Protecting Foreign Investment Under International Law: Legal Aspects of Political Risk, Co-Author (with Paul E. Comeaux) (Dobbs Ferry, New York: Oceana Publications, 1997)
Preface and Introduction below
Preface
Political risk—the risk that a host government will interfere with the property rights of a foreign investor—is a topic that has been discussed with increasing frequency in recent years, partly because of the increasing attractiveness of investing in developing economies. While legal and political considerations in the host state are critical in assessing political risk, international law also plays an important role. Matters such as international responsibility of a foreign government to an investor, treaties protecting foreign investment, political risk insurance, immunity of states from suit in other states, and international arbitration between states and investors are all either governed or affected by international law.
It had been clear to us for some time, when we conceived of writing this book, that there was no up-to-date reference work integrating these and other issues that affect political risk. Many of the relevant topics, such as political risk insurance, bilateral investment treaties, and arbitration, have been addressed in various law journals in the past, but not as an integrated whole in the context of political risk. Other topics, such as provisions in investor-state contracts that may reduce political risk, have not been given much attention at all in recent years. And while there is certainly a wealth of material covering the international law of expropriation and nationalization, much of it is written from an academic viewpoint rather than from the perspective of assisting the investor in avoiding confiscation of property located in a host state. We thus undertook this project in an attempt to address these and other topics, integrated by a common theme: protection of the investor against the risk of interference with or confiscation of property rights by a host government.
This book is addressed to a wide audience, and is written to appeal to both lawyers and non-lawyers alike. It is suitable as a primer for attorneys and investors seeking to familiarize themselves with international law affecting political risk. It is also addressed to both in-house and outside counsel for corporations that either have or are contemplating foreign investment in developing countries. Experienced attorneys involved in expropriation-related litigation should also find this book useful as a reference guide to important principles of international law related to political risk. It should also be useful to law students studying international law and academics seeking a reference work pertaining to the legal aspects of political risk. Practitioners should find the sample documents in the appendices of use as well, for both comparison purposes and for ease of reference.
Readers may note a certain unconventional non-neutrality in the book expressed towards both investors and governments that expropriate investments. We readily admit that we are pro-investor, since we believe in the sanctity of individual rights and private property rights. We acknowledge the absolutely essential role of entrepreneurship and capital investment in the production of wealth and in human flourishing, prosperity, and, indeed, civilized survival. (Some of our reasons for this view are presented in Appendix I.) For these reasons we cannot help but rejoice when private property rights are respected and gain greater acceptance worldwide, and cringe when host states engage in expropriation. These sentiments are one motivation for our undertaking this book and, we believe, have spurred us to attempt to point out as many ways for investors to protect themselves as possible. However, while admitting our pro-investor bias, we have attempted to remain strictly objective in our evaluation and discussion of international law and business and political realities. Where investors face dangers and their rights are insecure, a sober and realistic assessment of these dangers is essential so that the investor may make wise investment decisions.
Before concluding these brief prefatory remarks, a few words of thanks are in order. We would like to thank Mrs. Elia Braham for her proficient typing and editing assistance, Ms. Caren Zentner for her research assistance, and Ms. M.C. Susan De Maio of Oceana, for her encouragement in the preparation of a book-length treatment of these topics. Our gratitude also to Gabrielle Arrieh and Cindy DeLaney Kinsella for their support and encouragement as we spent many hours in the preparation of this book.
To two individuals we owe special thanks, and it is to these two that we dedicate this book. This book began, in a sense, in London, where we studied international law at King’s College London and the London School of Economics. We were fortunate to study international law relating to natural resources and the expropriation of foreign investment under Professor Rosalyn Higgins. Professor Higgins, who was recently appointed as a judge on the International Court of Justice, helped to provide us with a solid background in these and other areas and also sparked our interest in these topics. J. Lanier Yeates, who practices international and energy law in Houston and is a mentor to both of us, also encouraged us to write in this area, and inspired us by his professional and gentlemanly example.
One final note. While this book is intended to aid in the understanding of the interaction between international law, foreign investment, and political risk, a book cannot substitute for the advice of an attorney who has information concerning the client’s particular needs and situation. We encourage anyone requiring counsel in the matters discussed in this book to consult an attorney for individualized advice and assistance. Additionally, readers should be aware that the opinions expressed in this book are solely our own, and should not to be attributed to any entity or person other than the authors.
Paul E. Comeaux
N. Stephan Kinsella
November, 1996
Introduction
In the Twentieth Century, mankind has witnessed the spread of capitalism and institutionalized respect for individual rights across many parts of the globe. While Anglo-American institutions and the rule of law have been developing in the United States, Canada, parts of Europe, and certain other Western nations for centuries, these concepts have begun to gain acceptance in parts of the world that have, in the past, been hostile to these ideas.
This century has also, however, been plagued by collectivist ideologies such as socialism, communism, fascism, and Marxism,[1] which reject capitalism and have little or no respect for the property rights of individuals. This attitude is illustrated by a statement made by Fidel Castro in 1960:
We’ll take and take until not even the nails in their shoes are left. We will take American investments penny by penny until nothing is left.[2]
The fact that in this century, collectivist ideologies have controlled much of the developing world, combined with various political clashes and “misunderstandings” between the developing and developed world,[3] has led to massive nationalizations and confiscations of the property of Western investors. Isa Foighel pointed out that
[i]f we wish to pick out one single feature of the social-economic character of the 20th century, one fact accompanying the technical development will strike us very forcibly: the direct and indirect interference by government action with private property. [4]
A large number of these nationalizations and confiscations were takings of property invested in developing states in the form of so-called “foreign direct investment.” Foreign direct investment refers to direct control of either assets or an enterprise in a foreign country through ownership of a substantial portion of the assets or enterprise.[5] It is “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of an investor, the investor’s purpose being to have an effective voice in the management of the enterprise.”[6] One writer has defined “foreign direct investment” as follows:
[Foreign direct investment] may best be defined as the creation, acquisition or endowment in the host country of enterprises, either incorporated as branches, subsidiaries, or associate companies, or in the form of unincorporated enterprises or joint ventures. The desired result is to acquire a lasting interest, with powers of management and control, where the investor’s return depends upon the performance of the enterprise. [Foreign direct investment] flows include all funds provided by the investor, specifically, equity capital, reinvested earnings, and net borrowings. Equity investment that does not meet this standard constitutes portfolio investment which is placed through the capital markets without entrepreneurial commitment and merely for the sake of capital yield.[7]
Some of the largest nationalizations of foreign direct investment this century were the result of revolutions in the Soviet Union in 1917, Brazil in 1930, Mexico in 1938, Bulgaria, Czechoslovakia, Hungary, and Poland between 1945 and 1948, Bolivia in 1952, China in the 1940s and ’50s, Egypt in 1956, and Cuba in 1959. Other nationalization occurred in the Middle East and Africa during the 1950s, ’60s, and ’70s due in part to these states’ assertion of “permanent sovereignty” over their petroleum reserves following decolonialization. Many of these latter expropriations took place despite concessions that the host states had granted to Western investors.
Expropriations of Western investment continued into the 1970s in states such as Uganda, Ethiopia, Pakistan, and Iran. By the mid-1970s, many developing states appeared to have a negative view of both foreign direct investment and the multinational corporations that were usually the source of such investment.[8] In 1980, the only OPEC states in which oil concessions to Western multinationals remained in effect were the United Arab Emirates and Libya, representing a substantial decline from the middle part of this century.[9]
In recent years, however, the attitudes of developing states toward foreign direct investment have begun to shift, and foreign direct investment flows to developing states are increasing. In the second half of the 1980s cash flow increased from the West to developing countries in Asia, Latin America, and Eastern Europe.[10] Foreign direct investment worldwide increased three times faster than domestic output,[11] and, by 1993, foreign direct investment to developing states equalled approximately $67 billion.[12] In Central and Eastern Europe alone, foreign direct investment has increased from almost nothing in 1989 to almost $10 billion by the end of 1993.[13]
While some states have been cautious in welcoming foreign direct investment, others have begun to pursue it avidly, privatizing formerly state-run enterprises.[14] In Argentina, the state is in the process of privatizing the national airline, railways, many utilities, and most banks.[15] In the Philippines, the state has accelerated privatization of the telephone, steel, electricity, paper, and oil industries.[16] In Mexico, the national telephone company is partially owned by American and French companies, and Pemex, the national oil company, is planning to sell petrochemical plants to foreign investors.[17]
Oil companies whose properties were nationalized in the 1970s are now returning to the offending states.[18] As of 1992, Tunisia, Egypt, Oman, Yeman, and Syria now allow foreign participation in their oil industries.[19] Algeria also now permits joint ventures with foreign oil companies, provided that the state oil company retains a controlling share.[20] In November, 1994, Azerbaijan approved a $7.5 billion development deal with a consortium of foreign oil companies.[21] Regarding the Middle-East-related expropriations in the 1970s, Morris Adelman, an expert in oil economics at the Massachusetts Institute of Technology, points out: “Those countries have realized that nationalization has been a lousy way to run their oil business. They now know that throwing out the oil companies with their technical expertise and big money was a terrible mistake.”[22]
As a World Bank official has recently stated, “The present interest in privatization is no fad. . . . Lessons have been learned . . . and today’s strategies reflect those lessons.”[23] Foreign markets are being re-opened to Western investment in many parts of the world, and this tendency is expected to continue to grow.
Along with the rejection of explicit communism and socialism, there has been an increasing recognition of the crucial importance of property rights.[24] States formerly hostile to Western investment are beginning to enact investment codes favorable to investors,[25] and are beginning to adopt western legal and business methodology, such as western methods of contract interpretation.[26] Many developing states have also passed legislation guaranteeing compensation in the event of expropriation,[27] and have entered into bilateral investment treaties with Western countries, which often provide that full compensation will be paid to investors in the event of expropriation.[28]
Also, reversing earlier postures that investment disputes should be resolved under the laws of the host state (which, in practice, allowed states with influence over their courts to render contractual and legal guarantees virtually worthless), many developing states have enacted investment laws allowing for settlement of disputes in a neutral forum, using the facilities and procedural rules of arbitral institutions such as the International Chamber of Commerce and International Centre for the Settlement of Investment Disputes.[29] Finally, there have been a number of incentives offered by developing states to attract foreign direct investment, including tax breaks, inexpensive financing, and land at reduced prices.[30]
What has caused this dramatic reversal from the chasm that divided developing states and Western investors only a few short decades ago? Partly, it is due to the ideological shift in the world toward the recognition of the benefits of liberal democracy and free markets. Communism has been discredited, state management and socialism in general have fallen into disrepute,[31] and it appears as if relatively free markets are here to stay, at least for the short- and medium-term.[32]
Partly, such changes were caused by the competition among developing states for foreign direct investment in the early 1980s. As developing states’ demand for foreign direct investment was increasing in the late 1970s and early 1980s, the supply was decreasing.[33] While direct foreign investments to developing countries reached a peak of $17.24 billion in 1981, it fell to $11.86 billion in 1982 and $7.8 billion in 1983.[34] This was due in part to rising interest rates and falling commodity prices, causing many developing states to default on their debts to Western banks in the 1980s,[35] which caused Western banks and investors to tighten the supply of capital flowing to these states. Many multinationals, in fact, borrowed funds from their foreign subsidiaries, rather than injecting capital into them.[36] This, in turn, caused increased competition for the limited amount of investment capital available. One way states competed for investment dollars was by liberalizing investment codes.
In large part, however, developing states are liberalizing investment codes and embracing foreign direct investment because such investment benefits both the citizens of the host state and the investor. By the end of the 1970s, developing countries were becoming aware that the technology gap between the developing countries and the West was increasing. They realized that welcoming foreign direct investment was a more effective means of developing and importing Western high technology in the region than purchasing it.[37] In addition, “[b]ecause [foreign direct investment] is not a debt creating instrument requiring regular payments and generating continuous demands on the host country’s balance of payments, only when the investment earns a profit are payments implied, thereby placing part of the risk on the foreign investor.”[38] Foreign direct investment also helps the host state by creating more opportunities for local subcontractors and suppliers.[39] Further rationale for the acceptance of foreign direct investment is summarized by Ibrahim Shihata:
First, direct investment does not simply provide funds, but an integrated package of financial resources, managerial skills, technical knowledge, and marketing connections. Second, it is not a debt-creating instrument; the investor bears the risks of project failure, while a lender has the right to be repaid regardless of how effectively the borrowed funds were used. Third, other indirect but important attributes of this form of capital relate to benefits that insure the introduction of efficient and internationally competitive enterprises in local economy. In the long run, direct foreign investment can foster a general improvement in production by stimulating the adoption of improved techniques and management in other sectors of the economy, and among local entrepreneurs. Fourth, foreign investment often works as a catalyst for associated lending for specific projects, thus increasing the overall availability of external resources for productive purposes. Also, foreign investors often act as lobbyists in their home countries for the benefit of their projects in developing countries.[40]
❧
As a consequence of the world’s move toward market liberalization and the apparent embracing of foreign direct investment by developing states, political risk[41] appears to have decreased.[42] As mentioned above, developing states have enacted liberal investment codes and helped to create a web of bilateral and multilateral investment treaties, all of which give some comfort to the investor contemplating foreign direct investment in a developing state.
Yet despite these laws and the welcoming of Western investors by developing states, trends can change, as investors that have been the victims of expropriation in the past are painfully aware. The host state that welcomes foreign investment today can tomorrow turn inward, shunning liberal policies, and nationalizing foreign interests.
While the United Nations’ Centre on Transnational Corporations has recently argued that nationalization will represent a minimal risk in the future, this conclusion has been challenged as optimistic:
This conclusion must be seen as optimistic if account is taken of the fact that the year 1975 was in the middle of a severe economic crisis for many countries in the developing world, as a result of the rise in oil prices and the accompanying world recession. These countries not only had by that time to search for outside assistance, but also to turn to the IMF for help. One of the conditions of such help required them to relax their previous attitudes toward private foreign investment and to encourage the return of multinational corporations. It is by no means clear, therefore, that the postulated changes in attitudes, born partly of economic crises, will be permanent.[43]
With this in mind, political risk should certainly be a factor considered by any company contemplating investing in a developing state.
Government intervention can take many forms. Sometimes a host state will directly intervene, through either outright confiscation of property of the investor or refusal to allow conversion of local, soft currency into hard currency. In Cuba, for example, following the revolution in 1959, the government confiscated over two billion dollars in property belonging to U.S. nationals. In other cases, government intervention is indirect, such as confiscatory tax rates or a shutdown of electricity or other utilities that supply the investor’s business. In Iran following the 1979 revolution a common technique to expropriate property of U.S. nationals was to require companies to hire “managers” appointed by the state, who effectively took control of the company for the state’s benefit.
Risks such as these are usually a relatively minor concern to an investor in a stable liberal democracy. Primarily, this is due to such countries’ adherence to the rule of law, and a track record of protecting property rights.[44] For example, a Belgian national investing in a power project or oil and gas properties in the U.S. is reasonably confident that, in the unlikely event that the government were to confiscate his property, he would have recourse in the courts to challenge the action and to obtain just compensation for the value of the property taken.[45]
On the other hand, if the same Belgian national were investing in a power project or oil and gas properties in Russia, and Russia were to nationalize his properties, the investor’s options in the face of such intervention may be very limited. Russia does not have an established independent judiciary to serve as a check on its legislature. More importantly, the “rule of law,” or the idea that the law itself is supreme and the government and all government officials are subject to it, is not yet firmly entrenched in Russia.
❧
In light of this, what can an investor in a developing country do to measure the political risk in a given country before deciding whether to invest? What can an investor do to protect itself against political risk once it has invested? What type of protection against political risk currently exists under international law? Finally, what can an investor do after political risk has materialized and caused it damage? This book is an attempt to set out the answers to these questions that are provided by international law.
Part I of this book addresses the relevant international law affecting political risk. In Chapter 1, we discuss the types of political risk that an investor in a developing country is likely to encounter, and discuss practical steps an investor can take to measure such risk in a particular state before investing capital. In Chapter 2, we discuss the state of international law related to political risk, as developed by case law, commentators, state practice, and international organizations. A separate chapter, Chapter 3, is devoted to the international law of expropriation and repudiation of contracts. Chapter 4 surveys multilateral and bilateral investment treaties among Western states and developing states, which contain promises guaranteeing certain standards of treatment to both investors and investments.
Part II describes actions that can be taken by the investor to reduce its exposure to political risk prior to investing in a developing country. Chapter 5 analyses the various investment projects often undertaken in developing states, then discusses both structures that can be used to reduce exposure to political risk and contract terms in investor-state contracts that can further reduce such risk. If an investor is able to negotiate directly with a host state to receive “internationalized” contractual assurances containing, for example, a choice of law clause choosing international law as the governing law, and an international arbitration clause providing for arbitration of disputes before neutral tribunals, it is in a much better position to protect its investment if loss due to government intervention ever occurs or becomes a serious threat. Chapter 6 concerns political risk insurance. Such insurance typically provides coverage against non-commercial risks such as currency inconvertibility, expropriation, and war, and is available from a number of sources, including nationally-sponsored insurance agencies, private insurance companies, and the World Bank’s Multilateral Investment Guarantee Agency.
Part III describes what an investor can do when threatened with, or after suffering, loss due to government intervention. Chapter 7 addresses how and when to resort to international arbitration. Several forms of arbitration, ad hoc arbitration using rules promulgated by the United Nations Commission on International Trade Law and arbitration conducted by the World Bank’s International Centre for the Settlement of Investment Disputes, are discussed in detail. In Chapter 8, we discuss what actions may and will be taken by the investor’s own government and other states to protect the investor when an expropriation is threatened or has occurred.
This book’s scope is limited to the topics described above, and does not purport to cover the related and important topics of commercial risk involved in direct foreign investment;[46] business, financial, or tax strategies involved in direct foreign investment; or political risks that may arise in import/export transactions or investment other than foreign direct investment. We also do not discuss in detail the political risks in any particular country. Because such risks can change from month to month and even from day to day, such a discussion would be of limited value. There are, however, several services that provide up-to-date political risk assessment on a country-by-country basis, which are discussed in the text.
International law does not provide the entire solution to an investor seeking to reduce the political risks of investing in a developing state. The laws and political climate of the host state, as well as the organizational structure of the investment vehicle, also play important roles. A solid understanding of the international law related to political risk, however, is vital to any investor seeking to reduce such risks.
[Endnotes; some formatting, such as italics, missing]
[1] Such statist ideologies have left in their wake the deaths of tens of millions. In fact, it has been estimated that, in this century alone, governments have killed almost 170 million people. R.J. Rummel, Death By Government (1944). For further discussion of the destructive ideologies of this century, see Paul Johnson, Modern Times: From The Twenties To The Nineties (rev’d ed. 1991).
[2] New York Times, 21 August 1960, § 3(F), p. 1, quoted in ERIC N. BAKLANOFF, EXPROPRIATION OF U.S. INVESTMENT IN CUBA, MEXICO, AND CHILE 112 (1975).
[3] Multinational corporations were accused by developing states of, among other things, adopting overly capital-intensive production techniques and making insufficient transfers of technology. Klaus P. Berger, The New Multilateral Investment Guaranty Agency Globalizing the Investment Insurance Approach Towards Development, 15 SYR.J. INT’L L. & COM. 13, 31 (1988).
[4] ISA FOIGHEL, NATIONALIZATION: A STUDY IN THE PROTECTION OF ALIEN PROPERTY IN INTERNATIONAL LAW 13 (1957).
[5] Thomas L. Brewer, International Investment Dispute Settlement Procedures: The Evolving Regime for Foreign Direct Investment, 26 LAW & POL’Y INT’L BUS. 633, 634 (1995); see also Cheryl W. Gray & William W. Jarosz, Law and the Regulation of Foreign Direct Investment: The Experience from Central and Eastern Europe, 33 COLUM. J. TRANSNAT’L L. 1, 1 (1995). Different countries use different threshold levels of ownership, usually between ten and twenty-five percent, to distinguish foreign direct investment from so-called “portfolio investment.” Brewer, supra, at n2.
[6] INTERNATIONAL MONETARY FUND, BALANCE OF PAYMENTS MANUAL ¶408 at 136 (4th ed. 1977). Thus, “[w]ith respect to foreign direct investment, a foreign investor retains at least part of the ownership and control, unlike [official development assistance] and private bank lending where the business is owned and controlled by local companies or entrepreneurs.” Berger, supra note 3, at 17.
[7] Berger, supra note 3, at 17 (references omitted).
[8] Many academic writers and international organizations also viewed foreign direct investment and multinational corporations with suspicion in the 1960s and early ‘70s, with much emphasis being placed on imposing tighter control on such investment and corporations. Brewer, supra note 5, at 639.
[9] Edith Penrose, George Joffe & Paul Stevens, Nationalization of Foreign-owned Property for a Public Purpose: An Economic Perspective on Appropriate Compensation, 55 MODERN L. REV. 351, 353 (1992).
[10] Gray & Jarosz, supra note 5, at 5.
[11] U.N. Department of Econ. & Social Development, in TRANSNATIONAL CORPORATIONS AND MANAGEMENT DIVISION, WORLD INVESTMENT REPORTS 1992: TRANSNATIONAL CORPORATIONS AS ENGINES OF GROWTH AT 4, U.N.Doc. ST/CTC/130, U.N. Sales No. E.92.II.A.19 (1992). Foreign direct investments to developing countries has increased dramatically over the past several years. MULTILATERAL INVESTMENT GUARANTY AGENCY (MIGA) ANNUAL REPORT, 1995 (available upon request from MIGA).
[12] Miga Annual Report 9 (1995). This figure represents a 42% increase over 1992 levels. Id.
[13] Gray & Jarosz, supra note 5, at 1. For purposes of these statistics, Central and Eastern Europe include Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Slovakia. The increased flows of foreign direct investment to developing states has not, however, been enough to satisfy their demands. These states are still in dire need of massive injections of capital in order to turn around their depressed economies. The continued lack of sufficient capital is due in part to sluggish economic growth in the United States, Japan, and Western Europe over the past several years. In addition, there are more developing countries now competing for foreign dollars—countries such as Laos, Vietnam, India, and Cuba are now in the market.
[14] ”[A]t least eighty-three countries were conducting some significant form of privatization” by the early 1990s. Anna Gelpern & Malcolm Harrison, Ideology, Practice, and Performance in Privatization: A Case Study of Argentina, 33 HARV. INT’L L.J. 240 (1992) ( quoting Helen Nankani, Techniques of Privatization of State-Owned Enterprises, 1 WORLD BANK TECHNICAL PAPER 89 (1988)).
[15] Amy L. Chua, The Privatization-Nationalization Cycle: The Link Between Markets and Ethnicity in Developing Countries, 95 COL. L. REV. 223, 242 (1995).
[16] Id. at 256.
[17] Id. at 238.
[18] ”Conoco’s return to Iran is the latest in a wave of such U-turns. British Petroleum Co., expelled 16 years ago by Nigeria over the issue of apartheid in South Africa, is back in Nigeria despite a despotic military regime there. Mobil Corp., which fled Viet Nam in 1975 because of the war, is back even though a border dispute may lead to a brawl with China. Occidental Petroleum Corp., whose holdings in Venezuela were nationalized 19 years ago is back, despite a tottering economic system that could trigger a military coup.” Allanna Sullivan, Plunging Back: Western Oil Giants Return to the Countries That Threw Them Out, WALL STREET J., Mar.5, 1995, § A, at 1, col. 1.
[19] Penrose et al., supra note 9, at 353.
[20] Id. at 354.
[21] This consortium includes Amoco, British Petroleum, Azerbaijan State Oil Company, UNOCAL, Delta (a Saudi-affiliated entity), Lukoil (Russia), Pennzoil, Statoil (Norway), the Government of Iran, McDermott, RAMCO, and Turkish Petroleum Corp. COMMERCE, THE OFFICIAL NEWSLETTER OF THE C.I.S.-AMERICAN CHAMBER OF COMMERCE 3 (Fall 1995).
[22] Sullivan, supra note 18.
[23] Mary M. Shirley, The What, Why, and How of Privatization: A World Bank Perspective, 60 FORDHAM L. REV. S23, S31-32 (1992).
[24] “Some of the States that had been the most vociferous exponents of Third World ideology began to become exporters of capital and thus to acquire a heightened appreciation of property rights.” Brice M. Clagett, Present State of the International Law of Compensation for Expropriated Property and Repudiated State Contracts, in PRIVATE INVESTORS ABROAD §12.02 (1989).
[25] Ibrahim F.I. Shihata, Recent Trends Relating to Entry of Foreign Direct Investment, 9 ICSID REV.-FOR. INV. L.J. 47 (1994). For a discussion of the national foreign direct investment codes of several nations, see Michael A. Geist, Toward a General Agreement on the Regulation of Foreign Direct Investment, 26 LAW & POL’Y INT’L BUS. 673, 686-706 (1995). International organizations have also shifted their emphasis from the regulation of foreign direct investment to the liberalization of government policies toward such investment. See Brewer, supra note 5, at 639.
[26] For a discussion of such practices in Central and Eastern Europe, see Gray & Jarosz, supra note 5, at 32.
[27] For examples of such legislation in Central and Eastern Europe, see Gray & Jarosz, supra note 5, at 29; Geist, supra note 25.
[28] See Chapter 4, Section A.
[29] Adeoye Akinsanya, International Protection of Direct Foreign Investments in the Third World, 36 INT’L & COMP. L.Q. 58, 70-75 (1987).
[30] Geist, supra note 25, at 679.
[31] For elaboration regarding the impracticability of socialism, see Appendix I.
[32] See FRANCIS FUKUYAMA, THE END OF HISTORY AND THE LAST MAN (1992) (arguing that, with communism’s ideological defeat, liberal democracy has no serious challengers remaining and is stable and permanent). See also Seymour J. Rubin, Introductory Note [to the World Bank: Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment], 31 I.L.M. 1363 (1992), where it is pointed out that Guidelines were “prepared largely after the triumph of market over centrally guided economies, and [are] explicitly aimed at the encouragement of foreign direct investment (and incidentally portfolio investment) . . . .”
[33] In 1993 and 1994, it is estimated that half of all foreign direct investment flowing to developing countries went to East Asia and to the Pacific, while lower income countries, excluding China and India, received only about $3 billion dollars. MIGA ANNUAL REPORT, 1995.
[34] ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD), DEVELOPMENT COOPERATION—1984 REVIEW 64, Table IV-1 (1984).
[35] The total debt of developing countries exceeded $950 billion in 1985, causing the international capital flow to developing countries to slow and interest rates to rise. Shihata, supra note 40, at 672.
[36] Id. at 674.
[37] Berger, supra note 3, at 15.
[38] Id.
[39] Id.
[40] Ibrahim F.I. Shihata, Factors Influencing the Flow of Foreign Investment and the Relevance of a Multilateral Investment Guaranty Scheme, 21 INT’L LAW. 671, 675 (1987).
[41] ”Political risk” can be broadly defined as the risk that the laws of a country will change to the investor’s detriment after it has invested capital in the country, reducing the value of its investment. Put simply, it is the risk of government intervention. See Chapter 1, Section A.
[42] Expropriations appear to have peaked in 1975 with 83 expropriations in 28 different countries, but declined by fifty percent the following year. Between 1980 and 1985, the rate of expropriation averaged three per year. UN Centre on Transnational Corporations, The New Environment, UNTC Current Studies, Series A, No. 16 (New York: United Nations, 1990), p. 18.
[43] Penrose et al., supra note 9, at 351. See also Chua, supra note 15, for an argument that in many states, there is an ongoing cycle of privatization and nationalization. It should be noted that even today’s relatively free-market oriented liberal democracies do not show complete, consistent, or principled respect for private property, thus always posing at least some political danger for investment (whether foreign or domestic).
[44] Such protection is, however, inconsistent and spotty. In the United States, for example, the government may impose “restrictions” on the use of property. Many governmental actions in the U.S. which are in fact takings of property rights—such as zoning regulations and taxes—are not always considered to be takings by U.S. courts. See generally RICHARD EPSTEIN, TAKINGS: PRIVATE PROPERTY AND THE POWER OF EMINENT DOMAIN (1985).
[45] In the United States, just compensation for property taken by the State is normally measured by “the market value of the property at the time of the taking.” Olson v. United States, 292 U.S. 246, 255 (1934), aff’d. in United States v. 50 Acres of Land, 469 U.S. 24 (1984).
[46] Commercial risks are the types of risks inherent in any business venture, such as the risk of low consumer demand, higher than expected manufacturing costs, insolvency of purchasers, and cost overruns in production. Commercial risk is thus the business risk that remains even in the most stable political climate. While commercial risks affect any business, whether operating in its home country or abroad, these risks are often greater in a developing country due to lack of a developed infrastructure, primitive telecommunications systems, and an unskilled, uneducated, and relatively impoverished consumer base. As a practical matter, however, it may sometimes be difficult to distinguish between political and commercial risks. For example, the failure of a government-operated utility to deliver services to an investor’s facility may be either commercial or political in nature.
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