An interesting video from a recent meeting of the Venezuelan National Council for the Productive Economy has been circulating on Youtube since late January. In the video, Francisco Acevedo, the president of the Venezuelan Association of Chemical and Petrochemical Industry (Asoquim), detailed a number issues confronting Venezuela’s crippled chemical sector.
Among Acevedo’s proposals was the enactment of special legislation to protect domestic investors. Highlighting how Venezuela’s Foreign Investment Law protects the rights of foreign investors, Acevedo argued that the law discriminated against domestic investors. Local businesspeople, he claimed, should be entitled to a similar system of protections as those afford foreign investors.
Acevedo’s concern is shared by many. In recent years, the Venezuelan government has constantly bullied domestic investors by encroaching on property rights (or threatening to) and imposing regulations (or threatening to). As a result, according to the 2015 Rule of Law Index published by the World Justice Project, Venezuela is one of the most difficult countries in which to do business. But looking at Venezuela’s Foreign Investment Law as a favorable framework for domestic investors is misguided.
The current foreign investment law, reformed by President Nicolas Maduro in 2014, has actually increased costs for foreign investors, led to overregulation, and increased penalties for noncompliance. Such a heavily regulated and over-supervised system has created an unfair playing field for investment and led to concerns about the rule of law. In fact, according to the UNCTAD Global Investment Trade Monitor, in 2014 foreign investment in Venezuela declined by $6 billion, falling to under $1 billion. What investment did occur was largely through alliances with Russian or Chinese national oil companies, more likely the result of political affinities than cold, hard economic calculations.
Based on this treaty regime, foreign investors are protected by international law and international arbitration, while domestic investors have to face the inefficient, politicized and unpredictable system of national laws and courts.
The existence of this segregated regime between foreign and domestic investors is not the result of any one government’s decision or preference. It is a product of the evolution of international investment law until the twentieth century, and perhaps unconsciously, Acevedo is questioning why this discriminatory system is still valid in the light of twentieth-first century investment practices, where foreign and national investors require similar incentives.
Today, domestic and foreign capital tend to behave in very similar ways. In a globalized and hyper-connected economy, investors assess the risk and decide whether or not to invest, and have the possibility to explore more attractive and profitable markets for their investments, in their same borders or in other countries—if they believe they will be treated equally in both. (In the case of Venezuela that’s a big if.) These guarantees ensures the mobility of capital and people to more attractive markets, thus creating competition among states to attract investment. (Isn’t this similar to the delocalization of investments that affects countries like the U.S., Spain or France? See, for example, the case of Apple in the United States.)
Under the present economic crisis in which state-led production and allocation has created scarcity, overcoming the market bottlenecks and low productivity requires domestic and foreign private investment. The first step in doing this is to restore respect for property rights, not only against expropriation, but also against the government’s arbitrary imposition of price controls and tax increases. Any measures that seek to impose unnecessary restrictions on investors, both foreign and national, and restrict their activity and mobility will disadvantage the country.
Promoting private investment is critical to any reconstruction plan for the Venezuelan economy. The country requires capital injection to restore the local industrial sector and boost production in the sectors that provide foreign currency, such as oil, gas and mining, and to provide the basic goods that Venezuelans can no longer find in their grocery stores, pharmacies and hospitals.
During the 20th century, the development of the country’s productive sectors was linked to the collective work of Venezuelans and immigrants who came and together created what was a fledgling private business sector. Compared to today’s withered, oil-dependent economy, their accomplishment appears enormous. Under a fair, predictable, streamlined and transparent regime for both foreign and domestic investors, Venezuela can rebuild its shattered economy and encourage the return of productive investment. It’s an opinion shared by many investors in Venezuela, and captured by Acevedo’s speech: that what is necessary is to harmonize foreign and domestic international laws in ways that ensure equality and extend the spirit and rules embodied in Venezuela’s international investment treaties to foreign and Venezuelan businesses alike.
Julian Garcia Cardenas is a professor of Investment Law and Arbitration at the University of Houston Law Center. You can follow him on Twitter at: @JulianJCardenas.