Academic journal article American University Business Law Review

Free Trade, the Washington Consensus, and Bilateral Investment Treaties the South African Journey: A Rethink on the Rules on Foreign Investment by Developing Countries

Academic journal article American University Business Law Review

Free Trade, the Washington Consensus, and Bilateral Investment Treaties the South African Journey: A Rethink on the Rules on Foreign Investment by Developing Countries

Article excerpt

INTRODUCTION

The internationalization of business constitutes one of the dominant features of commerce today. Ever since World War II, the prevailing mantra of trade policy among western countries is free trade.1 Countries in the developed world are expected to eliminate all restrictions on the free movement of goods across national borders. This is codified in the rules of the World Trade organization ("WTO"),2 which entered into force in 1995 and the predecessor regime under the General Agreement of Trade and Tariffs ("GATT") entered into in 1948.3 Free trade is complemented by the rules of the International Monetary Fund ("IMF"), which requires countries, particularly those from the developed world, to remove currency restrictions.4

The developed world has relentlessly pushed other countries to embrace free trade, as most recently seen in the Washington Consensus.5 This article considers the trade and monetary policies pursued by South Africa, Africa's most developed if not largest economy in the post 1994 period. In the immediate aftermath of South Africa's first democratic elections, the country embraced the Washington Consensus and the underlying notion of free trade. In addition, it entered into a number of Bilateral Investment Treaties ("BITs") with several European countries.6 These agreements have proved to be profoundly detrimental to South Africa as a developing country. It has undermined South Africa's ability to nuance its economic policy choices to deal with the legacies of apartheid.

The developed world embraces free trade after it achieves a particular level of development. Countries in the developed world engaged in mutually beneficial free trade when their economies achieved similar levels of sophistication and development. Moreover, their populations function under superior standards of education and high material standards of living. South Africa adopted free trade under circumstances of extreme inequality and abject poverty.7 Unlike most of the developed world, South Africa has a deficient education system, which suffers from severe impediments, due to decades of apartheid rule.8 Parts of the economy are highly developed with a minority that lives under "first world" conditions. South Africa assumed largely first world free trade obligations despite the reality of the majority of the population subsisting under conditions of poverty and rampant unemployment unlike any other countries that assumed similar obligations.9

The embrace of free trade resulted in the decimation of key sectors of the economy.10 The liberalization policies also resulted in the movement of major corporate head offices and large amounts of currency out of South Africa. South Africa entered into a number of BITs with developed countries, which constrained its ability to adopt legislative and policy frameworks to advance the public interest." In several instances, the BITs agreements contained provisions inconsistent with constitutional imperatives. It meant that as a sovereign, the country surrendered key aspects of its economic policy. South African representatives failed to appreciate the impact of these measures and its consequences on the ability of the state to fashion progressive policies for the benefit of the disadvantaged.

The difficulty of competing against other developing countries has been compounded by a Constitution and legal order, which guarantees socio-economic and labor rights to its population.12 The progressive Constitution and the guarantees granted therein are something one expects in the developed world. When compared to other competitive markets in the developing world that do not provide similar legal guarantees, there is an increase in the cost of doing business in South Africa. This makes it difficult to compete with other developing countries that do not have a transparent, rights-based, and democratic constitution.

In hindsight, South Africa, like many developing countries, has soured on free trade and BITs. …

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