Bileateral Investment Treaties (BITs) Coming Back To Bite

Published by TIA

See related blog post on ICSID. 

African governments once rushed into signing Bilateral Investment Treaties (BITs) to encourage FDI. Lawyers are however now calling for new models.

With much of Africa’s investment coming from abroad, how governments manage complaints from foreign companies is a vital determinant of the business environment. For decades, foreign investors depended on diplomatic protection from home governments in their overseas adventures, which occasionally gave rise to “gunboat diplomacy”. The US, for example, sent troops into Latin America 34 times to settle commercial disputes.

Since the 1960s, and spiking in the 1990s, a more formal investment approach was attempted in the form of bilateral investment treaties (BITs). These state-to-state agreements establish how governments handle investors from each other’s country, covering fair and equitable treatment, security, and compensation for expropriation, in assets but also, in some cases, in shares, stocks, bonds and other modalities. While BITs infringe sovereignty, in that disputes are settled in international tribunals and not domestic courts, many developing countries saw them as a way of signalling their attractiveness for foreign investment.

The number of treaties has grown exponentially, to around 2,500 today. The number of claims is growing too. Philip Morris, Total, Mobil, Shell, Siemens and Cargill have all taken states to arbitration, with Sri Lanka suffering the first award against a developing country in 1990. Twenty-six percent of new claims in 2010 had an African or Middle Eastern state party involved. In Africa, Zimbabwe, Tanzania, Namibia, Liberia, Algeria and Senegal have all faced actions. There are likely to be more disputes in areas such as mining, water and agriculture, according to Mahnaz Malik, an investment arbitration lawyer at the Chambers of Arthur Marriott QC at 12 Gray’s Inn Square. She warns that events such as the Arab Spring can generate a flood of claims.

But so far, South Africa is arguably the most prominent in the African context. Pretoria signed 30 BITs post-1994 to attract private investment. The new government had inherited a society that was among the most unequal in the world, where the vast majority of black South Africans had been excluded from meaningful economic activity under apartheid. As part of a set of initiatives to redress this inheritance and to meet the government’s constitutional obligation to create a more open and equitable society based on human rights, Black Economic Empowerment (BEE) programmes were initiated.

In 2007, a group of investors from Italy and Luxembourg filed a claim at the Convention of the International Centre for Settlement of Investment Disputes (ICSID), arguing that South Africa’s 2002 Minerals and Petroleum Resources Development Act (MPRDA) contained provisions that amounted to expropriation of their mineral rights, thus violating the BITs South Africa had signed with both countries. The MPRDA, a separate piece of legislation from BEE that aims to transform the minerals industry in South Africa, requires that holders of mineral rights undertake equity or equity-equivalent obligations; requirements emerging from consultations between the government and relevant parties, including representatives of the claimants. The South African government defended the MPRDA by arguing that it protected existing mineral rights and allowed for their uninterrupted use so long as companies also met the government’s wider transformational obligations in some accepted combination. In a punitive judgment, the Icsid tribunal dismissed the claimant’s case, ordered them to pay the legal costs of the South African government, and prevented claimants from bringing any such action again in future.

On the basis of similar reviews conducted internationally, notably, in the US, Norway, and certain Latin American states, South Africa launched a lengthy BIT review, the conclusion of which is that the country will not enter any new treaties unless there are “compelling economic reasons”, says Xavier Carim, deputy director general of the international trade and economic development division of South Africa’s Department of Trade and Industry. “The very fact that narrow, shortsighted commercial interests can subject progressive and laudable government policies to international arbitration, the outcomes of which are unpredictable, creates unacceptable risks that can have a chilling impact on legitimate public policy making,” he says, noting that there have been inconsistencies in the rulings taken by tribunals over similar cases.

It would be simplistic to characterise BITs as simply giving rise to clashes between progressive government policy and corporate interests. In some cases, such as a SOABI v. Senegal dispute, the problem was a largely technical disagreement over terms and conditions of a low cost housing programme.

In Zimbabwe, cases have been brought in objection to the ruling Zanu-PF party’s arbitrary and at times violent land reform programme. Broad and ambiguous terms have been a central problem of many agreements, says Jansen Calamita, senior research fellow in international trade and investment law at the British Institute of Comparative and International Law. “BITs are an agreement by the host state to accept the application of external standards to determine the legality of its actions – standards above and beyond the state’s constitution and national law. If the standards agreed are not clear – as they largely are not – it will be left to tribunals to give meaning and effect to those standards.”

Some lawyers believe the first wave of BITs were signed too fast, with text penned by a closely-knit group of Western lawyers. The majority of BITs reflect the texts developed to promote the 1960s anti-communist, post-decolonisation protection agenda for European investors, says Ms Malik. She believes capacity to understand complex investment law issues is not always present in developing country negotiators. She notes that the imbalance becomes more acute as negotiations are often based on the developed country’s model. In a speech at the London School of Economics, Randall Williams of the South African Trade Department claimed to have seen negotiators making agreements without the presence of a lawyer.

Latin American governments have come out strongly in opposition to prevailing norms. In 2009, Ecuador’s vice minister of foreign affairs, Lautaro Pozo, said BITs reflected a “fifty year old ideology” and that many countries signed them without sufficient understanding of their implications. BITs did not, in his reckoning, reflect the objectives of developing states, especially on issues of the environment and human rights.

In one case, Philip Morris tried to sue Uruguay for copyright infringement when it ruled that cigarette packets needed to carry health warnings. Bolivian President Evo Morales claims that international arbitration offends state sovereignty, with Bolivia, Ecuador and most recently Venezuela denouncing Icsid, the Washington-based arbitration body, part of the World Bank Group, which settles nearly half of claims. India and Mexico have both refused to be party to the Icsid Convention, and Brazil has not ratified any BITs.

Others are more upbeat. “I think the backlash against investment treaties is overstated,” says Anthony Sinclair, a partner at law firm Allen & Overy. “Countries continue to sign these treaties at a rate of about 50 a year.” Mr Sinclair acknowledges there is “fine-tuning and recalibrating” of text, especially in terms of public interest regulation. “At the same time, countries are in search of growth, for which foreign investment is key.”

There is no credible analysis proving the effect of BITs on investment, which would be very hard to quantify. Furthermore, BITs are not the sole determinant of investment. China is a prolific signatory, but continues to invest in countries without BITs – in contrast to Germany, where risk insurance is only issued to companies if they are operating in a country with a German treaty. Yet whenever governments and investors are discussing major cross-border investment, “everybody” on both sides is talking about investment treaties, Mr Sinclair claims.

The focus on treaties should not draw attention away from domestic reforms which could lessen the investment risk. Guinea-Bissau has undertaken domestic reform, turning a single court system dealing with everything from divorces to commercial disputes, into a more differentiated structure with commercial courts run by appropriately trained legal teams and judges, says Raimundo Pereira, speaker of the Parliament of Guinea-Bissau. Nonetheless, bilateral frameworks do appear to be of growing importance to investors.

Despite the frustrations, there is little that can be done about existing treaties until they expire, at which point clearer text can be negotiated, or countries can withdraw. Pulling out of active treaties altogether is unlikely. Even South Africa has not done so, given the diplomatic downsides. The goal of African legal teams is to improve the text in future agreements.

To date, many African governments employed international law firms to advise on treaties. While this helps buffet their expertise in negotiations, capacity-building of African government lawyers is needed. Rukia Baruti recently founded the African International Legal Awareness (AILA) programme, which in late 2011 organised a week long BIT training workshop. Participants included lawyers from Liberia, Ghana, Uganda, the Gambia, Egypt and South Africa. Baruti organised the workshop, held in London, after attending an investment conference in Mauritius, where many African attendees were unfamiliar with investment treaty arbitration.

“By building capacity and increasing awareness of the consequences of concluding investment treaties, African states will, before signing such treaties, carefully examine the meaning and consider the provisions. This would go a long way to avoiding disputes involving African states.”  Mr Sinclair speaks approvingly of AILA, in which his firm participated. “There is no shortage of good will on the part of international lawyers to contribute on a pro bono basis. The issue is whether there are enough people with sufficient inspiration and energy, like Rukia, to organise these activities. Otherwise busy lawyers in firms or chambers, or in academic careers, may not be able to produce something like this themselves.”

Aila has since been approached by African governments to deliver training in-country. Similarly, the International Institute for Sustainable Development has conducted training courses for African government officials in country and at a regional level.  It is important to note that while bilateral treaties have been overwhelmingly North-South in the past, that is changing in reflection of growing South-South economic interaction. Current BITs between developing countries include Mozambique-Indonesia, Djibouti-China and Eritrea-Uganda. South-South deals provide a platform to create more development-orientated texts, but often the European template is copied over. Regional treaties on the other hand tend to create more bespoke texts.

“I have found that debate is healthier in regional dynamics compared to a bilateral context,” says Ms Malik. A recent COMESA Agreement treaty contains more nuanced obligations than those found typically in bilateral treaties, she claims, including provisions to allow tribunals to take greater account of the development status of the host state. The COMESA treaty also omitted the full protection and security standard, a controversial feature in many BITs which puts hefty responsibilities on states. Algeria was taken to tribunal to pay damages related to civil unrest during the civil war. Similarly, Congo faced a claim for riots on the streets of Kinshasa.

The COMESA treaty, and new model texts, exhibit the potential for designing modern templates, says Ms Malik. “It shows African countries that they are not tied to the old European model. It paves the way for innovation in terms of making the treaties better balanced.”

Published by TIA : 05 March, 2012

A Look at Turkey's Trade Policy and FTA with Mauritius

Turkey concluded an FTA with the first Sub Saharan African country, Mauritius, on September 9th 2011 and is expected to initiate negotiations with other EPA and EC FTA signatories.  This is because the customs union between Turkey and the EU, which entered into force on 1 January 1996, has been the main factor shaping Turkey's foreign trade policy.  In addition, the EU opened accession negotiations with Turkey in October 2005 and guidance on reform priorities is provided through the Accession Partnership, adopted in February 2008.

In the EU-Turkey customs union, the EU unilaterally eliminated all customs duties and equivalent measures for industrial products and processed agricultural products when the trade-related provisions of the Interim Agreement of the Protocol entered into force in September 1971, whereas Turkey as a developing country was accorded a transition period of 22 years.  

The EC-Turkey customs union also provides for a common external tariff for the products covered, and foresees that Turkey will align its trade-related legislation with the EU acquis in several areas essential for market access, e.g. with respect to product standards.  The customs union covers all industrial products as well as the industrial component of processed agricultural goods, TRIPS, and competition policy, but does not extend to agricultural commodities, services, or government procurement.  The EU however offers Turkey a preferential regime on imports of certain agricultural products. Negotiations on services and government procurement were launched in 2000, but are now part of Turkey's accession process. 

The customs union also provides provision for:

• free movement (elimination of customs duties and quantitative restrictions) 
• alignment of Turkey on the EC common external tariff, including preferential arrangements (even GSP), and harmonisation of commercial policy measures;
• approximation of customs law, and
• approximation of other laws (intellectual property, competition, taxation, etc.)
• the adoption by Turkey of measures equivalent to the EU's common commercial policy

The European Union remains Turkey's most important trading partner and investor.  For instance, the EU accounted for nearly 70% of total FDI inflows into Turkey during 2005-10.  Nearly 40% of its imports come from the EU, and just over 50% of exports go to the EU. Machinery and transport equipment dominate EU imports from Turkey followed by manufactured articles which account for 24.3%. Main EU exports to Turkey are machinery and transport material (45.1%), chemical products (17.1%) and manufactured goods (15.1%).Globally,  Turkey ranks 7th in the EU's top import list and 5th as an export market.  However, the dominance of the EU in Turkey's foreign trade has declined markedly over the last five years, reflecting a notable shift in Turkish exports towards growth markets in its neighbourhood, in North Africa, certain CIS countries, and in Asia. 

Other main Turkish export markets in 2010 were Iraq (5.3%), Russia (4.1 %), USA (3.4%), United Arab Emirates (2.9%) and Iran (2.7%). Imports into Turkey came from other key markets include: Russia (11.7%), China (9.4%), USA (6.7%), Iran (4.2%) and South Korea (2.6%). 

Turkey currently has about 17 FTAs in force which include one with the EFTA countries, Israel, Macedonia (FYR), Croatia, Bosnia-Herzegovina, Palestinian Authority, Tunisia, Morocco Syria, Egypt, Albania, Montenegro, Serbia, Georgia, Chile, Jordan, Lebanon and Mauritius.

The Mauritius-Turkey FTA provides enhanced duty free access on most industrial products.  All Mauritian industrial products will enter Turkey duty free with the exception of some 70 lines related to textiles which will be phased on four years.  Mauritius in return will offer duty free access to more than 80% of its tariff lines to Turkish industrial products.  In any case Mauritius is a duty free island with over 80% of applied tariffs at zero. 

Why the exclusion of agricultural products? Turkey, even though a member of the G-33 , ranks amongst the largest agricultural producers in the world and the main crop is wheat of which the country is over 90% self-sufficient. With corn, Turkey is about 80% self-sufficient and is a net-exporter of barley. Other major crops include fruit and vegetables, nuts, tobacco, cotton, and sugar. Turkey is also one of the major milk producers in the world, predominantly for domestic consumption of cheese and yoghurt.  While Turkey has specialized feed lots and dairy farms, and large-scale commercial poultry farms, livestock production is mainly extensive and small-scale.  

Useful to note that Turkish agricultural policy was adopted with a view to aligning it more closely with the EU Common Agricultural Policy.  Turkey's main policy objectives are food security and food safety, and raising the self-sufficiency level for selected net-imported products;  improving productivity and competitiveness;  ensuring sustainable farm incomes;  rural development;  and improving institutional capacity.

For comparison, by the end of 2007, the 6 ESA EPA States: Comoros, Madagascar, Mauritius, Seychelles, Zambia and Zimbabwe agreed an interim EPA with the EU. Mauritius in that agreement submitted an individual schedule which is annexed to the interim EPA and liberalises 96% of EU imports into Mauritius compared to a liberalisation of 80% with Turkey, possibly due to the inclusion of some agricultural products in the EPA.

What appears unfortunate in the Mauritius-Turkey FTA is that Turkey seems to have offered market access predominately in industrial goods, where Turkey is competitive. However few SSA African countries are neither productive nor competitive in industrial manufacturing. With Turkey being an emerging industrial exporter, the loss of revenue on the import side for African countries could be an area of concern. In agriculture, Turkey provides subsidized support which is equivalent to the EU Common Agricultural Policy.  

BRICS- SA's Role

Interesting analysis below from the business day. Should note that SA's BRICS membership also adds another dimension to the tripartite  FTA consisting of COMESA-EAC-SADC Member States.

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There is wide consensus that SA’s place in the emerging-market bloc that groups Brazil, Russia, India and China together, is only justified by SA’s strategic importance on the continent.

That means the country needs to tread a careful path between touting its own interests and facilitating links to the rest of Africa.

"It would be in SA’s interest to see this as a bargaining opportunity for the continent rather than just being expedient," said Standard Bank ’s group chief economist, Goolam Ballim. "Otherwise this could be harmful in the longer term for inter- African relationships."

It is a delicate task as SA does not have a mandate at this point to speak for any other African country. Jim O’Neill, the banker from Goldman Sachs who invented the acronym for the first four Bric countries, has said that Nigeria is in a better position to join the grouping.

SA’s economy is only a quarter the size of Russia’s, the next-smallest Brics member, and its share of world trade has been stagnant at 0,5% over the past decade. Its pace of growth also lags well behind the bloc’s other members.

But SA has a lot to offer the group, which analysts say could evolve into a political force rivalling the Group of Seven developed nations, campaigning for the interests of emerging economies. SA has one of the strongest financial sectors in the world, and receives about 95% of Africa’s portfolio inflows — foreign buying of local shares and bonds.

It could provide capital for companies looking to expand into the continent and is rated as the easiest place to open a business among all the other BRICS countries.

That would make it the logical choice for firms to establish their headquarters in SA.

The country is already the services hub for the continent and has significant corporate clout in the global arena.

Where it falls short is on transport infrastructure, both within the country and linked to its African neighbours.

Nonetheless, SA’s place on the continent is seen as key to its debut in the Brics club this week at the meeting at a Chinese resort.

"We are not individually important enough but if we can fill the role of an entry point to Africa, it will be an enormous opportunity," says Absa Capital economist Jeff Gable.

Sub-Saharan Africa has become the second-fastest growing region in the world after Asia and has been more resilient to the global financial crisis then Asia, Latin America and Eastern Europe. It offers an untapped market of hundreds of millions of people.

Standard Chartered’s regional research head for Africa, Razia Khan, thinks that the summit is unlikely to come up with concrete measures that will immediately affect the Brics economies.

But some analysts are expecting preferential trade agreements and developmental finance deals, given the participation of state-owned financial institutions.

Iraj Abedian, chief economist for Pan African Capital Holdings, hopes that the Brics summit will establish a "credible institution" to underpin its political clout. If that does not happen, it will remain a political multilateral rather than an economic leadership forum, he says.

For another piece on BRICS see here.

BRICS’ to Discuss Economic Coordination

and some politics as well....

Leaders from five of the world’s top emerging economies will discuss a coordinated stance on economic issues such as commodity price fluctuation (however, the yuan’s exchange rate is off the agenda).

The mid-April ‘BRICS’ summit will gather leaders from China, Russia, India, Brazil and South Africa in the southern Chinese beach resort of Sanya.  The summit will give the world’s big rising economies a venue to coordinate views on global financial reforms, commodity prices and other shared concerns since the BRICS countries have similar concerns on important questions like the global economy, international finance and development, reform of the international currency system, commodity price fluctuations, climate change and sustainable development. 

See full report here.

Lamy Warns on WTO DDA Negotiations

At a meeting in Kenya last week, Mr Pascal Lamy said the risk of failure of the talks — commonly referred to as Doha Development Agenda (DDA) after the Qatari city that first hosted them — is higher today than it was a few years ago. 'Should the talks fail, this could lock exports from poor countries out of major world markets'. See full report here.

Predictions: The Next BRICs and EAGLEs

There is much debate about the economic or political merits of South Africa's invitation to join the BRIC group of countries. The term BRIC (Brazil, Russia, India and China) was invented in 2001 by Economist Jim O’Neill, now the chairman of Goldman Sachs Asset Management. While path-breaking when coined, the concept of BRIC seems outdated today given increased growth differential among the four countries and given that the grouping is also not considered a structural concept since it depends on a country’s growth projections. 

Which countries were predicted to be the next BRICs? Goldman Sachs identified the Next 11 (N-11) countries that could rival the G7 over time, in the context of several important BRICs themes: energy, infrastructure, urbanisation, human capital and technology. The N-11 include Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. 

Meanwhile, a new group of countries have been coined EAGLESs by BBVA. The EAGLEs, which stands for Emerging and Growth-Leading Economies include the four giant economies (China, India, Brazil and Russia) but also six more countries, namely Korea, Indonesia, Mexico, Turkey, Egypt and Taiwan. 

BBVA has also identified the Next 11 Eagles which which have common characteristics with the EAGLEs and could be included if their growth prospects (already very positive generally) improved in coming years. The 11 countries in the Nest are: Nigeria, Poland, South Africa, Thailand, Colombia, Vietnam, Bangladesh, Malaysia, Argentina, Peru and Philippines.

Some facts about the EAGLEs:

In terms of the criterion for inclusion, each of these ten countries are expected to contribute more to global GDP growth than the average of the countries which have long been considered the most relevant ones worldwide, namely the G7.

In other words, EAGLE countries are chosen because they will be the most relevant in terms of new generated business. The EAGLEs are expected to be responsible for 50% of all global growth in the next 10 years. That compares with 14% for the G7.

This is not only about China or the BRICS. The EAGLEs countries outside the BRICS will grow by almost 4 trillion the next decade, equivalent to 10% of world growth. That compares with 2.4 trillions for the aggregate of Japan, Germany, UK, France, Canada and Italy (six percent of world growth).

From an African perspective, Egypt appears to have made both lists (Next BRIC and EAGLE) while Nigeria was identified as a Next BRIC and potential EAGLE. Meanwhile South Africa was identified as a potential EAGLE but may now be the newest Member of the BRIC group.

EPAs: Of what significance Multilaterally?

My article published on Tralac Website (original dated January 2008)

January 2008 ushered in useful milestones. Seven EPAs are reportedly in place, of which six are coined interim EPAs and therefore earmarked for further negotiations while the Caribbean-EC EPA has been crowned the full comprehensive EPA. All agreements have met the core objective, which is to conclude WTO compatible trade in goods agreements under Article XXIV and have thereby prevented trade disruption on the part of ACP States. EPAs have also provided the EU private sector with historic market access opportunities into some of the poorest countries in the world. Nonetheless, with additional negotiations anticipated in six EPA regions, the Cotonou Agreement preparatory period is far from over. Additionally, the repercussions of these agreements both regionally and at the WTO are not encouraging. 

The new EPA environment has been birthed amidst controversy and ingenuity. The conclusion of interim EPA or full comprehensive EPA has further compounded confusion as to the legal basis for additional negotiations, when in fact both EPAs meet the Cotonou Agreement core objective of WTO compatibility in trade in goods. GATT Article XXIV technically only differentiates between fully liberalised FTAs and interim tariff dismantling FTAs, while WTO practice finds that almost none of the near 300 regional trade agreements notified under Article XXIV to the WTO RTA Committee, have been notified as interim agreements. In practice however, interim EPAs are expected to rapidly migrate beyond goods into full comprehensive EPAs, by concluding on a range of rules, some of which the WTO has not even considered, such as the Singapore issues. 

This migration plunges ACP States into a minefield of multilaterally unregulated trade territory and one with almost no disciplines for regional trade agreements. The graduation of the interim EPA also moves against the negotiating procedures of the Cotonou Agreement Article 37, which mandates that EPAs would progressively eliminate barriers in accordance with relevant WTO rules. Furthermore, the development objective of negotiations in areas the WTO has not even considered remains questionable given various documented research findings that comprehensive EPAs would not support the development objectives of many poor countries. Nonetheless, taking into account the limited to non-existent negotiating capacity including incoherent regional participation in some EPA regions which dismally constitute only one or two ACP countries, its not clear how or whether the additional negotiations scheduled for 2008 would be consummated on the part of the ACP EPA Parties. 

At the WTO, reciprocal parties to FTAs with developed countries will for the first time include LDCs, in essence contradicting the developmental arguments put forth in the Doha Round by the poorest countries. The same can be said of the Small Economies whose vulnerabilities have been acknowledged by trade and development experts globally and considered in the Doha negotiations. On this basis, the role of the WTO in the area of development could be eventually eroded as the negotiating positions and coalitions among developing and LDCs are thrown into further disarray and possible fragmentation.

The second phase of EPA negotiations could also potentially worsen what is already an uncomfortable situation in trade in goods both in the regional and WTO context. Regionally EPAs may provide EC goods access into the wider ACP markets. At the WTO, EPAs appear to have compromised the potential development benefits of the Doha Round, given concluded provisions reverse some of the Doha negotiating positions of developing countries. These include EPA commitments even by LDCs, to reduce up to 80% of tariffs, to eliminate export taxes and other useful development tools. Further negotiations with the EC, before the conclusion of the Doha round could further detract from development objectives of developing countries and their negotiating leverage at the WTO. 

Additionally, future negotiations on the development dimension of Article XXIV may have been compromised by these agreements. It remains doubtful if the threshold for substantially all trade even for LDCs will be reviewed or whether additional flexibilities for developing countries under GATT Article XXIV will be permissible in the WTO negotiations, beyond that agreed upon in the EPAs. 

Finally, EPAs may essentially determine or provide advance impetus for a possible agenda for the next round of multilateral trade negotiations. This agenda may include the formerly rejected Singapore issues such as investment, competition, public procurement, among other areas now agreed as part of the interim EPA, but not presently regulated by the WTO. If the interim EPAs are fully concluded by most ACP States, this may compromise future multilateral negotiations, when these issues do come under the ambit of the WTO. 

ACP States and the EU Members combined, constitute close to two thirds of the 150 WTO Membership. So far about half the ACP membership has concluded an EPA with the EC, with more ACP countries likely to do so to safeguard their regional integration efforts. Which raises the question; what impact could EPAs have on the multilateral trade and development agenda as a whole?

Climate Change and Africa’s Food Deficit

"Africa is now facing the same type of long-term food deficit problem that India faced in the early 1960s". This is according to a Study by the International Food Policy Research Institute (IFPRI) which recommends that Africa should spend more on Agriculture in order to avert a possible crisis. Sub-Saharan Africa’s (SSA) food deficit is also increasingly compounded by climate change. In fact, one-third of the African population lives in drought-prone areas while two-thirds of SSA’s surface area is desert or dry land. The major impact of climate change on food security includes changes in precipitation and insulation, changes in the length of growing seasons and changes in carbon uptake. Additionally there are declines in agricultural yields, decline in the quality of pasture and livestock production, and reduced vegetation cover which place local people at risk of famine.

Climate change also affects rain-fed agriculture which is the main safety net of poor people in rural areas where agriculture employs about 70 percent of the population. The rain related challenges can either cause drought or floods and the maps shown (Source: World Bank Development Report 2010) indicates the countries likely to be affected by either.

Despite the fact that most people in SSA are engaged in agriculture, its productivity has stagnated for several years across the whole sub-region making the region a net food importer. In fact, according to the Food and Agriculture Organization’s (FAO) list for 2010 of Low-Income Food-Deficit Countries (LIFDC) - 44 of the 77 low income food deficit countries in the world are in Africa.

An example is the disappearance of Lake Chad over a 40 year period as shown in the image (source: GRID Arendal UNEP). Lake Chad is shared by Nigeria, Chad, Cameroon and Niger and its disappearance is a grim reminder of the dramatic ecological challenges and food shortages that lie ahead. The lake's area has decreased by 80 per cent over the last four decades, with catastrophic impacts on those reliant on its resources. Lake Victoria is receding as well and projected reductions in the rivers in the Nile region signal difficult times ahead. 

Another dimension is that of water, storage and infrastructure. Most rivers cross more than one country, necessitating effective cooperation across borders. Africa’s 63 transboundary river basins together account for 90 percent of its surface water resources necessitating regional water control systems.  Armed conflict further complicates agriculture and climate change risk management. For poor people living in weak or unstable states, climate change will deepen hunger, suffering, and intensify the risks of food insecurity, mass migration, violent conflict, and further fragility.

According to a World Bank Publication, by 2050, Sub-Saharan Africa will need to feed more people in a harsher climate. Agriculture will simply have to become more productive, getting more crop per drop while protecting ecosystems. Water resources need to be managed better by scaling up existing infrastructure to manage watersheds, rainfed agriculture and protecting forests. Improved planning for storage, power transmission, and irrigation including screening investments for climate risks will also be necessary. Countries will need to develop mechanisms for collaboration across sectors and countries.

There is a role for innovation and academic research institutions as well. This could be done by adopting simple technologies suitable for small farmers such as low-cost drip irrigation and storage of rainwater. African farmers should also be helped to work with new crop varieties. One example is "New Rice for Africa" (Nerica), an Asian-African hybrid developed in Africa with support from the Japanese International Cooperation Agency (JICA), that combines drought resistance with high yields and high protein content. 

NERICA, the new rice variety was the result of years of work by a team of plant breeders and particularly Sierra Leonean molecular scientist Monty Jones at the West Africa Rice Development Association (WARDA – now the Africa Rice Center). When Dr. Jones (a 2004 winner of the WFP) set up the biotechnology research program in 1991, some 240 million people in West Africa were dependant on rice as their primary source of food energy and protein, but the majority of Africa’s rice was imported, at an annual cost of US$1 billion. According to WIPO, the most popular Nerica rice takes only three months to ripen, as opposed to six months for the parent species, thus allowing African farmers to “double crop” it in a single growing season with nutritionally rich vegetables or high-value fiber crops. 

Meanwhile in 2009, Dr. Gebisa Ejeta of Ethiopia, was the recipient of the World Food Prize for his sorghum hybrids which are resistant to drought and the devastating Striga weed and which has dramatically increased the production and availability of one of the world’s five principal grains and enhanced the food supply of hundreds of millions of people in sub-Saharan Africa.

Overall, a Climate Strategy for Africa and food security should also include: sustainable land and forest management; increased knowledge and analytical capacity, improved weather forecasting, research, extension services, market infrastructure and renewal energy generation systems. Farmers will also need to benefit from integrating biodiversity into the landscape and reducing carbon emissions from soil and deforestation.

The Global Structural Realignment of Historic Significance

"The traditional split between North and South makes little sense in an increasingly multi-polar world where the largest and most dynamic economies may no longer be the richest, nor the world’s technological leaders”.

The OECD Shifting Wealth 2010 Report raises an interesting point above regarding the traditional north south divide which seems to have outlived its relevance. In fact, the Report finds that OECD non-member economies have markedly increased their share of global output since the 2000s, and  as shown below,  projections predict that this trend will continue. This realignment of the world economy is not a transitory phenomenon, but instead is described as a structural change of historical significance.Other interesting facts...

"In 2007, just before the global financial crisis hit, no fewer than 84 developing countries grew their per capita income at a rate more than twice the OECD average. Among them were more than 20 countries in sub-Saharan Africa. The five-year growth performance of Latin America was its best since the 1960s.

In 2009 China became the leading trade partner of Brazil, India and South Africa. The Indian multinational Tata is now the second most active investor in sub-Saharan Africa. Over 40% of the world’s researchers are now in Asia. As of 2008, developing countries were holding USD 4.2 trillion in foreign currency reserves, more than one and a half times the amount held by rich countries.

This structural realignment in the trade context can be considered in light of the fact that Africa trades predominantly with the rest of the world and Asia is the fastest growing trading partner and major source of imports with the US, EU the largest export destinations.  


On Africa-EU trade, the EPAs are deep policy instruments that open Africa's markets to Europe yet Asia is the largest source of imports. One can wonder if EPAs will accelerate or hinder Africa's integration with other developing countries especially with their restrictive rules of origin.

In the WTO Doha Round, traditionally the focus has been on developed and major developing countries with LDCs, (predominantly in Africa) exempt from multilateral liberalization. Hence Africa's south-south engagement would need to be concluded outside of the WTO for developing countries. 

What does this new economic geography mean for global governance, the G20, BRIC economies and is Africa adequately represented in this new world order?

Genesis of the EC's MFN Clause in the EPAs

There has been much discontent regarding the Most Favoured Nation (MFN) Clause found in the Africa-EU Economic Partnership Agreements (EPAs), and the effect the clause would have on south-south trade and the standing of the Enabling Clause.

The genesis of the MFN clause can be understood in the context of OECD's recent 2010 publication: Shifting Wealth, which finds that between 1990 and 2008, world trade expanded almost four-fold, but South-South trade multiplied more than ten times. Hence developing countries now account for around 37% of global trade, with South-South flows making up about half of that total. This trade could be one of the main engines of growth over the coming decade, especially if the right policies are pursued.

It would seem that the EU would like a slice of this rapidly expanding south south pie.  In fact as shown above, the contribution to world GDP and PPP growth by developing countries has risen sharply since the nineties and has outpaced the contribution of advanced economies, and has doubled it.  Hence, the MFN clause could be intended to accelerate the EC’s ability to benefit from south south market-opening especially with fast growing economic giants that the EU has not concluded an FTA with.  These include the BRIC countries (Brazil, Russia, India and China).  

As an example, Africa's south-south trade with non African countries, has increased from a low of 8% of Africa's total trade to almost 30% and this increase is largely trade with Asia. Trade between Africa and China was estimated at US$6.5billion in 1999 but in 2008 was valued at US$107 billion, making China, Africa's second largest single country trading partner following the United States (see previous posts on Asia China Trade). Meanwhile, in the last 30 years, Africa's trade with the EU has continued to decline, from a high of 55% in the mid eighties to about 35% share of total Africa trade in 2008.

In light of the above, it is necessary for African countries to take caution with regard to forward-looking concessions between Africa and fast growing economies and concessions between Africa and shrinking economies.  In addition, it should be noted that the EU is undertaking numerous FTA negotiations with developing and BRIC economies. Therefore, the future standing of the MFN clause in the EPAs should also be considered in light of the EU's rapidly expanding list of future FTAs. 

Other legal and systemic concerns regarding the EPAs can be found here. 

Shifting Wealth: Recommendations for the Future

According to the 2010 Perspectives on Global Development: Shifting Wealth, by the OECD Development Centre, the economic and financial crisis is accelerating a longer-term structural transformation in the global economy. In fact, longer-term forecasts in the Report suggest that today’s developing and emerging countries are likely to account for nearly 60% of world GDP by 2030.  

These findings should indeed transform the way we configure ourselves in Africa especially with the key economic engines of the world; China and India. 
To this end, the Report makes useful recommendations below with regard to development strategies in developing countries, which need to be adapted to harness the opportunities of shifting wealth. 

National development policies should:

● promote South-South foreign direct investment and learning the lessons from successful examples of clusters and Export Processing Zones. They should harness investment links to achieve technological upgrading through national innovation systems;

● ensure appropriate revenue management policies in resource-rich economies and consider using sovereign wealth funds to smooth consumption and channel resources to promote growth and investment in the domestic economy;

● respond to the growing demand for agricultural exports and increasing pressure on arable land by strategies to improve agricultural productivity, through greater support to R&D and extension services, and through South-South technological transfer;

● implement pro-poor growth policies, focusing on providing more and better jobs and improving social protection through further development and replication of institutional innovations such as conditional cash transfers;

● expand South-South peer learning to help design policy based on successful experiences in the South.

A shift from predominantly North-South cooperation to predominantly South South (African and non African) cooperation especially with india and china may require a shift in foreign policy for some African countries. However, that shift is not only necessary but crucial. 

Has the Financial Crisis Revealed the Limits of an Export Led Strategy?

The global economic crisis is making it painfully evident to the developing world, the limitations of over-dependence on a narrow set of exports and markets. Many countries are rightly worried about the merits of a growth process built on export-led growth. In the case of successful export-led growth strategies, the global economic crisis is revealing an additional limitation: the large exposure of exporting countries to financial vulnerability. 

For these reasons, countries should: strengthen their diversification and avoid agricultural or natural resource export vulnerability; emphasise the development of the domestic market; develop industrial policies rather than narrowly defined export led strategies only; increase regional trade and integration; enhance infrastructure development and other private sector development tools.

For instance, China's dependence on export-led growth, particularly as a global platform for exports of manufactured products, left it vulnerable to the effects of the global economic recession that began in late 2008. In 2009, China's exports fell by 16% and its imports fell by 11%, reflecting the high import-intensity of its manufactured export sector. Real GDP growth declined from 9.6% in 2008 to a year-on-year rate of 6.2% in the first quarter of 2009, the lowest rate in more than a decade. If China can be vulnerable to the downside of export-led growth, African countries are no exception.

Has the Financial Crisis Revealed the Limits of an Export Led Strategy? other views here.