Bolivia Exits ICSID, Endangers Global Direct Investment

One of the biggest risks involved when a company invests in a foreign country is that the government of that country will suddenly and capriciously confiscate the company's assets, violate the company's contractually-guaranteed rights, or otherwise act with impunity to rob the company of the profits and assets it thought it was acquiring. So, how do countries attract foreign investment in such a situation? There's an established answer: they sign something known as a bilateral investment treaty (BIT) with countries whose investment they wish to attract.

Let's say that Italy and Bolivia sign a bilateral investment treaty. Then if an Italian company invests in Bolivia and is subsequently summarily nationalized, it can take Bolivia to binding arbitration at an arm of the World Bank known as the International Centre for Settlement of Investment Disputes, or ICSID. If ICSID finds in favor of the Italian company – Telecom Italia, let's say – then Bolivia has to pay Telecom Italia the sum that ICSID decides upon.

Now if Bolivia is going around nationalizing telecommunication companies, why should it pay any attention to ICSID awards? The answer is that an ICSID award has the status of an international treaty obligation: the strongest obligation that a country can have under international law. Countries can and do ignore court orders the whole time, but they don't default to the World Bank, and they certainly don't default on their treaty obligations.

Except now all these best-laid plans seem to be going rather awry. Bolivia's leftist president, Evo Morales, has announced that his country is unilaterally exiting ICSID. What's more, other countries in his bloc, including Nicaragua and Venezuela, are likely to follow suit.

This is bad news not only for Telecom Italia, but also for any companies investing abroad: if Bolivia can exit ICSID, then so can any other country. It's far too early to tell whether a spate of these decisions might have deleterious consequences for total direct investment in developing countries. But this cannot be a good sign.