The Latin American Approach to FDI Law and Policy: An Outdated, Biased Vision Remains on Board

Nicolás M. Perrone & Leonardo E. Stanley

The 1990s witnessed a surge in economic and legal reforms that prioritised markets over government in allocating economic resources, installing a new institutional ruling. For neoliberals, open economies and free markets forces would bring laggards towards convergence. Rational agents’ investment decisions might place countries into a stable, long-run growth path. In the field of foreign investment regulation, this economic consensus—the so-called Washington consensus—recommended a policy agenda that was all about promoting and attracting FDI, in particular, by opening up sectors to foreign firms, privatising state-owned firms and creating a friendly investment environment. Measures aimed to screen investment flows or increase the benefits of foreign direct investment (FDI) for host countries were regarded as undue interventions to market forces. Governments were asked to promote linkages with the domestic economy but not to interfere with FDI flows—either directly or indirectly. Similarly, regulations to curb the costs and risks of FDI were deemed necessary sometimes, but ultimately discouraged, due to the risks of public abuse and arbitrary behavior (See generally, Perrone 2018).

This policy expected that by increasing FDI inflows, countries would focus on their more competitive sectors, join and climb the global value ladder, and build efficient public services and infrastructure. FDI was conceived as a key means to the goal of development, and therefore the Global South should attract as much capital inflow as they could. In the 2000s, this ‘quantitative’ FDI model was adjusted, and governments were granted more policy space, as international institutions recognised that a one-size-fits-all model was inappropriate for growth (Perrone 2018, p. 33). Yet, the basic policy premise remained the same, and states continued celebrating when they were the top receivers of FDI in their regions. This was indisputably a good signal for private and public actors. 

This ‘quantitative’ model has not been a success, however. In the last three decades, the contribution of FDI to sustainable development remains debatable. For one, positive spillover effects depend on several factors, while these capital flows can also have negative implications, such as crowding out domestic firms (Colen et al 2012). The relationship between FDI and inequality can also be problematic (Piketty 2014, pp. 68, 70, speaking of Africa). For another, the stock of FDI may not be significant compared to domestic capital, but foreign capital flows can still shape host economies. FDI may define the trade performance of a country, e.g. through global value chains, and states often pay more attention to multinational corporations than domestic firms (Bhaduri 2002, pp. 36-7). 

Meanwhile, some development economists and NGOs began to plead with international organisations for changing towards a more holistic perspective on growth: development should be socially inclusive and environmentally sustainable (Stanley 2020). Civil society’s pressure on governments towards the implementation of social and environmental development goals came to challenge the top-down, quantitative approach towards FDI. The push has been reflected in the emergence of a new consensus, requiring development to be inclusive and sustainable (See, e.g., UNCTAD 2012). For Global South countries, this holistic approach to FDI was and remains a top priority. Governments have the dual mission to attract FDI into their countries, and to create a regulatory framework capable of maximising the benefits while minimising the costs and risks of these capital flows (Perrone 2020). Unfortunately, and despite the huge effort put into the economic and social dimension, ECLAC has neither necessarily followed nor developed UNCTAD’s call to reform foreign investment governance in Latin America. ECLAC’s approach has remained, essentially, ‘quantitative’ (ECLAC’s flagship annual report tracks the latest data on FDI inflows and outflows in Latin America and the Caribbean, but the institutional question is not analysed nor is there a discussion of the importance to move towards a new, qualitative institutional approach. See, for instance, ECLAC 2020).  

Shifting from a ‘quantitative’ to a ‘qualitative’ FDI model comes with several challenges: a central one being institutional. Although there is a growing consensus that states should only promote and facilitate inclusive and sustainable FDI, the international regime on foreign investment remains centred on promoting investment, irrespective of whether these capital flows contribute to host states’ development. The investment treaty regime became popular in the 1990s, when states ratified thousands of bilateral investment treaties (BITs) and joined the World Bank’s International Court for the Settlement of Investment Disputes (ICSID). These treaties not only protect FDI from regulatory measures through investor-state dispute settlement (ISDS), but also have rules prohibiting or hindering screening and approval mechanisms, transfer of funds restrictions, performance requirements or technology transfer. In other words, this legal framework configures a top-down, quantitative approach, favoring foreign investors: a neoliberalism one-size-fits-all institutional project (Schneiderman 2008). 

BITs benefits proved to be minimal, but their negative consequences were significant. Global South countries increased their share of FDI inflows, as the ‘quantitative’ model recommended, but there is no evidence that investment treaties have significantly influenced this surge (Bellak 2015, p. 19). At the same time, compensations for alleged breaches started to boom, and Latin America has remained the top region in ISDS arbitrations. The 2001-2002 convertibility crisis in Argentina, and the consequent number of ISDS claims made developmental practitioners aware of the risks that the investment treaty regime had created. The Argentine experience shows that, as the influence of the international financial institutions declines, asymmetric solutions cannot last, and democratic governments will put their electorate before their investors (Stanley 2004; Mortimore and Stanley 2008). Critical voices also erupted in the Global North, as a result of ISDS cases against Canada and the United States over environmental and health regulations (Cosbey 2004).

In the following years, the critique against this institutional infrastructure—closely associated with the ‘quantitative’ FDI policy model—increased, admitting that if ‘there were a link between investment treaties and FDI flows, investment agreement and their protection can potentially undermine investment and its intended benefits’ (Johnson et al. 2018). After observing how lean benefits were, policymakers started to interrogate the substantial costs the scheme brings with it. The loss of flexibility suddenly transformed into a leading issue, as treaties disciplined host states’ policy space. At first, institutional and legal constraints were mostly seen as marginal, affecting only fiscally-undisciplined countries such as Argentina. The 2008 global financial crisis changed this perception, alerting the international community to the excessive power of financial markets. Notably, IMF staff brought to the debate the need for capital controls. A more holistic, abridged approach to this area was suggested by Gallagher and Stanley (2012), after reviewing the extent to which WTO agreements and various FTAs and investment treaties were compatible with the ability to deploy effective capital account regulations. Leaving aside the finer detail, most of the discussions have analysed the contractual straitjacket, and the need for flexibility in investment treaties, as opposed to the reimagination of this international regime to match the increasingly dominant ‘qualitative’ FDI model.

The paradox is obvious. The investment treaty regime emerged as the institutional pillar of a ‘quantitative’ FDI model, but it has remained in place irrespective of the critique and decay of this policy model. The situation is as if states aimed to fight climate change through the institutions underpinning the fossil fuels industry. A new institutional vision is required to replace the investment treaty regime and consolidate sustainable and inclusive FDI. 

Reform should be made bearing three things in mind. First, Latin America still needs large sums of money to eliminate extreme poverty, to reduce inequalities and mitigate climate change. The region could undoubtedly benefit from factors such as a large pool of funds, as well by the growing Chinese FDI in the region. Latin America’s stock of natural resources remains a potent lighthouse for foreign investors. However, unruled, unbounded FDI inflows could also lock the region into a long-term unsustainable development path. The institutional dimension of a ‘qualitative’ FDI model needs to incorporate tools to screen, monitor and renegotiate the conditions of long-term investment projects. States should be more than passive regulators, and institutions should reflect this paradigm-shift (see generally, Porterfield et al 2020). 

Secondly, climate change should push Latin America leaders to renegotiate old investment treaties and sign new deals, recognising the need for technology-transfer clauses, so they can meet their national determined contributions (NDCs) as per the 2015 Paris Agreement. Whereas decarbonisation is feasible, and within reach at very low cost, the limiting factor is ‘global political cooperation to get the job done through a variety of policy instruments such as carbon pricing, public investments, public–private R&D and government regulation’ (Sachs 2020). 

Lastly, what the region still lacks is a democratically discussed and carefully planned programme of inclusive and sustainable development. COVID-19 has revived the debate around inequality and the role of the state, markets, communities. These debates are undoubtedly interrelated, multidisciplinary, and voicing political, social, and economic issues. The problem is far more complex than setting up the right institutions or reducing barriers to woo investors. Economic policies should be directed to prevent social breakdown, address economic crises, and promote a transition towards a green economy. The institutional pillars of FDI governance need to ensure the space for experimental policies, and for all stakeholders’ participation before, during and after investment projects (Perrone 2019; Cotula & Perrone 2021). 

Nicolás M Perrone is a Research Associate Professor of International Law at Universidad Andrés Bello, Chile. His main research interests are in international economic law, particularly in international investment law and policy. He holds a PhD and an LLM from the London School of Economics. His research has appeared in the Indiana Journal of Global Legal Studies, Transnational Legal Theory, Journal of International Dispute Settlement, the Journal of World Investment & Trade and Leiden Journal of International Law. He is a member of the Editorial Committee of the Yearbook on International Investment Law and Policy (Columbia University). His monograph Investment Treaties and the Legal Imagination: How foreign investors play by their own rules was published by Oxford University Press in 2021. 

Leonardo E. Stanley is an Associate Researcher at the Centre for the Study of State and Society – CEDES / Argentina. His main areas of interest are Global Political Economy, Sustainable Development, International Financial Architecture, and China – Latin America. He has made several contributions in books and academic papers, including “The IPE of development finance in Latin America” in Ernesto Vivares (ed) “The Routledge Handbook to Global Political Economy” (https://www.routledge.com/The-
Routledge-Handbook-to-Global-Political-Economy-Conversations-and-Inquiries/Vivares/p/book/89781138479883), “Emerging Markets and Financial Globalization: Comparing thE experiences of Argentina, Brazil, China, India and South Korea” Anthem Press (2018) (https://ant-
hempress.com/emerging-market-economies-and-financial-globalization-hb), and “Latin America Global Insertion, Energy Transition, and Sustainable Development”, Cambridge University Press (2020) (https://www.cambridge.org/core/elements/abs/latin-america-global-insertion-energy-transi-tion-and-sustainable-development/BBAAE4104118AAD9378557347E33B557).

Photo by Roberto Huczek on Unsplash