Economic democracy series

Increasing citizen scrutiny of national economic policy

Published on 31 August 2023

Carlos Fortin

Research Associate

The question of economic democratisation is closely linked to an issue with which I have been concerned for some time, both in academia and in my 15 year spell as a United Nations official.

WTO Ministerial Conference 2022 via Flickr (CC BY-SA 2.0)

It is the issue of the economic policy space open to national decision makers in the context of the globalised world economy. How is the agenda for economic policy making set? What areas of economic policy remain within the purview of national states and can, and should, be the subject of citizen scrutiny?

Part of a series on economic democracy. Read the series introduction.

The search for alternative development models

The question has taken on a degree of urgency as governments, particularly in Latin America, have started to search for alternative development models in the face of the inability of the received neoliberal Anglo-Saxon capitalist model to deliver both growth and economic inclusion. Examples include the current governments of Argentina, Brazil, Chile, Colombia and Mexico.

The endeavour, however, faces two sets of difficulties. Firstly, the neoliberal ideology has succeeded in installing in the development discourse the notion that certain areas of economic policy are eminently technical and should be taken out of the democratic arena and placed in the hands of experts. The emblematic example is the autonomy of Central Banks to set interest rates.

Secondly, the expansion of globalisation has been accompanied by an effort on the part of the governments of OECD countries and multinational corporations to establish international disciplines and obligations that aim to consolidate the neoliberal model. The preferred vehicles for this have been free trade agreements, largely because of the fact that the notion of free trade commands a degree of legitimacy in international discourse.

This, however, involves introducing in trade agreements rules about non-trade matters which are deemed to be “related to trade”. In the Uruguay Round of trade negotiations that led to the creation of the World Trade Organization in 1994 the agenda included the adoption of rules about foreign direct investment and intellectual property rights. On investment, the new rules banned the imposition of performance requirements, including the compulsory use of inputs of domestic origin, an approach which was employed to different degrees by the East Asian countries in their economic miracle.

On intellectual property, the new rules resulted in governments being unable to refuse patent protection on grounds of national interest, for example, excluding pharmaceutical products and processes to uphold people’s right to health.

Read more about our work in inclusive trade

The expansion of the frontiers of trade disciplines to non-commercial areas has since continued at the bilateral and regional levels. A particularly worrisome development is the generalised inclusion in bilateral free trade and investment protection agreements of the so-called Investment/State Dispute Settlement system (ISDS). This allows a private foreign investor to sue the host State before external ad hoc arbitration panels to claim compensation for any changes in the legal regime existing at the time of the investment which have a negative impact on the expected profits of the investment; compensation is due if the changes involve a violation of fair and equitable treatment, in particular a denial of the legitimate expectations of the investor, or an indirect expropriation.

A difficulty with this approach is that the notion of fair and equitable treatment does not have a precise definition in international law, and is left to the interpretation of the ad hoc panels, which are often sympathetic to the claims of the investor.

An extreme but no means unique instance is that of an investor domiciled in Sweden against the government of Romania contesting a measure that removed certain investment incentives. The arbitrators determined that the measure was a reasonable action towards a rational policy (in fact, the removal of incentives was a requirement for Romania’s accession to the European Union); at the same time, however, they ruled that this was a breach of fair and equitable treatment of investors because Romania had created a reasonable expectation of regulatory stability. In establishing reasonable expectation, the panel stated that it is irrelevant whether the State actually wants to bind itself; it is sufficient that it acted in a way that reasonably implies that such an expectation is being created.

As the ISDS procedures can be long and costly, the mere possibility of their being initiated tends to have what is termed a chilling effect, which can dissuade governments from pursuing desirable policies and further encroach on the policy space open to democratic scrutiny.

Enlargement of the scope of WTO

The issue of the overextension of commercial disciplines has most recently come up in the discussion of the reform of the WTO. The European Union in particular has submitted a proposal that maintains that “the rules of the WTO are not sufficiently effective in tackling the negative spillovers of state intervention in the economy” and calls among other things for further prohibition of industrial subsidies as well as “strong rules against practices forcing companies to transfer innovation and technology” to domestic economic actors.

Economic democratisation should involve stopping this erosion of the economic policy space of national governments. This evidently calls for concerted international action on the part of governments of the Global South, which should at a minimum jointly resist the enlargement of the scope of WTO disciplines and press in the appropriate international fora for a more precise definition of the notion of fair and equitable treatment (one important effort in this direction is contained in the EU-Canada Comprehensive Economic and Trade Agreement, Art. 8.10.2. OECD governments, for their part, should accept the possibility of a diversity of development models.

And there have been some hopeful recent developments in the United States. Responding to the changes in the world situation stemming from the US-China conflict, the Covid-19 pandemic and the war in Ukraine, the Biden administration seems to be abandoning the neoliberal approach and rescuing the notion of government-led industrial policy, which is in turn a major component of the alternative development models being explored.

Read more on our economic democratisation series

The views expressed in this opinion piece are those of the author/s and do not necessarily reflect the views or policies of IDS.


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