One of the biggest risks involved when a company invests in a foreign country
is that the government of that country will suddenly and capriciously confiscate
the company’s assets, violate the company’s contractually-guaranteed rights,
or otherwise act with impunity to rob the company of the profits and assets
it thought it was acquiring. So, how do countries attract foreign investment
in such a situation? There’s an established answer: they sign something known
as a bilateral investment treaty (BIT) with countries whose investment they
wish to attract.
Let’s say that Italy
and Bolivia sign a bilateral investment treaty. Then if an Italian company
invests in Bolivia and is subsequently summarily nationalized, it can take Bolivia
to binding arbitration at an arm of the World Bank known as the International
Centre for Settlement of Investment Disputes, or ICSID.
If ICSID finds in favor of the Italian company – Telecom Italia, let’s
say – then Bolivia has to pay Telecom Italia the sum that ICSID decides
Now if Bolivia is going around nationalizing telecommunication companies, why
should it pay any attention to ICSID awards? The answer is that an ICSID award
has the status of an international treaty obligation: the strongest obligation
that a country can have under international law. Countries can and do ignore
court orders the whole time, but they don’t default to the World Bank, and they
certainly don’t default on their treaty obligations.
Except now all these best-laid plans seem to be going rather awry. Bolivia’s
leftist president, Evo Morales, has announced that his country
exiting ICSID. What’s more, other countries in his bloc, including Nicaragua
and Venezuela, are likely to follow suit.
This is bad news not only for Telecom Italia, but also for any companies investing
abroad: if Bolivia can exit ICSID, then so can any other country. It’s far too
early to tell whether a spate of these decisions might have deleterious consequences
for total direct investment in developing countries. But this cannot be a good