Africa, K. 2013. Preserving policy space in EAC-US Trade and Investment Partnership Agreement (TIPA) negotiations. GREAT Insights, Volume 2, Issue 8. November 2013. Maastricht: ECDPM.
The role of the state in the economy has always been a controversial issue in public debate. It has become more so with the rise of the neo-liberal paradigm that preaches the virtues of unregulated markets and recommends de-regulation, liberalisation and privatisation.
The push for a minimal, pro-business state (especially in least developed and developing countries) has been further intensified by both the rise of globalization and the many radical neo-liberal reforms implemented. These are often under pressure from multilateral agencies such as the International Monetary Fund (IMF), the World Bank (WB), and the World Trade Organization (WTO) and the continuously mushrooming bilateral treaties.
The 1995 Constitution of the Republic of Uganda clearly spells out the role of the state in development. Under chapters XI-XIII, it is stipulated that “the State shall give the highest priority to the enactment of legislation establishing measures that protect and enhance the right of the people to equal opportunities in development. The State shall stimulate agricultural, industrial, technological and scientific development by adopting appropriate policies and the enactment of enabling legislation, and that the State shall take special measures in favour of the development of the least developed areas.”
However, the states’ role in development has been regulated by the adoption of the neo-liberal doctrine that promotes market fundamentalism with a belief that an imperfect market is better than an imperfect state. The argument made by the Bretton Woods institutions is that development would occur faster if market fundamentalism (whose doctrine of the trickle-down-effect is no longer working as markets continue to fail the poor) assumed a central role in the economy. This would mean that the state would be forced to restructure its state-owned enterprises and rationalise its operations, thus becoming a facilitator in the development process.
With the failure of the neo-liberal paradigm to achieve meaningful development results, the state-development nexus still presents a key policy challenge for Uganda. Uganda and all other East African Community (EAC) states should be purposefully interventionist in today’s global village because of the more difficult international competition they face as newcomers to industrialization. There is still a weak linkage between the large peasant sector and the small modern sector, which limits the domestic market and the benefits from external economies. This is because of the inability of the private sector to generate sufficient capital to enter certain industries and public services that are regarded as essential to national development. EAC states should therefore engage in investment negotiations with a strategy of making them fill these linkages.
Focusing on the EAC-US
Focusing on the EAC-US Trade and Investment Partnership (TIP) negotiations, it is the role of Uganda and EAC governments to have their own investment model that is anchored in their development objectives and priorities to enable the EAC to negotiate with the US from an informed point of view (see Box 1). The Uganda investment code is still under review and the EAC does not have in place a joint investment policy to use as a basis to advance EAC’s interests during the negotiations. Therefore, Uganda and EAC states entering into these negotiations with a joint investment model is imperative.
The Ministers responsible for Trade matters in the EAC Partner States and the United States Trade Representative (USTR) met on 14th June 2012 on the margins of the African Growth and Opportunity Act (AGOA) Forum in Washington D.C. and agreed on the scope of the EAC-US Trade and Investment Partnership. Both parties released a joint statement in this regard and directed their respective technical teams led by the EAC to begin consultations as soon as possible on a regional investment treaty; a trade facilitation agreement; continued trade capacity building assistance; and a commercial dialogue. Since then, negotiations have been ongoing between the two parties.
The role of the EAC states in development will be measured according to their position on the performance requirements clause of the United States Bilateral Investment Treaty (US BIT), which currently prohibits EAC states from imposing performance requirements on US investors. These could include: regulation on limits and conditions on equity, obligations for technology transfer, measures for using local materials, increasing imports or limiting exports, and requirements to employ locally. These are all specifications which EAC needs in order to benefit from such a partnership. Retaining the right to impose obligations on foreign investments will ensure that negotiated investment agreements will be beneficial to EAC and their people.
The role of the EAC states in development will also be viewed on the positions they take regarding Most Favored Nation clause, National Treatment, dispute settlement, transfers and minimum treatment clauses. When critically analysed, these clauses have provisions that put emphasis on the investments and rights of investors, not the outcomes of the investments. They speak the language of laissez-faire where the role of the state in regulating investments and investors is disregarded. That is when the doctrine of the trickle-down effect takes the lead.
“EAC states have to play a big role in negotiating positions that foster their own development priorities. These negotiations have the ability to put EAC on a slippery road towards accepting rules that are difficult to reverse and which would gravely constrain the much needed policy space for development”.
The article on National Treatment accords foreign investors the right to be treated no less favorably than local investors with respect to the acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. The article on Most Favored Nation requires host countries to accord to foreign investors and their investments, treatment that is no less favourable than the treatment accorded to investors of any third state. The former article has provisions that erode the ability of EAC states to promote local investors or local industries which gravely need assistance to grow to be able to compete with foreign companies. At the same time, the latter limits the government’s ability to choose which countries it would like to offer its preference. In order for EAC states to be able to benefit from this agreement, they should defer these clauses as they are binding and limit their roles in regulating foreign investment without compromising domestic investment.
Adopting a development centered approach
Recognising that with appropriate policies in place, investment can be a powerful tool for poverty eradication and the fostering of sustainable development, EAC states have to play a critical role in ensuring that negotiations are mutually beneficial. This is enhanced by the neo-liberal paradigm which assigns Foreign Direct Investments (FDIs) a central role of development. However, for this assumption not to be flawed, EAC states have to play a big role in negotiating positions that foster their own development priorities since these negotiations have the ability to put EAC on a slippery road towards accepting rules that are difficult to reverse and which would gravely constrain the much needed policy space for development.
In conclusion, a free market system is purely based on individual maximising behavior and may not achieve socially optimal resource allocation as predicted by the orthodoxy of neoclassical economics. The state should play a central role in directing the development agenda. The African state, as represented by state-owned enterprises (SOEs), has been self-serving and inefficient in meeting the needs of large segments of the African population. Although the market may be efficient at maximising returns from scarce resources, optimal conditions may not always be consistent with the realities of the African political economy. Despite the shortcomings of the state, neither a workable market system, nor sustainable development is likely to be obtained without considerable state participation.
In order to consolidate the role of the EAC states in trade negotiations, the EAC should have a global trade strategy so as not to play by the rules of the US. The redefinition of development as the ‘‘Social Factor (SF) + (plus) the Democratic Factor (DF) – (minus) the Imperial Factor (IF)’’remains a sound formula if the EAC states have to negotiate investment treaties based on their terms and not on the US’s terms. Active trade and investment policies can enhance economic growth when based upon a coherent development strategy (with state intervention at the core) and supported by a range of others. Therefore, it is a cardinal role of the EAC, and the Ugandan government in particular, to assert its right to promote and protect the economy and livelihoods of East Africans/Ugandans who should not be undermined by the US self-serving interests. The urgent task for all stakeholders, and especially policy makers and CSOs, is to have a critical appraisal of the EAC-US TIPA and raise awareness of its implications, both in the medium and long term. The strategic TIP being negotiated should redress, and not perpetuate, the imbalances inherent in the present arrangements, since based on the current mode of negotiations the signs are not encouraging. The role of EAC states in ensuring that the EAC-US TIPA delivers remains unquestionably critical, based on the positions that they will deliver during the negotiations.
Kiiza Africa is currently the Acting Program Officer under the program area of Influencing Multilateral and Bilateral Trade Negotiations at the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI)-Uganda.
List, F., and J. Shield Nicholson, 1916. The National System of Political Economy. Longmans, Green publishers.
Ha-Joon Chang (2003) Globalization, Economic Development and the Role of the State, Zed Books Ltd.
The 2012 US Model Bilateral Investment Treaty.
This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).