e-Government

1. 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@cornell.edu

2. 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

6. 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.

7. 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

9.  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

11.  Preemption of Legislative Authority • Harmonization • Precautionary Principle • The choice of mechanism or law must be the “least trade restrictive”

12.  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

13. 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

14. 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

15. 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

16. 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.

17. 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

18. Business Construction Distribution Educational Environmental Health Tourism Recreational Cultural Transport Traditional Government Services Liberalized by GATS

19. 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

20. 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