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privatization free trade and the erosion of government authority

Privatization, Free Trade and the Erosion of Government Authority

Jennifer Gerbasi

Presented to

Economic Policy Institute Washington, D.C.

April 2003


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 *

market structuring role the subtext
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
market structuring role specific to privatization
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
free trade regime goals
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
free trade regime tasks
Free Trade RegimeTasks
  • Eliminate local requirements for contracting
  • Limit purchasing criteria to quality and quantity
  • Eliminate practices that favor public provision
recent trade agreements
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.
ftas erode state and local government authority
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
investor rights

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
investor property rights

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.

partial takings
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
preemption of legislative authority

Preemption of Legislative Authority
  • Harmonization
  • Precautionary Principle
  • The choice of mechanism or law must be the “least trade restrictive”
us laws courts irrelevant

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

democratic deficit
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
methanex v us
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
resulting nafta challenge
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
ups v canada
UPS v. Canada

Example 2


  • 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.
resulting challenge
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
traditional government services liberalized by gats










Traditional Government Services Liberalized by GATS
market structuring role threatened
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
free trade agreements create a governance deficit
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