Multinational Monitor

JUL/AUG 2005
VOL 26 No. 7


Merger Mania and Its Disontents: The Price of Corporate Consolidation
by James Brock

Indigenous People's Power: Global Mobilization Scores Dramatic Gains - With Many Challenges Ahead
by Marcus Colchester

Crisis of Credibility: the Declining Power of the International Monetary Fund
by Walden Bello and Shalmali Guttal

Programmed to Fail: The World Bank Clings to a Bankrupt Development Model
by Walden Bello and Shalmali Guttal

Heartache and Hope in Africa: The Failures of Market
Fundamentalism and Hope for an Alternative
by Soren Ambrose and Njoki Njoroge Njehu

Victories! Justice! The People's Triumphs Over Corporate Power
by Robert Weissman


Offshore: Tax Havens, Secrecy, Financial Manipulation, and the Offshore Economy
An Interview with William Brittain-Catlin


Letter to the Editor

Behind the Lines

The Global Justice Movement

The Front
Bolivia Insurrection -
ICSID Bleeds Argentina

The Lawrence Summers Memorial Award

Names In the News


The Front

Bolivia Insurrection

La Paz — In June, three weeks of dynamite-tossing protests, national strikes and crippling blockades of major Bolivian cities brought this South American country to the edge of a cliff.

At the last minute, in a late night session of the Bolivian Congress on June 9, the seat of the presidency — vacated by the resignation of Carlos Mesa in the wake of mass protests and an effective shutdown of the capital, — was passed to Supreme Court President Eduardo Rodríguez. What seemed an imminent civil war was averted.

The turmoil for Bolivia, however, has not passed. The campesino, indigenous, worker and other social movement organizations that organized the demonstrations and roadblocks that paralyzed the country have demobilized, but only in a temporary truce.

All eyes are now focused on how the Bolivian government will address social movement demands and answer the pivotal unresolved questions that sparked the crisis: Who will control Bolivia’s oil and gas resources? And, will Bolivia’s poor indigenous majority continue to get the short end of the deal?

According to Felix Muruchi Poma, a delegate to the Regional Council of Workers in the highly politicized and almost exclusively indigenous city of El Alto, Bolivia’s indigenous have seen little gains in the distribution of power and wealth within the country.

The government still discriminates against indigenous people, says Muruchi, and they continue not to share in the benefits from exploitation of the nation’s natural resource wealth. The June demonstrations were extended, he says, “to demand that all the transnationals installed during the neoliberal period should leave the country — they should stop taking our natural resources.”

Bolivia has the second largest natural gas reserves in Latin America after Venezuela, yet it is the poorest country on the continent. Nearly two-thirds of the population lives in poverty. It also notably has the highest percentage of indigenous people in Latin America.

Since the colonization by Spain in the sixteenth century, foreign entities have overwhelmingly benefited from the extraction and export of Bolivia’s resources, with little to no wealth returning to Bolivian citizens or the Bolivian government. Unlike some other resource-rich former colonies, including Mexico or Venezuela, Bolivia has never been able to develop a value-added industrial base. Many Bolivians are now looking toward end products such as diesel fuel as an essential means of economic development for the country. Many view nationalization as the way to ensure that resources are used for national well-being and the benefits of industrialization are spread evenly.

“The history of this country is intertwined with primary resources. This experience has left a lot of poverty in Bolivia,” explains Carlos Villegas, an economist and director of the graduate program in development sciences at the Greater University of San Andres in La Paz. “The hope of the Bolivian people is that now with natural gas we can solve these social and economic problems. Oil and gas have become the only activity that generates financial resources. We don’t have anything else.”

The most recent chapter in Bolivia’s gas conflict began in 1985 with the move to widespread free market liberalization (known in Bolivia, and throughout much of the world, as “neoliberalism”), at the behest of international financial institutions.

“In the nineties, Bolivia embraced neoliberalism and started to privatize everything,” explains Villegas. “With neoliberalism, Bolivia was going to resolve all its problems.”

In 1996, under pressure from the International Monetary Fund, the World Bank and the U.S. Embassy, the Bolivian Congress passed the Oil and Gas Law, privatizing the country’s oil and gas reserves, and classifying extracted oil and gas as property of private companies. Foreign petroleum enterprises which had previously been required to pay 50 percent royalties for exploiting Bolivia’s gas, suddenly had to pay only 18 percent.

But this generosity to foreign multinationals did not bring the promised benefits, and the accompanying free market reforms hit Bolivia’s poor indigenous the hardest.

“Bolivians now are in a much more vulnerable state in social terms than they were 10 years ago, after the application of these policies,” explains Sacha Llorenti, president of the Permanent Assembly on Human Rights, Bolivia’s preeminent human rights organization. “In the last 10 years, the methods that were supposed to generate jobs haven’t worked. And for every 10 jobs that have been generated in the market, seven are in the informal sector, like the woman who sells gum or Kleenex on the street.”

Over the past 15 years, anger with foreign corporations and U.S.-backed free market policies has become common among Bolivia’s citizens.

“We have so many natural resources, but we aren’t beneficiaries of these resources; more so, we’re feeling exploited by the transnationals,” says Santo Anagua of the indigenous organization, the National Council of Ayllus and Markas of Quillasuyu. “We’re feeling incredibly used.”

In October 2003, the gas conflict took on deadly proportions. During public unrest over President Gonzalo Lozada’s plan to allow private export of Bolivia’s gas through Chilean ports, government forces killed up to 80 civilians in La Paz and the surrounding largely indigenous Altiplano, Bolivia’s expansive high mountain plain.

Lozada was forced out of office, and the presidency passed to then-Vice President Carlos Mesa. Upon taking office, in an attempt to cool tensions, Mesa committed to introducing a new oil and gas law and organizing a Constituent Assembly. The Assembly would allow Bolivia’s marginalized indigenous population to participate in the drafting of a new, more equitable constitution.

“Mesa entered the presidency with a fundamental promise to all the social movements for a new oil and gas law, and a Constituent Assembly,” explains Villegas.

As the first half of that commitment, in May 2005, the Congress passed the New Oil and Gas Law. Though the law was originally written to reclassify Bolivia’s gas resources as state property and to add a 32 percent tax to exploitation, bringing the total repatriation of profits back to its original 50 percent, loopholes added to the legislation at the last minute made these changes ineffective.

Public unrest erupted immediately. Feeling once again betrayed by their government, Bolivians took to the streets. Indigenous and campesino organizations called for mass protests and instituted permanent blockades of major cities throughout the country. Various unions, including the transportation, mining and teachers unions, instigated work stoppages. For three weeks, the country was paralyzed, leading to the resignation of President Mesa and throwing the country to the brink of civil war.

“We’re living in this country with a profound structural crisis,” says Llorenti. “This is a political crisis, because right now the government doesn’t represent the interests of the citizens, an institutional crisis because the people no longer have faith in the institutions of the state, [and] an economic crisis because the policies of structural adjustment and the privatization processes have not resolved the situation of poverty, discrimination and social exclusion for Bolivians.”

While the recent change of government seems to have brought Bolivia one step back from the edge, the country still remains in an extremely precarious state waiting to see how the new president and the Congress will respond.

A June 27 statement issued by the Office of the President in conjunction with a new decree regulating taxation and royalty collection from oil and gas declared the government’s desire to “substantially improve its control over hydrocarbon [oil and gas] production.” The government has not, however, stated a position on nationalization.

Though the possibility of nationalization sets off alarm bells in corporate boardrooms and in Washington, D.C., it is not a particularly unusual or untested idea for Bolivia or among its neighbors. It’s only in the last decade that Bolivia’s oil and gas was privatized, alter all, and the significantly stronger neighboring economies of Chile, Venezuela, Brazil and Mexico all currently maintain national extractive industries, in many cases renationalized from private foreign control.

The Bolivian Congress has begun debate on these issues as well as the questions of regional autonomy, a constituent assembly and whether they will call for their own elections to coincide with presidential elections in December. What’s being demanded of them is a profound redrawing of power relations within the country.

“The Congress has to rise to the occasion,” says Villegas. “We are on the verge of a civil war, and the Congress has to make a decision.”

For Bolivia’s government, the charge is not something new, but rather to make good on long overdue promises to redress historic and structural injustices. Bolivians are asking for not just a new president, but a new Bolivia.

— Gretchen Gordon

ICSID Bleeds Argentina

Buenos Aires — Argentina must pay CMS Gas Transmission Company, a U.S. corporation with a roughly 30 percent share in the country’s gas utility, $133 million to compensate the firm for lost revenues due to a utility rate freeze, a World Bank arbitration panel ruled in May.

CMS brought the case before the World Bank’s International Court for the Settlement of Investment Disputes (ICSID), saying that Argentina has violated the company’s rights under the U.S.-Argentina Bilateral Investment Treaty.

CMS argued, and the ICSID panel agreed, that Argentina violated its privatization arrangement with the company when, in early 2002, amidst an economic crisis that was worse than the U.S. Great Depression, it froze utility rates. That rate freeze kept utility rates constant in peso terms. For Argentine consumers, this meant their utility bills would stay the same. But during this period, the international value of the peso, which previously had been pegged to the U.S. dollar at a rate of one-peso-to-one-dollar, plunged by 70 percent. From CMS’s dollar-based vantage point, the rate freeze meant its revenues would fall 70 percent.

Argentina has vowed to challenge the ICSID decision, not least because the World Bank has an ownership stake in privatized Argentine utilities and thus, the government argues, a conflict of interest in convening a panel to resolve the case.

At stake for Argentina is not just what it will pay out to CMS, but what it might owe as a result of more than 30 similar cases awaiting resolution at ICSID.

Although the facts of the Argentine case are particularly stark, the CMS case has tremendous importance for other nations, as well, since many of them have agreed to similar investment treaties and also have privatized utilities with promises to maintain utility rates in dollar terms.

Some recent history

During the 1990s, when Argentina was the poster child for International Monetary Fund (IMF) and World Bank policies, the government privatized all of its enterprises — public utilities and many other activities. Argentina privatized its non-renewable energy sources (gas and oil), its water works, the electric and phone companies, its flagship airline, the national mail system, airports and ports, and highways. Some of these privatizations, including World Bank and IMF-promoted privatization of the social security system, had disastrous results and greatly contributed to Argentina’s explosive debt accumulation and final economic implosion.

In order to attract foreign capital to invest in to-be-privatized enterprises and utilities, Argentina signed a slew of Bilateral Investment Treaties (BITs) with many of the countries where potential investors were headquartered. A BIT is an agreement signed between two states, guaranteeing the right of foreign investors to file complaints against the investment-receiving state in international courts in the case of a dispute. In practice, a BIT sets foreign corporations on an equal footing with sovereign states, allowing corporations to call into question the ability of a government to implement economic policies. In Argentina, BITs were promoted as a requirement for foreign investment flows to materialize, under the assumption that that these treaties would guarantee equal treatment of foreign and national capital.

By December 2004, Argentina had signed 58 BITs, 47 of which were signed by President Carlos Menem between 1992 and 1999.

Though BITs are proliferating quickly worldwide, not all countries have followed this strategy. Brazil, for example, a major recipient of foreign investment flows in the region, signed only 10 BITs during the 1990s, none of which were actually implemented.

“Fair and equitable?”

When the Argentine fixed exchange rate regime exploded in a major financial crisis in December 2001, the government was forced to devalue the currency. To lessen the economic impact, the government enacted an “Economic Emergency Law,” which, among other measures, converted utility rates to pesos and froze them at the December 2001 levels.

Under the privatization contracts of the 1990s, utility rates had been established in dollars, and had been indexed to the U.S. inflation rate, which was illegal, since the indexation of contracts was explicitly forbidden by Argentine law. Furthermore, during the late 1990s Argentina had negative inflation rates, which meant that utility rates increased even when the general price level decreased.

The Economic Emergency Law’s restrictions on utility rates made economic sense for several reasons, the government explained. First, at roughly 70 percent, the Argentine devaluation was huge. This meant that the domestic component of the utilities’ cost structure was also reduced considerably in dollar terms. Second, utilities are a key component of consumption in the economy; if their rates had been maintained at their dollar levels, the resulting crisis would have been substantially worse as many homes and businesses would no longer have been able to afford water, electricity, gas and other key services. Finally, following the devaluation, the entire economy was “pesoized,” meaning that all transactions in the economy were conducted in pesos. In this sense, privatized utilities were treated no differently than domestic firms.

In any case, the utility rate freeze, which is still in place, was not meant to be permanent. Rather, the government says, it was intended as a temporary measure while privatized utility contract compliance was evaluated and until new contracts were negotiated and signed. Contract violations by privatized utilities were extensive and substantial. Service level agreements were routinely violated, as were infrastructure investment commitments. State oversight of contract compliance has been non-existent, since regulatory agencies have been stacked with representatives from the privatized utilities.

These arguments about the reasonableness of Argentina’s actions would not carry the day with the ICSID panel, however.

CMS’s position in the case was that it had clear contractual rights. The rate freeze and conversion to pesos led values of shares in the Argentine firm to fall by 90 percent, and revenues to fall by 75 percent. The company argued that it had borrowed in dollars to invest in Argentina — and says it invested $1 billion in renovation and expansion of the country’s gas pipeline network — and needed to be paid back in dollars.

Argentina argued that its contract did not give CMS a guaranteed right of profit or a guarantee that tariffs would be indexed in dollars. In any case, the government contended, the country faced a national emergency.

But the ICSID panel held that a guarantee that utility rates would be maintained in dollar terms was part of the privatization deal, and that all of the purchasing companies believed so. “It is not credible that so many companies and governments and their phalanxes of lawyers could have misunderstood the meaning of the guarantees offered,” the panel ruled.

And while expressing sympathy for the economic plight of Argentina, the panel held that the national emergency argument was not an excuse. First, the panel concluded, the Argentine government’s fiscal mismanagement contributed to the economic crisis, mitigating that same government’s ability to claim that forces beyond its control necessitated the emergency law. Second, the panel ruled, Argentina could have lowered utility rates through the regulatory process, and in accord with the privatization contract, rather than through the across-the-board rate freeze and conversion to pesos.

The government’s action constituted a denial of “fair and equitable treatment” for CMS under the U.S.-Argentina BIT, the panel concluded. To be made whole, the company should be paid $133 million.

“We are delighted with the result,” says Nigel Blackaby, a lawyer with the Freshfields Bruckhaus Deringer firm that represented CMS. “The tribunal confirmed that Argentina violated the treaty by terminating [the gas utility’s] rights to calculate tariffs in U.S. dollars and make inflation adjustments. The tribunal considered — and rejected — Argentina’s defenses, including that its actions were justified by necessity and economic emergency. This is a complete vindication of CMS’s position.”

What lays ahead?

Of the 36 pending ICSID cases against Argentina, 19 were filed by energy-related utilities (gas and electric), seven were filed by water-works investors, five by communications investors and the remaining five by various other types of investors. Total potential claims are not publicly known, but are estimated at more than $30 billion.

Argentina maintains that ICSID cannot act as an impartial judge in the settlement of these investment disputes. First, the World Bank, ICSID’s parent organization, is a creditor of Argentina, to the tune of approximately $7.5 billion. Second, the World Bank was a strong promoter of the privatizations that benefited the corporations that now turn to the Bank and ICSID to protect their interests. Third, the World Bank is part owner of some of the privatized utilities, as in the case of Aguas Argentinas, the Capital City’s waterworks, which is 5 percent owned by the Bank. (The World Bank was also part-owner of the now re-nationalized national mail system). Finally, ICSID belongs to the World Bank, and, the Bank’s general counsel is ICSID secretary general.

Argentina’s initial official reaction to the ICSID award in favor of the CMS Gas Transmission Company was to reject the ruling, stating that it would not pay. Furthermore, there were attempts by high-ranking government officials to pass a law rejecting all ICSID rulings on privatized utilities. The opposition ARI party in Congress went even further, presenting two bills, one calling for the recision of all BITs and the other calling for the recision of Argentina’s signatory status to the treaty that establishes the jurisdiction of the ICSID as a valid international court for investment disputes.

U.S. officials responded quickly, calling on Argentina to honor the BITs and ICSID awards, and to create a predictable environment for foreign investors. Following the U.S. official statements, Argentine officials have toned down their rhetoric considerably. From the initial flat-out rejection, official statements now indicate that the decision will be appealed. Furthermore, the government has contracted a high-powered New York law firm to represent the country on all ICSID claims. It appears that, at least for now, Argentina will play by the World Bank’s rules after all.

— Alan Cibils is an Argentine economist who lives and works in Buenos Aires

Lawrence Summers Memorial Award

The July/August Lawrence Summers Memorial Award* goes to Bob Liodice, president of the Association of National Advertisers.

Advertising is the "most socially responsible industry in America," Liodice writes in his trade association blog.

Responding to U.S. congressional proposals to restrict junk food marketing to kids in schools and remove the tax deductibility of pharmaceutical advertising, Liodice writes that he is "particularly frustrated when the good work and socially responsible initiatives of our marketing industry go unrecognized and unappreciated."

"The marketing industry has done more than its share to contribute to the well being of people in America," he writes. "Our industry's social responsibility track record is second to none."

Source: Bob Liodice, ANA Marketing Musings, March 31, 2005.

*In a 1991 internal memorandum, then-World Bank economist Lawrence Summers argued for the transfer of waste and dirty industries from industrialized to developing countries. “Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the LDCs (lesser developed countries)?” wrote Summers, who went on to serve as Treasury Secretary during the Clinton administration and is now president of Harvard University. “I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. ... I’ve always thought that underpopulated countries in Africa are vastly under polluted; their air quality is vastly inefficiently low [sic] compared to Los Angeles or Mexico City.” Summers later said the memo was meant to be ironic.


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