EconomicsTHIRD WORLD

TRENdS & ANAlySiS

Published by the Third World Network KDN: PP 6946/07/2013(032707) ISSN: 0128-4134 Issue No 581 16 – 30 November 2014 Investment accords come under growing scrutiny

More voices are being raised, not only in developing but in devel- oped countries as well, questioning the wisdom of signing trade and investment agreements which would allow foreign investors to sue governments in international tribunals. The increasing calls for a rethink of such treaties are prompted, among others, by concerns over bias and flaws in the so-called investor-state dispute settlement system.

l Tide turns on investor treaties – p2 l Investment treaties bring more risk than benefit – p3

Also in this issue: Water services flowing back into Cosmetic changes to fundamen- public hands p9 tally flawed World Bank report p5 Analysis: TTIP may lead to EU Trade deals sow seeds of injustice dis-integration, unemployment, p7 instability p11

No 581 Third World Economics 16 – 30 November 2014 1 CURRENT REPORTS Investment agreements THIRD WORLD Economics Tide turns on investor treaties Trends & Analysis

131 Jalan Macalister The winds of change are blowing against trade and investment treaties 10400 Penang, Malaysia that contain the investor-sue-the-state system, which is now described as Tel: (60-4) 2266728/2266159 “toxic” by Western politicians and media. Fax: (60-4) 2264505 Email: [email protected] Website: www.twn.my by Martin Khor

Contents The tide is turning against the controver- claiming many billions of euros of lost sial system in which foreign companies profits because of new German policies CURRENT REPORTS are allowed to sue governments of their to phase out nuclear power and to 2 Tide turns on investor treaties host countries in a foreign court for mil- tighten emissions regulations in power 3 Investment treaties bring more risk lions or billions of dollars. plants. That the country’s environmen- than benefit At first it was the developing coun- tal policies are being challenged in such tries that started to rebel against the sys- an audacious way, and that this is made 5 Cosmetic changes to fundamentally flawed World Bank report tem, known as investor-state dispute possible by a skewed ISDS system, out- settlement (ISDS), which is embedded raged the public, the parliament and the 7 Trade deals sow seeds of injustice within bilateral investment treaties government. 9 Water services flowing back into (BITs) or in free trade agreements (FTAs). Germany was not the first devel- public hands South Africa, Indonesia and Bolivia oped country to turn around. A few ANALYSIS have withdrawn from the BITs they years ago, Australia decided not to en- 11 TTIP may lead to EU dis-integration, signed with other countries, following ter any new BITs or FTAs that contain unemployment, instability cases taken against them by multina- ISDS, after its government was sued for tional companies that made claims of up billions of dollars by Philip Morris for to $3 billion, in the case of Indonesia ver- its policy requiring minimum display of sus a British oil company. corporate logos on cigarette packages. Other developing countries are re- The new Australian government has viewing their BITs or weighing whether since watered down this ban by consid- to sign up to FTAs they are negotiating ering membership of FTAs with ISDS on that contain the ISDS system. a case-by-case basis. It is a matter of time before many of Meanwhile, two of the new top offi- THIRD WORLD ECONOMICS is published fortnightly by the Third World them decide to pull out or give notice cials of the European Commission, the Network, a grouping of organisations and that they are allowing existing BITs to President and the Trade Commissioner, individuals involved in Third World and development issues. expire without being renewed. both made known their scepticism if not opposition to ISDS when they took of- Publisher: S.M. Mohamed Idris; Editor: Chakravarthi Raghavan; Editorial Assistants: Developed-country opposition fice a few weeks ago. The Trade Com- Lean Ka-Min, T. Rajamoorthy; Contributing Edi- tors: Roberto Bissio, Charles Abugre; Staff: Linda missioner even called ISDS “toxic”. Both Ooi (Administration), Susila Vangar (Design), More surprising is that the disquiet officials hinted that they would make it Evelyne Hong & Lim Jee Yuan (Advisors). against ISDS has spread to prominent difficult for future EU trade deals to con- l Annual subscription rates: Third World coun- developed countries, their institutions tain ISDS. tries US$75 (airmail) or US$55 (surface mail); In- dia Rs900 (airmail) or Rs500 (surface mail); Ma- and establishment media. The new EC leaders were partly re- laysia RM110; Others US$95 (airmail) or US$75 The German government shocked sponding to the European Parliament, (surface mail). Europe when it announced it would not many of whose members are strongly l Subscribers in India: Payments and enquiries sign up to a free trade agreement that the opposed to having ISDS in the TTIP. can be sent to: The Other India Bookstore, Above Mapusa Clinic, Mapusa 403 507, Goa, India. European Commission had concluded European non-governmental orga- with Canada on behalf of the 28 Euro- nizations are also up in arms against l Subscribers in Malaysia: Please pay by credit card/crossed cheque/postal order. pean Union states because it contains the ISDS, accusing the international tribu- ISDS system. It is inconceivable that the nals that hear the cases of being heavily l Orders from Australia, Brunei, Indonesia, Phil- ippines, Singapore, Thailand, UK, USA: Please FTA can take effect if Europe’s biggest biased in favour of investors and against pay by credit card/cheque/bank draft/interna- economy refuses to be part of it. the states, and also of being riddled with tional money order in own currency, US$ or euro. If paying in own currency or euro, please calcu- Germany has also made clear it does conflict-of-interest situations. late equivalent of US$ rate. If paying in US$, please ensure that the agent bank is located in the USA. not want the ISDS system to be inside The same 10 to 20 law firms act as the Transatlantic Trade and Investment lawyers in some cases and as arbitrators l Rest of the world: Please pay by credit card/ cheque/bank draft/international money order in Partnership (TTIP) that the European in others. In one case, the chair of a tri- US$ or euro. If paying in euro, please calculate Commission is negotiating with the bunal that ruled against Argentina was equivalent of US$ rate. If paying in US$, please ensure that the agent bank is located in the USA. United States. later found to be a board member of the This is a remarkable turnaround parent company of the firm that sued Visit our web site at http://www.twn.my. since Germany has been one of the main and won. Yet a review panel ruled that Printed by Jutaprint, No. 2, Solok Sungei Pinang advocates of BITs. One reason for this is the decision would remain and that there 3, Sungai Pinang, 11600 Penang, Malaysia. that two cases have been brought against was no need for the case to be heard © Third World Network the country by a Swedish company again by another panel.

2 Third World Economics 16 – 30 November 2014 No 581 CURRENT REPORTS Investment agreements

Another blow against the ISDS sys- the UN Conference on Trade and Devel- After foreign firms attacked the tem came when the Secretary-General of opment in Geneva in October. black empowerment law, South Africa the OECD, the club of developed coun- The criticisms against ISDS include put in process an all-inclusive multi- tries, wrote an opinion piece on the “in- that the provisions of the treaties are stakeholder review of all its bilateral in- creasing problems” of the investment problematic, the arbitration system is vestment treaties. The government con- treaties. biased and flawed, and that national cluded that these treaties were inconsis- Then the Financial Times and The laws, parliaments and government poli- tent with its new constitution that aimed Economist, the two most prominent pro- cies are being seriously undermined by to restore the human rights and improve free enterprise newspapers in the West- allowing foreign investors to bypass the employment prospects of South Af- ern world, also joined in the onslaught them by taking up cases in international ricans. Bilateral investment treaties, the against BITs. The FT even published a tribunals that do not take account of the review found, “pose risks and limitations full-page article on what it headlined as national laws when making their deci- on the ability of the government to pur- “toxic deals.” sions.ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿp sue its constitutional-based transforma- The winds of change were also evi- tion agenda.” Since this review, South dent when many governments and or- Martin Khor is Executive Director of the South Africa has further concluded that “bilat- Centre, an intergovernmental policy think-tank of ganizations spoke in favour of urgent developing countries, and former Director of the eral investment treaties were now out- reform of the whole ISDS system at the Third World Network. This article first appeared dated and posed growing risks to World Investment Forum organized by in The Star (Malaysia) (24 November 2014). policymaking in the public interest.” On that basis, the government has recently moved to terminate many of its Investment treaties bring more risk than bilateral investment treaties. South Af- benefit rica is far from thumbing its nose at for- eign capital. Alongside the carefully ne- Developed countries rethinking the merits of investment accords can look gotiated withdrawal from its treaties, to South Africa and Ecuador for examples of the potential harm these South Africa is willing to renegotiate them. pacts pose – and of what can be done about it. Similarly, Ecuador – attacked by Occidental Petroleum corporation under by Kevin P. Gallagher secret tribunals – has begun to withdraw from its treaties as well. Occidental and As they negotiate a mega-trade and in- the world investment community that others confront Ecuador’s new constitu- vestment deal with the United States – they were open for business and that the tion that aims to rectify past inequities the Transatlantic Trade and Investment boat wouldn’t be rocked. and seek better treatment for indigenous Partnership (TTIP) – Germany and the Then each country discovered that peoples and to protect the country’s rich rest of Europe have recently started to they had signed on to treaties that al- ecological heritage. question the merits of signing treaties lowed the very interests they toppled to that allow private investors to sue their take them to secret tribunals that could Dubious claims governments over new regulations to potentially overturn the very founda- promote economic prosperity. tions of the new societies they sought to Both countries stand on strong This is old news to emerging-mar- justify. That’s right, if you signed a trade moral and economic grounds. First, both ket and developing countries that have or investment deal with the US or a Eu- countries have been subject to regimes experienced an onslaught of corporate ropean nation over the past few decades, that have exacerbated severe inequities. suits against their governments as they you are under much more scrutiny than Second, trade and investment treaties have attempted to foster policies for hu- if you are simply a member of the World have not proven to deliver their prom- man rights and environmental protection Trade Organization (WTO), where just ised benefits. that create inclusive growth for their citi- states file claims against each other. The Such treaties boast that they will zens. While Europe debates the costs and deals across Western and developing bring more foreign investment and that benefits of signing a deal with the US that countries, more often than not, allow such investment boosts economic allows such loopholes, pioneering na- private firms to directly sue a govern- growth. However, the majority of eco- tions such as South Africa and Ecuador ment. nomic analysis shows that such treaties offer sober lessons. In South Africa, foreign investors do not bring foreign investment and that Both South Africa and Ecuador have found loopholes to sue the South Afri- foreign investment, when it does come, been subject to pasts where ultra-right can government in private for its poli- is not necessarily correlated with growth. regimes favoured foreign-driven elites. cies to promote greater equality in its Brazil, a nation that has refused to sign By the turn of the century both countries lucrative mining sector. South Africa had such treaties, remains the second-largest had toppled such regimes in favour of required that these companies be partly recipient of emerging-market and devel- new governments focused on correcting owned by “historically disadvantaged oping-country foreign investment in the past inequities and putting their coun- persons.” world. tries on a path of broad-based equitable In Ecuador, foreign investors at- Indeed, a recent United Nations prosperity. tacked the country for new environmen- Conference on Trade and Development Yet, to allay fears, once these new re- tal regulations that enjoined foreign (UNCTAD) report confirms that invest- gimes took office, South Africa and Ec- firms to clean up their act and engage ment treaties are not strongly correlated uador both signed or inherited whatever with local and indigenous communities with attracting foreign investment. In they could to send the “right” signals to that had long been exploited. addition, new research by the Peterson

No 581 Third World Economics 16 – 30 November 2014 3 CURRENT REPORTS Investment agreements

Institute for International Economics fur- ther confirms that when foreign invest- The Management of Capital Flows in Asia ment does come to a nation, it is not nec- essarily correlated with economic Edited by Yilmaz Akyüz growth. Indeed, in many cases foreign firms put locals out of business for an THE 1997 Asian financial crisis brought home impact that is a net negative. to the region’s economies the importance of Both South Africa and Ecuador have managing capital flows in order to avert remained in good standing despite their financial shocks. This book looks into re-evaluation of these policies, as the whether and how this lesson was taken on Germans and other Europeans inevita- board by policy makers in Asia, and, bly will as well. South Africa continues accordingly, how capital account regimes in to receive record amounts of foreign in- the region evolved in the post-crisis period. vestment. In the case of Ecuador, that The early years of the new millennium country has investments upwards of 23% saw a strong surge of capital flows into Asian of GDP, while Latin America as a whole emerging markets amid conditions of ample has investments at a mere 20.5%. More- global liquidity. In response to the influx of over, Ecuador’s credit rating has been funds, these countries generally chose to upgraded in recent years and has paved keep their capital accounts open to inflows, its way back to global capital markets – dealing with the attendant impacts by despite the country’s disdain toward liberalizing resident outflows and ISBN: 978-967-5412-50-9 240pp obscure trade and investment treaties. accumulating foreign exchange reserves. 16.5 cm x 24 cm Year: 2011 The world of global economic gov- While this approach enabled them to avoid unsustainable currency appreciations ernance, and global capital markets and external deficits, it did not prevent the emergence of asset, credit and themselves, have begun to realize that investment bubbles and domestic market vulnerability to external financial shocks elevating the rights of private capital – as the events following the 2007 subprime crisis would prove. over national governments can create This book – a compilation of papers written in 2008 for the first phase of a more political and economic risk than Third World Network research project on financial policies in Asia – examines benefit. Nations such as South Africa and the above developments in relation to the region in general and to four major Ecuador should be praised for their pro- Asian developing economies: China, India, Malaysia and Thailand. gressive action. Nations such as Ger- many and their counterparts in Europe Price Postage should follow their lead and make sure Malaysia RM30.00 RM2.00 the TTIP allows for the continuity of Third World countries US$14.00 US$7.00 (air); US$3.00 (sea) market capitalism and welfare for Other foreign countries US$20.00 US$10.00 (air); US$3.00 (sea) citzenries.ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿp Orders from Malaysia – please pay by credit card/crossed cheque or postal order. Kevin P. Gallagher is the author of Ruling Capi- tal: Emerging Markets and the Reregulation of Orders from Australia, Brunei, Indonesia, Philippines, Singapore, Thailand, Cross-border Finance. He is a professor at the UK, USA – please pay by credit card/cheque/bank draft/international money order Pardee School of Global Studies, Boston Univer- in own currency, US$ or Euro.If paying in own currency or Euro, please calculate sity. This article is reproduced from the Triple equivalent of US$ rate. If paying in US$, please ensure that the agent bank is located Crisis website (triplecrisis.com, 24 November in the USA. 2014). Rest of the world – please pay by credit card/cheque/bank draft/international money order in US$ or Euro. If paying in Euro, please calculate equivalent of US$ rate. If Third World Economics paying in US$, please ensure that the agent bank is located in the USA. is also available in Spanish. All payments should be made in favour of: THIRD WORLD NETWORK BHD., 131 Jalan Macalister, 10400 Penang, Malaysia. Tel: 60-4-2266728/2266159; Fax: Tercer Mundo Economico 60-4-2264505; Email: [email protected]; Website: www.twn.my is the Spanish edition of Third World Economics, edited I would like to order ...... copy/copies of The Management of Capital Flows and published in cooperation in Asia. with Red del Tercer Mundo, I enclose the amount of ...... by cheque/bank draft/IMO. Uruguay. Please charge the amount of US$/Euro/RM ...... to my credit card: For subscription details, American Express Visa Mastercard please contact: A/c No.: Expiry date:

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4 Third World Economics 16 – 30 November 2014 No 581 CURRENT REPORTS World Bank Cosmetic changes to fundamen- emerging markets on the report. For ex- ample, many of the world’s fastest-grow- ing economies come very low down the tally flawed World Bank report list – China is at number 90, India is at 142 – while poor economic performance Despite some changes in its methodology, the World Bank’s latest assess- can happily coincide with excellent Do- ment of countries’ business climate remains of little relevance to poverty ing Business scores. For example, alleviation and may even end up promoting the wrong policy reforms, Macedonia (2.1% average economic contends an analyst from the European Network on Debt and Develop- growth between 2010 and 2013) is at ment (Eurodad). number 30 and South Africa (2.7% aver- age economic growth between 2010 and by Tiago Stichelmans 2013) is at number 43. In that sense, Do- ing Business rankings push for de-regu- The 2015 edition of the World Bank’s aggregate rankings. latory reforms without clear evidence widely distributed Doing Business report The Independent Panel outlined that these are important for achieving the received a lot of media attention. How- several problems with the rankings sys- Bank’s goals. This situation led some ever, it did not tackle the serious criti- tem in its report. emerging countries to attack the report, leading to its review. Their critiques are cisms made by the World Bank’s Inde- First, it explained that the rankings summarized in the Independent Panel pendent Evaluation Group (IEG), civil were an “arbitrary method of summa- report. society organizations (CSOs) and an In- rizing vast amounts of complex informa- Third, rankings tend to push coun- dependent Panel appointed by the Bank tion as a single number. Changing the tries to manipulate the indicators to im- itself to review the report. In fact, there weight accorded to a particular indica- prove their rankings instead of trying to were only minor changes compared with tor can easily change an item’s ranking”. improve the reality that the indicators try previous versions of the report. Currently, the Bank uses a subjective to capture. In 2012, Russian President Created by the World Bank in 2002, way of weighting the 10 different indi- Vladimir Putin ordered the government Doing Business ranks the business climate cators’ scores to produce the aggregate to improve Russia’s Doing Business rank- of 189 countries on the basis of 10 indi- ranking. The ranking itself is merely the ing from 120th in 2011 to 50th by 2015 cators. The following three main changes countries put in order, according to the and 20th in 2018. Although the 2015 tar- to Doing Business 2015 fail to address fun- Bank’s subjective scores. It is these final get was missed, Russia witnessed a no- damental flaws. results that attract media attention, with table improvement, as it is currently 1. Rankings: “Distance to fron- little consideration for the information’s ranked at 62. Analysis by the Russian tier” to give a clearer picture of reality subjectivity. daily newspaper Kommersant, however, The most notable change in the 2015 Second, in line with the IEG’s gen- reveals that this improvement is based report is the way rankings are calculated. eral criticism of the Bank’s investment on cosmetic reforms and not on a real Rankings were first introduced in 2005 climate work, Doing Business indicators improvement in the business environ- to make the report more influential do not consider the social or economic ment in Russia. The ease with which re- among policymakers. The Bank’s chief benefits of regulation, making the sults can be manipulated and the way economist Kaushik Basu argues, in the rankings a dubious measure in terms of that this tends to shift the focus of gov- foreword of the report, that rankings the Bank’s goals of eradicating poverty ernments away from reforms with real make “possible meaningful international and promoting shared prosperity. The impact on development is a major con- comparisons of the regulatory perfor- Bank defines Doing Business as an at- cern. mance of economies, contributing, along tempt to measure how governments pro- Eurodad’s main concern is that they the way, to increasing the accountabil- vide a positive business environment. push countries to dedicate important ef- ity of political actors”. According to the Bank, governments forts to improving their rankings, despite However, after criticism by the In- should fight against “excessively bur- the fact that these reforms may not bring dependent Panel on the methodology densome regulations [which] can lead to any benefits to their poorest population, used for the rankings, the Bank decided large informal and less-productive sec- and may divert attention and efforts to use a “distance to frontier” measure. tors, less entrepreneurship and lower from other, more important reforms. In This introduces a cardinal logic to the rates of employment growth”. However, so far as the rankings promote contro- rankings by indicating, in addition to the as many experts have pointed out, not versial policies, they can even be harm- rank, the actual “distance” to the best all the indicators are self-evidently ful to the poor. Given that the rankings performance for each indicator and for linked to higher rates of economic are highly subjective and are not statis- the aggregated best performance. This growth. For example, the US Economic tically sound, Eurodad is among the change allows clearer comparisons to be Policy Institute showed in a study that many voices that are calling for them to made between countries’ performances, low corporate tax rates do not necessar- be abandoned. Furthermore, as a as well as comparisons for each country’s ily increase the rate of economic growth. benchmarking exercise, Doing Business performance over time. However, this is Taking this into consideration, the level gives the idea that business environ- a cosmetic reform since the main feature of corporate taxation in the “paying ments should be inspired by “best” prac- of the report remains the ranks of each taxes” indicator is misleading. tices. This conception of a policy reform country. This reform does not answer the Furthermore, there is no empirical agenda denies the fact that every coun- criticism expressed by the Independent evidence that the rankings are linked to try lives in a specific and complex con- Panel or civil society organizations, poverty impact or even to economic text, which should be the starting point which had called for the removal of the growth, which is the core attack from in determining the kind of reforms that

No 581 Third World Economics 16 – 30 November 2014 5 CURRENT REPORTS World Bank are needed. 2. Inclusion of a second city for The Third World in the Third Millennium CE the 11 biggest economies The Journey from Colonialism Towards Sovereign Equality Previously, the Doing Business data and Justice was collected on the basis of a standard- ized scenario of the business regulations By Chakravarthi Raghavan faced by a fictitious firm that has 60 em- ployees, is based in the country’s largest The development path traversed by the countries of the Third World since emerging from the business city, and has exports worth colonial era has been anything but smooth. Their more than 10% of its sales (among other efforts to attain effective economic sovereignty characteristics). This year, the second alongside political independence, even till the largest city was included in the data present day, face myriad obstacles thrown up on sample of the 11 countries with more the global economic scene. This drive to improve than 100 million inhabitants. the conditions of the developing world’s The Bank claims that this reform is population has seen the countries of the South seek an answer to the Independent Panel re- to forge cooperative links among themselves and port and its methodological recommen- engage with the North to restructure international dations. The Panel criticized the fact that relations on a more equitable basis – not always using only one city “has the potential to with success. SBN: 978-967-5412-83-7 368pp create a distorted picture in larger coun- In this collection of contemporaneous articles written over a span of more than three 14 cm x 21.5 cm Year: 2014 tries and those with a federal system”. decades, Chakravarthi Raghavan traces the course However, the data sample still ignores of dialogue, cooperation and confrontation on the global development front through rural areas where many small- and me- the years. The respected journalist and longtime observer of international affairs dium-sized enterprises (SMEs) are lo- brings his inimitable blend of reportage, critique and analysis to bear on such issues cated in the developing world. as South-South cooperation, corporate-led globalization, the international financial The Bank has ignored other impor- system, trade and the environment-development nexus. Together, these writings tant critiques regarding its methodologi- present a vivid picture of the Third World’s struggle, in the face of a less-than- cal approach to data collection, in par- conducive external environment, for a development rooted in equity and justice. ticular, the use of law firms as the main Price Postage source of data. This approach implies Malaysia RM40.00 RM2.00 that data may be disconnected from re- Third World countries US$13.00 US$6.50 (air); US$3.00 (sea) ality on the ground. Concrete application Other foreign countries US$18.00 US$9.00 (air); US$3.00 (sea) of laws and regulations, as well as cor- Orders from Malaysia – please pay by credit card/crossed cheque or postal order. ruption, are absent from the report. This can push governments to focus on the Orders from Australia, Brunei, Indonesia, Philippines, Singapore, Thailand, reform of their regulatory framework UK, USA – please pay by credit card/cheque/bank draft/international money order with little regard for its concrete imple- in own currency, US$ or Euro.If paying in own currency or Euro, please calculate mentation. The Doing Business team tried equivalent of US$ rate. If paying in US$, please ensure that the agent bank is located to resolve this by expanding the data in the USA. collected for several of its indicators (see Rest of the world – please pay by credit card/cheque/bank draft/international money below) but, as pointed out by the Inde- order in US$ or Euro. If paying in Euro, please calculate equivalent of US$ rate. If pendent Panel, “there are inherent lim- paying in US$, please ensure that the agent bank is located in the USA. its to what their methodology can achieve”. All payments should be made in favour of: THIRD WORLD NETWORK BHD., In addition, the Independent Panel 131 Jalan Macalister, 10400 Penang, Malaysia. Tel: 60-4-2266728/2266159; Fax: points to the “one size fits all” approach 60-4-2264505; Email: [email protected]; Website: www.twn.my of the report’s methodology, which fo- I would like to order ...... copy/copies of The THIRD WORLD in the Third cuses on “whether one specific rule does Millennium CE: The journey from colonialism towards sovereign equality and or does not exist in different countries. justice. This effectively disregards other legal solutions that achieve the same goal.” I enclose the amount of ...... by cheque/bank draft/IMO. 3. Changes within the indicators Doing Business expanded the data Please charge the amount of US$/Euro/RM ...... to my credit card: collected for three out of its 11 indica- American Express Visa Mastercard tors (the 2016 edition will include an ex- pansion of five other indicators). The A/c No.: Expiry date: objective of this expansion is to improve the assessment of the quality of the regu- Signature: lations. This year, the report introduces more features on the strength of legal Name: rights and depth of credit information Address: and on minority shareholders’ rights. It

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6 Third World Economics 16 – 30 November 2014 No 581 CURRENT REPORTS Intellectual property Trade deals sow seeds of years. A recent update of our dataset (www.grain.org/attachments/3247/ download) shows that this trend is not injustice letting up. In fact, there are worrisome signs on the horizon. A raft of existing and planned free trade agreements are entrenching l The most important recent gains corporate control of seeds. GRAIN, a non-profit group working to for Monsanto, DuPont, Limagrain and promote sustainable food systems, cautions that this seed privatization Syngenta – the world’s top seed compa- drive puts traditional farming practices at risk. nies – have come from new trade deals accepted by Latin American states. In 2006, the US (home to Monsanto and Trade agreements have become a tool of UPOV now gets widely promoted DuPont) closed major deals with Peru choice for governments, working with through trade deals. and Colombia forcing both countries to corporate lobbies, to push new rules to The North American Free Trade adopt UPOV 1991. The EFTA states restrict farmers’ rights to work with Agreement – signed by Mexico, Canada (home to Syngenta) did the same in 2008 seeds. Until some years ago, the most and the US, at about the same time the and the EU (home to Limagrain) in 2012. important of these was the World Trade TRIPS Agreement was being finalized – In Central America, a similar pattern Organization (WTO)’s Agreement on was one of the first trade deals negoti- occurred. The US secured a very power- Trade-Related Aspects of Intellectual ated outside the multilateral arena to ful Central America Free Trade Agree- Property Rights (TRIPS). Adopted in carry with it the tighter seed ment (CAFTA) in 2007, forcing all coun- 1994, the TRIPS Agreement is the first in- privatization noose. It obliged Mexico to tries to adhere to UPOV 1991. EFTA did ternational treaty to establish global stan- join the UPOV club of countries giving the same last year. dards for “intellectual property” rights exclusive rights to seed companies to l An important step towards stron- over seeds. The goal is to ensure that stop farmers from recycling and reusing ger proprietary seed markets was re- companies like Monsanto or Syngenta, corporate seeds. This set a precedent for cently taken in Africa. After 10 years of which spend money on plant breeding all US bilateral trade agreements that talks, Economic Partnership Agreements and genetic engineering, can control followed, while the European Union, the (EPAs) were concluded between the EU what happens to the seeds they produce European Free Trade Association (EFTA, and sub-Saharan African states in 2014. by preventing farmers from reusing composed of Iceland, Liechtenstein, Nor- Most of them “only” liberalize trade in them – in much the same way as Holly- way and Switzerland) and Japan also goods for now, but also contain a com- wood or Microsoft try to stop people jumped on the same idea. mitment to negotiate common intellec- from copying and sharing films or soft- A non-stop process of diplomatic tual property standards with Brussels. ware by putting legal and technological and financial pressure to get countries The expectation is that those standards locks on them. to privatize seeds “through the back will be based on what the Caribbean But seeds are not software. The very door” (these trade deals are negotiated states already agreed to in their 2008 notion of “patenting life” is hugely con- in secret) has been going on since then. EPA: an obligation to at least consider tested. For this reason, the WTO agree- The stakes are high for the seed indus- joining UPOV. This is significant because ment was a kind of global compromise try. Globally, just 10 companies control until now African states have been un- between governments. It says that coun- 55% of the commercial seed market. der no obligation to adopt UPOV as a tries may exclude plants and animals But for these corporations, that mar- standard, and actually tried to come up (other than microorganisms) from their ket share is still not enough. Across Asia, with their own systems of plant variety patent laws, but they must provide some Africa and Latin America, some 70-80% protection. And while it’s true that Afri- form of intellectual property protection of the seeds farmers use are farm-saved can entities like the anglophone African over plant varieties, without specifying seeds, whether from their own farms or Regional Intellectual Property Organiza- how to do that. from neighbours or nearby communities. tion (ARIPO) and the francophone Afri- Trade agreements negotiated out- In these unconquered territories, the can Intellectual Property Organization side the WTO, especially those initiated agribusiness giants want to replace seed (OAPI) are already joining UPOV, un- by powerful economies of the global saving with seed markets and take con- der the EU trade deals, countries them- North, tend to go much further. They trol of those markets. To facilitate this, selves would be the ones to join. Further often require signatory countries to they demand legal protections from gov- towards the horizon, Africa is harmoniz- patent plants or animals, or to follow the ernments to create and enforce corporate ing within itself as its subregional trade rules of the Geneva-based Union for the monopoly rights on seeds. This is where blocs merge and unite to form a single Protection of New Plant Varieties free trade agreements (FTAs) come in as continental free trade zone, supposedly (UPOV) that provide patent-like rights a perfect vehicle to force countries to by 2017. This is expected to bring with it over crop varieties. Whether in the form change their laws. an internal harmonization of intellectual of patent laws or UPOV, these rules gen- property laws across the continent, likely Latest trends erally make it illegal for farmers to save, tightening the noose even further. exchange, sell or modify seeds they save l The Trans-Pacific Partnership from so-called protected varieties. In fact, GRAIN has been tracking how trade (TPP) agreement is possibly the scariest in 1991 the UPOV convention was modi- deals signed outside the multilateral sys- FTA under negotiation right now in fied to give even stronger monopoly tem are coercing countries to adopt the terms of what it may do to farmers’ rights powers to agribusiness companies at the industry’s wishlist of intellectual prop- to control seeds in Asia and the Pacific. expense of small and indigenous farm- erty rights for seeds, and ratchet up glo- This is because the US, which is leading ing communities. This 1991 version of bal standards in that process, for 15 the talks with 11 other Pacific Rim coun-

No 581 Third World Economics 16 – 30 November 2014 7 CURRENT REPORTS Intellectual property tries, is playing hardball. Leaked nego- test are rising against the plant variety der the exclusive control of a few corpo- tiating text from May 2014 shows the US protection regimes which countries are rations or defence ministries. A good calling not only for UPOV 1991 to be now going into. In Ghana, a vibrant cam- way to take part in this battle is to join applied in all TPP states but also for the paign is under way to stop the country the campaigns to stop important new outright patenting of plants and animals. from adopting UPOV 1991 legislation. trade deals like TTIP, CETA, TPP and the We don’t yet know whether these de- Elsewhere, civil society networks like the EPAs – and to get old ones like the US mands will also appear in the Transat- broad-based Alliance for Food Sover- and European deals with Mexico, Cen- lantic Trade and Investment Partnership eignty in Africa are filing appeals to stop tral America, Colombia or Chile re- (TTIP) currently being negotiated be- ARIPO from adopting UPOV-based leg- scinded. Trade deals are where a lot of tween the US and the EU, as the text re- islation and joining the union. these rules do get written and that is ÿÿÿÿÿÿÿÿÿÿÿÿÿÿp mains inaccessible to the public. Corporate interest groups have where they should be erased. l While the extent of what has to pushed too far trying to privatize what be privatized expands, so do the penal- people consider a commons. This is not GRAIN is a small international non-profit orga- nization that works to support small farmers and ties for disrespecting these norms. Un- limited to seeds. The same process has social movements in their struggles for commu- der numerous FTAs, countries like the been going on with land, minerals, hy- nity-controlled and biodiversity-based food sys- US require that farmers who infringe on drocarbons, water, knowledge, the tems. This article is reproduced from “Trade deals these new intellectual property rights on Internet, even important microorgan- criminalise farmers’seeds”, which was published as part of the Against the Grain series of opinion seeds face punishment under criminal isms, like avian flu a few years ago or pieces on recent trends and developments in the law instead of civil law. In some cases, the Ebola virus today. People are fight- issues that GRAIN works on (www.grain.org/ar- like the recently concluded EU-Canada ing back to stop these things falling un- ticle/categories/13-against-the-grain). Comprehensive Economic and Trade Agreement (CETA), the mere suspicion of infringement could see a farmer’s as- (continued from page 6) benefit from them. Such reforms are an sets seized or their bank accounts frozen. example of an intervention designed to also introduces a measure of the strength improve a country’s ranking and to at- Big battles heating up of the legal framework for insolvency. tract foreign direct investments over pri- In general, this reform fails to solve oritizing the real needs of local and The good news is that social move- most of the problems with the indicators. smaller businesses. ments are not taking this sitting down. As pointed out by the Independent Two other indicators are particularly They are becoming very active, vocal, Panel, there is no “scientific evidence to problematic. Despite data from the bold and organized about this. In 2013, support the report’s current selection of “labour market regulation” indicator not Colombians from all walks of life were indicators”. The report fails to explain affecting a country’s overall ranking, this shaken up when they saw firsthand how how the selection of indicators is relevant information is still collected and in- US and European FTAs could result in to the Bank’s goals of eradicating pov- cluded on the Doing Business website. their own government violently destroy- erty and promoting shared prosperity. This indicator continues to see labour ing tonnes of seeds saved by farmers It seems that the main rationale behind market regulations in terms of costs who did not know what the new rules the selection of criteria is the idea that rather than benefits. It has been widely were. The outrage, breaking out in the regulation is always “red tape” that pre- criticized by many actors, including the midst of a massive national agrarian vents business development, job cre- International Trade Union Confedera- strike, was so strong that the government ation, economic growth and ultimately tion (ITUC). actually agreed to suspend the law tem- poverty eradication. Finally, the “paying taxes” indicator porarily and re-examine the issue di- In addition, some indicators need continues to reward lower corporate tax rectly with farmers’ representatives. additional information in order to give rates, although not automatically. This In 2014, it was Guatemala’s turn to a relevant assessment of the area they are “race to the bottom” has negative effects be rocked when the general public real- covering. From that perspective, the ex- on development, as outlined by a recent ized that the government was pushing tension of the qualitative aspects of the International Monetary Fund (IMF) pa- through the adoption of UPOV 1991 indicators is a step in the right direction. per. without proper debate because of trade For example, the inclusion of “reliabil- Off-target reform deals like CAFTA. People were furious ity of supply” in the “getting electricity” that indigenous communities were not indicator will give a clearer picture of the consulted as is required, especially when reality. The same kind of reform should Doing Business 2015 comes at the end the purpose of the law – ultimately – is have been designed for the “getting of an extensive review process. How- to replace indigenous seeds with com- credit” indicator, which does not include ever, it does little to address the major mercial seeds from foreign companies any measure of the availability of credit concerns that were raised during that like Monsanto or Syngenta. After months for firms. process. The result is a highly publicized of pressure, the government backed This misleading indicator drove the report that tells us very little, has lim- down and repealed the law. But – as in Zambian government to undertake a re- ited relevance to poverty alleviation, and Colombia – this retreat is only temporary form programme that improved its “get- may end up promoting the wrong re- while other measures will be looked at. ting credit” ranking. According to a pa- forms. If the report continues in its cur- In yet other parts of Latin America, like per produced by the Jesuit Centre for rent manifestation, CSOs, including Eurodad, will continue to oppose this in Chile and Argentina, new laws to Theological Reflection and the Catholic ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿp implement UPOV 91, often dubbed aid agency CAFOD, this programme had misguided exercise. “Monsanto Laws”, are also being in- little impact on local micro and small Tiago Stichelmans is Policy and Networking Ana- tensely and successfully resisted by so- enterprises. These smaller businesses are lyst at Eurodad, the European Network on Debt cial movements. largely excluded from the reforms or are and Development, from the website of which In Africa too, waves of public pro- lacking the information about how to (eurodad.org) this article is reproduced.

8 Third World Economics 16 – 30 November 2014 No 581 CURRENT REPORTS Essential services Water services flowing back into ditionality of multilateral banks – whereas 44 cases were from low- and public hands middle-income countries. In the global North, the list of cities that have remunicipalized their water With privatization failing to deliver, more and more public authorities the services includes capitals such as Paris world over are reclaiming control of water supply and sanitation services. (France) and Berlin (Germany) and ma- jor US cities such as Atlanta and India- by Emanuele Lobina, Satoko Kishimoto and Olivier Petitjean napolis. Beyond the symbolically pow- erful cases of cities like Paris, many Cities, regions and countries worldwide Remunicipalization refers to the re- smaller municipalities are opting for are increasingly choosing to close the turn of previously privatized water sup- public control as well: for example, in book on water privatization and to ply and sanitation services to local au- France alone more than 50 municipali- “remunicipalize” services by taking back thorities or to public control more ties have terminated their private man- public control over water and sanitation broadly speaking. This typically occurs agement contracts or decided not to re- management. In many cases, this is a re- after the termination of private contracts new them. In the global South, sponse to the false promises of private by local governments or their non-re- remunicipalization also involves former operators and their failure to put the newal, but the process is not always (or flagships of water privatization, includ- needs of communities before profit. only) on a municipal scale. Regional and ing Buenos Aires (Argentina), La Paz A new report, “Here to Stay: Water national authorities have considerable (Bolivia), Johannesburg (South Africa), Remunicipalisation as a Global Trend”, influence over services funding and Dar es Salaam (Tanzania) and Kuala published by Public Services Interna- policy, and in some cases act directly as Lumpur (Malaysia). In Jakarta (Indone- tional Research Unit (University of water operators, so the process unfolds sia), there is also a strong ongoing cam- Greenwich), Transnational Institute and within this broader context. paign to remunicipalize the city’s water Multinational Observatory looks at the Whatever its form and scale, services. growing remunicipalization of water remunicipalization is generally a collec- 2. Remunicipalization is accelerat- supply and sanitation services as an tive reaction against the unsustainability ing dramatically emerging global trend and presents the of water privatization and PPPs. Because The number of cases in high-income most complete overview of cases so far. of the unpopularity of privatization, pri- countries shows a marked acceleration: In the last 15 years there have been at vate water companies have used their 81 took place between 2010-14, while least 180 cases of water remunicipaliza- marketing propaganda to encourage only 41 had occurred between 2005-09. tion in 35 countries, in both the global people to believe that concessions, lease Thus the pace of remunicipalization has North and South, including high-profile contracts and other PPPs are quite dis- doubled over the last five years. This cases in Europe, the Americas, Asia and tinct from privatization; they are not. In trend is even stronger in some countries Africa. Major cities that have fact, all these terms refer to the transfer such as France: eight cases between 2005- remunicipalized include Accra (Ghana), of services management control to the 09 compared to 33 cases since 2010. The Berlin (Germany), Budapest (Hungary), private sector. Policymakers must be high-profile 2010 remunicipalization in Buenos Aires (Argentina), Kuala aware of the high costs and risks of wa- Paris in particular has influenced many Lumpur (Malaysia), La Paz (Bolivia), ter privatization, and as such they have other municipalities in and outside Maputo (Mozambique) and Paris a lot to learn from the experiences of France such as Spain. (France). By contrast, in this same period public authorities which have chosen 3. Reasons to remunicipalize are there have been very few cases of remunicipalization and are working to universal privatization in the world’s large cities: develop democratically accountable and As illustrated by the cases discussed for example Nagpur (India), which has effective public water operations. in the report, the factors leading to wa- seen great opposition and criticism, and The key findings of the “Here to ter remunicipalization are similar world- Jeddah (Saudi Arabia). Stay” report are as follows: wide. The false promises of water Despite more than three decades of 1. Water remunicipalization is an privatization that have led to relentless promotion of privatization and emerging global trend remunicipalization include: poor perfor- public-private partnerships (PPPs) by in- As of October 2014, the global list of mance of private companies (e.g., in Dar ternational financial institutions and na- known water remunicipalizations that es Salaam, Accra, Maputo), under-in- tional governments, it now appears that occurred from 2000 to 2014 features 180 vestment (e.g., Berlin, Buenos Aires), dis- water remunicipalization is a policy op- cases. As the mapping of this process is putes over operational costs and price tion that is here to stay. Direct experi- still in its early days, we expect many increases (e.g., Almaty, Maputo, India- ence with common problems of private more cases to come to light as work napolis), soaring water bills (e.g., Berlin, water management – from lack of infra- progresses. This strong remunicipali- Kuala Lumpur), difficulties in monitor- structure investments to tariff hikes to zation trend is observable both in the ing private operators (e.g., Atlanta), lack environmental hazards – has persuaded global North and in the global South: 136 of financial transparency (e.g., Grenoble, communities and policymakers that the cases were found in high-income coun- Paris, Berlin), workforce cuts and poor public sector is better placed to provide tries – where local authorities benefit service quality (e.g., Atlanta, Indianapo- quality services to citizens and promote from greater administrative resources lis). the human right to water. and are less subject to the lending con- 4. Remunicipalization is more of-

No 581 Third World Economics 16 – 30 November 2014 9 CURRENT REPORTS Essential services ten initiated through termination of Buenos Aires (Argentina) and Arenys de a $29 million fee to French multinational private contracts Munt (Spain). The social benefits of wa- Veolia to terminate the 20-year contract Most cases of remunicipalization ter remunicipalization have been visible over a decade early. Berlin residents have around the world have occurred follow- in Arenys de Munt (Spain), where the had to accept very high costs to buy back ing the termination of private contracts local government and the new public the shares held by two private operators. before they were due to expire, with the operator restructured the tariff system to Private concessionaires sued Tucuman exception of France where most local guarantee access to water for low-income and Buenos Aires (Argentina) before an governments have waited until the re- households. In Buenos Aires (Argen- international arbitration tribunal to ob- newal date to end water privatization. tina), achieving universal access to wa- tain compensation. The risk of having to At the global level, 92 cases of ter has become a top priority for the new pay hefty compensation can distort the remunicipalization followed contractual public operator AySA. Since remunici- decision-making process of local govern- termination, while 69 cases were non- palization, AySA has extended training ments which are considering termination renewals of private contracts after ex- programmes for employees who work and remunicipalization (e.g., Jakarta, piry. This means that in the great major- with poor neighbourhood residents to Indonesia; Szeged, Hungary; Arezzo, ity of cases, private contracts proved so expand service access. Italy). But in other cases the potential unsustainable that local governments 7. Remunicipalization offers op- benefits are so clear that local authori- opted to remunicipalize even though portunities to build democratic gover- ties are ready to face such risks. they knew that they may have to pay nance 9. Public-public partnerships can compensation. While the best way to Remunicipalization allows for support remunicipalization efforts avoid the costs of remunicipalization is strengthening accountability and trans- Public water operators and national not to privatize in the first place, this also parency. In Paris and Grenoble (France), or regional associations are increasingly suggests that terminating a private con- the new public water operators have in- helping each other through the tract is feasible and often less costly than troduced advanced forms of public par- remunicipalization process. In Spain, the continuing with privatization in the long ticipation. First, civil society representa- regional public company Aguas del run. tives sit on the board of directors together Huesna (Andalusia) facilitated 5. Leading the remunicipalization with local government representatives, remunicipalization for 22 municipalities. trend are countries with long experience and have equal voting rights. This allows The remunicipalized water operators of private water management civil society to partake in decisions on from Paris and Grenoble played a key It is no accident that France, the the management of this most essential role in helping other local authorities in country with the longest history of wa- public service, and to make operations France and elsewhere to remunicipalize ter privatization and home to the lead- responsive to the interests of local com- and improve their water services. French ing water multinationals, presents so munities. Second, citizen observatories local authorities and public water opera- many cases of remunicipalization. have been established to open spaces for tors have benefited from the exchange French local authorities and citizens have citizens to engage in strategic decisions of experience and knowledge on experienced firsthand the “private man- on investment, technology options and remunicipalization that has been facili- agement model” that Veolia and Suez tariff setting. Both cities consider that full tated by associations of local govern- have exported around the world. In the information disclosure is a fundamental ments and public enterprises. The re- past few years, many French cities have condition for accountability, transpar- gional institution CONGIAC in decided to follow in the footsteps of ency and participation. Catalonia also played a key role in Grenoble and Paris and take back con- 8. Remunicipalization carries exter- Arenys de Munt’s remunicipalization trol of their water services. An even nal risks including possible litigation process from decision making to imple- larger number of contracts are coming Successful remunicipalization re- mentation. There are other such ex- up for renewal in the next few years and quires careful planning and assessment amples across boundaries: After failed it is expected that many more French cit- of external risks, even more so for coun- PPP experiments, the Mozambican gov- ies will remunicipalize. tries of the South which are under the ernment entered into a not-for-profit 6. Remunicipalization tends to im- grip of pro-private multilateral agencies. partnership with a Dutch public water prove access and quality of water ser- Decision-makers need to be aware that company focusing on local capacity vices transaction costs of remunicipalization building. Cooperation between public By eliminating the profit maximiza- may include paying compensation to water companies as part of public-pub- tion imperative of the private sector, private operators for their foregone prof- lic partnerships is a viable alternative to water remunicipalization often leads to its. When a private contract is terminated costly PPPs and the most effective way enhanced access and quality of services. before its expiry date, private companies to assist public water authorities in im- The equal or greater efficiency of public can sue local governments to receive proving services.ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿp water services and lower prices can be payment of the full profits granted un- observed in cases as diverse as Paris der the contract. The above is extracted from the report “Here to Stay: Water Remunicipalisation as a Global (France), Arenys de Munt (Spain) and A private concessionaire in Arenys Trend” (November 2014) published by Public Almaty (Kazakhstan). In some cases the de Munt (Spain) fiercely obstructed the Services International Research Unit (PSIRU), new public operators also dramatically remunicipalization process by filing University of Greenwich; Transnational Institute (TNI); and Multinational Observatory. The full increased investments in the water sys- complaints against the city council. The report is available on the PSIRU website tems, such as in Grenoble (France), US city of Indianapolis was forced to pay www.psiru.org.

10 Third World Economics 16 – 30 November 2014 No 581 Analysis TTIP may lead to EU dis-integration, unemployment, instability

The Transatlantic Trade and Investment Partnership (TTIP), a major trade pact now under negotiation by the US and the EU, is being touted on the basis of studies which predict net economic gains for all countries in- volved. However, these projections are derived from questionable assumptions and flawed models; a more realistic assessment finds that TTIP would lead to loss of income and employment in the EU, with few viable policy options available to counter the decline.

by Jeronim Capaldo

The European Union and the United States are currently ne- suitable basis for important trade reforms. Indeed, when a gotiating the Transatlantic Trade and Investment Partnership well-reputed but different model is used, results change dra- (TTIP), a major trade agreement intended to further integrate matically. their economies. Second, seeking a higher trade volume is not a sustain- In today’s low-tariff reality, TTIP focuses on removing able growth strategy for the EU. In the current context of aus- non-tariff trade barriers between countries, such as differing terity, high unemployment and low growth, requiring that standards set in the EU and in the US for given consumer goods economies become more competitive would further harm eco- and services. The underlying logic is the same as in traditional nomic activity. Our results suggest that any viable strategy to liberalizations: reducing the costs of trade – whether elimi- rekindle economic growth in Europe would have to build on nating tariffs or other impediments – is supposed to lead to a a strong policy effort in support of labour incomes. higher trade volume and overall economic benefits. Unfortunately, experience has shown that this appealing Existing assessments of TTIP reasoning is often misleading. As is common for trade agreements, TTIP negotiations Most assessments of TTIP predict gains in terms of trade have been accompanied by a series of econometric studies pro- and GDP for both the EU and the US. Some also predict gains jecting net economic gains for all countries involved. In the for non-TTIP countries, suggesting that the agreement would EU, advocates have pointed to four main studies mostly pro- create no losers in the global economy. If this were the case, jecting small and deferred net benefits alongside a gradual TTIP would be the key to a more efficient allocation of global substitution of intra-EU trade with trans-Atlantic trade. resources, with some countries achieving higher welfare and This leads the European Commission, TTIP’s main advo- all others enjoying at least the same welfare as before. cate in Europe, into a paradox: its proposed policy reform Unfortunately, as Raza and colleagues (2014) have shown, would favour economic dis-integration in the EU. TTIP might these desirable results rely on multiple unrealistic assump- also lead to other serious consequences for the EU and its tions and on methods that have proven inadequate to assess members. Recent literature has shown that the main studies the effects of trade reform. of TTIP do not provide a reliable basis for policy decisions as Furthermore, once the calculations are reviewed, it ap- they rely heavily on an unsuitable economic model. pears that several of these studies share the same question- Assessing TTIP with the United Nations Global Policy able economic model and database. The convergence of their Model, a model based on more plausible assumptions on eco- results is, therefore, not surprising and should not be taken as nomic adjustment and policy trends, we found very different providing independent confirmation of their predictions. results. Evaluated with the UN model, TTIP would lead to net losses in terms of GDP, personal incomes and employment in Methodological problems the EU. In particular, we project that labour incomes will decrease Quantitative arguments in favour of TTIP come mostly between 165 and 5,000 euros per worker depending on the from four widely cited econometric studies: Ecorys (2009), country. We also project a loss of approximately 600,000 jobs, CEPR (2013), CEPII (2013) and Bertelsmann Stiftung (2013). a continuing downward trend of the labour share in total in- CEPR has been very influential: the European Commis- come, and potentially destabilizing dynamics in asset prices. sion has relied on it as the main analysis of the economic ef- Our projections point to bleak prospects for EU fects of TTIP, going as far as presenting some of its findings as policymakers. Faced with higher vulnerability to any crises facts. However, the EC’s reference to CEPR as an “indepen- coming from the US and unable to coordinate a fiscal expan- dent report” seems misleading since the study’s cover page sion, they would be left with few options to stimulate the indicates the EC as the client for whom the study has been economy: favouring an increase of private lending (with the produced. Ecorys was also commissioned by the EC as part of risk of fuelling financial imbalances), seeking competitive de- a wider project encompassing economic, environmental and valuations or a combination of the two. social assessments. We draw two general conclusions. First, as suggested in Methodologically, the similarities among the four studies recent literature, existing assessments of TTIP do not offer a are striking. While all use World Bank-style Computable Gen-

No 581 Third World Economics 16 – 30 November 2014 11 Analysis eral Equilibrium (CGE) models, the first two studies also use ficult and could impose important adjustment costs not cap- exactly the same CGE. The specific CGE they use is called the tured by the models. Global Trade Analysis Project (GTAP), developed by research- ers at Purdue University. All but Bertelsmann use a version of Trade the same database (again from GTAP). The limitations of CGE models as tools for assessment of All assessments project large increases in bilateral US and trade reforms emerged during the liberalizations of the 1980s EU exports. In CEPR and CEPII, US bilateral exports increase and 1990s. The main problem with these models is their as- by 36.6% and 52% respectively in the long term, compared to sumption on the process leading to a new macroeconomic 28% and 48% for the EU. According to CEPR, the net increase equilibrium after trade is liberalized. in total exports will be 8% in the US and 5.9% in the EU. Typically, as tariffs or trade costs are cut and all sectors However, in all cases, these increases in trans-Atlantic become exposed to stronger international competition, these trade are achieved at the expense of intra-EU trade. Implic- models assume that the more competitive sectors of the itly, this means that imports from the US and imports from economy will absorb all the resources, including labour, re- non-TTIP countries through the US will replace a large por- leased by the shrinking sectors (those that lose business to in- tion of current trade among EU countries. ternational competitors). If these projections were true, higher trans-Atlantic inter- However, for this to happen, the competitive sectors must dependence would heighten the EU’s exposure to fluctuations expand enough to actually need all those resources. Moreover, in US import demand. This is an under-examined consequence these resources are assumed to lack sector-specific features, of certain patterns of trade liberalization. Even if higher ex- so they can be re-employed in a different sector. ports were to bring higher demand and economic activity (a Under these assumptions, an assembly-line employee of link that doesn’t always work in practice, as discussed), more an automobile factory can instantly take up a new job at a soft- reliance on the US as an export market would also make the ware company as long as her salary is low enough. Suppos- EU vulnerable to macroeconomic conditions in North America. edly, this process is driven by speedy price changes that allow If Europe could effectively implement countercyclical an appropriate decrease of labour costs and, consequently, the policies, this greater interdependence would not necessarily necessary expansion of the competitive sectors. be a problem. However, the EU’s current institutional struc- In practice, however, this “full employment” mechanism ture lacks a central fiscal authority while in practice prevent- has rarely operated. In many cases, less competitive sectors ing national governments, through the Maastricht treaty, from have contracted quickly while more competitive ones have implementing any fiscal expansion. This constellation of fac- expanded slowly or insufficiently, leaving large numbers of tors indicates that TTIP might usher in a period of higher in- workers unemployed. One need only look at the experience stability in Europe. of Europe in the last decade to see that full employment does The remaining two studies raise similar concerns. In not re-establish itself even if job seekers are willing to work Bertelsmann, aggregate figures for bilateral export increase and informally and at relatively low pay. net increase are not readily available but results exhibit the A critical point is that the distribution of gains and losses same pattern as in other studies. is rarely uniform within economies. If workers in competitive While bilateral exports are predicted to increase by more sectors may benefit from higher salaries, while those in shrink- than 60% for the EU and more than 80% for the US, intra-EU ing sectors lose, the economy as a whole may be worse off. exports are expected to decrease between 25% and 41%. This This is because in some countries domestic demand is mostly implication raises the same concerns about vulnerability to supported by the incomes earned in traditional occupations. US economic shocks as the other studies. In practice, aside from their high social costs, these transitions Finally, as noted above, the rest of the world does not stand have led to a drop in domestic demand that CGE-based calcu- still when two economies integrate. Applying Bertelsmann’s lations have often overlooked. percentages to recorded trade data with EU exports to the Moreover, most CGEs rely on misleading assumptions on world as a whole, Raza et al. (2014) calculate that the overall the pattern of international trade, imposing a fixed structure impact of TTIP on EU global exports, including those to non- on the market share that each country has in its export mar- TTIP countries, would be negative. kets, and on a static analysis that does not explain how econo- Furthermore, Felbermayr and Larch (2013) find that TTIP mies reach a new equilibrium. will have a negative effect on non-TTIP countries’ exports, in For example, when Country A expands trade with Coun- a pattern observed after other trade agreements. In other try B, the rest of the world’s economies do not simply stand words, both exports and imports of non-TTIP countries are still. Countries C, D and E will find that they are more or less projected to decrease, with uncertain or negative net effects. competitive in these markets as a result of the A-and-B trade CEPR and CEPII do not find negative effects on non-TTIP changes. This effect is known as “trade diversion”, and has countries, assuming ad hoc effects (spillovers) that allow ex- been a significant by-product of recent trade integration ini- ports in the rest of the world to grow. tiatives. Finally, the strategy chosen to simulate a “TTIP future” GDP and personal incomes has a strong impact on the results. Ecorys assumes that so- called “non-trade barriers” impose a given cost on trade and Given the small net effects on exports, most assessments that TTIP can remove up to one half of them. CEPR and CEPII predict small increases in TTIP countries’ GDP. borrow this approach but assume a lower share. These barri- In Ecorys, CEPR and CEPII, GDP increases less than 0.5% ers can include what other stakeholders refer to as consumer in both the EU and the US. This means that, at the end of the and environmental regulations. Phasing them out may be dif- simulation period in 2027, GDP would be 0.5% higher in a

12 Third World Economics 16 – 30 November 2014 No 581 Analysis

TTIP scenario than in the baseline, non-TTIP scenario, imply- the United Nations Global Policy Model (GPM), which informs ing negligible effects on annual GDP growth rates. influential publications such as the UN Conference on Trade This is a defining aspect of the results: Ecorys, CEPR and and Development (UNCTAD)’s Trade and Development Report. CEPII point to a one-time increase in the level of GDP, not to The GPM is a demand-driven, global econometric model an increase in the growth rate of GDP. Furthermore, this one- that relies on a dataset of consistent macroeconomic data for time increase is small and projected to occur only over the every country. Two features make the GPM particularly use- course of 13 years. ful in the analysis of a large trade agreement. Bertelsmann reports higher figures (5.3% for the EU and Firstly, the model assumes a more realistic mechanism 13.9% for the US) but provides little detail on the study’s meth- leading to macroeconomic equilibrium. All models that make odology. It is, therefore, unclear how the results compare to these types of projections necessarily make assumptions on those of other studies. the way economies will stabilize after a policy change, which Furthermore, given the assumptions on spillover effects, in this case is the introduction of TTIP. CEPR estimates that all regions of the world would benefit The most important difference between the GPM and the from long-term GDP increases. However, Felbermayr and CGE models described is that, in the GPM, the full-employ- Larch (2013) indicate that this expectation contradicts previ- ment assumption is replaced by the Keynesian principle of ous experiences of trade agreements such as CUSFTA, NAFTA “effective demand”. This means that the level of economic and MERCOSUR since these agreements typically affect the activity is driven by aggregate demand rather than produc- relative trade prices between members and non-members. tive efficiency. Consequently, a cost-cutting trade reform may Despite the small projected increases in GDP, some stud- have adverse effects on the economy if the “costs” that it “cuts” ies suggest that TTIP might lead to large increases in personal are the labour incomes that support aggregate demand. incomes in the long term. In often-cited examples, Ecorys esti- Unlike in CGE models, changes in income distribution mates that the average EU household would gain 12,300 eu- contribute to determining the level of economic activity. The ros over the work life of household members, while CEPR es- absence of this mechanism in many commonly used models timates that the same household would earn 545 euros more has often led to major errors in assessing the impact of trade every year. reforms. However, as noted above, these estimates are misleading Secondly, the GPM provides an explicit analysis of the since the studies provide no indication of the distribution of macroeconomic workings of every world region. This, in turn, income gains: they are simply averages. With EU wages fall- has two important benefits. It means that the model can pro- ing as a share of GDP since the mid-1990s, it is far from certain vide well-founded information on the economic interactions that any aggregate gains will translate into income increases among all regions, rather than just assuming that a given pro- for households living on income from wages (as opposed to portion of a country’s income will be spent on imports from capital). other countries. It also means that the GPM allows us to assess whether a Employment given policy strategy is globally sustainable. For example, the GPM shows that, when sought by every country, a strategy of Finally, most studies are not informative on the potential export-driven growth may lead to adverse consequences such consequences of TTIP on employment. While CEPII does not as a net loss of trade. discuss employment effects, CEPR and Ecorys assume a fixed A third valuable feature of the GPM is its estimation of supply of labour. This amounts to excluding by assumption employment. Using International Labour Organization (ILO) any consequences of TTIP on employment – wages are as- data, the GPM specifies how a given change in GDP growth sumed to fall or rise enough to ensure that all workers remain affects employment growth, and vice versa. employed regardless of the level of economic activity. A critical advantage of the specification used is that these On the other hand, Bertelsmann predicts that TTIP will growth-and-employment relationships (which economists call lead to the creation, in the long term, of approximately one “Okun’s relationships”) are not constant over time. In this way, million jobs in the US and 1.3 million jobs in the EU. How- the GPM recognizes that different factors might affect the re- ever, these positive figures are strongly dependent on the pe- lationship between output and employment at different mo- riod chosen in the estimation. ments in history. Thus, the model is able to account for recent Using data up to 2010, the authors estimate that econo- puzzles such as “jobless growth.” mies where labour and labour income are more protected (for Given the large amount of data that must be processed to example, by higher unemployment benefits) suffer from higher estimate and simulate the GPM, we keep the analysis trac- unemployment, concluding that any cost reductions intro- table by aggregating some countries into blocs. With this, we duced by TTIP would lead to positive employment effects in lose specific analysis for these countries. those countries. Despite its limitations, the GPM offers a useful perspec- When more recent data is taken into account, this conclu- tive on the consequences of agreements such as TTIP. Indeed, sion ceases to hold since all countries – not just those with it offers a “big picture” and insights into several important stronger labour protection – appear to have experienced higher adjustment mechanisms that are often overlooked by other and persistent unemployment. models. An alternative assessment with the Simulation strategy: Global implications of existing United Nations Global Policy Model trade projections

To obtain a more realistic TTIP scenario, we need to move Our country aggregation leaves the world’s largest econo- beyond CGE models. A convenient alternative is provided by mies as independent units. In the TTIP area, the United States,

No 581 Third World Economics 16 – 30 November 2014 13 Analysis the United Kingdom, Germany, France and Italy appear as As a result, the labour share of GDP would further de- standalone economies. crease in Europe in a downward trend toward the lower US The remaining countries are aggregated into two blocs: share, weakening aggregate demand. Finally, this adjustment “Other Northern and Western Europe” (including Finland, the mechanism might also play out through a nominal devalua- Netherlands and Belgium) and “Other Southern and Eastern tion. This might indeed help an economy gain higher market Europe” (including Greece, Spain, Portugal and Eastern Eu- shares abroad, but it may also generate a race to the bottom at ropean economies). the end of which no country will have gained higher exports. But European nations and the US are not the only coun- The second mechanism recognizes a policy strategy that tries in the world. One benefit to macroeconomic models is has become central in recent decades, assuming that, in order that we can estimate the effect of a policy change like TTIP on to stimulate flagging domestic demand, policy authorities may countries outside of the potential trade bloc. increase lending. As a result, asset prices (including some fi- Accordingly, we are able to estimate how TTIP will affect nancial assets) might increase, setting off the unstable dynam- individual countries like Argentina, Brazil, Canada, China, the ics that have become apparent after the 2009 financial crisis. Commonwealth of Independent States (CIS), India, Indone- sia, Japan, South Africa and Turkey (which we count as inde- Net exports and GDP pendent units, much as we did with the US). All other coun- tries are grouped into two blocs per continent. Our simulations show that the assumed trade expansion As in other simulation exercises, we first project a baseline among TTIP countries will cause a net export loss for all EU path for the economy of every country or country bloc from economies. Losses would be a drag on aggregate demand for 2015 to 2025 in order to match previous studies. We then de- all EU economies. Northern European economies would suf- termine counterfactual values that are implied by the adop- fer the largest decreases (2.07% of GDP by 2025) followed by tion of TTIP. France (1.9%), Germany (1.14%) and the UK (0.95%). To determine the baseline, we use all information avail- On the other hand, US net exports would be higher by able on countries’ past and present policies and spending pat- slightly more than 1%. terns. We use the same baseline assumptions as UNCTAD A likely explanation for how EU-US trade could expand (2014). while EU net exports to the world could decline is that, in the For example, we assume that governments in TTIP coun- EU’s stagnating economy, domestic demand for lower-value- tries and in some non-TTIP countries will not reverse their added manufactures – in which the EU is relatively commitments to fiscal austerity. Therefore, even in the baseline uncompetitive – will crowd out higher-value-added ones. scenario, we do not expect fiscal spending to expand aggre- Indeed, our figures show an increase of net exports in al- gate demand even though historically this has been an impor- most every other region of the world except Europe, suggest- tant channel. ing that higher demand for low-value-added products will This confirms a major advantage to GPM-type models that lead to higher net imports from Asian and African economies we noted above: they allow for greater realism about the likely and from the US. path of policy in the foreseeable future. [For more informa- Alternatively or additionally, TTIP could facilitate EU tion about how these assumptions on the path of different imports of manufactures assembled in the US with parts made countries’ policies were constructed, see UNCTAD (2014).] in China and other regions. In order to implement the TTIP scenario, we assume that Net exports are a key component of GDP. As such, the the volume of trade among TTIP countries will initially ex- net loss of trade will directly lower EU countries’ national pand at the pace indicated by the existing studies. However, income. Our simulations indicate small but widespread GDP we do not rely on these studies for changes in net exports, losses for the EU, in a clear contrast with existing assess- which ultimately determine any changes in GDP. ments. Instead, we calculate net export changes taking into ac- Consistent with our figures for net exports, Northern Eu- count the global feedbacks built into the GPM. Therefore, our ropean economies would suffer the largest GDP reduction simulation clarifies the implications of the “consensus” pat- (0.50%) followed by France (0.48%) and Germany (0.29%). GDP tern of trade in terms of GDP, income distribution and non- would increase slightly in the US (0.36%) while GDP increases TTIP trade. in non-TTIP countries would be positive but negligible (ap- In the GPM, the impact of a given increase in trade is dif- proximately 0.1%). ferent from other models. As indicated above, such change affects the distribution of income ultimately feeding back into Employment and incomes total demand and income. Finally, we consider two specific mechanisms through Following the reduction of net exports and overall eco- which the European economy could adjust to these TTIP-in- nomic activity, we project clear losses in EU employment and duced changes in net exports. labour incomes. Recall that our model allows us to make em- First, we assume that increased international competition ployment projections, because it estimates the relationship be- will exert pressure on the real exchange rate. This might occur tween GDP growth and employment growth over several de- as firms in every country try to preserve their international cades based on ILO data. competitiveness and increase efforts to reduce labour costs. It This is compatible with a tendency toward specialization might also be the result of unemployment pressures and leg- in higher-value-added, lower-employment-intensity products, islation that would reduce total labour compensation. which would lead to export and output gains in a few sectors

14 Third World Economics 16 – 30 November 2014 No 581 Analysis while adversely affecting many others. taxes would not be affected while the economic dependency As a result, we calculate that the EU as a whole would ratio would slightly improve. lose approximately 600,000 jobs by 2025, most of which are in Northern Europe, France and Germany. By comparison, this Asset price inflation and real devaluation is more jobs than the EU lost in the crisis years of 2010 and 2011 – clearly Europe must avoid another job loss of this mag- Policymakers will have a few options to adjust to the short- nitude even if gradual and spread over many years. fall in national incomes projected by our study. With wage The loss of employment would further accelerate the re- shares and government revenues decreasing, other incomes duction of incomes that has contributed to the EU’s current must sustain demand if the economy is to adjust. These ad- stagnation. Indeed, labour income will continue its steady justments have to be profits or rents but, with flagging con- decrease as a share of total income, weakening consumption sumption growth, profits cannot be expected to come from and residential investment while likely exacerbating social growing sales. tensions. A more realistic assumption is that profits and investment The flipside of this decrease is an increase in the share of (mostly in financial assets) will be sustained by growing asset profits and rents in total income, indicating that proportion- prices. The potential for macroeconomic instability of this ally there would be a transfer of income from labour to capi- growth strategy is well known. tal. The largest reductions will take place in the UK (with 7% In this adjustment scenario, there would be a strong in- of GDP transferred from labour to profit income), France (8%), crease in asset prices where financial markets are more devel- Germany and Northern Europe (4%), reinforcing a negative oped, especially in the United Kingdom, Germany, other West- trend that has continued at least since the early 2000s. ern and Northern European countries and France. Aggregate To emphasize the difference between our results and ex- demand in these economies would be sustained by a recovery isting estimates of employment impact, we calculated the pro- of the financial sector, stimulated by domestic lending and jected reduction of per capita employment income implied by growing profits. the fall of employment and the labour share. However, it is critical to note that such growth would last As mentioned above, CEPR estimates that the annual in- only as long as asset prices keep growing, requiring ever-ris- come of the average household would increase in the long ing levels of lending. In the current context of weak commer- term by 545 euros, while Ecorys projects an increase in work- cial lending, this might require intentional policy interventions, ing life income, again for the average household, of 12,300 such as further deregulation. This road to growth has been euros. taken before and its risks have proven extremely high. Given the ongoing deterioration of income distribution, During the most recent economic crisis, individuals and we chose to focus on working households, calculating the businesses quickly ran up unsustainable debts until general- change in per capita employment income. Our results are ized insolvency suddenly stopped economic activity. More- clearly incompatible with both CEPR and Ecorys. Indeed, we over, the extent to which deregulation is successful in increas- project losses of working incomes per capita ranging from 165 ing lending, rather than just reducing accountability in the fi- euros to more than 5,000 euros. France would be the worst hit nancial sector, is not clear. with a loss of 5,500 euros per worker, followed by Northern Of course, a run-up in asset prices is not the only policy European countries (4,800 euros), the United Kingdom (4,200 and economic response to the drop in aggregate demand. But euros) and Germany (3,400 euros). For a household with two it appears to be slightly more viable than alternative adjust- working persons, the loss ranges from 330 euros to more than ment mechanisms. For example, it is often suggested that an 10,000 euros. By contrast, in the US there would be an increase of employment income. opportunity might come from real devaluation. Countries The loss of economic activity and the weakening of con- might be tempted to seek this alternative by way of a nominal sumption in the EU means that tax revenue will be less than it depreciation, a reduction of real labour costs or both. would have been in the absence of TTIP. We estimate that the In light of the discussion above, the latter channel does surplus of indirect taxes (such as sales taxes or value-added not appear viable. This is because it would prove counter-pro- taxes) over subsidies will decrease in all EU countries, with ductive when applied by many countries. In other words, if France suffering the largest loss (0.64% of GDP or slightly more the incomes of workers in every country are reduced, the de- than 1% of the total government budget). mand hole is dug even deeper. Moreover, the magnitude of Government deficits would also increase as a percentage the cuts required could be socially unsustainable after decades of GDP in every EU country, pushing public finances closer of falling labour shares. or beyond the Maastricht limits. On the other hand, a substantial nominal depreciation of The loss of employment and labour income will increase the euro would probably trigger defensive depreciation in pressure on social security systems. Using GPM employment other currencies before any improvement in competitiveness projections and UN population data, we can calculate the eco- is achieved. nomic dependency ratio, that is, the ratio of total population According to our projections, a real devaluation would to employed population. This indicates how many people are have some effect in Germany and France but nothing that supported by each job, either through family relationships or might strongly stimulate aggregate demand. Furthermore, social security contributions. attempts at strong devaluations are often followed by a race According to our calculations, the ratio would increase to the bottom in which the trading partners of the country throughout the EU, announcing more troubled times for Eu- that devalues try to regain the lost ground by devaluing as ropean social security systems. By contrast, in the US, indirect well. But even when a race to the bottom does not happen,

No 581 Third World Economics 16 – 30 November 2014 15 Analysis lasting periods of real devaluation might lead to the accumu- ports, GDP, government finance and income distribution. lation of external debts, as Europe’s deficit countries have ex- Our analysis points to several major results. First, TTIP perienced after 1999. would have a negative net effect on the EU. We find that a To reiterate, our model requires some form of adjustment large expansion of the volume of trade in TTIP countries is to compensate for the drop in aggregate demand. The precise compatible with a net reduction of trade-related revenues for path that future policymakers will choose (if any) is of course the EU. This would lead to net losses in terms of GDP and unknowable at present. But our model sheds light on the likely employment. We estimate that almost 600,000 jobs would be macroeconomic consequences of a TTIP-induced change in lost as a result of TTIP. trade volumes, and also on the policy responses that are more Secondly, TTIP would reinforce the downward trend of or less likely to fill the demand gap. the labour share of GDP, leading to a transfer of income from wages to profits with adverse social and economic conse- Discussion and conclusion quences. Policymakers would face a few options to deal with this demand gap. Our model suggests that asset price infla- Existing studies on TTIP have focused on the impact the tion or devaluation could result, leading to higher economic agreement would have on aggregate economic activity in instability. member countries. They have done so based on detailed We have focused above on trade and its consequences, sectoral analyses of TTIP economies, but have neglected the leaving the investment component of TTIP on the sidelines. impact of income distribution and other important dimensions Going forward, valuable insights could be drawn by further of macroeconomic adjustment. extending the analysis of TTIP’s financial effects. (SUNS7918/ Our assessment of TTIP is based on the United Nations 7919)ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿp Global Policy Model, which has proven a convenient tool to estimate the impact of policy changes involving large areas of Jeronim Capaldo is a Research Fellow at the Global Development and En- vironment Institute (GDAE) of Tufts University in the US. The above is based the world economy. Our simulation does not question the on his GDAE Working Paper 14-03 (October 2014). The full paper with impact of TTIP on total trade flows estimated by existing stud- tables, graphs, footnotes and references can be accessed at www.ase.tufts.edu/ ies. Rather we analyze their implications in terms of net ex- gdae/policy_research/TTIP_simulations.html.

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16 Third World Economics 16 – 30 November 2014 No 581