BITs for Africa

In his April 2014 International Business Quarterly newsletter, CSIS Scholl Chair Scott Miller stressed the importance of rule of law to investment, both the domestic and the foreign direct varieties. Investment drives productivity improvements, raising GDP, wages, and standards of living. In her recently published book, Trading Spaces, Dr. Sonal Pandya of the University of Virginia shows that inward FDI improves productivity, raises wages, and strengthens prodemocracy constituencies in recipient countries.

In the 1960s, as African and Asian countries achieved independence, productivity levels in both regions were roughly equal. Over the past fifty years, Asian productivity has risen dramatically while African countries have suffered from low or even falling productivity. During the same period, a deep and persistent infrastructure deficit has impeded African growth. The World Economic Forum’s Africa Competitiveness Report cites both as causal factors for its conclusion that “on average, African economies trail the rest of the world in competitiveness…”

Throughout the post-independence era, African countries have sustained a reputation for weak adherence to rule of law. Every global report—the World Bank’s Doing Business Report, the Heritage Foundation’s Index of Economic Freedom, and Transparency International—ranks African countries, on average, among the lowest in rule of law indicators, especially those associated with protection of property rights and investor rights. The most recent Ibrahim Index of African Governance laments a “significant regression in…rule of law…” on the continent, and goes on to state that “rule of law is a requirement to improve the investment climate.”

Not surprisingly, African countries have persistently lagged behind the rest of the world in attracting FDI. According to UNCTAD’s World Investment Report (2013), inward FDI to African countries has been relatively steady at $50 billion per year during the 2006 to 2012 time period. Over the same years, inward FDI flows to Asia rose 67 percent, from $180 billion to over $300 billion per year.

Most FDI in Africa has been in extractive industries, although 2006-2012 saw an increase in FDI in consumer manufacturing in some countries that are developing population segments with more purchasing power. Still, no African country is among the world’s top 20 recipients of FDI or among the top 20 intended destinations of FDI. Only Namibia and Zambia crack the top 20 list of countries with the highest inward FDI rates of return, and neither is among the top African FDI recipients.

Economic development literature is largely unanimous in finding a strong correlation between effectiveness in attracting FDI and development. While the United States has been one of Africa’s leading sources for inward FDI, U.S. investment has not flowed to Africa in amounts similar to FDI flows to Asia or Latin America. Is Africa’s reputation for weak rule of law a major factor in deterring U.S. investment in Africa and if so, what are the policy implications?

The provisions of U.S. bilateral investment treaties (BITs) directly address the core rule of law elements that outward American investors seek. The central term of the U.S. Model BIT is a reciprocal binding commitment not to expropriate or nationalize a covered investment either directly or indirectly except for a public purpose, in a nondiscriminatory manner, and upon payment of prompt, adequate, and effective compensation, and in accordance with due process of law. The treaty’s national treatment obligation affords investors covered by the agreement treatment no less favorable than that accorded to domestic investors. Additionally, the treaty offers investors the option to settle a dispute with a host government through international arbitration which helps ensure a fair, impartial, effective, and transparent remedy for alleged breaches of the treaty.

Other elements of the BIT text require the implementation of government practices that reinforce the rule of law. Transparency and public participation in government activities are two of these principles. Article 10 of the 2012 Model BIT require the parties to publish or otherwise make publicly available all laws, regulations, administrative rulings and adjudicatory decisions respecting investment. In Article 11, the parties agree that draft laws and regulations should be made available for public comment prior to any final decision. The parties also agree to allow investors of the other party the opportunity to participate in the development of standards and technical regulations by central government bodies.

Currently, U.S. BITs are in force with only six African countries: Cameroon, Democratic Republic of Congo, Republic of Congo, Mozambique, Rwanda, and Senegal. BIT talks with Mauritius, Africa’s highest ranking country on the indices listed above, and Gabon have stalled. Exploratory talks with the East African Community (Burundi, Kenya, Rwanda, Tanzania, and Uganda) are showing promise, especially since east Africa appears to be attracting increasing FDI inflows.

However, if BITs require rule of law upgrades and promote economic development, both of which are consistent with U.S. foreign policy and development goals in Africa, why are we not exploring the possibility of negotiating BITs with a greater number of African countries? The 2014 U.S.-Africa Leaders Summit (August 5-6) presents an opportunity to announce the United States’ willingness to build new partnerships with African countries, based on our Model BIT, that will help our African partners strengthen rule of law within their countries, attract U.S. investment that further strengthens relationships, and fosters economic growth, higher wages, and improved standards of living.

Greg Hicks is a State Department fellow at the Center for Strategic and International Studies (CSIS) in Washington, D.C. The views expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Department of State or the U.S. government.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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Greg Hicks