View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by RMIT Research Repository Is Global Arbitration of International Debts Viable? A thesis submitted in fulfillment of the requirements for the degree of Doctor of Philosophy (PhD) Katarina Sehm Patomaki M.Sc. (economics) School of Global Studies, Social Science and Planning RMIT University November 2011 i DECLARATION I certify that except where due acknowledgements has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of the thesis is the result of work which has been carried out since the official commencement date of the approved research program; any editorial work, paid or unpaid, carried out by a third party is acknowledged; and, ethics procedures and guidelines have been followed. …………………………………………… Katarina Sehm Patomaki 6 December, 2011 ii Acknowledgements This thesis would not have been possible without the support from the RMIT University in Melbourne. The International Endeavour award allowed me to concentrate full-time and completely on this research. In addition, I am grateful for having had additional support from a number of foundations in Finland: the Finnish Peace Association (Finlands Fredsförbund), the Family Fund of Anna and Signe von Bonsdorff, Hans Bang Stiftelsen, Ella and Georg Ehrnrooths Stiftelse, Otto A Malms Donationsfond, Oskar Öflunds Stiftelse, and from both Väinö Tanner‘s and Mauno Koivisto‘s Funds of the Kansan sivistysrahasto. In addition to this important institutional support, I thank Paul James, Pavla Miller, Ravi Roy and Joe Siracusa of RMIT University for having sat on the panels of my confirmation and completion seminars. An extended thank you goes to Paul James and Ravi Roy for having supervised and supported this writing process, and for patiently having combed through my many drafts. Ravi joined the team at a later stage, so it is Paul whom I would like to single out in particular. Without him, this thesis would not have its present structure or coherence. Paul made sure my focus remained steady, and he has tirelessly talked through my arguments while never forgetting to remind me of the importance of making the language understandable. Thank you, Paul, for your eloquent, encouraging, inspiring and wise guidance. In addition to the support by Paul, Pavla and Roy, I am grateful to Aisling O‘Donnell for having proof-read the entire manuscript, and for having done so with humor and a smile. Aisling‘s careful work has definitely clarified the language of this theses, she helped make sense out of nonsense in more cases than one. I hope, of course, that any remaining linguistic problems I may involuntarily have missed − or worse, accidentally reinserted − will not distract the reader on the expense of my argument. Parts of my argument have been tested by anonymous referees. An early version of parts of chapter 2 first appeared in print in ―Dealing with Debt‖ by Matti Kohonen and Francine Mestrum (eds.). 2009. Tax justice. Putting global inequality on the agenda, Pluto Press, London, pp. 90–106. Parts of chapter 4 constitute the core of what appears in Global Society (2011, vol. 25, no. 4) under the heading of ―Towards global equity: disentangling odious debt from sovereign economic insolvency‖. The valuable comments and corrections iii I have received through these processes have been instrumental in helping me clarify and sharpen my argument. Naturally, the responsibility for any remaining mishaps lies with me. Finally, my thoughts go to my fabulous family, my husband Heikki and my children Anna and Oona. As I write this, I feel particularly fortunate for having shared so many exciting Australian adventures with you, this thesis being but one. In concluding these acknowledgements, an especially warm hug of thank you must go to my daughters not only for being such rays of light and for providing me with endless laughter, but also for having been good sports and contended with a restricted menu of casseroles and soup, allowing me to finalize the editing of this manuscript. iv Abbreviations ACP African, Caribbean and Pacific group of states BIS Bank for International Settlements BWIs Bretton Woods institutions, or the IMF and the World Bank group CACs Collective Action Clauses CIA Central Intelligence Agency COFACE Compagnie Française d‘Assurance pour le Commerce, the French export credit agency DAC Development Assistance Committee of the OECD DIFF Development Import Finance Facility-scheme of the Australian EFIC ECB European Central Bank ECOSOC Economic and Social Council of the UN EFIC The export finance and insurance corporation by the Australian government EPA European Partnership Agreement EU European Union EURODAD European Network on Debt and Development Ex-Im the US Export-Import Bank, the official export credit agency of the US government FRG Federal Republic of Germany FSB Financial Stability Board FTAP Free and Transparent Arbitration Process G7/8 Initially a group of six countries which now includes eight nations: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States. Representatives from these countries meet to discuss common economic concerns G10 A group originally of ten, now eleven, industrial nations: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, the US GATT General Agreement on Tariffs and Trade GDI Gross Domestic Income GDP Gross Domestic Product GNI Gross National Income GRD Global Resource Dividend HIPC Heavily Indebted Poor Country IBRD International Bank for Reconstruction and Development ICESCR International Covenant on Economic, Social and Cultural Rights IDA International Development Association IDRA International Debt Restructuring Agency v ILO International Labour Organization IMF International Monetary Fund ITO International Trade Organization MDG Millennium Development Goals MDRI Multilateral Debt Relief Initiative NATO North Atlantic Treaty Organization NEF New Economics Foundation NGOs Non-Governmental Organization NPV Net Present Value OECD Organization for Economic Cooperation and Development ODA Official Development Assistance OPEC Organization of the Petroleum Exporting Countries PLRI Public Law Research Institute PPP Purchasing power parity PRSPs Poverty Reduction Strategy Papers SAP Structural Adjustment Programme SDR Special Drawing Rights SDRM Sovereign Debt-Restructuring Mechanism TRIPS Agreement on Trade Related Aspects of Intellectual Property Rights UN United Nations UNCTAD United Nations Conference on Trade and Development UNCITRAL UN Commission on International Trade Law UNESCO United Nations Educational, Scientific and Educational Organization UNFED UN Fund for Economic Development UNICEF United Nations Children‘s Fund USD United States dollar US/USA United States/United States of America VAT Value Added Tax WIPO World Intellectual Property Organization World Bank short hand for the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) World Bank group The World Bank plus the International Finance Corporation (IFC), the International Bank for Reconstruction and Development (IBRD), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID) WTO World Trade Organization vi Summary The key question of the dissertation is whether arbitration of international debt is viable. Overall, the thesis argues that global arbitration of debt would ease the pressures on the present ways of dealing with problem debt. Currently, there are two contending approaches to sovereign debt restructuring. The first is that debt relations are restructured in line with economic reason and sustainability, and the second is that restructuring should be assessed against considerations of justice and procedural fairness. More specifically, the thesis argues for an international arbitration mechanism that translates the principles of Chapter 9 of Title 11 of the US Bankruptcy Code into a global framework. This thesis is centrally informed by the dynamics of global current account imbalances, as described by John Maynard Keynes, deficits that send nations down the slippery slope of debt. The core argument is based on Kunibert Raffer‘s initial work on arbitration of sovereign debt, but the approach is wider. In addition to economics, the approach of the thesis includes political, philosophical and legal dimensions of arbitrating problem debt. The political-philosophical dimension analyses the viability of global arbitration in a world with sovereign nation states and motivates dealings with problem debt by seeing it as a negative duty by the rich toward the poor and relies on the work by Thomas Nagel and Thomas Pogge. The legal dimension addresses the institutionalization of debt arbitration and separates the questions of odious debt from economic insolvency. It also speaks for debt arbitration as a way of introducing rule of law. Further, the thesis analyses the impact arbitration of debts would have on the neighboring financial fields of sovereign debt, here categorized as development aid, trade and future access to credit. Throughout, the focus is on global mechanisms and the experience of and policies behind problem debt especially in poor countries, starting with their debt crisis in 1982, but stretching back into the immediate pre-Bretton Woods era. In