev (2005). In the conventional analysis of the impact of trade liberalisation, based on computable general equilibrium (CGE) models, resource utilisation and trade balances are assumed to be unchanged. These CGE models almost invariably fi nd effi ciency gains from liberalisation. For a critique, see Akyüz (2005c).

19 Fernandez de Cordoba et al. (2004a) and South Centre (2004). These con-cerns are justifi ed since evidence shows that many low- income developing coun-tries dependent on trade taxes have been unable to recover the revenues lost from trade liberalisation (see Baunsgaard and Keen, 2005).



policy fl exibility needed for industrial progress in developing countries.

Setting bound tariff s line- by- line at suffi ciently high levels to accommo-

date all contingencies would provide considerable fl exibility, but it would

also render multilateral commitments superfl uous. In any case, as noted,

developing countries do not need high tariff s for all sectors (and) at all

times. However, they should have the option of using tariff s on a selective

basis as and when needed for progress in industrialisation. They should

not be expected to keep moving tariff s downward from one trade round to

another but should be able to move them in either direction for diff erent

sectors in the course of industrial development.

This kind of fl exibility is best accommodated by binding average tariff s

without line- by- line commitment – that is, to leave tariff s for individual

products unbound, subject to an overall constraint that the average applied

tariff should not exceed the average bound tariff . Clearly, the average bound

tariff should be high enough to accommodate the needs of diff erent sectors

at diff erent stages of industrial maturity. Such an approach does not only

have the advantage of simplicity; it would also reconcile multilateral disci-

plines with policy fl exibility since countries would be subject to an overall

average ceiling in setting tariff s for individual products. Furthermore, for

most countries in the early and intermediate stages of industrial develop-

ment, it would result in lower average tariff s than would be the case under

line- by- line commitments. In practice it would have the eff ect of balancing

tariff increases with reductions; a country would need to lower its applied

tariff s on certain products in order to be able to raise them elsewhere. This

would encourage governments to view tariff s as temporary instruments,

and to make an eff ort to ensure that they eff ectively serve the purpose they

are designed for, namely to provide a breathing space for infant industries

before they mature and catch up with those in more advanced economies.

II. Industrial Subsidies

The agreement on SCM constitutes a major departure from the pre- WTO

GATT regime, which lacked comprehensive principles and rules on sub-

sidies and allowed considerable freedom to developing countries in the

use of support measures for export promotion and import substitution.20

The agreement deals with this issue at three levels: it provides rules and

restrictions regarding governments’ use of subsidies; determines the type

20 In fact, the Subsidies Code that emerged from the Tokyo Round recognised that subsidies were an integral part of development programs. I am grateful to B L Das for this information.



of action that could be taken against violating members; and specifi es the

procedures to be followed (for a detailed description, see Das, 1999: ch.

4.1; Ayala and Gallagher, 2005). The main objective of the agreement is to

prevent the so- called trade- distorting, targeted direct or indirect govern-

ment support to fi rms and industries. Restrictions are imposed not only on

export subsidies but also on those provided for domestic sales in accord-

ance with the national treatment principle. The agreement applies mainly

to industrial subsidies. GATS contains no subsidy disciplines for services,

while special rules apply to agriculture. For services, the disciplines on

subsidies are under negotiation.

The concept of subsidy is defi ned to include transfers by governments

and public agencies, and intra- private- sector transfers aff ected through

government intervention. Budgetary transfers could take the form of

direct payments, forgone revenues and rights, government guarantees and

equity participation, and provision of goods and services by public agen-

cies below their market value. Benefi ts conferred by diff erential applica-

tion of certain rules to diff erent sectors and activities are also considered

to be subsidy even if they involve only intra- private transfers without any

fi nancial repercussions for public agencies. This would, for instance, be

the case in directed bank credits to certain sectors at preferential rates set

by the government where the cost of implicit subsidy would be borne by

non- preferential private borrowers.

The SCM agreement classifi es subsidies into three categories according

to whether they are trade distorting and causing injury to other members:

permissible (green light), prohibited (red light) and actionable (amber light)

subsidies. Subsidies that are not specifi c to fi rms and industries are permis-

sible or non- actionable, while specifi c subsidies are either prohibited or

permissible but actionable.21 This corresponds to the distinction between

‘functional’ and ‘selective’ intervention which has occupied a central place in

the debate on the role of the government. Provision of various public goods

and services to all domestic enterprises in the form of subsidised physical

and social infrastructure or cheap energy supplies resulting from low energy

taxes would not be in violation of the rules set by the SCM agreement.

The agreement allows even selective subsidies provided that the subset of

activities and enterprises earmarked are not confi ned to export and import-

competing fi rms and industries. Thus, it should be possible to apply diff eren-

tial tax rules or public service charges to enterprises according to their size.

21 Actionable subsidies are not prohibited. However, they are subject to chal-lenge, either through multilateral dispute settlement or through countervailing action, if they cause adverse eff ects to the interests of another member.



Direct and indirect assistance to fi rms and industries contingent on

export performance is explicitly prohibited. This is also true for import-

substitution subsidies – that is, assistance promoting the use of domesti-

cally produced, as opposed to imported, products. However, subsidies to

domestic producers competing with imports are not among the prohibited

but among the actionable subsidies, a grey area between prohibited and

permissible subsidies. These are permitted but actionable if they infl ict

costs on other members by causing or threatening material injury, vio-

lating the national treatment principle through the impairment of trade

concessions, or prejudicing their interests. LDCs and countries with a

per capita income of less than $1.000 per annum (Annex VII: developing

countries) are permitted to use export subsidies until graduation from this

category. Developing countries as a whole benefi t from higher thresholds

in the application of countervailing duties.

In assessing the extent to which the agreement on SCM limits policy

space, it should be noted that the distinction between economywide

and sector- specifi c subsidies is not always clear- cut in their incidence. A

subsidy to a specifi c sector (such as energy or education) could have sig-

nifi cant economywide implications when it has strong linkages. Similarly,

economywide subsidies can benefi t only a limited number of industries, as

in assistance to prevent industrial pollution. Since in practice it may be dif-

fi cult to determine whether a subsidy is, in fact, specifi c (Anderson, 2002:

168), there is scope to design subsidies in such a way that they can help

import- competing and export sectors without contravening WTO rules

and triggering retaliatory action. In reality many industrial countries seem

to be able to provide considerable support to industry through carefully

crafted and disguised subsidies (Weiss, 2006).

A careful reading of the agreement shows that many instruments of

support eff ectively used by late industrialisers are now outlawed and could

trigger retaliatory action, particular in view of pervasive mercantilist

tendencies. These constraints are particularly biting for middle- income

countries seeking industrial upgrading. The instruments that were for-

merly used extensively but are now outlawed include subsidies in the form

of direct payments, tax credits and tax holidays for import- competing and

export sectors; generous tax rebates and duty drawbacks for exporters;

selective allocation of licences for technology imports and investment;

preferential access to credit at subsidised interest rates for export fi nancing

and investment; and provision of subsidised infrastructure services.22

22 For measures used by the Asian newly industrialised economies (NIEs), see English and de Wulf (2002), Pangestu (2002) and Weiss (2005a).



The rationale for prohibition of selective subsidies is the same as that

for the harmonisation of tariff s across product lines; namely, to minimise

distortions in international trade and resource allocation. However, this

rationale has not been taken to its logical conclusions. The negotiations on

NAMA recognise a role for industrial tariff s despite the push for harmo-

nisation and cuts. This implies that, on orthodox thinking, the prohibition

of export subsidies contains a bias against trade.

More importantly, the agreement on SCM does not have a consist-

ent rationale for permissible and prohibited subsidies. The rationale

for permitting specifi c subsidies for research and development (R&D),

environment and regional development is said to be correction of market

failures.23 But these are not the only areas where markets fail. The litera-

ture is replete with examples of capital market failures and externalities

which necessitate infant- industry support to fi rms and industries to enable

them to undertake certain activities with high social rates of return which

they would not otherwise be willing or able to do. When capital markets

are reluctant, because of asymmetric information, to fi nance learning

and cover initial losses of potentially effi cient and profi table fi rms, tar-

geted credit allocation could be an eff ective and perhaps the only way for

upgrading into new activities. Such failures are certainly more common in

developing countries. They have also become pervasive in recent years as

fi nancial liberalisation has led to greater instability and encouraged taking

a short view in lending decisions. These provide a strong rationale not only

for infant- industry intervention in the allocation of investment credits but

also for directed and subsidised export credits and credit insurance.

There is also the much- debated inconsistency between agricultural and

industrial subsidies. Current WTO rules allow both export subsidies and

domestic support to agriculture while severely restricting them in indus-

try. This asymmetry clearly works against developing countries. Indeed,

the role of subsidies is embedded within a broader issue concerning the

relative signifi cance of diff erent sectors and the intersectoral transfer of

resources between agriculture and industry at diff erent stages of develop-

ment. In most developing countries in the early stages of industrialisation

the scope for transferring resources to agriculture through direct and

indirect subsidies is highly limited. This is not just a matter of fi scal con-

straints but of the availability of general resources outside agriculture to

eff ect such transfers.

23 Drawing on Hoekman and Kostecki (2001), Ayala and Gallagher (2005: 7) argue that the crafters of the agreement diff erentiated between subsidies justifi ed on market failure grounds and those that are not.



Consequently, while industrial countries provide massive subsidies to

agriculture, this sector is generally taxed in developing countries through

pricing policies and export taxes in order to mobilise resources for indus-

trialisation. In some parts of the world, marketing boards established

during the colonial period have been used for this purpose. In Africa in

the 1970s, for instance, exports contributed between 20 and 40 per cent to

government revenue. Agriculture was taxed at similar rates in other parts

of the developing world, including Asia, except that in the latter region an

important part of the resources mobilised in this way went back to agricul-

ture as infrastructural investment, helping to raise productivity. Although,

since the early 1990s, marketing boards have generally been dismantled

and export taxes eliminated and many developing countries have moved

towards more liberal agricultural pricing policies with the support of the

BWIs, these steps have only removed anti- agricultural bias rather than

resulting in the kind of assistance provided by industrial countries.24

Developing countries appear to be ambivalent about the policy con-

straints brought by WTO disciplines regarding industrial subsidies

because, unlike richer countries, they often lack fi nancial resources to

provide extensive support to emerging and/or declining industries. Given

that many of them already suff er from massive agricultural subsidies pro-

vided in the developed countries, they do not seem to be willing to open

up this route for industrial products as well. While the constraints brought

by the agreement on SCM could be particularly biting for middle- income

countries which need to move rapidly towards dynamic, high value- added

industries, the exceptions granted to Article VII countries provide them

more space than they can possibly exploit given their fi nancial con-

straints.

There is a strong rationale for multilateral disciplines over the use of

subsidies in traded goods sectors. However, it should also be recognised

that the prohibition of industrial subsidies places much greater constraint

over industrial development in countries at early and intermediate stages

of industrialisation than in mature industrial countries.

III. Investment- related Policies

There are two main sources of WTO disciplines on investment- related

policies: the agreement on TRIMs and specifi c commitments made in the

24 For a discussion of taxation of agriculture, see UNCTAD (1998b: part 2, ch. 2–3) and Anderson (2002); for a review of agricultural support in developed and developing countries, see Aksoy (2005) and Baff es and de Gorter (2005).



context of GATS negotiations for the commercial presence of foreign

enterprises, or the so- called mode 3, in the services sectors. In addition to

these a number of other agreements provide disciplines, directly or indi-

rectly, on investment- related policies, such as the prohibition of investment

subsidies linked to export performance in the agreement on SCM. There

was also an attempt by OECD countries to broaden WTO disciplines on

FDI policies in recipient countries by means of a multilateral agreement

on investment (MAI), but this has been dropped from the agenda for the

time being as a result of resistance by developing countries. However,

there is now a renewed eff ort by some industrial countries to bring invest-

ment policies in developing countries under tighter multilateral disciplines

through a fundamental change in the modalities of services negotiations

in the Doha Round.

The TRIMs agreement does not refer to foreign investment as such

but to investment generally. Following a subsequent interpretation by a

panel on a TRIMs dispute, its provisions are now understood to apply to

domestic investment as well as FDI (for a detailed treatment of the TRIMs

agreement, see Das, 1999: ch. 3; Bora, 2002). The agreement is simply

a reiteration of GATT provisions for national treatment and quantita-

tive restrictions in the context of investment measures, yet has nothing

to say about market access or national treatment of foreign investors. It

eff ectively prohibits attaching conditions to investment in violation of the

national treatment principle or the restrictions regarding the utilisation of

quantitative measures. From an economic point of view, the most impor-

tant provisions of the agreement relate to prohibition of domestic content

requirements whereby an investor is compelled or given an incentive to

use domestically produced rather than imported products, and of foreign

trade or foreign exchange balancing requirements linking imports by an

investor to its export earnings or to foreign exchange infl ows attributable

to investment.

Even though these provisions apply to domestic and foreign invest-

ment alike, the debate on the extent to which they constrain policy space

in developing countries has almost invariably focused on FDI (see, for

example, Wade, 2003b; Kumar, 2005; Weiss, 2006). This is in part because

the arrangements in the WTO in this respect are highly unbalanced. First

of all, there are no multilateral disciplines restricting beggar- my- neighbour

investment policies by recipient countries through various incentives to

foreign fi rms, including for investment in export industries linked to inter-

national production networks. Such incentives provide eff ective subsidy

to foreign investors and can infl uence investment and trade fl ows as much

as domestic content requirements or export subsidies, particularly since

a growing proportion of world trade is taking place among fi rms linked



through international production networks controlled by TNCs.25 More

importantly, multilateral restrictions through TRIMs over policies in

recipient countries vis- à- vis TNCs are not matched by multilateral codes

of conduct for TNCs, which are known to practise trade- restricting poli-

cies (Kumar, 2005: 194). These create asymmetry not only between TNCs

and recipient governments but also between developed and developing

countries. Since most developing countries do not have TNCs invest-

ing abroad to any signifi cant extent, the benefi ts accruing to countries

from the agreement on TRIMs are not reciprocal in so far as restrictions

imposed over government policies in recipient countries serve to boost the

profi ts of investors.

Clearly the impact of the provisions of the TRIMs agreement depends

very much on the objectives pursued in attracting FDI as well as the nature

of investment. While most fi nancially- constrained countries, notably

in Latin America and Africa, seek FDI for its potential contribution to

balance of payments and government fi nances, others, particularly in

Asia, emphasise its role in the transfer of technology and entrepreneurial

know- how and in the linkages with international production networks and

global markets for goods and fi nance. A large proportion of FDI in Africa

is in the exploitation of minerals; in Latin America in the form of acquisi-

tion of government assets, including non- traded public utilities; and in

East Asia in labour- intensive assembly industries linked to international

production networks (Akyüz, 2006a).

The TRIMs provisions are particularly biting for investment in manu-

facturing for domestic and/or international markets, notably in automotive

and electronics industries. Perhaps the single most important restriction

here concerns domestic content requirements. In developing countries,

most of the industries linked to international production networks have

high import contents in technology- intensive parts and components, while

their domestic value added often consists of wages paid to unskilled or

semi- skilled workers.26 Raising the domestic content of such production

25 There is a body of literature which argues against multilateral disciplines for incentives on grounds that if they are ineff ective there are no real negative spill overs, and if they are eff ective they improve global allocation of FDI (see Hoekman and Saggi, 1999: 12–13). Not all mainstream economists agree that FDI incentives are non- distorting (see, for example, Bhagwati, 1998). That incen-tives tend to distort investment patterns in much the same way as export subsidies distort trade patterns, see Kumar (2002).

26 For a detailed discussion of the issues regarding TNC- dominated interna-tional production networks, see UNCTAD (2002: ch. 2–3). For an account of the impact of TRIMs on policy space in Malaysia, a country extensively participating in global production networks, see Rasiah (2005).



is important not so much because of its impact on balance of payments as

because development of domestic industries for technology- intensive parts

and components constitutes an important step in industrial upgrading.27

Restrictions on domestic content requirements would thus limit transfer

of technology and import substitution in industries linked to international

production networks.

The domestic content of industrial production is not independent of the

tariff regime. Other things being equal, low tariff s and/or duty drawbacks

encourage high import content. By the same token it should be possible to

use tariff s as a substitute for quantity restrictions over imports by TNCs

when they are unbound in the WTO or bound at suffi ciently high levels.

Imports by TNCs could also be discouraged by raising transaction costs

through administrative means, as practised in some East Asian late indus-

trialisers in support of domestic industries producing import- competing

goods.

As long as there are no commitments to foreign investors for unre-

stricted market access, the constraints imposed by the TRIMs agreement

could be overcome by tying the entry of foreign investors to the produc-

tion of particular goods. For instance a foreign enterprise may be issued a

licence for an automotive assembly plant only if it simultaneously estab-

lishes a plant to produce engines, gearboxes or electronic components used

in cars. Similarly, licences for a computer assembly plant can be tied to

the establishment of a plant for producing integrated circuits and chips.

Such measures, which raise domestic value- added and net export earn-

ings of TNC- dominated sectors, would not contravene the provisions of

the TRIMs agreement.28 However, they call for considerable bargaining

power against TNCs. Such an approach was indeed an essential feature

of investment coordination policies widely practised in East Asia, vis- à- vis

not only foreign but also domestic investors.

There are also other measures that recipient developing countries can

use as part of entry conditions for foreign enterprises. One such measure

is imposing export performance requirements without linking them to

imports by investors. This would not contravene the TRIMs agreement

since it would not be restricting trade (Bora, 2002: 177). Governments

in developing countries would also be free to require joint ventures with

local enterprises or local ownership of a certain proportion of the equity

27 The contribution of FDI to balance of payments varies inversely with the share of profi ts in value added, the extent of its reliance on imports, and the pro-portion of the fi nal product sold in domestic markets (see Akyüz, 2005b: 30n).

28 I am grateful to B L Das for pointing this out to me.



of foreign enterprises. In fact, many of these conditions appear to be used

widely by industrial countries in one form or another (Weiss, 2006: 4–5).

Since the TRIMs agreement applies only to trade in goods, local pro-

curement of services such as banking, insurance and transport can also

be set as part of entry conditions of foreign fi rms in order to help develop

national capabilities in services sectors. However, such a route would only

be possible as long as developing countries continue to have discretion in

regulating access of TNCs to services.

The existing GATS regime provides considerable fl exibility to develop-

ing countries regarding policies for commercial presence in services. It

allows them to choose the sectors in which they make liberalisation com-

mitments on a bilateral off er- request basis, and to determine the restric-

tions they would want to apply to market access and national treatment

in each sector. It eff ectively adopts a positive list approach for sectoral

commitments and a negative list for restrictions; that is, GATS disciplines

apply only to sectors bound during negotiations (that is, included in a

country’s schedule of commitments) and countries can only apply the

restrictions and exemptions explicitly specifi ed in their commitments. This

is a main reason why developing countries have generally been unwilling

to include many sectors in their schedules of commitments.

Developed countries have been seeking fundamental changes in the

modalities of GATS negotiations (for a detailed description of the pro-

posals and pitfalls for developing countries, see Das, 2005). They called

for the requested countries to compulsorily take part in plurilateral and

sectoral negotiations, make binding commitments in a minimum number

of sub- sectors in each of the four modes of supply (benchmarking), and

to bind a certain percentage of the current level of applied liberalisation

not included in countries’ schedules of commitments so far. Requests have

also been made to major middle- income developing countries by indus-

trial countries for market access and national treatment in sectors such as

fi nance, energy, telecommunications, maritime transport, computer and

engineering services where TNCs from these countries have a clear com-

petitive edge (Khor, 2006) but are strongly opposed by some developing

countries.

The changes in the modalities of GATS sought by developed countries

would no doubt shrink policy space in developing countries a lot more

than the TRIMs agreement. Prohibition of pre- establishment conditions

would imply that various entry requirements that are permissible under

TRIMs (such as production of certain goods, joint ventures or types of

legal entity), noted above, would become illegal for FDI in services. On

the other hand, the application of national treatment would have the

same consequences as TRIMs in prohibiting domestic content and forex



balancing requirements, aggravating the negative impact of FDI in

services on balance of payments. Moreover, while national treatment in

TRIMs applies to goods traded by investors, in GATS it would apply to

the investor. This would preclude any preferential treatment of national

suppliers of services even when the development of indigenous capac-

ity and institutions and broad- based provision of public services call for

support and protection (see Cho and Dubash, 2005).29

As far as mode 3 is concerned, GATS is an agreement on investment,

not trade.30 It is indeed quite arbitrary to describe ‘commercial presence’

as a mode of supply for services but not for manufactures or primary

commodities. For some (such as Hoekman and Saggi, 2002: 445), this

provides a rationale for bringing them together under the same disciplines

of a multilateral investment agreement. Failing that, the recent proposals

by industrial countries for GATS are an attempt to expand multilateral

commitments in investment in an area that matters most for TNCs, since

in developing countries FDI typically faces greater restrictions in services

than in manufacturing. However, this also means that the concerns that

underlie the opposition of developing countries to MAI (shared in part

even by some free- trade economists such as Bhagwati, 1998) apply with

an even greater force to these proposals. The logic of the matter now calls

for taking mode 3 of GATS out of the WTO rather than promoting it as

a multilateral regime based on principles of right to establishment and

national treatment and seeking to extend it to other sectors such as indus-

try and agriculture.

7. CONCLUSIONS

While focusing on the question of national policy autonomy, a key

proposition of this chapter is that in a world where economies are closely

linked through fl ows of goods, services, money, capital and so on, there

is a strong rationale for multilateral disciplines over national policies.

However, certain conditions need to be met in order for such disciplines

to help promote international economic stability and broad- based eco-

nomic growth and development. First, there should be coherence among

arrangements in diff erent spheres of economic activity so that they rein-

29 Rasiah (2005) provides an illustrative account of the implications of GATS and its extension for policy space in Malaysia.

30 Strictly speaking this is similarly true for mode 4; it is not about trade per se, but labour movements. There are no compelling reasons why such matters should be taken up in the WTO rather than, say, in the ILO or UNCTAD.



force, rather than undermine and destabilise, each other. Second, the rules

should be even- handed across countries in terms of the fl exibility and

space they allow. Both of these call for a global governance system that

secures, inter alia, voluntary, full and equal participation in the formula-

tion of multilateral disciplines.

Current multilateral arrangements barely meet these principles.

Coherence between trade and fi nance is not secured because of lack of

multilateral disciplines over macroeconomic and exchange rate policies of

the countries that matter most for global monetary and fi nancial stability,

and because of the priority attached to meeting international fi nancial

obligations at the expense of trade and growth. This constitutes the single

most important threat to the stability and openness of the trading system.

On the other hand, conditionalities attached to multilateral lending by the

BWIs place constraints not only on macroeconomic and fi nancial policies

but also on broader social and economic development strategies in devel-

oping countries, and these extend beyond what is needed for the interna-

tional economic stability and fi nancial integrity of these institutions.

The trading system does not fare better in terms of the balance between

developed and developing countries. Although WTO rules and obligations

are legally equally binding for all parties, they are designed primarily to

accommodate the development trajectories of industrial countries, impos-

ing tighter eff ective constraints over policies in developing countries,

particularly those at intermediate stages of industrialisation. This is true,

above all, in areas of economic activity where there are inherent asym-

metries between developed and developing countries, such as FDI and

intellectual property rights. Furthermore, as shown by several examples

above, the WTO rules do not constitute a coherent system based on a

consistent application of principles for global collective action designed

to provide global public goods, but rather a pile of ad hoc concessions

and exceptions exchanged in pursuit of self- interest by its more powerful

members.

The above analysis also shows that, despite the proliferation of multilat-

eral rules and obligations, there is still room for manoeuvre within the con-

fi nes of the multilateral system. Moreover, a number of important areas

of policy remain outside the multilateral disciplines. There are hardly any

rules in the international monetary and fi nancial system obliging countries

to adopt a particular exchange rate or capital account regime and, as

noted, this is, in fact, a shortcoming of the multilateral system contribut-

ing to global economic instability. Similarly there are no hard and com-

prehensive multilateral rules in several areas such as labour mobility, FDI,

trade in services and competition policy.

In conclusion, a return of the development paradigm to replace orthodox



free market ideology requires action on three fronts. First, there is a need

to restructure multilateral disciplines to widen the boundaries of policy

intervention for development. This should be an exercise in rationalisa-

tion, rather than doing away with multilateralism. Second, for some coun-

tries there may be both the need and scope to regain the policy space and

fl exibility lost through unilateral action. It is true that policy reversal can

be quite costly, but this may be worth considering when potential benefi ts

are large. Finally, it is important to use the space that is available; some-

thing that calls for a fundamental rethinking of economic policy in many

developing countries.


67

4. Assessing international fi nancial reform

Daniel Bradlow*

1. INTRODUCTION

The foundations for the current international fi nancial governance

arrangements were laid at the Bretton Woods Conference in 1944. At

this conference, which was attended by delegates from 44 countries, the

International Monetary Fund (IMF or Fund) and the International Bank

for Reconstruction and Development (IBRD) were created, with the

IMF originally having US$8.5 billion in resources and the IBRD having

US$7.67 billion in prescribed capital.

The Fund’s function was to use its authority and fi nancial resources

to help create and support a rules- based international monetary system

that was designed to maintain stable exchange rates and relatively free

payments for current transactions (IMF Articles of Agreement: Art. I).

The IMF was expected to use its surveillance authority to oversee the

operation of the international monetary system and advise members on

their balance of payments and the maintenance of the par value1 of their

currencies. The founding states also anticipated that the IMF would use

its fi nancial resources to help those member states that were experiencing

balance of payments problems to correct these problems in ways that were

not destructive of international or domestic prosperity.

The IMF’s Articles of Agreement made clear that, while its member

* SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria, and Professor of Law, Washington College of Law, American University, Washington DC, USA. The author wishes to thank Maya Berinzon for her research assistance.

1 Under the system established with the creation of the IMF, each state was expected to establish the value of its currency in terms of the US dollar, whose value would be fi xed in terms of gold. The member state was expected to maintain this value, known as the par value of the currency, within narrow limits. It could only change the par value with the consent of the IMF.



states were surrendering some control over their exchange rate and their

policy discretion in regard to current transactions, they retained the

authority to regulate capital transfers as they saw fi t (ibid: Art. VI). Thus,

the founding member states did not anticipate that the Fund would play

any direct role in the regulation or oversight of either national or inter-

national fi nancial markets or in the international allocation of credit. At

the time this makes good sense because relatively few banks operated

across national boundaries, all fi nancial regulation was national, and

international fi nancial activity was a relatively small part of the global

fi nancial scene.

The IBRD’s role was to help fi nance the reconstruction of Europe and

the economic development of its erstwhile colonies and a few other states

in Africa, Asia, and Latin America (IBRD Articles of Agreement: Art. I).

At the time this was understood to mean that it would provide fi nancial

support primarily for physical infrastructure projects that were not able to

raise suffi cient fi nancing from private sources.

Since that time, the world has changed dramatically. The number

of states participating in the global monetary and fi nancial system has

increased, as has the number of fi nancial institutions that operate across

national borders. The par value system of exchange rates has broken

down and we now live in a world with freely fl uctuating exchange rates

and liberalised fi nancial fl ows. In this environment, international fi nan-

cial fl ows exceed, by several orders of magnitude, annual international

trade volumes; international capital markets are a key component of

the global fi nancial order; and there is no fi nancial regulator in a major

economic power that is able to eff ectively regulate its fi nancial industry

without addressing the international aspects of that industry’s operations

and without collaborating in some way with its counterparts in other key

countries.

The IMF and the IBRD have grown and the scope of their operations

has expanded far beyond what their creators envisaged in response to

this changing reality. They currently each have 186 member states. The

IMF now has about US$337,019 billion2 in its general resources and

the IBRD now has a total authorised capital of US$189,801 billion. The

IMF has become involved in international fi nancial market oversight

and in reviewing its member states’ fi nancial regulatory frameworks. It

also uses the conditions attached to its fi nancial support to get its devel-

oping member states to change their monetary and fi scal policies, their

2 The actual amount is SDR217,431.7 billion (1SDR was equal to about US$1.55 on 18 August 2009).


Assessing international fi nancial reform 69

fi nancial governance arrangements and their poverty reduction strategies

in ways that the IMF considers necessary for their future development.

Thus, in eff ect, the IMF has become an important actor in the policy

making process of those developing countries that rely on its fi nancial

support.3

The IBRD is now only one member of a group of international fi nancial

organisations, known collectively as the World Bank Group.4 Its opera-

tions have grown to include helping countries improve various aspects of

their governance arrangements, dealing with social and environmental

problems in its member states, and helping its member states deal with

their international fi nancial payments problems.

In addition, the demands of international fi nancial governance have

grown too complex for these institutions to manage on their own. As

a result, there are presently a broad range of international forums and

bodies that are involved in various aspects of international fi nancial

governance. They include the Basel Committee of Banking Supervision,

the International Organization of Securities Commissions and the

International Association of Insurance Administrators, which provide

forums in which national regulators can meet and coordinate their regula-

tory eff orts. In addition, they include groupings of states – such as the G- 8,

the G- 10, the G- 20, and the G- 24 – that meet regularly to coordinate their

interests in regard to international fi nancial aff airs.

As is clear from the many fi nancial crises that the world has experienced

since the 1980s, these international governance arrangements do not

always function eff ectively. In fact, at least since the 1997 Asian fi nancial

crisis, there has been general agreement that the existing arrangements for

international fi nancial governance, often referred to as the ‘global fi nancial

architecture’, need to be reformed.5 This general agreement led to the for-

mation of the G- 20 and, in 1999, to the creation of the Financial Stability

Forum (FSF), in which fi nancial regulators from the G- 8 countries and

3 On 25 April 2010, the World Bank’s member states agreed to increase the IBRD’s capital by US$86.2 billion. This increase still needs to be implemented. See ‘World Bank Reforms Voting Power, Gets $86 Billion Boost’, http://web.world bank.org / WBSITE / EXTERNAL / NEWS / 0,,contentMDK:22556045~pagePK:64 257043~piPK:437376~theSitePK:4607,00.html.

4 The members of the World Bank Group are the IBRD, the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for the Settlement of Investment Disputes (ICSID).

5 These arrangements include institutions like the IMF and the World Bank (for a useful overview of the international fi nancial architecture, see generally Alexander et al., 2006; Davies and Green, 2008).



key international organisations met to share information and coordinate

their activities.6 However, over time, the attention paid to this topic has

been inversely proportional to the wellbeing of the global fi nancial system.

Consequently, during most of the early years of the millennium, the topic

was not high on the international agenda.

This began to change as signs that the global political economy could

be running into problems began to appear. There was an agreement at

the 2006 International Monetary Fund Annual Meeting to reform IMF

governance (IMF, 2006b). The agreed measures included small increases

in the quotas (and therefore votes) of China, Mexico, Turkey and South

Korea, and additional support for the African Executive Directors.

Most of these reforms have now entered into eff ect. In 2008, the World

Bank Group (‘the World Bank’ or ‘the Bank’) agreed to create a new

seat for an additional African Director, although this has not been

implemented. More recently the leadership in the Fund and the Bank

each appointed a high- level commission to study their governance: the

Manuel Committee was appointed by the IMF (IMF, 2008c; Committee

on IMF Governance Reform, 2009) and the Zedillo Commission by the

World Bank (World Bank, 2009d). In addition, the G- 20 summits in

2008 and 2009 devoted considerable attention to reforming key fi nancial

governance institutions, in particular, the IMF and the FSF (G- 20, 2008

and 2009 a–d).

These developments suggest that there could be changes in the interna-

tional fi nancial architecture in the short to medium term. Consequently,

it is an opportune time to assess the actual signifi cance of the reforms

that either have recently been implemented or are under consideration

and the potential they might create for further international fi nancial

governance reform. Such an evaluation requires us to answer six ques-

tions: What are the purposes of international fi nancial governance? What

standards should we use in assessing the adequacy of any set of arrange-

ments for international fi nancial governance? What are the problems with

the current international fi nancial architecture? What, in fact, has been

achieved in terms of reforming international fi nancial governance? What

more can be achieved in the short run? What more needs to be achieved,

over the medium to long term, if we are to eventually have an eff ectively

functioning international fi nancial architecture?

6 See further Financial Stability Board (FSB), http://www.fi nancialstabilityboard.org/about/history.htm (accessed 7 July 2009).



2. WHAT ARE THE PURPOSES OF INTERNATIONAL FINANCIAL GOVERNANCE?

International fi nancial governance should have two objectives. The fi rst is

to support an international monetary system that is predictable and stable

and that facilitates payments for international economic transactions. The

second is to oversee an international fi nancial system that both protects

the interests of savers and investors around the world and allocates credit

effi ciently and fairly amongst all potential borrowers. Eff ective interna-

tional fi nancial governance should, therefore, facilitate productive and

sustainable economic activity that serves the interests of all stakeholders

in the international economic order.

3. WHAT STANDARDS SHOULD BE USED IN EVALUATING INTERNATIONAL FINANCIAL GOVERNANCE?

Any arrangements for international fi nancial governance will only eff ec-

tively achieve the requisite objectives if they conform to the following fi ve

sets of principles: a holistic approach to development, comprehensive cov-

erage, respect for applicable international law, coordinated specialisation,

and good administrative practice.

I. Holistic Approach to Development

All states are developing states in the sense that they are striving to create

better lives for their citizens, however they understand this concept. Thus,

a key test for the international fi nancial architecture is how eff ectively

it supports the eff orts of participating states to achieve their common

developmental objective. It follows that one standard for assessing inter-

national fi nancial governance is the vision of ‘development’ that informs

its arrangements and activities.

The original vision of development as an economic process that focuses

on growth, as measured by GDP per capita, is no longer seen as suffi cient

because it is now recognised that the level of development of both indi-

viduals and societies can be positively or negatively aff ected by a range

of non- economic factors.7 This insight has led to a new understanding of

7 UNDP (1990); Sen (1999); Declaration on the Right to Development, 4 December 1986 (UNGA, 1986). This new evolving defi nition of development is



development as being a comprehensive and holistic process that involves

intertwined economic, environmental, social, cultural, political and even

ethical dimensions. According to this view, the economic aspects of devel-

opment cannot be separated from its social, political, environmental and

cultural aspects, all of which are components of one dynamically inte-

grated process.

The extent to which the international fi nancial governance arrange-

ments incorporate this holistic vision of development determines how

well the arrangements can account for all the economic, fi nancial, envi-

ronmental, social, cultural and political implications of the international

fi nancial system and, thus, how eff ectively it helps all states achieve their

developmental objectives.

II. Comprehensive Coverage

The principle of comprehensive coverage holds that the mechanisms and

institutions of international fi nancial governance should be applicable

to all stakeholders in the international fi nancial system and should deal

with all the methods, institutional arrangements, and instruments they

use in their fi nancial operations (Alexander et al., 2006; Davies and

Green, 2008). This means that the mechanisms of international fi nancial

governance need to be concerned with all the activities and operations of

all fi nancial intermediaries that engage in cross- border fi nancial transac-

tions; large corporate and sovereign investors and borrowers that utilise

a broad range of complex fi nancial instruments; fi nancial actors who

wish to base their fi nancial transactions, both as savers and investors, on

religious principles; small local fi nancial institutions that operate only

in local markets and are engaged in transactions that involve small and

medium- size enterprises; community based businesses and local farming

operations; and micro- credit and other fi nancial intermediaries that are

concerned with the problems of poverty and expanding access to fi nancial

services to all.

also evident in the work of the World Bank and aspects of the work of the IMF. It can also be seen in the formulation of such principles as the ‘Equator Principles’ (The Equator Principles – A Financial Industry Benchmark for Determining, Assessing and Managing Social and Environmental Risk in Project Financing, http://www.equator- principles.com/principles.shtml (accessed 9 July 2009)); in the Principles developed by the United Nations Special Rapporteur on business and human rights (see Ruggie, 2008); and in the numerous industry and corporate codes of conduct that exist. See also Bradlow (2005a).



A. Three corollaries

There are three important corollaries that follow from the principle of

comprehensive coverage. First, the mechanisms of international fi nan-

cial governance must be suffi ciently fl exible and dynamic to adapt to the

changing needs and activities of their diverse stakeholders. For example,

as the ‘top end’ large- scale fi nancial institutions develop new fi nancial

instruments and new arrangements through which to conduct their opera-

tions, the international fi nancial architecture must have the capacity to

understand these instruments and arrangements and to determine how to

most eff ectively account for them and their impacts on the various stake-

holders in the international fi nancial system. At the same time the inter-

national fi nancial architecture must be able to accommodate the changing

needs of the ‘low end’ small and micro fi nancial institutions.

Second, the totality of international fi nancial governance arrangements

must ensure that the international community receives all the services it

requires from a well- functioning global fi nancial system. These services

are: a global lender of last resort, global monetary regulation and global

development fi nance; regulation of trade and investment in fi nancial serv-

ices; global regulation of the cross- border activity of fi nancial institutions;

coordination of national fi nancial regulation, including ensuring that all

fi nancial regulation promotes such issues as access to fi nancial services

for all (individuals, corporate entities, and states); coordinated taxation

of fi nancial transactions; arrangements for dealing with sovereign debt

problems and complex cross- border fi nancial institution and corporate

bankruptcies; and regulation of international money laundering.

The third corollary, which is intended to ensure that the international

fi nancial architecture is fl exible, effi cient and not unduly centralised, is the

principle of subsidiarity.8 This principle holds that all decisions should be

taken at the lowest level in the system compatible with eff ective decision

making. Thus, the principle would require that global fi nancial governance

arrangements encourage national or even sub- national decision making to

8 ‘The principle of subsidiarity is defi ned in Article 5 of the Treaty establish-ing the European Community. It is intended to ensure that decisions are taken as closely as possible to the citizen and that constant checks are made as to whether action at Community level is justifi ed in the light of the possibilities available at national, regional or local level. Specifi cally, it is the principle whereby the Union does not take action (except in the areas which fall within its exclusive competence) unless it is more eff ective than action taken at national, regional or local level. It is closely bound up with the principles of proportionality and necessity, which require that any action by the Union should not go beyond what is necessary to achieve the objectives of the Treaty,’ http://europa.eu/scadplus/glossary/subsidi-arity_en.htm (accessed 7 July 2009).



the greatest extent possible, consistent with eff ective decision making and

implementation. This principle is particularly important in international

fi nancial governance because of the diversity of interests of its many

stakeholders and because so many of its stakeholders have only local or

regional interests, as opposed to global ones. It is however a complicated

principle to implement because it must apply both in standard operating

conditions and in crisis situations, which may require that decisions are

made at a diff erent level than is the case during standard conditions. In

addition, it needs to be linked to a confl ict resolution mechanism that is

capable of resolving disputes between regulators as to which level is the

most appropriate for resolving a particular issue.

The principle of comprehensive coverage therefore establishes a second

test which global fi nancial arrangements must satisfy. They must be

able to demonstrate that they have both the technical expertise and the

mandate to address the concerns of all the stakeholders in the interna-

tional fi nancial system and that they have the capacity to adapt as the

interests and actions of these stakeholders evolve over time. It is important

to recognise that this does not mean that all these issues must be dealt with

by the global mechanisms themselves, but it does mean that they have

some mechanism for ensuring that these interests are addressed at the

appropriate level in the system and that learning and information on best

practices in this regard is shared within the system.

III. Respect for Applicable International Law

The institution arrangements for international fi nancial governance, either

because they are formal international organisations created by treaty

or include the participation of sovereign states in their decision making,

should comply with applicable international legal principles (see, for

example, Schermers and Blokker, 2003; Klabbers, 2007; Sands and Klein,

2009). While international law does not provide detailed rules and stand-

ards that are applicable to international fi nancial aff airs, it does provide

the general principles that should guide the institutional arrangements

for international fi nancial governance. In particular, this means that the

decision- making bodies and institutions involved in international fi nan-

cial governance should conform to universally applicable customary and

treaty based international legal principles. There are four sets of principles

that are applicable in this regard.9

9 See for example Brownlie (2008).



A. Sovereignty

The fi rst is the principle of respect for national sovereignty. It is clear that,

by participating in a global governance arrangement, states are agreeing

to forgo some level of national independence in order to reap the benefi ts

of a well- functioning international system. Given the diff erent power and

wealth characteristics of the participating states, it follows that, de facto,

the amount of independence they give up will be positively related to their

power and wealth. However, the principle of national sovereignty should

still provide all states, regardless of their wealth and power, with the means

for preserving as much independence and policy space as is practicable and

consistent with the demands of eff ective global fi nancial governance.

B. Non- discrimination

The second is the general principle of non- discrimination. This means

that the institutions of international fi nancial governance should treat all

similarly situated states and individuals in the same way. The key question

thus becomes what standards can be used to ensure that all stakeholders

receive treatment that is fair and reasonable.

The fi rst standard applicable to the treatment of states is that the insti-

tutions of global fi nancial governance, such as the IMF, should treat

similarly situated states similarly and diff erently situated states diff erently.

This means that while they should base their treatment of all states on the

same principles, they should apply these principles in a way that is respon-

sive to the diff erent situations of each member state. Their treatment of

non- state stakeholders should be based on the same approach.

Second, it means that recognition should be given to the fact that

weaker and poorer states are signifi cantly diff erent in capacities from rich

and powerful nations. One way of implementing this principle could be

to apply the general principle of special and diff erential treatment that is

applicable in a number of international legal contexts, for example in inter-

national environment and international trade law, to international fi nan-

cial governance. In the international fi nancial context, this principle would

ensure both that weak and poor countries are given access to fi nancing on

easier terms than may otherwise be applicable and that special attention is

paid to ensuring that they are able to enjoy a meaningful level of participa-

tion in international fi nancial decision- making structures, even when they

are based on principles like weighted voting. A consequence to this may

be that the organisation off ers some mechanism of accountability to these

states and their citizens to compensate for any participation defi cit.

In the case of natural persons, the relevant principles should be derived

from the Universal Declaration of Human Rights (UNGA, 1948), which is

now considered largely to be part of customary international law (Ruggie,



2007a: para. 38; see generally Hannum, 1998). Pursuant to this document,

it would seem that individuals have reason to expect that the principles

and institutions of international fi nancial governance, including national

regulatory bodies, respect their rights to housing, health care, education,

jobs, and social security. The institutions of international fi nancial govern-

ance should also respect their rights to freedom of speech and association.

Thus, one indicator of good fi nancial governance could be the level of

respect that the institutions of international fi nancial governance show for

human rights in their member countries.

C. State responsibility

The third set of international legal principles applicable to international

fi nancial governance deal with the responsibility of states for the functioning

of the fi nancial system. Based on general principles of state responsibility,10

they have an obligation to provide foreign legal persons (including fi nancial

institutions) that are present in the state, either through an investment or

an individual transaction, with fair and non- discriminatory treatment. This

means that these foreign entities should receive comparable treatment to

similarly situated domestic institutions. It does not necessarily mean that

they should receive the same treatment as all domestic fi nancial institu-

tions, regardless of their size or role in the domestic fi nancial system.

D. International environmental law

A fourth set of applicable international legal principles are derived from

international environmental law (see generally Hunter et al., 2006). At a

minimum these principles would impose on fi nancial regulators an obliga-

tion to insist that fi nancial institutions fully understand the environmental

and social impacts of their fi nancial practices and of individual transac-

tions. This is particularly relevant given the potential impact that envi-

ronmental events such as climate change can have on fi nancial risk, and

vice versa. This suggests that international fi nancial governance should be

working to ensure that the global fi nancial system promotes environmen-

tally sustainable practices and minimises the incentives for fi nancial actors

to engage in environmentally risky behaviour.

The principle of respect for applicable international law establishes a third

test for international fi nancial governance, namely to what extent do the

arrangements for international fi nancial governance promote respect for

10 See Responsibility of States for Internationally Wrongful Acts, Resolution 62/61, 6 December 2007 (UNGA, 2008).



national sovereignty, the environment, and the rights of all natural and

legal stakeholders in the international fi nancial system?

IV. Coordinated Specialisation

The principle of coordinated specialisation acknowledges that, even though

development is holistic and all aspects of international governance are

interconnected, international fi nancial governance cannot function effi -

ciently without a limited mandate and in the relevant institutions having

the requisite technical expertise to implement these mandates. Thus, the

principle of coordinated specialisation has two requirements. First, the

mandate of the mechanisms and institutions of international fi nancial

governance must be clearly defi ned and limited to international monetary

and fi nancial aff airs. Second, the institutions of international fi nancial

governance cannot ignore the other important aspects of the development

process. Consequently, there is a need to ensure some form of coordination

between the institutions and mechanisms of international fi nancial govern-

ance and other organisations and arrangements for global governance. The

coordinating mechanism, if it is to eff ectively resolve tensions between the

diff erent aspects of international governance, needs to be transparent and

predictable. It may also need some dispute settlement mechanism.

This principle, therefore, establishes a fourth standard for measuring

the adequacy of international fi nancial governance. This standard is that

the mechanisms of international fi nancial governance must have both spe-

cialised mandates and a means for coordinating their policies and opera-

tions with other institutions of global governance, each of which has its

own limited mandate. This means that the institutions of global fi nancial

governance must off er other institutions of global governance a meaning-

ful opportunity to raise concerns with them and that there must be some

mechanism for resolving tensions between the diff erent specialised mecha-

nisms of global governance.

V. Good Administrative Practice11

The basic principles of good administrative practice in global governance are

the same as those applicable to any public institution. These principles are

transparency, predictability, participation, reasoned decision making, and

accountability. This means that all the institutions of international fi nancial

11 Kingsbury et al. (2005). See generally Institute for International Law and Justice, http://iilj.org/publications/default.asp (accessed 10 July 2009).



governance must conduct their operations in a manner that is suffi ciently

open for their procedures, decisions, and actions to be predictable and under-

standable to all stakeholders. They must also off er these stakeholders some

meaningful way of raising their concerns and having them addressed by the

institutions. The institutions should also be required to explain their decisions

and operations to all interested stakeholders. Finally, the stakeholders should

be able to hold the institutions accountable for their decisions and actions.

Thus, the fi nal standard against which international fi nancial govern-

ance arrangements can be measured is the extent to which they comply

with the fi ve principles of good administrative practice stated above.

VI. Summary of the Standards for Evaluating Arrangements for

International Financial Governance

The fi ve standards that can be used for assessing the adequacy of any inter-

national fi nancial governance arrangements are:

1. Are the arrangements based on a holistic understanding of develop-

ment and how do they incorporate this vision?

2. Do the arrangements for international fi nancial governance deal, at

an appropriate level in the system, with all the stakeholders and all the

policy and regulatory issues relevant to the functioning of the interna-

tional fi nancial system and do they have the capacity to adapt to the

changing interests and concerns of these stakeholders?

3. Do the mechanisms for international fi nancial governance comply

with all applicable international law standards, including respect for

national sovereignty, the rights of all natural and legal persons, and

responsible environmental law practices?

4. How do the institutions of international fi nancial governance interact

with other global governance institutions?

5. Do the institutions and mechanisms for international fi nancial govern-

ance comply with the fi ve principles of good administrative practice:

transparency, predictability, participation, reasoned decision making,

and accountability?

4. WHAT ARE THE PROBLEMS WITH THE INSTITUTIONS OF INTERNATIONAL FINANCIAL GOVERNANCE?

Using the standards articulated above, it is possible to identify the key

problems with the existing international fi nancial architecture.



I. Holistic Vision of Development

The primary institutions of international fi nancial governance – the IMF,

the World Bank, the Financial Stability Board (FSB) – either do not

explicitly embrace a vision of development or they emphasise economic

factors over other considerations in the vision of development articulated

in their founding documents.

The IMF’s mandate, as set out in its Articles of Agreement, is to

promote stable international monetary arrangements, which it now inter-

prets as including some role in the oversight of international fi nancial

markets. However, its Articles do not make any explicit reference to

development and it has no formal responsibilities for promoting develop-

ment. Moreover, it would fi nd it diffi cult to incorporate a holistic vision

of development into its operations because it has interpreted its Articles of

Agreement as precluding it from dealing with certain aspects of a holistic

vision of development. For example, it should not take political considera-

tions into account in its policies and operations.

The World Bank, pursuant to its Articles of Agreement, has an explicit

development mandate. The Articles further stipulate that it must base its

decisions on economic considerations and expressly preclude it from doing

so on the basis of the political character of its member states or on political

considerations. Thus, while the Bank has been very creative in expand-

ing its mission to include many activities that it believes to be relevant to

development, its Articles place constraints on its ability to fully embrace a

holistic vision of development.

Finally, the FSB, which consists of representatives from the key fi nan-

cial regulatory bodies in the G- 20 countries, has a clear and relatively

narrow regulatory mandate. Its concerns are fi nancial regulation and the

coordination of such regulation among its participating members.

Thus, it is clear that regardless of how much key offi cials in these enti-

ties understand that development is a complex holistic process involving

environmental, social, political, cultural elements in addition to economic

ones, they are hampered in their ability to incorporate this understanding

into the functioning of their organisations. Changing this situation will

require either amendments to their Articles or changes in their relations

with other international organisations.

II. Comprehensive Coverage

The current international fi nancial governance arrangements suff er from

problems of under- inclusiveness in both a regulatory and a participa-

tory sense. There are three aspects to regulatory under- inclusiveness.



First, the current multilateral regulatory bodies do not cover all the rel-

evant actors in the international fi nancial system (Alexander et al., 2006;

Department of the Treasury (US), 2009; UN, 2009b; UNCTAD, 2009d).

While some national banking regulators meet at the Basel Committee of

Banking Supervision (Basel Committee), capital market regulators meet

in the International Organization of Securities Commissions (IOSCO) and

insurance regulators meet in the International Association for Insurance

Supervisors (IAIS), there is no currently existing international institution

or mechanism for coordinating regulation of such key actors in the fi nan-

cial system as credit rating agencies or those entities, like hedge funds,

private equity funds and sovereign wealth funds, that make up the so-

called ‘shadow banking’ system that has played such a critical role in the

creation of the 2008 fi nancial crisis. This lack of international coordina-

tion is a consequence of the fact that, currently, national regulation of the

shadow banking system is limited or non- existent. However, the net eff ect

of this situation is that the current institutional arrangements for interna-

tional fi nancial governance are incomplete and important fi nancial actors

fall outside the scope of these institutions. It should be noted that this is

likely to change as national regulatory regimes are changed to incorporate

the shadow banking system.

Another aspect of this regulatory under- inclusiveness is that signifi cant

fi nancial instruments are not covered by the international arrangements

(Department of the Treasury (US), 2009; UN, 2009b; UNCTAD, 2009d).

For example, many credit derivatives are currently left unregulated by

national fi nancial regulators in such key jurisdictions as the US and

Europe. As a result, there is also inadequate coordination of regulation at

the international level. This may change as national fi nancial regulation

is reformed.

The fi nal aspect of regulatory under- inclusiveness is that the global regu-

latory bodies sometimes rely on self- regulation by the entities that they are

expected to regulate. For example, the Basel II capital adequacy guidelines

allow qualifying banks to develop their own risk assessment models and

to base their capital requirements on these models (Basel Committee on

Banking Supervision, 2006; for critical analysis, see Tarullo, 2008). In addi-

tion, by basing capital weighting decisions on the credit ratings assigned to

specifi c transactions, the guidelines eff ectively delegate this decision to the

credit rating agencies. This situation results in under- regulation because it

allows self- interested parties to make decisions that aff ect their own capital

requirements or their own relationships with their clients.

Participatory under- inclusiveness is concerned with the operating prin-

ciples of the international regulatory bodies themselves rather than with

their activities (Alexander et al., 2006). In particular, it refers to the fact



that not all national regulatory bodies are able to participate in decision

making at the global level. For example, only 27 countries participate in

the Basel Committee even though the capital adequacy rules and the core

banking principles developed by this Committee are, in fact, applicable

globally.

Similarly, while IOSCO has more general membership, its Executive

Committee has established two important working groups: a Technical

Committee and an Emerging Markets Committee (Alexander et al., 2006).

The Technical Committee – most of whose members come from the G- 10

countries, including two each from the US and Canada – has limited

membership. It is responsible for developing and overseeing the regulatory

issues and standards of interest to the world’s most liquid and sophisticated

fi nancial markets (Davies and Green, 2008). While its proposals are sub-

mitted to the Emerging Markets Committee and the Executive Committee

before being shown to the full membership, the Technical Committee is

the forum in which the bargaining and the shaping of issues take place. As

a result, de facto, only the Technical Committee members fully participate

in the identifi cation of issues for consideration by the IOSCO membership

and they play the leading role in formulating its responses to these issues.

A third example is the Financial Stability Board (formerly the Financial

Stability Forum), which is the key global forum for coordinating fi nancial

regulation and for discussion of global fi nancial regulatory policy but its

membership is limited, primarily, to regulators from the G- 20 countries.

A fi nal, more complex, example is the IMF and the Bank, which help

transmit the regulatory standards established in the more technical regula-

tory bodies to all their member states (Bradlow, 2006). While they have

universal membership, these organisations do not off er all states meaning-

ful participation in their decision making. This follows from their weighted

voting system and the structure of their Board of Directors. For example,

Belgium has more votes in the IMF than Brazil; and sub- Saharan African

countries, which are big consumers of the services of the World Bank

and the IMF, currently have two representatives on their Boards, while

Western Europe has eight.

The current arrangements also have a second participatory under-

inclusiveness. They are under- inclusive in the sense that that they do not

provide for eff ective participation by all relevant and interested stakehold-

ers. Consequently, in addition to the problems with state actors discussed

above, entities like the IMF, the World Bank and the FSB do not provide

eff ective means for participation by all the various non- state actors who

have an interest in fi nancial regulation and governance. This is a particu-

larly signifi cant problem at the ‘low end’ of the system at which both insti-

tutions dealing with poverty and poor people themselves have inadequate



means for participating in international fi nancial governance, despite the

profound impact of international fi nancial decisions on their lives.

As we saw above, an important corollary of comprehensive coverage

is subsidiarity. In the case of international fi nancial governance, this

means deferring to national regulators to the greatest extent possible and,

when international- level regulation is necessary, ensuring that it pro-

vides for maximum feasible national implementation and interpretation.

The current international fi nancial governance arrangements satisfy the

requirement of subsidiarity for some member states and not for others.

In the case of the rich and powerful states, the arrangements are very

respectful of their need for making, to the greatest extent feasible, their

own fi nancial regulatory policies and their own monetary and fi nancial

policies. Consequently, the bodies which aff ect them most directly – such

as the Basel Committee, IOSCO, IAIS, the FSB – tend to be bodies in

which decisions depend on national implementation for their effi cacy. This

means that while these bodies develop standards that they expect all their

members to implement, their decisions are non- binding and it is left to each

state to decide for itself whether or not to incorporate the international

standard into its domestic regulatory regime. These states are also able to

interpret and apply the international standard in the way that is most con-

genial for them. While there are likely to be adverse market consequences

for fi nancial institutions and borrowers in any state that does not follow

the international standards, there will be no legal consequences.

On the other hand, weak and poor countries do not have the same

degree of discretion in regard to these international standards, despite the

fact that they have usually played no, or a very limited, role in developing

them. There are two reasons for this. First, the international fi nancial gov-

ernance institutions on which they are most dependent for fi nancing – the

World Bank and the IMF – tend to support the key international regula-

tory standards and to advocate for their adoption by all their member

states. Second, these institutions are able, through their technical support

and the conditions attached to their fi nancial support, de facto, to push

these weak and poor states to adopt and implement standards. Thus, these

poor and weak states end up having less policy discretion than the richer

and more powerful member states. The situation of these states is further

compromised by the participatory under- inclusiveness discussed above.

III. Respect for Applicable International Legal Standards

It is clear that the relevant international legal standards do not include

provisions that are explicitly applicable to international fi nancial govern-

ance. Nevertheless, there are some general considerations that are relevant



to assessing how eff ectively they are being applied in international fi nan-

cial governance.

Formal compliance with certain applicable international legal principles

is relatively non- controversial. The key institutions of international fi nan-

cial governance are respectful of the national sovereignty of their member

states. They appear to formally respect the principle of non- discrimination

in regard to the member states, in that they do not negatively discriminate

between states to the detriment of any state. Third, they appear to pay

attention to the rights of legal persons, particularly fi nancial institutions

in their activities and policies.

The remaining areas of concern, therefore, are their respect for the

rights of natural persons and their compliance with international environ-

mental legal standards. At a minimum, this would manifest itself in some

discussion of these issues in the policy and operational documents of the

key institutions of international fi nancial governance. This is necessary in

order to indicate that attention has been paid to these issues and how they

aff ect fi nancial regulation and fi nancial transactions. It is very diffi cult to

fi nd any indication that attention has been paid to them in the documents

of the key regulatory bodies – the Basel Committee, IOSCO, IAIS, the

FSB or the Bank of International Settlement (BIS).

On the other hand, some attention is paid to these issues by the public

international fi nancial institutions. The World Bank addresses envi-

ronmental law and some human rights issues in its safeguard policies.12

However, these policies, which deal with how the Bank should address

social, cultural, and environmental concerns in its operations, do not

explicitly require the Bank to assess the human rights impacts of Bank

operations and so are not comprehensive in their coverage of human rights

issues. The IMF acknowledges the relevance of some human rights issues

to the challenges of governance (Gianviti, 2000). Yet, like the Bank, it does

not explicitly or comprehensively evaluate the human rights impacts of its

policies or operations.

IV. Coordinated Specialisation

There are a number of international institutions that have specialised

responsibilities in international fi nancial governance. They include the

IMF, the World Bank, the FSB, the Basel Committee, IOSCO, IAIS, the

BIS, and the WTO, which is responsible for facilitating development of

12 See World Bank, Safeguard Policies, http://go.worldbank.org/WTA1ODE7T0 (accessed 9 July 2009); Danino (2006); IFC (2006a).



international standards in trade in services, including fi nancial services.

Each of these entities has, prima facie, clear and well- defi ned specialised

areas of expertise and their mandates are confi ned to these limited areas.

It is diffi cult to keep each institution confi ned to its area of expertise.

The dynamics of their work tend to push them to see connections between

their area of responsibility and other substantive issues, even if these fall

within the mandate of other international organisations. This can be seen

most clearly in the work of the World Bank and the IMF, both of which

over time have expanded their scope of work to include aspects that were

outside their original mandates (UN, 1945: Art. 70–71; Grossman and

Bradlow, 1995). A good example is the way in which the Bank and the

Fund have both come to address issues like good governance as they have

seen how these issues aff ect the developmental or international monetary

aff airs of their member states. However, their concern with these issues,

because it is fi ltered through their specialised mandates, is not comprehen-

sive and has a certain ad hoc quality.

This ‘mission creep’, in addition to taxing the Bank’s and the Fund’s

resources, credibility and ultimately legitimacy, also weakens other inter-

national organisations. The reason is that these other organisations, while

they may formally have the authority to act in certain areas, lack the fi nan-

cial and political means to off er serious counterweights to the fi nancially

powerful IMF and World Bank.

The existing international order envisages that this challenge of combin-

ing specialisation of function with the need for coordination between the

various international bodies will be addressed through the United Nations

(UN) system. The Economic and Social Council was supposed to be the

body where these diff erent specialised agencies could come together to

coordinate their activities (UN, 1945: Arts 62–6). However, this coordina-

tion has not functioned eff ectively, in large part because the specialised

fi nancial agencies are able to use their fi nancial power to overwhelm other

international organisations in almost any sphere where they choose to

operate. For example, if the World Bank decides that, in order to eff ectu-

ate its development mandate, it should become involved in health related

projects, it is able to allocate substantial amounts of money for such

projects. Similarly, when the IMF, through the conditions it attaches to its

fi nance, requires its member states to cut expenditures in ways that impact

on health, it indirectly exerts a key infl uence over its member states’ health

sectors. The result is that those states which are interested in developing

their health sectors are more likely to turn to the World Bank or the IMF

than to the World Health Organization, with its relatively small budget,

for advice and support in their health related activities and policies. This

situation inevitably undermines the position of the WHO, which is sup-



posed to be the UN specialised agency responsible for health. The IMF

and the World Bank have had similar eff ects in regard to other UN agen-

cies, for example those dealing with agriculture, children, and education.

The key role played by these two international fi nancial institutions

would be less problematic if they had an express mandate to act as the

international coordinating bodies. However, they do not. Moreover, given

their current governance and legitimacy problems, it is most unfortunate

that their operations have undermined other key parts of the United

Nations system.

The situation with regard to coordination of the various actors involved

in international fi nancial governance is further exacerbated by the fact

that some of the key actors in international fi nancial governance are not

part of the UN system. For example the FSB, which plays a key role in

coordinating the various international fi nancial regulatory bodies, is not a

UN agency. Consequently over time a distortion has appeared in the inter-

national governance system in the sense that the fi nancial institutions have

grown in power and resources while the non- fi nancial ones have declined.

The net eff ect is that international fi nancial governance is not eff ectively

coordinated with other areas of global governance. This is particularly

troubling given the importance of the principle of a holistic approach to

development.

V. Good Administrative Practice

Finance, which is so dependent on confi dence, is not an activity that lends

itself easily to all the principles of good administrative practice. It has no

problem with the principle of predictability, since this is essential to the

functioning of fi nance. Similarly, at least as a general proposition, it can

satisfy the principle of reasoned decision making because all key actors

in the fi nancial system need to understand the decisions of regulators and

other key players in international fi nancial governance if they are to act

in conformity with these decisions. However, the principles of transpar-

ency, participation and accountability are more challenging for the inter-

national fi nancial governance institutions. Consequently, the remainder

of this section will focus on these three aspects of good administrative

practice.

A. Transparency

The mechanisms for international fi nancial governance have attempted to

adapt to the need for transparency. This is perhaps not surprising, given

the need for their information to be shared with international fi nancial

markets.



The IMF and the World Bank have both signifi cantly improved the

transparency of their operations in recent years. Their information disclo-

sure policies now require that many of their documents are made publicly

available as a matter of course and there is greater eff ort to communicate

with stakeholders about their policies and operations.13 However, they

are not fully transparent. For example, there are still certain categories of

documents, such as their archives, that are not easily available. In addi-

tion, the IMF does not have a publicly available set of operational policies

and procedures, which makes it diffi cult for interested stakeholders to fully

understand how it goes about doing its business.

The other mechanisms of international fi nancial governance – the

international regulatory coordination bodies – are reasonably transpar-

ent. They share information with their members, who often, pursuant to

national requirements, will make this information public. They publish

drafts of their proposed policies and invite comment on the drafts. For

example, the Basel Committee published a number of drafts of the Basel II

capital adequacy guidelines and engaged in extensive discussions with key

stakeholders about these drafts.

B. Participation

The compliance of the institutions of international fi nancial governance

with the requirement of participation is problematic. The World Bank

and the IMF, despite their near- universal membership, do not provide

for eff ective participation by all member states. The level of member

state participation depends on their share of votes in the institution and

this is a function of each member state’s historical wealth and power.

Consequently, as indicated above, there are many member states that

are under- represented in the organisations and others that are over-

represented.

There is also a participatory defi cit in the international regulatory insti-

tutions. The reason is that these bodies either have restricted memberships

(for example, the Basel Committee and the FSB) or, despite their open

membership policies, have key decision making bodies with restricted

memberships (for example, the Technical Committee of IOSCO). The

result is that a large number of countries, in fact, are excluded from partic-

ipation in these bodies (Alexander et al., 2006; Davies and Green, 2008).

The openness of all these organisations to participation by non- state

stakeholders is complex. In some cases, while they do not formally

13 See World Bank, The World Bank’s Policy on Information Disclosure, http://go.worldbank.org/TRCDVYJ440 (accessed 9 July 2009); IMF (2005b).



provide for non- state- actor participation in their decision making, they

will consult with key stakeholders. However, the lack of formal consulta-

tion mechanisms means that other stakeholders may be excluded from

the consultation process. For example, the Basel Committee is likely to

consult, directly or indirectly, with large private banks and organisations

representing banks and any other entities that it sees as relevant to its

work. Thus, informally these consultations are likely to create opportuni-

ties for participation by certain entities from outside the Basel Committee

member countries in the work of the Basel Committee. However, since the

Basel Committee has discretion in deciding with whom to consult, it is less

likely to consult with consumer groups and other civil society groups that

may have an interest in the Committee’s work. This will be true for civil

society groups both from Basel Committee member countries and from

elsewhere. This lack of participation can be mitigated at the national level,

if the national law or policies require signifi cant public consultation and

participation in regard to fi nancial regulatory and operational aff airs.

C. Accountability

In this context, accountability means that all the stakeholders in interna-

tional fi nancial governance should have some means of holding decision

makers responsible for their decisions and for their implementation of

these decisions.

Using this yardstick, it is clear that the World Bank is the most account-

able global fi nancial institution (Bradlow, 2005b; Bissell and Nanwani,

2009). In addition to providing its member states with means to raise

concerns at the Board level, it has a procedure for dealing with complaints

about allegedly improper procurement awards, and independent entities

– the Inspection Panel and the Compliance Advisor Ombudsman – for

investigating complaints from private parties who allege that they have

been harmed or threatened with harm by the failure of the members of the

Bank Group to comply with their own operational policies and procedures

in the projects that they fund. It should be noted, however, that, while it

is possible for private parties to challenge any World Bank operation in

these entities, the complaints tend to deal far more with project based

loans than with policy based loans, which are likely to be more directly

relevant to international fi nancial governance.

The IMF has made some eff ort to enhance its accountability through

the creation of the Independent Evaluation Offi ce. This offi ce, which con-

ducts studies of IMF operations, is similar to the Independent Evaluation

Group in the World Bank. However, it does provide for public consulta-

tion on its work plan and on the scope of its studies.

The international regulatory bodies are suffi ciently diff erent from the



IMF and the World Bank that it is not reasonable to expect them to be

accountable in the same way. Their members are regulatory agencies, each

of which is accountable, nationally and through the national administra-

tive procedures, to their various stakeholders. However, the more signifi -

cant concern is that there is no accountability of these regulatory bodies

to stakeholders who do not participate, either directly or indirectly, in the

work of the international regulatory bodies. This is particularly signifi cant

because the non- participants in these bodies tend to be the poorer and

weaker states, which nevertheless are compelled either by other multilat-

eral organisations or by donor countries to conform to the policies and

guidelines of these international regulatory bodies.

5. WHAT REFORMS HAVE BEEN AGREED TO?

This section evaluates the recent eff orts to reform the international fi nan-

cial architecture. The current reform eff orts can be divided into three

areas.

I. Reforms Being Implemented

First, there are those reforms that have been, or are being, implement-

ed.14 Most noticeable here is that the G- 20 has emerged as the primary

forum for discussion of international fi nancial governance matters. This

is important because it represents an acknowledgement of the shift in

global power. This change has led to similar broadening of representation

in international regulatory bodies. For example, the membership of the

Financial Stability Forum, which was the forum in which the banking,

fi nance and insurance regulators from the G- 8 countries plus representa-

tives from international fi nancial institutions like the IMF met to discuss

fi nancial regulatory matters, has been expanded to include the regulators

from all the G- 20 countries and the status of the entity has been enhanced,

as exemplifi ed by the changing of its name to the Financial Stability Board

(FSB).15 This should result in broader participation in deliberations about

fi nancial regulation. However, it is not clear that the FSB will be more

responsive than the FSF to the concerns of low- income countries.

14 G- 20 (2008, 2009a, 2009b, 2009c); see also Annual and Spring Meetings of the International Monetary Fund and the World Bank Group, http://www.imf.org/External/am/index.htm (accessed 10 July 2009).

15 See Financial Stability Board, http://www.fi nancialstabilityboard.org/about/history.htm (accessed 7 July 2009).



There have also been some reforms in the IMF. The IMF has made

some eff ort to improve representation through minor changes in its

voting allocations, and promising additional support to the African

members of the Board. The IMF has also taken a number of actions

that are designed to enhance access to its fi nancing. These include

reforming its conditionality requirements so that they are more targeted

and streamlined; eliminating some under- utilised facilities; creating the

Flexible Credit Facility and the Exogenous Shocks Facility, both of

which are only available to member states that meet certain qualifi ca-

tions; and raising the limits on member states’ access to IMF fi nancing

(IMF, 2008b). The World Bank (2008a) has also agreed to increase its

lending over the next three years.

The IMF has also taken action to reform its fi nancial capacity. Member

states have increased its resources by US$500 billion. The IMF secured

most of this funding (IMF, 2009a). These contributions, in the case of

those member states that participate in the New Agreement to Borrow

(NAB), are in the form of loans through the NAB. In other cases, for

example Russia and China, the contributions are made through the pur-

chase of an unprecedented issue of IMF bonds. Both the NAB loans and

the bond purchases may only result in temporary increases in the resources

of the IMF. They will also not result in the states that contribute these

resources gaining any permanent increase in voting power in the IMF.

The IMF has taken additional measures designed to increase global

liquidity. With G- 20 support (G- 20, 2009c) it has implemented a new

SDR16 allocation equivalent to US$283 billion (IMF, 2009d). Pursuant

to its rules, the IMF must allocate SDRs among all its members on a pro

rata basis. Consequently, developing countries will receive about US$100

billion, of which low- income countries get about US$19 billion. It is pos-

sible that rich countries will decide to redirect their share of the SDR

allocation to developing countries. In many countries such a decision,

because it involves a commitment of state resources, will require legislative

authorisation, which is inherently uncertain.

Moreover, the G- 20 have agreed that the IMF should sell some of

its gold reserves to fund an endowment for its administrative costs and

provide (approximately US$6 billion) concessional funds for the poorest

developing countries (G- 20, 2009d; IMF, 2009g). These gold sales were

approved by the IMF Board of Executive Directors in August 2009 and

the sales will now be executed (IMF, 2009b).

16 Special Drawing Rights are created by the IMF to provide member states with additional liquidity.



II. Reforms that Have Been Proposed but Not Implemented

The second area is reforms that have been proposed but not yet imple-

mented (G- 20, 2009a). These include an agreement that future heads of the

IMF and the WB will be selected on the basis of merit and not nationality.

The G- 20 also agreed to implement all the voice and vote reforms agreed

in 2008 and to advance the quota review scheduled for 2013 to no later

than January 2011. Despite their agreement, it is unclear when and if these

reforms will be implemented. The key problem is that the European states

that are ‘over- represented’ in the organisation are unlikely to surrender

their votes (and therefore agree to quota reforms) without compensa-

tion and, to date, it is unclear how they can be adequately compensated

(Grajewski, 2009).

III. Reforms Still Under Consideration

The third area of reform consists of issues that are still under discussion.

The most signifi cant of these are the recommendations of the Manuel

report and the recommendations of the Zedillo Report. In the case of

the Manuel Committee (2009), the recommendations on IMF governance

reform include changing the requirement that the fi ve largest member

states have their own Executive Director, changing the scope of IMF sur-

veillance to make it more comprehensive, and changing the majority voting

rules to eliminate the US veto. These proposals require amendments to the

IMF Articles. Since adoption of such amendments requires parliamentary

approval in many member states, it is very diffi cult to predict if and when

they will actually be implemented. One indicator is that it took 12 years

for the Fourth Amendment to the IMF Articles to receive the 85 per cent

majority needed for its adoption (IMF, 1997, 2009e).

6. WHAT MORE CAN BE ACHIEVED IN THE SHORT RUN?

In evaluating the potential for further reform eff orts in the short run, it

is necessary to pay careful attention to the constraints within which these

reforms must be achieved. There are two issues that are relevant in this

regard.

First, we are undergoing a shift in power in the global political economy.

Currently, the ‘rising powers’, as typifi ed by the BRICs (that is, Brazil,

Russian, India, China), are not powerful enough to successfully demand

substantial reform of global fi nancial governance arrangements and the



‘declining powers’, primarily the G- 8 countries, can still block changes

that are not to their liking. Thus, the rising powers have only succeeded in

obtaining marginal changes in IMF quotas, and the rise of the G- 20 has

led to the eclipse but not yet to the demise of the G- 8. This has two impli-

cations for governance reforms. First, it suggests that it is not feasible in

the short run to reform any faster or further than the current major and

traditional powers are willing to accept. This may change over time as

power shifts more towards the newly rising powers but at the moment this

is an important constraint. Second, the current governance reform process

is unlikely to result in sustainable reforms because these reforms, necessar-

ily only partial, will always be subject to new pressures and constraints as

the shift in global power plays itself out.

Second, the reform eff orts have been selective in the issues that they

address. Thus, while they have addressed some regulatory issues and

some governance issues, they have not addressed any of the interlinked

issues. For example, the key challenges for global fi nancial governance,

in addition to more traditional fi nancial issues, include the environmental

crisis and the related problems of poverty and inequality, which both

impact global fi nancial fl ows and fi nancial regulation. Consequently,

their exclusion from discussions on international fi nancial governance

undermines current eff orts to sustainably reform the international

fi nancial architecture. One indication is that some developing countries

refused prior to the Copenhagen conference to make commitments on

curbing carbon emissions until the rich countries clarifi ed how much

funding they are willing to contribute towards helping them deal with

climate change.

These constraints suggest that the potential for serious additional

reform eff orts in the short run is limited – especially as the global economy

begins to grow again and the pressure imposed by the 2007–09 recession

declines. They even seem to indicate that the prospects for implementation

of the agreed but not yet implemented reforms are uncertain.

One result of the limited reform achieved so far is that the institutions’

legitimacy problems continue to fester. For example, there has been no

agreement on increasing the accountability of the IMF management and

staff or on enhancing the ability of all stakeholders to participate in its

operations. This raises some important challenges for those stakehold-

ers who are interested in promoting international fi nancial governance

reform.

Given the current situation, there are only two areas in which there is

scope for additional reforms in the short run. The fi rst is fi nancial regu-

latory reforms, like those that are currently being considered in the US

and Europe. While these reforms are likely to have their greatest impact



at the national level, they could result in some changes in governance at

the global level. The second is enhancing the accountability of the global

fi nancial governance institutions, in particular the IMF. The reason for

this is that it is currently the only major multilateral institution with a

clear fi nancial mandate that does not have some independent account-

ability mechanism. Given that such mechanisms can be introduced

without requiring Article amendments or even action beyond the level of

the Board of Executive Directors, they are relatively easy to implement.

Consequently, to the extent that the pressure for reform continues, this is a

relatively easy way to respond to the pressure. However, this should not be

interpreted to mean that such mechanisms are mere sops to institutional

critics. In fact, the history of these mechanisms suggests that they do have

an impact on the working of the institutions.

7. MEDIUM- TERM REFORM CONSIDERATIONS

The constraints that limit reform eff orts in the short run should not be

applicable over the medium term. The reason, as indicated above, is that

the force of these constraints is likely to weaken over time. Consequently,

when contemplating medium- term reform eff orts, it is reasonable to think

more laterally and to re- imagine the international fi nancial regime.

Due to space constraints, this is not the appropriate occasion to spell

out a new international fi nancial governance regime in great detail.

Suffi ce it to say that such a regime can take many forms as long as it con-

forms to the key principles set out in the third section of this chapter. This

means that the regime must be comprehensive in its coverage. It must also

be based on a holistic vision of development that both guides the imple-

mentation of its specialised technical mandate and ensures that there

is an eff ective means for coordinating its activities with those of other

institutions of global governance. It must also conform to all applicable

international legal standards, and to the principles of good administra-

tive practice, which include having transparent operational policies and

procedures, eff ective accountability mechanisms and meaningful partici-

pation by all stakeholders.

The functions that the international fi nancial regime must be able to

perform include being a global lender of last resort, a global monetary

regulator and a provider of global development fi nance; a facilitator of

fair trade in services; a sovereign debt workout mechanism, a means for

dealing with complex cross- border bankruptcies; a global fi nancial regula-

tor, which promotes, in addition to fi nancial effi ciency and innovation, fair

fi nancial systems that ensure access for all to fi nancial services and appro-



priate consideration of environmental and social risk; and an effi cient and

fair global tax system.

8. CONCLUSION

This chapter has set out a framework for assessing both the current inter-

national fi nancial architecture and the actual eff orts at reforming the

international fi nancial governance regime. Pursuant to the framework, it

is clear that the existing regime has substantial defi ciencies and that the

current reform eff orts are inadequate. However, it also indicates that,

while additional reform is possible, there are good reasons not to expect

fully adequate reform in the short run. Over the medium term such reform

may be more feasible. The chapter provides some guidance on the issues

that a fair, environmentally and socially sustainable international fi nancial

governance regime should address, but it does not spell out in any detail

how such a regime would look. This is a task for another chapter.


94

5. Crisis and opportunity: emerging economies and the Financial Stability Board

Enrique R. Carrasco*

1. INTRODUCTION

The current global fi nancial and economic crisis began in the subprime

mortgage sector in the United States. Through the process of securitisa-

tion, subprime mortgage loans were pooled together, sliced into tranches

and transmitted to investors in many parts of the world. When the US

housing bubble burst and housing values plummeted, subprime borrowers

began to default on their mortgage loans, which caused mortgage- backed

securities and other related assets (collateralised debt obligations, for

example) to plummet in value as well. These so- called ‘toxic assets’ led

to massive losses among banks, which then led to a freeze in the credit

markets. Although throughout much of 2008 the crisis was largely limited

to the fi nancial sector, by 2009 it became clear that the world was witness-

ing a full- blown economic crisis – the worst since the Great Depression.

At the outset of the crisis, most observers believed that emerging econo-

mies would not be signifi cantly aff ected by the crisis, which appeared to

be concentrated in the United States and Europe. This is because most

emerging economies did not hold toxic assets. Moreover, after the eco-

nomic/fi nancial crises in the 1980s and 1990s, many emerging economies

engaged in signifi cant reform of their fi nancial sectors, including signifi -

cant increases in foreign exchange reserves, which would make them less

vulnerable to external shocks. Thus they would be ‘decoupled’ from devel-

oped countries’ economies and not be dependent on them for economic

growth and stability (IMF, 2008a: 44; Kose and Prasad, 2008). Indeed,

in the midst of the fi nancial crisis in the summer of 2008 it appeared that

* Professor of Law, University of Iowa College of Law. Many thanks to Judith Faucette, Wesley Carrington, Laurie Glapa, Bryan Sullivan, and Kyounghwa Kang for their excellent research assistance.


Emerging economies and the FSB 95

growth in emerging economies, amounting to half of all global economic

growth in a given year, could help avert a global meltdown.

Nevertheless, emerging economies have not been immune from the

global crisis. Despite their progress, they still depend greatly on foreign

capital and investment, which is problematic when, during a crisis, foreign

investors withdraw their money to perceived safer investments. Moreover,

much of the double- digit growth seen throughout the developing world

has been dependent on the availability of foreign credit, a stable cur-

rency and sustainable global demand for exports, all of which were put

in jeopardy because of the crisis. The crisis has also shown that emerging

economies are still highly susceptible to fi nancial contagion, even when

their fundamentals appear to be sound.

Given the importance of emerging economies to the global economy,

the current crisis cannot be overcome on a sustainable basis without taking

into account their welfare and interests. This will require policymakers to

address the governance framework of international fi nance with the aim of

giving emerging economies (and developing countries in general) greater

voice in the governance of international fi nancial institutions, which

heretofore have been dominated by the G- 7 countries (Canada, the US,

France, Germany, the UK, Japan, and Italy), which have thus dictated the

standards and codes that govern international fi nance.

This chapter will address what appears to be the beginning of a change

in the status quo. It will do so in the context of the evolution of the

Financial Stability Forum (FSF), which was formed in the wake of the

Asian fi nancial crisis of the late 1990s. The FSF is an intergovernmental

forum whose purpose is to promote the stability of the international fi nan-

cial system, with an eye towards reducing the type of fi nancial contagion

that marked the Asian crisis. It has fi gured prominently in the current

crisis, having issued a major report in April 2008 that analysed the crisis

and proposed a series of reforms.

The FSF’s legitimacy has suff ered, however, because of the lack of

emerging- country membership. In a summit held in November 2008, the

G- 20 called upon the FSF to expand its membership in this regard. This

was accomplished four months later at the April 2009 G- 20 summit, with

the transformation of the FSF into the Financial Stability Board (FSB),

whose membership includes all G- 20 countries. Thus the global fi nancial

crisis created an opening for emerging economies to push for and achieve

institutional reform that may give them greater voice in the regulation of

international fi nance.

Section 2 of this chapter will identify how the crisis came to aff ect emerg-

ing economies via capital and investment outfl ows, currency depreciation,

stock market crashes, and drop in export and commodities prices. Section



3 will discuss the creation of the FSF, noting that despite the FSF’s initial

visibility its presence was slight as compared with that of the International

Monetary Fund (IMF). Section 4 will address the high- profi le role of

the FSF in the global fi nancial crisis, a role that created an opening for

emerging economies to press for greater representation and voice in that

body. Section 5 will cover the FSF’s transformation into the FSB, which

was driven by the G- 20. As a result of G- 20 summits in November 2008

and April 2009, the FSF became the FSB with a broadened mandate and

emerging country membership. The conclusion assesses the post- crisis role

of emerging economies in the governance of the global fi nancial system.

Globalization and development have situated emerging economies in posi-

tions of infl uence and consequence in the global economy. The expanded

FSB membership is a refl ection of this status. While it is too early to

make defi nitive judgments about the eff ectiveness of the FSB, its post-

crisis workload is meaningful and presents emerging economies with an

opportunity to increase their voice and infl uence in matters relating to the

regulation of international fi nance.

2. THE GLOBAL FINANCIAL CRISIS AND EMERGING ECONOMIES

The plight of emerging economies (and developing countries in general) did

not concern policymakers at the outset of the crisis, given that it originated in

the advanced economies of the United States and Western Europe. As noted

above, fi nancial institutions in emerging economies/developing countries

did not hold the toxic assets that poisoned the advanced economies, and sig-

nifi cant reforms led a good number of observers to believe in the decoupling

theory, which would insulate emerging economies from the damaging winds

of the fi nancial storm that emanated in 2007. However, about a year after the

storm commenced, fi nancial contagion made its mark when trading was sus-

pended in mid- September 2008 on the Russian stock exchanges Micex and

RTS. It was not long before the crisis was truly global in scope. At the time of

writing the IMF has entered into sixteen Stand- by Arrangements and three

Flexible Credit Lines with countries seeking to stem the contagion.

Transmission of fi nancial stress from advanced to emerging economies

was stronger in emerging economies that have tighter fi nancial links with

advanced economies, with bank lending (dominated by Western European

banks) being a key conduit (especially in emerging Europe) (IMF, 2009j:

141). The major stressors have been capital and investment outfl ows,

signifi cant downward pressures on emerging countries’ currencies, stock

market crashes, and declines in exports and commodity prices.



I. Capital and Investment Outfl ows

Foreign capital fl owed into emerging countries at a record pace in the

2000s, with foreign claims quadrupling between 2002 and 2008 to reach

$4.9 trillion (BIS, 2008: 68). Emerging economies have come to depend

on western capital in the form of loans and investment for funding to

build infrastructure, run their governments and export goods. When

the fi nancial crisis spread globally, emerging economies witnessed a sig-

nifi cant drop in capital infl ows as investors withdrew their investments

for safer havens and foreign lending declined signifi cantly. Net private

capital fl ows to emerging economies fell from $929 billion in 2007 to

$466 billion in 2008 and may plummet to just $165 billion in 2009 (IIF,

2009: 1). Declining capital fl ows led to concerns that emerging economies

were at increased risk of defaulting on their debt. The possibility of sov-

ereign defaults led to investment downgrades from credit rating agencies

and increased prices of credit default swaps – which insure government

bonds against default (IMF, 2008a: 45). Even emerging economies that

appeared to have solid fundamentals were threatened by this vicious

cycle.

II. Currency Depreciation

Like the Asian fi nancial crisis, the current crisis put heavy downward

pressure on the currencies of emerging economies as investors fl ed from

the perceived risk of emerging market currencies and into perceived safer

currencies such as the dollar. Many currencies plunged by 30 to 50 per cent

against the dollar or euro, forcing countries to burn through their foreign

exchange reserves to halt the decline. In just one day in October 2008, the

South African rand dropped 9.5 per cent, the Turkish lira fell 6.6 per cent,

the Brazilian real dropped 5.7 per cent and the Polish zloty fell 4.9 per cent

(Slater and McKay, 2008).

Falling currency values are particularly problematic for borrowers who

must repay loans denominated in foreign currencies – a dollar loan to

a Polish borrower becomes more expensive to repay as the zloty falls in

value. Prior to the global fi nancial crisis, foreign currency loans surged in

developing countries because of low interest rates. Borrowers in emerg-

ing economies owe approximately $4.7 trillion in foreign currency debt.

In some eastern European countries, such as Hungary, Romania and

Bulgaria, a full half of all debt is denominated in a foreign currency

(Matlack and Scott, 2008). Plunging currencies in the region forced a

number of countries to resort to the IMF to avoid default.



III. Stock Market Crashes

The global fi nancial crisis caused steep declines in emerging economy stock

markets, with daily double- digit losses not uncommon and many indexes

losing over half of their value. For instance, the MSCI Emerging Market

Index dropped by over 50 per cent in 2008, even including a December

rally. Russia’s index fell 74 per cent in 2008, while China’s dropped 52 per

cent. Even some of the best- performing emerging economy markets, such

as Chile’s, fell by nearly 40 per cent in 2008, while the emerging market

bond index (EMBI) fell 10.9 per cent on the year (IMF, 2009h: 185–93).

While stock markets tumbled, debt spreads rose dramatically. Between

August 2008 and March 2009, credit default swap spreads increased by

more than 200 basis points on average in Africa and the Middle East, and

by more than 500 basis points in Latin American and European emerging

economies. Spreads increased most dramatically in the Ukraine, rising

over 3000 basis points while stock prices declined 62 per cent (due largely

to capital fl ight motivated by fear of currency failure and wholesale stock

market collapse) (IMF, 2009h: 11). The volatility of emerging equity

markets, as measured by the MSCI Emerging Markets Index, peaked at

close to 90 per cent in the last quarter of 2008 but has declined steadily in

2009, dropping to 30 per cent in the spring of 2009 (IMF, 2009h: 185).

Importantly, in the fi rst few months of 2009 emerging economy stock

markets pared their losses and actually fared better than their developed

counterparts. By April 2009 Eastern European emerging markets had

improved 18 per cent from their lowest point in 2008, Asian and Latin

American emerging markets exceeding their lowest 2008 values by nearly

25 per cent (IMF, 2009j: 3). The MSCI Index fell by 11.4 per cent in the fi rst

quarter of 2009, compared with a 21.2 per cent drop in developed countries’

stock markets (Oakley, 2009). This diff erential is probably due to China’s

continuing economic growth, supported by a 4 trillion yuan stimulus package

in late 2008. Moreover, emerging economy stock markets fell further and

faster – and therefore hit bottom faster – than developed country markets

in 2008. And, unlike those of US and Western European banks, emerging

economy bank balance sheets are not heavily tainted with toxic assets.

IV. Drop in Exports and Commodity Prices

The current crisis has also resulted in decreased demand for emerging

economy goods and goods- related service exports (Borchert and Mattoo,

2009: 3; IMF, 2009h: 11). In export- led economies, such as China, exports

have fallen by record amounts as the worldwide scope of the fi nancial crisis

has pushed down economic growth and consumer demand in developed



countries such as the United States (ADB, 2009b: 3–5). Export growth in

East and Southeast Asia fell by 30 per cent in January 2009 from the last

quarter of 2008 and by 10 per cent in South Asia, with exports in electronics,

textiles, toys, and footwear particularly aff ected (ibid). Latin America has

also experienced severe export contraction, though imports have also fallen

to create a balance (Panitchpakdi, 2009). India witnessed one of its major

exports – textiles – plummet 25 per cent in 2008 because of lower demand

in Western Europe and the United States (Jagota and Gangopadhyay,

2008). Brazil and China, however, have been aff ected more drastically than

countries like India because their exports to the United States are primarily

goods and goods- related services, not services like information technology

that have been less aff ected by the crisis (Borchert and Mattoo, 2009: 3).

Throughout the developing world, vertical specialisation in trade con-

tributed to a boom in the 1990s, but vertical specialisation has magnifi ed

the impact of the crisis on these countries, particularly in Asia and Eastern

Europe, as the interconnectedness of suppliers and manufacturers at

diff erent levels of the trade process causes a downward spiral when one

participant fails (Pitigala, 2009: 4–5; Tanaka, 2009). Restrictions on credit

and trade fi nance are also contributing to the decline in exports, as are vol-

atile exchange rates that make trade unpredictable (World Bank, 2009b:

37). Some of the mitigating factors that allowed for strong exports despite

gradually declining US demand – shifting trade patterns, for example,

as in the shift in India’s exports from the United States to China in the

2004–07 period, and high commodity prices, as in Latin America – are no

longer present in 2009, which puts a strain on emerging economies (World

Bank, 2009b: 37–8). In terms of growth, India and China are expected to

be most aff ected by slowed growth in OECD countries through decreased

demand for exports (ADB, 2009a: 107).

Much like the decreasing demand for exports, falling commodity prices

during the crisis have aff ected those countries dependent on exports of

primary products. Nearly all commodity prices began to decline dramati-

cally in July 2008 (IMF, 2009i). The fall in the price of oil has been espe-

cially dramatic, from record highs of about $150 a barrel in July 2008 to

about $40 a barrel in January 2009 (Lipsky, 2009). Countries with large oil

sectors, such as Brazil, rely on minimum oil prices below which explora-

tion and future oilfi eld development are not profi table. Low commodity

prices have especially threatened Russia, where oil and natural gas make

up two- thirds of all export earnings (Bank of Russia, 2009). Falling com-

modity prices also hurt food exporters – exports are expected to decline,

for example, by 32 per cent in Vietnam, 25 per cent in Indonesia, 18 per

cent in Thailand and 13 per cent in Malaysia in 2009 (ADB, 2009b: 3).

Although lower energy costs and staple food prices ease the burden on



citizens of poor countries, many emerging economies whose economies

rely on the production of commodities will experience slower growth and

have diffi culty paying debts incurred when commodity prices were higher

(ADB, 2009b: 3–5; Ghosh et al., 2009: 20).

V. Hopeful But Guarded Signs of Recovery

Although emerging economies face signifi cant economic and fi nancial

challenges as a result of the global crisis, there are indications of abate-

ment. In September 2009, the IMF predicted that the global economy

would expand at slightly less than 3 per cent in 2010, an increase from its

July 2009 estimate of 2.5 per cent. Thanks in part to improved commod-

ity prices, economic growth is expected to be positive in most emerging

economies, with China’s and India’s 2009 GDP expected to grow 6–8 per

cent and 5.8 per cent respectively.

As to emerging market assets, portfolio investment infl ows have

improved. Equities markets have witnessed a signifi cant rebound of 30 to

60 per cent from the end of February 2009 to July 2009. Emerging Markets

Bond Index Global sovereign spreads have dropped by more than half

since October 2008. Still, emerging economies are not completely out of the

woods. They continue to face a drop in foreign investment. Countries with

pegged exchange rates will continue to experience signifi cant constrictions

on monetary policy, given downward pressures on their currency. And

they will remain dependent on global growth and cross- border lending,

particularly with respect to Emerging Europe and the Commonwealth of

Independent States (IMF, 2009f: 3–4).

Moreover, the crisis has had a devastating impact on the poor in the

developing world. Analysts expect the number of chronically hungry

people to rise to over 1 billion in 2009, reversing earlier progress in the

global fi ght against malnutrition. Because of the global recession, an addi-

tional 55 to 90 million people will suff er from extreme poverty in 2009. The

crisis has also seriously compromised eff orts to combat HIV/AIDS, mater-

nal and infant mortality, and malaria (World Bank, 2009c: 3, 7, 14).

3. THE FINANCIAL STABILITY FORUM

Prior to the spread of the crisis to emerging and developing economies, an

entity called the Financial Stability Forum was urgently engaged in diagnos-

ing the complex causes of the crisis and proposing coordinated regulatory

eff orts to resolve it. Before the crisis, the FSF laboured in the shadows of the

IMF. Like the IMF, the FSF was dominated by developed countries.



The FSF was created in 1999 to address vulnerabilities in the inter-

national fi nancial system, identify and oversee action needed to address

these vulnerabilities, and improve cooperation and information exchange

among authorities responsible for fi nancial stability. The FSF’s mandate

and its organisational structure grew out of a report commissioned by the

G- 7 in 1998 and written by Bundesbank President Dr Hans Tietmeyer.

Tietmeyer presented his report to the G- 7 fi nance ministers and central

bank governors in February of 1999 and the FSF convened for the fi rst

time in April 1999 under Chairman Andrew Crockett.

The initial members of the FSF consisted of the fi nance minister, central

bank governor and a supervisory authority from each of the G- 7 countries,

as well as representatives from the International Monetary Fund (IMF),

World Bank, Bank for International Settlements (BIS), Organisation for

Economic Co- operation and Development (OECD), Basel Committee

on Banking Supervision (BCBS), International Accounting Standards

Board (IASB), International Association of Insurance Supervisors

(IAIS), International Organization of Securities Commissions (IOSCO),

Committee on Payment and Settlements Systems (CPSS) and Committee

on the Global Financial System (CGFS). The European Central Bank and

additional national members were added after its creation – Australia,

Hong Kong, the Netherlands and Switzerland.

A persistent criticism of the FSF was that it did not include any devel-

oping or emerging economies. Chairman Crockett’s explanation for this

lack of representation was that the FSF could be more eff ective if it was

‘homogenous’ (Liberi, 2003: 573). The representatives met twice yearly

or as needed in a plenary session, as well as convening in regional meet-

ings and working groups. There were three initial working groups, focus-

ing on Highly- Leveraged Institutions, Off shore Financial Centres and

Capital Flows, along with two additional groups, the Implementation

Task Force and the Deposit Insurance Study Group. Though additional

participants from developing and developed countries were invited to

join in the work of the additional groups, these were not considered

formal working groups and these participants were not members of the

FSF.

The FSF was initially convened as a response to failings in the interna-

tional fi nancial regulatory system, which consists of codes and standards

promulgated by various standard setting bodies and voluntarily adopted

by nation states. In the wake of the fi nancial crises of the 1990s, there was

a push to create a New International Financial Architecture that would

better address problems as they arose and better coordinate fi nancial

supervision and regulation on an international scale. The FSF was part

of this push, with the particular goal of promoting the harmonisation of



standards among international fi nancial organisations and institutions

(Walker, 2001a: 130–31).

The FSF’s work prior to the current crisis was underwhelming, despite

the existence of an Implementation Task Force. The most ambitious

project was the adoption of a Compendium of Standards, intended to har-

monise and make the many sets of standards published by standard setting

bodies more workable. The Compendium comprised 64 standards that

sought to harmonise the work of the FSF’s institutional members. Because

the FSF recognised that implementing so many standards would be an

arduous task for most countries, the FSF fl agged ‘Twelve Key Standards’

for priority in implementation, such as the IMF’s Code of Good Practices

on Fiscal Transparency, the IASB’s International Accounting Standards,

and IOSCO’s Objectives and Principles of Securities Regulation. The

standards take a sectoral (for example, banking) as well as a functional

(for example, regulation and supervision) approach, and diff er between

principles (such as the Basel Committee’s Core Principles for Eff ective

Banking Supervision), practices (such as the Basel Committee’s Sound

Practices for Loan Accounting) and methodologies or guidelines (such

as implementation guidance) (Walker, 2001a: 135–54; Yokoi- Arai, 2001:

1636–7; Weber and Arner, 2007: 412–17).

The three working groups have also published reports in more limited

areas, but diffi culty coming to agreement on tough issues means that they

are similarly toothless. Reports include recommendations that are repeti-

tive of others’ work, basic frameworks that need elaboration on the details,

and entreaties for the various players to cooperate. They also tend to point

to substantial future work that needs to be done, positioning the FSF as a

body that has potential rather than one that is actually achieving solutions

to the problems it identifi es. The Implementation Task Force has been

somewhat more successful in focusing on implementation strategies for the

12 key standards in the Compendium, laying out how institutions such as

the IMF can help put the standards into practice (Walker, 2001b: 175–8).

In sum, despite the FSF’s visibility at its inception within the context of

the New International Financial Architecture, its work thereafter did not

fi gure prominently in international fi nance, and its presence on the global

fi nancial stage was slight compared to the IMF.

4. THE FSF’s ROLE IN THE GLOBAL FINANCIAL CRISIS

The FSF’s obscure existence changed in the spring of 2008, when it issued

a high- profi le report on the crisis. The report brought the FSF out of the



shadows and at the same time made it a very visible target of reform by

emerging economies seeking a greater presence and voice in that body.

The deliberations that led to the report commenced in the autumn of

2007.

I. The FSF’s September 2007 Meeting and the Working Group’s

Preliminary Report

The FSF met in September 2007 in New York to discuss ‘the implications

for fi nancial stability of recent turbulence in global fi nancial markets and

what might need to be done going forward to strengthen fi nancial system

stability and resilience’ (FSF, 2007). It was at that meeting that they

formed the Working Group on Market and Institutional Resilience, at the

request of the G- 7 treasury deputies, to analyse the underlying causes of

the crisis and to make proposals to enhance market stability and resilience.

The Group comprised representatives of the BCBS, IOSCO, IAIS, Joint

Forum, IASB, CPSS, CGFS, IMF and BIS, as well as national regulators

in key fi nancial centres and private sector market participants.

In October 2007, the Working Group provided an outline of their work

plan in the form of a Preliminary Report to the G- 7 Finance Ministers

and Central Bank Governors. The Report noted that since June 2007

the global fi nancial markets were adversely aff ected by a reduction in

risk- taking, risk repricing, and a liquidity squeeze. It identifi ed the US

subprime mortgage market and related structured products as the trig-

gers of the crisis that was aff ecting a wide range of markets, including

the broader market for structured credit products and the leveraged loan

markets, as well as the commercial paper and interbank funding markets.

The crisis was being spread by, among other things, rating downgrades of

mortgage- backed securities, a lack of confi dence in ratings and valuations

of other structured credit, and the drop in funding for many asset- backed

commercial paper conduits.

Although market participants had begun to take measures to rebuild

confi dence in the structured fi nance market, the report stated that there

were a number of weaknesses in the fi nancial markets, some of which were

apparent beforehand, that required the attention of national and interna-

tional fi nancial policymakers. Accordingly, the Working Group agreed

that it would provide an analysis of the recent events and recommend

actions needed to enhance market discipline and institutional resilience.

In so doing, it would focus on risk- management practices; valuation, risk

disclosure and accounting; the role of credit rating agencies; and principles

of prudential oversight (FSF Working Group, 2007: 3). The Group also

took upon itself an examination of issues relating to regulators’ ability to



coordinate their reactions to market turbulence on a national and inter-

national level.

II. The FSF’s Interim Report

In February 2008, the Working Group issued its Interim Report to the G- 7

Finance Ministers and Central Bank Governors. The Report reviewed the

prevailing conditions and adjustments in the fi nancial system. Noting that

the adjustment period was likely to be prolonged and diffi cult, the Interim

Report recommended a series of short- term actions including: (i) realistic

asset pricing, market liquidity and credit intermediation; (ii) further work to

provide confi dence to markets that valuation practices and related loss esti-

mates are adequate; (iii) ensuring that supervisors continue to work closely

with fi nancial institutions to assure adequate levels of capital and liquidity;

and (iv) ensuring that central banks continue to respond eff ectively and in

a coordinated fashion to developments. The Interim Report also identifi ed,

preliminarily, the now well- known factors that contributed to the credit

crisis, ranging from fraudulent practices in the US subprime mortgage

sector to poor disclosure by fi nancial fi rms of risks associated with their on-

and off - balance- sheet exposures (FSF Working Group, 2008: 3–5).

III. The FSF’s April 2008 Report

On 11 April 2008, the FSF submitted its report to the G- 7 (FSF, 2008a).

The Report, which received global press coverage, proposed ‘concrete

actions in . . . fi ve areas: (1) strengthened prudential oversight of capital,

liquidity and risk management; (2) enhancing transparency and valua-

tion; (3) changes in the role and uses of credit ratings; (4) strengthening

the authorities’ responsiveness to risks; and (5) robust arrangements for

dealing with stress in the fi nancial system’ (ibid: 2).

The Report set forth a number of recommendations with respect to the

fi ve areas. For instance, as to strengthened prudential oversight of capital

management – a key aspect of the crisis – it recommended: (i) raising Basel

II capital requirements for certain complex structured credit products; (ii)

introducing additional capital charges for default and event risk in the

trading books of banks and securities fi rms; and (iii) strengthening the

capital treatment of liquidity facilities to off - balance- sheet conduits (ibid:

12–21). As to enhancing transparency and valuation, the Report strongly

encouraged fi nancial institutions to make robust risk disclosures using

the leading disclosure practices set forth in the Report and called upon

standard setters to improve and converge fi nancial reporting standards for

off - balance- sheet vehicles (ibid: 22–31).



With respect to the role and use of credit ratings, the Report recom-

mended that credit rating agencies should (i) implement the revised

IOSCO Code of Conduct Fundamentals for Credit Rating Agencies to

manage confl icts of interest in rating structured products and improve

the quality of the rating process and (ii) diff erentiate ratings on structured

credit products from those on bonds and expand the information they

provide (ibid: 32–9). As to strengthening the authorities’ responsiveness

to risks, the Report called for a college of supervisors to be put in place by

the end of 2008 for each of the largest global fi nancial institutions (ibid:

40–44). And regarding robust arrangements for dealing with stress in the

fi nancial system, the Report called upon central banks to enhance their

operational frameworks and strengthen their cooperation for dealing with

stress (ibid: 45–52).

IV. Follow- up Reports

In October 2008, the FSF issued a follow- up report (October Report)

which stated that a substantial amount of work was underway to imple-

ment the recommendations of the FSF’s April 2008 Report. Still, in view

of market developments, implementation of certain recommendations had

to be accelerated, including putting in place central counterparty clearing

for over- the- counter (OTC) credit derivatives and harmonising guidance

on valuation of instruments in inactive markets. The October Report also

stated that the FSF would address additional issues, such as addressing

the international interaction and consistency of emergency arrangements

and responses being put in place to address the fi nancial crisis, mitigating

sources of pro- cyclicality in the fi nancial system, and reassessing the scope

of fi nancial regulation, with a special emphasis on unregulated institu-

tions, instruments and markets (FSF, 2008b).

In April 2009, the FSF (2009b) issued another update to coincide with

the G- 20’s London Summit. The April 2009 Report noted that extensive

progress had been made in the implementation of the recommendations

set forth in the FSF’s April 2008 Report. For instance, banking supervi-

sors had published proposals for improving risk coverage under Basel II,

especially with regard to credit- related risks in the trading book. They

had also published revised capital charges for liquidity commitments to

off - balance- sheet entities and for the re- securitised instruments. Central

counterparty clearing for OTC credit derivatives had been launched in

the United States and in Europe. Consistent guidance had been issued

by the IASB and the US Financial Accounting Standards Board for fair

valuation when markets are illiquid. The 2008 revisions of IOSCO’s Code

of Conduct Fundamentals for Credit Rating Agencies (CRAs) had been



substantially implemented by several CRAs including the three largest

agencies. And supervisory colleges had been established for most of the

global fi nancial institutions (FSF, 2009b).

5. TRANSFORMATION OF THE FSF

With the spread of the crisis to emerging economies and the increased

prominence of the FSF came renewed calls to broaden the FSF’s mem-

bership. A key voice in this regard was the G- 20, a forum created in the

wake of the Asian fi nancial crisis in which fi nance ministers and central

bank governors from systemically important industrialised and develop-

ing countries discuss issues relating to the global economy.1 In November

2008 and April 2009, the G- 20 held summits in Washington DC and

London, respectively, to address the global crisis. The summits resulted

in the transformation of the FSF into a Board and a broadening of policy

deliberation to include emerging and developing countries.

I. The November Summit

On 15 November 2008 leaders of the G- 20 met in Washington DC to

address what had become the worst global fi nancial and economic crisis

since the Great Depression. One of the primary purposes of the summit,

dubbed by some as ‘Bretton Woods II’, was to begin discussions on reforms

of the global fi nancial architecture that would prevent the occurrence of

another globally devastating crisis. There was some initial anticipation that

Bretton Woods II would produce a framework of fundamental reforms of

the global fi nancial system created in July 1944 during a three- week con-

ference in Bretton Woods, New Hampshire. This was, of course, highly

unrealistic, especially since George Bush was in the twilight of his presi-

dency – President- elect Obama did not attend the summit, sending instead

former Secretary of State Madeleine Albright and former Representative

Jim Leach on his behalf to meet informally with G- 20 leaders. Therefore,

apart from declaring a series of ‘immediate steps’ – such as the continua-

tion of vigorous eff orts to stabilise the fi nancial system, to use fi scal meas-

ures as appropriate to stimulate domestic demand, and to help emerging

1 The G- 20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States. The European Union is the twentieth member.



and developing economies gain access to fi nance – the G- 20 leaders during

the weekend summit could only agree upon a set of principles that would

guide future reform of the fi nancial markets.

Recognising that international cooperation among national regulators

– who form the fi rst line of defence – and strengthening of international

standards are necessary in today’s global fi nancial markets, the G- 20

leaders set forth fi ve principles that would guide policy implementation:

(i) strengthening transparency and accountability; (ii) enhancing sound

regulation; (iii) promoting integrity in fi nancial markets; (iv) reinforcing

international cooperation; and (v) reforming international fi nancial insti-

tutions. As to the fi fth principle, the summit’s Declaration stated:

We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately refl ect changing economic weights in the world economy in order to increase their legitimacy and eff ectiveness. In this respect, emerging and developing economies, including the poorest countries, should have greater voice and representation. The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their mem-bership. The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stresses, and act swiftly to play a key role in crisis response. (G- 20, 2008: para. 9)

The Action Plan attached to the Declaration set forth measures to be

implemented by 31 March 2009 as well as in the medium term. With

respect to the fi fth principle the Action Plan, among other things, called

for expanded FSF membership and greater collaboration between the

FSF and the IMF, which would include conducting ‘early warning exer-

cises’, by the March deadline.

The call for institutional reform is not new, of course. In the 1970s,

developing countries unsuccessfully demanded more power and infl u-

ence within the IMF under the rubric of the New International Economic

Order. Upon the 50th anniversary of the Bretton Woods institutions in

1994, non- governmental organisations (NGOs) throughout the world

brought forward wide- ranging critiques of the IMF and the World Bank

vis- à- vis developing countries. The NGO movement led to ongoing debate

over governance issues at the BWIs, which resulted in a meagre adjust-

ment recently in voting power within the IMF – an adjustment that left the

United States and Eurozone countries fi rmly in power.

Still, the leaders of the November G- 20 summit pushed for further

reform within the IMF as well as the FSF. Moreover, the reformed Fund

and Forum would work together to identify future crises in their incipi-

ence – early warning exercises. The collaboration anticipates that the IMF



will assess macro- fi nancial risks and systemic vulnerabilities, while the

FSF will assess fi nancial system vulnerabilities, drawing on the analyses

of its member bodies including the IMF. Where appropriate, the IMF and

the FSF may provide joint risk assessments and mitigation reports (Kahn

and Draghi, 2008).

II. London Summit

Given the November summit’s 31 March 2009 deadline for immedi-

ate actions, attention quickly shifted after the Washington DC summit

to London, the host for the next summit on 2 April 2009. As with the

November summit, high hopes accompanied the lead- up to the London

summit, with UK Prime Minister Gordon Brown claiming the summit

would launch a ‘grand bargain’ among countries that would help end

the global recession and set in motion reforms that would prevent future

crises. However, after a reality check, particularly with respect to diff er-

ences between the United States and Europe over additional stimulus

measures, expectations were lowered.

Nevertheless the London summit concluded with great fanfare – with a

number of ‘announceables’, even though a good number of the measures

had been agreed upon before the summit or were left to be agreed upon.

Through a creative use of numbers, the summit leaders declared that, on

top of a fi scal stimulus of $5 trillion, they had agreed upon ‘an additional

$1.1 trillion programme of support to restore credit, growth and jobs in

the world economy’ (G- 20, 2009c). Recognising that global recovery must

include emerging and developing economies – the engines of recent world

growth – the leaders agreed: (i) to triple the resources available to the

IMF to $750 billion; (ii) to support a new SDR allocation of $250 billion;

(iii) to support at least $100 billion of additional lending by the multilat-

eral development banks; (iv) to ensure $250 billion of support for trade

fi nance; and (v) to use additional resources from agreed IMF gold sales for

concessional fi nance for the poorest countries.

The leaders also declared that they were ‘determined’ to reform interna-

tional fi nancial institutions such as the IMF to ensure that emerging and

developing economies have greater voice and representation. The declara-

tion, however, lacked any newly agreed- upon reforms. By contrast, with

respect to strengthening fi nancial supervision and regulation, the leaders

agreed to establish a new Financial Stability Board as a successor to the

FSF.

The purpose of the change was to place the FSF ‘on stronger institu-

tional ground’ so that it can more eff ectively assist national authorities,

standard setting bodies (SSBs) and international fi nancial institutions in



addressing vulnerabilities and implementing strong regulatory, supervi-

sory and other policies in the interest of fi nancial stability.

Organisationally, the FSB consists of a Chairperson, a Steering

Committee, the Plenary with member countries, SSBs and international

fi nancial institutions, and a Secretariat. The Chair oversees the Steering

Committee, the Plenary and an enlarged Secretariat with a full- time

Secretary General. The FSB Plenary is the decision- making organ of

the FSB. The Steering Committee is an executive organ that provides

operational guidance between plenary meetings (twice per year) to carry

forward the directions of the FSB.

Plenary membership, which will be reviewed periodically, includes the

current FSF members plus the rest of the G- 20, Spain and the European

Commission. FSB members are obligated to pursue the ‘maintenance of

fi nancial stability, maintain the openness and transparency of the fi nancial

sector, implement international fi nancial standards (including the 12 key

International Standard and Codes), and agree to undergo periodic peer

reviews, using among other evidence IMF/World Bank Public Financial

Sector Assessment Program reports’ (FSF, 2009a).

In addition to the FSF’s current mandate – to assess vulnerabilities

aff ecting the fi nancial system, identify and oversee action needed to

address them, and promote coordination and information exchange

among authorities responsible for fi nancial stability – the FSB will:

● monitor and advise on market developments and their implications for regulatory policy;

● advise on and monitor best practice in meeting regulatory standards; ● undertake joint strategic reviews of the policy development work of the

international SSBs to ensure their work is timely, coordinated, focused on priorities and addressing gaps;

● set guidelines for and support the establishment of supervisory colleges; ● manage contingency planning for cross- border crisis management, par-

ticularly with respect to systemically important fi rms; and ● collaborate with the IMF to conduct Early Warning Exercises.

To promote the broader mandate, the FSB Plenary will establish

the following Standing Committees: (i) Vulnerabilities Assessment, (ii)

Supervisory and Regulatory Co- operation (including for supervisory col-

leges and cross- border crisis management), and (iii) Implementation of

Standards and Codes. It may establish other Standing Committees and

ad hoc working groups, which can include non- FSB member countries,

as necessary.

In an eff ort to promote its institutional legitimacy, the FSB’s mandate

includes increased regional outreach activities to broaden the circle of



countries engaged in work to promote international fi nancial stability.

Moreover, the FSB will engage in stronger public relations outreach

to raise the visibility of its work and role in the international fi nancial

system.

Reconstituted in this way the FSB will play an integral role in strength-

ening the global fi nancial system in the context of international coopera-

tion (such as developing a framework for cross- border bank resolution

arrangements), prudential regulation (such as working with account-

ing standard setters to implement recommendations to mitigate pro-

cyclicality) and broadening the scope of regulation (such as developing

eff ective oversight of hedge funds) (G- 20, 2009b).

6. CONCLUSION

The global fi nancial crisis has demonstrated not only the continued

dependency of emerging and developing economies on the developed

countries but also the critical importance of emerging economies to

global economic growth and future prosperity. The world that existed

at the inception of the BWIs has radically changed: countries that were

tangential economically and fi nancially in the mid- 1940s can no longer be

ignored. Consequently it is a matter of when, not if, emerging (and devel-

oping) economies will gain greater voice and representation in the govern-

ance of international fi nancial institutions.

The transformation of the FSF into the FSB with full G- 20 member-

ship may well constitute an important marker in this regard. Had the FSF

remained in obscurity in the current crisis, it is unlikely that broadening its

membership would have become a major issue in governance. But crises

present policymakers with opportunities as well as challenges.

Time will tell whether the FSB will give true voice to emerging econo-

mies. Much will depend on whether the FSB is eff ective. The expanded

membership, while a plus for emerging economies, may compromise the

organisation’s effi ciency. Moreover, it lacks enforcement powers – it must

seek to improve the global fi nancial system through moral suasion and

monitoring, the tools of soft law.

However, this does not mean that emerging economies have won a

meaningless battle. The FSB’s post- crisis workload is not insignifi cant. For

instance, the G- 20 has charged the FSB to develop proposals for develop-

ing a framework on corporate governance and compensation practices.

The FSB is also charged with ensuring eff ective operation of supervisory

colleges of cross- border fi nancial institutions. And it will have to develop

an eff ective relationship with the IMF. The two institutions will collabo-



rate on government exit strategies as the crisis recedes. Most importantly,

the IMF and the FSB must fulfi l their roles in the Early Warning Exercises

in order to detect vulnerabilities that may lead to another systemically

threatening crisis.

Ultimately, the FSB’s fate will depend on the viability of the G- 20 and

the commitment of emerging economies to become partners with devel-

oped economies in a multipolar global fi nancial system.


112

6. The new disciplinary framework: conditionality, new aid architecture and global economic governance*

Celine Tan**

1. INTRODUCTION

‘Country ownership’, ‘partnership’ and ‘participation’ are key pillars of

what has become increasingly referred to as the ‘new aid architecture’.

This prioritisation of ‘country- owned’ development strategies in the nego-

tiations for development fi nancing – including engendering a broad- based

participatory policymaking process – signifi es part of a wider concep-

tual shift in development policy and practice that has been taking place

since the late 1990s. Catalysed primarily by the inception of the Poverty

Reduction Strategy Paper (PRSP) framework, introduced in 1999 as

preconditions for debt relief under the enhanced Heavily Indebted Poor

Countries (HIPC) initiative and for concessional fi nancing from the World

Bank and the International Monetary Fund (IMF), this new blueprint for

offi cial development assistance (ODA) claims to move away from the pre-

scriptive legacy of conditionality which has traditionally characterised the

relationship between parties to such fi nancing.

In this respect, the principles underpinning the new aid architecture1

are regarded as the opposite of the doctrine of ‘conditionality’, operating

as a conceptually and operationally divergent framework for regulat-

* This chapter is drawn from the author’s book, Governance through Development: Poverty Reduction Strategies, International Law and the Disciplining of Third World States (2010), London: Routledge.

** Lecturer in Law, Birmingham Law School, University of Birmingham, Birmingham, UK.

1 The term ‘aid architecture’ is conventionally understood as ‘the set of rules and institutions governing aid fl ows to developing countries’ (IDA, 2007: para. 3). The terms ‘aid’, ‘offi cial development assistance’ (ODA) and ‘development fi nanc-ing’ will be used interchangeably in this chapter to refer to grants or concessional loans to developing countries by multilateral or bilateral donors.


The new disciplinary framework 113

ing relationships between the disbursers and recipients of development

fi nancing. Specifi cally, this new framework is perceived of as a depar-

ture from the practice of structural adjustment fi nancing in which the

behaviour of states – with particular reference to national policymaking

and institution building – is governed by the fi nancing terms set by the

fi nanciers. Under the new aid architecture, the locus of decision- making

is ostensibly transferred back to the countries in receipt of development

fi nancing through a series of changes in the content and modalities of aid

and aid governance.

This chapter examines the impact of this new regime of aid governance

in the context of the evolution of conditionality as a regulatory instru-

ment. It contends that changes to the policies and modalities of develop-

ment fi nancing in recent years have had the eff ect of entrenching rather

than retiring the use of conditionality in development fi nancing. This, in

turn, impacts signifi cantly on recipient countries’ engagement with and

obligations under international law. The emergence of conditionality as a

default mechanism for regulating aid relationships has led to the construc-

tion of a highly discretionary regime of global lawmaking, enabling the

progressive embedding of policy reforms outside conventional channels of

rulemaking. The conditionality- based aid framework entails the intimate

and extensive supervision of state policy and corresponding regulatory

reform by institutional bureaucracies with limited provisions for external

oversight of these arrangements.

The chapter argues that the new architecture of aid has extended and

refi ned this regulatory role of conditionality. Instead of departing from

the policies of the past, the new modalities of conditionality have been

altered to serve as a deeper and more intrusive form of disciplinary control

over the developing countries subject to them. Aside from reinforcing

the asymmetrical nature of international economic law, this new regime

exacerbates the fracture of domestic legal and constitutional frameworks

in developing countries in the wake of globalization.

The rest of the chapter will be organised as follows. Section 2 will

examine the nature of conditionality and locate its utility within the

context of offi cial development fi nancing. Section 3 will chart the emer-

gence of conditionality as a mechanism of economic governance and,

within this context, map the changes to the regulatory framework of aid

since the late 1990s. The next section will examine how the new archi-

tecture of aid has changed the nature and scope of conditionality and its

impact on developing countries. Finally, by way of conclusion, Section

5 will consider the eff ect of this new aid regime on developing countries’

engagement with the global economy and the international economic law

which sustains it.



2. DECONSTRUCTING CONDITIONALITY

I. Conditionality as a Quasi- Legal Instrument

Conditionality represents the regulatory aspect of the relationship between

parties involved in international sovereign fi nancing, most notably between

the World Bank and the IMF and their client states. While the doctrine of

conditionality shares similar characteristics with other contractual instru-

ments, the nature and practical application of conditionality is largely

peculiar to the nature of the relationship it regulates and to the type of

fi nancing that is being regulated. The disciplinary force of conditionality

does not derive exclusively (and often not primarily) from standard con-

tractual sanctions but from the wider economic and geopolitical impact

of non- compliance.

Conditionality refers to conditions which regulate the aspect of the

economic programme or specifi c institutional or structural reforms

that is being fi nanced by the fi nancing agency or institution, at either

the national or sectoral level. Such programme or policy condition-

alities are not specifi ed in the legal agreements for fi nancing but are,

instead, described in a separate document incorporated by reference in

such agreements (see Tan, 2006: 14, Box 2; World Bank, 2005d: paras

35–8).2

Like other obligations under fi nancial contracts, the principle of con-

ditionality contains a fi duciary component, requiring the performance

of due diligence on the part of the fi nancing institutions to minimise the

risk of a debt default or a departure from agreed fi nancing objectives.

However, the scope and scale of this exercise under the doctrine of con-

ditionality is far greater and much more intrusive than that undertaken

in conventional contractual relationships. In particular, the content of

conditionality extends beyond supervision of the fi nancial aspects of the

loan or grant agreement and is instead focused primarily on changes

2 For example, the programme of reform which forms the basis of a World Bank’s development policy loan (formerly known as a structural adjustment loan) is contained in a Letter of Development Policy (LDP) submitted by the borrower to the Bank’s Executive Board (World Bank, 2005d: para. 37; 2001a: para. 16). Meanwhile, adjustment programmes attached to the IMF’s fi nancing arrange-ments – whether under a Stand- By Arrangement (SBA), an Extended Fund Facility (EFF) or under a concessional facility such as the Poverty Reduction and Growth Facility (PRGF) – are detailed in a Letter of Intent and/or a Memorandum of Economic and Financial Policy (MEFP) similarly submitted to the IMF’s Executive Board (IMF, 2002: para. 10).



in government policy and institutional reform that is the subject of the

agreement.3

This is refl ective not only of the disproportionate gap in bargaining

power between the donor/lender and the client/borrower but also of the

disciplinary objective of development fi nancing as a whole: to compel

the client state to undertake domestic reforms in pursuit of objectives

– social, economic or political – of the fi nancier state or fi nancing institu-

tion. The World Bank itself acknowledges conditionality’s disciplinary

force, admitting that conditionality ‘is involved whenever the donor has

the right to halt the fl ow of resources if the recipient country does not

meet certain conditions’ (World Bank, 2005c: para. 4). This link between

the disbursement of funds and ‘the implementation of a desired action

of policy’ (World Bank, 2005f: para. 1) is often the only sanction for

non- compliance given the ambiguous legal nature of conditionality4 (see

below).

Unlike a borrower’s obligation to carry out a specifi c project under

investment or project fi nancing, such as the construction of a school or

highway, a borrower or grant recipient’s commitment to execute the

programme of reform under a policy- based loan or stabilisation arrange-

ment is generally not regarded as contractually enforceable. From a legal

perspective, a borrower or aid recipient state does not usually breach a

legal obligation should it fail to comply with policy conditionalities under

an offi cial fi nancing agreement. Instead, the direct primary sanction for a

breach of conditionality is the non- disbursement of funds under the agree-

ment.

Failure to comply with programme conditionalities can also have

other fi nancial repercussions for the defaulting state. Chiefl y, failure to

3 ‘Conditionality’ must therefore be distinguished from ‘conditions of fi nanc-ing’ which comprise the terms of the legal agreement between the fi nancing entity and the client state, including fi nancial conditions pertaining to the repayment period, loan charges, interest rate, procedures for loan withdrawals and policies on cancellation and dispute settlement provisions (Agarwal, 2000: 1–9; Tan, 2006: 18; World Bank, 2005d: para. 35). In policy- based loans, this will also include the covenant referring to the programme of policy reform or economic stabilisation and an undertaking by the client state that it shall implement the programme in exchange for fi nancing (Tan, 2006: 14, Box 2).

4 Although conditionality may sometimes be used in what is normally termed ‘investment’ or ‘project’ fi nancing – aimed at specifi c infrastructure or other ring- fenced expenditures – this particular instrument is most commonly used in fi nanc-ing policy changes, usually via a programme of structural or sectoral policy and institutional reform. The chapter will use the term ‘conditionality’ in the context of the latter type of fi nancing.



implement a programme of reform successfully, particularly in the case

of an IMF programme, can lead to the suspension of other fi nancing

from other fi nancial institutions or donors, delay offi cial debt relief and/

or send adverse signals to private fi nancial markets and/or other offi cial

fi nanciers generally. Debt relief under the enhanced HIPC initiative, for

example, is contingent on the debtor country establishing ‘a track record

of reform and sound policies through IMF- and IDA- supported pro-

grams’ (IMF, 2009k). Countries’ track records with the IMF are taken

into account for debt reschedulings under Paris Club arrangements (Paris

Club, 2008: Annex 3; Vilanova and Martin, 2001: 2) as well as by interna-

tional credit rating agencies in their assessments of countries’ investment

climates, thereby aff ecting countries’ future fi nancial solvency and access

to credit.

Moreover, as discussed further below, the proliferation of joint fi nanc-

ing frameworks, such as multi- donor budget support arrangements, has

increased the interdependence of programme conditionalities by linking

disbursements from diff erent offi cial fi nanciers to the compliance of a

central programme of reform (administered usually by the World Bank

or the IMF) or, more onerously, to successful implementation of multi-

ple programmes administered separately by respective institutions. This

means failure to comply with conditionalities established by one donor or

fi nancier may aff ect disbursements from other fi nancial sources.

II. Conditionality and Offi cial Development Assistance

Conditionality forms a major part of offi cial development assistance

(ODA). It is the combination of fi duciary, political and policy elements

which makes conditionality particularly suited to regulating the rela-

tionship between the fi nanciers and the clients in receipt of development

fi nance. The objective of policy and institutional reform is central to

conceptualising the role of conditionality in offi cial development fi nanc-

ing.

Conditionality links the two components of an aid relationship iden-

tifi ed by Degnbol- Martinussen and Engberg- Pedersen: normative and

operational, normative activities broadly referring to infl uence over social,

political and economic organisation and ideology in recipient countries

and operational activities comprising the implementation of aid projects

and programmes, including technical assistance, infrastructural devel-

opment and emergency assistance (Degnbol- Martinussen and Engberg-

Pedersen, 2003: 96). Conditionality polices what the authors term ‘the

interface between normative and operational activities’ (ibid), providing

the framework to ensure that fi nanced projects and programmes in recipi-



ent countries meet the normative objectives of the bilateral or multilateral

donor. It also provides the basis for negotiations between the two parties

to a grant or loan agreement.

The use of conditionality in development fi nancing agreements stems

primarily from the reluctance of international fi nancial institutions

(IFIs), including multilateral development banks (MDBs), and offi cial

aid agencies to apply full contractual force to an agreed programme of

policy and institutional reform. While the fi nancing agreement in itself

is usually legally binding between the two parties – a key exception

being IMF arrangements (see below) – fi nanciers and their clients are

unwilling to establish binding legal commitments for the substantive

content of the programme itself. There are a number of reasons for this

reluctance.

First, the political nature of aid itself renders such relationships unsuited

to standard forms of legal enforcement. In particular, due to the potential

sensitivities over their content, IFIs and donors remain cautious about

impinging on sovereign prerogative by insisting on legal compliance with

policy and institutional reform. The World Bank, for example, is hesitant

to be seen as ‘infl uencing or interfering’ with processes which may involve

‘delicate and sensitive domestic considerations and involve internal deci-

sion making, including parliamentary approval’ (World Bank, 2005d:

para. 39). Attributing legal force to policy and institutional reforms which

have yet to gain domestic legislative (or popular) approval may confl ict

with national constitutional arrangements, making compliance more

onerous for the country and enforcement politically diffi cult for the fi n-

ancier.

Second, while failure to comply with conditionality can result in similar

fi nancial penalties (see discussion above), the fi nancial ramifi cations

of subjecting such fi nancing to the rigour of conventional contractual

enforcement are much more severe. Aside from the loss of other offi cial

fi nancial support and the downgrading of the borrower’s standing in

international fi nancial markets, such a breach of contract could trigger

cross- default provisions in commercial loan agreements which tie loan

compliance with servicing of multilateral debt (see World Bank, ibid). This

is also particularly pertinent given the inherently complex political and

institutional nature of policy reforms, which often makes determination

of breach diffi cult.

Third, with respect to the IMF, access to the institution’s resources is

supervised by a regime which defers, at least notionally, to its original

design as an international credit union as well as its obligation under

Article 1(v) of its Articles of Agreement to assist its members facing fi nan-

cial diffi culties. Hence, drawing on the IMF’s general resources – made



up of members’ contributions according to their quota subscriptions – is

considered an assertion of the right of members to draw on such contrib-

uted funds. While this automaticity has been eroded over the years since

the IMF’s inception and such contributions have been supplemented by

funds from other sources,5 the absence of any ‘language of credit’ (Akyüz,

2004b: 13) or ‘language having a contractual connotation’ (IMF, 2002:

para. 9) in IMF arrangements refl ects this founding ethos. This includes

fi nancial arrangements under the Fund’s concessional lending facilities,

established under trusts and subsidised by a combination of donor contri-

butions and net profi ts of the IMF.6

Finally, IFIs and other donors have also traditionally been reluctant

to subject their aid operations to external justiciability. The World Bank

and the IMF in particular have consistently resisted outside interference

in their decision- making and administrative processes and have repeat-

edly opposed recourse to external adjudication for disputes with member

states. The two institutions have reserved for themselves the right to inter-

pret their own constitutions and by- laws and, while both have agreements

with the United Nations giving them authority to seek advisory opinions

from the International Court of Justice (ICJ) on matters of interpreta-

tion and legal issues arising from their operations, this procedure has

never been utilised (Shihata, 2000b: 222). Bilateral aid operations may

be more accountable but much of the policy design and implementation

of aid programmes would only be subject to scrutiny under domestic

administrative or legislative processes, with little recourse to independent

arbitration.7

Ascribing conventional legal force to policy commitments under a

development fi nancing agreement would thus also impose corresponding

obligations on the part of the fi nanciers which the IFIs and other donors

have been unwilling to undertake. Establishing precise legal criteria both

for defi ning the scope of policy conditionality and for determining com-

5 Notably the General Arrangements to Borrow (GAB) and New Arrangements to Borrow (NAB) which are essentially credit lines established with a number of countries and central banks (see IMF, 2001: 72–6).

6 Although they are technically referred to as ‘loans’, nothing in their trust instruments indicates that such arrangements possess contractual force (see Gold, 1996). Instead, all Fund arrangements are classifi ed as Executive Board decisions in which members are assured of a specifi ed amount of Fund resources under certain circumstances and for a specifi ed period (IMF, 2002: para. 9).

7 The activities of the UK’s Department for International Development (DFID), for example, are overseen by a UK parliamentary committee (see Collinson, 2002: 8) but aid recipient states and/or citizens in aid recipient countries do not have access to this process except by invitation.



pliance with such conditionalities may expose the IFIs and other donor

agencies to legal challenge on more controversial aspects of their activi-

ties. As discussed in the following section, the remit of conditionality has

expanded signifi cantly – in terms of both content and purpose – over the

years and this legal ambiguity has enabled offi cial fi nanciers, notably

the Bretton Woods institutions, to pre- empt potential disputes over

the content and implementation of reform programmes they fi nance. It

also allows the IFIs to circumvent constitutional questions which may

arise from their engagement in policy and institutional reform, includ-

ing potential breaches of the World Bank’s constitutional limitation on

non- project fi nancing8 and prohibition on political interference9 as well

as questions over the IMF’s mandate to engage in long- term development

assistance.

Conditionality has thus served as a useful default instrument for regu-

lating the relationship between parties to offi cial development fi nancing

in light of such concerns. The use of conditionality has enabled IFIs and

other donors to regulate the terms of the fi nancing and the behaviour of

the aid recipient country closely but correspondingly provided suffi cient

fl exibility to negotiate departures from agreed terms. Nonetheless, as

discussed above and as the following sections will demonstrate, the logic

which underpinned the inception of conditionality as a mechanism for reg-

ulating the relationship between the subjects of international development

fi nance – including the fl exibility, deference to the notion of sovereign

autonomy – has evolved over the years to take on a conversely regressive

role, refl ective of the developments in the international political economy

but also, crucially, refl ective of the political objectives of development aid

itself.

8 Article III, Section 4(vii) of the Articles of Agreement of the International Bank for Reconstruction and Development (IBRD) states that ‘Loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specifi c projects of reconstruction or development’ (emphasis added). A similar provision is found in the International Development Association (IDA)’s Articles of Agreement, Article V, Section 1(d). Policy- based loans have usually been justi-fi ed under the ‘exceptional circumstances’ provision although the exception has increasingly become the norm, exceeding a third of the share of Bank lending since 1998 (see World Bank, 2009a: i).

9 Article IV, Section 10 of the IBRD’s Articles of Agreement and Article V, Section 6 of the IDA’s Articles of Agreement both provide that the Bank and its offi cers ‘shall not interfere in the political aff airs of any member; nor shall they be infl uenced in their decisions by the political character of the member or members concerned’.



3. CONDITIONALITY, GLOBAL GOVERNANCE AND THE NEW AID ARCHITECTURE

I. Conditionality as an Instrument of Governance

The progressive entrenchment of conditionality as the primary instrument

regulating the relationship between parties to offi cial development fi nance

agreements has resulted in its emergence as a key mechanism of global eco-

nomic governance. In prescribing a standard template of policy and insti-

tutional reforms – including reforms to trade, fi scal and monetary policies

and establishment of specifi c administrative and budgetary processes – to

recipient countries, the conditionalities which accompany development

fi nancing have had the eff ect of organising, harmonising and enforcing

key regulatory norms across diff erent jurisdictions outside conventional

fora for lawmaking. In this manner, conditionality also serves as what

Braithwaite and Drahos term a ‘mechanism of globalization’ – ‘processes

that increase the extent to which patterns of regulation in one part of

the world are similar, or linked, to patterns of regulation in other parts’

(Braithwaite and Drahos, 2000: 15, 17).

Consequently, conditionality has evolved into a mechanism which not

only governs the terms of fi nancial support between two state entities (the

fi nancier and recipient countries) but also provides a framework for the

universalisation of other regulatory norms beyond those rules necessary

for regulating the aid relationship itself. The purpose of conditionality is

no longer solely about maintaining debtor discipline to protect the fi duci-

ary interests of its fi nanciers. Over the years, the remit of conditionality

has expanded dramatically towards restructuring the policy and institu-

tional framework of aid recipient countries as an end in itself rather than

as a means to an end, such as fi scal stability (in the case of the IMF) or

economic growth and poverty reduction (World Bank and other donors).

The progressive entrenchment of conditionality as a quasi- legal mecha-

nism for governing fi nancial transactions in lieu of formal legal arrange-

ments has also accorded IFIs and other donors signifi cant autonomy (from

constitutional and external oversight) and wide discretionary powers vis-

à- vis the nature of and substance of their fi nancial and policy interactions

with their client states. This has enabled them to extract a wide range of

policy commitments from borrowing or aid recipient countries, including

fairly intrusive reforms to domestic institutions, without attracting legal

or constitutional challenges or subjecting the policy prescriptions to wider

international legal scrutiny. As a result of the ambiguous legal nature of

the policy and institutional reforms prescribed through fi nancing condi-

tionalities, compounded by the associated fi nancial stakes, it is diffi cult for



recipient states to challenge the validity and content of such conditionali-

ties.

The consequence of these developments has been the construction of a

highly discretionary regime of fi nancing, relying on the supervision of client

states by bureaucracies within IFIs and donor institutions with correspond-

ingly few fi xed rules of guidance. At the same time, the uniformity of the

reforms prescribed through fi nancing conditionalities – in areas such as trade

liberalisation, land tenure, intellectual property rights, fi scal and monetary

policy, and investment climates – globalizes the regulatory scope of condi-

tionality. This has meant that domestic structures of law and regulation in

diff erent jurisdictions are increasingly harmonised, not through conven-

tional channels of international norm brokerage – such as through nego-

tiation, consensus and ratifi cation of international treaties – but through

compliance with the terms of fi nancing of a shared donor or creditor. In this

manner, conditionality serves as ‘regulation by appropriation’ or ‘regulation

through credit disbursement’ in which the behaviour of actors is shaped by

the terms of their fi nancing arrangements (Kalderimis, 2004: 105).

The legacy of structural adjustment on countries subject to its discipline

furnishes a key example of the regulatory role played by the conditional-

ity regime in the global economy. Implemented primarily during the debt

crisis of the 1980s and premised on the conceptual framework of economic

neo- liberalism in the 1980s, structural adjustment programmes (SAPs)

used conditionality as a tool for reforming the economic trajectories of

developing countries seeking development assistance from the Bretton

Woods institutions. Under this conceptual approach, economic growth

led by market forces became the new rationale for domestic and interna-

tional economic relations, with the potential for development and poverty

education contingent upon ensuring fi scal and monetary austerity in

developing countries and creating an enabling environment for economic

activity, including trade and fi nancial liberalisation, investment deregula-

tion and the privatisation of public enterprises (SAPRIN, 2004: 1–4).

Conditionalities attached to policy- based lending from the World Bank

and stabilisation programmes from the IMF were therefore aimed at

facilitating the universal adoption of the Washington Consensus model

of economic policymaking. This has led to the now- widespread critique

of SAPs as ‘one- size- fi ts- all’ blueprints or boilerplates for economic plan-

ning in which the same policy and institutional reforms were prescribed

for diff erent countries regardless of diff ering economic circumstances (see

Stiglitz, 2002a: 34, 47), leading to the aforementioned globalization of

regulation across SAP- recipient countries.

At the same time, commitments to these reforms often bypassed local

and national decision- making structures. While sweeping changes were



introduced to domestic policy and institutions, very little consultation took

place nationally (between civil society, the public and the government) and

bilaterally (between the government and the IFIs) prior to the entry into force

of such arrangements. This is compounded by the fact that such conditionali-

ties do not form part of the international fi nancing agreement, which means

that, for the most part, even if such agreements require legislative authorisa-

tion, legislators are not normally familiar with the policy and institutional

reforms that may be necessitated by the fi nancing arrangement. States were

consequently inserted into the international economic order and subjected to

external regulatory authority in a manner that may not necessarily be com-

patible with domestic constitutional or administrative arrangements.

II. The New Face of Conditionality

Towards the end of the 1990s, disillusionment with structural adjustment

programmes as a template for economic development on the part of the

IFI and donor community, intensifi ed by a groundswell of opposition

from global social movements and a cadre of specialist transnational non-

governmental organisations (NGOs), led to the conceptualisation of a new

framework for aid conditionality. Extensive criticism of the Washington

Consensus and its failure to contain the social and economic fallouts asso-

ciated with SAP reforms, coupled with a series of fi nancial crises in the

developing world, led to what Higgott describes as a ‘mood swing’ in

the international political economy from the Washington Consensus to

the ‘post’- Washington Consensus, driven by the recognition ‘that globali-

zation has to be politically legitimized, democratized and socialized if the

gains of the economic liberalization process are not to be lost to its benefi -

ciaries’ (Higgott, 2000: 134).

The politics and processes of conditionality, particularly as it was

administered at the IFIs, were seen as contributing to this crisis of legiti-

macy. The top- down, prescriptive manner in which policy and institutional

reforms were imposed on countries subject to conditionality’s application,

along with the failure of its substantive content to account for and miti-

gate the social and economic dislocations of SAPs, rendered the instru-

ment complicit in a crisis of confi dence in the international economy in

the late 1990s. The imperative to reshape the principles and modalities of

conditionality was therefore crucial to restoring faith in the international

economic order in the post- Washington Consensus period.

At the same time, other bilateral and multilateral donors had begun to

review existing aid modalities in the face of mounting criticism over the effi -

cacy of aid programmes in developing countries (see, for example, DFID,

1997: 37–8; Kayizzi- Mugerwa, 1998). In this respect, the narratives ema-



nating from the ‘aid eff ectiveness’ agenda – academic and policy research in

the 1990s focused on evaluating ‘the role, impact and eff ectiveness’ of ODA

– had a signifi cant infl uence on the reorientation of international develop-

ment policy (Christiansen with Hovland, 2003: 10–11). Although there was

some critique of the instrument’s substantive content, conditionality, as it

was practised by the IFIs and other donors, was primarily perceived to be

problematic from a technical perspective of aid administration.

For the international aid establishment, the questions were less about

the legitimacy of conditionality as a mode of regulation or the appropriate-

ness of the reforms instituted through conditionality than about improv-

ing the enforcement and implementation of such reforms (see Morrow,

2005: 2). The need to rehabilitate the credibility of conditionality was thus

viewed as essential to institutionalising the content of conditionality and

improving its regulatory effi cacy. In other words, the new framework of

aid engagement in the post- Washington Consensus era did not envisage

a rolling- back of the neoliberal policies which characterised the old con-

ditionality regime but sought rather to ‘develop a political institutional

framework to embed the structural adjustment policies of the Washington

Consensus’ (Jayasuriya, 2001: 1, emphasis added).

In order to do so, the new aid architecture needed to restore a sense

of agency in the relationships between the fi nanciers of ODA and their

client states and to broaden the constituents in the policy formulation and

decision- making process within the states themselves. Designed to allevi-

ate the hostility towards the centralisation of control under conventional

modes of conditionality, the new conditionality regime had to be geared

towards mobilising support in aid recipient states for the policy and insti-

tutional reforms associated with development policy loans and grants.

In recasting the aid relationship as one of partnership between the fi n-

ancier and recipient, the new conditionality regime enlists ‘recipient states

as partners or agents in their own self- management’ (Abrahamsen, 2004:

1453–4). The incorporation of the new principles of ownership, partner-

ship and participation into the design of aid programmes represented a key

change in the discourse and practice of conditionality, shifting the emphasis

away from coercion and compulsion towards policy dialogue and coopera-

tion as the basis for donor–recipient negotiations in aid relationships.

Following this conceptual shift, the modalities of conditionality have

correspondingly evolved, changing the operational landscape of aid gov-

ernance. Morrow identifi es two components of this new framework of aid

engagement: ‘country selectivity’ and ‘consensual conditionality’ (Morrow,

2005: 5). The former describes a disbursement policy which prioritises

countries which are deemed to possess ‘a reasonably good set of policies

and institutions’, while the latter means policy reforms are only established



as conditions of fi nancing where they have been mutually agreed and/or

have ‘suffi ciently broad support within the recipient country’ (ibid: 5–7).

Operationally, this new framework has meant a gradual shift towards

new policies and modalities of conditionality, notably the movement from

ex post conditionality – fi nancing in exchange for commitments to future

reforms – to ex ante conditionality – fi nancing in exchange for compliance

with pre- established actions. It has also meant an increase in the use of

modalities such as programme reviews and outcome- based conditionali-

ties – conditions based on meeting set targets and objectives rather than

action – as well as non- binding monitoring instruments such as bench-

marks and triggers. At the same time, the content of conditionality has

also shifted away from purely fi scal, monetary and structural economic

conditions towards an emphasis on institutional reform, particularly a

focus on reforming public fi nancial management systems and state budg-

etary administration (see further discussion below).

From an aid fi nancier’s perspective, the shaping of conditionality in

this manner is aimed at ensuring greater success in policy implementa-

tion and institutional reform through the removal of the element of

formal coercion which characterised previous models of conditionality.

Although coerciveness remains a substantial component of this new

regime of conditionality, the mechanics of enforcement depend less on

the threat of sanction or censure than on the incentive of reward for good

behaviour. Here, although the objective of conditionality remains one of

regulation and supervision of countries’ behaviour, disciplinary force is no

longer imposed through direct sanction but rather through a framework

of self- regulation and internal discipline exercised by the recipient state

authorities (see Harrison, 2001: 660–61). This new confi guration has not

extinguished the politics of structural adjustment nor altered the dynam-

ics of power or conditions of resource dependency inherent in the use of

conditionality as a regulatory instrument, but has instead resulted in a

situation where external intervention is not exercised through coercive

fi nancing terms but ‘through closer involvement in state institutions and

the employment of incentive fi nance’ (ibid: 660).

4. THE RECONSTELLATION OF INTERNATIONAL ENGAGEMENT

I. Self- Regulation and the New Aid Architecture

Although the reform of the conditionality regime represents a signifi cant

part of the overhaul of international development policy and the tech-



nologies of aid management since the late 1990s, it is only one aspect of

the reorientation of international aid architecture. The shift in the policy

and practice of conditionality has been accompanied by the revision of

existing modalities of aid delivery and the introduction of new develop-

ment fi nancing instruments. Taken together, these changes refl ect a wider

reconfi guration not just of aid relationships but of north–south relations

generally, of which aid forms a pivotal strand. In many respects, the new

aid architecture provides a new disciplinary framework for developing

countries’ engagement with the exterior, entrenching and refi ning the

regulatory role of conditionality in the global economy despite claims to

the contrary.

First, the front- loading of conditionality has redefi ned the parameters

of development fi nancing. Whereas traditional conditionality is linked

to commitments to policy reform – with specifi c conditions having to

be met by recipient countries before each tranche of a loan, grant or

debt relief is released – the increasing use of ex ante conditionalities in

development fi nancing, particularly from the World Bank and the IMF,

has meant that concessional assistance is now viewed as a reward for

reforms already committed to and implemented by the potential recipi-

ent state.

Commonly implemented through what is known as ‘prior actions’,

ex ante conditionality requires recipient states to comply with a set of

policy and institutional measures before an offi cial fi nancing arrange-

ment is entered into. At the World Bank and the IMF, prior actions are

normally required to be completed before a fi nancing arrangement is

presented to the respective Executive Boards for approval (IMF, 2006a:

para. 14; World Bank, 2005d: para. 13). This means that, unlike tradi-

tional conditionalities which have to be complied with after the fi nancing

agreement has been entered into and which are often tied to the release of

each tranche of the loan or grant, prior actions are only formally brought

to the attention of the Executive Directors once conditions have been

complied with. The design of prior actions therefore is not reviewed offi -

cially and discussions on policy and institutional reforms are undertaken

largely between staff of the IFIs and the country authorities. Approvals

of fi nancing arrangements are contingent on compliance with such prior

actions.

Critics have argued that the front- loading of conditionality in this manner

signifi cantly increases the discretion and leverage of IFI bureaucracies and

aid agency staff ‘vis- à- vis the governments of developing countries’ without

corresponding institutional oversight (see Babb and Buira, 2004: 14). It

also involves a high degree of scrutiny of administrative systems within

the client state, particularly if resources are channelled through the budget



support instruments10 introduced as part of the wider reform of aid delivery.

Prospective recipient states are expected to secure changes, including legal

or other regulatory reforms or administrative or institutional reform, before

a fi nancing arrangement proceeds. Although prior actions are often listed

in a schedule accompanying the legal agreement (see World Bank, 2005d:

para. 13), the use of such conditionalities may end up obscuring the total

number of conditionalities which accompany a fi nancing arrangement.

The use of ex- ante conditionality is compounded by the application of

‘country selectivity’ and the attendant use of pre- qualifi cation criteria as

a basis for aid allocation. Tied to the overarching concept of ‘ownership’,

the principle of country selectivity enables donors to identify countries

with economic and social development strategies which correspond with

the fi nancing priorities and/or objectives of the donors and ‘reward’ them

for ‘good behaviour’ (see Morrow, 2005: 5; Harrison, 2001: 659–60).

Finance is thus extended not primarily on the basis of need but on the

relative ‘merits’ of the prospective recipient state’s policy and institutional

framework, using certain indicators of country performance to measure

countries’ current circumstances and future potential for reform. Although

this practice does not link policy commitments directly with a specifi c

instrument of fi nancing – that is, it is not conditionality per se – country

selectivity does inform fi nancing decisions at a very political level.

The World Bank’s concessional lending arm, the International

Development Association (IDA), for example, relies on a performance-

based allocation (PBA) system, underpinned by a complex scorecard

known as the Country Policy and Institutional Assessment (CPIA), when

allocating fi nancing to eligible countries. The CPIA measures a country’s

performance on a range of macroeconomic, structural, social and public

sector criteria (World Bank, 2008b: 3). The complexity of the formula used

to arrive at a fi gure for fi nancing allocations, particularly its dispropor-

tionate emphasis on ‘governance’ as a criterion, highlights in many ways

how the World Bank as an institution is trying to manage conditionality

as an instrument for regulatory change in response to the priorities of its

major shareholders (and donors to the IDA).11

10 Budget support, such as the World Bank’s Poverty Reduction Strategy Credits (PRSCs), is a relatively new mechanism for aid delivery in which fi nan-cial resources are channelled directly to recipient countries’ budgets, using local accounting systems and budget processes and linked to sectoral or national poli-cies rather than being ring- fenced for specifi c project activities or tied to specifi c expenditures (DFID, 2004: 3; World Bank, 2005b: 3–4).

11 Unlike the non- concessional IBRD which raises its capital from the fi nan-cial markets, resources for the IDA are derived mainly from donor contributions



Country selectivity is further encouraged by the growing use of Poverty

Reduction Strategy Papers beyond the Bretton Woods institutions and

the HIPC initiative. As a document setting out a country’s national devel-

opment plan, the PRSP12 provides a useful template from which country

selectivity can be exercised as it enables donors to pick and choose which

parts of the national strategy they are willing to support. PRSPs form

an integral part of many bilateral and multilateral donor programmes,

particularly in informing their budget support activities. Consequently,

the onus is on developing countries to design strategies which maximise

their potential for aid by adhering to a policy and institutional framework

favoured by donor governments. As Harrison observes, based on his case

studies of Tanzania and Uganda: ‘it is certainly the case that a country

strategy which eff ectively taps into international orthodoxies of develop-

ment and governance stands a much better chance of being funded by

donors’ (Harrison, 2001: 669). It is therefore unsurprising that, from 2000

to 2004, 68 per cent of the World Bank’s policy- based lending went to

countries that ranked above average on the CPIA (World Bank, 2005e:

para. 28).

Country selectivity under the new aid paradigm amplifi es the political

and often ideological nature of aid relationships. Countries have a fi nancial

incentive for institutionalising the policy environment expected of them by

IFIs and aid donors and presenting such reforms as part of a domestic

reform package, undertaken voluntarily to demonstrate a willingness to

engage with the international economic community on established terms.

Unlike traditional conditionality where conditions are negotiated between

fi nanciers and clients and policy reforms are clearly delineated as refl ect-

ing donor interests, ex ante conditionality blurs the distinction between

internal and external interests.

This further complicates internal structures of decision- making and

political accountability within the recipient state in two ways. First, as

such conditions are not established as part of an international treaty or

bilateral agreement between the IFIs or donors and the recipient state,

decisions to undertake critical policy reforms bypass state legislatures as

and supplemented by net proceeds from the IBRD and repayments from IDA bor-rowers. See http://go.worldbank.org/DG0REG38A0 for further details.

12 PRSPs must also focus and be developed nationally through a participa-tory process involving a cross- section of stakeholders. Aside from Bank and Fund concessional fi nancing and debt relief, PRSPs have also served as the basis of other concessional support, including multi- donor joint fi nancing arrangements in which multiple donors use a common assessment and evaluation framework for disbursement of aid to a recipient country (see World Bank, 2005b).



such policy dialogues remain the prerogative of the executive. In spite of

provisions for participatory policymaking within the new aid architecture

– such as via the PRSP process – discussions over the scope and content of

policy reforms are still largely confi ned to bilateral negotiations between

government ministries and donor agencies, especially if such reforms are

pre- requisites for fi nancing eligibility under the ex ante approach.

Second, the emphasis on country ownership has indirectly shifted the

responsibility for success or failure of aid programmes on to national

authorities irrespective of the extent of donor input into the design of

such programmes or of external factors, such as trade or fi nancial shocks.

This shift in responsibility downwards to recipient governments further

removes the accountability of the IFIs and other donors to the ultimate

benefi ciaries of development fi nancing – the citizens of the recipient state.

It also precludes discussion of international factors which contribute

to the economic and social pressures faced by developing countries and

forecloses possibilities of a wider international reform agenda on issues,

such as declining terms of trade, asymmetrical trade and investment rules

and the absence of international regulation of fi nance capital, which also

impact adversely on countries’ capacities to generate and sustain revenue

for such development.

II. Harmonisation of Aid Relations

Aside from improving the effi cacy of aid delivery and the successful imple-

mentation of policy reform, changes in the modalities of aid governance

over the past decade have also been aimed at standardising aid processes

across diff erent jurisdictions, both among donors and within recipient

states. The process of ‘aid harmonisation’, linked closely to the afore-

mentioned ‘aid eff ectiveness’ agenda, is increasingly formalised under the

auspices of the OECD- sponsored Paris Declaration on Aid Eff ectiveness

2005, signed by over 140 developing and donor countries and development

agencies.13 Aimed ostensibly at promoting country ownership of develop-

ment strategies, harmonising donor and creditor practices and establish-

ing ‘mutual accountability’ for the use of aid resources, the institutional

framework established by the Paris Declaration and its attendant Accra

Agenda for Action (AAA) (2008) is fast becoming the umbrella body for

global aid relations.

In particular, joint fi nancing arrangements based on the Paris

13 See OECD website, http://www.oecd.org/document/22/0,3343,en_2649_3236398_36074966_1_1_1_1,00.html (accessed 7 August 2009).



Declaration principles have become common instruments for coordinat-

ing budget support14 fi nancing to recipient countries (Alexander, 2007: 7;

Eurodad et al., 2008: 19–22). Under such a framework, a Memorandum of

Understanding (MoU), Partnership Framework (PF) or Joint Financing

Arrangement (JFA) is usually entered into between a country in receipt of

budget support and its fi nanciers, including the multilateral development

banks and bilateral aid agencies (World Bank, 2005b: para. 1). The MoU,

PF or JFA outlines the objectives and procedures for engagement for the

group of donors and the responsibilities of the recipient government but

does not constitute a legally binding document (ibid: para. 2). However,

signatories to the document are expected to establish binding fi nancing

agreements which are ‘compatible with the spirit and provisions’ of the

arrangement (ibid: para. 13 and Annex 1, para. 4.1).

Proponents of joint fi nancing frameworks argue that it assists in the

harmonisation of donor policies and practice and aligns donor support

with country strategies (ibid: para. 2; OECD DAC, 2003: Box 1.1).

However, critics of the process have been concerned that this shift towards

universalisation aid policy and delivery have and will continue to have an

adverse impact on aid practice and developing countries’ engagement with

donors and concessional creditors. Specifi cally, the aid harmonisation

agenda has not extinguished the structural defi cits inherent in aid rela-

tionships, notably the power asymmetries between IFIs and other donors

and resources- strapped developing countries (see Alexander, 2007: Bissio,

2007: para. 7).

The implications of this aid harmonisation agenda for conditional-

ity have been twofold: (1) joint fi nancing arrangements have resulted in

greater imbalance in negotiating strength between donors and recipients

and less fl exibility in the context of conditionality design and implemen-

tation; and (2) the new modalities of aid delivery accompanying such

arrangements have resulted in more intrusive conditionality, focused sig-

nifi cantly on reforming public administrative systems in developing coun-

tries. Altogether, this new model of conditionality has consigned many aid

recipient countries into a straightjacket of external scrutiny over national

policies and institutions with correspondingly little accountability on the

part of the donors.

Rather than enabling space for negotiations, joint fi nancing arrange-

ments have had the converse eff ect of consolidating donor priorities and

subjecting recipient countries to a single model of aid delivery. Unlike

traditional bilateral aid arrangements which – while problematic in terms

14 See note 10 above.



of increasing transaction costs – enable recipient countries to negotiate

on the basis of historical ties and wider economic and political relations

with each donor country and/or institution, joint fi nancing arrangements

attempt to standardise aid relations under a single umbrella of assessment

and implementation. These arrangements are supposed to be based on

a country’s operational development strategy and usually incorporate

a common Performance Assessment Framework (PAF) setting out the

performance indicators necessary to gauge government performance

under the arrangement (World Bank, 2005b: para. 13). In most cases, the

World Bank’s instruments are adopted as the default framework, such as

the PRSP as an operational strategy and the PRSP’s Annual Performance

Review (APR) and the Bank’s CPIA as performance indicators.

Although the OECD DAC guidelines stipulate that a ‘good framework

for aid coordination will enable leadership by partner governments’

(OECD DAC, 2003: 18), many aid recipient governments lack the capac-

ity to negotiate on equal terms with a single donor, let alone a group of

donors and offi cial creditors. In spite of exhortations to the contrary, the

new aid regime has been designed and led by a handful of western donor

states in concert with the World Bank. Developing countries have had little

input into the construction of the new aid framework. Moreover, claims of

harmonisation have not been borne out in practice. Instead of streamlin-

ing the number of conditionalities, research by civil society groups, such

as the European Network on Debt and Development (Eurodad), have

demonstrated that PAFs can be a consolidation of donors’ ‘shopping

lists’ so that the PAF becomes ‘the sum of all donors’ wish lists’, with little

clarity as to how the reforms required should be implemented and assessed

(Eurodad et al., 2008: 20).

At the same time, tying aid fl ows to a single framework for conditional-

ity design, evaluation and assessment risks countries being cut off from

fi nancial transfers from multiple sources should they fail to meet critical

conditions under a joint assistance strategy. This is particularly pertinent

for countries undergoing an IMF programme as most offi cial creditors

and donors pivot their fi nancing decisions and disbursements on coun-

tries’ ‘on track’ implementation of the IMF’s programme of reform. Case

studies have demonstrated instances where IFIs and donors have with-

held funds because of a country’s failure to meet IMF conditionalities,15

15 For example, in 2001, disbursements from the IMF, IDA and a group of bilateral donors providing budget support under a common budget support framework were discontinued after the Malawian government failed to meet the conditions of its PRGF programme (IMF, 2005a: para. 3), while in 2003 the IMF



with serious consequences for public sector expenditure in aid- dependent

countries. Additionally, the establishment of a joint strategy, concluded

after lengthy negotiations between donors, creditors and the recipient

government, renders the conditionality framework attached to this new

aid model infl exible to respond to economic contingencies or other neces-

sary changes in the social, political and economic structure of the recipient

state (see Bissio, 2007: para. 74).

Reforms under the new aid framework signifi cantly increase donor

infl uence and presence within a country, facilitating deeper policy dialogue

between donors and offi cial creditors and country authorities. Outwardly,

budget support is viewed as promoting a country’s ownership of its devel-

opment programme – with IFIs and donors supporting diff erent elements

of the programme – but in reality these resources are rarely untied from the

expectation of donor input into their policy content. A World Vision study

in 2005 noted that ‘in terms of political infl uence, donors prefer direct

budget support because relatively little money can buy signifi cant access

to political decision- making’ (World Vision, 2005: 47). Under the rubric of

‘partnership’ and ‘policy dialogue’, the new aid regime has enabled donors

and other offi cial creditors to infl uence national economic policymaking in

developing countries at a very strategic level, including providing capacity

building and technical assistance to countries to develop national develop-

ment plans (see for example World Bank, 2005b: para. 13).

Aside from expecting a greater say in government policy, donors and

creditors also expect greater scrutiny over domestic administrative struc-

tures, often demanding reforms in public fi nancial management (PFM)

in exchange for the ‘autonomy’ that comes with providing fi nancial

resources directly into government coff ers. This includes the opening up

of public accounts to external inspection and reforming domestic public

procurement policy and practice. The Paris Declaration advocates the use

of country systems of public fi nancial management, accounting, procure-

ment and evaluation but only insofar as such systems meet the standards

established by the donor community. Consequently, countries’ systems

are assessed by donors and reviewed on a regular basis with governments

often engaging in periodic dialogues with creditors and donors on govern-

ment performance and implementation of reforms (see Afrodad, 2007: 19;

Alexander, 2007: 6).

The focus on reforming public administrative systems, including budg-

etary processes and procurement practices, is not confi ned to harmonised

and the EU withheld over US$138 million of support to Zambia when it exceeded the IMF’s budget defi cit limit by 0.4 per cent (Nkombo, 2008: 2).



aid frameworks. There has been a progressive shift generally towards

standardising public fi nancial management systems in developing coun-

tries through aid conditionalities. The World Bank’s review of condi-

tionality trends and practices in 2005 showed that conditions in public

expenditure management and other fi duciary areas had grown rapidly

within a decade, with at least 75 per cent of Bank loans involving public

expenditure management conditions (World Bank, 2005e: para. 27).

While the donor community claims that such conditions are ‘designed to

fi ght corruption, strengthen fi scal governance, enhance transparency in

resource allocation, and improve overall management and accountability

in public expenditures’ (ibid), the implementation of such conditionalities

also provide donors with greater supervision over recipient states’ fi duci-

ary processes and greater control over government expenditure.

III. Towards a Globalized Aid Regime

Changes in the policy and practice of international development fi nancing

over the past decade have had an enormous infl uence over the develop-

ment trajectories of countries subject to its jurisdiction. Many of the shifts

in the conceptual framework and operational structures of aid policy and

aid delivery have had an impact on developing countries who receive such

fi nancing, fi scally as well as strategically and politically. As discussed

above, the new regime entails greater supervision not just of countries’

policy choices in specifi c areas but also their national policymaking frame-

works and public administrative systems.

One of the explicit objectives of the new architecture of aid has been

the facilitation of better aid coordination and the harmonisation of aid

policy and practice, seeking to standardise the fragmented regulatory

webs involved in the negotiation, evaluation and disbursement of offi cial

development fi nancing. In this manner, the new aid regime aims to glo-

balize aid relations across diff erent jurisdictions through institutionalising

standardised systems for economic planning and public administration in

aid recipient states. It moves beyond the universalisation of economic poli-

cies seen during the era of the Washington Consensus in which states were

conscripted into a unifi ed model of economic development and, instead,

penetrates into the heart of public policymaking and public administra-

tion in developing countries.

This is facilitated through a systematic globalization of public adminis-

trative structures and the centralised monitoring of countries’ budgetary

and other fi nancial systems. Where previous conditionalities focused on

the restructuring of the economy, the new conditionality regime is aimed

at establishing the strategic and institutional structures necessary for the



implementation of such economic reforms. The requirements for countries

to formulate comprehensive development plans, such as the PRSP, and

subscribe to a universal template or blueprint for national policymaking in

order to access aid resources engenders a form of constitutional mimicry

which validates the ongoing clientalist relationship between aid donors

and aid recipients, exacerbating the power cleavages between developed

and developing countries.

In other words, developing countries are increasingly required, through

aid conditionalities, to adopt policies and institutional reforms which do

not just refl ect the economic and geo- strategic priorities and interests of

powerful donor states but also, in many ways, imitate the donors’ struc-

tures of social and political organisation without due consideration of

local circumstances or constraints. Recipient countries tend to restructure

their administrative systems and reform social and economic policies in

accordance with the template established by the donor community in

order to access funds. Consequently, research on the impact of donor-

supported PFM reform programmes has demonstrated that they have

tended to pay too much attention to ‘complex technical solutions and too

little to existing constraints in terms of capacity, incentives and political-

economy factors’, leading to a failure of such reforms even when judged

by donor standards (de Renzio, 2006: 633; see also Molenaers and Nijs,

2009: 571).

This type of importation of law and policy is described by Badie as

exemplifying the ‘logic of dependence’ characterising the historical rela-

tionship between the north and south (Badie, 2000: 14–15). For Badie, this

internalisation of the western political order in what he calls the ‘periph-

eral states’ is driven by the need to prove, at least on the part of the local

political elites, their affi nity with and adherence to the norms and stand-

ards of the patron states to secure continued access to resources from the

exterior (ibid: 14–15, 25–8). According to Badie, the asymmetry of these

relations produces ‘the phenomenon of forced constitutional imitation’

whereby the ‘[t]he client state must bring its own political structures into

alignment with those of the patron state’ (ibid: 25–6).

However, unlike the mimicry facilitated by conventional aid condi-

tionalities in which states were overtly required to adopt such reforms in

exchange for fi nancing, the new forms of conditionality masks the dynam-

ics of power and coercion inherent in the aid relationship. The emphasis

on engagement with country authorities through a process of ‘policy dia-

logue’ enables the IFIs and other donors to extract policy commitments

and to secure support for policy and institutional reforms outside conven-

tional channels of norm brokerage and bilateral negotiations. The eff ect

of these reforms has been a signifi cant restructuring of state apparatuses



and a corresponding radical overhaul of the business of government in aid

recipient countries.

The construction of the relationship between parties to development

fi nancing assumes a more globalized form under the new aid paradigm,

creating what some have termed ‘a new level of supranational economic

governance’ (Bissio, 2007: para. 7) but without the corresponding mecha-

nisms of accountability. As discussed previously, the design of aid policy

and aid delivery is increasingly conducted within clusters of donor-

dominated groups and centralised in the name of aid harmonisation.

However, despite exhortations of ‘mutual accountability’, this new aid

and conditionality framework remains deeply asymmetrical. Recipient

states remain highly accountable to IFIs and donors, but rarely vice versa,

and donors, not domestic constituents, remain primary consumers of

fi nancial information and government performance reviews under the new

aid regime16 (Afrodad, 2007: 21; Nkombo, 2008: 5).

Moreover, as with the previous conditionality regime, the reforms

necessitated under the new conditionality framework may also impact

adversely on countries’ engagement with other aspects of international

economic law. Where external market- friendly reforms, such as trade lib-

eralisation and fi nancial deregulation, prescribed under structural adjust-

ment programmes often impacted on countries’ bargaining positions

vis- à- vis bilateral and multilateral trade and/or investment agreements,

public sector reforms under these so- called ‘third generation’ conditionali-

ties can similarly conscript countries into international obligations outside

conventional negotiating frameworks.

For example, conditions on reforming public expenditure systems in

recipient countries often involve liberalising a country’s procurement

regime to allow foreign fi rms to tender for government projects (see Bissio,

2007: para. 43). Developing countries generally have resisted attempts to

liberalise government procurement under multilateral and bilateral trade

negotiations due to the utility of government procurement as developmen-

tal strategy.17 By insisting on international competition for government

procurement as a condition of fi nancing – even for purchases outside the

16 In many instances, fi nancial information, such as reports on budgets and public expenditure, is prepared for and consumed by solely offi cial creditors and donors by one or two government departments, such as fi nance ministries and/or ministries of planning, and does not fi lter down to the other arms of government or the public at large (see Afrodad, 2007: 21).

17 Government procurement is often used as a national strategy for promoting local industries in developing countries, a policy that was commonly utilised by developed countries during their period of industrialisation.



aid- allocated budgets – donor states are securing trade reforms through

the back door, thus undermining recipient states’ positions in other inter-

national lawmaking fora.

5. CONCLUSION

The doctrine of conditionality is an integral part of development fi nanc-

ing, governing not only the terms of fi nancial support between a donor or

offi cial creditor and the aid recipient country but also impacting on the

recipient country’s engagement in the wider international economy. The

evolution of conditionality from primarily a mechanism for regulating

aid relations into an instrument of global economic governance has been

facilitated by the changes in both the content of conditionality and the

modalities of conditionality over the past few decades. In turn, this emer-

gence of conditionality as a mechanism of global economic governance

has a signifi cant impact on developing countries’ engagement in the global

economy and with the international economic law which sustains it.

The regulatory role of conditionality has been both reinforced and

refi ned with the inception of new modalities of aid delivery and policies of

development fi nancing in the past decade. While framed in the language

of engagement and autonomy, the new framework for governing the

relationships between offi cial donors and creditors and their client states

assumes a conversely stringent disciplinary eff ect on the behaviours of

those in receipt of ODA that is both a reiteration and a reinforcement of

the old modes of conditionality. This new aid paradigm impacts on the

constitution of international law and global governance by establishing a

new regulatory framework which is fundamentally restructuring relation-

ships between the various actors engaged in development fi nancing.

The regulatory framework established by the new aid paradigm departs

from the conventional disciplinary force of conditionality in two respects.

First, it depends less on coercive rules of engagement and more on the pol-

itics of persuasion, disciplining aid recipient countries through voluntary

accession to reforms. Countries are obliged to accept the reform agenda

set by the IFIs and other donors not because they are contractually bound

to do so under international agreements but because such consent is sine

qua non for access to such fi nancing in the fi rst instance.

Second, and relatedly, the new forms of conditionality place responsibil-

ity for social and economic development and the effi cacy of aid primarily

on the shoulders of the recipient state. The discourse of ‘ownership’ and

‘accountability’ which permeates the new aid architecture problematises

the recipient state in the process of social and economic development.



Under the new aid regime, states shoulder the primary responsibility for

meeting developmental challenges and overcoming socio- economic exclu-

sion in the globalized, interdependent era. Poverty and other economic

and social dislocations within a nation state is perceived as less rooted in

the international than the national, caused not by the lack of resources

stemming from the iniquities of the global trade and fi nancial system or

the design and content of aid conditionalities but by: (a) the state’s own

incapacity to generate or absorb fi nancial resources due to wrong policy

choices; and (b) the state’s inability or disinclination to utilise the resources

generated in a productive and redistributive manner.

The eff ect of this has been a reassignment of responsibility which fore-

closes opportunities for revision of the rules and institutions of interna-

tional economic law which contribute to the social and economic problems

faced by developing countries in the era of globalization. As Abrahamsen

notes, the recasting of aid relationships as ‘partnerships’ has meant that

‘development aid as a principle of international solidarity gives way to

an obligation on the part of the developing country to manage its own

underdevelopment wisely’ (Abrahamsen, 2004: 1460–61). The new aid

framework thus diff uses emphasis on the asymmetry of aid relationships

and inequality of global economic rules by refocusing the debate away

from the causes of resource constraints in developing countries towards

how states manage these limited resources.

At the same time, this renewed focus on the state legitimises donor

interventions in recipient countries which extend beyond those of tradi-

tional conditionalities, entailing intimate supervision of countries’ policy

choices and administrative structures above and beyond that necessary

for fi duciary oversight. The relationship between donor and recipient in a

development fi nancing arrangement remains dominated by the rules set by

the donor community and without clear criteria for establishing genuine

‘mutual accountability’ or avenues for redress in the event of a dispute.

The discourse of ‘ownership’ and ‘partnership’ under the new conditional-

ity framework continues to mask the unequal nature of the aid relation-

ship and the continuing political objectives of aid.

The new aid paradigm also means that decision- making on crucial areas

of public policy and public administration is increasingly taking place at a

supranational level, contributing to the emergence of what some scholars

term a ‘global administrative space’ (Kingsbury et al., 2005: 25–6). The ces-

sation of national control over crucial aspects of norm creation, enforce-

ment and adjudication, including dispensation with domestic ratifi cation

of externally negotiated rules and the performance of administrative and

regulatory functions by ‘transnational administrative bodies’ such as IFIs,

is a hallmark of this global administrative plane (ibid: 3–4, 16; 25–6).



However, the politics and economics of the aid relationship mean that

this enmeshment of local and global regulatory structures has diff erent

impacts on developing countries who represent the recipients of offi cial

development assistance from those it has on developed countries who

make up the majority of aid donors. Without a radical overhaul of the

underlying premise and structures of this relationship, the revised condi-

tionality framework can only serve to reinforce the systemic asymmetries

in global economic governance and international economic law.


138

7. Taxing constraints on developing countries and the global economic recession

David Salter*

1. INTRODUCTION

Taxation and the corresponding raising of tax revenue are central to a

country’s culture, legal system and ultimate development. The correla-

tion between taxation and development is imprecise not least because of

the other tangible and intangible factors that impact upon development.

However, tax revenues feed development and without economic growth

linked to development tax revenues are circumscribed. In the absence of a

worldwide unitary tax system, taxation and the raising of tax revenues lie

primarily within the province of individual countries.

Consequently, taxation has the potential to empower a country to

allocate resources and to adopt policies, determined by economic and

political considerations, as to its wealth and its distribution. In developed

countries, the presence of strong governance systems ensures that this

potential can normally be realised and hence the control of taxation and

for that matter borrowing remains in central government. This cannot

be said of developing countries. In this chapter, an examination is under-

taken of the ways in which such fi scal autonomy or sovereignty has been

fettered or constrained in developing countries whose tax systems and

other governance systems are at an earlier stage of development than

their counterparts in developed countries. This encompasses an initial

consideration of in- built domestic constraints, followed by an analysis of

inter- country constraints (regional trade/tax agreements, multilateral and

bilateral double taxation agreements, and tax competition) and interna-

tional institutional constraints arising out of membership of or dealings

with international organisations or supranational legal regimes, leading

* Associate Professor, School of Law, University of Warwick, Coventry, UK.


Taxing constraints on developing countries 139

to a conclusion that purveys a sense of a fi scal sovereignty that is shared

rather than owned.

The chapter is written against the backdrop of the present period of

global economic integration ushered in by the liberalisation of trade and

capital fl ows and deregulation of markets promoted by international

organisations, such as the International Monetary Fund (IMF) and the

World Bank, and supranational legal regimes, such as the World Trade

Organization (WTO), collectively referred to in the remainder of this

chapter, for ease of reference, as international economic institutions.

The chapter also considers, albeit more briefl y, aspects of the extent to

which a developing country may have the freedom or discretion to react

within the context of its constrained fi scal autonomy to the antithesis of

the economic growth that was anticipated by the aforementioned interna-

tional economic institutions and by the United Nations (UN) to follow

global economic integration, namely a global economic recession.

2. TAX AND FISCAL POLICY

I. Background

There is no single or accepted template for a tax system. Consequently,

every country endeavours, insofar as it is able, to design a tax system

which is a refl ection of its needs and requirements set against its resources

and that serves, principally, its own ever changing economic, political and

societal circumstances. This is an exercise that involves, amongst other

things, selecting from a plethora of taxes and duties those taxes and duties

which, when combined, will contribute in an equitable manner as between

taxpayers towards the revenue required to meet the costs of those pur-

poses that are seen as the responsibility of government (broadly, public

purposes).

Tax revenue constitutes only a portion of total government revenue

and the proportions of total government revenue attributable to tax

and non- tax revenue respectively vary substantially from country to

country. Nevertheless, the importance of tax revenue as a major source

of government revenue is fundamental to sustainable development even

in developing countries where there may be a marked dependence on non-

tax revenue, such as foreign monetary aid which may be proff ered, for

example, in order to support trade and development. Further, the ability

of a government to tax and raise tax revenue is also an affi rmation of that

government’s legitimacy or its ‘right to rule’, which in the case of a devel-

oping country may refl ect a growing economic strength that is, in turn,



reinforced by a greater commitment to the provision of non- tax revenue

by donor and aid organisations.

When attention is directed towards the public purposes that may be

funded by government revenue, it can be seen that, as with the absence of

a template for a tax system, there is similarly no universal gauge as to what

constitutes a public purpose, nor as to the manner in which and extent to

which a particular public purpose may be supported monetarily, nor as to

the relative weight that may be attached to respective, and often compet-

ing, public purposes.

Moreover, in determining the distribution of the absolute and relative

tax burdens as between taxpayers, notions of fairness and equity are also

variable. For example, views as to whether an income tax should be pro-

gressive and, if so, how progressive it should be will often diff er. Indeed,

these notions may not always be compatible with achieving optimal levels

of tax revenue (for example, where circumstances dictate that in the inter-

ests of equity tax revenue should be forgone, and they may be, au con-

traire, eschewed, in appropriate circumstances, in favour of effi ciency). In

these respects, a developing country often occupies an unenviable position

that draws it, on grounds of equity, towards the redistribution of wealth in

order to alleviate poverty and inequality whilst requiring it, in the interests

of effi ciency, to act in ways that nurture wealth and investment.

II. Domestic Constraints on Fiscal Autonomy

In light of the above circumstances, it is not surprising that, whilst tax

systems may serve similar purposes and have common components,

each tax system is unique and, as will be seen, each potentially provides

competition for the other in the quest for tax revenue. Notwithstanding

this reality, the above notions of equity and effi ciency engender a certain

degree of uniformity in those instances in which, as identifi ed by Avi-

Yonah and Margalioth (2007–08: 4), taxes are necessary

to overcome the free riding inherent in the fi nancing of public goods, to control market imperfections, and to achieve social justice through redistribution. Economic growth (effi ciency) is promoted by the fi rst set of goals, whereas social justice (equity) is promoted by redistribution and the provision of public and merit goods, most notably health and education.

Ultimately, however, decisions that are made by a country regarding

what will comprise the essential elements of its tax system, and determina-

tions such as the relative importance to be attributed to the concepts of

effi ciency and equity within that system, are essentially matters of politi-

cal and economic judgment informed by internal factors. Increasingly



however, in the present era of global economic integration and interde-

pendence of countries, these decisions are also determined by external

fi scal relations with other countries and with international institutions.

This is especially evident in the case of developing countries in the context

of their relationships with international economic institutions such as the

IMF and World Bank, which play a pivotal role in fostering much needed

economic development in those countries.

It is a political as well as an economic judgment that must be made,

initially and inevitably, against the backdrop of the prevailing and antici-

pated domestic conditions and circumstances. It is one that is particu-

larly acute in a developing country where the ‘the tax challenges . . . are

shaped by initial conditions such as the degree of inequality [in asset and

income distribution], the growth prospects of the country, the degree of

national savings, the degree of political stability and state legitimacy in

non- tax realms’ (World Bank Group, 2008: 7). Further, a juxtaposition

of developed and developing countries brings out, in this context, signifi -

cant diff erences between them, which include ‘variations in industry type

(primarily the relatively high shares of agricultural and small businesses in

developing countries), in the size of administrative and compliance costs,

in the levels of corruption, in the levels of monetization in the economy,

in political constraints, and in the relative size of the informal economy’

(Avi- Yonah and Margalioth, 2007–08: 4).

Clearly, the extent to which these in- built domestic constraints exist will

vary from one developing country to another, as will the manner in which

they are accommodated and the impact which they may have upon the

substantive and administrative aspects of particular tax systems.

In terms of their accommodation, it may be relatively easy to pontifi cate

on a simplistic and general plane about steps that should not be taken to

address these constraints. For example, on a substantive level there is little

point, especially in a least developed country in, say, sub- Saharan Africa,

in relying on a personal income tax to raise signifi cant amounts of revenue

for public purposes where the per capita income of all but a relatively small

minority of the population is low; whilst, on an administrative level, it is

folly to countenance an ineffi cient, ineff ective and corrupt tax administra-

tion. However, in the case of either substantive or administrative concerns,

it is, obviously, quite another matter and much more diffi cult to provide

specifi c, viable and sustainable pointers as to what may be done.

III. Inter- country Constraints on Fiscal Autonomy

As intimated in the introduction above, a country’s fi scal autonomy or

sovereignty may also be constrained as a consequence of its relationship



with other countries and, as will be seen, such constraint may be consen-

sual or otherwise. This circumstance has become particularly evident in

recent times, and especially since the 1980s when global economic integra-

tion took root following the relaxation of exchange and capital controls

and the lowering of trade barriers between countries. The result is that

the defi nition of the parameters of what may be done and the consequent

confi guration of tax systems has been infl uenced, increasingly, by fi scal

relations with other countries, with the consequence that the resolution

of some tax issues often lies beyond the sole autonomy of a single nation

state. To a degree, this is true for all countries regardless of their respective

levels of development, and particularly so in relation to the externality of

the enhanced fi scal interconnection between countries. As Bird and Mintz

(1993–94: 408) observed, succinctly: ‘No taxing jurisdiction is an island

unto itself: each is part of the global whole and especially of its immediate

region, and hence its freedom of fi scal action is to some extent inevitably

constrained.’

In some instances, a constraint on a country’s freedom of fi scal action

may be market led and be a feature of tax competition between countries

which, in some respects, has been exacerbated by globalization and the

increased mobility of capital to which it has given rise. For example,

a developing country may off er tax incentives to attract foreign direct

investment not because it necessarily wishes to do so (as it is likely to lose

tax revenue that would otherwise be due), but in order to compete with

other countries which also off er such incentives or their equivalent. In

other cases, a country may accept a constraint on its fi scal sovereignty –

as opposed to a constraint on its ability to act fi scally – voluntarily and

formally acknowledge that acceptance within the confi nes of either a mul-

tilateral or bilateral agreement entered into with other countries. In this

latter respect, it does not follow that a decision to voluntarily accept a con-

straint on fi scal sovereignty must necessarily lead vis- à- vis other countries

to a negative outcome, that is, to a diminution of fi scal authority without

a commensurate return. However, as will be seen, this may sometimes be

the case especially, in certain circumstances, where developing countries

are concerned.

Therefore, there may be instances in which some relinquishment of fi scal

autonomy or sovereignty may be accepted voluntarily and be benefi cial.

For example, the perceived benefi ts to be derived from joining a regional

economic union, such as the European Union (EU), which is founded on

mutuality and reciprocity may outweigh any compromise of individual

fi scal autonomy or sovereignty which membership of the union may entail.

Similarly, in a discrete tax context it may be evident that the advantages

(fi scal and/or otherwise) to be gained from agreeing to cooperate and co-



ordinate warrant some dilution of fi scal sovereignty; for example, where

a country is, along with its neighbours, party to a customs union that

may provide, particularly, for the elimination of customs duties and the

removal of quantitative restrictions on the import and export of goods

between members of the union.

More generally, issues that involve a compromise of national fi scal

autonomy (that may not necessarily be benefi cial) may also arise in rela-

tion to the trading regimes that purportedly seek to facilitate trade between

major trading partners. Thus, in the context of developing countries, for

example, the EU and African, Caribbean and Pacifi c countries (the ACP

countries) have agreed, in accordance with the Cotonou Agreement which

they entered into in 2000, to conclude WTO- compatible economic part-

nership agreements (EPAs) that will replace pre- existing preferential trade

arrangements in favour of ACP countries. These are intended to establish

reciprocal trade relations between EU countries and ACP countries based

on the progressive removal of barriers to trade, including tariff s, and

on the enhancement of cooperation in all areas relating to trade. The

Cotonou Agreement states that this goal is intended to foster the promo-

tion of sustainable development and poverty reduction in ACP countries

by, fi rst, assisting the integration of those countries into the world trading

system and, second, by supporting the regional economic integration of

ACP countries.

In furtherance of the Cotonou Agreement, negotiations have been

conducted between the EU and six ACP regional groupings since 2002.

However, progress has been slow, not least because of concerns about the

possible detrimental impact on development in ACP countries that may be

caused by the loss of government revenue that would occur as a result of

the provisions relating to the removal of tariff s in EPAs, and which, as will

be seen below, may be diffi cult to recoup from other taxes. Consequently,

these negotiations have resulted in only one EPA, which was signed by the

EU and CARIFORUM on 15 October 2008, although a number of interim

agreements have been initialled between the EU and individual ACP coun-

tries and sub- groups of countries (for a recent review of EPA negotiations,

see European Centre for Development Policy Management, 2009).

Further, fi scal sovereignty may also be compromised or surrendered

when countries enter into multilateral or bilateral double taxation

agreements,1 most commonly bilateral, with a view to eliminating or

1 Double taxation agreements may also be referred to as double taxation treaties or double taxation conventions. The term ‘double taxation agreements’ (DTAs) will be used in this chapter.



mitigating double taxation that would otherwise arise in circumstances

in which two (or more) countries assert their jurisdiction to tax income

derived from cross- border (international) transactions; for example, where

a company is taxed by its country of residence (its home country) on its

worldwide profi ts and also by the country in which it has a permanent

establishment (its host country) on the proportion of those profi ts that are

attributable to that permanent establishment.

In relation to bilateral DTAs, which presently operate within an exten-

sive and continually growing global network, there is likely to be an

inherent element of reciprocity when such a DTA is entered into by two

developed countries, especially where, as will be seen, each is a member of

the OECD. In the case of such countries, the likelihood is that cross- border

fl ows of income from one country to the other will be commonplace and

signifi cant, and that such fl ows of income will be related, predominantly,

to trade conducted by companies/entities operating within the same multi-

national group, that is, within a multinational enterprise (MNE).

The scale of the trade conducted by MNEs worldwide can be gleaned

from the fact that ‘an estimated 79,000 MNEs control some 790,000

foreign affi liates, with the value added activity of foreign affi liates account-

ing for 11% of global GDP, sales amounting to $31 trillion (about one

fi fth of which represents exports) and the number of employees reaching

82 million’ (UNCTAD, 2008d: 9). Moreover, the importance of such mul-

tinational groups to developed countries, in particular, is emphasised by

the fact that ‘about 85% of the world’s multinationals are headquartered

in OECD member countries’ (Avi- Yonah, 2004: 383).

In these circumstances, it often makes economic sense for developed

countries to seek to regularise their respective (and otherwise competing)

jurisdictions to tax in a DTA. One reason for this, with a view to counter-

ing the spectre of double taxation and its negative eff ect on cross- border

transactions, is to allocate taxing rights between the countries in relation

to pertinent kinds of income – such as business profi ts, royalties, interest,

and dividends – in a manner which, in practice, will provide an ‘accept-

able’ share of the tax take for each country and a degree of certainty for

multinationals as to the taxation of income covered by the DTA.

Commonly, this regularisation is achieved by such countries entering

into DTAs that follow the OECD Model Tax Convention on Income

and on Capital (the OECD Model).2 The fi rst draft of this Model, with

accompanying Commentaries, was published in 1963. Both the OECD

2 OECD (2008a). Some developed countries, such as the Netherlands and the USA, have produced their own model conventions which depart from the OECD



Model and its commentaries have been subject to revision over the years

and its current version embodies the latest changes that were made in

2008. The OECD Model establishes a framework for the negotiation of

DTAs and one which furthers a core objective of the OECD, namely the

promotion of trade between its members. The Model’s allocation of taxing

rights, with a view to combating double taxation that would otherwise be

a hindrance to trade, refl ects its intended primary use by members of the

OECD and, more generally, by non- OECD capital exporting countries;

user which is particularly apposite in circumstances in which the above-

mentioned reciprocity is present and where the countries enjoy similar

bargaining positions.

However, where such reciprocity is absent and the respective bargain-

ing positions of countries are unequal, as is likely to be the case with a

developed and a developing country, the rationale for using the OECD

Model as a basis for a DTA is less compelling. This is recognised in the

United Nations Model Double Taxation Convention (the UN Model)

which, although following the approach of the OECD Model in many

respects, nevertheless seeks to provide an ‘alternative’ framework for the

negotiation of DTAs between developed and developing countries and, in

so doing, to provide a more balanced and equitable allocation of taxing

rights than the OECD Model might provide in such an instance. As Miller

and Oats (2009: 123) state:

The UN Model Convention, developed in 1980, favours capital importing countries as opposed to capital exporting countries and it was developed for use between developing and developed countries. More scope is aff orded for the taxation of the foreign investor by the source country. The UN Model is designed to aid developing countries to tax a larger part of the overseas inves-tor’s income than the other two Models [OECD and US]. It permits double tax relief by exemption and includes tax sparing clauses . . . It permits withholding tax to be levied on royalty payments leaving the country whereas the latest ver-sions of the other two Models do not . . . one of the most useful features of this Model is the enhanced rights it aff ords to developing countries to tax a part of the [business] profi ts of multinational companies.

In practice, however, the utility of the UN Model is heavily dependent

upon the willingness of developed countries to enter with developing coun-

tries into DTAs which follow its norms. The number of DTAs between

developed and developing countries which are founded on the UN Model

per se suggests that this is a path, with its accompanying diminution in

Model in some important respects and provide the basis for the DTAs which they enter into with other countries.



tax revenue for the developed country, which too few developed countries

wish to take. In fact, an imbalance between the respective bargaining

positions of countries is more likely to lead to a contrary outcome that

favours, as might be expected, the stronger party. In this regard, Stewart

(2003: 147) opined in the course of her consideration of the infl uence of

developed country governments on tax reform in developing and transi-

tional countries:

A key feature of bilateral tax treaties is that tax concessions are achieved by bargaining and are generally not based on ‘sound principles of taxation’. More powerful countries can typically extract signifi cant concessions in this process. In addition, the form of tax treaties was developed by reference largely to tax laws of developed countries and the shape of international commerce among those countries.

This situation leads, in turn, to a concomitant allocation of taxing rights.

Again, in the words of Stewart:

The treaty mechanisms to prevent double taxation frequently have the eff ect of allocating tax revenues to the ‘home’ or ‘residence’ country of the investor (usually a developed country) and away from the ‘host’ or ‘source’ country (usually developing and transition countries). Typically, this reallocation occurs by application of a credit mechanism or by shifting the taxing jurisdic-tion to the residence country. (ibid)

The starkness of the circumstances outlined above by Stewart may, on

occasions, be ameliorated by the inclusion of tax sparing provisions in

bilateral DTAs between developed and developing countries, notably in

those entered into by former colonial powers and their erstwhile colonies.

Typically, these provisions are intended to ensure, as between the devel-

oped and developing countries, that when the developing country makes

available a tax incentive (for example, a tax holiday or a reduced rate of tax

to a foreign investor) the fi scal effi cacy of that incentive is not undermined

by the developed country within which the investor is resident. Thus, in

this situation, it is incumbent on the developed country to grant a credit

to its resident for taxes that the resident would have paid in the developing

country but for the tax incentive. This reduces the total level of taxation

on that foreign investment and thereby increases the level of cross- border

investment and related benefi ts for the developing country. It also means,

of course, that the developed country will lose the tax revenue that it would

have collected in the absence of the tax credit. More generally, the question

of whether tax incentives made available by a developing country in this

way are eff ective in attracting foreign direct investment which leads, subse-

quently, to sustainable economic growth is debateable (see Klemm, 2009).



However, the signifi cance for a developing country of entering into a

DTA may extend beyond the allocation of taxing rights, notwithstanding

the importance that clearly attaches to that allocation in relation to the

raising of tax revenue. The DTA may, for example, enhance a country’s

international standing as ‘bilateral tax treaties seem to serve largely “to

signal that a country is willing to accept the international norms” regard-

ing trade and investment, and hence, that the country is a safe place to

invest’ and ‘a symbol of international capitalist engagement’ (Stewart,

2003: 148). In a similar vein, Dagan (1999–2000), whilst denying the need

for DTAs to alleviate double taxation when in her opinion unilateral

mechanisms are as eff ective, acknowledges, nevertheless, the following

advantages that a DTA may off er to a developing country:

the administrative convenience, certainty, and the international economic recognition the treaty regime provides may prove much more important for developing countries than for developed countries. In other words, unlike the benefi ts that accrue to developed countries, the main benefi ts for developing countries are increased legitimacy on the international level and, at times, a more robust foreign policy. However, developing countries, unlike developed countries (which receive symmetrical benefi ts), must make a sacrifi ce in the guise of tax revenues to win these benefi ts. (Dagan, 1999–2000: 990)

The DTA itself may also provide other advantages for a developing

country, in particular, those relating to cooperation between the parties

to the agreement. This may involve, for example, the exchange of informa-

tion (often with a view to furthering another of the commonly expressed

purposes of a DTA, namely the combating of tax avoidance and/or tax

evasion) and other aspects of mutual assistance such as the mutual agree-

ment procedure whereby cases brought by taxpayers in which it is alleged

that taxation has been imposed (usually double taxation) otherwise than

in accordance with the DTA may be resolved.

The outcome of such cooperation may be to enhance the ability of

both countries to collect tax revenues with the result that the sacrifi ce of

tax revenues made by a developing country as a result of the allocation

of taxing rights under the DTA, to which Dagan refers, may, to some

extent, be mitigated. However, as with all matters pertaining to the col-

lection of tax in a developing country, the extent to which this mitigation

is likely to be achieved will be related to the resources that are available

to a tax administration or revenue authority, and, where these are limited

(which is probable), to the priority or otherwise that is given in the use of

those resources, especially personnel with the requisite level of expertise,

to the tracking of particular revenue streams, and, in this instance, to the

pursuit of tax revenue in the international sphere.



It is clear that these instances of the interaction between countries have

a potential bearing on the fi scal autonomy of developed and developing

countries. Their signifi cance, however, is perhaps more telling for devel-

oping countries in view of the curbs which, principally through a sharing

of sovereignty, may be placed on their right or ability to tax and hence to

raise tax revenues. These curbs, arguably, are not suffi ciently outweighed

by more tangential benefi ts that may be provided by way of consensus in,

for example, a bilateral DTA.

In the following part of this chapter, consideration is given to the

manner in which the fi scal autonomy of developing countries may be

further compromised as a result of the infl uence which international eco-

nomic institutions have had on the confi guration of the tax systems in

many developing countries.

IV. International Economic Institutions and Constraints on Fiscal

Autonomy

Interaction between international economic institutions and countries can

occur in a myriad of ways and with varying degrees of signifi cance. In the

present context, such interaction has often involved interplay between the

achievement of economic goals set by international economic institutions

and domestic fi scal provision with, additionally, the UN and some of its

agencies having a long established interest in free market economic devel-

opment and concomitant tax issues.

Indeed, as will be seen, it is sometimes diffi cult to disentangle the diff er-

ent modes of engagement between an international economic institution

and a country when they are, principally, economically motivated (for

example, the removal of trade tariff s with a view to furthering the liberali-

sation of trade but nevertheless trespass upon national fi scal autonomy).

This is an undercurrent that is commonplace, especially in the relations

between developing countries and the IMF, the World Bank and the WTO

respectively, and one which normally contemplates some measure of tax

reform in order to facilitate the achievement of the designated economic

goal(s).

In relation to the OECD, this profi le is perhaps best illustrated by the

fact that one of the motivations for countries to enter into a bilateral DTA

that follows the OCED Model is that provision is thereby made for the

elimination or mitigation of double taxation that would otherwise have

been a hindrance to cross- border trade. In fact, the preamble of many

such bilateral DTAs recites that an express purpose of the agreement is the

facilitation of international trade and investment between the contract-

ing parties (or words to that eff ect). More generally, the provision by the



OECD, amongst other things, of a forum where its members can work

together ‘to address the economic, social and environmental challenges of

globalisation’ (OECD, 2007) tends to translate for its members in relation

to their fi scal responsibilities into expectation rather than obligation and

this is encapsulated in the notion that an OECD member will abide by

OECD driven standards and practices.

However, there may be occasions when adherence to such standards and

practices may also be expected of non- OECD members, as is illustrated by

the OECD’s initiative against harmful tax practices that commenced in the

late 1990s and which is ongoing. Latterly, the notion of moving towards

a global ‘level playing fi eld’ in the areas of transparency and eff ective

exchange of information for tax purposes has been paramount. This has

led, in particular, to an acceptance by tax havens (some of which may,

of course, be developing countries) of the need for a greater transpar-

ency, made manifest by the steadily growing number of tax information

exchange agreements entered into by tax havens with developed countries

based on the OECD’s Model Agreement on the Exchange of Information

on Tax Matters that was published in 2002.

The correlation between the achievement of economic objectives and

related challenges to fi scal autonomy is readily apparent when the rela-

tionship between the WTO and its members is considered. For countries,

developed or developing, that are members of the WTO, membership

itself, notwithstanding the supposed separateness of free trade obligations

from domestic tax systems, brings constraints on members’ fi scal auton-

omy. On a generic level, this is epitomised by the need to comply with

the fundamental non- discrimination principle that can be found in the

WTO Agreements such as the General Agreement on Tariff s and Trade

(GATT) and in the General Agreement on Trade in Services (GATS) and

which fi nds expression, respectively, in the ‘most favoured nation obliga-

tion’ and the ‘national treatment obligation’, either of which may apply to

internal tax obstacles to trade in goods or services with other WTO mem-

bers.3 More specifi cally in the tax context, the use of direct and indirect

tax incentives may be prohibited by the WTO Agreement on Subsidies

and Countervailing Measures (the SCM Agreement) where they take the

form of subsidies granted, directly or indirectly, in relation to exports. For

the purposes of the SCM Agreement, a subsidy includes any forgone or

3 For an example of a violation of the non- discrimination principle, see the preferential access to EU markets accorded to ACP countries that preceded the provision in the Cotonou Agreement between the EU and ACP countries for WTO- compatible trade agreements (EPAs).



uncollected revenue ‘that is otherwise due’. However, only those subsi-

dies which are contingent, legally or factually, on export performance (or

which discriminate against importation) are prohibited.4

However, for many developing countries the relationships with interna-

tional economic institutions that have had and continue to have a direct

bearing on their fi scal autonomy are those forged with the IMF and the

World Bank. As Stewart and Jogarajan opine, ‘international fi nancial

institutions, in particular the International Monetary Fund (IMF) and

the World Bank, have come to dominate the direction and conduct of

tax reform projects in developing countries’ and, moreover, ‘the IMF has

been the pre- eminent organisation in establishing the overall norms and

direction of tax reform as well as direct involvement in tax reform projects’

(Stewart and Jogarajan, 2004: 147). In the words of Fjeldstad and Moore,

the IMF is ‘the number one driver of the global reform agenda’ (Fjeldstad

and Moore, 2008: 238).

In this regard, the IMF has since the 1980s commonly required tax

reform as a necessary condition of the funding that is made available to

a borrowing country in order to fi nance broader economic or structural

reform. The terms of this tax conditionality are normally set out in a

borrowing country’s policy intention documents, notably in a Letter of

Intent, and these terms have tended to be fairly uniform from country to

country. In this respect, Stewart and Jogarajan, in the course of their study

of all published Letters of Intent from 1997 to early 2004, teased out the

following characteristics of the IMF tax reform ‘package’:

The IMF tax reform ‘package’ incorporates the following elements: a broad- based value added tax (VAT), introduced as early as possible, preferably at a single rate of close to 20 per cent, to replace older- style sales and turnover taxes; a low- rate, broad- based corporate and personal income tax which is ‘neutral’ with respect to diff erent investments and activities; and the simplifi ca-tion, gradual reduction and eventual elimination of import and export tariff s. In addition, it includes excises on a few items, such as petrol and alcohol, elimination of minor taxes and reform of payroll and land taxes to broaden their base and simplify administration. Finally, the IMF is now a forceful advocate of tax administration reform. (Stewart and Jogarajan, 2004: 152, footnote omitted)

4 For consideration of income tax measures that may constitute prohibited subsidies, see Lang et al., 2004: 28–34. For an analysis in the same text of the well- known DISC/FSC/ETI cases in which the WTO Panel and the Appellate Body determined that the US tax treatment of foreign sales corporations, which eff ectively excluded their trading income from taxation in the US, was contin-gent upon export performance and, consequently, WTO- incompatible, see ibid: 748–59.



The IMF’s rationale for such a tax package is related, specifi cally, to

its mandate to ensure that governments can raise suffi cient revenue in a

reliable and consistent manner to pay interest on their loans, repay their

debts and also, where necessary, be in a position to undertake further bor-

rowing. Its principal focus is on effi ciency, which explains in particular the

requirements, in relation to substantive tax provision, for the replacement

of trade taxes (that is, taxes on imports and exports) and the introduction

of a VAT. Consequently, in this respect, as Avi- Yonah and Margalioth

(2007–08) indicate, the replacement of trade taxes with domestic con-

sumption taxes, particularly VAT, is geared towards furthering macr-

oeconomic activity and providing the benefi ts of free market trading to

developing countries. More particularly, as Avi- Yonah and Margalioth

(2007–08) further point out, this encompasses the following notions.

Thus, export taxes are regarded as ineffi cient because local producers who

export their goods are disadvantaged compared with foreign producers,

whilst the VAT is seen as more effi cient than import taxes because it does

not discriminate between domestic and imported goods. Moreover, the

elimination of import taxes allows local consumers to benefi t from lower

prices created by competition between domestic and foreign producers.

Further, the elimination of import taxes makes local producers become

more effi cient and focus their eff orts on their competitive advantage.

From the perspective of a developing country, which has little choice

but to accept IMF tax conditionality if it is to be able to borrow, the

impact on its fi scal autonomy is clearly far reaching and ‘invasive’. Indeed,

broadly, the constraints on such autonomy imposed by tax conditionality

straddle choice of taxes (with VAT as the preferred consumption tax), tax

design (chiefl y, through simplifi cation) and reform of tax administration.

In the context of this chapter, these constraints reinforce the notion of a

‘shared’ rather than ‘owned’ sovereignty that became evident in the earlier

examination of certain inter- country constraints on fi scal autonomy, par-

ticularly bilateral DTAs.

Looking ahead, these areas of fi scal autonomy will continue to exercise

the IMF, and other international economic institutions, especially in a

changed and less favourable global economic environment. They will also

concern those in the international arena who are involved in tax reform.

This concern may extend, as Fjeldstad and Moore (2008) anticipate, to

an emergent epistemic community of taxation professionals, including

those employed in national tax administrations, consultancy companies

and international fi nancial institutions and organised in regional and

global organisations: an ‘epistemic community [that] both shaped and was

shaped by a period of unusually radical tax reform in the developing world

since the 1980s’ (ibid: 258).



Finally, the last substantive part of this chapter considers whether

domestic, inter- country and international economic institution- country

constraints on the fi scal autonomy of developing countries provide, indi-

vidually and/or cumulatively, suffi cient fl exibility to enable such countries

to react eff ectively to the particular challenge of the prospect of declining

tax revenues in the immediate aftermath of a global economic recession.

3. ROOM FOR FISCAL MANOEUVRE IN THE IMMEDIATE AFTERMATH OF A GLOBAL ECONOMIC RECESSION?

The onset of a global economic recession brings into sharp focus the vul-

nerability and fragility of the economies of all countries, but particularly

of those of countries in the developing world. The current recession is

no exception. However, unlike previous recessions its impact has been

accentuated by the more pronounced interconnection between, and inter-

dependence of, countries that has followed the period of global economic

integration that began in the 1980s. It is an interdependence that is

weighted in favour of developed countries and one which, as acknowl-

edged recently by the G- 20 in its Global Plan for Recovery and Reform,

imposes on its members a responsibility to act in ways that ensure ‘a fair

and sustainable recovery for all’ (G- 20, 2009c). In time, this broad decla-

ration of intent from the G- 20, together with its associated stratagems to

boost the global recovery and related promises of monetary assistance,

will have an impact. Thus, in relation to least developed countries, the

G- 20 has pledged ‘$50 billion to support social protection, boost trade and

safeguard development in low income countries’ and ‘$6 billion additional

concessional and fl exible fi nance [from the IMF] for the poorer countries

over the next 2 to 3 years’ (ibid: para. 25), which will no doubt provide

welcome support for such developing countries.

Notwithstanding such forthcoming ‘international’ monetary support,

there is a primary responsibility on developing countries to take, in so far

as they are able, such steps as are necessary within their own individual

jurisdictions to withstand the immediate consequences of the current

recession. It is a responsibility that is far from easy to discharge and one

which provides, amongst (many) other things, a pressing fi scal challenge

for developing countries of how to respond to the prospect that tax rev-

enues (and hence government revenue) are likely to decline as a result

of the contraction in legitimate economic activity brought about by the

recession. This is a challenge that must, of course, also be faced by devel-

oped countries but one which such countries are far better placed to meet.



The response to this challenge in developing countries may simply be to

accept the decline in tax revenues and to acknowledge that this, together

with falls in government revenue in other spheres, will necessitate cuts in

government expenditure, especially in relation to the provision of public

services, save to the extent that external donor aid can be found to cover

the shortfall.

Alternatively, it may be decided that there is a political and social imper-

ative to resist these cuts in government expenditure, as far as possible, and

that one way to do this is to seek to stabilise and maintain tax revenues.

This is a decision that is not without risk, because, whatever fi scal action is

contemplated, it is imperative to ensure that those measures that might be

taken with a view to stabilising and maintaining tax revenues do not deter

the engagement or re- engagement in the economic activity that is essential

to bring about a sustainable economic recovery. In short, the measures

must not be pro- cyclical in their eff ect and thereby exacerbate the prevail-

ing economic downturn. It is also a decision that clearly has a particular

poignancy in the context of this chapter because of the constraints on

fi scal autonomy to which a developing country may be subject, and it is

one that raises the fundamental question of how much latitude or room

for manoeuvre may be available to a developing country in this situation

when it wishes to take remedial fi scal action.

In this regard, expediency may suggest that the contemplated remedial

fi scal action might focus on measures that are designed to generate tax

revenue in the short term rather than on those which are likely to con-

tribute to an enhanced fi scal return over a longer period (for example, the

simplifi cation of the tax system or reforms that are designed to further the

effi ciency and eff ectiveness of a tax administration). If this is so, it follows

that general pronouncements that emanate from the international com-

munity about the prospective provision of non- monetary support in fi scal

matters to developing countries are unlikely to be regarded as a panacea

for the immediate diffi culties of straitened economic times unless related,

specifi cally, to the resolution of pressing tax revenue concerns. This

includes the following statement which was forthcoming from the UN in

December 2008, albeit in furtherance of the wider agenda of fi nancing for

development in accordance with the Monterrey Consensus:

We will continue to undertake fi scal reform, including tax reform, which is key to enhancing macroeconomic policies and mobilizing domestic public resources . . . We will step up eff orts to enhance tax revenues through modernized tax systems, more effi cient tax collection, broadening the tax base and eff ectively combating tax evasion. We will undertake these eff orts with an overarching view to make tax systems more pro- poor. While each country is responsible for its tax system, it is important to support national eff orts in these areas by



strengthening technical assistance and enhancing international cooperation and participation in addressing international tax matters, including in the area of double taxation (UN, 2008a: para. 16).

In the short term, the preferred, relatively technically straightforward

and attractive option in the endeavour to stabilise and maintain tax rev-

enues may be to make changes to an existing tax or taxes and related tax

burdens; for example, by altering rates of tax and/or by withdrawing or

suspending allowances and exemptions, rather than, more ambitiously,

extending the tax base through the adoption of the more exacting and

time- consuming option of introducing ‘new’ taxes.

However, as intimated above, a critical consideration in relation to

measures that may be directed towards the stabilisation and maintenance

of tax revenues is the extent to which the freedom or discretion to react

is ‘hedged in’ by the fi scal constraints examined in this chapter. In this

respect, the degree of fi scal fl exibility that is available will vary from one

developing country to another as each country will have its own unique

experience of the individual and cumulative impact of domestic, inter-

country and international institutional constraints on its fi scal autonomy.

Notwithstanding this heterogeneous experience, there is, nevertheless,

a marked congruence as to the taxes such as a personal income tax, value

added tax (VAT) and a corporate income tax that characterise the tax

systems of many developing countries that has been encouraged in numer-

ous instances by the IMF tax reform ‘package’. This makes it possible to

identify elements of commonality when the impact of fi scal constraints on

the freedom of developing countries to introduce changes to these taxes

with a view to stabilising and maintaining tax revenues is considered.

A comprehensive examination of such elements, however, lies beyond

the confi nes of this chapter and, consequently, the remainder of this

section seeks simply to highlight, briefl y, those elements that might be

regarded as particularly salient.

In the case of a personal income tax, domestic constraints are most

likely to predominate. In particular, the room for manoeuvre for devel-

oping countries, albeit in varying degrees, is conditioned by the limited

numbers of individuals within the tax constituency overall and of those

who may be able and, equally importantly, willing to bear the increased

tax burden that measures (such as a more steeply progressive income tax)

designed to stabilise and maintain tax revenues may entail. In countries

where there is a correlation between the enjoyment of higher levels of

income and the wielding of economic and political power within society as

a whole, the scope for resistance to such measures by those so privileged,

the elite, is clear. Moreover, even if there is acquiescence in the promul-



gation of such measures, this does not guarantee compliance generally

and/or by members of the elite. Indeed, such measures may, on the con-

trary, act as a catalyst for taxpayers to resort to tax avoidance and/or tax

evasion; actions that under- resourced revenue authorities in developing

countries may fi nd very diffi cult to detect and combat and which will serve,

therefore, to undermine the raison d’être for the measures.

The scope for developing countries to stabilise and maintain tax rev-

enues through an increase in VAT revenue may also be circumscribed by

domestic constraints. In particular, VAT can be regressive and especially

so when it is applied at a single rate. Consequently, an increase in the rate

or rates of VAT, or the withdrawal/suspension of exemptions that will

have an equivalent eff ect, is likely to worsen the extant high inequality in

developing countries; a situation that prudence suggests is inadvisable,

particularly during a recession. However, if it is decided that the rate or

rates of VAT should be increased, it does not follow that the consequent

expected increase in VAT revenue will be forthcoming. Much may depend

on the prevalence of the conditions necessary for an eff ective VAT gener-

ally, particularly regular bookkeeping, reliable self- assessment and an

effi cient revenue authority, which experience has shown may be lacking in

many developing countries.

It might also be added that an increase in the rate or rates of VAT,

notwithstanding any defi ciencies in the administration of a VAT, may

encourage the transference of economic activity, with a view to avoiding

or evading tax that would otherwise be payable, to the informal sector.

In this respect, some commentators have advocated the widening of the

VAT tax base to cover relevant economic activity conducted within the

informal sector (see, for example, Fjeldstad and Moore, 2008: 244–5). This

is an objective that, needless to say, requires careful planning and execu-

tion, not least in relation to the tax collection mechanisms that might be

employed, and one that is not likely to be achievable in many countries in

the short term.

The fetters imposed by these domestic constraints may be compounded

by inter- country constraints that are contained within regional agreements,

such as the customs union referred to earlier in this chapter, by virtue of

which compliance with prescriptive norms may be required, for example,

as to the bands within which rates of VAT may be levied. Further, in the

context of international institutional constraints, the role of the IMF, in

the case of many developing countries, is likely to be the most signifi cant.

The introduction of a VAT in place of trade taxes represents the most

radical measure within the standard IMF tax reform ‘package’. As a

consequence, a proposed change to a VAT regime that has its origins in

such a package, such as an alteration to the applicable rate(s), will need to



be reconcilable with a country’s obligation to service its debt to the IMF.

Moreover, such changes may be subjected to particular scrutiny where

they are proposed in developing countries which have struggled to adapt

to the fi scal ramifi cations of trade liberalisation.

In this regard, trade liberalisation in some low- income and postwar

economies has led not only to a reduction in trade taxes, which were previ-

ously the main source of tax revenue, but also to a situation in which alter-

native tax revenues, derived in particular from VAT and income tax, have

risen signifi cantly less than the decline in trade tax revenue (World Bank

Group, 2008: 58). In fact, recent research conducted under the auspices of

the IMF found that low- income countries tended, typically, to recover at

best only 30 cents on each dollar lost to the decline in trade tax revenue

(Baunsgaard and Keen, 2005). Further research is required in order to

achieve an understanding of the reasons for this ‘revenue gap’, although

it has been suggested by some commentators, but not without challenge,

that one factor that explains why the introduction of VAT as a substitute

for trade taxes has led to declines in total tax revenues in low- income

countries is the high levels of informal economic activity in those countries

(World Bank Group, 2008: 58–61). Be that as it may, the prospects for

closing this ‘revenue gap’ are unlikely to be enhanced by measures that

complicate the design and structure of a VAT regime. This would seem,

therefore, in the context of measures that might be taken to stabilise and

maintain VAT revenue, to militate against, for example, the introduction

of multiple rates of VAT.

Finally, in the case of a corporate income tax, tax avoidance and/or

evasion (as with a personal income tax and a VAT) may threaten the

effi cacy of measures that would otherwise increase the tax burden of

corporations. However, the principal concern is likely to be whether, as a

result of the measures, MNEs are minded to relocate to another country.

As indicated above, the right of a developing country to tax the profi ts of

a permanent establishment of an MNE is already likely to be constrained

in many cases by DTAs entered into with developed countries that are

based on the provisions of the OECD Model Convention, particularly in

this context Article 5, which defi nes ‘permanent establishment’ more nar-

rowly than its UN Model counterpart, and Article 7, which provides for

the attribution of business profi ts to a permanent establishment. However,

in this instance, the pertinent constraint is the need to retain competitive-

ness with other similarly placed countries. Perversely perhaps, it might be

decided that a reduction in the corporate tax burden is preferable if this

is what is needed to persuade MNEs to remain; a reduced fi scal return

in the short term being compensated by a continuing opportunity to tax

in coming years. The drawback is that ‘competitors’ may be tempted to



retaliate by reducing their corporate tax burden to an even lower level and,

thereby, to raise the spectre of a destructive ‘race to the bottom’.

This section of the chapter has provided a topical cameo of the con-

straints that may fetter the fi scal autonomy of developing countries.

The impact of those constraints has been considered, admittedly, in nar-

rowly defi ned circumstances. Nevertheless, notwithstanding these narrow

confi nes, an impression has been created not only of the limits that may

be placed on fi scal self- help by developing countries but also of the

responsibility for these limits that lies, particularly, with those developed

countries and international institutions to which developing countries are

beholden.

4. CONCLUSION

Taxation provides the potential for empowering a country to allocate

resources and make policy decisions, which are partly economic and partly

political, on wealth and its distribution. In the case of developed countries,

even when borrowing, most have strong governance systems to ensure

that taxation controls are retained by central government. In developing

countries where governance is weak, taxation is an essential element in

persuading donors to lend. In such circumstances, developing countries

face an uneasy and destabilising situation. Taxation that is linked to bor-

rowing requirements usually fi nds its way to foreign enterprises and other

external actors such as consultants and contractors. Moreover, central

government is usually weakened by being dependent on external sources

and foreign investors.


158

8. The World Trade Organization and the turbulent legacy of international economic lawmaking in the long twentieth century

Fiona Macmillan*

1. INTRODUCTION

This chapter focuses on the establishment of the WTO with a view to sug-

gesting that it constitutes the climax, and so the beginning of the end, of the

current process of international economic lawmaking. The chapter argues

that, in essence, the emergence of the WTO as an institution is a crystal-

lisation of pervasive structures and ideologies that combined and gained

particular force and impetus during the twentieth century. Specifi cally,

the chapter considers the eff ects of the so- called doctrines of comparative

advantage and free trade in the context of the rise of corporate capitalism

in the post- World War Two period.

Tied in with this potent combination is the process of decolonisation.

The eff ect of decolonisation on the world economy has, of course, been

profound. In particular, decolonisation has called for the development

of new techniques for accessing the resources of the so- called develop-

ing world on terms that ensure that the dominant position of the former

colonial powers in the world economy is maintained. This chapter is

premised on the claim that both the doctrine of comparative advantage,

which has provided the theoretical ballast for the current world trade

regime, and the rise of corporate capitalism, the practical arrow in the

theoretical bow, are inherently well- adapted to the task of maintaining

the subordinate position of the former colonies. In this sense, the underly-

ing argument of the chapter is that the establishment of the World Trade

Organization was not only the climax of the current process of interna-

* Corporation of London Professor of Law, School of Law, Birkbeck, University of London, London, UK.


The World Trade Organization 159

tional economic lawmaking but also the institutional realisation of the

postcolonial process.

2. THE ‘DOCTRINE’ OF COMPARATIVE ADVANTAGE

The commitment to a global free trade regime, which underlies the rhetoric

– if not the reality – of the WTO system, is said to be based upon the so-

called doctrine of comparative advantage. The idea of comparative advan-

tage was developed in the work of nineteenth- century classical economists,

building on the work of Adam Smith (Smith, 1776). Smith’s insight was

that economic gains would be produced where a nation concentrated on

producing particular commodities and then traded its surpluses in these

commodities. Smith argued that government interference in international

trade would inhibit the development of such specialisation (Dunkley,

2001: 108–9). The work of David Ricardo (Ricardo, 1817) added the

refi nement that the ability to specialise was a consequence not of so- called

absolute advantage in the form of production costs but of comparative

advantage based on national tastes, technology and resources bases, as

well as production costs (Dunkley, 2001: 109; Alessandrini, 2005).

Beginning in the late nineteenth century, advocates of international free

trade regimes have employed the theory as a tool to support their political

position. This re- badging of a political question as an economic one, and,

moreover, an economic question that is governed by an economic ‘doc-

trine’, has been an important weapon in the crusade for the liberalisation

of world trade, of which the establishment of the WTO is a signifi cant part.

However, despite the authority implicit in the use of the word ‘doctrine’,

it would be wrong to conclude that the theory of comparative advantage

commands universal adherence amongst economists. While it has some

pious adherents, there are those who embrace it only subject to extensive

qualifi cations, as well as those who are even less enthusiastic (Dunkley,

2001). Those wedded to the Washington Consensus are, of course, most

likely to fall into the group of pious adherents.

The modern version of the ‘doctrine’ argues that optimal allocation of

international resources will be achieved if each country uses its compara-

tive advantage to produce only the commodities that it can most effi ciently

produce and trades those commodities with other countries in order to

obtain the commodities that it does not produce (Dunkley, 2001: ch. 6;

Leonard, 1998: ch. 1). Essentially, therefore, the argument is one about

optimal allocation of resources as a consequence of the operation of an

unfettered market mechanism. Ultimately, it is argued, where there is



optimal allocation of resources then economic welfare will be maximised.

It is also frequently argued that economic growth will be stimulated and

everyone will be better off in economic terms. However, even some promi-

nent free trade advocates are doubtful about this proposition and accord-

ingly reluctant to hang the free trade case under this banner (Bhagwati,

2002: 41–3). Non- economic benefi ts in the form of greater international

cooperation and harmony are also postulated by adherents of the doctrine

of comparative advantage and its concomitant of international trade free

from government interference (Alessandrini, 2005; Dunkley, 2001: 110).

These non- economic benefi ts would, it is argued, fl ow from the fact of

economic interdependence.

There are a number of diffi culties in using the doctrine of compara-

tive advantage as a spiritual guide for the development of the world

trading system. Foremost among these is the fact that it has always been

unclear whether the doctrine is prescriptive or merely descriptive of the

process of international trade (Leonard, 1998: 1; Davis and Neacsu, 2001:

754–62). Even those who embrace it on a prescriptive basis acknowledge

that it may cause ‘short- term’ dislocations. In particular, the need for

‘structural adjustment’ in a country’s economy as it gears up to meet its

comparatively advantageous destiny will create hardship in those sectors

from which resources move (Dunkley, 2001: 147ff ). As Dunkley notes, the

free trade response to this creation of ‘winners and (temporary) losers’ is

that ‘if the former “bribe” or compensate the latter so as to facilitate their

adjustment, everyone will be economically better off ’ (Dunkley, 2001:

109). Many proponents of free trade also acknowledge that, in a world of

imperfect markets, there are circumstances in which temporary forms of

government intervention in the market may be necessary (Dunkley, 2001:

109; Bhagwati, 2002: 11–33).

There are, however, a range of objections to the doctrine of comparative

advantage and its concomitant of free international trade that go beyond

acknowledging the need for some tinkering around the edges. Some of

these arguments constitute developments or extensions of those accepted

by free trade proponents as grounding temporary forms of government

intervention. For example, there is relatively widespread acceptance of the

proposition that infant industries with potential comparative advantage

may need some form of protection in their early life in order to realise

their comparative advantage (Dunkley, 2001: 112). An extension of this

argument that is not widely accepted amongst free trade proponents is

that today’s developed countries owe their current state of development

to the fact that they employed blanket or selective protection in order to

nurture the process of industrialisation (Dunkley, 2001: 114–15; Arrighi,

2002: 47–58 and ch. 3; Alessandrini, 2005). The corollary of this being



that to deny such protectionist advantages to developing countries is to

deprive them of an essential step in the development process (Dunkley,

2001: 114–15; Alessandrini, 2005: 58–60).

Another set of arguments, which for free trade proponents constitutes

an unjustifi able extension of a largely acceptable qualifi cation of the

comparative advantage doctrine, relates to the use of protective devices

to improve income or the rate of employment. Such arguments are

very much part of the Keynesian legacy (Keynes, 1932; Dunkley, 2001:

116–17). However, they go considerably beyond the acceptance by some

free trade proponents that certain externalities may justify intervention

in the market. This is especially so since there tends to be a consensus

amongst free trade proponents that such externalities should be dealt with

by non- tariff measures, such as subsidies, rather than by direct protection

(Dunkley, 2001: 113; Bhagwati, 2002: 26–33).

There have been many criticisms of the economic assumptions upon

which the doctrine of comparative advantage is based (Dunkley, 2001:

110). A serious problem about its current applicability relates to its

assumption that capital, along with skilled labour, is largely immobile

(Gray, 1998: 82). The effi ciency and welfare advantages predicted by

the doctrine are based upon the movement of traded commodities, in

the form of raw materials and manufactured goods, across borders. The

twentieth century, however, was marked by an increase (that has contin-

ued unabated into the twenty- fi rst century) in the movement of the means

of production across borders. This generally occurs by means of foreign

direct investment by multinational enterprises, which establish sub-

sidiary undertakings in another country for this purpose. It seems clear

that corporate decisions about the optimal destination of foreign direct

investment are informed by a range of factors including ‘raw materials,

energy sources, markets, labor supply and costs, transportation avail-

ability and costs, capital availability, the potential for economies of scale,

services and infrastructure (electricity, water supply, waste disposal, and

so forth), governmental actions (taxes, incentives, regulations), and site

costs’ (Leonard, 1998: 21). Disagreement exists about the relative weight

of these factors, and it seems likely that their signifi cance diff ers sub-

stantially from industry to industry (Leonard, 1998: 21–6). The impor-

tant point, however, is that the prevalence and pattern of foreign direct

investment suggests that capital seeks absolute, rather than comparative,

advantage (Gray, 1998: 81–3; Dunkley, 2001: 118). This is likely to create

welfare problems in countries that compete for foreign direct investment.

Currently, such problems are most likely to be experienced in developing

countries.



3. COMPARATIVE ADVANTAGE, FREE TRADE AND DEVELOPING COUNTRIES

Cogent criticisms have been made about the ability of the doctrine of com-

parative advantage to deal with the obvious global disadvantage of devel-

oping countries. The concern here, as Dunkley notes, is that ‘in a world

of uneven development free trade, or even trade per se, may be inherently

unequalising’ (Dunkley, 2001: 119). There is a range of economic argu-

ments that explain why the doctrine of comparative advantage may be

unable to deliver its promised welfare benefi ts to developing countries.

One of the important general arguments in this context is that com-

parative advantage is created and cumulative, rather than natural, ‘being

based on historical development processes, acquired skills, cultivated

industry patterns or “fi rst mover” benefi ts, so it can change over time,

can be shaped by governments or industry leaders and can decay through

neglect’ (Dunkley, 2001: 122). If this is so, then the cumulative compara-

tive advantage of developed countries will ensure either that inequalities

always remain or that they take an unacceptably long time to disappear.

Another important school of economic thought postulates perpetual ine-

qualities as a consequence of free trade. According to this argument, where

there is low elasticity in demand for the exports of a country but high elas-

ticity in domestic demand for imports, then export prices relative to import

prices will result in a continuous trade defi cit (Mill, 1844: 21). As this tends

to describe the terms upon which at least some developing countries export

their primary products and import manufactured products, it is argued that

under free trade conditions these developing countries will remain trapped

in a trade defi cit preventing them from realising the welfare gains promised

by free trade doctrine (Dunkley, 2001: 118 and 145ff ).

These are not, of course, the only explanations for the current trade

defi cit and retarded economic development suff ered by developing coun-

tries. It is certainly the case that the adverse economic position of develop-

ing countries has been exacerbated by the fact that they have been denied

comparative advantages that they might have otherwise enjoyed. In this

respect two factors, in particular, are worthy of note.

The fi rst is that the requirements for the global protection of intellectual

property rights,1 the large- scale benefi ts of which are overwhelmingly

enjoyed by undertakings based in the developed world, deny to develop-

1 This is a result of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement) (GATT, 1994b), about which much more below.



ing countries any comparative advantage that they may have accrued in

the processes or imitation of certain manufactured goods and in ‘incre-

mental innovation’ (Reichman, 1993: 175). To place this in context, it is

essential to understand that many of today’s developed countries once

placed extensive economic reliance on the unfettered ability to copy

manufactured goods emanating from other more developed economies.

(It is acknowledged that this point might be thought to push the notion

of comparative advantage beyond its orthodox scope, although as the

critique of the doctrine in this chapter tends to demonstrate, the ambit of

that scope is contested.)

Secondly, the trading position of many developing countries is adversely

aff ected by the fact that developed countries have continued to protect

their domestic markets for certain primary products and manufactured

goods exported from developing countries.2 However, the extent to which

the opening of developed country markets to such exports would allevi-

ate the trade defi cits of developing countries remains a matter of debate

amongst economists (Dunkley, 2001: 119; Bhagwati, 2002: 89–90).

The protectionism of developed countries is a response to what is per-

ceived as a potential fl ood of ‘cheap imports’ from the developing world.

It is not uncommon for industries in developed countries to argue that,

in order to survive, they need protection from such imports, which are

made on the back of low labour costs in developing countries. From the

free trade point of view, this argument denies to developing countries their

legitimate comparative advantage. In economic terms, some questions

have been raised about the validity of this free trade argument given that

many of the employers of low- cost labour in the developing world are

multinational corporate interests, which marry high technology with low-

cost labour in order to achieve an advantage that gives little in the way of

welfare benefi ts to the host developing country (Dunkley, 2001: 120–21).

In addition to this, it is not clear that the developed world market for

cheap manufactured imports from developing countries functions in quite

the way that classical free trade economists postulate. Theoretically, the

comparative advantage of the developing country will be realised when

developed world consumers purchase the cheaper imports rather than

more expensive domestic products. However, increasing numbers of con-

sumers in the developed world eschew the products of low- cost labour on

ethical grounds. This not only shows the limits of economic theory but

2 The ongoing dispute over market access for the cotton and cotton products of Benin, Burkina Faso, Chad and Mali is a good example of this (see WTO, 2003a, 2003b).



also indicates that the debate about free trade should transcend arguments

about the validity in solely economic terms of the doctrine of comparative

advantage.

Ethical concerns about the exploitation of labour, whether by multi-

national corporate interests or by domestically based interests, are one

of a number of non- economic arguments that may be made about an

unfettered free trade regime. What these arguments have in common is

the rejection of wealth maximisation as the ultimate measure of human

happiness and attainment. As Keynes (1932) famously wrote:

If it were true that we should be a little richer, provided that the whole country and all the workers in it were to specialise on half- a- dozen mass- produced products, each individual doing nothing and having no hopes of doing any-thing except one minute, unskilled repetitive act all his life long, should we all cry out for the immediate destruction of the endless variety of trades and crafts and employments which stand in the way of the glorious attainment of this maximum degree of specialised cheapness? Of course we should not – and that is enough to prove the case for free trade . . . has left something out. Our task is to redress the balance of the argument.

The critique of free trade based upon the rejection of wealth maximi-

sation draws stark attention to the diffi culty in attempting to divide the

political and the economic. The decision to embrace a free trade regime

is not, and can never be, a purely economic one. Rather, it is a political

choice involving, amongst other things, economic considerations. Joseph

Stiglitz underlines the signifi cance of this point:

There are important disagreements about economic and social policy in our democracies. Some of these disagreements are about values – how concerned should we be about our environment (how much environmental degradation should we tolerate, if it allows us to have a higher GDP); how concerned should we be about the poor (how much sacrifi ce in our total income should we be willing to make, if it allows some of the poor to move out of poverty, or to be slightly better off ); or how concerned should we be about democracy (are we willing to compromise on basic rights, such as the rights to association, if we believe that as a result, the economy will grow faster). (Stiglitz, 2002a: 218–19)

Overall, the debate on the non- economic merits and de- merits of the

comparative advantage doctrine is one that even the most thoughtful

modern proponents of free trade, such as Bhagwati, seem to have trouble

joining. In this, as in so much else, modern free trade theorists appear to

be embracing a type of intellectual foreclosure that dates back to the work

of Adam Smith. Smith postulated non- economic eff ects of free trade, both

positive and negative. On the positive side, both he and Ricardo cited

cosmopolitanism and international harmony as a non- economic benefi t



of free trade. However, Smith saw that the pursuit of material wealth had

less desirable eff ects:

These are the disadvantages of a commercial spirit. The minds of men are contracted, are rendered incapable of elevation. Education is despised, or at least neglected, and the heroic spirit is almost utterly extinguished. (Hirschman, 1977: 106–7)

He was, however, unable to resolve the confl ict between this concern and

his commitment to the expansion of wealth, cosmopolitanism and inter-

national harmony through international trade. He thus concludes that the

primary motivation of humankind is to better its material condition. This

conclusion set the parameters to the post- Smithian debate about interna-

tional trade, which has been conducted around the question of whether,

and to what extent, international trade is capable of improving material

wellbeing (Hirschman, 1977: 112). Somewhere along the way, the insidi-

ous idea that the maximisation of material wealth is the ultimate human

attainment seems to have become a foundational principle in this debate

(Alessandrini, 2005: 60).

This rather messy theory of comparative advantage starts to look even

more problematic when it is located in the terrain of this chapter’s central

object of consideration, the WTO. Despite its appeal to the doctrine of

comparative advantage as a justifi cation for world market liberalisation, it

is arguable that the WTO is incapable of realising the benefi ts suggested by

advocates of the doctrine because, rhetoric aside, it is not really concerned

with removing barriers to international trade. Rather, the argument may

be made that the WTO is a pretext for keeping up protectionist barriers

in some areas.3 Thus, Amin has remarked that ‘the function of the IMF

and the World Bank, and also GATT, masquerading behind the discourse

of free trade, is the protection of market control by the dominant transna-

tional oligopolies’ (Amin, 1998: 97).

4. THE RISE OF CORPORATE CAPITALISM

In their attachment to the theory of comparative advantage and its pre-

sumed concomitant of a world market economy under which economic

3 See above note 2. See also, for example, US – Transitional Safeguard Measures on Combed Cotton Yarn from Pakistan; US – Rules of Origin for Textiles and Apparel Products; European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries; US – Subsidies on Upland Cotton.



welfare would be maximised, neither Adam Smith nor David Ricardo

appear to have foreseen the meteoric rise of the multinational corporate

entity. This is not particularly surprising. Like all of us, their intellectual

horizons were shaped by their times and, in their case, by the prevailing

pattern of capitalist development.

It would, of course, have been impossible for the early theorists of com-

parative advantage to ignore the importance of the joint stock corpora-

tions in opening up lucrative avenues of foreign trade. Since at least the

establishment of the English East India Company in 1600 and its Dutch

counterpart, the Verenigde Oost- Indische Compagnie (VOC), in 1602,

these corporations had been features of the international trade landscape.

The trade ascendancy of the VOC in the seventeenth century was, like the

power of the Dutch Empire, on the wane by the middle of the eighteenth

century (Arrighi, 2002: 139ff ). At this time, as the British Empire super-

seded the Dutch, the English joint stock companies began their domina-

tion of international trade. This pattern was not a mere coincidence. As

Arrighi has noted, the ‘joint- stock chartered companies were highly mal-

leable instruments of expansion of state power’ (Arrighi, 2002: 307). In

other words, these corporations were not just part of the trade landscape,

they were also part of the political landscape in a way that directly allied

them to the interests of their originating nation state.

Today’s multinational corporate enterprise has a certain type of inter-

dependence with the nation state, and this relationship has considerable

political signifi cance. However, despite its interdependence with the state,

the modern multinational enterprise is not an instrument of state power.

Rather, it has come to constitute ‘the most fundamental limit of that

power’ (Arrighi, 2002: 307). This is because, in many respects, the multi-

national corporation wields power quite independently of the state and of

state constraints.

Viewed through the lens of the ‘extroverted’ national economy (Amin,

1974: 599) that characterised the period of British dominance, during

which both Adam Smith and David Ricardo were writing their infl uential

works, this development in the nature of corporate power would have been

far from predictable. It was the shift from Britain as the dominant global

state power to the period of US dominance, associated with the move from

a leading extroverted national economy to a leading ‘autocentric’ national

economy (Amin, 1974: 599), which provided the conditions necessary for

the fl ourishing of the multinational corporate enterprise:

In the US regime . . . the autocentric nature of the dominant and leading national economy (the US) became the basis of a process of ‘internalization’ of the world market within the organizational domains of giant business corpora-



tions, while economic activities in the United States remained organically inte-grated into a single national reality to a far greater extent than they ever were in nineteenth- century Britain. (Arrighi, 2002: 281)

The key feature of these new ‘organisational domains’ was vertical inte-

gration (Chandler, 1977: 244), which was the complete opposite of the

approach taken by British trading concerns during the height of Britain’s

colonial and trade domination (Arrighi, 2002: 287).

With the advantage of increased historical perspective, Braudel enjoyed

an insight denied to Smith, Ricardo and their ilk. He saw that the economy

(in its broadest sense) was composed of three layers: the material life, the

market economy and capitalism (Braudel, 1982: 10–11). The fi rst layer is

‘an extremely elementary and mostly self- suffi cient economy’ (Arrighi,

2002: 10), which Braudel also referred to as ‘the non- economy’ (Braudel,

1982: 229). The second layer of the economy is characterised by ‘its many

horizontal communications between the diff erent markets’, where ‘a

degree of automatic coordination usually links supply, demand and prices’

(Braudel, 1982: 229).

It seems likely that Smith, Ricardo and their fellow free trade enthusiasts

not only were concerned with this second layer of the economy but also

would not have distinguished it from Braudel’s third layer (Arrighi, 2002:

10). As the market economy has its roots in the material life, so Braudel’s

top layer emerges from the market economy. This is ‘the zone of the anti-

market, where the great predators roam and the law of the jungle operates.

This – today as in the past, before and after the industrial revolution – is the

real home of capitalism’ (Braudel, 1982: 229–30). The real home of capital-

ism is, however, an unstable structure; and in its instability it threatens the

stability of the lower layers of the economy, especially the market economy.

Arrighi has argued that this inherent instability of the capitalist system

has led to a cyclical series of paradigm shifts. When capital can no longer

be profi tably employed by use in the development of new markets that

expand the productive capacity of the existing markets, then a switch

occurs and excess profi ts are ploughed into the trade in money. That is, a

switch is made from trade to fi nance.

The switch is the expression of a ‘crisis’ in the sense that it marks a

‘turning point’, a ‘crucial time of decision’, when the leading agency of

systemic processes of capital accumulation reveals, through the switch,

a negative judgment on the possibility of continuing to profi t from the

reinvestment of surplus capital in the material expansion of the world

economy, as well as a positive judgment on the possibility of prolonging in

time and space its leadership/dominance through a greater specialisation

in high fi nance (Arrighi, 2002: 215).



Drawing on Weber (1978), Arrighi argues that interstate competition

for mobile capital has been essential to the material expansion of the capi-

talist world economy. However, Arrighi’s gloss to this proposition is that

capitalist power has intensifi ed during each period of capitalist accumula-

tion (Arrighi, 2002: 12ff ).

It seems that the modern multinational enterprise is very much a crea-

ture of this intensifi cation of capitalist power. The preconditions of the

ascendancy of the multinational enterprise were the twentieth- century

processes of vertical integration and internalisation of international trade,

but the dominance of multinational enterprises is crucially linked to inter-

state competition for investment. Gray notes:

Today’s competition between states for investment by multinational corpora-tions allows them to exercise a leverage they did not possess in a more hierarchi-cal world order. At the same time such competition limits the freedom of action of sovereign states. The leverage that states can exercise over corporations must be exercised in a global environment in which most of the competitive pressures that aff ect them work to limit the control of governments over their economies within a narrow margin. (Gray, 1998: 70)

Thus, the evolution of the relationship between state and international

corporate enterprise has been characterised by a move along the spectrum

from an identity to an opposition of interest. The relationship remains

interdependent, but the nature of that interdependence has altered.

The phenomenon of corporate capitalism has produced multinational

corporate entities of considerable size and economic power (Anderson and

Cavanagh, 2000). The infl uence multinational corporate entities are able

to wield over the world economy has important implications for the doc-

trine of comparative advantage and its free trade concomitant, which are

concerned in essence with the eff ect of market forces on trading advantages

between nation states and do not take into account the massive market

power exercised by members of the international corporate sector.

Indeed, one of the strangest aspects of Bhagwati’s thoughtful advocacy

of the free trade position is the way in which he ignores both the impact

of corporate power on the underlying assumptions of the comparative

advantage doctrine and the fact that free trade has become an instrument

of the augmentation of corporate power. One of Bhagwati’s foundational

arguments is that ‘[i]n the presence of market failure (or distortion), free

trade is not necessarily the best policy . . . Where the distortion is external,

free trade must be departed from as part of the suitable fi rst best trade

policy addressed to that distortion’ (Bhagwati, 2002: 28). Bhagwati does

not seem to take into account even the possibility that the dominating

market power of multinational enterprises, which allows them ‘to manipu-



late world prices and supplies (and often demands as well) in their own

private interests’, might constitute an external distortion (Alessandrini,

2005: 17–19). He does not, therefore, respond to the argument, noted

above, that corporate entities pursue and achieve absolute advantage. The

distortion caused by corporate power constitutes more than a serious dent

in Bhagwati’s argument. Because the power of multinational corporate

entities is not, precisely as a result of its transnational character, suscep-

tible to national government control, Bhagwati’s solution of tackling the

external distortion through government action is not really a practicable

one. In any case such action, even assuming such a distortion could be

cured in this way, seems to compromise the theoretical foundations of free

trade theory, which relies on markets as the best form of resource alloca-

tion.

Associated with the fact that corporate capitalism has undermined

the basis of the doctrine of comparative advantage is its responsibility

for structural change in the world economy. It is common to describe

aspects of this under the rubric of economic globalization. Views on the

meaning, depth, signifi cance, inevitability and desirability of globaliza-

tion are legion. Structurally speaking, important diff erences exist between

those who perceive globalization as promoting diversity and those who

perceive it as the harbinger of homogenisation. Advocates of the former

view often appear to be confusing the means of globalization with its ends.

Gray’s argument, for example, that globalization is stimulated by ‘diff er-

ences between localities, nations and regions’ because ‘[t]here would not

be profi ts to be made by investing and manufacturing worldwide if condi-

tions were similar everywhere’ (Gray, 1998: 57–8) provides an example of

this tendency. It may be that economic globalization is stimulated by dif-

ference, but its end result is homogenisation. Ultimately, the ability to sell

the same or substantially the same product or service in as many markets

as possible not only seems to make the most economic sense for globaliz-

ing corporate interests but also appears to be the obvious intention behind

their worldwide marketing campaigns (Levitt, 1983).

If homogenisation of markets is the object or eff ect of economic glo-

balization then it seems almost axiomatic that this will have an impact

on cultural, social, legal and political life. Again, the precise nature of

this impact is much disputed. It is, for example, common to perceive in

globalization a threat to national sovereignty. However, the signifi cance

of this threat in terms of the exercise of sovereignty is much debated. For

some commentators sovereignty has been relocated upwards to the supra-

national level and downwards to the sub- national level (Jayasuriya, 1999);

for others, multinational corporations have usurped the role of the nation

state, yet others argue that the global market ‘has weakened and hollowed



out’ both nation states and multinational corporations (Gray, 1998: 63,

74–7). Some consider the nation state to retain vitality and take the view

that arguments to the contrary are propaganda for the proposition that

complete globalization is inevitable (Hirst and Thompson, 1996; Dunkley,

2001: 234–7). Many bemoan the decline in the power and autonomy of

the nation state, but not all. There are those (Hardt and Negri, 2000) who,

as Dunkley notes, ‘see globalisation as allowing . . . ideological diversity

to combat narrow nationalisms, broad outlooks to supersede particular-

ism or alternative models to rival European forms of modernisation’

(Dunkley, 2001: 16).

In terms of the social, legal and political eff ects of globalization, Amin

has argued that globalization has produced ‘global disorder’ because,

amongst other things, the global system ‘has not developed new forms of

political and social organization going beyond the nation state – a require-

ment of the globalized system of production’ (Amin, 1998: 2). This is, of

course, intimately connected with one of the most persistent constitutional

problems of the modern era, which is that the power of capital, and specifi -

cally of multinational corporate entities, has transcended the nation state

while the exercise of political and legal power has remained trapped within

its confi nes.

Despite all the competing views on the nature of the structural changes

consequent on globalization, almost no one seems to deny that the rise of

the multinational or transnational corporate enterprise is both a cause and

a predominant feature of our globalized world. This power is not appro-

priately characterised as simply economic. It also has an explicitly political

character. One manifestation of this political power is the way in which

corporate interests are able to infl uence government policies in countries

seeking foreign direct investment (FDI). The exercise of this power is a

prevalent feature of twenty- fi rst- century political life precisely because

of the importance of interstate competition for mobile capital. However,

the leverage that such corporate interests are able to exert in this respect

is obviously directly proportional to the needs of countries seeking FDI –

the greater the need, the greater the potential power that may be wielded.

The fact that certain countries are vulnerable to such leverage shows that

there are considerable perceived benefi ts fl owing from FDI. However, it is

becoming clear that where the conditions for FDI are particularly onerous

this has developmental implications for the recipient country.

That this type of behaviour sticks in the craw of developing countries

is evidenced by a Communication from China, Cuba, India, Kenya,

Pakistan and Zimbabwe to the WTO Working Group on the Relationship

between Trade and Investment (2002). Of multinational enterprises, the

Communication notes:



They command enormous physical and fi nancial resources, including propri-etary technology and worldwide recognition of their brand or trade names. Their global scale of operations give them unique ability to respond to exchange rate movements in any part of the world, minimize their global tax bill and circumvent fi nancial restrictions imposed by governments, ability to minimize the political risks, access to information on world markets and the ability to bargain with the potential host countries from a position of strength arising from their global position. (ibid: para. 1)

In a clear refl ection on the way in which at least some corporate entities

use their power, the Communication calls for the imposition, within the

context of a WTO Multilateral Investment Agreement, of obligations on

multinational enterprises based on four general principles, as follows:

● foreign investors would respect the national sovereignty of the host member and the right of each member government to regulate and monitor their activities;

● non- interference in internal aff airs of the host member and in its determi-nation of its economic and other priorities;

● adherence to economic goals and development objectives, policies and priorities of host members, and working seriously towards making a positive contribution to the achievement of the host members’ economic goals, development policies and objectives;

● adherence to socio- cultural objectives and values, and avoiding practices, products or services that may have detrimental eff ects. (WTO Working Group on the Relationship between Trade and Investment, 2002: para. 12)

Another aspect of the political power of multinational corporate entities

is the way in which they are also able to infl uence structural change and

institution building at the supranational level. Because states are generally

the formal actors at this level, corporate entities need to use their power

and infl uence with states in order to achieve desired changes. The states

implicated in this exercise of power are not just developing countries, the

ability of which to infl uence political developments at the international

level is perceived as comparatively limited, but are rather the most power-

ful states in the current world order (Dryden, 1995; Odell and Eichengreen,

2000: 200–206).

For example, there is extensive evidence for the proposition that a pow-

erful alliance of cross- sectoral multinational corporate interests operating

under the auspices of the US Intellectual Property Committee procured

both the inclusion of intellectual property as a trade issue within the

Uruguay Round of trade talks and the eventual conclusion of the WTO

Agreement on Trade Related Aspects of Intellectual Property Rights

(Blakeney, 1996: ch. 1; Sell, 2003). In doing this, they exercised leverage

not only with the US government but also on the governments of other



powerful and infl uential states (especially those of the European Union

and Japan) by mobilising corporate interests based in those countries (Sell,

2003: 46). It is, accordingly, arguable that the general perception by the

most powerful and infl uential states that there is a community of interest

between state and corporation had a decisive infl uence on the outcome of

the Uruguay Round.

5. THE TRANSITION FROM GATT TO THE WTO

The new institution of the WTO was the fi nal product of the long

Uruguay Round of trade negotiations that commenced at Punta del Este

in September 1986.4 A resounding chorus of commentators appears to

embrace the view that the move from a regime predicated on an agree-

ment to one predicated on an intergovernmental institution constitutes a

quantum shift in the nature of multilateral trade relations.

Looked at in the cold light of day, however, the diff erences between

the world trading regime before and after the establishment of the WTO

might appear rather less monumental (Macmillan, 2005). In a move that

might be regarded as emphasising either continuity or the minimal nature

of the shift from agreement to organisation, the Agreement Establishing

the World Trade Organization (hereafter, the WTO Agreement) contains

a Preamble that substantially reproduces the Preamble of the 1947 GATT

with the addition of some remarks directed towards the importance of

sustainable development5 and of securing ‘economic development’.6

That constitutive agreement also makes it clear that important GATT

principles, such as being member- driven and proceeding by consensus,

have been carried over from GATT into the WTO. So much (and more)

can be said for the similarities between GATT and the WTO. There are,

of course, diff erences between the two, but it seems unlikely that they are

such as to amount to a rupture in the pattern of international economic

4 General Agreement on Tariff s and Trade, Punta del Este Declaration, Ministerial Declaration, 20 September 1986.

5 Specifi cally, the Preamble to the WTO Agreement refers to ‘allowing for the optimal use of the world’s resources in accordance with the objective of sustain-able development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at diff erent levels of economic development’.

6 Specifi cally, the Preamble to the WTO Agreement refers to the ‘need for positive eff orts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development’.



lawmaking. This is not to suggest that the establishment of the WTO is

without signifi cance in the pattern and trajectory of multilateral trade

governance. On the contrary, it was a moment of great signifi cance pre-

cisely because it marked the culmination of a long process of international

economic lawmaking.

As is commonly noted, the Uruguay Round marked a move to a more

focused concern with non- tariff barriers to international trade. This con-

solidated a trend that began during the Tokyo Round, when the trading

system fi rst fi xed its eye in a more organised way on the importance of

non- tariff issues. As the post- Tokyo Round consequence of this was a

plethora of smaller, often plurilateral, agreements, there was considerable

fragmentation in the legal system governing international trade. It seems

clear that this created a pressure for consolidation to which one possible

response was the creation of an overarching institution. This seems to

have been one of the factors that, in April 1990, motivated the suggestion

by Canada’s trade minister for the establishment of just such an institu-

tion (Preeg, 1995: 113; Odell and Eichengreen, 2000: 188; Hoekman and

Kostecki, 2001: 40), which was followed by the formal proposal of the

European Communities in July 1990 for a so- called Multilateral Trade

Organization (see GATT, 1990b). There also seems to have been a strong

view that the integration of the two new major areas of multilateral agree-

ment, intellectual property and services, would be most effi ciently achieved

under the auspices of an institution (UNCTAD, 1994: 8).

These types of explanations for the emergence of what became the WTO

may cast some light on the immediately proximate pressures for the crea-

tion of an institution, although it is interesting that a number of GATT

members found them less than compelling at the time.7 It seems possible,

however, despite the fact that an institutional approach was not contem-

plated in the Punta del Este Declaration, that there were longer- term sys-

temic pressures behind the creation of the WTO as an institution. If this is

so, it means that the movement from GATT to the WTO is unlikely to be

a quantum shift. If the creation of the WTO was due to longer- term pres-

sures, rather than being a moment of gestalt in 1990, this tends to suggest

a process of gradual change in the world trading system rather than a

sudden alteration. The creation of the institution may, in this sense, be no

more than a recognition or legitimation of changes already occurring.

7 Switzerland, for example, preferred the option of retaining GATT and strengthening its links to the Bretton Woods institutions (see GATT, 1990a), while the US, at that stage, preferred a more gradual consideration of the need for a new institutional approach (see GATT, 1990c), and see UNCTAD (1994: 8–9 and 9n).



A problem in assessing the meaning and signifi cance of the move

from the GATT to the WTO is in distinguishing between proponents

of the new institutional form and proponents of greater trade liberalisa-

tion. While one might be tempted to argue that the quest to distinguish

between the form of the organisation and the content of its trade rules

is diffi cult, if not impossible – and, in other contexts, possibly meaning-

less since the form clearly aff ects the content – it seems to be the case

that this distinction did exist during the Uruguay Round negotiations.

While it was the US government that was pressing for greater trade lib-

eralisation and the inclusion of an agreement on intellectual property,

the initial proposal for a multilateral institution did not emanate from

the US, either formally or informally. Rather, as noted above, the formal

impetus came from the European Communities following on from a

Canadian proposal.

Developing countries, which had become a signifi cant presence in mul-

tilateral trade talks for the fi rst time during the Uruguay Round (Krueger,

2000: 1, 7), also seem to have supported an institutional framework on

the basis that it would have greater potential to constrain aggressive

US bilateralism – a consideration that was equally attractive to most of

the developed world, including the European Communities (Odell and

Eichengreen, 2000: 188; Hoekman and Kostecki, 2001: 34). Possibly for

connected reasons, the US seems to have been, at fi rst, rather lukewarm in

relation to the proposed new trade organisation, preferring a more incre-

mental approach to the establishment of any new overarching institution.

By the time of the 1991 Dunkel Draft,8 which formed the basis of the fi nal

agreement for the WTO, the US position appears to have solidifi ed in

favour of the proposed new institution.

The European Communities, on the other hand, were having far more

diffi culty with the proposed content of the agreements that would make

up the operating rules for the institution. The particular sticking point for

the European Communities was the issue of agricultural liberalisation,

which was central to the US negotiating position. Additionally, the French

government resisted services liberalisation owing to its fears about US

cultural imperialism, generally, and its eff ect on the French fi lm industry,

specifi cally.

In the end, it was the US that forced the issue, demonstrating coales-

cence between pressures for trade liberalisation and for the new institu-

tional form. While this may have been, at least in part, a matter of strategic

8 This was a consolidated draft by Arthur Dunkel, Director- General of GATT, which formed the basis of the fi nal Uruguay Round Agreements.



expediency, it suggests that ultimately there was no intrinsic contradiction

between greater trade liberalisation and the new institution of the WTO.

Given this fi nal rapprochement between greater trade liberalisation and

the new institution of the WTO, it is tempting to argue that the greatest

signifi cance of the WTO lies in its free trade credentials. This argument

gains strength from the fact that it was the US, consistently standing

for the interests of trade liberalisation in selected sectors, that drove the

process that concluded the Uruguay Round. Given this US dominance, it

does not seem unreasonable to go even further and suggest that, in its fi nal

form, the institution of the WTO serves the cause of the (sectorally selec-

tive) free traders, rather than free trade serving the cause of greater institu-

tionalism in multilateral trading relations. If this is so, then we need to ask:

what motivated the free trade warriors of the late twentieth century?

A considerable infl uence on the architects of the WTO’s doomed fore-

runner, the International Trade Organization, and by default the GATT,

was the conviction that liberalised trade and consequent economic interde-

pendence would reduce political confl ict and make a repeat of the carnage

of the First and Second World Wars more unlikely (Penrose, 1953). In this,

they showed themselves to be the intellectual heirs of Adam Smith. There

does not seem, however, to be any obvious connection between this laud-

able objective and the transition from GATT to the WTO. Certainly, the

carnage of war – if not world war – continued unabated during the second

half of the twentieth century. However, none of the armed confl icts of this

period seem obviously trade- related (Bello, 2000: 104). This may, or may

not, mean that the GATT was doing a good job in this respect. It does,

on the other hand, seem to undermine an argument that the movement to

a new trade regime was stimulated by the desire to secure more peaceful

multilateral political relations. Further, it is notable that the period since

the establishment of the WTO has not witnessed a particular diminution

in war. On the contrary, humanity has managed to enter the new century

with an apparent appetite to relive many of the horrors of the old one.

It is, therefore, diffi cult to place much emphasis on the prevention

of war as a reason for the transition from GATT to the WTO. Casting

around for other explanations, it is notable that, rhetorically at least, the

late- twentieth- century trade warriors placed considerable emphasis on

the economic benefi ts of trade liberalisation. Leaving aside the questions

that have been raised about these above and (especially) the question of

the distribution of these benefi ts, it seems that the WTO was not essential

to the expansion of world trade. As Bello remarks, on the basis of the

WTO’s own statistics ‘[w]orld trade did not need the WTO to expand 87-

fold between 1948 and 1997, from $124 billion to $10,772 billion’ (Bello,

2000: 104, citing WTO, 1998).



Rather, as an explanation of the emergence of the WTO, it seems much

more likely that the WTO was a response to that economic interdepend-

ence to which GATT had so successfully contributed. That is, the WTO

was a response to the rise of so- called globalization in the form of cor-

porate capitalism. Globalization as a vehicle of corporate capitalism was

considerably inhibited by a range of non- tariff measures introduced after

the ‘exogenous shocks’ (Hoekman and Kostecki, 2001: 43), including the

collapse of the fi xed exchange rate system established under the auspices

of the Bretton Woods institutions and the OPEC crisis, of the 1970s and

1980s (Odell and Eichengreen, 2000: 187–9; Hoekman and Kostecki, 2001:

41–4). Hoekman and Kostecki note that ‘[m]atters were compounded

by international political developments such as détente that reduced the

primacy of foreign policy considerations in maintaining cooperation in

trade’ (ibid: 43). The rise of the WTO, therefore, with its emphasis on

the removal of non- tariff barriers, is a response to the interruption of the

process of corporate- led globalization.

6. TOWARDS TURBULENCE?

Perspectives emerging from structuralist theory tend to reinforce the

idea of an interdependent relationship between globalization, corporate

capitalism and the emergence of the WTO as an institution. Sociological

institutionalism (Nichols, 1998: 482), for example, which focuses on the

interaction of individual actors and institutions in the light of the political,

social and cultural environment in which those interactions take place,

posits ‘that institutions are created or changed because the new institution

will confer greater social legitimacy on the organisation or its individuals’

(ibid: 485). Indeed, this concern with legitimacy in the context of the wider

cultural, political and social milieu is a key feature of sociological insti-

tutionalism. From this theoretical perspective, the mutually constitutive

relationship between globalization and international organisations like

the WTO can be explicitly recognised.

It is also apposite to note that it is not merely the case that globalization

has a legitimating eff ect on the WTO. The constitution of legitimacy is

mutual, so that the WTO has a legitimating eff ect on globalization. That

is, there is a compelling argument that the legalisation and juridicialisation

of the trade regime through the framework of the WTO is a legitimisation

of the processes of globalization (Davis and Neacsu, 2001: 737; Picciotto,

2003: 386; cf Teubner, 1997).

Remaining within the structuralist tradition, post- Marxist accounts tend

to build upon this type of approach by taking a longer and more nuanced



view of the relationship between the structure of the world economy and

the emergence of legal institutions. Specifi cally, these accounts draw

attention to a range of structures of varying depth and longevity. In the

present context, at the deep and long end, the structural development of

capitalism is relevant to an account of the origins of the WTO. Occupying

a median position is the birth of the Westphalian system and its relation-

ship to the structure of international trade relations. The post- World War

Two bifurcated system of international law, especially its management

of international economic relations and the associated rise of corporate

capitalism, occupies signifi cant space at the shallower and shorter end of

the spectrum.

The structural role of capitalism and its relationship to international

trade relations are the key components of Arrighi’s (2002) argument that

capitalism is a history of cycles of capitalist accumulation dominated by a

leading agency of capital accumulation in the form of a state. The current

dominant agency of capital accumulation is, of course, the US. The

current cycle is the fourth of those identifi ed by Arrighi and was preceded

by the Genoese, Dutch and British dominated cycles.

For the British dominated cycle, the so- called signal point, when the

profi ts derived from trade became so poor that money was switched from

trade to investment capital, came as the result of the intensifi cation of

competition from Germany and the US consequent upon the depression

of 1873 to 1896. For the Americans, the signal point arrived after a similar

depression in the 1970s and 1980s, when it was economically challenged by

Japan. These signal points and their accompanying switches are autumnal

and generally inaugurate a period of economic turbulence. They do not,

however, spell the immediate end of the dominant regime of capital accu-

mulation.

Further complicating the neatness of the successive cycles of capital-

ist accumulation is Arrighi’s insight that capitalist power intensifi es with

each cycle. It is this complication that causes Arrighi to doubt whether

the cycles of accumulation can continue indefi nitely (Arrighi, 2002: 330).

Arrighi suspects that in the post- switch phase of US capitalist dominance

we may be entering into the terminal stage of capitalism.

In the current turbulent, and possibly terminal, stage Arrighi argues

that a combination of structural changes in the form of ‘the withering

away of the modern system of territorial states as the primary locus of

world power’, ‘the internalization of world- scale processes of production

and exchange within the organizational domains of transnational corpo-

rations’ and ‘the resurgence of suprastatal world fi nancial markets’ have

created a pressure to relocate state authority (Arrighi, 2002: 331; see also

Jayasuriya, 1999: 443):



In recent years, the most signifi cant pressure to relocate authority upward has been the tendency to counter escalating systemic chaos with a process of world government formation. In a wholly unplanned fashion, and under the pressure of events, the dormant suprastatal organizations established by the Roosevelt administration of the closing years of the Second World War have been hur-riedly revitalized to perform the most urgent functions of world governance which the US state could neither neglect nor perform single- handed . . . But the problems that have driven it to seek inter- statal forms of world governance remained. (Arrighi, 2002: 331)

Following this account it might be argued that the creation of the WTO

as an institution can be located as part of the escalating process of world

government formation. This might account for the otherwise somewhat

perplexing transition in the governance of the world trading system from

agreement to institution. Going further and refl ecting on the nature and

ideology of the WTO, do these represent an attempt on the part of the US,

in its death throes as the dominant agency of capitalist accumulation, and

its allies to control interstate competition for mobile capital? Certainly,

the chronological coincidence between Arrighi’s post- switch phase of the

US cycle of capital accumulation and the Uruguay Round negotiations is

striking, as is the fact that the two new Uruguay Round agreements, the

TRIPS Agreement and the GATS, are quite conceivably conceptualised

as being essentially concerned with investment (Macmillan, 1999, 2005:

178–80). Added to this, a drive to control competition for mobile capital

might explain the obsession with the conclusion of a global investment

agreement (Macmillan, 1999, 2004: 77–9).

Might we go even further than this and argue that at a more general

level, during the turbulent post- switch phase, the international com-

munity turns to international (economic) lawmaking, perhaps as an

alternative to war- making, in order to manage confl ict? Certainly, the

post- switch period of the British period of dominance was characterised

by the intensive making of trade treaties (McGillivray et al., 2001). The

multilateral free trade regime that was established in 1860 by the Anglo-

French Treaty of Commerce was a dead duck by the end of the 1870s as

a result of German protectionism (Arrighi, 2002: 55). From around this

time on, as the Germans vied with the British for economic and political

dominance (and the Americans waited in the wings to reap the benefi ts of

their own expansion), the United Kingdom promoted or participated in

a range of treaty obligations designed to maintain its pre- eminent posi-

tion. While not all the ‘trade’ treaties are centrally concerned with the

control of investment, it is possible to discern a new concern with aspects

of investment during this period. In particular, arguably as a result of the

patent law policies adopted by the German government, the European



nations turned their attention to the conclusion of multilateral treaties in

relation to intellectual property. The Paris Convention for the Protection

of Industrial Property (1883) and the Berne Convention for the Protection

of Literary and Artistic Works (1886), the two founding conventions of

modern intellectual property law, were negotiated in this period.

Of course, it may be argued, as the dominant discourse of intellectual

property still has it today, that these conventions were concerned with

international innovation not investment. But, looking at the corporate

stranglehold over intellectual property today, it seems diffi cult to contest

the argument that it is as much about investment as it is about anything

else. If this phase of multilateral intellectual property lawmaking refl ected

a new concern about international investment, then we should not be

surprised to see exactly the same concerns manifested in the Uruguay

Round. This would explain the rather anomalous position of the TRIPS

Agreement within the suite of WTO agreements (Bhagwati, 2002: 75–6),

along with the privileged position of intellectual property obligations in the

current spate of US bilateral investment treaties (Drahos, 2002). Further,

as has already been noted, the joined hands of the US government and

various powerful corporate sectors were fundamental to the existence and

shape of the TRIPS Agreement (Blakeney, 1996: ch. 1; Sell, 2003). But it

is particularly interesting to note that when the US government went into

battle for the TRIPS Agreement it was not just advancing the interests of

its corporate sector. It was also seriously concerned about the trade defi cit

and Japan’s economic potential (Sell, 2003: ch. 4) – the very indicators

that it had reached its signal point or autumnal moment as the dominant

agency of capital accumulation.

Of course, the implications of this account are not happy. The unprec-

edented phenomenon of almost one hundred years of European peace

from the time of the Treaty of Vienna in 1815 was shattered by the onset

of the First World War – the moment when the great European powers

turned from law to war. The next thirty- odd years of history marked an

epoch of astounding horror that may have been focused on Europe but

was certainly not confi ned to it. At the end of this period at least one thing

was clear: the time of British dominance was past and the US was calling

the shots. The fi nal turbulent years of the British cycle had coincided with

an attempt to put in place a comprehensive system of world economic gov-

ernment. In the same way, perhaps the current attempt to avert systemic

chaos through world government formation, including the establishment

of the WTO, is doomed as we enter yet another period of international

turbulence. Might this projected death of the WTO mark the moment in

which the process of decolonisation is truly completed?


180

9. Holistic approaches to development and international investment law: the role of international investment agreements

Peter Muchlinski*

1. INTRODUCTION

This chapter discusses the contribution made by ‘international investment

law’ to the process of economic and social development in developing

countries. This area is based on the myriad of international investment

agreements (IIAs), especially bilateral investment treaties (BITs), which

have existed in their broad current form for at least 50 years. In that time

they have been seen as vehicles for development so far as they provide for

improvements in the regulatory environment that could, in turn, facilitate

the attraction of new foreign investment. Such agreements are said to secure

the legitimate expectations of investors for a stable, transparent and predict-

able investment environment. More recently, IIAs have been subjected to

extensive interpretation in arbitral awards as a result of the sharp increase

in investor–state disputes under such treaties in the fi rst years of the twenty-

fi rst century (see UNCTAD, 2009b). This has led to the development of a

new ‘international investment law’.1 Concerns have been expressed as to the

adverse eff ects of such agreements, and how they have been interpreted, on

* Professor of International Commercial Law, School of Law, School of Oriental and African Studies, London, UK.

1 This has led to the production of many recent works on international invest-ment law. Prior to 2007 there was in eff ect only one major text dedicated to this subject, Sornarajah (2004) which fi rst came out in 1994, and a section in the author’s fi rst edition of his treatise Multinational Enterprises and the Law (Muchlinski, 1995: Part III; see now 2007b: Part IV). Since 2007 we have: McLachlan et al. (2007); Dolzer and Schreuer (2008); Dugan et al. (2008); Muchlinski et al. (2008); Subedi (2008); Binder et al. (2009); Newcombe and Paradell (2009). A remarkable explosion of expert literature!


The role of international investment agreements 181

the balance of rights and duties between investors and host and home coun-

tries. It is the purpose of this chapter to examine such concerns.

In particular it has been argued that investors’ interests are too readily

protected at the expense of other signifi cant social values which can

only be secured through eff ective governance. Indeed it is arguable that

investors’ legitimate expectations need to be delimited by reference to

the social context in which they operate (see Muchlinski, 2008: 640–41).

Accordingly, new generations of IIAs may have to provide for a revised

balance of rights and responsibilities for investors alongside the already

existing responsibilities of host states. In addition, home states may have

responsibilities to ensure adequate fl ows of investment to developing

states and to police the behaviour of their investors.

A new approach to IIAs is becoming evident in some more recent model

treaties and in the Canadian based International Institute for Sustainable

Development (IISD)’s Model International Agreement on Investment.

This will be used in Section 3 to illustrate how the above concerns can be

placed on a more legal footing. Before this, however, Section 2 will set

the scene through an examination of the concept of ‘development’ as it

appears in relation to international investment law. A narrow economic

focus may be inadequate to grasp the rich assortment of factors that may

contribute to ‘development’. Indeed a wider concept of development, one

that is both social and economic, may be required so as to capture the

various discourses that seek to reform existing IIAs where the idea of cor-

porate social responsibility and home country responsibility for ensuring

development- friendly investment is prominent.

2. THE CONCEPT OF ‘DEVELOPMENT’ IN INTERNATIONAL INVESTMENT LAW

In general IIAs do not refer to the concept of development in any detail.

IIAs that do refer to development will usually do so in the Preamble. For

example the Preamble of the US–Rwanda BIT (2008) recognises ‘that

agreement on the treatment to be accorded such investment will stimulate

the fl ow of private capital and the economic development of the Parties

. . .’. The context is clearly that of stimulating investment fl ows and it

stems from the greater economic cooperation between the contracting

parties under the BIT itself (US–Rwanda BIT, 2008).

The treaty is, as such, silent on any social aspect of development.

However the Preamble does stress the need to achieve the economic objec-

tives of the treaty in a manner consistent with the protection of health,

safety and the environment and the promotion of consumer protection



and internationally recognised labour rights. This is backed up by ‘best

eff orts’ clauses against lowering environmental and labour standards as an

inducement to investment (ibid: Art. 12, 13). Some agreements link tech-

nology transfer with human development,2 while other agreements stress

that development should be sustainable but there are few examples.3

Indeed one of the most signifi cant examples, the draft Norwegian Model

BIT of 2007, has been abandoned.4 Thus IIAs say little about develop-

ment save for generally accepting that a quantitative increase in foreign

investment equates with development.

This stress on the quantitative aspect of investment for development is

reinforced by the predominant use of a broad, asset- based defi nition of

investment in IIAs. There is no reference to development concerns in such

defi nitions (for examples see further UNCTAD, 2007: 8–10). On the other

hand some recent arbitral awards have considered whether development

concerns should aff ect their interpretation of whether an ‘investment’ has

taken place for the purposes of establishing the jurisdiction of an arbitral

panel under the International Centre for Settlement of Investment Disputes

(ICSID). According to certain decisions on jurisdiction, for an arrange-

ment to qualify as an ‘investment’ it should have ‘a certain duration, a

regularity of profi t and return, an element of risk, a substantial commitment

and . . . it should constitute a signifi cant contribution to the host State’s

development’.5 The contribution to development requirement may be open

2 See Brunei–Darussalam–Republic of Korea BIT 2000: ‘Recognising the importance of the transfer of technology and human resources development arising from such investments . . .’ (cited in UNCTAD, 2007: 4).

3 One such reference can be found in the Preamble to the Investment Agreement for the CCIA: Legal Tool for Increasing Investment Flows within the COMESA: ‘REAFFIRMING the importance of having sustainable economic growth and development in all Member States and the region through joint eff orts in liberalis-ing and promoting intra- COMESA trade and investment fl ows . . .’(COMESA, 2007: 1, original emphasis).

4 The Preamble to the Norwegian Model states inter alia: ‘Recognising that the promotion of sustainable investments is critical for the further development of national and global economies as well as for the pursuit of national and global objectives for sustainable development, and understanding that the promotion of such investments requires cooperative eff orts of investors, host governments and home governments . . .’ (see http://ita.law.uvic.ca/investmenttreaties.htm (accessed 25 September 2009)). The Draft Model Agreement was abandoned due to the polarisation of views upon it, with business interests fearing it did not protect investors enough and civil society groups fearing that it would restrain govern-ments’ ability to regulate in the public interest (see Vis- Dunbar, 2009a).

5 Joy Mining Machinery Limited v. Egypt, para. 53; Salini Construtorri S.p.A. and Italstrade S.p.A. v. Morocco, para. 52; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, paras 122–38.



to criticism as it introduces an element of motivation into the defi nition. This

may not be relevant if the given defi nition of ‘investment’ in the BIT is asset-

based.6 Nonetheless some tribunals have used the development element to

deny jurisdiction over a dispute on the ground that the transaction involved

failed to make a signifi cant contribution to the development of the host

country.7 In general, the development element should be met in most cases

where the fi rst three elements are shown to exist (Dolzer and Schreuer, 2008:

69).

More recently, the validity of introducing the development criterion

as a jurisdictional requirement has been criticised by the Annulment

Committee in the case of Malaysian Historical Salvors v. Malaysia.8

The question at issue was whether the salvage contract between the

Government of Malaysia and Malaysian Historical Salvors was an ‘invest-

ment’ for the purposes of Article 25(1) of the ICSID Convention (2006),

which governs the jurisdiction of an ICSID Tribunal.9 The original sole

arbitrator held that it was not, on the ground that, ‘while the Contract did

provide some benefi t to Malaysia’, there was not ‘a suffi cient contribution

to Malaysia’s economic development to qualify as an ‘investment’ for the

purposes of Article 25(1) or Article 1(a) of the BIT’.10 The Annulment

Committee disagreed. They felt that the arbitrator had failed to take into

account the fact that Article 1 of the BIT between the United Kingdom

and Malaysia, under which the claimant – a British majority shareholder

in the Malaysian incorporated contracting company – brought his claim,

contained a broad asset- based defi nition of investment whose purpose was

to give a wide range of investments protection under the BIT.11 Instead the

6 Saluka Investments BV (The Netherlands) v. The Czech Republic, paras 209–11.

7 See Malaysian Historical Salvors, SDN, BHD v. Malaysia, Award on Jurisdiction; and Patrick Mitchell v. Democratic Republic of the Congo, Decision on the Application for Annulment of the Award, paras 25–33 and 39.

8 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Annulment Decision.

9 Article 25(1) of the ICSID Convention (2006) provides that: ‘[t]he jurisdic-tion of the Centre shall extend to any legal dispute arising directly out of an invest-ment, between a Contracting State (or any constituent subdivision or agency of a Contracting State . . .) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre’.

10 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Award on Jurisdiction, para. 143.

11 By Article 1: ‘For the purpose of this Agreement (1)(a) ‘investment’ means every kind of asset and in particular, though not exclusively, includes: . . . (ii) shares, stock and debentures of companies or interests in the property of such companies; (iii) claims to money or to any performance under contract having a



sole arbitrator used the approach taken in earlier awards to the interpreta-

tion of ‘investment’ under Article 25(1) of the ICSID Convention as the

basis for interpreting the same term in the BIT as well.

According to the Annulment Committee, the contract was an investment

as it was a ‘one of a kind of asset’ and, in accordance with the defi nition in

Article 1 of the BIT, there was ‘a claim to money and to performance under

a contract having fi nancial value’.12 Furthermore, ‘the contract involves

intellectual property rights; and the right granted to salvage may be treated

as a business concession conferred under contract’.13 The Annulment

Committee went on to criticise the elevation, by the sole arbitrator, of the

development criterion as a jurisdictional requirement under the ICSID

Convention. To do so would have the eff ect of excluding small contribu-

tions, and contributions of a cultural and historical nature. It also

failed to take account of the preparatory work of the ICSID Convention and, in particular, reached conclusions not consonant with the travaux in key respects, notably the decisions of the drafters of the ICSID Convention to reject a monetary fl oor in the amount of an investment, to reject specifi cation of its duration, to leave ‘investment’ undefi ned, and to accord great weight to the defi nition of investment agreed by the Parties in the instrument providing for recourse to ICSID.14

Accordingly, the majority of the Annulment Committee concluded that

the sole arbitrator had manifestly exceeded his powers in making this deci-

sion.

The majority decision was strongly criticised by Judge Mohamed

Shahabuddeen in his dissenting opinion. He felt that the ICSID Convention

set certain ‘outer limits’ to the meaning of an ‘investment’ based on the

fact that a major aim of the Convention was to encourage the economic

development of member countries by way of investment. Thus it was per-

fectly reasonable to read that term as being bound by a requirement that

the investment should contribute to the economic development of the host

country. Judge Shahabuddeen stated:

In this connection, it is possible to conceive of an entity which is systematically earning its wealth at the expense of the development of the host State. However much that may collide with a prospect of development of the host State, it

fi nancial value; (iv) intellectual property rights . . . ; (v) business concessions con-ferred . . . under contract . . .’.

12 Malaysian Historical Salvors, SDN, BHD v. Malaysia, Annulment Decision, para. 60.

13 Ibid.14 Ibid: para. 80.



would not breach a condition – on the argument of the Applicant. Accordingly, such an entity would be entitled to claim the protection of ICSID. Host States which let in purely commercial enterprises would have something to worry about. Correspondingly, ICSID would seem to have lost its way: it is time to call back the organization to its original mission.15

That original mission was, in the Judge’s view, to provide a dispute set-

tlement mechanism for investments that made a positive contribution

to the economic development of the host country. Accordingly it was

Article 25(1) that governed the defi nition of investments for the purposes

of taking the dispute to ICSID, not the terms of the BIT. Otherwise the

parties could determine the jurisdiction of ICSID and Article 25(1) would

be rendered meaningless.16

The disagreement between the majority of the Annulment Committee

and Judge Shahabuddeen encapsulates the dilemma in international

investment law as to whether it is a law of investment protection, pure

and simple, in which case the notion of investment must be given as wide

a compass as possible so that access to dispute settlement procedures is

made easier for the investor, or whether it is a law of international eco-

nomic cooperation, in which case the need for a balancing of the private

interests of the investor and the public interests of the host country may be

essential. On this approach the requirement of a signifi cant contribution

to development arising out of the investment may be seen as a key juris-

dictional prerequisite. It remains to be seen whether ICSID Tribunals will

follow the majority position in Malaysian Salvors and ignore the develop-

ment criterion or continue to apply it.

Another context in which arbitral tribunals have discussed the concept

of development concerns the question whether the level of development of

the host country can act as a mitigating circumstance in relation to a claim

made by the investor. Some tribunals have taken into account exceptional

circumstances that might aff ect the content of the investor’s legitimate

expectations as to treatment.17 However the general trend has been not

to take into account the developing host country’s level of development

(see further Gallus, 2005). On the other hand, in American Manufacturing

and Trading, Inc. v. Zaire the issue was considered relevant to the

15 Malaysian Historical Salvors, SDN, BHD v. Malaysia, ‘Dissenting Opinion of Judge Mohamed Shahabuddeen’, Annulment Decision, para. 22.

16 Ibid: paras 43–7.17 See for example CMS Gas Transmission Company v. The Argentine Republic,

where the tribunal held that account should be taken of the eff ect of abnormal conditions, prompted by the economic crisis in Argentina, in assessing the scope of protection aff orded to the investor by an investment treaty (para. 244).



determination of compensation, where the claimant was found to have

been aware of local conditions (para. 7.14–7.15).

Discussion of ‘development’ in arbitral awards is therefore very limited.

By reason of the narrow economic scope of the treaties that tribunals have

to apply, they inevitably focus only on economic development. This is also

the case in the academic literature that considers how far IIAs contribute

to development. A number of studies have been made as to the correlation

between the conclusion of, in particular, BITs and increases in foreign

direct investment (FDI) fl ows.18 Historically the aim of BITs has been

to strengthen the protection of foreign investors, especially in developing

and transitional country markets, in return for increased inward foreign

investment fl ows. However the empirical evidence is mixed. Some studies

fi nd a positive correlation between the conclusion of BITs and increases in

investment fl ows (notably Neymeyer and Spess, 2005, 2009: 225; Salacuse

and Sullivan, 2005, 2009: 109); others do not (see in particular UNCTAD,

2009e, originally 1998a: ch. IV; Hallward- Driemeier, 2009, originally 2003;

Rose- Ackerman, 2009). This is perhaps to be expected as it is diffi cult to

consider one part of a wider regulatory framework in isolation. Equally it

may be hard to exclude other factors that may aff ect the size and origin

of inward FDI fl ows. The domestic political, economic and institutional

environment may be as important in determining inward investment fl ows

as are individual BITs (Rose- Ackerman, 2009: 321), as might the eco-

nomic sector in which investment is made (Aisbett, 2009: 423).

Thus, there is still no incontrovertible evidence that BITs will deliver

increased FDI fl ows. Yet developing host countries continue to sign up to

them even though there are clear sovereignty and welfare costs involved,

given the responsibilities host countries assume concerning the protection

of investor rights and given the increased recent risk of investor–state arbi-

tration resulting in an award of damages (see further Sauvant and Sachs,

2009: xli; Guzman, 2009). The true reasons for concluding BITs are many

and varied, ranging from the ‘state visit’ treaty – where something concrete

has to come out of such a visit and the signing of a BIT may be such a

thing – to an indication that the host country is willing to provide a good

regulatory environment for FDI. However, the enhancement of economic

development through increased FDI fl ows may not be the most important

of these reasons nor the most likely consequence of the signing of a BIT.

So far the discussion has emphasised the economic aspects of develop-

ment, largely because IIAs tend to defi ne development in that light – in so

18 All of the major recent empirical studies on the eff ects of BITs on invest-ment fl ows are brought together in Sauvant and Sachs (eds) (2009: Part II).



far as they off er any contribution to this concept. However this chapter

argues that a wider, socially rooted conception of development is needed

to understand the true impact of IIAs on the communities to which these

agreements relate. That this approach should be taken can be justifi ed by

reference to contemporary thinking on the meaning of ‘development’.

According to Amartya Sen (1999: 35) a distinction can be made between

two attitudes to development:

One view sees development as a ‘fi erce’ process, with much ‘blood sweat and tears’ – a world in which wisdom demands toughness. In particular, it demands calculated neglect of various concerns that are seen as ‘soft- headed’ [including] social safety nets that protect the very poor, providing social services for the population at large, departing from rugged institutional guidelines in response to identifi ed hardship and favouring – ‘much too early’ – political and civil rights and the ‘luxury’ of democracy . . . This hard- knocks attitude contrasts with an alternative outlook that sees development as essentially a ‘friendly’ process. Depending on the particular version of this attitude, the congenial-ity of the process is seen as exemplifi ed by such things as mutually benefi cial exchanges (of which Adam Smith spoke eloquently), or by the working of social safety nets, or of political liberties, or of social development – or some combina-tion or other of these supportive activities.

Sen is persuaded by the latter approach, from which he builds his thesis that

development can only occur as a process of expanding ‘the real freedoms that

people enjoy’ (ibid: 36). Such freedoms include the provision of elementary

capabilities for life but also run to political freedoms, access to economic

facilities, social opportunities such as access to education or health care,

transparency guarantees allowing for freedom to deal with one another

in conditions of disclosure and lucidity, and protective security based on

essential welfare support against abject misery (ibid: 38–40). Not only Sen

but others, including Joseph Stiglitz (1998b, 2002a: ch. 9) and Jeff rey Sachs

(2001), see development as a holistic process including not only economic

growth but also societal transformation along the lines suggested by Sen.

What are the implications of this approach to the further evolution of

international investment law? Two points may be made. First, interna-

tional investment law exists within the wider framework of public inter-

national law and should be informed by its general principles (see further

McLachlan, 2008). One such principle is the duty of international co-

operation embodied in Article 56 of the UN Charter.19 This duty is given

substance by Article 55 of the Charter (UN, 1945) which states:

19 By Article 56: ‘All Members pledge themselves to take joint and separate action in cooperation with the Organization for the achievement of the purposes set forth in Article 55’ (UN, 1945).



With a view to the creation of conditions of stability and wellbeing which are necessary for peaceful and friendly relations among nations based on respect for the principle of equal rights and self- determination of peoples, the United Nations shall promote:a. higher standards of living, full employment, and conditions of economic

and social progress and development;b. solutions of international economic, social, health, and related problems;

and international cultural and educational cooperation; andc. universal respect for, and observance of, human rights and fundamental

freedoms for all without distinction as to race, sex, language, or religion.

The duty of cooperation between UN members is rooted in a wider

conception of development such as that advocated by Sen. That duty can

extend to relations based on IIAs in that they are treaties based in inter-

national law and should refl ect its policies, though, as shown above, this

is not made expressly clear in many existing IIAs. Given the list of issues

covered by the duty in Article 55, it is clear that home and host countries

could and, indeed, should cooperate to bring about an investment process

and regulatory regime that seeks, as far as possible, to embody these wider

social goals. This may require the development of certain new duties of co-

operation on the part of home countries, in addition to the existing duties

of host countries to protect investors and their investments, in new IIAs.

Second, the wider conception of development may require certain obli-

gations from private investors. In this regard it should be noted that the

UN Secretary- General has appointed a Special Representative on Business

and Human Rights, Professor John Ruggie. In his work Ruggie has made

clear that corporations have duties to respect human rights in the course

of their operations and states have duties of protection (for the most recent

restatement of this position see Ruggie, 2009). In his 2008 Report to the

Human Rights Council, for example, the UN Special Representative made

clear that the failure of companies to meet their responsibility to respect

human rights

can subject companies to the courts of public opinion – comprising employees, communities, consumers, civil society, as well as investors – and occasionally to charges in actual courts. Whereas governments defi ne the scope of legal com-pliance, the broader scope of the responsibility to respect is defi ned by social expectations – as part of what is sometimes called a company’s social licence to operate. (Ruggie, 2008: para. 54)

Ruggie clearly sees a social context for the operations of corporate

investors in host countries. This echoes numerous ‘soft law’ instruments

that also extend social responsibilities to corporations, including responsi-

bilities based on the concept of sustainable development. Thus the OECD



Guidelines for Multinational Enterprises state as one of their General

Policies:

Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders. In this regard, enterprises should:1. Contribute to economic, social and environmental progress with a view to

achieving sustainable development. (OECD, 2000: 14)

Such statements could of course be disregarded as irrelevant to the inter-

pretation of IIAs, and, on strict cannons of interpretation, they most

probably are unless the treaty in question actually refers to corporate

obligations. Thus in relation to investors, whether corporate or natural

persons, new IIAs may have to include language of this kind so as to make

certain that the growing body of standards of international corporate

social responsibility is not ignored in the context of IIAs.

The question of home country duties and investor duties under new

generation IIAs is an issue that naturally emerges from current discourses

on international investment law. These are not confi ned to the discourse

of practitioners of investment arbitration or of academic commenta-

tors on that process. The discourse of international investment law has

always been much wider than that. Indeed it is to be hoped that the

current fashion for litigated solutions to investor–state disputes is no

more than that and that a narrow focus on investor protection alone does

not dominate the fi eld. As noted in the Final Report of the International

Law Association (ILA) Committee on the International Law on Foreign

Investment:

The rise in investment arbitration in the opening decade of the 21st century has pushed international investment law towards a more litigious character. While this may be a welcome and interesting development for international lawyers, it has to be asked whether this fi eld should take on such a character. Given that the main aim of the parties to foreign investment contracts is to off er economic development for the host country in return for a reasonable rate of profi t for the investor, disputes should not form the ‘leitmotif’ of this subject. Rather cooperation and long term collaboration should play this role. Indeed cooperation and collaboration have been the principal characteristics of the fi eld for many years and it is to be hoped that it will continue to operate in such a fashion. (International Law Association Committee on the International Law on Foreign Investment, 2008: 799)

Indeed the ILA Committee’s Report also notes that a balancing of

rights and obligations between the main actors could be required, given

that the aim of international investment law is ‘to allow host countries to

attract and to benefi t from foreign investment and for investors to enjoy



a transparent, secure and predictable investment environment’ (ibid: 798).

The Committee describes international investment law as:

a fi eld that combines both commercial and public law concerns and requires a balancing of rights and obligations to ensure that these complementary aims are achieved. This may require the highlighting of the social and economic consequences of investment activity upon host countries, as through increased awareness of the need to ensure that corporate social responsibility standards are respected by investors, through the possible introduction of new investor and home country obligations in new generations of agreements, and through the clarifi cation of the scope of the host country’s right to regulate alongside the existing rights of investors for protection of their assets. Equally a more development oriented approach may be needed. (ibid: 798–9)

How such a rebalancing should work out in new generation IIAs is the

subject of the next section of this chapter.

3. RECALIBRATING IIAs20

The recalibration of IIAs to achieve greater balance between the rights and

obligations of the main stakeholders in the investment process will be hard

to operationalise given the general absence, at present, of a political will

to change such agreements substantially. Apart from certain civil society

groups and some academics few are actively engaged in such a debate.21

Of these one body deserves special mention. The Canadian based IISD

has put forward a draft IIA which seeks to redress the balance of rights

and responsibilities between the host country and the investor to ensure

that the latter also carries a measure of responsibilities (see Mann et al.,

2006; for the Model Agreement see Mann et al., 2005. See further, Mann

et al., 2006: 84; UNCTAD, 2003a: ch. VI ). This model agreement will be

referred to below in more detail.

A further point to note by way of introduction to this section is that not

only host countries, investors and home countries should be considered

stakeholders in the investment process but also the local communities in

which investment takes place. So much is clear from the wider approach to

development outlined above. Accordingly any recalibration of rights and

obligations for investors and home countries will need to be undertaken

20 This section of the chapter draws on Muchlinski (2007a, 2007c).21 For example the views of a group of academics at Columbia Law School

calling for President Obama to initiate a review of IIAs along these lines (see Vis- Dunbar, 2009b).



in this context. Under international law the task of safeguarding local

community interests will fall on the host country. Thus its approach to the

issue of home country and investor obligations will be important.

Before the specifi c issues of investor and home country obligations are

discussed, given the abovementioned international duty for UN members

to cooperate in the pursuit of certain key social and developmental goals,

it is interesting to note how far the UN itself has come in advocating

reform of IIAs.

I. The Role of the UN

The principal body responsible for discussion of IIAs is UNCTAD.22 In

recent years it has evolved the concept of ‘fl exibility for development’ as a

means of dealing with the need to balance the diff erent interests of stake-

holders in the investment treaty universe. The risk that IIA provisions

will restrict national policy space and the sovereign right to regulate has

caused UNCTAD to consider how this possibility could be mitigated (see

UNCTAD, 2003a: ch. V). This is especially the case for developing coun-

tries that may have greater diffi culties than developed countries in opening

up their economies to the full force of global competition.

According to UNCTAD, in order to reap the full benefi ts from FDI,

the developing host country may need to supplement an open approach

to inward investment with further policies. In particular, it may need posi-

tive measures to increase the contribution of foreign affi liates to the host

country through mandatory measures such as performance requirements

and through the encouragement of desired action by affi liates through, for

example, incentives to transfer technology and to create local research and

development (R&D) capacity.

Such policy measures entail a degree of regulation. This may involve

some measure of intervention in the freedom of action of the foreign

investor and controls over the manner in which the investment can evolve.

Such regulatory instruments could infringe the investor protection pro-

visions of IIAs. To avoid such an outcome in cases of legitimate, non-

discriminatory regulation, IIA provisions may need to off er a degree of

fl exibility for development (Muchlinski, 2007b: 98; see further UNCTAD,

2000b, 2004b: vol. 1, ch. 2). Such fl exibility can be introduced by way of

certain changes in approach to the drafting of IIAs, including develop-

ment oriented preambular statements, a degree of special and diff erential

22 See generally the UNCTAD IIA programme, http://unctad.org/Templates/StartPage.asp?intItemID=2310&lang=1 (accessed 9 September 2009).



treatment for developing country parties to the agreement, substantive

provisions drafted in a manner that allows for the recognition of special

considerations for developing countries, including the use of exception

clauses and variations in the normative force of certain obligations, and by

the introduction of mechanisms through which development concerns can

be articulated, such as intergovernmental commissions and interpretative

mechanisms (see further UNCTAD, 2003a: ch. V, 2000b: Part Two).

UNCTAD’s recommendations on fl exibility in IIAs pertain to the

drafting of the IIA but they do not mention the balance of rights and

obligations between the parties. This is not to say that UNCTAD has

ignored these issues. They are discussed in certain other research papers

and in the World Investment Report 2003 (see in particular: UNCTAD,

2001c, also found in 2003a: ch. VI, and 2004b: vol. III, ch.22; 2001a:

55–61, also found in 2004b: vol. II, 148–50). However, this policy option

is presented as one among many options. UNCTAD does not commit

itself unequivocally to the advocacy of this position. While suggesting

that future IIAs should contain commitments for home country measures,

based on existing national experience of unilateral initiatives (UNCTAD,

2003a: 163), on the question of including measures addressed to corporate

actors, UNCTAD says no more than that ‘good corporate citizenship

– especially when it combines the interests of host countries and fi rms –

deserves a careful examination in future IIAs’ (ibid: 167). Thus UN policy

in this area still needs further development. The establishment of a regular

UNCTAD annual expert meeting to discuss developments in IIA practice

is a welcome development in this regard and it is hoped that it will become

a signifi cant voice in the recalibration process.23

23 See UNCTAD (2009a: 3): Multi- year Expert Meeting on Investment for Development . . .

8. Reconfi rms UNCTAD’s role as the key focal point in the United Nations system for dealing with matters related to international investment agree-ments (IIAs), and as the forum to advance understanding of issues related to IIAs and their development dimension;

9. Endorses the suggestion that experts in the fi eld of IIAs should meet annu-ally for the purposes of collective learning and collective advisory services, involving all stakeholders in developing countries, with a view towards facili-tating increased exchanges of national experiences and sharing best practices;

10. Welcomes the utilization of UNCTAD’s existing online IIA network as a platform for continued sharing of experiences and views on key and emerging issues;

11. Requests that UNCTAD, within its mandate, continue to analyse trends in IIAs and international investment law, and provide research and policy analysis on key and emerging issues, development implications and impact



II. Investor Obligations

A good starting point for a list of applicable obligations comes from the

OECD Guidelines for Multinational Enterprises section on ‘General

Policies’, which off ers what appears as an emerging international consen-

sus on the social obligations of multinational enterprises (MNEs):

Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders. In this regard, enterprises should: 1. Contribute to economic, social and environmental progress with a view to

achieving sustainable development. 2. Respect the human rights of those aff ected by their activities consistent

with the host government’s international obligations and commitments. 3. Encourage local capacity building through close cooperation with the

local community, including business interests, as well as developing the enterprise’s activities in domestic and foreign markets, consistent with the need for sound commercial practice.

4. Encourage human capital formation, in particular by creating employ-ment opportunities and facilitating training opportunities for employees.

5. Refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, fi nancial incentives, or other issues.

6. Support and uphold good corporate governance principles and develop and apply good corporate governance practices.

7. Develop and apply eff ective self- regulatory practices and management systems that foster a relationship of confi dence and mutual trust between enterprises and the societies in which they operate.

8. Promote employee awareness of, and compliance with, company policies through appropriate dissemination of these policies, including through training programmes.

9. Refrain from discriminatory or disciplinary action against employees who make bona fi de reports to management or, as appropriate, to the compe-tent authorities, on practices that contravene the law, the Guidelines or the enterprise’s policies.

10. Encourage, where practicable, business partners, including suppliers and sub- contractors, to apply principles of corporate conduct compatible with the Guidelines.

11. Abstain from any improper involvement in local political activities. (OECD, 2000)

As may be apparent from this wide- ranging list of issues, the precise clas-

sifi cation of international corporate social responsibility (ICSR) standards

is diffi cult as, potentially, the phrase could cover all aspects of corporate

of technical assistance and capacity- building in this area, in accordance with paragraphs 149 and 151 of the Accra Accord.



regulation. By contrast, the UN Global Compact contains a more spe-

cifi c set of standards. The Ten Principles on which the Global Compact

is founded concern the areas of human rights, labour, the environment

and anti- corruption. These are said to enjoy universal consensus and are

derived from a number of signifi cant international instruments.24 From the

above, it is clear that social responsibility may take both an economic and

a social and ethical dimension in that MNEs are expected to conduct their

economic aff airs in good faith and in accordance with proper standards

of economic activity, while also observing fundamental principles of good

social and ethical conduct (for a fuller discussion, see Muchlinski, 2008).

If extensive provisions were to be included on all of the issues that could

possibly come within the ICSR rubric, multilateral, regional or bilateral

investment agreements would probably be impossible to adopt, let alone

apply, given the extensive subject matter. There would also be the problem

of institutional overlap, given that many of these matters are already being

dealt with by specialised intergovernmental organisations or other special-

ist bodies. Thus the drafters of IIAs will have to think very carefully as to

how corporate responsibility provisions should appear.

Given the abovementioned problems, it is likely that corporate respon-

sibility issues will be dealt with by means that do not seek to off er detailed

provisions but, rather, provide for overall commitments to certain stand-

ards. This may be achieved in a number of ways. First a general com-

mitment on the part of the signatory states to further the observance by

corporate investors of corporate responsibility standards could be included

in the preamble and/or in a specifi c substantive provision. Equally, where

an issue is not yet fully developed, it can be expected that hortatory, best

eff orts provisions may be used. For example the European Free Trade

Area–Singapore Agreement of 2002 includes a preambular paragraph,

‘REAFFIRMING their commitment to the principles set out in the

United Nations Charter and the Universal Declaration of Human Rights’.

A further example of the inclusion of a commitment to respect for human

rights and other social issues can be found in Article 7.2.d of the revised

COMESA Agreement on a Common Investment Area (COMESA, 2007).

This enables the COMESA Committee for the Common Investment Area

to consider and make:

recommendations to the [COMESA] Council on any policy issues that need to be made to enhance the objectives of this Agreement. For example the develop-ment of common minimum standards relating to investment in areas such as:

24 See further http://www.unglobalcompact.org/ (accessed 9 September 2009).



(i) environmental impact and social impact assessments(ii) labour standards(iii) respect for human rights(iv) conduct in confl ict zones(v) corruption(vi) subsidies.

This is the fi rst time that any investment agreement has expressly included

human rights issues related to investment as a possible future working

item under the agreement (see Mann, 2008: 10, from which the examples

are taken).

Second, international instruments and agreements that already contain

a more extensive treatment of specifi c social responsibility issues could

be incorporated as part of the new investment rules, in the manner that

existing international minimum standards of treatment for intellectual

property contained in the Paris and Berne Conventions were incorporated

by reference into the TRIPS Agreement (see GATT, 1994b: Art. 2). A

third possibility would be to follow the practice under NAFTA and use

‘side- agreements’ on specifi c social issues or to follow the precedent of

the negotiations over the ill- fated MAI, where some delegations favoured

appending the OECD Guidelines on Multinational Enterprises to the text

of that agreement in a non- binding appendix (see Muchlinski, 2007b: 667).

Whatever approach is taken, one matter remains of central importance.

So long as investor–state tribunals have their subject- matter jurisdiction

controlled by the contents of IIAs, then such agreements will need to

have some form of reference to and/or inclusion of standards found in

other international agreements and instruments so as to make clear their

relevance and applicability to the interpretation and development of the

IIA in question. The current situation, where the vast majority of IIAs

remain silent on home country and corporate responsibilities, leaves open

to doubt whether an international tribunal is required to take account of

wider international obligations contained in other instruments concern-

ing these actors. While there are some examples of investment tribunals

referring to issues covered by other international agreements, including

the issue of whether human rights standards can govern the outcome of an

investment dispute,25 a clear indication in an IIA that other instruments

apply is desirable in the interests of clarity and procedural certainty.

25 See further Mann, 2008: 26–9 citing Maff ezini v. Spain, para. 67 (EC envi-ronmental impact assessment); Parkerings- Compagniet AS v. Lithuania, section 8.3.1, and Southern Pacifi c Properties (Middle East) Limited v. Arab Republic of Egypt (UNESCO World Cultural Heritage designation); Aguas Argentinas S.A.,



It may be added that, as an international adjudicating body, an interna-

tional investment tribunal is under a duty to apply international law, and

that failure to do so may amount to an error of law capable of rendering

the award ineff ective, but such a conclusion may involve much dispute

and further litigation. It would appear much better simply to develop a

practice of reference by inclusion to relevant agreements outlining home

country and corporate responsibilities.

A possible approach to the inclusion of home country and inves-

tor responsibilities into IIAs is given by the IISD Model International

Agreement on Investment for Sustainable Development (Mann et al.,

2005). This agreement commits the parties, in the Preamble, to the adop-

tion of a balance of rights and obligations as between the home and host

countries and the investor. Accordingly it contains separate Parts dealing

with the rights and obligations of each actor. In addition, existing investor

rights are modifi ed to take into account the rights of home and host states

to regulate their activities.

Part 3 contains key provisions concerning investor obligations. Article

11 of Part 3 begins with a general obligation of subjection to the laws and

regulations of the host state; compliance with any formalities required by

host state regulations as a condition of establishment; and provision of

information required by the host state for purposes of decision- making. A

‘best eff orts’ commitment to contribute to the host’s development objectives

is also included. Articles 12 to 16 then detail more specifi c investor obliga-

tions. These include a pre- investment environmental and social impact

assessment based on the more demanding of the host or home country law; a

prohibition on participation in corrupt practices; a commitment to uphold-

ing environmental management systems in accordance with the ISO 14001

standard, human rights, and ILO labour standards; and a duty to comply

with nationally and internationally accepted standards of corporate gov-

ernance and corporate social responsibility. These provisions can be seen

as relatively uncontroversial. They restate in eff ect what investors should

already observe in terms of existing legal standards in national law and in

international ‘soft law’ instruments such as the UN Global Compact.

By contrast Article 17 adds a signifi cant new obligation. It states:

Investors shall be subject to civil actions for liability in the judicial process of the home state for the acts or decisions made in relation to the investment where

Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, para. 19 (on whether human rights standards can be invoked in an investment dispute); Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, para. 52. See further UNCTAD (2009c).



such acts or decisions lead to signifi cant damage, personal injuries or loss of life in the host state (Mann et al., 2005).

This provision seeks to institutionalise, at the level of an IIA obligation,

the process of foreign direct liability litigation that has emerged during

the last twenty years or so (on the meaning of foreign direct liability see,

for example: Ward, 2001). Such litigation is brought by claimants located

in the host country of a subsidiary against the parent company in home

country courts where the subsidiary is alleged to have caused harm to

victims of wrongful corporate acts, for which the parent company should

be held responsible by reason of its control over the subsidiary.

The major problems arising out of such litigation have evolved out of

the corporate separation between the parent and its subsidiaries. First,

this separation can create jurisdictional barriers to the litigation. This is so

because the parent is formally absent from the host country jurisdiction,

even though it may operate there in fact through its subsidiary. Second,

corporate separation can allow for the avoidance of liability for the acts

of the subsidiary by reason that the acts of the subsidiary are not, in legal

terms, the acts of the parent.

In an apparent eff ort to counter such problems, the IISD Model

Agreement contains, in Part 6 on Home State Rights and Obligations, a

duty on the part of home states to

ensure that their legal systems and rules allow for, or do not prevent or unduly restrict, the bringing of court actions on their merits before domestic courts relating to the civil liability of investors for damages resulting from alleged acts or decisions made by investors in relation to their investments in the territory of other Parties.26

This provision would appear to require reform in the national laws of the

Parties. In particular, the eff ects of the legal separation of companies in

a group would need to be altered so as to allow for jurisdiction and for a

fi nding of liability based on control. Whether states would be willing to do

this is very much open to doubt. Indeed the trend in more recent years has

been to narrow down the cases in which the corporate veil may be lifted and

to restrict such cases to instances where the separation between the corpora-

tion and its owners is being used as a vehicle for fraud. Thus there is little

26 Mann et al. (2005: Art. 3.1). It goes on to specify the doctrine of forum non conveniens – whereby the court may decline jurisdiction over a case because it feels that another jurisdiction off ers a more appropriate forum – in a footnote to the relevant provision as an example of a jurisdictional rule that can impede such litigation. On this, see further Muchlinski (2007b: 153–60).



sympathy at the level of national law for a more liberal doctrine of corporate

responsibility based on control (Muchlinski, 2007b: 308–13). By contrast

the UN Special Representative on Business and Human Rights advocates

the strengthening of national remedies for breaches of the corporate duty to

respect human rights and even considers the possibility of establishing some

sort of international review mechanism (Ruggie, 2009: paras 106–14).

Finally, Part 3 of the IISD Model Agreement ends with a provision on

dispute settlement (Mann et al., 2005: Art. 18). Unlike existing provisions

which give to the investor an unconditional right to bring a claim based

on an alleged breach of an IIA protection standard, the IISD Model

introduces certain requirements based on investor compliance with key

standards. Thus, breach of the anti- corruption obligation in Article 13

bars any dispute settlement rights for the investor. A failure to undertake

the required pre- investment environmental and social impact assess-

ment under Article 12 will not bar a claim but may mitigate or off set the

merits of the claim of the amount of damages payable to the investor. The

same is true where the investor is shown to have breached the main post-

establishment obligations listed in Article 14 and the corporate govern-

ance obligations in Article 15. A further change from existing IIA dispute

settlement provisions is an express right of action granted to the host or

home state. This can arise as a result of a breach of the anti- corruption

provision or for persistent failure on the part of the investor to observe

its obligations under Articles 14 or 15. Furthermore, the host state may

bring a counterclaim before any tribunal established pursuant to the

Agreement.27 Finally, the right to bring an action against the investor, for

breach of Part 3 obligations, before the courts of the home or host state on

the part of one or other state is included.

A further element in the IISD Model that is of signifi cance to the rec-

alibration of the balance of rights and obligations under an IIA concerns

the host country’s ‘right to regulate’. According to one of the principal

authors of the IISD Model Agreement, current formulations of such a

right in an IIA tend to subject it to the requirements of investor protec-

tion under the IIA by use of qualifying language such as ‘consistent with

27 The COMESA Investment Area Agreement (2007) includes a specifi c provision allowing counterclaims against investors who initiate the investor–state process in Article 28.9: ‘A Member State against whom a claim is brought by a COMESA investor under this Article may assert as a defence, counterclaim, right of set off or other similar claim, that the COMESA investor bringing the claim has not fulfi lled its obligations under this Agreement, including the obligations to comply with all applicable domestic measures or that it has not taken all reason-able steps to mitigate possible damages’.



this Agreement’.28 As a result the provision tends to be ‘legally useless in

terms of reinforcing the right to regulate’ (Mann, 2008: 19).

To remedy this limitation the IISD Model Agreement formulates the

right to regulate on the basis of a right of the host state to pursue its

own development objectives and priorities, subject only to customary

international law and general principles of international law. This right

may be protected by way of express exceptions to the obligations of the

Model Agreement, but where such exceptions are not taken, it is to be

‘understood as embodied within a balance of the rights and obligations of

investors and investments and host states, as set out in this agreement, and

consistent with other norms of customary international law’ (Mann et al.,

2005: Art. 25(C)). So as to protect exercises of regulatory discretion under

other treaties, the IISD Model adds that ‘bona fi de, non- discriminatory

measures taken by a Party to comply with its international obligations

under other treaties shall not constitute a breach of this Agreement’ (ibid:

Art. 25(D)). Finally, host states may, through their applicable constitu-

tional processes, fully incorporate the Model Agreement into their own

domestic law so as to make its provisions enforceable before domestic

courts or other appropriate processes (ibid: Art. 25(E)).

This provision is aimed at changing the nature of how the investor rights

contained in an IIA impact upon the right to regulate. It makes those

rights subject to the legitimate exercise of the right to regulate, rather than

the other way round. However, the actual wording of the IISD provision

leaves much room for speculation. In particular the reference to custom-

ary international law and general principles of international law, as an

aspect of the process of interpreting the right to regulate, can leave impor-

tant issues in the air. For example, how is the international minimum

standard of treatment of aliens and their property to fi t into this provision?

Although it is an aspect of customary international law, it is also a highly

contentious issue which not all states have accepted. Indeed IIAs exist in

part because this standard is not universally accepted as customary law.

Equally, general principles of international law may favour the protec-

tion of private property and contractual obligations as well as procedural

fairness. In other words they may reinforce the investor’s rights and not

subject them to regulatory control. Thus the reference to international

law, while appearing to balance rights and obligations between state and

28 See Mann (2008: 19), citing Article 43 of the EFTA–Singapore FTA 2002 entitled ‘Domestic Regulation’ which states: ‘Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure consistent with this Chapter that is in the public interest, such as measures to meet health, safety or environmental concerns’ (see also Mann et al., 2006: 38).



non- state actors, begs the question ‘which version of international law?’

or ‘whose international law?’ In practice it may be invoked precisely to do

what the IISD draft seeks to avoid, namely, to subject the state’s right to

regulate to investor rights. The main way around this problem would be

to give the concept of sustainable development, which appears to qualify

the reference to international law in the way that the IISD provision is

drafted, a core meaning that seeks to reinforce the right to regulate over

investor rights.29 In addition there is a catch- all reference to ‘other social

and economic policy objectives’ which is very vague and open ended. It

could mean that any regulatory policy at all can trump investor rights,

thereby making the investor protection standards in the Model Agreement

legally useless as they will always be subject to this overriding discretion.

It appears that a provision on the right to regulate may have to take

a more specifi c approach than that off ered by the IISD. In this regard,

recent US and Canadian Model BITs explain that non- discriminatory

regulatory actions that are designed and applied to eff ectuate legitimate

public welfare objectives, such as public health, safety and the environ-

ment, do not constitute expropriations except in rare circumstances.30

The Canadian model adds that such rare circumstances will exist where

‘a measure or series of measures are so severe in the light of their purpose

that they cannot be reasonably viewed as having been adopted and applied

in good faith . . .’(Canada Model BIT, 2004: Annex B 13(1)). Both Models

add that, in determining whether a regulatory act has an eff ect equivalent

to expropriation, the economic impact of the act (though the mere loss of

economic value in itself does not show that the act is an indirect expropria-

tion), the extent of interference with legitimate investment backed expecta-

tions and the character of the act are all of signifi cance. In addition, the

most recent US BITs contain provisions asserting that it is inappropriate

for host countries to seek investment through the lowering of environmen-

tal or labour standards, while the Canadian counterpart applies to health,

safety and the environment.31

29 Article 25(b) of the IISD Model Agreement states: ‘In accordance with cus-tomary international law and other general principles of international law, host states have the right to take regulatory or other measures to ensure that development in their territory is consistent with the goals and principles of sustainable develop-ment, and with other social and economic policy objectives’ (Mann et al., 2005).

30 These paragraphs draw on Muchlinski (2007b: 693). See The Republic of Uruguay and the United States of America BIT (2005: Annex B); Canada Model BIT (2004: Annex B 13(1)).

31 The Republic of Uruguay and the United States of America BIT (2005: Art. 12, 13); Canada Model BIT (2004: Art. 11). The areas covered are: protection of human animal and plant life and health, compliance with laws not inconsistent



The Canadian model is also notable for the inclusion of a general excep-

tions clause protecting the rights of the Contracting Parties to regulate in

the fi elds mentioned by its terms. The clause follows the general pattern of

Article XX GATT 1994 by listing areas in which regulation is consistent

with the provisions of the BIT and adds a ‘chapeau’ requiring such regula-

tion not to be arbitrary, discriminatory or a disguised restriction on trade

and investment (Canada Model BIT, 2004: Art. 10). By contrast the US

model reserves only measures aimed at the maintenance or restoration

of international peace or security, or the protection of essential security

interests (The Republic of Uruguay and the United States of America BIT,

2005: Art. 18).

These provisions are by no means perfect answers to the balancing issue

and they do rely heavily on a case- by- case analysis. That said, the intro-

duction of a proportionality test would appear to be the only eff ective way

of allowing balancing to occur in practice in that it avoids both the bias

in favour of investor protection typical of fi rst generation IIAs and the

responsive bias towards the extensive protection of regulatory discretion

exemplifi ed by the IISD Model Agreement formulation.

III. Extending IIAs to Home Country Responsibilities

In its World Investment Report 2003, UNCTAD (2003a: 163) examined

what types of home country responsibilities could be developed in relation

to international investment. It asserted that dealing with home country

measures ‘is a new but potentially important aspect of how to make the

evolving structure of IIAs more development friendly’ and that this would

be consistent with the call in the Doha Declaration for an investment

framework that refl ected in a balanced manner the interests of home and

host countries. It concludes that this ‘suggests that future IIAs should

contain commitments for home country measures, building on the experi-

ence to date’ (ibid). The experience referred to centres on unilateral eff orts

to assist in the promotion of development oriented investment by MNEs

located in the home country. This can be achieved through the liberalisa-

tion of outfl ows, the provision of information on investment opportunities

in host countries, encouraging technology transfers, providing incentives

to outward investors and mitigating risk through investment insurance

with the agreement, the conservation of living or non- living exhaustible natural resources, prudential fi nancial regulation, monetary credit and exchange rate poli-cies, essential security interests, the upholding of UN obligations and international peace and security interests, confi dentiality laws, cultural industries and measures taken in conformity with WTO decisions.



schemes (ibid: 155–6). In addition the courts of the home country could

be used to bring corporate conduct to account, as already seen above, and

home country laws and regulations could be used to control corrupt prac-

tices overseas undertaken by home based investors.

These policy prescriptions fi nd expression in the IISD Model Agreement.

Part 6 covers all of the above. Article 29 deals with assistance and facilita-

tion of foreign investment to developing and least developed countries. It

states:

(A) Home states with the capacity to do so should assist developing and least- developed states in the promotion and facilitation of foreign investment into such states, in particular by their own investors. Such assistance shall be con-sistent with the development goals and priorities of the countries in question. Such assistance may include, inter alia:i) capacity building with respect to host state agencies and programs on

investment promotion and facilitation;ii) insurance programs based on commercial principles;iii) direct fi nancial assistance in support of the investment or of feasibility

studies prior to the investment being established;iv) technical or fi nancial support for environmental and social impact assess-

ments of a potential investment;v) technology transfer; andvi) periodic trade missions, support for joint business councils and other

cooperative eff orts to promote sustainable investments.(B) Home states shall inform host states of the form and extent of available assistance as appropriate for the type and size of diff erent investments. (Mann et al., 2005)

The language is not mandatory in that home states ‘should’ assist develop-

ing and least- developed states. This refl ects the fact that ‘it is diffi cult to

compel assistance between states’ (Mann et al., 2006: 42). Thus the IISD

Model Agreement takes a programmatic approach based on institution

building that seeks to further interstate cooperation. On the other hand

the assistance given by the home state shall be consistent with the devel-

opment goals and priorities of the host states. Thus the latter are to set

the policy agenda, not the home states – which may be said to be the case

with fi rst generation IIAs, refl ecting as they do the home state’s interest in

securing the best possible protection for investors and investments coming

out of the home state.

The IISD Model Agreement then deals with the implication of the duty

to provide information on the part of the home state. Thus Article 30

requires home states to give information to the host state to enable it to

perform its obligations under the Agreement and to give details of home

state standards that may apply to the investment in question. The IISD

Model Agreement adds two further obligations for home countries. First,



Article 31 reinforces the need of the home state to make possible civil

litigation before its own courts against investors. This Article is the com-

panion article to Article 17 on liability of investors. It seeks to remove any

barriers that preclude a hearing of such a case on the merits, as discussed

above. In some states, this may require action by diff erent governments,

depending on the constitutional rules in place (Mann et al., 2006: 43).

Second, Article 32 covers the obligation to render acts of overseas corrup-

tion as criminal off ences under home country law.

The IISD Model does not address all possible home country measures

that could be included in an IIA. Certain further measures could be intro-

duced. According to UNCTAD, these may include provisions to improve

the coordinated delivery of fi nancial assistance for FDI promotion while

minimising ineffi cient restrictions such as ‘tied aid’ limitations that are

often found in unilateral or bilateral assistance schemes. Here the empha-

sis should be on recipient country enterprise needs not on reciprocal ben-

efi ts for donor and recipient countries alike (UNCTAD, 2001a: 58, 2004b:

vol. III, 23). These provisions could also include qualifi cations upon the

MFN principle so as to ensure preferential treatment of certain recipient

countries. A second set of provisions might involve tax preferences for

developing countries as a means of stimulating FDI, and controls over

transfer pricing practices which could divert taxable income from develop-

ing host countries (UNCTAD, 2001a: 59, 2004b: vol. III, 23). A third type

of provision goes a step beyond the cooperative IISD Model’s position

and makes a developing country’s obligations under the IIA contingent

upon the actual provision of technical assistance that is suffi cient for the

latter to comply with those obligations (UNCTAD, 2001a: 60, 2004b:

vol. III, 23–4). Further provisions could be included to promote technol-

ogy transfer, whether in general or for specifi c projects, and preferential

trade related investment measures such as rules of origin provisions,

anti- dumping protection and product certifi cation regulations favouring

imports of goods produced in developing host countries by foreign inves-

tors (UNCTAD, 2001a: 61–2, 2004b: vol. III, 24).

4. CONCLUDING REMARKS

This chapter has shown that a holistic development oriented approach to

international investment law may be achievable by way of a rebalancing of

rights and obligations in IIAs so as to include investor and home country

duties. In particular, it has shown that an extension of obligations to these

two groups of actors can be justifi ed philosophically on the basis of a wide-

ranging conception of development, which accepts not only economic



growth through increased investment but also the creation of sustainable

development based on community freedoms that can be furthered by way

of a greater balance of rights and obligations between host and home

countries as well as investors.

It has also shown that it is possible to draft provisions that seek

to capture the essence of such a rebalancing. In this the IISD Model

Agreement off ers a useful, though by no means uncontroversial, step

forward. However, despite the growth of unease with IIAs among a sig-

nifi cant minority of countries, for the present this vision is likely not to

be fulfi lled. On the other hand, as the issue of rebalancing continues to

be talked about, this in itself represents a major change in the continuing

debate. The UNCTAD annual expert group meeting is one forum where

this debate can take on a more robust content. It may well bear fruit in the

future with a new generation of revised IIAs that contain provisions of the

kind outlined in this chapter.


205

10. Human rights and transnational corporations: establishing meaningful international obligations

James Harrison*

1. INTRODUCTION

This chapter considers the value of international human rights norms and

standards as mechanisms for eff ectively holding transnational corpora-

tions (TNCs)1 accountable for their broader social impacts, particularly

in the context of developing countries. It argues that there are a number

of existing human rights initiatives directed at the human rights perform-

ance of TNCs. But these suff er from signifi cant accountability gaps and

coverage problems which throw into question whether international

human rights obligations are well placed to act as a system for enhanc-

ing TNC conduct across the full range of their diverse social impacts. It

therefore focuses upon two specifi c methodological frameworks which are

addressed to all TNCs internationally to assess how they might contribute

to the establishment of more meaningful obligations: the Draft Norms on

the Responsibilities of Transnational Corporations and Other Business

Enterprises with Regard to Human Rights (‘the UN Draft Norms’) pro-

duced by the UN Sub- Commission on the Promotion and Protection of

Human Rights; and ‘Protect, Respect and Remedy: a Framework for

Business and Human Rights’ produced by the Special Representative

of the Secretary- General on the issue of human rights and transnational


1 This article will use the term ‘transnational corporation’ (TNC) to describe a company with operations in more than one country. No diff erentiation is intended between this term and others such as ‘transnational enterprise’ or ‘multinational corporation/enterprise’. For a more nuanced discussion of these terms, see Muchlinski (2007a: 5ff ).



corporations and other business enterprises, John Ruggie (‘the Ruggie

Framework’) (Ruggie, 2008).

This chapter evaluates the respective merits and fl aws of these two

approaches in the context of existing human rights initiatives. While

they represent very diff erent methods for enhancing the accountability

of TNCs, both are international mechanisms for creating greater coher-

ence and responsibility for all TNCs with regard to all their human

rights conduct. It is the holistic approach adopted by both mechanisms

that makes them worthy of comparative evaluation. Since the Ruggie

Framework now appears to have replaced the UN Draft Norms as the

focus of international action on human rights in the corporate sphere, it is

an apposite time to compare and contrast the two approaches.

In assessing these initiatives, the chapter argues that criticism of the

Draft Norms by Ruggie and others is largely justifi ed. It further contends

that Ruggie’s approach has a number of advantages in terms of its poten-

tial to create a positive impact on the human rights performance of TNCs.

But it also argues there are limitations to the Ruggie Framework and

that it requires signifi cant further work if it is to be fully operationalised.

Finally it is stressed that there are limits to what any international human

rights framework can achieve in altering behaviour of relevant actors. We

must therefore continue to monitor the Ruggie Framework to make sure

that it is part of the solution to the problems, rather than, at worst, an

unhelpful distraction from meaningful action.

2. THE RATIONALE FOR INTERNATIONAL HUMAN RIGHTS REGULATION OF TRANSNATIONAL CORPORATIONS

Conceptions of human rights on the one hand and conceptions of global

capitalism (which underpin the activities of TNCs) on the other arise from

very diff erent theoretical and normative frameworks. The foundations

of human rights are strongly deontological, mandating certain actions

(for example, fair trials, fair working conditions) and prohibiting other

actions (for example, torture, arbitrary detention) on the basis of a set

of requirements due to each human being by virtue of their humanity.

Human rights law is viewed as being in the realm of ‘public’ law, and fl ows

from international legal obligations which regulate government conduct,

requiring governments to take action with regard to these rights. Global

capitalism on the other hand rests on strongly consequentialist grounds:

that individuals pursuing their own self- interests can be harnessed in

order to create a greater public good (Freeman, 2006: 20ff ). Regulation


Human rights and transnational corporations 207

of the activities of TNCs has largely been part of the ‘private realm’ and

governed by the rules of the market place, focusing upon concepts such as

corporate governance and shareholder value. The underlying ideologies

of these two normative frameworks and their translation into systems of

regulation appear to be poles apart. But over the last few decades there

have been steadily increasing calls for TNCs to be subjected to the norms

and standards of international human rights law.

High- profi le allegations of human rights abuses by TNCs, predomi-

nantly in developing countries, have undoubtedly fuelled calls for regula-

tion. These have included labour conditions in the apparel and footwear

industries in Asia, Shell’s actions in the Niger Delta in Nigeria, the

complicity of Unocal and Total in forced labour in Burma, Google and

Yahoo’s acceptance of censorship in China, Coca Cola’s deprivation of

local communities of water in India, and the use of highly poisonous pesti-

cides in banana plantations by Chiquita, Dole, and Del Monte in Central

and South America. These activities have all been widely characterised as

(alleged) human rights violations for which a TNC bears responsibility. A

signifi cant number of other TNCs have, over the years, been accused of

violating a wide range of human rights in their operations.2

But the question remains – why does such conduct require deviation

from standard regulatory models? Traditionally, individual governments

regulate the human rights conduct of TNCs in their jurisdiction through

their own national legal systems, primarily through provisions of corpo-

rate law, criminal law and so on. Those governments are then responsible,

inter alia, to international human rights supervisory mechanisms, such

as the UN Human Rights Treaty Monitoring Bodies (TMBs), for ensur-

ing that the human rights of those within their jurisdiction are protected,

including with respect to TNC conduct. With regard to all governmental

conduct, relevant UN supervisory bodies generally have very limited

powers to unilaterally compel governments to take actions with regard

to human rights violations (Tomasevski, 1994: 92, 98).3 But what are the

2 For a more detailed examination of many such alleged human rights viola-tions, see the Business and Human Rights Resource Centre, http://www.business- humanrights.org/Home (accessed 21 September 2009).

3 For instance, the UN Treaty Monitoring Bodies which monitor the UN Covenants (ICCPR, ICESCR and so on) require governments to report on their implementation of the human rights instrument in question. But they are limited in their response to producing concluding observations on the State’s performance. A number of the TMBs have individual complaint mechanisms but, again, the TMBs have no power to enforce judgments which the State in question is unwill-ing to accept. Some regional human rights mechanisms have stronger powers. The European Convention on Human Rights is generally perceived to be the strongest



particular inadequacies of this form of regulatory model with regard to the

activities of TNCs?

The perceived inadequacies of traditional regulation refl ect concerns

about the changing nature of corporations in our increasingly globalized

world. Fifty years ago, most companies operated within a single country.

Today, we live in a world of some 77,000 transnational companies, with

approximately 770,000 subsidiaries and millions of suppliers (Ruggie, 2007a:

18). An increasingly large share of global trade is now conducted within

multinational corporations and is internalised within their supply chains.

TNCs are therefore increasingly powerful actors in our globalized economy.

TNCs have also increased their power within the international legal system

through expansion of the legal obligations imposed on States through the

international trade regime, and increased levels of direct legal protection

through bilateral and regional investment treaties. So, a foreign company

can win millions of dollars’ worth of damages through international invest-

ment arbitration, or strongly infl uence countries to bring cases under the

international trading system so as to promote their access to markets.4

It is in this globalized regulatory environment that questions are raised

about the ability of governments individually, particularly in developing

countries, to eff ectively regulate the actions of TNCs. Developing coun-

tries, in particular, are often competing with other countries for investment

by TNCs and are therefore not in a strong position to impose eff ective

regulatory measures unilaterally. This situation is exacerbated by other

factors; for example, by weak governance structures in many developing

countries, by the fact that TNCs have hugely complicated networks of

subsidiaries and suppliers, and by the fact that corporations may become

complicit in the human rights violations of governments (Ratner, 2001:

461ff ; Ruggie, 2008: 5–6, 9). Assessment of the policies and practices by

which governments in developing countries actually regulate with regard

to the human rights conduct of multinational companies supports these

concerns; studies indicate that legislation is virtually non- existent and

States largely rely on voluntary initiatives. Such regulatory frameworks

are widely perceived as inadequate for holding TNCs accountable for their

conduct (Muchlinski, 2007a: 526; Ruggie, 2007a: 6–7).

mechanism, but regional mechanisms in developing countries are generally much weaker. Compare this with the enforcement powers of international trade and investment dispute mechanisms which are much stronger.

4 For instance, with regard to Chiquita’s lobbying the US to bring a case against the EU for its system of quotas and tariff s on bananas, see Alter and Meunier (2006: 369ff ); and with regard to Argentina’s liabilities with regard to the investment tribunal cases brought against it, see Burke- White (2008).



These concerns about the inherent inability of countries to eff ectively

regulate the human rights impacts of TNCs have led to alternative strate-

gies to address such conduct. A host of international campaigning groups

have appeared wanting to take action with regard to the negative social

impact of multinationals – organising consumer boycotts, protests, and

naming and shaming of misbehaving TNCs and pressing for eff ective reg-

ulation of their activities (Shamir, 2004: 643–4). One approach advocated

is for international human rights norms and standards to be utilised more

eff ectively to hold TNCs accountable for their conduct. The UN Draft

Norms and the Ruggie Framework represent two recent and radically

diff erent approaches to increasing that accountability. But they cannot

be properly evaluated in isolation. Rather, they must be viewed in the

context of numerous previous initiatives to engage TNCs with regard to

their international human rights responsibilities. By fi rst exploring the effi -

cacy and defi ciencies of these previous initiatives, we are assisted in better

understanding the strengths and weaknesses of the UN Draft Norms

and the Ruggie Framework and determining whether they are capable of

enhancing TNC conduct in developing countries.

3. THE HISTORY OF ENGAGEMENT: TNCs AND HUMAN RIGHTS

There is now a considerable amount of scholarship arguing that, like

other private actors, TNCs do have obligations under international law,

and these can include human rights obligations (Steinhardt, 2005: 197–8;

De Schutter, 2006: 29, 33; Kinley and Chambers, 2006: 480; Muchlinski,

2007a: 516–17; Ruggie, 2007a: 7–14). From the trials at Nuremburg,

private actors have been held directly legally accountable for various

actions under international law (Ratner, 2001: 466ff ). Furthermore, there

are a number of international legal instruments which target corporate

behaviour (Clapham, 2006: 247ff ). A number of commentators and organ-

isations have argued that the Universal Declaration of Human Rights is

addressed to corporations and that corporations may be held accountable

in international law ‘at least for gross human rights violations’ (Clapham,

2006: 227–8, 246).

But, despite these assertions of the potential for TNCs to be held

accountable for their human rights conduct under international law, as

yet there is no fully formed and overarching international framework

relating to the human rights performance of TNCs. Instead, there have

been a plethora of diff erent initiatives which have attempted to formulate

some kind of supranational corporate human rights responsibility. These



initiatives are therefore briefl y evaluated below, crudely categorised for

our purposes into four diff erent types: international ‘soft law’ frameworks,

multi- stakeholder initiatives, self- regulatory frameworks, and national

cross- border accountability mechanisms. By considering the positives

and negatives of these initiatives, it is hoped that we may reach a better

understanding of the situation which the UN Draft Norms and the Ruggie

Framework are seeking to address.

I. International Soft Law Frameworks

There have been various guidelines, codes and principles produced by

international organisations which have included, in various diff erent

forms, reference to the human rights responsibilities of TNCs. Together

we might term these international ‘soft law’ frameworks. An early eff ort

in this regard was the Guidelines for Multinational Enterprises of the

OECD, originally set up in 1976 and most recently revised in 2000. This

is still the ‘most widely used instrument defi ning the obligations of multi-

national enterprises’ (De Schutter, 2006: 4). The Guidelines cover a wide

range of corporate conduct and make only general reference to human

rights, stating that enterprises should ‘respect the human rights of those

aff ected by their activities consistent with the host government’s interna-

tional obligations and commitments’ (OECD, 2001: Section II). There are

in addition some more detailed provisions covering labour rights (OECD,

2001: Section IV).

Another such soft law framework is the International Labour

Organization (ILO)’s Tripartite Declaration of Principles Concerning

Multinational Enterprises, which is primarily concerned with labour rights

and contains detailed provisions on a range of labour rights issues. More

generally, it proclaims at Article 8 that TNCs should ‘respect the [UDHR]

and the corresponding international covenants’. A further initiative was

the UN Draft Code of Conduct on Transnational Corporations, which

was fi nalised in 1990 and included a provision requiring that transnational

companies shall respect human rights. But this was never adopted, partly

because of opposition from business and western governments (Buhmann,

2009: 28).

All of the above instruments are intended to apply to all TNCs equally.

An alternative approach has been the creation of a set of standards to

which TNCs voluntarily sign themselves up. This was the approach taken

by the United Nations with the Global Compact, launched in 1999 by

Kofi Annan. The Global Compact includes a set of ten principles, two

of which concern human rights and four of which concern labour rights

issues. This initiative has had relatively widespread appeal amongst high-



profi le TNCs. Thus far, several thousand TNCs have signed up to the

Compact.5

A number of commentators have argued that each of these initiatives has

had value in terms of enhancing corporate conduct, including in respect of

protection and promotion of human rights (see for example Clapham,

2006: 207–9). But many others have noted the limitations of these mecha-

nisms. The Global Compact requires only a vague commitment to human

rights with no defi ned and concrete obligations and lacks any eff ective

monitoring system (Litvin, 2003: 70; Clapham, 2006: 225). The main com-

mitment of companies is that they must report on their enactment of the

Compact, but a large number of companies are either non- communicating

or inactive, and while there is some shame in being listed as such, this is

clearly not a great deterrent against inertia (MacLeod, 2007: 700).

The OECD Guidelines similarly lack detailed provisions on human rights

and an eff ective enforcement mechanism that requires companies to take

them seriously (De Schutter, 2006: 9; Kinley and Chambers, 2006: 456).

The OECD Guidelines do include National Contact Points (NCPs) where

complaints can be brought. But, while there are examples of complaints

brought to these NCPs having a positive impact on corporate behaviour

(Clapham, 2006: 208–9), their performance has also been widely criticised

(see for example De Schutter, 2006: 8). The ILO Declaration includes a

similarly vague commitment to human rights and, although it does include

more detailed obligations for TNCs with regard to labour rights, little

work has been done on its implementation (Clapham, 2006: 218).

Overall, a combination of lack of specifi city in human rights obliga-

tions, the requirement of only a vague commitment to human rights, the

lack of eff ective monitoring and enforcement procedures, and the inability

to diff erentiate eff ectively between diff erent levels of corporate perform-

ance have all been factors which have undermined the functioning of these

models to diff ering degrees.

II. Multi- stakeholder Initiatives

A second set of initiatives operate outside the institutional architectures

of the international legal regime. They are multi- stakeholder initiatives

which involve complex ‘collaborative networks’ between states, NGOs,

and business groups (Ruggie, 2007a: 16). They include the Voluntary

Principles on Security and Human Rights, the Kimberley Process

5 For more details on the Global Compact, its membership and its function-ing see http://www.unglobalcompact.org (accessed 21 September 2009).



Certifi cation Scheme (KPCS) and the Extractive Industries Transparency

Initiative. Such initiatives are sector specifi c and were all driven by social

pressure with regard to particularly pressing human rights issues. The ini-

tiatives are all voluntary in that participants are free to decide whether or

not to sign up to them, but they can have ‘harder’ law features of varying

degrees of strength.

One of the most widely lauded initiatives is the KPCS, which is a system

developed by civil society organisations, states and relevant corporations

to deal with the issue of ‘confl ict diamonds’. That is, diamonds produced

by rebel groups, mostly in developing countries, who use the proceeds of

sales to fund their campaigns and often commit horrendous human rights

abuses. The KPCS aims to ensure that no confl ict diamonds are traded

internationally, thus depriving rebel groups of a crucial source of income.

It does this by restricting trade between Kimberley participants to certifi ed

non- confl ict diamonds only, and prohibiting trade between Kimberley

participants and non- Kimberley participants, since the latter have not

agreed to certify that their diamonds do not originate from the targeted

rebel groups.6 Participants can be suspended or expelled if they do not

comply with certifi cation criteria. The KPCS currently has 47 member

states and is credited with reducing the fl ow of confl ict diamonds from

about 3–4 per cent to around 1 per cent of the total diamonds market

(Ruggie, 2007a: 17). One can therefore see that this ‘soft law’ mechanism

actually does have the ability to deprive countries of an important source

of income by suspending or expelling them from the scheme, thereby cre-

ating a viable accountability mechanism.

It is beyond the scope of this chapter to assess the strengths and weak-

nesses of each of the very varied multi- stakeholder initiatives which exist.

Some are certainly more heavily critiqued than others.7 Looking at

these types of mechanisms in the round, they tend to be responsive to

particularly high- profi le human rights situations, and so creating universal

coverage of all human rights issues internationally through such initia-

tives is highly unlikely. But it is important to note that if such initiatives

are structured to eff ectively incentivise good conduct and/or penalise bad

conduct, such as in the case of the KPCS, they can have advantages over

the more generic international soft law frameworks described above. The

fact that they tend to have greater specifi city – dealing with a particular

6 For a detailed examination of the functioning of the scheme, see Wright (2004); Grant and Taylor (2004).

7 For instance, on the limitations of the Extractive Industries Transparency Initiative, see Hilson and Maconachie (2009).



human rights issue such as confl ict diamonds, rather than human rights

generically – gives them a focus that can lead to more tangible results if

there is suffi cient pressure for the creation of meaningful accountability

mechanisms.

III. Self- regulatory Initiatives

A third set of initiatives are the self- regulatory schemes of TNCs them-

selves. These take the form of voluntary codes or policies, which broadly

speaking can be seen as part of TNCs’ corporate social responsibility

(CSR) agendas. Increasingly such codes and policies are accompanied

by some form of reporting on the company’s social and environmental

impact across all the countries in which they operate. Such initiatives can

be undertaken in accordance with principles such as the Global Compact

and other relevant codes and standards, but it is up to the individual TNC

to interpret and implement them. There is the potential therefore for these

initiatives to foster corporate accountability for human rights without the

need to negotiate binding regulatory frameworks and their merits have

been highlighted by a number of commentators. They have the poten-

tial to allow a fl exible focus on the particular social and environmental

impacts of each business, to foster ownership and responsibility for the

issues and to allow comparison with others in the sector by consumers,

workers and other key stakeholders (Redmond, 2003: 90; Blowfi eld and

Frynas, 2005: 502).

However, the limitations of what can be achieved through CSR and

corporate reporting have also been widely highlighted. With regard to

CSR more generally, the defi nitions and remit of what is required remain

illusory (Blowfi eld and Frynas, 2005: 500–504) and only a limited minor-

ity of TNCs do, and will ever, report on their non- fi nancial performance

on a voluntary basis (Hess, 2008: 468). There remain substantial doubts

about whether the CSR movement, and corporate self- reporting of it in

particular, is in fact giving us a reliable picture of a company’s social and

environmental impacts (Hess, 2008). There are particular worries about

the impact of CSR on developing countries and how CSR initiatives may

be diverting attention away from more eff ective forms of governance

(Blowfeld and Frynas, 2005).

In such a scenario, the more universally accepted concepts and fi rmly

entrenched obligations of human rights appear to have the capacity to add

signifi cant value to CSR frameworks. But, although CSR initiatives have

dealt with many human rights concerns (most prevalently workers’ rights)

they have not traditionally been framed in human rights terms (Wettstein,

2009: 142) and only a relatively small number of TNCs include human



rights principles in their company codes.8 Even with regard to labour

rights – clearly fundamental to all corporate activity – only a small minor-

ity of company codes actually refer to ILO core labour conventions and

even then they are very selective in the conventions they cite (Redmond,

2003: 91–2; Clapham, 2006: 215). Where codes do reference human rights,

the codes are often vague in respect of the human rights obligations they

impose and lack implementation and enforcement mechanisms and inde-

pendent monitoring (Weissbrodt 2005: 293; Kinley and Chambers, 2006:

491–2; Ruggie, 2007a: 20).

Reporting procedures, for the most part, lack robust methodologies

for assessing human rights impacts (Clapham, 2006: 198); instead ‘anec-

dotal descriptions of isolated projects and philanthropic activity prevail’

(Shamir, 2004: 656; Ruggie, 2007a: 21; Wettstein, 2009: 131). TNCs tend

to concentrate on their positive social, environmental and human rights

impacts rather than providing a balanced report of their activities (Hess,

2008: 462–3). In human rights terms, companies themselves defi ne the

content of the rights they identify, so that such rights become so elastic in

meaning that they lose their value as measures of a company’s perform-

ance (Ruggie, 2006: 13, 2007a: 20–21). Overall, corporate social report-

ing is not achieving the objectives it aspires to, including the protection

and promotion of human rights, other than perhaps with regard to a few

industry leaders in each fi eld (Hess, 2008: generally and 448).

Independent verifi cation of human rights performance should guard

against some of the problems described above. In general terms, empirical

studies show that companies who sign up to independent codes of practice

and independent monitoring of their activities are better at protecting and

promoting labour rights than those who do not (Barrientos and Smith,

2006; Nelson et al., 2007). Reporting and assurance standards assist

in attesting to a certain objectivity and independent monitoring of the

reporting process, but very few companies fully utilise such procedures

(Redmond, 2003: 93; Hess, 2008: 470–71; Ruggie, 2007a: 21–2). External

verifi cation of performance too often involves large accounting fi rms who

have little expertise on the issues and who often do other work for the

TNC in question meaning that their impartiality is therefore open to ques-

tion (Redmond, 2003: 92–3). Nor can we assume that external pressure

on companies will improve performance. Reporting ranking systems are

insuffi ciently intrusive into a company’s actual social and environmental

8 For an updated list of companies, see the Business and Human Rights Resource Centre, http://www.business- humanrights.org/Documents/Policies (accessed 21 September 2009).



performance and instead often simply focus on the amount of disclosure

against key indicators (Chatterji and Levine, 2006: 47; Hess, 2008: 463).

Furthermore, a proliferation of ethical codes in certain sectors, such as

the apparel and footwear industry, can make it diffi cult for consumers to

diff erentiate eff ectively between brands, some of whom may be adhering

to far weaker standards than others (Chatterji and Levine, 2006: 34–40).

Therefore, despite claims that independent assurance allows companies to

‘diff erentiate themselves from uncertifi ed competitors’ (Steinhardt, 2005:

184), the reliance on consumers to diff erentiate the certifi ed from the non-

certifi ed is often overstated.

So, while voluntary codes and reporting practices can have some ben-

efi ts with regard to companies’ practices, those that do take on meaning-

ful human rights obligations and truly independent verifi cation can end

up being those that get penalised, while those that ignore or distort such

schemes are more likely to be able to commit violations with impunity

(Litvin, 2003: 71; Kinley and Chambers, 2006: 491–2). These problems

with CSR have led to campaigning organisations declaring CSR to be a

sham and pressing for international regulatory standards, while TNCs,

supported by many home governments, have tended to continue to advo-

cate a voluntary approach (Clapham, 2006: 195–6).

IV. Cross- border Accountability Mechanisms

Finally, we can see certain forms of cross- border accountability mecha-

nisms at the national level. These are government initiatives which buck

the voluntary trend and impose harder forms of regulation on corporate

conduct internationally with regard to human rights obligations. Such

initiatives include human rights conditionality in export credit guarantees,

consideration of human rights compliance in investment decision- making

and requirements that companies disclose certain aspects of their social

and environmental performance (Dhooge, 2004; Blowfeld and Frynas,

2005: 502–3; Clapham, 2006: 197). Such initiatives are potentially impor-

tant mechanisms for incentivising corporate adherence to human rights

standards globally, but they have been undertaken by only a very few

countries.

Another form of trans- border accountability mechanism is that in

a number of jurisdictions claims can be brought in national courts for

human rights violations committed by TNCs in another country. Most

prominent has been the case law of the Alien Claims Tort Act in the US.

ACTA allows for claims against companies incorporated in, or with a

continuous business relationship with, the US. Claims can be brought by

victims who have suff ered violations of international law anywhere in the



world on the basis that the company concerned has committed the viola-

tions or been complicit in them.

There have been successes in holding fi rms accountable for violations

of human rights – most notably Unocal in Burma where the company

settled with the plaintiff s out of court. But there are signifi cant procedural

hurdles to making successful claims under the Statute (for example, forum

non conveniens), as well as limitations to the types of human rights viola-

tions (only the most serious) which can be litigated (Redmond, 2003: 83).

Of the more than forty cases fi led against corporate defendants, most have

been dismissed on pre- trial motions and none has reached a fi nal judgment

(Steinhardt, 2005: 202).

Future use of ACTA is likely to be highly contested. Early cases led

to an orchestrated campaign by hundreds of TNCs against the use of

ACTA for holding companies liable for their actions overseas (Shamir,

2004: 650–55). Similar types of claims can be made in other jurisdictions

(Redmond, 2003: 80). But some include more procedural bars than others

and we are a long way from seeing an appropriate model in a wide range

of jurisdictions.

V. Assessment of Existing Mechanisms

Overall, reviewing the current situation of human rights protection at

the international level, what we are faced with is a patchwork of diff erent

mechanisms for holding TNCs accountable for their human rights per-

formance. Each has a certain value, but each leaves signifi cant account-

ability gaps which are not necessarily fi lled by other initiatives.

International soft law initiatives and self- regulatory frameworks are

essentially voluntary in nature and require corporate buy- in for their eff ec-

tiveness. Some TNCs who are leading human rights advocates may benefi t

from this approach, but many other TNCs ignore these initiatives or make

only a vague commitment to human rights which remains ineff ectively

monitored and enforced. Lack of specifi city with regard to the underlying

human rights obligations and their application makes objective assess-

ment and diff erentiation between varying levels of corporate performance

through these mechanisms very diffi cult. For similar reasons, ‘consumer

power’ is often overstated as an accountability mechanism.

Certain multi- stakeholder initiatives (for example, the Kimberley

Process) are more context- specifi c and eff ective and include more concrete

mechanisms of enforcement, but are specifi c to particular high- profi le

human rights issues. National cross- border accountability mechanisms

of governments and litigation through the courts are ‘harder law’ options

but are only available in certain countries, have signifi cant hurdles to



access and currently are only utilised to pursue a tiny minority of the most

extreme human rights abuses.

An overarching theme of debates around increasing accountability

with regard to all these mechanisms has been the very polarised views

about the best forms of regulation. In general terms, business lobby

groups, supported by governments, have been in favour of governmental

responsibility for human rights and purely voluntary frameworks for

TNCs. Campaigning groups on the other hand have sought to fi nd mecha-

nisms for creating direct accountability of TNCs for their actions which

negatively impact upon human rights (Shamir, 2004: 650–55 and 659;

MacLeod, 2007: 681). Any new attempt to create more meaningful obliga-

tions at the international level has to attempt to bridge the gaps between

these actors if it is to have any hope of success.

We are therefore faced with a world of multiple codes, initiatives, and

other measures aimed at addressing the human rights performance of

TNCs, most of which are not binding and leave signifi cant accountability

gaps. This is exacerbated by very polarised views about the further meas-

ures that are required to close the gaps which exist. Questions therefore

remain about the extent to which international human rights obligations

have the potential to become standards by which every TNC could be held

accountable for the full range of its broader social impacts with regard to

the developing countries in which it operates.

It is in the context of these questions that we need to assess the Draft

Norms and the Ruggie Framework. Both initiatives attempt to develop a

normative framework for the human rights obligations of all transnational

corporations, but they do so in very diff erent ways. Neither endeavour can

be assessed in a vacuum. We need to examine the extent to which these

two frameworks can eff ectively address the existing ‘governance gaps’ in

the regulation of TNCs and thereby make human rights obligations more

meaningful across the broad range of TNC conduct where they are rel-

evant and applicable.

4. UN DRAFT NORMS ON THE RESPONSIBILITIES OF TRANSNATIONAL CORPORATIONS AND OTHER BUSINESS ENTERPRISES WITH REGARD TO HUMAN RIGHTS

I. The Nature and Content of the UN Norms

The UN Norms represented a fi rst attempt to draft ‘a common global

framework for understanding the responsibilities of business enterprises



with regard to human rights’ (Statement of Support for the UN Human

Rights Norms for Business, 2004). The Norms, with an accompanying

Commentary, were produced by the UN Sub- Commission on the Promotion

and Protection of Human Rights, after a fi ve- year period of consultation

and development (Kinley and Chambers, 2006: 456–7). The Draft Norms

essentially present themselves as a restatement of the existing human rights

obligations with regard to multinational corporations in international law

(De Schutter, 2006: 11; Buhmann, 2009: 44). They are set out in a form

which will be familiar to those accustomed to UN legal documents – a

lengthy preamble and a set of operative provisions which specify the sub-

stantive obligations, mechanisms of implementation and key defi nitions.

The Norms start by emphasising that States have the primary responsi-

bility for human rights, but that transnational corporations and other busi-

ness enterprises also have human rights obligations ‘within their spheres of

activity and infl uence’. The Norms then go on to list the human rights obli-

gations for which transnational corporations have direct responsibility,

including equal opportunity and non- discriminatory treatment, security

of persons, workers’ rights, the prohibition of corruption, obligations with

regard to consumer protection and obligations with regard to environ-

mental protection. There is also a general obligation on TNCs to respect

and contribute to the realisation of civil, cultural, economic, political, and

social rights, with a number of these rights particularly highlighted.

The Norms then set out modes of implementation, including dissemina-

tion by TNCs; the creation of internal rules of compliance with the Norms

by TNCs; the application of the Norms in contracts with third parties;

provisions for monitoring of the Norms; provisions requesting States to

establish legal and administrative frameworks to ensure the Norms are

implemented; and a requirement that TNCs and other business enterprises

‘shall provide prompt, eff ective and adequate compensation’ to those

aff ected by violations of the Norms.

II. Reaction to the UN Norms

It is clear that the Norms were intended to evolve into a binding instru-

ment and they have been described by their main author as the ‘fi rst

non- voluntary initiative accepted at the international level’ (Weissbrodt

and Kruger, 2005: 318, 339). It has been further pointed out that the

application of the Norms in contracts with third parties would also make

them contractually binding and justiciable under relevant national law

(Clapham, 2006: 233). It is therefore hardly surprising, given the polari-

sation on the issue of voluntarism versus enforceability described above,

that there were a range of diff ering opinions about the Norms. Business



organisations were very critical of the Norms and very opposed to their

adoption, while many human rights and other campaigning organisations

were supportive of this endeavour (Kinley and Chambers, 2006: 458–9).

In the context of such confl icting views, a Resolution was fi nally adopted

by the Human Rights Commission which requested the UN Secretary-

General to appoint a Special Representative (SRSG) on business and

human rights. Professor John Ruggie was subsequently appointed, with a

mandate which included the identifi cation and clarifi cation of ‘corporate

responsibility and accountability for TNCs and other business enterprises

with regard to human rights’ as well as to elaborate on ‘the role of states

in eff ectively regulating and adjudicating the role of TNCs and other busi-

ness enterprises’. He was also asked to provide defi nitions for concepts

such as ‘complicity’ and ‘sphere of infl uence’ which had featured promi-

nently in the Norms.

The SRSG, in his fi rst report to the Commission on Human Rights,

directly attacked the UN Norms. Despite it not being part of his offi cial

mandate, the SRSG felt it necessary to critique the Norms in order to

advance discussions he felt had become deadlocked (Ruggie, 2006: 14). He

recognised that there was some usefulness in producing a summary list of

rights that may be aff ected by business, but then accused the Norms exer-

cise of becoming ‘engulfed by its own doctrinal excesses’ and a distraction

to the debate, focusing on two particularly problematic issues (Ruggie,

2006: 15–17).

First, he argued that the Norms, despite maintaining that they were

merely restating existing international human rights law in respect of

TNCs, were in fact the fi rst initiative to create a broad array of interna-

tional human rights obligations attach[ing] directly to corporations. While

this was perhaps desirable, the SRSG argued that it was a long way from

the current position and considerable state action was needed to bring

the proposition into eff ect. Second, the SRSG took issue with the lack of

precision for allocating human rights responsibilities to States on the one

hand and businesses on the other. The concept of ‘spheres of infl uence’

carried the burden of this allocation of responsibility, but the term had

no recognised legal history through which principles could be derived to

determine its application in any given situation. It was therefore not a

‘suitable basis for establishing binding obligations’ (Ruggie, 2006: 18).

Ruggie has not been alone in his criticism of the Norms. It has been

argued that they contain a long list of rights without defi ning precisely

what the obligations of corporations are with regard to those rights

(Litvin, 2003: 70–71). Furthermore, included in the list of rights are pro-

visions on, for instance, consumer protection and anti- corruption whose

appropriateness within a human rights framework is highly dubious



(Muchlinski, 2007a: 524). In terms of enforcement, there is no discussion

of where claims can be brought for reparations (Muchlinski, 2007a: 534–5)

and various NGOs even criticised the lack of monitoring and compliance

system in the Norms (MacLeod, 2007: 694–5).

The Norms have also had a considerable number of supporters. Such

supporters admit that key terms such as ‘sphere of infl uence’ and ‘com-

plicity’ are vague terms without clear and established legal meanings (De

Schutter, 2006: 12–13). But it is argued that Ruggie is misplaced in seeking

a defi nition of such key terms. Their vagueness in terms of the duties

they impose is inevitable in any kind of international instrument of this

nature. The Norms should rather be a starting point from which future

concretisation of the terms can be derived (Kinley and Chambers, 2006:

466, 471; Buhmann, 2009: 40). The term ‘spheres of activity and infl uence’

is defended as necessary to cover gaps in human rights coverage, most

obviously when a government is failing in its human rights duties (Kinley

and Chambers, 2006: 467–8). It is argued in support of the human rights

listed in the Norms that, although they cover rights which are not covered

traditionally in human rights law, infringements of such rights could either

amount to or lead to human rights violations. So violations of consumer

rights could amount to violations of human rights if death or serious

injury were the consequence. Violations of norms on anti- corruption could

squander resources, which could lead to violations of economic, social and

cultural rights. The inclusion of these norms is fundamentally justifi ed by

‘the importance of such matters’ (Kinley and Chambers, 2006: 472).

It is therefore argued that the Norms can be built upon to clarify the

obligations of TNCs and to set up monitoring mechanisms to ensure

compliance (De Schutter, 2006: 21), and that the norms could be used by

legislatures and courts at national level as the basis for determining liabil-

ity in certain cases (Weissbrodt, 2005: 295). It is argued that the underly-

ing reason for the rejection of the Norms is that ‘business alliances, in the

main, do not want TNCs to be held legally accountable for the human

rights abuses that they may infl ict or are complicit in, and that the Norms

are seen as a fi rst step in this direction’ (Kinley and Chambers, 2006: 491).

The question remains therefore whether this is simply a question of politi-

cal will or whether there are fundamental fl aws in the Norms, as Ruggie

suggests, which make them an inappropriate basis for increasing the inter-

national accountability of TNCs for their human rights performance.

III. Evaluation of the UN Norms

The Norms do have a number of positives in terms of tackling the exist-

ing TNC accountability gaps outlined in Section 2 above. They purport



to create a binding legal framework with a set of codifi ed rights which are

universally applicable to all TNCs. They therefore have the potential to

reduce the problems of voluntarism and self- defi nition which have plagued

existing initiatives. They also contain specifi c implementation mechanisms

to be undertaken by the company itself and by relevant international and

national bodies and provisions on redress to victims. This, again, has the

potential to reduce the problems of individual implementation by com-

panies, largely self- defi ned regulation of conduct and a lack of eff ective

remedies for violations. But there are signifi cant problems with the Norms

which undermine these potential benefi ts.

The Norms adopt the approach of so many other UN human rights

instruments in focusing the main part of their attention on the list of rights

that are applicable, followed by provisions on implementation. So why

is this approach problematic here? There are a number of reasons. First,

there were clearly misjudgements in the list produced. For instance, wide-

ranging consumer protection obligations are included within the Norms.

Some violations of consumer protection may be grave enough to have the

potential to become human rights violations (for example, endangering

the physical safety of consumers in particular ways9), but this is not a

reason to elevate all issues of consumer protection to the status of human

rights. For example, the UN Guidelines for Consumer Protection (cited in

the commentary on the UN Draft Norms as relevant international stand-

ards which TNCs should observe) quite appropriately states that

Governments should adopt or maintain policies that make clear the responsi-bility of the producer to ensure that goods meet reasonable demands of dura-bility, utility and reliability, and are suited to the purpose for which they are intended.

It is clearly important that the ‘durability, utility and reliability’ of goods

is the subject of consumer protection legislation, but it would be absurd to

argue that breaches of such provisions should be considered human rights

9 Even where products do cause serious injuries to consumers, there will still need to be a case made that this represents a human rights violation. This may be somewhat easier to establish where the producer is guilty of clear and gross negligence in the production of the product and serious injury or death results. But is it a human rights violation where the consumer has utilised a product inap-propriately, causing injury, but insuffi cient instructions on the product are partly to blame? It is beyond the scope of this chapter to consider such questions. For our purposes, it is suffi cient to note that the nuances and coverage of consumer protection legislation are not going to be (nor should they be) synonymous with human rights law.



violations in all but the most extreme of scenarios. To do otherwise is to

devalue the human rights regime and the core set of important values it

represents.

Anti- corruption provisions are even more problematic in that they do

not seem at all well captured by a human rights approach – it is not viola-

tions to the dignity of the individual person which are the reason for acting

against corruption, but rather destructive tendencies with regard to wider

society. Broadly worded environmental provisions (for example, includ-

ing an obligation to act in accordance with the precautionary principle)

are equally problematic. If they are to be captured by a human rights

approach, a human rights orientated environmental framework must be

carefully constructed. They cannot simply be tacked on to a generalised

human rights instrument. The fundamental underlying mistake is the

attempt to include within a human rights instrument a number of issues

simply because they are important to society and they are within the scope

of corporate activity. Obligations must be compatible with basic concep-

tions of human rights if the human rights framework within which they

operate is to be in any way meaningful. Novel obligations must be articu-

lated clearly and precisely in a way that builds upon existing understand-

ings of human rights. Otherwise the underlying power of human rights and

their codifi cation in international law is lost.

The inclusion of inappropriate ‘rights’ within the Norms is not a ration-

ale for abandoning the endeavour but rather for refi ning it to only include

issues appropriate to a human rights framework. But there are more fun-

damental rationales for questioning the utility of a single list approach.

What we fi nd in the Norms is a more detailed exposition of rights which

its authors appear to see as more fundamental to corporate activity, such

as workers’ rights, while others are mentioned only in passing, such as

freedom of expression and opinion. But diff erent rights are going to be

more relevant to diff erent companies in diff erent sectors. For instance

freedom of expression may be the most important right for a particular

subset of companies (for example, Yahoo or Google operating in China)

who may be less likely to breach, for example, workers’ rights. A single list

approach to the creation of a framework makes it diffi cult to set out rights

in a way that is both applicable to all diff erent types of TNCs and compre-

hensive. What the Norms therefore produce is uneven, although generally

brief, reference to a wide range of rights whose full normative content

is only found in the relevant international covenants (for example, the

International Covenant on Civil and Political Rights or the International

Covenant on Economic, Social and Cultural Rights).

Given that TNCs can potentially impact upon the full range of human

rights codifi ed under international law (Wright, 2008), it is the nature of



the responsibilities which TNCs have with regard to each of those human

rights in their diff erent activities that becomes the key concern of the exer-

cise. In the Draft Norms this is primarily determined by what is within

their ‘sphere of activity and infl uence’. This approach is problematic. The

proposition that TNCs have responsibility for human rights within their

‘sphere of activity and infl uence’ is vague and can be interpreted as giving

rise to very diff erent levels of liability depending upon subjective views

about what TNCs do or should do. For example, it is arguable that all

actions of a government fall within the sphere of infl uence of TNCs oper-

ating in their country. Moreover, the defi nition of this concept should not

be left for future ‘concretisation’. Attempts to further defi ne the term by

supporters merely serve to demonstrate the nebulous nature of the provi-

sion. For instance it has been suggested that

[t]he phrase ‘sphere of activity’ . . . might be reasonably assumed to encompass such actors as workers, consumers, members of the host community as well as the environment in which the company operates. (Kinley and Chambers, 2006: 469)

In particular, the idea that TNCs should reasonably have some form of

responsibility for the environment in which they operate demonstrates the

imprecise contours of the landscape which the term ‘sphere of activity or

infl uence’ is attempting to map.

Other authors have attempted to argue for varied obligations of TNCs,

based on, for example, the leverage the company has with regard to the

abuse or the nexus between abuse and the company (Ratner, 2001: 465;

Jagers, 2002: 79; Steinhardt, 2005: 216–17). But nowhere has this been

done with conceptual clarity, which demonstrates the inherent diffi culties

of utilising entirely new terminology to defi ne legal responsibility with

regard to contested and ambiguous areas of responsibility. We cannot

ignore the fact that we are not painting a rights landscape onto a blank

canvas here, but rather attempting to delineate areas of responsibility that

are already greatly populated both by human rights initiatives and various

corporate governance mechanisms. Areas of responsibility are also greatly

contested and so utilising terms with no recognised legal meaning or pedi-

gree will mean that key actors cannot in any way predict what they could

be conceding liability for. This is bound to make agreement to the Norms

as a whole far more diffi cult. In such a fi ercely contested environment as

TNC responsibility for human rights, everything must be done to reduce

the conceptual uncertainties of key provisions.

With regard to implementation, the Norms opt for direct incorporation

of the substantive provisions of the Norms themselves into the policies

of TNCs and their contractors. Implementation will then be monitored



by international and national regulatory mechanisms and be the basis of

providing redress to victims of abuses. The Norms appear to bypass the

many industry- specifi c and rights- specifi c mechanisms detailed above that

are already attempting to do this work. Given the fl aws identifi ed in many

of these initiatives, this might be considered a positive step. But the adop-

tion of a new overarching human rights instrument would create as many

problems as it solves.

First, it has been demonstrated through existing initiatives that a

great degree of specifi city is required to deal with the particular human

rights problems affl icting each corporate sector or activity. The Norms

risk diverting the focus from industry- and subject- specifi c human rights

compliance to a one- size- fi ts- all human rights instrument and monitoring

mechanism, thereby reducing the degree of specifi city which human rights

can achieve in any given setting.

This situation is exacerbated by the fact that the Norms are intended

to be implemented primarily according to the rigour and application of

individual companies. As has been shown, all but the very best performing

TNCs have a tendency to focus on areas of good performance or philan-

thropic activity rather than utilising codes and principles to unearth bad

practice. A single overarching human rights instrument such as the Norms

is highly unlikely to lead to strict adherence to the key human rights that

are particularly relevant to an individual company (for example, freedom

of expression for Google, freedom of association for Walmart, and so on)

because TNCs would be able to gloss over particularly problematic areas

of their conduct.

Although implementation is intended to be monitored by relevant inter-

national, national and non- governmental bodies, again the creation of a

monitoring system for such a generic instrument may not be a step for-

wards in terms of securing better human rights performance. Would such

bodies really have the capacity and powers to eff ectively review the human

rights performance of TNCs across the full range of their activities? As

mentioned above, international human rights monitoring bodies are

greatly limited in the extent to which they can eff ectively monitor and posi-

tively infl uence State conduct with regard to human rights (Tomasevski,

1994: 92, 98). There appear to be grave dangers that a further ‘light touch’

review mechanism might be created for a generic and broadly framed set

of Norms which therefore does little to eff ectively monitor the specifi c

human rights performance of TNCs in key areas of concern. So, although

direct implementation of the Norms seems initially attractive, careful con-

sideration needs to be given to what additional benefi ts such an approach

would be likely to bring.

The Norms are therefore fl awed on a number of counts. The ‘list’ of



rights contains a number of rights which should never have been included

in a human rights instrument and others that required substantial further

elaboration and refi nement. The list approach itself is problematic given

the nature of TNCs and their wide- ranging potential to impact upon just

about all codifi ed human rights. Key terms in the Norms, and in par-

ticular ‘sphere of infl uence’, are asked to carry too much of the normative

burden of the exercise. Although such terms may be capable of future

‘concretisation’, there are no real indicators of how this process should

happen. Given the contested nature of the debate, these terms require

clear signposts for how they might develop in future if they are to be per-

suasive. Furthermore, the implementation mechanisms suggested seem

to be unlikely to create added value beyond schemes already in existence.

Finally, the fact that the Norms would become a distinct, free- standing

and generic human rights instrument means that they may divert atten-

tion from existing mechanisms that are more subject and context specifi c,

without themselves creating signifi cant added value.

The rejection of the Norms by TNCs and supportive governments

cannot therefore simply be blamed on a wish to avoid any kind of direct

legal responsibility for human rights violations (although this may well be

part of the reason). On balance, the Norms do not provide a clear concep-

tual framework for determining what corporate conduct will be considered

a human rights violation in any particular situation, or a mechanism for

enhancing the ability of human rights norms and standards to eff ectively

tackle negative social impacts, particularly in developing countries. The

question therefore remains whether the alternative approach advocated by

Ruggie provides a better model for attempting to make the international

human rights framework a more eff ective one for dealing with relevant

TNC conduct.

5. THE RUGGIE FRAMEWORK

I. Introducing the Ruggie Framework

Ruggie concluded that no single ‘silver bullet’ could resolve the human

rights and business paradigm (Ruggie, 2007a: 24, 2008: 4). He did not

attempt to produce a (quasi- )legal instrument of regulation, but rather a

‘principles- based conceptual and policy framework’ as a foundation upon

which a more coherent, systemic and commensurate response could be

built (Ruggie, 2008: 3–4). It may sensibly be asked whether it is reasonable

to compare the Ruggie Framework with the Draft Norms at all, given

their diff ering ambitions and intended legal status. In answering in the



affi rmative, it is suggested that it is the universality of the two initiatives

which makes them comparable – both represent visions for creating greater

coherence and accountability for all TNCs with regard to all their human

rights conduct. The fact that they do so in very diff erent ways is perhaps

an indictment of the diffi culties of harnessing existing international human

rights norms and standards towards that endeavour, a subject we will

return to in concluding this chapter. First, however, we will examine the

Framework itself and evaluate its (potential) eff ectiveness.

The Framework consists of three underlying principles – the State duty

to protect against human rights abuses by third parties, including business;

the corporate duty to respect human rights; and the need for more eff ective

remedies. The State duty to protect is an obligation which is a cornerstone

of international human rights law and is regularly utilised by the United

Nations TMBs in describing the obligations of States with regard to all

substantive human rights. The duty to protect is the most relevant to the

conduct of TNCs because it includes obligations on the State with regard

to violations by third parties such as TNCs (Human Rights Committee,

2004: para. 8; Ruggie, 2007a: 5). On the basis of its usage by the TMBs,

Ruggie argues that this imposes an obligation on States to take ‘all neces-

sary steps to protect against such abuse, including to prevent, investigate,

and punish the abuse and provide access to remedies’ and to regulate and

adjudicate on abuses (Ruggie, 2008: 7).

Ruggie suggests that States can take a variety of approaches to fulfi lling

this obligation and gives examples as to how this might be achieved. First

he suggests governments can foster human rights cultures in corpora-

tions by supporting and strengthening ‘market pressures on companies to

respect rights’ (Ruggie, 2008: 10). This could include government regula-

tion with regard to sustainability reporting and with regard to corporate

culture in deciding corporate accountability. He suggests ‘policy align-

ment’ by taking measures to achieve greater coherence between human

rights obligations on the one hand and trade and investment obligations

on the other. He argues for instance that action is required with regard

to stabilisation clauses in investment agreements which may prevent

States (particularly developing countries) from regulating to protect and

promote human rights (Ruggie, 2009: 11–12). He also argues that action is

required with regard to untransparent investment procedures which mar-

ginalise issues of public interest including human rights. Ruggie further

argues that the State duty to protect can be enhanced by various forms

of international cooperation, for instance more extensive use of Security

Council sanctions to target abuses in confl ict zones.

The second principle is the corporate duty to respect human rights; put

simply, to do no harm. But it is not a purely negative obligation. The duty



to respect ‘in essence means to act with due diligence in order to avoid

infringing on the rights of others’ (Ruggie, 2009: 3) and therefore requires

taking action to discover and then act upon any (potential) human rights

violations. Ruggie gives various examples of the implementation of the

duty to respect, including: the creation of corporate human rights policies

with detailed guidance where necessary; impact assessments of a compa-

ny’s existing and proposed activities; integration of human rights policies

throughout the company; and monitoring and auditing of human rights

performance utilising the Global Compact and other relevant instruments

(Ruggie, 2008: 17–19).

The fi nal principle is access to remedies. This includes both judicial

and non- judicial mechanisms to investigate, punish and seek redress for

abuses. Ruggie fi nds that the existing patchwork of remedies is, in many

respects, ineff ectual and requires strengthening. States should ‘strengthen

judicial capacity to hear claims and enforce remedies’ against all corpora-

tions operating in their territory and reduce barriers to justice, including

for foreign plaintiff s. Non- judicial remedies including company- level

grievance procedures, State- based non- judicial mechanisms and multi-

stakeholder and industry initiatives all need to meet certain criteria to be

credible and eff ective. Ruggie sets out a number of criteria; they must be

legitimate, accessible, predictable, equitable, rights- compatible and trans-

parent (Ruggie, 2008: 24–7).

II. Evaluating the Ruggie Framework

How do we assess this framework in terms of the added value it creates

with regard to holding TNCs accountable for their human rights conduct?

Thus far, the response to Ruggie’s Framework has been cautious optimism

from the vast majority of actors, including both campaigning groups and

business groups. This in itself is quite an achievement, given the polarised

opinions of these two groups on the issue with regard to many previous

initiatives in the fi eld. Part of the reason for its widespread acceptance

must be the participatory nature of Ruggie’s work. He has conducted

meetings with a huge range of diff erent actors, and this has undoubtedly

enhanced the reception given to his work (Ruggie, 2007a: 6, 2008: 3). The

degree of consultation, particularly with business, was much higher than

for the UN Norms (Buhmann, 2009: 42, 45–7). Even those who were great

supporters of the UN Norms have been relatively muted in their criticism

of his rejection, and his alternative proposal for a conceptual framework

has been widely accepted by key stakeholders from the business and

campaigning communities. It is suggested that these kinds of participa-

tory or ‘refl exive’ processes for the creation of law increase the levels of



success with regard to the standards they create and increase chances of

self- regulation (Buhmann, 2009: 17). But procedural inclusivity is not suf-

fi cient. To ascertain whether the Ruggie Framework can establish more

meaningful obligations for TNCs, more in- depth analysis is needed of the

substantive proposals themselves.

As noted above, Ruggie’s policy framework is a very diff erent beast

from the more traditional (quasi)- legal approach of the Draft Norms.

One’s view of Ruggie’s approach will therefore depend partly on the extent

to which one believes that existing initiatives are worth empowering, as

well as the degree to which Ruggie’s Framework is capable of taking on

this empowerment function. We will discuss this further below. But it is

important to make clear at the outset that the Framework should not be

viewed as promoting voluntarism and self- regulation. There is recognition

in the third principle that without eff ective and appropriate remedies no

mechanism is going to be able to create meaningful obligations for TNCs.

Enforcement mechanisms of existing schemes and initiatives are therefore

potentially open to scrutiny, which, as explored above, is an important

aspect of many of their failings. Such an approach is also in line with the

approach of NGOs in the European arena, who are dropping calls for

strictly legally binding instruments in favour of strengthening existing

mechanisms through, for example, ‘mandatory social and environmental

reporting, redress mechanisms, extraterritorial application of human

rights and labour standards and a duty of care upon companies and their

directors regarding social and environmental impacts’ (MacLeod, 2007:

686).

In fact, the adoption of a policy framework has allowed Ruggie to

concentrate primarily on the procedural mechanisms (for example, regu-

lation with regard to sustainability reporting, impact assessments and

so on) through which to create more meaningful obligations for TNCs,

rather than become engulfed in discussions about the nature of the rights

at issue or the precise remit of the responsibilities of TNCs with regard to

human rights. The Framework thus has the potential to operate in a wide

variety of ways, dependent on the particular instrument or business sector

to which it is applied. It can therefore build on existing initiatives and be

utilised to reinforce them as opposed to starting afresh with a new ‘stand-

alone’ legal instrument.

Despite the fact that Ruggie eschews the traditional legal method, one

of the key diff erences of his approach is that it draws upon the existing

terminology of international human rights law. The terms ‘protect’ and

‘respect’ have been well utilised by the UN treaty bodies in relation to

a wide range of issues and actors. Much background research has been

done to carefully build up a holistic picture of how these terms have been



utilised and therefore how they can be applied to the current context

(Ruggie, 2007a: 5–7, 2007b). By adopting this terminology, Ruggie can

draw upon this body of work and lessons learnt from how the terms have

been applied with regard to other human rights issues. It thereby creates

some degree of certainty with regard to key actors, and in particular

corporations, about the range of conduct which might be covered by the

terms in the future. This has been central to allowing Ruggie to maintain

near- universal support for his proposals; TNCs and states are not going

to dispute the fact that they have an obligation to respect and protect

human rights respectively. On the other hand, campaigning organisations

perceive that the protect, respect and remedy framework may provide

them with the starting point for enhancing existing obligations of TNCs in

a wide variety of policy areas and create more eff ective remedies for viola-

tions by TNCs.

The question remains the extent to which the Ruggie Framework is

capable of creating real value with regard to the governance and coverage

gaps which were identifi ed in Section 2 above. To begin to answer this

question we have to consider how the Framework has been applied to

those gaps. Ruggie’s strategy thus far has been to augment his Framework

utilising a discursive narrative style, providing examples of the kind of

actions that could be taken by States, TNCs and others in order to imple-

ment their obligations, enhance existing initiatives and improve existing

practice. This approach is generally adopted rather than the development

of more formal substantive content for his Framework (for example, by

means of a set of sub- principles which operate with regard to each of the

three main principles).

There are signifi cant advantages of this approach. It has provided

Ruggie with the space to explore particular human rights issues in a

diverse range of policy areas – from the human rights impacts of inter-

national investment agreements to the human rights policies of Fortune

Global 500 Firms.10 Alongside this, it has allowed him to make a series of

practical and workable (if disparate) suggestions for how the three obliga-

tions could be utilised in order to enhance existing initiatives and improve

existing practice. Because of the broadness of his principles, it has been

relatively simple to connect each of the suggestions to the principles in

a coherent way. Third, it has allowed him to focus primarily on increas-

ing knowledge among key actors about relevant human rights issues and

10 For the repository of all studies conducted, see the Business and Human Rights Resource Centre, http://www.business- humanrights.org/Gettingstarted/UNSpecialRepresentative (accessed 21 September 2009).



how they can be addressed and to conduct a range of capacity building

and research activities to support this endeavour. For instance, he has

conducted detailed research into the (potential) human rights impact on

developing countries of stabilisation clauses in investment agreements and

a number of further studies are promised (Ruggie, 2009: 12).

But the fl uidity of both the Framework and its application by Ruggie

also has potential weaknesses. First there is the issue of the conceptual

uncertainty inherent in such a broad framework. In spite of the fact that

protect and respect have been widely used by the TMBs in other policy

areas, their application in the context of TNCs needs to be more precisely

defi ned before we can understand what kind of impact the Framework will

have. Most crucial in this regard is the corporate duty to respect human

rights. There are clear ambiguities about the ambit of this obligation in

particular circumstances. For instance, to what degree does the duty to

respect place an obligation on companies to use their infl uence to protect

individuals from human rights abuses committed by other employees,

by contractors or by the government in the country in which the TNC is

operating? Ruggie argues that such responsibilities should be considered a

‘specifi c operationalization of the responsibility to respect’ (Ruggie, 2009:

7). But what work can the ‘respect’ obligation do in creating a principled

rationale for delineating the limits of TNC liability in such scenarios?

Currently Ruggie does not provide us with the principles by which such

a task can be undertaken. His unpacking of the respect obligation has

largely been restricted to providing examples of the procedural obligations

which a company has (for example, due diligence, impact assessment,

integration of human rights policies throughout a company, and so on).

At some point he will need to articulate how the respect obligation allows

us to delineate the nature of a TNC’s substantive obligations with respect

to diff erent actors (employees, governments, local communities and so on)

and in diff erent scenarios (for example, confl ict zones). It is only then that

we can really gauge whether it is a normative concept capable of coher-

ently dealing with the full range of corporate conduct for which TNCs

should bear some human rights responsibility.

A second issue is in the application of the Framework. Ruggie has con-

centrated largely on capacity building and research activities which have

increased the knowledge of key actors (for example, TNCs, governments)

regarding the human rights problems faced. He has in addition suggested

various actions they could take to enhance human rights accountabil-

ity. But where he has not focused his attention is in relation to the sub-

standard initiatives and laggard TNCs which litter the human rights and

business landscape; for instance, those TNCs who ignore all human rights

initiatives or make only a vague commitment to human rights and those



initiatives which remain vague in conception and ineff ectively monitored

and enforced.

One might reasonably ask whether any international human rights

mechanism would have the power to change such conduct. Existing

human rights conventions and their treaty monitoring bodies have had

little impact upon laggard States where there has not been signifi cant pres-

sure for change (from within the State or by other powerful States inter-

nationally). But a crucial starting point for the ability to exert signifi cant

pressure for change is methodologies which help us to eff ectively diff eren-

tiate between diff erent levels of state/corporate performance and between

the impacts of diff erent human rights initiatives.

It is to be hoped that the guidance and principles which Ruggie intends

to produce in a range of areas will fi ll some of these gaps. As described

above, guidance has already been provided in relation to standards for

non- judicial grievance mechanisms. Further guidance or principles are

promised in a number of other areas such as the conduct of due diligence,

the drafting of investment agreements and the prevention of corporate-

related abuse in confl ict- aff ected areas (Ruggie, 2009: 12, 13 and 19). The

further guidance which Ruggie produces should not simply be a detailed

narrative which can be followed by TNCs and States which are already

committed to the underlying principles. Such guidance needs to provide

clear, precise and mutually reinforcing mechanisms which can be taken

up by campaigners and even citizens/consumers as a tool for eff ectively

diff erentiating between TNCs, States and human rights initiatives which

are at the forefront of creating broader accountability for wide- ranging

social impacts and those that are at the rear. To the extent that the Ruggie

Framework fails to provide this, we may want to critically refl ect upon

its usefulness. We may also want to refl ect on the extent to which we can

expect Ruggie to be able to utilise broadly framed and weakly enforced

obligations, such as those contained in international human rights instru-

ments, to create a universal framework which imposes truly meaningful

and widespread obligations on TNCs and their wide- ranging activities in


6. CONCLUSION

Over recent years international human rights norms and standards have

increasingly become viewed as important mechanisms for holding TNCs

accountable for some of their wider social impacts. International ‘soft law’

frameworks, multi- stakeholder initiatives, self- regulatory frameworks,

and national cross- border accountability mechanisms have all purported



to play a role in these endeavours. There are clearly individual companies

and/or sectors for which particular initiatives have made important dif-

ferences. But it has been argued that varying degrees of governance and

coverage gaps in existing initiatives mean that the overall value of interna-

tional human rights norms and standards in holding TNCs accountable

for their broader social impacts, particularly in developing countries, must

be seriously questioned.

Two initiatives have been evaluated here in order to assess the future

potential for human rights to create more meaningful and widespread

obligations for TNCs at the international level. While very diff erent in

design and vision, they are worthy of comparison because both initiatives

have universal application – attempting to enhance the accountability of

TNCs generally with regard to all their human rights responsibilities. It

has been argued that the UN Draft Norms are a misguided mechanism

for creating greater human rights accountability for TNCs for a variety

of reasons. Many of these relate to problems in the way the Norms have

been drafted and the terminology utilised. But it has also been questioned

whether a single stand- alone (quasi- )legal instrument is the right approach

to enhancing accountability. It is suggested that it might lack the requi-

site specifi city and enforceability that are vital to the effi cacy of such an

endeavour.

The question remains whether the Ruggie Framework will fare any

better. The Framework has, in various respects, greater potential. Positive

aspects in this regard include: a potential to enhance existing initiatives,

rather than operate as a stand- alone generic instrument; widespread

endorsement by relevant stakeholders; strong roots in existing interna-

tional human rights law discourse; a recognition of the importance of

eff ective remedies; and a focus on practical suggestions and recommenda-

tions which fl ow (albeit disparately) from the substantive principles of the

framework.

But there are also limits to what the Framework, as currently conceived,

can achieve. Some of these may be remedied by the kind of further work

suggested above, including: explanation of how the conceptual framework

can coherently capture the full range of substantive issues which arise with

regard to the human rights responsibilities of TNCs; a strengthening of the

linkages between the broad policy framework and the concrete suggestions

made for increasing accountability; and ensuring that future guidance and

principles have optimal specifi city so that they maximise their chances of

being eff ectively utilised by relevant actors.

If these issues are eff ectively addressed, could the Framework signifi -

cantly enhance the ability of international human rights norms and stand-

ards to operate as a mechanism for eff ectively holding all transnational



corporations more accountable? As has already been argued, we can

certainly expect no more of international human rights standards in the

context of TNCs than we can in the context of governments. It is those

governments/TNCs who are under eff ective domestic and/or international

pressure (or are themselves willing) to take action for whom international

human rights mechanisms have the capacity to have a signifi cant impact.

But we also need to bear in mind that there are a variety of other legal and

non- legal, international and national strategies for infl uencing the conduct

of TNCs in developing countries (for example, enhancing national cor-

porate law codes, campaigning on the basis of investment or trade law

obligations, and so on). While these strategies may well be reinforced by

a human rights approach,11 previous experience suggests that we need to

monitor carefully whether generic overarching human rights principles

and standards, such as the Ruggie Framework, are capable of being uti-

lised in specifi c contexts in a way that creates real added value. If relevant

actors focus their energies upon the international human rights regime

as a mechanism for enhancing more universalised accountability, this is

likely to be at a certain cost to the focus on alternative and perhaps more

context- specifi c mechanisms for change.

A case was made in Section 2 above for why international human rights

norms and standards are potentially a key mechanism in dealing with the

current accountability problems. Rationales were provided in Section 3

for why many existing initiatives have failed to increase accountability

in the way we might have hoped. The Ruggie Framework represents an

innovative and potentially exciting model for addressing those concerns.

But it needs to demonstrate that it can overcome habitual concerns over

the underlying capacity of generalised and universally applicable interna-

tional human rights mechanisms to have the requisite specifi city, applica-

bility and enforceability to create real added value in the corporate sphere.

We therefore need to continue to monitor whether the Framework is in

fact playing a signifi cant role in enhancing TNC conduct in developing

countries, rather than becoming a distraction from other endeavours.

11 For instance, one might campaign in a particular country for new corpo-rate law provisions which fi ne companies, for example, utilising forced labour, partly on the basis of international human rights standards.


234

11. Core labour standards conditionalities: a means by which to achieve sustainable development?

Tonia Novitz*

1. INTRODUCTION

In the twenty- fi rst century, ‘core’ labour standards have emerged as an

apparently legitimate subject for trade and aid conditionality in the pursuit

of sustainable development. This chapter explains how this situation has

come about and challenges current complacency on this issue.

The second section of the chapter contrasts results- led and participatory

views of sustainable development and identifi es how, despite the tendency

of policymakers to focus on a results- based approach, the protection of

labour standards could be associated with a participatory orientation. The

third section considers how a very limited number of ‘fundamental princi-

ples and rights at work’ came to be identifi ed as ‘core’ by the International

Labour Organization (ILO) and considers critically the pros and cons of

this selective approach. The fourth section of the chapter discusses the

use of core labour standards in conditionality, including an overview of

this practice in lending institutions and under the Generalised System of

Preferences (GSP).

It is suggested that promotion of labour standards could prove a useful

means by which to achieve sustainable development, but that this requires

opportunities for inclusive dialogue and participatory strategies. Such pro-

cedural mechanisms are now receiving greater attention, but have yet to

fully permeate current modes of conditionality. Indeed, the forms of con-

ditionality that have emerged have done so despite vocal resistance from

governments and civil society (including some trade unions) in developing

states. This is likely to limit the extent to which the procedures currently in

* Professor of Law, School of Law, University of Bristol, Bristol, UK.


Core labour standards conditionalities 235

place, which are ostensibly designed to promote inclusion and participa-

tion in monitoring core labour standards, are fi t for purpose. There needs

to be further inclusive debate as to the ways in which conditionality should

be applied, and criteria for genuine participation established, before we

can be confi dent that sustainable development can be achieved through

these means.

2. APPROACHES TO SUSTAINABLE DEVELOPMENT

It has been observed that ‘one of the most striking characteristics of the

term sustainable development is that it means so many diff erent things to

diff erent people and organizations’ (Robinson, 2004: 369). For example,

environmentalists associate the term with ‘a dualistic relationship between

nature and humanity’ (Hopwood et al., 2005: 38), while in an industrial

setting, labour lawyers understand the term as being connected to the

achievement of durable social objectives.

An attempt to reconcile these divergent understandings was made via

the ‘three pillars’ approach adopted in the Johannesburg Declaration on

Sustainable Development 2002, which states that we have ‘a collective

responsibility to advance and strengthen the interdependent and mutually

reinforcing pillars’: economic development, social development and envi-

ronmental protection (ibid: para. 5). Indeed, by stressing the signifi cance of

collective participation in the enterprise of promotion of development, the

Johannesburg Declaration continued a tradition, drawing on both the UN

Declaration on the Right to Development of 1986 and the Rio Declaration

on Environment and Development 1992. Article 1(1) of the UN Declaration

stressed not only that development is a human right, but that it is one ‘by

virtue of which every human person and all peoples are entitled to par-

ticipate in, contribute to, and enjoy economic, social, cultural and political

development, in which all human rights and fundamental freedoms can be

fully realized’. This is because, as Article 2(1) of the UN Declaration (1986)

established, ‘the human person is the central subject of development and

should be the active participant and benefi ciary of the right to development’.

Principle 10 of the Rio Declaration (1992) likewise observed that ‘environ-

mental issues are best handled with participation of all concerned citizens, at

the relevant level’. This perspective was reiterated again in the Johannesburg

Declaration (2002), which recognised ‘that sustainable development requires

a long- term perspective and broad- based participation in policy formula-

tion, decision- making and implementation at all levels’ (para. 26).

Yet, despite this rhetorical recognition of an entitlement to participatory



involvement in the process of development, development has historically

been assessed in practice in terms of outcomes. Targets for progress have

been set, the achievement of which are empirically ascertainable, whether

via economic or other statistical indicators. For example, the Washington

Consensus, which came to govern the operations of the International

Monetary Fund (IMF) and World Bank Group, may be regarded as

having fallen into that trap. As Stiglitz has observed:

The success of the Washington consensus as an intellectual doctrine rests on its simplicity: its policy recommendations could be administered by economists using little more than simple accounting frameworks. A few economic indica-tors – infl ation, money supply growth, interest rates, budget and trade defi cits – could serve as the basis for a set of policy recommendations. Indeed, in some cases economists would fl y into a country, look at and attempt to verify these data, and make macroeconomic recommendations for policy reforms all in the space of a couple of weeks. (1998a: 5)

Arguably, the quest for achievement of the Millennium Development

Goals (MDG) raises similar issues, in that targets are set from on high,

regardless of local priorities (Satterthwaite, 2003; Black and White, 2006;

Saith, 2006). Even one of the original architects of this ambitious project,

Vandemoortele (2009), has voiced concern that there has been a capture

of the MDG process, such that money- metric and donor- centric views of

development are prominent. He sees a need for social partnership if the

MDGs are to be met (Vandemoortele, 2008).

Within a results- based framework for development, social and labour

standards tend to be seen as subsidiary social goods which promote and

sustain economic growth or other humanitarian objectives. It follows that

they can readily be sacrifi ced where they would obstruct the achievement of

these objectives, because they are purely instrumental. The establishment

of objectives and their implementation are determined by experts, often

through the operation of international organisations, a prime example

being structural adjustment programmes which have been imposed by

the IMF and the World Bank Group. While following the neoliberal

market- led policies associated with the Washington Consensus, these

international economic institutions saw little point in the promotion of

socio- economic rights, including labour standards. The objective was to

facilitate competitiveness of exports on international markets and, to this

end, the aim was to deregulate labour markets, so as to reduce the cost

of labour (for example, abolishing minimum wages). In such a context,

collective organisation and participatory representation aimed at raising

wages and constraining managerial discretion were viewed as rigidities

that were best avoided (Morgan- Foster, 2003; Kaufmann, 2007: 102).



By way of contrast, the notion that development is a process which has

to be understood in procedural terms can be allied to the view that com-

mentators such as Sen (1999) and Nussbaum (2000) take of ‘development

as freedom’, according to which the role of development is to enhance the

human capabilities of present and future generations. Such a perspective

would suggest that labour standards are not merely a by- product of other

development objectives, nor are they merely a means to achieve economic

or other goals. Rather, such labour rights as freedom of association, col-

lective bargaining and collective action can be regarded as constitutive of a

participatory process which gives credibility and sustainability to develop-

ment (Novitz, 2003: ch. 1; Bogg, 2009).

One might therefore suppose that enhanced protection of labour

standards through trade and aid conditionality could conceivably assist

in sustainable development, given that such standards could promote par-

ticipation in the establishment and maintenance of policies which promote

development, not only at the site of the workplace, but regionally and

nationally. However, it is argued below that, in practice, this ideal has yet

to be fully realised.

3. IDENTIFICATION OF CORE LABOUR STANDARDS AS A BASIS FOR CONDITIONALITY

In the period after the end of the Cold War, there emerged debate within

both the International Labour Organization (ILO) and the new World

Trade Organization (WTO) as to the inclusion of labour standards as

conditions in trade and aid agreements. The response of the tripartite

ILO Governing Body was, in 1994, to establish a ‘Working Party’ on the

social dimension of the liberalisation of international trade. The aim was

to discover whether consensus could be reached on the viability of a ‘social

clause’ in trade agreements. However, it was diffi cult, even then, to see

how such consensus could be achievable, due to stark divisions of opinion

between diff erent countries (particularly the North and the South) and

between social actors (especially employers’ organisations and the inter-

national trade union movement).

Simultaneously, the ILO was placed under pressure to reform and

retreat from the ways in which international labour standards had been

set. There was a view that the ILO had witnessed an ‘overproduction’ of

labour standards, which made it near impossible for the labour markets

of ILO Member States to operate in an effi cient manner (Cordova, 1993).

It was suggested that revision of international labour standards could



facilitate greater access to employment and, thereby, profi tability, foreign

direct investment and export share for ILO Member States.

The then ILO Director- General, Michel Hansenne, took the views

of government and employer representatives very seriously, as it was

vital that the ILO re- establish its credibility in this crucial juncture

in international aff airs. In the Director- General’s Annual Report,

Defending Values, Promoting Change, he advocated further study of the

relevance and effi cacy of ILO standards, and suggested that the ILO as

an institution concentrate on a campaign for ratifi cation of seven ‘core

Conventions’. These were ILO Conventions Nos 87 and 98 on freedom

of association and collective bargaining (1948 and 1949); Conventions

Nos 29 and 105 on the elimination of all forms of forced and compulsory

labour (1930 and 1957); ILO Convention No 138 on the minimum age

for admission to employment (1973); and ILO Conventions Nos 100

and 111 on the elimination of discrimination in respect of employment

and occupation (1957 and 1958). The selection of core labour standards

was affi rmed in the Final Declaration of the World Social Summit at

Copenhagen.1

This was, in many respects, a controversial reduction of the ILO’s

potential sphere of infl uence. The subject matter covered by the itemised

ILO conventions was narrower than the list of fundamental labour rights

advocated previously by commentators, excluding for example such

matters as health and safety (Bartolomei de la Cruz, 1994: 211–13; Hepple,

1997: 358). The reasons for selection of this list of core labour rights are

unclear. Alston has speculated that

the choice of standards to be included in the CLS was not based on the consist-ent application of any coherent or compelling economic, philosophical, or legal criteria, but rather refl ects a pragmatic political selection of what would be acceptable at the time to the United States and those seeking to salvage some-thing from what was seen as an unsustainably broad array of labour rights. (2004: 485)

He cites (ibid: 487) Bhagwati as having taken the even more extreme view

that

1 Final Declaration, World Social Summit held at Copenhagen, 6–12 March 1995, Commitment 3: ‘The debate over how to refer to workers’ rights was resolved with a general reference to relevant ILO conventions, followed by references to specifi c ILO conventions on forced and child labour, freedom of association, the right to organize and bargain collectively, and non- discrimination.’ See also the Programme of Action adopted by the Copenhagen Social Summit (para. 54(b)). See for acknowledgement ILO Doc GB.267/LILS/5: para. 16.



the CLS list simply refl ects those labour practices in relation to which devel-oped countries are thought to perform well and on which at least some of the major exporting developing countries are thought to perform poorly.

A more generous construction of their justifi cation comes from com-

mentators such as Langille (2005) and Maupain (2005). Langille (2005:

431) has asserted that

These rights are best conceived as a set of restrictions on the rights of the other party to the bargain as to whom it will bargain with, while saying nothing in the abstract about the substantive outcome of any bargain.

In other words, these are aimed at the protection of process rights, which

will enhance substantive outcomes (ibid: 435). Maupain (2005: 448) goes

further, identifying

a sort of common ‘Kantian’ thread running through their diversity. As pointed out in one of the early documents submitted to the ILO Governing Body in 1994, freedom from forced and child labour as well as non- discrimination relate to the autonomy of will and freedom of association and collective bargaining are the extrapolation of this autonomy from the individual to the collective level.

This may be so, and certainly the inclusion of freedom of association

and collective bargaining must be welcomed, especially given the challenge

to trade unionism globally over the last twenty years, in which we have

witnessed a signifi cant decline in their membership and infl uence (Visser,

2003; Blanchfl ower, 2007). The aim would seem to be to give workers

some basis on which to organise and collectively protect their interests,

which seems likely to contribute to any sustainable development project.

However, what is left out would seem to be troubling. Without any recog-

nition of the fundamental nature of health and safety standards, we fi nd

workers exposed to egregious practices, which allow them little rest or

respite in which to participate in any real way in collective activities, such

as trade union meetings.2

One might speculate that certain government and worker representa-

tives accepted the limited scope of the ‘core’ labour standards as a

2 See, for example, the comments made by the members of the ILO Conference Committee regarding lack of UK compliance with ILO Convention No 180, in relation to the eff ects of the extensive hours permitted in respect of seafarers (and their implications in the context of absence of permission to contact a trade union).



trade- off , because they recognised this at least off ered a potential platform

for legitimising trade and aid conditionality. There are indications of this

connection between labour standards and international trade in a con-

temporaneous OECD report, which concluded that compliance with the

core labour standards identifi ed by the ILO Director- General would not

harm but could even assist developing countries engaged in international

trade (OECD, 1996). Strategically, however, the WTO was not prepared

to accept a global ‘social clause’, that is, compliance with even the minimal

core ILO Conventions as a precondition for access to international trade

relations. In a Ministerial Declaration issued in 1996 at Singapore, the

position was taken that WTO members did advocate protection of ‘core

international labour standards’ but saw the ILO as the appropriate vehicle

for setting such standards and monitoring compliance (WTO, 1996: para.

4).

In 1998, the ILO seized the momentum by preparing and gaining unani-

mous consent at the annual International Labour Conference to a ground-

breaking Declaration on Fundamental Principles and Rights at Work.

This was a departure from mere focus on ratifi cation of and compliance

with the core ILO Conventions. Instead, Article 2 of the 1998 Declaration

set out the following rights:

(a) freedom of association and the eff ective recognition of the right to collec-tive bargaining;

(b) the elimination of all forms of forced or compulsory labour;(c) the eff ective abolition of child labour; and(d) the elimination of discrimination in respect of employment and occupa-

tion.

This provision also stated that these principles were embedded in the

very fabric of the ILO Constitution and, as such, constituted obligations

to which all ILO Member States were obliged to adhere. Moreover, the

Declaration does not only acknowledge the obligations of Member States,

but also the obligation of the ILO to take action to assist its members,

inter alia, ‘by encouraging other international organisations . . . to support

these eff orts’.

The one rather sour note for those who favoured some kind of con-

ditionality was the curious reference in Article 5 to the eff ect that ‘the

comparative advantage of any country [in trade] should in no way be

called into question’ by either the Declaration or the attached follow-

up procedure (Langille, 1999). This provision clearly did not satisfy

one of the most enthusiastic proponents of the use of labour standards

conditionality, namely the US, which already employed this device in



the context of its Generalized System of Preferences3 and, to a lesser

extent, in the context of NAFTA (Alston, 2004: 499–503).4 However,

the attempt made by the Clinton administration to raise labour con-

ditionality as an agenda item at the WTO Seattle talks failed, amidst

government boycotts of such discussion and mounting civil unrest

(Summers, 2001).

Today, the matter has been simply omitted from the Doha agenda.

Indeed, the statement of the WTO Director- General, Pascal Lamy, is

interesting in this regard. Without mentioning labour standards, he has

said that ‘the WTO is concerned with trade and it does not seek to go

beyond this although, of course, it recognizes that WTO members must

deal with policies and international obligations that go beyond trade’;

the WTO will recognise certain key exceptions to the principles of trade

liberalisation, such as environmental protection and ‘sustainable devel-

opment’. The scope of such exceptions, as for example under Article XX

of the GATT, remains unclear (Howse and Langille, 2006). We are told

by Lamy that they will be narrowly construed, but that a balance will be

struck between WTO obligations and those which arise by virtue of mem-

bership of other specialist institutions, of which we can assume the ILO is

one (see Lamy, 2008).

Recently, the ILO and the WTO have engaged in a joint study of the

relationship between trade and labour standards (ILO and WTO, 2007).

Nevertheless, this exercise has been criticised as largely ‘administrative’,

providing a summary of the literature to date, rather than a meaning-

ful endeavour to engage in fresh theoretical and empirical analysis

(Charnowitz, 2008). Any consultative element was also lacking from the

study.

3 Since 1984 the US has conditioned eligibility for GSP on whether a benefi ciary country ‘has taken or is taking, steps to aff ord to workers in that country (including any designated zone in that country) internationally- recognized workers’ rights’. This was a labour rights amendment to US GSP adopted by Congress and signed by Reagan (the GSP Renewal Act 1984, Pub L No 98- 577, 98 Stat 3019). For a useful overview of US practice, see Tsogas (2000) and Hepple (2006: 93).

4 Note that the list of labour standards referred to in the NAFTA side agree-ment, the North American Agreement on Labor Cooperation (NAALC), is signifi cantly lengthier than that of ILO core labour standards in the 1998 ILO Declaration, but that the norms are to be determined with reference to compli-ance with national labour laws, rather than established international labour standards.



4. CONDITIONALITY IN PRACTICE

The political rejection of a ‘social clause’ within the sphere of WTO

negotiations should not be regarded as conclusive of the omission of

labour standards conditionality in trade and aid agreements. Rather,

key economic powers such as the US and the EU have continued to act

unilaterally in this regard, taking the view that the WTO cannot prevent

them from doing so. Moreover, certain international agencies, such as

the World Bank’s International Finance Corporation (IFC) and the

European Bank for Reconstruction and Development (EBRD), have spe-

cifi cally made the terms of aid conditional on compliance with ILO core

labour standards with reference to the notion of sustainable development.

Notably, added to the list of fundamental Conventions that these insti-

tutions recognise is now ILO Convention No 182 on child labour 1999,

which is regarded as an extremely signifi cant instrument for the purposes

of imposing conditionality.

The question, then, is whether labour conditionality is imposed in a

manner which allows a voice to workers and others aff ected by the imposi-

tion of conditionality, or whether powerful trading blocs and international

agencies follow a results- driven conception of development. My sugges-

tion is that we are witnessing a gradual transition towards a process- based

conception of development, but that this transition is far from complete.

In 2004, Alston expressed concern that ‘an important consequence

of the Declaration has been to facilitate or validate the eff orts of actors

external to the ILO who seek to develop alternatives to the ILO’s own

monitoring system’ (Alston, 2004: 510), but the outcome does not seem

to have been as stark as this. Rather, various economic actors, whether

an international economic organisation such as the IFC or a European

fi nancial institution such as the EBRD, or a regional trading bloc, such as

the EU, have sought to use ILO standards to lend legitimacy to their poli-

cies. As Kaufmann (2007: 108) has observed: ‘international human rights

agreements that have been ratifi ed by Member States allow international

economic institutions to “depoliticize” human rights and to rely on them

in formulating and defi ning development standards’. These actors have

sought to apply ILO standards, often with explicit reference to the fi ndings

of key ILO supervisory bodies.

Nevertheless, there are at least two concerns which arise from the

manner in which they have done so. First, they have tended to be selec-

tive, such that ILO labour standards concerning child and forced labour

have been given greater priority than procedural entitlements to freedom

of association and collective bargaining. This is arguably at odds with

the rhetoric of ‘country ownership’ and the stress these organisations



seek to place on participative engagement with civil society. Secondly,

although we are told that the views of ILO supervisory bodies are taken

into account, the way in which ILO standards have been applied is not

altogether transparent.

I. World Bank

The World Bank Group has substantially revised its practices as regards

the inclusion of requirements regarding labour standards in its terms

of lending. Experts within World Bank institutions would seem to have

struggled with the notion that legal protection of freedom of association

and collective bargaining could be anything other than obstructive of

development. It is only since 2002 that the Bank’s position would seem

to have shifted, and even then, the controversial report Doing Business

seemed to prize deregulation of labour markets and praise states which

were known as ‘egregious violators of workers rights’ (Bakvis and McCoy,

2008: 7–8). Moreover, the Bank would seem to have been further inhibited

by a desire not to appear ‘politicised’, based on a restrictive interpretation

of the IBRD Articles of Agreement (Darrow, 2003: ch. 4).

The evolution towards recognition of ILO core labour standards within

the World Bank Group has been slow and incremental. It could be said

to have begun with the initiation of the Human Development Network’s

Child Labor Program, created in 1998, at a time when this issue was

receiving considerable attention within the ILO (which one year later

culminated in the adoption of ILO Convention No 182). In 2003, the

International Finance Corporation (IFC), which facilitates private sector

lending, took the initiative in terms of linking lending conditions to ILO

core labour standards. To this end, they have developed a ‘Core Labor

Standards Toolkit’, which has been made available on the World Bank

website.5 That document states:

Compliance with core labor standards is not a condition for lending or technical assistance in client countries. The IFC and MIGA, however, do have policies forbidding the use of harmful child or forced labour in investor projects.6

This suggests a priority at least initially given to those facets of ILO

core labour standards other than freedom of association and collective

bargaining. The Toolkit does, however, suggest that all four of the core

labour standards listed in the 2008 Declaration should be considered in the

5 See http://go.worldbank.org/1JZA8B2CO0 (accessed 7 July 2009).6 Ibid.



International Development Agency (IDA) Country Assistance Strategies

(CAS) as a route towards development, and it provides extracts from

CAS which demonstrate that IDA staff have taken note of these issues,

although it is much less clear how this information has aff ected their deci-

sions and the design of the strategies themselves.

Curiously, the online Toolkit does not refl ect more signifi cant recent

developments, such as the inclusion of a freedom of association condition

in an IFC loan to a clothing manufacturer in the Dominican Republic

in 2004 (Bakvis and McCoy, 2008: 6). Nor does it mention the adop-

tion by the IFC of its Policy and Performance Standards on Social and

Environmental Sustainability in 2006. In this policy document, the IFC

combines its commitment to social and environmental sustainability.

‘Labor and Working Conditions’ arise as the second of eight ‘Performance

Standards’ (PS). As the document states:

Performance Standards are essential documents to help IFC and its clients manage and improve their social and environment performance through an outcomes- based approach. The desired outcomes are described in the objec-tives of each Performance Standard, followed by specifi c requirements to help clients achieve these outcomes through means that are appropriate to the nature and scale of the project and commensurate with the level of social and environmental risks (likelihood of harm) and impacts. Central to these require-ments is a consistent approach to avoid adverse impacts on workers, communi-ties, and the environment, or if avoidance is not possible, to reduce, mitigate, or compensate for the impacts, as appropriate. The Performance Standards also provide a solid base from which clients may increase the sustainability of their business operations (IFC, 2006b: para. 4).

While phrased in the familiar language of ‘outcomes’, the 2006 policy doc-

ument does at least anticipate engagement with workers and communities

so as to avoid the potential adverse impact of IFC- funded projects.

However, PS 2 ‘Labor and Working Conditions’, set out in greater

detail in a further document attached to the 2006 policy, is curious in that,

while it purports to be based on all eight core ILO Conventions, its objec-

tives are limited as follows:

§ To establish, maintain and improve the worker–management relationship§ To promote the fair treatment, non- discrimination and equal opportunity

of workers, and compliance with national labor and employment laws§ To protect the workforce by addressing child labor and forced labor§ To promote safe and healthy working conditions, and to protect and

promote the health of workers. (IFC, 2006b: PS 2)

There is no explicit mention of freedom of association and collective

bargaining. Instead, the policy document is cautiously respectful of state



autonomy in this regard, stating that IFC clients are obliged to respect

national law regarding workers’ organisations, and that where a state

places restrictions on the activities of such organisations the IFC client is

to ‘enable alternative means for workers to express their grievances and

protect their rights regarding working conditions and terms of employ-

ment’ (ibid: PS 2, para. 9). It is thereby evident that access to collective

bargaining is not regarded as an essential condition of funding and indeed

is the poor relation of the core labour standards otherwise utilised in this

policy.

Moreover, the International Trade Union Confederation (ITUC)

reports that, although the 2006 policy document makes provision for cor-

rective action where a client does not comply with performance standards,

and provides for ‘eff ective community engagement’(IFC, 2006b: para. 2),

this is not always a reality. In particular, Bakvis and McCoy (2008: 7)

observe that,

Unless complaints are fi led by trade unions or other parties about violation, the IFC relies largely on borrowing countries’ self- reporting; IFC’s own information- gathering and monitoring mechanisms only cover a small portion of the activities it fi nances. Also, unions have only a short period of time – 30 or 60 days depending on the type of project – between the public announcement of a loan and its submission to the Bank’s board for approval, to react to potential violations of PS2 . . . Global Unions have urged IFC to improve its information and consultation processes so as to allow earlier input from unions about risks of CLS in each project . . .

That is not to say that the IFC does not cooperate with the ILO. Its most

recent collaborative eff ort is a ‘Better Work’ programme to facilitate com-

pliance with ILO core labour standards in developing countries (see ILO

and IFC, 2009). Nevertheless, its activities to date demonstrate a degree

of reluctance to place the same emphasis on ILO Conventions Nos 87 and

98 as on other ILO Conventions and to fully engage in community con-

sultation which involves trade unions, let alone other civil society actors,

such as workers in the informal economy who are poorly organised and

even more vulnerable (see the Commission on Legal Empowerment of the

Poor, 2008; for discussion, see Faundez, 2009).

II. European Bank for Reconstruction and Development

In many respects, the policies regarding sustainable development and

conditionality adopted by the EBRD mirror those of the IFC. The EBRD

‘Environmental Policy’ established in 2003 required that, where the EBRD

invests directly in a project, that project must, among other requirements,



comply with ‘the International Labour Organization’s fundamental

Conventions concerning abolition of child labour, the elimination of dis-

crimination at the workplace; and the elimination of forced and compulsory

labour’ (EBRD, 2003). Freedom of association and collective bargaining

were omitted from these requirements. However, conditionality regarding

the other three core labour standards was justifi ed with reference to ILO

membership of all the EBRD countries, even though they may not have

ratifi ed the specifi c ILO Conventions (as per the 1998 ILO Declaration).

Finally, it may be interesting to note that an instrumental justifi cation was

off ered in the 2003 policy documentation for respect for ILO standards:

The EBRD believes that good labour practices resulting in a well- treated work-force can lower staff turnover and enhance productivity, benefi ting the busi-ness of EBRD countries. It also improves their position in the market, where increasingly international companies require their suppliers to comply with the core labour standards.7

This policy has since been revisited and redefi ned in a manner which

refl ects and improves upon IFC labour conditionality. In May 2008 the

EBRD adopted a new ‘Environmental and Social Policy’ which came into

eff ect in November 2008, although (like the IFC) the EBRD have yet to

update various parts of their website to refl ect this change. The 2008 policy,

similar to that of the IFC, utilises a system of ‘Performance Requirements’

(PR), the second of which is ‘Labour and Working Conditions’. This is

not a crude form of conditionality, whereby on proof of non- compliance

funding will end. Rather:

The Bank’s role is: (i) to review the clients’ assessment; (ii) to assist clients in developing appropriate and effi cient measures to avoid or, where this is not pos-sible, minimise, mitigate or off set, or compensate for adverse social and envi-ronmental impacts consistent with the PRs; (iii) to help identify opportunities for additional environmental or social benefi ts; and (iv) to monitor the projects’ compliance with its environmental and social covenants as long as the Bank maintains a fi nancial interest in the project. (EBRD, 2008: 3)

The EBRD policy now makes a specifi c commitment to the eff ect that

projects are required to comply, at a minimum, with not only health

and safety standards but also all four ILO Conventions. However, on

closer reading the commitments as regards PR 2: ‘Labour and Working

Conditions’ are not so very diff erent from those of the IFC:

7 Notably, this policy followed from the agreement reached between the EBRD and the ILO in 1992 (see EBRD and ILO, 1992).



11. The client will not discourage workers from forming or joining workers’ organisations of their choosing or from bargaining collectively, and will not discriminate or retaliate against workers who participate, or seek to partici-pate, in such organisations or bargain collectively. In accordance with national law, the client will engage with such workers’ organisations and provide them with information needed for meaningful negotiation in a timely manner. Where national law substantially restricts the establishment or functioning of workers’ organisations, the client will enable means for workers to express their grievances and protect their rights regarding working conditions and terms of employment. These means should not be under the infl uence or control of the client. (EBRD, 2008: 23)

What is potentially an improvement on the IFC 2006 policy document

is the adoption within the EBRD ‘Environmental and Social Policy’ of a

separate and distinct PR 10 on ‘Information Disclosure and Stakeholder

Involvement’. The ‘stakeholder engagement plan’ is a procedure whereby

interested parties have had opportunity to contribute their views regard-

ing environmental and social issues associated with a client’s investments.

This is to involve ‘meaningful consultation’ during both project prepara-

tion and implementation. Moreover, a grievance mechanism has to be

established by the client, so as to ensure that stakeholder concerns are

addressed. One can only hope that this proves more effi cacious than the

IFC processes have done to date.

III. US and EU GSP

As regards trade agreements, the US and the EU, both powerful trading

partners, have sought to include ILO core labour standards in bilateral

trade agreements. One example is the use of this requirement in free trade

agreements (FTAs). Once again, this does not always allow for stakeholder

engagement. For example, the US–Jordan FTA contains reference to ILO

core labour standards, but is notorious for a review process for violations

of labour clauses which does not allow for a public complaint, thereby

excluding trade unions from involvement (Bakvis and McCoy, 2008: 3).

By way of contrast, US GSP requires compliance with certain labour

standards without reference to core ILO Conventions8 and its operation

has been criticised on the basis that it is inconsistent and highly politicised

8 GSP Renewal Act 1984, Pub L No 98- 577, 98 Stat 3019. The US admin-istration can enforce the labour conditions unilaterally, via the Offi ce of the US Trade Representatives (USTR). In the alternative, NGOs and trade unions can put forward their own petition to the USTR. It is only if the USTR accepts the petition that a public hearing will be held (see Hepple, 2006: 93; Grossman and Sykes, 2007: 258).



(Hepple, 2005). The system allows the US administration to take unilateral

action via the Offi ce of the US Trade Representatives (USTR), but there

is also potential for petition by private organisations such as NGOs and

trade unions. If the USTR accepts the petition, a public hearing will be

held. Thereby, US GSP does at least off er the possibility of public scrutiny

(Tsogas, 2000). A very positive picture of the operation of this mechanism

is off ered by Douglas et al. (2004) who claim that the petition procedure

available under US GSP provides ‘an eff ective confl uence of forces’,

whereby the US trade union lobby can ‘give teeth’ to ILO criticism of state

practices, which itself arises in response to complaints made by unions

and NGOs operating within developing countries (ibid: 297–9). Jones

(2006) is more sceptical, observing that a ‘subjective criterion’ is applied

by the USTR when determining the outcome of any public hearing, such

that there is scope to act ‘in a discriminatory manner’, with the result that

diff erent developing countries can be required to take diff erent steps to

accord internationally recognised rights to their workers (ibid: 28–9).

By way of comparison with US bilateral conduct, EU FTAs do make

reference to core labour standards, but tend to do so without citing specifi c

enforcement measures. Examples include the EU–Chile FTA and the eco-

nomic partnership agreement concluded in 2007 with the Cariforum group

of Caribbean states (Bakvis and McCoy, 2008: 4). The latter did follow

a process of consultation under a ‘Sustainability Impact Assessment’

contracted out to PriceWaterhouseCoopers, which indicates ‘lessons to

be learnt’ for future consultative exercises (see PricewaterhouseCoopers,

2007).

It is in the context of EU GSP that compliance with ILO core

Conventions is likely to have the greatest impact on trade for the devel-

oping countries that make use of the system, given that the EU reports

that the value of preferential imports has now increased to EURO 58.6

billion.9 The EU now utilises a three- pronged approach to GSP. Firstly,

there is the common- or- garden variety ‘standard GSP’, which provides

preferences to 176 developing countries. Secondly, there is a ‘special incen-

tive arrangement for Sustainable Development and Good Governance’,

which is commonly described as ‘GSP+’. It off ers a carrot, in the form of

additional tariff preferences for those ‘vulnerable’ developing countries10

9 Council Regulation (EC) No 732/2008, 22 July 2008, applying a scheme of generalised tariff preferences.

10 Note that ‘vulnerability’ is a technical requirement set out in Article 8(2) of Council Regulation (EC) No 732/2008. In order to be ‘vulnerable’ countries need to (a) not be classifi ed by the World Bank as a high- income country during three consecutive years, and have the fi ve largest sections of its GSP- covered



which have ratifi ed and eff ectively implemented 27 specifi ed international

conventions in the fi elds of human rights, core labour standards, sustain-

able development and good governance. The third limb to EU GSP is the

‘Everything But Arms (EBA)’ arrangement, which provides duty- free,

quota- free access for all goods from the 50 least- developed countries (or

LDCs).

The list of benefi ciaries under GSP+ currently stands at 16.11 It is

not altogether clear why it contains some states which are clearly in the

most fl agrant breach of ILO core labour standards, particularly freedom

of association in countries such as Columbia (Novitz, 2009: 35). The

suspicion may well be that, with the termination of the EU GSP Drugs

regime, after a challenge from India within the WTO dispute settlement

procedure,12 the EU has merely transferred the access of certain South and

Central American states to trade preferences across by this alternative

avenue. This suggests that the lack of transparency highlighted in that

case as a violation of the Enabling Clause and thereby the WTO General

Agreement on Tariff s and Trade (the GATT) has not altogether been

cured by the current EU GSP regime.

Preferences under any of the three GSP regimes can be temporarily

withdrawn where there is ‘serious and systematic’ violation of any of a

number of key human rights conventions, including the eight core ILO

Conventions.13 This is a notable improvement on the fi rst use of labour

standards conditionality in GSP, whereby withdrawal was only possible

on grounds of slave labour, forced labour or export of goods made by

prison labour.14 It is on such a basis that two countries (Myanmar and

Belarus) remain temporarily withdrawn from GSP preferences, as the

imports into the Community represent more than 75 per cent in value of its total GSP- covered imports; and (b) have the GSP- covered imports into the Community represent less than 1 per cent in value of the total GSP- covered imports into the Community.

11 For the period 2009–11, 16 benefi ciary countries have now qualifi ed to receive the additional preferences off ered under the GSP+ incentive arrangement (see Commission Decision 2008 L334/90, 12 December 2008). They are (cur-rently): Armenia, Azerbaijan, Bolivia, Colombia, Costa Rica, Ecuador, Georgia, Guatemala, Honduras, Sri Lanka, Mongolia, Nicaragua, Peru, Paraguay, El Salvador, Venezuela. This is subject to review of the inclusion of Sri Lanka, El Salvador and Venezuela, which may not meet the necessary criteria.

12 European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WTO Appellate Body Decision, adopted 7 April 2004.

13 Council Regulation (EC) No 732/2008, 22 July 2008: Reg. 15. See also Annex III, Part A, in which the core ILO Conventions are listed.

14 See previously Council Regulation (EC) No 2820/98, discussed by Tsogas (2000).



reasons for their withdrawals still persist, the latter involving clear viola-

tion of principles of freedom of association, leading to specifi c identifi ca-

tion of its violations in a ‘special’ paragraph at the 95th and 96th ILO

International Labour Conferences.15

In carrying out the task of an investigation into grounds for temporary

withdrawal, the EU Commission is placed under a series of procedural

responsibilities.16 For example, the investigation is to be completed

within one year before it goes to the Council for fi nal determination.

Moreover, there is to be formal and appropriate notifi cation of the ben-

efi ciary country, which is to be given the option to make representations.

Also, the views and fi ndings of the ILO and other UN supervisory bodies

are to be taken into account. However, there is no formal account made

public of the Commission’s reasoning or that of the Council. It does

not seem to be contemplated that the process could be reviewed by the

European Court of Justice, although this should in theory be possible.

Moreover, there seems to be no specifi c scope under the Regulations for

representations to be made by interested civil society actors. However, in

practice, the Commission on announcement of a violation, for example

that in El Salvador relating to ILO Convention No 87 on freedom of

association and the right to organise, invites ‘interested parties’ to send

relevant information and comments within four months. It is unclear what

kind of a hearing civil society actors, including trade unions, and those

aff ected in the country concerned can expect to have. Nor is this clarifi ed

on the public website which the EU has at its disposal.

5. CONCLUSION

What seems to emerge from these examples of labour conditionality in

trade and aid is a richer and more comprehensive conception of core

labour standards, which is gradually beginning to include freedom of asso-

ciation, a key procedural entitlement. This is not fully realised within the

systems for aid conditionality off ered by the IFC and the EBRD, but some

progress is being made in this direction. What is still lacking is meaningful

participation in determining how aid and trade conditionality is applied,

whether in the context of preferential lending through IFIs or of preferen-

tial tariff rates through GSP.

15 These were decisions previously made under Council Regulations (EC) No 552/97 and No 1933/2006 respectively.

16 See, for example, Council Regulation (EC) No 732/2008: Reg. 18.



While labour conditionality is apparently fi rmly entrenched in interna-

tional commercial and trade relations, the ways in which it operates are

open to criticism. It is here that consensus is lacking. There would seem

to be a case for greater scrutiny of this practice and the question remains

where the locus of such control should lie. De facto, where conditionality

is trade- related, the most obvious means for supervisory control lies with

the WTO and its dispute settlement process. Yet, while the case brought

by India regarding EU GSP off ers some future hope, there is little immedi-

ate indication that this jurisprudence will evolve swiftly so as to operate

in an eff ective fashion which protects those aff ected by conditionality.

Arguably, it is here that the ILO could play a role.

After all, the danger is that the core labour standards identifi ed by the

ILO lend legitimacy to the operation of current modes of conditionality,

without ILO interpretation and application of such standards aff ecting

how those core labour standards are applied. Having established the list

of core labour standards, it would seem that the onus is on the ILO to act

again, to provide a steer on how they are used in aid and trade condition-

ality. Moreover, given that this is a tripartite body, consisting of govern-

ment, employer and worker representatives, which allows for signifi cant

NGO representation, the ILO off ers the greatest opportunity for partici-

patory debate. This is diffi cult, since some developing countries and social

actors will fear that such an initiative amounts to endorsement of existing

practices to which they have always been opposed. However, the political

reality may be that it is too late to block such initiatives and that the most

sensible tactical strategy is to shape their operation in ways that are condu-

cive to the participatory dimension of sustainable development.


252

12. Developing countries and international competition law and policy

Kathryn McMahon*

1. INTRODUCTION

In the last 20 years the number of countries with some form of competition

law has almost doubled. Approximately 100 countries now have a com-

petition law and as many as 75 per cent of these are developing countries

(Fox, 2007: 104; Stewart et al., 2007: 4; Evans and Jenny, 2009: 10). Many

other developing countries are in the process of enacting legislation and

establishing competition authorities.

Much of this activity can be traced to global trends towards the liber-

alisation of markets and the privatisation of government utilities (OECD,

1992). As the state contracts, competition law is viewed as a last bastion of

regulation required to umpire imperfectly competitive markets or residual

pockets of ‘market failure’: the idea of ‘competition as the regulator’.

In developing countries the enactment of competition laws was also

a response to neoliberal international development policies most com-

monly associated with the ‘Washington Consensus’, which prioritised pro-

market structural reforms, fi scal restraint and monetary controls, and the

pursuit of economic effi ciency (Williamson, 1990a). Some countries, such

as Indonesia, adopted competition law as a direct condition of the receipt

of funding from the International Monetary Fund. For other post- Soviet

and transitional economies in Eastern Europe its adoption was seen as

preparation for eventual membership of the European Union (EU).

At the international level, competition policy was perceived as integral

to the effi cient fl ow of goods, services and capital in the global economy. In

the absence of competition law the productivity and development benefi ts

from trade liberalisation could be eroded by the erection of domestic bar-

riers to competition through cartels, the structural division of markets and



International competition law and policy 253

the abuse of monopoly power. As a consequence there have been increas-

ing calls for the international harmonisation of competition laws and in

1996 the idea of a ‘global competition law’ was placed on the agenda of

the World Trade Organization (WTO) as one of the ‘Singapore issues’.

The eventual breakdown of these negotiations in 2004 and the abandon-

ment of the idea of adopting multilateral competition rules following the

Ministerial Conference of the WTO in Cancún are most commonly attrib-

uted to the opposition voiced by developing and least- developed coun-

tries. Of course the reality is somewhat more complicated. So- called global

competition laws, while strongly supported by the European Union, were

never fully endorsed by the United States.

This chapter will examine some of these issues within the context of the

utility of global and domestic competition law and policy for developing

and least- developed countries. While developing countries may have been

right to question the overall benefi ts of a multilateral scheme, the enact-

ment of a domestic competition law which is mindful of the contextual

issues at stake in these economies may make an important contribution to

economic development.

2. THE IDEA OF A ‘GLOBAL COMPETITION LAW’

The liberalisation and globalization of trade has brought with it a number

of issues for competition law and policy. On the one hand, the enactment

of competition law strengthened international trade by protecting market

access opportunities against anticompetitive practices. However, poten-

tial ineffi ciencies were also brought about by increased transaction costs,

as scrutiny of cross- border mergers and the potentially anticompetitive

conduct of transnational corporations was required according to some-

times confl icting national criteria in multiple jurisdictions. Cartels were

also now operating on a global scale, which had an unprecedented eff ect

on international market prices.

There were calls to harmonise or streamline domestic merger regula-

tions, eliminate multiple pre- merger notifi cation procedures, and establish

a ‘one- stop shop’ for merger and joint venture clearance and the imposi-

tion of merger remedies and undertakings. The eradication of interna-

tional cartels would also need a coordinated, international response to

information exchange and investigation (Sokol, 2007).

After the consideration of a number of proposals, the WTO was

regarded as best placed to negotiate a set of multilateral competition

rules due to the close relationship among competition, market access and

non- discrimination issues. The WTO also had the advantages of almost



universal membership, an existing dispute resolution mechanism and

the presence of existing competition provisions concerning telecommu-

nications and intellectual property in the General Agreement on Trade

in Services (GATS) and the Agreement on Trade- Related Aspects of

Intellectual Property Rights (TRIPS) (Geradin and Kerf, 2004). In

1996, as a result of the Ministerial Conference in Singapore, the WTO

established a Working Group on the Interaction between Trade and

Competition Policy,1 and in 2001 the idea of a ‘global competition law’

was placed on the agenda of the WTO as one of the ‘Singapore issues’ of

the Doha Ministerial Declaration (WTO, 2001a).

The focus of this agreement was to be on the core principles of competi-

tion policy, including transparency, non- discrimination and procedural

fairness, and common approaches to anticompetitive practices with

signifi cant impact on international trade. These included provisions on

hardcore cartels, international cooperation between antitrust authorities

and dispute settlement to ensure domestic competition law and enforce-

ment structures were in accordance with provisions agreed multilaterally.

There was also an explicit statement regarding the need to ‘recognize the

needs of developing and least- developed countries for enhanced support

for technical assistance and capacity building in this area’ (WTO, 2001a:

para. 24).

But in the ensuing discussions no real consensus emerged on the form and

scope of a multilateral agreement (Hoekman and Holmes, 1999) and, as

noted, the negotiations broke down in 2003 at the Ministerial Conference

of the WTO in Cancún. A Decision was adopted by the General Council

of the WTO on 1 August 2004 to abandon the Interaction between Trade

and Competition Policy as part of the Work Programme set out in the

Doha Declaration (WTO, 2004b).

The opposition to the agreement voiced by developing and least-

developed countries was a major factor leading to the demise of the nego-

tiations. But the United States, who had a fundamental objection to the

idea that trade and competition concerns could be combined, also failed

to support the idea.

Negotiated multi- party agreements face coordination problems and

outcomes can be weakened by compromise and concession. In this case,

however, the US feared that a global competition agreement might actu-

ally impose more stringent rules for the regulation of anticompetitive

behaviour and international mergers on US fi rms than those currently

1 See http://www.wto.org/english/tratop_e/comp_e/comp_e.htm#documents (accessed 11 November 2009).



applied by way of domestic US antitrust law, which recently, particularly

in some important US Supreme Court decisions,2 had been signifi cantly

infl uenced by the pro- market rules of the Chicago School (Bork, 1978;

Posner, 2001). The US expressed uncertainty concerning what a global

regime would look like and fears that a harmonised model would more

closely resemble the more interventionist EU competition law, which had

been the preferred competition model adopted in many countries (Fox,

2000; Bradford, 2007: 408). At a fundamental level the US did not want

its sovereignty in domestic and extraterritorial competition matters to be

jeopardised or curtailed by an international regime.

It is not however possible to place all the blame on the US and devel-

oping countries. Multiple factors were at work, including a more simple

explanation of bad political strategy. As Evenett (2007: 400) has argued, it

may have been unwise to link competition as a coherent package with the

other ‘Singapore issues’ such as the interaction between trade and invest-

ment and government procurement transparency. These issues were also

eventually dropped from the Doha Work Programme.

3. THE OBJECTIONS TO A MULTILATERAL AGREEMENT RAISED BY DEVELOPING COUNTRIES

It was not surprising that developing and least- developed countries could

not see much to benefi t them in the idea of a ‘global competition law’. The

impetus for some form of multilateral agreement was always fi rmly based

in trade liberalisation, foreign direct investment (FDI) and the facilitation

of market access, hence the choice of the WTO. Measures to ensure the

effi ciency of global commerce were not a priority for developing and least-

developed countries who were not active participants in global mergers or

joint ventures. They were also wary of yet further international measures

to facilitate access to their domestic markets when they already faced sig-

nifi cant trade defi cits.

Some believed it was hypocritical for developed countries to pursue

another market access scheme when they failed to dismantle their own

agricultural subsidies and industrial state aid which severely impacted

2 See, for example, Brooke Group v. Brown and Williamson Tobacco Corp; Verizon Communications Inc v. Law Offi ces of Curtis V. Trinko; Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co.; Pacifi c Bell Telephone Co. v. Linkline Communications, Inc.



access to global commodity markets for developing countries. They were

suspicious too of the possibility of yet another global agreement through

the WTO and the proposed safeguards for developing nations, when

agreements such as TRIPS and the WTO dispute settlement process were

perceived as unfair by many developing countries. TRIPS strengthened the

rights of the owners of intellectual property rights, the majority of which

are from developed countries, to impose restrictive conditions on licensing

(including purchaser and distributional restrictions) which may adversely

aff ect competition. While the TRIPS agreement does permit members to

take appropriate measures to prevent abuse of intellectual property rights,

these are dependent on functioning and eff ective competition enforcement

agencies, which may not be established in developing and least- developed

countries. The TRIPS agreement off ers limited guidance on the narrowly

construed areas of intellectual property abuse which often require a com-

plicated rule of reason analysis and a certain level of competency in com-

petition issues (Bhattacharjea, 2006: 302).

The pursuit of a global competition agreement by developed countries

was also regarded as somewhat disingenuous when they had in place export

cartels which had detrimental eff ects on global commerce. Legislation such

as the US Webb- Pomerene Act3 exempts from US antitrust laws ‘export

cartels’ created by US fi rms who gain by the ability to collude and increase

prices on international markets, as long as the conduct does not adversely

aff ect US consumers. Export cartels are predominately formed to provide

opportunities to participate in export markets for small and medium- sized

fi rms, sometimes within trade associations, who individually would not

have the resources to engage in this activity (Hoekman and Holmes, 1999:

4). They are therefore thought incapable of raising competition concerns

because they would not have suffi cient market power to exploit foreign

markets (Bradford, 2007). But it is the aggregate eff ect of these cartels

which is likely to impact importing nations such as developing and least-

developed countries who are often unable to protect themselves against

this activity. At the very least, the exemption for export cartels sends a

symbolic message that developed countries are only concerned about the

impact of cartels on their own domestic markets (see discussion in Section

7 below).

The merits of the wholesale pursuit of the pro- market, neoliberal

agenda of the Washington Consensus, even before the current global fi nan-

cial crisis, were also already beginning to be questioned when the promised

outcomes for developing countries did not readily materialise (Kennedy,

3 15 USC 61- 65 2000.



2006). This free market approach could entrench inequalities and wealth

transfers from consumers to producers in the highly concentrated markets

in developing countries and in circumstances where consumers had little

relative power (Stewart et al., 2007). The ‘effi ciency’ or ‘aggregate wealth’

goals of competition law were regarded by developing nations as perhaps

‘inappropriate to their context because of the tendency of free- market

policies to disproportionately advantage the already advantaged in every

game played’ (Fox, 2007: 215).

Where 20 per cent of the world’s population (and in sub- Saharan Africa

this fi gure rises to more than 40 per cent) live on less than one dollar a

day (Fox, 2007: 218), developing and least- developed countries had other

priorities such as access to water and the right to an adequate standard of

living, including food, clothing and housing. Competition law was seen to

have little to say about distribution issues and inequalities and it was these

other non- competition policy aims, such as that represented by the fi rst of

the United Nations’ (eight) Millennium Development Goals (MDGs) – to

halve the percentage of the world’s severely poor by 2015 – which would

need to be prioritised (UNGA, 2000).

4. THE REJECTION OF A ‘ONE SIZE FITS ALL’ MODEL OF COMPETITION LAW FOR DEVELOPING COUNTRIES

Developing countries were primarily concerned about the model of com-

petition law this proposed multilateral agreement could impose on them.

They questioned how institutional models of competition law, enacted

over long periods in globalised and fully developed economies such as

the EU and the US, would translate to markets in developing economies

which faced arguably wholly diff erent circumstances of highly concen-

trated domestic markets, strong commodity based economies with exten-

sive non- traded sectors, weak institutional governance structures and

enforcement mechanisms, and poor technical capacity.

These concerns were expressed at a Workshop organised by the

Southern and Eastern African Trade Information and Negotiations

Institute (SEATINI) in April 2003 in Tanzania. African trade offi cials

from Angola, Kenya, Lesotho, Malawi, Mozambique, Tanzania, Uganda,

Zambia and Zimbabwe set out a statement opposing negotiations on the

competition issues:

Our understanding of competition policy from the development perspective is that there is a need for government to assist and promote local fi rms so that



they can survive, be viable and develop despite their present relative weakness, so that they can successfully compete with foreign fi rms and their products . . . If negotiations begin, it is likely that the developed countries’ market access approach may eventually win out, due to their higher negotiating capacity and infl uence. There could then be a competition agreement in WTO that would oblige our governments to give almost total freedom and market access rights for foreign fi rms and their products and services, whilst local fi rms would not be able to receive assistance or subsidies and many of them may not survive. (SEATINI, 2003)

Developing countries were concerned that the WTO principle of ‘non-

discrimination’ would not permit them to exempt certain fi rms from acting

in ways to benefi t the economy and grant concessions to particular state

owned monopolies (Stewart, 2004; Bradford, 2007: 411–12). It could also

prevent them from imposing duties on essential utilities such as telecom-

munication fi rms to achieve more distributional outcomes such as uni-

versal service obligations or universal access (see discussion in Section 7

below). They wanted the autonomy to apply a more contextual, fl exible

approach to competition law – analogous to the existing ‘special and dif-

ferent treatment’ regime of the WTO (Bradford, 2007: 420).

The retention of the right to formulate exceptions more conducive

to their stage of development was partly derived from what developing

countries had observed in the operation of competition law throughout

history in developed countries. For example, the current global priority

being given to the detection, prosecution and criminalisation of cartel

activity is only a recent occurrence in developed countries (other than

the US) (Evans and Jenny, 2009: 10). In the early part of the twentieth

century, European cartels were not merely tolerated but embraced as a

necessary aid to the stabilisation of market prices during industrialisa-

tion. Successive European governments encouraged and even participated

in cartel behaviour through public enterprises in order to stabilise markets

or control them through means such as the ‘total cartels’ of Nazi Germany

(Harding and Joshua, 2003: ch. 3).

Developing countries maintain that at their stage of industrialisation

they prefer a competition policy which protects, and thereby permits, the

development of national champions: larger fi rms which can take advan-

tage of economies of scale and productive effi ciencies so that they are

better prepared to eventually compete on the international market. This

requires more permissive scrutiny of domestic mergers and/or allows dom-

inant national fi rms special freedoms or exemptions to exercise market

power (Gal, 2003).

It was always acknowledged however that WTO members could seek

exceptions from any binding agreement in the event of any substantial



clash between the proposed obligations and national development policy

as long as these were transparent and operated for a defi ned period

(Evenett, 2007: 405). The economic argument for special protection has

also been questioned. A fair portion of economic activity in developing

countries relates to the non- traded sector, such as electricity, water, fi nan-

cial services and telephony, where foreign trade has not provided market

discipline. Ineffi cient monopolies may be protected and entrenched by

concessions or the failure to regulate the abuse of market power. These

exemptions can also be the direct result of regulatory capture and rent-

seeking by producers, whereby weak regulatory authorities adopt policies

or allow exceptions for various interests, which can impede the develop-

ment of fully competitive markets (Bhattacharjea, 2008). It is also not

self- evident that economies of scale in small or developing nations will

always require highly concentrated markets. Any assessment will depend

on the particular product and the minimum effi cient scale for the market

(Elhauge and Geradin, 2007: 1108). Porter (1990), in his extensive study of

competitiveness in small economies, argues that strong domestic rivalry is

more important to innovation and economic development than industrial

policy designed to foster national champions. Evenett concludes that ‘the

conceptual arguments and the available empirical evidence by and large

supports the view that promoting inter- fi rm rivalry enhances the dynamic

economic performance of developing economies’ (Evenett, 2003: 7).

5. THE CONSEQUENCES OF REJECTION OF THE AGREEMENT

What were the consequences for developing countries of the failure of the

multilateral negotiations? International cartels, mergers which create anti-

competitive eff ects and the abuse of market power by foreign multination-

als, if unconstrained, can be hugely detrimental to consumer welfare in

these emerging and developing economies. It is also true that the welfare

benefi ts from the increased detection and eradication of global cartels go

beyond the mere facilitation of ‘market access’ (Evenett, 2007: 408). Surely

enhanced eff orts to coordinate the eradication of this behaviour would be

benefi cial for developing countries.

International cartels have a disproportionate eff ect on developing

countries because they are highly exposed to international trade. This is

partly due to the fact that many import substitution schemes have been

unsuccessful. Developing countries are also generally ‘price takers’ on

world markets (Hoekman and Holmes, 1999: 10; Gal, 2004), that is, they

have no real buyer market power which they can use to aff ect prices.



Levenstein and Suslow (2004) estimated that for 19 selected products

the value of cartel- aff ected imports to developing countries in 1997 was

$US51.1 billion (an amount which exceeded the amount of all foreign aid

to developing countries that year – $US39.4 billion) and that the price of

these imports by reason of the price- fi xed overcharge was elevated by at

least 10 per cent (ibid: 813–16). These goods represented 6.7 per cent of

imports and 1.2 per cent of GDP in developing countries.

While it is true that competition policies are more directly linked to pro-

market agendas than distribution concerns, it is a reality that international

cartel activity has directly increased the price of many staple commodi-

ties. This has had a real impact on the consumer purchasing power and

thereby the poverty levels of developing countries. At its most extreme,

excessive pricing of essential commodities can create shortages, which

have potential spill- over eff ects in social and political disruption. The anti-

competitive eff ects remain largely unregulated however because competi-

tion laws are under- enforced by developing countries which either do not

have a competition regime or lack the resources to enforce it (Bradford,

2007: 389).

The abandonment of negotiations to formulate a global agreement

also meant that eff orts to coordinate a response to international anti-

competitive behaviour were transferred to strengthening bilateral or

regional competition agreements for the exchange of information, issues

of comity and coordinated enforcement, and voluntary soft law options

such as the International Competition Network (ICN).4

The ICN was established in 2001 as a forum for competition agencies

to cooperate and exchange information concerning ‘best practice’ and

the identifi cation of frameworks for the harmonisation of competition

rules and procedures. Today its membership includes 107 competition

agencies and hundreds of non- governmental advisors (NGAs). The ICN

has assisted with fi nancial support for delegations from developing coun-

tries and ensured that they have a role in heading working groups within

the organisation such as those on Competition Policy Implementation

(Brazil) and the Judiciary (Brazil and Chile) (Sokol, 2007: 106). It has

also implemented a pilot project whereby volunteering agencies agree to

provide a partnership role or to be on call to answer questions and provide

information for less experienced and newer agencies. Its major policy

work programme, however, has tended to focus on issues of most concern

to developed countries such as reducing the regulatory burden for cross-

4 See http://www.internationalcompetitionnetwork.org/ (accessed 11 November 2009).



border mergers and the investigation of international cartels. Thus, devel-

oping countries still participate largely as ‘recipients’ of technical advice

and capacity building rather than directly contributing to the development

of an optimum model of competition law, where the debate is still domi-

nated by either the EU or the US.

What is perhaps most surprising is that while developing and least-

developed countries have opposed the multilateral competition agree-

ment, they have been willing to enter into preferential trade agreements

and regional trade agreements which, in many cases, impose just as

onerous competition related provisions in return for preferential trade

terms and market access (UNCTAD, 2005a; Bhattacharjea, 2006: 314,

315). These agreements often require signatories to adopt domestic com-

petition law regimes and to apply these extraterritorially to cross- border

transactions which have anticompetitive eff ects. But, as Bhattacharjea

points out, there is a crucial diff erence between these agreements and

the one proposed by the WTO, which partly explains the willingness of

developing countries to participate, in that there is no mandatory dispute

settlement mechanism (ibid: 315). Rennie argues that the competition

provisions in these regional trade agreements largely lack ‘functional

defi nition’ and would require further negotiation and domestic commit-

ment to their implementation, which is often lacking, to operate eff ectively

(Rennie, 2009b: 11, 71). Developing countries often lack the institutional

support of a strong domestic competition agency to take an active part in

reciprocal information sharing and enforcement which forms part of these

competition agreements.5 But, as Bhattacharjea argues, ‘once competi-

tion laws are in place, there will be an increasing pressure for them to be

enforced’ which may result in a de facto multilateral agreement which has

the potential to undermine opposition to a future multilateral agreement

by developing countries (Bhattacharjea, 2006: 323).

Developing countries may have also been reluctant to support a multi-

lateral agreement on competition law which failed to address one of the

fundamental issues which impacts unfairly on their ability to engage in

international trade: the imposition of anti- dumping duties. While a reas-

sessment of anti- dumping duties was originally on the agenda for negotia-

tion of the multilateral agreement, it was excluded from the fi nal Doha

Declaration.

Article VI of the General Agreement on Tariff s and Trade (GATT) 1994

5 Bradford (2007: 411) argues that this is another reason why developing countries would seem likely to be benefi ciaries of a future international antitrust agreement.



permits the imposition of duties on imported goods ‘when the export price

is below the “normal value” given by the comparable price, in the ordinary

course of trade, for the like product when destined for consumption in the

exporting country’. Anti- dumping duties are intended to counter ‘unfair

competition in the domestic market arising from price discrimination

between diff erent geographical markets’ (Neufeld, 2001: 1).

Developing countries are subject to 42 per cent of all anti- dumping

investigations, an increase from 20 per cent in the 1980s (Neufeld, 2001:

4). Developed countries are increasingly taking advantage of these meas-

ures to protect their domestic industries against lower priced imports

(often the result of currency devaluations) from developing countries.

There have long been calls to align these anti- dumping duties with compe-

tition principles so that they can be assessed on a fi rmer economic basis,

namely the eff ect of these prices on competition in the market and con-

sumer welfare rather than the protection of domestic competitors. Many

prices which attract anti- dumping duties would not be classed as ‘preda-

tory’, and therefore illegal, under competition law principles because they

do not amount to ‘price discrimination’ or ‘predatory pricing’ (Vermulst,

1999).

The assessment of the anti- dumping duty on technical, narrow and

administratively burdensome price comparisons, with reference to compli-

cated constructed value determinations6 on often historical data, is anath-

ema to competition law principles which require such assessments to be

related to an intent to harm an equally effi cient competitor and/or to gain

market power. The excessive duration of the fi nal measures, which can

remain in force for an average of six to nine years (Neufeld, 2001: 8–9), is

also contrary to competition law principles where courts favour structural

over behavioural and price setting remedies in order to avoid the ongoing

supervision of the commercial transaction.

The failure to assess these prices under competition principles grants

those countries with the requisite technical expertise and legal resources

to successfully invoke them an eff ective protectionist instrument for

their domestic industries which encourages market distortions and rent-

seeking. These often excessively lengthy investigations create uncertainty

and instability particularly for export fi rms in developing countries, which

often lack the technical and fi nancial capability to successfully defend

these investigations (Neufeld, 2001: 14). Often the mere threat of a chal-

6 In instances where there is no comparable reference, the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profi t is taken into account.



lenge is suffi cient for exporting countries to alter their behaviour and with-

draw from markets.

While Article 15 of the WTO Anti- dumping Agreement requires that

‘special regard must be given by developed country Members to the special

situation of developing country Members when considering the applica-

tion of anti- dumping measures’, it is rarely applied. Bhattacharjea (2006:

301) argues that developed countries have abused the anti- dumping provi-

sions and that these actions are spiralling out of control. The multilateral

agreement on competition may have provided an opportunity to expose

the apparent unfairness, economic unsoundness and somewhat arbitrary

application of these duties. The increasing use of these protectionist meas-

ures by developed countries against developing countries also exposes,

once again, the somewhat disingenuous nature of their simultaneous calls

for greater market access and trade liberalisation.

6. A COMPETITION POLICY FOR DEVELOPING COUNTRIES

After the failure of the multilateral competition agreement the question

remains: should the enactment of domestic competition laws be a prior-

ity for developing countries? A number of studies, particularly those in

transition economies, have concluded that strong competition policy is

conducive to economic growth (Cook et al., 2007). A study of the two

countries which have experienced the most rapid recent growth, China

and India, may prove otherwise. China did not have a competition law

until 2008 and India experienced its highest- ever growth rates during the

period (2003–08) when its competition law was in abeyance while new leg-

islation was being drafted (Bhattacharjea, 2008: 27, n 62). It has also been

argued that, because domestic antitrust enforcement is generally ‘designed

to maximise consumer welfare and excludes producer surplus, it is not

clear one would expect desirable antitrust enforcement to increase GDP’

(Elhauge and Geradin, 2007: 1110). Nevertheless, strong competition law

and policy in developing countries should provide the necessary incentive

for foreign and domestic investment. In this way, as Fox argues, competi-

tion law operates in the opposite direction to regulatory competition in tax

or corporation law as states are not in direct competition to have the most

desirable competition law (Fox, 2000: 1788–9).

In the absence of a multilateral agreement, developing and transi-

tion economies have, of course, the autonomy to determine their own

competition rules even if these are considered contrary to the interests of

foreign companies. For example, the Anti- Monopoly Law of the People’s



Republic of China came into eff ect on 1 August 2008. China’s fi rst major

ruling under its new competition law was to reject Coca- Cola’s US$2.4

billion bid to buy the Chinese juice- maker Huiyuan. The economic reason-

ing and market defi nition applied by the Chinese Ministry of Commerce

(MOFCOM) drew much criticism from the US. The potential market

share of the merged company was estimated to be 20.3 per cent of the

Chinese juice market. It was argued that this would present no competition

issues in the US or the EU, which would require a market share of at least

40 per cent before concerns could be raised. The decision was considered

to be one which merely protected Chinese domestic juice producers from

a foreign competitor (Chovanec, 2009). It is unclear whether the Chinese

authority would retain the right to make a similar decision if it signed up

to a multilateral competition agreement or whether, according to Fox’s

argument, this decision will also discourage further foreign merger activity

and investment in China.

Foreign direct investment has not only increased the presence of foreign

fi rms but also strengthened domestic rivalry in developing countries.

But anticompetitive practices have been observed in many markets

(UNCTAD, 2004a, 2008c). Fox (2007) notes that there is evidence of

rampant buying cartels and bidding cartels for state contracts in develop-

ing countries in staple commodities. Such arrangements exploit domestic

small farmers and producers:

Seller cartels target basic necessities, including staples of diets. In Peru, poultry farms and their trade association conspired to eliminate competitors and prevent entry . . . In Kenya, owners of minivans sought monopolies over lucra-tive routes . . . [and] the fertilizer manufacturers organized a secret bidding cartel in their tenders to the government buying authority, which impoverished the farmers who needed an increasing number of supplies. In many countries, numerous vertical agreements have tied up scarce channels of distribution. (ibid: 225)

Markets in developing countries are highly concentrated, which makes

them particularly susceptible to abuses of dominance or monopolisation.

As Brusick and Evenett (2008) point out, concentrations of market power

are frequent because geographical conditions and poor transport links

often result in small and fragmented markets. Merger policy conducive

to the creation of national champions may also produce dominant fi rms

which may not be subject to competitive discipline. The presence of a large

informal market sector can also lead to narrowly drawn markets and exag-

gerated measurements of market power.

In many countries, one may also encounter a failure to restructure and

introduce contestability to elements of state monopolies prior to privati-



sation. The state monopoly may have been merely transferred to private

hands to maximise treasury receipts (Brusick and Evenett, 2008: 276). The

sale may have been to the highest bidder rather than one following an

assessment of any anticompetitive eff ect on existing markets. There may

also have been instances of non- competitive bidding and/or corruption

where the sale was made to interests associated with the government.

The close relationship between the new owners and government may

facilitate the exploitation of market power in key infrastructure industries

such as transport (ports, freight) or communications (control of local loop

access), which is particularly detrimental to development. As Brusick and

Evenett (2008) point out:

many poor countries are either island or landlocked countries, and effi cient transportation infrastructures are a prerequisite for the inexpensive distribu-tion of domestic- and foreign- produced goods and for fast exportation, both of which foster economic development. (ibid: 275)

There may be very little competition between ports and each may be served

by a single shipping line which enables them, and the port authorities, to

extract excessive charges and monopoly profi ts in key export and import

sectors. Truck- drivers’ unions may also operate as a cartel to fi x prices for

freight transportation (ibid). Foreign multinational companies may also

be monopsony (or sole) buyers in key sectors such as supermarkets where

they can impose restrictive conditions on, and extract lower prices from,

local suppliers. This has a huge impact on developing countries because of

the large numbers engaged in the agriculture sector (ibid: 284, 291).

The strong presence of the state in public services and utility ownership

means it can intervene in the bidding process for public works and the

awarding of contracts. The powerful position of the state may also mean

that it is able to negotiate extremely favourable contracts for the provision

of services from utilities (ibid: 277) leaving them undercapitalised or near

bankruptcy.

Competition regulation could be used to establish discipline in these

domestic markets. Certainly, there has been a huge growth in recent years

in the number of competition regimes in developing countries but many of

these laws remain unenforced. As noted, any domestic competition policy

faces the major political challenges of weak institutional capacity and

governance, lack of technical expertise and fi nancial resources, and rent-

seeking by public and private enterprises.

Given these complex issues, the key question remains what model of

competition law is best suited to developing countries. What is clear from

an examination of the political and economic context is that a model of

competition law based on US antitrust, as dominated by the Chicago



School, is not appropriate. The Chicago School goal of economic effi -

ciency as ‘total welfare’ (whereby producer surplus and consumer surplus

are maximised within a utilitarian calculus) and belief in ‘self- correcting

markets’ are not appropriate to the diff erent issues and problems facing

developing and least- developed economies with conditions of highly con-

centrated markets and specially protected sectors.

The Chicago School idea of ‘self- correcting’ markets is based in the

idea that monopoly power is fragile and temporary. As barriers to entry

are considered minimal and the capital market is perfectly competitive,

monopoly profi ts will be competed away as new players enter the market.

But, as we have seen, markets are often small and fragmented in develop-

ing countries. They are also dominated by the state, which signifi cantly

raises barriers to entry. The fi nancial markets are also far from perfectly

competitive. Access to funds for a fi rm trying to adopt a counter- strategy

in response to predation (such as predatory prices), or to gain entry to

a new market, is severely limited. The banking sector is highly concen-

trated and ‘[a]ccess to fi nance, distribution networks, information about

customers, and the necessary approvals from state bodies often frustrate

the extent to which dominant fi rms will be disciplined in this manner’

(Brusick and Evenett, 2008: 277). In India, for example, Bhattacharjea

(2008: 24) observes that the ‘capital market is far from perfect, and small

and medium fi rms have been credit- constrained by a banking system that

systematically ignores future profi tability in lending decisions’.

As Fox (2007: 213) concludes, developing economies require a competi-

tion policy which is mindful of ‘the opacity, blockage and political capture

of . . . [their] markets, and includes some measure of helping to empower

people economically to help themselves’. A model consistent with devel-

opment economics (ibid: 211) is not one where the role of the state is very

much a residual one confi ned to regulating instances of ‘market failure’.

Competition law in the context of developing economies should not

be on the side of liberalised markets which may protect entrenched

interests and inequality, but should attempt to impose market discipline

and increase incentives for entrepreneurship for small and medium- sized

businesses by levelling the playing fi eld and ensuring ‘competition on the

merits’. This includes the incorporation of notions of fairness and the pro-

tection of smaller competitors from the predatory actions of larger fi rms.

These ideas are broadly in agreement with Amartya Sen’s (1999) discus-

sion of the ‘freedom to compete’, which goes beyond the purely neoliberal

concerns of effi cient markets to link it to the broader concerns of human

rights and human fl ourishing (Kennedy, 2006). Competition law can have

a direct eff ect in this area, not through the implementation of ‘command

and control’ mechanisms to control prices or by the protection of small



enterprises for their own sake but by, for example, providing access to

telecommunications networks for smaller mobile operators, which, by

facilitating communications, can also have important democratic and

cultural implications (Clarke and Wallsten, 2002; McMahon, 2009), the

prising open of vertical distribution channels, and the challenging of bid

rigging and predatory strategies (Bolton et al., 2000).

A competition law model more closely resembling that of the EU, not-

withstanding more recent attempts at modernisation which some may argue

have brought it closer to that of the US, may therefore be a more appropri-

ate one for developing countries. The EU model, as embedded in Articles

101 and 102 of the Treaty on the Functioning of the European Union

(TFEU) (formally Articles 81 and 82 of the EC Treaty), is more tradition-

ally associated with rules to safeguard the totality of the competitive process

rather than the US embrace of effi cient outcomes and ‘total welfare’.

EC competition law has its theoretical foundations in the political and

economic ideas of ‘ordoliberalism’, which originated in the 1930s in the

University of Freiburg, Germany (Gerber, 1998: ch. 7). The state has an

important but limited role in safeguarding individual economic freedom

against the exercise of private power (Gormsen, 2007). Under this view,

competition is a value in itself and allocative effi ciency is ‘but an indirect

and derived goal’ (Möschel, 2001: 4). Competition law has an essential

role in the maintenance of the ideal of an ‘economic constitution’ whereby

‘the eff ectiveness of the economy depended on its relationship to the politi-

cal and legal systems’ (Gerber, 1998: 246). It strives to maintain a system

which permits neither unconstrained private power nor discretionary gov-

ernmental intervention in the economy (Jones and Sufrin, 2008: 34–5).

The EC focus is on preserving rivalry, preventing foreclosure and

ensuring ‘competition on the merits’ (OECD, 2005) and is derived from

an institutional and political history which prioritised market integration

and set out a system ensuring that competition in the internal market was

not distorted (formally Article 3(1)(g) of the EC Treaty, cf Article 3(1)(b)

of the TFEU; Schweitzer, 2008: 119). Its rules aim to achieve short- run

competitive rivalry rather than the Chicago School goal of economically

effi cient outcomes based on ‘self- correcting’ markets. For example, a

competition rule designed to facilitate the licensing of intellectual property

may increase competition in the short run by introducing new products

to the market but may be ultimately detrimental to investment incentives

in the long run.7 As Gerber notes, the development of the ‘abuse’ concept

7 See, for example, the EU Court of First Instance decision in Case T- 201/04Microsoft v. Commission.



under Article 102 of the TFEU (formally Article 82 of the EC Treaty) has

been particularly concerned with the protection of small and medium-

sized fi rms and the ability of large fi rms to extract unfair prices and condi-

tions from smaller enterprises (Gerber, 1998: 368). He refers specifi cally to

notions of economic dependency developed in French and German com-

petition law where a fi rm does not have suffi cient and reasonable possibili-

ties to shift to another purchaser, supplier or distributer (ibid: 315–16).

Certainly it is this more interventionist EU model of competition law

which has been more readily adopted over the US model in post- liberalised

and developing economies (Fox, 2000). They see it as better suited to their

more complex and highly concentrated economies as they dismantle state

monopolies and/or require closer regulation of previously privatised utili-

ties and networks.

Yet, as Fox (2007: 214) points out, movement away from rules and

a ‘one size fi ts all’ model, to a more contextual, discretionary one, can

increase regulatory costs and requires a level of technical expertise which

may be absent in developing countries. This may be true, for example,

if the authority wishes to establish block exemptions based on safe-

harbours calculated by reference to market shares. Such market share data

may be unavailable or unreliable and this increases uncertainty for the

fi rm (Bhattacharjea, 2008: 29). Competition agencies need institutional

support through technical training and capacity building so that they can

make independent and transparent decisions (Gal, 2004). Adequate public

funding, which is diffi cult when there are so many competing demands

on public expenditure, is essential to the autonomy of these agencies. The

Peruvian competition agency, for example, is required to be self- fi nanced,

relying on service fees and fi nes as its sources of revenue. This in turn

results in business dissatisfaction with excessive fees and the apprehension

of bias in decision- making (OECD, 2006a: 385).

Too much discretion also potentially opens the door to regulatory

capture by vested producer interests and/or corruption resulting in

extensive or particularised exemption for private interests. India’s new

Competition Act,8 for example, has been criticised for permitting too

many discretionary exceptions and the insertion of vague criteria penal-

ising ‘unfair’ behaviour in the ‘public interest’ rather than assessing the

eff ect of behaviour on competition (Bhattacharjea, 2008). It also permits

broad exceptions for conduct such as ‘hardcore’ cartels which are usually

treated as illegal per se in most jurisdictions (s19(3)). Section 54 also

8 Act 12 of 2003 (India), see http://www.competition- commission- india.nic.in (accessed 11 November 2009).



permits the government to exempt ‘any class of enterprises if such exemp-

tion is necessary in the interest of security of the State or public interest’

(Bhattacharjea, 2008: 21, 29). ‘Unfair’ and ‘discriminatory’ prices and

‘unfair contract terms’ are also proscribed in circumstances where they

would not be considered to have an anticompetitive eff ect in most com-

petition law regimes.

Competition rules based on preserving competitive rivalry and fair

competition will also fail to be useful if they are not placed within market

conditions conducive to competition more generally, that is, within the

broader context of competition policy. Competition policy includes: the

restructuring of government utilities and their privatisation and/or corpo-

ratisation, the implementation of competitive neutrality between public

and private enterprises, the enactment of sector- specifi c regulation in areas

of market failure, including access to essential facilities, and fi nally, the

enactment of competition law (Hoekman and Holmes, 1999).

Fostering competition is not always politically expedient in developing

countries because it may result in loss of employment as some fi rms exit

the market (Bhattacharjea, 2008: 29). This may have an immediate impact

on the poor, especially in the absence of a welfare net. Competition agen-

cies can therefore have an important role in ‘competition advocacy’ where

they can promote the development of government policy to reassess and

dismantle highly interventionist industrial policy and anticompetitive state

measures, such as restrictive licensing, and implement competitive neutral-

ity (Hoekman and Holmes, 1999: 12; UNCTAD, 2000a; Gal, 2004: 22).

Regulatory review for anticompetitive legislation should also be imple-

mented to ensure that barriers to competition incorporated in legisla-

tion and administrative rules are assessed from an economic perspective

(UNCTAD, 2001b) but also by the ‘public interest’. In this way a com-

petition authority in a developing country can also assume some of the

broader functions normally undertaken by sector- specifi c regulators in

many other countries of licensing, standard- setting, access to essential

facilities and consumer protection legislation (Gal, 2004: 35).

7. EXISTING INTERNATIONAL AGREEMENTS WHICH REGULATE COMPETITION

Competition provisions are of course already enforced internationally

through the extraterritorial reach of domestic competition laws and are

incorporated in particular international agreements such as GATS and

TRIPS, in addition to regional and bilateral agreements. In the remain-

ing two sections of this chapter the impact on developing countries of



some of these existing mechanisms will be examined in the context of two

cases: the WTO decision in Telmex and the US Supreme Court decision

in Empagran.

I. The Telecommunications Annex and the Telmex decision

The 2004 Telmex (George, 2004; WTO, 2004d; WTO Panel Report, 2004)

decision by the Dispute Settlement Panel of the WTO concerning the

interpretation of the Telecommunications Annex9 of GATS provides

a useful context for the apparent opposition between the application of

international competition law provisions and an attempt by a developing

country to provide concessions or protection to a monopolist to achieve

distributional or other public aims.

The GATS agreement includes, in addition to general obligations that

apply to all WTO members to liberalise and open access to telecommu-

nications services on a non- discriminatory basis, a Telecommunications

Annex which contains specifi c commitments to market access, full national

treatment and pro- competitive regulatory principles (Reference Paper).

The Reference Paper commits members to maintain appropriate measures

to prevent anticompetitive practices by ‘major suppliers’, defi ned as those

that can materially aff ect the terms of participation in the relevant market

for basic telecommunications services as a result of control over essential

facilities or use of their position in the market to achieve ‘anticompetitive

cross- subsidization’. Additional specifi c obligations to trade liberalisation

may also be applied to services listed in a WTO member’s ‘Schedule of

Commitments’.

The Telecommunications Annex makes specifi c provision for meas-

ures aff ecting access to and use of public telecommunications networks

and services. Members may only impose conditions that are necessary

to safeguard the public service responsibilities of the suppliers of public

networks, such as a universal service obligation. WTO members who

fail to make the necessary legislative or regulatory changes to implement

their commitments, or permit acts, policies or practices in their markets

that run counter to those commitments, are subject to an action. Parties

may request the establishment of a Panel by the Dispute Settlement Body

(DSB) of the WTO, which, while not a judicial body, can make recom-

mendations where the actions of a Member State are inconsistent with the

terms of the relevant agreement.

9 The Fourth Protocol to the GATS, generally referred to as the WTO Basic Telecommunications Agreement, 5 February 1998.



The Telmex10 dispute between the US and the Mexican Governments

concerned potential confl icts between the competition commitments under

the GATS and an attempt by a developing economy to build a universal

service fund for the cross- subsidisation of telecommunications infrastruc-

ture. Universal service obligations in the telecommunications industry are

those obligations which are imposed on public or private operators or

on the industry as a whole to provide a minimum standard of basic tele-

communications service. In developed countries this obligation includes:

reasonable and equitable access to standard voice telephone services, a

uniform price for local calls, operator assistance and directory services,

public pay phones, specialist services for persons with disabilities and

special tariff packages for lower socio- economic groups. In developing

countries where tele- density fi gures are only 1 to 5 per cent (Clarke and

Wallsten, 2002; Gasmi and Recuero Virto, 2005: 22, n5) and three billion

people do not have access to basic telecommunications, the focus is nor-

mally on the reasonable provision of the means of access to a public tele-

communications network, usually referred to as ‘universal access’ rather

than ‘universal service’ (Intven and Tétrault, 2000: 6.1.1).

When domestic utilities were largely publicly owned these universal

service obligations were not separately costed but were merely funded as

part of the government funded budget. In newly privatised and competi-

tive markets they are now identifi ed as areas of ‘market failure’ or uneco-

nomic services which cannot be profi tably provided. Developing countries

have often sought to obtain funds for the uneconomic provision of univer-

sal access from cross- subsidised funds from state- owned telecom monopo-

lies or privatised national champions. As developing countries have been

encouraged to liberalise and privatise state- owned utilities, funds available

for the provision of uneconomic services from cross- subsidies and tariff

rebalancing have been reduced.

In the context of international markets, developing countries have

sought to obtain these cross- subsidised funds from favourable account-

ing rates for the termination of international calls.11 These rates are an

attempt to provide an equitable payment to the terminating operator for

the termination of an international call and to any transit operators that

have handled the call. The rates are usually determined on a bilateral

basis through mutual agreement. But the imbalance of calls originating

10 It is, to date, the only WTO dispute panel decision dealing with the telecom-munications industry.

11 The accounting rate is a wholesale rate representing the agreed cost of transmitting each unit of traffi c between the calling parties.



in developed countries, such as the US, and terminating in developing

countries requires the US to pay a large above- cost subsidy to foreign

carriers. Similar apparent imbalances are perceived by US operators for

internet peering settlements (due to the large net outfl ow of data from

the US to other countries). Such settlements have resulted in large pay-

ments to developing countries. These cross- subsidies and imbalances have

met resistance, as being in violation of GATS. The WTO has specifi cally

promoted the move towards International Benchmarks, transparent tariff

conditions and more ‘cost- oriented’ accounting rates.

In the Telmex case the US claimed that the Mexican legislative rules

for the termination of cross- border telephone calls had eff ectively permit-

ted Telmex (the privatised monopoly telecommunications company) to

impose a uniform and excessive settlement rate on its competitors and

thereby operate a cartel contrary to the competition law principles in the

Reference Paper. The US argued that the Mexican provisions on termina-

tion were not in accordance with the principles of ‘cost- orientation’ and

were in breach of Section 1.1 of the Reference Paper, which requires that

appropriate ‘measures shall be maintained for the purpose of preventing

suppliers who . . . are a major supplier from engaging in or continuing

anticompetitive practices’.

Mexico argued a ‘state action’ defence but the WTO Dispute Panel

stated that this could not be used to insulate a national champion and

permit it to harm cross- border trade by discriminating against interna-

tional competitors. Mexico further argued that regulatory sovereignty

permitted it to adopt rules to protect and promote Mexican investment in

domestic infrastructure and advance its economic development (includ-

ing universal service provision) (Kariyawasam, 2007: 75–80). However

the Panel ultimately ruled that this outcome could not be achieved by

anticompetitive measures, and that the price charged for terminating

incoming international calls was not in accordance with the principles of

‘cost- orientation’ and was contrary to the competition principles in the

Reference Paper (WTO, 2004d; WTO Panel Report, 2004).

Fox claims the decision is a victory for ‘cosmopolitan antitrust over

narrow nationalism’ (Fox, 2006a: 77, 2006c) because exploitative pricing

and protection from competition induces ineffi ciency and reduces output.

It is also arguable that the Mexican government may have had an inter-

est in granting favours and concessions to Telmex’s billionaire owner,

Carlos Slim.12 Previous attempts by the Mexican competition authority

to regulate Telmex’s abuse of dominance had often been subject to chal-

12 For a profi le of Carlos Slim, see Wright (2009).



lenges by Telmex by way of its considerable fi nancial resources. The deci-

sion may therefore provide valuable international backing to Mexico’s

eff orts to resist and control a domestic monopoly which can wield not only

economic power but also considerable political power and infl uence. But

there is another, potentially broader, issue at stake here: is the decision

an appropriate international response to protective and anticompetitive

state action or is it an unwarranted interference with a developing coun-

try’s legitimate use of regulatory mechanisms to foster growth in local

telecommunications markets?

The protection of national champions in developing countries can serve

useful purposes including the provision of funding for much needed infra-

structure. Higher termination rates on international calls can be used to

subsidise the cost of the local telephone service in Mexico. The application

of competition laws and strict cost- oriented pricing through international

agreements to override ‘state action’ doctrine can be detrimental to econo-

mies at this stage of development especially when the institutional frame-

work and technological expertise may still be in their infancy. As Sidak

and Singer (2004: 17–18) argue:

In seeking Mexico’s rapid elimination of its cross- subsidy policy, the U.S. Government ignores its own lengthy transition to cost- based pricing. Before the introduction of competition in most countries, telecommunications prices have typically embodied large cross- subsidies that refl ect public policy preferences. In particular, access to the network for residential customers has generally been priced below cost. The preponderance of network costs have been recovered through high usage rates for domestic and international long- distance calling . . . Fifteen years after the AT & T divestiture, the FCC was still concerned about too rapid a transition to cost- orientated rates . . . [Universal service funding mechanisms] would ease Mexico’s transition to a fully rebalanced rate structure. Without such measures, however, Mexico would be called upon to complete in a few years what the United States has failed to complete in nearly nineteen years.

It is undeniable that fostering market forces and technological develop-

ments has the potential to bridge the digital divide in developing countries.

The number of mobile subscribers, for example, is growing rapidly and

the increased use of wireless and satellite services also reduces reliance

on fi xed line provision (ITU–UNTCAD, 2007: 8). But huge problems

remain in developing countries and tele- density levels are only improving

marginally in rural and remote communities where access is limited or

non- existent and levels of technological skill are low. These private market

initiatives may never provide suffi cient coverage or maintain viability

in these unprofi table rural regions or to the very poor, in the absence of

cross- subsidies or signifi cant direct government funding (Shanmugavelan

and Warnock, 2004).



The use of competition provisions within international trade agreements

to mandate the implementation of ‘cost- oriented’ accounting rates and the

removal of cross- subsidies may ultimately prove detrimental to the inter-

ests of developing countries in key sectors such as telecommunications. As

Silbey (1997: 227–8) argues, ‘the conventional narratives of globalization

erode the possibilities of justice’.

Criticism was also directed at the WTO Dispute Panel for the manner in

which they dealt with the substantive competition law issues. The Reference

Paper does not defi ne ‘anticompetitive practices’. Those terms that are

defi ned, such as ‘major supplier’, apply to a much broader set of fi rms in

the telecommunications industry than those ‘in a dominant position’ as

identifi ed under competition law principles. The WTO Panel referred to

a dictionary defi nition of ‘anticompetitive’ as ‘actions that lessen rivalry

or competition in the market’. The Panel also referred to other secondary

documents, such as OECD recommendations which classed cartels as a

particularly pernicious form of anticompetitive conduct. Apart from

‘price- fi xing’, none of the forms of conduct subject to the action were

explicitly defi ned or prohibited in the Agreement and therefore arguably

were not subject to agreement by the parties. The competition provisions

in the Reference Paper therefore applied to much broader categories of

conduct than that regulated by competition law.

There are legitimate disputes among courts, legislators and competi-

tion agencies concerning the characterisation of anticompetitive conduct.

These are informed by diff ering views as to the economic theory to be

applied, the context of the particular market under investigation and

the political theory governing the relationship between the state and the

market. To ignore these issues and determine these terms by dictionary

defi nitions is problematic in an international agreement and raises real

questions as to whose competition law is being applied and in whose inter-

ests (Kariyawasam, 2007: 79–80).

While eff orts to negotiate a multilateral competition agreement may

have usefully exposed these shortcomings in the interpretation of the exist-

ing competition provisions within the WTO agreements, the manner in

which these issues were determined by the Dispute Panel raises stark warn-

ings for any future proposals concerning a global agreement. Developing

countries may have been right, in the wake of the Telmex decision, to be

wary of an international competition regime which may ultimately dimin-

ish their ability to prioritise domestic industrial policy over competition

concerns, including the right of monopolists to price discriminate and

provide cross- subsidies for distributional or other public purposes. For

example, as para. 7.244 of the Panel Report sets out, international com-

mitments made under the GATS ‘for the purpose of preventing a supplier



. . . from engaging in or continuing anticompetitive practices are . . .

designed to limit the regulatory powers of WTO Members’ (WTO Panel

Report, 2004).

II. The Extraterritorial Application of Competition Laws and the

Decision in F. Hoff man- La Roche Ltd v. Empagran

In the absence of a multilateral agreement on competition law, other inter-

national legal options, beyond the ‘soft law’ approach of the ICN, can be

harnessed in order to alleviate the eff ects of global cartels and other anti-

competitive behaviour by foreign fi rms in developing countries as they

seek to enact their own competition regimes, develop technical capacity

and strengthen enforcement.

While developed countries could, of course, be encouraged to do more

to eradicate export cartels, international eff orts to investigate and punish

participants in global cartels have increased considerably in recent years.

There have been expanded eff orts to coordinate the exchange of informa-

tion (although much of this information remains subject to commercial

confi dentiality), strengthen civil and criminal penalties, and implement

immunity and leniency programmes to encourage participants to come

forward with information.

These eff orts have positive spill- over eff ects for developing countries

as more international cartels are deterred, investigated and eliminated.

However, an equally likely eff ect of this increased scrutiny will be the

movement of these illegal activities and their anticompetitive impact to

developing countries where they are more likely to escape detection. As

Evenett (2007: 408) points out:

Failure to enforce a national cartel law can make a jurisdiction a safe haven for organizing regional or worldwide cartels, creating adverse knock- on eff ects for the nation’s trading partners. Evidence about the cartel’s formation and organi-zation can be stored in the safe haven without risk of seizure and being sent to competition agencies abroad.

Many have argued that greater use could be made of the extraterrito-

rial eff ect of competition laws in developed countries to deter and prevent

the pernicious eff ect of global cartels on foreign markets. Can victims of

international cartels, and other anticompetitive behaviour, sue in foreign

courts with more developed competition regimes to claim redress against

the harmful eff ects of this behaviour?

The US courts with the prospect of treble damages, criminalisation

and strong procedural remedies are very attractive for foreign victims of

anticompetitive conduct. The US antitrust provisions which apply to



‘commerce . . . with foreign nations’ have always had a strong extrater-

ritorial application and have been applied to any foreign conduct which

has a general domestic eff ect.13 The doctrine was given a statutory basis

in the Foreign Trade Antitrust Improvements Act 1982 (FTAIA) which

provides that the Sherman Act only applies to foreign conduct if (a) such

conduct has a ‘direct, substantial, and reasonably foreseeable eff ect’ on the

US market, and (b) ‘such eff ect gives rise to a claim under the provisions

of’ the Sherman Act.

In cases such as Hartford Fire Insurance Co. v. California the US

Supreme Court has generally applied the FTAIA to permit these foreign

actions notwithstanding the international law rules on comity which

require reciprocal deference to the sovereign interests of other countries.

These rules on comity have been construed narrowly and applied only

where there was a true confl ict between the domestic and foreign law. A

true confl ict was deemed not to exist if a person subject to regulation by

two statutes could comply with the laws of both.

More recently, however, the Supreme Court has construed the FTAIA

more narrowly and reasserted the importance of comity to limit the

extraterritorial application of US antitrust law and deny suit to foreign

plaintiff s. In F. Hoff man- La Roche Ltd v. Empagran SA foreign victims of

a global price- fi xing vitamin cartel brought an action before the US courts

for antitrust injury under section 1 of the Sherman Act, which prohibits

agreements in restraint of trade.

Vitamin manufacturers, which included US and other foreign com-

panies, had fi xed their prices over a number of years, earning estimated

global profi ts of US$9–13 billion (Klevorick and Sykes, 2007: 363). This

resulted in US and other competition agencies setting huge fi nes. An action

for damages was brought in the US by a class of plaintiff s which included

domestic US and foreign victims. Jurisdiction was clearly established for

the domestic US victims. The remaining foreign plaintiff s, who had suf-

fered their injuries outside the US market (namely in Ecuador, Ukraine,

Panama and Australia), had to establish their claim under the FTAIA.

It was clear that the fi rst part of the test (a) was satisfi ed: the global

cartel had an eff ect on the US domestic market. It was unclear, however,

whether the second part of the test (b) required that the plaintiff s’ injury

must stem from the US market eff ects, or whether jurisdiction over foreign

claims would lie so long as the conduct generating the eff ects was action-

able under the Sherman Act. The foreign plaintiff s, who had purchased

vitamins outside the US, argued that the infl ated price due to the cartel

13 United States v. Alcoa.



was the same conduct that injured US domestic commerce, so the second

part of the test was satisfi ed.

The DC Circuit court had held that where anticompetitive conduct

has the requisite eff ect on US commerce, foreigners who are injured

solely by that conduct’s eff ect on foreign commerce may sue under US

antitrust. On appeal, however, the US Supreme Court held that the

second part of the FTAIA test was not satisfi ed if they suff ered their

injuries outside the US market and independently from eff ects on the

domestic US market.

It was argued before the Court that the operation of global markets

means that the foreign plaintiff s would not have suff ered loss but for the

supra- competitive prices maintained in the US. The way in which global

markets are interdependent and the easy transportability of the product in

question (vitamins) means that the cartel could not raise prices in foreign

markets without raising them in the US and therefore the injury was not

independent of the cartel’s domestic eff ect.

However, Justice Breyer, who gave the judgment for the US Supreme

Court, relied on a narrow statutory interpretation of the FTAIA, stating

that Congress could not have intended to give a remedy for injuries suf-

fered abroad. The plaintiff s who purchased abroad have no cause of action

unless the challenged conduct’s domestic eff ect ‘gives rise’ to their claim,

which requires a direct causal relationship. The same global cartel caused

the high prices paid by the foreign and domestic plaintiff s, but the domes-

tic eff ects must cause the other. It was not enough that the injury had a

common cause with the US conduct. It was an independent foreign eff ect,

not one ‘derived from US domestic eff ect’.14

This is an example of the disjunction between law and economic rea-

soning which can arise in antitrust cases. The ‘substantial eff ect’ on US

commerce is determined by an acknowledgement of the anticompetitive

eff ects of cartel behaviour in raising prices above market price which gives

rise to the domestic plaintiff s’ action, enough to satisfy a ‘but for’ causa-

tion standard: in this way, the economic and legal arguments coincide. A

further legal argument of ‘insuffi cient causality’ and ‘proximate cause’ is

invoked to narrowly construe the statute to deny foreign plaintiff s who

have suff ered as a result of the same conduct, notwithstanding that it was

clearly caused by that conduct in economic terms. The reasoning fails to

recognise, however, the interdependent nature of global markets whereby

14 On remand for further inquiry into whether the plaintiff s’ damages were truly independent from the US market, the Court of Appeals dismissed the plain-tiff s’ claim: Empagran v. F. Hoff man- La Roche.



the concept of the eff ect in a ‘separate’ or purely ‘domestic’ market is often

meaningless.

Justice Breyer also invoked the international law rule of comity where

to give foreign plaintiff s an action could undermine, and fail to give due

deference to, the competition laws of foreign jurisdictions. Justice Breyer

stated that comity ‘helps the potentially confl icting laws of diff erent

nations work together in harmony – a harmony particularly needed in

today’s highly interdependent commercial world’ (164–5).

Yet, as Klevorick and Sykes (2007: 371) point out, this view does not

take into account an outcome which would maximise deterrence of global

cartels:

the Court never pauses to ask whether that high degree of commercial interde-pendence has any implications for the premise that the harmful foreign eff ects of the global vitamins cartel were independent of the adverse domestic ones.

The Supreme Court’s invocation of comity and deference to prosecu-

tions and private actions in foreign antitrust jurisdictions also does not

adequately account for developing countries where many of the harmful

eff ects of these cartels are felt. It was, in fact, established in the Empagran

case that countries that lacked competition agencies had higher over-

charges due to the cartel than those that had agencies (Clarke and Evenett,

2003: 692).15 The principles of international comity require the US to take

account of ‘the extent to which enforcement by either state can be expected

to achieve compliance’.16 While some competition regimes in develop-

ing countries such as Brazil have successfully prosecuted the vitamins

cartel,17 many other developing countries lack the evidential material,

resources or eff ectiveness to prosecute them and this ultimately leads to

global under- deterrence.

The Empagran decision may therefore be categorised as a victory for

international cartels where their global gains exceed those in the US

with particular adverse impact on developing countries. Should the

US Supreme Court have been more mindful of ‘global welfare’ in its

15 For a critique of the methodology used in this study however, see Bhattacharjea (2006: 305–6).

16 Timberlane Lumber Co. v. Bank of America (1976: 611–15).17 Decision of the Conselho Administrativo de Defesa Econõmica (CADE),

Administrative Proceedings No 08012.004599/1999- 18 (see http://www.cade.gov.br/ (accessed 11 November 2009)). Section 2 of the Brazilian Competition Act 2000 extends its jurisdiction to include ‘foreign acts that aff ect or may aff ect the Brazilian Territory’.



decision?18 As Eleanor Fox stated in her Testimony before the Antitrust

Modernization Commission:

We must contemplate maximizing world welfare . . . The national law gov-erning jurisdiction and remedies should be broadened so that, for example, national authorities in a jurisdiction with the greatest contacts or the largest consumer market can provide a forum in which smaller aff ected nations can be heard, can take account of outside harms, and can aff ord relief that covers those harms. (Fox, 2000: 8)

This is not an argument that the US courts should become some sort

of surrogate ‘global antitrust court’, because to do so would permit other

countries to free ride on the enforcement costs absorbed by the US. It

could also prove to be a disincentive for others to develop their own com-

petition expertise (Klevorick and Sykes, 2007: 379). It is also true that

when the US has tried in the past to extend its extraterritorial jurisdic-

tion to foreign cartels, international comity and blocking statutes were

invoked to prevent this (ibid: 390). Amicus briefs were also fi led by the US

Department of Justice and other nations, arguing that extensive extrater-

ritorial jurisdiction could interfere with their own antitrust enforcement

policies, especially immunity and leniency programs. Participants in

cartels, it is argued, are less likely to come forward if doing so may expose

them to multiple treble damage suits.19

But, perhaps more importantly, US competition agencies have no incen-

tive to prosecute or assist other competition agencies to prosecute anti-

competitive conduct where the detrimental welfare eff ects are external to

their domestic market. The conduct may also directly benefi t their domestic

markets. Export cartels clearly fall into this category as they enable small

domestic producers to gain access to the export market and the detrimen-

tal welfare eff ects are external to the exporting country. The incentive to

irradiate global cartels only arises when the negative net welfare eff ect of

the higher prices on domestic consumers exceeds the supernormal profi ts

earned by domestic fi rms which participate in the cartel. If the net welfare

detriment is on foreign consumers rather than domestically, the individual

18 Domestic eff ects versus foreign effi ciency gains and losses, and an argument that to exclude the foreign eff ects could be contrary to the Canadian international obligations of non- discrimination under NAFTA and GATT, were considered in the context of a Canadian merger decision in Commissioner of Competition v. Superior Propane Inc.

19 This possibility has been removed and now a successful leniency appli-cant cannot be subject to a claim for treble damages: Antitrust Criminal Penalty Enhancement and Reform Act 2004.



country may actually gain from the domestic fi rm’s participation in the

cartel through excess profi ts (Klevorick and Sykes, 2007).

Developed countries may also be disinclined to prosecute anti-

competitive practices which are external to their domestic welfare when

developing countries’ competition agencies lack the resources and techni-

cal skills to reciprocate with respect to the similar practices of their own

fi rms (Bhattacharjea, 2006: 310). Bhattacharjea notes that such ‘out-

sourced enforcement’ by developed countries could be obtained in return

for market- access concessions by developing countries, but also notes the

fatal asymmetry in the enforceability of this proposal. Violations of market- access commitments can be detected and proved with relative ease. But how can a developing country, which may not even be aware of the existence of a foreign cartel or lacks the evidence to prove it, establish before a WTO panel that the antitrust agency in the relevant country is not serious about investigat-ing it? (ibid: 313)

Even competition authorities in developing countries which are well

placed to prosecute this anticompetitive conduct are often constrained if

they require evidence within the exporting jurisdiction, or are dependent

on remedies only the exporting jurisdiction can impose because that is

where the assets or management are located (Elhauge and Geradin, 2007:

1012). A developing nation may also not want to pursue enforcement

against an international cartel if it does not want to discourage the cartel

from selling and investing in its country (ibid: 1014).

In Empagran it may ultimately have been the Supreme Court’s defer-

ence to the comity issues which led it to depart from its earlier, more liberal

approach to jurisdiction in these actions. Yet, at the same time, when the

court invokes comity it needs to ask the right questions and conduct the

right balancing in order to achieve optimal deterrence of global cartels,

including the disparity between the antitrust enforcement capacity of

developed and developing countries.20

20 The Supreme Court decision was followed by the Eighth Circuit of the US Court of Appeals in In re Monosodium Glutamate Antitrust Litigation (2007) to deny foreign victims of a cartel a remedy. In that case there was only an indirect connection between the domestic prices and the prices paid by the foreign appli-cants. The US prices were ‘not signifi cant enough to constitute the direct cause of the appellants’ injuries, as they constituted merely one link in the causal chain . . . While such an indirect connection may be enough to satisfy a ‘but for’ causation, it is too remote to satisfy the proximate cause standard . . . the Sherman Act’s deter-rence goal, although not without force, is unavailing in light of the dictates of the FTAIA and the considerations of comity’.



8. CONCLUSION

While developing and least- developed nations were opposed to the nego-

tiation of a multilateral agreement on competition law, it is not always

evident that such a regime would have been counter to their interests.

Greater eff orts to coordinate the detection and elimination of global

cartels, for example, would have been highly benefi cial to developing

countries where these cartels have a disproportionate impact. Negotiations

for an agreement may have also exposed the apparently unfair imposition

of anti- dumping duties on developing countries, and permitted them to be

placed on a sounder economic basis through convergence with competi-

tion principles.

Developing countries may have been right however, in the wake of the

Telmex decision, to be wary of an international competition regime which

may apply dictionary and non- consensual defi nitions of ‘anticompetitive

conduct’ to override their attempts to achieve particular public purposes

through domestic industrial policy. Another reading of the Telmex deci-

sion, of course, may be that international rules can assist domestic govern-

ments to resist and control powerful private interests.

It is also true that markets in developing and least- developed coun-

tries often bear the brunt of anticompetitive practices (both global and

domestic) which extract monopoly rents and diminish competitive rivalry,

resulting in productive and allocative ineffi ciencies in crucial infrastructure

industries. While competition policies may be more directly linked to ‘pro-

market’ policies, these anticompetitive practices can have a real impact

on the price of essential goods and services with clear and detrimental

distributional outcomes.

Domestic competition laws which are therefore mindful of the com-

plexities of markets in these developing and least- developed countries can

have a positive impact on fostering enterprise and providing a basis for the

‘freedom to compete’. The suggested model is one which rejects notions of

a diminished role for the state and ‘self- correcting’ markets, as commonly

associated with the US model of competition law. At the same time it is

important to ensure that competition agencies do not become subject to

regulatory capture by public or private interests and that these laws do not

fl ounder or become inoperable through too many discretionary conces-

sions and exceptions.

The international community can also do more, whether through the

ICN or other initiatives, to assist with greater technical advice and capac-

ity building for domestic competition regimes in developing countries.

Developed countries may also assist by outlawing export cartels and coop-

erating more readily with foreign competition agencies for the exchange of



information on international cartels which, at present, is severely restricted

by requirements related to commercial confi dentiality.

Developed countries could also apply more liberal standing rules to the

extraterritorial application of their competition laws to permit foreign

plaintiff s the right to sue in their courts, and competition agencies could

increase their enforcement eff orts against anticompetitive action with

cross- border eff ects. But there are major obstacles to these proposals. Such

actions permit foreign countries to ‘free ride’ on the enforcement capabili-

ties of developed countries. Yet, perhaps more importantly, these agencies

have no incentive to prosecute or assist other competition agencies to

prosecute anticompetitive conduct where the detrimental welfare eff ects

are external to their domestic market (Empagran).

This is an argument for a more concerted international eff ort to pursue

the detrimental welfare eff ects of cross- border transactions through agen-

cies such as the ICN. It is also an argument for domestic courts and

competition agencies in their interpretation of extraterritoriality and the

international rules on comity to understand that ‘global welfare’ is often

inextricably linked to ‘domestic welfare’ in global markets.


283

13. Does the globalization of anti- corruption law help developing countries?

Kevin E. Davis*

1. INTRODUCTION

What role do foreign institutions play in combating political corruption in

developing countries? This chapter attempts to shed light on this question

by examining the impact on developing countries of the elaborate transna-

tional anti- corruption regime that has emerged in recent years. The cen-

trepieces of that regime are dedicated treaties such as the Organisation for

Economic Co- operation and Development’s Convention on Combating

Bribery of Foreign Public Offi cials in International Business Transactions

(‘OECD Convention’) and the United Nations Convention against

Corruption (‘UN Convention’). However, the regime also encompasses a

range of other legal instruments, including the anti- corruption policies of

international fi nancial institutions, components of the international anti-

money laundering regime, international norms governing government

procurement, and private law norms concerning enforcement of corruptly

procured contracts.

The idea that foreign legal institutions can step in and be of assist-

ance when their domestic counterparts are found wanting, which some

might call a form of legal globalization (others might call it ‘institu-

tional piggy- backing’), is a familiar one in modern legal thought. For

instance, the international investment regime is typically justifi ed by refer-

ence to the idea that investor–state arbitration can usefully compensate

* Beller Family Professor of Business Law, New York University School of Law. I am grateful for comments on an earlier version from Indira Carr, Robert Howse, James Jacobs, Guillermo Jorge, and Benedict Kingsbury, as well as Julio Faundez and Celine Tan (the editors). I am also grateful for the support of the Filomen D’Agostino and Max E. Greenberg Research Fund at NYU School of Law.



for the shortcomings of national courts in capital- importing countries.

International commercial arbitration is often justifi ed on similar grounds.

Along the same lines, Dammann and Hansmann (2008) have proposed

that countries with strong courts should allow those courts to assert juris-

diction over disputes to which they have no tangible connection in order

to enable litigants in developing countries (and elsewhere) to break the

monopolies enjoyed by dysfunctional local courts. Coff ee (1999) makes

the case for allowing issuers from countries with weak securities regulators

to rely on foreign securities laws. Finally, proponents of extraterritorial

application of labour and environmental laws argue that this is the best

means of securing protection for the inhabitants of countries with inad-

equate labour and environmental regimes.

The idea of calling on foreign legal institutions to buttress domestic

institutions is particularly appealing when what is at stake is the very

integrity of the state. Political corruption, which I will defi ne broadly – if

somewhat vaguely – as the misuse of public power for private gain, com-

promises the integrity of the state and is widely viewed as a signifi cant

obstacle to development (see generally Rose- Ackerman, 1999). At the

same time, the advent of globalization has made political corruption a

transnational phenomenon. We live in a world of structural adjustment

programs, multinational corporations, international supply chains, inter-

national wire transfers and daily inter- continental fl ights; it is a world in

which offi cials’ incentives and opportunities to engage in corruption are

shaped as much by the politics of international fi nancial institutions as

by local politics, bribes can be paid by foreign as well as local actors, and

the proceeds of corruption can be moved overseas at a moment’s notice.

Under the circumstances it seems reasonable to believe that if there is

any fi eld in which the activities of foreign legal institutions can benefi t

developing countries it is in the fi eld of anti- corruption law (for specifi c

recommendations, see ibid: 177–97). In other words, globalization of

the causes of corruption may demand globalization of the institutional

responses.

At the same time, it is important to recognise that there are powerful

objections to the idea of relying on foreign legal institutions to perform

roles that might, at least in principle, be played by domestic ones. Framed

in general terms, those objections fall into three main categories.

The fi rst category of objections focus on the motivations that are likely

to drive the behaviour of foreign institutions and the possibility that they

may be less than pure. The concern is that foreign institutions and the

actors who inhabit them will generally tend to be indiff erent or even hostile

to the welfare of distant populations and so will not be reliable guardians

of those populations’ interests. The strongest versions of these arguments


The globalization of anti- corruption law 285

draw on colonial experiences in which international law and the legal

institutions of colonisers were expressly designed to facilitate exploitation

of colonial populations for the benefi t of colonisers.

Objections in the second category focus on the potential outcomes of

relying on foreign legal institutions. They represent elaborations on the

theme that, even if they are off ered with the best of intentions, the legal

solutions provided by foreign institutions may be incompatible with local

interests. To begin with, foreign institutions may refl ect foreign values that

are incompatible with local values. Alternatively, foreign institutions may

rely on the presence of complementary institutions that are missing in the

new context.

A third rather disparate set of objections are united by concerns about

the longer- term development of societies that rely heavily on foreign legal

institutions – and, in particular, their long- run institutional development.

The concern is that foreign institutions will serve as substitutes for dis-

placed domestic institutions that may, even if only over time, off er equal

or even superior performance. When scratched these objections often turn

out to be little more than the idea that local institutions are inherently

superior to foreign ones. But sometimes they rest on more secure theoreti-

cal foundations. Consider, for example, Hirschman’s (1970) well- known

analysis of the potential trade- off s entailed in permitting the clients of an

organisation to ‘exit’ its sphere of infl uence as opposed to relying on their

‘voice’ to motivate organisational change. In this context the relevant

argument would be that permitting the members of a society to exit local

legal institutions and rely on foreign ones may reduce their incentive to use

‘voice’ to lobby for improvements in local institutions. A second basis for

concern about displacing local institutions relies on another insight from

economics, namely, the value of learning- by- doing. The argument here is

that, if given enough opportunities to address challenging problems, over

time local institutions will acquire increasing expertise and legitimacy, to

the point where, eventually, their performance may surpass that of foreign

institutions.

This chapter begins with an overview of the transnational regime that

governs the extent to which foreign institutions participate in preventing,

sanctioning, or providing redress for corruption in developing countries.

The next two sections set out the potential advantages and disadvantages

respectively of permitting foreign institutions to operate in this fashion.

The subsequent section surveys the evidence supporting those theoretical

claims. The conclusion emphasises the need for concerted eff orts to collect

data bearing on the validity of one potential disadvantage, namely the

possibility that the activities of foreign institutions might undermine the

development of local institutions.



2. OVERVIEW OF THE TRANSNATIONAL ANTI- CORRUPTION REGIME

How international and transnational law came to be concerned with cor-

ruption is now well documented (see, for example, Abbott and Snidal,

2002; Schroth, 2002).1 It began in the United States, where investiga-

tions into ‘dirty tricks’ by the administration of President Richard Nixon

uncovered evidence that American multinational corporations were rou-

tinely making illicit payments to foreign public offi cials out of secret slush

funds. In response, the US Congress passed the Foreign Corrupt Practices

Act (FCPA). The most prominent feature of the FCPA was a prohibition –

backed by stiff criminal and civil penalties – on payments to foreign public

offi cials in order to assist in ‘obtaining or retaining business’. Curiously,

the FCPA also explicitly excludes ‘facilitation payments’ – defi ned as

payments made to facilitate or expedite performance of a ‘routine govern-

mental action’ – from the scope of its prohibition on bribery (15 U.S.C. §

78dd- 1). Just as important but somewhat less prominent were the FCPA’s

recordkeeping obligations, which require public companies to keep accu-

rate books and records, and requirements to maintain internal controls

designed to ensure the integrity of those books and records (15 U.S.C. §

78m(b)(2)).

The FCPA is, of course, a creature of domestic law. Anti- corruption

norms inspired by the FCPA became part of international law as a result

of a campaign that involved a number of constituencies (Abbott and

Snidal, 2002). To begin with, the US government and fi rms subject to the

FCPA shared an interest in seeing other countries adopt legislation similar

to the FCPA in order to level the playing fi eld; in other words, to ensure

that the FCPA’s constraints would not place US fi rms at a competitive

disadvantage. Another important actor was Transparency International,

a non- governmental organisation established in 1993 and dedicated to

combating corruption. Transparency International, through both its

international organisation and various national chapters, lobbied for the

adoption of anti- corruption laws both at the domestic level and in interna-

tional organisations. In the 1990s the World Bank under the leadership of

James Wolfensohn also joined the fi ght against corruption, and it adopted

1 For practical reasons the focus here is on legal instruments that are spe-cifi cally targeted at corruption. A more comprehensive analysis would include other legal instruments such as bilateral investment treaties or austerity programs imposed by international fi nancial institutions that exert signifi cant infl uence over the scope and nature of state action in developing countries and thereby, at least arguably, infl uence the nature and prevalence of corruption.



an anti- corruption policy in 1997. These actors were joined by a range of

human rights activists and development experts from both developed and

developing countries who were concerned about the corrosive eff ects of

corruption in many parts of the world. In fact, the global anti- corruption

campaign displays many of the characteristics of a mass movement, very

much like the movements that campaigned for the abolition of the slave

trade around the beginning of the nineteenth century and which continue

to campaign for initiatives such as fair trade, Third World debt relief, and

respect for various sorts of human rights.

The anti- corruption movement began to bear fruit in the late 1990s.

The fi rst and most notable success was the conclusion in 1997 of the

OECD Convention. There were also advances at the regional level, in

the form of anti- corruption conventions produced by the African Union, the

Council of Europe and the Organization of American States. Meanwhile,

international fi nancial institutions such as the World Bank, the regional

development banks and the International Monetary Fund all adopted

anti- corruption policies. Developing countries also came under consider-

able pressure from international fi nancial institutions and other actors to

adopt international norms concerning government procurement, includ-

ing those set out in instruments such as the UNCITRAL Model Law on

Procurement of Goods, Construction and Services and the World Trade

Organization’s Agreement on Government Procurement (McCrudden

and Gross, 2006). It is also signifi cant that in 2003 the Financial Action

Task Force decided to include ‘corruption and bribery’ among the predi-

cate off ences to money laundering, thereby instantly creating pressure for

countries to bring their elaborate anti- money laundering regimes to bear

against corruption (Financial Action Task Force, 2003).2 Activity at the

global level culminated in 2003 with the adoption of the UN Convention.

The OECD Convention and most of the other anti- corruption conven-

tions referred to above focus on encouraging states to adopt domestic

legislation like the US FCPA prohibiting bribery of foreign public offi -

cials; prohibiting laundering of the proceeds of transnational bribery;

ensuring that bribes are not tax deductible; and cooperating with foreign

governments in investigating and prosecuting bribery through both extra-

dition and mutual legal assistance. The regional conventions also recom-

mend various measures to be taken against domestic bribery, including

2 Individual members of FATF began to express concern about launder-ing of the proceeds of corruption somewhat earlier. See, for example, Financial Action Task Force (1999): ‘Written submissions from some of the members also mentioned an increase in the number of cases in which laundering was related to offi cial corruption or the funding of international terrorism’ (para. 43).



preventive measures such as transparency in public administration, codes

of conduct for civil servants, and requirements that public procurement

processes be open, competitive and accountable.

The UN Convention covers much of the same ground but goes some-

what further by encouraging states to criminalise the solicitation or

acceptance of bribes by foreign public offi cials (as opposed to focusing

exclusively on the bribe- payers).3 The UN Convention also contains pro-

visions requiring parties to cooperate in the recovery of assets that qualify

as either proceeds or instruments of corruption, and in collecting compen-

satory damages for harm caused by corruption (Arts 54–9).

The anti- corruption policies of the international fi nancial institutions

focus on ensuring that the proceeds of their grants or loans are not used

for corrupt purposes. Those policies include procedures for cancelling

agreements with fi rms or governments found to have engaged in improper

activity and disqualifying guilty fi rms from receiving further funds. In

addition, though, the international fi nancial institutions have pressed for

the adoption of international norms concerning government procurement

that are designed to prevent all forms of corruption. For instance, the

Agreement on Government Procurement generally requires open, compet-

itive bidding; acceptance of the lowest qualifi ed tender; the establishment

of procedures for bringing challenges to the procurement process before

an independent tribunal; and abandonment of discrimination in favour of

local suppliers.

All of this activity in the areas of public international law and domestic

criminal law has begun to have an infl uence on private law. In one remark-

able decision, after an extensive review of the international law on point,

a distinguished arbitral panel declared that condemnation of bribery is a

provision of international public policy that is automatically incorporated

into the law that governs private contracts.4

For present purposes the most striking feature of the regime that has

been constructed through these various initiatives is the signifi cant role it

allows foreign legal institutions to play in both preventing and respond-

ing to corruption – especially bribery – involving local public offi cials. In

particular, the foreign institutions may

press the government to adopt measures designed to minimise ●

opportunities for corruption;

3 UN Convention: Art. 16(2). The UN Convention also goes beyond the other conventions by extending to corruption of private actors, a topic that is beyond the focus of this chapter. See UN Convention: Arts 12, 21 and 22.

4 World Duty Free v. Kenya



impose criminal liability for paying bribes to local public offi cials; ●

impose civil liability, including potential cancellation of contracts, ●

for paying bribes to local public offi cials;

impose administrative penalties for paying bribes to local public ●

offi cials;

impose criminal or civil liability for laundering proceeds of ●

bribery;

impose criminal liability for soliciting or accepting a bribe; ●

impose recordkeeping and reporting obligations on potential payers ●

of bribes as well as fi nancial intermediaries and other actors who

deal with them;

extradite suspected bribe- payers; ●

provide mutual legal assistance in the course of investigations of ●

corruption;

assist other actors in recovering assets used in or derived from ●

corruption, or which are required to compensate victims of corrup-

tion.

This regime clearly invites countries aff ected by corruption, especially

when it takes the form of transnational bribery, to look to foreign legal

institutions for assistance. The question now becomes: should developing

countries accept the invitation?

3. POTENTIAL ADVANTAGES OF INVOLVING FOREIGN LEGAL INSTITUTIONS

The theoretical arguments in favour of allowing foreign institutions to

play a role in combating corruption in developing countries are straight-

forward and reasonably compelling. They all stem from the proposition

that foreign legal institutions may bring to the table valuable resources

that local institutions are unable to match.

To begin with there is the obvious point that relying on foreign institu-

tions allows local actors to save money. Investigating and prosecuting

white- collar crime can be expensive in terms of both money and human

capital, especially when defendants can use their ill- gotten gains to hire the

best lawyers and accountants money can buy to help cover their tracks and

defend their activities. Foreign actors do not typically insist on payment

for these services and so no poor country can aff ord to ignore the eco-

nomic value of this kind of assistance.

It is also important to understand that foreign institutions may provide

not only additional resources but resources that local institutions cannot



obtain at any price. The most obvious example of such a resource is the

ability to deploy coercive force in the foreign territory. Foreign courts, law

enforcement agencies and other branches of the state typically regulate the

use of force within their territory and so may be indispensable in eff orts to

arrest individuals or seize assets located overseas.

Another consideration is that foreign legal institutions may have access

to superior information. Information about corporate misconduct tends

to fl ow from fi rms’ employees, regulators, competitors or fi nanciers. With

the advent of globalization, those sources can just as easily be located

outside the jurisdiction of the bribe- recipient as inside. Courts and law

enforcement agencies in a bribe- recipient’s jurisdiction are less likely to

have access to foreign sources than the courts and law enforcement agen-

cies in the jurisdictions where the employees, and so on, are located. A

related point is that foreign institutions may have superior expertise, either

across the board or in relation to specifi c aspects of the investigation or

prosecution of specifi c forms of misconduct. For instance, foreign pros-

ecutors may possess special expertise in forensic accounting, or they may

have special insight into the tactics that will induce local whistleblowers to

come forward.

Last, but certainly not least, is the possibility that foreign institutions

may have greater integrity. If corruption has infected local legal institu-

tions then foreign institutions may off er the only viable responses. Of

course a cynic might ask why anyone should expect foreign legal institu-

tions to be less corrupt than local ones. As a theoretical matter there are

several possible answers. One response is that some foreign actors may be

inherently less corruptible – whether because they have been selected more

carefully or because they are subject to more eff ective schemes of monitor-

ing, rewards and punishments. A second response to the cynic is that, even

if they are no less corruptible than local institutions, foreign institutions

are less likely to have been corrupted in a way that impairs their ability to

deal with the local problem. It seems plausible that local actors will fi nd it

relatively diffi cult to establish illicit relationships with foreign legal institu-

tions that allow to them to subvert the course of justice.

4. POTENTIAL DISADVANTAGES OF INVOLVING FOREIGN LEGAL INSTITUTIONS

Although there are many plausible advantages that come with relying, at

least to some extent, on foreign legal institutions to address the problem

posed by corruption, there are also some plausible disadvantages. The

disadvantages fall quite neatly into the general categories used above to



organise the arguments against getting foreign legal institutions involved

in preventing, deterring or providing redress for domestic problems: indif-

ference, incompatibility and institutional displacement. It is convenient to

begin by spelling out the arguments in theoretical terms and to hold off for

a few more pages before turning to the evidence.

I. Indiff erence

At fi rst glance the argument that draws upon concerns about indiff erence

seems like a simple application of the idea that foreign actors will gener-

ally act in accordance with their self- interest. The argument would be that,

even if they derive some benefi t from paying lip service to the fi ght against

corruption, self- interested foreign institutions will not dedicate their

resources to combating corruption in developing countries because they,

and the societies to which they belong, receive no material benefi t from

doing so.5 However, this argument rests on two contestable premises. The

fi rst premise is that foreign institutions are motivated by selfi sh material

interests. But what if foreign actors are motivated by values rather than

interests? The question of what motivates state behaviour is the subject of

a raging debate in international relations and the right answer is unlikely

to be clear cut. Moreover, in many cases the individual state is not the

relevant actor. In practice the individuals or organisations that form

sub- components of a state’s legal system often have substantial amounts

of autonomy and in many cases there is no reason to presume that their

actions will be motivated or guided by their home state’s material inter-

ests. In other cases, the relevant actors are international organisations or

non- governmental organisations, which also often operate autonomously

from states.

The second contestable premise is that combating corruption of public

offi cials in developing countries is incompatible with foreign states’ self-

interest. This claim ignores the fact that sometimes foreign states have a

direct economic interest in combating corruption. For instance, if only

because of the diffi culty of enforcing corrupt transactions, bribery is

often an expensive and unreliable way of obtaining the services of foreign

public offi cials (Davis, 2002). The claim that foreign states have no inter-

est in combating corruption in developing countries may also ignore the

reality of the incentives created by international interdependence. Perhaps

enlightened states perceive an interest in helping to eradicate political

5 For a considerably more sophisticated version of this argument, see Reisman (1979).



corruption in societies with which they share goods, capital, people, ideas

and culture.6 Or perhaps they see profi t in helping other societies to diag-

nose their corruption problems so as to boost demand for anti- corruption

consulting services and technology (Rajagopal, 1999: 505).

Cutting in the other direction, in favour of the indiff erence argument, is

another complication, namely the distinction between indiff erence on the

part of individual states and collective indiff erence. Even states that have

some sort of motivation to dedicate resources to combating corruption in

the developing world have an incentive to free- ride on the eff orts of others.

In other words, even if states collectively have an interest – whether based

on moral or material considerations – in contributing to anti- corruption

eff orts, individual states may not have any interest in stepping up to the

plate.

Taking these considerations into account suggests that the most plau-

sible version of the indiff erence argument is that foreign actors will mani-

fest selective indiff erence in the fi ght against corruption in the developing

world. So, for instance, states may focus on combating bribery as a means

of obtaining legitimate government contracts in jurisdictions whose eco-

nomic development they consider uniquely important, while turning a

blind eye to bribes paid to obtain otherwise- unobtainable goods such

as illegal logging concessions in jurisdictions which are of less strategic

importance or in which other states have equally strong interests (Davis,

2002).

II. Incompatibility

A second set of arguments against relying on foreign institutions’ anti-

corruption eff orts is that those eff orts may be incompatible with local

needs or desires. Or to put it another way, the response to the claim that

foreigners bring invaluable resources to the table in the fi ght against cor-

ruption is that those resources either may not be valued by local actors or

may not be deployed in ways which, on balance, benefi t the local popula-

tion.

One form of incompatibility stems from a clash of values: foreign actors

may wish to impose harsh penalties on activity that local actors either

would not condemn or would not condemn very severely. When values

confl ict in this fashion, respect for self- rule and cultural diversity arguably

6 Edmund Burke presented an early example of this argument in his eff orts to impeach Warren Hastings for corruption while serving as Governor- General of Bengal (see Ala’i, 2000; Pavarala, 2004).



weighs against foreign intervention. This is the argument that Edmund

Burke once dismissively referred to as ‘geographical morality’.7 Steven

Salbu (1999), for example, suggests that campaigns against transnational

bribery risk degenerating into a form of moral imperialism. He acknowl-

edges the fact that by all accounts bribery is universally condemned but

argues that the meaning of bribery in any given context can be subjective

– one man’s culturally appropriate gift may be another man’s morally

reprehensible bribe – and the views of locals and foreigners may diverge

systematically.

Foreigners’ anti- corruption eff orts may also be incompatible with the

material interests, as opposed to the moral values, of local actors. This

problem stems from the fact that many aspects of the transnational anti-

corruption regime, including those which punish fi rms for paying bribes

to foreign public offi cials, tend to discourage fi rms from doing business

in countries with corrupt offi cials. Cutting off those countries’ access to

trade and investment obviously threatens to undermine their development

prospects (Sparling, 2009).

Of course anti- corruption advocates hope that the economic incentive

created by the threat of economic isolation, together with the ideological

pressure generated by international organisations, will encourage corrupt

states to take steps to reduce corruption. Sceptics worry that the cures

might be worse than the disease. Some scholars claim that the interna-

tional anti- corruption campaign threatens to work fundamental and

potentially pernicious changes in relationships between state and societies

in developing countries (Kennedy, 1999; Rajagopal, 1999). For example,

one commonly prescribed ‘cure’ for corruption is to reduce the number of

opportunities public offi cials have to abuse their power. This can be done

by reducing the scope of offi cials’ authority, which may in turn require

reducing the extent of state control over the economy (Klitgaard, 1988).

The concern is that this kind of anti- corruption strategy will indirectly

weaken and delegitimise the kind of developmental state that (some would

argue) is so desperately needed in poor countries in favour of a night-

watchman state that eschews excessive ‘intervention’ in the economy.

Ironically, there is also reason to be concerned that anti- corruption

strategies will unduly enhance state power. If we leave aside the idea of

reducing the extent of state intervention in the economy, the most intuitive

7 The reference is to an argument off ered by Warren Hastings in his defence against Burke’s eff orts to impeach Hastings before the House of Lords for engag-ing in acts of corruption while he was Governor of Bengal. For accounts of this aff air, see Ala’i (2000) and Pavarala (2004).



anti- corruption strategy is to enhance surveillance and increase penalties.

The problem is that, in addition to curbing corruption, this may serve

to bolster the authority of otherwise undesirable leaders or factions and

permit violations of civil liberties (Rose- Ackerman, 1999: 207–9). And

even if paying more attention to corruption does not involve repression,

any increase in the amount of eff ort a society devotes to analysing and

controlling corruption may reduce public bodies’ ability to pursue other

public purposes (Anechiarico and Jacobs, 1996). Crackdowns and zero-

tolerance approaches can even be counter- productive if, for example,

they discourage actors involved in corruption from coming forward with

information that can be used to prosecute other actors (Davis, 2009).

Alternatively, foreign- supported crackdowns that focus on one form of

corruption to the exclusion of others may simply lead to increased levels

of the forms subject to less scrutiny. Finally, the eff ects of drawing atten-

tion to corruption can be particularly perverse if nothing can be done to

eliminate it, in which case the main eff ect will be merely to undermine the

legitimacy of the state in question.

The apparent contradictions between these arguments – foreign insti-

tutions may either weaken or strengthen the state – are consistent with

the more basic proposition that any particular set of anti- corruption

resources may be valuable in the context of one society but not in another.

One straightforward reason why the impact of the transnational anti-

corruption regime may vary is because the activities it targets pose less of a

threat to some societies than to others, perhaps because the eff ectiveness of

domestic institutional substitutes varies across societies. Alternatively, the

consequences of adopting a given legal institution may depend on the pres-

ence of some complementary feature of the society, that is to say, a feature

that enhances the value of the institution in question. In the absence of

that complementary feature, the institution may have little value, and may

even be harmful. For example, in some jurisdictions allowing local actors

to use foreign courts to pursue allegations of corruption may be useful

because there are institutional mechanisms in place to ensure that the

allegations are well- founded. The impact would be diff erent though in a

society in which local politicians are free from any meaningful constraints

on their ability to use legal proceedings to pursue political vendettas. In

that setting it is not obvious that the international community ought to be

helping to expand the local politicians’ arsenal.

III. Institutional Displacement

The arguments in favour of permitting foreign institutions to address cor-

ruption in developing countries include claims that foreign institutions



are simply more competent than local institutions in the sense that they

possess superior integrity or expertise. The idea of allocating responsibility

according to relative institutional competence presumes that institutional

competence is an exogenous variable in the analysis. In other words, it

presumes that institutional competence is not infl uenced by the allocation

of responsibility. The objection is that institutional quality may actually

be endogenous.

This objection rests on the premise that foreign institutions can serve as

substitutes for domestic institutions. That is to say, the greater the extent

to which foreign institutions become involved in combating corruption,

the fewer the benefi ts to be derived from the eff orts of domestic institu-

tions. For example, if American forensic accountants can be relied on to

investigate cases of transnational bribery involving public offi cials from

Country X, there will be little benefi t to Country X in building up local

forensic accounting capacity.

So how might the use of foreign institutions as substitutes for domestic

institutions diminish the competence of the latter? Hirschman’s claim that

permitting people to exit an institution generally reduces their incentives

to exercise voice seems directly applicable here. Suppose that victims of

corruption could rely on foreign police forces, prosecutors, lawyers, and

courts to investigate, prosecute and adjudicate complaints of bribery and

to levy criminal or civil sanctions. In that case, why would those victims

invest any eff ort in complaining about or pressing for the improvement of

local courts, and so on? This may not be a problem if the foreign institu-

tions are a perfect substitute for local institutions. But suppose that the

foreign institutions only serve the needs of a subset of the local popula-

tion, perhaps only people – such as foreign investors – who are victimised

by transnational bribery as opposed to corruption with no international

aspect. Suppose that the local prosecutors and courts would serve both

constituencies. Suppose that the voices of victims of local corruption

are too weak to prompt change and the guardians of local institutions

are indiff erent to the prospect of losing jurisdiction over cases involving

transnational bribery. In these circumstances it is quite plausible that

permitting foreign institutions to respond to corruption will retard the

development of local institutions.

A separate argument can be made that foreign institutions may prevent

local institutions from learning- by- doing. This argument leads to the

same conclusion as the argument about the deleterious eff ects of enabling

exit from local institutions but proceeds from a diff erent starting point.

The premise of the learning- by- doing argument is that local institutions

improve by experience rather than as a result of pressure from vocal

constituents. The intuition is that professionals such as judges, lawyers,



police offi cers and accountants, as well as the organisations to which they

belong, may need to cut their teeth on at least a few cases before they can

be expected to perform at the same levels as more experienced foreign

institutions. On this view, the fact that at some point in time local legal

institutions lack expertise or integrity may be a consequence rather than a

cause of their disuse. To the extent that victims of corruption can rely on

foreign lawyers, prosecutors, courts and police forces to respond to their

claims, local institutions will face diminished opportunities to acquire the

requisite experience. This is sub- optimal whenever the long- term benefi ts

of enhancing the quality of local institutions would outweigh the costs

borne by victims who are poorly served while local institutions are in the

process of acquiring expertise. Again, the conclusion is that limiting the

role that foreign legal institutions play in combating corruption may, over

time, better serve the interests of local actors.

Of course, in some cases it will be reasonable to conclude that foreign

institutions serve as complements to local institutions, not substitutes. In

other words, the greater the extent to which foreign institutions are involved

in combating political corruption, the greater the benefi ts a country will

derive from domestic institutions’ anti- corruption eff orts. In these situa-

tions the fl ip sides of the arguments set out above suggest that the involve-

ment of foreign institutions will increase the quality of local institutions.

For example, the fact that foreign institutions are willing to investigate

fi nancial fl ows passing through their jurisdictions and to assist in recovery

of misappropriated funds will tend to increase the benefi ts to a developing

country of initiating proceedings against corrupt actors and, by extension,

of building local institutions capable of initiating such proceedings. The

competence of those local institutions may very well increase as they attract

the critical attention of local constituencies and accumulate experience.

5. EVIDENCE

It is all well and good to list theoretical claims about the advantages and

disadvantages of a particular legal regime, but when the regime in ques-

tion has been in place for a number of years it seems reasonable to ask

whether there is any supporting evidence. It is not possible at this point

to undertake a comprehensive analysis of the impact of the transnational

anti- corruption regime on developing countries. Even if space would

permit it, the available data would not. Canvassing the available evidence

will, however, help us to develop tentative views about some of the theo-

ries outlined above and to identify areas in which further data collection

and analysis is warranted.



I. Evidence of Advantages

The good news about the transnational anti- corruption regime begins

with the fact that it is being used. The clearest indications are that a

number of large multinational fi rms have been successfully prosecuted

by US and European authorities for paying bribes to public offi cials in

developing countries. In the most high- profi le proceedings, Siemens AG

and three of its affi liates paid fi nes or penalties totalling over $1.7 billion

to authorities in the United States and Germany, and the World Bank, to

settle allegations that for over a decade it had paid substantial bribes to

offi cials in countries including Argentina, Bangladesh, Iraq and Venezuela

(US Department of Justice, 2008; World Bank Group, 2009). Moreover,

since 2001 the US Department of Justice has made visible commitments to

strengthen its enforcement of the FCPA (US Department of Justice, 2009:

31). In addition, there have been some encouraging successes in proceed-

ings that have sought to use foreign courts to recover assets from corrupt

public offi cials such as Sani Abacha (Basel Institute on Governance, 2007)

and Frederick Chiluba.8

There is also evidence that at least one prominent component of the

transnational anti- corruption regime, the OECD Convention, is having a

deterrent eff ect. Cuervo- Cazurra (2008) presents a statistical study which

fi nds that for countries which had implemented the OECD Convention,

investment fl ows became more sensitive to corruption in the sense that

more corrupt countries were more likely to experience diminished invest-

ment fl ows. These fi ndings are broadly consistent with the fi ndings of the

OECD Working Group on Bribery, which the OECD Convention charges

with performing regular reviews of the parties’ compliance (OECD

Convention: Art. 12 and associated commentary). In 2006 the Working

Group on Bribery reported on the 21 Phase 2 evaluations that had been

conducted by the end of 2005 (OECD, 2006b). The report enumerated

many defi ciencies in parties’ implementing legislation – defi ciencies which,

taken as a whole, call into question their commitment to the objectives of

the Convention (more on this below). On the other hand, the Working

Group reported that awareness of anti- corruption legislation among rep-

resentatives of large multinational companies operating in those countries

was ‘acceptable’ and that many of the companies had adopted codes of

conduct or codes of ethics that addressed corruption (OECD, 2006b:

128).

If it is true that having foreign legal institutions combat corruption is

8 Attorney General of Zambia v. Meer Care and Desai.



advantageous to developing countries, the evidence might take the form

not only of improved deterrence but also improvements in the eff ective-

ness of local institutions as they obtain access to greater resources and

are exposed to the infl uence of institutions with relatively high levels of

integrity. Only a handful of countries that even arguably qualify as devel-

oping countries are parties to the OECD Convention and, aside from the

data that has been compiled on the eff ects of the Convention on its parties,

there does not appear to be any particularly systematic examination of the

extent to which the transnational anti- corruption regime has infl uenced

the eff ectiveness of local legal institutions.9 However, there are clearly

instances where the transnational anti- corruption regime has served to

enhance the eff ectiveness of anti- corruption institutions in developing

countries. For example, in Kenya, pressure from foreign donors and

lenders clearly drove the adoption of new anti- corruption legislation. At

one point the Attorney General indicated that anti- corruption legislation

had to be vetted by the International Monetary Fund before being submit-

ted to either Cabinet or Parliament (Kibwana et al., 2001). Carr (2009)

reports that donors have played a similar role in Tanzania. Meanwhile,

the accession process has allowed the European Union along with other

foreign actors to play a signifi cant role in encouraging legal actors in

South Eastern Europe and the Baltic states to invest in combating corrup-

tion (Smilov, 2009: 96–9; Dahl, 2009).10

II. Evidence of Indiff erence

Although there is some evidence that the transnational anti- corruption

regime has been successfully put into operation, there is also a fair amount

of evidence that local actors who look to foreign institutions for assistance

in combating corruption are often met with indiff erence. This is especially

true if they look beyond the United States, which generally appears to

be an exceptionally diligent participant in international anti- corruption

eff orts.

The indiff erence of foreign institutions can be manifested in a number of

ways. To begin with, foreign countries may be reluctant to take the steps

9 The 38 parties to the OECD Convention include seven countries that are not members of the OECD, namely Argentina, Brazil, Bulgaria, Chile, Estonia, Slovenia and South Africa. It is also worth noting that the OECD members include a few relatively poor countries such as Mexico (OECD, 2009).

10 Going further back in time, Gillespie and Okruhlik (1991: 89) report that a clean- up campaign in Saudi Arabia was prompted by the same revelations of cor-ruption that prompted the enactment of the FCPA.



necessary to ensure that they comply with both the letter and the spirit of

the obligations they have assumed under international instruments such

as the OECD Convention. According to the OECD’s Working Group

on Bribery, recurring problems include: failure to enact laws that make it

likely that legal persons such as corporations will be held liable for bribery;

the low level of monetary sanctions imposed on legal persons for bribery of

foreign public offi cials; perceptions that factors such as national economic

interests infl uence the investigation or prosecution of foreign bribery;

ineff ectiveness of eff orts to use fraudulent accounting off ences to uncover

eff orts to conceal bribery; and lack of reporting by providers of offi cial

development assistance and export credit agencies (OECD, 2006b).

Another manifestation of indiff erence is failure to enforce anti- corruption

laws after they have been enacted. Transparency International (Heimann

and Dell, 2009) reports that only four of the 38 parties to the OECD

Convention (Germany, Norway, Switzerland and the United States) have

actively enforced their anti- corruption laws, while 21 have seen little or no

enforcement. This fi nding is broadly consistent with the conclusions of the

OECD’s Working Group on Bribery, though not entirely consistent with

Cuervo- Cazurra’s (2008) fi nding that the OECD Convention has reduced

investment fl ows to relatively corrupt countries.

Interestingly, Cuervo- Cazurra’s study does provide circumstantial evi-

dence that for some period of time even the United States engaged in self-

interested non- enforcement. He fi nds that although the FCPA has been

in force since 1977, fl ows of foreign direct investment from the US were

sensitive to levels of corruption in the host country after the adoption of

the OECD Convention, but not before. The implication is that the FCPA

only became an eff ective deterrent to investment in corrupt countries after

the OECD Convention was adopted. This is consistent with the hypothesis

that the United States engaged in limited enforcement of the FCPA prior

to the adoption of similar legislation by other OECD countries in order to

avoid placing US fi rms at a competitive disadvantage. But other explana-

tions for these fi ndings are possible. For instance, it may be the case that

the US’s unilateral eff orts were sincere but limited in eff ectiveness by the

absence of cooperation from law enforcement agencies in other OECD

countries. Moreover, Cuervo- Cazurra’s empirical claims are not fully

consistent with other evidence. For instance, Hines (1995) fi nds that more

corrupt countries attracted less US foreign direct investment in the period

between 1977 and 1982. In addition, both Smarzynska and Wei (2000) and

Hines (1995) fi nd, using diff erent methodologies, that after the enactment

of the FCPA but before the adoption of the OECD Convention, US inves-

tors in countries with higher levels of corruption were more reluctant than

other investors to take on local partners.



Robust and reliable data on cases in which allegations of corruption

have not been pursued is not available, and even examples of specifi c

instances of non- enforcement are hard to come by. The most promi-

nent example is the BAE aff air, in which the government of the United

Kingdom closed an investigation into allegations that a British company,

BAE Systems plc, paid bribes to members of the Saudi royal family and

government offi cials in connection with a massive sale of airplanes from

the United Kingdom to Saudi Arabia. BAE was the prime contractor

(Rose- Ackerman and Billa, 2008). The UK government cited ‘the need

to safeguard national and international security’ as the main reason

for closing the inquiry. There was also speculation that the government

feared that any penalties imposed on BAE would force the company into

insolvency, which would have been politically unacceptable (Alexander,

2009). However, the UK’s Serious Fraud Offi ce subsequently announced

it would seek permission to prosecute BAE for corruption associated with

its activities in Africa and Eastern Europe (Serious Fraud Offi ce, 2009b).

In any event, it is clear that the UK took its own interests – though not

necessarily its economic interests – into account in determining whether to

permit its courts and prosecutorial agencies to be used to pursue corrup-

tion of the Saudi government.

It is diffi cult to say to what extent the instances of non- enforcement that

have been uncovered refl ect total as opposed to selective indiff erence on

the part of foreign legal institutions. For instance, it is unclear whether the

UK government would have turned a blind eye to bribery if the allegations

had involved a country that was less strategically important than Saudi

Arabia.11 Occasionally, interviews with key actors are able to uncover

evidence of selectivity. For instance, Harrison (2001: 673) reports that

donors operating in Uganda, Tanzania and Mozambique were inclined to

turn a blind eye to known instances of corruption in order preserve their

ability to use the countries as showcases for their development projects.

Wrong (2009) makes similar allegations about donors operating in Kenya.

In general though, it is diffi cult to say what motivates non- enforcement or

under- enforcement of anti- corruption norms.

Of course, even if countries enact and enforce anti- corruption laws

targeting overseas bribery, that does not amount to conclusive evidence

11 The UK’s Serious Fraud Offi ce announced the fi rst prosecution of a British fi rm for transnational bribery on 10 July 2009 (there was at least one earlier case of an individual prosecution). The prosecution arose from the company’s voluntary disclosure to the SFO of evidence that it had sought to infl uence decision- makers in public contracts in Jamaica and Ghana between 1993 and 2001 (Serious Fraud Offi ce, 2009a).



that they are committed to fi ghting corruption in developing countries.

To begin with, the major components of the transnational anti- corruption

regime focus on only a subset of the activities that could be labelled

corrupt – mainly, bribery of and embezzlement by high- level public offi -

cials who deal with foreign companies. This leaves a whole world of cor-

ruption untouched (Gathii, 2009). To some extent the lack of attention to

other forms of corruption refl ects practical considerations such as lack of

access to the relevant actors. But practical considerations do not explain

why the OECD Convention explicitly excludes ‘facilitation payments’

made by multinational actors from its prohibition on bribery.12 The impli-

cation is that foreign actors are not concerned with ‘minor’ matters such

as schoolteachers who request bribes to allow students to take exams,

or police offi cers who extract bribes from motorists for spurious viola-

tions, or public offi cials who facilitate irregular allocations of public land.

Meanwhile, reports from countries such as Bulgaria, Mongolia, Kenya

and Slovakia suggest that members of the general public regard these

forms of corruption as being at least as harmful as grand corruption

(Klopp, 2000; Lajcakova, 2003; Nichols et al., 2004).

It is also true that not every instance in which foreign actors activate the

transnational anti- corruption regime can be taken as a manifestation of

desire to protect the interests of local actors. This is most evident in cases

where private actors launch allegations of political corruption in foreign

courts in order to serve their private economic interests. Take for example

the proceedings that were launched in Hong Kong to recover assets mis-

appropriated by the ruling family of the Republic of the Congo.13 They

were initiated by a vulture fund trying to enhance the value of Congolese

sovereign debt it bought at a discount, presumably on the theory that the

assets uncovered would probably be located outside the Congo and thus

be relatively amenable to attachment and execution. If successful this kind

of litigation might have a deterrent eff ect on leaders of other countries,

but the direct benefi ts to the population of the Congo will be limited. The

primary motivation of the vulture fund is to line its own pockets. To see

the potential confl ict between the interests of the creditors and local inter-

ests, imagine if litigation of this sort were directed by local actors and with

12 Similarly, there is no practical reason why international fi nancial institu-tions advising client governments on austerity policies ostensibly aimed at macroeconomic stabilisation should not take into account the potential impact on levels of corruption; Klitgaard (1988: 197; 1989) suggests that austerity policies have, by reducing levels of public sector wages, contributed to increased levels of corrup-tion.

13 See Long Beach Ltd v. Global Witness Ltd.



a view to local interests. In that case, any assets recovered would probably

be repatriated as rapidly as possible to the Congo, where eff orts could be

made to shield them from foreign creditors.

III. Evidence of Incompatibility

Turning now from motivations to consequences, is there any evidence that

the transnational anti- corruption regime has worked against the aspira-

tions or interests of developing countries?

To begin with, charges of moral imperialism seem to have little foun-

dation. Though there may be disagreement about the boundaries of the

concept of corruption, there does not seem to be much disagreement

about the moral status of the kinds of high- level bribery and embez-

zlement that are the focus of the transnational anti- corruption regime

(Rose- Ackerman, 1999). These forms of corruption appear to be univer-

sally criminalised and condemned. It is not clear, however, that they are

condemned with equal force in all societies. For instance, in a survey of

students in Bulgaria and Mongolia, Nichols et al. (2004) found that con-

demnation of bribe- taking by traffi c offi cers was ‘soft’. They report that

the students ‘seemed resigned to this small- scale corruption as a fact of

everyday life and even joked about it and the small salaries earned by civil

servants’ (ibid: 237). The presence of these kinds of disagreements does

little to undermine the legitimacy of the transnational anti- corruption

regime, though, because that regime has devoted relatively little attention

to practices other than bribery and embezzlement. Moreover, the central

feature of that regime, the OECD’s prohibition on transnational bribery,

does not apply to actions that are lawful in the jurisdiction of the offi cial

who has been bribed (OECD, 1997: Comment 8 to Art. 1).

The evidence suggests that there is more disagreement about the moral-

ity of practices such as payments to political parties, confl icts of interest,

and nepotism. Nichols et al. (2004) found signifi cant diff erences across

countries on whether to condemn a public offi cial for ‘helping to get his

relatives in getting a job/getting into schools’. Moreover, relatively few

respondents in either of the countries studied defi ned corruption to include

‘participation in commercial ventures’ or ‘assisting relatives in meeting

infl uential people’. Again though, these activities are generally not the

focus of the transnational anti- corruption regime. The one exception

may be in the area of government procurement, where some developing

states have argued that the kinds of transparency and non- discrimination

demanded by international norms are incompatible with their desire to use

government procurement to achieve important social policies. In particu-

lar, Malaysia has complained that the norms contained in the Agreement



on Government Procurement are incompatible with the value it attaches

to the practice of using preferences in government procurement to mitigate

ethnic inequalities (McCrudden and Gross, 2006).

Leaving aside the concerns about moral imperialism, is there any evi-

dence that the anti- corruption strategies that have been rolled out in con-

nection with the emergence of the transnational anti- corruption regime

are having more tangible benign or malign eff ects on developing countries?

As a general matter, evidence that patterns of corrupt activity vary signifi -

cantly across countries tends to undermine the basis for expecting any sort

of one- size- fi ts- all legal response to be equally eff ective across countries

(Rose- Ackerman, 1999; Johnston, 2005). But there appears to be little

direct evidence on the actual eff ects of the transnational anti- corruption

regime on developing countries. Most notably, no one appears to have

undertaken a comprehensive empirical analysis of whether the transna-

tional anti- corruption regime, or any component thereof, has caused cor-

ruption in developing countries to decrease. Admittedly however, given

the diffi culties inherent in measuring the incidence of corruption in a way

that enables comparison across space or time, such a study may not even

be feasible.

There are, however, a few instances in which a worsening of corruption

has been tied to externally driven anti- corruption strategies. The principal

complaints have involved the idea of reducing state intervention in the

economy as a means of reducing opportunities to engage in corruption.

The process of shrinking the state through privatisation has led to some

of the most egregious examples of corruption in recent history (see, for

example, Rose- Ackerman, 1999: 35–8; Johnston, 2005: 125–9); and once

the state has been shrunk it is not clear from the evidence that it is likely

to be any less corrupt. As Krastev (2004) points out, the Nordic coun-

tries have some of the most interventionist states in the world but are

also regarded as the least corrupt. There is also at least one case in which

international scrutiny of one set of corrupt practices is reported to have

induced offi cials to switch to equally pernicious corrupt practices that

attracted less international attention. Klopp (2000) claims that during the

1990s the Kenyan government resorted to irregular allocation of public

lands as a form of patronage in order to avoid international scrutiny of

other forms of corruption such as irregular appointments to para- statal

organisations.

There is more evidence bearing on the claim that the anti- corruption

regime will have the short- term eff ect of discouraging fi rms from doing

business in or with corrupt states. As far as investment fl ows are con-

cerned, and at least for the period from 1996 to 2002, this hypothesis is

squarely supported by Cuervo- Cazurra’s (2008) statistical study. The idea



that there has been a deterrent eff ect is also consistent with the OECD

Working Group’s qualitative evidence suggesting that large multinational

fi rms are highly aware of anti- bribery legislation and have incorporated

its tenets into their in- house compliance programs. On the other hand, the

OECD’s research does leave open the possibility of small and medium-

sized fi rms replacing larger fi rms in niches that involve doing business in

relatively corrupt environments.

Finally, there is the concern that it may be dangerous to provide foreign

backing for anti- corruption initiatives in situations where complementary

institutions such as constraints on politically motivated prosecutions

are missing. There is little direct evidence that foreign anti- corruption

institutions have been abused, but there is certainly evidence of domestic

anti- corruption institutions being used in a partisan fashion. For instance,

Larmour (2009) describes how the leader of a military coup in Fiji in

December 2006 tried to use an anti- corruption campaign to disable politi-

cal opponents and shore up his legitimacy without always presenting clear

evidence of corruption on the part of the targeted individuals. Similarly,

Krastev (2004) reports that in post- communist Eastern Europe allegations

of corruption slung at one another by political opponents have led both

politicians and the public to obsess about corruption to the exclusion of

other important policy considerations, and to reduce public trust in politi-

cal institutions (see also Smilov, 2009). De Weaver (2005) argues that a

Chinese anti- corruption campaign launched in or around 2003 was moti-

vated in part by a desire ‘to remove people loyal to former party chairman

Jiang Zemin’. Finally, going further back in time, in a study focused on

the Middle East and North Africa, Gillespie and Okruhlik (1991) identi-

fi ed many examples of ineff ective anti- corruption campaigns that were

either public relations exercises or designed primarily to target political

opponents.14

At the same time, the Fijian example suggests that legal institutions are

capable of avoiding co- optation by self- interested politicians. For instance,

the Fijian High Court initially questioned whether the coup leader’s

newly created anti- corruption commission could initiate criminal proceed-

ings without the participation of the Director of Public Prosecutions.15

Meanwhile the Commonwealth Lawyers Association reportedly discour-

aged at least one foreign lawyer from participating in the Commission’s

14 To be fair, however, they also found many other examples of campaigns that appeared to be motivated by a genuine desire to alleviate corruption.

15 Compare Fiji Independent Commission Against Corruption v. Devo with Fiji Independent Commission Against Corruption v. Kumar.



activities, suggesting that resistance to politicisation of the anti- corruption

regime may also come from the broader international legal community

(Fiji Times Online, 2007).

IV. Evidence of Institutional Displacement

Evidence on whether the transnational anti- corruption regime has dis-

placed local institutions is sparse, mainly because there appears to be no

systematic eff ort to collect it. Ideally we would have comprehensive data

on the institutional integrity and competence of local institutions involved

in combating corruption. It would also be nice to have data on various

factors that might have infl uenced the quality of those institutions over

time, including how frequently they participate in transnational proceed-

ings and the extent to which they play a leadership role. Even data on how

local actors perceive the transnational anti- corruption regime – perhaps

a survey of law enforcement offi cials in developing countries asking how

helpful they fi nd foreign institutions – would be enlightening.

To end on a positive note though, there are certainly cases in which

foreign institutions appear to have served as complements of rather than

substitutes for the anti- corruption eff orts of actors from developing coun-

tries. The prime examples are the proceedings that states have brought

– not always with success – against former leaders such as Ferdinand

Marcos,16 Jean- Claude Duvalier17 and Frederick Chiluba18 to recover

embezzled assets.19 The time is ripe for a comprehensive assessment of not

only the prevalence and eff ectiveness of such proceedings but also their

long- term impact on the development of local institutions.

6. CONCLUSION

The primary purpose of this chapter is to explore the advantages and

disadvantages of the transnational anti- corruption regime for develop-

ing countries. The potential advantages and disadvantages appear to

be similar to those associated with other international or transnational

regimes that aff ect developing countries. At this stage it does not seem

prudent to go further and attempt to draw any conclusions about whether

16 Republic of the Philippines v. Marcos.17 Republic of Haiti v. Duvalier.18 Attorney General of Zambia v. Meer Care and Desai.19 For regularly updated data on such cases, see http://www.assetrecovery.org

(accessed 30 October 2009).



the anti- corruption eff orts of foreign legal institutions have, in general,

positive or negative eff ects on developing countries. In the fi rst place, it

is unclear whether any general claims would be helpful because there are

strong reasons to believe that the answers to this question will be highly

context- dependent. Second, there is insuffi cient data to assess many of the

relevant hypotheses. In fact, in my view the principal lesson to be drawn

from this exercise is that too little attention is being paid to some of the

ramifi cations of relying on foreign legal institutions to solve the problems

of the developing world, and especially the ramifi cations for the develop-

ment of local institutions.


307

14. Intellectual property, development concerns and developing countries

Pedro Roff e*

1. INTRODUCTION

Intellectual property (IP) has increasingly become more globalized and

economically and politically important, but it remains complex, contro-

versial and divisive. IP emerges often and prominently in discussions on

trade, innovation, transfer of technology, public health, food security,

education, climate change, biodiversity, the Internet or the entertain-

ment industry. Its role and complexities in the context of less developed

economies have not been unambiguous. Some argue that a strong system

of protection is a prerequisite for economic and cultural development.1

Others blame the system for all possible sins, including making access to

public goods (such as health, education, food) diffi cult and highly unaf-

fordable for poor countries. Some even contend that the system is an

expression of ‘legislative colonisation’ imposed by rich countries on poor

ones (Stallman, 2009).

Intellectual property laws established primarily in Europe and in the

United States spread to almost all developing countries, particularly

former colonies and new, independent states. However, not many devel-

oping countries have had much direct experience with IP instruments and

policy, even in cases where such legal systems have existed for many years.

* Senior Fellow, Intellectual Property Programme, ICTSD, Geneva. The chapter draws on recent work and publications by the author, as duly noted. The author is grateful for comments and insights provided by Xavier Seuba, Christoph Spennemann and David Vivas on an earlier version but he is solely responsible for its content.

1 ‘IP is a “power tool” for economic development that is not yet being used to optimal eff ect in all countries, particularly in the developing world. It off ers the possibility of growth and economic development in a way that is not a “zero sum game”, where if some win, others will lose. On the contrary, international accept-ance and utilization of IP tools means that there will be more innovation and there-fore more creative change and cultural and economic growth’ (Idris, 2003: 4).



For many, IP is an entirely new subject. Indeed, traditionally, it has been

the exclusive domain of specialists. Paradoxically, particularly over the

past few years, IP has become an area in which developing countries have

come under pressure to reform and to become more vigilant regarding the

protection and enforcement of intellectual property rights (IPRs). This has

been in many respects one of the main outcomes of the 1994 World Trade

Organization (WTO) Agreement on Trade- Related Aspects of Intellectual

Property Rights (TRIPS).2

The substantive obligations set forth in TRIPS are now widely accepted

as the centerpiece of the new international IP architecture. IPRs being

an integral part of the new international trading system implies that the

failure to implement and enforce the TRIPS standards constitutes a cause

of action for commercial retaliation or cross- retaliation under the WTO

Dispute Settlement Understanding (see Abbott, 2009a). In addition, by

placing IP issues within the scope of the WTO, Members are obliged

to implement IP laws consistent with the national- treatment and most-

favoured- nation principles, meaning that IP protection and enforcement

must be non- discriminatory as to the nationality of rights holders and

that Members must extend any advantage they grant to nationals of one

country to the nationals of all other WTO Members (UNCTAD- ICTSD,

2005).

The subsequent emergence of bilateral and regional free trade agree-

ments (FTAs) with comprehensive and robust IP chapters has added new

complexities and challenges for developing countries. The IP obligations

in these agreements are notable for expanding the standards of protection

and enforcement laid out in the TRIPS Agreement (Roff e and Santa- Cruz,

2006).

This chapter will focus on the IP system and the developing countries;

how their participation has evolved since the inception of the international

system; the challenges faced by the newcomers; and the extent to which the

system has accommodated their needs. The chapter reviews the main land-

marks in the evolution of the system, particularly with respect to patents

since the establishment in the last quarter of the nineteenth century of the

classical conventions (such as the Paris Convention for the Protection of

Industrial Property of 1883 and the Berne Convention for the Protection

of Literary and Artistic Work of 1886). The exposure of developing coun-

tries to the international system has not been homogeneous but they have

2 See Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, which was concluded on 15 April 1994 and entered into force on 1 January 1995 (GATT, 1994b).


IP, development concerns and developing countries 309

tended to make their claims and vindications in a collective form, as has

been the practice in the United Nations system since the creation of the

United Nations Conference on Trade and Development (UNCTAD).3

2. THE INTERNATIONAL SYSTEM4

In the nineteenth century, the industrial revolution in Europe and North

America, and the growth of international trade, marked a critical moment

in the birth of the modern but still embryonic international system of intel-

lectual property. In 1873, coinciding with the world exhibition in Vienna,

the US seized the opportunity to propose an international convention on

industrial property based on the premise that at a time of major techno-

logical progress, such as in steam and electricity and the magnitude of

the exchange of goods, it was not possible that ‘the Patent granted for

an invention in one country becomes in fact a restriction, unprofi table

and obstructive, if that invention without limitation or increase in price,

becomes in an adjoining country common property’ (Kronstein and Till,

1947).

The US initiative found Europe in the middle of a major controversy

on the merits of the patent system. The critics regarded the patent mecha-

nism as one that restricts, rather than promotes, trade. They argued that

it distorts the market by protecting certain economic interests over others.

Some critics asserted that national patent laws, by granting temporary

monopolies, acted in the same way as ‘prohibitive tariff s’ (Patel, 1974).

The European anti- patent movement collapsed after an impressive propa-

ganda campaign by patent protection advocates (Machlup and Penrose,

1950; Machlup, 1958). It ended in the negotiations on the international

treaty, during which countries reached a ‘strategic compromise’ around

the working of the invention in the country of importation. In this form,

the pro- and anti- patent advocates accommodated their views by leaving

the option to the country of importation to impose or not a conditional

working requirement on the importer of the patented invention. This com-

promise reassured those with apprehensions that the system would not be

responsive to the development and industrialisation needs of the import-

ing country, unfairly favouring more advanced economies.

3 See United Nations General Assembly, 19th Session, 1314th Plenary Meeting, 30 December 1964, Resolution 1995 (XIX), Establishment of the United Nations Conference on Trade and Development.

4 See Roff e (2008); Roff e and Vea (2009).



The International Convention for the Protection of Industrial Property

(the ‘Paris Convention’) was fi nally adopted in 1883. The second major

international IP treaty, dealing with the protection of Literary and Artistic

Work (the Berne Convention), was signed in 1886. The Paris Convention

was subsequently revised in diplomatic conferences, the last held in

Stockholm in 1967. The original signatories to the Paris Convention were

Belgium, Brazil, Ecuador, El Salvador, France, Guatemala, Great Britain,

Italy, the Netherlands, Portugal, Serbia, Spain, Switzerland and Tunisia.

In subsequent years, Ecuador, El Salvador and Guatemala withdrew from

the Convention (see Patel, 1974), only returning almost 100 years later, as

a result of the coming into being of the TRIPS Agreement.

The original conception of ‘local working’ evolved during the various

revision conferences, and ‘compulsory licensing’ was subsequently for-

mally incorporated5 as one of the measures that countries could adopt

to remedy possible abuses resulting from the exclusive rights conferred

by patents, including, for example, failure to work. By and large, the fi ve

major revision conferences diluted the ‘strategic compromise’ of 1883. The

fi nal text of the Convention – part of the WTO TRIPS Agreement of 1994

– is less fl exible concerning the freedom given to countries to determine

the conditions under which local exploitation can take place. This lack

of fl exibility was one major point of contention in the incorporation of

developing countries into the system and has been a continuous divisive

issue among parties.

3. THE EMERGENCE OF DEVELOPING COUNTRIES: THE CASE OF LATIN AMERICA6

The membership of the Paris Convention grew steadily. It increased to

47 by 1958 and to 80 in the early part of the 1970s. Today, membership

is more than 170. If by the end of the nineteenth century the developing

countries membership was limited to three countries, the number grew

consistently: to 9 by 1934; 15 by 1958 and 44 by 1973 (see UNCTAD,

1975). More than half of the current African membership joined the

Paris Convention during the 1960s and 1970s coinciding with their politi-

cal independence. Some of the largest developing countries – including

Bangladesh, China, India, Malaysia, Pakistan, the Republic of Korea,

5 The formal incorporation of compulsory licensing into the text of the Convention was the outcome of the Hague Revision Conference of 1925.

6 See Roff e (2007).



Sudan, and Thailand – are relative newcomers. Their adherence to the

Convention began in the 1980s. India, for example, became a member in

1998, and Pakistan as recently as 2004 – both in many respects as a result

or condition of their adherence to the TRIPS Agreement.

Latin America provides an interesting case study. The adoption of

national IPR laws began in the early part of the nineteenth century but

spread massively throughout the region in the late nineteenth and early

twentieth centuries. However, the spread of national laws was not the

result of membership of international conventions and membership of

international instruments was not widespread. In the mid- 1960s, only fi ve

countries were members of the Paris Convention.7 Such a major country

as Argentina became a member in the middle of the 1960s and Venezuela

joined as recently as 1995 (again, as a result of the TRIPS Agreement).

Similarly, Latin American countries were also uncommitted to the Berne

Convention. In the mid- 1960s, Brazil was its only member (since 1922).

The majority became members in the last decade of the twentieth cen-

tury.8 In short, beginning in the late 1960s, Latin American countries

became part of the international IP architecture slowly and warily.

They became unequivocally part of it after the adoption of the TRIPS

Agreement in 1994 by joining, among others, the two classical conventions

of the nineteenth century (Paris and Berne).

Why were Latin American and other developing countries particularly

cautious with respect to the implications of their adherence to the classical

IP conventions? With respect to the Paris Convention, the general view at

the time was that it was not in the national interest to join an international

instrument that was cumbersome and not fl exible enough to facilitate the

local exploitation of foreign inventions as a means to contribute to the

dissemination and transfer of technology. It was also felt that the national-

treatment principle constituted a barrier to the design of national regimes

duly suited to local conditions. Furthermore, the prevailing economic

thinking in those days favoured import substitution industrialisation poli-

cies. Under these premises, local production was a key ingredient to this

approach: ‘Instead of being used in production an overwhelming majority

of patents granted to foreigners through national laws of developing coun-

tries have been used to secure import monopolies’ (UNCTAD, 1975: 64).

7 This was the case of Brazil – founding member of the Paris Convention – Cuba, Mexico, the Dominican Republic, and Trinidad and Tobago.

8 It should be noted, however, that in the case of copyright, an impor-tant number of countries were already members of the Universal Copyright Convention (UNESCO) of 1952, together with the US, which only joined the Berne Convention in the late 1980s.



The reservations towards the spread of the IP system reached their

climax in the last quarter of the twentieth century. A wave of legal reforms

translated into important changes in IP- related legislation in a number of

countries. The national reforms included, for example, the strengthening

of the working requirement in the case of patents, and the expansion of

measures to prevent patent abuses and promote the transfer of technology

through the establishment of special national regimes to screen transfer

of technology transactions.9 Immediately after independence, India

commissioned a number of enquiries on how to make the patent system

more suitable for the specifi c needs of the country (see Ayyangar, 1959).

The adoption of the fi rst Indian Patent Law in 1970 represents, in many

respects, the thinking that prevailed in those days in terms of law reform.

For example, the law diff erentiated in areas of social concern (health and

food) where, for instance, patents would be granted only to processes and

not products, and only for seven years as opposed to 14 years in other

areas (Roff e, 2000).

The case of the Andean Group also provides an interesting illustration

of how developing countries dealt with patent reform in those years.10 As

one of its foundations, the Group adopted common rules for the treatment

of foreign capital, trademarks, patents, licences, and royalties. These rules

were embodied in the well- known Decision 24, and subsequent regula-

tions and decisions on the treatment of IP and the transfer of technology

(Abbott, 1975). The framers conceived the Decision as an important step

in contributing to the integration of the Andean community by regulating

international capital in a way that infl uenced the distribution of benefi ts

of the integration process. By dealing with various aspects of economic

foreign collaboration including foreign direct investment, licensing agree-

ments, and the treatment of intellectual property rights, the Andean

Group sought mainly to extract benefi ts from the technological skills of

transnational corporations as a springboard to the upgrading of local

fi rms. It was perceived that this could be achieved with a more selective

screening of foreign direct investment and technologies that could con-

tribute to the national development of the fi ve countries. Toward that aim,

the Andean Group set forth performance requirements for foreign capital,

such as to facilitate access to foreign technology and train local fi rms, as a

9 This was the case in Latin American countries, particularly Argentina, Brazil, Mexico, and the countries of the Andean Group.

10 The Andean Group was established in 1969 between Bolivia, Chile, Colombia, Ecuador, and Peru. Venezuela joined four years later. Of the original six countries, two left the Community (Chile and Venezuela). Chile withdrew from the Pact after serious disagreements concerning Decision 24.



condition of their establishment in the region. The accompanying patent

agenda reform was large and multifaceted (see Remiche, 1982).

The general tendency of national reforms had an impact on the interna-

tional front, including the fl agging of the issue in deliberations of the UN

General Assembly (see Roff e and Vea, 2009). Debates on reform in WIPO

gained momentum, as membership in international conventions increased.

Many of the new members expressed concern about the lack of suffi cient

access to information and knowledge and how the prevailing international

system was not well adapted to their needs. Led by India, developing

countries demanded, in the context of the Berne Convention, ‘that unless

some major copyright concessions were made for developing countries,

they would have to make drastic changes in their international copyright

arrangements’ (Yu, 2004). The 1967 WIPO Stockholm conference became

the venue for these countries ‘to adjust the system of protection under the

Berne Convention to [their] economic, social and cultural needs’ (ibid).

With respect to the Paris Convention, the idea of a possible revision

was fi rst advanced in June 1974 when the Director General of WIPO was

instructed to create and convene an Ad Hoc Group of Governmental

Experts, which in 1977 adopted a Declaration which served as the basic

document for the Sixth Diplomatic Conference on the revision of the Paris

Convention. Access to technology, transfer of technology, and dissemina-

tion of knowledge were at the heart of the Declaration. It should be noted

here that a conspicuous element of the broad developing countries’ reform

agenda was improving the conditions for the transfer of technology,

leading to an agreement on an international code of conduct on the trans-

fer of technology that would establish a framework for cooperation and

would lay out general principles on commercial technology transactions,

including the use of fair terms and conditions in contractual relationships

(see Patel et al., 2000).

The preparatory work for the Sixth Revision of the Paris Convention

was entrusted to diff erent working groups, resulting in the preparation

of the basic proposals fi nally submitted to the revision conference that

met for the fi rst time in 1981. One of the centrepieces of the revision was

the attempt to fundamentally reshape the Convention by revisiting the

notions of local working and remedies to abuses. It was indeed the most

radical attempt to revise the Convention in its entire history (see Roff e and

Vea, 2009).

To the frustration of developing countries, in the middle of the revision

process a WIPO secretariat proposal made in 1983 for a complementary

treaty to the Paris Convention (which included aspects such as the legal

eff ects of public disclosure of an invention) sidetracked the general revi-

sion process initiated at the instance of developing countries. The scope



of the 1983 initiative was subsequently widened to include other issues

of concern to major developed countries.11 The latter initiative ran

counter to developing countries’ views on reforming the main tenets of the

Convention. Ultimately, the two initiatives were turned aside by the sub-

sequent move to incorporate IPRs as an integral part of the world- trade

regime in the new Round of Multilateral Trade Negotiations launched in

Punta del Este in 1986 (see Sell, 2003).

4. TRIPS, FTAs AND THEIR IMPLICATIONS

The WTO TRIPS Agreement marked a major event in the evolution of

the international IP system. It moved international policymaking from

a fl exible bottom- up approach as in the Paris Convention to a new set of

minimum international standards of protection and enforcement of IPRs

in the new broader forum of the WTO (see Okediji, 2008).

In contrast to developing countries’ activism in the preceding period,

their role in the drafting and negotiation of the Agreement was entirely

defensive. Initially, they took the position that, except for counterfeiting

and anticompetitive behaviour, the subject was not apt for the General

Agreement on Tariff s and Trade (GATT). In this context, they argued

that WIPO, as the UN international specialised body, was the only com-

petent body on these matters. Finally, developing countries adhered to

TRIPS as part of the single- undertaking concept that prevailed in the

Uruguay Round negotiations.12 In exchange, in the context of TRIPS,

they obtained some modest concessions in terms of fl exibilities in the

implementation of its provisions.

Within the policy space recognised by the Agreement, Members are

free, for example, to apply more extensive protection – provided that such

protection does not contravene the provisions of the Agreement (see Ruse-

Khan, 2009). In its implementation, Members are free to determine the

appropriate method of implementing those standards ‘within their own

legal system and practice’ (TRIPS: Art. 1.1).

The Agreement also recognises fl exibilities and discretion in the imple-

mentation of its minimum standards. How fl exible the Agreement is and

11 The wider agenda included issues such as the unity of invention, the fi rst- to- fi le versus the fi rst- to- invent criterion, the minimum duration of rights, enforce-ment issues, exclusion of certain fi elds of technology from patentability, and the rights and obligations of patentees.

12 A deal comprising a single package of issues on improved access to market, in general, agriculture and textile goods, services, and investment.



how free countries are to implement its provisions are important questions

that have, in many respects, infl uenced the evolution of TRIPS and have

dominated multilateral discussions in the WTO, WIPO and the World

Health Organization (WHO). In the context of the WTO, the fl exibility

issue reached a climax in the process and follow- up to the adoption of the

2001 Doha Declaration on TRIPS and Public Health.13 Among the fl ex-

ibilities specifi cally mentioned in the Declaration is the right to grant com-

pulsory licences, including the freedom to determine the grounds upon

which such licences are granted and the freedom to establish the appropri-

ate regime for the exhaustion of IPRs. These are not the only fl exibilities,

implicitly or explicitly, included in the Agreement.14

FTAs elaborate on the TRIPS minimum standards, further advancing

the process of upward harmonisation of IP law and diluting the options

of making use of the TRIPS fl exibilities (see Roff e and Santa- Cruz, 2006).

Similar to the adherence to the TRIPS Agreement as a quid pro quo for

the benefi ts of WTO membership, negotiators seem to acknowledge that

the IP provisions in FTAs are the result of trade- off s in exchange for

trade concessions in areas more signifi cant to their national commercial

interests. In the case of developed countries – namely the United States,

the European Union and the country members of EFTA – the driving

forces behind the incorporation of comprehensive and robust IP chapters

in FTAs have been those industrial sectors highly dependent on IP pro-

tection and interested in sustaining their technological edge (Roff e and

Spennemann, 2009).

In broad terms, compared with the agreements sponsored by the US,

the EFTA and EU agreements have been less comprehensive. However,

the EU has recently launched a series of negotiations that include

stronger and more extensive IP chapters. These include the new Economic

Partnership Agreements (EPAs) with six regional groupings of the

African, Caribbean and Pacifi c (ACP) states (see Santa- Cruz, 2007), and

Free Trade Agreements and Association Agreements with, for example,

members of the Andean Community (see Seuba Hernandez, 2009b) and

Central American countries. All these agreements put greater emphasis

on IP provisions, particularly with respect to enforcement. In the recent

past, the IP chapters in the FTAs signed by the EU and EFTA have placed

general emphasis on reinforcing the existing international IP architecture

13 Declaration on the TRIPS Agreement and Public Health, adopted on 14 November 2001 (WTO, 2001b).

14 See UNCTAD- ICTSD (2005) for a detailed consideration of the policy options compliant with TRIPS.



by committing the parties to become party to a number of multilateral

IP- related agreements (see Santa- Cruz, 2007). For example, in the case of

the Agreement between Chile and the EU, the Parties have ‘to accede to

and ensure an adequate and eff ective implementation of the obligations

arising from’ a number of WIPO- administered treaties15 and make ‘every

eff ort to ratify and ensure an adequate and eff ective implementation of the

obligations arising from’ multilateral conventions.16 The adherence to

these agreements was reinforced by the overarching obligation of ensuring

adequate and eff ective protection to IPRs in accordance with the ‘highest

international standards’, including eff ective means of enforcing such rights

(see Roff e and Santa- Cruz, 2006).

A major shift in the emphasis of the FTAs signed by the EU has taken

place recently with the signature of the Economic Partnership Agreement

(EPA) with the countries of the CARIFORUM (CARIFORUM–EC,

2008). The EPA and the prototype being used in current ongoing negotia-

tions (see Santa- Cruz, 2007; Seuba Hernandez, 2009b) show that the EU

is now following an approach closer to that of the US.

EFTA has followed the EU approach very closely, but expands the

protection in the case of pharmaceutical products with respect to data pro-

vided to national authorities on the safety and effi cacy of those products

– either by way of exclusive protection for an adequate number of years or

by adequate compensation payable to the data originator by those making

use of the data.17 The protection of undisclosed information is also a new

pattern in the FTAs being negotiated by the EU (see Seuba Hernandez,

2009b).

15 For example, the World Intellectual Property Organization Copyright Treaty (WCT), 1996; the World Intellectual Property Organization Performances and Phonograms Treaty (WPPT), 1996; the Patent Cooperation Treaty, 19 June 1970, the Washington Act amended in 1979 and modifi ed in 1984.

16 For example, the Protocol to the Madrid Agreement Concerning the International Registration of Marks; the Madrid Agreement Concerning the International Registration of Marks, Stockholm Act 1967, as amended in 1979; and the Vienna Agreement Establishing an International Classifi cation of Figurative Elements of Marks, 1973, as amended in 1985.

17 See Roff e and Santa- Cruz (2006). In the case of the Chile–FTA with EFTA, see Article 4 of Annex XII Referred to in Article 46 Intellectual Property Rights (see http://www.efta.int/content/legal- texts/third- country- relations/chile/annexes- and- protocols/CL- FTA- Annex- XII.pdf/view (accessed 2 September 2009)). The option to protect undisclosed data by adequate compensation is found in the FTA between EFTA and the Republic of Korea (see Article 3, Annex XIII Referred to in Article 46 Intellectual Property Rights, http://www.efta.int/content/legal- texts/third- country- relations/republic- of- korea/fi nal- act- record- of- understanding- annexes- and/KR- Annex- XIII- IPR.pdf/view (accessed 2 September 2009)).



The agreements to which the US is a party have had a more expansive

and detailed coverage. Since 2002 they have followed the general princi-

ples and objectives set in the Trade Promotion Authority Act of 2002 that

guide the negotiations towards the achievement of a number of objectives.

These include the accelerated and full implementation of the TRIPS obli-

gations and that the provisions of any trade agreement ‘refl ect a standard

of protection similar to that found in US law’.18

Before the completion of the TRIPS Agreement, the US concluded a

bilateral agreement with Canada in which IP features prominently.19

Again, in NAFTA,20 the Chapter on IP is an important component of

the treaty. Following NAFTA a number of other bilateral agreements

with comprehensive IP chapters were signed by the US. As in the case of

TRIPS, the breadth and scope of the agreements sponsored by the US

relate to all major IP disciplines.

An important development in the evolution of US policies is the change

introduced in May 2007, after the expiration of the Trade Promotion

Authority of 2002 and as a result of a bipartisan understanding with

respect to the ratifi cation of outstanding free trade agreements.21 As a

result of this understanding, modifi cations were introduced in the FTAs

with respect to provisions dealing with pharmaceutical products, refl ect-

ing concerns expressed in many quarters about the impact of the FTAs

on public health policies (see, for example, United States Government

Accountability Offi ce, 2007). The amendments relate to issues such as

extensions of the patent term, data exclusivity, the patent–data protection

linkage and the appropriate treatment of the Doha Declaration on Health

(see Roff e and Vivas, 2007: 15). Subsequently the texts of the agreements

negotiated with Colombia, Panama and Peru were respectively amended

and, shortly afterwards, the Peruvian Trade Promotion Agreement was

approved by Congress and signed by the President of the US.22

Notwithstanding this interesting change in US policies, in a common

18 See, among others, Section 2102 of the Trade Promotion Authority, Trade Act of 2002.

19 The Canada–US Free Trade Agreement entered into force on 1 January 1989 (see http://wehner.tamu.edu/mgmt.www/nafta/fta/ (accessed 2 September 2009)).

20 See http://www.nafta- sec- alena.org/DefaultSite/index_e.aspx?DetailID=78 (accessed 2 September 2009).

21 Four bilateral trade agreements negotiated and signed by the Executive, respectively, with the Republic of Korea, Panama, Peru and Colombia were still subject to ratifi cation by Congress at the time of the 2006 Congressional elec-tions.

22 The FTA with Peru entered into force in February 2009.



provision in all US FTA implementation bills23 the entry into force of the

Agreements is set ‘at such time as the President determines that countries

. . . have taken measures necessary to comply with the provisions of the

Agreement . . .’.24 This determination conditions the entry into force upon

the satisfaction expressed by the President that the other Party has taken

the necessary measures to implement eff ectively the provisions of the agree-

ment. This aspect of the implementation process, known as the ‘certifi ca-

tion’ act, commits the other Party to adopt the necessary implementation

legislation that meets the expectations of the US. This process adds major

hurdles to the implementation in good faith of these agreements. In practi-

cal terms it means that once the negotiation has been concluded and signed

by the parties, a new negotiating process begins with respect to the imple-

mentation legislation, which demands a major redesign of the legal and

institutional base. In brief, this aspect of the US legal system puts partner

countries under the obligation to take measures to adjust their internal

IP regimes to the new FTA standards, prior to the entry into force of the

Agreement, initiating a complex process of certifi cation of the implement-

ing legislation that questions the relevance of the principle of freedom of

implementation sanctioned by TRIPS (see Roff e and Spennemann, 2009).

Consequently, few could contest the fact that the IP chapters have been

one of the most contentious aspects of the negotiations of the FTAs. The

general critique is that while the agreements build on the TRIPS minimum

standards, they tend to aff ect the general balance of the Agreement by

overemphasising the protection aspects of IP while reducing policy spaces

otherwise available for the protection of the broader public interest.

5. REVISITING THE DEVELOPMENT CONCERNS

The genesis and the evolution of the Paris Convention – one central pillar

of the international IP architecture – were marked by the tension of how

the system impacted local industrialisation and transfer of technology. We

have highlighted that the local working requirement was diluted through

the various revision conferences. The attempt by developing countries to

recast the Convention to their needs – the local working and fl exibilities

being in general the core of this eff ort – did not bear fruit.

23 See, for example, Dominican Republic–Central American–United States Free Trade Agreement Implementation Act, Pub L 109- 53, 109th Cong, 1st session (2005).

24 Ibid, section 101.



As a result of TRIPS and consequent developments, a number of

reports have revisited past preoccupations by raising concerns about the

one- sided nature of the evolution of international IP architecture; among

other things, for failing to contribute to the very objectives that the TRIPS

Agreement was intended to achieve. Namely, these objectives include the

promotion of technological innovation and transfer and dissemination

of technology ‘to the mutual advantage of producers and users of tech-

nological knowledge and in a manner conducive to social and economic

welfare, and to a balance of rights and obligations’ (Art. 7). Prominent

among these criticisms was the infl uential 2002 report on Intellectual

Property Rights and Development of the UK- appointed Commission on

Intellectual Property Rights (CIPR). Overall, for the Commission a ‘one-

size- fi ts- all’ approach to IPR protection simply does not work, especially

when the required levels of protection are as high as they are today, or are

likely to become in the near future. At certain stages of development, weak

levels of IPR protection are more likely to stimulate economic develop-

ment and poverty alleviation than strong levels. The CIPR presented well-

documented historical evidence to support this view. Available empirical

data is, as the Commission reveals, somewhat lacking at present, but what

does exist points to the same conclusion (Commission on Intellectual

Property Rights, 2002).

This quest for harmonisation based on a one- size- fi ts- all approach ‘has

resulted in a “race to the top” directed by the eff orts and self- interest of

the countries that have had the strongest property rights’ (see Khan and

Sokoloff , 2009: 241). In a public letter addressed to US authorities, a

group of congressmen has argued that recent trends have meant stripping

away ‘fl exibilities to which countries are entitled under TRIPS. The FTAs

provisions also appear to upset an important balance between innova-

tion and access by elevating intellectual property at the expense of public

health’.25 In the case of health, recent developments are marked by the

extension of the duration of patents beyond 20 years, restricting the use of

compulsory licensing, and prohibiting the use of test data on the safety and

effi cacy of products by companies seeking marketing approval for generic

products (see Roff e et al., 2006). These measures have been a major source

of concern for countries attempting to tailor policies according to their

development needs, particularly those aimed at improving access to medi-

cines (see Roff e et al., 2007). Apprehensions expressed at the expansive

exclusive rights on pharmaceutical products extend also to the building of

25 Public letter dated 12 March 2007 addressed to the USA Trade Representative, signed by 12 members of the US Congress.



technological capacities in developing countries. Overly broad exclusive

rights may threaten the ability of local innovators to engage in research

and development (R&D) through reverse engineering and the creation of

functional generic equivalents and improvements. Expansive rights might

discourage generic investors from investing in existing local production

plants, thus denying important opportunities for technology transfer to

local producers. Thus, the implementation of international standards

without due regard to their potential impact on innovation may seriously

hamper developing countries’ eff orts at technological catching- up.

The issues related to access to medicines have been the focus of most

of the attention on the impact and pervasiveness of recent developments

(see Roff e and Spennemann, 2009). But a number of other matters have

been singled out as being as controversial and harmful to less advanced

countries. This is a result of expanding the system to new frontiers and

upsetting the structural balance reached at the time of the conclusion of

the TRIPS Agreement. Other issues that come forth prominently include:

genetic resources and the protection of life forms; the expansion of copy-

right protection in the digital environment, including the circumvention of

technological measures; and enforcement of IPRs.

In the case of genetic resources, FTA provisions intensify the ‘race

to the top’ process interfering in many respects with ongoing multilat-

eral deliberations. The TRIPS Agreement allows for the exclusion from

patentability of ‘plants and animals’ in general. Members may exclude

plants as such (including transgenic plants), plant varieties (including

hybrids), as well as plant cells, seeds and other plant materials. They may

also exclude animals (including transgenic) and animal races. TRIPS

provides that Members need to aff ord patent protection for the following:

micro- organisms, non- biological processes and microbiological processes.

Furthermore, Members need to provide protection to plant varieties either

by patents or by an ‘eff ective sui generis system’ or by any combination of

the two. At the same time, TRIPS provides that Members may exclude

from patent protection: plants, animals, and essentially biological proc-

esses for the production of plants or animals and plant varieties (Art.

27.3). An ‘eff ective sui generis system’ in this context could imply the

breeders’ rights regime, as established in the UPOV Convention, but the

text very deliberately does not refer to UPOV. The possibility is open to

combine the patent system with a breeders’ rights regime, or to develop

other ‘eff ective sui generis’ forms of protection.

In the context of the review process contemplated by TRIPS on this

provision of the Agreement (Art. 27.3b), a number of developing coun-

tries have reiterated their discomfort by emphasising the need to reconcile

TRIPS with the relevant provisions of the Convention on Biological



Diversity (CBD)26 of 1992, especially with respect to the principles of

prior informed consent and access and benefi t sharing (see Bragdon et

al., 2008). For instance, the African Group has consistently been of the

view that patents should not be granted on micro- organisms or on non-

biological and microbiological processes for the production of plants and

animals because this ‘is contrary to the fabric of their society and culture’

(WTO Secretariat, 2006: paras 28–9).

The FTAs in a number of ways preclude parties from taking advantage

of the options and exclusions acknowledged in TRIPS. For example,

FTAs, in general, list the 1991 Act of the UPOV Convention as one of

the international treaties that Parties should subscribe to or endeavour

to adhere to as the modality of protection for plant varieties. The TRIPS

Agreement, as noted, obliges countries to prescribe protection of plant

varieties but off ers various options including an eff ective sui generis system

of protection. UPOV provides a framework for the protection of plant

varieties27 but has been criticised on the grounds that plant breeders’ rights

regimes better respond to conditions prevailing in industrialised countries

and thereby risk undermining the food security of communities in devel-

oping countries (see UNCTAD- ICTSD, 2003: 105).

There are two versions of the Convention: UPOV 1978 and UPOV

1991. The FTAs oblige countries to opt for the 1991 version of UPOV,

which is seen as less fl exible and more stringent than its previous incarna-

tions (ibid). An important diff erence between the two acts is that in the

1978 version species eligible for plant breeders’ rights cannot be patented

whereas the 1991 version tacitly permits the possibility of double protec-

tion. Further, in the 1978 version there is no reference to the right of

farmers to re- sow seed harvested from protected varieties for their own

use (often referred to as the ‘farmers’ privilege’). Thus, countries that

are members of the 1978 version are free, but not obliged, to uphold the

farmers’ privilege. While under UPOV 1991 governments can also use their

discretion to decide whether to uphold farmers’ rights, the 1991 version is

more specifi c (and restrictive) on the scope of these farmers’ rights. It

provides for an optional exception that allows parties ‘within reasonable

limits and subject to the safeguarding of the legitimate interests of the

breeder, [to] restrict the breeder’s right in relation to any variety in order to

permit farmers to use for propagating purposes, on their own holdings, the

26 Convention on Biological Diversity, Rio de Janeiro, 5 June 1992. 27 The Convention was fi rst signed in 1961 and revised in 1972, 1978 and

1991. It entered into force in 1968. It established the International Union for the Protection of New Varieties of Plants, based in Geneva and associated with WIPO.



product of the harvest which they have obtained by planting, on their own

holdings, the protected variety or a[n essentially derived] variety’ (UPOV,

1991: Art. 15.2). This means that the farmers’ privilege no longer includes

the right to use seeds for free (see Dutfi eld, 2008).

Countries party to FTAs undertake further commitments to make

eff orts to introduce legislation concerning the patenting of plants and

animals which is not, as we have seen, mandatory under TRIPS. For

example, in the CAFTA–DR Agreement, plants and animals may be

excluded from patentability, but any Party that does not provide patent

protection for plants by the date of entry into force of the agreement shall

undertake all reasonable eff orts to make such patent protection available

(CAFTA–DR: Art. 15.9.2). In addition, any Party that provides patent

protection for plants and animals as of, or after, the date of entry into

force of the agreement shall maintain such protection (ibid). This means

a practical derogation from the TRIPS fl exibility to determine the appro-

priate method of implementation by ‘locking- in’ countries to maintain

such protection without alteration. This is no doubt a clear indication

of the pervasive nature of these agreements that as a matter of principle

would not allow Parties to amend their national legislation if conditions

and circumstances changed. Contrary to this best endeavour clause, in the

case of the agreement between the US and Morocco, the Parties assume

the obligation to grant patents to inventions on animals and plants

(Morocco–USA: Art. 15.9.2). An intermediary approach is followed in

the agreement with Bahrain that makes mandatory the patenting of ‘plant

inventions’ and not of animals (Bahrain–USA: Art. 14.8.2).

As alluded to, the FTAs have deepened the process of upward harmoni-

sation started by TRIPS, with important consequences in the evolution of

the IP architecture. This is the case with FTA provisions on the protection

and enforcement of copyright and related rights which are quite rigorous

and precise. One manifestation of this is the expansion of the duration

of copyright and related rights by 20 years, in addition to the 50 years as

generally established in TRIPS (see Roff e, 2004).

The FTAs signed with the US include detailed rules aimed at providing

adequate legal protection and eff ective legal remedies to fi ght against the

circumvention of eff ective technological protection measures (TPMs) used

by authors, performers and the producers of phonograms to protect their

works, performances and phonograms protected by copyright and related

rights.28 In a common provision that can be found with minor varia-

28 ‘Eff ective technological measure means any technology, device, or compo-nent that, in the normal course of its operation, controls access to a work, perform-



tions in all FTAs signed with the US, Parties are obliged to provide for a

detailed system of protection from circumvention that practically exports

the US law into the domestic legislation of its partners. In addition, the

FTAs provide for the obligation to make available adequate and eff ective

legal remedies to protect rights management information.29

The provisions on eff ective TPMs in US FTAs go beyond the WIPO

‘Internet treaties’ of 1996 (the WIPO Copyright Treaty (WCT) and the

WIPO Performances and Phonograms Treaty (WPPT) (see UNCTAD-

ICTSD, 2003), which state that Parties ‘shall provide adequate legal pro-

tection and eff ective legal remedies’ against the circumvention of TPMs

(WCT: Art. 11; WPPT: Art. 18), leaving it to each Party to decide the way

in which it will implement the provisions and whether it will apply civil

and/or criminal sanctions to infringers.

Both the prohibition to circumvent TPMs and the prohibition to

produce and distribute circumvention tools do not apply to a number

of public interest institutions (non- profi t libraries, archives, educa-

tional institutions, or public non- commercial broadcasting entities) and

are subject to some exceptions. Despite these exceptions, it has been

observed that these measures, while providing protection to digital

content, go far beyond what is necessary in this regard and are causing

avoidable ‘collateral harm’ by imposing, inter alia, undue restrictions of

fair and other legitimate uses of digital content, unnecessary obstacles

to competition within the content industry, and inappropriate obstacles

to competition in the market for TPMs (see Samuelson and Scotchmer,

2001: 57).

Finally, one important feature of US agreements has been their strong

articulation of enforcement measures. However, the European approach

has considerably changed in recent years and its new prototype resembles

in many respects the approach taken by the US and suggests an even

more ambitious and drastic approach to enforcement issues (see Seuba

ance, phonogram, or any other protected material, or that protects any copyright or any rights related to copyright, and cannot, in the usual case, be circumvented accidentally’ (USA–Chile: Art. 17.7.5(f)).

29 ‘Rights management information means: (i) information that identifi es a work, performance, or phonogram; the author of the work, the performer of the performance, or the producer of the phonogram; or the owner of any right in the work, performance, or phonogram; (ii) information about the terms and condi-tions of the use of the work, performance, or phonogram; or (iii) any numbers or codes that represent such information, when any of these items is attached to a copy of the work, performance, or phonogram or appears in connection with the communication or making available of a work, performance, or phonogram, to the public’ (USA–Peru: Art. 16.7.5(c)).



Hernandez, 2009b). These trends, in general, refl ect the new enforcement

agenda (see Fink and Correa, 2009) led at the international level by these

same countries, with a clear expression in the eff orts being made to adopt

an Anti- Counterfeiting Trade Agreement (ACTA) (see Sell, 2008) with

a view to consolidating gains obtained in recent FTAs and transforming

even more severely the international IP architecture.

In general, the enforcement provisions of the FTAs negotiated with

the US have the same structure as the TRIPS Agreement. Accordingly,

they contain General Provisions; Civil and Administrative Procedures;

Provisional Measures; Border Measures; and Criminal Procedures.

Perhaps the most important achievement in this area for the US has

been to make many of the TRIPS discretionary remedies mandatory. An

important novelty of the FTAs, as far as TRIPS and the WIPO Internet

Treaties are concerned, is that they provide for ‘Limitations on Liability of

Internet Service Providers’ (see Roff e, 2004).

The new agreements provide, for example, that damages should be

paid by the infringer to compensate for the injuries suff ered by the right

holder,30 without qualifying the nature of the infringement. The equiva-

lent provision in the TRIPS Agreement limits damages to a contravention

of the rights by an infringer who ‘knowingly, or with reasonable grounds

to know, engaged in infringing activity’ (Art. 45.1). Therefore, innocent

infringement according to TRIPS may be excluded; however, it is not

apparent whether that possibility is open in the FTAs.

As far as border measures are concerned, the FTAs once again go

beyond TRIPS, particularly in one aspect. The TRIPS Agreement recog-

nises that Members may adopt such measures to enable right holders, sus-

pecting that the importation of counterfeit trademark or pirated goods

(see TRIPS: Art. 51) may take place, to authorise competent authori-

ties to act even upon their own initiative (ex offi cio action) (Art. 58) in

suspending the release of goods when, prima facie, intellectual property

rights might be infringed. The application of border measures to goods

being exported and to goods in transit is optional.31 The FTAs expand

these minimum TRIPS requirements by providing for ex offi cio meas-

ures for goods being imported, as well as for those destined for export

30 In a similar provision in the FTA with Chile, Parties, however, are free to provide that the presumption will only be valid on two conditions: that the work appears on its face to be original and that it bears a publication date not more than 70 years prior to the date of the alleged infringement. The 70 years from publica-tion term is the equivalent to the term of protection granted to legal persons (see USA–Chile: Art. 17.11.6(b)).

31 See Article 51, TRIPS Agreement.



or moving in transit (see USA–Peru: Art. 16.11.23; CARIFORUM–EC

Agreement: Art. 163). Border measures are also an important feature

of recent agreements signed by the EC, as in the case of the one signed

with CARIFORUM that goes even beyond the agreements sponsored

by the US.32 The latter stick to the minimum standard of TRIPS, in the

sense that border measures apply to counterfeit trademark or pirated

copyright goods only. In the case of CARIFORUM, border measures

apply in general to ‘goods infringing an intellectual property right’.

CARIFORUM States also agree ‘to collaborate to expand the scope of

this defi nition to cover goods infringing all intellectual property rights’.

Thus, in the future, border measures could also embrace patent infringe-

ments that are not covered under TRIPS minimum standards (see Seuba

Hernandez, 2009a).

The FTAs expand also the TRIPS provisions on criminal measures.

According to the latter, for example, criminal measures apply to cases

of wilful trademark counterfeiting or copyright piracy on a commercial

scale. The FTAs broaden the scope of what is considered a wilful infringe-

ment on a commercial scale (USA–Peru: Art. 16.11.26). The new obliga-

tions disregard the quantitative ‘commercial scale’ requirement in TRIPS

and replace it with the notion of a ‘commercial advantage or fi nancial

gain’ element, which focuses more on the purpose of the infringement,

even if it is not made on a commercial scale. Other examples of provisions

that go beyond TRIPS deal with criminal procedure; specifi cally, the

detailed rules on seizure, forfeiture and destruction of infringing goods

and elements used in the infringements (see, for example, USA–Peru: Art.

16.11.17).

Overall, this ‘race to the top’ has an important eff ect on the public

domain and its relevance to technological innovation and cultural

progress (see, for example, Boyle, 2008). The tendency for an over-

expansion of private rights, both under the TRIPS Agreement and even

more so under the new generation of FTAs, has been supported by the

belief in many countries that stronger exclusive rights will necessar-

ily yield higher levels of creativity and innovation, despite the lack of

concrete empirical evidence in this regard (see ibid). Taken together,

these trends have upset the balance between private rights and the free

dissemination of knowledge that appears to be one of the main tenets

of TRIPS. Precisely, one premise of the TRIPS Agreement is the desire

32 The idea of expanding IPRs covered by border measures appears to be a recent feature of the proposals made in the negotiations initiated by the EC with Andean countries and India (see Seuba Hernandez, 2009b).



‘to reduce distortions and impediments to international trade, and . . .

the need to promote eff ective and adequate protection of intellectual

property rights, and to ensure that measures and procedures to enforce

intellectual property rights do not themselves become barriers to legiti-

mate trade’ (see TRIPS: Preamble). But also high in the underpinning

of the Agreement is the acknowledgement of the ‘underlying public

policy objectives of national systems . . . including developmental and

technological objectives’ (see ibid, its objectives: Art. 7, and principles:

Art. 8).

6. THE WIPO DEVELOPMENT AGENDA33

As noted, attempts to integrate development concerns in the IP archi-

tecture have a long history and a close relationship with the genesis and

evolution of the system. The gravity of public health problems affl icting

many developing countries and the impact IP protection has on the pricing

of medicines – aggravated by the negative exposure major pharmaceutical

international fi rms had in a case brought against the South African State

challenging the use of TRIPS fl exibilities – prompted governments to

adopt the 2001 Declaration on the TRIPS Agreement and Public Health

(see Abbott, 2009b).

A more ambitious attempt to bring back development issues to the IP

debate, namely in WIPO, has been the initiative for a development agenda.

In support of such agenda, Argentina and Brazil argued that IP protection

is a public policy instrument involving benefi ts as well as costs, depend-

ing on a country’s level of development. Action was therefore needed to

ensure that the costs do not outweigh the benefi ts, particularly in the case

of less developed countries:

A vision that promotes the absolute benefi ts of intellectual property

protection without acknowledging public policy concerns undermines

the very credibility of the IP system. Integrating the development dimen-

sion into the IP system and WIPO’s activities, on the other hand, will

strengthen the credibility of the IP system and encourage its wider accept-

ance as an important tool for the promotion of innovation, creativity and

development.34

33 See Santa- Cruz and Roff e (2009). See also detailed discussions on the WIPO Development Agenda in De Beer (2009); Netanel (2009: 79–109).

34 Proposal by Argentina and Brazil for the establishment of a Development Agenda for WIPO, 2004.



One important objective of the WIPO Development Agenda was

to mainstream the development dimension into all activities of the

Organization. The proponents sought to promote, among other things,

‘a deeper refl ection on the development implications of current and new

approaches to diff erent IP policy choices and international norm setting,

as well as a more accurate and pervasive discussion on the consequences

of their adoption by countries at diff erent stages of social, economic and

technological development’ (see WIPO, 2005).

After three years of intensive deliberations and negotiations, WIPO

Members agreed on 45 recommendations aimed at integrating develop-

ment considerations in all aspects of WIPO’s work. Among the most

relevant recommendations are those targeted to deepen the analysis of

the implications and benefi ts of the public domain; to initiate discus-

sions on how to further facilitate access to knowledge and technology;

to promote pro- competitive licensing practices to foster creativity,

innovation and the transfer of technology; and to promote the use of

fl exibilities in the TRIPS Agreement. Finally, in an attempt to redress

former practices, the Agenda recommends that norm- setting activities

shall be inclusive and member- driven; take into account diff erent levels

of development; take into consideration a balance between costs and

benefi ts; be a participatory process, which takes into consideration the

interests and priorities of all WIPO Member States and the viewpoints

of other stakeholders, including accredited intergovernmental organisa-

tions and NGOs; and be in line with the principle of neutrality of the

WIPO Secretariat.

Apart from the work specifi cally related to the Development Agenda,

another important recent development in WIPO has been the resumption

of the work of the Standing Committee on the Law of Patents (SCP) after

a three- year paralysis due to the failure in negotiating a new substantive

patent law treaty. The failure stemmed from tensions around the further

upward expansion of the IP system, which was seen by many developing

countries as a process adding new layers of protection and enforcement

without the necessary safeguards within a system perceived as lacking

adequate balance.35

35 The SCP resumed its work in June 2008. Following a proposal by the Chair of the Committee, the Members of the SCP unanimously agreed to con-sider a set of new issues under its new revised agenda (for example by including issues such as dissemination of patent information, the relation between patents and standards, the client- attorney privilege and exclusions from patentable subject matter and exceptions and limitations to exclusive rights) (see WIPO, 2008).



7. FINAL REFLECTIONS: IS THE IP SYSTEM MORE GLOBAL AND ATTUNED WITH DEVELOPMENT?

Since the early beginnings of the modern international IP system almost

130 years ago, the system has certainly evolved, becoming more universal

and covering a wide spectrum of countries and growing in a direction of

upward expansion.

The WTO and WIPO have been the major multilateral institutions

overseeing recent changes in the international architecture. But, in addi-

tion to the WTO and WIPO, there are a variety of organisations dealing

with specifi c IP matters. Today, a number of intergovernmental bodies

incorporate IP- related questions in their work programmes, including

the United Nations Educational, Scientifi c and Cultural Organization

(UNESCO), the CBD and other UN agencies, such as UNCTAD and

the United Nations Development Programme (UNDP). For example, the

WHO and the Food and Agriculture Organization of the United Nations

(FAO) have become more involved in IP- related questions. Members of

FAO spent a number of years negotiating an International Treaty on

Plant Genetic Resources for Food and Agriculture that fi nally entered into

force in 2004. The WHO has engaged actively on IP and health, particu-

larly since the report of the Commission on Intellectual Property Rights,

Innovation and Public Health, and the adoption in 2008 of the Global

Strategy and Plan of Action on public health, innovation and intellectual

property.36

The chapter has attempted to show that while the system has grown

and expanded, the new trends appear to have tilted the balance in favour

of private interests. For example, the impact generated through FTAs on

access to essential products, such as medicines or knowledge in general,

narrowing down the public domain of essential information and further

reducing a pro- competitive environment, should be a source of concern

and a major challenge to policy makers.

The FTAs are a legitimate off spring of TRIPS. They take full advan-

tage of the ambiguities of the Agreement, constituting at the same time a

major step in the expansion of the IP international architecture, not only

in terms of adherence by new members to an important number of inter-

36 See Commission on Intellectual Property Rights, Innovation and Public Health (2006); the follow- up work of its Intergovernmental Working Group on Public Health, Innovation and Intellectual Property (IGWG); and the fi nal adoption in 2008 of the Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property (WHA, 2008).



national treaties37 but also by rendering mandatory a number of WIPO

soft law instruments (such as well- known marks) becoming hard law in the

context of the FTAs. On questions such as stricter enforcement measures,

expansion of copyright protection particularly in the digital environment

(duration, technological protection measures, rights management infor-

mation) and undisclosed information, the FTAs refl ect a new set of norms

and standards that build on the TRIPS Agreement, enlarge its scope and

set precedents on its future evolution marked by, among other things, the

consequences of the WTO- TRIPS most- favoured- nation principle.

One of the most notable features is the ‘importation’ of foreign schemes

of protection in the case, for example, of the protection of clinical test

data. The upward movement towards stronger protection – as the case of

TRIPS and FTAs shows – constitutes, in general, a case of importation

of foreign regimes that prove appropriate for advanced economies but

untested in less advanced countries. The serious challenge for developing

countries is the fact that when importing those foreign systems includes

sophisticated pieces of legislation (such as, for example, the US Digital

Millennium Copyright Act), they do it without the necessary checks and

balances (see Abbott, 2006) that do exist in the ‘exporting’ countries who

have experienced IPRs incrementally through a lengthy period of time (see

Kim, 2003). Less developed countries have major shortcomings in terms

of weak judiciary and administrative systems and an almost non- existent

critical academic and professional bar community. This implies a lack of

signifi cant capacity and boldness to implement, for example, legitimate

TRIPS- compliant exclusions, exceptions and limitations;38 scarce resort

to public policy instruments such as compulsory licensing; and fi nally, a

limited experience of the use of competition policies (see Correa, 2007).

The new IP architecture represents major challenges, among them the

challenge of modernisation that demands major investments in various

areas. To face those challenges, IP alone would not be the answer. IP

reform should be part of a major design anchored in wide- ranging sustain-

able development objectives, where protection and enforcement goes par

to par with access to knowledge; transfer and dissemination of technolo-

gies; the promotion of innovation and competition policies; and, overall,

the recognition of the important role the public domain plays for innova-

tion and creativity.

The international system faces major challenges on how to build

37 See above notes 15 and 16. 38 There is practically no use of the Appendix of the Berne Convention on

Special Provisions regarding Developing Countries.



partnerships with the developing world in terms of better understanding

the needs of technologically backward countries. This would require a

fresh and candid look at the role of diff erent instruments and policies that

could be adapted to particular circumstances and conditions. Property

rights also have an important and crucial role; however, new business

methods, including open source schemes, non- proprietary regimes, com-

petition law and necessary incentives to lift the cultural and technological

conditions in developing countries, also deserve further and more consid-

ered attention.

The European Patent Offi ce (EPO) acknowledged in a pioneering project

that ‘there are many pressures impacting on the patent system – political,

economic, societal, environmental, technological and historical – over

which its guardians and stakeholders have little or no control’ (European

Patent Offi ce, 2007: 2). The EPO identifi ed the fi ve most important

driving forces that will create the greatest uncertainty causing the system

to become more complex and unpredictable, namely power, the global

jungle, the rate of change, systemic risks and the knowledge paradox.

Based on its analysis, EPO foresees four main drivers in possible scenarios

for the future: business (‘market rules’); geo- politics (‘whose game?’);

society (‘trees of knowledge’); and technology (‘blue skies’). One impor-

tant conclusion of the project is that the patent system ‘is far too complex,

and the issues far too diverse for any single group of stakeholders to decide

its future’ (ibid). Such an open and candid view of the IP system is more

than urgent and necessary in the case of developing countries.

In brief, IP has become more globalized and more economically and

politically important, but it remains complex, controversial and divisive.

How the system would better respond to the needs and requirements of

countries at diff erent level of development is still work in progress and a

major challenge to the international system.


331

15. Biotechnology and the international regulation of food and fuel security in developing countries

Mary E. Footer*

1. INTRODUCTION

According to the United Nations, the world’s population is set to grow

from the current 6.8 billion to surpass 9.1 billion in 2050, with sub-

Saharan Africa and Asia accounting for a large proportion of the addi-

tional increase of 2.3 billion (UN, 2009c: vii, ix–x, 1). Already there is

evidence that shows not only a rise in per capita food consumption but

also changes in the geography of consumption. As household incomes

around the world have risen, the current fi nancial crisis notwithstanding,

there has been a dietary shift in many developing countries away from

vegetables and pulses to greater consumption of meat and dairy, with

increased reliance on grain- fed livestock (Stamoulis et al., 2004: 155–8,

165).

Additionally, some developing countries face high demand for biofuels1

from industrial countries where fossil fuels are being rapidly depleted.

Increasingly, biofuels are being produced in developing countries like

Brazil, China, India and Nigeria, with sugar cane and sweet sorghum as

the basis for bioethanol.2 Meanwhile, Indonesia and Malaysia are turning

acreage previously used for rubber production over to palm oil and

* Professor of International Economic Law, School of Law, University of Nottingham, Nottingham, UK.

1 ‘Biofuels’ means any solid, liquid or gaseous fuel produced from ‘biomass’ for use in transport.

2 ‘Bioethanol’ (or simply ethanol) is a gasoline- type fuel made by fermenting sugars found in sugar- rich plants, such as sugar cane, maize, beet, cassava, wheat, sorghum or starch, into alcohol.



Jatropha3 nut oil in order to make biodiesel.4 In some developing coun-

tries, increased production of biofuels has been at the expense of agricul-

tural food production, as demonstrated by rising food prices (Dufey, 2007:

3; FAO, 2008b: 72–86).

As the global population continues to rise agricultural communities

are coming under increasing pressure to increase global food produc-

tion. Conservative estimates anticipate that food production will need to

double in the next 15 years in order to meet such demand. Not only is there

a mounting need for staple crops to provide the basis for food, feed and

fuel but also in the case of developing countries those crops will need to

produce better yields and, where possible, be high in nutritional value. It

therefore becomes paramount to fi nd ways of increasing the agricultural

productivity, yield and nutritional quality of major crops whilst minimis-

ing potential damage to the environment. Advances in agricultural bio-

technology (or agrobiotechnology) could mean that genetic modifi cation

to plant and fi bre will become a vital element in combating human, animal

and plant disease and could even curb certain types of pollution (Harmsen

et al., 2004: 233; Lacy, 2003: 188).

In light of these developments, I argue for a fresh approach towards

evaluating and understanding the potential impact of modern biotech-

nology on food and fuel security in developing countries. However, in so

doing I believe such an exercise is only justifi able when all the pros and

cons of this particular relationship have been duly presented and consid-

ered.

Currently, many biotechnological innovations in the developed, indus-

trialised world are driven by the private sector in pursuit of profi t. The

pattern is not necessarily repeated in developing countries where public

sector universities and research institutions play a more prominent role.

Alternatives to either of these models exist in the form of public–private

partnerships between academic research institutions, not- for- profi t insti-

tutions and the life- science industry, examples of which abound in the fi eld

of human genetics. Despite legal obstacles, such as intellectual property

protection and the need to control anticompetitive behaviour, a ‘common

good’ approach, upon which forward- looking public–private partner-

3 ‘Jatropha’ is ‘mainly Jatropha curcas, an evergreen shrub found in Asia, Africa and the West Indies. Its non- edible seeds contain a high proportion of oil which can be used to produce biodiesel’ (Zaid et al., 2001).

4 ‘Biodiesel’ – as its name suggests – is a diesel- type fuel, which is made by separating glycerine from animal and vegetable oil (such as palm oil, oilseed, rapeseed, Jatropha and soybean), animal fats or algae in order to create methyl esters.


Biotechnology and food and fuel security 333

ships in the fi eld of agrobiotechnology could be based, may have a role to

play in developing countries. Additionally, ‘open source biotechnology’,

which involves open source licensing of technologies (including so- called

‘humanitarian licensing’) may provide a way forward. If so, what are its

implications in terms of the future of food and fuel security in developing

countries?

Beginning with the next section, I provide a brief overview of biotech-

nology and an explanation of its signifi cance for crop development. This

is followed by an elaboration of what is currently understood by food and

fuel security in terms of policy within the human rights discourse and the

food and agriculture community. In the third section, I consider how con-

ventional breeding, as opposed to biotechnology, has dealt with the issue

of food and fuel security before discussing the gains and losses of each

approach and the particular plight of developing countries in this triangu-

lar relationship. The fourth section reviews the public sector universities/

research institutions model of regulating biotechnology and the private

sector life sciences model before discussing the role of public–private

partnerships in biotechnology and agricultural food production. I then

briefl y examine open source biotechnology, which eschews traditional

forms of intellectual property protection in favour of licensing, including

humanitarian licensing. In the fi fth and fi nal section, I off er some conclud-

ing remarks.

2. BIOTECHNOLOGY AND ITS RELATIONSHIP TO FOOD AND FUEL SECURITY: SOME BASIC CONCEPTS

In this section, I defi ne what I understand by biotechnology, explain its

relevance to crop germplasm and agricultural production, and place this

in the context of the current food and fuel security debate.

I. What is Biotechnology and How is it Linked to Crop Development?

Biotechnology is the ‘technological application that uses biological

systems, living organisms, or derivatives thereof, to make or modify prod-

ucts or processes for specifi c use’.5 In a narrower sense biotechnology

is ‘a range of diff erent molecular technologies such as gene manipulation

5 Convention on Biological Diversity, Rio de Janeiro, 5 June 1992, 1760 United Nations Treaty Series 79, (1992) 31 ILM 818: Art. 2.



and gene transfer, DNA typing and cloning of plants and animals’ (FAO,

2000). When such molecular technologies are applied to crop germplasm

and the novel use of plants, animals and micro- organisms, they may result

in the improvement of crops and livestock in terms of yield and nutritional

quality (Borlaug, 2002: 7–8).

What types of technologies are being used in order to develop crops and

what benefi ts do they provide? Further, to what extent are they used by

developing countries? Currently, in so- called green biotechnology,6 there

are several techniques at work. One is cell or tissue culture, which is ‘the in

vitro culture’ of cells or tissues in a nutrient medium under sterile condi-

tions (Zaid et al., 2001). It allows for the micropropagation and breeding

of a plant from very small amounts of its parts, such as roots, leaves or

stems, or even a single plant cell, under laboratory conditions. Both plant

cell and plant tissue culture have been used in Kenya for the development

of crops such as banana, potato and cassava. The latter crops are known

in the bioindustry as pro- poor crops since they are found mostly in middle

to lower income developing or least- developed countries and are a signifi -

cant source of nutrition for local communities.

Another, more widespread technique is genetic engineering, which is pri-

marily aimed at crop protection. During the course of plant breeding ‘indi-

vidual genes or sections of chromosomes from a particular genome’ are

selected and deliberately transferred from one organism to another under

laboratory conditions in order to create new plant species or to improve

the yield of existing ones (Kropiwnicka, 2005: 47). Sometimes, selection is

based on a related technique, using molecular or genetic markers in plants

that comprise identifi able deoxyribonucleic acid or DNA sequences (also

known as molecular or marker- assisted breeding). These DNA sequences

are associated with a specifi c trait in a gene, which can then be selected for

its high yield, resistance to disease or tolerance of climatic conditions such

as cold or drought.

Examples of genetically engineered crops (sometimes known more

commonly as genetically modifi ed or GM crops) are cotton, maize and

soybean. Molecular breeding is prevalent in the production of Bt maize,

which has been grown not only for its high- yielding qualities but also for

its resistance to such abiotic7 stresses as drought. It is anticipated that its

6 ‘Green (or agrifood) biotechnology’ refers to a collection of technologies using plant organisms and plant cells for the transformation of food, biomaterials and energy (Zaid et al., 2001; Scoones, 2002: 12).

7 So- called ‘abiotic stresses’ include such things as drought, salinity or extreme temperature in contrast to ‘biotic stresses’ such as pests, weeds or dis-eases.



impact on food security in sub- Saharan Africa, where maize is the staple

food, could prove signifi cant. So too could Bt rice, since rice is the world’s

most important food crop and the one on which some of the most popu-

lous regions of Asia are dependent (James, 2008: 11–12).

There are two other techniques which may have a role to play in the

application of biotechnology to agricultural food production in devel-

oping countries. One is embryo rescue, which involves ‘[a] sequence of

tissue culture techniques’ being used to allow ‘a fertilized immature

embryo resulting from an interspecifi c cross to continue growth and

development, until it can be regenerated into an adult plant’ (Zaid et al.,

2001). Embryo rescue has been used with some success for the purposes

of cross- breeding by the West African Rice Development Association

(WARDA) in Côte d’Ivoire in order to achieve earlier maturity and

improved pest resistance as well as tolerance to drought and acid soils.

It also allows the rice to grow to a greater height in the fi elds, thereby

making it easier for farmers to harvest by hand and introducing cost-

savings (Glover, 2003: 2). It is therefore representative of second genera-

tion GM crops, which provide value- enhancing traits for the farmer and,

ultimately, the consumer.

The other technique is biofortifi cation, which is the deliberate develop-

ment of staple food crops that are rich in micronutrients, or ‘nutrition-

ally enhanced foods’, either through conventional breeding or genetic

modifi cation (Johns and Eyzaguirre, 2007: 2, 4–6). Crops containing

micronutrients which are capable of reducing the risk factors for dis-

eases are sometimes known as ‘functional foods’. A good example of

biofortifi cation for developing countries, especially those situated in

Southeast Asia, is the production of ‘Golden Rice’, which has the poten-

tial to help alleviate vitamin A and beta- carotene defi ciency, which can

lead to loss of eyesight, and auto- immune defi ciencies. After almost 20

years, two Swiss scientists succeeded in inserting the relevant genes into

rice to produce a beta- carotene-rich species and thereby contributed to

a nutritionally higher food source (Krattiger and Potrykus, 2007: CS.

11).

The question is whether any of the techniques for commercialised

crop production are being used in order to meet the food security needs

of the developing countries which are growing them. Or, put diff erently,

is large- scale agrobiotech production primarily destined for interna-

tional commodity markets or is it suffi cient to feed local populations as

well? This is an issue to which I return in Section 3 when considering

the impact of biotechnology on food and fuel security in developing

countries.



II. The Current Debate about Food and Fuel Security in Policy Terms

At various points over the past thirty years food security8 has taken

on diff erent meanings depending upon where the policy debate was

taking place. From the mid- 1970s onwards, spurred on by the Green

Revolution9 with its emphasis on ‘high productivity while preserving or

improving the resource base of agriculture and the environment’ (Welch

and Graham, 2000: 362), policymakers emphasised the availability of

food and its supply at the global level. By the beginning of the 1990s the

emphasis had shifted from supplying food to the issue of access to food

and the importance of the wellbeing that food security brings.

As a result, food security has come to form part of the overall focus of

policymakers concerned with the alleviation of poverty, as an element

in the broader approach to ‘livelihood security’ (Scoones, 2002: 11). At

the same time, it is of fundamental importance to human rights policy

and forms part of the international human rights discourse (Marks and

Clapham, 2005: 168–74).

The right to adequate food is taken up in the Universal Declaration of

Human Rights, which states that everyone has the right ‘to a standard of

living adequate for the health and wellbeing of himself and of his family,

including food’ (UNGA, 1948: Art. 25). Similarly, the International

Covenant on Economic, Social and Cultural Rights (ICESCR)10 endorses

the right to adequate food (Art. 11(1)) and records the commitment of

8 While food safety forms part of the broader concept of food security it is not one of the primary objectives of the regulatory instruments addressed in this chapter. Therefore, the legal regulation of the transboundary movement of geneti-cally modifi ed organisms (GMOs) under the Cartagena Protocol on Biosafety to the Convention on Biological Diversity, 2000, the legal regime for pest control, disease and contamination in plants as provided for under the International Plant Protection Convention, and the work of the FAO/WHO Codex Alimentarius Commission are not discussed here.

9 The Green Revolution refers to ‘the dramatic increase in crop productivity during the third quarter of the twentieth century, as a result of integrated advances in genetics and plant breeding, agronomy, and pest and disease control’ (Zaid et al., 2001). It is often associated with the American Scientist and Nobel Prize- winner, Norman Borlaug, who successfully increased yields of wheat in Mexico during the 1950s and 1960s using the aforementioned advances in plant science and technology.

10 International Covenant on Economic, Social and Cultural Rights, adopted and opened for signature, ratifi cation and accession by United Nations General Assembly, 16 December 1966, Resolution 2200A (XXI), 21 UN GAOR Supplement, No 16, 49; UN Doc A/6316 (1966), 999 UNTS 3, 6 ILM 360 (entered into force 3 January 1976).



state parties to take measures to ensure that everyone is free from hunger

(Art. 11(2)). Furthermore, the right to adequate food encompasses the

‘minimum standard of nutrition and other basic necessities’ (Eide, 2001:

134).

Heads of State and Governments which are Members of the FAO

placed food security at the heart of the organisation’s work when they

adopted the Rome Declaration on World Food Security at the World

Food Summit in 1996. According to the World Food Summit Action

Plan, food security exists ‘when all people at all times, have physical and

economic access to suffi cient, safe and nutritious food to meet their dietary

needs and food preferences for an active and healthy life’ (FAO, 1996:

para. 1). Contemporaneously, the World Food Summit Action Plan called

upon states ‘to clarify the content of the right to adequate food and the

fundamental right of everyone to be free from hunger’ (FAO, 1996: para.

61, obj. 7.4).

The Committee on Economic, Social and Cultural Rights (CESCR)

responded to the FAO’s concern in 1999 by elaborating an infl uential

analysis of the right to adequate food in its General Comment No 12

(Marks and Clapham, 2005: 170–71; Mechlem and Raney, 2007: 134).

Accordingly, the normative content of paragraphs 1 and 2 of Article 11

ICESCR means that ‘[T]he right to adequate food is realized when every

. . . [individual], alone or in community with others, has physical and eco-

nomic access at all times to adequate food or means for its procurement’

(CESCR, 1999: para. 6).

In accordance with Article 11, states are under an obligation to respect

existing access to adequate food, which means that they are required ‘not

to take any measures that result in preventing such access’. They have an

obligation to protect, which means they must ‘ensure that [multinationals

and other business] enterprises or individuals do not deprive individuals

of their access to adequate food’. Lastly, states are under an obligation to

fulfi l (facilitate) the right to food, which means that they must ‘pro- actively

engage in activities intended to strengthen people’s access to and utiliza-

tion of resources and means to ensure their livelihood, including food

security’. Where necessary, for reasons beyond the control of their people,

including victims of natural and other disasters, states have another obli-

gation to fulfi l (provide) food directly, that is, by means of food aid (ibid:

para. 15).

Furthermore, the CESCR defi nes the meaning of ‘adequate food’ as

comprising ‘the availability of food in quantity and quality suffi cient

to satisfy dietary needs of individuals, free from adverse substances,

and acceptable within a given culture’ (ibid: para. 8). While many

commentators consider the obligations in General Comment No 12 to be



authoritative, there are also a fair number of detractors who argue that the

CESCR has overreached its mandate in interpreting Article 11 so broadly

(Downes, 2007: 627).

In November 2004, the FAO Council adopted Voluntary Guidelines on

the Progressive Realization of the Right to Adequate Food in the Context

of National Food Security (FAO, 2005), which go a step further in making

the right to adequate food essential to FAO food policy. These right to

food guidelines stem from the aspirations set out in the 2002 Declaration

of the World Food Summit: Five Years Later (FAO, 2002) and build upon

existing international law – in particular the CESCR’s (1999) General

Comment No 12. Despite some scepticism as to their legal value (Downes,

2007: 625), the guidelines are intended to provide practical recommenda-

tions for action that national authorities need to take in order to fulfi l the

right to adequate food (Donati and Vidar, 2008: 56). Operationalisation

of this right at national level, by means of a right to food impact assess-

ments (Voluntary Guideline 17), is already taking place, spurred on by the

FAO’s adoption of practical methods for monitoring the right to adequate

food, although such eff orts remain limited in their scope and application

(Oshaug, 2007: 426–32).

Related activities in the fi eld of biotechnology and ethics at the FAO are

also relevant to food security and the right to adequate food. However,

progress on a Draft Code of Conduct on Biotechnology as it Relates to

Genetic Resources for Food and Agriculture, which began in 1991, has

been slow. It is currently subject to a broad review, which has revealed

inter alia that ‘there are currently no international policy instruments spe-

cifi cally dealing with the issue of how agricultural biotechnologies might

be focussed on . . . food security’ (FAO, 2007: 3). This is a serious omis-

sion.

Meanwhile, an independent Panel of Eminent Experts on Ethics in

Food and Agriculture was established in 2000 by the FAO Director

General in order to advise Members on ethical issues related to the appli-

cation of biotechnology in the fi eld of food and agriculture. In its third

report, the Panel has stated that ‘[W]hile most innovation for food and

agriculture does not depend on IPRs’ [intellectual property rights] their

‘acquisition and exercise . . . in this fi eld raise a variety of ethical concerns’

(FAO, 2006b: 21).

Along similar lines, Olivier de Schutter, the second UN Special

Rapporteur on the Right to Food, in his Interim Report to the UN

General Assembly, has noted that the WTO Trade- Related Aspects of

Intellectual Property Rights (TRIPS) Agreement ‘will have consider-

able implications across the food system’ (UN, 2008b: para. 24). He is

concerned that the TRIPs Agreement and the protection of other IPRs



on plant varieties ‘remain fully compatible with the obligation to protect

the right to food, including the right of farmers to produce food under

conditions that ensure an adequate standard of living’ (ibid: para. 28). In

furtherance of this goal, he has produced a report on the commercialisa-

tion of plant breeding alongside the use of farmers’ varieties through tra-

ditional seed systems, examining inter alia how these two systems might

coexist in pursuit of the realisation of the right to food (UN, 2009a: paras

26–7, 42–3, 52). The issue of coexistence, in the context of food security,

is an issue to which I return in Section 3 below.

Within the international community the issue of food security has taken

on another dimension owing to concerns about fuel security in the context

of global warming and climate change. Increased biofuels production is

capable of diverting output from staple crops like sugar cane, maize and

oilseeds from food (agricultural) to non- food (non- agricultural) uses. In

2008, when food prices rose dramatically, it was conceded that the emerg-

ing biofuels industry was a ‘new and signifi cant user of [such] agricultural

commodities’, which had driven up prices in world markets and in turn

had led to higher food prices (FAO, 2008a: para. 18).

However, the evidence to demonstrate a direct link between increased

biofuels production and food insecurity is inconclusive. The FAO has

acknowledged that ‘[B]iofuels may aff ect the utilization dimension of food

security’ and, by way of example, cites the diversion of substantial water

supplies away from households for use in feedstock production as poten-

tially aff ecting the health of individuals and their food security status.

Even so, there may be a positive outcome if new sources of bioenergy

replace existing energy sources that pollute and there is an expansion in

available energy to the rural poor, with positive eff ects on the environ-

ment, health and food utilisation in developing countries (FAO, 2008b:

79).

The FAO has noted that biofuels have emerged as a major new source

of demand for agricultural commodities, which could help revitalise

agriculture in developing countries and have positive eff ects on economic

growth, poverty reduction and food security (ibid). Yet only a handful of

developing countries, including Brazil, China, India and Nigeria followed

by Indonesia and Malaysia, are capable of this. In these countries, with

plantation- style economies, the balance of agricultural production has

been tipping in favour of crops for biofuels alongside food and animal feed-

stuff s. With the advantage of almost year- round growing seasons, cheap

agricultural labour and high crop yields based on sugar cane, soybean,

Jatropha nut oil and palm oil, they are able to produce bioethanol and

biodiesel both for domestic consumption and for export. Additionally,

the cost- savings that these countries make by producing crops for biofuels



means that they can compete domestically with petroleum- based products,

thereby providing greater fuel security for their own people (ibid).

3. TRIANGULATING BIOTECHNOLOGY, FOOD AND FUEL SECURITY AND DEVELOPING COUNTRIES

Despite some successes many developing countries are not necessarily

reaping any real gains from biotechnology when it comes to food and fuel

security and, where they are, those benefi ts may be distributed unevenly.

This is largely due to asymmetric information about, and lack of access

to, technology as well as general resource problems, which hamper many

farming communities in the developing world.

This section begins by looking at how conventional breeding of crop

germplasm is the norm although modern biotechnology is making inroads,

especially in the middle to higher income developing countries, which are

growing staple crops commercially for food and fuel production. I examine

the gains and losses from conventional breeding and genetic engineering in

developing countries, as well as the issue of ‘coexistence’, before discuss-

ing the impact of all three methods on food and fuel security.

I. Conventional Breeding versus Genetic Engineering in Developing

Countries: Gains and Losses

Conventional breeding of plant genetic resources for food and agriculture

(PGRFA)11 has relied primarily on the propagation of improved crop

germplasm through traditional methods of conservation and reproduc-

tion. Since time immemorial farmers have been saving and exchanging the

seeds they have harvested from traditional landraces12 and seeking out

new varieties, which are essential for improving basic crops such as maize,

millet, rice and wheat and ensuring sustainability. They have done so

without asserting individual or collective ownership over their seeds and

without claiming any form of intellectual property (IP) protection.

Instead, they have sought to improve upon existing varieties through the

11 This sort of genetic material is used for plant conservation and breed-ing since it is linked to crops, which are referred to collectively as plant genetic resources for food and agriculture or PGRFA (Zaid et al., 2001).

12 Landraces are early, cultivated forms of a crop species, which have evolved from a wild population and are adapted to the natural and cultural environment from which they originated or in which they are found.



informal exchange of seed. Other more formal means, such as village grain

markets, are also commonplace in many developing countries even if the

quality of seed cannot be assured (Smale et al., 2009: 3; UN, 2009a: para.

42). By continuously deriving new or modern varieties from PGRFA,

production levels of all major staple crops around the world have risen,

leading to greater food security and increased incomes for farmers in both

the developed and developing world.

High- yielding crop varieties were fi rst introduced into conventional

breeding from the late 1950s and mid- 1960s onwards, with particular

success in hybrid13 forms of rice and wheat in Asia and Latin America

respectively. Such introductions were assisted by the establishment of

the fi rst two publicly funded international agricultural research centres

(IARCs) in the developing world. One was the Centro Internacional de

Mejoramiento de Maíz y Trigo (CIMMYT) or International Maize and

Wheat Improvement Center in Mexico. The other was the International

Rice Research Institute (IRRI) in the Philippines. Over the past four

decades, the impact of these two IARCs, which operate under the aus-

pices of the Consultative Group for International Agricultural Research

(CGIAR),14 has contributed signifi cantly to the breeding, release and dif-

fusion of modern varieties, with reliance on ‘access to rich stocks of genetic

resources . . . [that have drawn] on extensive breeding experience in devel-

oped countries’ (Evenson and Gollin, 2003: 758).

An important feature of the establishment and management of these

IARC genebanks, nearly all of which are located in the germplasm rich

countries of the southern hemisphere, was their understanding that

PGRFA belongs to humanity’s collective ‘genetic estate’; that is, it forms

part of the common heritage of mankind, and is not subject to individual

appropriation. Essential crop germplasm or PGRFA has always been

freely available – the only cost being that of its actual collection. The

free exchange paradigm was the norm among plant breeders and other

13 A hybrid is the off spring that results from crossing two genetically diff erent pure- bred varieties.

14 The Consultative Group on International Agricultural Research or CGIAR supports 18 international agricultural research centres or IARCs, 12 of which are concerned with the genetic improvement and conservation of major food crops and animal feedstuff s, also known as forages. The CGIAR, through its diff erent IARCs, currently holds the world’s largest international ex situ collection of PGRFA with more than 500,000 accessions, representing some 3,000 species that are vital for crop improvement and the maintenance of global food security. Besides being centres for the storage of germplasm, the IARCs also function as centres of international research and testing of crop germplasm and they assist with the training of scientists for national agricultural research programmes.



scientists and was suffi cient to maintain a relatively free international fl ow

of plant genetic material stored in the genebanks at IARCs around the

world (Footer, 2000: 57).

And so the Green Revolution, to which I referred earlier, was born. It

had a broad and deep impact on agricultural production in many devel-

oping countries, which went well beyond the original success of wheat

in Latin America and rice in Asia, although overall production began

to decline everywhere, except sub- Saharan Africa, from 1981 onwards

(Evenson and Gollin, 2003: 760). In fact, the negative aspects of the Green

Revolution eventually came to outweigh the positive gains. The gains that

were made from introducing modern varieties of high- yielding varieties of

corn and wheat in developing countries’ crops were off set by the gradual

abandonment of diverse, relatively low- yielding landraces, or traditional

cultivars, and with it the loss of biodiversity. There were other far- reaching

consequences for the rural poor, in terms of food security, which are dis-

cussed in the next section.

Techniques of modern biotechnology essentially allow the introduction

into organisms (including cell lines, tissues and so on) of specifi c genes that

can bring about new traits in crop germplasm, as mentioned in Section

2. The essential point about genetic engineering is that ‘it preserves the

integrity of the parental genotype, inserting only a small additional piece

of information that controls a specifi c trait’ (Manshardt, 2004: 1). It is

seen as superior to forms of conventional breeding because ‘it allows for a

quicker, more precise and more reliable transfer of traits, and draws on a

wider variety of genetic material’ (Lacy, 2003: 189).

Yet, the gains from biotechnology in terms of higher yields and/or pest/

herbicide resistant crops may be off set by the accompanying risks that

genetic engineering poses. These include its eff ects on human, animal

and plant health because of the potential transfer of toxins from one life

form to another, including substances responsible for allergic reactions,

or the possibility that the products of biotechnology might contain anti-

nutritional properties (Lacy, 2003: 191; Manshardt, 2004: 2; Kropiwnicka,

2005: 47). There are also environmental risks, including the loss of biodi-

versity in favour of new GM food crops, the potential contamination of

the world’s PGRFA and the appearance of a whole new generation of

more aggressive weeds with basic resistance to both diseases and pesticides

(Lacy, 2003: 192; Kropiwnicka, 2005: 47).

Uncertainty about the risks to health and the environment surrounding

the use of GM technology means that an approach which advocates its

application in dealing with the problems of food security in developing

countries is bound to face resistance. Yet, while several major multilateral

environmental agreements, including the Convention on Biodiversity



(CBD) 15 and the Cartagena Protocol on Biosafety (CBP),16 endorse the

precautionary principle,17 there is still no global consensus about the

risks that attach to new technologies in general or to GMOs in particular.

Instead, there is evidence that the precautionary principle – even in the

area of food safety – is becoming susceptible to a policy of moderation,

particularly in developing countries where highly precautionary policies

may come at the expense of eradicating hunger (Wiener, 2007: 610–11).

Another aspect of modern biotechnology is that the current structure

of the agrobiotech industry is dominated by the private sector and cur-

rently revolves around patent- protected crop germplasm or PGRFA that

is either herbicide resistant (such as Monsanto’s Roundup Ready®18

soybean) or engineered to produce its own insecticide (such as Bt (Bacillus

thuringiensis)19 crops). The emergence of a new generation of IP rights

– in the form of plant variety protection (PVP) – over the germplasm

of sexually reproducing plants, including most commercial agricultural

crops, grants to breeders of new plant varieties an exclusive property right

on the basis of a set of uniform and clearly defi ned principles, known as

a plant breeder’s right (PBR). Additionally, patents, which formerly only

applied to the inventions of industrial processes and not to discoveries of

the natural laws, are increasingly tolerated in the agricultural sector.

Many countries, including an increasing number of developing coun-

tries, have adopted some type of PVP legislation, conforming either to

the 1978 or the 1991 version of the UPOV Convention (International

15 See the ninth preambular paragraph to the Convention on Biological Diversity, Rio de Janeiro, 5 June 1992, 1760 United Nations Treaty Series 79; (1992) 31 ILM 818.

16 See the fourth preambular para., Arts 1, 10.6 and 11.8 to the Protocol on Biosafety to the Convention on Biological Diversity, Cartagena, 29 January 2000, 39 ILM 1027, entered into force 11 September 2003.

17 The precautionary principle is understood as meaning that lack of scientifi c certainty, due to insuffi cient scientifi c knowledge regarding the potential adverse eff ects of biotechnology on the conservation and sustainable use of biological diversity, taking into account the risks to human health, shall not be used as a reason for inaction; instead action should be taken to avoid or minimise such adverse eff ects.

18 RR® or Roundup Ready is the proprietary name of the herbicide or weed killer developed by Monsanto. Its active ingredient is glyphosate, mixed with other chemicals, or adjuvants, which allow the product to stick to the leaves, or other plant parts, thereby helping the active ingredients to enter the plant cells and kill the entire plant.

19 Bt or Bacillus thuringiensis is ‘a bacterium that produces a toxin against certain insects, particularly Coloeptera and Lepidoptera, and a major insecticide approved for use in organic farming’ (Mechlem and Raney, 2007: 133, fn. 8).



Convention for the Protection of New Varieties of Plants). In most cases,

this allows for the exclusive grant of IP protection over crop germplasm or

PGRFA, by means of patents or plant breeders’ rights (PBRs), which are

sought after by multinational corporations that produce GM food crops

commercially. The consequence is that there has been a move towards

standardisation of crop germplasm or PGRFA for many staple food

crops, with the possibility of genetic erosion (Footer, 2000: 52).

Additionally, and in contrast to the Green Revolution, while new varie-

ties were previously developed with public sector research funding, there

has been a decline in agricultural capacity in many developing countries.

This is symptomatic of the retreat of the state from agricultural research

and development (R&D), as a result of various conditionalities under

structural adjustment programmes and the incompatibility of state subsi-

dies, including food subsidies, with international trade rules (UNCTAD,

2008a: paras 18, 20, 24). The gap has been fi lled in many developing coun-

tries by the private sector, mostly by a handful of multinational corpora-

tions with large injections of private capital, which cannot be matched in

terms of public funding. The amount spent by the private sector on R&D

in agrobiotechnology far outweighs that of the IARCs under the CGIAR

system and of individual countries, including the three largest national

agricultural research programmes of Brazil, India and China (Mechlem

and Raney, 2007: 145).

In the meantime, there are three troubling consequences of the private

sector domination of agrobiotech for developing countries. First, know-

ledge accumulated in the private sector about the quality of a particular

seed, based on its genetic performance characteristics, is invariably not

shared between seed suppliers and poor farmers. Besides, where a private

seed industry has become established in a developing country, farmers

may be insuffi ciently informed to distinguish among varieties and those

providing agricultural inputs, such as fertilisers, may lack capacity (Tripp,

2001: 252, 260–61).

Second, private- sector- led R&D in agrobiotechnology tends to focus on

those technologies which are the most suitable for large- scale commercial

agricultural production and which enjoy strong intellectual property (IP)

protection. The encroachment of patents and PBRs, notwithstanding

legitimate research exemptions and the farmers’ privilege to save and

exchange seed under international instruments, is a considerable cause for

concern (UN, 2009a: paras 27–30). I return to this issue in Section 4, where

I also discuss the role that open source biotechnology might play in the

transfer of technology in developing countries, thereby mitigating some of

the worst eff ects of an over- protective IP regime.

Third, the rural poor may be further marginalised by the failure of large



agrobiotech companies to conduct research on improvements to orphan

or pro- poor crops like cassava, millet and sorghum, upon which many

people rely for their very survival (Mechlem and Raney, 2007: 147; UN,

2009a: para. 34).

Finally, following the lead of Argentina, Brazil and China, an increas-

ing number of developing countries in the southern hemisphere are

beginning to approve the growing of GM crops on a commercial scale,

following biosafety and environmental impact assessments, and despite

the high costs of compliance. The emerging picture of crop production in

the developing world is increasingly likely to be one where conventional

and GM crops coexist (possibly also with organic production) in order to

furnish both domestic and international markets with diff erentiated prod-

ucts (Falck Zepeda, 2006: 1200–3, 1206).

However, initial research on the issue of coexistence has shown that

there may be limited opportunities to implement such systems on the Asian

continent, and even less in sub- Saharan Africa, due to a lack of knowledge

about innovations in the fi eld of biotechnology and the inappropriate

agricultural infrastructure faced by many poor farmers (Tripp, 2001:

252–4). Additionally, many developing countries are unable to support a

well- managed system of segregation, traceability and identity preservation

(STIP), which is vital for distinguishing between conventional breeding

and crops that have been genetically engineered, other than through the

intermediation of private standard- setting by the agrifood industry. Many

of them have not established appropriate frameworks for liability and

redress in order to deal with the risks of commingling during planting,

harvesting, storage and transportation (Falck Zepeda, 2006: 1202, 1204).

II. The Impact of Biotechnology on Food and Fuel Security in Developing

Countries

Nearly two decades ago Agenda 21 held out the promise that biotechnol-

ogy could ‘make a signifi cant contribution in enabling the development

of . . . enhanced food security through sustainable agricultural practices’

(UN, 1993: 16.1). To what extent has that promise been achieved? What

impact has the regulation of biotechnology had on food and fuel security

in developing countries?

Refl ecting the global importance of cereals as staple foods, and spurred

on by private sector investment, governments have put extensive public

money into breeding high- yielding, well- adapted varieties of the major

cereal crops alongside the production of GM crops, thereby giving content

to the duty to fulfi l (facilitate) the right of their peoples to adequate food.

This has enabled modern varieties of rice, wheat and maize to perform



relatively well in many production environments. As a result, there have

been successes, although it is not always easy to discern where biotechnol-

ogy has helped in the commercialisation of food crops and where, if at all,

it has been directed at eradicating hunger or addressing fuel poverty in


For example, over the past 13 years there has been a steady increase

in the number of developing countries planting high- yielding Bt maize

(Argentina, Brazil, Chile, Egypt, Honduras, Philippines, South Africa

and Uruguay), pest- resistant Bt cotton20 (Argentina, Brazil, Burkina

Faso, China, Colombia, India, Mexico and South Africa), and Roundup

Ready® herbicide resistant soybean (Argentina, Bolivia, Brazil, Chile,

Mexico, Paraguay, South Africa and Uruguay). In 2008, six of the top

eight countries with more than one million hectares of GM crops were

developing countries – Argentina, Brazil, China, India, Paraguay and

South Africa – with the largest concentration of such crops being in the

southern cone of Latin America where Argentina and Brazil combined

accounted for more than 37 million hectares of soybean, maize and cotton

(James, 2008: 4–6).

While agricultural production using GM technology may have expanded

in some developing countries, this still represents only approximately 30

per cent of GM crops planted globally (Falck Zepeda, 2006: 1200; James,

2008: 4–5). Another point to note is that in semi- arid and arid environ-

ments – particularly in the non- industrialised agricultural economies of

sub- Saharan Africa – tubers such as cassava or cereals like sorghum and

millet predominate, rather than rice, wheat or maize. The private sector

should be encouraged to invest more in these orphan crops (UN, 2009a:

para. 35).

As for fuel security, the picture in both major developing country pro-

ducers of biofuels for feedstock and other developing countries is more

complex. In some developing countries, like Brazil, biofuels production

has led to further savings by using parts of the sugar- cane plant to fertilise

the crops which provide the raw ingredients and to fi re up the distilleries

for ethanol production, thereby using less fossil fuel and with lower CO2

emission in the production process. Similarly, biofertilisers have been suc-

cessfully piloted in Bangladesh, Brazil, Kenya, Tanzania, Zimbabwe and

Zambia. While they could assist farmers to increase domestic production,

by enhancing crop yields of legumes and cereals, they could also increase

20 Bt cotton is principally developed in order to suppress infestations of a pest known as the cotton bollworm or Helicoverpa zea, which bores into cotton before it has matured.



the export capacity in biofertilisers from those countries, thereby leading

to increased export revenues (UNCTAD, 2004d: 5–6, 90).

However, where biofuel production levels are high there is the possibil-

ity that land may be drawn away from other agricultural uses, including

food production, aff ecting both food prices and the availability of food for

domestic consumers, which fl ies in the face of a government’s obligation to

respect, protect and fulfi l (facilitate) the right to adequate food. Likewise,

intensive cultivation of crops for biofuels may trigger or exacerbate

common environmental problems such as deforestation, monocropping,

over- usage of water and land degradation (Dufey, 2007: 2).

A further issue is that while some of the world’s poorest countries may

be well placed to become major producers of biomass21 for liquid food

production, many of their farmers are smallholders and cannot keep pace

with large- scale plantation- style production. Other constraints that these

farmers face arise from poorly functioning commodity markets, lack of

access to fi nance, poorly performing producer organisations and signifi -

cant problems with access to seed and fertiliser, especially in sub- Saharan

Africa (FAO, 2008b: 79, 82).

4. DIFFERENT MODELS FOR THE REGULATION OF BIOTECHNOLOGY IN AGRICULTURAL PRODUCTION

Another aspect of the relationship of biotechnology to food and fuel secu-

rity in developing countries is the way in which the emerging bioeconomy

is structured. Agenda 21 boldly claimed that biotechnology off ered ‘new

opportunities for global partnerships, especially between the countries

rich in biological resources . . . but lacking the expertise and investments

needed to apply such resources . . . and the countries that have developed

the technological expertise to transform biological resources’ (UN, 1993:

16.1). In other words, the claims that were made for biotechnology were

what it could achieve not just in terms of improving human welfare but

also in terms of forging new forms of cooperation between North and

South.

In this section I discuss how the public and private sectors have joined

forces in the regulation of biotechnology before briefl y examining the

21 ‘Biomass’ is any sort of organic material found above or below ground, either living or dead, such as trees, crops, grasses, tree litter, and roots (Zaid et al., 2001).



potential for open source biotechnology, which some have advocated as a

way of addressing intractable IP issues in public–private partnerships.

I. Public–Private Sector Regulation of Biotechnology

When it comes to the regulation of biotechnology in developing countries,

many governments have traditionally made a choice between a public

sector model approach (which broadly supports public funding of scien-

tifi c research, coupled with the development of essential technologies) and

a private sector model approach (which fosters a free- market approach

and includes strong intellectual property protection) or, alternatively,

have chosen some combination of the two (Richards, 2004: 273).

Since coming into force in 2004 the International Treaty on Plant

Genetic Resources for Food and Agriculture (ITPGRFA) has played an

important role in public research. Its presence ensures that there is a mul-

tilateral system22 for facilitated access to a specifi ed list of PGRFA of 64

food crops which are (a) under the permanent management and control

of the 120 states parties to it, and (b) only accessible for the purpose of

‘utilization and conservation for research, breeding and training’ (Art.

12(3)(a)). Any attempts to appropriate this essential crop germplasm for

more general commercial purposes are strictly limited and royalties earned

must be paid into a common fund, with benefi ts fl owing back primarily

to farmers. To the extent that states are parties to this treaty arrangement

and using the Multilateral System (MLS), they are in a position to secure

sources of crop germplasm or PGRFA for conventional breeding of all

essential crops, with the exception of soybean.

However, when it comes to GM technology in agricultural crop produc-

tion, many of the tools which are needed for research are in the private

sector, while the genetic material for sustaining crops which are essential

for survival of the poorest are in the public sector, often in the very same

CGIAR centre genebanks that are exchanging crop germplasm through

the MLS. It is hardly surprising therefore to fi nd that public research

institutions and the private sector are joining forces in order to conduct

agrobiotech research for the benefi t of developing country farmers. Are

such partnerships global, as Agenda 21 suggests? To what extent are they

22 The Multilateral System of Access and Benefi t Sharing, or Multilateral System (MLS) for short, was established under Articles 11, 12 and 13 of the International Treaty on Plant Genetic Resources for Food and Agriculture, adopted on 3 November 2001, FAO Conference, 31st Session, Rome 2–13 November, Resolution 3/01, entered into force 29 June 2004.



capable of providing the scientifi c and technological advances necessary to

ensure food and fuel security in poor rural areas?

Public–private partnerships in agricultural research take a variety of

diff erent forms. While, universities or publicly funded research institutes

may link up with cooperatives of small producers, or local private com-

panies may partner with national agricultural research centres (NARCs),

increasingly the most visible, and sometimes controversial, partnerships

are between large, international life science companies and national or

CGIAR institutions. For example, the Golden Rice project, to which I

referred earlier, led Potrykus and Beyer, the two scientists from the ETH

Zurich and the University of Freiburg, Germany, to partner with Zeneca

(which later merged with Novartis to form Syngenta) in order to advance

their research into the biofortifi cation of rice.

Yet, while some public–private partnerships may hold out the promise

of technological advancement in the fi eld of agrobiotech, others have

drawbacks due to the confl icting incentives of the partners or the fact

that they are answerable to diff erent stakeholders. Similarly, the costs

of managing such relationships and achieving true partnerships in the

sense of technology and knowledge transfer can be high. One example of

a successful public–private partnership is the Scientifi c and Know- How

Exchange Program (SKEP), which is an initiative of the World Bank and

CGIAR’s Private- Sector Committee that was launched in 2005. Under the

SKEP umbrella, Bayer CropScience entered into an agreement with the

International Food Policy Research Institute (IFPRI), one of the CGIAR

centres, to explore ways of supporting public–private innovation processes

in biotechnology for the benefi t of developing countries.

Another successful public–private partnership is the work of the

CIMMYT, the Kenya Agricultural Research Institute (KARI), a national

agricultural research centre, and the Syngenta Foundation in developing

insect- resistant maize23 for Africa (IRMA), using both GM and conven-

tional breeding. Besides being in a position to develop large fi eld trials

of maize varieties for resistance to a pest known as the stem borer, the

Syngenta Foundation has been able to contribute signifi cant amounts of

fi nancial capital as well as expertise in bioregulation and business planning

to the joint venture, which is housed at KARI. Meanwhile KARI can off er

its local experience of genetic modifi cation and provide extension systems

to farmers, based on its research and testing, while the CIMMYT provides

23 The work involves developing a maize variety that is resistant to the stem borer – a pest which, until recently, has been responsible for causing 15 per cent or more of losses in maize yields in Kenya.



the basic crop germplasm or PGRFA for insect- resistant maize together

with its scientifi c and training expertise. Even so, in terms of food security

for poor rural communities, such a partnership may prove irrelevant if

there are no local seed companies and markets to distribute the new forms

of insect- resistant maize seeds to rural farming communities or if there

is widespread opposition to such collaborative partnerships, especially if

they involve the pursuit of GM innovations in agricultural production.

A further reason that not all public–private partnerships are necessar-

ily successful is that there may be a confl ict over the transfer of technol-

ogy, which is encumbered by IP protection. For example, ICI Seeds, an

American seed company (later Zeneca and now Syngenta), entered into a

partnership with Indonesia’s Central Research Institute for Food Crops

(CRIFC), another national agricultural research centre, between 1995 and

1998, in order to develop insect- resistant tropical corn. The partnership

succeeded in training the Indonesian researchers in techniques like genetic

engineering and molecular mapping. When the time came to transfer the

company’s technologies to CRIFC for use in the institute’s breeding pro-

grams the partnership fell apart. This was due to Indonesia’s weak system

of patent protection combined with a lack of biosafety regulation for

testing genetically engineered plants in fi eld trials. ICI eventually refused

to transfer the relevant technology to the Indonesian partner.

II. Towards Open Source Biotechnology

A fi nal issue that arises when dealing with the complexities of food and fuel

security is the degree to which the private partner is willing to relinquish its

claim to IP protection over new agrobiotech applications in which it has

invested so much R&D. Given the dramatic expansion of IP protection in

the fi eld of biotechnology research there is an obvious worry that further

innovation which is vital to the maintenance and development of certain

crop germplasm or PGRFA could be blocked. Action needs to be taken to

preserve access to biotechnology innovations in order to protect the right

to adequate food which, as we have seen in Section 2, means governments

must ensure that multinational and other business enterprises and/or indi-

viduals do not deprive individuals of this right. More often than not in the

fi eld of agrobiotechnology this is manifested in an undue restriction by the

private partner on technological innovations through IP protection, as

happened in the case of CRIFC. Three diff erent approaches to reversing

this trend are open source licensing, IP clearing house mechanisms and the

use of humanitarian licensing.

It has been suggested that open source licensing, which is a form of

intellectual property management that evolved out of the Free Software



movement and aims to preserve community access to proprietary soft-

ware tools without discouraging commercial development, could be

applied to biological innovations, although there is some uncertainty

about this (Hope, 2009: 173–84). Already, experiments in open source

biotechnology have been attempted. For example, the Biological Open

Source (BiOS) licence – pioneered by the Centre for the Application of

Molecular Biology to International Agriculture (CAMBIA) in Canberra

in order to reverse the trend of private sector companies taking out overly

broad patents, or demanding exclusive licences, on agrobiotech innova-

tions – has put certain technologies freely at the disposal of researchers.

The only condition is that any improvements should be shared with other

researchers under the BiOS open source licence regime and any patented

improvements granted back to the licensor, BiOS (Berthels, 2009: 194–6;

UN, 2009a: para. 31).

Another mechanism known as the Public Intellectual Property Resource

for Agriculture (PIPRA), consisting of an alliance of more than 40 institu-

tions from 12 diff erent countries, aims to decrease IP barriers and facilitate

the transfer of technology by pooling the eff orts of individual researchers.

PIPRA is a one- stop IP clearing house for access to public sector patented

technologies in order to deal with ‘patent thickets’24 that might otherwise

stymie the dissemination of innovations in staple and speciality crops

(Bennett and Boettiger, 2009: 139–41; UN, 2009a: para. 31).

Finally, to return to the example of Golden Rice, Potrykus and Beyer

used proprietary technologies belonging to half a dozen diff erent com-

panies in their research on the biofortifi cation of rice. After completing

their initial research, the next step was to arrange for free licences for

these technologies so that Potrykus and Beyer could use them to further

develop Golden Rice varieties. The private sector partner, Syngenta, then

arranged for the IP rights to be transferred to a group called the Golden

Rice Humanitarian Board, chaired by Potrykus and made up of indi-

viduals from various public and private organisations. The Board in turn

granted royalty- free sublicences in the Golden Rice technology to public

research institutions in order for them to develop locally adapted varieties

in places like Bangladesh, China, India, and the Philippines. According to

the licence, ‘[H]umanitarian use is defi ned as use in developing countries

by resource- poor farmers (earning less than US$10,000 per year from

farming’. Moreover, ‘the technology must be introduced into public seed

24 A ‘patent thicket’ is a dense web or tangle of overlapping IP rights, particu-larly patents, which a company must break through in order to be able to com-mercialise a new technology.



varieties, as a way to optimize public sector benefi t and use’ and ‘[F]armers

are allowed to reuse harvested seeds’ (Krattiger and Potrykus, 2007: CS.

12).

5. CONCLUSIONS

It is clear that in order to maintain existing levels of access to adequate

food there is an urgent need to increase food production. Biotechnology,

despite its detractors, has a potential role to play in fulfi lling (facilitating)

the right to food and ensuring that food security needs are met in develop-

ing countries, by expanding the overall supply of food. Possibly, the same

is true for the role of biotechnology with respect to fuel security, although

presently there is insuffi cient empirical evidence to support this claim.

While GM technology may be available for crop improvement, or could

potentially be off ered alongside conventional breeding in some form of

coexistence, it remains beyond the reach of many in developing countries.

This is due to lack of public and private funding, inadequate regulatory

procedures, poorly functioning markets and fragile seed distribution

systems, weak domestic plant breeding capacity, inadequate research

capacities and various IP restrictions.

In terms of food and fuel security, the extent to which any benefi ts from

agricultural biotechnology will be felt by the poorest sectors of society

will depend, to some extent, on whether transfer of that technology to

poor farmers is unencumbered by IP rights and other restrictive practices.

Current trends are worrying. Private sector investment in agricultural bio-

technology – other than through public – private partnerships – is often

primarily aimed at large- scale commercial production. Small farmers in

poor rural areas, many of whom rely on orphan crops such as cassava,

millet and sorghum, are likely to be overlooked. The situation is not

helped by a serious lack of public sector funding in many developing

countries, which could ensure biotechnological innovations are developed

and applied to orphan crops and indigenous farming systems in poor rural

communities in ways which would enhance their food security.

Likewise, very few biotechnology research institutions have addressed

ways in which research exemptions on their proprietary technologies might

be used to promote food security. However, the BiOS open source licence,

the PIPRA clearing house mechanism and the Golden Rice humanitarian

licence all demonstrate that it is possible to come up with more creative

ways of addressing restrictive IP practices.

Finally, it is essential that renewed eff orts be undertaken to address

the challenges and opportunities posed by the introduction of biofuels in



developing countries. The pressure that agricultural production for bio-

fuels may bring to bear on production of food and feedstuff s should not

be dismissed lightly. A deeper understanding of how biofuels can be made

economically, environmentally and socially sustainable in developing

countries is well overdue.


354

16. Environment and development – the missing link

Philippe Cullet*

1. INTRODUCTION

International environmental law has grown at a rapid pace over the past

few decades and now covers a range of issues of relevance to developed

and developing countries (see generally Birnie et al., 2008). Further, a

number of environmental problems addressed in environmental treaties

are of global relevance; in other words, not amenable to solution at the

national or regional level.

There are at least three ways to approach the link between environmen-

tal law and development at the international level. First, international

environmental law has developed in the space of relatively few years into

an area of law that is now fundamentally based on attempting to put con-

servation and economic development side by side and, ideally, reconcile

the two objectives. The legally unclear umbrella notion of sustainable

development provides the general framework within which all environ-

mental issues are conceived today.

Second, the link between environment and development in international

law is in large part underpinned by considerations of equity that have

come to dominate the engagement of the South in a variety of environ-

mental regimes. This is refl ected in legal terms in the concept of diff erential

treatment that provides, in its most evolved form, a new basis for commit-

ments that are not based on reciprocity of obligations. This manifestation

of equity or justice concerns in international environmental law is prem-

ised for the most part on diff erent levels of economic development in the

North and South. It is also the refl ection of a political compromise and,

thus, not entirely a principle- based response to the moral concerns raised

by current environmental challenges. Indeed, diff erential treatment consti-

tutes the middle ground where the North and South meet: between devel-

* Professor of International and Environmental Law, School of Law, School of Oriental and African Studies, London, UK.


Environment and development – the missing link 355

oping countries having sought ‘preferential’ treatment since independence,

and developed countries seeking the engagement of the South in tackling

global environmental problems caused mostly by the North, as in the case

of global warming and the ozone layer depletion.

Third, international environmental law has had an ambiguous relation-

ship with the growth of environmental law in developing countries. It has,

without doubt, contributed to the transmission of what are now basic

principles of environmental law in many countries of the world and in

this way may have sped up certain aspects of environmental protection in

certain countries.1 At the same time, the priorities set at the international

level, which have not necessarily been dictated by developing countries,

have often de facto become core concerns of environmental law and policy

at the national level, regardless of the actual environmental situation of

particular countries.

The relationship between environmental law and development needs

to be understood through its varied and partly contradictory trends.

This chapter highlights some of the main issues that defi ne this relation-

ship. The following section considers the link between environment and

development through the lens of the notion of sustainable development,

examining the general issues that arise in this regard. The third section

considers some of the diffi culties that have arisen in the development of

international environmental law with regard to developing countries; in

particular, the impact of economic development issues on environmental

law. The fourth section then examines the notion of diff erential treatment,

one of the ways in which the concerns of developing countries have been

taken into account in recent environmental law. Finally, the fi fth section

considers ways in which economic globalization has aff ected international

environmental law.

2. SUSTAINABLE DEVELOPMENT: ENVIRONMENTAL LAW’S CONCEPTUAL FRAMEWORK FOR THE 21st CENTURY

International environmental law has developed remarkably fast since its

formal beginning in the early 1970s (see, for example, UNGA, 1972). Apart

from the great number of legal instruments adopted, environmental law is

also noteworthy for the development of a corpus of notions and principles

1 See, for example, the integration of the precautionary principle by the Indian Supreme Court in Vellore Citizens’ Welfare Forum v. Union of India.



that have come to defi ne not only the way in which environmental issues

are addressed but also how they have impacted other areas of law.

One of the most remarkable developments that have taken place over

the past few decades is the changing premises on which environmental reg-

ulation is conceived. Indeed, while an understanding of the links between

environmental protection and development issues is already clearly articu-

lated in the Stockholm Declaration,2 early environmental treaties tended

to be infl uenced more by a conservationist perspective (see, for example,

Okereke, 2008: 14). This changed signifi cantly over time and since the

publication of the World Commission on Environment and Development

(WCED) report in 1987, environmental issues have in principle not been

considered in international law in isolation from their development com-

ponent (World Commission on Environment and Development, 1987).

Thus the 1992 Rio Conference was tasked by the UN General Assembly to

address ‘environmental issues in the developmental context’.3

The link between the use and conservation of the environment provided

the bedrock for the changes that have led environmental law to be an

area of international law that covers a huge spectrum: it includes not only

environmental issues strictly speaking, but many other issues related to the

core environmental issues addressed, such as human rights, health, trade,

economic development, intellectual property protection and agriculture.

The expansion of the scope of environmental law was due in large part to

developing country concerns that conservation did not provide an appro-

priate angle to approach issues that were directly linked to livelihoods.

In that sense, poverty has been an integral part of environmental law for

the past couple of decades. Yet, at the same time as it was the poverty of

developing countries that provided the trigger for broadening the scope of

environmental law, the actual poverty of the majority of poor people in

developing countries has not become the core concern of environmental

law.

The acknowledgment of the intrinsic links between environmental

issues and economic development from the local to the global levels has

had a dramatic eff ect on the growth of environmental law. Indeed, if it

was not for the fact that global warming is intrinsically linked to the basic

economic development framework of most countries, it is doubtful that it

would have acquired the prominence that it has been given over the past

2 Declaration of the United Nations Conference on the Human Environment, Stockholm, 16 June 1972 (UNGA, 1972).

3 United Nations Conference on Environment and Development, Resolution 44/228 (UNGA, 1989: para. 15).



few years. Even a key conservation treaty like the Biodiversity Convention

owes its prominence at least as much to the links between conservation

and use as to concerns for nature protection. These examples are sympto-

matic of a broader trend whereby most major environmental issues over

the past couple of decades have become issues that are also major eco-

nomic development concerns, from access to biological resources to trade

in genetically modifi ed organisms.

At a conceptual level, the notion of sustainable development encom-

passes the links between environment and development. Sustainable

development is extremely useful as a catchphrase because it provided in

the fi rst place the background for understanding that environmental issues

cannot be considered in isolation from their development impacts. While

it is the economic dimension that still dominates the sustainable develop-

ment discourse today, its relative fl exibility has allowed social issues also

to be considered a key component of sustainability. The open nature of the

notion of sustainable development has also meant that it has progressively

become one of the key defi ning elements of the international legal order.

This is, for instance, illustrated by the fact that even an organisation like

the World Trade Organization (WTO) that has no specifi c environmental

mandate sees the fostering of ‘the objective of sustainable development’ as

an overarching goal of the organisation.4

The widening acceptance of sustainable development as a key element of

international law in general is a signifi cant step forward because it provides

a recognition that the links between, for example, trade and environmental

protection cannot be ignored. Yet, at the same time, its widespread accept-

ability is also the cause of its irrelevance at a more specifi c level. There have

been debates for a long time as to whether sustainable development can be

deemed to be a principle of international (environmental) law. While there

are strong arguments in favour of such recognition, this only shifts the tasks

at hand. Indeed, the very reason why those involved in social movements,

NGOs, the United Nations Environment Programme (UNEP), the WTO

and the World Bank agree on the goal of sustainable development is because

it is a malleable notion that can be given a multiplicity of defi nitions (on the

diff erent understandings of sustainable development, see Blewitt, 2008).

Since the present international legal order does not provide a single specifi c

defi nition, sustainable development remains at present an umbrella term

that serves a useful purpose in drawing attention to the broad scope of the

challenges at hand but does not point towards any specifi c policy direction.

4 See Preamble to the Agreement Establishing the World Trade Organization (GATT, 1994a).



One of the clearest cases in favour of recognising sustainable devel-

opment as a binding principle of international law was made by Judge

Weeramantry more than a decade ago. He argued that sustainable

development ‘off ers an important principle for the resolution of tensions

between two established rights. It reaffi rms in the arena of international

law that there must be both development and environmental protection,

and that neither of these rights can be neglected’ (Gabčíkovo- Nagymaros

Project, 1997: 95). Judge Weeramantry sees sustainable development as

the mechanism that provides an avenue to solve tensions between the two

rights. To people who believe in the existence of a right to development and

a right to a clean environment, this may be a simple extension of the right.

This is not, however, the position of all states (see generally Bosselmann,

2008: ch. 2). While a majority of states have, in some way, integrated the

right to a clean environment in their legal framework,5 its recognition

at the international level remains a distant prospect (see, for example,

Shelton, 2007). With regard to the right to development, its explicit recog-

nition in the 1986 Declaration has proved insuffi cient to build a consensus

over its status and its content.6 In other words, the defi nition that Judge

Weeramantry proposed is a well- argued position, but one that would be

disputed by a number of developed states.

This highlights the underlying North–South tension that can be found

in a number of documents. Yet, the noteworthy aspect of ‘sustainable

development’ is that it has transcended what could be seen as its original

North–South context that sought to bridge the diff erent perspectives of

the North and South on environmental regulation. Sustainable develop-

ment can today alternatively be conceived as the linchpin of an interna-

tional organisation promoting free trade around the world like the WTO

and an organisation seeking to foster stronger environmental regulation

like UNEP. Similarly, it can provide the conceptual basis for an NGO

advocating free fl ows of genetic resources across borders that may be used

to develop genetically modifi ed seeds, and for organic farmers seeking

to protect their lands from the threat of genetically modifi ed organism

(GMO) contamination. This is what explains its wide appeal rather than

its focus on the development concerns of developing countries or its focus

on the situation of the most marginalised and the poorest.

The limitations of the umbrella notion of sustainable development –

5 According to the list of constitutional provisions compiled by Earthjustice, 119 countries have a right to a clean environment (Earthjustice, 2008).

6 Declaration on the Right to Development, 4 December 1986 (UNGA, 1986).



notwithstanding a number of legal principles that are well established

– can be argued as constituting a more specifi c understanding of what

sustainability implies. These include, for instance, the principle of integra-

tion of environment and development concerns; the prevention and pre-

cautionary principles; and participation, in particular that of women, and

intra- and inter- generational equity.7 The precautionary principle has,

for instance, been integrated as a core element of the Biosafety Protocol.8

This is signifi cant for several reasons in the context of this chapter. First,

the precautionary principle is one of the important novel conceptual devel-

opments that have taken place in international environmental law. Its

inclusion in a treaty seeking to regulate a new technology where economic

and commercial stakes are extremely high is a signifi cant achievement.

Second, given that the Protocol provides, in eff ect, safeguards for import-

ing state parties, the use of the precautionary principle in this context

provides a shield for developing countries that are in practice the main

benefi ciaries of the measures adopted. Third, while the Protocol is clearly

an environmental law treaty, it is in no way a classical conservation treaty.

In fact, the Biosafety Protocol is an instrument that regulates transbound-

ary trade in GMOs. In other words, it is one of the environmental law

treaties that focus on trade as the point of entry for introducing environ-

mental safeguards. Overall, the Biosafety Protocol uses the precautionary

principle to foster objectives that fall directly under the broader umbrella

of sustainability in a context that is centred on conservation through the

regulation of trade.

Sustainable development has on the whole become so important that

it has come to defi ne the relationship between environment and develop-

ment. This is helpful in bringing out the links between the environment and

the overall process of development. At the same time it can have unwanted

side- eff ects insofar as it may aff ect the core environmental values of

environmental law in favour of approaches that may eventually not be

environmentally sound. Since there is no exact legal standard by which

to judge ‘sustainability’, it pushes back the debate to the level of broader

questions of environmental values. Thus, whereas it can be argued that the

Clean Development Mechanism (CDM) fosters sustainability because it

contributes to the global goal of climate change mitigation, the CDM can

also be seen as a simple economic mechanism that redistributes the cost

7 Rio Declaration on Environment and Development, adopted at the UN Conference on Environment and Development, Rio de Janeiro, 14 June 1992 (UNGA 1992: Annex 1).

8 See the Cartagena Protocol on Biosafety to the Convention on Biological Diversity (Secretariat of the Convention on Biological Diversity, 2000).



of mitigation and uses up the cheapest emission reduction opportunities

in developing countries that will not be able to benefi t from them the day

they have to cap or reduce their emissions (see Section 5 below).

3. ENVIRONMENTAL LAW AND DEVELOPING COUNTRIES: FOCUS AND PRIORITIES

The shift from what could be seen as a more conservationist agenda to the

broader agenda of sustainable development is in principle a testimony to

the fact that the position of the South has had an important infl uence on the

development of environmental law. This also seems to be borne out by

the fact that some of the basic principles of international environmental

law directly refer to the development dimension of environmental regula-

tion, such as the principle of integration of environment and development.

Similarly, the rapid growth of diff erential treatment examined in the next

section is a refl ection of the importance of the South in shaping up envi-

ronmental law.

Yet, international environmental law cannot be qualifi ed as a developing-

country- focused area of international law. In fact, there exist a number of

areas of tension or confl ict that have surfaced over time.

International environmental law has now addressed a number of issues,

some of a relatively specifi c nature like wetland protection, some of an

immense complexity like global warming. Yet, there is a lack of unity

overall. This is due, in part, to the fact that there is no set of principles

that apply by defi nition to all international environmental treaties. While

it is hoped that a number of the Stockholm and Rio Declaration principles

may have or will attain the status of customary law, this is only partly

helpful because individual treaty regimes can have their own understand-

ing of a given principle. The sort of unity that can be identifi ed in contexts

such as those of the WTO or the International Labour Organization

(ILO) is largely absent in environmental law. Indeed, the ‘cement’ that

binds environmental law are those soft law instruments, in particular the

conference declarations, that provide the most evolved statements on the

structure of international environmental law.

The fragmented nature of international environmental law is reinforced

by the fact that UNEP has never had as strong a mandate as specialised

agencies of the UN in their own fi elds or institutions like the WTO.

Additionally, for a combination of reasons, the multiplicity of negotiating

forums and the multiplicity of institutional setups – in particular, the dif-

ferent secretariats found in diff erent regions of the world – have combined

to ensure any progress in one area may have little impact in another area.



Further, while the setting up of UNEP as the only major UN programme

in the South was a huge step forward, the last three decades have seen at

least another three strong centres of environmental governance emerge in

Europe and North America – Geneva, Bonn and Montreal – that have

diluted the leadership role that Nairobi should have ideally played.

The absence of either a specialised agency dealing with environmen-

tal issues within which all environmental negotiations would take place

and that would administer all treaties or an international covenant on

environmental law has had negative impacts on the overall development

of international environmental law from the point of view of the South

and of the integration of the concerns and rights of the poorest and most

marginalised.9 Indeed, the development of international environmental

law has taken place, in part, according to the priorities of the states iden-

tifying a new issue of concern and, in part, according to the availability of

resources to implement new treaties. In both cases, the priority given to

‘global environmental issues’ is revealing in terms of the choice of issues

addressed. The case of the ozone layer regime refl ects, for instance, the

push by developed countries having nearly exclusively contributed to

an environmental problem with global consequences to develop a legal

regime that would bind polluters and non- polluters alike (see, for example,

Benedick, 1998). What is at stake is not the reality of the environmental

issue but the fact that the same priority was not – and has not been – given

to the impacts of economic development (in particular in the phase of

economic globalization) on the poor (in particular the majority of the

poor people in the South). The case of the ozone layer also refl ects the

importance of fi nancial issues in the development of the environmental

law regime since universal membership was only achieved after the cost of

compliance for the South was made insignifi cant through implementation

aid and technology transfer.10

The issue is not the extent to which developing countries were able to

extract concessions in the negotiations of environmental treaties that did

not constitute immediate priorities at the national level (such as in the

case of the ozone regime or climate change) at the time of the adoption

of the treaties. What matters is the way in which priorities were defi ned.

A telling example is that of land degradation and desertifi cation. In terms

of the legal regime, its development only happened as an afterthought of

9 On the debates concerning the need for an international environment organ-isation, see Biermann and Bauer (eds) (2005). With regard to the proposal for an international covenant, see IUCN (2004).

10 See, for example, Gallagher (1992). The Montreal Protocol is the fi rst inter-national environmental treaty to have achieved universal participation in 2009.



the Rio process, with developing countries extracting the concession for

their participation in the biodiversity and climate change negotiations

(see Cullet, 2007). Even more diffi cult was the inclusion of land degrada-

tion as a ‘focal area’ in the Global Environment Facility. While this has

nothing to do directly with environmental law priorities, the importance

that implementation aid has acquired in making environmental treaties

eff ective in individual countries implies that the sidelining of land degra-

dation until 2002 refl ected its lower priority for the global community of

states despite its critical importance in a number of developing and least

developed countries (see GEF, 2002).

The politics of the legal agenda is not an innocuous concern because

addressing environmental issues cannot be separated from the develop-

ment concerns of the majority of the South. There are thus two sets of

issues that need to be addressed concurrently. First, international envi-

ronmental law is tasked with addressing transboundary environmental

issues. Most people would probably identify global warming as an issue

that is intrinsically global in scope and perceive the need for cooperation

on issues such as migratory species. The same level of agreement may not

be apparent concerning an issue like biodiversity conservation or land

degradation since most of the direct negative impacts are suff ered within

the country under whose jurisdiction the problem is taking place. Yet,

today biodiversity conservation and land degradation are overwhelmingly

understood as being issues that have important international aspects. In

fact, there are a growing number of problems that may not be appar-

ently transboundary but have an international dimension. Additionally,

it is artifi cial to make a distinction between local air pollution and global

warming since it is the same harmful emissions that are the subject matter

of both. This, together with the fact that environmental law is concerned

with the various links with related fi elds, makes it diffi cult to fi x with preci-

sion the boundaries of the fi eld.

Second, there is no institution which has been tasked with prioritising

environmental issues at the international level. Given the multiplicity and

variety of issues that qualify as international environmental issues, and

given the absence of any framework treaty allocating priorities, this has

happened largely in an ad hoc fashion. In practice, this has meant that law

making is related to a specifi c policy proposal in one forum or another by

a determined group of countries. The skewed priority list of international

environmental law has arisen from this inchoate policy process that ben-

efi ts countries taking the initiative. This would not necessarily be prob-

lematic if environmental issues had no links to the development process

because this sectoral approach would simply imply that the international

community is slowly covering issues one after the other. The links with



development make the choice of issues more signifi cant. Indeed, in the case

of land degradation, not only was it a subsidiary priority at the time of the

Rio Conference and a subsidiary issue for the GEF, but the Desertifi cation

Convention has remained a poor cousin of the other conventions address-

ing ‘global’ issues such as biodiversity and climate change.11

Further, the relative weakness of UNEP in the UN system cannot be

ascribed only to its ‘decentralised’ location and the emergence of other

centres of international environmental governance. Indeed, the power

that has never been given to UNEP has not necessarily been left to an

institutional vacuum. This is illustrated by the following two examples.

First, while funding for the implementation of environmental treaties has

played a key role in the success of environmental regimes, this funding has

routinely been channelled through institutions that are, at least in princi-

ple, more responsive to donor concerns than UNEP. This is refl ected even

in the case of the GEF, which is credited with being more responsive to

developing country concerns than its parent institution the World Bank.

Second, the case of climate change illustrates the lack of commitment of

the donor community to the global regime. On the one hand, attempts

by developing countries to have adaptation given more importance led

to the setting- up of the Adaptation Fund but its full operationalisation

has proved to be diffi cult.12 On the other hand, several special funding

mechanisms have been established directly under the authority of the

World Bank, from the early Prototype Carbon Fund to the recent Climate

Investment Funds: the Clean Technology Fund and the Strategic Climate

Fund. The latter include a sunset clause to avoid prejudicing ongoing

climate change negotiations but at the same time propose that they may

continue operation if the outcome of the negotiations so indicates (World

Bank, 2008c: paras 53, 55, 2008d: paras 56, 58). There is thus an important

degree of independence for these funds.

The policy preferences of developed countries, refl ected in their push for

certain regimes in preference to others, have resulted in a legal landscape

that gives much more prominence to certain issues than others. Typically,

over the past few years, climate change has become the environmental issue

subsuming everything else. Interestingly, climate change was one of those

global issues that bore no direct relationship to the environmental pri-

orities of most developing countries when the United Nations Framework

11 See Convention to Combat Desertifi cation in Those Countries Experiencing Serious Drought and/or Desertifi cation, Particularly in Africa, Paris, 17 June 1994.

12 See, for example, Decision 1/CMP.4, Adaptation Fund (UNFCCC, 2009b).



Convention on Climate Change was being negotiated, with the obvious

exception of countries facing, for instance, the threat of submergence.

In the meantime, adaptation concerns have become widespread in most

countries. Yet, while global warming is a major challenge for each and

every country, an overwhelming majority of developing countries have

much more pressing environmental and development concerns to address.

This is not to say that developing countries are not concerned by global

warming. There is, however, a signifi cant diff erence in approach where the

need to reduce air pollution at the local level for health and environmental

reasons is addressed with a local rationale in mind from where it is done in

the context of a global issue.

Another issue that signifi cantly aff ects environmental law is the fact that

it largely refl ects the main concerns of states. As a result, while interna-

tional environmental law fails to prioritise environmental concerns of the

South, it is even less responsive to the concerns of the majority of the poor

in the South. Thus, the only existing international treaty on water only

addresses transboundary watercourse issues.13 Similarly, when the fi rst

treaty specifi cally addressing food security was negotiated, and despite

a specifi c mandate to defi ne farmers’ rights more precisely, negotiat-

ing states did everything apart from provide an eff ective farmers’ rights

regime.14 These two examples are symptomatic because water and food

are two of the most fundamental needs that are not fulfi lled for hundreds

of millions of people. There are good international law reasons explaining

the failure of states to negotiate on issues that actually matter to people,

such as sovereignty concerns with regard to water, yet the result is that

international environmental law is not particularly responsive to the con-

cerns of the poorest and most marginalised.

4. ADDRESSING THE NORTH–SOUTH GAP: THE DIFFERENTIAL TREATMENT ANSWER

As analysed in the previous section, international environmental law

has, in certain respects, failed to respond to the development needs of

the South. At the same time, international environmental law has been

one of the most dynamic and responsive areas of international law in

13 Convention on the Law of the Non- navigational Uses of International Watercourses, Resolution 51/229, 21 May 1997 (UNGA, 1997).

14 International Treaty on Plant Genetic Resources for Food and Agriculture, approved by the Food and Agriculture Organization (FAO) Conference, 31st Session, Resolution 3/2001, 3 November 2001.



recent decades with regard to its engagement with the South. This can,

for the most part, be explained by the fact that while law making has

often been driven by concerns of the North, the issues addressed could

only be solved with the active participation and engagement of the

South. This pragmatic realisation that cooperation was required, and

that the South had often no particular interest in collaborating, has led

to the development of a series of new bases for international environ-

mental law.15

At the broadest level, developed countries have appealed to the basic

principle of solidarity to enlist the cooperation and participation of a

majority of developing countries in legal regimes that did not necessarily

refl ect their own priorities (McDonald, 1996). This could be the case of

climate change, where they had made only a minor contribution to the

problem at hand and were not much aff ected at the time of the negotia-

tions in the early 1990s; or GMOs, where one of the primary concerns

was to avoid losing out on export markets for conventional or organic

crops.

The principle of solidarity may be widely accepted, but it is not neces-

sarily enough to make countries eff ectively engage on a specifi c issue. As a

result, more specifi c mechanisms have been needed to ensure full and eff ec-

tive cooperation of all countries on issues that could not be solved by the

actions of the North alone. The concept of diff erential treatment, which

recognises that all international law measures need not be strictly based on

the principle of formal legal equality, has been one of the main conceptual

vehicles for ensuring developing country participation.

Diff erential treatment off ers, in its most developed form, an avenue to

adopt international measures that do not impose the same obligations

on all states. This is, for instance, the case of the Kyoto Protocol.16 A

number of other mechanisms that are diff erently diff erential have also

been introduced in environmental treaties. These include varying imple-

mentation time periods, where all states take on the same commitments

but at diff erent dates,17 implementation aid, where certain states are only

legally bound to implement their commitments upon receipt of fi nancial

15 Cf Okereke (2008) arguing that ‘from the perspective of North–South rela-tions . . . distributive bargaining rather than environmental protection is the defi n-ing feature of international regime eff orts’.

16 See Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto 10 December 1997 (UNFCCC, 1998b: 7).

17 Montreal Protocol on Substances that Deplete the Ozone Layer (Protocol to the Vienna Convention for the Protection of the Ozone Layer), Montreal, 16 September 1987.



or technological aid;18 and legally less clear contextual provisions, where

states are allowed to interpret the commitments they take according to

their development situation.19

Diff erential treatment remains controversial and it has, for instance,

been argued by a leading environmental lawyer that even if redistribution

is necessary, it should not be undertaken by exempting the poor from

‘effi cient environmental and resource standards – giving them a “right to

pollute” – rather than through a more straightforward step- up in aid and

development assistance’ (Stone, 2004: 294). Indeed, in international trade

and economic law, a massive backlash against the granting of ‘diff erential’

or ‘preferential’ treatment has been visible since the 1980s. The pervasive

inclusion of diff erentiation in international environmental treaties is thus

doubly noteworthy.20 First, diff erential treatment has been one of the most

eff ective ways that states negotiating global environmental regimes have

found to address the persistent inequalities among states forming the UN.

Second, this has happened more or less at the same time as the scope for

granting preferences in international trade law diminished to the point

where the Uruguay Round was largely premised on returning to the

principle of legal equality as a more eff ective basis for lifting developing

countries out of poverty (cf Michalopoulos, 2000).

The concept of diff erentiation has several noteworthy features. Firstly,

at a conceptual level it is a manifestation of equity. In fact, it constitutes

an acknowledgment at the international law level of the principle that

formal equality does not necessarily lead to substantive equality (see gen-

erally Cullet, 2003). While this should not have been a major discovery,

because of the vast gap in economic development between the North and

the South, it took more than three centuries and the process of decoloni-

sation for the limits of formal legal equality to become obvious to most.

More specifi cally, diff erential treatment is a refl ection of a notion of

distributive justice that was clarifi ed a number of decades ago by Justice

Tanaka, who asserted that ‘[t]o treat unequal matters diff erently accord-

ing to their inequality is not only permitted but required’.21 While this is

not the conception of justice that is generally accepted today (for instance,

18 Convention on Biological Diversity, Rio de Janeiro, 5 June 1992: Art. 20(4).

19 See, for example, ibid: Art. 6.20 More generally, Okereke (2008: 29) notes that almost all global environ-

mental agreements since 1972 contain at least one reference to international justice and equity.

21 South West Africa (Ethiopia v. South Africa; Liberia v. South Africa) (1966: 306).



by the International Court of Justice), Justice Tanaka’s statement refl ects

the fact that the need for a progressive evolution of the understanding of

equality and equity has been felt at various levels in the decades following

decolonisation.

Second, diff erential treatment turns out to be one of the legal mecha-

nisms that provide a space to development concerns in international

law. The fact that the most successful diff erential measures over the past

couple of decades have been adopted in environmental law is, in some

way, a refl ection of the increasingly strong links between development

and environmental concerns. This is refl ected, for instance, in two prin-

ciples of the Rio Declaration. Principle 6 fi rst recognises, in general, the

fact that there is a need for UN member states to give special attention

to economic and environmental vulnerability, singling out the position

of least developed countries. Principle 7 is more specifi c and addresses

the diff erent contributions that developed and developing countries

have made to environmental degradation and their diff erent capacity

to address these problems. While this is not necessarily always linked to

levels of economic development, in the case of some of the most impor-

tant global problems such as global warming there is an intrinsic link

between levels of economic development and contribution to the global

problem. The acknowledgment of the link between the environment and

development is thus direct, even though the legal consequences that fl ow

from this statement are not made explicit.

Third, diff erential treatment off ers results that can be compared with

the ‘preferential’ treatment that was found earlier in international trade

and economic law. Yet, the path is diff erent. In the era of preferential

treatment between the 1950s and 1970s, the driving force behind prefer-

ences was the attempt by newly decolonised countries to reorganise the

structure of international law. As a result, in that era, developing coun-

tries were often pitted against developed countries. This yielded some

results, in particular in political terms in the context of the call for a New

International Economic Order; however, in strict legal terms, relatively

little of substance was achieved.22 As opposed to the relatively confronta-

tionist path of the post- decolonisation years, international environmental

law has developed in a much more consensual way. This is due to the fact

that, while the relative power equations have not necessarily evolved sig-

nifi cantly since the 1970s, negotiations around international environmen-

tal issues brought to the fore a new ‘strength’ of developing countries. The

22 Declaration on the Establishment of a New International Economic Order, Resolution 3201 (S- VI), 1 May 1974 (UNGA, 1974).



necessity for the North to include them in the regimes negotiated implies

that the South was in a much better position to extract concessions. These

concessions can be analysed in conceptual terms as a manifestation of

equity, but their genesis owes at least as much to hard practical realities as

to lofty concepts.

The development of diff erential treatment in international environmen-

tal law refl ects to a large extent the development concerns of developing

countries. Yet, unlike in the era of preferential treatment, the South is not

trying to engage the North in restructuring the international legal order.

The South is here benefi ting from the fact that environmental issues are

so structured that its participation is often a precondition for addressing

certain issues in an eff ective way. This has translated into ‘diff erent’ com-

mitments in several treaties, implementation aid has become a nearly nec-

essary part of any treaty, and most treaties include a variety of contextual

provisions which meet the concerns of countries that are unsure about

their capacity to implement the commitments they take.

While the development of diff erential treatment is, on the whole, benefi -

cial to the South, this is not necessarily the case in all its aspects. The case

of capacity building under the Biosafety Protocol illustrates this point.

From a diff erential treatment perspective, the biosafety regime provides

procedural safeguards for an importing country and thus strengthens

developing countries’ position in negotiations with GMO exporters.23

At the same time, one of the impacts of the Protocol is to ensure that

all member states have a legal regime in place that regulates – but does

not prohibit – the transboundary movement of GMOs. This restricts the

options that developing countries have with regard to banning GMOs.

In addition, signifi cant capacity building was undertaken in the context

of a relatively large UNEP/GEF project whose main intent was to ensure

that developing countries that had ratifi ed the Protocol had the actual

capacity to deal with import requests (see, for example, GEF Council,

2000). In this case, capacity building ends up indirectly limiting the range

of options that developing countries consider in adopting biosafety laws.

This is, for instance, illustrated by the fact that while the African Model

Law on Safety in Biotechnology had a strong liability and redress provi-

sion – something that is clearly positive for an importing country – some

countries, like Cameroon, having drafted their laws in the context of the

UNEP/GEF project, ended up with very weak liability and redress frame-

23 See Articles 7–10 of the Cartagena Protocol on Biosafety to the Convention on Biological Diversity (Secretariat of the Convention on Biological Diversity, 2000).



works.24 In other words, even an instrument that is very progressive from

an environmental point of view – since it uses the precautionary principle

as its main operative principle – and an instrument that, in substance,

builds up procedural safeguards in favour of developing countries does

not necessarily lead to results that are unequivocally positive for develop-

ing countries.

5. ENVIRONMENTAL LAW AND RECENT ECONOMIC REFORMS

Environmental law entered a phase of consolidation after a period of rapid

development in the 1980s and 1990s. This is partly due to the realisation

that the constant addition of new instruments was doing little to ensure

their eff ective implementation and thus to improve environmental stand-

ards overall. It is in this context that implementation aid has become one of

the key elements of most environmental regimes as technology and fi nance

were identifi ed as key stumbling blocks in the process of implementing

international commitments in the South. The end of the ‘growth’ can also

be ascribed to an increasing disenchantment with the way environmental

policy had been conceived in the 1970s and 1980s, linked in large part to

the changing economic policy environment. This section examines some of

the main impacts of the neoliberal reforms on international environmental

law.

I. Economic Instruments and the Climate Change Regime

One of the important trends that can be noticed from the 1990s is the

increased visibility of economic instruments in international environ-

mental law. The Kyoto Protocol marks some sort of a watershed in this

context. Indeed, the introduction of economic instruments became one of

the key points that United States negotiators insisted upon in the Kyoto

Protocol negotiations. This led to the inclusion of what we now know as

fl exibility. Flexibility refers to two new phenomena in international envi-

ronmental law. The fi rst is the fl exibility which is given to countries with

commitments to reduce their greenhouse gas emissions to implement part

of their international obligations through projects in a diff erent member

24 See Organisation of African Unity (2002: Art. 14); Law to Lay down Safety Regulations Governing Modern Biotechnology in Cameroon, Law No 2003/006, 21 April 2003: s. 11.



state. This is unprecedented because it provides a form of extraterritorial

implementation of international commitments. The environmental justifi -

cation for this new mechanism is linked to the global nature of the environ-

mental issue that is addressed. Indeed, it matters neither where a given ton

of greenhouse gas is emitted nor where emissions are reduced or avoided.

As a result, where the frame of reference is the global environment good

that is climate change mitigation, there is no need to diff erentiate between

action taken in the United Kingdom or in Malawi.

Secondly, fl exibility refers to the desire to ensure that environmental

aims are reached in the most economically effi cient way. This translates

into the search for the cheapest emission reduction opportunities any-

where on the planet, regardless of the origin of the pollution. This has led

to the development of what we now know as carbon markets. While this

was not necessarily directly stated at the outset, one of the implications of

the search for effi ciency has been that the private sector plays an important

and direct role in the implementation of the climate change regime. This is

also novel in international environmental law.

Of the two diff erent market mechanisms that have been set up under the

Kyoto Protocol, the more important in a North–South context is the Clean

Development Mechanism (CDM).25 The CDM is, in eff ect, a project-

based market mechanism that seeks to redistribute the cost of compliance

with Kyoto commitments by providing a framework for undertaking

emission reduction activities where they are cheaper than in the country

with the commitment.26 In other words, extraterritorial implementation

of commitments is directly linked to an economic rationale – reducing the

cost of compliance for countries with commitments – even though an envi-

ronmental cloak has been put around the issue, as indicated in the previous

paragraph. Additionally, the CDM includes a sustainable development

veil that is meant to counterbalance the economic rationale for fl exibility.

In practice, however, while the international legal framework makes pious

admonition for sustainability, where developing country governments fail

to take action to ensure that benefi ts of the CDM are ploughed back into

climate change mitigation or adaptation measures it turns into another

commercial instrument for businesses in the North and the South.

The introduction of economic instruments was crucial for the participa-

25 The CDM is defi ned in the Kyoto Protocol to the United Nations Framework Convention on Climate Change, Kyoto, 10 December 1997 (UNFCCC, 1998b: 11, Art. 12).

26 See generally Decision 3/CMP.1 ‘Modalities and Procedures for a Clean Development Mechanism, as Defi ned in Article 12 of the Kyoto Protocol’ (UNFCCC, 2006: 6).



tion of the United States in the Kyoto Protocol in the mid- 1990s. In the

meantime, economic instruments have been adopted by many countries as

a key element of any climate change deal. In fact, they have come to play

such a central role that they can be described as the linchpin of any global

agreement on climate change mitigation. The CDM, joint implementation

and emissions trading have thus turned out to be much more than a new

supplemental way to implement an international treaty. They have led to

a completely new outlook on the way international environmental treaties

are shaped.

II. Limited Overall Progress in Environmental Law

Since the 1992 Rio Conference, the conceptual development of inter-

national environmental law seems to have tapered off . The 2002 World

Summit on Sustainable Development (WSSD) failed, for instance, to take

international environmental law beyond what had been achieved in 1992

(see, for example, Galizzi, 2006). Further, it has been increasingly diffi cult

to conclude negotiations on issues that could not be fi nalised at the time of

the adoption of a particular treaty, as in the case of the liability and redress

regime of the Biosafety Protocol.27 Similarly, where liability and redress

regimes have been adopted, states have been increasingly slow in ratifying

these instruments.28

In international environmental law per se, there has been no signifi -

cant weakening of standards adopted earlier. The same cannot be said,

however, of the overall environmental dimension of international law.

This is true, in particular, with regard to the international trade regime.

In the context of a fast- evolving jurisprudence on trade and the environ-

ment, WTO panels have taken positions that at least indirectly aff ect

environmental instruments. This is partly related to the way in which

environmental treaties are considered by WTO panels, making them at

best a relevant consideration in a decision that does not apply norms of

international environmental law. It is also partly due to the often more

specifi c nature of trade obligations, which may lead to an assessment of

27 For the most recent version of the text under negotiation, see, for example, Group of the Friends of the Co- Chairs on Liability and Redress in the Context of the Cartagena Protocol on Biosafety (2009).

28 This is, for instance, the case of the Basel Protocol on Liability and Compensation for Damage Resulting from Transboundary Movements of Hazardous Wastes and their Disposal, Fifth Conference of Parties, Basel, 10 December 1999, UNEP/CHW.5/29, Annex III, which has not yet entered into force.



norms that implicitly privileges trade rules over environmental norms with

a frequent in- built potential for a broader interpretation.

Additionally, it is symptomatic that some of the most important envi-

ronmental instruments, such as environmental impact assessments, are for

all practical purposes not covered in international law as far as the South

is concerned. This is due to the fact that the Espoo Convention remains,

despite the opening- up of its membership to all states, a regional conven-

tion and one that was negotiated without the South.29 Further, even if

the Espoo Convention was widely ratifi ed in the South, it would not cover

some of the most important issues of relevance to the South, in particular

aid and foreign investment.

The result is that one of the key impact assessment frameworks at the

international level ends up being the World Bank’s operational policy

applicable to its lending activities. This is positive because it ensures that

at least some projects get assessed. The major shortcoming is that this is

not a framework that has ever been debated and negotiated in the form of

an international treaty. Additionally, while it refl ects the greening of the

World Bank, this remains necessarily limited because protecting the envi-

ronment is not, and maybe can never be, the core mandate of the Bank.

There are also concerns that the Bank may be instrumental in certain cases

in fostering the weakening of existing frameworks for impact assessment,

as identifi ed in the case of India by the independent people’s tribunal on

the World Bank (Independent People’s Tribunal on the World Bank in

India, 2007).

III. Sustainable Development and Neoliberal Reforms

The progressive shift from ‘environment’ to ‘environment and develop-

ment’ and eventually ‘sustainable development’ has had two diff erent

consequences. On the one hand, enshrining sustainable development at

the heart of international law reinforces on a superfi cial level the idea that

environment and development have eff ectively been integrated. On the

other hand, the vagueness of the concept of sustainable development has

had the unfortunate eff ect of making it easier for the language of neolib-

eral economic reforms to enter the domain of environmental law without

necessarily being in open confl ict with the basic tenets of the international-

level orthodoxy. Thus, whereas environmental law was viewed for some

time as a relatively new and innovative branch of international law that

29 Convention on Environmental Impact Assessment in a Transboundary Context, Espoo, 25 February 1991.



had the potential to challenge some of the orthodoxy prevalent in other

branches of international law, the past decade seems to indicate that this is

not the case any more. This can be partly related to the linking of environ-

ment and development that has, over time, provided the basis for a weak-

ening of the environmental part in favour of an economic development

discourse. It can also be linked to the neoliberal discourse that is generally

averse to governmental intervention.

The preceding remarks may appear out of place in a context where

global warming has been given a central place in all areas of policy-

making over the past couple of years. In fact, what seems to be progres-

sively happening is that the environmental discourse is used as a tool to

reconfi gure economic policies under the guise of a broader environmental

aim such as global warming mitigation. Thus, the shift in international

environmental policy is, for instance, illustrated by the WSSD Plan of

Action’s frequent call for private sector participation and public–private

partnerships in a variety of areas, including a reliance on the private

sector to deliver integrated water management and water effi ciency that

‘give priority to the needs of the poor’ (World Summit on Sustainable

Development, 2002: 22, para. 26(g)). In other words, whether it is fl ex-

ibility mechanisms that give the private sector what is probably its most

direct role in the implementation of an international environmental treaty

yet, or the reconfi guration of basic development goals such as access to

drinking water as requiring the private sector for their fulfi lment, the

language of neoliberalism has increasingly infi ltrated international envi-

ronmental law.

IV. Increasing Role of International Institutions in Shaping

Environmental Law in the South

The link between environmental law and development is increasingly

shaped by international actors. Thus, over the past decade, the World Bank

has, for instance, taken a pro- active view of law making in the South. This is

illustrated in the context of water in India where the Bank has, for instance,

imposed on several Indian states the adoption of specifi c pieces of legisla-

tion as part of a water sector loan. The resurgence of conditionality in the

context of economic globalization is in itself very important and a worrying

development. More specifi cally, recent water- law- related conditionality

reinforces the view that economic reforms prevail over the environment, as

well as, for instance, the realisation of human rights. In the case of water,

the main premise for law reform is that water must be seen as an economic

good. The prescriptions of the Bank include the setting up of new ‘inde-

pendent water regulatory authorities’ modelled on the framework used for



electricity earlier.30 The signifi cance of the interventions of the Bank is

manifold. In the context of this chapter, the following can be highlighted:

First, the water law interventions of the Bank do not have a strong ●

environmental component. This is surprising in general and more so

in the Indian context where a general environmental perspective to

water law is missing despite a piece of legislation focusing on water

pollution.31

Second, water is a multifaceted issue that includes a major envi- ●

ronmental dimension. This is sidelined by the focus on issues of

‘management’ in the water sector and on the conception of water as

an economic good.

Third, from a legal perspective, the single- minded focus on water ●

as an economic good as a premise for law making in India is at best

inappropriate. This is due to the fact that there is no basis in law to

affi rm that water is a tradable economic good.32 On the contrary,

various Supreme Court judgments affi rm that there is a human right

to water and that water is a public trust.33

V. Deregulation in the Name of Stronger Regulation

Where international environmental law has been strengthened in recent

years, the additional ‘regulation’ often comes in the form of indirect

or hidden deregulation. This is, for instance, illustrated by the case of

benefi t sharing. Access and benefi t sharing has become one of the main

mechanisms to address the inequities of the international fl ow of genetic

resources. This has been taken up in the context of several regimes but

the only binding regime at present is that of the 2001 International Treaty

on Plant Genetic Resources for Food and Agriculture. In furtherance of

the Treaty provisions, the Governing Body adopted a standard material

transfer agreement (SMTA) (see FAO, 2006a: app. G).

Benefi t sharing, as conceived under the Treaty and the SMTA, is a form

30 See, for example, World Bank (2001b) and Uttar Pradesh Water Management and Regulatory Commission Act 2008.

31 India, Water (Prevention and Control of Pollution) Act 1974.32 The main basis for affi rming that water is an economic good in India is

policy documents. While there has been a tendency to confl ate water policies and water laws, this is inappropriate because the two are completely diff erent instru-ments (see, for example, Cullet, 2009).

33 See, for example, Subhash Kumar v. State of Bihar and others (on the human right to water) and MC Mehta v. Kamal Nath (public trust).



of compensation that is conceived in the context of bilateral transactions.

The recognition of the need for benefi t sharing and the adoption of the

SMTA constitute important additions to regulation since, in the absence

of legal rights, farmers did not get any benefi t when their varieties were

used.

At the same time, the framing of access and benefi t sharing in the form

of a contract mechanism that involves only the two parties signing the

contract refl ects the absence of any public power in this context. This is

particularly surprising and unwelcome in the context of benefi t sharing

because the actors signing the contract can, as a matter of principle, be

– with exceptions – expected not to be on a level playing fi eld. Problems

arise, for instance, from the fact that it is in most cases the weaker party to

the contract – such as a farmer or a group of farmers – that off ers to trans-

fer something under their control to another party – such as a university

or private company – that will be largely free to use, modify and commer-

cially exploit the seed and knowledge related thereto in any way they see

fi t. In other words, the party that benefi ts most from the contract – usually

a legal entity – is also the one who most often proposes the transaction and

has better resources to ensure that the contract fulfi ls all their interests.

Some countries like South Africa have recognised the dangers posed by

purely private transactions and propose at least a form of monitoring by

a public authority.34

VI. Unresolved Confl icts between the Economic and Environmental

Regimes

Environmental law has also been indirectly and directly aff ected by the

fact that potential or actual confl icts between the economic and environ-

mental regimes are not given concrete solutions in the environmental law

regime. This is damaging, for instance, in the context of any dispute that

has a trade angle, as is the case of many issues that may arise at the inter-

national level. In a context where there is little by way of binding dispute

settlement provisions in international environmental law, this leads to the

dispute being brought nearly by default to the WTO, rather than, say, the

International Court of Justice. This is not the place where a neutral resolu-

tion to any trade and environment confl ict can be expected.

The identifi ed problem in terms of dispute settlement is made worse

by the fact that the international economic and trade law regime to a

34 See, for example, South Africa, National Environment Management: Biodiversity Act 2004: s. 82.



large extent does not even consider the possibility of a confl ict with other

international law regimes. There is thus very little to work from. This is

illustrated, for instance, by the Agreement on Trade- Related Aspects of

Intellectual Property Rights (TRIPS), whose single mention of the envi-

ronment is in a narrowly construed exception to the principle that patents

must be available in all fi elds of technology (GATT, 1994b: Art. 27(2)).

On the environmental law front, some attempts have been made to

consider the links that exist and the problems that can arise. The primary

link is in terms of technology transfer, which has been a key demand of

the South in most international environmental law treaties since the 1970s.

In most cases, the link between the fulfi lment of environmental commit-

ments and technology transfer is made but no specifi c mention is made of

intellectual property rights as being of central importance to technology

transfer. In a few cases, the link has been acknowledged.35 This, however,

only confi rms that there is a link; it does not discuss the potential impedi-

ments to technology transfer that intellectual property rights foster (for

instance, where importing countries cannot aff ord the royalty demanded).

The most direct acknowledgment in a general provision that there is a

potential confl ict between the environment and intellectual property rights

is found in Article 16(5) of the Biodiversity Convention.36 Article 16(5) is

an important provision because it does what no trade treaty does. It does

not, however, provide a specifi c answer, because the broad commitments

of the Biodiversity Convention do not lend themselves easily to identifying

the point at which a confl ict of norms would arise in a concrete situation.

Environmental treaties include other provisions confi rming the pres-

ence of a confl ict. This is, for instance, the case of the so- called ‘savings

clauses’. These clauses typically found in preambles tend to sidestep the

real issue by emphasising the need for mutual supportiveness or harmoni-

sation, then stating that the environmental law instrument does not aff ect

other existing treaties and fi nally asserting that the present treaty is not

subordinate to any other treaty.37 The end result is that such clauses do

not actually give any new guidance since they only restate things that are

derived from existing principles of international law. Further, by empha-

35 See, for example, ‘Decision VII/22, Review of the Financial Mechanism (Annex V, Action 21)’ (Seventh Meeting of the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer, 1995).

36 See Convention on Biological Diversity, Rio de Janeiro, 5 June 1992: Art. 16(5).

37 See, for example, Preamble to Cartagena Protocol on Biosafety to the Convention on Biological Diversity (Secretariat of the Convention on Biological Diversity, 2000).



sising mutual supportiveness, as stated above, they tend to favour the

trade/economic regime because environmental law provisions are usually

more amenable to a broader array of diff erent interpretations than trade/

economic treaties.

Overall, existing international law tends to disregard the very possibil-

ity of a confl ict between development law and environmental law (for

instance, in the case of the TRIPS Agreement). Where links, overlaps

and confl icts are acknowledged, no practical and specifi c solutions are

proposed, as is the case in environmental law treaties. This is problematic

because a treaty like the TRIPS Agreement has signifi cant consequences

for developing countries beyond the strict intellectual property rights

regime. Thus, in the case of benefi t sharing mentioned above, the TRIPS

Agreement recognises neither farmer/healer knowledge nor what is now

known in policy circles as traditional knowledge as forms of knowledge

that can be protected by legal rights. This implies that all this knowledge

is part of the public domain that can be freely used by any- and every-

one because it is knowledge that does not meet the criteria for protection

under existing intellectual property rights frameworks. Since intellectual

property rights protect knowledge only in the context of its commercial

exploitation, this leaves out all other rationales for protection, including

any social, cultural, religious or environmental grounds for the protection

of certain forms of knowledge. The end result is that in a context where

knowledge can only be protected through what are recognised forms of

intellectual property rights, all other knowledge is seen as hierarchically

inferior, in practical and in legal terms.

6. CONCLUSION

Environment and development are today inseparable as far as interna-

tional law and policy making is concerned. This is, for instance, refl ected

in the central role played by the notion of sustainable development.

The understanding that the two are linked is most welcome and has, for

instance, ensured that environmental law has evolved beyond a conserva-

tionist agenda and has started to consider a number of links going beyond

the environment stricto sensu.

Yet, the central problem is that no specifi c legal meaning can be ascribed

to sustainable development at the international level today. It can be used

alternatively to justify neoliberal economic policies, welfare state measures

and conservationist agendas. While some of the diff erent perspectives can

be reconciled, there exist also a number of areas of confl ict. This is made

more complex by the fact that, today, environmental law is much more



than nature protection. Conversely, the environment is a major aspect of

many other fi elds of international law. In a decentralised system there is

thus no scope for imposing a defi nition of sustainable development that

would apply in international environmental law as well as in all other

fi elds. In fact, the only reason why people working on such diverse issues

as the environment, human rights, economic development, trade and

fi nancial issues can agree on a single umbrella concept is because each can

ascribe their own understanding of the term. As a result, the seemingly all-

pervasive link between environment and development is in fact, at least in

part, a front that lacks in depth.

This is not to say that the links between environment and development

have not been made in various contexts. However, where the links are

made, it has often been in a context which privileges an understanding

of development as focusing on economic development. In other words,

despite signifi cant developments in conceptual terms over the past couple

of decades, the practice of international law, as well as the practice of

international institutions directly involved in ‘development’ (such as the

World Bank), still indicates a signifi cant bias in favour of growth and eco-

nomic development as the core measure of development. This has in fact

been reinforced over the past two decades with the sweeping neoliberal

economic reforms that most countries of the world have witnessed.

Overall, much work remains to be done to ensure that the ‘development’

discourse does not use environmental arguments as a fi g leaf to foster

further economic development activities that are either environmentally

unsustainable or socially regressive. At the international level, the devel-

opment over the past two decades of the concept of diff erential treatment

refl ects a broad realisation of the need to take into account ‘development’

as a factor in environmental law making and implementation. Yet, much

more needs to be done. Indeed, diff erential treatment per se does no more

than address some of the basic inequalities that are in- built in the structure

of international law. It does not necessarily lead to norms that intrinsically

integrate environmental and human rights principles as core issues in envi-

ronmental law and development. A much broader eff ort must be made to

ensure that diff erential treatment is eff ectively coupled with a large- scale

application of basic principles of environmental law such as the precau-

tionary principle. It is only once such a broader framework is adopted that

environmental protection will stop being in some cases an excuse for the

promotion of certain economic agendas, as is the case with the develop-

ment of carbon markets in the climate change regime.


379

17. The UN Climate Change Convention and developing countries: towards eff ective implementation

Vicente Paolo B. Yu III*

1. INTRODUCTION

There is currently one multilateral treaty that addresses climate change.

This is the United Nations Framework Convention on Climate Change

(hereafter UNFCCC). The structure of the UNFCCC is fi nely balanced.

It recognises the development needs of developing countries, as well as

the responsibilities and obligations that developed and developing coun-

tries1 have to implement in order to address such needs in the context of

climate change.

The negotiations in the Intergovernmental Negotiating Committee

(INC)2 that eventually resulted in the UNFCCC took place in fi ve ses-

sions between February 1991 and May 1992, in which more than 150

States participated. The UNFCCC was adopted and opened for signature

in May 1992 and entered into force on 21 March 1994.3

* AB, LLB, LLM; Programme Coordinator, Global Governance for Development Programme South Centre

1 For the purposes of this chapter, the phrase ‘developed countries’ refers to States Parties listed in Annex I of the UNFCCC and may be used interchangeably with the phrase ‘Annex I Parties’. The phrase ‘developing countries’ refers to those States Parties not so listed in Annex I of the UNFCCC and may be used inter-changeably with ‘non- Annex I Parties’.

2 The mandate for the INC was established by the United Nations General Assembly pursuant to Resolution No 45/212, 21 December 1990, Protection of Global Climate for Present and Future Generations of Mankind, (UNGA, 1990).

3 Aware that the UNFCCC’s provisions may not in themselves be suffi cient to tackle climate change, UNFCCC Parties in the mid- 1990s set out to establish fi rmer and more detailed commitments for developed countries in terms of binding greenhouse gas (GHG) emissions reductions, resulting in the adoption of the



The UNFCCC’s balance of obligations between developed and devel-

oping countries – one that is based on climate science, the acceptance of

common but diff erentiated responsibilities, and recognition of diff ering

capacities arising from varying developmental conditions – establishes

the UNFCCC as one of the prime examples of how global cooperation to

address a global problem may be structured. However, the extent to which

there are failures in the implementation of the UNFCCC, especially from

those countries that are both expected and obligated to take the lead and to

support others in its implementation, is an example of the all too common

gap that exists between multilateral policy intent and actual action.

This chapter looks at the UNFCCC as a policy case study in how a

multilateral treaty instrument that could be a model for guiding global

cooperation between developed and developing countries to address a

global problem falls short of realising such potential. The discussion in

this chapter takes off from a policy practitioner perspective in looking at

actual State practice in relation to the implementation of treaty obliga-

tions, rather than looking at the normative theoretical aspects of treaty-

related State practice.

2. BACKGROUND: GLOBAL WARMING

The UNFCCC is a science- based normative treaty instrument. It has its

roots in the scientifi c concern in the 1980s about the threats posed by

anthropogenic greenhouse gas emissions and the increased severity of

the greenhouse gas eff ect. In 1988 and 1989, the UN General Assembly

recognised that climate change is a common concern of mankind.4

Also in 1988, the World Meteorological Organisation (WMO) and

the United Nations Environment Programme (UNEP) established the

Intergovernmental Panel on Climate Change (IPCC), which completed, in

1990, its First Assessment Report. This fi rst IPCC report concluded that

human activities were responsible for climate change.

Kyoto Protocol at the 3rd Conference of the UNFCCC Parties in Kyoto, Japan, in 1997. It sets out basic rules for binding GHG emissions reductions for developed countries and has provisions intended to assist developing countries in voluntarily reducing their own GHG emissions. The Kyoto Protocol entered into force on 16 February 2005.

4 See Protection of Global Climate for Present and Future Generations of Mankind, 6 December 1988, Resolution No 43/53 (UNGA, 1988); and Protection of Global Climate for Present and Future Generations of Mankind, 22 December 1989, Resolution No 44/207 (UNGA, 1989).


The UN Climate Change Convention 381

The conclusions of this fi rst IPCC report were among the considera-

tions that led the UN General Assembly to establish the intergovernmen-

tal negotiating process under the INC to prepare ‘an eff ective framework

convention on climate change, containing appropriate commitments, and

any related instruments as might be agreed upon, taking into account

proposals that may be submitted by States participating in the negoti-

ating process, the work of the IPCC and the results achieved at inter-

national meetings on the subject, including the Second World Climate

Conference’.5

Global warming, and its associated climate changes, is now undeniable

(IPCC, 2007: 30). The temperature increase is globally spread in terms of

both land and ocean surface temperatures, with higher levels of increases

in high northern latitudes (ibid). Current global warming is due primarily

to the emissions of greenhouse gases (GHGs) arising from human activi-

ties, which ‘have grown since pre- industrial times, with an increase of 70%

between 1970 and 2004’ (ibid: 36), mostly from ‘energy supply, transport

and industry, while residential and commercial building, forestry (including

deforestation) and agriculture sectors have been growing at a lower rate’

(ibid). On a per capita basis in 2004, developed countries, while having only

20 per cent of global population, ‘accounted for 46% of global GHG emis-

sions’ (ibid: 37).

The IPCC projects that ‘with current climate change mitigation policies

and related sustainable development practices, global GHG emissions will

continue to grow over the next few decades’ (ibid: 44).The human and

fi nancial costs to countries of coping with extreme weather events, crop

failures and other emergencies related to climate are growing and will

continue to grow higher. Developing countries, especially least developed

countries (LDCs) and small island developing states (SIDS), who are

already facing diffi culties in alleviating poverty as a result of their eco-

nomic situation, are especially vulnerable to the adverse eff ects of climate

change.

Unless current rates of GHG emissions are drastically cut and reversed,

global average temperatures will rise by at least 2oC by 2050, according to

the IPCC. This will result in, among other things, the creation of hundreds

of millions of environmental refugees mostly from developing countries,

acute water shortages for large proportions of the global population

5 See Protection of Global Climate for Present and Future Generations of Mankind, Resolution No 45/212, 21 December 1990 (UNGA, 1990: para. 1), which established the INC as the negotiating forum.



(again mostly in developing countries), food shortages as agricultural

production goes down all over the world, sea level rises, and the extinction

of a third of the world’s species. Even before that, the expected 1oC rise

by 2020 and the 1.3oC rise by 2025 will already have devastating impacts

on the lives and livelihoods of people, especially the poor and especially in


3. UNFCCC: AN EQUITY- BASED TREATY

The UNFCCC sets up an equity- based normative framework for global

action on climate change centred on: (i) a clear recognition and allocation

of both historical and current responsibility for anthropogenic greenhouse

gas emissions; and (ii) a deep understanding of the relationship between

greenhouse gas emissions and economic development, especially insofar

as developing countries are concerned.

I. Historical and Current Responsibility for Anthropogenic Emissions

Developed countries have used up and still continue to use more than their

fair share of the global atmospheric space (with respect to greenhouse gas

concentrations in the atmosphere) relative to the size of their populations.

This leaves developing countries at a disadvantage – both in economic and

atmospheric terms – as their populations grow (while the populations of

developed countries generally remain stable) and, consequently, their need

to improve and increase economic productivity also grows.

The attribution of historical and current responsibility with respect to

global warming and climate change is explicitly set out in the UNFCCC.

The third paragraph of the Preamble notes that ‘the largest share of his-

torical and current global emissions of greenhouse gases has originated

in developed countries, that per capita emissions in developing countries

are still relatively low and that the share of global emissions in developing

counties will grow to meet their social and development needs’.

This attribution of responsibility is science- based. Historically, devel-

oped countries – as a result of their industrialisation process and its associ-

ated production and consumption patterns – have accounted for around

three- fourths of total anthropogenic emissions of greenhouse gases into

the atmosphere since the start of the Industrial Revolution (that is, from

around 1850 to the present). Developing countries – despite their larger

populations, but as a result of their lower industrialisation levels – have

contributed much less to such anthropogenic emissions (Baumert et al.,

2005: 32; UNDP, 2007: 40).



Currently, developed countries, with just 15 per cent of the world

population, account for 45 per cent of CO2 emissions (UNDP, 2007: 42).

By 2030, ‘developing countries are projected to account for just over half

of total emissions’ from less than half in 2004 (ibid), largely as a result of

increasing populations and economic growth.6 However, these aggregate

fi gures hide a wide disparity in per capita emissions. Current per capita

emissions in developed countries (with a population of approximately 1.2

billion) is almost four times higher (at 16.1 tons of CO2 equivalent) than in

developing countries (with a population of approximately 5.6 billion and

per capita emissions of 4.2 tons of CO2 equivalent).

Essentially, given the historical responsibility of developed countries,

as recognised in the UNFCCC and in scientifi c assessments, for almost

three- fourths of historical GHG emissions and their share of more than

half of current GHG emissions, developed country Parties clearly need to

undertake steep and rapid emission reductions that should be more than the

overall minimum mitigation targets for developed country Parties described

above (possibly even leading to ‘negative emissions’7) – especially for the

period between now and 2050 – in order to limit the committed warming to

the lower end of the range rather than the upper end. Such actions would help

mitigate to some extent the climate adaptation impacts and costs that devel-

oping countries will have to bear as a result of the committed warming.

The over- use by developed countries of the global atmospheric space

and the global carbon budget, with the adverse climate impacts that such

over- use is now bringing forth, eff ectively shrinks the development space of

developing countries. There remains, currently, a close correlation between

greenhouse gas emissions and development progress, although this correla-

tion may change as a result of technological shifts or other factors.

II. Climate Change and Sustainable Development

Sustainable economic development – that is, a development pathway

that provides adequate economic opportunities and a decent quality

6 See UNDESA (2009) projecting developing country population growth from 5.67 billion in 2010 to 7.03 billion in 2030.

7 This concept implies going beyond 100 per cent emission reductions below 1990 levels by essentially transforming economies to be carbon- negative (and not simply carbon- neutral) – for example, undertaking actions to create and expand carbon sinks in addition to eliminating carbon emissions, combined with actions to provide fi nancing and technology to developing country Parties to enable the latter to eff ect deeper and more rapid emission reductions. For more on this, see, for example, Third World Network (2008).



of life in a manner that is equitable and environmentally sustainable

– is needed, especially in developing countries. The poor in developing

countries simply cannot aff ord to see development in their countries be

constrained by climate change. Development is also urgently needed in

order to minimise and mitigate climate change risks by improving devel-

oping countries’ adaptive capacity. Furthermore, developing countries

would be in a better position to participate in global eff orts to address

climate change if the basic economic needs of their populations were

already met.

Developing countries’ populations are predicted by the United

Nations to grow by almost half by 2050 (see UNDESA, 2009). This

means, unavoidably, that developing countries’ GHG emissions will

also need to grow if they are to secure adequate economic and social

development.8

With a limited global carbon budget, developed countries (whose pop-

ulations are expected to remain stable, up to 2050, at around 1.2 billion)

will need to make even deeper emission reductions in order to provide

developing countries with the additional emissions budgets. However,

at the same time, the growth of emissions in developing countries could

be lowered if their economic development could be generated using

low carbon technologies. Since such technologies by and large are cur-

rently developed and patented in developed countries, developed coun-

tries under the UNFCCC are specifi cally committed to provide greatly

increased fl ows of such technology (as well as the fi nancing to acquire

such technology) and undertake actual transfers of such low carbon tech-

nology to developing countries.

The UNFCCC unequivocally embraces the principle of sustainable

development. It states (Art. 3.4) that Parties should promote sustainable

development. It stresses (Art. 3.5) the need for cooperation to promote

an open international economic system that would lead to growth and

development in all Parties. It also recognises (Art. 4.7) that ‘economic and

social development and poverty reduction’ are the ‘fi rst and overriding

priorities’ of developing countries.

Economic and population growth are both drivers entailing an increas-

ing demand for energy, goods and services with strong infl uence on GHG

emissions. Hence, emissions in developing countries are expected to grow

8 This need is recognised and refl ected in the third paragraph of the Preamble as well as in the framework of commitments in the UNFCCC itself, which does not require any specifi c mitigation obligations on the part of developing coun-tries.



as a result of their high population growth rates and their need to grow in

economic terms to address poverty and development concerns.

It is important to emphasise that emissions in most developing coun-

tries, in particular LDCs and small states, are minuscule and do not add

important pressure to the climate system. Most developing countries

combined contribute only 10 per cent of annual global GHG emissions.

Thus, although global GHG emissions need to be reduced in order to

avoid surpassing ‘safe levels’ of GHG concentration in the atmosphere,

the reduction has to come fi rst and primarily from developed countries

and these reductions should be large enough to off set the needed emissions

increase in developing countries.

Relative to people living in developed countries, populations in develop-

ing countries are more vulnerable to, and will be more adversely aff ected

by, climate change because they ‘have fewer resources to adapt: socially,

technologically and fi nancially’ (UNFCCC, 2007a: 6). Such impacts will

have far- reaching eff ects on the sustainable development of developing

countries including the attainment of the Millennium Development Goals

and other internationally agreed development goals by 2015. For example,

more people living in developing countries are at risk of, and suff er from,

climate- related disasters (such as extreme weather events, storm surges,

droughts) than in developed countries.

These climate impacts compound the major development challenges

that continue to exist and addressing these continues to be the overrid-

ing priority of developing countries. On 2000 to 2005 growth trends, the

UNDP in 2005 suggested that

it will still take India until 2106 to catch up with high- income countries. For other countries and regions convergence prospects are even more limited. Were high- income countries to stop growing today and Latin America and Sub- Saharan Africa to continue on their current growth trajectories, it would take Latin America until 2177 and Africa until 2236 to catch up. (UNDP, 2005: 37)

Other than for the fast- growing Asian developing countries, most other

developing countries are falling behind, rather than catching up, with

developed countries in terms of income growth, with Africa’s share of the

income- poor projected to increase by 2015 (ibid).9

9 See also the World Bank (2007: 42) which projects that ‘[t]here would be a further falling behind in Sub- Saharan Africa with its modest per capita growth below the high- income average, and Latin America would see little if any conver-gence on average’.



4. THE UNFCCC: A BALANCED LEGAL FRAMEWORK FOR GLOBAL COOPERATIVE ACTION ON CLIMATE CHANGE

I. A Balance of Principles and Obligations

A. A principles- based framework

The UNFCCC is a fi nely balanced multilateral policy regime in terms of

the framework that it establishes to mandate and guide global cooperative

action on climate change. This framework is characterised by:

a system of obligations and commitments that refl ects the principles ●

of equity, common but diff erentiated responsibilities and respective

capabilities;

an integrated approach to global cooperative action that links ●

developing countries’ implementation of the UNFCCC to devel-

oped countries’ implementation of their UNFCCC commitments

on fi nancing and technology transfer, taking into account that eco-

nomic development and poverty eradication are the fi rst and over-

riding priorities of developing countries.

The underlying principles of both the UNFCCC and the implementation

of its provisions (that is, equity, common but diff erentiated responsibilities

and respective capabilities) are explicitly stated in, for example, the sixth

preambular paragraph and Art. 3.1 of the UNFCCC.

B. Commitments refl ecting common but diff erentiated responsibilities and

respective capabilities

These principles are fl eshed out in the framework of commitments and

obligations contained in Arts 4.1, 4.2, 5, 6, 10 and 12. In essence, this

framework provides for:

a set of ● common commitments to: provide and communicate climate

change- related information (Art. 4.1(a)); adopt and implement

mitigation and adaptation measures (Art. 4.1(b)); cooperate in

technology transfer, adaptation, ‘climate- proofi ng’ economic, social

and environmental policies and actions, research and observation,

information exchange, education, training and public awareness

(Arts 4.1(c)–(i), 5, 6); consider and take into account the needs and

concerns of developing country Parties (Art. 4.8–4.10); and com-

municate information regarding the Party’s implementation of the

UNFCCC (Arts 4.1(j), 12.1);



a set of ● diff erentiated commitments (in addition to the common

commitments above) applicable specifi cally for developed country

Parties relating to: mitigation (Art. 4.2(a) and (b)); communi-

cation of information regarding such mitigation (Art. 4.2(b));

fi nancing for developing countries’ national communications and

the implementation by developing countries of their UNFCCC

commitments (Art. 4.3); meeting the adaptation costs of develop-

ing countries (Art. 4.4); and technology transfer to developing

countries (including supporting the development in developing

countries of endogenous technologies and technological capacity)

(Art. 4.5).

Summaries of these commitments are provided in Boxes 17.1 and 17.2.

C. Article 4.7 the fulcrum for the balance in the framework

The fulcrum around which the framework of commitments and obliga-

tions described above revolves is Art. 4.7 of the UNFCCC, as follows:

The extent to which developing country Parties will eff ectively implement their commitments under the Convention will depend on the eff ective implementa-tion by developed country Parties of their commitments under the Convention related to fi nancial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the fi rst and overriding priorities of the developing country Parties.

This means it is the level and extent of implementation by developed

country Parties of their diff erentiated commitments under Art. 4.3, 4.4

and 4.5 that determines the extent to which developing countries will

implement their common obligations under Arts 4.1 and 12.1. That is,

the more that developed countries provide climate change mitigation and

adaptation- related fi nancing and technology to developing countries, the

more that developing countries will be able to do in order to implement

their common obligations under the UNFCCC and thereby contribute

more to address climate change.

In the absence of the full and eff ective implementation by developed

countries of their commitments under Art. 4.3, 4.4 and 4.5, the correspond-

ing implementation by developing countries of their commitments under

the UNFCCC cannot be expected to be full or eff ective, for this would be

dependent on what developing countries can do by themselves. In such

a situation, the framework of cooperation on climate change between

developed and developing countries as envisioned under the UNFCCC

becomes marginalised, and global cooperative action on climate change

becomes disjointed and ineff ective.



BOX 17.1 SUMMARY OF COMMON PROVISIONS (FOR BOTH DEVELOPED AND DEVELOPING PARTIES)

Art. 2 – common obligation to meet the objective of the UNFCCC

Art. 4.1 – common obligations to:

a) develop and update public national greenhouse gas invento-ries using comparable methodologies

b) formulate, implement, publish and update national and regional programmes containing measures to mitigate climate change and measures to facilitate adequate adaptation to climate change

c) promote and cooperate in greenhouse gas mitigation- related technology transfer in all relevant sectors

d) promote and cooperate in the management, conservation and enhancement of greenhouse gas sinks and reservoirs

e) cooperate with respect to adaptationf) take climate change considerations into account in social,

economic and environmental policies and undertake actions to minimise adverse impacts of climate- related measures on the economy, public health and environmental quality

g) promote and cooperate in climate- related research and observation

h) promote and cooperate in climate- related information exchange

i) promote and cooperate in climate- related education, training and public awareness

j) communicate to the UNFCCC Conference of the Parties (COP) information related to the Party’s implementation of the UNFCCC

Art. 5 – obligation to cooperate in research and systematic observation

Art. 6 – obligation to cooperate in education, training and public awareness

Art. 10.2(a) – consideration by the SBI of all Parties’ national communications ‘to assess the overall aggregated effect of the steps taken by the Parties in the light of the latest scientifi c assessment concerning climate change’



The framework for global cooperative action on climate change estab-

lished by the UNFCCC can therefore be visualised as in Figure 17.1.

D. The governance architecture of the UNFCCC

The UNFCCC is institutionally designed to be a Party- driven treaty instru-

ment, both in terms of its policy or rulemaking and in terms of its implemen-

tation. All Parties to the UNFCCC are represented in its Conference of the

Parties (COP), ‘the supreme body of this Convention’, which is mandated

to ‘keep under regular review the implementation of the Convention and

any related legal instruments’ that it may adopt, and to make the decisions

needed to promote the UNFCCC’s eff ective implementation (Art. 7.2).

The COP is supported by a secretariat (Art. 8), and is assisted by two sub-

sidiary bodies – a Subsidiary Body for Scientifi c and Technological Advice

(SBSTA) and a Subsidiary Body for Implementation (SBI) (see Arts 9,

10).10 On the basis of the reports, advice and recommendations from its sub-

sidiary bodies, the COP may make decisions and recommendations as may

be necessary for the implementation of the UNFCCC (Art. 7.2(a)–(m)).

A fi nancial mechanism with its own governance system is also estab-

lished to handle the ‘provision of fi nancial resources on a grant or

concessional basis, including for the transfer of technology’ under the

Convention (Art. 11). An operating entity for the fi nancial mechanism is

the Global Environment Facility (GEF).

The COP may establish such other subsidiary bodies as it may deem

necessary to secure the eff ective implementation of the UNFCCC (Art.

7.2(i)). These bodies may include expert groups (such as the Expert Group

on Technology Transfer (EGTT) and the Least Developed Countries

Expert Group (LEG) with respect to adaptation) and ad hoc working

groups of the Parties to discuss specifi c issues (such as the Ad Hoc

Working Group on Long- Term Cooperative Action (AWG- LCA)11).

10 The SBSTA is tasked to ‘provide [the COP] and, as appropriate, its other subsidiary bodies with timely information and advice on scientifi c and technologi-cal matters relating to the Convention’. The SBI is tasked to ‘assist the [COP] in the assessment and review of the eff ective implementation of the Convention’. Both subsidiaries are open to participation by all Parties.

11 See COP decision 1/CP.13: para. 2 (UNFCCC, 2008c: 5).

Art. 12.1 – obligation to communicate to the COP, through national communications, a national greenhouse gas inventory, a general description of steps taken or to be taken to implement the UNFCCC, and other relevant information



BOX 17.2 SUMMARY OF DIFFERENTIATED PROVISIONS (ONLY FOR DEVELOPED PARTIES)

Art. 4.2(a) and (b) – obligation to:

● adopt national policies and take corresponding measures to mitigate climate change by limiting anthropogenic emis-sions of greenhouse gases and enhancing greenhouse gas sinks and reservoirs;

● take the lead in modifying longer- term trends in anthro-pogenic emissions consistent with the objective of the UNFCCC;1

● periodically communicate to the COP ‘detailed information’ on their mitigation policies and measures and their green-house gas national inventories, ‘with the aim of returning individually or jointly to their 1990 levels’ such greenhouse gas emissions.

Art. 4.3 – obligation to provide new and additional fi nancial resources to developing countries to:

● meet the agreed full costs for the preparation and submis-sion of developing countries’ national communications;

● meet the agreed full incremental costs (including for tech-nology transfer) of developing countries to implement their obligations under Art. 4.1.2

Art. 4.4 – obligation to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation to such adverse effects3

Art. 4.5 – obligation to:

● take all practicable steps to promote, facilitate and fi nance the transfer of, or access to, environmentally sound tech-nologies and know- how to developing country Parties to enable implementation of the UNFCCC;

● support the development and enhancement of endogenous capacities and technologies of developing country Parties



Art. 4.8 – obligation to give full consideration to what actions are needed (including fi nancing, insurance and technology transfer) to meet the specifi c needs and concerns of developing country Parties arising from the adverse effects of climate change and/or the impact of the implementation of response measures

Art. 4.9 – obligation to take full account of the specifi c needs and special situations of least developed countries in relation to funding and technology transfer

Art. 4.10 – obligation to take into consideration the situation of Parties, particularly developing country Parties, with economies that are vulnerable to the adverse effects of the implementation of response measures (notably fossil fuel income dependent economies)

Art. 10.2(b) – consideration by the SBI of the national com-munications of Annex I Parties in the context of the review by the COP under Art. 4.2(d) of the adequacy of the mitigation target for developed countries under Art. 4.2(a) and (b) in the light of the implementation by such Parties of their obligation to take the lead in mitigation in order to modify longer- term trends in GHG emissions

Art. 12.2 – obligation to include in their national communica-tions a detailed description of policies and measures to mitigate greenhouse gas emissions or enhance removals to implement their mitigation obligation under Art. 4.2(a) and (b), and a specifi c estimate of the effects of such policies and measures on anthro-pogenic emissions by sources or removals by sinks

Art. 12.3 – obligation to include details of measures taken in accordance with Art. 4.3, 4.4 and 4.5 (provision of agreed full incremental fi nancing, fi nancing to meet costs of adaptation, and technology transfer)

Art. 12.5 – differentiated timetable with respect to the submis-sion of national communications (more frequent for developed country Parties)

Notes:1 The obligation of developed countries under Art. 4.2(a) is not simply the limita-tion of greenhouse gas emissions and enhancing removals but rather doing so in ways that will: (i) show that they are leading in ‘modifying longer- term trends’ – that is, that they are changing the underlying production and consumption patterns in their societies that result in longer- term trends of anthropogenic emissions or removals; and (ii) lead to the achievement of the objective of the UNFCCC – that



II. Implementation by Developed Countries of their Diff erentiated

Commitments

A. Article 4.2(a) and (b): taking the lead in mitigation to modify longer-

term trends in emissions and returning to 1990 levels

Developed countries, by and large, have not yet complied with their

commitment under Art. 4.2(b) – to return ‘individually or jointly to their

1990 levels’ their anthropogenic greenhouse gas emissions – in order to

is, the stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference in the climate system, to be achieved within a timeframe suffi cient to allow for ecosystems to adapt naturally to climate change, ensure food security and production, and enable economic development to proceed sustainably.2 Such fi nancing for agreed full incremental costs is supposed to be channelled through the UNFCCC’s fi nancial mechanism set up under Art. 11.1. To date, however, there is no agreement on what constitutes ‘agreed full incremental costs’. Furthermore, there are many implementation problems – both in terms of actual fi nancial fl ows and in the administrative arrangements relating to such fi nancial fl ows – that the UNFCCC fi nancial mechanism is running into under the current administrative arrangement in which the Global Environmental Facility (GEF) serves as an operating entity of the UNFCCC fi nancial mechanism (see, for example, South Centre, 2008b).3 These developing country Parties that are ‘particularly vulnerable’ to the adverse effects of climate change would be those developing countries that have one or more of the vulnerability characteristics listed in Art. 4.8.

All countries (art. 4.1)

Mitigation (voluntary

for developing

countries)

Information provision

and exchange

Cooperation in

technology transfer,

R&D, adaptation,

education and training,

GHG sink and

reservoir conservation

and management

Developed countries

Common commitments

(art. 4.1)

+

Mitigation (mandatory,

art. 4.2)

Financing UNFCCC

implementation (art. 4.3)

Financing adaptation

(art. 4.4)

Technology transfer

(art. 4.5)

Provide detailed

information (arts. 12.2,

12.3 and 10.2(a) and (b))

Respective

capabilities

(preamble 6 and

art. 3.1)

Intra- and Inter-

generational equity (art.

3.1 and 3.2)

Sustainable development, in particular of

developing countries, within an enabling

international economic system

(art. 3.4 and 3.5)

Common

commitments

Differentiated

commitments

Balance of commitments (art. 4.7)

Figure 17.1 The UNFCCC framework



demonstrate, under Art. 4.2(a), that they are taking the lead in modifying

longer- term trends in human- made greenhouse gas emissions. It is, in fact,

largely the Economies In Transition (EIT) Annex I Parties that were able

to do so, mainly because of the economic diffi culties that they faced in the

1990s that resulted in the collapse of many industrial activities. Non- EIT

developed countries, by and large, except for a few, have not managed to

return to their 1990 levels (see UNFCCC, 2008b: fi g. 4).

The developed countries’ commitment under Art. 4.2(a) is not simply

about limiting anthropogenic emissions of greenhouse gases (as well as

protecting and enhancing sinks and reservoirs). The adoption and imple-

mentation of mitigation policies and measures by developed countries

under Art. 4.2(a) is to enable these countries to demonstrate that they are

‘taking the lead in modifying longer- term trends in anthropogenic emis-

sions consistent with the objective of the Convention’.

This means, essentially, that reductions in developed countries’ emis-

sions must be such as would result in modifi cations of longer- term emis-

sion trends; that is, result in long- term downward trends in emissions

arising from changes in the production and consumption patterns that

underlie such trends. In this context, it is quite clear that developed coun-

tries by and large have also not yet complied fully and eff ectively with their

commitment under Art. 4.2(a).

In fact, as of 2003–07, 19 (mostly non- EIT Annex Parties) of the 40

Annex I Parties to the UNFCCC have GHG emissions that are still above

their 1990 levels. These are Australia, Austria, Belgium, Canada, Finland,

Greece, Ireland, Italy, Japan, Liechtenstein, Monaco, the Netherlands,

New Zealand, Norway, Portugal, Slovenia, Spain, Turkey12 and the

United States of America.

Of the 39 Annex I Parties that are Parties to the Kyoto Protocol,13 21

have not yet, as of the period 2003–07, met their Kyoto Protocol Annex

B mitigation commitments nor have they ‘made demonstrable progress’

in achieving such commitments.14 These are Australia, Austria, Belgium,

12 Turkey’s GHG emissions rose from 170.1 million tons to 296.6 million tons CO2 equivalent between 1990 and 2004 (see Republic of Turkey, 2007).

13 The only Annex I Party that is not a Party to the Kyoto Protocol is the United States.

14 It should be noted, however, that the fi rst commitment period of the Kyoto Protocol under which the Annex I Parties are supposed to comply with their targets under Annex B of the Kyoto Protocol covers only the period 2008 to 2012. However, Art. 3.2 of the Kyoto Protocol expressly provides that ‘[e]ach Party included in Annex I shall, by 2005, have made demonstrable progress in achieving its commitments under this Protocol’.



Canada, Denmark, the European Community, Finland, Greece, Ireland,

Italy, Japan, Liechtenstein, Monaco, the Netherlands, New Zealand,

Norway, Portugal, Slovenia, Spain, Sweden, and Switzerland.

B. Article 4.3 and 4.4: providing new and additional fi nancing to

developing countries

Non- EIT developed countries15 are obliged under Art. 4.3 to provide new

and additional fi nancial resources to developing countries to:

meet the agreed full costs for the preparation and submission of ●

developing countries’ national communications;

meet the agreed full incremental costs (including for technology ●

transfer) of developing countries to implement their obligations

under Art. 4.1.

Additionally, such developed countries as are listed in Annex II of the

UNFCCC also have, under Art. 4.4, the obligation to ‘assist the devel-

oping country Parties that are particularly vulnerable to the adverse

eff ects of climate change in meeting costs of adaptation to those adverse

eff ects’.

Financing fl ows under the UNFCCC from developed (Annex II) Parties

to developing countries, pursuant to Art. 4.3, 4.4, and 4.5, are supposed

to go through the UNFCCC’s fi nancial mechanism established under Art.

11.1 to 11.4, with such fi nancing to be ‘on a grant or concessional basis’

(Art. 11.2). The fi nancial mechanism is currently being operated by the

GEF, on behalf of the COP and subject to review by the COP every four

years. The GEF, as an operating entity of the fi nancial mechanism, is sup-

posed to comply with the guidance issued by the COP for its operation.16

Optionally, under Art. 11.5, developed countries may also provide, and

developing countries avail themselves of, fi nancial resources through bilat-

eral, regional, or multilateral channels.17 Annex II developed Parties are

15 These are the developed countries that are listed in Annex II of the UNFCCC, often referred to as ‘Annex II Parties’.

16 Under Art. 11.1, the fi nancial mechanism ‘shall function under the guid-ance of and be accountable to the [COP], which shall decide on its policies, pro-gramme priorities and eligibility criteria related to’ the UNFCCC.

17 These channels include, for example, bilateral offi cial development assist-ance (ODA) that is climate change related, fi nancing (such as loans or grants) obtained through multilateral agencies such as the World Bank, UNDP, or UNEP, or through regional institutions such as the Asian Development Bank, African Development Bank, etc.



required to include in their national communications the details of meas-

ures that they take to comply with their fi nancing obligations under Art.

4.3, 4.4 and 4.5 (Art. 12.3). Such measures are taken into account in the

context of the COP’s review of the fi nancial mechanism that takes place

every four years.18

Compliance by developed countries with the obligations above has been

far from adequate.19 With respect to the obligation to meet the agreed

full costs for developing countries’ national communications (NCs), the

GEF has adopted operational procedures for the expedited fi nancing

of national communications from developing country Parties to assist

eligible countries to formulate and submit proposals based on COP 8

guidelines.20 Under these operational procedures, up to US$405,000 is

made available to each developing country Party for the preparation of

its NC. The GEF also provides an additional US$15,000 per country for

stocktaking and stakeholder consultations in preparation of the project

proposals. That such amounts should be determined by the GEF alone is

contrary to the obligation of developed countries to provide ‘agreed full

cost’ funding for the preparation of NCs. This has been one of the most

contentious issues under continued negotiations on the matter of develop-

ing country NCs under the Convention.

With respect to meeting the agreed full incremental costs of develop-

ing countries to implement their common commitments under Art. 4.1,

the UNFCCC secretariat’s estimated annual cost requirements to fund

adaptation, mitigation and technology transfer for developing countries

were detailed in an update of its 2007 report on investment and fi nancial

fl ows to address climate change (UNFCCC, 2008a). These are outlined in

Table 17.1.

The amounts pledged or to be committed from non- EIT developed

countries for climate fi nancing remain far too low to meet the scale of

the fi nancing needs of developing countries in relation to climate adap-

tation and mitigation. The UNFCCC estimates that US$262.15–615.65

billion will be needed annually by 2030, while the G- 77 and China in their

August 2008 climate fi nance proposal have suggested that initially at least

US$278.82–557.64 billion (based on the 2007 GDP of Annex I Parties) will

be needed.

18 See Annex of COP decision 3/CP.4 (UNFCCC, 1998a: 9). 19 For discussion of Annex II Parties’ reports in terms of their provision of

fi nancial resources pursuant to the UNFCCC see, for example, UNFCCC (2007b: para. 27ff ; 2007c: para. 27ff ).

20 See http://www.thegef.org/Documents/Enabling_Activity_Projects/GEF- C22- Inf16.pdf (accessed 11 November 2009) for the text of these procedures.


396

Table

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Currently, climate- related funds under the GEF amount to US$10.03–

10.25 billion, while US$18.95 billion (including US$6.68 billion in bilat-

eral initiatives and US$12.27 billion through multilateral initiatives) in

climate- related fi nancing may be forthcoming from non- EIT developed

country Parties’ individual climate fi nancing initiatives, with approxi-

mately US$4.8082 billion annually being made available as a result of

these initiatives over varying time periods. That is, climate fi nancing that

is available or may be made available by non- EIT developed country

Parties in the foreseeable future is a little over one- tenth of the minimum

estimated requirements for climate fi nancing coming from the UNFCCC

or the G- 77 and China.

As can be seen in Figure 17.2, the total of currently available or pledged

public sector fi nancing from non- EIT developed country Parties, whether

through the GEF (as an operating entity for the UNFCCC’s fi nancial

mechanism) or through bilateral or other non- UNFCCC multilateral

channels, falls far short of current estimates for annual climate fi nancing

requirements (whether based on the UNFCCC paper or the G- 77 and

China’s fi nancial mechanism proposal). Much more scaling- up of public

262.15

278.82

28.98

Estimates of what

is needed

0

50

100

150

200

250

300

What is available

or pledged

UNFCCC estimate – low end

G-77 and China proposal –

low end – 2007 GDP

Available or pledged – GEF-

UNFCCC + non-UNFCCC

channels

Source: South Centre calculations

Figure 17.2 Climate fi nancing mismatch between needs and availability

(US$ billions)



sector fi nancing from non- EIT developed country Parties therefore needs

to be undertaken in order to meet climate fi nancing requirements.

The problem is also not simply limited to the severe funding shortfall

evident in both UNFCCC (through the GEF) and non- UNFCCC chan-

nels. A major part of the problem relating to current public climate fi nanc-

ing from developed countries is that, regardless of the delivery channel,

these are voluntary and are not directly accountable to the UNFCCC

COP.

Virtually all of the fi nancing that Annex II Parties reported in their

fourth national communications (save for Italy for some of its fi nancing)

as compliance with their UNFCCC Art. 4.3, 4.4 and 4.5 fi nancing obliga-

tions, forms part of these Parties’ overall offi cial development assistance

(ODA) programmes rather than being ‘new and additional’.21

Mixing ODA fl ows for development projects and fi nancial fl ows for

climate adaptation and mitigation makes it diffi cult to obtain a clear

picture of the extent to which Annex I Parties are complying eff ec-

tively with their UNFCCC obligation to provide new and additional

climate fi nancing to support developing country implementation of their

UNFCCC obligations.

In essence, developed countries’ fi nancial fl ows that go towards meeting

their internationally agreed goal of providing at least 0.7 per cent of their

annual gross national income (GNI) as ODA are double- counted as also

going towards meeting their treaty obligations under UNFCCC Art. 4.3,

4.4 and 4.5 to provide climate fi nancing to developing countries. In this

context, therefore, such fi nancial fl ows are neither new, additional, nor,

indeed, mandatory in nature. Therefore, counting ODA fi nancing as

UNFCCC- compliant climate fi nancing is not consistent with UNFCCC

Art. 4.3 because such climate fi nancing must be new and additional. As

the G- 77 and China have stressed, climate fi nancing must be ‘new and

additional . . . which is over and above ODA’. Furthermore, ODA is,

by its very nature, voluntary. The climate fi nancing commitment under

UNFCCC Art. 4.3 is mandatory.

21 With regard to ‘new and additional’ fi nancial contributions, no universal interpretation of the term appears to exist, as seven Annex II parties considered their contributions to the GEF as part of this category, while two linked their new and additional contributions to pledges made in Bonn Agreements. Two other parties chose to report certain contributions as ‘new and additional’ without identifying the reasons behind such a classifi cation. Some countries merely chose to specify the total amount of bilateral and regional development assistance con-tributed without indicating all the recipients and which ones in particular are given funds for mitigation and/or adaptation.



By double- counting ODA as climate fi nancing, developed countries

are essentially refl ecting and responding to their own priorities relating to

development assistance and climate fi nancing rather than to the priorities

and needs of developing countries. This undermines the balance contained

in the UNFCCC with respect to the climate fi nancing needs of developing

countries and the climate fi nancing obligations of developed countries.

As such, currently available public fi nancing for climate action from

developed countries (whether channelled through the GEF or not) does

not, and cannot, be compliant with the criteria of predictability and ade-

quacy of fi nancing that are required under Art. 4.3 of the Convention. The

nature of voluntary fi nancing is directly inconsistent with the mandatory

nature of the fi nancing commitments for developed country Parties under

the UNFCCC.

Furthermore, it is not clear to what extent such voluntary fi nancing

(again whether through the GEF or other non- UNFCCC channels)

complies with the COP’s guidelines on such fi nancing’s consistency with

COP policies, programme priorities and eligibility criteria, and on non-

introduction of new forms of conditionalities.22 For example, in relation to

the GEF, the COP has had to issue additional guidance at virtually every

session to the GEF, thereby indicating that qualitative defi ciencies in the

GEF’s performance as an operating entity for the UNFCCC’s fi nancial

mechanism continue to persist. Critiques of the GEF’s performance as an

operating entity generally relate to, inter alia, the simplicity and effi ciency

of its funding procedures and the equitable distribution of GEF funding to

developing country Parties, especially LDCs and SIDS.

Developed countries also show a great reluctance to channel climate

fi nancing sourced from their governmental funds through the UNFCCC,

preferring to use either their own bilateral channels or other multilateral

channels such as the World Bank as their vehicles for public sector climate

fi nancing fl ows. They also show a preference for relying on unpredictable

and market- driven private sector fi nancing. The public fi nancing from

developed countries for climate- change- related actions that goes through

non- UNFCCC channels and such fi nancing that does go through the

UNFCCC’s fi nancial mechanism (via the Global Environment Facility as

an operating entity) refl ect and respond to the donors’ political and eco-

nomic priorities and interests rather than to the sustainable development

priorities of developing countries.

Counting the low- end estimate of US$10.03 billion channelled or avail-

able through the GEF as an operating entity of the UNFCCC’s Art. 11

22 See COP Decision 11/CP.1: para. 2(a) (UNFCCC, 1995: 34).



fi nancial mechanism and the amount through bilateral and other non-

UNFCCC multilateral mechanisms (US$18.95 billion), the current total

available or pledged public fi nancing for climate- change- related actions

from Annex I Parties amounts to US$28.98 billion. Of this total amount,

34.61 per cent is through the UNFCCC (via the GEF as an operating

entity) and 65.39 per cent is through non- UNFCCC channels (see Figure

17.3).

Many non- EIT developed country Parties justify their reluctance to

channel such fi nancing through the UNFCCC by arguing that the

UNFCCC is not set up institutionally to handle massive fi nancial fl ows,

and that other multilateral institutions such as the World Bank are better

equipped and have more expertise in handling such fl ows. However, con-

sidering that the UNFCCC is the sole, virtually universal, multilateral

policy and institutional regime providing the legitimate framework for

global action on climate change, climate fi nancing should be channelled

through the UNFCCC’s fi nancial mechanism and its capacity to handle

such fl ows should be further enhanced.

There are four main consequences to this preference by Annex I Parties

to direct their public sector fi nancing for climate- change- related actions

through non- UNFCCC channels:

10.036.68

12.27

UNFCCC (GEF)

Non-UNFCCC (bilateral)

Non-UNFCCC (multilateral)

Source: South Centre calculations

Figure 17.3 Public sector climate fi nancing from some Annex I Parties –

clear preference for non- UNFCCC channels (in US$ billions)



(i) The UNFCCC is institutionally weakened. The preference for non-

UNFCCC channels for climate- related public fi nancing is a step towards

weakening the UNFCCC itself and thereby undermining the eff ective-

ness of the UNFCCC’s legal regime and institutional architecture as

the international community’s main vehicle for global action on climate

change. Such weakening also eff ectively lessens the normative value of the

UNFCCC itself as a binding legal regime.

(ii) The UNFCCC’s fi nancial mechanism is weakened. The fi nancial

mechanism established under Art. 11 of the UNFCCC serves as the sole

multilaterally recognised channel through which developed countries can

comply with their obligations under Art. 4.3, 4.4, and 4.5 to provide new

and additional fi nancing. By leaving the UNFCCC virtually unfi nanced,

and by moving public climate fi nancing to other channels, the institu-

tional ability of the UNFCCC to serve as the main conduit for public-

sector- sourced climate fi nancing is severely weakened. Furthermore, once

non- UNFCCC funding channels are built up and adequately funded,

developed countries might become even more reluctant to further enhance

the UNFCCC’s fi nancial mechanism as the main channel for climate

fi nancing. This would make it unfeasible for the UNFCCC’s COP, and

developing country Parties to the UNFCCC, to ensure that such fi nancing

is consistent with the provisions and objectives of the UNFCCC.

(iii) Developed countries cannot be held accountable to the UNFCCC

COP for fulfi lment of their fi nancing commitments under the UNFCCC. As

most Annex I public- sector- sourced climate fi nancing is not through the

UNFCCC under the authority of the COP, developing countries will fi nd

it diffi cult if not impossible to raise issues relating to measurement, report-

ing and verifi cation, as well as accountability, for the fl ow and the use of

such fi nancing in the COP.

The diffi culties that developing countries have experienced with the

GEF as an operating entity for the UNFCCC’s fi nancial mechanism in

terms of accessing climate fi nancing are likely to be compounded even

more with respect to climate fi nancing that goes through non- UNFCCC

channels that are not accountable to the COP. These non- UNFCCC chan-

nels (such as the World Bank and other multilateral institutions whose

governance structures and memberships are diff erent from the UNFCCC

COP’s – not to mention the fact that the governance of the World Bank

and most of the other regional development banks is heavily dominated

by developed countries) are likely to have governance and accountability

mechanisms in which developing country recipients play little or no eff ec-

tive role and in which the funding priorities are likely to be driven by the



donors’ interests rather than the recipients’ needs or the climate fi nancing

priorities identifi ed by the UNFCCC COP.

The example of the GEF can be highlighted because, even though it

was designated to be an operating entity for the UNFCCC’s fi nancial

mechanism and, with respect to climate change- related funds, its actions

are supposed to be subject to the guidance of the UNFCCC COP, devel-

oping countries have often raised concerns with respect to the diffi culties

encountered in terms of having the GEF’s operational decisions be fully

consistent with COP guidance.23 The fact that the GEF’s governance body

is diff erent from and not accountable to the UNFCCC COP makes it even

more diffi cult for developing countries to call the GEF to account through

the COP.

Using non- UNFCCC channels as the main conduits for public climate

fi nancing to support developing countries’ implementation of climate

change- related actions means that the fund providers – for example, devel-

oped countries – need not and would not be bound by UNFCCC COP

guidelines, nor be accountable to the UNFCCC COP. Furthermore, there

is greater room for donor control over the scale, direction, objectives,

recipients, and objectives of climate fi nancing by using non- UNFCCC

channels. This therefore also institutionally weakens the UNFCCC.

Accountability to the UNFCCC COP with respect to climate fi nancing

is explicitly stated in Art. 11 of the UNFCCC, and having such fi nanc-

ing go through the UNFCCC’s fi nancial mechanism will ensure that all

the UNFCCC Parties, both developed and developing alike, will be able

through the COP to participate fully and transparently (and hold each

other accountable) in the process of guiding and using such fi nancial

resources consistent with the provisions of the UNFCCC. This would

also enable the Parties, both developed and developing, to work together

to leverage such fi nancing to generate other resources outside of the

23 Part of the problem with the GEF in terms of ensuring the equitable allo-cation of funding resources to developing country Parties is that ‘higher levels of funding have typically been assigned to the countries with the highest overall potential for GHG mitigation’, which means that many other developing country Parties whose priority is adaptation more than mitigation (because of their low emission levels or low mitigation capabilities) often fi nd it diffi cult to obtain GEF funding. Many African countries, for example, are sinks rather than sources of emissions. Some of the GEF’s stakeholders, particularly in the Pacifi c region, have, in fact, suggested that ‘the GEF must fund activities in the area of adaptation to climate change because it is in the guidance from the UNFCCC and, because they are smaller emitters, the mitigation of GHG emissions is not a high national priority’ (see GEF, 2005: 36–40).



UNFCCC context that can be used to also support the meeting of the

UNFCCC’s objective.

(iv) Climate fi nancing priorities of developing countries will not be

met. Current public fi nancing from developed countries for climate

action – whether through the GEF or through non- UNFCCC channels

– will essentially refl ect and respond to their own strategic political and

economic interests and priorities rather than the sustainable development

priorities of developing countries. This is clearly inconsistent with the

needs- focused approach implicit in the UNFCCC’s fi nancing provisions

(Art. 4.3, 4.4 and 4.5) in which fi nancing from developed countries is to

respond to and meet developing countries’ needs.

Existing modalities under which climate fi nancing is being provided by

developed countries have the eff ect of weakening the UNFCCC in terms

of its eff ectiveness as a normative legal regime for global action on climate

change and in terms of the eff ectiveness of its fi nancial mechanism as a

catalyst and vehicle for climate fi nancing that is consistent with and sup-

ports the objectives of the UNFCCC.

C. Article 4.5: transferring technology to developing countries

Article 4.5 commits developed countries to:

take all practicable steps to promote, facilitate and fi nance the ●

transfer of, or access to, environmentally sound technologies and

know- how to developing country Parties to enable implementation

of the UNFCCC;

support the development and enhancement of endogenous capaci- ●

ties and technologies of developing country Parties.

The extent of compliance by developed countries with this treaty com-

mitment has also been the subject of much discussion among the Parties.

The UNFCCC COP has, in various sessions, discussed the issue of the

implementation of Art. 4.5, with various decisions coming out that laid

down specifi c actions to be undertaken by Parties, the Secretariat, and the

subsidiary bodies. Of particular importance is COP Decision 4/CP.7 (see

UNFCCC, 2002: 22) which established a framework for ‘meaningful and

eff ective actions to enhance the implementation’ of UNFCCC Art. 4.5 ‘by

increasing and improving the transfer of and access to environmentally

sound technologies (ESTs) and know- how’. The decision’s annex identi-

fi ed fi ve themes around which such ‘meaningful and eff ective actions’

would be undertaken. These are:



Technology needs and needs assessments; ●

Technology information; ●

Enabling environments; ●

Capacity building; ●

Mechanisms for technology transfer. ●

In its 2007 report, the UNFCCC Expert Group on Technology Transfer

(EGTT) concluded that discussions relating to technology transfer in the

UNFCCC ‘should evolve to more practical, results- oriented actions in spe-

cifi c sectors and programs (see UNFCCC, 2007d: 12). The EGTT eff ectively

implied that, to date, the UNFCCC’s technology- transfer- related provi-

sions really have not been implemented by developed country Parties.24

Developing countries have also identifi ed key concerns relating to tech-

nology transfer under the UNFCCC in the context of the climate negotia-

tions currently taking place pursuant to the Bali Action Plan agreed to by

the thirteenth COP in Bali, Indonesia, in December 2007. These include,

inter alia, concerns about the general principles that mechanisms for

technology transfer under the UNFCCC need to refl ect, the kinds of insti-

tutional arrangements that would be needed to make technology transfer

eff ective, addressing intellectual property rights (IPR) issues, and fi nanc-

ing for technology transfer (see UNFCCC, 2009a: para. 127–34).

Developed countries, on the other hand, tend to stress that technology

transfer should be done in the context of commercial transactions that

will be subject to normal cross- border trade regulations as well as through

foreign investment rather than through non- commercial modalities. In

this context, developed countries have stressed that robust and strong

compliance with IPR regimes (such as the WTO TRIPS Agreement) is

necessary.

Given the shortfalls in the implementation of the UNFCCC’s technol-

ogy transfer provisions by developed countries, and in light of paragraphs

1(b)(ii) and 1(d) of the BAP pointing to technology transfer of climate-

related ESTs to developing countries as an essential and integral compo-

nent in enhancing the full and eff ective implementation of the UNFCCC,

establishing a strong, adequately funded, transparent and participatory

mechanism for technology transfer operating under the authority of, and

accountable to, the UNFCCC COP is essential.

The mechanism should be comprehensive in coverage so as to be able to

24 For a discussion of Annex I Parties’ reports on their compliance with Art. 4.5 as contained in their national communications, see, for example, UNFCCC (2007c: para. 45ff ).



address all stages of the technology development cycle (including research

and development, demonstration, deployment, diff usion, and endogenous

innovation). It should be designed in such a way that it enhances devel-

oped country compliance with the provisions of UNFCCC Art. 4.3 and

4.5 on technology transfer. The transfer modalities must be focused on

direct, concrete, and on- the- ground approaches that will actually result in

technology transfer taking place. The mechanism should also ensure the

technology transferred under its modalities is appropriate and adapted to,

or may be adapted to, the unique environmental and developmental con-

ditions of the recipient country. It should also be able to encourage and

promote further innovation and development of the transferred technol-

ogy in the recipient country.

III. Implementation by Developing Countries of their Common

Commitments

As pointed out above, developing countries have commitments in common

with developed countries under Art. 4.1 of the UNFCCC. However, what

is important to note is that in implementing such common commitments,

the principle of common but diff erentiated responsibilities and the specifi c

national and regional development priorities, objectives and circum-

stances of the Parties should be taken into account (Art. 4.1 chapeau).

Additionally, the extent to which developing countries implement such

common commitments would depend on the extent to which developed

countries implement their commitments to provide fi nancing and technol-

ogy transfer for the implementation of Art. 4.1 by developing countries

(Art. 4.7 in relation to Art. 4.3, 4.4 and 4.5).

These common commitments of developing countries include having to:

provide and communicate climate- change- related information (Art. ●

4.1(a));

adopt and implement mitigation and adaptation measures (Art. ●

4.1(b));

cooperate in technology transfer, adaptation, ‘climate- proofi ng’ ●

economic, social and environmental policies and actions, research

and observation, information exchange, education, training and

public awareness (Arts 4.1(c)–(i), 5 and 6);

communicate information regarding the Party’s implementation of ●

the UNFCCC (Arts 4.1(j), 12.1).

With respect to providing climate change- related and UNFCCC

implementation- related information, developing countries have by and



large done so within the limits their respective capacities. As of 1 April

2005, 122 developing country Parties have already submitted their initial

national communications.25

Developing countries Parties have provided vast amounts of informa-

tion in their national communications. Their implementation of Art. 4.1

has been largely in the following areas:

sustainable development and the integration of climate change con- ●

cerns into medium- and long- term planning;

preparation of inventories of anthropogenic emissions by sources ●

and removals by sinks of greenhouse gases;

undertaking measures contributing to addressing climate change; ●

undertaking and cooperating in research and systematic observa- ●

tion;

assessing climate change impacts and undertaking adaptation meas- ●

ures and response strategies;

education, training and public awareness (see, for example, ●

UNFCCC, 2005a).

For many developing country Parties, poverty reduction continues to be

their overriding aim (ibid: para. 24). In doing so, they have noted that their

emissions are still likely to grow commensurate with economic growth.

Developing countries do not have quantifi ed emission reduction targets

linked to a base year similar to what developed countries have under Art.

4.2(a) and (b). Instead, developing countries are committed under Art.

4.1(b) to formulate and implement national mitigation and adaptation

measures, taking into account their specifi c needs and development priori-

ties.

As of 1994, the total greenhouse gas emissions, excluding LULUCF

(land use, land- use change and forestry), reported by 122 developing

country Parties amounted to 11.7 billion tons CO2 equivalent (ibid: para.

36; see also, UNFCCC, 2005b: para. 23). Most developing countries

reported that they were net greenhouse gas emitters, but 29 countries

reported that they were net greenhouse gas sinks and 36 indicated that

their removals of greenhouse gases by sinks exceeded their total emissions

(UNFCCC, 2005b: para. 21).

25 Art. 12.5 specifi es that developing country Parties shall make their initial national communications within three years from the entry into force of the UNFCCC or of the availability of fi nancial resources for national communica-tions provided by developed countries under Art. 4.3.



Developing countries also reported a wide range of measures to address

climate change, with most indicating that ‘the principles of sustainable

development were used to guide the assessment of options for abating

the increase of GHG emissions and enhancing sinks’ (UNFCCC, 2005a:

para. 42). In this regard, developing countries’ choice of measures was

‘infl uenced by key national circumstances relating to population, natural

resource endowment, geography, and political and economic structures

as well as national priorities such as poverty alleviation, and provision of

access to basic facilities and health issues, as well as fi nancial and techno-

logical considerations’ (ibid). These measures were undertaken in various

sectors, as reported by developing countries.

Most developing countries that submitted national communications

indicated that their technical and institutional capacities were inadequate

for meeting their reporting obligations under the UNFCCC regarding

national GHG inventories (ibid: para. 86).

The ineff ective and insuffi cient implementation by developed countries

of their fi nancial and technology transfer commitments under Art. 4.3,

4.4, and 4.5, and in respecting Art. 4.7, can be clearly seen in developing

countries’ national communications that stressed the need for fi nancial

and technological support (see, for example, UNFCCC, 2005a: paras 86,

89, 90, 93, 95, 98, 100).

IV. Enforcement and Compliance: Multilateral Governance Issues in

UNFCCC Implementation

The UNFCCC as it currently exists has great potential in serving as

the multilateral policy framework under which the global community

can build a fair, equitable and low- carbon sustainable common future.

However, the record of its implementation since its entry into force on

21 March 1994 belies this great potential, largely as a result of failures in

implementation on the part of many developed countries that bear the his-

torical responsibility and specifi c obligations to take the lead in addressing

climate change under the UNFCCC through such actions as cutting their

emissions and providing fi nancing and technology to developing coun-

tries. Implementation of these obligations by developed countries is an

essential condition for the full implementation of the UNFCCC, including

by developing countries in the context of their sustainable development

processes. This balancing of obligations is clearly specifi ed in Art. 4.7 of

the UNFCCC.

Enforcing compliance with these obligations, however, has been one

of the major diffi culties faced by the UNFCCC given that, as a treaty

regime, it is not sanction- based in terms of its enforcement and compliance



mechanism. It relies on a regime of transparency through a system of

reporting – that is, the national communications under Arts 4.1(h) and 12

– and review (fi rst by the SBI under Art. 10 and then by the COP).

The COP’s power to review the implementation of the UNFCCC is

principally grounded on Art. 7.2, which requires a ‘regular review’ of ‘the

implementation of the Convention and any related legal instruments’26

so that the COP can make ‘the decisions necessary to promote the eff ec-

tive implementation of the Convention’. All decisions that need to be

taken with respect to the implementation of the UNFCCC have to be

made by the COP under its Art. 7 powers. This essentially means, given

the consensus- based decision- making practice in the COP, that all of the

Parties have to agree on a decision, and each and every decision has to

be politically negotiated among all the Parties before a decision can be

made.

Among other things, such regular review should include assessing, ‘on

the basis of all information made available to it in accordance with the

provisions of the Convention, the implementation of the Convention

by the Parties, the overall eff ects of the measures taken pursuant to the

Convention, in particular environmental, economic and social eff ects as

well as their cumulative impacts and the extent to which progress towards

the objective of the Convention is being achieved’ (Art. 7.2(e)). Such

information would include the national communications to be provided

by the Parties under Art. 12; the consideration of the information in such

national communications by the SBI under Art. 10; and the review by the

COP pursuant to Art. 4.2(d) of whether developed countries’ mitigation

actions under Art. 4.2(a) and (b) are adequate in meeting the UNFCCC’s

objective.

To date, however, the COP has not yet undertaken any formal review

of the implementation of the UNFCCC pursuant to Art. 7.2(a) and (e) in

order to assess how it may be more eff ectively implemented by the Parties.

Developed countries have generally sought to focus attention on the need

for developing countries to do more in terms of mitigation, while discus-

sions on how to ensure eff ective compliance with developed country obli-

gations in relation to mitigation, fi nancing and technology transfer remain

at the conceptual level.27

26 This would hence include the Kyoto Protocol within the scope of such man-dated regular review by the COP of the implementation of the Convention.

27 This can be clearly seen in, for example, the climate negotiations taking place pursuant to the Bali Action Plan (see COP Decision 1/CP.13 (UNFCCC, 2008c)). In these negotiations, developed countries are generally pushing for a revision or replacement of the UNFCCC, including the demand to have develop-



UNFCCC Arts 13 and 14, which currently do not contemplate or

provide for binding punitive sanctions as a modality for addressing non-

compliance, could be amended in order to explicitly provide for such

binding punitive sanctions. It is important to note that, even under the

Kyoto Protocol’s Art. 18, addressing non- compliance issues by modalities

that would have ‘binding consequences’ would need to be done pursuant

to an amendment to the KP.

Article 13 states that ‘the resolution of questions regarding the imple-

mentation of the Convention’ can be done by the Parties through the

establishment of a ‘multilateral consultative process’ which would be

available to the Parties on their request (Art. 13). The COP adopted

Decision 10/CP.4 (see UNFCCC, 1998a) establishing the multilateral

consultative process (MCP). However, the MCP has not yet been made

operational due to continuing disagreements among the Parties on the

governance structure for the MCP.

Article 14.2(b) mandates the COP to adopt arbitration procedures ‘as

soon as practicable, in an annex on arbitration’ to supplement the arbitra-

tion provision in Art. 14.2(b). UNFCCC Art. 14.7 mandates the COP to

adopt ‘additional procedures relating to conciliation . . . as soon as prac-

ticable, in an annex on conciliation’ in order to supplement the provisions

on conciliation contained in Art. 14.5 and 14.6. However, with respect to

conciliation, any conciliation commission established under Art. 14.6 can

render only a ‘recommendatory award, which the parties shall consider

in good faith’. To date, however, no such annex on conciliation has been

adopted.

5. CONCLUSION

The UNFCCC incorporates a set of obligations and commitments that

take into account the common, but diff erentiated, responsibilities and

capabilities of developed and developing countries in relation to climate

change.

As a governance regime, the UNFCCC has already prompted many

actions on the part of its Parties to address climate change. However, these

actions have not yet been enough to stop anthropogenic greenhouse gas

emissions from increasing since 1990.

ing countries assume binding quantifi ed mitigation obligations, while insisting on using current non- UNFCCC- compliant modalities and channels to provide climate fi nancing and technology.



While the urgency of the climate change crisis is now acknowledged more

than ever as a serious international public policy issue, the UNFCCC’s

provisions have not yet been fully or adequately implemented, especially by

developed countries that have both the greater responsibility and greater

capacity for doing so. In particular, there are failures of implementation

in relation to developed countries’ commitments to provide fi nancing and

technology transfer to developing countries. Developing countries, on the

other hand, which have the right to expect fi nancial support and technol-

ogy transfer from developed countries to enable their full and eff ective

implementation of the UNFCCC, are doing what they can in the midst of

their limited resources to comply with their own treaty obligations.

The global community can do much more in order to address climate

change through ensuring the full, eff ective and sustained implementation

of the UNFCCC by developed countries, taking into account its objectives

and, in particular, the obligation to mitigate emissions and the commit-

ment to provide fi nancing and to transfer appropriate technology. The

UNFCCC sets up a balanced and organic linkage between developed

country compliance and developing country compliance. Thus, develop-

ing countries will only be able to comply fully with their obligations under

this treaty if developed countries comply with theirs.


411

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July 1966, 1966 ICJ Reports 6.

Subhash Kumar v. State of Bihar and others (1991) Supreme Court of India,

AIR 1991 SC 420, http://www.ielrc.org/content/e9108.pdf (accessed 11

November 2009).

Timberlane Lumber Co v. Bank of America (1976, 9th Cir) 549 F.2d 597.

United States v. Alcoa 148 F.2d 416 (2d Cir 1945).

US – Transitional Safeguard Measures on Combed Cotton Yarn from

Pakistan, WT/DS192/R, 31 May 2001 and WT/DS192/AB/R, 8 October

2001.

US – Rules of Origin for Textiles and Apparel Products, WT/DS243/R, 20

June 2003.

US – Subsidies on Upland Cotton, WT/DS267/R, 8 September 2004 and

WT/DS267/AB/R, 3 March 2005.

Vellore Citizens’ Welfare Forum v. Union of India (1996) 5 SCC 647, 28

August 1996.

Verizon Communications Inc v. Law Offi ces of Curtis V. Trinko (2004) 540

US 398.

Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co. (2007) 127 S

Ct 1069.

World Duty Free v. Kenya, ICSID Case No ARB/00/7, 46 International

Legal Materials 339 (2007).


480

Legislation

Brazil, Brazilian Competition Act 2000.

China, Anti-Monopoly Law of the People’s Republic of China 2008.

Dominican Republic–Central American–United States Free Trade

Agreement Implementation Act, Pub L 109- 53, 109th Cong, 1st session

(2005).

Foreign Corrupt Practices Act of 1977, Pub. L. No. 95- 213, § 102, 91 Stat.

1494, codifi ed as amended at 15 U.S.C. §§78m(b), (d)(1), (g)–(h), 78dd-

1, 78dd- 2, 78dd- 3, 78ff ; amended by Foreign Corrupt Practices Act

Amendment of 1988 (part of Omnibus Trade and Competitiveness Act

of 1988), Pub. L. 100– 418, 102 Stat. 1107, 1415 (1988), and International

Anti- Bribery and Fair Competition Act of 1998, Pub. L. 105– 366, 112

Stat. 3302 (1998).

India, Competition Act 2003, http://www.competition-commission-india.

nic.in (accessed 11 November 2009).

India, Water (Prevention and Control of Pollution) Act 1974, http://www.

ielrc.org/content/e7402.pdf (accessed 11 November 2009).

South Africa, National Environment Management: Biodiversity Act

2004.

United States, Antirust Criminal Penalty Enhancement and Reform Act

2004.

United States, Foreign Trade Antitrust Improvements Act 1982.

United States, Sherman Antitrust Act 1890 (15 U.S.C. §§1–7).

United States, Webb-Pomerene Act (15 U.S.C. 61–65 2000).

Uttar Pradesh Water Management and Regulatory Commission Act 2008,

http://www.ielrc.org/content/e0803.pdf (accessed 11 November 2009).


481

International instruments

African Union Convention on Preventing and Combating Corruption, 11

July 2003, 43 ILM 5 (2004).

Agreement on Government Procurement, 15 April 1994, WTO Agreement,

entered into force 1 January 1996.

Civil Law Convention on Corruption, Council of Europe, 4 November,

1999.

Convention on Biological Diversity (CBD) (1992), Rio de Janeiro, 5 June

1992, 31 ILM 818, entered into force 29 December 1993.

Convention on Combating Bribery of Foreign Public Offi cials in

International Business Transactions, Organisation for Economic Co-

operation and Development, 21 November 1997, 37 ILM 4 (1998).

Convention on Environmental Impact Assessment in a Transboundary

Context, Espoo, 25 February 1991, 1989 United Nations Treaty Series

309.

Criminal Law Convention on Corruption, Council of Europe, 27 January

1999.

European Union, Treaty on the Functioning of the European Union.

European Union, European Community Treaty.

IBRD (International Bank for Reconstruction and Development)

Articles of Agreement, 22 July 1944, as amended eff ective 16 February

1989.

IMF (International Monetary Fund) Articles of Agreement, 22 July 1944,

as amended 28 July 1969.

Inter- American Convention against Corruption, 29 March 1996, 35 ILM

724 (1996).

International Covenant on Economic, Social and Cultural Rights

(ICESCR), 16 December 1966, Resolution 2200A (XXI), 21 UN GAOR

Supplement (No 16) 49; UN Doc A/6316 (1966); 999 UNTS 3; 6 ILM

360, entered into force 3 January 1976.

International Treaty on Plant Genetic Resources for Food and Agriculture

(ITPGRFA), adopted on 3 November 2001, FAO Conference, 31st

Session, Rome, 2–13 November, Resolution 3/01, entered into force

29 June 2004, http://www.planttreaty.org/texts_en.htm (accessed 5

December 2009).

Montreal Protocol on Substances that Deplete the Ozone Layer (Protocol



to the Vienna Convention for the Protection of the Ozone Layer),

Montreal, 16 September 1987. (No 26369), 1522 United Nations Treaty

Series 3.

Patent Cooperation Treaty, 19 June 1970, Washington Act, amended in

1979 and modifi ed in 1984.

Protocol on Biosafety to the Convention on Biological Diversity (CBP),

Cartagena, 29 January 2000, 39 ILM 1027, entered into force 11

September 2003.

United Nations Convention against Corruption, adopted on 31 October

2003 entered into force 14 December 2005.

United Nations Commission on International Trade Law, UNCITRAL

Model Law on Procurement of Goods, Construction and Services, 15

June 1994.

World Intellectual Property Organization Copyright Treaty (WCT) 1996.

World Intellectual Property Organization Performances and Phonograms

Treaty (WPPT) 1996.


Index

Abrahamson, Rita 136accountability

for corporate human rights violations 215–17

of IMF and World Bank 86–7in international aid 135–6in international fi nancial governance

85–8Accra Agenda for Action (AAA) 128Africa 81

food production, and genetic engineering 334–5, 349–50

Model Law on safety in biotechnology (2007) 368–9

Agreement on subsidies and countervailing measures (1994)(WTO) 21, 55–9, 149–50

Agreement on trade-related aspects of intellectual property rights (TRIPS) see TRIPS Agreement

Agreement on trade-related investment measures (TRIMs) see TRIMs Agreement

agriculture see biofuels; food production; plant varieties

aid see international aidAlien Claims Tort Act 1789 (US)

215–16Alston, Philip 238, 242Alvarez, José 27American Manufacturing and Trading,

Inc. v Zaire (1997) 185–6Amin, Samir 165, 170Amsden, Alice 17anti-corruption policies

and access to information 290and colonialism 284–5and corporate social responsibility

222–3dispute settlement 283–4focus of 287–9

by foreign legal institutions/jurisdictions 284, 286–7, 305–6

advantages 289–90, 297–8and cultural diff erences 292–4,

302–5disadvantages 290–96incompatibility issues 291–4,

302–5indiff erence of 291–2, 298–302and learning by doing 285, 295–6malign eff ects of 294, 303–5motives for 290–92and national autonomy 293–4and national self-interest 290–92,

298–302objections to 284–5proposals for 284as substitutes for domestic

institutions 294–6, 305successes in, evidence of 297–305

globalization of measures for 7, 284and international arbitration 283–4law on, development of 286–9money-laundering 283, 287OECD Convention on combating

bribery (1997) 283, 287–8, 297, 299, 301, 303

OECD Working Group on bribery 297, 299, 304

political corruption, defi ning 284and privatisation 303UN Convention against corruption

(2003) 283, 287–8WTO Agreement on government

procurement 287–8, 302–3Anti-counterfeiting Trade Agreement

Act (ACTA) (2007) 324anti-dumping duties 261–3, 281arbitration see dispute settlementArgentina 311, 326, 345Arrighi, Giovanni 166–8, 177–8

483



Australia 32autocentric economies 166autonomy, national

Charter of economic rights and duties of states (1974)(UN) 16–17, 19

and developing countries, international law confl icts 15–16, 26–7

and economic openness 37–42fi scal autonomy 5

IMF infl uence over 150–52, 154–6non-discrimination, principle of

149–50and foreign legal institutions,

anti-corruption role 293–4and globalization 26–9, 34–5, 38–9international economic law 3, 12,

26–7changes in multilateral emphasis

39–42limitations on 34–7over economic openness 37–42over policy instruments and goals

37–9surveillance mechanisms 45–7

and international fi nancial governance 75–6

and international institutions, infl uence over 29–32, 35, 75, 150–52, 154–6

macroeconomic conditions, multilateral controls of 34–6, 41–3, 45–50, 65, 151–3

and market liberalisation, impact on 34–5

Resolution on permanent sovereignty over natural resources (1962)(UN) 16

Avi-Yonah, Reuven S. 140, 151

Badie, Betrand 133Bakvis, Peter 245Banco Nacional de Cuba v Sabbatino

(1964) 15Basel Committee of Banking

Supervision 69, 86Capital adequacy guidelines 80–81Core principles for eff ective banking

supervision 102

Bello, Walden 175Berne Convention for the protection of

literary and artistic work (1886) 179, 310–11

Bhagwati, Jagdish 31, 164, 168–9Bhattacharjea, Aditaya 261, 266, 280bilateral investment treaties (BITs)

best eff orts clauses in 182corporate responsibility trends in

200–201dispute resolution under 180–86and economic development

contribution to 186–7reference to 181–2

US model, worldwide adoption of 19

biofortifi cation 335biofuels

and biotechnology 346–7demand for 331and food security 339–40use of agricultural land for 331–2,

339–40Biological Open Source (BiOS) licence

351–2biosafety, Cartagena Protocol on

(2003) 343, 359, 368, 371biotechnology, in plants/animals

African Model law on safety in biotechnology (2007) 368–9

biofortifi cation 335and biofuels 346–7biosafety, Cartagena Protocol on

(2003) 343, 359, 368, 371defi ning 334–5, 342embryo rescue 335and ethics 338in food production 352–3

advantages and disadvantages 340–47

in Africa 334–5, 349–50international agricultural research

centres (IARCs) for 341–2, 344

Multilateral system of access and benefi t sharing (MLS) 348

private sector role in 343–5, 348–9regulation 347–52

open source biotechnology 333, 350–52


Index 485

public-private sector regulation 348–50

Scientifi c and Know-How Exchange Program (SKEP) 349

genetic modifi cation 8, 334–5, 342, 346


co-existence with other crops 339–40, 345, 352

Convention on biological diversity (CBD Convention)(1992) 320–21, 342–3, 357, 376

humanitarian licensing in 333, 350–52

International Treaty on plant genetic resources for food and agriculture (seed treaty)(2001) 328, 348, 374

segregation, traceability and identity preservation (STIP) 345

green/cell/tissue biotechnology 334and intellectual property law 8,

338–9genetic modifi cation 320–22,

342–3, 357, 376open source biotechnology 333,

350–52plant breeder’s rights 343–4plant varieties 320–22, 328, 343–4,

348, 374private sector role in 332, 348–9

Bird, Richard 142Braithwaite, John 120Braudel, Fernand 167Brazil 81

competition law regime in 278, 310–11

impact of 2008 global fi nancial crisis 99

on intellectual property protection 326

and power shift in international fi nancial governance 90–91

Bretton Woods institutions see International Monetary Fund; United Nations; World Bank

bribery see anti-corruption

BRIC countries see also Brazil; China; India; Russia

potential for change from 90–91British Imperialism 165–7Brusick, Philippe 264–5Bulgaria 301–2Burke, Edmund 293

Canada, model bilateral investment treaty 200–201

Carr, Indira 298cartels

calls for global competition law to combat 252–4

deterrence of 278–9as development protectionist

mechanism 258F. Hoff man-La Roche v Empagran

(2004)(US) 8, 275–80impact on developing countries

259–60, 264–5, 275incentives for targeting 278–9US domestic law exemptions on 256

Central Research Institute for Food Crops (CRIFIC) 350

Centre for the Application of Molecular Biology to International Agriculture (CAMBIA) 351

Centro Internacional de Mejoraamiento de Maiz y Trig (CIMMYT) 341, 349–50

child labour 238–40conditionality in aid programs

242–4, 246Human Development Network

programs 243China

anti-corruption progress in 304competition law in 263–4impact of 2008 global fi nancial crisis

98–100and power shift in international

fi nancial governance 90–91Clean Development Mechanism

(CDM) 358–9, 370climate change 9

Clean Development Mechanism (CDM) 358–9, 370

and developing countries



diff erential treatment 364–9,382–3, 386–92

environmental priorities 361–4greenhouse gas emissions in 382,

384–5, 406impact on 363–4obligations regarding 386–9,

392–4compliance with 405–9

regulatory mechanisms in 369–71economic instruments for managing

369–71Framework Convention on (1992)

(UNFCCC) 9, 363–4, 409–10Bali Action Plan (2007) 404–5Economies in Transition Annex

I 393establishment 379fi nance mechanisms under 389,

394–403aid requirements for developing

countries 395–9and alternate fi nancing channels

399–403effi ciency of 398–403

Global Environment Facility (GEF) 362–3, 368, 389,394–5, 397–403

governance mechanisms under 389

obligations and enforcementcommon commitments 387–9,

392, 405–7compliance with 393–5, 407–9for developed countries 387–9,

392–405, 407for developing countries 386–9,

392–4, 405–7diff erentiated responsibilities

and capabilities under 386–92

fi nancial aid commitments 394–403

technology transfer 396, 403–5Subsidiary Bodies, for

implementation/scientifi c and technological advice 389

Intergovernmental Panel on Climate Change (IPCC) reports on 380–82

Kyoto Protocol (1997)(UN) 365, 369–71, 393–4, 409

predicted impacts 381–2responsibility for, historical/current

382–3and sustainable development 383–5and technology transfer 396, 403–5

Coff ee, John C. 284cold war, impact on post-war economic

settlement 13collective bargaining, as core labour

standard 237–40, 242–6colonialism see also decolonisation

and double taxation 146and international corruption 284–5and principle of self-determination

13and technology transfer 15

COMESA Agreement on a common investment area (2007) 194–5

comity, rule of 276–8, 280, 282Commission on Intellectual Property

Rights (CIPR) 319Commission on intellectual property

rights, innovation and health (2006)(WHO) 328

Committee on Economic, Social and Cultural Rights (CESCR) 337–8

commodities, prices during 2008 global fi nancial crisis 98–100

comparative advantage, doctrine ofapplicability to developing

countriesas control mechanism 158–9and developed country

protectionism 159–61, 163–5fl uidity of 162in free trade policy development

159–62and corporate capitalism 165–72,

169and non-economic benefi ts 160,

164–5problems with 160–65

competition lawanti-dumping duties 261–3, 281and conditionality 252in developing countries

advantages 265, 269anti-dumping duties 261–3


Index 487

consequences of lack of 259–63, 281–2

constraints on 280discretion in 268–9global regime, views on 7–8,

255–9, 281International Competition

Network 260–61and international regulatory

agreements 269–80market exploitation 264–5models for, comparing 265–9and national champions/state

monopolies 264–5and non-discrimination, principles

of 258–9in non-traded sectors 259preferential trade and regional

trade agreements 261and protectionism 258–9as response to neo-liberal

international development policy 252

and economic growth, whether links between 263–9

extraterritorial application of 275–80and rule of comity 276–8, 280, 282

global regime for 7, 253–5, 281–2failure to establish, implications

of 259–63resistance to 7–8, 255–7, 281Telmex decision (2004) (WTO)

7–8, 261–3, 270–75United States views on 254–5,

278–80models for 265–9, 266

Chicago School 266EU model 267–8freedom to compete 266–7, 281

purpose 252–3as regulator 252soft law approaches to 260–61and taxation 142and WTO framework 7–8, 261–3,

270–75, 281compulsory licensing, in intellectual

property law 21, 25, 310, 315, 319, 329

conditionalityand competition law 252

consensual conditionality 123–4country selectivity 123–4, 126–8disciplinary force of 114–16as distinguished from conditions of

fi nancing 115governance role

consequences 121–2evolution 120–24

imposed in combating corruption 7in international aid 121

accountability in 135–6aid harmonisation programs

129–34confl icts in 132–5

and child labour 242–4, 246country selectivity 126–8criticisms of 122–4as default regulatory instrument

119ex post vs. ex ante conditionality

124–7human rights 215interference by aid organisations,

reluctance of 117–19non-compliance, fi nancial

repercussions 115–16as quasi-legal instrument 114–16and relationships for Offi cial

Development Assistance (ODA) 116–19

in international economic law 12, 32in international environmental

regulation 373–4legitimacy of, debate over 122–4modalities of 123–4normative vs. operational activities

116–17over labour standards 6–7, 243–5,

251EBRD, imposed by 245–7ILO/WTO debate over 237,

240–42as part of Offi cial Development

Assistance (ODA) 116–19purpose 114–16risk management 48–9in taxation 151–2World Bank/IMF, imposed by 36–7,

47–9, 117–18, 243–5, 251Congo, Republic of 301



Conotou Agreement (2000) (EU-ACP treaty on economic partnership) 143

constitutional imitation 133Consultative Group for International

Agricultural Research (CGIAR) 341, 344

Convention on biological diversity (CBD Convention)(1992) 320–21, 342–3, 357, 376

Convention on environmental impact assessment in a transboundary context (Espoo Convention)(1991)(UN) 372

Convention on the settlement of investment disputes between states (2005) (ICSID Convention) 183

Convention to combat desertifi cation (1994)(UN) 363

corporate capitalismand capital mobility 168and comparative advantage, doctrine

of 165–72, 169and control over former colonies

158–9development 165–8

British Imperialism 165–7, 177cyclical nature 177–9US role in 166–7

and globalization 168–71and human rights 206–9state, relationships with 168–9

corporate responsibilitycorporate social responsibility (see

under multinational enterprises (MNEs))

investor obligations, under international investment agreements 193–201

corruption see anti-corruptionCountry Policy and Institutional

Assessment (CPIA)(IDA) 126country selectivity 126–8credit rating agencies, international

standards for 105–6Cuervao-Cazurra, Alvaro 297, 299, 303

Dagan, Tsilly 147Dammann, Jens 284de Schutter, Olivier 338–9

De Weaver, Mark A. 304Decision 24 (intellectual property law

development in South America) 312–13

decolonisationand concept of diff erentiation 366–7and corporate capitalism 158–9and distributive justice 366–7impact on world economy 158

Defending values, promoting change (ILO)(1994) 238

Degnbol-Martinussen, John 116developed countries, generally

income, trends in 17and non-discrimination, principle

of 31protectionism, during economic

development 13–17, 19–20, 160–63

voting/blocking powers 90–91developing countries, generally

2008 global fi nancial crisis, impact on 96–100

denial of protectionist advantages 32, 57, 128, 160–65

food consumption trends 331income, trends in 17, 25in multilateral organisations,

representation/involvement 2, 26, 46

natural resources, exploitation of 13–16

population growth forecasts 331–2, 384

post-war settlement protectionism policies of 13–17, 19–20

development assistance see international aid

dispute settlementeconomic development, relevance in

183–86ICSID Convention on investment

dispute settlement (2005) 183and international corruption 283–4in international environmental law

375–6and international fi nancial

governance 77in international investment

agreements 180–86, 189–90


Index 489

WTO dispute settlement policies 21, 308

double taxation see under taxationDouglas, William A. 248Drahos, Peter 120Dunkley, Graham 160, 162, 170

economic developmentattitudes to 187defi ning 187–90by developing countries

and confl icts with international economic law 13–15

import substitution policies 13–17state role, changing trends in

13–17as freedom 237as human right 235and international environmental law

377–8 (see also climate change)changing emphasis 355–6, 360confl icts between 360–64, 375–7and conservation 354, 356–7,

360equity and justice 354–5links between 8–9, 235, 354–5sustainable development 244–5,

354–60, 372–3and international investment

agreementscontribution to, level of 180,

186–7as jurisdictional requirement for

183–6relevance to concept of 181–90

and labour standards 163, 243–4protectionist mechanisms denied

to developing countries 32, 57, 128, 160–65

economic openness, and national policy autonomy 37–42

emerging market bond index (EMBI) 98, 100

Engberg-Pedersen, Poul 116environmental law see international

environmental lawEspoo Convention (Convention on

environmental impact assessment in a transboundary context)(1991)(UN) 372

European Bank for Reconstruction and Development

environmental policy 245–6labour standards, conditionality over

245–7countries withdrawn from 249–50stakeholder engagement plan 247

European Free Trade Area (EFTA)free trade agreements (FTAs), and

intellectual property 315–16European Patent Offi ce (EPO) 330European Union

accession process, impact on corruption 298

and competition law 252model for 267–8

Conotou Agreement (2000) (EU–ACP treaty on economic partnership) 143

economic partnership agreements with 143–4

General System of Preferences (GSP Programme) 23, 247–51

and core labour standards247–50

‘Everything but arms’ (EBA) arrangement 249

free trade agreements (FTAs), and intellectual property 315–16

and WTO 174Evenett, Simon J. 255, 259, 264, 275exchange rates

distortions in, trade impacts of 42IMF/World Bank controls over

44–7, 67–8exports, during 2008 global fi nancial

crisis 98–100Extended Fund Facility program

(IMF) 48Extractive Industries Transparency

Initiative 212extraterritorial application of domestic

laws 275–80, 283–4

F. Hoff man-La Roche v Empagran (2004)(US) 8, 275–80

Fiji 304–5Financial Accounting Standards Board

105Financial Action Task Force 287



fi nancial crisesin Asia in 1990s 4, 95global, in 2008 4, 94–5, 98

capital and investment outfl ows 97currency depreciation 97and developing/emerging

economiesconcerns over 96impact on 4, 94–100

export and commodity price decreases 98–9

and fi scal reform 152–7IMF actions during 96recovery signs 100

and international governance mechanisms, success of 12, 69–70

oil price crises, in 1970s 19–20fi nancial governance see international

fi nancial governanceFinancial Stability Board (FSB) 4, 46,

79, 95establishment 108–10importance 110–11limitations on 81, 85purpose 108–11structure 109

Financial Stability Forum (FSF) 4, 46, 69–70

Action Plan and Declaration 107–8Compendium of Standards 102criticism of 101Implementation Task Force 102membership and structure 101,

106purpose 100–102reform 88, 103–6

London Summit 2009 108–10Washington Summit 2008 101,

106–8reform recommendations 103–6role in 2008 global fi nancial crisis

102–6Fjeldstad, Odd-Helge 151Food and Agriculture Organization

(FAO)(UN) 328on ethics in food and agriculture

338on the right to adequate food 338

food consumption trends 331–2

food productionand biotechnology 352–3


in Africa 334–5, 349–50international agricultural research




private sector role in 343–5, 348–9regulation 333, 348–52Scientifi c and Know-How

Exchange Program (SKEP) 349

genetic modifi cation 8, 332, 334–5, 342, 346


in Africa 334–5, 349–50Bt maize 334–5, 346co-existence with other crops

339–40, 345, 352Convention on biological diversity

(CBD Convention)(1992) 320–21, 342–3, 357, 376

in developing countries, gains and losses 340–45

and food production, in Africa 334–5, 349–50

‘golden rice’ 335, 349, 351–2humanitarian licensing in 333,

350–52and intellectual property law

320–322, 342–3, 357, 376international agricultural research




segregation, traceability and identity preservation (STIP) 345

orphan crops 344–6, 352


Index 491

R&D, private sector role 343–5, 348–9

and subsidies 58–9food security 8

and biofuels 339–40and biotechnology 334–5, 345–7defi ning 336–8and human rights 336–8and intellectual property 338–9and poverty 336Rome Declaration on world food

security (1996) 337and technology transfer 336

Foreign Corrupt Practices Act 1977 (FCPA)(US) 286, 297, 299

foreign direct investment (FDI)contribution to economic

development 186–7in developing countries

and competition law 264investment agreement restrictions

on 60–64globalization impact on policies for

170tax incentives for attracting 146–7

Foreign Trade Antitrust Improvements Act 1982 (FTAIA)(US) 276–8

Fox, Eleanor 263–4, 266, 268, 272,279

free trade policies see also General Agreement on Tariff s and Trade; TRIPS Agreement; World Trade Organization

comparative advantage, doctrine of 159–62, 165–72, 169

applicability to developing countries 159–61, 163–5

and corporate capitalism 165–8and economic interdependence,

confl icts of 175–6Free Trade Agreements (FTAs)

and intellectual property law 315–18, 320–22, 343–4

historical development 165–8market economy, defi ning 167

freedom of association, as core labour standard 237–40, 242–6, 249–50

fuel security 8, 352–3and biotechnology, impact on

346–7

G-20 countriesestablishment 69–70Global plan for recovery and reform

152–3and international economic law, role,

in development 25and international fi nancial

regulatory controls 70, 88–91, 95–6, 106–8, 110–11

General Agreement on Tariff s and Trade (GATT) 50–51

Agreement on subsidies and countervailing measures (1994)(WTO) 21

anti-dumping duties 261–3competition issues concerned with

270–80criticism of 18–19diff erences from WTO 21–2, 172–5and free trade in developing

countries, infl uence on 17purpose 13–14, 29and regional trade agreements 31and Telmex decision 261–3, 270–75,

281General Agreement on Trade in

Services (GATS) 63–4, 149Generalised System of Preferences

(GSP) 23–4, 240–41core labour standards 247–50

genetic engineering/modifi cation see under biotechnology

Gerber, David J. 267–8Gillespie, Kate 304Global Environment Facility (GEF)

362–3, 368, 389, 394–5, 397–403Global strategy and plan of action

on public health, innovation and intellectual property (2008)(WHO) 328

global warming see climate changeglobalization

and corporate capitalism 168–71and economic interdependence,

confl icts of 175–6and extraterritorial applicability of

domestic laws 275–80, 283–4fi nancial impact on developing

countries 25global aid regime 132–7



global competition law 253–5, 281–2developing countries’ resistance to

7–8, 255–9failure to establish, implications

of 259–63and global disorder 170global economic integration 33,

39–40homogenization vs. diversity debate

169–70infl uence over government policy

170–71and international economic law

development, role in 1–2, 10–12, 26–9

legal globalization, defi ning 283and national autonomy, impact on

26–9, 34–5, 38–9self-enforcing governance over

29–32social, legal and political eff ects of

170and sustainable development 6–7,

356–7and taxation, infl uence on 142, 152and WTO, relationship between

175–6governance, generally see also

international fi nancialgovernance

international economic law role in 29–32

Gray, John 168–9greenhouse gas emissions see under

climate change

Hansenne, Michel 238Hansmann, Henry 284Harrison, Graham 127, 300Hartford Fire Insurance Co v California

(1993)(US) 276–8health

and access to medicines 315, 317, 319–20

Commission on intellectual property rights, innovation and health (2006) (WHO) 328

Declaration on the TRIPS Agreement and public health 25, 315, 317

Global strategy and plan of action on public health, innovation and intellectual property (2008)(WHO) 328

and intellectual property 25, 315, 317, 320–23, 326

Higgott, Richard 121Hines, James R. 299Hirschman, Albert O. 285, 295Hoekman, Bernard H. 176Hong Kong 301Human Development Network Child

Labor Program 243human rights

and aid conditionality 215basis for 206–7, 209–10child labour 238–40, 242–4, 246and consumer protection 221–2depoliticisation of 242economic development as 235and food security 336–9and global capitalism 206–9and international fi nancial

governance 75–6and international law development,

role in 1jurisdiction issues 215–16and multinational enterprises

accountability mechanisms 215–17anti-corruption provisions 7, 222corporate social responsibility 6,

188–90, 206–9, 232–3calls for regulation 207disclosure and reporting

procedures 214–15under international investment

agreements 193–201limitations 208–9, 213–14soft law/self-regulatory

mechanisms 210–215national protocols for 207policies

Draft norms on the responsibilities of transnational corporations (UN) 6, 205–6, 217–25, 232

Global Compact, ten principles of (UN) 194, 210–11, 213

Kimberley Process Certifi cation Scheme (KPCS) 211–13


Index 493

OECD Guidelines for 188–9, 193, 210–11

Ruggie framework (UN) 6, 188–90, 205–6, 225–33

Tripartite declaration of principles concerning (ILO) 210–11

Universal declaration of human rights (1948)(UN) 336

Voluntary principles on security and human rights (NGO) 211–13

ICSID (International Centre for Settlement of Investment Disputes) 182

Convention on the settlement of investment disputes (2005) 183

IISD (International Institute for Sustainable Development)

Model international agreement on investment 181, 190, 196–201, 204

home country responsibilities 201–3

IMF (International Monetary Fund)accountability and transparency

86–7anti-corruption policies 287Articles of Agreement 67–8, 79

on fi nancial assistance 117–18criticism of 30–31and developing countries

changing policies regarding 20,70

fi scal autonomy, infl uence on 150–52, 154–6

voting weighting 70, 81, 90Exogenous Shocks Facility 89fi scal reform policies 150–52, 154–6Flexible Credit Facility 89, 96jurisdiction and powers 23–4, 84

conditionality 36–7, 47–9, 117–18, 243–5, 251

enforcement, limitations on 45–7exchange rates, controls over 44–7and international coordination

84–5and national autonomy 35,

150–52, 154–6quota changes 70

risk management 48–9surveillance mechanisms 45–7

Manuel Committee (2009) 90New Agreement to Borrow (NAB)

89purpose 13–14, 39, 67–8, 84, 165

and changing policy emphasis 39–42, 68–9

reform 49–50, 89–90Stand-by Arrangements 96Zedillo Committee (2009) 90

import substitution 13–17India

challenge to EU GSP programme 23, 251

competition law in 266, 268–9impact of 2008 global fi nancial crisis

99–100intellectual property law in 311–12and power shift in international

fi nancial governance 90–91Indonesia 350intellectual property law 8 see also

TRIPS Agreement; World Intellectual Property Organization

Anti-counterfeiting Trade Agreement Act 2007 (ACTA) (US) 324

Berne Convention for the protection of literary and artistic work (1886) 179, 310–11

and biotechnology, in plants/animals 8, 338–9

genetic modifi cation 320–22, 342–3, 357, 376


plant breeder’s rights 343–4plant varieties 320–22, 328, 343–4,

348, 374private sector role in 332, 348–9

clinical test data, protection of 329compulsory licensing 21, 25, 310,

315, 319, 329developing countries

applicability to 310–14challenges for 308, 329–30concerns over 311–14, 319–26denial of protectionism of

162–3



expertise in 307–8role in development 8, 318

development of 307, 309–14focus of 179harmonisation approach, relevance

of 319–26and health issues, in developing

countries 25, 315, 317, 320–23, 326, 328

and international environmental law 376–7

Paris Convention for the protection of industrial property (1883) 179, 310–11, 313, 318

protection, as pre-requisite for development 307

technological protection measures (TPMs) 322–3

and technology transfer 313–14Intergovernmental Panel on Climate

Change (IPCC)reports on climate change 380–82

international accounting standards 105–6

international aidaid harmonisation programs 128–32

background to 122–5confl icts between 132–5developing countries’ role in

130–31donor infl uence under 130–32,

136and globalized aid regime 132–7partnership basis of 122–4, 136–7and public expenditure/

procurement reforms 134–5purpose 132restrictions resulting from 130–31and self-regulation 124–8

conditionality in 112–13accountability 135–6aid harmonisation 129–35and child labour 242–4, 246country selectivity 126–8criticisms of 122–4as default regulatory instrument

119ex post vs. ex ante conditionality

124–7human rights 215

interference by aid organisations, reluctance of 117–19

non-compliance, fi nancial repercussions 115–16

as quasi-legal instrument 114–16and relationships for Offi cial

Development Assistance (ODA) 116–19

impact on domestic/political powers of developing countries 4–5

joint fi nancing frameworks 128–32Poverty Reduction Strategy Paper

(PRSP) framework 112relationships in, defi ning 123–4Structural Development Loans 20

International Association of Insurance Administrators 69

International Bank for Reconstruction and Development (IBRD) 67–9

International Competition Network (ICN) 260–61

international cooperation, duty of 187–8

International Covenant on Economic, Social and Cultural Rights (ICESCR) 336–7

International Development Association (IDA) 126

international economic law see also competition law; intellectual property law; multilateral rules; taxation

as alternative to war 178–9bias in 29–32conditionality 12, 32and constitutional imitation 133and developing countries

adoption/utilization of, trends in 3, 11

Asian/global fi nancial crises, impact of 4, 94–100

confl icts between 13–15involvement in development of

2, 26preferential treatment 367–8pressures of 1–2, 133as rule takers 32system fl aws 24–5technology transfer 15–17whether benefi cial to 1–2


Index 495

development of 10–11changing emphasis, impact of

39–42and globalization 1–2, 10–12, 26–9import substitution phase 13–17lack of coherence in 32, 360–63managed protectionism phase

17–19opportunities for future 33post-war settlement 13–17Washington consensus 2–3, 17–25

enforceability 11growth in, volume of 10–11and national autonomy 3, 12, 26–7

change in emphasis 39–42limitations on 34–7over economic openness 37–42over policy instruments and goals

37–9surveillance mechanisms 45–7

international environmental lawbenefi t sharing 348, 374–5Clean Development Mechanism

(CDM) 358–9, 370and conditionality 373–4Convention on environmental

impact assessment in a transboundary context (Espoo Convention)(1991)(UN) 372

and corporate social responsibility 222–3

and developing countriesdiff erential treatment 364–9,

382–3, 386–9and preferential treatment

367–8priorities of 360–64

desertifi cation 362–3and global issues 361–2

and solidarity principle 365dispute settlement 375–6EBRD policy on 245–6and economic development 377–8

changing emphasis 355–6, 360confl icts between 360–64, 375–7and conservation 354, 356–7, 360equity and justice 354–5links between 8–9, 235, 354–5sustainable development 244–5,

354–60, 372–3

fragmented and ad hoc nature 360–61

Global Environment Facility (GEF) 362–3, 368, 389, 394–5,397–403

global issues 354, 356–7 (see also climate change)

and developing countries, impact on 361–4

and intellectual property 376–7and international fi nancial

governance 76regulation

international institutions’ role in 371–4

progress in 371–2responsibility for, lack of coherent

360–63savings clauses 376–7

United Nations Environment Programme (UNEP) 360–62, 368

International Finance Corporation (IFC)

core labour standards 243–5policy and performance standards

244–5international fi nancial governance

110–11accountability and transparency

85–8and administrative practice 77–8,

85–8and applicable international law

74–8, 82–3compliance and participation 86–7comprehensive coverage, principle

of 72–4and coordinated specialisation 77,

83–5developing countries’ dependence

on 82developments in

historical background 4purpose 4

dispute settlement 77fi nancial crises, success of

mechanisms during 12, 69–70holistic approach to 71–2, 79and human rights 75–6



and international environmental law 76

and national autonomy 75–6New International Financial

Architecture 101–2and non-discrimination 75–6problems with 78–88, 82–5, 90–93

exclusion of fi nancial instruments 80

global self-regulation 80regulatory under-inclusiveness

79–82transparency and accountability

85–8purpose 71reform 4, 88–90

limitations on 91–3potential for 90–93

regulatory institutions (see IMF; World Bank; WTO)

standards for 4, 23, 71–8, 102, 131–2 (see also Financial Stability Board; Financial Standards Forum)

Code of conduct fundamentals for credit rating agencies (IOSCO) 105–6

Core principles for eff ective banking supervision 102

inequalities in 42jurisdiction over 23

and subsidiarity, principle of 73–4, 82

international investment agreements 5–6

arbitration in 180–85, 189–90balance with national investment

priorities 6bilateral investment treaties (BITs)

best eff orts clauses in 182contribution to economic

development 186–7corporate responsibility trends in

200–201dispute resolution under 180–86and economic development,

reference to 181–2US model, worldwide adoption

of 19context of 187–8

defi nitions 190development 186–7investment 60, 180–82

developing/rebalancingcorporate/investor obligations

193–201home country responsibilities

201–3UNCTAD role in 191–2

and developing countriesrestrictions imposed on 60–64special considerations for 191–2

and duties of MNEs 188–9economic development

contribution to, level of 180, 186–7

as jurisdictional requirement for 183–6

need for policy fl exibility for 191–2

relevance to concept of 181–90General Agreement on Trade in

Services (GATS) 63–4, 149IISD Model International

Agreement on Investment 181, 190, 196–201, 204

home country responsibilities 201–3

investorsinterests of, focus on 181obligations of 188–9, 193–201as stakeholders 190–91

Multilateral agreement on investment (MAI) (draft)(OECD) 22

purpose 181–2TRIMs Agreement (Agreement

on trade-related investment measures)(1994)(WTO) 59–63

US bilateral investment treaty (BIT) model 19, 201

International Labour Organization (ILO)

core labour standardsbenefi ts of 240conditionalities over 6–7

ILO/WTO debate on 237, 240–42

IMF/World Bank, imposed by 243–5, 251


Index 497

Conventions on 238, 245in EU/US General System of

Preferences 247–50fundamental principles of 234identifying 237–41selectivity of 242–3

Declaration on fundamental principles and rights at work (1998) 240

and IFC performance standards 245Tripartite declaration of principles

concerning multinational enterprises 210–11

International Law Association (ILA)Committee on the international law

of foreign investment 189–90International Maize Wheat

Improvement Center 341International Monetary Fund see

IMFInternational Organization of

Securities Commissions (IOSCO) 69, 81, 86

Code of conduct fundamentals for credit rating agencies 105–6

International Rice Research Institute (IRRI) 341

international trade disputes see dispute settlement

international trade liberalisation see World Trade Organization

International Trade Union Confederation (ITUC) 245


International Union for the Protection of New Varieties of Plants see UPOV

Jackson, John 28Jogarajan, Sunita 150Johannesburg Declaration on

sustainable development (2002) 235

Jones, Jennifer S. 248

Kapur, Davesh 48Kaufmann, Christine 242Kelsen, Hans 21

Kenyaanti-corruption progress in 298,

300–301, 303genetically modifi ed crops, use in

334, 349–50Kenya Agricultural Research Institute

(KARI) 349Keynes, John Maynard 164Kimberley Process Certifi cation

Scheme (KPCS) 211–13Klevorick, Alvin K. 278Klopp, Jacqueline M. 303Kostecki, Michel 176Krastev, Ivan 303–4Kyoto Protocol (1997)(UN) 365,

369–71, 393–4, 409

labour standardschild labour 238–40, 242–4, 246collective bargaining 237–40, 242–6conditionalities over 6–7

ILO/WTO debate over 237, 240–42

IMF/World Bank, imposed by 243–5, 251

and corporate social responsibility 214, 222

discrimination in employment238–40, 244, 246

and economic development 163, 243–4

exploitationand ethics 163–4as protectionism 163

forced labour 242–3, 246, 249freedom of association 237–40,

242–6, 249–50fundamental principles of 234IFC labour standards toolkit and

performance standards 243–5selectivity in 242–3and sustainable development

234–5Lamy, Pascal 241Langille, Brian 239Larmour, Peter 304Levenstein, Margaret 260liberalisation see international trade

liberalisation‘logic of independence’ 133



Malaysia 302–3Malaysian Historical Salvors v

Malaysia (2009) 183–5Margalioth, Yoram 140, 151Maupain, Francis 239McCoy, Molly 245medicines, access to 315, 317, 319–20Millennium Development Goals 32,

236, 257Miller, Angharad 145–6Mintz, Jack 142MNEs see multinational enterprisesmoney-laundering 283, 287Mongolia 301–2Moore, Mick 151Morrow, Daniel 123–4most favoured nation principle 5, 40,

51–2, 149Mozambique 300MSCI emerging market index 98Multilateral agreement on investment

(MAI)(draft)(OECD) 22Multilateral agreement on investment

(MAI)(WTO) 64, 171, 195multilateral rules, generally

advantages 35–6, 64–5developing countries, under-

representation 2, 26, 46failings of 65–6focus of

bias towards developed countries 35–6

emphasis of, change in 39–42, 179limitations on application to 42–3and national economic controls 34–7need for reform 37

Multilateral system of access and benefi t sharing of plant genetic resources for food and agriculture (MLS) 348

multinational enterprises (MNEs)and anti-corruption regime 7,

222–3Code of conduct on transnational

corporations (draft)(1984)(UN) 16, 210

and corporate capitalismand control over former colonies

158–9development of 165–8

corporate social responsibility 6, 222–3

and human rights 6, 188–90, 206–9, 232–3

calls for regulation of 207disclosure and reporting

procedures 214–15under international investment

agreements 193–201limitations on 208–9, 213–14

self-regulatory initiatives 213–15Draft norms on the responsibilities

of transnational corporations with regard to human rights (UN) 205–6, 217–25, 232

incorporation and implementation 223–4

positives of 220–21problems with 218–25, 232‘sphere of infl uence’ under

219–20, 223, 225, 238impact on developing countries

170–72increasing powers of 39interdependence of 166and international investment

agreements 5–6investors obligations under 189,

193–201OECD Guidelines for 188–9, 193,

210–11powers 171–2Protect, respect and remedy: a

framework for business and human rights (2008)(UN) 6, 188–90, 205–6, 225–31

tax regime, infl uence on 156–7UN Declaration on international

investment and multinational enterprises (1977) 16

UN Global Compact, ten principles of 194, 210–11, 213

UN resolutions on conduct of 16, 19and Washington consensus, role in

development 17–19and WTO

obligations under Multilateral agreement on investment (MAI) 170–71

and WTO, undermining of 5, 171–2


Index 499

national treatment principle 5, 40, 51, 149

natural resources, developing countries control over 13–16, 26

new aid architecture see aid harmonisation under international aid

Nichols, Philip 302non-discrimination, principles of 31,

39–40, 51and fi scal autonomy 149–50and global competition policy

258–9and international fi nancial

governance 75–6North American Free Trade Area

(NAFTA)free trade agreements (FTAs), and

intellectual property 317Norway 182

Oats, Lynne 145–6OECD (Organisation for Economic

Co-operation and Development)on compliance with ILO core labour

standards 240Convention on combating bribery

of foreign public offi cials in international business transactions (1997) 283, 287–8, 297, 299, 301, 303

Guidelines for multinational enterprises 188–9, 193, 210–11

Model agreement on the exchange of information on tax matters (2002) 149

Model tax convention 144–5,156–7

motivation for following 148–9multilateral agreement on investment

(draft) 22Paris Declaration on Aid

eff ectiveness (2007) 128–32Working Group on bribery 297, 299,

304oil price crises, impact on developing

countries 19–20Okruhlik, Gwenn 304ordoliberalism 267orphan crops 344–6, 352

Panel of eminent experts on ethics in food and agriculture (FAO) 338

Paris Convention for the protection of industrial property (1883) 179, 310–11, 313, 318

Paris Declaration on aid eff ectiveness (OECD) 128–32

patents, law on see intellectual propertyPetersmann, Ernst-Ulrich 28plant varieties

protection 320–22, 328, 343–5, 348, 374

UPOV (International Union for the Protection of New Varieties of Plants) 320–21, 343–4

Policy and performance standards on social and environmental sustainability (IFC) 244–5

populationgrowth forecasts 331–2, 384vulnerability of, in developing

countries 385Porter, Michael 258poverty 406

and food security 336perceptions of 136trends 17, 100

Poverty Reduction Strategy Paper 112, 127

‘Protect, respect and remedy,’ Ruggie framework (2008)(UN) 6, 188–90, 205–6

background to 225–7evaluation 227–31issues with 230–31potential advantages 228–9, 232–3principles 226–7

protectionismcartels as mechanism for 258during economic development

160–63mechanisms denied to developing

countries 32, 57, 128,160–65

exploitation of labour 163Public Intellectual Property Resource

for Agriculture (PIRPA) 351–2

regional trade agreements (RTAs) 261trends 22, 31



Rennie, Jane 261Ricardo, David 159, 164–5, 167Rio Conference and Declaration on

environment and development (1992)(UN) 235, 356, 367, 371

risk management, and IMF/World Bank conditionality 48–9

Rome Declaration on world food security (1996) 337

Ruggie, Johnon embedded liberalism 17on human rights responsibilities of

multinational enterprises‘Protect, respect and remedy’

framework (2008)(UN) 6, 188–90, 205–6, 225–33

on UN Draft norms 17Russia 90–91, 99

Salbu, Steven 293Scientifi c and Know-How Exchange

Program (SKEP) 349SCM Agreement see under subsidiesSen, Amartya 187, 266–7, 281Sidak, J. Gregory 273Silbey, Susan 274Singapore Ministerial Conference see

under World Trade OrganizationSinger, Hal J. 273Slaughter, Anne Marie 27–8Slovakia 301Smarzynska, Beata K. 299Smith, Adam 159, 164–6sociological institutionalism 176South America, intellectual property

law development in 311–13sovereignty, national see autonomystandards see Financial Standards

Board; Financial Standards Forum; international fi nancial standards; labour standards

Stewart, Miranda 146, 150Stiglitz, Joseph 164, 187, 236Structural Adjustment Loans 20, 30

and conditionality 121subsidiarity, principle of 73–4, 82subsidies

in agriculture 58–9classifi cation 56denied to developing countries 32

foreign investment as potential 60–61import substitution subsidies 57inconsistency in regime 58–9SCM agreement (Agreement on

subsidies and countervailing measures)(1994)(WTO) 21, 55–9, 149–50

selective subsidies 56–8WTO fl exibilities and constraints

53–7and developing countries, impact

on 57–9Summers, Larry 11surveillance mechanisms, of

multilateral organisations 45–7, 67–8

Suslow, Valerie 260sustainable development 8–9, 244–5

approaches to 6–7, 235–7and climate change 383–5and conservation 354, 356–7contradictions of 358and cultural diff erences 358defi ning 357, 359, 377–8and economic development 224–5,

354–60importance in 355–60, 372–3limitations 358–60

and globalization 6–7, 356–7IISD Model International

Agreement on investment 181, 190, 196–204

increasing scope of 355–7Johannesburg Declaration on (2002)

235and labour standards 234–7in OECD Guidelines for MNEs

188–9, 193, 210–11and social partnership 235–6target setting, problems with

235–7World Summit on (WSSD)(2002)

371, 373Sykes, Alan O. 278Syngenta Foundation 349, 351

Tanaka, Kakuei 364–9Tanzania 298, 300tariff s 42 see also General Agreement

on Tariff s and Trade


Index 501

WTO fl exibilities and constraintsand developing countries, impact

of proposed cuts on 53–7taxation

autonomy, constraints on 5domestic 140–41, 154–6inter-country 141–8

potential disadvantages 145–6by multilateral organisations

148–52voluntary acceptance 142–3

and customs regime, confl icts between 155–6

in developing countriesadvantages and disadvantages

145–8conditionality in 151–2double taxation agreements 143–8IMF infl uence on 150–52and multinational enterprises

156–7patterns of 140revenue gap 156United Nations Monterrey

Consensus (2008) 153–4and VAT regime 151, 155–6

and development, correlation between 138–9

double taxation agreements 143–8and economic objectives, correlation

between 149–52fairness and equity in 140importance 139–40on imports and exports, reform

151infl uences on 141–3and international competition 142OECD Model agreement on the

exchange of information on tax matters (2002) 149

OECD Model tax convention 144–5, 156–7

political judgement in developing 141

reformand fi scal autonomy 150–52,

154–6multinational plans for 150–54

UN Model double tax convention (1980) 145–6, 156–7

VAT harmonisation 151, 155–6technology transfer

and climate change 396, 403–5confl icts with international economic

law 15–17and environmental law 376and food security 336intellectual property law

developments on 313–14UNCTAD Code of conduct on

the regulation of transfer of technology (2001)(draft)16–17

Telmex decision (2004) (WTO) 7–8, 261–3, 270–75

‘toxic assets’ 94transnational corporations (TNCs) see

multinational enterprisestransparency

of IMF and World Bank 86–7in international aid 135–6in international fi nancial governance

85–8Transparency International 286, 299Triffi n, Robert 44TRIMs Agreement (Agreement on

trade-related investment measures)(1994)(WTO) 59–63

TRIPS Agreement (Agreement on trade related aspects of intellectual property rights) (WTO) (1994) 21, 179

and animals/plant varieties320–22

compulsory licensing 21, 25, 310, 315, 319, 329

Declaration on the TRIPS Agreement and public health (2001) 25, 315, 317, 326

and developing countries 314and access to medicines 315, 317,

319–20objections to 256

enforcement of 308and environmental law 376and food security 338–9and free trade agreement provisions

315–18, 320–26, 328–9importance 314scope 314–15



Uganda 300UNCITRAL (United Nations

Commission on International Trade Law)

Model law on procurement of goods, construction and services 287

United Kingdomanti-corruption investigations in

300corporate capitalism, development

165–7, 177United Nations

generallycoordination problems 84–5on corporate responsibility 194,

196duty of international cooperation

under 187–8human rights, regulatory powers

regarding 207–8impact of cold war on 13purpose 13–14

policiesBali Action Plan (2007) under

Climate Change Convention (UNFCCC) 404–5

Charter of economic rights and duties of states (1974) 16–17, 19, 187–8

Code of conduct on transnational corporations (draft)(1984) 16, 210

Convention against corruption (2003) 283, 287–8

Convention on environmental impact assessment in a transboundary context (Espoo Convention)(1991)(UN) 372

Convention to combat desertifi cation (1994) 363

Declaration of the establishment of a new economic order (1974) 16

Declaration on international investment and multinational enterprises (1977) 16

Declaration on the right to development (1986) 235

Draft norms on the responsibilities of transnational corporations with regard to human rights (2003) 6, 205–6, 217–25, 232

Framework Convention on Climate Change (1992) (UNFCCC) 9, 363–5,379–80, 382–3, 386–410

Global Compact, ten principles of 194, 210–11, 213

Kyoto Protocol to Climate Change Convention (UNFCCC)(1997) 365,369–71, 393–4, 409

Model double tax convention (1980) 145–6, 156–7

Monterrey Consensus (2008) 153–4

Protect, respect and remedy: a framework for business and human rights (2008) (UN) 6, 188–90, 205–6, 225–33

Resolution on permanent sovereignty over natural resources (1962) 16

Rio Conference and Declaration on environment and development (1992) 235, 356, 367, 371

United Nations Environment Programme (UNEP) 360–62, 368

Universal declaration of human rights (1948) 336

United Nations Centre on Transnational Corporations (UNCTC) 19

United Nations Conference on Trade and Development (UNCTAD) 6, 8, 19

Code of conduct on the regulation of transfer of technology (2001)(draft) 16–17

Trade and Investment Framework Agreements (TIFAs) 24, 191–2

United Statesaggressive unilateralism,

development of policy on 18–19Alien Claims Tort Act 1789 215–16


Index 503

and corruption, role in international policies on 278–80, 286, 297, 299

criticism of GATT 18–19Foreign Corrupt Practices Act 1977

(FCPA) 286, 297, 299Foreign Trade Antitrust

Improvements Act 1982 (FTAIA) 276–8

General System of Preferences (GSP Programme) 23, 240–41

and core labour standards 247–50as global antitrust court 278–80on global competition regime 254–5,

278–80and intellectual property

development role in 309free trade agreements (FTAs)

317–18, 323–4US bilateral investment treaty (BIT)

model 19, 201Webb-Pomerene Act 1918 256

Universal declaration of human rights (1948)(UN) 336

UPOV (International Union for the Protection of New Varieties of Plants)

and free trade agreements 320–21, 343–4

scope of 321–2Uruguay Ministerial Conference see

under World Trade Organization

Vandemoortele, Jan 236VAT, and taxation constraints 151,

155–6Voluntary principles on security and

human rights (NGOs) 211–13

Washington Consensusand competition law, in developing

countries 252criticism of 11, 20–21, 122, 236development of 3, 11, 17–25, 23impact on developing countries 2,

20–25impact on international law

development 2–3, 17–25Webb, Richard 48Webb-Pomerene Act 1918 (US) 256

Weeramantry, Christopher 358Wei, Shang-Jin 299Wong, Michela 300World Bank

accountability and transparency 86–7

anti-corruption policy 286–7and conditionality 47–8, 117, 242–3

labour standards 243–5risk management 48–9

criticism of 30–31, 79and developing countries

Adaptation Fund 363changing policies regarding 20,

30, 70voting weighting 70, 81, 90

exchange rates controls 44–7, 67–8international environmental law,

regulatory role 372–4jurisdiction and powers 23–4, 84

impact on national autonomy 35and international coordination

84–5purpose 13–14, 41, 69, 84, 165reform 49–50, 90

World Commission on environment and development (WCED) Report (1987) 356

World Food Summit Action Plan 337World Health Organization (WHO)

328and international coordination 84–5

World Intellectual Property Organization (WIPO)

Copyright treaty (1996) 323Development Agenda 327Internet treaties (1996) 323Performance and Phonograms treaty

(1996) 323reform debates 313–14Standing Committee on patents

(SCP) 327World Summit on sustainable

development (WSSD)(2002) 371, 373

World Trade Organization (WTO) 5and core labour standards

social clause in 237, 240–42and developing countries 5

increased policy role in 174



limitations on policy imposed byescape/safeguard clauses 52industrial tariff s 53–5investment policies 59–64rule exceptions for 51–2subsidies 55–9

generally 5, 50–51criticism of 29–32diff erences from GATT 21–2,

172–4and economic interdependence

175–6escape/safeguard clauses 52establishment 21, 172–8and global competition regime

7–8, 253–5, 257–9, 261Telmex decision 7–8, 261–3,

270–75, 281and globalization, relationship

between 175–6governance role 29–32most favoured nation principle 5,

40, 51–2, 149and national autonomy, infl uence

on 29–32national treatment principle 5, 40,

51, 149non-discrimination, principles of

31, 39–40, 51place in international economic

law-making 158

purpose 39–40, 50–52signifi cance 173–4, 176–9undermining by multinational

enterprises 5, 171–2and international environmental law

371–2Ministerial Conferences

Doha (2001) 25, 53, 261, 315, 317Singapore (1996) 22, 253–4Uruguay Round (1986–1994) 21

non-discrimination, principles of 31, 39–40, 51

policiesAgreement on government

procurement 287–8, 302–3Agreement on subsidies and

countervailing measures (SCM agreement)(1994) 21, 55–9, 149–50

on dispute settlement 21, 308and ILO core labour standards,

debtate over 237, 240–42on intellectual property (see

TRIPS Agreement)Multilateral Agreement on

Investment (MAI) 64, 171, 195

non-agricultural market access (NAMA) 53–4

and prevention of war 175WTO see World Trade Organization
