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Free Trade, the Washington Consensus, and Bilateral American University Business Law Review Volume 6 | Issue 1 Article 4 2016 Free Trade, The aW shington Consensus, And Bilateral Investment Treaties The outhS African Journey: A Rethink On The Rules On Foreign Investment By Developing Countries Ziyad Motala Howard Law School, [email protected] Follow this and additional works at: http://digitalcommons.wcl.american.edu/aublr Part of the Banking and Finance Law Commons, International Law Commons, and the International Trade Law Commons Recommended Citation Motala, Ziyad "Free Trade, The ashinW gton Consensus, And Bilateral Investment Treaties The outhS African Journey: A Rethink On The Rules On Foreign Investment By Developing Countries," American University Business Law Review, Vol. 6, No. 1 (2018) . Available at: http://digitalcommons.wcl.american.edu/aublr/vol6/iss1/4 This Article is brought to you for free and open access by the Washington College of Law Journals & Law Reviews at Digital Commons @ American University Washington College of Law. It has been accepted for inclusion in American University Business Law Review by an authorized editor of Digital Commons @ American University Washington College of Law. For more information, please contact [email protected]. FREE TRADE, THE WASHINGTON CONSENSUS, AND BILATERAL INVESTMENT TREATIES THE SOUTH AFRICAN JOURNEY: A RETHINK ON THE RULES ON FOREIGN INVESTMENT BY DEVELOPING COUNTRIES ZIYAD MOTALA * Introduction ........................................................................................... 31 II. Embrace of free trade and the Washington Consensus ...................... 34 III. South Africa and Free Trade ............................................................ 35 IV. A rethink on unrestricted free trade ................................................. 45 V. Free trade among the developing world ............................................. 47 V II. R ethink on B ITS ............................................................................. 48 V II. N ew investm ent law ....................................................................... 52 C onclusion .............................................................................................. 55 INTRODUCTION The internationalization of business constitutes one of the dominant features of commerce today. Ever since World War II, the prevailing mantra of trade policy among western countries is free trade.' Countries in the developed world are expected to eliminate all restrictions on the free movement of goods across national borders. This is codified in the rules of * Professor of Law, Howard Law School. I want to thank Helen Osun, Rebeca Pannick, Rashia Reddy, Zakhary Knatt and Irshad Motala for their research and other support. This project was supported by a 2016 summer research stipend provided by Howard University School of Law 1. RALPH H. FOLSOM ET AL., INTERNATIONAL BUSINESS TRANSACTIONS: FOREIGN INVESTMENT 22 (10th ed. 2009); Free Trade Protection and Agreements (last visited June 18, 2016), http://www.referenceforbusiness.com/encyclopedia/For-Gol/Free-Trad e-Protection-and-Agreements. AMERICAN UNIVERSITY BUSINESS LA WREVIEW Vol. 6:1 the World Trade organization ("WTO"),2 which entered into force in 1995 and the predecessor regime under the General Agreement of Trade and Tariffs ("GATT") entered into in 1948. 3 Free trade is complemented by the rules of the International Monetary Fund ("IMF"), which requires countries, particularly those from the developed world, to remove currency restrictions.4 The developed world has relentlessly pushed other countries to embrace free trade, as most recently seen in the Washington Consensus.5 This article considers the trade and monetary policies pursued by South Africa, Africa's most developed if not largest economy in the post 1994 period. In the immediate aftermath of South Africa's first democratic elections, the country embraced the Washington Consensus and the underlying notion of free trade. In addition, it entered into a number of Bilateral Investment Treaties ("BITs") with several European countries. 6 These agreements have proved to be profoundly detrimental to South Africa as a developing country. It has undermined South Africa's ability to nuance its economic policy choices to deal with the legacies of apartheid. The developed world embraces free trade after it achieves a particular level of development. Countries in the developed world engaged in mutually beneficial free trade when their economies achieved similar levels of sophistication and development. Moreover, their populations function under superior standards of education and high material standards of living. South Africa adopted free trade under circumstances of extreme inequality and abject poverty.7 Unlike most of the developed world, South Africa has a deficient education system, which suffers from severe impediments, due to decades of apartheid rule.8 Parts of the economy are highly developed 2. World Trade Organization, Ministerial Declaration of 14 November 2001, WTO Doc. WT/M1N(01)/DEC/1, 42 ILM 746 (2002) [hereinafter Doha Declaration]. 3. FOLSOM, supra note 1, at 22-23; What is the WTO?, WTO (last visited June 18, 2016), https://www.wto.org/english/thewto-e/whatis-e/wto-dg-stat e.htm. 4. FOLSOM, supra note 1, at 21; Factsheet,IMF (Mar. 23, 2016), http://www.imf org/external/np/exr/facts/glance.htm. 5. Washington Consensus, WHO (last visited June 18, 2016), http://www.who.int /trade/glossary/story094/en/. 6. Peter Leon, Creeping Expropriations of Mining Investments: An African Perspective, 27 J. ENERGY NAT. RESOURCES & ENVTL. L., 597, 601 (2009). 7. Andrew Friedman, Flexible Arbitration for the Developing World: Piero Forestiand the Future of BilateralInvestment Treaties in the Global South, 7 INT'L L. & MGMT. REv. 37,40 (2010-2011). 8. Lucy Holborn, Education in South Africa: Where Did it Go Wrong?, GGA (Sept. 1, 2013), http://gga.org/stories/editions/aif-15-off-the-mark/education-in-south -africa-where-did-it-go-wrong; see also Julian Rademeyer, Is SA Bottom of the Class in Maths and Science? WEF Ranking is Meaningless, AFR. CHECK (Sept. 3, 2014, 5:54), https://africacheck.org/reports/is-sa-bottom-of-the-class-in-maths-and-scienc 2016 FREE TRADE with a minority that lives under "first world" conditions. South Africa assumed largely first world free trade obligations despite the reality of the majority of the population subsisting under conditions of poverty and rampant unemployment unlike any other countries that assumed similar obligations.' The embrace of free trade resulted in the decimation of key sectors of the economy. o The liberalization policies also resulted in the movement of major corporate head offices and large amounts of currency out of South Africa. South Africa entered into a number of BITs with developed countries, which constrained its ability to adopt legislative and policy frameworks to advance the public interest."' In several instances, the BITs agreements contained provisions inconsistent with constitutional imperatives. It meant that as a sovereign, the country surrendered key aspects of its economic policy. South African representatives failed to appreciate the impact of these measures and its consequences on the ability of the state to fashion progressive policies for the benefit of the disadvantaged. The difficulty of competing against other developing countries has been compounded by a Constitution and legal order, which guarantees socio- economic and labor rights to its population.12 The progressive Constitution and the guarantees granted therein are something one expects in the developed world. When compared to other competitive markets in the developing world that do not provide similar legal guarantees, there is an increase in the cost of doing business in South Africa. This makes it difficult to compete with other developing countries that do not have a transparent, rights-based, and democratic constitution. In hindsight, South Africa, like many developing countries, has soured on free trade and BITs.' 3 The South African government has come to the realization that free trade with the developed world and an essentially passive government has adverse consequences for its development and e-why-ranking-is-meaningless/. 9. See Thabi Mbeki, Former President of South Africa, State of the Nation Speech (Feb. 14, 2003) (describing South Africa as a dual economy with an industrialized and underdeveloped part). 10. Lila J. Truett & Dale B. Truett, New Challenges for the South African Textile and Apparel Industries in the Global Economy, 35 J. ECON. DEV. 4 (2010). 11. Mohammed Mossallem, Process Matters: South Africa's Experience Exiting its BITs, GLOBAL ECON. GOVERNANCE PROGRAMME (2015). 12. See S. AFR. CONST., 1996 §§ 22-27 (containing a myriad of positive rights including: the right to freedom of trade, labour rights, housing, health care, food, water and social security). 13. David Schneiderman, Promoting Equality, Black Economic Empowerment, and the Future of Investment Rules, 25 SAJHR 246, 249 (2009). AMERICAN UNIVERSITYBUSINESS LA W REVIEW Vol. 6:1 ability to create an environment that uplifts the material conditions of the majority. 14 There is an emerging consensus that free trade among similarly situated countries in the continent offers better opportunities for the developing world. Free trade with the developed world has not delivered a manufacturing base to most African countries leaving them dependent on the export of raw materials. 1 5 The BIT agreements, which complement free
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