Privatization, Free Trade and the Erosion of Government Authority

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Privatization, Free Trade and the Erosion of
Government Authority

• Jennifer Gerbasi
• Presented to
• Economic Policy Institute Washington, D.C.
• April 2003
• Overview
• Market Structuring Role of Local Government
• Democratic Deficit Created by Free Trade
  Agreements
• Implications for Privatization

Cornell University, 305 West Sibley Hall, Ithaca,
NY 14853 607/255-6647 jcg28_at_cornell.edu
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Market Structuring RoleThe Subtext

• Government needs to actively shape the market
• Government sets the proconditions and
  presuppositions of markets
• Define property rights
• Create a framework for bargaining
• Balance public and private interests
• Provide a process for dispute resolution

3
Market Structuring RoleSpecific to Privatization

• Privatization requires government intervention
  into the administration of markets undermines
  market independence
• Ensure competition, and attention to public
  values
• The contract negotiation by the government is key
• Monitoring, reliability, quality
• Access, process transparency, public
  participation
• Government is the primary actor in privatization

4
Free Trade Regime Goals

• Inhibit government manipulation of the market
• Perceived barriers to the flow of money and goods
• Rely on market disciplines to make businesses
  efficient
• Regulations, guidelines and rules are viewed as
  non-tariff barriers to trade and unnecessary
• Increase Foreign Direct Investment (FDI)
• Rise above the politics of place

5
Free Trade RegimeTasks

• Eliminate local requirements for contracting
• Limit purchasing criteria to quality and quantity
• Eliminate practices that favor public provision

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Recent Trade Agreements

• North American Free Trade Agreement (1994)
• New Investor Rights - Chapter 11
• World Trade Organization (1995)
• Binding/Financial Penalties
• General Agreement on Trade in Services (1996)
• Liberalizes Services
• Free Trade Area of the Americas
• Extends the above to all 34 north, central and
  south American countries excluding Cuba.

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FTAs Erode State and Local Government Authority

• Replacing democratic voice and participation with
  enhanced investor rights
• Change in property rights limits the framework
  for bargaining and security in contract
  negotiations
• Limiting the expression of collective preference
  through state and local legislation
• Undermining judicial authority by substituting
  private tribunals for the public courts

8
Investor rights
?

• Foreign Investors are on par with nations
• Investors
• Enforce treaty obligations in investor-state
  disputes that traditionally were nation-nation
• Do not need the approval of their home nation
• Comment on Proposed Legislation
• Defined
• An investor is any person or entity with a
  financial interest in the property including
  individual shareholders and lenders

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Investor Property Rights
?

• Under free trade agreements property includes
• market share
• market access
• future profits
• Compensation could be awarded when a regulation
  interferes substantially with the enjoyment of
  property
• Not considered property in the US.

10
Partial Takings

• US investors would not get compensation if
• Owners equally impacted
• Other uses of the property
• Rationally related to a legitimate public purpose
  
• Compensated only for
• physical occupation or
• Close to 100 of the property value was lost
• Mexico customarily subjugates private rights to
  the public good

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Preemption of Legislative Authority
?

• Harmonization
• Precautionary Principle
• The choice of mechanism or law must be the least
  trade restrictive

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US Laws/CourtsIrrelevant
?

• Foreign investors can challenge US laws in
  secretive international tribunals
• The federal government is a party
• The state or locality is not privy
• The investor and country choose
• the law (usually international)
• No deference is given to precedence in
• the national courts or previous tribunals

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Democratic Deficit

• No effective mechanism for citizen input/debate
• Citizen voice shared by foreign investors
• Investor needs placed above public values and
  accountability
• Government action can be
• interpreted as a barrier to trade
• Tribunals preempt legislation and court system

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Methanex v. US
Example 1

• Facts
• California well water was contaminated
• Studies showed it was MTBE
• It is used to make gas burn cleaner
• MTBE is carcinogenic
• There are substitutes
• Government Reaction
• California banned its use as of 2003
• Courts award 50 million to municipalities for
  ground water contamination

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Resulting NAFTA Challenge

• Canadian manufacturer claims
• Loss of Profit/Market Share
• Discrimination in favor of domestic products
• Other countries find no leakages
• California should enforce LUST laws more
  stringently rather than ban MTBE
• Damages requested
• 970 million US

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UPS v. Canada
Example 2

• Facts
• The Canadian Royal Post delivers parcels on
  letter routes.
• The government owned corporation parallels the US
  Postal Service
• Government Action
• No new action. Traditional role.

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Resulting Challenge

• UPS, a United States corporation, claims
• This constitutes an unfair cross-subsidy
• Public is competing unfairly with the private
  firm
• Damages Requested
• Equal access to letter carriers or
• Cash awards equal in value to the subsidy

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Traditional Government Services Liberalized by
GATS

• Business
• Construction
• Distribution
• Educational
• Environmental

• Health
• Tourism
• Recreational
• Cultural
• Transport

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Market StructuringRole Threatened

• Subsidies to government services must be extended
  to foreign investors
• Zoning may be challenged
• Licensing may be harmonized
• No residency requirements
• No performance requirements
• Bonds may be prohibited
• Tax revenues may be affected

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Free Trade Agreements Create a Governance Deficit

• Need a balance between governance and economic
  development goals.
• Market solutions to public goods require
  government intervention
• Free trade agreements strip state and local
  governments of that authority