SOUTH BULLETIN Published by the South Centre ● ● 16 May 2016, Issue 90 Foreign Investment, Investment Treaties and Development: Myths & Realities

SOUTH BULLETIN Published by the South Centre ● www.southcentre.int ● 16 May 2016, Issue 90 Foreign Investment, Investment Treaties and Development: Myths & Realities

The growing debate on investment agreements has underscored the importance of understanding the nature and effects of foreign investment. The issues of FDI, investment treaties and development are examined in this South Bulletin.

 Pages 2-5

A night scene of multinational firms: what are their effects on development? South Analysis of the Centre Paris Board Agreement Meeting IISD on climate

 Pages 6-7 change  Pages 14-20 China boost to South-South Implications of Argentina’s deal cooperation  Pages 8-9 with the “holdouts”  Pages 10-13

Boutros Boutros- Patents and the high cost of medicines  Pages 21-22 Ghali—The Nobility of Ideas and Ideals South Centre Statement to UPOV on FAO-ITPGRFA  Pages 23-24  Page 22 FDI, Investment Agreements & Development: Myths & Realities This article by the South Centre’s Chief Economist briefly ex- the notion that FDI is functionally in- plains the myths and realities of foreign direct investment (FDI). distinguishable from fresh capital in- It then analyses how a country’s investment policy is being con- flows and represents a flow of foreign strained by rules in the WTO and in the bilateral investment trea- resources crossing the borders of two ties (BITs). countries has no validity. Second, an important part of FDI involves transfer of ownership of existing firms. Only the so-called greenfield investment makes a direct contribution to productive capacity and involves cross-border movement of capital goods. But it is not easy to identify from reported statistics what proportion of FDI consists of such investment. In particular, statistics provide almost no information on how retained earnings and loans from parent companies, two of the three sources of finance for FDI, are used. Further- more, even when FDI is in bricks and mortar, it may not add to aggregate investment because it may crowd out domestic investors, as shown by most studies on the effects of FDI on domes- The Daily Bell TheDaily tic investment. Evidence also shows widespread association between rising FDI and falling gross fixed capital for-

mation (GFCF) in the developing world. All these suggest that the economic conditions that attract foreign ways involve flows of financial capital By Yılmaz Akyüz enterprises may not always be condu- (movements of funds through foreign cive to faster capital formation and Foreign Direct Investment exchange markets) or real capital that the two sets of investment deci- (imports of machinery and equipment and Development sions may be driven by different con- for the installation of productive capac- Foreign direct investment (FDI) is per- siderations. ity). A large proportion of FDI does not haps one of the most ambiguous and entail cross-border capital flows but is Third, what is commonly known least understood concepts in interna- financed from incomes generated on and reported as FDI contains specula- tional economics. Common debate on the existing stock of investment in host tive components and creates destabi- FDI is confounded by several myths countries. Equity and loans from par- lizing impulses which need to be con- regarding its nature and impact on cap- ent companies account for a relatively trolled and managed as any other ital accumulation, technological pro- small part of recorded FDI and an even form of international capital flows. gress, industrialization and growth in smaller part of total foreign assets con- Many of the changes in financial mar- emerging and developing economies trolled by transnational corporations kets that have facilitated international (EDEs). It is often portrayed as a long- (TNCs). In 2008, retained earnings con- capital movements have not only in- term, stable, cross-border flow of capi- stituted 60% of outward FDI stock for creased the mobility of FDI, but also tal that adds to productive capacity, non-bank affiliates of US non-bank made it difficult to assess its stability. helps meet balance-of-payments short- corporations. In the same year, total FDI inflows to EDEs are subject to falls, transfers technology and manage- assets controlled by US affiliates were boom-bust cycles and closely correlat- ment skills, and links domestic firms 8.6 times the net external finance from ed with non-FDI (portfolio) flows as with wider global markets. US sources. Globally, in 2011, retained they are also influenced by global li- However, none of these are intrinsic earnings accounted for 30% of total FDI quidity conditions and risk appetite. qualities of FDI. First, FDI is more flows. In the same year, half of the Surges in FDI inflows could generate about transfer and exercise of control earnings on FDI stock in EDEs were unsustainable currency appreciations than movement of capital. Contrary to retained, financing about 40% of total in much the same way as surges in widespread perception, it does not al- inward FDI in these economies. Thus, other forms of capital inflows. FDI in

Page 2 ● South Bulletin ● Issue 90, 16 May 2016 property is often motivated by specula- networks, but participation in such mestic content, export targets and tive capital gains and subject to severe networks also carries the risk of getting links with local firms; bubble-and-bust cycles. More im- locked into low-value-added activities.  portantly, financial transactions can Domestic firms should be nur- To sum up, contrary to what is accomplish a reversal of FDI. What tured to compete with TNCs; maintained by the dominant corporate may get recorded as portfolio outflows  ideology, FDI is not a recipe for rapid Linking to international produc- may well be outflows of FDI in dis- and sustained growth and industriali- tion networks organized by TNCs is guise: a foreign affiliate can borrow in zation in EDEs. However, this does not not a recipe for industrialization. It the host country in order to export cap- mean that FDI does not offer any bene- could trap the economy in the lower ital. Furthermore, foreign banks estab- fits to EDEs. Rather, policy in host ends of the value-chain. lished in EDEs can be a major source of countries plays a key role in determin- financial instability. They tend to con- Multilateral and Bilateral Con- ing the impact of FDI on industrializa- tribute to build-up of fragility in host straints on Investment Policy tion and development. A laissez-faire countries and transmit shocks from approach could not yield much benefit. The experience strongly suggests that home countries, as seen during the eu- It may in fact do more harm than good. policy interventions would be neces- rozone crisis. Successful examples are found not nec- sary to contain adverse effects of FDI Fourth, the immediate contribution essarily among EDEs that attracted on stability, balance of payments, capi- of FDI to the balance of payments may more FDI, but among those which used tal accumulation and industrial devel- be positive, since it is only partly ab- it in the context of national industrial opment and to activate its potential sorbed by imports of capital goods re- policy designed to shape the evolution benefits. Still, the past two decades quired to install production capacity. of specific industries through interven- have seen a rapid liberalization of FDI But its longer-term impact is often neg- tions. In this respect the experience of regimes and erosion of policy space in ative because of profit remittances and successful late industrializers, notably EDEs vis-à-vis TNCs. This is partly the high import content of production in East Asia, yields a number of policy due to the commitments undertaken and exports by foreign firms. Many lessons: in the World Trade Organization countries with a long history of in- (WTO) as part of the Agreement on volvement with TNCs face negative net  Encourage greenfield investment Trade-Related Investment Measures transfers on FDI; that is, their new FDI but be selective in terms of sectors and (TRIMs). However, many of the more inflows fall short of profit remittances technology; serious constraints are in practice self- on the stock of inward FDI. Again, in a  Encourage joint ventures rather inflicted through unilateral liberaliza- large majority of EDEs, export earnings than wholly foreign-owned affiliates in tion or bilateral investment treaties by foreign companies do not cover order to accelerate learning and limit (BITs) signed with more advanced their import bills and profit remittanc- foreign control; economies (AEs) – a process that ap- es. This is true even in countries highly pears to be going ahead with full successful in attracting export-oriented  Allow mergers and acquisitions force, with the universe of investment FDI such as China. (M&A) only if there are significant ben- agreements reaching 3,262 at the end efits in terms of managerial skills and of 2014 (UNCTAD IPM, 2015). Alt- Finally, superior technology and follow-up investment; hough there is considerable diversity management skills of TNCs create an in the obligations contained in various  Do not use FDI as a way of meet- opportunity for the diffusion of tech- BITs, the constraints they entail are ing balance-of-payments shortfalls. nology and ideas. However, spillovers becoming increasingly tighter than The long-term impact of FDI on exter- are not automatic but need to be ex- those imposed by the WTO regime. tracted through policy guidance and nal payments is often negative even in interventions. Foreign firms invest in EDEs attracting export-oriented firms; There are two main sources of EDEs in order to exploit their existing WTO disciplines on investment-  Debt financing may be preferable competitive advantages such as rich related policies: the Agreement on to equity financing when there are no natural resources and cheap labour and TRIMs and specific commitments significant positive spillovers from infrastructure services rather than to made in the context of the General FDI; move them up on the technological Agreement on Trade in Services ladder. TNCs resist passing their tech-  FDI contains speculative compo- (GATS) negotiations for commercial nological and managerial know-how to nents and generates destabilizing im- presence of foreign enterprises (the so- host countries since these give them a pulses which need to be controlled and called mode 3) in the services sectors. competitive edge. The high productivi- managed as any other form of interna- In addition to these, a number of other ty and competition they bring could tional capital flows; agreements provide disciplines, direct- help improve the efficiency of local ly or indirectly, on investment-related firms, but these can also block entry of  No incentives should be provid- policies, such as the prohibition of these firms into high-value product ed to FDI without securing reciprocity investment subsidies linked to export lines or drive them out of business. in benefits for industrialization and performance in the Agreement on They can prevent rather than promote development; Subsidies and Countervailing infant-industry learning unless local Measures.

 Performance requirements may firms are supported and protected by be needed to secure positive spillovers The TRIMs Agreement does not deliberate policies. They may help including employment and training of refer to foreign investment as such but EDEs integrate into global production local labour, local procurement, do- to investment generally. It effectively

Page 3 ● South Bulletin ● Issue 90, 16 May 2016 In order to discuss the issue of investment treaties, the South Centre and the International Institute for Sustainable Development (IISD) hold annually a meeting of developing country investment negotiators. At the last meeting held in Rio de Janeiro, Brazil in November 2015, participants examined the challenges and uncertainties that international investment law faces today, and assessed the implications for emerging and developing economies. prohibits attaching conditions to in- over domestic content requirements to remain unrestricted by the WTO vestment in violation of the national can reinforce the “resource curse syn- regime. treatment principle or quantitative re- drome” as the country wants to nour- Second, as long as there are no strictions in the context of investment ish resource-based industries, to trans- commitments for unrestricted market measures. The most important provi- fer technology to local firms and estab- access to foreign investors, the con- sions relate to prohibition of domestic lish backward and forward linkages straints imposed by the TRIMs Agree- content requirements whereby an in- with them. ment could be overcome by tying the vestor is compelled or provided an Domestic content requirements are entry of foreign investors to the pro- incentive to use domestically produced particularly important for investment duction of particular goods. For in- rather than imported products, and of in manufacturing in countries at inter- stance, a foreign enterprise may be foreign trade or foreign exchange bal- mediate stages of industrialization, issued a licence for an automotive as- ancing requirements linking imports by notably in automotive and electronics sembly plant only if it simultaneously an investor to its export earnings or to industries – the two key sectors where establishes a plant to produce engines, foreign exchange inflows attributable they were successfully applied in East gearboxes or electronic components to investment. By contrast, in TRIMs or Asia. Most industries of EDEs linked used in cars. Similarly, licences for a the WTO more broadly, there are no to international production networks computer assembly plant can be tied disciplines restricting beggar-my- have high import content in technolo- to the establishment of a plant for pro- neighbour investment incentives by gy-intensive parts and components ducing integrated circuits and chips. recipient countries that are just as trade while their domestic value-added Such measures would raise domestic -distorting. Such incentives provide an mainly consists of wages paid to local value-added and net export earnings effective subsidy to foreign investors workers. Raising domestic content of TNCs and would not contravene and can influence investment and trade would not only improve the balance of the provisions of the TRIMs Agree- flows as much as domestic content re- payments but also constitute an im- ment. quirements or export subsidies, partic- portant step in industrial upgrading. ularly since a growing proportion of Third, export performance require- Restrictions over domestic content re- world trade is taking place among ments can be used without linking quirements would thus limit transfer of firms linked through international pro- them to imports by investors as part of technology and import-substitution in duction networks controlled by TNCs entry conditions for foreign enterpris- industries linked to international pro- (Kumar, 2002). es. This would not contravene the duction networks. TRIMs Agreement since it would not The obligations under TRIMs may However, TRIMs provisions leave be restricting trade (Bora, 2002, p. 177). not affect very much the countries rich certain flexibilities that could allow Finally, the TRIMs regime does not in natural resources, notably minerals, EDEs to make room to move in order restrict governments in demanding in their earlier stages of development. to increase benefits from FDI. First, the joint ventures with local enterprises or FDI in mineral resources is generally domestic content of industrial produc- local ownership of a certain propor- capital-intensive and countries at such tion by TNCs is not independent of the tion of the equity of foreign enterpris- stages depend almost fully on foreign tariff regime. Other things being equal, es. In reality, many of these conditions technology and know-how in extrac- low tariffs and high duty drawbacks appear to be used widely by industrial tive industries and lack capital good encourage high import content. Thus, countries in one form or another industries. Linkages with domestic it should be possible to use tariffs as a (Weiss, 2005). industries are usually weak and output substitute for quantity restrictions over is almost fully exported. Domestic con- Since the TRIMs Agreement applies imports by TNCs when they are un- tent of production by foreign compa- only to trade in goods, local procure- bound in the WTO or bound at suffi- nies is mainly limited to labour and ment of services such as banking, in- ciently high levels. Similarly, in re- some intermediate inputs. The main surance and transport can also be set

source-rich countries, export taxes can challenge is how to promote local pro- as part of entry conditions of foreign be used to discourage exports of un- cessing to increase domestic value- firms in order to help develop national processed minerals and agricultural added. However, over time, restrictions capabilities in services sectors. This commodities as long as they continue

Page 4 ● South Bulletin ● Issue 90, 16 May 2016 would be possible as long as EDEs con- growth and development. However, The combination of expansive in- tinue to have discretion in regulating there is no clear evidence that BITs terpretations of investment and “free access of TNCs to services sectors. The have a strong impact on the direction transfer of capital” provisions of BITs existing GATS regime provides consid- of FDI inflows. More importantly, seriously exposes host EDEs to finan- erable flexibility in this respect, includ- these agreements are generally incom- cial instability by precluding controls

ing for performance requirements. patible with the principal objectives of over destabilizing capital flows. This is However, the kind of changes in the signing them because they constrain also recognized by the IMF. In its In- modalities of GATS sought by AEs, the ability of host countries to pursue stitutional View on the Liberalization including the prohibition of pre- policies needed to derive their full po- and Management of Capital Flows, the establishment conditions and the appli- tential benefits. IMF (2012) notes that “numerous bilat- cation of national treatment, could eral and regional trade agreements While in TRIMs investment is a pro- shrink policy space in EDEs a lot more and investment treaties … include duction-based concept, BITs generally than the TRIMs Agreement. provisions that give rise to obligations incorporate an asset-based concept of on capital flows” (para. 8) and "do not The constraints exerted by most investment whether the assets owned take into account macroeconomic and BITs signed in recent years on policy by the investor are used for the pro- financial stability” (para. 65) and “do options in host countries go well be- duction of goods and services, or simp- not allow for the introduction of re- yond the TRIMs Agreement because of ly held with the prospect of income strictions on capital outflows in the wide-ranging provisions in favour of and/or capital gain. This is largely be- event of a balance of payments crisis investors. These include broad defini- cause BITs are fashioned by corporate and also effectively limit the ability of tions of investment and investor, free perspectives even though they are signatories to impose controls on in- transfer of capital, rights to establish- signed among governments. Typically, flows” (Note 1, Annex III). The Fund ment, the national treatment and the agreements are prepared by the home points out that these provisions may most-favoured-nation (MFN) clauses, countries of TNCs and offered to EDEs conflict with its recommendation on fair and equitable treatment, protection for signature. The coverage of BITs the use of capital controls and asks for from direct and indirect expropriation includes a broad range of tangible and its Institutional View to be taken into and prohibition of performance re- intangible assets such as fixed-income account in the drafting of such agree- quirements (Bernasconi-Osterwalder et claims, portfolio equities, financial de- ments. al., 2012). Furthermore, the reach of rivatives, intellectual property rights BITs has extended rapidly thanks to the and business concessions as well as Although the IMF’s Institutional use of the so-called Special Purpose FDI as officially defined by the Organi- View focuses mainly on regulating Entities (SPEs) which allow TNCs from sation for Economic Co-operation and capital inflows to prevent build-up of countries without a BIT with the desti- Development (OECD) and the Interna- financial fragility, prohibitions in BITs nation country to make the investment tional Monetary Fund (IMF). This im- regarding restrictions over outflows through an affiliate incorporated in a plies that all kinds of assets owned by can also become a major handicap in third-party state with a BIT with the foreigners could claim the same protec- crisis management. It is now widely destination country. Many BITs also tion and guarantees independent of agreed that countries facing an exter- provide unrestricted arbitration, free- their nature and contribution to stabil- nal financial crisis due to an interrup- ing foreign investors from the obliga- ity and growth in host countries. tion of their access to international tion of having to exhaust local legal capital markets, a sudden stop of capi- It also opens the door to mission remedies in disputes with host coun- tal inflows and rapid depletion of re- creep. Investment agreements may be tries before seeking international arbi- serves could need temporary debt granted jurisdiction by tribunals over a tration. This, together with lack of clari- standstills and exchange controls in variety of areas that have nothing to do ty in treaty provisions, has resulted in order to prevent a financial meltdown with FDI proper, further circumscrib- the emergence of arbitral tribunals as (Akyüz, 2014). However, such ing the policy options of host countries. lawmakers in international investment. measures could be illegal under “free Indeed, the expansive scope of invest- These tend to provide expansive inter- transfer of capital” provisions of BITs. ment protection in the North American pretations of investment provisions, Free Trade Agreement (NAFTA) has Where rights of establishment are thereby constraining policy further and already given rise to claims that pa- granted, the flexibilities in the TRIMs inflicting costs on host countries tents are a form of investment and Agreement regarding entry require- (Bernasconi-Osterwalder et al., 2012; hence should be protected as any other ments noted above would simply dis- Eberhardt and Olivet, 2012; UNCTAD capital asset, thereby threatening the appear. The national treatment clause TDR, 2014). flexibilities left in the Agreement on in BITs requires host countries to treat Only a few EDEs signing such BITs Trade-Related Aspects of Intellectual foreign investors no less favourably with AEs have significant outward FDI. Property Rights (TRIPS) and access to than their own national investors and Therefore, in the large majority of cases medicines (Correa, 2013). Similarly, hence prevents them from protecting there is no reciprocity in deriving bene- there have been claims by Argentinian and supporting infant industries fits from the rights and protection bond holders that such holdings against mature TNCs and nourishing granted to foreign investors. Rather, should be protected as any other in- domestic firms to compete with for- most EDEs sign them on expectations vestment under the Italy-Argentina eign affiliates. It brings greater re-

that they would attract more FDI by BIT, thereby intervening with the restrictions than national treatment in providing foreign investors guarantees structuring of sovereign debt (Continued on page 13 ) and protection, thereby accelerating (Gallagher, 2012).

Page 5 ● South Bulletin ● Issue 90, 16 May 2016 Both State Councillor Yang and South Centre Board Chairman Benja- Productive South Centre min Mkapa recalled the meeting between President Xi Jinping of China and Mr. Mkapa in his capacity as Board Meeting, held in Beijing Chairman of the South Centre when President Xi visited Tanzania in March The South Centre held its 35th Board meeting in Beijing. Below 2013. Mr. Yang said that the meeting is a brief description of the meeting as well as some highlights “gave a strong impetus to strengthening the cooperation between the South of events linked to the Board meeting. Centre and China.” During the meeting, Mr. Yang stat- ed that “the South Centre, as an important think-tank of developing countries, plays a significant role in boosting South-South cooperation and South-North cooperation. China val- ues the great support the South Centre provides for the participation of developing nations in international development cooperation, and is ready to advance cooperation with the South Centre to maintain close communica- tion and coordination on major issues concerning international development such as the 2030 Agenda for Sustaina- ble Development and help developing nations realize common development and prosperity.”

South Centre Chairman Mr. Mkapa Chinese State Councillor Mr. Yang Jiechi (right) meeting with the South Centre Chairperson Mr. Benja- mentioned how impressed he was min Mkapa (left) at the Great Hall of the People in Beijing. with the new Chinese initiatives to promote South-South cooperation and By Yuefen Li The South Centre’s Chairman, Mr. said: “The South Centre is very happy Benjamin Mkapa, formerly the Presi- with this because we were set up pre- n 10-11 November 2015, the South dent of the United Republic of Tanza- cisely to promote South-South cooper- O Centre Board held its 35th meet- nia, thanked State Councillor Yang for ation. The South Centre is now the ing in Beijing, China, at the invitation the warm welcome and the coopera- only international inter-governmental of the Government of the People’s Re- tion of China with the Centre. think tank and research centre set up public of China. The meeting itself was hosted by the Chinese People’s Insti- tute of Foreign Affairs (CPIFA), an institute that was set up by Premier Zhou Enlai in 1949 to foster and promote better people-to-people dialogue and understanding between China and the rest of the world. The Board at its 35th meeting dis- cussed and made decisions on the activities and financing of the South Cen- tre, and looked at the medium- and long-term prospects and institutional and global contexts for strengthening the work of the South Centre in promoting the interests of the developing countries in the global arena. The highlight of the Board’s visit was a meeting with Chinese State Councillor Mr. Yang Jiechi, at the Great Hall of the People in Beijing on 10 No- vember 2015. Group photo of the 35th Board Meeting of the South Centre. Page 6 ● South Bulletin ● Issue 90, 16 May 2016 by the leaders to serve all the developing countries.” Mr. Mkapa added that “the South Centre is ready to constantly deepen

South-South cooperation with China, contributing to the realization of the 2030 Agenda for Sustainable Develop- ment.” Another highlight was the Brainstorming Meeting on South-South Cooperation and China co-organized by the South Centre with the Chinese Peo- ple’s Institute of Foreign Affairs and the Institute of World Economics and Politics/Chinese Academy of Social Sciences on 12 November 2015. Senior Chinese experts elaborated the new Chinese initiatives on South-South cooperation and in creating new regional and international institutions and their potential impact in assisting developing countries in implementing the post- The 35th Board Meeting of the South Centre in session. 2015 development agenda. also be found in other developing Yuefen Li is the Special Advisor on South Centre Chairman Mr. Mkapa countries of the South. Economics and Development Finance said that with its large and growing of the South Centre. economy, China has a crucial role in the present and future development of the developing countries. He also praised the new Chinese South-South funds for climate change and for the development agenda, amounting to US$5.1 billion which President Xi announced at the United Nations’ SDG summit in September 2015. The Chairman and Board Members also visited Chengdu as part of the Board’s programme in China, upon the invitation of CPIFA, and experienced the cultural and natural diversity of China as examples, in many ways, of the same kind of richness and diversity in terms of culture and nature that may South Centre Chair of the Board Mr. Benjamin Mkapa (left) being greeted in Chengdu by Mr. Zhao Zhenxi, Vice Chairman of the Sichuan Committee of the Chinese People’s Political Consultative Con- ference (CPPCC) (right).

Special Guest to the Board of the South Centre Prof. Deepak Nayyar (left) in The South Centre Board Members visited Chengdu and experienced the conversation with Mr. Zou Zhibo, Vice President of the Institute of World cultural and natural diversity of China. Economics and Politics/CASS (right). Page 7 ● South Bulletin ● Issue 90, 16 May 2016 China’s boost to South-South cooperation

Two new Chinese funds totalling US$ 5.1 billion to help devel- Xi himself, at a South-South oping countries tackle climate change and development prob- roundtable he chaired at the UN, de- lems could be a game changer in South-South cooperation and scribed South-South cooperation as “a great pioneering measure uniting the international relations. developing nations together for self- improvement, is featured by equality, mutual trust, mutual benefit, win-win result, solidarity and mutual assistance and can help developing nations pave a new path for development and prosperity. “As the overall strength of developing nations improves, the South-South cooperation is set to play a bigger role in promoting the collective rise of developing countries.” In recent years, as Western countries reduced their commitment towards aid, they tried to blur the distinction and have been pressing big developing countries like China and India to also commit to provide development aid just like them, within the framework of the OECD, the rich countries’ club. President Xi Jinping (centre) chaired the High-level Roundtable on South-South Cooperation co- hosted by China and the United Nations (UN) at the UN headquarters in New York with participation However, the developing coun- of developing country leaders and heads of international organizations. tries have stuck to their political position: The developed countries have the By Martin Khor It is significant that Xi used the responsibility to give adequate aid to framework of South-South coopera- poor countries and should not shift this hina gave a big boost to South- tion as the basis of the two funds. on to other developing countries. The South cooperation when its Presi- C developing countries however will also dent, Xi Jinping, made two unprece- In the international system, there help one another, through the arm of dented mega pledges totalling US$5.1 have been two types of development South-South cooperation. billion to assist other developing coun- cooperation: North-South and South- tries, during his visit to the United South cooperation. This has increasingly led some of the States in September. North-South cooperation has been developed countries to vaguely threaten to reduce their aid commitment, un- Firstly, he announced that China based on the obligation of developed less some of the developing countries would set up a China South-South Cli- countries to assist developing coun- also pay their share. For them, South- mate Cooperation Fund to provide tries because the former have much South cooperation is just too vague and RMB 20 billion or US$3.1 billion to help more resources and have also benefit- too small. developing countries tackle climate ted from their former colonies as a change. This announcement was made result of colonialism. This perception has been changed at the White House at a media confer- Indeed, developed countries have by the two Chinese pledges, both inter- ence with US President Barrack committed to provide 0.7% of their esting in themselves. Obama. GNP as development aid, a target that It is noted by many that the $3.1 bil- Secondly, at the Development Sum- unfortunately is being met by only a lion Chinese climate aid exceeds the $3 mit at the United Nations, Xi said that handful of countries. billion that the United States has China would set up another fund with South-South cooperation on the pledged (but not yet delivered) to the initial spending of US$2 billion for other hand is based on solidarity and Green Climate Fund (GCF) under the South-South Cooperation and to aid mutual benefit between developing UN Climate Convention. developing countries to implement the countries as equals, and without obli- Major developing countries have post-2015 Development Agenda. gations as there is no colonial history been pressed to contribute to the GCF The sheer size of the pledges gives a among them. but they have correctly argued that the big political weight to the Chinese con- This is the position of the develop- GCF is a fund meant for developed tribution. President Xi’s initiatives ing countries and their umbrella countries to meet their historical re- have the feel of a “game changer” in grouping, the G77 and China. sponsibility to assist developing coun- international relations. tries. Developing countries can choose

Page 8 ● South Bulletin ● Issue 90, 16 May 2016

South South coop- - including poor South coopera- -

--- South Cooperation and and Cooperation South [email protected] - South cooperation in aid, -

Martin Khor the is Executive Direc- South Let’s hope that the two new funds Recently, the world imagination was ● South Bulletin ● Issue 90, 16 South● May 90, Issue ● 2016 Bulletin

tor of the South Centre. direc- Contact: 9 also also captured by the BRICS creation Bank, of the Asian the Investment Infrastructure Bank and the Chinese One Belt One Road programme, which contain all elements of South eration. however, is symbolically and practically of great importance, as it tends to assist the more vulnerable people and countries, and fragile envi- ronments including biodiversity the climate undergoing crisis. and being set up by China will give a much needed boost to South tion and amongsolidarity the people. sion in recentsion decades. - - - Page Brainstorming Meeting on South Meeting Brainstorming

facilitate studies

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The The regional trade agreements in The The next steps to implement these After all, South Of course, aid is not the only di- Xi also said an Academy of South mension mension of South which is especially prominent in areas of the trade, investment, finance and the sectors. social ASEAN, East regions Asia, of Africa and and Latin America, as the well as sub the trade links and between investment the three South nents, conti- have shown immense expan- pledges would be to set up the institutional basis for the funds, and design their framework, aims and functions. It is a whether South great opportunity contribute to show as positivelySouth aid. as North is meant to complement replace North and not to in policy andin action.policy South Cooperation and Development will be established to and exchanges by developing tries coun- on theories and practices of velopment de- suited to their national conditions. respective -

the Chinese People’s Institute of Foreign Affairs and the Institute of World Economics and Politics/Chinese Politics/Chinese and Economics of World the Institute and Affairs of Foreign Institute People’s Chinese the

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This This new fund has the potential of As As for the other fund announced With such a large amount, the Chi- China has now taken that South from from one another’s development experiences and practices and make leaps fund mayfund cover. helping developing countries learn development goals. poverty reduction, Xi agriculture, health mentioned and education as some of the areas the implementing the development agenda just adopted agenda’s centrepiece is the sustainable by the UN. The by President Xi, the initial $2 billion is for South facilitate grammes manyon climate mitigation, adap- significanttation and institutional building. pro- mentioned then was only $20 million. nese climate fund has the potential to veloped veloped country has pledged GCF. at Last year, when China initially the announced a similar fund, the sum South South route by announcing it will set up its own South with the unexpectedly big size of $3.1 billion, an amount larger than any de- nue South of to help one another through the ave- Academy of Social Sciences in Beijing. in Sciences of Social Academy The Board Members of the South Centre and Chinese experts pose for a group photo during the during photo group a for pose experts Chinese and Centre South the of Members Board The China

Implications of Argentina’s Deal with “Super holdouts”: Need for an Urgent Revision to Bond Contracts and for a Debt Workout Mechanism

holders turned down the offers. In 2003, NML Capital Ltd which is managed by Elliott first sued Argenti- na for repayment of 100% of the face value of the bonds they hold. As a result of the suit, U.S. District Judge Griesa issued his pari passu ruling which prohibited Argentina from servicing its bonds before paying the holdouts. This led Argentina to default on its debt again in 2014. With it the thirteen year-long litigation saga –

considered to be among the most pub- licized, the ugliest and the most divi- sive legal battle in history for sovereign debt restructuring – came to a stalemate with both sides refusing to move. To end the stalemate, the newly elected President of Argentina, Mauri- cio Macri, made resolving the holdout Argentina’s Senate members voting in favour of the deal with the “holdouts”. dispute a priority and in February 2016 offered to pay $6.5 billion to the By Yuefen Li economy on a more sustainable path group of six hedge fund holdouts. even though this would mean having Two of the funds accepted the offer rgentina signed an agreement in to use a substantial part of its foreign but not NML and three other funds A principle on 29 February 2016 currency reserves to pay off the hold- which asked for better terms. Hence, with four “super holdout” hedge funds out bond holders. Nevertheless, there we see different degrees of tenacity including NML Capital Ltd, Aurelius are systemic implications of this deal to among holdouts, resulting essentially Capital, Davidson Kempner and Brace- future sovereign debt restructurings in different levels of payment to them bridge Capital. Buenos Aires would which deserve careful examination and and compromising inter-creditor equi- pay them a total of about $4.65 billion, remedial actions. ty. Clearly, the deal is a great victory amounting to 75 percent of the princi- for the “super holdouts”. In addition pal and interest of all their claims of The reason to call the four hedge to the 75% payment in principal and Argentina’s bonds that were defaulted funds as “super holdouts” is because hefty interest accumulated over the on during the 2001 debt crisis. The pay- they are the largest, the most com- years, thirteen years of hefty legal bills ment is to be made in cash before 14 bative and the most tenacious holdout will also be picked up by Argentina. April 2016, provided that Argentina's creditors. Argentina floated exchange Estimates on the returns that the Congress approves the repeal of Ar- bonds in 2005 and then again in 2010 “super holdouts” will make on their gentina's domestic laws, namely the after it defaulted during the 2001 debt investment in Argentina’s bonds Lock Law and the Sovereign Payment crisis on its bonds that were valued at range from three to five times what Law, which prohibit the country from nearly $100 billion. Ninety-three per- they paid for the bonds in the first proposing terms to the holdouts that cent of the holders of Argentine replace. are better than those Argentina offered structured sovereign bonds accepted to its creditors in earlier restructurings. the exchange proposals at a considera- The business model of these hedge This deal would allow the return of ble “haircut” (i.e. discount rate) of funds is well known. They seek and

Argentina to the international capital about 65% (that is, they agreed to re- buy sovereign bonds issued by States market after more than 15 years of ex- ceive only 35 cents for each dollar of that are going through economic dis- clusion, something that is imperative the face value of the restructured tress for a fraction of the bonds' face for the government to try to put the bonds). The remaining 7% of the bond value and then holding out by refus-

Page 10 ● South Bulletin ● Issue 90, 16 May 2016 ing discounted repayment of such for their CDS holdings because of the for wage increase have been going on bonds when offered by the issuing default and sharp price decline. Subse- for years. To regain access to the capi- State, seeking instead to getting paid in quently, because of the desire to return tal markets to raise new money is im- full or as close to full as possible for the to the international market, the bond portant for mitigating the severe principal plus interest through litiga- issuers would have to resume negotia- shortage of liquidity and smooth out

tion or other means including seizing tion with the same hedge fund which economic bottlenecks. assets. Although the precise infor- would not give up until they squeeze The last hurdles to Argentina being mation on the prices paid by these as much as possible from the sovereign able to return to the international capi- “super holdouts” for the Argentinian bond issuers. tal market to obtain financing are bonds is not easily available, based on Nevertheless, it is understandable these “super holdouts” as well as the data from the Ministry of Finance of that the new government of Argentina injunction from the U.S. District Court. Argentina, Bloomberg estimated that moved fast to tackle the impasse of the The deal would therefore clear both payment on principal would equal to bond holdout problem. The country is obstacles as Judge Griesa has granted about four times the face value of facing many severe economic challeng- the lifting of the injunction upon the bonds Elliott holds. Elliott will get es at the moment. Inflation is about repeal of the Argentine domestic laws. back, under the terms of the deal struck 25% and the primary fiscal deficit is As the injunction is an important lev- on 29 February 2016, $2.28 billion on its more than 5.8 percent of GDP. erage for the “super holdouts” to get $617 million investment in principal. paid, they requested the injunction be To make up the fiscal shortfalls, the However, the payment from the lifted after they get paid. The country government has been borrowing from deal struck with Argentina may not be has already settled some major arbitra- the central bank, leading to a big drop the only profit the “super holdout” tion cases and disputes in previous in its foreign reserves. In the current funds get from their Argentina bonds. years. global economic environment of low It is common for these funds to pur- aggregate demand and declining com- However, can we collectively utter chase CDSs (Credit Default Swaps) modity prices, it is not very realistic to a sigh of relief and celebrate the com- against the distressed bonds they hold. pin hope on increasing trade revenue ing to an end of the longest and the CDS is a credit derivative which en- to replenish its foreign reserves, espe- most high profile holdout case in the sures creditors get paid of the premium cially when its two largest export prod- history? Before doing so, we need to as well as the interest in times of de- ucts - soya and petroleum - are subject contemplate the impact and the impli- fault and other credit events. This cre- to worsening terms of trade and drastic cations of such a publicised legal bat- ates a win win business situation for price fluctuation. To mitigate the se- tle that would end by the payment of the hedge funds and lose lose dilemma vere liquidity shortage, Argentina has billions of dollars to “super holdouts”. for the sovereigns. With CDSs, the already utilized its currency swap ar- hedge funds would get paid if the bor- Firstly, it would not be surprising rangements with China. The govern- rowers default or the bond prices suffer for creditors involved in future debt ment also has the option of cutting ex- from a deep decline. They would get restructurings to first look around and penditure in order to ease the liquidity paid twice if a defaulted borrower loses find out whether there are big institu- crunch, but embarking on a Greek- legal battle and is forced to pay the tional creditors with strong financial style austerity programme would be hedge funds. and legal positions involved in the highly unpopular. Inflation has al- same case. If so, the tendency could be In the case of Argentina, further to ready eroded the real take-home pay of to wait for a “me too” chance instead the pari passu injunction, a “failure to the wage earners and demonstrations of examining the creditors' own eco- pay” credit event triggered the payment of the CDS on Argentina’s debt. Yet, it is not possible to get the CDS positions of the hedge funds involved in the litigation against Argentina. Some observers have suggested that relevant hedge funds against Argentina may also hold CDS on these bonds and thus profit from a default scenario. When being probed at the court room, Elliott’s lawyer chose to give an evasive answer. However, purchasing large quanti- ties of CDSs is the business model of such kind of hedge funds. This creates a conflict of interest as the hedge funds holding CDSs on the particular bond they are litigating in court are in a very

EPA good position to trigger default or push

the prices of the litigated bonds lower through their litigation tactics. In re- Protesters voiced their opposition to the deal outside Congress, but lawmakers voted in favour. turn, these hedge funds can get paid

Page 11 ● South Bulletin ● Issue 90, 16 May 2016 nomic positions and decide whether or revised CACs and pari passu clauses One approach is to reduce incen- not to be cooperative and accept the will take a long time to phase in de- tives for holdouts. It is common busi- restructuring proposals. This will then pending on the maturity of the bonds. ness practice for goods and services most likely result in a delayed and dis- With the slow recovery from the global bought at huge discount in retail orderly debt workout and undermine financial crisis and low commodity stores or via internet to have clear stip- the objective to quickly rescue the fi- prices, some developing countries are ulations that they are either not re- nancially distressed governments and facing debt sustainability challenges, fundable or cannot be changed or re- restore debt sustainability. making them eventual easy targets for turned. People take it for granted that litigation-oriented hedge funds. it is a lawful and correct business prac- Secondly, huge financial gains for tice. To buy things at Christmas sales the “super holdouts” could lead to the How can the potential negative sys- and go back to the stores and request birth of more “baby NML” making this temic impact from this case be mitigat- for refund of the full original price of much specialised profession a more ed and make future debt workout the products would be considered as crowded market. With this litigation timely and orderly? unethical. Why then is it so unlawful case being so dramatic and traumatic Current efforts have concentrated to reject the request of the “super that even a ship was seized, some cred- on making it more difficult for hold- holdout” to get paid 100% when the itors could be more combative and outs to rush to the court room through bonds were bought at a fraction of more uncompromising in the future. strengthening current contract clauses. their face value? Because sovereign As a result, creditor coordination This is necessary and welcome. How- bond contracts often do not explicitly would turn out to be more difficult ever, this may be far from sufficient. mention that bonds bought at a dis- than before. The financial incentives to be “super count will be redeemed by the govern- Thirdly, it is highly likely that these holdouts” are immense. Additionally, ment at the discounted rate rather hedge funds would look for more weak NML and other holdout hedge funds than at face value, the issuing State links in the bond contracts further than have done everything within the law. then gets bound to respect the bond pari passu and prepare themselves for The “super holdouts” have every right contract and pay it at face value. the next target. The tremendous influ- to purchase bonds at the secondary In the absence of a multilateral le- ence of these hedge funds, their legal market as bonds are transferable and gal framework on sovereign debt re- tactics and the demonstrated tenacity the secondary market is needed to structuring mechanism, reducing in- have already led to efforts to strength- make bonds liquid. Herding behaviour centives may be done through revising en the contractual clauses to reduce can make bonds undervalued. But buy- the contractual terms for the bonds. In chances of holdout and rushing to the ing them at a fraction of their face val- the case when the bonds were bought court. These include the tightening of ue is not a crime. at a steep discount, there could be a the language of the collective action While the purchase of sovereign contractual clause to limit the margin clause (CACs) and pari passu clause as bonds on the secondary market at dis- of returns to minimize the likelihood well as the strengthening of sovereign count rates may be legal, one can say of litigating for 100% repayment. Con- immunity. However, there are other that the business model of specializing sideration could be given to add a boilerplate/general clauses which in purchasing hugely undervalued clause to bond contracts to the effect could be subject to innovative interpre- bonds for the purpose of resorting to that “in case of a debt restructuring, tations like what happened to pari pas- litigation and other means to force the the bondholders would be paid back su. distressed governments to pay the full no higher than X% of the purchase Fourthly, even though the legal bat- face value is not ethical because it is at price of the bond.” The percentage tle between NML and Argentina is the expense of the ordinary tax payers could be a range and take into consid- coming to an end, the impact of the and the well being of a sovereign state. eration the past holdout cases together powerful 2012 injunction on pari passu with haircut levels of historical debt Academia and institutions have may still linger on. The question on restructuring incidences. The range or used the strategy of “name and shame” whether the conditional lifting of the specific percentage should allow suffi- hoping the “super holdouts” would injunction granted by Judge Griesa cient profit margin and avoid the pos- give in. Apparently, it has not had would make the injunction disappear sibility of moral hazard of strategic much impact. Argentina’s unsuccessful for good remains to be seen. The in- default. In this way, secondary mar- pleadings in the U.S district and su- junction prevents Buenos Aires from ket operations would not be disrupted preme courts were supported by the servicing its bonds until it settles with and hopefully the incentives for super Pope, Nobel Prize winners, countries the holdouts. As Professor Anna Gelp- holdout could be diminished. like France, Mexico and Brazil, interna- ern mentioned, this is a powerful finan- tional intergovernmental institutions Other ways of reducing incentives cial weapon. It would certainly favour like the IMF, the United Nations and for super holdout should be examined. the holdouts if the borrower does not the South Centre, NGOs and ordinary For instance, the statutory penalty have close to infinite financial re- citizens. None managed to persuade interest rates of some of the bonds sources to fight lengthy legal battles. If the hedge funds to give up. Elliott holds are exorbitantly high. holdouts can still use this injunction as According to the Wall Street Journal, recourse, chances of borrowers to win Three approaches may be of value these bonds would bring 10-15 times the legal battle would be significantly to consider for the purpose of reducing of return to Elliott. These kinds of ar- diminished. Outstanding bonds with- the recurrences of the NML-style rangements give insane incentives to out improved language of CACs and “super holdouts”. holdout bond holders. pari passu is eye boggling. The newly

Page 12 ● South Bulletin ● Issue 90, 16 May 2016 Another way out is to explore FDI, Investment Agreements... developmental benefits and most of whether it is really beneficial for the (Continued from page 5) these countries have no BITs with ma- stability of the international financial jor AEs. Econometric studies on the market not to regulate hedge funds TRIMs because it would apply not to impact of BITs on FDI flows are highly specialized in debt holdout. At a time goods traded by investors but to the ambivalent. While a few studies con-

of increased social responsibilities for investor and the investment. tend that BITs affect FDI flows, they the institutions of the real economy, do not examine whether BITs have led Further, provisions on expropria- more regulations in the banking sector to the kind of FDI inflows that add to tion and fair and equitable treatment and more specific codes of conduct for industrial dynamism in host countries. give considerable leverage to foreign various business sectors, should there The majority of empirical studies find affiliates in challenging changes in tax also be some regulations and codes of no link between the two (UNCTAD, and regulatory standards and demand- conduct with respect to these hedge 2009, Annex and UNCTAD TDR, 2014, ing compensation. In particular, the funds? Apparently, conflict of interests Annex to Chapter VI). Similarly, sur- concept of indirect expropriation has and lack of transparency do exist in vey data show that the providers of led states to worry about their ability to their purchases of CDSs, hence, there political risk or in-house counsel in regulate. The fair and equitable treat- should be efforts to investigate into this large US corporations on investment ment obligation has also been inter- relatively closed and opaque business. decisions do not pay much attention to preted expansively by some tribunals BITs (Yackee, 2010). Finally, there have been repeated to include the right of investors to a international efforts to establish an in- stable and predictable business envi- Conclusion ternational debt workout regime or ronment. Policy space in several key areas af- legal framework to cope with systemic The large majority of outstanding fecting the contribution of FDI to the issues relating to the “too late and too BITs do not make any reference to per- pace and pattern of industrialization little” phenomenon for debt restructur- formance requirements of the kind dis- might be somewhat constrained by the ings as well as the holdout problem. cussed above, but a growing number of WTO Agreement on TRIMs, but it is The IMF tried in 2003. The United Na- them signed in recent years incorporate still possible for EDEs to encourage tions General Assembly set up an Ad explicit prohibitions (Nikièma, 2014). positive spillovers without violating Hoc Committee mandated to create a Some BITs go beyond TRIMs and bring the WTO commitments. However, multilateral legal framework for sover- additional prohibitions for perfor- many of the more serious constraints eign debt restructurings in September mance requirements both at pre- and are in practice self-inflicted through 2014. post-establishment phases. Others investment and free trade agreements. As one outcome, in 2015 the Com- simply refer to TRIMs without addi- There are strong reasons for EDEs to mittee formulated the ‘Basic Principles tional restrictions. Still, this narrows avoid negotiating the kind of BITs on Sovereign Debt Restructuring’ the ability of governments to move promoted by AEs. They need to turn based on years of research and consen- within the WTO regime because it al- attention to improving their underly- sus building in UNCTAD. However, lows investors to challenge the TRIMs- ing economic fundamentals rather political resistance from the developed compatibility of host-country actions than pinning their hopes on BITs in countries has made it difficult for the outside the WTO system. This multi- attracting FDI. Where commitments United Nations to push the work to a plies the risk of disputes that host undertaken in existing BITs seriously more inclusive and substantive phase. countries can face since corporations impair their ability to use FDI for in- The Argentina case has proved once are much more inclined to resort to dustrialization and development, they again the need of a debt workout investor-state arbitration than the can be renegotiated or terminated, as mechanism. states do in the WTO system. The is being done by some EDEs, even if MFN clause could entail even greater doing so may entail some immediate

loss of policy autonomy in all these costs. areas, including performance require-

ments, by allowing foreign investors to Yuefen Li is the Special Advisor on invoke more favourable rights and pro- Economics and Development Finance tection granted to foreign investors in of the South Centre. Yılmaz Akyüz is the chief econo- agreements with third-party countries. mist of the South Centre. While investment agreements entail

a considerable loss of policy autonomy, This article is based on South Centre they do not appear to be serving the Research Paper 63 entitled "Foreign intended purpose and accelerating the Direct Investment, Investment Agree- kind of FDI inflows sought by policy ments and Economic Development: makers in host countries. Evidence Myths and Realities", available at suggests that BITs are neither neces- http://www.southcentre.int/research- sary nor sufficient to bring significant paper-63-october-2015/. amounts of FDI. Most EDEs are now

wide open to TNCs from AEs through unilateral liberalization or BITs or free trade agreements (FTAs), but only a few are getting FDI with significant

Page 13 ● South Bulletin ● Issue 90, 16 May 2016

minded building - -

redlines”. Among them -

redlines. In the end the French - The The COP 21 Presidency was gener- The The LMDC conveyed the message COP21 was a battleground that A major concern was how the Towards the end, an important per took the LMDC points, and got the US to agree. ally viewed as playing a fair and difficult role in securing balanced a outcome, except for delicate an inci- and mise), mise), during the night of Friday, December, 11 where the LMDC present- ed its “super included that the Agreement is purpose to enhance of thementation imple- of the the Convention cordance with the in principles and pro- ac- visions of the Convention; and reflection operationalisation of equity and CBDR across all elements; clear differentiation between developed and developing countries on the mitigation efforts; commitment countries on provision of finance, tech- by developed nology transfer and capacity with no transfer or extension of obligations to developing countries to provide finance. that with 30 countries in its grouping representing more than 50% population of of the world the and the 70% poor, of it wanted the COP success to but be that the a outcome must be balanced, and not depart from its su- involved an onslaught (with both de- fensive and offensive interests) of the US and its allies versus the resistance and offensive by the Group of 77 and China, and especially the Like Developing Countries (LMDC) (which includes India) that had comprehensive negotiation positions and a well operating machinery. French Presidency of COP 21 behave, would in light of the polarised positions. meeting took LMDC place and the between (who were crafting French the the final compro- Presidency

The United States and allies is hostile tohostile theis climate issue. change (especially those under the Group) Umbrella wanted the mounted an onslaught on the opposite.Conven- They tion, seeking to weaken the provisions and their obligations; they wanted redefine differentiation so as to to blur the different obligations of developed and developing countries; and they wanted a legal “hybrid” clauses are and are not legally binding), (in terms of mainly what to suit the US administration’s relations with the US Congress which (CBDR) and respective capabilities; (d) to ensure that developed countries enhance the provision technology of transfer’ (e) to finance ensure that and ‘loss and damage’ is recognised separate as pillar a apart from and adaptation (f) legally binding provisions, especially on the countries.developed

h t i w

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e b moon; COP 21/CMP 11 President Laurent Fabius, Foreign Minister, Minister, Foreign Fabius, Laurent President 11 21/CMP COP moon; -

s t c e p

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General Ban Ki Ban General - ● South Bulletin ● Issue 90, 16 South● May 90, Issue ● 2016 Bulletin n

mitigation centric with all issues

he Paris Agreement adopted by the 21st Conference of Parties

14 - n

Developing Developing countries by and large

o i t but differentiated responsibilities anced manner; (c) to ensure differenti- a the principles of equity and common (including (including adaptation, loss and damage, finance and technology, besides mitigation) addressed and in a bal- wanted (a) to defend the Convention and not let it be changed or subverted; (b) to ensure that the non Agreement is had these negotiating objectives. They was the outcome of major battles on a multitude of issues, tween especially developed be- countries. and developing (COP21) under the Framework United Convention Nations on Change Climate (UNFCCC) on 12 December, By Meenakshi Raman T Secretary Agreement Paris of the adoption the celebrate France, Hollande, François President and France; Laurence Tubiana, COP 21/CMP 11 Presidency; UNFCCC Executive Secretary Christiana Figueres; UN UN Figueres; Christiana Secretary Executive UNFCCC Presidency; 11 21/CMP COP Tubiana, Laurence ties. developing countries, on many of the key issues. It also analyses analyses also It issues. the key of on many countries, developing and Agreement the Paris within issues these of the outcomes Par- the among battles the from emerged outcomes these how The UN Climate Change Conference (known as COP21) in De- in as COP21) (known Conference Change Climate The UN attract- which Agreement Paris a historic adopted 2015 cember article This criticisms. some also but congratulations of a lot ed and developed between mainly Paris, in battles the describes Paris Agreement Paris An analysis of the Paris COP21 and the Paris of the analysis An the and COP21 Climate Change Battles in Paris: in Paris: Battles Change Climate Page IISD (c) Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” Sub-paragraph 2 states that “This Agreement will be implemented to reflect equity and the principle of common but differentiated responsibilities and respective capabilities (CBDR-RC), in the light of different national circumstances.” The purpose of the Agreement was a major area of contention between developed and developing countries.

IISD In the four years of negotiations, the common refrain of developing

countries under the G77 and China Developing country negotiators gathered for an informal meeting in the corridors of the conference. was for the Agreement not to “rewrite, The G77 made a unified call on developed countries to maintain their commitment to provide finance, replace or reinterpret the Conven- technology transfer and capacity building. tion.” The G77 and China, including its sub-groupings especially the Like- dent in the final plenary that somewhat whether the views of developed or minded Developing Countries marred the process. developing countries (or both) pre- (LMDC) and the African Group con- vailed. This is the ‘should incident’ where stantly stressed that the purpose of the the US wanted the word “shall” to be Given that the Agreement is a new Agreement is to enhance the imple- replaced with the word “should” in legal instrument, it will have to be rati- mentation of the Convention on the Article 4.4 of the Agreement that relat- fied by Parties for it to come into effect. elements of mitigation, adaptation, ed to the mitigation efforts of Parties. It will enter into force after at least 55 finance, technology transfer, capacity- The US wanted developed and devel- Parties to the Convention, accounting building, and transparency of action oping countries to be treated in a like in total for at least an estimated 55 per and support. manner legally, as the original version cent of the total global greenhouse gas Developed countries, on the other referred to “shall” for developed coun- emissions have deposited their instru- hand, appeared to focus more of their tries and “should” for developing ments of ratification or acceptance. attention on the ‘objective’ of the countries.” Instead of raising the issue (The Agreement is expected to come Agreement, which was perceived by from the floor of the plenary, the US into effect post-2020.) developing countries as a mitigation- request was accommodated by the The Agreement (12 pages) was centric approach linked only to the COP Presidency by what was termed a adopted as an annex of a decision (19 temperature goal, with an attempt to “technical correction” and the word pages) of COP21. weaken the link to the Convention “shall” was then replaced with provisions and the obligations of de- “should” and was read out by the Sec- Purpose of the Agreement veloped countries under the Conven- retariat. This was viewed with dismay (Article 2) tion, especially on the means of imple- by some LMDC delegations, but as Article 2 of the Agreement states in sub mentation (finance, technology trans- there was no formal objection, the US- fer and capacity-building). inspired amendment stood. -paragraph 1 that: “This Agreement, in enhancing the implementation of the Con- Hence, the reference to “enhancing Another incident was when Nicara- vention, including its objective, aims to the implementation of the Conven- gua put up its flag in the final session strengthen the global response to the threat tion” is seen as a positive win for de- of the Paris Committee that adopted of climate change, in the context of sustain- veloping countries. the Paris agreement but it was ignored able development and efforts to eradicate by the Chair. After the agreement had poverty, including by: Although limiting temperature rise passed, the Minister of Nicaragua well below the 2 degrees Celsius goal (a) Holding the increase in the global made a strong statement protesting above pre-industrial levels is clear, average temperature to well below 2 C against his being ignored earlier. reference to the pursuit of efforts to above pre-industrial levels and to pursue

limit the increase to 1.5 degrees Celsi- efforts to limit the temperature increase to Highlights of the Paris Agree- us is seen as a major victory for many  ment 1.5 C above pre-industrial levels, recog- developing countries, especially the nizing that this would significantly reduce Small Island Developing States, the To understand the COP21 outcome, a the risks and impacts of climate change; reflection on the key clauses of the Par- Least Developed Countries, Africa and is Agreement and the decision that (b) Increasing the ability to adapt to the the ALBA countries. adverse impacts of climate change and fos- adopted it is important. Below is an Developing countries also wanted ter climate resilience and low greenhouse initial assessment of the issues that the focus to also be on adaptation and gas emissions development, in a manner form the context of the clauses, and the finance and to ensure that the global that does not threaten food production; final outcome, with an assessment as to response is in “the context of sustaina-

Page 15 ● South Bulletin ● Issue 90, 16 May 2016 ble development and efforts to eradi- the principle of CBDR-RC, in light of It was an uphill task during the cate poverty”. different national circumstances. This negotiations to get developed coun- was eventually the ‘landing-zone’ ar- tries to see the viewpoint of the LMDC Several senior developing country rived at in the Paris Agreement. in this regard. The proposal was to delegates did express their unhappi- ensure that the contributions of Parties ness over the reference to “finance Nationally Determined Contri- are viewed in a comprehensive man- flows” in the Article 2(1)(c) of the butions (NDCs) (Article 3) ner, reflecting the respective obliga- Agreement rather than a reference to tions they have under the provisions the provision of financial resources Article 3 (previously known as Article of the Convention, and not to confine from developed to developing coun- 2bis during the negotiations) states the contributions only to mitigation as tries, the commitment language of the that, “As nationally determined contribu- desired by the developed countries. Convention. tions to the global response to climate change, all Parties are to undertake and Mitigation (Article 4) A major win for developing coun- communicate ambitious efforts as defined tries is Article 2.2 that states that the in Articles 4, 7, 9, 10, 11 and 13 with the The following sub-paragraphs of Arti- Agreement will be implemented to review to achieving the purpose of this cle 4 are among the main highlights in flect equity and the principle of CBDR- Agreement as set out in Article 2. The relation to mitigation: RC, in the light of different national efforts of all Parties will represent a pro- “1. In order to achieve the long-term circumstances. gression over time, while recognizing the need to support developing country Par- temperature goal set out in Article 2, Par- A key issue throughout the Durban ties for the effective implementation of this ties aim to reach global peaking of GHGs Platform process and at COP21 was Agreement.” as soon as possible, recognizing that peak- whether and how the principle of ing will take longer for developing country CBDR-RC will be operationalised in all Article 3 symbolizes the ‘battle’ Parties, and to undertake rapid reductions the elements of the Agreement. over the nature of the agreement to thereafter in accordance with best availa- ensure that the NDCs are not viewed ble science, so as to achieve a balance be- Developed countries had been in- only as being ‘mitigation - tween anthropogenic emissions by sources sisting that the agreement must reflect centric’ (Article 4 refers to the element and removals by sinks of greenhouse gases the “evolving economic and emission of ‘mitigation’, Article 7 to in the second half of this century, on the trends” of countries in the post-2020 ‘adaptation’, Article 9 to ‘finance’, Ar- basis of equity, and in the context of sus- timeframe, while developing countries ticle 10 to ‘technology development tainable development and efforts to eradi- continued to argue that given the his- and transfer’, Article 11 to ‘capacity- cate poverty. torical emissions of developed coun- building’ and Article 13 to a “2. Each Party shall prepare, com- tries, developed countries continue to ‘transparency framework for action bear the responsibility in taking the municate and maintain successive NDCs and support’). that it intends to achieve. Parties shall lead in emission reductions and in pursue domestic mitigation measures, helping developing countries with the The LMDC was the major propo- with the aim of achieving the objectives of provision of finance, technology trans- nent for all Parties to regularly pre- such contributions.” fer and capacity-building as provided pare, communicate and implement for under the UNFCCC. their intended NDCs (INDCs) towards The US was against any reference achieving the purpose of the Agree- that each Party shall implement the At the COP in Lima in 2014, where ment. It also proposed that INDCs will NDCs that it has communicated, as the issue of differentiation was also represent a progression in light of Par- this would make it an obligation for hotly contested, Parties underscored ties’ differentiated responsibilities and the US and others to implement the their commitment to reaching an ambi- commitments under the Convention. emissions reduction target communi- tious agreement in Paris that reflects cated. To accommodate the US ‘problem’, all Parties have to do is to “pursue domestic mitigation measures, with the aim of achieving the objectives of such contributions.” What this means is that there is an obligation to take the measures necessary, with the aim of achieving the emissions reduction target, but not to achieve the target itself (emphasis added). “3. Each Party’s successive NDC will represent a progression beyond the Party’s then current NDC and reflect its highest

IISD possible ambition, reflecting its common but differentiated responsibilities and re-

spective capabilities, in the light of different national circumstances.” Demonstrators outside Le Bourget, the venue of the conference, called for a fair, trans- parent and more ambitious agreement.

Page 16 ● South Bulletin ● Issue 90, 16 May 2016 “4. Developed country Parties should tion and to avoid having only a mitiga- Paris Agreement, distinct from continue taking the lead by undertaking tion centric-goal linked to the tempera- ‘adaptation’. Developing countries economy-wide absolute emission reduction ture goal. This goal also links the adap- had been arguing very hard for ‘loss targets. Developing country Parties should tation response to the temperature and damage’ to be separately recog- continue enhancing their mitigation efforts, goal. nised. and are encouraged to move over time towards economy-wide emission reduction or In relation to the global goal on ad- (The term ‘loss and damage’ refers limitation targets in the light of different aptation, developing countries had broadly to the entire range of damage national circumstances.” during the negotiations proposed “an and permanent loss associated with

assessment of the adequacy of sup- climate change impacts in developing Article 4.4 was another major para- port” from developed countries to de- countries that can no longer be avoid- graph of contention between devel- veloping countries as well as the ed through mitigation nor can be oped and developing countries. Many “recognition of increased adaptation avoided through adaptation.) developing countries wanted the na- needs and associated costs in the light The anchoring of ‘loss and damage’ ture of the mitigation efforts to be dif- of mitigation efforts…” ferentiated between developed and as a distinct article in the Agreement developing countries, reflecting the What eventually found its way in came at a costly price when a deal was existing provisions of the Convention the adaptation section (in sub- made behind closed doors between that are based on historical responsibil- paragraph 14 of Article 7) is the refer- the US, European Union and some ity and CBDR. ence to the global stocktake (in Article Small Island Developing States and 14) which states that the stocktake Least Developed Countries in the final The US and its allies in the Umbrella “shall” “review the adequacy and effective- hours, prior to the draft agreement Group were opposed to any form of ness of adaptation and support provided for being released to Parties for considera- differentiated efforts, preferring that adaptation” as well as “review the overall tion and adoption. Parties “self-differentiate” among progress made in achieving the global goal themselves, while recognising that on adaptation…” The compromise reached is found those who have undertaken absolute in paragraph 52 of the decision text emission reduction targets before According to sub-paragraph 3, “the which provides that Parties agree “that should continue to do so in the post- adaptation efforts of developing country Article 8 of the Agreement does not in- 2020 timeframe. Parties shall be recognised…”, with the volve or provide a basis for any liability or modalities to be developed for such compensation.” While this sub-paragraph continues recognition. to provide the policy space for devel- According to one source, the deal oping countries in undertaking any Developing countries during the was between the US, EU, and five type of enhanced mitigation efforts negotiations wanted to ensure that the small island states. It seems that most (including relative emission reduction adaptation efforts they are undertaking developing countries were completely targets which are economy-wide and with or without international support unaware of the deal being done. The non-economy wide actions), over time, are recognised as their contribution to deal might have also been linked with developing countries will have to move climate action. getting reference to 1.5 degrees C in to economy-wide targets, in light of Loss and Damage (Article 8) the long-term temperature goal in the their different national circumstances. Paris Agreement in Article 2.1 (a). One major victory for developing According to several experts who The term “over time” is not precise- countries is the recognition of ‘loss and have been following the UNFCCC ly defined and there is also no refer- damage’ as a separate article to the ence that developing countries have to negotiations, the clause in paragraph undertake “absolute” emission reduction targets, which was what developed countries and some developing countries were pushing for during the negotiations. Adaptation (Article 7) In sub-paragraph 1 of Article 7, Parties agreed to “establish the global goal on adaptation of enhancing adaptive capacity, strengthening resilience and reducing vul- nerability to climate change, with a view to contributing to sustainable development and ensuring an adequate adaptation response in the context of the temperature goal referred to in Article 2.” Developing countries had been pushing for a long term goal or vision on adaptation to ensure that there is parity between adaptation and mitiga- Developing countries’ vulnerable population are the most affected by the impacts of climate change.

Page 17 ● South Bulletin ● Issue 90, 16 May 2016 52 on exclusion of liability and compensation does not preclude financial resources from being allocated to developing countries seeking funds to address the adverse impacts related to loss and damage. Finance (Article 9) Prior to the final outcome in the Paris Agreement, the thrust of the developed countries position on the issue of finance was to increase the scope of countries (to include developing countries) who should be ‘donors’ of climate finance by proposing terms in the text like ‘all Parties in a position to do so’ should provide financial resources or that the mobilisation of climate finance is a “shared effort” of all Parties. Deforestation of a tropical forest . The key sub-paragraphs on finance which were agreed to are: zation of climate finance should represent a In Cancun in 2010, Parties had “1. Developed country Parties shall progression beyond previous efforts.” agreed to developed countries mobi- provide financial resources to assist devel- lising USD 100 billion per year by Many developing countries includ- oping country Parties with respect to both 2020. With the Paris Agreement, a five ing the LMDC preferred the reference mitigation and adaptation in continuation year extension has been obtained to to the provision of financial resources of their existing obligations under the Con- reach this target and a new quantified by developed countries instead of the vention.” goal will be set for the period after focus on the “mobilisation” of climate 2025. Senior developing country nego- This paragraph continues to ensure finance. The Paris Agreement provides tiators also point out that the mobilisa- that developed countries are not ab- for both the provision of support by tion of existing climate finance as stat- solved from their existing financial developed countries and the mobilisa- ed above, is conditional on commitments under Articles 4.3 and tion of climate finance. 4.4 under the UNFCCC. “meaningful mitigation actions and In the earlier version of the draft transparency on implementation”, However, the G77 and China, had agreement (version 2 issued on Dec. 10 which was actually previously agreed during the negotiations, pressed for the by the COP 21 President), there was to under the Copenhagen Accord (in provision of these resources to be reference that the provision and mobi- 2009) and later affirmed in the deci- “new, additional, adequate, predicta- lisation of climate finance “shall repre- sion in Cancun. ble, accessible and sustained” but these sent a progression beyond previous Developed countries, with the US terms did not find place in the Agree- efforts from a floor of USD 100 billion in particular, were against the indica- ment, except for a reference in sub- per year…” and “towards achieving tion of any quantified target on the paragraph 4 on “the provision of scaled short-term collective quantified goals scale of resources in the Paris Agree- -up resources” (see below). Sub- for the post-2020 period to be periodi- ment. paragraph 2 states that “Other Parties cally established and reviewed…”. are encouraged to provide or continue to Developing countries, through the It is notable that the reference to the provide such support voluntarily.” G77 and China on the other hand, USD 100 billion per year as a floor did pressed for clear “pathways to annual Instead of the reference to “all Par- not make it to the Agreement but is expected levels of available resources ties in a position to do so” also having found in paragraph 54 of the COP 21 towards achieving short-term collec- to contribute to climate finance (which decision which states as follows: “Also tive quantified goals for the post 2020 was opposed to by many developing decides that, in accordance with Article 9, countries), the above paragraph was paragraph 3, of the Agreement, developed period to be periodically established agreed to, which stresses the countries intend to continue their existing and reviewed” and for “financial re- “voluntary” nature of such support. collective mobilization goal through 2025 sources to be scaled up from a floor of in the context of meaningful mitigation USD 100 billion per year, including a Sub-paragraph 3 provides that “As actions and transparency on implementa- clear burden-sharing formula, and in part of a global effort, developed country tion; prior to 2025 the Conference of the line with needs and priorities identi- Parties should continue to take the lead in Parties serving as the meeting of the Par- fied by developing country Parties…”. mobilizing climate finance from a wide ties to the Paris Agreement shall set a new variety of sources, instruments and chan- Technology Transfer (Article collective quantified goal from a floor of nels, noting the significant role of public 10) USD 100 billion per year, taking into ac- funds through a variety of actions,… and count the needs and priorities of developing In the negotiations on technology taking into account the needs and priorities countries.” transfer, the LMDC had called for the of developing country Parties. Such mobili- establishment of a global goal on the

Page 18 ● South Bulletin ● Issue 90, 16 May 2016 transfer of technologies by developed based system in providing clarity on Convention or the Agreement’s long- countries and know-how as well as for the content and information regarding term goal. the provision of financial resources for those efforts. On the scope, for developed coun- collaborative research and develop- Developing countries on the other tries, the stocktaking was primarily for ment of environmentally sound tech- hand were pressing for a transparency considering the aggregate effect of the nologies and enhancing accesses of framework which is differentiated be- mitigation contributions of Parties in developing countries to such technolo- tween developed and developing light of the long-term mitigation goal gies that match their technology needs. countries and better rules on linked to the temperature goal, while There was also a proposal from In- ‘transparency of support’ which relates for developing countries, it was to dia for developed countries to provide to information from developed coun- consider the overall implementation of financial resources to address barriers tries on the means of implementation obligations of Parties (consistent with related to intellectual property rights (finance, technology transfer and ca- the differentiated responsibilities), in (IPRs) and facilitate access to technolo- pacity-building). relation to mitigation, adaptation and gies. the means of implementation. The main bone of contention there- The African Group proposed a tech- fore was whether such a transparency Under the Agreement, the global nology framework to be adopted that framework should be differentiated stocktake, which will be conducted will provide direction and guidance in between developed and developing every 5 years, is to be comprehensive, relation to technology assessments, countries. considering mitigation, adaptation including in identifying options for and the means of implementation and What was agreed to is a transparen- enhancing access and to address barri- support, and undertaken in the light cy framework with flexibilities taking ers. of both equity and the best available into account the different capacities of science. This will avoid a mitigation- These proposals were opposed by countries and builds on the existing centric process which also takes into developed countries. transparency arrangements (that is account considerations of equity. Thus currently differentiated between devel- The real value for developing coun- the developing countries’ viewpoints oped and developing countries). tries is the establishment of the technol- prevailed in this clause. ogy framework that includes “the as- Global Stocktake (Article 14) In a related matter, in the COP 21 sessment of technologies that are ready During the negotiations, the main issue decision under the section on intended for transfer” (as reflected in paragraph around the global stocktake was nationally determined contributions 68 of the COP 21 decision). around its purpose and scope. (INDCs), paragraph 17 notes with con- In addition, there is now a link es- (Stocktake is a ‘code’for taking stock of cern “that the estimated aggregate green- tablished between the Technology the implementation by Parties collec- house gas emission levels in 2025 and Mechanism and the Financial Mecha- tively of their progress). The idea was 2030 resulting from the INDCs do not fall nism to allow for collaborative ap- for a periodic stocktake of the imple- within least-cost 2 ˚C scenarios but rather proaches in R and D and for facilitating mentation of the Agreement and there lead to a projected level of 55 gigatonnes access to technologies, which some- were options as to the purpose of the in 2030, and also notes that much greater what reflects the call by India to pro- stocktake: whether to assess the over- emission reduction efforts will be required vide financial resources to address bar- all/aggregate/collective progress to- than those associated with the INDCs in riers related to IPRs and facilitate ac- wards achieving the objective of the order to hold the increase in the global cess to technologies. average temperature to below 2 ˚C above The IPR issue has been a long- standing battle between developed and developing countries under the UN- FCCC process, with strong opposition by developed countries led by the US in particular, to even mention the word ‘IPRs’. Transparency of action and support (Article 13) With a ‘bottom-up’ system in place for countries to nationally determine (not multilaterally determined) their contributions to climate change efforts under the Agreement as advanced primarily by the US, there was a push by developed countries to have a common and unified system in place (which is not differentiated between developed and developing countries) on ‘transparency Environmentally-unfriendly products and consumption patterns contribute to resource wastefulness of action’- which is a ‘top-down’ rules- and climate change.

Page 19 ● South Bulletin ● Issue 90, 16 May 2016 pre-industrial levels by reducing emissions countries, although in some aspects only favours the developed countries to 40 gigatonnes or to 1.5 ˚C above pre- mitigation does gets pride of place. with the rewriting of the Convention. industrial levels by reducing to a level to be - The developing countries to a sig- identified in the special report referred to in The Agreement, from this perspec- paragraph 21 below.” nificant extent successfully defended tive, has laid the foundation on which the Convention and stopped the plans future actions can be motivated and In paragraph 20, Parties agreed that of developed countries to drastically re- incentivised, a baseline from which a facilitative dialogue among Parties write the Convention. more ambitious actions must flow. will be convened in 2018 “to take stock of There are mechanisms in place in the the collective efforts of Parties in relation to - Differentiation between developed and developing countries was retained Paris agreement, such as the global progress towards the long-term goal re- stocktake, that can be used to encour- ferred to Article 4(1) of the Agreement in the main, although weakened in some areas. age countries to raise their ambition [which relates to the long-term temper- level. ature goal and the mitigation goal) and - The principles of equity and CBDR to inform the preparation of nationally were mentioned in a specific clause in International cooperation, however determined contributions (NDCs) pursu- the important Article 2 on purpose of inadequate and flawed, remains intact ant to Article 4, paragraph 8, of the Agree- the Agreement, and operationalised in from which much more cooperation ment (which relates to the communica- some key areas of the Agreement. can flow in future. tion of the NDCs). - Sustainable development and pov- The outcome represented by the The “facilitative dialogue” above erty eradication as important objectives Paris Agreement, that a bottom-up appears to be an ex-ante process to in- of developing countries were referred approach is taken on enabling each form the preparation of the NDCs, and to as the context of actions by develop- country to choose its “nationally de- is only about mitigation, unlike the ing countries in some key areas. termined contribution” with presently global stocktake. very weak or even no compliance, was - Developed countries should take the only possibility, given the state of The EU has been a major proponent the lead in mitigation and finance is many governments (including the of a review process every five years to referred to in the agreement. United States) generally not being assess if Parties’ mitigation contribu- ready or willing or able to undertake tions are on track in meeting the long- - Although the temperature goal is legally binding targets. term mitigation goal and for enhancing to limit temperature rise to well below (or ratcheting up) the contributions of 2 degrees C from pre-industrial levels, It can be expected that developed Parties accordingly. the reference to pursuing efforts to lim- countries will pile pressure on devel- it temperature rise to below 1.5 degrees oping countries, especially emerging Many developing countries, espe- C (this 1.5 degrees C as the target was economies, and also try to shift or cially from the LMDC were worried called for by small island states, LDCs, avoid their obligations. For the devel- about such a ratcheting up process due Africa and ALBA countries) is signifi- oping countries, they should invoke to concerns that with developed coun- cant. the overall context of what will make tries not doing their fair share of the a low carbon pathway a reality--- fi- effort (taking into account their histori- True, the Paris Agreement also nance, technology transfer, capacity cal emissions), the pressure would be means that big pressures will be put on building plus adaptation, loss and on developing countries to plug the developing countries, and especially damage, all in context of sustainable emissions gap to limit the temperature the emerging economies, to do much development and poverty eradication. rise. Due to this concern, they had been more on their climate actions, including They must also remain firm and unit- opposed to any ex-ante process to re- mitigation. But these enhanced actions ed in the negotiations and other pro- view the INDCs prior to their commu- need to be taken, given the crisis of cesses ahead, starting from now, even nication by Parties. climate change that very seriously af- before the signing and ratification of fect developing countries themselves. Clearly, the EU has got its way, the Agreement. against the concerns of the LMDC. The Agreement also fails to provide

actions that fulfil the 2 degrees Celsius Conclusion pathway, let alone 1.5 degrees. The emissions gap between what countries The developing countries started the Meenakshi Raman is Senior Legal in aggregate should do and what they Paris talks with some clear objectives Advisor and Coordinator of the Cli- pledged to do in their INDCs up to and principles. Though some aspects mate Change Programme of the Third 2030 is very large. This has led many were diluted, it got its red lines protect- World Network. The contribution of ed, though it did not get some of its commentators to condemn the Paris Martin Khor, Executive Director of offensive points accepted (for example, COP21 as a failure. the South Centre, is gratefully clearer targets on finance or a reference However another perspective is that acknowledged. This article has also to IPRs as a barrier to technology trans- COP21 is only a start, and the Agree- been published in the Economic and fer). Some of the important points ment represents an agreement interna- Political Weekly, January 9, 2016. gained by developing countries were tionally to enhance individual and col- that lective actions to face the climate catas-

- The Paris agreement is not mitiga- trophe. A real failure would have been tion-centric as desired by developed a collapse of the Paris negotiations, Copenhagen-style, or an outcome that Page 20 ● South Bulletin ● Issue 90, 16 May 2016 The grant of patents and the exorbitant cost of "lifesaving" drugs By Germán Velásquez process to meet the conditions neces- conclusion that the number of mole- sary to grant patent protection, name- cules that produced significant thera- he important relationship between ly: novelty, inventive step and indus- peutic progress reduced drastically: 22 T the examination of patents carried trial applicability (utility). in 2006; 15, 10, 7, 4 in the following out by national patent offices and the years up to 2011, which was a year in These three elements, however, are right of citizens to access to medicines which Prescrire declared that only one not defined in the TRIPS Agreement hasn't always been well-understood. medicine of significant therapeutic in- and WTO Member States are free to

terest was brought to the market. Too often these are viewed as unre- define these three criteria in a manner lated functions or responsibilities of the consistent with the public health objec- Given that France is one of the larg- state. And the reason is clear: patenta- tives defined by each country. est pharmaceutical markets in the bility requirements are not defined by world, the reduction in innovation con- It is widely held that patents are patent offices, but frequently by the firmed that France is a good indicator of granted to protect new medicines to courts, tribunals, legislation or treaty the global situation. negotiators. reward the innovation effort. Howev- er, the number of patents obtained Oncologists from fifteen countries This is the case when patent policy annually to protect truly new pharma- recently denounced the excessive prices is implemented in isolation from, ra- ceutical products is very low and fall- of cancer treatments, which are neces- ther than guided by, public health poli- ing. sary to save the lives of the patients, cy. and urged that moral implications Moreover, of the thousands of pa- should prevail; according to them, of Given the impact of pharmaceutical tents that are granted for pharmaceuti- the 12 cancer treatments approved in patents on access to medicines, patent cal products each year, a few are for 2012 by the United States Food and offices should continue to align their new medicines - e.g. new molecular Drug Administration, 11 cost more than work in support of national health and entities (NMEs). medicine policies, using the freedom 100,000 dollars per patient per year. All of the above led the World permitted by the Trade-Related As- Since the 1950s, there have been Health Organization (WHO), in collab- pects of Intellectual Property Rights some references to the costs of Research oration with the United Nations Con- Agreement (TRIPS) to define patenta- and Development (R&D) for pharma- ference on Trade and Development bility requirements. ceutical products. (UNCTAD), the United Nations Devel- The TRIPS Agreement requires all opment Programme (UNDP) and the According to some sources, the aver- World Trade Organization (WTO) International Centre for Trade and age cost of research for a new pharma- member states to incorporate into their Sustainable Development (ICTSD), to ceutical product has increased from 1 legislation universal minimum stand- develop, in 2007, guidelines for the million dollars in 1950 to 2.5 billion dol- ards for almost all rights in this do- examination of pharmaceutical patents lars for the development of a single main: copyright, patents and trade- from a public health perspective. product. marks. The guidelines were intended to During the summer of 2014, a num- A patent is a title granted by the contribute to improving the transpar- ber of European countries, including public authorities conferring a tempo- ency and efficacy of the patent system France and Spain, spent many months rary monopoly for the exploitation of for pharmaceutical products, so that negotiating with the company Gilead an invention upon the person who re- countries could pay more attention to on the price of a new medicine for hep- veals it, furnishes a sufficiently clear patent examination and granting pro- atitis C known as Solvaldi. and full description of it, and claims cedures in order to avoid the negative The price fixed by Gilead was 56,000 this monopoly. effects of non-inventive developments Euros per patient for a twelve-week on access to medicines. As with any monopoly, it may lead treatment, or 666 Euros per tablet. to high prices that in turn may restrict The major problems can be identi- According to the newspaper Le access. The problem is compounded in fied in the current use of the patent Monde, the price of each tablet was 280 the case of medicines, when patents system to protect pharmaceutical inno- times more than the production cost. In confer a monopoly for a public good vation: reduction in innovation, high France, it is calculated that 250,000 pa- and essential products needed to pre- prices of medicines, lack of transparen- tients should receive this medicine, the vent illness or death and improve cy in research and development costs, cost of which would represent 7 per health. and proliferation of patents. cent of the annual state medicine budg- According to the TRIPS Agreement, A study carried out by the journal et. the patentability requirements used by Prescrire analysed the medicines that national intellectual property offices were introduced to the French market require a product or manufacturing between 2006 and 2011, arriving at the (Continued on page 22)

Page 21 ● South Bulletin ● Issue 90, 16 May 2016 South Centre statement to the UPOV Consultative Committee on the issue of interrelations with the FAO-ITPGRFA Below is the South Centre statement made at the UPOV Consul- Protecting farmers' practices with tative Committee meeting on 17 March 2016. The statement respect to saving, using, exchanging was made by Viviana Munoz Tellez, head of the Centre’s Devel- and selling seeds and other propagat- ing material is central to achieving opment, Innovation and Intellectual Property (DIIP) Programme. these objectives. The issue of interrelations of UPOV and the ITPGRFA is crucial to advance the realization of farmers’ rights. The result from the discussion on interrelations should be to facilitate the enactment and implementation of legislation by members of UPOV Union and contracting parties of the FAO IT- PGRFA that promotes the full and fair exercise of farmers’ rights. South Centre responded in 2014 to the invitation of the Governing Body of the FAO ITPGRFA by submitting com- ments on the issue of interrelations be- The South Centre recognizes the importance of both formal and informal seed systems and ensuring equity in farming systems, particularly in developing countries. tween the FAO ITPGRFA, UPOV and WIPO. The submission is publicly appreciate the opportunity for the South Centre is here today because available on the treaty website: http:// I South Centre, an intergovernmental we recognize the importance of both www.planttreaty.org/content/south- organization of developing countries, formal and informal seed systems and centre-submissions-interrelations-upov- to make an intervention to the UPOV ensuring equity in farming systems, wipo Consultative Committee on this issue. particularly in developing countries. We applaud this effort towards pro- There is an urgent need for countries With regards to the current exercise moting the participatory and inclusive- to take measures to protect and pro- to identify possible areas of interrela- ness of the process. mote farmers rights, in accordance to tions, South Centre suggests that the Article 9 of the FAO ITPGRFA and draft list of issues be extended to include in addition to Article 9 provi- The grant of patents... toward achieving the United Nations (UN) agreed Sustainable Development sions, including 9.1, the Preamble of the (Continued from page 21) Goals (SDGs). FAO ITPGRFA and Article 6. The application of patentability re- Countries through the SDGs are South Centre agrees that there is a quirements for medicines, given their committed to tackling hunger not only need for deeper analysis on the issue of public health dimension, should be by increasing agricultural productivity interrelations between UPOV, the FAO considered with even more care than in but also the incomes of small-scale ITPGRFA, as well as with the WIPO. the case of regular merchandise or lux- food producers, in particular women, Thus, we support the establishment of ury items. indigenous peoples, and family farm- an independent experts committee to undertake a report. The first and most important step is ers, as well as by ensuring sustainable to use the freedom permitted by the food production systems and resilient We also support the idea of a sym- TRIPS Agreement to define the patent- agricultural practices adapted to cli- posium to share experiences and views ability requirements: novelty, inventive mate change. on the implementation of the UPOV step and industrial applicability Countries are also committed Conventions and the FAO ITPGRFA. (utility) in a way that keeps sight of through the SDGs and international We kindly request, in continuing with public interest in the wide dissemina- agreements to maintain the genetic the participatory and open nature of tion of knowledge. diversity of seeds, and ensure access the discussion, that observers and in particular, farmer organizations, are Germán Velásquez is the Special Ad- to and fair and equitable sharing of invited and supported to participate in viser for Health and Development of benefits from the utilization of genetic the symposium. the South Centre. resources and associated traditional knowledge. Page 22 ● South Bulletin ● Issue 90, 16 May 2016 Boutros Boutros-Ghali—The Nobility of Ideas and Ideals This article is in remembrance of Boutros Boutros-Ghali, who had been Secretary General of the United Nations in 1992-1996. He also served as Chairperson of the Board of the South Centre from 2003 to 2006. By Roberto Savio to fight with the driver, an Egyptian, who did not want him to pay. t is no coincidence that Boutros I Boutros-Ghali (BBG), who died on BBG was not popular in the United February 16, was the only Secretary- Nations. He was very strict, very pri- General in the history of the United vate (he never went to any reception) Nations to have served only one of the and very aloof. He was, in reality, a Professor of International Law, which two terms that have always been al- Boutros Boutros-Ghali, former UN Secretary- lowed. The United States vetoed his re- was his real interest in life. He did not General and former Chair of the Board of the election, in spite of the favourable vote like very many people but suddenly South Centre. became alert when he met somebody of the other members of the Security General Assembly had unanimously with a personality, or an unusual per- Council. He was considered too inde- approved a global plan of governance, son. And he looked on the world of the pendent. under which international cooperation United Nations as too pompous and became the basis for its actions. Out of We have now forgotten that in 1992, formal. He always preferred a book to this plan, for example, the UN Indus- on US request, BBG authorised a UN a diplomat, but if you became his trial Development Organization intervention in Somalia, run by a US friend, you found a very ironic and (UNIDO) was created, and a Summit General, the aim of which was to dis- amusing mind, with striking intellectu- of Heads of State was even held in tribute US$90 million of food and aid to al depth and shy human warmth. the former Italian colony, shaken by an Cancun, Mexico, in 1981 to advance on internal conflict among several war BBG came from an historical Egyp- a New Economic Order. tian orthodox family, which was very lords. The intervention cost $900 mil- It was the first overseas visit of rich until [President Gamal Abdel] lion dollars in military expenses, and newly-elected U.S. President Reagan, Nasser's nationalisations. He consid- ended with the downing of two Black and he immediately made it clear that ered that, because of his family, he Hawk helicopters and the tragic death the days of the United Nations were could not be conditioned by power. He of 18 American soldiers, dragged finished. The United States, he said, was a Copt, married to a strong and through the streets of Mogadishu. would not tolerate being straightjack- intelligent Jewish Egyptian, Leila, and eted in an absurd democratic mecha- An obvious expedient for the Unit- he was able to make a career up to the nism in which its vote was equal to ed States was to put the blame squarely level of Secretary of State, while main- that of Monte Carlo (he probably on BBG, who became the scapegoat taining his university tenure. When he meant Monaco!). during the electoral campaign for the was vetoed by the United States for a 1996 US presidential election. In his second UN term, he told me: The United States had become rich campaign, Bill Clinton referred to him “Americans do not want you to say because of trade, and its slogan was as “Boo Boo Ghali”, and an alliance 'yes', they want you to say 'yes sir'.” 'trade not aid'. British Prime Minister was made with the then US Ambassa- Margaret Thatcher was also part of the He never forgot his identity. He dor to the United Nations, Madeleine Cancun Summit, and she and Reagan spoke of himself as an Arab, and open- Albright, to get rid of him in exchange established an alliance making mar- ly wondered whether he would have for her becoming Secretary of State. kets and the free movement of capital had the same treatment had he been the new basis for international rela- As you can see, I do not intend to white and American or European. He tions. write a ritual commemoration of BBG. I openly sympathised with what he travelled with him on the same flight to called the “underdogs” and the From 1981 to 1992, the world Paris when he left the United Nations “exploited”, and he tried to make the changed dramatically, not only be- (only the Italian ambassador went to United Nations once again a forum of cause of the collapse of a bilateral say goodbye at the airport), and I re- global governance. We have to remem- world with the end of the Soviet Un- member the ease with which, when we ber that when BBG became Secretary- ion, but because the winners took liter- arrived at the immigration line, he General in January 1992, the United ally the end of communism as a man- went to the Non-EU queue, in spite of a Nations was at the end of a long pro- date for a capitalism disencumbered policeman inviting him to the diplo- cess of decline which had started with from any form of governance. mats' exit. He said: “My friend, those US President Ronald Reagan in 1981. times are gone, now I am a citizen like BBG was not a left-wing person, you.” And when we took a taxi, he had Eight years earlier, in 1973, the UN but he felt how the big powers were

Page 23 ● South Bulletin ● Issue 90, 16 May 2016 marginalising the United Nations. Fi- tions. Human Rights in Egypt, and did not nance and Trade – the two engines of deviate from his overall political view Today, the United Nations has no globalisation – were already running by becoming Honorary President of the funds for action, and has become a outside of the organisation and BBG Belgrade-based European Centre for dignified International Red Cross, left spoke about this trend based on na- Peace and Development, an organisa- with education, health, food, children tional interest with the concern of an tion created by the UN General Assem- and any other humanitarian sector Arab and the distaste of a Professor of bly which has played a unique role in which is totally extraneous to the are- International Law. creating academic cooperation all over na in which the politics of money and the Balkans and other countries of East- In his early days as Secretary- power is played out. The Millennium ern and Central Europe. In this centre, General, he made a strong effort to Development Goals, adopted with he found a place where his ideals of establish an Agenda for Peace, a great fanfare from the world's Heads justice and peace, development and strong juridical document on a clear of States in 2000, would cost less than cooperation, were still vibrant and ac- role for the United Nations, which was 5% of the world's military expenses. tive. conveniently ignored by the great The five permanent members of the powers. UN Security Council are responsible BBG died in the moment of clashes for the international trade of 82% of between the fundamentalists of Islam He then proceeded to convene a weapons, and the Council's legitimacy and the others. He had tried to draw number of extraordinary conferences, for military intervention is a blanket attention to this problem which he had from the one on Environment (Earth conveniently used according to cir- clearly seen looming, and he leaves a Summit) in Rio de Janeiro in 1992 (the cumstances. The sad situation of Iraq, world where his ideas and ideals have basis of the path towards the Paris Syria and Libya is a good example. become too noble for a world where Climate Conference at the end of nationalism, xenophobia and conflict 2015), to the conference on Human Meanwhile, the great powers have have become the main actors in inter- Rights in Vienna in 1993, the confer- not hidden their agenda of displacing national relations. ence on Population in Cairo in 1994, the debate on governance from the the Social Summit in Copenhagen in United Nations. The Group of Seven It is time now to look more at those 1995 and the conference on Women in has become the Group of 20, and the ideas and ideals, and less to BBG as a Beijing in the same year. World Economic Forum in Davos a human being, with his inevitable flaws more important space for exchange and shortcomings. This would also be In all those conferences, the United than the UN General Assembly. as he would like to be remembered. States and the other great powers had With him, we lived through what un- to bow again to the rules of interna- BBG viewed the decline of the UN fortunately looks now as the last great tional democracy, and accept resolu- with regret. After he left, he moved moment of the United Nations, and of tions and plans of action that they into positions which were consistent international law as the basis for coop- would gladly have avoided. with his concerns. He became Secre- eration and action. tary-General of the International Or- When they finally got rid of him in ganisation of La Francophonie, where Roberto Savio is publisher of Other 1996, the decline of the United Nations again he had trouble with the French News, editorial adviser to IDN resumed its course. Even Kofi Annan, because he wanted to make alliances (InDepthNews) and adviser to Global who was chosen to succeed BBG on with other Latin language areas given Cooperation Council. He is also co- Madeline Albright's request, eventual- a cultural not merely linguistic view of founder of Inter Press Service (IPS) ly fell into disgrace, because he tried to the world to be mobilised. news agency and its President Emeri- retain some independence for his ac- tus. He then became Commissioner for SOUTH BULLETIN EDITORIAL COMMITTEE Chief Editor: Martin Khor Managing Editor: Vice Yu Assistants: Anna Bernardo, Adriano Timossi The South Bulletin is published by the South Centre, an intergovernmental think-tank of developing countries.

South Centre website: (in English, French and Spanish) www.SouthCentre.int South Centre Tel: +41 22 791 8050 A group photo of a South Centre Board Meeting with Boutros Boutros-Ghali (2nd row from the top, Email: [email protected] third from left) who was Chairman of the Centre in 2003-2006. Page 24 ● South Bulletin ● Issue 90, 16 May 2016