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2024 | OriginalPaper | Chapter

Balance of Payments-Related Restrictions on the Freedom of Investment

Author : Claus Zimmermann

Published in: Weaponising Investments

Publisher: Springer Nature Switzerland

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Abstract

This chapter takes a closer look at the potential conflict between the freedom of investment and the relatively wide margin of manoeuvre of states to restrict transfers of funds and to impose balance-of- payments restrictions in the event of external financial difficulties. The chapter examines the evolving IMF and WTO perspectives in this field situated at the intersection of trade, money and foreign investment regulation. Furthermore, it analyzes the relevant legal framework for restrictions on foreign investment resulting from exchange controls and exchange reserve management. As part of its analysis, the chapter also takes a closer look at the evolving legal framework on capital controls post-Washington consensus in light of destabilizing phenomena such as hot-money flows. The chapter concludes that, as an exceptional, temporary policy tool, balance-of-payments restrictions remain vitally important. From the perspective of foreign investors, this does not necessarily entail negative consequences as long as reliable investment conditions, including with respect to both inwards and outwards flows of funds can still be ensured.

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Footnotes
1
For a detailed analysis of the terms of the provisions contained in Articles VIII and XIV of the Fund’s Articles, see Siegel (2002), pp. 584–90.
 
2
See Siegel (2002), p. 586, original emphasis, for a more detailed, excellent analysis of this point.
 
3
Ibid.
 
4
IMF, Decision No 1034-(60/27) (1 June 1960) in IMF (2020), Selected Decisions and Selected Documents of the International Monetary Fund [Selected Decisions] (41st issue, Washington DC, last updated 31 July 2020) <https://​www.​imf.​org/​en/​publications/​selected-decisions/​description?​decision=​1034-(60%2F27)>.
 
5
For details on this point, see Siegel (2002), p. 586.
 
6
Figures as of 15 December 2022. See IMF, ‘IMF Members’ Quotas and Voting Power, and IMF Board of Governors’ <https://​www.​imf.​org/​en/​About/​executive-board/​members-quotas>. The countries at issue are, in alphabetical order: Islamic Republic of Afghanistan, Albania, Angola, Bhutan, Bosnia and Herzegovina, Burundi, Eritrea, Ethiopia, Iraq, Lao People’s Democratic Republic, Liberia, Maldives, Mozambique, Myanmar, Nigeria, Somalia, Republic of South Sudan, Syrian Arab Republic, Turkmenistan, Tuvalu.
 
7
The percentage of IMF members relying on the transitional arrangements has still slightly decreased as the total membership increased from 188 to 190 over the same time.
 
8
Confusion sometimes arises from the fact that the IMF also employs the term ‘capital account’, yet for a different purpose. As used by the IMF, the latter term designates only a small proportion of the ‘capital and financial account’ and is thus defined more narrowly than the ‘capital account’ used in most economic textbooks. The analysis provided in this paper remains unaffected by these different definitions. All capital controls in the sense of Article VI of the Fund’s Articles are those that affect transactions accounted for in the broad ‘capital and financial account’ and not only the narrow ‘capital account’ as used by the IMF. The OECD and the UN System of National Accounts (SNA) follow the IMF approach.
 
9
Gold (1977), p. 20.
 
10
See, e.g., Black (2002), p. 104.
 
11
See Lichtenstein (2000), p. 66.
 
12
Roessler (1975), pp. 640–643.
 
13
Examining the many issues arising from Article VIII:2(b) lies beyond the scope and purpose of this chapter. For detailed analyses see, notably, Gianviti (1973), pp. 629–661; and Gold (1962). See also Gianviti (1980), p. 279; and Burdeau (1997), p. 5.
 
14
For a succinct analysis of the Keynes and White Plans drafted and negotiated over the course of several years in preparation of the Bretton Woods Conference and for insightful commentary on the Bretton Woods Conference itself, see Lastra (2000), p. 507 as well as Lastra (2006), pp. 351–355 and the various useful references contained in these studies.
 
15
See Lastra (2006), p. 396.
 
16
At the time, the standard policy recommendations for purposes of restructuring crisis-hit economies included the following ten policy recommendations, which had first been formulated by economist John Williamson in 1989: (1) fiscal discipline; (2) redirecting public expenditure; (3) tax reform; (4) financial liberalisation; (5) adoption of a single, competitive exchange rate; (6) trade liberalisation; (7) elimination of barriers to foreign direct investment; (8) privatization of state owned enterprises; (9) deregulation of market entry and competition; and (10) secure property rights. For details, see Lopes (2012), p. 4.
 
17
For an insightful analysis of both the IMF’s legal framework on capital and exchange controls in its historic context and of the efforts undertaken in the 1990s towards giving the IMF jurisdiction over capital controls, see Lichtenstein (2000), pp. 61–80.
 
18
IMF (2009) IMF Completes First Review Under Stand-By Arrangement with Iceland, and Approves US$167.5 Million Disbursement. Press Release No 09/375 (28 October 2009). http://​www.​imf.​org/​external/​np/​sec/​pr/​2009/​pr09375.​htm.
 
19
Ostry et al. (2010). See also Bob Davis (2010).
 
20
At the same time, numerous external commentators, aware of the fact that the tide was shifting towards an explicit acknowledgement, by the IMF, of the usefulness of capital controls, published related policy briefs. See, e.g., Gallagher (2012).
 
21
IMF (2012a) The Liberalization and Management of Capital Flows—An Institutional View (14 November 2012) <http://​www.​imf.​org/​external/​np/​pp/​eng/​2012/​111412.​pdf>.
 
22
IMF (2012b) IMF Executive Board Discusses The Liberalization and Management of Capital Flows—An Institutional View. PIN No. 12/137 (3 December 2012) <http://​www.​imf.​org/​external/​np/​sec/​pn/​2012/​pn12137.​htm>.
 
23
IMF (2012c) IMF Adopts Institutional View on Capital Flows. IMF Survey Online (3 December 2012) <http://​www.​imf.​org/​external/​pubs/​ft/​survey/​so/​2012/​POL120312A.​htm>.
 
24
At the end of March 2013, Cyprus became the first Member of the eurozone to apply capital controls, precisely to avoid such uncontrolled capital outflows from its oversized banking sector. Members of a monetary union face an additional set of practical and legal hurdles when resorting to capital controls as a temporary policy tool.
 
25
Only a few weeks before publishing its news institutional view on capital flows, the Fund’s Executive Board had explicitly cautioned Iceland against premature and disorderly capital account liberalisation. See IMF (2012d) IMF Executive Board Concludes Second Post-Program Monitoring Discussion with Iceland. PIN No 12/129 (19 November 2012) <http://​www.​imf.​org/​external/​np/​sec/​pn/​2012/​pn12129.​htm>.
 
26
According to Articles XII:4(a) and XVIII:12(a) of the General Agreement on Trade in Goods (hereinafter ‘GATT’).
 
27
According to GATT Article XII:4(b)) and GATT Article XVIII:12(b), respectively.
 
28
According to GATT Article XII:4(d) and GATT Article XVIII:12(d), respectively.
 
29
Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994 (15 April 1994) in WTO Secretariat. Legal Texts: 22.
 
30
Declaration on Trade Measures Taken for Balance-of-Payments Purposes (28 November 1979) BISD 26S/205–209.
 
31
The so-called “full consultation procedures” (BISD 18S/48–53) and “simplified consultation procedures” (BISD 20S/47–49).
 
32
For a detailed analysis of the IMF-WTO relationship and, in particular, the consultation requirement in GATT Article XV:2 and the related WTO case law, see the following book chapter of mine: Zimmermann (2012), pp. 57–85.
 
33
This quotation of GATT Article XV has been adapted according to Article 2(a) of the introductory text of the GATT 1994, stipulating that all references to the “contracting party” in the incorporated provisions of the GATT 1947 shall be deemed to read “Member”. In addition, the quoted parts of GATT Article XV are among those provisions for which, according to Article 2(b) of the introductory text of the GATT 1994, references to the CONTRACTING PARTIES acting jointly shall be deemed to be references to the WTO. These changes have been included without further express notice into any relevant quotes in the remainder of this chapter.
 
34
Emphasis added.
 
35
Siegel (2002), p. 571.
 
36
Siegel (2002), p. 571, 582–583.
 
37
Siegel (2002), p. 571.
 
38
Siegel (2002), p. 589.
 
39
See Siegel (2002), p. 589–590.
 
40
Siegel (2002), p. 586, 590.
 
41
For details on this point, see Gianviti (1997), pp. 775–776.
 
42
See, e.g., Lastra (2006), p. 396; Siegel (2002), p. 590; and Lichtenstein (2000), p. 66.
 
43
Emphasis added.
 
44
For a thorough analysis of the exception under GATS Article XI:2, in particular of its second part, which limits the scope of the exception with respect to certain restrictions on capital transactions, see Siegel (2002), pp. 596–599.
 
45
Convention on the Organisation for Economic Co-operation and Development (adopted 14 December 1960, entered into force 30 September 1961) <http://​www.​oecd.​org/​document/​7/​0,2340,en_​2649_​201185_​1915847_​119672_​1_​1_​1,00.​html>.
The OECD’s forerunner was the Organisation for European Economic Co-operation (OEEC), which was created in 1947 to administer reconstruction aid under the Marshall Plan, and was reconstituted as the OECD in 1961. The OECD currently has 38 member countries, with Costa Rica being the latest country to join the organization on 25 May 2021. Most OECD member countries are high-income countries, but the OECD also maintains cooperative relations, thus sharing its expertise, with more than 70 developing and emerging market economies in addition to its official members. The OECD’s governing body is the OECD Council; formal decisions by the OECD Council are taken by consensus and are legally binding on all OECD member countries. However, decisions by the OECD Council are not international agreements in the sense of public international law.
 
46
Both codes as well as the OECD’s official User’s Guide for both codes are available at <http://​www.​oecd.​org/​daf/​investment/​codes>.
 
47
OECD member countries and OECD key partners currently represent about 80% of world trade and investment. It still remains, however, that major developing countries, notably China, India, and Brazil, do not figure among the OECD’s member countries and are thus not bound by the organization’s rules on capital liberalisation. Russia is not a member country either.
 
48
C(2012)88/REV2 Decision of the Council on the Governance of the Codes of Liberalisation of Capital Movements and of Current Invisible Operations.
 
49
For details, see OECD (2021) OECD Codes of Liberalisation: User’s Guide: 11–15. <http://​www.​oecd.​org/​daf/​investment/​codes>.
 
50
The approach under the OECD Codes of Liberalisation is thus distinct from the ‘bottom-up’ approach under the GATS (see OECD (2021), pp. 11–12).
 
51
OECD (2021), pp. 35–36.
 
52
This summary of the relevant aspects of Article 7 is taken from the commentary in OECD (2021), p. 36.
 
53
For a detailed overview of the essential features of both codes, see United Nations Conference on Trade and Development (UNCTAD) (2000) Transfer of Funds. UNCTAD/ITE/IIT/20 (UNCTAD, New York and Geneva 2000) 18–23, and, in particular, OECD (2021).
 
54
See UNCTAD (2000), pp. 18–23.
 
55
For detailed analysis and commentary, see Zimmermann (2011), p. 725.
 
56
UNCTAD (2000), p. 32.
 
57
NAFTA also contained a detailed temporary safeguards provision in its Article 21.04.
 
58
USMCA, Article 32.4(4)(b).
 
59
See USMCA, Article 32.4(5)(a).
 
60
See UNCTAD (2000), pp. 18–23.
 
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Metadata
Title
Balance of Payments-Related Restrictions on the Freedom of Investment
Author
Claus Zimmermann
Copyright Year
2024
DOI
https://doi.org/10.1007/17280_2023_11

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