Latin America and the Caribbean in International Investment Law: The Price of Overestimating the Value of FDI

Latin America and the Caribbean in International Investment Law: The Price of Overestimating the Value of FDI

Antonius R. Hippolyte & Jason K. Haynes 

Most developing countries still lack the industrial capacity to participate in international trade in a manner similar to industrialised countries, whose industrial transformation was catalysed at the end of the 18th century. Thus, advocates of the neoliberal international economic order have long touted Foreign Direct Investment (FDI) as the panacea for development and economic growth in developing countries, including those in Latin America and the Caribbean. Indeed, as the economic successes of  ‘Asian Tigers ‘ such as Taiwan, Singapore and South Korea have demonstrated, such neoliberal economic thought has some merit. In addition to the injection of much-needed foreign capital into the host economy, FDI triggers technology expansion, assists human capital formation, and nurtures a dynamic business environment by fostering competition between local and foreign businesses which usually culminates in economic growth in the host state. Consequently, since their ascendency to statehood, countries in Latin America and the Caribbean have generally raced to attract foreign investment to bolster their economies, a significant element of which has been subscribing to the international rules and procedures governing foreign investment.

Over the last two decades, however, Latin American and Caribbean countries have increasingly acknowledged that FDI is not as economically virtuous as originally envisaged. The Economic Commission for Latin America and the Caribbean (ECLAC), for example, has expressed that there is no evidence to suggest that FDI has contributed to significant changes in the region’s productivity over the course of the last decade. Despite this reality, however, by overestimating the value of FDI and the consequent desire to portray themselves as investor-friendly, developing countries have had to offer investors significant concessions, or turn a blind eye to investors’ activities which prove detrimental to the host-state—or, where they have intervened, they have had to compensate investors to the tune of billions of dollars for what investors perceive as breaches of host states’ international obligations. Human rights and environmental protection have been compromised in the process of attempting to attract and retain foreign investment, though this has only rarely been accounted for in arbitral practice. Thus, due the high price these countries have had to pay in their attempts to attract and retain capital, when they have attempted to regulate the activities of foreign investors operating in their jurisdictions, some of these countries, coalescing under the ALBA umbrella, have sought to distance themselves from the international investment regime.

Overestimating the Value of FDI

As intimated above, over the last few years, numerous Latin American and Caribbean countries have paid a high price for overestimating the value of FDI to their local economies. Quite apart from their offer to investors of unparalleled concessions and unbridled access to investor-state dispute settlement mechanisms, a number of Latin American and Caribbean countries have been thrust into the unenviable position of having to compensate investors to the tune of millions—much more than investors have injected into local economies.


Argentina is one of the Latin American and Caribbean countries which has had to face the bitter truth that FDI is not as economically virtuous as touted by neoliberal proponents of this regime. In 1989, Argentina pursued an economic liberalisation programme in order to restructure its economy along the lines of the Washington Consensus model. For most of the 1990s, Argentina was hailed as one of the most prosperous states in Latin America and the Caribbean, with a growth rate of 8 per cent. In fact, during the economic meltdown in East Asia in 1997, Argentina was being referred to as a model state, due to its fixed exchange rate regime. However, due to various macro-economic factors, including high external debt and debt servicing ratio, by 2001, Argentina’s economy had collapsed. Between 2001-2002, Argentina faced a political and economic crisis, which led to the country having to cancel numerous previously granted concessions to foreign investors in an effort to halt the economic crisis. Investors adversely affected by these measures initiated ISDS claims against Argentina, for the alleged breach of its international obligations owed to them under various International Investment Agreements (IIAs). 

Interestingly, Argentina’s net FDI inflows, prior to the crisis, accounted for very little of its economic success. In fact, for most of the 1990s, net FDI inflows into Argentina was less than 3 per cent of Argentina’s GDP. To put this into perspective, in 2000, Argentina had a GDP of US $281.7 billion, with only 3.666 per cent of this credited to net FDI inflows. Nevertheless, since 2001,  57 ISDS claims have been brought against Argentina, whereas before 2001, the country had only faced five ISDS claims. Of these 62 ISDS claims, eight are pending, 18 were settled and 22 were decided in favour of investors. In 2015, it was estimated that if all 38 foreign investment claims brought against Argentina between 2003 and 2007 (which represent a quarter of all ICSID claims for that period) were decided against Argentina, the state would be liable to compensate investors in the region of around US $80 billion. This is more than the combined net inflow of FDI to Argentina for the years 1990 to 2000, which stood at around US $70 billion. Thus, notwithstanding Argentina’s valiant attempt to curtail the socio-economic impact of the financial crisis, there has been little sympathy shown by investors, who have ruthlessly succeeded in their ISDS claims against that state. Argentina being required to pay more in compensation to foreign investors than the FDI inflows it has managed to generate is an apt illustration of a state paying a heavy price for overvaluing the benefits of FDI. 


Belize is a Central American country, but because of its shared historical, linguistic and cultural links to the Anglophone Caribbean, it is often considered part of the Commonwealth Caribbean. In as much as foreign investment inflows have been an important contributor to Belize’s development, these inflows have, in many ways, been offset by the astonishing privileges afforded investors by that jurisdiction. Indeed, investors’ exemption from or reduction of payment of customs duty, sales tax, income tax, stamp duty and alien land holding duty are not negligible concessionary benefits. A particularly apt illustration of the unacceptable state of affairs relative to the relentless pursuit of profits by foreign investors arose in Dunkeld v Belize (I) Dunkeld International Investment Limited v The Government of Belize (I). In this case, the government of Belize had entered into an Accommodation Agreement with Telemedia. Under this agreement, Telemedia was guaranteed a minimum rate of return, and if the government failed to timely pay any shortfall when this minimum return was not met, the Claimant could set off this shortfall against taxes or other obligations owed to the government. The agreement also provided for a guarantee on Telemedia’s tax rate, a prohibition on the use of voice-over-internet-protocol ( ‘VoIP ‘) except by license from Telemedia, and an exemption from paying import duties. There was a change in Government in Belize, and the new government began aggressively seeking to collect business tax from the company. Telemedia had filed tax returns with the Government, in which it had off-set its taxes against the shortfall amount, but the Government refused to accept the returns. The government then issued to Telemedia monthly tax assessment notices, including penalties and interest. Telemedia, in turn, refused to accept the tax assessment notices. In order to compel Telemedia to pay the assessed taxes, the Government issued judgment summonses in the Magistrate’s Court. After Telemedia made the requisite tax payments, the National Assembly of Belize passed the Belize Telecommunications (Amendment) Act which sought to acquire for and on behalf of the Government Telemedia for the stabilisation and improvement of the telecommunications industry, and the provision of reliable telecommunications services to the public at affordable prices in a harmonious and non-contentious environment. The claimant initiated claims before local courts, as well as before an arbitral tribunal alleging unlawful expropriation. 

The Government determined that a reasonable offer of compensation for the acquisition of the claimant’s shareholding in Telemedia was BZ$1.46 per share, and insisted that the claimant withdraw their claims for compensation, and discontinue all arbitral and other proceedings aimed at enforcing said claims. The claimant, however, pointed out that the valuation of BZ$1.46 per share was not consistent with the price of BZ$5.00 per share, an offer which was refused by the government after its re-acquisition of Telemedia in 2011. The tribunal held that the government did not afford the claimant fair market value of the expropriated investment, and awarded damages in the sum of US $96,935,233—an undoubtedly significant amount when one considers that Belize’s GDP is only US $1.88 billion. 

The particularly troubling feature of this case is that, for over 20 years, the claimant managed to control 94 per cent of Belize Telemedia Limited (BTL) shares; earned 20 cents for every dollar invested; was allowed to declare in any given year that they had not met a minimum rate of return of 15 per cent, and in turn, simply not pay taxes (business tax and customs duties) until the shortfall had been recovered; required that all other existing telecoms licenses (except Speednet’s) be revoked; outlawed voice-over-internet protocol, which allowed consumers the cheapest option; and required that each government department, agency, or associated body, use only Telemedia’s services at onerous prearranged rates. 

While it is clear that the claimant contributed to the improvement of Belize’s telecommunications infrastructure, this was arguably counterbalanced by the fact that the claimant in Dunkeld was guaranteed a monopolistic position in the market, and for over twenty years benefited from an astonishing number of concessions, which quantitatively ran into the millions. 

Costa Rica

Costa Rica, too, has been a victim of the neoliberal workings of the foreign investment regime. The case of Compañia del Desarrollo de Santa Elena SA v Republic of Costa Rica, ICSID Case No. ARB/96/1 is instructive in this regard. In Santa Elena, the property that was subject to the dispute was located in Costa Rica’s Guanacaste Province, in the northwest region of the country. This terrain consists of over 30 kilometres of Pacific coastline, as well as numerous rivers, springs, valleys, forests and mountains. In addition to its geographical and geological features, the property is home to a dazzling variety of flora and fauna, many of which are indigenous to the region and to the tropical dry forest habitat for which it is known. Compañia del Desarrollo de Santa Elena, the Claimant, was formed in 1970 primarily for the purpose of purchasing Santa Elena, with the intention of developing large portions of the property as a tourist resort and residential community. A majority of Compania del Desarrollo de Santa Elena shareholders were US citizens. After acquiring the property for the sum of approximately US $395,000, Compania del Desarrollo de Santa Elena proceeded to design a land development programme and undertook various financial and technical analyses of the property with a view to its development. 

On 5 May 1978, Costa Rica issued an expropriation decree for Santa Elena. In accordance with an appraisal of the property conducted by one of its agencies less than one month earlier, on 14 April 1978, Costa Rica proposed to pay Compañia del Desarrollo de Santa Elena the sum of approximately US $1,900,000 (based on the then-current exchange rate for Costa Rican cólones) as compensation for the intended expropriation of the property. The Claimant had advised the Respondent that it had no objection to the expropriation, but contested the price fixed by the Respondent. Compañia del Desarrollo de Santa Elena then claimed, as compensation, the sum of approximately US $6,400,000 (based on the then-current exchange rate for Costa Rican cólones), in accordance with an appraisal of the property that had been commissioned by Compania del Desarrollo de Santa Elena and conducted by the Chief Appraiser of Banco de Costa Rica in February 1978, three months prior to the 1978 Decree. The approximately twenty-year period from the date of Respondent’s 1978 Decree until the commencement of the arbitral arbitration was marked by intermittent inactivity and intensive legal proceedings between the parties before the Courts of Costa Rica. Each party blamed the other for the very long delay in resolving the issue of compensation. The tribunal was charged with determining the amount of compensation to be paid for the property from the date of the expropriation until the commencement of the arbitration proceedings. The ICSID tribunal held that:

[E]xpropriatory environmental measures—no matter how laudable and beneficial to society as a whole—are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.

The tribunal’s ruling that interference with investors’ property which result in them sustaining loss must be compensated—even if such measures are aimed at protecting host-states’ welfare in the form of environmental protection—is highly problematic for a number of reasons, not the least being Costa Rica having been forced to redirect capital which could have been invested in other infrastructural projects in the country to compensate the investor. In so ruling as it did, the tribunal also dismissed the applicability of the police powers doctrine, effectively reinforcing the asymmetrical nature of the international investment regime. 

Paying a High Price

Having regard to the foregoing, we submit that, notwithstanding the neoliberal discourse that FDI is the panacea for all the economic problems facing developing countries—like those in Latin America and the Caribbean—the last few decades have taught us that there is a heavy price to be paid for overestimating the value of FDI. While its economic benefits in  host economies are questionable, the foregoing discussion strongly suggests that any attempt by host states to regulate investments so as to protect their policy space (including their environmental domain) may render them liable to crippling compensation, sometimes to the tune of hundreds of millions of dollars. Capital which should have been used to improve national infrastructure in these developing countries, and to assist them in achieving their sustainable development goals has had to be used to compensate foreign investors—even while these countries continue to struggle economically, and their citizens in turn continue to struggle to access even the most basic services. In this sense, developing countries in Latin America and the Caribbean can be said to have paid a high price for overestimating the value of FDI. 

Photo by Sasha • Stories on Unsplash

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