Investment Treaties Showing Mixed Results for Latin America, Experts Say

By Mollie Bracewell
February 5, 2008

Investment Treaties Showing Mixed Results for Latin America, Experts Say

With over 2,500 investment treaties now in effect worldwide, almost 400 of which involve Latin American countries, a group of leaders met Tuesday in Washington to explore how effective and useful the treaties have proven to be for the region.

Bilateral investment treaties (BITs), most of which have been created over the past 15 years, were designed in part to establish a predictable trade and business environment and to integrate the economies of the region.

But these treaties have shown mixed results in attracting more foreign investment from U.S. companies to Latin America, Boston University economist Kevin Gallagher told an audience at the Inter-American Dialogue.

Gallagher suggested that foreign direct investment, while certainly desirable, was neither uniformly beneficial nor equally distributed across Latin America. Currently, 82 percent of foreign direct investment is concentrated in just five Latin American countries: Brazil, Argentina, Chile, Mexico, and Venezuela.

Gallagher’s research suggests that most countries attract foreign direct investment “by getting the fundamentals right.” Things like the size of the market, rate of economic growth, and macro stability have tended to have a larger role than the benefit of having BITs alone. In fact, the hope that foreign direct investment will snowball into general investment and create a spill-over of productivity comes alongside the potential danger that FDI can crowd out an existing domestic sector, he noted. 

Growing Caseload

Currently over half of the disputes at the International Centre for the Settlement of Investment Disputes—the facility housed at the World Bank responsible for settling many investor conflicts—involve Latin American countries, more than any other region of the world.

Ana Palacio, Spain’s former foreign minister who is now secretary general of the ICSID, told the audience some Latin American governments, notably Argentina, have themselves taken actions that led to new cases. She also speculated that other causes for the higher number of Latin America cases could be a culture of consensus building in Asia, and that some Asian-U.S. BITs are relatively new. Whatever the causes of more cases, however, Palacio said investment treaties should be evaluated by their contribution to broad goals, like economic development and hemispheric integration, rather than simply tracking the number of disputes.

The Future of ICSID

Investment treaties in Latin America do play an essential role in the protection of both investors and countries by almost always including an ICSID clause, a reliable formula for resolving disputes through arbitration, said Jonathan Hamilton, a partner at White & Case.

Over 40 percent of ICSID cases have been mutually resolved as opposed to an award. “Tribunals want to avoid annulment so that the parties feel they’ve received due process,” one participant noted.

ICSID’s caseload has increased dramatically in recent years—with some 37 new cases in 2007 alone—and the organization will be seeking input from practitioners about how to make the process more efficient and less costly for governments and investors alike.

While Palacio acknowledged that Bolivia recently withdrew from the ICSID convention, followed by Ecuador’s partial withdrawal, she noted the importance of respecting sovereign decisions. “We have to understand that public interest is linked to public opinion,” Palacio said. 

A digital audio file of this event is available for Corporate Circle members. Please contact Erik Brand for access.