What is the impact of international economic law on developing countries? – Developing Economics

Just as at the time of Bretton Woods, international economic law is essential to discourage destructive national policies. But it is also vital to understand how law, regulations and institutions are located within a longer historical trajectory of colonialism, inequality and exploitation.

The Covid-19 pandemic and the climate crisis demonstrate how the world today is more connected economically, socially, politically and ecologically than at any other point in history.

Actions in one country have impacts, sometimes very serious ones, on the societies, environment and economies of other countries. The globalisation of economic markets and technological change affect how countries, companies and individuals conduct economic exchange, including trade in goods and services, capital investment and financial transfers.

These developments also accelerate the social and environmental costs of transnational economic activity. For example, while products, such as mobile phones, can be used in one part of the world, their production can criss-cross multiple other geographical regions. Similarly, raw materials can be extracted from one country to be manufactured into consumer products in another.

This means that the social or environmental costs of production – such as low wages, poor health and safety standards and/or air or water pollution – are not necessarily borne by the countries or communities where the final product is sold and used by consumers.

These changes underscore the critical importance of global collective action and international economic law – the set of global rules and institutions that regulate transnational economic transactions.

As discussion turns to how international economic law deals with contemporary global problems – such as managing global supply chains, settling trade disputes, overcoming sovereign debt crises and financing transitions to low-carbon economies – it is important to consider how the historical legacies of the current system can affect its capacity to do so effectively.

This will enable us to move beyond the economics discipline’s approach to international law, which is often limited to narrowly measuring the ‘effect’ of different laws and legal institutions on various economic indicators, such as growth, investment and poverty. Taking this approach will enable us to explore how law is itself developed in a colonial and imperial context, which may serve to reproduce and perpetuate colonial harms and exploitation.

The colonial context

The interdependence of countries was recognised in the aftermath of the Second World War. Post-war planners sought to set ground rules for cross-border transactions of goods, services and finance. The aim was to prevent a repeat of the self-interested policies that led to the Great Depression and to catalyse post-war reconstruction and development.

The trio of international institutions developed at the Bretton Woods conference in New Hampshire in 1944 – the International Bank for Reconstruction and Development (later expanded into the World Bank Group), the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT, the precursor of the World Trade Organization, WTO) – remain the foundation of the architecture governing the world economy today.

This original system was developed to regulate trade and other economic relations among the ‘sovereign’ nations at the time and by the victors of the Second World War. Colonised states and other non-industrialised countries were mostly excluded from the initial agreements and entered into the system at later dates on terms already set by the colonial states.

The post-war planners and their industrialised country proponents did not envisage the system dealing with the specific conditions of newly independent and developing countries in the post-colonial period. Nor did they envisage the impact of these new states on their participation in the global economy.

Instead, there was an imperative to restrain the activities of these new participants in the international economic system in order to protect colonial geopolitical and economic interests. Without overt territorial control over post-colonial states, international law became a mechanism through which former colonial powers and their corporations secured access to natural resources and markets for the goods and services that they produced.

For example, the post-war international trade regimes, notably under the GATT and later the WTO, prioritise the liberalisation of economic sectors where industrialised countries have an advantage – industrial products, capital and money, services sectors and enterprises. There is far less emphasis on areas where developing countries can benefit, such as agriculture, labour mobility and technology transfer (Akyüz, 2010).

International investment law, enacted through customary international law and international investment agreements (IIAs), was developed to protect the property of foreign investors, overwhelmingly from developed countries. This was without corresponding restraint on their activities in host states, which were primarily developing countries (Sornarajah, 2021).

The asymmetries of international economic law have been laid bare in the aftermath of the global pandemic. The rules of international trade and investment regimes have been shown to have curtailed countries’ access to vaccines and other medical technologies while potentially restricting countries’ ability to impose emergency public health measures, such as travel restrictions and business closures.

There are already documented cases of foreign investors using the investor-state dispute settlement (ISDS) system to bring claims against governments for the public health and economic measures they undertook during the pandemic, which they claim cost them financial losses.

Meanwhile, the lack of adequate rules on finance and for resolving sovereign debt crises have led to worsening financial and economic crises in developing countries. Global debt burdens are currently at their highest level since records began, with developing countries shouldering the highest debt burdens.

This is, in part, due to the lack of an established restructuring and insolvency regime for sovereign debtors that allows them to restructure debt in an orderly manner, including the growing debt owed to private creditors.

Imperial law

These global developments reflect ‘the pathologies of international law’ that are inherited from its legacy of imperialism, which included the legitimising of colonial conquest on the basis of paternalistic grounds of protecting and improving the livelihoods of colonial populations (Linarelli et al, 2018).

International law with its deeply Eurocentric roots has established what has been called a ‘dynamic of difference’ – the gap between European and non-European cultures and peoples, with the former being characterised as broadly ‘civilised’ and the latter as ‘uncivilised’ (Anghie, 2005).

This has allowed international law to be used instrumentally to justify the design and application of rules that privilege one set of countries and communities over others in the global economy. This ‘civilising mission’ of international law has been used to incorporate developing countries into the international economic order despite unequal terms, often under the guise of economic development and poverty reduction.

To be seen as genuine players in the global economy, developing countries had to ‘play by the same rules’ of the game or face exclusion from the community of ‘civilised nations’. Within a historical context where the rules and institutions have been developed by one set of states, the narrative of ‘rule of law’ has a powerful legitimising effect.

For example, the protection of foreign investors’ rights even where they may come into conflict with community and environmental interests is seen as acceptable in the longer term because this legal security will provide incentives for further foreign investment for development.

Recent high profile decisions in arbitration cases such as Eco Oro v Colombia (2021) and Bear Creek v Peru (2018) demonstrate that broad-based provisions in investment treaties continue to privilege foreign investors, finding host states in breach of investment law for revoking mining licences due to environmental and social concerns.

These decisions that require host states to pay significant financial damages can lead to ‘regulatory chill’ as governments may refrain from enacting or enforcing public interest regulatory or policy measures that may lead to litigation from investors (Tienhaara, 2018).

In another example, we see developing countries continuing to repay their creditors even when they can no longer afford to do so. In other cases, they limit spending on essential services, such as healthcare and education, to service debt because international markets and donors look unfavourably on sovereigns that wilfully breach their contractual obligations.

Even where there are officially sanctioned mechanisms for debt relief – such as the Debt Service Suspension Initiative, G20-initiated debt payments moratoria and the G20 Common Framework for Debt Treatments – sovereign debtors had been reluctant to use them due to the risk of sovereign credit downgrades by ratings agencies.

These debt relief initiatives have also not provided mechanisms to deal with the burgeoning debt owed by countries to private creditors who have not generally participated in official restructuring initiatives.

Rethinking international economic law

Understanding how international economic law is located within a longer historical trajectory of colonialism, inequality and exploitation is important in our efforts to reshape its future.

Whatever its past, it is clear that we need a set of clear and equitable rules and institutions to tackle global problems. The raison d’être for international economic regulation at the time of the Bretton Woods conference – to prevent destructive, self-interested national economic policies – remains as relevant as ever.

As post-colonial countries entered into the world economy during the decolonisation period, they did advocate for new rules and institutions that would recognise, among other things, their sovereignty over natural resources in their territories, their right to development and a call for redistribution of global wealth.

Principles of intergenerational and intra-generational equity, common but differentiated responsibilities, special and differentiated treatment, and less than full reciprocity have been written into international agreements in recognition of the historical and contemporary circumstances of developing countries. The effects of these accommodations, while hard fought for, remain limited in the face of broader systemic developments in international economic law.

The problem remains that the circumstances of developing countries are viewed as exceptions to the norm that can be addressed through adjustments to the status quo rather than by a revision of the asymmetrical rules of international economic law.

And it is often difficult to secure agreement to invoke these so-called ‘flexibilities’ in international law in the face of powerful states and corporate actors. For example, there was a long and fraught battle by developing countries to secure waivers of intellectual property rules at the WTO to allow for more manufacturing of Covid-19 vaccines to address the lack of global supply and developing countries’ access to them.

Although this is an exemption available under WTO rules, proposals by developing countries, led by India and South Africa, were opposed by the UK, the European Union and other developed countries until a compromise deal was reached in 2022.

Former imperial powers continue to dominate international law-making and global governance spaces. What’s more, they are reluctant to cede control and to reform international economic law in favour of developing countries and marginalised communities. Until we recognise that international law is part of the problem, it will not be part of the solution.

Photo: Mt. Washington Hotel where the Bretton Woods conference took place in 1944. By photographer Carol M. Highsmith.

Celine Tan is Professor of International Economic Law at the University of Warwick.

This blog post is a part of the Decolonising Economics blog series.