The Impact of State-Investor Contracts on Development
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A State-Investor Contract is an agreement between the government of a country and a foreign business investor, often, but not always supported with a Bilateral Investment Treaty (BIT), which is an agreement between two States. While rules governing trade, competition and investment are becoming global norms, health and environmental protection, social and labour rights, are mainly issues of international negotiation and domestic regulation, limiting the tools for protecting social and environmental interest. In order to attract foreign investors, governments promise favourable treatment of the investors with investment contracts or concession agreements that include stabilisation clauses, freezing clauses, economic equilibrium clauses and taxation provisions, among others. The literature makes a strong case that these clauses and arrangements have a negative impact on human rights, domestic legislation and public regulation. Furthermore, the lack of transparency undermines the ability of individuals and groups affected by the investment project to have a say on whether and under what conditions the project should be undertaken. Overall, the literature on State-Investor Contracts (and investment treaties) shows that governments in particular in developing countries are the most affected. They are the countries that need foreign capital the most for their development and therefore are willing to make concessions to attract foreign investment. However, the evidence in the literature is very mixed on the real impact on host countries. Direct benefits or through spill-overs (horizontal or vertical) in technology exchange, knowledge exchange, labour markets, entrepreneurial development etc. are mainly based on assumptions. The literature makes a strong case that developing countries, in particular in sub-Saharan Africa and Low-Income Countries (LICs) do not have the absorption levels that are required to benefit from foreign investments. Some literature even shows negative spill-overs due to crowding out of domestic competitors and investment. Government are watering down on the introduction of new laws to protect environment and human rights for the threat to pay high compensation to foreign investors for breaching the stabilisation clause. There is also evidence that through State-Investor Contracts local people are pushed away from their land. Evidence also shows that tax income goes down because tax incentives are given to foreign investors and due to the practice of price shifting (international corporations shift money internally within its international network out of a country with high tax rates to another country with lower tax rates). Gender issues are absent in negotiations, because of a lack of women who participate in investment negotiations. Remedy and compensation through legal settlement mechanisms is often not given or enough for local populations, while foreign investors can rely on international norms that protect them and have access to international tribunals when they assume contract breaches. The literature suggests that we could have reached a tipping point. For the first time there were less BITs in force in 2017. Responsible Frameworks and Guidelines are promoted worldwide (e.g. UNCTAD, UN Human Rights and OECD) and the capacity of negotiators from developing countries is improving. However, the literature does not adequately discuss the impact this has on the content of new investment contracts (how they have changed since 2015).
CitationQuak, E. (2018). State-Investor Contracts and Development. K4D Helpdesk Report 397. Brighton, UK: Institute of Development Studies.
Is part of seriesK4D Helpdesk Report;397
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