Bolivia Exits ICSID, Endangers Global Direct Investment

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

is unilaterally

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


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