Over the course of good years and bad, the countries of Latin America have recently been taking diverging paths to very different futures.
In one camp are countries such as Chile, Colombia and Panama, which are actively promoting the rule of law. By fostering an investment climate that supports job creation and economic growth, they have advanced the prosperity of their citizens.
In another camp are countries such as Bolivia, Ecuador and Nicaragua, which have taken stances inimical to the rule of law and hostile to international investment. Unsurprisingly, they have seen growth and investment collapse.
The difference in outcome is stark. The UN’s Economic Commission for Latin America and the Caribbean has for several years reported that countries in the second group have attracted almost no foreign direct investment, and economic growth and job creation have suffered.
By contrast, countries that have improved legal certainty have attracted direct investment equivalent to approximately 7 percent-11 percent of GDP in recent years. These are unprecedented sums that are creating tens of thousands of good jobs for their citizens.
Too often, U.S. analysts focus on the ideological preferences or geopolitical alliances of leaders to explain these countries’ poor economic performance. But the factor that best explains this difference is respect for the rule of law.
Rule of law is shorthand for a properly functioning judiciary, clear property rights and good government. It also means resisting the temptation to discard contracts, politicize judicial proceedings, and rewrite the rules of the game for investors.
For a negative case study, look no further than Ecuador, where the government is backing a lawsuit seeking $27 billion for alleged environmental and health damages from Chevron, which acquired Texaco in 2001.
While Ecuador’s government in 1998 certified that Texaco had cleaned up its old drilling sites, the suit has proceeded despite judicial irregularities, attorney misconduct, and interference by the executive branch.
Recently, a series of reports has raised fundamental questions:
• A court-appointed geologist has been exposed as owner and manager of an environmental remediation company registered to do business with Ecuador’s state-owned oil company, a conflict of interest he had failed to disclose. As the chief “expert” blaming Chevron and exculpating the state-owned firm, this revelation has sent shockwaves through Ecuador.
• A court-appointed biologist reports he found no hydrocarbon contamination in Ecuadorean rivers near the sites in question. He did find high levels of bacterial contamination from fecal matter that could be the source of the local population’s health problems, but this can only stem from poor sanitation, not oil production.
• The judge hearing the case was recused last September after he was captured in a series of videotapes in which he appeared to be participating in a $3 million bribery scheme.
The case against Chevron is notorious, in part, because the plaintiffs are seeking a sum equivalent to half of Ecuador’s GDP. But it exemplifies broader concerns about respect for the rule of law in Ecuador, as documented by the U.S. Department of State, the International Bar Association and other organizations.
The case also has caused alarm because Quito has signaled it may not respect the outcome of international arbitration under its bilateral investment treaty with the U.S. While no country has ever refused to comply with the terms of such a treaty with the U.S., the government of Ecuador has brought suit in U.S. District Court in New York seeking to enjoin Chevron from pursuing international arbitration.
Doing violence to the rule of law may bring momentary popularity or ready cash, but the bill comes due sooner than you may think. Where the rule of law is present, rational business decisions are possible, investment grows, and prosperity follows. Where the rule of law is absent, uncertainty reigns, corruption thrives, and investment flees, taking jobs, money, and talent with it.
Governments that ignore this lesson will still have to learn it in the end—the hard way.
Myron Brilliant is Senior Vice President for International Affairs at the U.S. Chamber of Commerce, which has recently launched a Coalition for the Rule of Law in Global Markets.