German Yearbook of International Law / Jahrbuch für Internationales Recht: Vol. 32 (1989) [1 ed.] 9783428468263, 9783428068265

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GERMAN YEARBOOK OF INTERNATIONAL Volume 32 · 1989

LAW

The Editors

and the Institut für Internationales Recht

do not make themselves in any way responsible for the views expressed by contributors

This Yearbook may be cited: G Y I L 32 (1989)

Communications should be addressed to: The Editors German Yearbook of International Law Institut für Internationales Recht an der Universität Kiel Olshausenstrasse 40/60 D-2300 Kiel 1

GERMAN YEARBOOK OF INTERNATIONAL LAW JAHRBUCH FÜR I N T E R N A T I O N A L E S RECHT

Volume 32 · 1989

DUNCKER & HUMBLOT / BERLIN

Founders: Rudolf Laun - Hermann von Mangoldt

Editors: Jost Delbrück and Rüdiger Wolfrum Assistant Editor: Denise Smith-Bizzarro Institut für Internationales Recht an der Universität Kiel

A d v i s o r y B o a r d of the I n s t i t u t e : Daniel Bardonnet l'Université de Paris I I Rudolf Bernhardt Max-Planck-Institut für ausländisches öffentliches Recht und Völkerrecht, Heidelberg Lucius Caflisch Institut Universitaire de Hautes Études Internationales, Genève

John Norton Moore University of Virginia, Charlottesville Fred L. Morrison University of Minnesota, Minneapolis Albrecht Randelzhofer Freie Universität Berlin

Antonius Eitel Bonn

Krzysztof Skubiszewski Polish Academy of Sciences, Warsaw and Poznan

Luigi Ferrari Bravo Università di Roma

Christian Tomuschat Universität Bonn

Louis Henkin Columbia University, New York

Grigorij Tunkin Moscow State University

Tommy T. B. Koh Washington, D. C.

Sir Arthur Watts London

All rights reserved © 1990 Duncker & Humblot GmbH, Berlin 41 Printed by Berliner Buchdruckerei Union GmbH, Berlin 61 ISBN 3-428-06826-2

Contents

Articles

Stephen Zamora: Is There Customary International Economic Law?

9

Ignaz Seidl-Hohenveldern: Piercing the Corporate Veil of International Organizations : The International T i n Council Case in the English Court of Appeals . .

43

Ibrahim F. I.Shihata: The " G o l d Dollar" as a Measure of Capital Valuation after the Termination of the Par Value System: The Case of I B R D Capital

55

Francis Snyder: European Community Law and T h i r d W o r l d Food Entitlements

87

Julius Emeka Okolo: E C O W A S Regional Cooperation Regime

Ill

Jean-Pierre Quéneudec: Les rapports entre zone de pêche et zone économique exclusive

138

Francis Auburn: The Erebus Disaster Mechthild Minknei:

156

Central American Integration: Evolution, Experiences and

Perspectives Alexandre

195

Kiss: Nouvelles tendances en droit international de l'environnement

Claudio Grossman: Proposals to Strengthen the Inter-American System of Protection of Human Rights Ernst-Ulrich Petersmann: Mid-Term Review Agreements of the Uruguay Round and the 1989 Improvements to the G A T T Dispute Settlement Procedures . . P. R. Ghandhi: The Human Rights Committee and Derogation in Public Emergencies

241

264 280 321

Ravi Tennekoon: Regulation of London's Financial Markets Under the Financial Services Act 1986

362

Volker Roben: Le précédent dans la jurisprudence de la Cour internationale

382

....

6

Contents Notes and Comments

Otto Kimminich: Anmerkung zu den Entscheidungen des Verfassungsgerichtshofes der Republik Österreich vom 21.6.1988, Β 400/87-10 und Β 625/87-8

408

R. W Bentham: The Law of Development: International Contracts

418

Reports Eva-Maria

Schulze/Stefan

Schuppert: Die Rechtsprechung des Internationalen

Gerichtshofes in den Jahren 1987 und 1988

435

Wulf Hermann: Die Tätigkeit des Nordischen Rates im Jahre 1987

450

Carsten H. Krage: Die Tätigkeit des Nordischen Rates im Jahre 1988

463

Karen Rickers: Die Tätigkeit des Europarates im Jahre 1988

478

Book Reviews

Dahm/Delbrück/Wolfrum:

Völkerrecht I I (Kimminich)

International Geneva Yearbook 1989 (F tischen)

501 503

Bergers/Danelius: The United Nations Convention against Torture: A Handbook on the Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment (Wolfrum ) 505 Schreuer: State Immunity: Some Recent Developments (Wolfrum) Mansel: Personalstatut, Staatsangehörigkeit und Effektivität (Wengler) Touscoz: Atlas Géostratégique. Crises, tensions et convergences (Dicke) Hilken: Innovation und Patentschutz auf dem EG-Arzneimittelmarkt unter besonderer Berücksichtigung des europäischen Wettbewerbsrechts (Stolt) . . .

506 507 509

510

Siedentopf/Ziller (eds.): L'Europe des administrations? La mise en œuvre de la législation dans les Etats membres. Making European Policies Work. Vols. I and I I (Tscheulin) 512 Beutler!Bieber! Ρipkorn/Streil: und Politik (Brammer)

Die Europäische Gemeinschaft. — Rechtsordnung 515

Contents Jar ass: Auslegung und Umsetzung der EG-Richtlinie zur Umweltverträglichkeitsprüfung: Konkretisiert anhand der Probleme im Abfallrecht (Bartram)

517

Wirtschafts- und Sozialausschuß der Europäischen Gemeinschaften (Hrsg.): Die beratende Funktion in Europa. Die beratendenden Wirtschafts- und Sozialräte in der Europäischen Gemeinschaft (Titschen)

517

von der Groehen: Die Europäische Gemeinschaft und die Herausforderung unserer Zeit (Brammer)

519

Mahmoudi: The Law of Deep Sea-Bed Mining (Wolfrum)

521

Hafner: Die seerechtliche Verteilung von Nutzungsrechten (Wolfrum)

522

Seerecht (Härders) Wiktor/Foster (eds.): Marine Affairs Bibliography

524

Petersen: Deutsches Küstenrecht: Eine systematische Darstellung Advisory Committee on Pollution of the Sea (ed.): Yearbook 1986/87 Dahmani: The Fisheries Regime of the Exclusive Economic Zone Churchill: EEC Fisheries Law Reijnen/de Graaf: The Pollution of Outer Space, in Particular of the Geostationary O r b i t (Konstantinov)

528

Young: Law and Policy in the Space Stations' Era (Konstantinov)

529

Jayme: Methoden der Konkretisierung des ordre public im Privatrecht (Bartram)

Internationalen 530

Praaning/ Perry: East-West Relations in the 1990s: Politics and Technology (Konstantinov) Makarczyk:

531

Principles of a New International Economic Order (Smith-Bizzarro)

Weiler: Internationale Ethik (Dicke)

531 532

Kilian: Umweltschutz durch Internationale Organisationen. Die A n t w o r t des Völkerrechts auf die Krise der Umwelt? (Dicke)

535

World Health Organization (ed.): Legislative Responses t o Aids (Smith-Bizzarro)

538

Books Received List of Contributors

540 542

ARTICLES

Is There Customary International Economic Law? By Stephen Zamora

I. Introduction The post-war international economic order has been undergoing structural changes since the early 1970's. Founded on the economic hegemony of the United States and codified in international agreements establishing such institutions as the General Agreement on Tariffs and Trade ( G A T T ) and the International Monetary Fund (IMF), the post-war Bretton Woods system is gradually giving way to a new, more complex structuring of the world economy. Instead of reacting to U.S. hegemony, the world economy faces the dispersal of economic power among several economic poles. In our post Bretton-Woods system, economic power is distributed more evenly among the European Community (EC), Japan, the newly industrialized countries (NICs) of the Pacific region, N o r t h America (U.S., Canada, Mexico), and, to a lesser extent, the Soviet and developing country blocs. 1 The dispersal of economic power combines with a second important characteristic of the post-Bretton Woods order — a high level of economic interdependence . Many industries that were predominantly national in scope — banking, capital markets, the manufacturing process, communications, to name a few — are now more highly integrated with their counterparts in other nations. Consequently, it is harder than ever for national economies to be insulated from the effects of currency fluctuations, capital movements, trade patterns, and other economic factors. The creation of a decentralized, highly interdependent economic order may be the crowning achievement of the Bretton Woods system. A t the same time, however, heightened competition among relative equals strains the effectiveness of the Bretton Woods regime, one designed for a less integrated world economy that responded to the economic and political hegemony of the United States. New rules of international economic law, and new institutional frameworks, must eventually be developed to reflect these new conditions. 1

Theodore Geiger , The Future of the International System: The United States and the W o r l d Political Economy, Boston 1988, 2-8. Geiger argues that coordination of the international economy has gradually eroded since the 1970s, as the hegemony of the United States has disappeared, and as countries have pursued the short term benefits of individual actions.

10

Stephen Zamora

These structural changes are also likely to affect the way in which the substantive rules of international economic law will be developed. I n the Bretton Woods era, the rules of a liberal economic order were embodied in formal treaties — multilateral agreements negotiated and ratified by a majority of Western nations. The most important agreements came about as initiatives of the United States, and that country strongly influenced both their substantive content and the institutions and practices that grew out of them. 2 Due to the relative success of agreements establishing international economic organizations such as the I M F , the G A T T , the W o r l d Bank, and others, we have come to assume that international economic law is treaty-based (that is, embodied in formal international agreements), although it is also recognized that the decisions and practices of these same organizations also create international economic rules. 3 If the existing rules of international economic law are to adapt to structural changes, the normal assumption is that appropriate changes must be negotiated in multilateral conferences and reduced to formal international agreements. Unfortunately, it has become increasingly difficult in multilateral conferences to negotiate specific, binding rules that would govern economic relations between States. This is due to structural changes already mentioned: in a world economy of heightened interdependency, the stakes at such multilateral conferences are considerably higher than those of earlier decades; because economic power is dispersed among powerful competitors, it is becoming harder to achieve agreement on new multilateral treaties, amendments to existing treaties, or new economic codes. 1. The Role (or non-Role) of Customary International

Economic Law

Another source of international rules — customary international law — has been generally ignored in analyses of international economic law. Does this mean that customary international law plays no role in international economic relations? Is there even such a thing as "customary international economic law"? W i l l customary international law affect the development of new rules to meet the changing structure of the world economy? Even though the multilateral treaty process may not respond efficiently to the changing needs of the world economy, few commentators have paused to consider whether customary international law plays a role in intergovernmental economic relations. Indeed, the assumption has been that customary international law has 2 O n U.S. influence in the negotiation of the G A T T Agreement, see J ohn Jackson , W o r l d Trade and the Law of G A T T , New York 1969,36-46. O n U.S. (and British) influence in the drafting of the I M F Agreement, see Richard W. Edwards, Jr., International Monetary Collaboration, Dobbs Ferry, N . Y . 1985, 4-8. 3 Kenneth Dam, The Rules of the Game: Reform and Evolution in the International Monetary System, Chicago 1982, 3 (alluding to monetary rules): "International rules today arise largely out of international organizations".

Is There Customary International

Economic Law?

11

l i t t l e , if a n y t h i n g , t o d o w i t h i n t e r n a t i o n a l economic relations. 4 Academic studies o f customary i n t e r n a t i o n a l law c o n t a i n v i r t u a l l y n o discussion o f i n t e r n a t i o n a l economic l a w , 5 b o o k s o n i n t e r n a t i o n a l economic law rarely m e n t i o n customary i n t e r n a t i o n a l law. 6 A m e r i c a n law casebooks represent customary i n t e r n a t i o n a l law as marginally i m p o r t a n t , i f at all, t o the subject o f i n t e r n a t i o n a l economic l a w . 7 Finally, and perhaps m o s t significant, courts i n the U n i t e d States have given l i m i t e d effect t o customary i n t e r n a t i o n a l economic law. 8 M a n y experts believe t h a t i n t e r n a t i o n a l " l e g i s l a t i o n " — treaties and r u l e - m a k i n g decisions o f i n t e r n a t i o n a l economic organizations — has usurped any p o t e n t i a l role t h a t c u s t o m a r y i n t e r n a t i o n a l law m i g h t play i n regulating economic relations between States. T h i s is the p o s i t i o n t a k e n b y the drafters o f the T h i r d Restatement 4

Georg Schwarzenberger y The Principles and Standards of International Economic Law, in: Recueil des Cours (RdC) 117 (1966/1), 7-98 (12): "Compared w i t h the other two law-creating processes of international law — international customary law and the general principles of law recognised by civilised nations — the emphasis in International Economic Law is on treaties." 5 For instance, Anthony D'Amato, in his comprehensive study of customary international law, only mentions a subject of international economic law once: to point out that the principle of most-favoured-nation treatment is not a rule of customary international law. Anthony A. D'Amato , The Concept of Custom in International Law, Ithaca/London 1971, 130, 131. Mark E. Villiger , Customary International Law and Treaties, Dordrecht 1985, passim, is equally silent on the subject of international economic law. 6 Pieter V erLoren van Themaat , The Changing Structure of International Economic Law, The Hague 1981, 9, places customary international law outside the scope of his study "for reasons of efficiency". Palitha Tikiri Bandara Kohona , The Regulation of International Economic Relations Through Law, Dordrecht 1985, is also silent on customary international law. See also Dominique Carreau / Patrick Juillard / Thiebaut Flory y D r o i t International Economique, Paris 1978, 17, 437, 438. The authors recognize that the sources of international economic law are contained in Article 38 of the Statute of the International Court of Justice (which includes international custom), but only in the discussion of the international law of expropriation of property do they obliquely refer to "international law" in such a way as to indicate that customary norms may exist in this area. 7

See y e. g.,/ ohn H.Jackson / William J. Davey , Legal Problems of International Economic Relations, 2d ed., St. Paul, Minnesota 1986, 261: " W h e n we search for customary norms of international law that relate to economic transactions, there is precious little t o be found apart from the extensive developments on expropriation of property." See also Louis Henkin / Richard Pugh / Oscar Schachter / Hans Smit , International Law: Cases and Materials, St. Paul, Minnesota 1987,1163: "This is an area dominated by international agreements; little customary law affecting economic relations has developed." Compare Joseph Modeste Sweeney / Covey T. Oliver / Noves E. Leech, Cases and Materials on the International Legal System, 2d ed., Westbury, N . Y . 1988,1132,1133: " ... [T]here is no customary international law imposing duties and creating correlative rights [in hypothetical cases of economic injury cited in the text] ... Except for the increasingly disputed nationalization area [involving expropriation of property of aliens]... and some rules about the trading rights of neutrals in pre-UN wars — rules that in W o r l d War I and I I were not followed because the enemy continued to breach closely related rules — the rules of the international legal systems as to economic activity are found in international agreements." 8

See text accompanying notes 123-133.

12

Stephen Zamora

of the Law of Foreign Relations of the United States.9 Yet even in areas where international agreements are virtually nonexistent, such as the regulation of economic coercion, customary international law is rarely mentioned. 10 Furthermore, the existence of rules contained in international agreements need not displace customary international law altogether. Quite the opposite is possible, in fact, since scholars have argued that the repeated observance of rules contained in treaties may give rise to customary international law binding on non-parties. 11 Yet most scholars assume, usually without detailed analysis, that treaties dealing with subjects of international economic law are incapable of generating customary international law. 12 Few authorities offer a cogent explanation why customary international economic law should not exist. There is no theoretical reason why the dual pre-requisites of customary international law — a history of State practice, and the existence of opinio juris indicating that the practice is accepted as a legal obligation — cannot be satisfied when the subject is a matter of international economic law. Indeed, the worldwide proliferation of common types of economic transactions might be expected to provide numerous opportunities for the development and recognition of customary international economic law. For example, international lending to sovereign governments from both official and private sources tend to follow standard legal and financial patterns; relatively uniform practices have also been followed in the treatment of borrowers in default. Yet, despite a steady growth in State practice in this area, no one has bothered to identify any customary international economic law norms related to sovereign lending. In assessing the changing structure of international law more than two decades ago, Wolfgang Friedmann observed that custom is an unsuitable vehicle for international "welfare" or "co-operative" law. The latter demands the positive regulation of economic, social, cultural and administrative 9 American Law Institute (ed.), Restatement (Third) of the Foreign Relations Law of the United States, vol.2, St. Paul, Minnesota 1987, 261 (hereinafter cited as Restatement) (Introductory note to Part V I I I , Selected Law of International Economic Relations): "There has been little customary international law of economic relations, but the interest of states in an efficient global economy has resulted in a variety of international agreements and arrangements." 10 See notes 80-94, infra. 11 D'Amato (note 5), 104. Richard Baxter argued that treaties would continue to "gain paramountcy " over customary international law, but multilateral treaties would themselves "generate new customary international law growing out of the application of the agreements". Richard Baxter, Treaties and Custom, in: R d C 129 (1970/1), 25-105 (101,103). A more cautionary approach on this subject is taken by Michael Akehurst, Custom as a Source of International Law, in: British Yearbook of International Law 47 (1974-1975), 1-53 (42-52). 12 See, e. g., D'Amato (note 5), 105, 106: " A treaty such as the General Agreement on Tariffs and Trade that institutionalizes trade is similarly incapable of giving rise to rules of customary law binding upon nonparties."

Is There Customary International

Economic Law?

13

matters, a regulation that can only be effective by specific formulation and enactment... [Custom] must be replaced by more articulate and specific instruments of law-making, i.e., in the absence of an international legislative body, by bilateral or multilateral treaties, in the regulation of international or transnational interests . . . n

Professor Friedmann correctly identified why international agreements are predominant, but he did not explain the complete absence of customary international economic law. In this article, I will attempt to assess the role, if any, that customary international law plays in economic relations. I will consider why customary international economic law has received such limited recognition in domestic and international tribunals. Before considering these questions, however, I should point out some definitions that are important in understanding the scope of my inquiry. 2. International

Economic Law Defined

As a discrete category of international law, international economic law is of recent vintage. Early definitions of the term were narrow, focusing only on the rules of public international law that affected economic relations between States. Under this definition, the legal aspects of economic relations between States and private parties, or between private parties alone, would not be included in the concept of international economic law. 1 4 There are still adherents of a narrow definition of international economic law, 15 and traditional doctrinal reasons exist to support a narrow definition. 1 6 Nevertheless, there has been increasing recognition that a narrow definition of international economic law is artificially confining in an age when most problems of international economic relations involve private, governmental and intergovernmental protagonists. 17 Governments are deeply involved in 13

Wolfgang Friedmann , The Changing Structure of International Law, New Y o r k 1964,

122. 14 15

See, for instance, Schwarzenberger

(note 4), 7.

V erLoren van Themaat (note 6), 9, 10, follows Professor Schwarzenberger* s focus on public international law (State — State relations). 16 Norbert Horn , Codes of Conduct for M N E s and Transnational Lex Mercatoria: A n International Process of Learning and Law Making, in: Norbert Horn (ed.), Legal Problems of Codes of Conduct for Multinational Enterprise, Deventer 1980, 45-81 (56), points out that private parties have not traditionally been accorded status as subjects of international law. Most authorities hold that private parties cannot create customary international law. See Ignaz Seidl-Hohenveldern , International Economic "Soft Law", in: R d C 163 (1979/11), 165-246 (212); Akehurst (note 11), 11. A t least one court in the United States has held that private parties have no standing to assert norms of customary international economic law. Hunt v. BP Exploration Co. (Libya) Ltd., 492 Federal Supplement (F. Supp.), 885, 903 (Northern District of Texas 1980). 17 Thomas W. Walde , North/South Economic Cooperation and International Economic Development Law. Legal Process and Institutional Considerations, in: German Yearbook of International Law ( G Y I L ) 23 (1980), 61-90, 77, 78.

14

Stephen Zamora

formerly "private" economic activities; private entities may wield considerable power over governmental actions; and intergovernmental organizations may step in to mediate between State and private entities. Writing in 1964, Wolfgang Friedmann called attention to the "interpretation of public and private elements in many modern international economic transactions", and to the intermingling of public and private law. 18 Professor Friedmann called for new techniques of international law to deal with this irreversible phenomenon. 19 The drafters of the T h i r d Restatement of the Foreign Relations Law of the United States have recognized that the law of international economic relations is potentially broad, including "all the international law and international agreements governing economic transactions that cross state boundaries or that otherwise have implications for more than one state " 2 0 Academic discussions of international economic law increasingly include subjects that are traditionally categorized as private international law. 21 Historical reasons also support the inclusion of private law subjects under international economic law. The earliest form of international economic law, even preceding State involvement in transnational economic relations, was lex mercatoria — the customary rules followed by merchants from the earliest days of trading in the Mediterranean. 22 Lex mercatoria was a universal regime based on custom and administered by merchant traders themselves, and only later incorporated into national laws. 23 Professors Steiner and Vagts have explained how lex mercatoria , which regulated primarily private transactions, was not considered separate from international law generally: Writers and courts of the 18th century held a larger concept of international law than their successors. They did not distinguish as sharply of a law nations, regulating regulations between states, from a common or universal law, a jus gentium , interpreted by courts in all civilized nations to have much the same content and often regulating the conduct of individuals ... Decisions of courts [in the United States] during the colonial period ... evidenced the extent to which the law of nations was thought to be a part of the 18

Friedmann (note 13), 28, 190-195. Friedmann (note 13), 187. 20 Restatement (note 9), 261 (Introductory note to Part V I I I , Selected Law of International Economic Relations). The Restatement expressly "deals only w i t h selected aspects of that law". 19

21

Professor Andreas Lowenfeld has written a series of casebooks on International Economic Law that includes subjects of private international law. See, for example, the first volume in the series, Andreas Lowenfeld , International Private Trade, revised 2d ed., New Y o r k 1988. The Interest Group on International Economic Law of the American Society of International Law regularly includes subjects of private international law in its discussions. 22 Ernst-U. Petersmann , International Economic Order, in: Encyclopedia of Public International Law, Amsterdam 1985, 337, 338. 23 Leon Trakman , The Law Merchant: The Evolution of Commercial Law, Littleton, Colorado 1983, 7-11.

Is There Customary International

Economic Law?

15

common or general law administered by the courts and to be applicable to individuals as well as countries ... The law merchant and the law maritime were among the principal subjects of this universal law or jus gentium. 24

I t would be illogical if, despite increasingly direct involvement of governments in private business enterprises (from energy production to transportation and tourism), the rules governing private transactions (the modern lex mercatoria) would be excluded from the definition of international economic law. In modern international economic transactions, issues of "public law" are often mixed with issues of "private law", and it would be unproductive to consider them separately. While a broad definition of international economic law may not be doctrinally neat, the realities of international economic relations in the late twentieth century dictate an inclusive definition. The description of lex mercatoria as customary international economic law regulating international business transactions is only the beginning of my inquiry, however. The difficult question is whether there are rules of customary international economic law that impinge upon the freedom with which States conduct economic relations with other States at the economic policy level. Having made a case for a broad definition of international economic law, I will narrow my focus to this more difficult question. I should mention one other important definitional element. Many rules of international law have economic implications that are indirect, but they do not constitute international economic law. For instance, rules concerning the establishment of territorial and maritime boundaries have obvious economic importance for the State that can exploit the resources of the territory. Similarly, international environmental law has obvious economic implications for the State or enterprise that must alter environmentally harmful activities that violate international law. Such rules, which carry indirect economic implications, lie outside of my inquiry here. The rules of international economic law are distinguished from these areas by the directness with which they impinge on economic transactions and economic relations between States. International economic law governs economic transactions per se. The main subjects are international trade in goods and services; international financial transactions and monetary affairs; and foreign investment. 3. Customary International Law and the New International Economic Order The rules of international economic law that made up the Bretton Woods system have undergone increasingly harsh examination in light of the campaign for a New 24

Henry Steiner / Detlev Vagts , Transnational Legal Problems: Materials and T e x t , 3d ed., Mineola, New York 1986, 578, 579.

16

Stephen Zamora

International Economic Order ( N I E O ) . The developing countries have expressed dissatisfaction with the existing economic order, which is created through processes (multilateral conferences and the rule-making of international economic organizations) that reflect and preserve the power of the industrialized countries. Through the passage of various resolutions and codes of conduct (some of which have never received the endorsement of industrialized countries, and have not been reduced to binding international agreements), developing countries have attempted to influence the development of international economic law through non-traditional means. 25 This move has been resisted by many commentators, especially those from industrialized countries. 26 Discussions of the New International Economic Order have involved not only the substantive rules of international economic law, but also the processes by which rules are established. As a consequence, the question asked in this article — is there customary international economic law? — may be considered part of the general N I E O debate. The opposing sides in this debate can be characterized as "Idealists" and "Realists". Idealists view current international economic law as excessively disposed to favor the interests of wealthy countries. In the words of one critic, traditional international economic law consists largely of "international treaties made without significant participation by the developing countries". 27 This author concludes that "a new public order indeed has emerged based on international consensus as to the value of human dignity". 2 8 This new order involves four "normative principles" 2 9 drawn from the United Nations Charter on Economic Rights and Duties of States 30 — a U . N . declaration which, although not binding on States, is a central element of the N I E O . According to the author, the Charter on Economic Rights and Duties of States serves "as evidence of state practice, [and] also creates a strong presumption that its rules reflect customary law". 3 1 25 See generally Mark E. Ellis , The New International Economic Order and General Assembly Resolutions: The Debate over the Legal Effects of General Assembly Resolution Revisited, in: California Western International Law Journal ( C W I L J ) 15 (1985), 647-704; Adeoye Akinsaya / Arthur Davies , T h i r d W o r l d Quest for a New International Economic Order: A n Overview, in: International and Comparative Law Quarterly 33 (1984), 208-217. 26 See y for example, Brower / Tepe, The Charter of Economic Rights and Duties of States: A Reflection or Rejection of International Law?, in: The International Lawyer 9 (1975), 295. 27 Edward A. Laing , International Economic Law and Public Order in the Age of Equality, in: Law and Policy in International Business 12 (1980), 727-781 (740, 741). 28 Op. cit., 749. 29 The author mentions the principle of friendly relations, the principle of international cooperation, the principle of development, and the principle of promoting the N I E O . Op. cit. (note 27), 762-768. 30 U N - D o c . A/Res. 3281 ( X X I X ) , of 12 December 1974, G A O R , 29th Session (Sess.), Supplement (Suppl.) N o . 31, 50.

Is There Customary International

Economic Law

17

O t h e r authors have t h e o r i z e d a b o u t the l a w - m a k i n g effects of the N I E O and o f the guidelines o r codes o f c o n d u c t t h a t were adopted d u r i n g the 1970's i n reaction t o t h e call f o r a new economic o r d e r . 3 2 Some scholars have discussed the p o s s i b i l i t y t h a t these n o n - b i n d i n g i n s t r u m e n t s c o u l d give rise t o customary i n t e r n a t i o n a l l a w . 3 3 Professor Seidl-Hohenveldern

has described the u n i q u e " s o f t l a w " nature o f

the N I E O and its progeny, b u t nevertheless holds o p e n the p o s s i b i l i t y t h a t rules o f soft i n t e r n a t i o n a l economic law, if t h e y became a d o p t e d i n t o the domestic law o f States, c o u l d acquire the status o f customary i n t e r n a t i o n a l l a w . 3 4 Professor Hans Baade, i n a p a r t i c u l a r l y well-reasoned article, has s h o w n h o w c o n d u c t by States acting i n c o n f o r m i t y w i t h v o l u n t a r y codes o r guidelines can lead t o the establishm e n t o f rules o f c u s t o m a r y i n t e r n a t i o n a l law g o v e r n i n g the activities o f m u l t i national enterprises. 3 5 These c o m m e n t a t o r s d o n o t equally embrace the n o t i o n t h a t the developing c o u n t r y campaign for a N e w I n t e r n a t i o n a l E c o n o m i c O r d e r has led, o r is leading, t o the creation o f customary i n t e r n a t i o n a l economic law. T h e y d o , however, leave open the p o s s i b i l i t y o f this happening. Realists , o n the o t h e r hand, disavow such an effect. These c o m m e n t a t o r s d i s c o u n t customary i n t e r n a t i o n a l law, arguing t h a t i t is less i m p o r t a n t t h a n t r e a t y law. I n a s t r o n g l y w o r d e d c r i t i c i s m o f t r a d i t i o n a l l y held views, Professor Phillip

Trimble

36

has s h o w n t h a t c u s t o m a r y i n t e r n a t i o n a l law

31 Edward A. Laing (note 27), 777. " T h a t presumption is particularly strong in relation to the four broad principles of the Economic Charter, rather than its detailed rules. " V erLoren van Themaat (note 6), 292, argues that the Economic Charter cannot confirm existing customary law, but could contribute to the abolition of existing customary law "and also serve as a signpost towards a new international economic order". 32 See, for example, Walde (note 17), 71: " . . . [W]hile traditional international law is largely silent or irrelevant on the problems arising during long-term project cooperation, the 4 alternative international law ' constituted by U N resolutions is relatively more oriented towards the specific issues of interaction between host state and foreign investor and hence provides a set of 'authoritative arguments' eventually applicable t o contract interpretation." 33 See, for example, Joel Davidow / Lisa Chilses , The United States and the Issue of the Binding or Voluntary Nature of International Codes of Conduct Regarding Restrictive Business Practices, in: American Journal of International Law (AJIL) 72 (1978), 247-271 (255) (codes of conduct on business practices "might pass into the general corpus of customary international law"). Compare Louis Sohn, The Shaping of International Law, in: Georgia Journal of International and Comparative Law 8 (1978), 1-25 (21, 22) (unanimous declarations of international bodies can become binding as customary international law as soon as they are accepted by the international community); Oscar Schach ter. Sharing the World's Resources , New York 1977, 3, 4 ( U . N . declarations and charters influence the development of customary international law, even if they are not explicitly involved in international law-making). See also Akinsaya / Davies (note 25), 213,214; and the discussion in Ellis ( note 25), 686-691. 34 Seidl-Hohenveldern (note 16), 198-201. 35 Hans Baade, The Legal Effects of Codes of Conduct for Multinational Enterprises, in: Norbert Horn (note 16), 3-38 (13-15, 26-28, 38). 36 Phillip Trimble , A Revisionist View of Customary International Law, in: U.C.L.A. Law Review 33 (1986), 665-732.

2 GYIL 32

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is rarely, if ever, applied by courts in the United States. H e argues that customary international law can claim, at best, only "weak legitimacy" in a democratic political system, for it ignores the process of political consensus and acceptance that is built into treaty law. As a result, spurious claims to the existence of customary international economic law weaken the recognition and observance of "true" international law, which is based on treaties. While Professor Trimble does not focus narrowly on the N I E O debate, his argument applies equally to it. Other commentators, such as Professor Michael Reisman , do not deny the existence of customary international law, but instead point out the insufficiency of customary international law in dealing with important economic issues.37 Although the Realists represent a minority view among international legal scholars, 38 they raise arguments that are difficult to refute. In the ensuing discussion, I will return to analyse certain points raised by them.

II. Basic Elements of Customary International Law Before proceeding to consider whether customary international economic law exists, it is useful to review the principal features of customary international law. The requisite elements of customary international law are implied in Article 38, paragraph 1 (b) of the Statute of the International Court of Justice, which refers to "international custom, as evidence of a general practice accepted as law". According to most scholars, this formulation establishes two necessary elements: State practice, and acceptance of that practice as a legal obligation (opinio juris). 39 1. State Practice State practice may be defined broadly as "any act, articulation or other behaviour of a State, as long as the behaviour in question discloses the State's conscious 37

W. Michael Reisman , The Cult of Custom in the Late 20th Century, in: C W I L J 17 (1987), 133-145 (142, 143): "[C]ustomary processes of lawmaking cannot deal w i t h the enormous problems facing the world such as the debt crisis, the complex arrangements involved in a space station, the staggering detailed problems involved in meshing economically interdependent but functionally different national economies, the arranging of transnational defense against and suppression of terrorism and so on." Compare Damian Hubbard , The International Law Commission and the New International Economic Order, in: G Y I L 22 (1979), 80-99 (96) ( N I E O cannot be reflected in customary international law; it is designed to have a moral or political effect, not a legal one); and Norbert Horn , Normative Problems of a New International Economic Order, in: Journal of W o r l d Trade Law 16 (1982), 338-351 (351) (alluding to the "uncertain normative nature of the texts of N I E O " ) . 38

See also N. C. H. Dunbar , The M y t h of Customary International Law, in: Australian Yearbook of International Law 8 (1983), 1-19.

Is There Customary International

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attitude with respect to — its recognition of — a customary rule". 4 0 This definition shows that evidence of State practice need not be a physical act: "according to some scholars", a mere pronouncement ("articulation") may suffice. 41 If pronouncements may constitute State practice, then surely treaties may do so, and many scholars have so asserted. 42 Both multilateral and bilateral treaties may achieve this result, in the latter case if a series of identical or similar provisions appear in a series of bilateral agreements. 43 Although treaties do not per se establish rules of customary international law, they may, if combined with practice in observance of the treaty, lead to customary law. 4 4 The argument might be made that rules followed out of a sense of treaty obligation do not establish that a State would feel legally compelled to observe the rule if the treaty were absent. 45 Nevertheless, treaties have been cited rather indiscriminately as evidence of customary international law. 46 Even non-binding codes of conduct or guidelines for multinational enterprises, to the extent that they direct governments to act in conformity with the "voluntary" provisions contained in them, may be important precursors of State practice. 47 Finally, some authorities contend that silence or inaction in response to another State's actions may contribute to the "general practice" required to satisfy the element. 48 A t this point, the concept of State practice becomes distended, and 39

D'Amato (note 5), 49. More detailed formulations break down the requirement of State practice or of opinio juris into several sub-elements. D'Amato (note 5), 7-10, 57-72; Ian Brownlie , Principles of Public International Law, 3d ed., Oxford 1979, 6-8. 40 Mark E. Villiger , Customary International Law and Treaties, Dordrecht/Boston/Lancaster 1985, 4. 41 O n this point, compare the differing points of view of Professors D'Amato and Akehurst, discussed in Akehurst (note 11), 1-3. 42 Ibrahim Shihata , The Treaty as a Law-Declaring and Custom-Making Instrument, in: Revue Egyptienne de D r o i t International 22 (1966), 51-90; D'Amato (note 5), 104-Jackson / Davey (note 7), 260); Akehurst (note 11), 43; Baxter (note 11), 31. 43

Baxter (note 11), 77. Laing (note 27), 741, contends that "bilateral economic treaties do not reveal any patterns sufficiently universal to suggest the existence of tangible norms". This is a surprising conclusion, given the similarity of provisions in bilateral trade and other treaties. 44 Villiger (note 5), 10: " I t is not the written text which contributes towards customary law, but the instances whereby States apply these rules . . . " 45 Laing (note 27), 742, cites Schwarzenberger (note 4), 43-45, for the notion that "presumptively fundamental principles of international economic law such as freedom of commerce and freedom of communication are not binding 'rules of customary international law' because these rules were articulated only in consensual treaties". D'Amato (note 5), 149-152, appears to refute the notion that consensual treaties may not lead to customary law. 46 See, for example, the discussion of reliance on bilateral and multilateral treaties in the Barcelona Traction Case, noted in Baxter (note 11), 36,37. Shihata (note 42), 80, goes so far as to argue that "every treaty has some evidential value beyond its contractual limits". 47 Baade { note 35), 28, 38. 48 Villiger (note 5), 18, 19; Shihata (note 42), 76.

2*

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raises questions about the continued legitimacy of the State practice requirement. Indeed, some authorities have argued that the requirement of State practice has become less important in recent times. One reason for this is the acceptance of State practice of limited duration and less than universal scope as sufficient to establish the requirement. As explained by Professor Seidl-Hohenveldern , Thus practice more or less abandoned the requirement of proof of long usage, and thereby facilitated the establishment of new customary rules of international law. The existence of an opinio juris , coupled w i t h at least one instance of practice, thus appears sufficient to create "instant customary international law". As a kind of compensation, requirement as to the proof of opinio juris may have become stricter. 49

Reading commentaries on customary international law leads one to conjecture that the distinction between State practice and opinio juris may not be so important after all. Some of the same evidence — texts of international instruments, decisions of international courts, diplomatic correspondence, opinions of legal advisers — may be offered as proof of both elements. 50 Some writers have even argued that State practice is itself evidence of opinio jurist The concepts become so intertwined that i t may be sufficient, in proving the existence of a norm of customary international law, to show the existence of either universal State practice of long duration, or opinio juris (by unequivocal statements that a rule is accepted as binding). 52 T w o other sources of evidence of State practice are relevant in considering the existence of customary international economic law. First, "the cumulative practice of international organizations may be regarded as evidence of customary international law w i t h reference to States' relations to the organizations". 53 Given the importance of international economic organizations such as the I M F , World Bank, G A T T , etc. y this could be a potentially important source of customary inter49 Seidl-Hohenveldern (note 16), 189. Professor Baade appears to agree. Baade (note 35), 7, As t o a diminished requirement of generality of practice, see Prosper Weil , Towards Relative Normativity in International Law?, in: A J I L 77 (1983), 413-442 (434). 50 The classical representation concerning evidence of customary international law is contained in Manley O. Hudson , Article 24 of the Statute of the International Law Commission, in: Yearbook of the International Law Commission, 1950, vol. 2, New York (1957), 24. Judge Hudson makes no distinction between the use of such evidence to prove State practice as opposed to opinio juris. 51 Maarten Bosy The Identification of Custom in International Law, in: G Y I L 25 (1982), 9-53 (32). See also the discussion in D'Amato (note 5), 53-55. 52 See Bin Chengy United Nations Resolutions on Outer Space: "Instant" International Customary Law?, in: Indian Journal of International Law (IJIL) 5 (1965), 23 (35,36). See also Sohn (note 33), 17, 21, 22. 53

International Law Commission (ed.), Report of the International Law Commission to the General Assembly, in: Yearbook of the International Law Commission, 1950, vol.2 (1957), 364 (372). See also Akehurst (note 11), 11; Brownlie (note 39), 5. Villiger (note 5), 4, asserts that the practice of international organizations themselves does not create customary law, but rather the practice of those organizations that is attributable to States.

Is There Customary International

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national economic law. Second, some commentators 54 have asserted that national legislation in different countries, if in agreement in dealing with matters of international concern, may provide evidence of customary international law, a position that the International Law Commission has endorsed. 55 Again, given the volume of national legislation covering issues of international economic concern, this could be a source of customary international economic law. In fact, there have been relatively few attempts to find evidence of customary international law in either the practice of international organizations or in national legislation. 2. Opinio Juris A classic statement of the requirement of opinio juris occurs in the North Sea Continental Shelf Cases:56 N o t only must the acts concerned amount to a settled practice, but they must also be such, or be carried out in such a way, as t o be evidence of a belief that this practice is rendered obligatory by the existence of a rule of law requiring it.

A distinction is made, then, between a practice followed because of legal obligation, and a mere usage, which may be followed out of habit, convenience, or moral obligation. Proof of opinio juris may come from express government statements that a rule is accepted as obligatory. 5 7 Such a statement is a rare occurence, 58 however, so that we are left to prove opinio juris by a potpourri of whatever evidence is at hand: texts of international instruments, decisions of national and international courts, national legislation, diplomatic correspondence, opinions of national legal advisers, and practice of international organizations. 59 Interpretation of this evidence is anything but scientific. The need to demonstrate opinio juris has not been interpreted by most authorities as requiring that all States, or even a majority of States, must be shown to have "consented" to the customary rule. 60 Rather, a relatively small number of examples 54

See, for example, Akehurst (note 11), 8, 9; Baade (note 35), 27, 28. International Law Commission (note 53), 370, 371. 56 North Sea Continental Shelf Cases (Federal Republic of Germany v. Denmark; Federal Republic of Germany v. Netherlands), ICJ Reports 1969, 1 (45). 57 Baxter (note 11), 37: " A n authoritative pronouncement by States counts for much more than other forms of evidence of the law . . . " See also Akehurst (note 11), 36; Villiger (note 5), 28. 55

58 A rare instance of such an express statement is President Ronald Reagan s statement concerning United States adherence to certain rules contained in the United Nations Convention on the Law of the Sea. United States: Proclamation on an Exclusive Economic Zone, in: International Legal Materials ( I L M ) 22 (1983), 461-465 (464). 59 International Law Commission (note 53), 368-373. 60 Some dispute exists as to the consensual nature of customary international law. Soviet scholars, in particular, substitute an "agreement" requirement for the opinio juris requirement of most Western scholars. Richard J. Erickson , International law and the Revolution-

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of State practice are sometimes taken as establishing a customary rule that applies to all States that fail to object to the norm. 6 1 The only way to resist adherence to a customary rule is to object, both early and often, to the existence of such a rule. 62 3. Codification of Customary International

Law

Before considering how the rules and viewpoints just described influence the development of customary international economic law, it is well to look at one final element in the creation of customary international law — the phenomenon of codification of customary law. I n 1947, the United Nations General Assembly created a subsidiary organ, the International Law Commission (ILC), 6 3 to carry out the "codification" and "progressive development" of international law by sponsoring the drafting and negotiation of treaties. Codification may be described as the "transformation of customary law into the written form", 6 4 while progressive development consists of the drafting of new rules of international law. The I L C has sponsored 13 multilateral conventions, the most important being the four Geneva Conventions on the Law of the Sea and the 1969 Vienna Convention on the Law of Treaties. I t has been criticized for failing to take up vital topics related to the N I E O , 6 5 but others argue that the goals of the N I E O cannot be achieved through the I L C process of codification and progressive development. 66 While the I L C has been an important factor in solidifying international law in certain areas, it has had little influence on customary international economic law. For whatever reason, the I L C has seldom engaged itself in topics of international economic law. 6 7 Furthermore, the I L C process mixes both codification and progressive development, 68 so that it is virtually impossible to ascertain if a rule ary State: A Case Study of the Soviet Ü n i o n and Customary International Law, Dobbs Ferry, N . Y . 1972, 32-35. 61 D'Amato (note 5), 5. 62 R. P. Anand, U . N . Convention on the Law of the Sea and the United States, in: I J I L 24 (1984), 153-193 (190, 191); Seidl-Hohenveldern (note 16), 191. 63 U N - D o c . A/Res. 174 (II), 21 November 1947, Establishment of an International Law Commission, G A O R , 2d Sess., Resolutions, 105. 64 Villiger (note 5), 117. H e discusses both codification and progressive development at pages 117-137. 65 This criticism is discussed in Villiger (note 5), 81, 82. 66 Hubbard (note 37), 98, 99. 67

A n exception is the I L C draft convention on the most-favoured-nation ( M F N ) clause, which is intended to clarify the meaning of this clause as it exists in bilateral and multilateral conventions. International Law Commission (ed.), Report of the Commission to the General Assembly on the work of its thirtieth session, in: Yearbook of the International Law Commission 1978, vol. 2, part 2, 8. See the discussion at notes 97, 98, infra . 68

Carl-August Fleischhauer , The United Nations and the Progressive Development and Codification of International Law, in: I J I L 25 (1985), 1-7.

Is There Customary International

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expressed in an I L C draft is declaratory of an existing customary rule, or is instead a new development. This confusion makes it difficult to argue that the rules expressed in I L C drafts apply equally to States that ratify them as well as to States that do not.

I I I . Possible Areas of Customary International Economic Law There is no theoretical reason why customary international economic law should not exist. A t first glance, the two principal elements of customary international law — State practice and opinio juris — would appear to be as readily provable in cases of international economic law as they are in cases of public international law. Indeed, given the plethora of economic relations between States (or between States and private parties) and the similarity of patterns w i t h which these transactions are carried out, one might expect to find numerous examples of customary international economic law. Modern lex mercatoria — the law governing international commercial transactions — was largely customary in origin, and courts still apply principles of customary law to decide international commercial cases. Yet, as we have seen, the common assumption is that customary international economic law is virtually non-existent. Before discussing the accuracy of this assumption, and the reasons for it, let us consider several areas in which one might expect to find customary international economic law. While the following examination is intended to be neither comprehensive nor conclusive as to the existence of customary law (more detailed research is required in each of these areas to justify any conclusions), the subsequent discussion will benefit from consideration of these specific cases. 1. Expropriation The area of international economic law that is most commonly associated w i t h customary law involves the expropriation of foreign-owned property. 6 9 I t is now well accepted that, under customary international law, States have the right to expropriate foreign-owned property located within their territories. 70 As stated by Rene-Jean Dupuy in the arbitral award in Texaco Overseas Petroleum Company v. Libyan Arab Republic , ...[T]he right of a State to nationalize is unquestionable today. I t results from international customary law, established as the result of general practices considered by the 69

Sweeney / Oliver / Leech (note 7), 1132, 1133. Adeoye A. Akinsaya , The Expropriation of Multinational Property in the T h i r d World, New Y o r k 1980,17. As Akinsaya points out, there is some question as t o whether the expropriation must be for a public purpose, but the concept of public purpose in modern times is a broad one and is not often in dispute. I d . y 19, 20. 70

24

Stephen Zamora international community as being the law. The exercise of the national sovereignty to nationalize is regarded as the expression of the State's territorial sovereignty. 71

Considerable uncertainty exists, however, as to an important secondary question: is expropriation without compensation a violation of customary international law? Writing in 1970, Richard Baxter noted that the principle of just compensation had been called into question after the Second W o r l d War, but asserted that, as a rule of customary law, "compensation in some measure or other must be paid". 7 2 In the ensuing years, the debate has continued, and the recognition of customary rules concerning compensation is problematical at best. 73 Even the T h i r d Restatement of Foreign Relations Law of the United States, while espousing the principle of just compensation , acknowledges that the rules of customary law have been challenged in recent years. 74 In 1974, as part of the N I E O campaign, the United Nations General Assembly adopted, by an overwhelming majority vote, the Charter of Economic Rights and Duties of States. The Charter reinforces the right of States to expropriate foreignowned property, but specifies that "appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent". 7 5 This standard, "appropriate compensation", had appeared in earlier United Nations resolutions, 76 and was accepted as a rule of customary law by Professor Dupuy in the abovementioned case.77 Professor Dupuy rejected the Libyan government contention that the question of compensation for expropriation of foreign-owned assets could only be decided by reference to the law of Libya. As Professor Oscar Schachter has pointed out, there is strong support both for the Restatements rule of "just compensation" and for the Charter's rule of "appropriate compensation" as alternative formulations of a rule of customary international law. 78 For our purposes, two points are worth making in connection with discussions of the customary law of expropriation. First, despite the general acceptance of the 71

Texas Overseas Petroleum Company / California Asiatic Oil Company v.Government of the Libyan Arab Republic , reproduced in: I L M 17 (1978), 1-37 (21). 72 Baxter (note 11), 88. 73 Akinsaya (note 70), 25-48; Jackson / Davey (note 7), 1039. 74

Restatement , section 712, and comment b and the Reporter's note 1 thereto. Oscar Schachter , Compensation for Expropriation, in: A J I L 78, 121-130, discusses the formulat i o n "just compensation" that appears in section 712, as well as alternative formulation ("prompt, adequate and effective" compensation, or "appropriate" compensation) that were not adopted. 75

Charter of Economic Rights and Duties of States (note 30), Article 2, para. 2 (c). Permanent Sovereignty over Natural Resources, U N - D o c . A/Res. 1803 ( X V I I ) of 14 December 1962, G A O R , 17th Sess., Suppl. N o . 17, 15. 76

77 78

Texaco Overseas Petroleum Company v. Libya (note 71), 30. Schachter (note 74), 127-130.

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dual requirement of State practice and opinio juris , judges and arbitrators do not engage in anything resembling comprehensive analysis of these two elements in the expropriation cases that come before them. (In this way, such decisions resemble much academic writing on the subject). There are citations to previous cases (both of the International Court of Justice and other tribunals), references to U . N . resolutions, occasional examples of specific acts of States, and references to academic writings. There is never, however, a methodical, social-scientific gathering of evidence of either State practice or opinio juris. 79 Instead, the "evidence" in favor of the customary rule appears to have been gathered in a highly selective manner. This is not to criticize those who make these decisions; it would take an army of researchers and historians to establish authoritatively the elements of State practice and opinio juris . Nevertheless, an examination of decisions does give pause as to the "requirements" of State practice and opinio juris. Second, the most unassailable rule of customary law is, in a sense, a passive one: international law will not restrict a State from expropriating property within its borders. Such a rule imposes no positive burden on any State; instead, customary international law recognizes that the international community cannot curtail the power of expropriation, at least if the expropriation is accompanied by reasonable compensation. When the rule begins to curtail State power — as in the imposition of a requirement to pay ( tjust compensation ", a positive act — the recognition of a customary rule becomes more questionable. As we shall see, the most obvious examples of customary international economic law are often of such a "passive" character. 2. Economic Coercion In his Hague lectures on international economic law, Georg Schwarzenberger contended that "international customary law provides the bulk of the rules governing the laws of international economic torts and economic warfare". 80 In fact, there are few recognized rules of customary law concerning economic coercion practiced by one State against another, or against the citizens of another State. The clearest rule of customary law of economic relations may actually operate as an obstacle to the development of customary rules of economic responsibility. I t 79

See, for example, the lengthy discussions in Texaco (note 71), 27-32; and in Banco Nacional de Cuba v. Chase Manhatten Bank , 658 Federal Reporter (F.), 2d 875, 887-893 (allowing setoff for value of bank's property expropriated by Cuban government). See also the discussion at notes 123-133, infra. A number of disputes over compensation for expropriation have been settled by treaties or compensation agreements. There is some difference of opinion as to whether the existence of such treaties is evidence of a customary rule of law that just compensation must be paid. Compare Akehurst (note 11), 51, 52 (customary rules have not developed out of such treaties); Akinsaya (note 70), 46-48; and Baxter (note 11), 87, 88. 80 Schwarzenberger (note 4), 14.

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has l o n g been accepted t h a t States have v i r t u a l l y unfettered discretion t o either p e r m i t o r restrict commerce w i t h o t h e r States. 8 1 A s Schwarzenberger

has p o i n t e d

o u t , there is n o customary i n t e r n a t i o n a l rule o f freedom o f commerce; States have n o " r i g h t " t o carry o n commerce w i t h o t h e r States. 8 2 T h u s , a State is free t o set u p barriers t o t r a d e , 8 3 a l t h o u g h i t is usually n o t i n its interest t o do so. T h e d i f f i c u l t y comes i n assessing instances o f active economic coercion, o r economic sanctions, practiced b y one State against another. Since the Second W o r l d W a r , economic coercion, f o r p o l i t i c a l o r economic reasons, has been practiced repeatedly. A s o f 1985, f o r instance, the U n i t e d States m a i n t a i n e d 7 programs o f severe e c o n o m i c sanctions against 12 n a t i o n s . 8 4 W h i l e such programs are pot e n t i a l l y (and at times actually) d i s r u p t i v e o f peace and security, t h e y have n o t engendered m u c h customary i n t e r n a t i o n a l law against economic coercion o r econ o m i c reprisals. T h e c o n t r a r y appears t o be true, i n fact: economic coercion appears t o be seen as an acceptable, i f n o t very nice, t a c t i c o f i n t e r n a t i o n a l relat i o n s . 8 5 T h i s may be due t o a g r u d g i n g acceptance t h a t e c o n o m i c coercion, t h o u g h d i s r u p t i v e , is a preferred alternative t o armed coercion, w h i c h was once seen as a p r o p e r f o r m o f p r o t e c t i n g the private financial interests o f a S t a t e . 8 6 A State's use o f 81

82

Law of Nations, London 1883, 39. Schwarzenberger (note 4), 49.

E. Vattely

83 James A. Boormann III , Economic Coercion in International Law: The Arab O i l Weapon and the Ensuing Juridical Issues, in: Journal of International Law and Economics 9 (1974), 205-231 (213), reprinted in: Richard Lillich (ed.), Economic Coercion and the New International Economic Order, Charlottesville, Virginia 1976,255-281 (263) (quoting C. Eagleton , International Government, 1957 (3d ed.), 86, 87). 84 J. Curtis Henderson , Legality of Economic Sanctions under International Law: The Case of Nicaragua, in: Washington and Lee Law Review 43 (1986), 167-196 (176). 85 See generally Derek Bowett , Economic Coercion and Reprisals by States, in: Virginia Journal of International Law (VJIL) 13 (1972), 1-12, reprinted in: Lillich (note 83), 7-18;/. Dapray Muir , The Boycott in International Law, in: Journal of International Law and Economics 9 (1974), 187-204 (202), reprinted in: Lillich (note 83), 36: " A b o u t all that can be said at present w i t h respect t o the status of the boycott under international law is that a number of countries and commentators have suggested that it ought to be prohibited by law." I n Sardino v. Federal Reserve Bank of New York , 361 F. 2d 106, 112 (2d Cir. 1966), the Second Circuit Court of Appeals upheld a federal government refusal of a license to Cuban citizens to transfer assets from a New Y o r k bank. Judge Henry Friendly , in dicta y stated: " H a r d currency is a weapon in the struggle between the free and the communist worlds; it would be a strange reading of the Constitution to regard it as demanding depletion of dollar resources for the benefit of a government seeking to create a base for activities inimical to our national welfare. " 86 Friedmann (note 13), 22. See also Seidl-Hohenveldern (note 16), 218: "Many States of the T h i r d W o r l d . . . had evolved a theory that any threat of the use of economic force would fall under the prohibition of the use of 'force' figuring in Article 2, paragraph 4, of the United Nations Charter, whereas the majority view in the West interprets these words as referring only to the use of armed force. I have always opposed this T h i r d W o r l d view. States should be free to react w i t h such relatively peaceful means against what they consider to be an international delinquency."

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its e c o n o m i c p o w e r f o r e c o n o m i c o r p o l i t i c a l ends has h i s t o r i c a l l y been viewed as legitimate. " W h e r e m i l i t a r y force is illegal o r inadvisable, economic s t r e n g t h is n o w the p r i n c i p a l source o f a state's a u t h o r i t y i n the i n t e r n a t i o n a l s y s t e m . " 8 7 I f a State does take d i s r u p t i v e economic measures t h a t are directed specifically against the e c o n o m y o f another State, arguments have been made t h a t such a c t i o n w o u l d v i o l a t e customary i n t e r n a t i o n a l law. O n e a u t h o r has argued i n favor o f recognizing a " d u t y o f n o n i n t e r v e n t i o n " : Under international law, the duty of nonintervention requires that a state refrain from intervening in the internal or external affairs of another sovereign state against the will of that state. Economic conduct is interventionary if a nation carries out an economic policy that coerces a target state to take a course of action that the coercing state desires. 88 T h e argument is u n c o n v i n c i n g , however, because i t goes against the record o f State practice. Derek

Bowett

has n o t e d t h a t the f o r m u l a t i o n s o f concepts o f

n o n i n t e r v e n t i o n c o n t a i n e d i n U . N . resolutions "lack the n o r m a t i v e q u a l i t y o f a treaty p r o v i s i o n " . 8 9 W h i l e stating t h a t such resolutions are n o t t o be ignored, Professor Bowett

p o i n t s o u t t h a t the W e s t e r n powers d i d n o t use the resolutions

(or any o t h e r argument based o n customary i n t e r n a t i o n a l law) t o challenge the 1973 Arab oil embargo.90 T h e T h i r d R e s t a t e m e n t o f F o r e i g n R e l a t i o n s L a w o f the U n i t e d States includes the f o l l o w i n g p r o v i s i o n i n section 712: A state is responsible under international law for injury resulting from: (3) other arbitrary or discriminatory acts or omissions by the state that impair property or other economic interests of a national of another state.

87

Sweeney / Oliver / Leech (note 7), 1132. Henderson (note 84), 193. The author cites as authority the U N General Assembly's Declaration on Intervention, Declaration on the Inadmissability of Intervention in the Domestic Affairs of States and the Protection of their Independence and Sovereignty, U N - D o c . A/Res. 2131 (XX), 21 December 1965, G A O R , 20th Sess., Suppl. N o . 14, 11, reprinted in: A J I L 60 (1966), 662. 89 Derek W. Bowett , International Law and Economic Coercion, in: V J I L 16 (1976), 245-259 (246). 90 Op. cit.. Professor Bowett includes in his discussion the 1970 U N Declaration on Principles of International Law Concerning Friendly Relations and Cooperation among States. U N - D o c . A/Res. 2625 ( X X V ) , 24 October 1970, G A O R , 25 t h Sess., Suppl. N o . 28, 121. Paragraph 2 of the third principle of the 1970 Declaration states: " N o State may use or encourage the use of economic, political or any other type of measures t o coerce another State in order to obtain from it the subordination of the exercise of its sovereign rights and to secure from it advantages of any kind." While certain acts of economic coercion — counterfeiting of foreign currency (see note 109, infra) — may violate specific norms of customary international law, there are many instances in which specific rules cannot be invoked in order t o challenge acts of economic coercion. Bowett (note 89), 248. 88

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If stated as an expression of customary international law, the Restatement provision must rest on shaky ground. States often take measures that operate against the economic interests of foreign nationals; if that measure amounts to an expropriation, there is a separate Restatement provision (Section 712, para. 1) to deal with "takings". The Reporter's note to section 712 91 does not mention customary law, but instead points to bilateral treaties that insure economic rights for foreign nationals. I t also cites as support the O E C D Declaration on International Investment and Multinational Enterprises, which, as Professor Baade has noted, may lead to customary international law but are not automatically expressive of binding legal norms. 92 One might expect that the subject of economic coercion would provide fertile ground for identifying rules of customary international law. Blatant examples of economic warfare might be expected to generate defensive actions and statements by States so as to give evidence of customary norms. This does not appear to be the case, however. There are few customary rules, if any, against economic coercion. 93 The most clearly acknowledged rule of customary international law is that States are generally free to conduct commercial relations as they wish. 94 As with the subject of expropriation, this rule of customary law is of a "passive" character, since it accepts the notion that international law will not intrude on State action. 3. The Most-Favoured-Nation

Principle

One of the most basic principles of international economic law is that of most-favoured-nation ( M F N ) treatment. I t was through the proliferation of M F N clauses in bilateral treaties that important provisions of international economic law came to have universal application. 95 Despite the ubiquitous appearance of the M F N clause, it is generally accepted that the M F N principle — the right to receive equal treatment in trade or other commerce with a trading partner — is not created by operation of customary international law, but rather is consensual in nature and must be acquired by treaty. 96 Beginning in 1964, the International Law Commission undertook consideration of the subject of M F N clauses as part of its work on the law of treaties. The I L C 91

Restatement (note 9), vol. 2, section 712, Reporter's note 12. Baade (note 35), 19-28, 37, 38. 93 A collection of essays on economic coercion and the N I E O contains remarkably little discussion of customary law. See Lillich (note 83), passim. 94 See text accompanying notes 82-84, supra. 95 VerLoren van Themaat (note 6), 145. 96 D'Amato (note 5), 131; Jackson / Davey (note 7), 439, 440 (quoting from George E. Warren Corp. v. United States, 71 F. 2d 434 (Court of Customs and Patent Appeals 1934)). 92

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concluded, after a number of years of discussion, a set of draft articles on M F N clauses. The draft articles have never been submitted for ratification, although eventual adoption as a convention was envisaged. The purpose of the draft articles was to clarify the meaning to be given to M F N clauses in light of developments concerning preferential treatment for developing nationas, promotion of commodity agreements, etc. T o this end, the I L C draft articles on M F N embody certain principles of the N I E O . The I L C has been careful to point out that the M F N principle itself has not become a rule of customary law. 9 7 I t is possible, however, that the I L C draft could serve as the basis of the development of customary rules of law concerning the interpretation of M F N clauses, although some commentators have expressed doubt whether the I L C draft will receive sufficient support from both developed and developing countries. 98 The lack of a customary law right to M F N treatment is consistent with the rule, stated above, that States are free to discriminate in their commercial relations w i t h other States, absent treaty commitments to the contrary. 4. International

Monetary Law

The field of international monetary law is a challenging (and at times confusing) combination of treaties, customary practices, decisions (both formal and informal) of international organizations, and informal rules, all of which have been characterized as "quasi-orders" 99 or "rules of the game". 1 0 0 Defining a rule for customary international law in this mix is a daunting task. One may begin with the generally accepted view that customary international law recognizes the right of each State to regulate its own currency. 101 Once again, this is an example of a "passive" rule of customary international economic law, holding that international law shall not generally impinge upon freedom of State action. Professor Mann, however, argues that the freedom to regulate currency is not unfettered, but is limited by a general rule of international law: ... while normally the State is entitled at its discretion to regulate its monetary affairs, there comes a point when the exercise of such discretion so unreasonably or grossly 97 International Law Commission (note 67), 25: "Although the grant of most-favourednation treatment is frequent in commercial treaties, there is no evidence that it has developed into a rule of customary international law. Hence it is widely held that only treaties are the foundation of most-favoured-nation treatment." The I L C cites Schwarzenberger (note 4), 74, for this position. 98 Villiger (note 5), 82. 99 Schwarzenberger (note 4), 63. 100 Dam (note 3), 1-6. 101 See the authorities cited in F. A. Mann, The Legal Aspect of Money, 4th ed., Oxford 1982, 465; and in Palitha T. B. Kohona , The Implementation of International Economic Agreements within Municipal Legal Systems and Its Implications, in: Washington University Law Quarterly 65 (1987), 842-871 (847).

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Stephen Zamora offends against the alien's right to fair and equitable treatment, or so clearly deviates from customary standards of behaviour, that international law will intervene. 102

Professor Mann gives some examples of cases where such a principle (which he terms "abuse of monetary powers"), or a more specific manifestation of it, has been argued. However, he does not attempt to show how such a rule is compelled by the requirements of customary international law (State practice and opinio juris); he is, in fact, rather vague about its provenance. 103 The argument for such a rule seems to owe as much to the sense that monetary affairs should be handled according to the good manners of a gentlemen's club — according to the "rules of the game" — as it does to the evidence of State practice, which shows considerable occasions in which the interests of foreign citizens are severely hurt by monetary actions, such, as exchange controls, without recognition of a violation of international law. 1 0 4 The International Monetary Fund (IMF) Agreement imposes a code of good conduct on member States, which agree by treaty to conform their national actions to that code. 105 I t does not appear, however, that customary international law imposes a general duty on States to protect the monetary system of other States. 106 Nevertheless, one of the leading commentators on international monetary law, Professor Richard Edwards , has argued that international monetary law has given rise to two obligations of "general international law" that are not treaty-based: an obligation on all States not to deliberately disrupt the international monetary and banking system, and an obligation to consult and collaborate with other States in confronting transnational monetary problems arising from a State's actions. 107 As in the case of Professor Manns argument in favor of a rule of "abuse of monetary powers", Professor Edwards' discussion of these two principles, though giving some examples of State practice (including the I M F Agreement itself), falls short of a convincing demonstration that the dual requirement of State practice and opinio juris establish these two obligations. He seems to sidestep the issue by referring to principles of "general international law", rather than customary law. I t is true that States generally do not disrupt the international monetary system, and they usually consult (and less usually collaborate) when international monetary problems arise. This is not to say that there is in both cases a sense of legal obligation, however. The United States seriously disrupted the international monetary system in 1971 when President Richard Nixon refused to continue the 102

Mann (note 101), 477. Op. cit. , 476-482. 104 See, for example, West v. Multibanco Comermex , S. A , 807 F. 2d 820, 831 (9th Cir., 1987) (imposition of exchange controls t o the detriment of foreign depositors does not violate international law; the court cited Mann (note 101), 465, for the principle that customary international law does not create an international wrong in such cases). 105 Edwards (note 2), 17, 379-659. 106 Mann (note 101), 483. 107 Edwards (note 2), 647-654. 103

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convertibility of the dollar into gold, and there was no consultation with Western powers before he did so. Yet there have been no outcries, either at the time the action was taken or since, that in doing so the United States violated a principle of customary international law. 1 0 8 There is one area of monetary law in which a rule of customary law has been recognized. Several writers have argued, using evidence of judicial decisions in England and the United States, that customary international law requires States to prevent and punish the counterfreiting of a foreign State's currency. 109 Even though the instances of State practice are few, counterfeiting of currency is so potentially disruptive, not only to the State whose currency is affected but also to third States, that the rule is compelled by reason in order to maintain the integrity of the international monetary system. I t is the egregiousness of the offense, rather than compelling evidence of State practice and opinio juris , that argues in favor of a customary rule here. 5. Other Legal Subjects a) Sovereign Immunity International economic law takes up questions of sovereign immunity whenever government agencies engage in commercial activities. According to the restrictive theory of sovereign immunity, a foreign government is not immune from the jurisdiction of domestic courts in cases that arise out of commercial activities. Most States recognize the basic rule of sovereign immunity (courts of one State generally lack jurisdiction to entertain suits against another State), and it is often asserted that this rule is compelled by customary international law. 1 1 0 However, as inroads on the doctrine of absolute immunity have been made, the question has arisen whether the absolute theory of immunity, or the restrictive theory, is indicative of a rule of customary international law. A t least one court in the United States, without detailed analysis, has concluded that both the basic doctrine of sovereign immunity and the restrictive theory of immunity are rules of international law that have been developed by custom. 1 1 1 This conclusion is questionable, however; a number of States continue to espouse the absolute theory of immunity, and the continuing debate over the application of the restrictive theory and the commercial 108

See the excellent discussion of this episode in Andreas Lowenfeld y The International Monetary System, 2d ed., New York 1984, 122 et seq. 109 See Mann (note 101), 484; and Georg Schwarzenberger , A n Evolving Economic W o r l d Order?, in: Rutgers-Camden Law Journal 1 (1969), 243-271 (264), and the cases cited therein, therein. 110 Restatement (note 9), vol. 1, 390 (Introductory note to chapter 5, Immunity of States from Jurisdiction): "The immunity of a state from the jurisdiction of the courts of another state is an undisputed principle of customary international law." 111

International

Assyn of Machinists v. OPEC , 549 F. 2d 1354, 1357 (9th Cir., 1981).

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activities exception tends to defeat claims that these more recent theories are expressive of customary international law. 1 1 2 b) Extraterritorial Effects of Government Regulation There are differences of opinion whether customary international law limits the exercise of jurisdiction by a State when such exercise causes extraterritorial effects. Professor Schwarzenberger , in his 1966 Hague lectures, wrote that "subjects of international law are free under customary international law to enact legislation with extraterritorial effect N o r is there any general principle of law recognized by civilized nations which would limit this dicretion". 1 1 3 If such is still the rule, it would be another example of "passive" customary international economic law — such as we have seen in the areas of expropriation, economic coercion, and international monetary law. The T h i r d Restatement of Foreign Relations Law of the United States appears to take a different position, however. I n section 403, paragraph 1, the Restatement proclaims that "a state may not exercise jurisdiction to prescribe law with respect to a person or activity having connections with another state when the exercise of such jurisdiction is unreasonable". Paragraph 2 of the same section lists eight factors (such as links w i t h the regulating State, nationality, likelihood of conflict, etc.) that are relevant to a "balancing test" to be used in evaluating whether the exercise of jurisdiction is unreasonable. Comment (a) to the section asserts that this "principle of reasonableness" has emerged as a rule of international law, and is not merely a matter of non-binding comity. In support of this rule, the Restatement lists in a Reporter's note an American appellate opinion, Timberlane Lumber Co. v. Bank of America N.T. & S.A. , 1 1 4 which used a similar balancing test in refusing to apply U.S. antitrust laws to activity that was centered in Honduras. Professor Philipp Trimble has vigorously criticized both Timberlane and the Restatement rule. 1 1 5 H e argues that the cases cited in the Reporter's note to section 403 were decided on the basis of comity or of U.S. congressional intent; he contends that those courts were not attempting to follow a rule of customary international law, but the Restatement mistakenly took the decisions as evidence 112 Brownlie (note 39), 330. See also the discussion in Trendtex Trading Corporation v. Central Bank of Nigeria, [1977] 1 Queen's Bench, 529, 555-559, 569-572, 575-579 (opinions of Denning , Stephenson and Shaw , differing on whether international law required applicat i o n of the absolute or restrictive theory). Dunbar (note 38), 5-19, criticizes Lord Denning for finding a rule of customary international law where none exists, and argues that judges are ill-equipped to identify customary international law. 113 Schwarzenberger (note 4), 29. H e noted that, conversely, there is no duty under customary law to give local effect to foreign regulations. 114 549 F. 2d 597 (9th Cir., 1976). See also Timberlane Lumber Co. v. Bank of America, N. T. & S.A., 749 F. 2d 1378 (9th Cir., 1984). 115 Trimble (note 36), 674-704.

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of customary law. H e points out that the rule expressed in Timberlane has not been followed by other courts in the United States. In conclusion, Professor Trimble espouses a rule similar to that expressed by Professor Schwarzenberger: ... I infer a different rule of customary international law — that states are free to regulate economic activity that has minimum contacts with its territory or nationals whenever its interests so dictate, subject only to limitation by treaty (as in the tax field). 1 1 6

Given the frequency with which U.S. regulations produce extraterritorial effects, pronouncements by U.S. authorities on this subject are of great interest. In the final analysis, it is not clear that the evidence of state practice and opinio juris supports a finding that rules of customary international law — even the "passive" rule expressed by Professor Schwarzenberger and Trimble — apply to questions of extraterritoriality. The problem w i t h the passive rule is that reason would seem to support the recognition of some limitation under international law over highly disruptive extraterritorial effects of economic regulation. c) Regulation of Multinational Enterprises In the second (1970) Barcelona Traction decision, the International Court of Justice noted in dicta that, insofar as the treatment of multinational enterprises (MNEs) is concerned, " i t may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallized on the international plane". 1 1 7 The Court attributed the lack of rules of customary international law to "intense conflict of systems and interests", and concluded that the protection of shareholders requires that recourse be had to treaty arrangements. 118 Professor Baade has pointed out that "less than a decade after the Barcelona Traction case, there has come into being a wealth of state practice on M N E s from which pertinent rules of customary international law might be derived". 1 1 9 A t least some of this State practice springs from the development of Codes of Conduct and Guidelines on MNEs, which may eventually give rise to the recognition of rules of customary international law. However, Professor Baade does not go so far as to say that customary international law has yet developed rules in this area; 120 in fact, he points to " t w o paramount obstacles" in attempting to formulate the customary international law of M N E s — an overabundance of scholarly commentary, and a death of hard decisional law on M N E s . 1 2 1 116

Op. cit. (note 36), 704. Case concerning the Barcelon Traction, Light and Power Company Limited (Belgium v. Spain), 1970 ICJ Reports 3, 46, 47. 117

118

Loc. cit. (note 117), 47. Hans Baade, Codes of Conduct for Multinational Enterprises: A n Introductory Survey, in: Norbert Horn (note 16), 407-441 (413). 1,9

120 121

See note 35, supra. Baade (note 119), 413.

3 GYIL 32

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I V . Common Characteristics of Customary International Economic Law As the above examples illustrate, there appears to be relatively little recognition of customary international economic law. T o the extent that customary rules are recognized, they display several common characteristics that warrant comment. 1. The Passive Character of Customary International Economic Law The rules that have received broadest recognition as rules of customary international law are variations of a simple, general rule of economic sovereignty: the control of a State over its economy shall not be interfered with. Thus, we have seen that, absent Treaty commitments to the contrary, States are free to expropriate property within their borders, to permit or restrict commerce with other States, to discriminate in their trade relations, and to regulate their own currency. These rules, rather than creating a positive role for customary international law, are passive or negative in character: they support the principle of freedom of State action from limitations imposed by international law. Where limitations are imposed, such as the requirement of just compensation for expropriations of foreignowned property, the rules of customary international law are subject to greater uncertainty, or are not recognized at all. The enshrinement of economic sovereignty of States might seem paradoxical given the interdependent nature of the world economy, for it is apparent that States' control over their economies is not supreme at all, but instead is constantly compromised by external economic forces. This increasing interdependence has not engendered many rules of customary international law; it has, however, been a prime motivation behind States conceding a measure of their economic sovereignty in international agreements, in exchange for reciprocal benefits. 2. The "Soft Law" Nature of Customary International Economic Law A further characteristic of rules of customary international economic law is the vagueness w i t h which they are expressed. We have seen customary rules on "appropriate compensation" for expropriations; on an alleged "duty of nonintervention" as a brake on economic coercion; and on an alleged duty not to "disrupt" the international monetary system. Rarely is a rule of customary international economic law formulated in specific terms (an exception is the rule that requires the prevention and punishment of the crime of counterfeiting a foreign State's currency). These vague standards, which leave much room for interpretation, are

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examples of the "soft" international law that is becoming increasingly prevalent in international relations. The adoption of "soft law" norms of international economic law has received increased attention in recent years as a method of overcoming deadlocks in the conflict over the establishment of a new international economic order. 1 2 2 There are several reasons for the vagueness of such rules. The process of identifying customary rules requires the gleaning of a general principle from more specific instances of State practice, and it is natural that the general principle be formulated in broad language to fit w i t h other examples. More important, however, is the fact that vague language increases the likelihood that the rule will achieve the acceptance implicit in the concept of opinio juris . The cost associated w i t h achieving a consensus based on vague notions of "soft law" is a lack of predictability as to how these rules should be applied. Is partial compensation of the expropriation of a multinational enterprise "appropriate" if the enterprise has engaged in practices that prejudice the host country? If a State refuses to intervene to support the value of its currency, is it guilty of "disrupting the international monetary system"? The vagueness of these soft law norms make rules of customary international economic law of limited utility in deciding cases of hard conflict, such as those presented in litigation, for they provide little direction to the judge or arbitrator. Lacking sufficient case law to give direction in the application of these rules, as explained below, judges will inevitably decide conflicts on the basis of value judgments that are based on local perceptions rather than on international norms. 3. Customary International Economic Law at the Extremes of Economic Behaviour A final characteristic of customary international economic law is that it tends to appear at the extremes of international economic behaviour. Arguments based on customary international economic law are raised when States expropriate the property of foreigners, place trade embargos on other States, permit the counterfeiting of foreign currency, or undertake other extreme acts. Despite the impressions left in news headlines, these are not the normal daily activities of the international economy. The resolution of the less extreme conflicts of trade and investment require reference to written forms of law — contracts, legislation, and treaties — that provide specific answers to specific problems. The normal economic behaviour of States occurs without any discussion of the requirements of customary international economic law, although the rules of customary law indirectly influence that behaviour. 122 See Seidl-Hohenveldern (note 16), 193; Joseph Gold , Strengthening the Soft International Law of Exchange Arrangements, in: A J I L 77 (1983), 443-489 (443).

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V. Customary International Economic Law and the Courts Research into case law at the international, national or arbitral level yields remarkably little application of rules of customary international economic law. The International Court of Justice (ICJ) (like the Permanent Court that preceded it) has decided only a small number of cases dealing with questions of international economic law, 1 2 3 and seldom has the ICJ applied a rule of customary international economic law to resolve a dispute before it. Even though ICJ judgments are given primacy as evidence of customary international law, 1 2 4 due to the scarcity of ICJ rulings, a more likely source of evidence of customary international economic law exists in the judgments of national courts. 1 2 5 For this reason, it is interesting to consider the decision published by U.S. courts, certainly the world's most prolific generators of decisional law. A review of U.S. judicial opinions 1 2 6 shows that rules of customary international economic law are rarely mentioned; while courts occasionally make tangential references to customary international law to bolster their decisions in cases involving economic matters, such rules are almost never relied upon to decide a case. 127 Computer research of all published federal opinions in the United States from 1957 to 1988 found 75 cases that employed the term "customary international law". O f this number, only 18 cases dealt with issues of international economic law. 1 2 8 Most of these cases (12) raised the Act of State doctrine, a domestic rule applied by U.S. courts, and the only reference to customary international law occurred when the court quoted the formulation of the doctrine from the leading Supreme Court 123 Schwarzenberger (note 4), 16, lists eighteen cases of "international economic law" that had been decided by the ICJ up to 1966. Some of these cases, however, have been decided not on the basis of rules of international economic law, but rather w i t h reference to rules of territorial or maritime jurisdiction (e. g., Anglo-Norwegian Fisheries Case), jurisdiction of the ICJ itself (e.g., Norwegian Loans Case), international criteria for State protection (Nottebohm Base), or other matters that have only indirect economic impact. 124 Restatement (note 9), section 103 (2) (a), and comment (b) thereto ("Judgments and opinions of international tribunals generally are accorded more weight than those of domestic courts ..."). 125

Compare Pieter Ver Loren van Themaat, The Impact of the Case Law of the Court of Justice of the European Communities on the Economic W o r l d Order, in: Michigan Law Review 82 (1984), 1422-1438 (1425): "the development of public international case law in its present state mainly results from decentralized judgments by national courts and only rarely results from compulsory jurisdiction or arbitration." 126

I am excluding from this survey rules of lex mercatoria, which are applied as U.S. common law or as usage of trade. 127

Accord, Trimble (note 36), 672. Op. cit. (note 36), 685 (note 71), using the broader category of "international law", found 2000 cases decided between 1789 and 1984, of which only 50 cases involved the judicial application of customary international law. Most of the 50 cases involved questions of diplomatic immunity and sovereign immunity. 128

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decision; 129 in short, customary international law was not itself in issue. When a rule of customary international law is raised, it is often done so to bolster the court's decision, rather than as the principal grounds for that decision. 130 None of the U.S. decisions offers a thorough analysis of the dual requirements of State practice and opinio juris before deciding the meaning or applicability of customary international law. Professor Phillip Trimble gives one reason for this: domestic judges lack the training and professional experience to decide issues of customary international law. 1 3 1 He finds that U.S. courts have rarely applied customary international law of any kind, and have almost never done so as a restraint against U.S. government interest. 1 3 2 Professor Trimble concludes that customary international law lacks the political foundations (consensual agreement), and therefore the "legitimacy", of treaty law, and a court should never apply it except pursuant to direction from Congress or the President. 133 While I agree w i t h Professor Trimble's survey of the cases, which demonstrates the marginal nature of customary international law in U.S. judicial decisions, I am unconvinced by the vehemency of his argument that customary law violates democratic principles (since it is "found" by judges and scholars) and therefore lacks legitimacy. This same lack of "democracy" applies to the common law judicial system as a whole, not just to the application of international law. The problem with using customary international law in U.S. courts is not, in my mind, an ideological one, but rather a problem of proof: as a practical matter, U.S. judges cannot be expected to conclude accurately, on the basis of haphazard assessment of imperfect evidence, that a rule of customary international law exists. The lack of hard decisional law, either at the international or the national level, profoundly affects the quality of analysis of customary international law, as the following section discusses.

129 Banco Nacional de Cuba v. Sabbatino , 376 United States Reports 398,428 (1964): " . . . we decide only that the Judicial Branch will not examine the validity of a taking of property within its own territory by a foreign sovereign government, extant and recognized by this country at the time of suit, in the absence of a treaty or other unambiguous agreement regarding controlling legal principles, even if the complaint alleges that the taking violates customary international law" (emphasis added). 130 A good example is West v. Multibanco Comermex , S. A.y discussed at note 104 supra , where the court cited customary international law t o support the court's conclusion that exchange controls did not constitute a "taking". 131 Trimble (note 36), 713, 714. A t least one court has candidly acknowledged the difficulty of ascertaining the existence of a rule of international law. Hunt v. BP Exploration Co. (Libya) LTD (note 16), 902, note 12. 132 Trimble (note 36), 684-686. 133

18, 19.

Op. cit. (note 36), 716. Professor Trimble's complaints are echoed in Dunbar (note 38),

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V I . An Assessment of the Analytical Framework for Customary International Economic Law 1. Weaknesses in Customary International

Law Analysis

As we have seen, the basic rule of customary international law seems simple enough — one must establish the requisite State practice and opinio juris to show that the rule is adhered to, either actively or passively, by a consensus of States. Yet the difficult of actually proving these elements is overwhelming, given the heterogeneity of events and pronouncements concerning them. The International Law Commission lists seven categories of evidence of customary international law, from texts of international treaties to the practice of international organizations. 134 Also generally accepted as "proof" of customary international law are U . N . resolutions and declarations. 135 While the opinions of scholars and writers are not, formally speaking, evidence of customary international law, they are often influential in deciding the existence or absence of a rule of customary law, 1 3 6 and they are frequently cited and relied upon in cases.137 In short, the rule of evidence of customary international law is a broad one, allowing consideration of virtually anything that would appear to be relevant to State practice or opinio juris. This inclusive approach has been criticized. One author has referred to the standard evidence of customary international law as an "unbalanced, incomplete and arbitrary miscellany". 138 While the categories of evidence may be logically related to elements of State practice and opinio juris , the selective resort to such evidence by courts, arbitrators and commentators weakens the conclusions that they make. Perhaps only an International Law Commission in permanent session with armies of researchers could gather and sift through all the relevant evidence to establish, in a manner acceptable to social scientists, the existence of a rule of customary international law. Lacking this, the lawyer, judge or scholar is left with something resembling less a scientific examination than an exercise in rhetoric that reflects the value judgments of the examiner. Part of the problem may stem from the aforementioned lack of hard decisional law. Even if judicial decisions do not carry the strength of formal precedent (as ICJ decisions do not), case law is nevertheless effective in crystallizing acceptance of rules of law. Yet there is relatively little case law, either at the international or national level, concerning customary international law, economic or otherwise; 134

See (note 59) and accompanying text. See the discussion in Ellis (note 25). See also Professor Dupuys analysis in Texaco Overseas Petroleum Company (note 71), 29. 136 D'Amato (note 5), 138. 137 See, for example, Texaco Overseas Petroleum Company (note 71), 34, 35; West v. Multibanco Comermec (note 104), 465. 138 Dunbar (note 38), 3. 135

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instead, there is an odd assortment of disparate cases in which customary law has been discussed. This paucity of case law is "compensated" by the wealth of scholarly comment, but it is not clear that this represents a strength, even if much of the scholarship is of a high level. Professor Hans Baade has remarked on the "overabundance of legal literature" on the rules applicable to multinational enterprises: "whenever the volume of learned comment outstrips the supply of 'hard' decisional law, and especially wherever scholarly discussion starts to feed on itself, it loses touch with reality". 1 3 9 I t is much easier to point to the conclusion of a scholar on a point of customary international law than to go through a lengthy examination of State practice. Even credible legal scholarship would appear to be a poor substitute for examination of State practice, however. The lack of customary international economic law as identified by courts may be due in part to the fact that most of the scholarship on customary law has been written by specialists in public international law, while experts in international economic law have largely ignored this area. The lack of clearly demonstrable proof helps explain the vague, soft law nature of customary international law. Vagueness and flexibility may be desirable characteristics for political and cultural relations; they are not particularly attractive in the competitive world of economic relations, however. This is one reason why the pronouncements of the N I E O have not been accepted as rules of customary international economic law. As Professor Seidl-Hohenveldern has remarked, " A mere appeal to moral principles, fairness and equitable feelings may be more effective in many other fields of human relations than where money is at stake". 1 4 0 2. Customary Law and the Element of Exchange in International Economic Law The lack of a consent requirement for customary international law may also help to explain a reticence of States to be strictly bound by customary international economic law. Most commentators hold that there is no requirement that a State must have consented to a rule of customary law in order to be bound by i t . 1 4 1 Being bound without consent goes against the traditional grain of economic relations. Even in a world of mixed economies and prevalent government regulation, notions of bargained-for exchange lie at the heart of western economic activity. Quid pro quo permeates international trade relations, both on a State and private level. Lacking a powerful international mechanism of enforcement of customary inter139 Baade (note 119), 413. Compare D'Amato (note 5), 4: "Most of the literature on custom is repetitive and involuted. The questions of how custom comes into being and how it can be changed or modified are wrapped in mystery and illogic." 140 Seidl-Hohenveldern (note 16), 182. 141 D'Amato (note 5), 187-199; Akehurst (note 11), 7, 23, 24; Villiger (note 5), 12-25. For the Soviet view, requiring agreement, see Erickson (note 60), 32-35.

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national economic law, a State may not feel constrained by a rule of custom that it did not help to create and for which it receives little immediate return. In the debate over the N I E O , a basic conflict exists between those ("Realists") who see the development of legal norms as the culmination of a process of conscious agreement and exchange, and others ("Idealists") who see the development of norms as a means to create a more just international economic system. The latter are more likely to identify principles of customary international economic law than the former. 3. The Role of Custom in an Evolving World Economy The international economy is not static. Economic relations respond to changes in technology and in other indicia of economic power. The winds of economic policy also shift from time to time. Principles of mercantilism may prevail, to be replaced by laissez-faire practices; equality of trade gives way to trade preferences; freedom of investment or government regulation of it may wax and wane. Applying customary law to shifting economic relations poses a problem: if it is difficult to prove customary international economic law, it is even more difficult to show that a customary rule has now been abandoned by subsequent State practice and by a shift in opinio juris. Customary international law as it is now understood does not permit change easily; a deviation from an established rule, rather than representing a necessary modification to reflect economic reality, would be taken as a violation of customary international law by anyone adversely affected by the new rule. 1 4 2 By contrast, rules having to do with territorial and maritime boundaries, the conduct of diplomatic relations, the effects of treaties, and other rules that constitute the bulk of recognized customary international law are more immutable. Several authors have remarked that customary international law is an inappropriate guide for modern economic relations, which require increasingly specific rules to deal with complex transactions. 143 As Kenneth Dam has pointed out, " . . . experience with the international monetary system also shows that even when change is basically evolutionary, rules can be expected to increase in detail and complexity". 1 4 4 Yet, as we have seen, customary international economic law does not engender detailed rules.

142 143 144

See Trimble (note 36), 710. See the quote from Friedmann at (note 13); Reisman (note 37), 142, 143. Dam (note 3), 342,343.

Is There Customary International

Economic Law?

41

V I I . Conclusion — The True Role of Custom in International Economic Law If one assumed that international economic law only affected the decisions of judges and arbitrators, then it would be apparent from the foregoing discussion that customary international economic law exists in such a trivial amount as to be marginal to world economic affairs. If one excludes rules of lex mercatoria , few courts at any level mention rules of customary international economic law. Those that do mention such rules rarely rely on them for a decision, but instead treat them in a passing comment. For various reasons — its "soft law" nature; the difficulties of proving customary rules; an over-dependence on scholarly opinion that may be as rooted in aspirations as it is in reality — customary international economic law is of limited utility in making decisions in the harsh glare of litigation. A l l of this would seem to underscore the conclusion, stated above, 145 that international economic law is treaty law and only treaty law. I believe that would be an improper characterization, however. Judges and arbitrators are not the only decision-makers of importance in the world economy. Even if judicial decisions do have economic repurcussions, judges deal with such a small and haphazard sampling of economic behaviour that they can hardly claim pre-eminence as economic decision-makers over legislators, government officials, or diplomats. This is especially true in regards to economic relations between States, which are rarely submitted to tribunals of any kind, but instead find resolution in international negotiation. I suggest that customary international economic law is as important on the political level as it is unimportant on the judicial level. 146 Let me give an example of this thesis. Professor Edwards has argued 147 that there is an obligation under general international law that States shall not disrupt the international monetary system. I question whether State practice and opinio juris supports such a rule as customary law. Furthermore, it is hard to imagine that such a rule could be judiciously applied by a court of law that is forced to make a judgment for or against a State. What is meant by "disrupt"? If a State ignores a looming balance of payments crisis, is it guilty of disruption? Since monetary affairs reflect the actions of more than one State, how is one to identify which State is guilty of disruption? Yet when it comes to the political sphere of monetary diplomacy, the "rule" that States must not disrupt the international monetary system, even though not 145

See text at (notes 7, 8). Phillip Trimble y while discounting the observance of customary international law by U.S. courts, argues that "[i]n practice, customary international law is applied primarily by the political branches, not the judiciary", Trimble (note 36), 670. 146

147

See (note 107).

42

Stephen Zamora

demonstrable with the precision that judges might seek, will certainly be argued vigorously in negotiations over the disruptive practices. Those who wish to terminate the disruptive practice will use whatever evidence of State practice and sense of obligation (moral, ethical or legal) to try to get the offending State to conform to the "rule" of customary practice. One might argue that the principles of customary international economic law that come into play at this political level are not rules of law, since they are not followed precisely and do not command unswerving observance. Yet increasingly we find that even rules of international treaty law that are drafted in the most precise of terms, such as the I M F Articles of Agreement or the articles of the G A T T , suffer from the same lack of rigid observance. Finally, it may be a mistake to think of law as a dichotomy, with only two alternatives: law, and non-law. According to traditional notions, if a customary practice is not easily demonstrable (since it is not written in a treaty or legislative act), if it is not followed unswervingly, and if there is no case law to support it, it must be non-law. However, the law/non-law dichotomy may be too simple to explain the role of international economic law in a post-Bretton Woods world. Instead of a neat border between law and non-law, we might view international economic law — at least insofar as it is observed outside the judicial sphere — as consisting of a spectrum of norms running from the "always observed" to the "rarely observed". Both treaty law and customary international law norms may appear at various points along this spectrum. Thus, a substantive rule may be of a "soft law" nature, but contained in a "hard law" form (a binding international agreement). 148 Such a "rule" may have less effect on international economic relations than a "harder" substantive rule that is contained in a "soft law" form (customary international law). 1 4 9 I n the post-Bretton Woods economic system, treaty law plays an important role in setting the framework for international economic cooperation and in supplying fixed rules that, even if applied selectively, influence the pattern of economic behaviour. Customary practices followed out of a sense of obligation to the system are also important elements of international economic relations. If such pratices are not recognized as "law" under the State practice/opmzo juris test (a test that is almost never applied with precision), because they are seldom enforced in judicial proceedings, they should at least be given due regard as normative guides — or "partial international l a w " 1 5 0 — that influence international economic relations. 148

For instance, the I M F Agreement, Article I V , section 1 (iii), obligates I M F members t o "seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions". 149 A n example of "hard law" in "soft law" (customary) form would be the rule against expropriation without payment of any compensation. 150 Compare Baade (note 35), 27.

Piercing the Corporate Veil of International Organizations: The International T i n Council Case in the English Court of Appeals By Ignaz Seidl-Hohenveldern

Can an international organization go bankrupt? U n t i l a few years ago, such a question seemed far removed from reality. I t seemed almost unthinkable that the member States of an international organization would lose interest in the fate of their creature to such an extent that they would not prevent it from engaging in extravagant financial adventures, and would be unwilling to help it overcome financial difficulties resulting from such adventures, should the organization have engaged in them all the same. A refusal of help would only be due to the unwillingness and not to the inability of the member States to offer such help. States nowadays hardly go bankrupt in the formal sense,1 and seen in comparison with the deficit of most State budgets, the sums needed to overcome the financial difficulties endangering the existence of an international organization hardly would drive any member State into bankruptcy. Finally, there exists a sort of financial collective security. I t seems impossible that all member States of an organization would go bankrupt at the same time. In recent times it has been rumored that, now and again, EEC and members of the U N family of organizations had encountered difficulties to live up to their financial commitments, even to their staff — but these difficulties have always been overcome in the end. T w o joint inter-State enterprises, the International Institute for the Management of Technology in Milan (hereinafter "Milan Institute") and Eurochemic have run so heavily into debt that they could not be refloated. 2 But there, the member States ensured that these entities could be wound up w i t h the consent of their creditors. Thus the suits in bankruptcy recently decided by the English Court of Appeals in the case of the International T i n Council ( I T C ) are the first instance of an international organization going bankrupt. The I T C has its headquarters in London. Its membership consists of the EEC and 23 member States, including States as solvent as the United Kingdom, Aus1

Alfred Manes, Staatsbankrotte, Wirtschaftliche und rechtliche Betrachtungen, Berlin 1923. 2 Ignaz Seidl-Hohenveldern y International Economic Law, Dordrecht 1989, 159.

44

Ignaz Seidl-Hohenveldern

tralia, Belgium, Canada, Denmark, Finland, France, the Federal Republic of Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden and Switzerland. 3 The main purpose of the I T C , according to the Sixth International T i n Agreement of 1982 presently in force, is " t o provide for adjustment between world production and consumption of tin and to alleviate serious difficulties arising from supplies and shortage of t i n " . 4 This is done inter alia by means of purchases of tin by a buffer stock. 5 The manager of the buffer stock, acting apparently without special instruction from the members, 6 had continued to conclude contracts for the purchase of tin after the funds at his disposal had been exhausted. He moreover continued to borrow money to finance the buffer stock. When in October 1985 the I T C became unable to honour the contracts and to repay its loans, both governed by English law, the t i n brokers and the bankers concerned brought actions in the English courts against the I T C . The I T C relied on its immunity, insofar as the I T C had not waived it by arbitration clauses inserted in contracts. N o t all broker contracts and only one loan contract contained such a clause. Large awards were made in these cases, but they remained unsatisfied. In the main "direct action" the brokers and bankers now try to hold the member States and EEC jointly and severally liable for the debts of the I T C . By now, these debts amount to more than 900 million pounds. The plaintiffs tried to reach their aim by three lines of arguments. They tried to reach the members by (a) contesting squarely that the I T C enjoyed legal personality under English law, (b) by claiming that the existence of such a personality of the I T C does not exclude concurrent liability of the members rendering them jointly and severally responsible for the ITC's debts and (c) by submitting that the I T C acted as agent for the members. We will not deal in extenso w i t h the claims under a) and c). T o us, it seems obvious that Orders-in-Council from 1956 to 1972 stating that the I T C shall have the "legal capacities of a body corporate" in English law were an adequate transformation into English law, of the international commitments assumed by the United Kingdom. These result from Article 16 para. 1 of the Sixth International T i n Agreement and from Article 3 of the Headquarters Agreement of 9 February 3

List in Maclaine Watson v. Dept. of Trade (Kerr, L. J.) [1988] 3 A l l England Law Reports ( A l l E.R.) 257, 271. 4

Article 1 lit. (a), loc. cit., 282. Article 21-28, loc. cit., 286, 287. 6 Pierre Michel Eisemann, Crise du Conseil International de l'Etain et Insolvabilité d'une Organisation Intergouvernementale, in: Annuaire Français de droit international ( A F D I ) 31 (1985), 730-746 (735). I n general critical of the poor management of the buffer stock, see Eric J. McFadden , The Collapse of T i n : Restructuring a Failed Commodity Agreement, in: American Journal of International Law (AJIL) 80 (1986), 811-830 (828, 829). 5

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Tin Council Case in the English Court of Appeals

45

1972, which provide that "the Council shall have legal personality". Thus, the I T C , also under English law, enjoyed a personality distinct from those of its members. English law distinguishes between "constitutional" and "factual" agency. The Court of Appeals found that statements in the standard contract forms contradicted the claim that the I T C had acted on behalf of the members in virtue of a "constitutional" agency. Whether or not a "factual" agency may have existed between the I T C and its members will be decided in furhter proceedings. The most interesting submission certainly is that of the concurrent liability of the members for the liabilities of an international organization enjoying legal personality. A t the outset, we would like to recall that the domestic rules granting to the I T C the capacity of a body corporate under English law have been adopted pursuant to international commitments of the United Kingdom. The relevant domestic legislation thus refers back to international law. The latter will serve to interpret and elucidate the relevant domestic rules as it cannot lightly be assumed that a State would violate its international commitments. Does the recognition of the I T C ' s personality in the International T i n Agreement and in the Headquarters Agreement concern a type of personality which either excludes altogether any concurrent liability of the members of such a juridical person or at least limits their liability to their share in the assets of that person? Judge Kerr has drawn up an impressive list of treaties concerning the status of international organizations in the United Kingdom. 16 out of 64 examined treaties contain clauses excluding expressis verbis such concurrent liability. 7 H o w ever, what can be inferred if the treaty concerned is silent on this point? Such is the case of the International T i n Agreement. Here, as elsewhere in international law, the presence or absence of a certain clause in a number of treaties is no proof for or against the existence of a rule of customary international law identical to the content of that clause.8 The Barcelona Traction Case has shown that public international law has not established a notion of corporate entity proper to that system of law. I n international law the problem of concurrent liability of the members of a corporate entity will have to be solved by a reference to comparative municipal law. 9 This includes a lifting of the corporate veil, especially in the interest of creditors. 10 The International Court of Justice has stated that such recourse to general principles of municipal law "does not necessarily imply drawing any analogy between its own institutions and those of municipal law". 1 1 The Barcelona Traction Case was 7

[1983] 3 All. E.R. 357, 321-223. Seidl-Hohenveldern (note 2), 34. 9 Barcelona Traction Case, I.C.J. Reports 1970, 33 para. 38. 10 Loc. cit., 39 para. 56-58. 8

11

See (note 9).

46

Ignaz Seidl-Hohenveldern

concerned w i t h a L i m i t e d C o m p a n y established u n d e r m u n i c i p a l law. Y e t , intern a t i o n a l t r i b u n a l s had recourse t o arguments based o n the n o t i o n o f a corporate e n t i t y also i n circumstances i n v o l v i n g treaty c o m m i t m e n t s o f several States acting jure imperii

— the rights o f t w o C e n t r a l A m e r i c a n States i n respect t o the G u l f of

Fonseca being compared t o those o f the co-owners u n d e r c i v i l l a w 1 2 and the partner States i n an e n t i t y , qualified b y Sir Hersch Lauterpacht

as a l i m i t e d p a r t n e r s h i p , 1 3 t o

wage naval war against Spain were held d i r e c t l y responsible f o r the financial liabilities o f t h a t e n t i t y . 1 4 T h u s , recourse t o general principles o f m u n i c i p a l law concerning corporate entities appears p e r m i s s i b l e 1 5 also w h e n deciding the issue o f the c o n c u r r e n t l i a b i l i t y o f the members o f the I T C f o r the debts o f the l a t t e r . 1 6 A c o m p a r i s o n o f the rules o f m u n i c i p a l law shows t h a t there exist certain types o f entities e n j o y i n g legal personality, w h i c h , however, d o n o t exclude a c o n c u r r e n t l i a b i l i t y o f its m e m b e r s . 1 7 T h e award i n the Westland respect referred t o the société coopérative

Helicopters

case, 18 i n this

( A r t i c l e 868 o f the Swiss C o d e o f

O b l i g a t i o n s ) and t o the société en commandite

par actions

( A r t i c l e 764 o f t h a t

C o d e ) . H o w e v e r , this c o m p a r i s o n merely refutes the belief t h a t the existence o f a legal person does necessarily exclude a c o n c u r r e n t l i a b i l i t y o f its m e m b e r s . 1 9 Y e t , i t 12

Central American Court of Justice, Judicial Decisions Involving Questions of International Law, Costa Rica v. Nicaragua , 30 September 1916, in: A J I L 11 (1917), 181-229 (200, 219). 13 Hersch Lauterpacht , Private Law Sources and Analogies of International Law, London 1927, 4. 14 C. A. Logan, Chilean-Peruvian Accounts, in: John Bassett Moore , Digest of the International Arbitrations to which the United States Has Been a Party, vol. 2, Washington, D.C. 1898, 2085-2105. 15 T o this effect see E. Lauterpacht , The Development of the Law of International Organization by the Decisions of International Tribunals, in: Recueil des Cours (RdC) 152 (1976/IV), 387-468 (405). 16 According t o E. Lauterpacht, op. cit., 412, 413, this issue is still open but see Ignaz Seidl-Hohenveldern , Der Rückgriff auf die Mitgliedstaaten in Internationalen Organisationen, in: Völkerrecht als Rechtsordnung. Internationale Gerichtsbarkeit. Menschenrechte: Festschrift für Hermann Mosler, Berlin/Heidelberg 1983, 881-890 (889). 17

René David / Ulrich Drohnig, in: Suzanne Bastid et al., La personality morale et ses limites, Paris 1960, 12, 13 and 46-48, respectively. 18 International Chamber of Commerce Court of Arbitration, Case N o . 3879/AS, Interim Award t o 5 March 1984, Westland Helicopters Ltd. v. Arab Organization for Industrialization , United Emirates, Kingdom of Saudi Arabia, State of Qatar, Arab Republic of Egypt, Arab-British Helicopter Coy, reproduced in English, in: International Legal Materials 23 (1984), 1071-1089 (1082 et seq.). 19 Against this belief also F. A. Mann, Die juristische Person des Völkerrechts, in: Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht 152 (1988), 303-317 (313, 316). We are not convinced by the arguments in favour of this belief adduced by Matthias Herdegen, Bemerkungen zur Zwangsliquidation und zum Haftungsdurchgriff bei Internationalen Organisationen, in: Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 47 (1987), 537-557 (549, 555).

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Tin Council Case in the English Court of Appeals

47

does not establish the existence of a general rule in municipal law to this effect. As far as the problem of concurrent liability in international law is concerned we therefore have to turn to the opinion of writers. Among the writers having dealt with the problem Adam 20 appears to have gone too far, when he infers from the mere fact that international law lacks any specific rules limiting the concurrent liability of members of an international corporate entity, such as exist in the municipal legal systems in respect of limited companies or Aktiengesellschaften , that members of an international organization shall always remain liable for the debts of the entity. While other passages in Adam's book render his position equivocal, 21 Schermers inferred from the absence of such rules, even that " i t is impossible to create international legal persons in such a way as to limit the responsibility of individual members". 22 However, as we have seen, there exists a fair number of treaties where the member States have indeed excluded or limited their concurrent liability for the debts of an organization. Our own writings have been quoted by both parties and by the judges of the Court of Appeals, 23 although we had not been asked by the parties for our opinion. We share the views of Shihata. The absence of any rule of limited liability in international law does not automatically establish an unlimited liability of the members of an organization for the debts of that organization. " A l l relevant provisions and circumstances must be studied to ascertain what was intended by the parties in this respect and the extent to which their intention was made known to third parties dealing with the enterprise." 24 Judge Nourse 25 points out that we dealt with common inter-State enterprises rather than with international organizations, properly so called. This same objection could be raised also against the above-quoted view of Shihata. Judge Nourse rightly considers the I T C to be an international organization, properly so called. The aims of the I T C belong to the sphere of State activities jure imperii . A US court has rightly refused to treat OPEC as a cartel infringing the US anti-trust law. 2 6 Leigh commenting this decision considers OPEC's activities " t o control the 20

Henri T. Adam, Les Organismes Internationaux Spécialisés, Paris 1965,129 para. 110 quoted by Gibson L. J., [1988] 3 A l l E.R. 257, 344. 21 [1988] 3 A l l E.R. 257, 327 per Nourse L. J. 22 Henry G. Schermers , International Institutional Law, Alphen aan den Rijn 1980, 780 §1395. 23

See (note 21) and at 344 per Gibson L. J. Ibrahim F. I. Shihata , The Role of Economic Development: The Legal Problems of International Public Ventures, in: Revue Egyptienne de D r o i t International 25 (1969), 119-128 (125). 24

25

See (note 21). International Association of Machinists and Aerospace Workers v. Opec> 649 Federal Report 2d. 1351 (1981) and see a synopsis by Monroe Leigh , Judicial Decisions, in: A J I L 76 (1982), 160-162. 26

48

Ignaz Seidl-Hohenveldern

price of oil in the interest of conservation as compatible with that legislation. Be that as it may be, when States control prices, they act for a jure imperii purpose". Judge Nourse , however, is also right when he says that the principal activity of the I T C , that of buying and selling t i n in large quantities is one which, if viewed in isolation, ought to be regarded as jure gestionis . Judge Nourse wonders how we would deal w i t h such a hybrid case.27 I n our General Course at the Hague Academy of International Law, we did already refer to the I T C case then pending in the lower courts. We said there: " I t is immaterial whether the Council is held to be an international organization or a non-national joint inter-State enterprise. Statements made in connection with such enterprises will apply also to international organizations." 28 Let us thus return to the criteria concerning the assumption of concurrent liablity by the members of I T C . I t seems self evident, for the reasons set out at the beginning of this article, that, when concluding the several International T i n Agreements the member States never had envisaged the calamities which would befall the I T C . 2 9 I t is therefore wrong to conclude a contrario from Article 60 para. 2 (b) of the Sixth International T i n Agreement read together with its Article 2 that members are not obliged to any further contributions to the I T C , except to ensure the coverage of a deficit in relation to the administrative account on termination, so as to ensure the fulfilment of the obligations of the I T C towards its staff. 30 I t is true that the members of the International Natural Rubber Agreement of 1987 did limit their liability, but this Agreement was concluded after the I T C bankruptcy. The members having learned by this event, wanted to exclude similar risk in future, 3 1 but as they could not have foreseen that event it appears to be rather far-fetched to imply that they had intended to exclude that risk by not explicitly accepting a concurrent liability when concluding the International T i n Agreement. We are not at all convinced by Judge Kerr s attempt to explain away the statements of authors favorable to a concurrent liability of the members. According t o Judge Kerr these authors referred merely to a concurrent liability under international law, whereas the claims of the brokers and creditors could succeed only if justiciable under English law. 3 2 I n our view clauses excluding the liability of member States serve the purpose of giving a fair warning to the creditors of the 27

See (note 21). Ignaz Seidl-Hohenveldern , International Economic Law, in: R d C 198 (1986/III), 21264 (193), and see Seidl-Hohenveldern (note 2), 158. 28

29

Kerr L.J. [1988] 3 A l l E.R. 257, 304, and Gibson L . J . [1988] 3 A l l E.R. 257, 338. However, t o this effect Kerr L.J. [1988] 3 A l l E.R. 257, 288, 289, 304, and Gibson L.J. [1988] 3 A l l E.R. 257, 351. 30

31 32

This is admitted by Kerr L.J. [1988] 3 A l l E.R. 257, 306. Loc. cit., 307.

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49

organization concerned. These creditors, however, will mainly be interested in the members' concurrent liability in municipal law. The warning to be placed on every security guaranteed or issued by the World Bank "that it is not an obligation of any government unless expressly stated on the security" 33 makes sense only, if the warning excludes such liability in municipal law. The same is true of the limitation of the liability to third parties, figuring in the International Natural Rubber Agreement. 34 The I T C award in the Westland Helicopters case35 will serve at least as a precedent for a finding 3 6 that creditors may rely on the concurrent liability of the member States of an international organization to be enforceable in municipal law. The interim award in the Westland Helicopters case was rendered by an International Chamber of Commerce (ICC) arbitral tribunal. Such awards are enforceable in municipal law. The members having formed the majority of the Court of Appeals were openly critical of the behaviour of the members of the I T C . 3 7 Yet, to their regret, they felt obliged to find against the plaintiffs. These judges saw clearly that brokers and bankers dealing with the I T C , relying on an implied obligation of the members to replenish the buffer stock, were entitled to assume that the members would fulfill this commitments to the I T C . Plaintiffs will have granted credit to the I T C in contemplation of this obligation of the members. I t seems a very meager consolation for the plaintiffs that they could seek redress on the level of public international law, 3 8 where, according also to Judge Kerr , there exists a concurrent liability of the members. However, how are English brokers and bankers going to induce their national State to espouse their claims, as required under international law 3 9 if the United Kingdom itself is one of the defendants utilizing every trick of pleading and procedure to defeat their claims. This reasoning applies likewise to the failure of consequences to be drawn from the failure of the I T C to include arbitration clauses in its loan contracts, in breach of Article 23 of the Headquarters Agreement with the United Kingdom. W i t h all due respect to Judges Kerr and Gibson we wonder whether a solution could not have been found preventing such grave injustice to the plaintiffs. If concurrent liability of the members exists on the international law level, is there really no possibility to let this rule produce its effects also in English law? Judge Ν ourse reached this result by interpreting Article 5 of the 1972 Order in Council 33

Article I V , Section 9 of the Articles of Agreement of the W o r l d Bank; see (note 45).

34

Article 48 para. 4 of the Agreement of 1987 quoted by Kerr. See (note 31). See (note 18). In spite of doubts voiced by Kerr (note 32). Kerr L.J. [1988] 3 A l l E.R. 257, 301, and Gibson L.J., loc. cit., 350. Gibson L. J., loc. cit ., 353.

35 36 37 38 39

Kerr (note 37), 315.

4 GYIL 32

50

Ignaz Seidl-Hohenveldern

which reads, "the Council shall have the legal capacity of a body corporate". 4 0 According to him the extent of the legal capacity of the I T C should be the one which this entity enjoys under public international law. O n that level, however, there exists a concurrent liability of the member States. 41 If this case would have been decided in the Federal Republic of Germany, this linkage of the international law level with the domestic law level, in our view, would follow already from the first sentence of Article 25 of the Basic Law (Constitution) of the Federal Republic, according to which the general rules of international law are regarded as integral part of federal law. Hoffmann wants to deduce such linkage only from the second sentence of this Article, according to which these rules produce rights and obligations directly for the inhabitants of the federal territory. 4 2 I n his view that would exclude claims by non-German creditors. I n the absence of comparable rules in English law Judges Kerr and Gibson felt unable to accept Judge Nourse 9s effort to establish such a linkage. However, could such a link not be found by recourse to the notion of commercial plausibility, invoked by Judge Kerr in another context? 43 Would any broker or banker have been willing to extend credit to the I T C for its risky operations involving large-scale purchases of tin, if they would have been aware that, under no circumstances, could the members be obliged to come to the rescue of the I T C — not even if the I T C and the members blatantly disregarded the obligations of the members under the International T i n Agreement? I t certainly is not plausible that the plaintiffs would have been such fools. However, would it be plausible that the I T C could "discharge its responsibilities and fulfil its purposes and functions adequately", if the I T C ' s credit-worthiness would be down to zero? Just as certainly, this appears to be impossible. However, according to Article 2 of the Headquarters Agreement 44 the latter shall be interpreted in the light of the primary objective of enabling the Council at its Headquarters in the United Kingdom " t o achieve the above-mentioned result". I n our view, this rule of interpretation should tip the scale in favour of interpreting Article 5 of the same agreement ("The Council shall have legal personality") to the effect that such legal personality does not exclude the concurrent liability of the members. W i t h some hesitation we even venture to adduce some practice which — while not fully supporting a direct concurrent liability of the members — had at least produced the same result. We have already referred to the cases of the Milan Institute and of Eurocbemic. Both these entities were joint inter-State enterprises 40

Quoted in [1988] 3 A l l E.R. 257, 290. Loc. cit., 334, 335. 42 Gerhard Hoffmann, Der Durchgriff auf die Mitgliedstaaten von Internationalen Organisationen für deren Schulden, in: Neue Juristische Wochenschrift 41 (1988), 585-590 (588). 43 [1988] 3 A l l E.R. 257, 312. 44 Quoted in: loc. cit., 289. 41

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and not international organizations, properly speaking. As a rule, such enterprises will be engaged in economic activities to a much greater extent than international organizations. Hence, these enterprises are exposed to a much greater risk of financial failure. Owing to the hybrid nature of the I T C , its situation in this respect is perfectly analoguous to that of these enterprises. The United Kingdom was a member of both enterprises 45 — we thus may consider its attitude in these cases as evidence that Great Britain had assented — as far as the result is concerned — to the opinions of the above text writers. Insofar the condition required by Justice Kerr 46 in his quotation from West Central Gold Mining Co Ltd. v. /?. 47 appears to have been met. This argument appears not to have been brought to the notice of Judge Kerr. He therefore rendered his decision in the belief that the United Kingdom had never accepted a concurrent liability for the debts of juridical persons established under international law, of which the United Kingdom is a member. The better documented of the two cases is that of Eurochemic^ a European Company established by a decision of the O E E C Council of 17 December 1957. 48 Its members had instructed the managers to continue operations even after the management had warned the members that Eurochemic would never be able to make a profit. When the members finally agreed to winding-up Eurochemic each member wanted to limit its financial liability to its share in the capital of the company — yet, Eurochemic had run into debt well beyond exhausting its capital. 49 After long discussions, Belgium on 24 July 1978 signed an agreement w i t h Eurochemic providing the transfer of its installations and of the responsibility for disposing of its atomic waste t o Belgium. However, this Convention entered into force only after Belgium had received from the other member countries satisfactory guarantees that they would respect the financial obligations resulting from their participation in the past activities of Eurochemic, 50 I n the end, in the case of Eurochemic 51 as well as in that of the Milan Institute 5 2 the members assumed full liability for all the debts of the enterprise concerned. They thus assumed a liability going beyond that of a shareholder in a company. From a formalistic point of view 45

Under Article 6 of the Convention of 6 October 1971, Austrian Bundesgesetzblatt 1975/516 the United Kingdom was held liable for its proportional share in the deficit of the Institute. The Institute was wound-up on 2 June 1980, Austrian Bundesgesetzblatt 1980/312. 46

[1988] 3 A l l E.R. 257, 306. [1905] 2 King's Bench 391, 408. 48 Bundesanzeiger N r . 70/59. 49 Udo von Busekist , Der Werdegang der Eurochemic — Eine Bilanz der Atomwirtschaft, Düsseldorf 1980, 264. 47

50 Ministere des Affaires Economiques (ed.), Elements pour une nouvelle politique énergétique, Bruxelles 1979, 301. 51 von Busekist (note 49), 261. 52 According to oral information received by the author from the German Federal Ministry of Economy.

4*

52

Ignaz Seidl-Hohenveldern

the value of the above cases as a precedent for the I T C case may be contested as the member States made no direct payments to the creditors of the enterprises. They preferred to provide sufficient additional funds to the enterprise concerned, so that the latter could satisfy the claims of the creditors. However, the fact remains that in the end, the members, including the United Kingdom, assumed full financial responsibility for the enterprises concerned, even in spite of the apparent limitation of their responsibility resulting from the structures of the Eurochemic Company and from the explicit establishment of a joint liability of the members of the Milan Institute. 5 3 The International T i n Agreement does not contain any comparable limitation. These facts reinforce the case for the concurrent liability of the members for the debts of the I T C . There remains the problem as to whether the members are jointly and severally liable for the debts of the I T C or whether each member is responsible merely in accordance w i t h the amount by which it is assessed for the contributions to the organization's budget. Schermers appears to favour such joint liability 5 4 as we did when we approached this subject for the first time. We were prompted by the aim to encroach upon State sovereignty only as much as is indispensable.55 However, Baxter in his comments on our draft for the Institut de Droit International drew our attention to the fact that the several international banks when granting a loan to a joint inter-State enterprise always require that its members declare themselves jointly and severally liable for such loan. This argument as well as arguments similar to those advanced by Judge Nourse have led us to accept the view that the members of such an enterprise or of an international organization have jointly and severally a concurrent responsibility for its debts. 56 The I T C case raises also problems concerning the hitherto dominant doctrine on the immunity of international organization — even apart from the fact that, here for the first time, 5 7 a domestic court had to deal with a claim to immunity on behalf of the EEC and rightly rejected this claim by referring to Article 178 of the EEC Treaty and to Article 28 of the Merger Treaty. 5 8 The I T C , by inserting arbitration clauses in its contracts governed by English law, waived its immunity. However, many of the I T C contracts did not contain such a clause. In these instances the I T C relied on its immunity. By invoking the concurrent liability of the member States in 53

Article 6 and Article 15 para. 2 of the Convention. Schermers (note22), 780 § 1395, but see Nourse L.J. [1988] 3 A l l E.R. 257, 333, 334. 55 Ignaz Seidl-Hohenveldern , Le droit applicable aux entreprises internationales communes étatiques ou paraétatiques, Annuaire de l'Institut de D r o i t International 60/1 (1983), 1-43 (33). 54

56 Ignaz Seidl-Hohenveldern , Corporations in and under International Law, Cambridge 1987, 121. T o the same effect see Hoffmann (note 42), 586. But see Matthias Herdegen (note 19). 57 58

Kerr L. J. [1988] 3 A l l E.R. 257, 318. Loc. cit., 318-320, and see Gibson L. J., loc. cit., 359.

The International

Tin Council Case in the English Court of Appeals

53

these cases the plaintiff tried to benefit from a discrepancy between the immunity to be granted, on the one hand, to international organizations, and, on the other hand, to States. When States purchase tin, they will not enjoy immunity. Regardless of the motives for that purchase, which may well be due to jure imperii purposes like establishing a strategic emergency stockpile, such purchase will be considered an act jure gestionis . What counts is the nature of the act, not its purpose. The right of international organizations to immunity is usually laid down in specific agreements. In most countries, these agreements are interpreted as granting to international organization immunity also in respect to their acta jure gestionis . This attitude is explained by the fact that any jure gestionis activity of an organization will have to be necessary to enable the organization to achieve its purposes and to exercise its functions. 59 As the organization enjoys legal capacity only within these limits any act outside these limits would be ultra vires . Moreover, in most organizations, jure gestionis acts will be restricted to acts required by the internal administrative functioning of the organization, like renting premises or printing publications. The I T C , however, exercises its jure imperii functions mainly by the purchase of tin, a function which by itself is an act jure gestionis . Some other organizations have waived their absolute immunity for certain of their acts. The World Bank 6 0 did this for the obvious reason to ensure its creditworthiness, E U R O C O N T R O L 6 1 thereby wanted to increase the confidence of usagers in the reliability of its services. I t would have made economic sense if the I T C would have followed this example or, at least, would have observed fully its commitment to waive its immunity by including an arbitration clause in all its contracts. Should more and more international organizations continue to extend their jure gestionis activities we wonder how much longer the preferential treatment in respect of the immunity accorded to international organizations as compared to States, will be upheld. Italy, which in the 19th century had been the forerunner in granting States immunity only for their acta jure imperii , has begun to act in the same way in respect to international organizations. 62 59

Seidl-Hohenveldern (note 2), 115, 166, but see Herdegen (note 19), 545. Article V I I , section 3 of its Articles of Agreement. 61 Articles 26 and 27 of the E U R O C O N T R O L Convention of 13 December 1960, German Bundesgesetzblatt 1962/11, 2273, and Ignaz Seidl-Hohenveldern , Die Immunität Internationaler Organisationen in Dienstrechtsstreitfällen, Berlin 1981, 36. 62 Antonio Cassese, L'immunité de jurisdiction civile des organisations internationales dans la jurisprudence italienne, in: A F D I 30 (1984), 556-566 (558, 559), signals cases where Italian courts based their decisions alternatively on the distinction between acta jura gestionis: Acta jure imperii and as to whether the act concerned is or is not indispensable for the fulfilment of the purposes of the organization. I n the cases before the Italian courts both criteria led to the same result. Cassese (p. 556) prefers the second of these criteria. However, in case the main purpose of the organization cannot be fulfilled but by acta jure gestionis, this criterion should be preferred. I t would protect the interests of the persons dealing w i t h the 60

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Ignaz Seidl-Hohenveldern

The I T C case, at present, is pending before the House of Lords. We cannot deal w i t h all the aspects of this fascinating case. Let us resume by stating that we believe in the existence of a concurrent, joint and several liability of the members for the debts of the I T C and let us express the hope that the members will abandon their attitude of denying any remedy whatsoever to the plaintiffs, an attitude quite properly castigated by the Court of Appeals. 63 There, as in the literature hitherto published, we have failed to find any allusion to facts which possibly might excuse such otherwise disreputable and irresponsible attitude.

organization and it would not deprive the members e. g. of I T C of any right which they would remain entitled to, had they respected the provisions of the Headquarters Agreement concerning the insertion of arbitration clauses. 63

MacLaine Watson v. ITC (No. 2) [1988] 3 All E.R. 257, 384.

The "Gold Dollar" as a Measure of Capital Valuation after Termination of the Par Value System: The Case of I B R D Capital By Ibrahim F. I. Shihata

I. Introduction According to the Articles of Agreement of the International Bank for Reconstruction and Development (the Bank or IBRD), the Bank's capital is denominated in terms of "United States dollars of the weight and fineness in effect on 1 July 1944". 1 This unit of value is distinguished from several units of payment mentioned in the Articles. The unit of payment of members' subscriptions depends on the nature of the amount payable: it is "gold or United States dollars" for the 2 % portion of the price of each share to be initially paid; 2 "the currency of the member" for the 18 % portion subject to call as needed for the Bank's operations; 3 and "gold, United States dollars or the currency required to discharge the obligations of the Bank" for such payments under the remaining 80 % as may be needed to meet obligations of the Bank towards its creditors or towards the beneficiaries of its guarantees. 4 The unit of payment by the Bank for the repurchased shares of a country which ceases to be a member is the currency of the country receiving payment or, at the option of the Bank, gold. 5 A n d the unit of payment of dividends to the Bank's members is the member's currency or, if this is not available, a currency acceptable to the member concerned. 6 The term "United States dollars" is mentioned no less than five times in the Articles. 7 In the context of its function as 1

Articles of Agreement of the International Bank for Reconstruction and Development (hereinafter "Articles of Agreement"), 27 December 1945, 2 United Nations Treaty Series (U.N.T.S.), Series 134, Article I I , Section 2 (a). 2 Articles of Agreement, Article I I , Section 7 (i) and Section 8 (a). 3 Loc. cit., Article I I , Section 7 (i). 4 Loc. cit., Article I I , Section 7 (ii). While the distinction between the three components of capital subscriptions has been maintained in practice for each increase in the Bank's capital, lower percentages were adopted for the portions paid or payable for the Bank's operations in US dollars and in the members' currencies. 5

Loc. cit., Article V I , Section 4 (c) (iii). Loc. cit., Article V , Section 14 (b). 7 Loc. cit., Article I I , Sections 2 (a); 7; 7 (i); 7 (ii); 8 (a), see also Schedule A of the Articles which lists subscriptions in "millions of dollars". 6

56

Ibrahim F. I. Shihata

the numeraire of the Bank's capital, it is defined in terms of a certain weight and fineness (of gold) at a given date. 8 Although "gold" is mentioned also in the Articles, both as an alternative unit of payment 9 and separately, 10 it is not described as such to be the common denominator or standard of value. 11 The common denominator of the value of capital subscriptions under the Bank's Articles is thus a unit described simply as "the United States dollar of the weight and fineness in effect on July 1,1944". The gold content of this 1944 dollar (0.888671 gram of fine gold) was formally maintained for the U.S. legal tender from January 1934 until May 1972 when the United States established a new par value for the U.S. dollar, 1 2 whose convertibility into gold for the benefit of official holders was terminated earlier in August 1971. The I M F introduced the Special Drawing Right (SDR) in 1969 with the value of a quantity of gold equal to the gold content of the 1944 dollar. I t decided, as of 1 July 1974, subject to review at the end of two years, to determine the value of the SDR in terms of currencies by reference to a "basket" of 16 currencies yielding then the same dollar value of the SDR as under the earlier gold-based valuation method (/. e., 1.20635 U.S. dollar). The I M F used the SDR under this method of valuation for the purpose of computation of quotas, operations in currencies and maintenance of value under the provisions of its Articles. By virtue of the "Second Amendment" of the I M F Articles, which was approved on 30 April 1976, and became effective on 1 April 1978, the SDR formally became the sole measure of value under the I M F Articles. 13 8 The first draft of Article I I , Section 2 (a) did not specify the date at which the gold equivalent of the dollar was to be determined. The date of 1 July 1944 was inserted by the drafting committee. See U.S. Department of State , Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods Conference, 1-22 July 1944, Washington 1948, 550, 715, 838, 1617 (hereinafter "Proceedings"). 9 Articles of Agreement, Article I I , Section 7; 7 (i); 7 (ii); 8; Article I V , Section 4 (b) and Article V I , Section 4 (c) (iii). See also Article I I , Section 9 (a). 10 Loc. cit., Article V , Section 11 (b) (holding of assets by the Bank). 11 Compare Article I V , Section 1 (a) of the Article of Agreement of the International Monetary Fund ( I M F or the Fund), 27 December 1945, 2 U . N . T . S . 134, before the Second Amendment of 30 A p r i l 1976 where "the par value of the currency of each member" was to be expressed " i n terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944". 12

Par Value Modification Act, Public Law (Pub. L.) 92-268, 2, 86 Statute (Stat.) 116 (1972). A second devaluation took place in October 1973, Pub. L. N o . 93-110,1,87 Stat. 352 (1973) (repealed w i t h abolition of the official price of gold in 1978). 13 See Article of Agreement, new Article I I I , Section 1 and Article V , Sections 10 and 11 of the I M F Articles (reprinted in I M F , Article of Agreement of the International Monetary Fund, Washington, D.C. 1978). The Articles provide, however, that a par value system may be reintroduced by an 85 °Ic majority of total voting power. (New Article I V , Section 4.) Effective 1 January 1981, the I M F changed the composition of the SDR basket by limiting it t o five currencies, w i t h a total value equal to the value of the pre-existing basket at the time of the changeover. See I M F Executive Board Decision N o . 6631-(80/145) G/S, 17 September 1980, reprinted in: I M F , Selected Decisions of the International Monetary Fund and Selected Documents, Thirteenth Issue, Washington, D.C. 1987, 324, 325.

The " Gold Dollar

as a Measure of Capital Valuation

Had an amendment of the Bank's Articles been considered simultaneously with that of the IMF's, there can be little doubt that the SDR would have been the natural choice for the unit of account and the measure of value of the Bank's capital. The SDR was chosen, in the context of the I M F Articles, by representatives of the same governments which constitute the Bank's membership, as the successor of the same unit (the 1944 gold dollar), where it also played a similar role (of common denominator and unit of value). The SDR was also defined, when first introduced in 1969, by reference to the same quantity and quality of gold as that of the 1944 dollar. Even when it was later defined in 1974 in terms of a basket of currencies, this basket was composed and calculated so as to produce an initial value of the SDR translated into dollars equal to the gold value of the 1944 dollar (on the basis of the 1973 par value of the U.S. dollar). I n addition to its uniformity as a general standard of international value , and its relative continuity of value and relative stability in terms of national currencies , the SDR is international in its composition 1 4 and more so in the decision-making process of its valuation. 15 As a result, it is less affected than various other possible units of account by fluctuations in the value of a single currency and is not subject to the control of a single country. The concern that the adoption of the SDR as a common standard of value for the Bank's capital would entail, in terms of the currency of each member, including the United States, an open-ended and uncertain commitment, equally applied to the original "gold dollar", where devaluation (in terms of gold) of any national currency, including the U.S. dollar, created maintenance of value obligations on the devaluing member, as happened with the U.S. in the early 'Seventies. Presumably, such a concern would not have had the same weight if an amendment of the Bank's Articles had been considered, especially if that would have taken place at the same time as the amendment of the IMF's Articles. N o amendment of the relevant provisions of the Bank's Articles has been formally proposed, however. Instead, the Bank's Executive Directors were repeatedly asked to exercise their statutory power of interpretation under Article I X . 1 6 The President of the Bank first recommended to them in June 1976 that "the SDR 14 In the sense that it consists of a basket of currencies, five at present, chosen according t o objective criteria related to their utilization: the value of exports of the countries issuing them and the value of the balances of such currencies held by the monetary authorities of other countries. See I M F Executive Board Decision N o . 6631-(80/145) G/S (note 13). 15 I n the sense that the SDR valuation requires a decision of the I M F Board of Governors, or, by delegation, its Executive Board, adopted by a 70 °Jo majority of the total voting power, and, if the new valuation is based on a change in the established principle or on a fundamental change in the application of such principle, by an 85 % majority of the total voting power. I M F Articles of Agreement (note 13), Article X V , Section 2. 16 Memorandum t o the Executive Directors: Valuation of the Bank's Capital, Sec M 76423, dated 8 June 1976; Memorandum to the Executive Directors: Valuation of the Bank's Capital (hereinafter "Executive Memorandum"), SecM 78-251, dated 29 March 1978; Discussion Draft Memorandum: Possible Courses of Action (hereinafter "Discussion Draft Memorandum"), R 81-57, dated 20 March 1981 (limited circulation).

58

Ibrahim F. I. Shihata

be substituted for the 1944 dollar as the standard of value for the Bank's capital and for purposes of maintenance of value". 17 The memorandum of the General Counsel on the basis of which this recommendation was made and which was simultaneously distributed to the Executive Directors, explained that "the only other possible meaning" of the term (the 1944 gold dollar) would be the current dollar equivalent of the 1944 dollar calculated by reference to the last established I M F par value for the U.S. dollar (i. e., $ 1.20635). That latter meaning was criticized, however, in the memorandum as discriminatory and likely to result in constant changes in the valuation of the Bank's capital. 18 As it became clear in the discussions of Executive Directors that there was no consensus on this matter and as the need for a solution became more urgent (to enable the Bank to determine amounts of subscriptions under its "1979 General Capital Increase"), the President suggested to the Executive Directors in March 1981 that there were four "possible courses of action" in respect of this matter: 1 9 (a) use of SDR as a common standard of value for all members' subscriptions; (b) use of the "current U.S. dollar" (on the basis of one 1944 gold dollar being equal to $ 1.20635) as a common standard for all members' subscriptions; (c) granting members a choice of either the SDR or any one of the constituent currencies of the SDR to denominate their subscriptions; and (d) permitting all members to subscribe in their own national currency (i. e., without adopting any standard of value). The President's memorandum depicted the last "option", however, as leading to problems w i t h the Bank's creditors, not beneficial to the Bank and its bondholders and likely to weaken the link between votes and financial obligations over time. Furthermore, the then General Counsel voiced his opinion that no interpretation could be done in a way to contradict a basic element in the Bank's Articles such as the existence of one common standard of value. As the last mentioned two "options" could meet such a common standard only if adjustments were made at reasonable intervals between the various obligations of members in terms of one central value (e.g., the SDR), he felt that they could not be adopted through interpretation by the Executive Directors without such adjustments. 20 17

Executive Memorandum, SecM 76-423, paragraph 6 (limited circulation). Memorandum of the Vice President and General Counsel, M r . Broches , Interpretation of the Articles of Agreement, Attachment A to the President's Memorandum of 8 June 1976, paragraph 25. 19 Discussion Draft Memorandum (note 16). 18

20

M r . Golsong' s "Legal Opinion — Valuation of the Bank's Capital". Distributed to the Executive Directors under SecM 81-368, dated 1 May 1981. The past General Counsel, M r . Broches , stated also in an earlier Oral Statement before the "Joint A u d i t Committee" of the Executive Directors, that "a common standard of value is central to the Articles and the Executive Directors have no power to interpret it away. A n amendment of the Articles would therefore be inescapable" (for its exclusion). Statement by M r . A. Broches to the Joint

The " Gold Dollar ' as a Measure of Capital Valuation

59

The Bank's Board, unable to reach consensus on this matter, established on 5 July 1983, its first " A d - H o c Committee on the Valuation of Bank Capital". After discussing extensive legal and financial analyses of the issues involved, the Committee decided on 23 July 1986 to recommend to the Board a certain interpretation of the relevant provisions which was adopted by the Board on 14 October 1986. This interpretation was questioned, however, less than two years later in the context of the Board's discussion of the Bank's "1988 General Capital Increase" and a second Ad-Hoc Committee was established on 19 February 1988 to consider the issue anew. The remainder of this paper will deal with the legal aspects of the issues which had to be addressed by the first A d - H o c Committee in the light of the legal opinions submitted to it by this writer. After explaining the decision reached by the Bank's Executive Directors on these issues in 1986, the paper will attempt to outline the options available to the present Committee and the limitations related to those options. I I . Determination of the Standard of Value for the Bank's Capital — A Legal Analysis 1. Power of Interpretation of the Bank's Articles of Agreement According to the Bank's Articles of Agreement, "any question of interpretation of the provisions of [the] Agreement arising between any member and the Bank or between members of the Bank shall be submitted to the Executive Directors for their decision". 21 The decision of the Executive Directors in this respect is subject to appeal by any member of the Bank before the Board of Governors "whose decision shall be final". 2 2 Reference of questions of interpretation to the governing bodies of the institution, rather than to an international judicial tribunal, 2 3 indicates that the framers of the Articles preferred the settlement of disputes related to their provisions through a process internal to the Bank which involves its policymaking organs, rather than through a judicial process. This solution has since been generally followed in the constituent agreements of other international financial institutions. While this approach gives the Executive Directors considerable latitude in interpreting the Articles and in adapting them to the changing conditions in which the Bank operates, it does not, however, endow them with an absolute power in this respect. Their power of interpretation clearly involves a much wider discreA u d i t Committee, 28 February 1979: Valuation of the Bank's Capital, 5 (limited circulation). 21 Article of Agreement, Article I X (a). 22 Loc. cit., Article I X (b). 23 When a dispute arises, however, between the Bank and a country which has ceased t o be a member it must, if not solved otherwise, be submitted to arbitration, in order to ensure objectivity. The same applies, for practical reasons, in the settlement of disputes between the Bank and any member during the "permanent suspension" of the Bank (Article I X (c)).

60

Ibrahim F. I. Shihata

tion than that of a judicial authority. I t cannot, nevertheless, be so wide as to ignore the explicit language of the interpreted text (unless such language leads in a certain situation to manifestly absurd or unreasonable results), run counter to other provisions of the Articles or undermine the purposes of the text and the overall objectives of the institution as stated in its Articles. I n other words, although the interpretation given by the Executive Directors could admittedly include such elements of ingenuity and creativity as may be required for the successful pursuit of the Bank's objectives, it should not amount in fact to an amendment of the Articles. This latter process is entrusted to the Board of Governors acting according to a certain procedure and subject to acceptance by a special majority of the Bank's members and, in the case of certain provisions, by all members. 24 Amending the Articles under the guise of interpreting them would evidently constitute an excessive exercise of the power of interpretation, a typical excès de pouvoir tantamount to an abuse of power, which cannot be condoned under the Articles. The above understanding has been duly shared by the Bank's former General Counsel. As early as 1957, the then General Counsel expressed the opinion that the Executive Directors should not be unduly restrictive in interpreting the Articles, and emphasized that "limitations on the Bank's freedom of action should not be read into the Articles except where required by express provision or by necessary implication". 2 5 Another former General Counsel also voiced the opinion that in exercising their broad power of interpretation, the Executive Directors could not interpret the Articles in a manner which would go beyond the limits of Article I, which lays down the general purposes of the Bank, or transform the rights and obligations of Bank members. 26 Before the issue of the interpretation of the unit value of the Bank's capital became a bone of contention, only twelve formal interpretations had been issued by the Executive Directors under Article I X , the last of which in July 1964. While they added elements which were not explicitly provided for in the provisions under interpretation, their consistency with the letter and spirit of the Articles has not been in question. Four of these formal interpretations related to the Articles' provisions which deal with valuation of capital and maintenance of value: 27 24

Articles of Agreement, Article V I I I . Opinion of M r . D. Sommers regarding "Article I V , Section 4 (a) of the Articles of Agreement" (R57-4, 8 January 1957, paragraph 10). 25

26 Opinion of M r . H. Golsong on the valuation of the capital stock of the Bank, Sec M 81-368, 1 May 1981, paragraphs 5 and 6. 27 In addition to the formal interpretations mentioned above, there are other instances where the Executive Directors "approved the Bank's practice" or "concurred w i t h the General CounsëPs advice" in respect of the relevant Articles or w i t h the President's recommendation t o follow a certain practice until the interpretation issue was resolved. This last approach was followed when the Executive Directors concurred on 29 March 1978 w i t h the President's proposal to continue the practice of accepting subscriptions and payments on the basis that the 1944 gold dollar was equal to 1.20635 current U.S. dollars.

The " Gold Dollar

(i)

as a Measure of Capital Valuation

61

O n 20 June 1946, the Executive Directors interpreted Article I V , Section 2 (a), which provides that "Currencies paid into the Bank under Article I I , Section 7 (i) shall be loaned only with the approval in each case of the member whose currency is involved... to mean that the U.S. would not have control of the U.S. dollars paid to the Bank in lieu of gold (on account of the 2 % portion of the capital) when payment of that portion was made by a member in U.S. dollars. 28

(ii) O n 28 April 1948, the Executive Directors interpreted Article I I , Section 9 (a), on maintenance of value in case of devaluation or significant depreciation of the portion of shares paid in a member's currency and "held by the Bank", to give the Bank the discretion to postpone the determination that a currency had been significantly depreciated while it was out on loan, without prejudice to the Bank's right to obtain payment on account of maintenance of value at a later date, i. e., after the amount involved had been repaid by a Bank borrower. 29 (iii) O n 23 May 1950, the Executive Directors interpreted the same Article I I , Section 9 to apply to the amounts of capital subscription paid in local currency (the 18 % currency) which had been used by the Bank in lending operations, if the currency involved was devalued, had significantly depreciated or had been revalued before repayment of such amounts, provided that such devaluation, depreciation, or revaluation continued in effect on the date repayment was made. 30 (iv) O n 14 June 1951, the Executive Directors adopted a formal interpretation of Article I I , Section 9 and Article I V , Section 2 (b), to the effect that the proceeds of the sale of a portion of a loan made out of the 18 % currency were to be treated as a repayment of the principal of the loan for the purposes of Article I V , Section 2 (b) (/. e., would be subject to control by the member whose currency was involved irrespective of whether the Bank could exchange it for another currency or relend it) and Article I I , Section 9 (i. e., would be subject to maintenance of value). 31 The above interpretations and the authority provided for in Article I X under which they were issued, are obviously related to the meaning of the language used in certain Articles. Such questions of "interpretation of the provisions", which is the 28

Report of Committee on Interpretations Approved by the Executive Directors on 20 June 1946, in: I B R D , Basic Documents, A-I-27. 29 Decision of the Executive Directors , dated 28 April 1948, id., A-I-33. 30 Decision of the Executive Directors , dated 23 May 1950, id., A-I-36. 31 Resolution of Executive Directors N o . 192 adopted 14 June 1951, loc. cit. Pursuant to this Resolution, "proceeds of the sale" would not, for these purposes, include any amount received by the Bank on account of accrued interest, a sales price in excess of par or any proceeds received by the Bank otherwise than in the currency in which the obligations were denominated.

62

Ibrahim F. I. Shihata

subject matter of Article I X , should not be confused w i t h the different, though closely related, question of the implied powers of the Executive Directors to undertake activities or develop solutions for matters not provided for under the Articles which are nevertheless deemed "essential", "appropriate", or "incidental" to achieving the institution's objectives. These implied powers are vested in the Bank under general international law rules applicable to inter-governmental organizations, 3 2 and are reflected in the Bank's Articles (Article V , Section 2 (f)), which authorize it to adopt rules and regulations "as may be necessary or appropriate to conduct the business of the Bank". The Bank would exercise such powers through the decisions of the Executive Directors acting on the basis of the delegation they have received from the Board of Governors under Article V , Section 2 (b) of the Articles of Agreement and Sections 14 and 15 of the By-Laws. A n Agreement establishing an international organization, much like the text of a domestic statute, cannot possibly cover every issue which may arise and require a solution. If, as a result, a legal vacuum existed, considerations of necessity and efficiency require that decision-makers be authorized to develop a solution that would be consistent w i t h the purposes of the agreement and the general logic of its provisions. This "semi-legislative" power, often exercised by courts in similar situations of "lacuna " or legal vacuum, is common practice among international organizations including the Bank. 33 The exercise of this power is not limited to cases where the text is silent on the issue at hand. I t also extends to the cases where an existing text becomes devoid of any meaning and therefore incapable of literal application, due to developments which were not anticipated at the time of its drafting. Relevant precedents show, however, that the solution adopted by the organization in such cases had been conceived as an interim arrangement or a provisional solution to be adopted until the defunct text is properly amended. 32 This principle has been well recognized in the advisory opinions of the Permanent Court of International Justice (see, e. g., Competence of the International Labour Organization to Regulate, Incidentally, the Personal W o r k of the Employer, 1926 Permanent Court of International Justice (P.C.I.J.), ser. B, no. 13 (Advisory Opinion of 23 July)) and of the International Court of Justice (I.C.J.) (see Reparations for Injuries Suffered in the Service of the United Nations, 1949 International Court of Justice (I.C.J.) 174 (Advisory Opinion of 11 April); Effect of Awards of Compensation Made by the U . N . Administrative Tribunal, 1954 I.C.J. 47 (Advisory Opinion of 13 July); Certain Expenses of the United Nations, 1962 I.C.J. 151 (Advisory Opinion of 20 July)). 33 As early as September 1946, the then General Counsel, M r . M chain, advised the "Committee on Interpretation" of the Executive Directors that the Executive Directors had an implied power to take decisions which were not prohibited under the Articles and would "assist the Bank in the accomplishment of its purposes". The same conclusion was repeatedly reached by successive General Counsel and was acted upon by the Executive Directors on several occasions. The Articles of Agreement of the International Development Association, 29 January 1960, 439 U . N . T . S . 249, codified this principle in Article V , Section 5 (vi) thereof. See also Articles of Agreement of the International Finance Corporation, 25 May 1955, 264 U . N . T . S . 117 (Article I I I , Section 6 (v), and the Convention Establishing the Multilateral Investment Guarantee Agency, 11 October 1985, in: I C S I D Review — Foreign Investment Law Journal 1 (1986), 147, 154, Article 2 (c).

The " Gold Dollar

as a Measure of Capital Valuation

63

2. Practice of Other Agencies The authority to fill in a legal vacuum, as distinguished from the interpretation, in a strict sense, of an existing but obscure text, has been used by a number of international organizations in devising alternative formulae to the gold monetary units provided for in their constituent agreement after such units ceased to exist. As has been mentioned earlier, in the period between 1 July 1974 and 1 A p r i l 1978, the I M F temporarily applied a basket valuation of the SDR as the Fund's unit of account, necessarily implying a legal fiction of a gold value for the SDR in that period. As the former General Counsel and Director of the IMF's Legal Department put it, "the justification for this fiction was that the efficacy of the Articles demanded a solution in which no currency could be said to have a gold content". 3 4 The European Investment Bank (EIB), whose capital was initially expressed in terms of units of account having a value of a quantity of fine gold identical to the gold content of the 1944 dollar, first adopted, in March 1975, by a decision of its Board of Governors, an interim measure whereby the currencies of its members would be converted to the EIB's unit of account according to rates used for converting member's currencies into the EEC's European unit of account (itself defined in terms of a basket of member's currencies). I n July 1975, the EIB Statute was amended, by virtue of a new treaty, to enable its Board of Governors to introduce a new definition of EIB's unit of account and to modify the system for converting member's currencies into it. After this amendment became effective in 1977, the EIB's Board of Governors decided to introduce the definition of the provisionally-adopted European unit of account as the new statutory definition of the EIB's unit of account. The African Development Bank (AfDB) also attempted for a while to follow this two-stage approach. Its capital stock is also expressed in units of account defined as a certain quantity of fine gold (the same gold content of the 1944 dollar). I n February 1978, AfDB's Board of Directors resolved that, for accounting purposes, the weight of gold of the unit of account should be deemed to be equivalent in value to one SDR. I n May 1978, the AfDB's Board of Governors decided to recommend an amendment to the agreement to adopt the SDR as the unit of account. This recommendation was not implemented, however, and the AfDB's Board of Directors followed the approach adopted for the IBRD's capital valuation before October 1986. The Bank for International Settlements (BIS) has a franc of a certain gold content as its unit of account. The last par value of the U.S. dollar was first adopted, in 1973, to express the BIS's assets and liabilities in the balance sheet in terms of U.S. dollars. I n June 1979, BIS decided, w i t h effect from the June 1979 Statement of Account, to adopt, as a new basis of translating its unit of account into dollars, the average market price of gold during BIS's financial year 1978/79 ($ 208 per fine ounce). This change was confined to presentation purposes. 34 Joseph Gold , The Fund Agreement in the Courts, vol. 2, annex B, I M F , Washington, D.C. 1982, 439, 454.

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Substantive rights and obligations would only be affected by the adoption of a new unit of account, presumably by an amendment of the statute, which does not seem to be contemplated at present. I n a different but also relevant example, the Plenipotentiary Conference of the International Telecommunications Union ( I T U ) decided at its 1982 meeting in Nairobi, to adopt the "monetary unit of the I M F " as an alternative unit to the gold provided for in the I T U Convention. As both units were to be defined in the I T U Administrative Regulations, which could only be revised by an administrative conference to be held in 1988, the Nairobi Conference adopted a certain parity rate between the SDR and the gold franc as an "interim method" until the competent conference decided the issue. 35 I t is worth noting that "no Specialized Agency of the United Nations has adopted for its purposes a new unit of account other than the S D R " . 3 6 However, the SDR has been adopted by such agencies either in the initial text of the Articles of new organizations (e. g., the International Fund for Agricultural Development ( I F A D ) , 3 7 the Common Fund for Commodities (indirect reference), 38 through an amendment (e. g., the I M F and I T U ) or as an interim arrangement (e. g., the I M F in the period 1 July 1974 to 1 A p r i l 1978 and, in respect of its Regulations, in the case of I T U ) . The Bank itself has, in fact, adopted for a long period interim arrangements whereby subscriptions would continue to be accepted on the basis of one 1944 gold dollar equalling 1.20635 current U.S. dollars, the application of maintenance of value provisions would, in fact, be suspended and the capital would be expressed in the Financial Statements on the basis of one 1944 dollar equalling one SDR, all subject to adjustment when the standard of value issue was resolved. 39 I t is interesting to note, however, that these arrangements seem to have been adopted 35 See texts in I M F Survey 13 December 1982, 404. The Council of the Commonwealth Telecommunications Organization also decided in 1976 to adopt the SDR as the unit of account for its financial arrangements in 1979 and 1984. Also, the Universal Postal Union's Congress, while failing to agree on clearly substituting the SDR for the Germinal (gold) franc mentioned in its original constitution, reached the conclusion, with effect from January 1986, that "amounts expressed in gold francs and gold centimes in the Acts of the U P U shall henceforth be supplemented by their exchange value in SDR calculated on the basis of the linking coefficient of 1 SDR = 3,061 g fr." which is based on the SDR definition in terms of gold before the Second Amendment of the Fund's Articles. See Joseph Gold , SDRs, Currencies and gold: Seventh Survey of New Legal Developments, I M F Pamphlet Series, No. 44, Washinton, D.C. 1987, 12, 15-18. 36 Joseph Gold , SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, I M F Pamphlet Series, No. 36, Washington, D.C. 1981, 88. 37 Agreement Establishing the International Fund for Agricultural Development, 13 June 1976, in: International Legal Materials (I.L.M.) 15 (1976), 922-949, Article 5 (2) (a) (928). 38 United Nations Conference on Trade Development: Agreement Establishing the Common Fund for Commodities, 27 June 1980, in: I.L.M. 19 (1980), 896-937, Article 8 (i) (902) and Schedule F (937). 39 R 81-127, 14 March 1981; M 81-23, I D A / M 81-23, 27 May 1981 (limited circulation).

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pending agreement by the Executive Directors on the interpretation of Article I I , Section 2 (a). A similar attitude has been adopted by the Inter-American Development Bank (IDB). Its capital stock is expressed in terms of 1959 gold dollars (of the same value as the 1944 dollars). I D B uses the 1959 dollar value at 1.20635 current dollars as the basis of valuation and subscription as well as for the purposes of its financial statements, as an interim arrangement. The Asian Development Bank (ADB), whose unit of account is the 1966 dollar (equal to the 1944 dollar), also as an interim solution; it accepts payments of amounts due on its shares, at the option of the subscribing member, on the basis of either 10,000 SDRs per share or 12,06350 current dollars per share (or $ 10,7234 for subscriptions under the latest capital increase based on the US$/SDR exchange rate of 30 September 1982). However, A D B uses the SDR as the unit of account of its financial statements. 3. Judicial Practice I t is also relevant to see how domestic courts in different jurisdictions interpreted in recent years the gold units of account used in treaties ratified by their States and incorporated in their domestic legislation. Available judicial decisions are mainly related to the limitation of liability of air carriers under the 1929 Warsaw Convention, 4 0 of road carriers of goods under the 1956 ( C M R ) Convention 4 1 and of owners of seagoing vessels under the 1957 Brussels Convention. 4 2 Under these conventions liability is limited to a certain amount of either "Poincaré francs" or "Germinal francs", both of which are defined in terms of a quantity of gold. 4 3 The importance of these cases is that they represent attempts by courts of law to find a meaning for a unit of account defined in terms of a gold content the valuation of which no longer existed in law, much as is the case of the 1944 gold dollar defined in the Bank's Articles. As these judicial interpretations were made in isolation of the considerations related to the Bank's Articles, policies and requirements, it is not suggested that they be read as examples to be followed in interpreting the gold dollar mentioned in the Bank's Articles. This is all the more so as some courts were influenced in this exercise by, or had to comply with, the definition given by a department of government on how a gold franc was to be translated into the domestic currency. Domestic legal systems do differ in the extent of the power 40

Convention for the Unification of Certain Rules Relating to International Carriage by Air, signed at Warsaw on 12 October 1929,137 League of Nations Treaty Series (L.N.T.S.)

11.

41

Convention on the Contract for the International Carriage of Goods by Road (CMR), signed at Geneva on 19 May 1956, 399 U.N.T.S. 189. 42 Convention Relating to the Limitation of Liability of Owners of Sea-going Ships, signed at Brussels on 10 October 1957, reprinted in: Nagendra Singh , International Conventions of Merchant Shipping, London 1973, 1354. 43 "The Poincaré franc" equaled 65.5 milligrams, nine-tenths fine gold. The "Germinal franc" equaled 10/31 gram, nine tenths fine gold. 5 GYIL 32

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which courts assert for themselves or are allowed to exercise in the interpretation of treaties. They also differ in respect of the extent of the courts' power to devise new rules in order to fill gaps in applicable legislation. I t is interesting, therefore, to note that no single interpretation was found by all courts to be the "correct" legal solution to this complex problem. M y reading of the several available precedents suggests that the solution often differed depending on whether the court considered the issue as a strict question of legal interpretation of the existing text (which seems to have been the path followed by most lower courts) or addressed it as a question of a lacuna resulting from the termination of the monetary role of gold and requiring a new solution to be developed by the court itself pending a legislative solution (as some higher courts did). 4 4 Several cases brought before lower courts in Sweden, Italy, Canada, USA, the Netherlands, France, India and Greece after the termination of the gold-based par value of national currencies were decided on the basis of the free market price of gold. This interpretation represented an attempt to read the ordinary meaning of the text by ascertaining the actual price of the gold represented by the gold franc. I t was also justified in certain decisions by the need to protect individual claimants against inflation, an argument which apparently confused the role of the gold franc as a common denominator maintaining the comparative value of the currencies of the parties to the convention against a stable common standard with a different role in the maintenance of the purchasing power of the respective currencies. In spite of the excessive results of this interpretation, its closeness to the language of the text seems to have caused some courts of appeal to uphold it, as evidenced by judgments in Greece, Argentina, Canada, India and Italy. I t was reversed in one case, however, by the Supreme Court of the Netherlands which, in 1972, applied instead the "most recent par value " of the national currency. Some lower U.S. courts reached a similar conclusion by applying the "last official U.S. price of gold " to calculate limits of liability. A French commercial court also adopted the most recent par value of the French franc but with the adjustment of that value in accordance with the latest domestic retail price index, again for the purpose of maintaining the purchasing power of the unit of account. German courts rejected from the beginning the use of the market price of gold on the basis that it was subject to severe and speculative pressure and, therefore, incapable of promoting the objectives of the provisions referring to par values. They applied instead the "central rate" of the national currency when such a rate existed and was recognized by the I M F . The same conclusion was reached by the Supreme Court of the Netherlands in 1979, citing a gap in the law which had to be filled after gold ceased to play the monetary function envisaged in the text. T w o French courts of appeal, noting that the gold franc was valued according to an official parity that no longer existed, found that the only solution was to recognize that the current franc , though inconvertible to 44 Compare a more detailed analysis of precedents involving the application of gold units of account before domestic courts in Gold (note 34), vol. 2, 439-455 and vol. 3,1986,18-36.

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gold, was the successor of the Poincaré (gold) franc, a solution which was also adopted in one case by a U.S. District Court. The SDR was found to be the appropriate substitute (on the basis of one SDR equalling 15 Poincaré francs) by lower courts in Germany and Italy mainly on the basis of the development of the international monetary system and the adoption of the SDR by the I M F . The Supreme Court of the Netherlands gave, in 1981, an elaborate justification for adopting the SDR as the successor unit of account in the 1957 Brussels Convention and the domestic legislation incorporating it. Although such a solution was being adopted in draft legislation and in a protocol amending the Convention, which was not in effect at the time of the judgment, the court refused to characterize it as "anticipatory interpretation" of the text. I t spoke, instead, of a "legislative gap" resulting from the fact that the franc, expressed in gold, was no longer capable of serving as a generally accepted unit of account for determining internationally uniform limits of liability. Faced w i t h this lacuna , at a time when the central rate adopted by the court in a previous case had also ceased to exist, it had to look for "a point of departure consistent w i t h the treaty objective" as it could not simply abstain from giving a conversion standard. I t thus reached under what I have referred to earlier as a "semi-legislative" process, the conclusion of "joining the choice made by the Member States of the I M F for a unit of account which is suited to be used as such in international payments, since gold has ceased to be a monetary standard", i. e., the SDR. 4 5 A l l the above "solutions" were examined by a United States Court of Appeals which concluded that none of them constituted a proper interpretation of the gold unit of account referred to in the Warsaw Convention. 4 6 The "free market price of gold" was found by the court to be "simply the daily fluctuating price of a commodity, affected by conditions relating to supply and non-monetary uses affecting demand." The "current French franc" was, on the other hand, specifically rejected by the framers of the treaty. " T o enforce it would amount to a deliberate departure from the expressed wishes of the framers to avoid the use of a single national currency subject to unilateral action". The "last official price of gold" had, in fact, been repealed by the Par Value Modification A c t of 1978 and was no longer recognized by the U.S. As for the " S D R " , the court continued, the "[Warsaw] Convention itself contains not the slightest authority for its use"; the Protocol amending the Convention and naming the SDR as the successor unit of account had not been ratified. I n the absence of such legislative sanction the court had no authority " t o adopt a unit of conversion variable at the whim of an international body distinct from the parties to the Convention". The court, thus, concluded its analysis by finding that substitution of a new term for the gold franc was "a political 45

Giants Shipping Corporation v. State of the Netherlands , Decision of the Supreme Court

of the Netherlands Rechtspraak van den Week, N o . 69-70 (30 May 1981), 321. 46

1982). 5*

Franklin Mint Corporation et al. v. Trans World A irlines, Inc., 690 F. 2d 303 (2nd. Cir.

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Ibrahim F. I. Shihata

question, unfit for judicial resolution", and made a "prospective" ruling to the effect that the Convention's limit of liability would not be enforceable in future in U.S. courts. 47 These conclusions were candidly explained by the court in the following words: We deal here not with ambiguities which may be clarified by reference to underlying purpose or w i t h language which inadequately mirrors the understood intentions of the drafters. For almost two generations, the [Warsaw] Convention's limits on liability have been translatable into domestic currency values by application of a clear and easily applied formula. A n essential ingredient for that formula has, as a consequence of international action followed by domestic legislation, ceased to exist. What the parties ask us to do is to select, upon the basis of our judgment as to what is best as a matter of policy, a new unit of conversion. We are without authority to do so. 48

O n 17 April 1984, the U.S. Supreme Court held in the same dispute, with one justice dissenting, that a fixed liability limit based on the last official price of gold in current U.S. dollars represents a choice not inconsistent with the Convention's purposes of setting "some limit on a carrier's liability", of setting "a stable, predictable and internationally uniform limit that would encourage the growth of a fledging industry", and of linking the Convention " t o a constant value that would keep step with the average value of cargo carried and so remain equitable for carriers and transport users alike". 4 9 The Court recognized, however, that "in the long term, effectuation of the Convention's objective of international uniformity might require periodic adjustment by the C A B [Civil Aeronautics Board] of the dollar-based limit to account both for the dollar's changing value relative to other western currencies and, if necessary, for changes in the conversion rates adopted by other Convention signatories". Describing the SDR as the "new, nonparochial, internationally recognized standard of conversion", the Court noted that the limit expressed in current dollars represented a reasonably stable figure when converted to other western currencies or when compared to a limit established by reference to the SDR. I t is also interesting to note, however, that the Court found that the dollar limit "appears to have been a reasonable interim choice for keeping the Convention's liability limit as enforced in the United States in line with limits enforced by other signatories". 50 The Court thus concluded that "the CAB's decision to 47 The Court accepted, however, the "last official price of gold" as the applicable interpretation for the purposes of events creating liability accruing before the lapse of 60 days from the issuance of the mandate in the case at hand, to avoid "injustice and harship" and to allow carriers to reformulate tariffs. Id ., 312.

48 49

Id., 311. Trans World Airlines, Inc., v. Franklin Mint Corporation et al., 104 Supreme Court

1776, 1784-86 (1984). 50 Loc. cit., 1785 (emphasis added). The Warsaw Convention was amended on 25 September 1975 to set a liability limit in terms of SDRs, but the United States had not yet ratified this amendment.

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continue using a $ 42.22 per ounce of gold conversion rate after the repeal of the Par Value Modification Act was consistent with domestic law and with the Convention itself, construed in light of its purposes, the understanding of its signatories, and its international implementation since 1929". 51 4. Interpretation of the Provisions of Article //, Section 2 (a) of the Bank's Articles of Agreements a) Implications of the Issue Although the term "United States dollars of the weight and fineness in effect on July 1, 1944" appears only in Article I I , Section 2 (a) of the I B R D Articles of Agreement which defines the Bank's "authorized capital stock", the meaning given to this term reaches beyond this issue to influence other matters of fundamental importance to the Bank's financing and operations. In particular, it has a direct bearing on the following subjects which are dealt with under eight other provisions of the Bank's Articles of Agreement: (i)

The price of shares in the Bank's capital. Article I I , Section 4 provides that shares shall be issued at par, except in "special circumstances" for shares other than those included in the minimum subscriptions of original members.

(ii) The extent of member's obligations towards the Bank. Article I I , Section 6 limits the liability of each member to the unpaid portion of the issue price of its shares. (iii) Payments of subscriptions. Article I I , Section 7 (i) defines the portion of members' subscriptions payable for use in the Bank's operations (the initial 2 % and the 18 % local currency); Article I I , Section 7 (ii) defines the method of payment under calls of the callable portion (the remaining 80%); and Article I I , Section 7 (iii) defines the extent of liability for payment under Sections 7 (i) and (ii). (iv) Maintenance of value of member's paid subscriptions. Article I I , Section 9 (a) stipulates for the maintenance of value by Bank members of their respective currencies held by the Bank in case of the reduction in the "par value" or the significant depreciation of the "foreign exchange value" of such currencies. These currencies include: (i) currencies which were originally paid to the Bank by members as part of their capital subscription under Article I I , Section 7 (i), (ii) currencies received by the Bank from borrowers or guarantors as repayments on account of principal of direct loans made with the above currencies, and (iii) amounts received to maintain the value of the currencies paid under (i) and (ii) above. Article I I , Section 9 (b) requires the maintenance of value by the Bank of the same currencies only in case of increase in the "par value" of a 51

Loc. cit., 1787.

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Ibrahim F. I. Shihata

member's currency. Although the text of this Section speaks of amounts of the currency of a member held by the Bank, it does not distinguish between the 2 % portion paid in gold or U.S. dollars and the 18 % portion paid in the member's currency. Such a distinction presents itself, however, as a matter of interpretation. (v) The Bank's lending limit. Article I I I , Section 3 limits the Bank's lending ("total amount outstanding of guarantees, participations in loans and direct loans") to an amount equal to the amount of the Bank's "unimpaired subscribed capital, reserves and surplus". If the Bank's capital is expressed in one currency such as the current U.S. dollar, while the total amount outstanding of its loans and guarantees is expressed in the several currencies loaned, continued depreciation of the capital's currency against such currencies may result in depriving the Bank of the authority to make new loans and in inadvertently exceeding its "lending l i m i t " , until its capital is increased, its liabilities are reduced or the changes in the exchange rates of the currencies involved are reversed in favour of the currency used as the unit of value of the Bank's capital. This "headroom" issue became acute in fact in late 1987 and early 1988. 52 The interpretation of the term used in Article I I I , Section 2 (a) thus represents the most important interpretation issue ever faced by the Bank. Its effects are to be ascertained in respect of the size of the Bank's capital and the value of its shares, obligations of members with respect to the "paid-in" and "callable" portions of their subscriptions, the maintenance of value of paid-in amounts, the Bank's lending limit, and the reporting in the Bank's financial statements. b) Conflicting Interpretations If the phrase "United States dollars of the weight and fineness in effect on July 1, 1944" were to be given the ordinary meaning of the words constituting it, without regard to the context and purpose of its use in the Articles, it would simply be taken as a reference to the current market price of 0.888671 grams of nine-tenths fine gold, expressed in U.S. dollars. This interpretation defeats, however, the purpose of the term if read in its context. Furthermore, it leads to date to results which are, to use the words of the Vienna Convention on the Law of Treaties, "manifestly absurd or unreasonable". 53 T o clarify the meaning of the term, it is necessary, 52 The term "headroom" emerged in Bank papers in 1988 indicating the difference between capital and reserves on the one hand and the " t o t a l amount outstanding of guarantees, participations in loans and direct loans made by the Bank" on the other. The latter phrase has been understood by the Bank's management, with the recent concurrence of the Executive Directors, to mean callable guarantees and disbursed loans which are not yet repaid. 53

Article 31 of the Vienna Convention of the Law of Treaties, 23 May 1969, United Nations Document ( U . N . Doc.), A/Conf. 39/27, provides that a treaty shall be interpreted " i n good faith in accordance w i t h the ordinary meaning to be given to the terms of the treaty

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therefore, to discard the simple ordinary meaning of the words and to look in detail into the legislative history of the text in an attempt to identify the purpose of its use in the particular context of the Bank's Articles. I t should first be recalled that at the time the Articles were drafted, the "gold clause" was null and void in private and public obligations under practically all domestic legislation, although some countries tolerated it in international contracts. I n the United States, the 5 June 1933 Joint Resolution of the U.S. Congress stated that "[e]very provision contained in or made w i t h respect to any obligation which purports to give the obligee a right to require payment in gold or a particular kind of coins or currency or in an amount of money of the United States measured thereby, is declared to be against public policy; and no such provision shall be contained in or made w i t h respect to any obligation hereafter incurred". 5 4 I n spite of this general opposition to the gold clause, which under U.S. legislation was void even in the case of contracts w i t h foreign parties, the original drafts of the Articles of both the I M F and the Bank included provisions which referred to gold. The successive drafts prepared for the agreements establishing these two institutions eventually distinguished, in different degrees of clarity, between two roles of gold in this respect: (1) its role as a common denominator of the institution's capital , against which the relative value of each member's currency would be measured, and (ii) its role as a device to maintain the value of capital subscriptions . The history of the I M F Articles is more revealing in this respect and its final provisions clearly stated this distinction by explicitly describing gold as "the common denominator" in respect of the expression of the par values of members' currencies 55 while requiring, under other provisions, the maintenance of value of the IMF's holdings of members' currencies in certain situations. I n the case of the Bank, the first internal draft Articles prepared by the U.S. Treasury staff, dated 3 December 1942, in their context and in the light of its object and purpose". Under Article 32 of the Vienna Convention, recourse may however be had to "supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion" when, inter alia , the interpretation according to Article 31 "leads to a result that is manifestly absurd or unreasonable". 54 Public Resolution No. 10,73rd Congress, H.J. Res. 192,48 Stat. 112,31 United States Code (U.S.C.), para. 5118. 55 Article I V , Section 1 (a), of the I M F Articles, before the Second Amendment (note 11). The words "as a common denominator" were suggested by Lord Keynes at the Atlantic City meeting presumably to satisfy those members who did not wish to emphasize the relationship to gold as such. The original British proposal for an International Clearing Union, dated April 1943, was based on a new international unit called "Bancor" fixed in terms of gold. Proceedings (note 8), 1552. Early unofficial U.S. proposals referred to an international unit called "Unitas" as is mentioned above. A t Bretton Woods, the Egyptian delegation proposed an international unit called V A L . Id ., 164, 165. A l l these units were meant to be international standards of value based on gold. None of them was adopted in the final text but the underlying relationship to gold was maintained by mentioning it as the common denominator and by describing the U.S. dollar in terms of gold in Article I V , Section 1 (a) of the I M F Articles. The same description was then adopted in Article II, Section 2 (a) of the IBRD Articles.

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expressed the Bank's capital "for convenience in terms of U.S. dollars" without relating them to gold. The second staff draft proposal, dated January 1943, also expressed the capital stock in U.S. dollars and, without relating these dollars to gold, spoke of an "international monetary unit to be called the Unitas", defined the value of that unit in terms of gold, and required only that the Bank's account be kept in Unitas, its loans be expressed in Unitas and its transactions be based on rates of exchange between the Unitas and members' currencies. 56 The capital and the value of each share were expressed in current U.S. dollars while a maximum of 25 % of initial payments was required to be made in gold. Subsequent draft proposals by the U.S. Treasury staff continued to express the Bank's capital in U.S. dollars without reference to the gold weight and fineness of such dollars. A revised staff draft, dated 8 September 1943, included a provision in Article I I I to the effect that "the local currency assets of the Bank are to be guaranteed against any depreciation in their value in terms of Unitas" (emphasis added), thus suggesting that paid-in local currency subscriptions were to be maintained at their original value in terms of Unitas, i. e.y gold. The 24 November 1943 "Premininary Draft Outline on a Proposal for a Bank for Reconstruction and Development of the United and Association Nations", published by the U.S. Treasury and sent to the Allied governments as "a basis of discussion and amendment" dispensed with the "Unitas" and provided that the "monetary unit of the Bank shall be the unit of value of the International Stabilization Fund" (137-1/7 grains of fine gold, that is equivalent to US$ 10). I t also provided that the Bank "shall keep its accounts in terms of this u n i t " . 5 7 The explicit reference to the 1944 gold dollar, rather than to the current U.S. dollar, as a common denominator of the capital of the proposed Bank, was introduced for the first time in a U.S. Treasury staff proposal dated 12 June 1944, where the capital stock of the Bank was expressed in terms of U.S. dollars "of the weight and fineness in effect on 1 July 1944". 58 In addition, provisions on the maintenance of value of member's currencies held by the Bank were included in this draft along w i t h the previously used provisions in respect of the maintenance of value of the Bank but no reference was made to the "Unitas" or to gold as a unit of account. The small Drafting Committee which met in Atlantic City before the inauguration of the Bretton Woods Conference witnessed objections from Euro56

See Articles I (1), I I (1 to 3 and 5) and I I I A 4 (h) of the "Draft Proposal for a Bank for Reconstruction and Development", dated January 1943. I t should be noted that the drafts quoted in the text are unpublished drafts which are not part of the formal drafting history of the Articles of Agreement. They provide, however, useful background information on how the drafting of the text of Article I I , Section 2 (a), evolved. 57 Proceedings (note 8), vol. 2, 1616 and 1622. Although this was the first draft proposal published by the U.S. Treasury, its introduction stated that it was " i n every sense still a preliminary comment representing the views of the technical staffs of the Treasury and other Departments of this [U.S.] Government". 58 The reference to the 1944 gold dollar appeared earlier in a U.S. Treasury draft of the I M F Articles, dated 22 May 1944 (Article V I I , Section 2).

The " Gold Dollar ' as a Measure of Capital Valuation

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pean countries endorsed by the U . K . delegation against the reference to gold in the Articles both as a common denominator of capital and, more specifically, for maintenance of value purposes. However, the draft of 6 July 1944, which was adopted by the "Agenda Committee" of Commission I I in Bretton Woods, maintained the reference to the gold dollar in Article I I , Section 2, defining the capital, and required in Article I V , Section 4 (d), that repayment of loans, and payment of interest and commissions be "equivalent to the gold value". 59 The subsequent discussions at the Bretton Woods Conference, where the gold standard was again vehemently opposed by several delegations, led to two important changes: the original idea of inserting a gold clause in loan agreements was given up; and exceptions were allowed, explicitly or by implication, to the maintenance of value of paid-in capital subscriptions. The gold dollar was kept, however, as the common denominator of the Bank's capital, its gold content being fixed as that of 1 July 1944. I n addition, the Drafting Committee changed the provisions requiring initial payment in gold to be in "gold or United States dollars" after a proposal requiring payment in "gold or a gold convertible currency" failed to receive adequate support. 6 0 The review of the legislative history of the Bank's Articles establishes the following important points. (i)

The U.S. dollar, defined in terms of its gold content at the time, was meant to serve as the common standard for measuring the relative value of the currencies of all members, so that the balance between members' rights and obligations be maintained at all times according to a stable criterion which, though expressed in the currency of a member, was tied to the value of a given volume of gold representing the relationship between that currency and gold at a given date.

(ii) Because of its gold content, the 1944 dollar was also to serve as the standard against which the value of the members' paid subscriptions expressed in their national currencies was to be maintained in case of changes in the par values of members' currencies which were also gold-based. Although the final text described the gold dollar on as the numéraire of the Bank's capital and tied the maintenance of value obligations to changes in the par value or the foreign exchange value of members' currencies, the 1944 dollar, serving as a proxy for gold, readily fitted as the standard against which the value of members' local subscriptions was to be maintained. I n spite of attempts to the contrary in earlier drafts, the final text of the Articles does not envisage a role for the gold dollar in the maintenance of value of the Bank's loans or of its borrowed funds. (iii) The United States dollar, in which the Bank's capital was originally expressed, though described in the end in terms of gold in the provisions defining the 59

60

See Proceedings (note 8), 193 and 200. Loc. cit., 370 and 627.

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authorized capital, was accepted without qualification as a unit of payment which substituted for gold in both the initial payment (the 2 % portion) and the callable capital (the 80 % portion). Reference was also made to the possibility of repurchasing local currency payments (the 18 % portion) for "acceptable" currencies among which the U.S. dollar would presumably by the first and to the inapplicability of the maintenance of value provisions in such a case. Although earlier proposals seemed to have been more concerned with the second of the above functions and, indeed, with the maintenance of value of the Bank's loans, the final text gave prominence to the first function. Article I I , Section 9 (c), confirmed this by allowing the Bank to waive altogether the maintenance of value provisions in Section 9 (a) and (b) "when a uniform proportionate change in the par value of the currencies of all its members is made by the International Monetary Fund", /. e., when the function of the gold dollar as a common standard of value remains intact in spite of the change in the value of each currency in terms of gold. As the relationship between the U.S. dollar and gold, defined in Article I I , Section 2 (a), no longer exists, the meaning which may be ascribed to the 1944 dollar at present should be as close a possible to the originally described unit. I t must also be able to serve the same purposes, and to reflect the concerns which prompted the choice of that original unit, as evidenced by the legislative history of the text. In this context, a literal reading of the text may result in considering the gold dollar described in it as a historical dollar which has the same value of the 1944 gold dollar at the moment preceding the abolition of the gold par value of the dollar. In other words, the 1944 dollar continues to exist in this interpretation, not as a physical reality but as a necessary legal fiction to allow the continued application of the respective provisions. As such, it would be defined in terms of current U.S. dollars. I t is a historical gold dollar pegged to the current U.S. dollar at the rate prevailing at the moment the U.S. dollar lost its gold content, that is a fixed rate of one "historical dollar" to $ 1.20635. However, the choice of the U.S. "historical dollar" concept has the disadvantage of expressing the Bank's standard of value in terms of the currency of one member which fluctuates in relation to other currencies, creating as it appreciates significant obligations for all other members t o adjust the value of their subscriptions accordingly. This could lead to discrimination in favor of the U.S. and to possibly more frequent changes in the valuation of the Bank's capital than in the case of adoption of a more stable unit. Such a disadvantage, no doubt, makes the SDR a better alternative from a policy viewpoint. I t does not, however, necessarily present the SDR as a more convincing "interpretation" of the words used in Article II, Section 2 (a). N o t only does the SDR represent a unit which was not conceived at the time the Articles were drafted and accepted by the Bank's members, but also the idea of using an index of currencies as the numéraire of the Bank's capital was dismissed from the very beginning as "a complicated device and of doubtful u t i l i t y " . 6 1 As for

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the constant changes in the valuation of capital in case it is to be valued in terms of one national currency, this can also occur, though less frequently, in the case of the SDR, and could be limited in both cases through practical measures such as introducing adjustments only at agreed intervals (i. e., according to the value on a given date, such as the date of the financial statements at the end of each fiscal year). Although the adoption of the "historical dollar" concept may thus present a defensible interpretation of the words used in the Articles, if the text is to be analyzed from a narrow legal viewpoint which attempts to read the words in the context of relevant historical developments related to the U.S. currency, it is obvious that the importance of such a reading should not be overstated. The Executive Directors were not bound to follow such a strict approach in the exercise of their interpretation powers. As explained earlier, their concern would rather be to develop the solution which best serves the objectives of the institution and its policies in the future. They were, therefore, free to adopt another interpretation if they deemed it more helpful in serving the purposes of the Articles. I t is in this sense, and in view of the attractive features of the SDR from the institutional and policy viewpoints and of the fact that it has replaced the gold dollar in the international financial system administered by the I M F , that the Executive Directors could interpret the term used in Article I I , Section 2 (a), so as to deny it a literal sense and to give it instead a meaning more consistent with present-day realities and more just in its application to all members (/. e., the SDR). I I I . Work of the First Ad-Hoc Committee on Valuation of Bank Capital and the Executive Directors' Decision of 14 October 1986 The above analysis was presented to the A d - H o c Committee in the detailed legal opinion submitted by this writer on 15 December 1983. 62 The options given in the opinion's conclusions were thus set forth as follows: (i)

The Executive Directors should first make a choice on whether, as a matter of policy, an amendment of Article I I , Section 2 (a), should be recommended. In case they wish to propose an amendment, they are free to choose the solution they deem appropriate for this purpose. The SDR will no doubt figure as the most prominent successor to the gold dollar in an amendment process.

61 See the April 1942 "Preliminary Draft" of Mr. H. D. White , Assistant to the Secretary of the U.S. Treasury Department, entitled "Proposal for the United Nations Stabilization Fund and a Bank for Reconstruction and Development of the United and Associated Nations" at 11-36-38, referring, in the context of the Fund, to the hypothetical case where the unit of account was to be defined "in terms of an index of other currencies" rather than in terms of gold. This draft represents the initial thinking of the U.S. Treasury on the subject and served as the basis of the subsequent draft proposals referred to earlier in the text above. 62 Valuation of I B R D Capital — Opinion of the Vice President and General Counsel, dated 15 December 1983 (CVBC 84-1, 13 January 1984) (limited circulation).

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Ibrahim F. I. Shihata (ii)

In case the Executive Directors wish to avoid the amendment course, in view of the practical difficulties inherent in it, they should make a choice as to whether they wish to proceed w i t h the interpretation of the text or merely w i t h adopting an arrangement to be applied until such time as the Bank members may agree on an amendment of the text. Such an arrangement, if adopted, would presumably be conceived as an interim solution, although it may, in point of fact, last for a long time to come. If this latter course of adopting an interim arrangement is preferred, it would be advisable to review the present practice of accepting subscriptions on the basis of one gold dollar being equal to 1.20635 current U.S. dollars, while valuing the Bank's capital in the Financial Statements on the basis of one gold dollar being equal to one SDR. One of these two units would better be used for both purposes as well as for the purpose of maintenance of value. In adopting either unit, the Executive Directors would, in this case be exercising their implied powers of filling in a gap in the Articles resulting from the inapplicability of the gold standard, rather than interpreting Article I I , Section 2 (a), by virtue of the power provided for in Article IX.

(iii) I n case the Executive Directors proceed to give a definitive interpretation to the term " U n i t e d States dollars of the weight and fineness in effect on July 1, 1944", they may either act as if they were a judicial authority of limited jurisdiction, or they may choose to exercise their broad powers of interpretation allowed under the Articles. I n the former case, they would be closer to the language of the text by adopting the last official price of gold in defining the content of the U.S. gold dollar (one historical gold dollar equals 1.20635 current dollars). In the latter case, they would be following the prevailing trend in the present international financial system by adopting the SDR as the substitute for the gold dollar. 63 P r o l o n g e d discussions i n the C o m m i t t e e left its members w i t h o u t a consensus o n w h i c h o p t i o n t o f o l l o w . I n spite o f several a t t e m p t s , n o technical accommodat i o n seemed adequate t o persuade the U . S . t o accept t h e S D R as the u n i t o f the Bank's capital o r t o persuade the E u r o p e a n members t h a t the c u r r e n t U . S . d o l l a r (at the rate o f $ 1.20635 t o 1) s h o u l d be t h a t u n i t . N o r was an amendment o f the relevant p r o v i s i o n s considered a practical p o s s i b i l i t y . I n t h a t c o n t e x t , a c o m p r o mise " s o l u t i o n " was suggested i n January 1985 w h i c h , w h i l e a d m i t t e d l y imperfect, represented a pragmatic a t t e m p t t o accommodate t h e concerns o f b o t h sides. 6 4 T h i s i n v o l v e d the a d o p t i o n o f a "capped S D R " as the possible u n i t o f value, i. e.y accepting the S D R as the s u b s t i t u t e f o r the g o l d d o l l a r as l o n g as its value d i d n o t exceed c u r r e n t U S $ 1.20635. U n d e r this s o l u t i o n , the u n i t o f value o f the Bank's capital w o u l d be a restricted S D R w h i c h w o u l d cease t o have the same value as the S D R p r o p e r w h e n the d o l l a r value o f t h e l a t t e r exceeded a certain p r e d e t e r m i n e d a m o u n t . A t t h a t p o i n t , t h e Bank's u n i t o f value w o u l d be frozen at t h e level o f t h a t d o l l a r ceiling u n t i l the S D R depreciated back t o i t . T h e standard o f value o f the Bank's capital w o u l d thus be the S D R b u t o n l y as l o n g as the S D R ' s dollar value 63

Loc. cit., 42-45. Valuation of the Bank's Capital — A Compromise Solution. A note from the General Counsel to the Chairman of the A d - H o c Committee dated 10 January 1985. 64

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remained at or below $ 1.20635. Beyond that point, the latter dollar amount, rather than the SDR proper, would be the Bank's standard of value. The purpose was obvious: to adopt in principle the SDR as the applicable standard, while protecting the U.S. against the open-ended commitment in its own currency which in the first place had prompted the U.S. objection and thus made it impossible to reach the desired consensus. The proposal realized, however, that a ceiling expressed in U.S. dollars might in the long run prove to be in great discrepancy with the changing value of the current SDR. I t herefore suggested complementing the adoption of the "capped S D R " with a mechanism of periodic adjustments of the dollar ceiling by the Bank's Executive Directors " t o ensure that the Bank's standard of value continued to serve its objectives". 65 Obviously, such a practical solution was proposed as a provisional arrangement to be adopted until the Articles were amended. 66 As such, it was described as a preferable alternative to the then existing arrangements where the SDR was used as the unit of in the Bank's financial statements while members were asked to effect payment of shares on subscriptions on the assumption that the 1944 dollar equalled $ 1.20635 and the Articles' maintenance of value provisions remained suspended. In spite of its practical advantages, the "capped SDR" idea proved to be elusive and was eventually abandoned in favor of another concept with which it had one element in common, the adoption of an " S D R " whose dollar value may be different from that of the current SDR! The new concept was no doubt influenced by the developments related to the unit of value adopted for the capital of the Multilateral Investment Guarantee Agency ( M I G A ) whose constituent Convention was approved by the Bank's Executive Directors on 12 September 1985. 67 Following a lengthy debate during the preparation of that Convention in which the U.S. supported the proposal that the Agency's capital be expressed in terms of the U.S. dollar while others insisted on the adoption of the SDR, this writer, as the chairman of the Bank's Executive Director's Committee of the Whole preparing the draft M I G A Convention, proposed first to express the Agency's capital in a " M I G A unit of account which would be equivalent to one SDR on July 1,1985". I n the absence of agreement on that proposal, I suggested that payment obligations of members' subscriptions (expressed in SDRs) be settled on the basis of the SDR average value in U.S. dollars over the period from the date of the establishment of 65 66

Loc. cit., 5.

The justification offered for the above-mentioned solution was that departure from the narrow literal interpretation (current U.S. dollars) for policy and institutional reasons should not result in a greater financial cost to members. Loc. cit., 3. 67 See Article 5 (a) of the Convention Establishing the Multilateral Investment Guarantee Agency (note 33), where the Agency's capital is described as "one billion Special Drawing Rights" but "[a]ll payment obligations of members w i t h respect to capital stock shall be settled on the basis of the average value of the SDR in terms of United States dollars for the period January 1, 1981 to June 30, 1985, such value being 1.082 United States dollars per SDR".

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the SDR to 30 June 1985. Agreement was finally reached on that concept but w i t h a shorter period for calculating the average (from the date of the introduction of the present composition of the SDR basket on 1 January 1981 to 30 June 1985). 68 This innovative approach was possible to adopt in a new convention. However, it alerted members of the A d - H o c Committee to new possibilities regarding the unit of value of the Bank's own capital. I n the end they agreed to recommend that the Executive Directors formally interpret the 1944 gold dollar to mean the SDR introduced by the I M F but "as the SDR was valued in terms of United States dollars immediately before the introduction of the basket method of valuing the SDR on July 1,1974". This, of course, was equivalent to the value of the 1944 gold dollar at the time of the abolition of the dollar's par value ($ 1.20635). While the above conclusion was described as an interpretation of the relevant provisions of the Bank's Articles, it was proposed for adoption until these provisions were amended. Accepting this recommendation, the Executive Directors decided on 14 October 1986 to issue a formal interpretation to which they attached detailed technical arrangements related to the implementation of maintenance of value settlements. The Executive Directors' decision, which states explicitly that it became effective on 30 June 1987 "and u n t i l such time as the relevant provisions of the Articles of Agreement are amended", read as follows: [the Executive Directors] 1. Decide the question of interpretation in accordance w i t h Article I X of the Articles of Agreement of the Bank, by reading the words "United States dollars of the weight and fineness in effect on July 1,1944" in Article I I , Section 2 (a), of the Articles of Agreement of the Bank to mean the Special Drawing Right (SDR) introduced by the Fund, as the SDR was valued in terms of United States dollars immediately before the introduction of the basket method of valuing the SDR on 1 July 1974, such value being 1.20635 United States dollars for one SDR. 2. Concurrently w i t h the above interpretation, and as an integral part of the resolution of the issue of the valuation of the Bank's capital stock, decide: (a) that the capital payment obligations under Article I I , Sections 5, 7, and 8 of the Articles of Agreement shall be determined in accordance w i t h the value of the SDR in terms of United States dollars as stated in paragraph 1, above; (b) in order to avoid negative effects on the Bank's capital in case the SDR substantially appreciates vis-à-vis the United States dollar, to review the adequacy of the Bank's capital every three years, or at any time in the intervening periods when in their judgment such a review becomes warranted, w i t h a view to recommending to the Board of Governors appropriate measures required to restore its value; (c) t o resume maintenance of value payments to the Bank on the basis of the provisions of Article I I , Section 9 of the Articles of Agreement regarding significant changes in the foreign exchange value of members' currencies measured against the standard of value of the Bank's capital established in paragraph 1 above; 68 See Ibrahim F. I. Shihata , M I G A and Foreign Investment: Origins, Operations, Policies and Basic Documents of the Multilateral Investment Guarantee Agency, Dordrecht 1988, 87, 88.

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(d) to adopt a policy under which the Bank will make maintenance of value payments to members whose currency has significantly appreciated; (e) to establish maintenance of value positions w i t h respect to the local currency portion of all capital subscriptions (except such local currency as shall have been repurchased pursuant to the provisions of Article I I , Section 9 (a), of the Articles of Agreement), as of June 30,1987 and every June 30 thereafter, and to implement maintenance of value settlements in accordance w i t h the Annex to this decision; and (f)

to express the value of the capital stock of the Bank on the basis of the unit of value referred to in paragraph (i), above, for purposes of the Bank's financial statements. 69

I V . T h e Issue Revisited — O p t i o n s before the Second A d - H o c C o m m i t t e e 1. Establishment

and Task of the New

Committee

T h e satisfaction o f reaching a r e s o l u t i o n o f the Bank's capital v a l u a t i o n issue almost t e n years after i t emerged was short lived. T h e C o m m i t t e e w h i c h recomm e n d e d t h e "1974 S D R " , o r the c u r r e n t U . S . d o l l a r at 1.20635 f o r one g o l d d o l l a r , had itself i n d i c a t e d t h a t m o s t o f its members preferred t h e establishment o f the S D R p r o p e r as t h e standard o f value "as soon as t h e necessary consensus f o r t h a t a c t i o n emerges". W h i l e t h e o b j e c t i o n o f the largest shareholder has prevented such a consensus f r o m emerging, the c o n t i n u e d depreciation o f t h e U . S . d o l l a r against the currencies used i n Bank lending exacerbated the pressure o n the Bank's "headr o o m " and emphasized the v o l a t i l i t y o f t h a t currency as a stable standard o f value. Soon after discussions started o n a general capital increase f o r the Bank t o enable i t t o expand its l e n d i n g a u t h o r i t y , a n u m b e r o f E x e c u t i v e D i r e c t o r s started t o q u e s t i o n anew t h e w i s d o m o f the a d o p t i o n o f the U . S . d o l l a r as the u n i t o f value o f t h e Bank's capital and called f o r the a d o p t i o n o f the S D R o r a n o t h e r c o m p o s i t e u n i t r o u g h l y c o r r e s p o n d i n g t o the c o m p o s i t i o n o f the Bank's currency p o o l o f o u t s t a n d i n g l o a n s . 7 0 W h e n the E x e c u t i v e D i r e c t o r s finally agreed t o r e c o m m e n d 69 Decision of the Executive Directors of I B R D , rendered on 14 October 1986, in: I B R D : Basic Documents, A-l-39-40. The decision included a detailed Annex covering the measures to be followed in the maintenance of value settlements of local currency subscriptions. Loc. cit., 40-42. 70 Before 1980, each loan had a different currency composition, consisting of a number of each currency disbursed under the loan less the number repaid. Service payments of Bank loans were thus billed by the Bank and paid by the borrowers in the various currencies disbursed under the loan, including currencies used by the Bank to purchase other currencies for the purpose of loan disbursement. Since 1 July 1980, the Bank has established a central loan pool of currencies, representing all funds loaned and not yet repaid under loan agreements concluded after that date. Loan agreements covering these loans provide that the Bank lends "an amount in various currencies equivalent t o " a specified amount of U.S. dollars. The dollar figure represents the ceiling of disbursement under the loan but repay-

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the "1988 General Capital Increase", they noted in their report to the Board of Governors that, with the U.S. dollar as the standard of value, there was no assurance that the "headroom" problem would not recur within the period intended to be covered by that capital increase and in subsequent increases. They further recorded the view expressed by many of them during the discussion to the effect that the valuation of the Bank's capital should be considered further by the Executive Directors in the course of their future work program. I n fact, a compromise agreement was reached, as part of the agreement on the capital increase, to form a new ad-hoc committee to look into this issue once again. The terms of reference of the new " A d - H o c Committee on the Valuation of Bank Capital" were different from those of the previous committee established in 1983. The latter's task was basically to formlate recommendations for a replacement of the 1944 gold dollar as the unit of value of the Bank's capital and to provide solutions to the maintenance of value issues arising under that replacement. I t had to address the same concerns which led the drafters of the Bank's Articles to choose the gold dollar as the common standard of value as explained earlier. By contrast, the new committee was established after a successor unit of the gold dollar had been adopted by a formal decision of the Executive Directors issued under the interpretation authority of Article I X . Also, it was established after the "headroom" issue, identified as a potential problem in the work of the earlier committee, had become a real concern of great magnitude. The dollar value of disbursed and outstanding Bank loans represented in the loan currency pool sharply increased with the continued rise of the proportion of other currencies (European and Japanese) in the pool and the significant depreciation of the U.S. dollar against these currencies. In late 1987, the dollar equivalent of the aggregate amount of outstanding loans came dangerously close to the Bank's lending limit and made action on a new capital increase all the more necessary. The terms of reference of the new committee thus emphasized the need to diminish the Bank's vulnerability to fluctuations in exchange rates through possible changes in the valuation of the Bank's capital as well as any other steps. 71 As members' positions on the definition of the standard of value seemed to have remained unchanged and a solution reached by consensus including the major shareholder was still being pursued as a common objective, the new committee recognized that its task was basically to find ways to minimize the effect of the depreciation of the standard of value vis-à-vis other currencies on the ment is made by borrowers in one currency determined by the Bank on the occasion of each repayment and calculated w i t h reference t o the U.S. dollar equivalent of the proportion of the currency pool represented by the loan, valued on the date of payment. O n that date, several currencies equivalent in value to the aggregate amount due are then removed from the loan currency pool. 71 The decision of the Executive Directors establishing the Committee issued on 19 February 1988 defined its task as " t o consider possible changes in the valuation of the Bank's capital, as well as any other steps, which could help to diminish the Bank's vulnerability to fluctuations in exchange rates".

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Bank's lending authority (mainly the Bank's subscribed capital now denominated in current U.S. dollars). This objective may in theory be most readily achieved by adopting an alternative standard of value which permits closer movement of the unit used for valuation of the Bank's subscribed capital in tandem with the value of the currencies in which the Bank's outstanding loans are denominated. The Committee was cognizant, however, that other techniques of currency management could contribute to achieving this result under the existing standard of value. Such techniques could not, of course, eliminate vulnerability to exchange rate movements altogether. In fact, nothing short of expressing borrowers' repayment obligations under all loans in the same unit of value of the Bank's capital (and reserves) could eliminate such vulnerability. Given the fact that the Bank normally holds local currency subscriptions in the currencies paid and for practical reasons has to borrow in several currencies, it would not be consistent with explicit provisions of its Articles of Agreement to denominate borrowers' repayment obligations under its loans only in U.S. dollars. 72 Also, with the U.S. dollar as the standard of value, maintenance of value of the local currency portion of the paid in capital will differ among different shareholders. Under this standard, the U.S., and any member paying in U.S. dollars, is practically exempted from maintenance of value obligations while any other member whose national currency depreciates against the dollar is required to pay additional amounts of its currency to the Bank to maintain the dollar value of its paid subscription. The desired solution should therefore not only minimize the vulnerability of the Bank's capital to exchange rate movements but also reduce the disparity in maintenance of value obligations among members. The Committee was quick to realize the importance of this consideration as well in its search for a solution.

72

Pursuant to Articles of Agreement, Article I V , Section 4 (b) (i), loans made out of the Bank's "own funds", defined as paid up capital, surplus and reserves, will require that service payments be affected " i n the currency loaned" unless the member whose currency is loaned agrees otherwise. Loans made out of "funds raised in the market of a member, or otherwise borrowed by the Bank" are subject to a different, more general requirement, pursuant to Section 4 (b) (ii) of the same Article: "The total amount outstanding and payable to the Bank in any one currency shall at no time exceed the total amount of the outstanding borrowings made by the Bank ... payable in the same currency." Since 1950, the Bank followed a policy whereby the matching requirement of borrowed funds would apply to both the borrowed funds used by the Bank in funding its loans and the borrowed funds held by the Bank as liquid assets. This policy was changed on January 6,1989, when the Executive Directors approved a new policy whereby the loan currency pool would be gradually reconstituted to ensure equilibrium among the major currencies (the U.S. dollar, the Japanese yen, and the Deutsche mark [including in the latter the Swiss franc and the Dutch guilder]). N o restriction would be imposed on keeping investment funds in the currencies borrowed. A n d the interest rate on Bank loans would be based on the interest rate of Bank borrowings for lending purposes only. 6GYIL32

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2. Options Before the Committee The discrepancy in the currencies used in the valuation of the Bank's capital (and reserves) on the one hand and those used in recording the amounts of disbursed and outstanding loans on the other calls for a better management of the risks which may evolve for the Bank and its borrowers as a result of exchange rate movements. As long as the U.S. dollar is the effective unit of value of the Bank capital, the fewer dollars in the currency pool of outstanding loans, the more likely it is that the Bank's lending limit, which heavily relies on the Bank's dollar-based capital, will be adversely affected by the decline of the value of the dollar against other pool currencies. The need for the adoption of techniques to reduce such a risk will actually present itself so long as a single national currency is used for the valuation and the maintenance of value of the Bank's subscribed capital. This was in fact recognized by both the Bank's management and the first Ad-Hoc Committee. However, the latter called only for periodic reviews of the adequacy of the Bank's capital " w i t h a view to recommending to the Board of Governors appropriate measures" if the U.S. dollar depreciates significantly. Meanwhile, management's search for ways to reduce the effect of adverse exchange rate movements on the Bank's lending limit called for introducing a number of practical measures. These included a more conservative calculation of the Bank's "sustainable lending level", 7 3 the gradual reconstitution of the currency pool of disbursed and outstanding loans to allow for greater representation of the U.S. dollar, a more active loan sales program and, if need be, further encouragement of loan prepayments by Bank borrowers. More drastic possible additional techniques to be considered include such mechanisms as readjusting the lending terms to increase the pace of loan repayments, and reducing the Bank's lending program to lower the volume of future disbursements or both. The second Ad-Hoc Committee has expressed interest in these techniques which may continue to be relevant regardless of the unit of value of the Bank's capital. In addition to such practical techniques, another important measure which also assumes the continued use of the U.S. dollar as the standard of value would be to enable the Bank to cope with the effects of the erosion of the value of its capital in terms of other currencies through an accelerated process of capital increases. This seems to have been uppermost in the minds of the Executive Directors when they adopted their above-quoted 1986 decision. This decision, it will be recalled, calls 73

The "sustainable lending level (SLL)" means in the Bank's practice the maximum amount of annual loan commitments that can be sustained indefinitely without increasing the loans disbursed and outstanding beyond the Bank's capital and reserves. The calculation of the SLL is based on a set of assumptions related to exchange rates and subscription status, the percentage of fast-disbursing loans in future commitments, the ratio of reserve to disbursed and outstanding loans, the level of loan cancellations and repayment on schedule of all outstanding loans. Obviously, the choices made under these assumptions influence the resulting SLL.

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for a review of the adequacy of the Bank capital "every three years, or at any time in the intervening periods when in their [i. e., the Executive Directors'] judgment such a review becomes warranted". The objective of such a review is explicitly stated to be "recommending to the Board of Governors appropriate measures required to restore [the Bank capital's] value". The second A d - H o c Committee may thus make proposals to ensure that this review process would actually take place, especially in the intervening years, and would lead to specific results. I t could recommend, for instance, that the review would become mandatory every time the dollar depreciates vis-à-vis the SDR or the major currencies represented in the loan pool below a certain percentage. T o ensure that such a review would serve its objective the Committee may also state that the Executive Directors should then recommend a capital increase, unless agreement is reached on other practical measures to cope adequately with the problem, especially if it threatens the Bank's "headroom". The process may even be carried further by recommending that the Board of Governors issue a general resolution, by the special majority required to increase the authorized capital, committing itself to approve a capital increase when this is recommended by the Executive Directors as a corrective measure to restore the value of the Bank capital (in terms of the SDR or the major pool currencies). While such a resolution would not necessarily obligate the Governors to act in this manner, it could indicate beforehand the direction they would be expected to take and may thus help accelerate a decision on the capital increase when needed.74 Three other options may also be open to the Committee, even though serious questions may arise as to their practicality or advisability. A l l these option envisage introducing a standard of value for the Bank capital different from the one adopted in October 1986. The first and most straightforward of these options is to recommend an amendment of the Articles of Agreement so as to substitute the current SDR (or another unit consisting of a combination of currencies used in Bank lending) for the gold dollar, now interpreted in terms of current 1.20635 U.S. dollar. This would be consistent with the explicit language of the 1986 decision which anticipated in fact such a course of action by stating that the interpretation provided in that decision would apply "until such time as the relevant provisions of the Articles of Agreement are amended". Such a course would also allow for a great deal of flexibility as the Board of Governors would be free to adopt any solution it deems appropriate in the form of an amendment. The amendment process may not represent, however, a practical way of addressing this issue. Under a recent amendment of the Articles, the second in the Bank's history, it is required for an amendment to be effective that, after its approval by the Board of Governors, 60 percent of the Bank members 74

I t should be noted that only the actual subscription of the authorized capital increase would solve the capital adequacy problem in such a case. 6:

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representing 85 percent of the total voting power accept such an amendment. 75 W i t h the U.S. having at present more than 15 percent of the total votes and therefore a virtual veto on any amendment, there is no way in which a solution unacceptable to the U.S. may be introduced through this process. Even when it was possible for a short while to introduce an amendment without the approval of the U.S. (when the majority required for members' acceptance was 60 percent of the members having 80 percent of the total voting power and the U.S. votes were less than 20 percent), the amendment route was excluded as it was assumed that the issue should be settled by consensus. In the absence of an amendment of the Articles, the Bank's standard of value may be changed only through resorting anew to the interpretation process provided for under Article I X . As indicated earlier, this Article authorizes the Executive Directors to adopt formal interpretations of the Articles of Agreement and no special majority is required for this purpose. The matter is complicated, however, by the fact that the provision at issue has already been formally interpreted as recently as October 1986 and no fundamental change of circumstances, unpredictable at the time, may reasonably be cited as a justification for a different interpretation at this stage. Indeed, the Executive Directors adopted the "1974 SDR" by way of a formal interpretation on the advice of the first Ad-Hoc Committee which chose not to propose the same conclusion as an interim, practical solution — even though it realized that that was another option. They also envisaged that that interpretation would remain in effect until the Articles were amended. Also, reinterpretation of the Articles under these circumstances cannot obviously be done by consensus unless the U.S. changes its position (in which case, amendment would be a much better solution). I t may also unduly give the impression that decisions on interpretation of the Articles may be altered even in the absence of fundamental changes of circumstances since their adoption. The continued validity of the formal interpretations adopted by the Executive Directors should not be lightly challenged. Certain key elements of the description of the Bank's callable capital contained in the Bank's "Information Statement" (which is issued in support of Bank borrowings) rest in fact on a 1947 formal interpretation of the Articles and should not be seen as changeable at the Bank's convenience. 76 75

W i t h effect from 16 February 1989, the latter percentage (85 %) replaced the original majority of four fifths (80 %) provided for in Article V I I I . 76 O n 2 A p r i l 1947, the Executive Directors issued a formal interpretation of the Articles of Agreement, Article I V , Section 1 to the effect that: 1. the obligations of members to make payment under their 80 % subscriptions are not dependent on each other; the failure of one or more members to pay does not excuse any member from its obligation to make payment; 2. if the Bank calls a part of the 80 % of the capital subscriptions and the amount received falls short of enabling it to meet its obligations to its creditors, the Bank has the right to make other successive calls on such 80 % until it receive sufficient amount for this purpose;

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Finally, the interpretation adopted in 1986 may be reconsidered under the appellate process envisaged in Article I X (but never used in practice). 77 Paragraph (b) of this Article provides: In any case where the Executive Directors have given a decision under (a) above, any member may require that the question be referred to the Board of Governors, whose decision shall be final. Pending the result of the reference to the Board, the Bank may, so far as it deems necessary, act on the basis of the decision of the Executive Directors.

As no time limit is prescribed for an appeal to the Board of Governors under this text, the Ad-Hoc Committee may recommend that an appeal against the 1986 decision be brought before the Board of Governors by any member which disagrees with that decision. In practice, however, it is not likely that the Board of Governors would act in a manner different from that followed by the Executive Directors and would thus hardly be expected to change a decision of the latter unless they themselves recommended the change. T o that extent, this option would in practice call first for a reconsideration by the Executive Directors of this earlier decision and would create concerns similar to those mentioned in respect of reinterpretation.

V . Conclusion The 1944 gold dollar mentioned in the I B R D Articles of Agreement as the numéraire of its capital no longer exists in fact. I t should have been replaced by another unit through an amendment of the Articles, as the I M F did in 1976 when it substituted the SDR for the gold dollar by an amendment of the relevant provision of its Articles (which became effective on 1 April 1978). The Bank attempted, however, to find a successor for the gold dollar for the purposes of its Articles by way of interpreting the relevant provisions. After nearly ten years of discussion the majority of Executive Directors conceded in fact to the U.S. position and accepted the current dollar as the formal "interpretation" of the gold dollar on the basis of $ 1.20635 being equal to the 1944 gold dollar. This was also the value of the SDR when the basis of its determination was changed, on 1 July 1974, from gold to a basket of currencies. The "1974 S D R " was thus adopted as the unit of value of the Bank capital "until the relevant provisions of the Articles are amended".

3. the Bank has the right to make calls on the 80 °Jo subscriptions sufficiently in advance of the maturity of its obligations which need to be funded through such calls; and 4. the Bank is under a duty to avail itself of the 80 % of subscriptions which are subject to call to meet its obligations. 77

Following the adoption of the Executive Directors' 1986 decision, one Bank member asked that the matter be referred to the Board of Governors but when asked to clarify its request indicated that it was not meant to be an appeal against the decision but merely t o inform the Governors and give them an opportunity t o discuss the issue if they wished.

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The interpretation adopted in 1986 was questioned in the context of the negotiation of the Bank's 1988 "General Capital Increase" and a new A d - H o c Committee of the Executive Directors was established to consider possible changes in the valuation of capital and other steps to diminish the Bank's vulnerability to exchange rate fluctuations. The possibilities of adopting a unit of value different from the "1974 SDR" through an amendment of the Articles is ruled out so long as the U.S., which has a veto power in the amendment process, objects to such a course of action. The 1986 interpretation could in theory be revised either through a decision of the Executive Directors reinterpreting the provisions at issue or a decision of the Board of Governors ruling on an appeal by a Bank member against the existing interpretation. Such a revision is highly undesirable in the absence of a fundamental change of circumstances, however, and can hardly be justified by the circumstances surrounding this issue. I n either case, it can only be done with the approval of the U.S., unless the rest of the Bank's membership is willing to forego consensus as the preferred approach in the solution of this problem. This analysis leads to the conclusion that, short of a change in the U.S. position which would allow for the reinterpretation of the Articles or for their amendment (the latter being obviously a more appropriate and defensible course of action in such a case), two choices would be left for the Bank: either to do away with the consensus approach and revise the existing interpretation by a majority vote (through a reinterpretation or a decision of the Board of Governors) or continue to accept the "1974 SDR" as the standard of value while attempting to mitigate its negative effects through other measures. These would include prior agreement on a tightened and accelerated process for corrective capital increases through the capital adequacy review and the adoption in the meanwhile of practical preventive measures to reduce the vulnerability of the Bank capital to changes in exchange rates as elaborated earlier in this paper. As for the differences in the burden of the maintenance of value obligations resulting from the use of a single national currency as the standard of value, the practical measures adopted along with the 1986 decision on interpretation 78 represented an important attempt to lessen the inequities involved in such differences.

78 These practical measures include (i) the encouragement of Bank members to repurchase their paid-in local currency subscriptions by U.S. dollars or other currencies acceptable to the Bank, thus avoiding the maintenance of value (M.O.V.) obligation, (ii) the encouragement of members to authorize the Bank t o use local currency subscriptions in its lending operations, thus postponing the M . O . V . settlement, as local currency subscriptions which are out on loan w i l l be deemed to be the last to be recovered, (iii) allowing members experiencing difficulties in effecting M . O . V . payments to do so in instalments over a period not exceeding five years, (iv) future M . O . V . obligations will be established at the end of each fiscal year of the Bank and actual settlement will be made within one year after that date and (v) M . O . V . settlements of less than 5 % of the value of the local currency subscription will be postponed to the next year.

European Community Law and Third World Food Entitlements By Francis Snyder'

I. Introduction Lawyers and other social scientists traditionally analyse hunger and famine by focussing on the availability of food. They usually explain the occurrence of famines, and also prescribe remedies, by changes in food supply. This approach may appear at first glance to be based on common sense, but in fact it is fundamentally defective. I n his persuasive book, Poverty and Famines ,1 Professor Amartya Sen sustains a trenchant criticism of an approach to famines based on food availability decline, and he sets forth a convincing alternative. H e describes this alternative way of explaining famines as the entitlement approach. Famines, according to this view, are the result of the loss of food entitlements. Entitlements to food may be of several different kinds. Direct entitlements refer to control of the means of producing one's own food. Indirect entitlements refer to the capacity of obtaining food by exchange. Such exchange entitlements may be realised by the sale of food and agricultural products, such as cash crops; income from remunerated work, or the sale of one's own labour power; the sale of other, non-agricultural commodities; or forms of exchange, such as social security, which do not depend primarily on the market. A n entitlement to food, just as its loss, may be expressed in legal form. Either may take the form of a legal right or find expression in another legal concept. For example, a direct entitlement may depend upon ownership or other rights of property. A n indirect entitlement may involve, for example, the right to carry on a business, a contract of employment, or an entitlement to social security, which may be subject to conditions such as nationality, residence or previous payment of contributions. Conversely, the deprivation of an entitlement may be crystallised in the law. Restrictions on property ownership, limitations on the types of crops purchased by State marketing agencies, and exclusion from certain types of employment because of gender or race exemplify such deprivations. The law, as Sen * The author wishes to thank the Nuffield Foundation for supporting his research. 1 Amartya Sen, Poverty and Famines: A n Essay on Entitlement and Deprivation, Oxford 1982.

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has shown, in many cases Stands between food availability and food entitlement. Starvation deaths can reflect legality w i t h a vengeance'.2 Legality refers, in Sen s terms, solely to domestic law. it is essential, however, to broaden the scope of the argument, taking account not only of municipal law but also of international law and hybrid legal systems. This is especially important at a time of reform in the European Community's Common Agricultural Policy (CAP), increasing emphasis on the completion of the European Single Market by the end of 1992, re-negotiation of the European Community's Lomé Convention w i t h African, Caribbean and Pacific (ACP) countries, and potential reform of the international trade in agricultural commodities. Law in relations among States may limit, at least in principle, the use of military force. Similarly, international law may potentially circumscribe other forms of international violence and coercion. Pre-eminent among these other forms is the deprivation of food, seen most cruelly in the cases of poverty, famine and starvation. 3 International law, in a manner analogous to municipal or domestic law, creates, embodies and symbolises different kinds of food entitlements. Yet international legal relations, just like domestic legal relations, may also contribute to hunger and famine. We live in a world community in which sufficient food to sustain the world's population is produced, but in which the international distribution of food is scandalously unequal. Law, including international law, reflects these assymetrical power relations. I t provides an organising framework for — and consequently legitimates — many of the ways by which food is unequally distributed. This paper elaborates this argument w i t h reference to the law of the European Community, focussing in particular on the European Community's external relations w i t h the T h i r d World. 4 The European Community and many T h i r d W o r l d countries are bound together in a dense network of economic, political and legal relations. If we consider agricultural trade alone, the European Community is the 2

Sen (note 1), 166. The analogy between arms and food as instruments of violence, especially but not only in international relations, is now commonplace. For its use in different contexts, see Sophie Bessis, L'arme alimentaire, Paris 1982; Joseph Rocher , The Interaction between the Common Agricultural Policy and the Lomé Conventions, in: Lomé Briefing 15 (1984), 3-7. 4 For a discussion of the effects of European agricultural trade on other countries, including developing countries, see Joseph A. McMahon , European Trade Policy in Agricultural Products, Dordrecht/Boston/London 1988. Public international law and international economic law are other important aspects of international legal relations which potentially influence T h i r d W o r l d food policy. See, for example,/acques Bourrinet / M aurice F lory (eds.), L O r d r e alimentaire mondial, Paris 1982; Philip Alston, International Law and the H u m a n Right t o Food, in: Philip Alston ! Katerina Tomasevski (eds.), The Right t o Food, Dordrecht 1985; Ian Brownlie , The Human Right to Food, Human Rights U n i t Occasional Paper, Commonwealth Secretariat, London 1987; and see the International Law and W o r l d Hunger Symposium, in: Iowa Law Review 70 (July 1985), 1183-1337. 3

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world's largest importer of agricultural products. More than 50 % of its agricultural imports come from T h i r d W o r l d countries. I n addition, the European Community is after the United States the world's second largest agricultural exporter. Almost 50 % of its exports go to the T h i r d World. 5 The relations between the European Community and the T h i r d W o r l d have recently been described as 'a pyramid of privilege'. 6 From the standpoint of legal relations, however, they may also be envisaged in terms of a more variable geometry. 7 First, the African, Caribbean and Pacific countries are linked to the European Community by the Lomé Convention. Secondly, even more T h i r d W o r l d countries are affected, directly or indirectly, by the Common Agricultural Policy, the European Community's major common policy. Thirdly, most form part of the intricate web of the Community's bilateral and multilateral external relations. Fourthly, almost all are influenced by the European Community in numerous other respects, ranging from the activities of non-governmental organisations to the extension of Western models of food production. The relations between the European Community and T h i r d W o r l d countries thus constitute an important cornerstone of the world food order. This paper considers some of the ways in which European Community law influences T h i r d W o r l d food entitlements. I n order to reduce the subject to manageable dimensions, it focusses on two particular types of entitlements: direct entitlements to food that people produce themselves, and indirect entitlements deriving from income from the sale for cash of food and agricultural products. 8 I t delineates three major areas of European Community law which influence such entitlements. A first section considers laws regarding policies that are internal to the European Community, but that also have far-reaching external consequences. A second section is concerned w i t h the T h i r d Lomé Convention. A third section reviews other aspects of the European Community's external relations. Each section thus identifies a general area of European Community law, which it then illustrates w i t h selected examples. A conclusion summarises the general argument.

5 Alan Mathews , The Common Agricultural Policy and the Less Developed Countries, Dublin 1985, 20, 97-102.

6

Philip Mishalani / Annette Robert / Christopher Stevens I Ann Weston , The Pyramid of

Privilege, in: Christopher Stevens (ed.), EEC and the T h i r d World: A Survey I, London 1981. 7 The remainder of this paragraph is based on Francis Snyder , New Directions in European Community Law, in: Journal of Law and Society 14 (Spring 1987), 167-182 (178). 8 The discussion is intended merely to illustrate the general argument. I n particular, the European Development Fund, which may influence direct entitlements, and the Stabex scheme, an important non-market mechanism influencing exchange entitlements, cannot be treated here because of space limitations.

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I I . Internal Policies with External Consequences The first major area of European Community law which affects T h i r d W o r l d food and agricultural policy, actually or potentially, consists of those aspects of European Community law which, in principle, are concerned wholly w i t h policies within the European Community, but which nevertheless have important external implications. This area of law embraces the legislation and the administrative and judicial decisions of the European Community concerning the internal market, including the free movement of goods, workers, services and capital and the right of establishment; agriculture and fisheries; competition policy, especially with regard to multinational food and agribusiness companies; and taxation. O f particular importance to T h i r d W o r l d countries is the law of the European Community's food and agricultural policy. The Common Agricultural Policy is based, at least in theory, on the principle that the European Community should be self-sufficient in temperate zone products. This principle underpins the special treatment of agriculture in European Community law, including its particular conjunction of often contradictory policies designed to preserve the family farm yet to encourage the industrialisation of agriculture. 9 I t also underlies the basic legal principles of the Common Agricultural Policy, its major objectives and the common organisations of agricultural markets. The Common Agricultural Policy is based primarily on Articles 38 to 47 of the Treaty of Rome. 1 0 Its foundations consist of six general principles: the inclusion of agriculture in the common market; its exemption from certain general Rome Treaty rules; the establishment of a common agricultural policy; the unity of the market; financial solidarity; and Community preference. These principles, at least as they have usually been interpreted so far, are concerned only w i t h individuals, organisations and States within the European Community. This point may be illustrated by Case 70/77 Simmenthal, u which involved the application of a general Treaty principle concerning the free movement of goods to the importation of agricultural products falling under a common organisation of the market. Simmenthal imported consignments of Uruguyan frozen beef into Italy. The beef was subjected to veterinary inspections, for which the plaintiff paid. Subsequently seeking restitution of the sums, the plaintiff argued that they were charges having an effect equivalent to customs duties, and therefore incompatible w i t h the regulations on the common organisation of the beef and veal market. O n a 9

See Francis Snyder , L'agriculture et l'industrie dans le droit de la CEE, in: D r o i t et Société 5 (1987), 23-52. 10 See generally Francis G. Snyder , Law of the Common Agricultural Policy, London 1985; or the translation D r o i t de la Politique Agricole Commune, Paris 1987. 11

Case 7 0/77 Simmenthal S.p. A. v. Amministrazione dette Finanze dello Stato [1978]

European Court Reports (hereinafter E.C.R), 1453.

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reference for a preliminary ruling under Article 177 EEC, the European Court of Justice held, first, that pecuniary charges for veterinary or public health inspections of meat imported from third countries were to be regarded as charges having an effect equivalent to customs duties, unless they form part of a systematic and non-discriminatory system of internal taxation. I t also held, however, that in this instance the Council did not infringe any provision of Community law. I t stated that the prohibition against such charges, though unconditional in respect of intra-Community trade, is not absolute in so far as trade w i t h third countries is concerned, and that when they impose that prohibition the Council or, where appropriate, the Commission may make exceptions to it. The principle of Community preference arose in Case 5/67 B eus v. Hauptzollamt München. The case was a reference by the Finanzgericht, Munich, under Article 177 EEC concerning the validity of Commission Regulation 144/65, which introduced a countervailing charge on imports of outdoor table grapes from Bulgaria and Romania. According to the Regulation, the introduction of a countervailing charge was not subject to the condition that "the Community markets experience or are threatened with serious disturbances resulting from imports from third countries at prices lower than the reference price", as was previously the case, but only to "the entry price of a product imported from third countries being lower than the reference price". The plaintiff in the main action alleged that the Regulation was incompatible with Articles 39 and 110 EEC, because, though guaranteeing the standard of living of producers, it totally neglected other objectives of the Common Agricultural Policy, such as ensuring the availability of supplies and the provision of food at reasonable prices. The European Court of Justice stated, however, that, in balancing interests in order to achieve the objectives of the Common Agricultural Policy, "the Council must take into account, where necessary in favour of farmers, the principle known as 'Community preference', which is one of the principles of the Treaty and which in agricultural matters is laid down in Article 44 (2). 12 The objectives of the Common Agricultural Policy are stated in Article 39 (1) EEC: (a) to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour; (b) thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture; (c) to stabilise markets; (d) to assure the availability of supplies; (e) to ensure that supplies reach consumers at reasonable prices.

12

[1966] E.C.R., 83 at 98.

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These objectives were elaborated during the mid-1950s, when most of the countries which constitute the T h i r d W o r l d today were still under colonial rule. I t is perhaps not surprising, therefore, that, in the establishment of the Common Agricultural Policy, and in the drafting of its objectives, T h i r d W o r l d interests were given so little attention. Since the early 1960s, the Council has used Article 43 (2) EEC as the basis for enacting regulations that establish common market organisations for most temperate zone agricultural products. The main exceptions are agricultural alcohol and potatoes. Each market organisation, or regime, comprises a single Council regulation, which is supplemented as necessary by Council or Commission regulations that are specific to each product or group of products. Other, 'horizontal' Commission regulations that apply to all products concern common questions such as licenses or export levies. Together w i t h related financial mechanisms, such as the establishment of agricultural prices in European Currency Units (ECU), 'green currencies' and monetary compensatory amounts, these agricultural commodity regimes constitute the core of the Common Agricultural Policy. The commodity regimes, despite substantial variations, usually share several common features. First, they establish a legal obligation on the part of the European Community, acting through the Member States, to purchase supplies of an agricultural commodity at (or, as of recently, just below) a guaranteed intervention price, once the price of the commodity falls below this previously agreed minimum price. The basic regulation of the archetypical cereals regime, for example, provides that " [ t h r o u g h o u t the marketing year the intervention agencies designated by the Member States shall be obliged to buy in cereals ... which are offered to them and have been harvested in the Community, provided that the offers comply w i t h conditions, in particular in respect of quality and quantity " 1 3 U n t i l recently this obligation to purchase was not subject to any limitations regarding maximum quantities. 14 Consequently, the intervention system — in conjunction w i t h other factors, such as the production of food solely for profit, vast technological changes in agriculture, the adoption of a food policy of self-sufficiency and the fixing of unnecessarily high minimum prices — has led inevitably to overproduction. These 13 Council Regulation N o . 2727/75 on the common organisation of the market in cereals, Article 7 (1) (Official Journal of the European Communities, hereinafter "O.J.") 1975, L 281/1. 14 As a consequence of the continued overproduction, however, intervention concerning the main temperate zone products is now usually limited. The precise mechanisms for limiting intervention differ according to the particular commodity regime. A striking example is that of the system of quotas and superlevy in the dairy sector, instituted by Council Regulations N o . 856/84 (O.J. 1984, L 90/10) and N o 857/84 (O.J. 1984, L 90/13) and subsequently amended. The 1987-88 agreement concerning agricultural stabilisers has consolidated this and similar mechanisms as a more or less permanent feature of the Common

Agricultural Policy: see O.J. 1988 L110; House of Lords Select Committee on the European Communities , Agricultural Stabilisers, Session 1987-88, 9th Report, H L Paper 43 (1988).

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agricultural surpluses, w i t h the benefit of export refunds (see below), have often been exported to the world market. Secondly, the commodity regimes typically provide the legal framework for a system of prices which is designed, in principle, primarily to support farmers' incomes. The legality of this general priority of the Common Agricultural Policy, as well as both the structure and the aims of specific agricultural commodity price systems, have continually been upheld by the European Court of Justice. I n Case 34/62 Germany v. Commission, 15 for example, the Court interpreted the wording of Article 39 (1) (e) EEC, which provides that an objective of the Common Agricultural Policy is " t o ensure that supplies reach consumers at reasonable prices". I t held that the expression 'reasonable prices' must be considered in the light of the Common Agricultural Policy and could not be taken to mean the lowest possible prices. Consequently, it dismissed an application for the annulment of a Commission decision refusing to authorise Germany to suspend customs duties on imported oranges. The European Court thus upheld the priority of the interests of Community producers over Community consumers. I t also, however, protected the interests of Community producers as against those of third country producers, exporters and exporting States. Thirdly, the typical regime, as in the case of cereals, imposes on third country imports of the particular agricultural commodity a variable levy. Though forming part of the CAP, nominally a mainly internal EC policy, the levy is clearly intended to have both internal and external consequences. Charged sometimes in addition to customs duties, the variable levy is equal to the difference between the world market price c. i .f. Rotterdam and an established threshold price. I t ensures that such import cannot be sold into the European Community at less than the threshold price. As the European Court has held, "the levy is fixed on the basis of the day from which the imported goods exercise an influence on the internal market of the Community, that is to say, the date on which they finally reach this market and enter into competition w i t h domestic products". 1 6 The express purpose of the levy is thus to protect European Community producers from competition from less costly agricultural imports. 1 7 The variable levy has also been criticised for its allegedly destabilising effects on world agricultural trade. When a commodity is in short supply on the world market, the world market price of the product rises, the variable levy falls, imports into the European Community are encouraged, and the world price rises further. Conversely, in the case of an over-supply on the world market, the world market 15

16

[1963] E.C.R. 131.

Case 35/71 Schleswig-Holsteinische landwirtschaftliche Hauptzollamt Itzehoe [1971) E.C.R. 1083 at 1093, 1094. 17

Hauptgenossenschaft GmbH ν.

O n the effects of variable levies, see R. Sampson / R. Snape, Effects of the EEC's Variable Import Levies, in: Journal of Political Economy 88 (1980), 1026-1040.

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price of the commodity falls, the variable levy rises, and imports into the European Community are discouraged, leading to a further decline in the world market price. The variable levy thus magnifies the effects of world market shortages or gluts. Consequently, it increases the difficulties of food policy planning in the T h i r d World, both at the macro-economic level by governments and at the micro-economic level by producers and consumers. 18 Fourth, most agricultural commodity regimes include a safeguard clause, which provides for the imposition of protective measures against imports. The basic regulation on fruit and vegetables, for example, allows the imposition of protective measures when imports cause, or threaten to cause, a serious disturbance on the European Community market, thus endangering the Article 39 EEC objectives. 19 Such measures must not, however, breach the European Community's commitments under the General Agreement on Tariffs and Trade ( G A T T ) . I n particular, Article X I X of the G A T T provides for the invocation of sectoral safeguards only if, as a result of unforeseen developments and of the effect of G A T T obligations, including tariff concessions, a product is imported in such increased quantities as to cause or threaten serious injury to domestic producers of like or directly competitive products. I n Case 112/80 Diirbeck, 20 the plaintiff importer and wholesaler challenged a Commission regulation suspending the placing in free circulation in the European Community of fresh apples from Chile. I t argued, inter alia , that the regulation infringed the provisions of G A T T and Article 110 EEC. Article 110 EEC states that "Member States aim to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and the lowering of customs barriers". The European Court of Justice dismissed the plaintiff's claim. I t stated that Article 110 EEC cannot be interpreted as prohibiting the Community from enacting, upon pain of commiting an infringement of the Treaty, a safeguard measure liable to affect trade w i t h third countries, even where the adoption of such a measure is required by the risk of a serious disturbance which might endanger the Article 39 EEC objectives and where the measure is legally justified under European Community law. 21 Fifth, when the world market price of a commodity is lower than the Community price, the typical agricultural commodity regime encourages European Community traders to export by the grant of a subsidy. Known as an export refund, the 18 See Thomas Grennes , Economic Interdependence and the Variability of Tariffs, in: Journal of W o r l d Trade Law 14 (1980), 242-245. 19 Council Regulation N o . 1035/72, Article 29 (O.J. Eng. Sp. Ed., 1972 (II), 437); see also Council Regulation N o . 2707/72 laying down conditions for applying protective measures for fruit and vegetables (O.J. Eng. Sp. Ed., 28-30 December 1972, 3).

20

Case 112/80 Firma Anton Dürheck v. Hauptzollamt Frankfurt

[1981] E.C.R. 1095. 21 [1981] E.C.R. 1095 at 1119, 1120.

am Main- Flughafen

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subsidy covers the difference between the Community price and the world market price. Though, in principle, the amount of the refund is the price difference on the date of exportation, it may instead be fixed in advance. I t may on request be at the level applicable on the date when an application for an export licence is made: see Case 62/83 Exmio Molkereierzeugnisse Handelsgesellschaft mbH v. Commission, 22 Approximately eighty per cent of cereals export licences have the levy fixed in advance, and a speculative market for advance-fixed licences exists among traders. 23 Such export refunds act to depress world market prices. I n 1978, for example, the Government of Australia complained that European Community export refunds on sugar were inconsistent w i t h the Community's obligations under the G A T T . The G A T T Panel concluded that an increase in European Community sugar exports in 1978 was effected through the use of subsidies. I t did not reach a definite conclusion as to whether the increase resulted in the Community "having more than an equitable share of world export trade in that product", in the terms of Article X V I : 3 G A T T . I t found, however, that the Community system of export refunds had contributed to depress world sugar prices and that it constituted a permanent source of uncertainty in world sugar markets. 24 Export refunds affect both the income and the planning capacity of sugar-exporting T h i r d W o r l d countries. The Common Agricultural Policy thus exemplifies a major area of European Community law which, in principle, is concerned solely with domestic European Community policies. I n practice, however, it often has a profound affect on food and agricultural policies in T h i r d W o r l d countries. Based on the Treaty of Rome and European Community regulations, directives and decisions, and implemented primarily by institutions of the Member States, it potentially affects food and agricultural policies in three different ways. First, it influences the nature of T h i r d W o r l d agricultural exports to the European Community. Secondly, i t affects the types and prices of food commodities available on T h i r d W o r l d markets. Thirdly, it increases the instability of food and agricultural commodity prices on the world market. These three consequences of the CAP harm some T h i r d W o r l d countries while benefitting others. 25 I n addition, even within a particular country, they have differential effects on various groups and classes. I t is not surprising, therefore, that 22

[1984] E.C.R. 2295.

23

Simon Harris ! Alan Swinbank / Guy Wilkinson , The Food and Farm Policies of the

European Community, Chichester 1985,75,76; Michel Debatisse, Hedging and Speculation on the EEC Levy and Restitution Markets, in: K.J. Thomson / R. M. Warren (eds.), Price and Market Policies in European Agriculture, Newcastle upon Tyne 1984, 120-130. 24

European Communities — Refunds on Exports of Sugar, Report of the Panel adopted on 6 November 1979 (L/4833) ( G A T T , BISD, 26th Supp. 290). See also the similar complaint by Brazil: G A T T , BISD, 27th Supp. 69. 25 See Adrian Moyes y Common Ground: H o w Changes in the Common Agricultural Policy Affect the T h i r d W o r l d Poor, Oxford 1987, 11, passim. See generally Mathews (note 5).

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influential non-governmental organisations, such as Oxfam in the United Kingdom, have tried to formulate a procedure for identifying the groups of T h i r d W o r l d people who will be affected most severely by changes in European agricultural policy. 2 6 These efforts form part of the growing pressures for fundamental reforms of the Common Agricultural Policy to take account of T h i r d W o r l d interests. I I I . The T h i r d Lomé Convention A second aspect of European Community law which influences food entitlements in the T h i r d W o r l d is the T h i r d Lomé Convention. I t currently governs relations between the European Community and 66 African, Carribean and Pacific (ACP) countries. 27 Like its predecessors, 28 Lomé I I I is a mixed agreement, falling partly within the external relations powers of the European Community and partly within the powers of the Member States. 29 Its legal basis in European Community law is Article 238 EEC. Lomé I I I was signed on 8 December 1984 and, being of five years' duration, is due to expire on 28 February 1990; negotiations on its successor are currently underway. The distinctive nature of the European Community's relationship w i t h the A C P countries, as compared to that w i t h other T h i r d W o r l d countries, is suggested by the judgment of the European Court of Justice in Case 87/75 Bresciani. 30 This case concerned a conflict between Italian law and Article 2, first paragraph, of the 1963 26

For a checklist designed to identify these different effects, see Adrian Moyes , A New Procedure for Identifying Groups of Third World People who Might be H u r t by Changes in Rich World Agricultural Policy, Oxford 1988. 27 Third ACP-EEC Convention of Lomé (Lomé, 8 December 1984: EC 19 (1985); Cmnd. 9511; The Courier , January-February 1986). See also ACP-EEC Council of Ministers, Brussels, The T h i r d ACP-EEC Convention signed at Lomé on 8 December 1984 and Related Documents, Luxembourg 1985. A recent general review may be found in Marjorie Lister , The European Community and the Developing World: The Role of the Lomé Convention, Aldershot 1988. O n the legal aspects in particular, see Kenneth Simmonds , The T h i r d Lomé Convention, Common Market Law Review 22 (1985), 389-420; Michael Lake , The Lomé I I I Convention — Europe's New Model for Dialogue and Development, in: Francis G. Jacobs (ed.), Yearbook of European Law 5 (1985), Oxford 1986, 21-56. 28 The Second ACP-EEC Convention of Lomé and Agreement on Products within the Province of the European Coal and Steel Community (Lomé, 31 October 1979: TS 3 (1983); Cmnd. 8761; O.J. 1980, L 347/2) and the ACP-EEC Convention of Lomé and Agreement on Products within the Province of the European Coal and Steel Community (Lomé, 28 February 1975; TS 105 (1979); Cmnd. 7751; O.J. 1976, L 25/2). For a European Community view of financial and technical co-operation under these two Conventions, see Commission of the European Communities , Directorate-General for Development , Ten Years of Lomé: A Record of ACP-EEC Partnership 1976-1985, Brussels 1986. 29 O n mixed agreements generally, see David O'Keeffe / Henry Schermers (eds.), Mixed Agreements, Deventer 1983. 30 Case 87/75 Bresciani v. Amministrazione Italiana delle Finanze [1976] ECR 129.

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Yaounde Convention, a predecessor of Lomé. The provision in the Convention provided, in terms similar to those of Article 13 EEC, that goods originating in Associated States were, when imported into Member States, to benefit from the progressive abolition of customs duties and charges having equivalent effect. O n an Article 177 EEC reference for a preliminary ruling, the European Court of Justice held that the obligation established by this provision between the Community and the Associated States was identical to that established by the second paragraph of Article 13 EEC between the Member States. I t also concluded that this provision was directly effective, in the sense that i t conferred upon individuals' rights which could be enforced in national courts. 3 1 This area of European Community law encompasses, in particular, the aspects of the Lomé Convention that are directly related to food production or t o the exportation or importation of agricultural commodities. These aspects include, inter alia , an agricultural chapter that is new compared to the Second Lomé Convention; provisions on drought and desertification control; the development of fisheries; the European Development Fund; the Stabex scheme for the stabilisation of agricultural export earnings; co-operation in relation to trade and t o agricultural commodities; and the special undertakings and protocols on bananas, rum and sugar. I t also encompasses the historical background of the European Community's food and development policy, in particular its legal expression. I n addition, it embraces human rights, including the right to development and the right to food in so far as such matters are dealt w i t h by the Lomé Convention; the right of establishment, especially in so far as i t concerns the establishment in A C P countries of agricultural commodity processors or traders based in other A C P countries or in the European Community; food strategies; the European Community's hunger in the world programme; and agreements w i t h specific A C P countries concerning agricultural trade, food and agricultural policy, or rural development. Only a few of these aspects can be touched upon here. The T h i r d Lomé Convention includes a special chapter [Part I I , T i t l e I, Chapter I ] on agricultural co-operation and food security. I t provides that co-operation in the agricultural and rural sector shall be aimed, inter alia , at — supporting the ACP States' efforts to increase their degree of self-sufficiency in food, in particular by strengthening the capacity of the ACP States to provide their population with sufficient food and ensure a satisfactory level of nutrition; — reinforcing food security at national, regional and inter-regional level;

31

This judgment contrasts sharply with that in Case 70/77 Simmenthal [1978] ECR1453 (see above). Compare, however, Case 65/77Jean Razanatsimha [1977) ECR 2229, in which the European Court held that Article 62 of the first Lomé Convention did not purport to provide equality of treatment between nationals of an ACP State and those of an EEC Member State with regard to freedom of establishment. 7GYIL 32

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Francis Snyder — promoting the active participation of the rural population in their own development by organizing small farmers into associations and integrating them more effectively into national and international economic activity; — improving production by on-the-spot processing of the products of agriculture, including livestock farming, and fisheries and forestry; — ensuring a balance between food crops and export crops;

These provisions potentially have a direct influence on the nature and scope of T h i r d W o r l d food production. Special emphasis is also given to food security, food strategies and food aid. Article 33 of the Lomé Convention provides, inter alia , that "Community measures aimed at food security in the A C P States shall be conducted in the context of food strategies or policies of the A C P States concerned and of the development objectives which they lay down". Article 34 provides for the possibility that export refunds for the European Community's available agricultural products (surplus commodities) can be fixed further in advance, and also for the conclusion of specific agreements w i t h A C P States which so request in the context of their food security policies. Article 35 specifies guidelines for food aid. Thus, except in urgent cases, European Community food aid, which shall be a transitional measure, must be integrated w i t h the A C P States' development policies. I n addition, food aid may be replaced, in accordance w i t h the relevant European Community rules, by alternative operations in the form of financial and technical assistance; such operations are to be decided at the request of the A C P State concerned. These provisions have significant, continuing implications for T h i r d W o r l d food entitlements, both direct and indirect. One example must suffice. The emphasis on food strategies stemmed from the September 1979 ministerial session of the W o r l d Food Council. I t was subsequently endorsed by the U N General Assembly, proposed by the Commission in a 1981 review of food aid policy, and then incorporated into the T h i r d Lomé Convention. 3 2 Food strategy has been defined by the Executive Director of the W o r l d Food Council as "[an] integrative policy approach to food production, distribution and consumption, encompassing the broad economic and social policies and reforms which affect the wider distribution of income and people's access to food". 3 3 Food strategies, though w i t h differing emphases, have been implemented in various African countries, starting with Mali, Kenya, 32

Maurice J. Williams , National Food Strategies: A Response to Crisis, in: Journal of Development Planning, 15 (1985), 85-98; Commission of the European Communities , T o wards a Plan of Action t o Combat W o r l d Hunger, C O M (81) 560 final (1981); Jacques Bourrinet } Stratégie et sécurité alimentaire dans la Convention de Lomé I I I , in: Revue du Marché Commun 296 (avril 1986), 222-227; see also Michael Lipton , African Agricultural Development: The EEC's New Role, in: Development Policy Review 1 (1983), 1-21. 33 Maurice J. Williams , Des stratégies nationales: point d'appui des politiques alimentaires, in: Le Courrier ACP-CE, 84 (mars-avril 1984), 67-80.

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Rwanda and Zambia. 3 4 W r i t i n g in 1988, however, an outside observer concluded that "the verdict on food strategies must so far be 'not proven'". 3 5 Even before 1988 such sectoral programmes were imbricated in the broader macro-economic framework of structural adjustment encouraged by the W o r l d Bank and the International Monetary Fund. 3 6 O n the basis of studies of adjustment in twenty-five African countries, the U N Economic Commission for Africa recently proposed "an African alternative to structural adjustment programmes". Though not yet endorsed (at the time of writing) by African governments, 37 this proposal, like adjustment policies already being implemented, will if adopted have substantial effects on exchange rates, interest rates, subsidies, parastatal organisations, and price controls concerning the food and agricultural sector. Consequently, it will bear directly on the forms of agricultural production, the types of food produced, domestic food markets, food imports and the types of food available to different groups of consumers. Trade co-operation within the framework of the Lomé Convention, according to Article 129, aims to promote trade between the A C P States and the Community. Products originating in the A C P States are to be imported into the Community free of customs duties and charges having equivalent effect (Article 130 (1)). Article 131 (1) provides that the Community shall not apply to imports of products originating in the A C P States any quantitative restrictions or measures having equivalent effect. The latter provision does not, however, necessarily apply to products of A C P origin which are listed in Annex I I of the Rome Treaty where such products come within a common organisation of the market (Article 131 (2)). Agricultural exports from the A C P countries, therefore, are not allowed totally free access to the European Community market. W i t h i n this broad framework Article 136 of the Convention establishes the principle of non-reciprocity. The A C P States are only obliged not to discriminate among the European Community Member States and to grant to the Community treatment no less favourable than the most-favoured-nation treatment (Article 136 (2)). Article 130 (2) governs two groups of ACP agricultural products: first, those listed in Annex I I of the Rome Treaty (and therefore covered by the Common 34

See Commission of the European Communities, Food Strategies: Review and Prospects, SEC (84) 1692 (1984); Commission of the European Communities, Implementation of Food Strategies and Prospects for the Future, C O M (86) 198 final (1986). 35 Philip Raikes , Modernising Hunger: Famine, Food Surplus and Farm Policy in the EEC and Africa, London 1988, 197. 36 See Dossier: Structural Adjustment, in: The ACP-EC Courrier, 111, September-October 1988, 50-86; see also the papers presented at the Workshop on " T h e Interaction of Food Security and Structural Adjustment Policies: Institutional Issues for Development Policy Management", European Centre for Development Policy Management, Maastricht, The Netherlands, 7-12 December 1987. 37 M ike H all, African Alternative Adjustment Strategy Needs More Research, in: Financial Times (London), Friday, 10 March 1989, 3. The Economic Commission for Africa proposal has not been made public.

τ

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Agricultural Policy) and subject to a CAP commodity regime; and, secondly, those subject on import to specific rules introduced as a result of the implementation of the Common Agricultural Policy. Products in either group for which European Community measures do not provide any import measures, apart from customs duties, are to be imported free of customs duties. I n relation to other products, however, again in either group, the European Community is obliged only to ensure that the A C P States are treated more favourably than third countries benefitting from most-favoured-nation treatment. The preferential treatment for such other products is to be granted by means of specific measures. The intention of the Community to take such measures is noted in a Joint Declaration in Annex X I I I of the Convention. Annex X I I I also provides for these specific measures in detail. Thus, for example, imports of beef and veal originating from an ACP State are entitled to exemption from customs duties for all products covered by the common organisation of the market. The exemption may be partially or totally suspended, however, if, in the course of a year, such imports exceed a quantity equivalent to that of imports from that source into the Community from 1969 to 1974 inclusive, plus an annual growth rate of 7%. In addition, pursuant to an Exchange of Letters on A C P Beef and Veal, special treatment in the form of suspension of import duties within a specified quota is allowed for imports from traditional exporters (Botswana, Kenya, Madagascar, Swaziland, Zimbabwe). The reduction of import charges on beef and veal originating in ACP States under the First Lomé Convention was at issue in Case 124/84 Spitta? % Consistently w i t h the Community's undertakings under the First Lomé Convention, Regulation 1599/75 modified the beef and veal régime to exempt products covered by the régime from customs duties. I t provided that other import charges were to be reduced by an amount fixed quarterly by the Commission and corresponding to 90 % of the average of the import duties during a reference period. The reduction was to apply to all imports for which the importer proved that an import tax equal to the amount of the reduction had been charged by the exporting State. The plaintiff in the main action, a company registered in Germany, had entered into contracts for the importation of prepared beef and veal from Madagascar. As a result of delay in dispatching the goods, customs formalities did not take place until after the entry into force of Commission Regulation 425/77, which modified the tariff heading of the goods and subjected them to a special levy fixed in accordance w i t h Regulation 932177. The levy was calculated by the Commission according to a standard method, based on the extension to the entire Community, except the United Kingdom and Ireland, of the financial conditions for importation applicable t o France, the former colonial ruler of Madagascar and the sole Member State in 38

1923.

Case 124/84 H. Spitta & Co. v. Hauptzollamt Frankfurt

am Main-Ost [1985] ECR

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respect of which a real pattern of trade was known to exist. Consequently the levy charged to the plaintiff was greater (and the export tax payable to the A C P States was less) than would have been the case if the levy had been calculated so as to take account of the monetary compensatory amounts applicable in each Member State. Contesting the charging of the levy, the plaintiff complained that the method of calculation favoured French importers and discriminated against others, contrary to Article 40 EEC. I t argued, inter alia , that the method of calculating the reduction laid down in Regulation 932177 was incompatible with the provisions of Council Regulation 3328/75, providing for a 90 % reduction in import charges. O n an Article 177 EEC reference the European Court concluded, inter alia , that the method of calculating the levy left unaltered the total charge to which the importer was liable, and in no way modified the conditions of competition between importers in the Community. I t recognised, however, that in certain instances, as in casu, the method of calculation reduced the part of the levy actually retained by the exporting A C P State to less than the 90 % provided for by way of reduction of the import charges. The safeguard clause in Article 139 provides that the Commission may take, or authorise a Member State to take, safeguard measures if the application of Chapter Three of the Convention should result in serious disturbances in a sector of the economy of the Community or of one or more Member States, or jeopardise their external financial stability, or if difficulties arise which may result in a deterioration thereof. Such measures, their duration and their methods of application are required to be notified immediately to the EC-ACP Council of Ministers. They are subject, however, to several conditions. First, consultations between the Community and the A C P States must, except in special circumstances, precede their application or extension (Article 140 (1), (2)). Secondly, the Community and the Member States undertake not to use safeguard measures or other means for protectionist purposes or to hamper structural development (Article 139 (2)). Thirdly, safeguard measures must be limited to those which least disturb trade between the Community and the A C P States and must not exceed the scope of what is strictly necessary to remedy the difficulties (Article 139 (3)). Fourthly, when applied, safeguard measures shall take account of the existing level of the ACP exports concerned to the Community and their potential for development (Article 139 (4)). A Joint Declaration in Annex X V I to the Convention concerns the safeguard measures w i t h respect to products covered by the Common Agricultural Policy. I t states, inter alia , that the Lomé Convention provisions concerning the safeguard clause may be applied to such products only in so far as they are consistent with the specific nature of these rules and regulations. Among the most important trade provisions of the Lomé Convention for T h i r d World countries are those concerning sugar. Article 175 states the European Community's special undertaking on sugar. Implementing this undertaking, Pro-

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tocol 7 contains the text of Protocol 3 on A C P sugar, which appeared initially in the First Lomé Convention. 3 9 I t provides that "[t]he Community undertakes for an indefinite period to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw or white, which originate in the A C P States and which these States undertake to deliver to i t " (Article 1 (1)). The safeguard clause does not apply to this sector (Article 1 (2)). By the terms of the Protocol, agreed quantities of cane sugar, expressed in metric tonnes of white sugar, for delivery in each twelvemonth period are allocated to thirteen A C P countries; three other countries are included by virtue of a Declaration on Protocol 3. Five countries (Mauritius, Fiji, Guyana, Jamaica, Swaziland) make up 80 % of the total. Mauritius alone accounts for one-third of the entire A C P allocation; 85 % of its sugar exports are encompassed in its agreed quantity of 487,200 tonnes. 40 The central provisions of the Sugar Protocol concern duration, pricing and supply arrangements. T o take but one example, Article 7 (3) of the Protocol provides that if, in any delivery period, a sugar-exporting A C P State fails to deliver its agreed quantity in full for reasons other than force majeure , its quantity shall be reduced, for each subsequent delivery period, by the undelivered quantity. The use of this clause has given rise to controversy. Though the European Court of Justice has considered the concept of force majeure in numerous cases concerning the common organisation of agricultural markets or the regulation of the steel sector, 41 it has yet to consider the meaning of this concept in the context of the Lomé Convention. Consequently the definition and the application of force majeure in respect of the Sugar Protocol have been left to the Commission. I n an early case during the 1975-76 sugar delivery period it defined the concept as "l'impossibilité de livrer une marchandise sans sacrifices démesurés, résultant de faits imprévisibles, inévitables et indépendantes de la volonté de la partie contractante concernée". 42 39

On the negotiation of the Sugar Protocol, see Christopher Stevens / Carole Webb , The Political Economy of Sugar: A Window on the CAP, in: Helen Wallace / William Wallace / Carole Webb (eds.), Policy-Making in the European Community, 2d ed., Chichester 1983. For critical analyses, see Simon Harris / Don Hagelberg , Effects of the Lomé Convention on the World's Cane-Sugar Producers, in: Overseas Development Institute ( O D I ) Review 2

(1975), 38-52; Ulrich Koester / Peter Michael Schmitz , The EC Sugar Market Policy and Developing Countries, in: European Review of Agricultural Economics 9 (1982), 183-204. 40

Belinda Coote , The Hunger Crop: Poverty and the Sugar Industry, Oxford 1987, 61,

62. 41 The concept of force majeure in European Community law is discussed in Peter Gilsdorf \ La force majeure dans le droit de la CEE à la lumière de la jurisprudence de la Cour de Justice, in: Cahiers de Droit Européen (1982), 137-143; Bruno Loyant , La force majeure et l'organisation commune des marchés agricoles, in: Revue trimestrielle de Droit européen (1980), 256-283; James Flynn , Force Majeure Pleas in Proceedings before the European Court of Justice, in: European Law Review 6 (1981), 102-114; James L. Thompson , Force Majeure: The Contextual Approach of the European Court of Justice, in: Common Market Law Review 24 (1987), 259-271. 42 Albert te Pass, Le Protocole no. 3 sur le sucre ACP annexé à la Convention de Lomé, in: Revue du Marché Commun (1977), 401-410 (404).

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Accordingly it did not accept the reasons advanced by Surinam, Uganda and the Congo during the first and second Lomé Conventions for failing to deliver their agreed quantities. Surinam and Uganda persuaded the Commission that they should be allowed to remain within the Protocol, while the agreed quantity of the Congo was renewed at only 80 % of its original allocation. 43 The A C P States were less concerned, however, w i t h the Commission's specific definitional criteria than w i t h the fact that they were not consulted. 44 I t is notable that all of the paragraphs of Article 7 of the Sugar Protocol, except for paragraph 3, provide for the consultation of the A C P States concerned. I V . Other External Relations The third major area of European Community law which potentially influences T h i r d W o r l d food policy ranges more widely: it encompasses all other relevant aspects of the European Community's external relations. This broad, residual category, some aspects of which have already been mentioned, includes the European Community's Common Commercial Policy (CCP) and the Common Customs Tariff ( C C T ) ; its participation in the General Agreement on Tariffs and Trade ( G A T T ) ; the Generalised Scheme of Preferences (GSP); the commodity agreements to which the European Community is a party; the importation by the European Community of so-called cereals substitutes; the spread of the European model of food production to the T h i r d W o r l d and its environmental effects; relations w i t h international and non-governmental organisations; the transfer of technology, including biotechnology; the legal regulation of agrochemicals and seeds; food aid; and famine and other emergency relief. A n example of this area of European Community law concerns the legal regulation of cereals substitutes imports. The European animal feedingstuffs idustry, especially in the Netherlands, has played an important role in the transformation of European Community agriculture. W i t h the establishment of the Common Agricultural Policy, including the application of the principle of Community preference and Community- wide agreement on relatively high prices for cereals, it began t o seek substitutes for European Community cereals. Manioc (cassava) imports from Thailand consequently increased from a quarter of a million tonnes in 1960 to nearly seven million tonnes in 1984, when Thailand supplied 95 % of the European Community manioc requirements. 45 43

Ken Laidlow , The Sugar Protocol: Room for Improvement, in: Lomé Briefing 12 (1983), 3. 44

te Pass (note 42), 5.

45

See "Europe — Thailand: l'histoire d'un débat", in: La Lettre de Solagral 51 (septem-

bre 1986), 5-15; André A. van Amstel / Els Ε. M. Baars /Jos Sijm / Huub Μ. Venne, Tapioca from Thailand for the Dutch Livestock Industry, translation by Paul Bruijin , cited in: Adrian Moyes , Common Ground: H o w Changes in the Common Agricultural Policy Affect the Third World Poor, Oxford 1987, 26, 27.

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Thailand strongly encouraged the cultivation of manioc, mainly on small farms in the poorer parts of the country. T h e European C o m m u n i t y then sought t o protect its cereals producers. I n Case 72/69 Bremer Handelsgesellschaft ,46 for example, the German customs authorities had denied duty-free import to crushed manioc roots w i t h a starch content of more than 55 %. O n an Article 177 reference, the European C o u r t of Justice in effect upheld this decision: it interpreted the expression 'manioc flours' w i t h i n the meaning of Article 1 (d) of Regulation N o . 16/62, read in conjunction w i t h heading N o . 11.06 of the C o m m o n Customs Tariff, to refer t o all farinaceous substances obtained from manioc roots, irrespective of the treatment which the roots may have undergone, where the product has a starch content in excess of 40 %. Nevertheless, as a low-priced animal feedingstuffs component, bound in G A T T at a duty of 6 % , manioc partly replaced more expensive European Community cereals. Imports of Thailand manioc led t o a loss of markets for competing European producers, to an increase in the European C o m m u n i t y cereals surplus, and consequently t o greater storage and export refund costs. I n order to obtain export refunds, traders sometimes sought to manipulate the proportions of ingredients of compound animal feedingstuffs. I n Case 125/78 Firma Peter Cremer, 47 for example, the plaintiff in the main action had received export refunds in 1965 in the form of levy-free import licences. T h e latter were revoked, however, when the German customs authorities established that the plaintiff had sifted tapioca chips from the exported product after the feedingstuffs arrived in Denmark and then reimported the chips i n t o the European C o m m u n i t y . Upholding the German authorities' decision, the European C o u r t held that an export refund for a compound feedingstuff containing cereals, or cereal-based products, can be granted only where the cereals or cereal-based products [including manioc, which is included in the cereals regime] are in fact contained in the mixture in significant proportions. Amidst these contradictory political pressures, the Commission in 1982 negotiated w i t h Thailand a bilateral Cooperation (or Voluntary Restraint) Agreement concerning manioc production and trade. 4 8 The conclusion of the Agreement was 46 Case 72/69 Hauptzollamt Bremen-Freihafen v. Bremer Handelsgesellschaft [1970] E.C.R. 427. 47 Case 125/76 Firma Peter Cremer v. Bundesanstalt für landwirtschaftliche Marktordnung

[1977] E.C.R. 1593. 48 Council Decision of 19 July 1982 (82/495/EEC) ( Ο J . 1982, L 219/52); Cooperation Agreement between the European Economic Community and the Kingdom of Thailand on manioc production and trade (O.J. 1982, L 219/53). The background, terms and implications of the agreement are discussed in: Dossier: Thailand, pre/parer Paprès-manioc?, in: La

Lettre de Solagral 35 (mars 1985), 3-6, 11, 12; Hugh Corbet , Excesses of the CAP and Thailand's Manioc, in: The World Economy 5 (1982), 208-210; A. Siamwalla , More Aspects of the Manioc Agreement between Brussels and Bangkok, in: The World Economy 6 (1983), 89,90. O n the use of this general legal instrument, see Guy Fievet , Les accords d'auto-limita-

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consistent with the European Court's view in Case 112/80 Dürbeck , namely that "[t]he Commission's attempt to secure the agreement of the exporting countries to a voluntary restriction of their exports to the C o m m u n i t y . . . cannot be regarded as unacceptable under Community law since that attempt reflects the Community's endeavour not to adopt except as a last resort coercive measures". 49 The Agreement was based on Article 113 EEC. Concluded initially for the period from 1 January 1982 to 31 December 1986, it was renewed in 1986. 50 Under the 1982 Agreement, Thailand undertook to restrict its manioc exports to the European Community to agreed quantities. The parties agreed to enter into consultation, if necessary, concerning appropriate measures if Thailand experienced serious balance of payments difficulties due to controls on manioc exports or major difficulties in sensitive manioc production regions. The European Community undertook to limit the levy on manioc imports to a maximum amount of 6 % ad valorem and to ensure that Thailand enjoyed most-favoured-nation treatment with respect to the levy rate. The European Community also undertook to take appropriate measures to ensure that Thailand's position on the Community market during the period of the Agreement would not be significantly undermined by a substantial increase in manioc imported from other countries. As Thailand was not then a G A T T contracting party, the European Community was not required to make compensation or take other measures under Article X I X G A T T . I t undertook, however, " t o do its utmost" to provide assistance for rural development and crop diversification schemes in Thailand, particularly in the poorest manioc-producing regions. The European Community's manioc agreement with Thailand is a bilateral agreement, negotiated by the Commission after authorisation by the Council following a Commission recommendation (Article 113 (3) EEC). I t requires the periodic adoption by the Commission of implementing regulations. 51 I t affects the extent to which T h i r d W o r l d producers, exporters and governments can generate exchange entitlements by the production and export of cash crops. In contrast, European Community law regarding food aid illustrates the way in which the conjunction of a multilateral agreement and an EEC regulation may potentially affect the direct access of T h i r d World people to food. The European Community on the basis of Article 113 EEC is a signatory to the Food A i d Convention [originally 1967, now 1986], which with the Wheat Trade Convention is part of the International Wheat Agreement. 52 European Communtion, une nouvelle technique d'accords communautaires, Revue du Marché Commun 262 (décembre 1982), 597-608. 49

Case 112/80 Firma Anton Dürbeck ν. Hauptzollamt Frankfurt

am Main-Flughafen

[1981] E.C.R. 1095 at 1118. 50 Council Decision of 28 A p r i l 1986 (86/222/EEC) (O.J. 1986 L155/8). 51 For example, Commission Regulation N o . 480/87 lays down implementing measures for 1987, 1988, 1989 and 1990 (O.J. 1987 L 49/13).

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ity food aid is currently governed by Council Regulation no. 3972/86 of 22 December 1986 on food aid policy and food aid management. 53 The 1986 framework Regulation represents, in principle, a major change in European Community food aid policy, away from the disposal of agricultural surpluses and towards a T h i r d W o r l d food and development policy. This change is symbolised by the Regulation's legal basis, its objectives and numerous specific provisions. The legal basis of European Community food aid, according to the framework Regulation, is not Rome Treaty Article 43, an agricultural provision, but Article 235, the residual powers clause. Similarly, the statement of objectives in the Regulation emphasises development policy. Thus the preamble provides that "food aid must be integrated into developing countries' policies aimed at improving their food security, in particular by establishing food strategies". The general objectives of food aid are stated to include henceforward the promotion of food security and support for efforts by recipient countries to improve their own food production. More specifically, food aid is to be integrated into national development policies, particularly agricultural and food policies. When food aid is sold, for example, the price of the products must not be one liable to disrupt the domestic market. I n addition, food aid products must as far as possible fit the dietary habits of the recipient populations and have no adverse effect on the recipient countries. Funds may be substituted in place of part or all of the allocated quantities of food, subject to certain conditions and w i t h specified operations eligible for financing. 54 Moreover, new additional criteria are provided for allocation of food aid. The previous criteria included basic food needs (estimated food imports for the coming year), per capita income and the balance of payments situation. N o w 'economic considerations', the existence of particularly impoverished population groups, the economic and social impact of the aid and the financial cost of the proposed action are also to be taken into account. I n relation to the conditions, scheduling and mobilisation of food aid, the new Regulation also emphasises the objective of development. The granting of food aid is expressed as being conditional, if necessary, on the implementation, not only of development projects, but also of sectoral actions or development programmes, such as food strategies or indicative food policy programmes. The complementarity of food aid and local projects is to be ensured by the use of counterpart funds; the use of such funds is to be laid down by common agreement between the 52

J.O: E.C. 1968, L 305/1; O.J. E.C. 1986, L 195/1.

53

O.J. E.C. 1986, L 370/1. See generally Francis Snyder , The European Community's

New Food A i d Legislation: Towards a Development Policy?, in: Francis Snyder / Peter Slinn (eds.), International Law of Development: Comparative Perspectives, Abingdon 1987. 54 Such "substitution actions" were initially provided in Council Regulation N o . 1755/84 (O.J. 1984 L165/17).

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European Community and the food aid beneficiary. Greater facilities are also provided for the use of multiannual food aid programmes. I n the mobilisation of food aid priority is still given t o t he European Community market, but nevertheless the scope of triangular operations has been significantly expanded. I t remains to be seen, however, whether European Community food aid can really serve as an instrument of development, or, except in the case of emergencies perhaps, as a means of ensuring greater access to food. W i t h respect to export refunds, in Case 13/73 Netherlandsv. Commission, 55 the European Court of Justice held that food aid transactions benefit from export refunds in the same manner as commercial agricultural exports, thus underscoring their primarily commercial nature. More generally, the European Community is by virtue of its dairy surpluses the world's largest supplier of dairy food aid. Yet its most significant dairy food aid project, Operation Flood in India, has been severely criticised. Though benefitting urban, middle-class consumers, it was recently described by the European Communities' Court of Auditors as leaving "unresolved the frequently raised problem of satisfying the physical nutritional needs of a large part of the Indian population which is unable to express these needs in financial terms". 5 6

V . Concluding Remarks on Law and Policy This paper has drawn an outline map of certain crucial legal relationships between the European Community and Third World countries. Its purposes were not only to classify a wide range of European Community legal instruments, but also to elaborate and, if possible, partly to substantiate a single basic hypothesis: European Community law significantly affects T h i r d W o r l d food entitlements. I n order to do so, it identified three general areas of European Community law, which, though overlapping, may none the less be considered in many respects to be discrete. They are, first, laws concerning policies that are internal to the European Community, but that also have far-reaching external consequences; secondly, the Lomé Convention; and, thirdly, other European Community external relations. These aspects of European Community law have a direct influence on T h i r d W o r l d food entitlements. In particular, they affect direct entitlements resulting from the production of food and exchange entitlements resulting from the sale of agricultural and food commodities. This discussion, apart from selected examples, concentrated primarily on legal principles. Such legal principles form such an important element in the European Community's food and development policy practice. I t is important, however, to 55

[1973] E.C.R. 27. Court of Auditors Special Report N o . 6/87 on food aid supplied to India between 1978 and 1985 [Flood I I operation] accompanied by the replies of the Commission (88/C 31/01), O.J. E.C. 1988, C 31/1 at 13 [para. 4, 5]. 56

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extend the argument which has been advanced in outline form here, taking account of other aspects of European Community law and their operation in practice and also to examine the implications of this argument for European Community law and development policy. I n conclusion of this discussion, therefore, a number of general theoretical and methodological remarks need to be made in order to provide a basis for further work. First, the hypothesis that European Community law significantly influences food and agricultural policies in T h i r d W o r l d countries may appear to be relatively straightforward. When it is examined more closely, however, this hypothesis proves to be very problematic. I t raises particularly intractable theoretical issues, in particular concerning the relationship between law and economic policy and the role of law in society. Secondly, although the European Community may for legal, policy and socioeconomic purposes be treated as a single unit, the T h i r d W o r l d by contrast is not homogeneous. Instead, it is incredibly diverse. Far from representing an analytic category, the expression ' T h i r d World' is at best a convenient term of reference. 57 Thirdly, the relations between the European Community and T h i r d W o r l d countries are extremely complex. They consist of numerous strands, linking European Community institutions, processes, policies and laws, on the one hand, and similar (and other) phenomena in the T h i r d World, on the other hand. Consequently, they differ, both quantitatively and qualitatively, from the superficially analogous relations between domestic laws and economic policies within a single nation State. Fourth, these relations are manifested or expressed, at least partly, by law. Such manifestations or expressions may, however, take a variety of legal forms. They include, for example, provisions of the Treaty of Rome; European Community legislative acts, such as regulations, directives and decisions (as well as recommendations and opinions, which under Article 189 EEC are not legally binding); judicial decisions by the European Court of Justice; bilateral or multilateral international agreements between the European Community and third countries; and other legal forms. These instruments have different formal characteristics and different legal consequences and, as a result, they may have different social, political and economic implications. Fifth, European Community law, like other law, may, and often does, have identifiable social and economic effects. This postulate holds for its effects within the European Community. I t also applies to the effects of European Community law within T h i r d W o r l d countries. Such an assertion, it should be noted, raises 57 O n the idea of the " T h i r d W o r l d " , see Nigel Harris , The End of the T h i r d World: Newly Industrializing Countries and the Decline of an Ideology, Harmondsworth 1987.

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numerous acute difficulties of theory and method commonly associated w i t h studies of legal impact. Sixth, as a corollary, food and agricultural policy in T h i r d W o r l d countries is potentially made not only by these countries' domestic political and legal institutions. I t is also made, in part, by the institutions include both the European Community. These institutions include both the European Community's basic legislative institutions and the European Court of Justice. I t follows that the interests of different groups of people in T h i r d W o r l d countries should be expressly considered by European Community institutions during the law-making process. Seventh, the influence of European Community institutions on T h i r d W o r l d food policies is not limited to the exercise of their powers concerning external relations. I t also encompasses many of the ways in which they formulate and implement policies within the European Community. European Community legislation may be intended to have solely domestic effects, but none the less it may also have wide-ranging implications for food and agricultural policies in the T h i r d World. Eighth, the effects of European Community law on T h i r d W o r l d food policies are often difficult to ascertain. They may be, in fact, extremely problematic. For example, a legislative act or an administrative or judicial decision may have effects which are entirely unintended. Moreover, it may be virtually impossible in many instances to distinguish the causal effects of European Community policies and laws from those of the policies and laws of other international organisations. 58 N i n t h , not all — or perhaps even most — of the links between European Community law and T h i r d W o r l d food entitlements involve relationships of cause and effect. Instead, they consist potentially of many different types of relationships. Some are undoubtedly causal: that is, a specific European Community law is the cause of a specific feature of the production and distribution of food in a particular T h i r d W o r l d country. But this is by no means true of all relationships. Other, non-causal connections may also be extremely important. W i t h regard to some aspects of T h i r d W o r l d food entitlements, European Community law thus is direct and vital in its effects. W i t h regard to other aspects, however, it is primarily of symbolic (but often of no less real) significance. Finally, as legal scholars specialising in international, European Community or domestic law, we commonly make one or two assumptions. O n the one hand, we frequently assume that law is simply a technical medium; its basic function is t o express political and economic policy decisions in a specialised language. Law, on 58 For example, see Philip Raikes , Flowing with M i l k and Money: Food Production in Africa and the Policies of the EEC, in: Peter Lawrence (ed.), W o r l d Recession and the Food Crisis in Africa, London 1986, 160, 174.

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this view, has no independent or even relatively autonomous role. O n the other hand, we often presume that law is essentially an instrument of economic policy: it may be used by the State as a means of implementing particular policy goals. Law in its own right, according to this view, has a distinctive effect. Neither of these assumptions, however, is adequate as a starting point for analysing the relationship between European Community law and T h i r d World food policy. We must begin instead by recognising that in many different ways, as in numerous contexts, law is potentially — though not necessarily — significant. Then, in delimiting the relevant aspects of European Community law, we need to consider, not only those elements that are directly and causally related to food and agricultural policies in the T h i r d World, but also those that have potential connections other than those of cause and effect. The most profound influences may be in fact those which are the least obvious. For example, European Community law often has clearly defined, immediately instrumental implications. In addition, however, it may also influence T h i r d World food policy by allocating important decision-making powers, by expressing otherwise implicit premises about international legal relations, or by presenting a complex legal ideology of economic development or dependence. This approach to European Community law requires the revision of some common assumptions concerning the role of law in society, and, by extrapolation, concerning the role of international law and hybrid legal systems in the international political economy. Only in this way, however, may we best understand how, in an interdependent world, European Community law affects T h i r d World food entitlements.

ECOWAS Regional Cooperation Regime By Julius Emeka Okolo

I. The Treaty for ECOWAS Cooperation 1. General Background The first attempt to promote the idea of a West African unity was made by President William Tubman of Liberia in January 1964 in his inaugural speech in which he introduced the notion of a West African free trade area. Backed by his country, he arranged a series of bilateral and multilateral talks with the Heads of State and Government of other countries in the subregion to advance and elicit support for his proposal. O n 24 August 1964 representatives of four West African States of Côte D'Ivoire, Guinea, Liberia, and Sierra Leone met in Monrovia, Liberia, to consider the possibility of creating a free trade zone. The meeting ended with the representatives favouring the setting up of a West African free trade zone open to other States. A n Interim Committee of Ministers and Experts was set up to study the problems involved and submit its recommendation to the four governments by January 1965. A t a subsequent meeting of 15 to 17 February 1965, Ministers of the four participating States drew up an agreement to create an interim organization to be superseded by a more permanent organization for West African Economic Cooperation. The agreement was signed in May 1965 in Freetown, Sierra Leone. Among other things, it charged the Interim Organization with the responsibility of planning the establishment of a multilateral system of economic cooperation of a regional character with a view to removing trade barriers and encouraging the harmonious development of the cooperating States in every field. Although the success of the Liberian initiative was limited, i t was so encouraging that it pushed the United Nations Economic Commission for Africa (ECA) and the Food and Agricultural Organization (FAO) to organize a West African conference on coordination of industries in Bamako, Mali, on 14 October 1964. This move was in pursuance of ECA's division of Africa into regions for purposes of promoting and enhancing economic development. Differences in national goals and disharmony of interests, however, thwarted the effort as representatives of participating States disagreed on the principles that would have guided the estab-

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lishment of a number of industries, especially iron and steel. A n opportunity for laying a strong foundation for regional economic integration was thus missed. Nonetheless, in October 1966 and April/May 1967, E C A called specialized meetings in Niamey, Niger and Accra, Ghana designed to bring together the fourteen West African countries it had included in its projected economic association, and the latter led to the signing of an Article of Association of the proposed Economic Community of West Africa and the formation of an Interim Council of Ministers. I n November 1967, the Council met in Dakar, Senegal, and prepared the ground for a Heads of State meeting of A p r i l 1968 in Monrovia. The summit resulted in the establishment of the West African regional group. But the success was limited: only nine of the fourteen countries sent delegates to the meeting and signed the protocol. The group's lone achievement was the preparation of Priority Studies of areas of cooperation by Nigeria and Guinea. A conference that was to be held in Quagadougou, Burkina Faso, in March 1969, at which the treaty was to have been signed and sealed never materialized. Renewed efforts to create a West African Community had to wait several years. I t is important to observe that several political and practical problems impeded the regional cooperation process in West Africa up t i l l 1968. These included vested interests on the part of the leadership in the preservation of the status quo, such as the maintenance of semi-colonial ties with the former metropoles, the different commercial and financial policies inherited from the past colonial administrations, different currencies and payments arrangements, and dependence on revenue from import duties as well as manipulation of the duties to encourage the inflow of foreign capital and protect industries. Above all, there was a general lack of political will to surrender national binding decision-making powers to a supra-national authority. 1 The formal launching of the Economic Community of West African States ( E C O W A S ) came at the end of an A p r i l 1972 visit to Togo by General Yakubu Gowon , Nigeria's Head of State. H e and his Togolese counterpart, President Gnassingbe Eyadema , issued a communique announcing their decision to create economic grouping, "an embryonic West African Economic Community", between their two countries. The two leaders set up a commission of experts which met at Lagos in June to make recommendations on the proposed grouping. The conference agreed to work out broad areas of cooperation in such matters as transport and communications, trade, industry, money payments, and movement of factors between Nigeria and Togo. I t recommended the abolition of transit tax, which constituted an impediment to development of trade, and, most importantly, it mandated General Gowon to call a summit conference of West African leaders to discuss the proposed regional economic community. 1

Adebayo Adedeji , Economic Community of West African States: Ideals and Realities. Public lecture delivered at the Nigerian Institute of International Affairs, Lagos, 30 A p r i l 1975.

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W i t h i n approximately one-and-half years of its first meeting, the Nigeria-Togo commission of experts had produced a draft treaty. W i t h a combination of persuasive power, extention of financial assistance through what has come to be called "spraying diplomacy", and some arm-twisting, General Gowon was able to get ministers of West African States together at a meeting in Lomé, Togo, in December 1973 to consider the draft treaty and adopt basic principles for the creation of E C O W A S . Following subsequent meetings in Accra in February 1974 and Monrovia in January 1975, the treaty establishing E C O W A S was adopted by a ministerial meeting. I t was signed by the original fifteen member-states at Lagos on 28 May 1975,2 and it formally came into effect on 23 June 1975, when the required minimum of seven Member-States had ratified it. The signing of the first five protocols annexed to the treaty at Lomé on 5 November 1976 completed the birth of ECOWAS. 2. Legal-Institutional

Issues of the Treaty

The E C O W A S Treaty reflects the desire of the founding fathers to enhance bilateral and multilateral cooperation within the subregion. I t provides a process through which integration could be achieved and exhorts Member-States to make the sacrifice necessary for integration. Beginning with its preamble, the Treaty has several legal-institutional implications which deserve to be scrutinized critically. a) The Community's Aims and Purposes In its preamble, the Treaty states as its main objectives the promotion of "accelerated and sustained" and "harmonious economic development" of the E C O W A S Member-States, the "creation of a homogeneous society, leading to the unity of the countries of West Africa", and enhancing "a fair and equitable distribution of the benefits of cooperation among Member-States". Additionally, the Treaty aims at eliminating all customs and other duties on trade among member countries and establishing a common customs tariff and a common commercial policy toward third countries. In short, the community will promote "the rapid and balanced development of West Africa" 3 and expects to achieve the goal "by stages".4 2

Cape Verde became the 16th member upon its accession to the treaty in 1978. E C O W A S , Development of the Community — The First Five Years 1977-1981, Lagos 1981, 11. 4 Treaty of Economic Community of West African States, A r t . 2 (hereinafter E C O W A S Treaty). The E C O W A S Treaty is reprinted in: International Legal Materials 14 (1973), 1200-1209. Summaries of the treaty are found in Colin Legum (ed.), Africa Contemporary Record: Annual Survey and Documents 1976-1977, London 1977,196-199; West Africa, 16 June 1975, 679 and 23 June 1975, 720; and E. O. Ehiefie, Central Provisions of the Treaty of E C O W A S , in: A. B. Akinyemi / S. B. Falegan/I. A. Aluko (eds.), Readings and Documents 3

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The inequality of Member-States in terms of the geo-demographic base and economic endowments and the fears expressed by the less-developed countries during the negotiations 5 required that the contracting parties take cognizance of impediments to regional integration and make compromises that would not only allay such fears but also satisfy the different aspirations of the Member-States. Indeed, this basic principle is reflected in Article 52 (f) of the Treaty, whereby the contracting parties commit themselves to "promote development projects in the less developed Member-States of the community". Neither in the Treaty nor in any of the first five protocols annexed to it, is it clearly defined which are the L D C s within the community, but a 1980 decision on trade liberalization identified the twelve States belonging to this category as Benin, Burkina Faso, Cape Verde, Gambia, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Sierra Leone, and Togo, leaving Côte D'Ivoire, Ghana, Nigeria, and Senegal as the more developed States. 6 Thus, it can be surmised that the L D C s are so defined by their lower G N P per capita incomes, although this does not fully explain why Liberia w i t h a higher per capita income in 1980/81 than two of the more developed countries is included among the L D C s . 7 Perhaps, a plausible explanation for such categorization of Liberia may be its less abundant natural resources in comparison to those of each of the designated more developed countries. Moreover, the founding fathers noted that the existence of "forms of bilateral and multilateral economic cooperation in the subregion gives hope for wider cooperation", and in their dedication to the wider progress of Africa they believed that "efforts at subregional cooperation should not conflict or hamper similar efforts being made to foster wider cooperation in Africa". These two factors in the preamble are interesting in that while the former recognizes the obvious contribution of existing subregional cooperation efforts to the creation of E C O W A S , the latter, along w i t h the reaffirmation by the founding fathers of their adherence to "the declaration of African cooperation, development and economic independence adopted by the 10th Assembly of Heads of State and Government of the Organization of African U n i t y ( O A U ) " , stresses solidarity w i t h the wider regional body on on ECOWAS: Selected Papers and Discussions from the 1976 Economic Community of West African States Conference, Lagos 1984, 109-117. 5 Reportedly, Lieutenant-Colonel Seyni Kountche , Niger's then head of State, had insisted that the proposed Community should "take into account the varying degrees of development of Member States". See Africa Diary , 3-9 December 1974, 7221. 6 Official Journal of ECOWAS, 2 (1980), 6. 7 The average G N P per capita rates for the sixteen Member-States of ECOWAS was $ 354, and the figure for the various countries in United States dollars was Benin 250, Burkina Faso 180, Cape Verde 160, Côte D'Ivoire 1,040, Gambia 230, Ghana 400, Guinea 280, Guinea-Bissau 200, Liberia 500, Mali 140, Mauritania 320, Niger 270, Nigeria 670, Senegal 430, Sierra Leone 250, and Togo 350. See Julius Emeka Okolo , Integrative and Cooperative Regionalism: The Economic Community of West African States, in: International Organization 39 (1985), 121-153 (125).

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matters of common economic development concern. The parties to the Treaty apparently sought to mitigate, if not defuse, any suspicion that their new grouping might evoke within the African continent. The final aspect of the preamble to be considered is the recognition by the contracting parties that "progress toward subregional economic integration requires an assessment of the economic potential and interests of each State". The reference to national interest and the numerous allusions to the concept throughout the Treaty is indicative of the defensive nature of the agreement. While opting for an all-embracing integrative approach to West African development and a machinery, for its implementation, as opposed to the nationally — and/or narrower subregionally — based strategies, the signatories of the Treaty apparently recognized the problem which the pursuit of national interests poses for the community. The formal establishment and naming of the integrative grouping is carried out by Article 1 paragraph 1 which states that "by this Treaty the H i g h Contracting Parties establish among themselves an Economic Community of West African States ( E C O W A S ) " . But there is some ambiguity which remains unclarified by the definition given in paragraph 2 of the article which refers to the members of the community as "the States that ratify this Treaty and such other West African States as may accede to i t " . West Africa is not defined, but this may be a deliberate omission designed to assuage the fears of Senegal and other francophone States which, in their quest to checkmate Nigeria's overpowering presence, wanted all African States facing West to the Atlantic, including Cameroon and Zaire, to be eligible for membership. 8 H a d all such States joined, the Community might have become unwieldy and unmanageable. The fundamental element of the purpose and spirit of the Treaty rests in Article 2 paragraph 1, whereby the signatories agree " t o promote cooperation and development in all fields of economic activity, particularly in the fields of industry, transport, telecommunications, energy, agriculture, natural resources, commerce, monetary and financial questions and in social and cultural matters for the purpose of raising the standard of living of its peoples, of increasing and maintaining economic stability, of fostering closer relations among its members and of contributing to the progress and development of the African continent". More specifically, the purposes of the Community are stated in Article 2, paragraph 2 and cover the elimination of customs and similar duties between the Member-States; abolition of other restrictions on trade among the States; and establishment of a common customs tariff and commercial policy towards " t h i r d " countries. Also covered are the abolition of the obstacles to the free movement of persons, services and capital; harmonization of agricultural policies and promotion of joint projects in agricultural, marketing, research and agroindustrial enterprises; implementation of schemes for joint development of transport, communication, energy, and other 8

8*

See Africa's Common Market, in: West Africa , 16 June 1975, 678.

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infrastructure; "harmonization of economic and industrial policies of the MemberStates and the elimination of the disparities in the level of development of MemberStates". The other purposes cover the need for the proper functioning of the Community, for the harmonization of monetary policies of the Member-States; the establishment of a fund for cooperation, compensation, and development; and the pursuit of other activities calculated to promote the Community as the Member-States may from time to time undertake in common. These expressly stated areas of cooperation merely serve as a justification for the creation of E C O W A S but do not exhaust all the possibilities of subregional endeavour towards the achievement of integration. For instance, no mention is made here of a defence pact, but the Community has since, as shall later be seen, evolved one in response to circumstances. Generally, it should be noted that based on these purposes, the development of each State's territory within the Community remains the sovereign prerogative of the State, but an effort will be made to coordinate harmoniously these essentially national endeavours in such a manner as to facilitate joint actions that would enhance the beneficial progress and development of the subregion and Africa as a whole. Indeed, this notion is reinforced by Article 3, whereby Member-States undertake to "make every effort to plan and direct their policies w i t h a view to creating favourable conditions for the achievement of the aims of the Community". From a legal standpoint, it can be reasonably inferred from the last part of Article 3, as well as from other sections of the Treaty, for instance Article 23,25 (2), and 27 (2), which make reference to the conclusion of supplementary agreements or the taking of "appropriate measures", that the E C O W A S Treaty is endowed with the juridical characteristics of a traité-cadre , which regarding its full implementation requires the conclusion of complementary and specific understandings and agreements. As Georges Landau has observed, this is the nature of most integration agreements, including the Treaty of Montevideo, which in 1960 established the Latin American Free Trade Association ( L A F T A ) , and the Cartagena Agreement which established the Andean Pact in 1969, both of which contain basic principles and general norms to be supplemented by ad-hoc agreements and resolutions in specific circumstances. 9 I n short, when the E C O W A S Treaty states that "each Member-State shall take all steps to secure the enactment of such legislation as it is necessary to give effect to this Treaty", it is establishing a legal framework the scope of which permits ad-hoc agreements to be developed in response to actual needs.

9 Georges D. Landau , The Treaty for Amazonian Cooperation: a Bold New Instrument for Development, in: Georgia Journal of International and Comparative Law 10 (1980), 463-489 (479).

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b) Membership Rights and Obligations Although it is nowhere expressly provided, the principle of sovereign equality of Member-States pervades the E C O W A S Treaty. O n the basis of this principle, members enjoy equal rights, including voting rights in which unanimity is required, and presumably equal duties. As regards equal rights, there is little w i t h which one can quarrel, but there are issues of concern w i t h respect to equal duties. For instance, apart from the obligation of ensuring the promotion of the provisions of the Treaty and execution of the decisions of the Community, the most important of the obligations of membership is the sharing of the burdens of the budget. Pursuant to the relevant provisions of Articles 51 and 53 concerning the contributions by Member-States to Community budget, Article 5 of the Protocol Relating to the Fund for Cooperation, Compensation and Development annexed to the Treaty reads as follows: The contribution of each Member-State ... shall be assessed on the basis of a coefficient which takes into account the gross domestic product and the per capita income of all Member-States. For this purpose, the coefficient shall be calculated as one-half of the ratio of the gross domestic product of each Member-State to the total gross domestic product of all Member-States plus one-half of the ratio of the per capita income of each Member-State to the total per capital income of all Member-States.

This provision raises several issues. One is that members are required to contribute to the budget in accordance w i t h their national incomes and not on the basis of equality. I t is on the basis of this formula for budgetary apportionment that members are required to make the following percentage contributions: Benin 3, Burkina Faso 2.6, Cape Verde 1, Côte D'Ivoire 13, Gambia 2.6, Ghana 12.9, Guinea 2.9, Guinea-Bissau 1.5, Liberia 6.7, Mali 1.9, Mauritania 2.6, Niger 2.1, Nigeria 32.8, Senegal 5.4, Sierra Leone 4.4, and Togo 3.6. 10 The scale of assessment obviously takes into consideration the inequality in the national incomes of the members. Thus, whereas all the Member-States are equally obliged to fulfill at all times all the aims and purposes of the Community, their duties cannot actually be said to be exactly equal in this regard. Article 54 (2), which provides that Member-States undertake to pay regularly their annual contributions to the budget of the Community, may be regarded as merely emphasizing to members the importance of regular payment of their contributions and not as necessarily adding to the obligations assumed through membership. I t is significant that Article 53 (3) provides a penalty of suspension from participation in the activities of the Community where a Member-State is in arrears at the end of any financial year in the payment of its contributions for reasons other than those caused by public or natural calamity or exceptional circumstances which gravely affect its economy. 11 10 Figures obtained from the Librarian at the E C O W A S Executive Secretariat, Lagos, Nigeria. 11

This provision not withstanding, many members are in arrears w i t h their contributions

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Acquisition of the status of member of the Community is easy. As already indicated, original members are those that ratify the Treaty. Under Article 62 (2) other West African States may obtain membership by accession to the Treaty, the instruments of which accession are deposited with a government designated for that purpose. The latter notifies all other Member-States and the Treaty enters into force for the acceding State on the date its instrument of accession is deposited. The procedure by which membership in the Community terminates is similarly easy. Article 64 requires a State desiring to withdraw its membership to forward a one-year written notification to the Executive Secretary. When the twelve calender months notification is on, the Member-State is under obligation to continue to observe the provisions of the Treaty and discharge its other duties under the Treaty. If at the end of the twelve calender months it does not withdraw its notification, the State automatically ceases to belong to the Community and the provisions of the Treaty no longer apply to it. The founding fathers of E C O W A S had envisaged that a lapse of one year between the issuance of withdrawal notice and cessation of membership would allow both the withdrawing State and the Community enough time to adjust all outstanding rights and obligations. c) Institutional Structure of the Community The E C O W A S Treaty makes extensive provisions for institutions charged with administering and directing the affairs of the Community. Under Article 4, four principal organs are established through which the Community accomplishes its purposes: (a) the Authority of Heads of State and Government; (b) the Council of Ministers; (c) the Executive Secretary; (d) the Tribunal of the Community. Also provided for are (e) several technical and specialized commissions, including a Fund for Cooperation, Compensation and Development. aa) The Authority I t is provided in Article 5 that the principal governing institution of the Community is the Authority of Heads of State and Government (hereinafter "the Authority"). One of its main functions is to direct and control the "performance of the executive functions of the Community for the progressive development of the Community and the achievement of its aims", and its decisions and directions are to the Community. As reported by the Executive Secretary in May 1988, 1 State owes contributions from 1978. 2 States owe from 1981, 3 from 1982, 5 from 1983, 5 from 1984, 8 from 1985, 11 from 1986, and 13 from 1987. N o effort has been made to enforce the provision, although some heads of State recently insisted that some explanation be demanded of the defaulters and that specific action be taken against them. See E C O W A S , Annual Report of the Executive Secretary 1987-1988, Lagos 1988,45 and Contributions and

complaints, in: West Africa, 4 July 1988, 1197.

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binding on all institutions of the Community. As its name signifies, the Authority is composed of the Heads of State and Government or their accredited representatives from all Member-States. I t meets at least once a year in ordinary session, and its chairmanship rotates among the members. Paragraph 4 of Article 5 gives the Authority the power to determine its own rules of procedure including that for convening its meetings and conducting business at such meetings. During its meeting in Lagos on 21 and 22 April 1978, the Authority considered and adopted its Rules of Procedure and decided that as a rule its ordinary meetings should be held in the future on the anniversary of the signing of the E C O W A S Treaty; that is on the 28th of May each year. 12 bb) Council of Ministers The Council of Ministers is next in the hierarchical order of the Community's institutions. Established under Article 6, it consists of two representatives from each Member-State. I t is required under Article 6 (4) to meet twice a year in ordinary session, and extraordinary meetings are convened as and when necessary. One of the ordinary meetings immediately precedes the annual meeting of the Authority and is primarily directed toward preparing for the latter. The chairmanship of the Council also rotates. The major functions of the Council are stated in Article 6 (2) to be monitoring the functioning of the Community; making recommendations to the Authority on the efficient and harmonious development of E C O W A S and directing and supervising all subordinate institutions. Article 7 in defining the exact relationship between the Authority and the Council establishes the Authority's precedence by giving it the power to determine the procedure for the dissemination of both its decisions and directions and those of the Council and for matters relating to their coming into effect. The Council also, subject to any directions that the Authority may give, determines its own procedure including that for convening meetings, conducting its business, and rotating chairmanship among its members. 13 cc) The Executive Secretariat Article 8 provides for the Executive Secretariat. Headed by an Executive Secretary who is assisted by two Deputy Executive Secretaries, it performs the main administrative and executive functions of E C O W A S and services all the other institutions. I t also initiates and proposes policy measures and programs to the technical commissions, submits a report of activities to all sessions of the Council and all meetings of the Authority, undertakes such other functions as the Council 12

Final Communique, Summit Meeting, 1978, E C O W A S Document E C W / H S G/I/21/Rev. 1. 13

E C O W A S Treaty, A r t . 6 (5).

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of Ministers may assign to it, and makes proposals that may assist in the efficient and harmonious functioning and development of the Community. The Executive Secretary is appointed by the Authority for a term of four years and can be reappointed only for another term of four years. He is removed from office by the Authority upon the recommendation of the Council. 1 4 The appointment of his two deputies 15 as well as the determination of their terms and conditions of service and those of other officers of the Executive Secretariat are under the control of the Council of Ministers, who shall, "subject to the paramount importance of securing the highest standards of efficiency and technical compétence", have due regard " t o the desirability of maintaining an equitable distribution of appointments to such posts among citizens of Member-States". 16 The Council of Ministers have since enjoyed wide latitude in the exercise of its powers not only in preparing the ground for the meetings of the Authority but also in taking far-reaching decisions in the area of appointment and recommendations to the Authority — a positively developing trend. The Treaty expressly specifies that all officers of the Secretariat "in the discharge of their duties, owe their loyalty entirely to the Community". 1 7 They are, therefore, expected to function, according to the accepted rule of international secretariats, as uninstructed bureaucratic and technical experts whose positions are insulated from the politics and diplomacy of their States of origin. This independence accorded the officers of the Secretariat is expected to enhance cooperation by allowing technical issues to be removed from political considerations, of course, depending on the overall outlook, skills, decision-making style, and dynamism of the Secretariat officials. 14 Loc. cit., A r t . 8 (2) (3). Pursuant to A r t . 61 (1) (a) which empowers the Authority to appoint the Executive Secretary at its first meeting after the entry into force of the Treaty, the Authority at its Lagos Summit of 21 and 22 April 1978, ratified the appointment of Aboubakar Diaby-Quattara of Côte D'Ivoire, the nominee of his State, as the first Executive Secretary of E C O W A S . H i s appointment was renewed w i t h effect from 1 January 1981 for his second four-year term. In January 1985, he was succeeded by Momodu Munu of Sierra Leone whose appointment was not renewed by the A u t h o r i t y during its 11th Summit in Togo in June 1988, but the Authority agreed that Sierra Leone should nominate another national t o fill the vacancy as from 1 January 1989, for a four-year term. E C O W A S Document ECW/HSG/I/21/Rev. 1; Official Journal of E C O W A S , 3 (1981), 17; and New Nigeria (Kaduna), 27 June 1988. 15 The two deputies are responsible for the two branches of the Secretariat, Administrative and Economic matters, respectively. The Deputy Executive Secretary for Administrat i o n has four directors working under him, respectively charged w i t h the departments of Administration, Finance, Legal Affairs, and Social and Cultural Affairs. The Deputy Executive Secretary for Economic matters also has under him four directors who head the departments of Trade, Customs, Immigration, Monetary and Payments; Industry, Agriculture and Natural Resources; Transport, Telecommunications and Energy; and Economic Research and Statistics. See (note 3), 12, 15. 16 E C O W A S Treaty, A r t . 8 (7). 17 Loc. cit. , A r t . 8 (8). The founding fathers of E C O W A S obviously borrowed freely here from the provisions of A r t . 100 of the United Nations Charter.

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Because of the type of responsibilities which the Executive Secretary and his staff are to shoulder, it was found necessary to accord them some measure of privileges and immunities. Accordingly, Article 60 which stipulates that the Community is an international organization enjoying legal personality, in the exercise thereof it is represented by the Executive Secretary, also provides that the Council of Ministers must determine the privileges and immunities to be granted to the personnel of the Executive Secretariat by the Member-States. Thus, the Authority at its meeting in Lagos in April 1978 adopted the General Convention on Privileges and Immunities upon the recommendation of the Council. 1 8 dd) The Tribunal of the Community The Treaty makes provision for the Tribunal of the Community, whose composition, competence, and other matters are decided by the Authority. The Tribunal interprets the provisions of the Treaty, settles disputes referred to it, and ensures "the observance of law and justice". 1 9 I t is significant that the Community has established a body which will authoritatively interpret the Treaty and other E C O W A S rules. I t is not, however, clear how the Tribunal, given its other charge to ensure the observance of law and justice will make its interpretation binding on Member-States in the absence of a supranational law-enforcement agency. ee) Technical and Specialized Commissions In addition to the Authority, Council, Secretariat, and Tribunal, E C O W A S institutional structure has five specialized and technical commissions, namely: the Trade, Customs, Immigration, Monetary and Payments Commission; the Industry, Agriculture and Natural Resources Commission; the Transport, Telecommunications and Energy Commission; the Social and Cultural Affairs Commission; and the Fund for Cooperation, Compensation, and Development. Article 4 (1) (e) of the Treaty originally provided for the first four and the discussion that immediately follows applies to them only. The Fund is discussed thereafter. The Commissions are made up of experts from all member countries. Their primary function is to draw up integration programs in their relevant fields of competence and to assess the implementation of the programs. They prepare reports and submit recommendation to the Council through the Executive Secretary. Although as advisory bodies they lack authoritative decision-making power, 18

What actually was adopted by the A u t h o r i t y for the use of the Community was Convention on the Privileges and Immunities of the United Nations, adopted by the General Assembly on 13 February 1946, U N - D o c . A/43/Rëv. 1 G A O R 1st Sess., 1 Part, Plenary Meetings, Annex 22, 644, reprinted U N - D o c . ST/LEG/9. 19 E C O W A S Treaty, A r t . 11. A r t . 56 provides for settlement of disputes by the Tribunal regarding the interpretation or application of the Treaty where direct agreement fails, and the decision of the Tribunal is final.

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their role in the cooperative and integrative process may prove to be very significant in that they serve as a bridge between the national governments and the private sector. H o w the Fund developed into an institution of E C O W A S is so interesting as to warrant its being discussed separately. Originally assigned an entire chapter in the Treaty (Chapter XI), its primary tasks include funding regional development projects and disbursing compensation to Member-States that suffer loss as a result of trade liberalization or location of Community enterprises. The Fund is also used to guarantee the foreign investment made in pursuance of the Treaty's provisions for harmonizing industry and to facilitate mobilization of internal and external finance for Member-States and the Community. 2 0 Its resources are derived from contributions of Member-States (determined as per the formula already indicated); income from Community enterprises; receipts from bilateral and multilateral sources and other foreign sources; and all kinds of subsidies and contributions from all sources. 21 Article 51 (3) of the Treaty leaves details about the mode of operation, organization, management and other matters pertaining to the Fund to the Protocol Relating to the Fund for Cooperation, Compensation and Development annexed to the Treaty. According to the Protocol (Art. 28) the Fund has a Head Office under a Managing Director appointed by Council for a term of four years, reappointed for another term of four years only. H e serves as the Chief Executive and legal representative of the Fund, and he is assisted by a Deputy Managing Director appointed and dismissed in the same manner as himself. A Board of Directors made up of a Minister from each Member-State assisted by an alternate and experts is charged with the responsibility of ensuring the proper management of the Fund (Art. 25 of the Protocol). Under Article 29 of the Protocol, the Managing Director and all staff of the Fund owe their loyalty entirely to the Fund in the discharge of their duties, and Article 28 (3) provides that the Executive Secretary attends meetings of the Board of Directors without the right to vote. Despite these provisions, it was not clear whether the Fund was created as a temporary special feature whose operation was to be limited to the initial years of the development of the Community or whether it would be institutionalized in the Treaty. Upon the promulgation of the Protocol in November 1976, the Head Office of the Fund was actually established in Lomé in January 1977, the same date that the E C O W A S Executive Secretariat had become operational in Lagos. Romeo Horton of Liberia was appointed Managing Director of the Fund at same time that Aboubakar Diaby-Quattara became Executive Secretary of ECOWAS. I t transpired that both the Fund and the Secretariat became embroiled in conflict, initially concerning the degree of independence to which the Fund was 20 Loc. cit., A r t . 52. 21 Loc. cit., A r t . 51 (1).

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entitled and conflicts of styles of operation by Horton and Diaby-Quattara. The latter's insistence that the Fund constituted an administrative arm which must be controlled by the Secretariat was countered by the former's desire for more freedom of action. As the dispute progressed, hampering the progress of the Community, most members of the Authority openly showed sympathy towards Diaby-Quattara' s position. Consequently, during the May 1979 summit, the Authority decided once and for all that the Executive Secretary heads the administrative structure of the Community and that the Fund based in Lomé is an operational unit for the proper management of Fund resources and "the financial instrument for the implementation of Community policies". 2 2 The Authority in effect upheld the provisions of Article 8 (a) of the Treaty in relation to the administrative responsibilities of the Executive Secretary and specified that it was meant to be applied to the letter of the law. I t also amended Article 4 (1) (e) of the Treaty to include the Fund as one of the institutions of E C O W A S and relevant articles of the Protocol to bring them into conformity w i t h its decision. 23 I t has been argued that the unequal contributions to the Fund by members could result in conflicts between beneficiaries of the compensatory scheme and regular contributors who may not always qualify for compensation; that E C O W A S would thus be viewed by its various members as an association of perpetual beneficiaries and benefactors; and that the Community could face paralysis when expected rewards do not materialize and there is unwillingness to make sacrifices. 24 Viewed differently, the compensatory scheme constitutes an obviously important equalizing element in the cooperative system. A t the initial stages of integration the more developed Member-States may appear to bear a heavier burden than the less developed, but in the long run they are likely to gain more from other activities, such as trade liberalization, when the Community becomes fully operational. Despite the disaffection any member could feel, Article 34 of the Protocol provides that no Member-State can withdraw from the Fund unless it withdraws entirely from the Community. ff) Financial Controls The other significant matters for which the Treaty makes provision are proper maintenance of and accounting for the finances of the Community. A Financial 22

Official Journal of E C O W A S , 1 (1979), 13. See also West Africa, 25 February 1980,351,

352. 23 The relevant articles of the Protocol referred to here are Articles 24,25,26, and 27. For details see Official Journal of E C O W A S , 1 (1979), 13. 24 Sam Oloftn , E C O W A S and Lomé Convention: A n experiment in complementary or conflicting Customs Union arrangements, in: Journal of Common Market Studies, 16 (1977), 52-72 (65).

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Controller is provided in the Executive Secretariat, 25 and he does the internal auditing. A n External A u d i t o r appointed and removed by the Authority on the recommendation of the Council does the external auditing. 2 6 d) Features of Institutional Issues aa) Free Trade and Common External Tariff Expanded intra-West African trade had in the past faced economic, political and institutional, and sociocultural and infrastructural problems. 27 Trade preferences which the francophone West African States enjoyed by virtue of their link with the European Economic Community (EEC) fostered their unwillingness to cooperate w i t h other countries of the subregion and encouraged dependency for the supply of their requirements for manufacturai goods. Those West African countries that attempted to promote industrialization endeavoured to accomplish it through the imposition of high tariffs, the resultant effect of which was increase in the price of goods and the reduction of their competitive ability. The net effect was discouragement of intra-West African trade, particularly trade w i t h non-associates of the EEC. These problems, coupled w i t h the multiplicity of currency systems and exchange rates and the high prices and low quality of products manufactured in the subregion, slowed the growth of trade among West African States. I n order to meet many of the concerns of West African leaders and peoples and in recognition of the special economic vulnerability of the subregion, the founding fathers agreed in the E C O W A S Treaty to a number of provisions designed to liberalize subregional trade. Basically, this is done by providing a transitional period of fifteen years from the coming into force of the Treaty within which a customs union is to be established. 28 Customs and similar duties, w i t h agreed exceptions, may not be increased within the next two years and Member-States during this period will provide the Executive Secretariat with information about such duties. 2 9 W i t h i n the following eight years, members are to reduce and ultimately eliminate import duties in accordance with a schedule to be worked out by 25

E C O W A S Treaty, A r t . 8 (5). Loc. cit., A r t . 10. During the 1978 Lagos Summit, the Authority designated Sierra Leone t o nominate the External Auditors and at the Dakar Summit (1979), the appointment of R. Dillisworth and Company as the first External Auditors was ratified. They were since January 1985 succeeded by Mauritania's firm of Hariba and Company. E C O W A S Documents ECW/HSG/I/21/Rev. 1 and E C W / H S G / . I I , 7 R e v . l . Also Official Journal of E C O W A S , 5 (1983), 8; 6 (1984), 21; and 11 (1987), 13. 27 E. C. Edozien / E. Osagie , Intra-West African Trade in the Last Decade: Problems and Prospects, in: E. C. Edozien / E. Osagie (eds.), Economic Integration of West Africa, Ibadan 1982,17-118. 28 E C O W A S Treaty, A r t . 12. 29 Loc. cit. , A r t . 13 (2). 26

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the Trade, Customs, Immigration, Monetary, and Payments Commission, taking into account the need to avoid disruption of the revenue Member-States derive from import duties. 30 Moreover, recognizing that the character of the integrating scheme must be defined by the common external tariff more than the elimination of tariffs and non-tariff barriers to intraregional trade, because it is the common external tariff that determines the protection granted to regional industry (whether or not the integrating scheme is to foster a further stage of import-substituting industrialization) and the character and nature of the new stage of industrial development, the Treaty provides that at the end of the eight year period and during the next five years, Member-States will gradually abolish existing differences in their customs nomenclature. 31 Based on these provisions, the first stage of the trade liberalization process was to have been accomplished by 1977, the second by 1985, and a common external tariff and elimination of import duties from third countries were to be simultaneously achieved by 1990. However, meetings of the Authority between 1976 and 1979 failed to adopt a trade liberalization scheme and to establish a common external tariff. Differences between individual countries' preferences and those of other subregional organizations caused the delay in implementing the trade liberalization program, 32 of which announcement had to wait until the Authority's May 1980 summit. The Authority distinguished three categories of goods: products manufactured by enterprises accorded Community status, products manufactured in a MemberState already accorded preferential treatment under other existing subregional cooperation organization — the francophone Economic Community of West Africa ( C E A O ) and the Mano River U n i o n ( M R U ) — and other products. Tariffs for the first group were to be eliminated by 1981. O n the second group, tariff liberalization was to start on the same date for the industrially more advanced members (Côte D'Ivoire, Ghana, Nigeria, and Senegal), which were to eliminate all barriers by 28 May 1985; the rest of the members had eight years (up to 28 May 1989) to lift barriers. The third category, the bulk of the E C O W A S tariff schedule, was subjected to a more gradual process of intraregional tariff reduction. Tariffs on this group are to be completely removed by the industrially more advanced countries over a period of six years beginning on 28 May 1981, less advanced members 30 31 32

Loc. cit., A r t . 13 (3). Loc. cit., A r t . 14.

Most Member-States derive their revenues from indirect taxes, primarily import and export duties, and before the birth of E C O W A S , marked differences existed between countries in the importance and structure of tariffs and quantitative restrictions as sources of government revenue. For instance, in 1973 Gambia reportedly had more than 50 percent of total government revenue originating from customs duties, Benin 49 Burkina Fasi 47 Sierra Leone 37 %, and Côte D'Ivoire 35 %. West Africa , 24 Mai 1982,1371.

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have eight years starting from the same date. 33 Tariffs on all categories are therefore supposed to be completely eliminated by 1989. Non-tariff regional barriers, also scheduled for complete elimination by May 1985, were left to the discretion of members, casting doubts as to their abolition. O n the basis of the above program, a common external tariff should be achieved by May 1994, but no definite program has been decided. However, since intraCommunity trade liberalization is already behind schedule, the abolition of existing differences in Member-States' external customs tariffs will also arrive late. I t is still very early to assess the gains or losses to Member-States of the elimination of the intraregional trade barriers, especially since the E C O W A S program has not been fully implemented by members. I t is, nonetheless, expected that the action will ultimately boost trade within the Community, which, in turn, should engender purposeful and coordinated industrial planning from which every country will gain, although some may gain more than others. 34

bb) Free Movement of Peoples W i t h i n the customs area there is in principle to be free movement of persons, goods, services and capital. T o facilitate this, the Treaty contains one provision that touches the individual in the Community: citizens of Member-States are to be regarded as "Community Citizens", and Member-States are by mutual agreement w i t h each other to eliminate obstacles (visitors visas, resident permits, etc. ) to their freedom of movement, residence, and commercial and industrial activity. 3 5 The obvious ambiguity of the term "Community Citizens" was removed by its definition by the Authority in 1982 as "citizens of Member-States fulfilling the conditions to be defined in the Protocol relating to the citizenship code". 3 6 N o details were given on the matter of free movement of persons in the final communique of the A p r i l 1978 Lagos summit, but the Authority decided in principle to adopt a multilateral agreement on the free movement of persons within the Community and directed the Council of Ministers to propose a text to be considered at the next summit. 3 7 During the May 1979 Dakar summit, the Authority considered and signed a "Protocol on Free Movement of Persons, Right of Residence and Establish33

Official Journal of ECOWAS, 2 (1980), 29-30. A preliminary assessment which also discusses problems involved is Julius Emeka Okolo , Intra-ECOWAS Trade Liberalization: A n Assessment, Paper presented at the 28th Annual Convention of the International Studies Association (ISA), Omni Shoreham, Washington, D.C., U.S.A., 15-18 April 1987. 34

35 36 37

ECOWAS Treaty, Art. 27. Official Journal of ECOWAS, 4 (1982), 55. ECOWAS Document ECW/HSG/I/21/Rev. I.

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ment". 3 8 I t grants Community citizens the right to enter, reside and establish in the territory of Member-States, but it stipulates that free movement of persons will be achieved in three phases: first the right of entry and abolition of visas, then the right of residence, and finally the right of establishment (Article 2 of the Protocol). The three phases are to be spread over fifteen years at five-year intervals. In the first phase, the Authority decided to remove visa requirements only in respect of Community citizens intending to stay for a maximum of 90 days in another Member-State. Decision on the crucial matters of residence and establishment was postponed. The Authority had merely stated that "a phased program for effecting the Right of Residence and Establishment should be drawn up, taking into account the effects on Member States of the abolition of visas during the first phase". 39 The Protocol was signed and annexed to the Treaty on 29 May 1979, but it did not enter into force until a year later on 20 May 1980 when it had been ratified by the required minimum of seven Member-States. Thenceforth, E C O W A S citizens have preferable right of entry to Member-States and to move about freely within the Community provided that they possess valid travel documents and international health certificates. But until the second and third phases of the Protocol are implemented, no ECOWAS citizen is free to enter any Member-State in contravention of its immigration laws. If he does enter legally, he is not free to reside and take up employment unless he follows the regular procedure prescribed by the host State's immigration laws. Moreover, it is not every Community citizen that is allowed to visit or reside in any Member-State, even if for 90 days, for a State has the right to refuse admission into its territory to any Community citizen who comes within the category of inadmissible immigrants under its laws (Article 4 of the Protocol). Additionally, those admitted do not have unlimited freedom to stay, for they cannot exercise rights higher than those allowed the citizens of their host countries. Thus, where for various reasons they are found to be undesirable, a decision could be made to expel them or to have them repatriated. If they are expelled, the Member-State is required to notify them, their government and the Executive Secretary of ECOWAS, bear the expenses incurred in the expulsion, guarantee their security, and protect their property. If they are repatriated a similar notification requirement must be observed, except that the person repatriated or his or her government bears the cost of repatriation (Article 11 of the Protocol). Free movement of persons has been the most popularly known aspect of E C O WAS, and the implementation of the first phase of the protocol generated much hostility in several States where the labour force felt threatened by the spectre or actual invasion of foreign competitors. This hostility was particularly widespread in Ghana and Nigeria — two of the more developed countries of the Community. 38 39

For full text of the protocol, see Official Journal of E C O W A S , 1 (1979), 3-5. E C O W A S Document E C W / H S G .II, 7 Rev. I.

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In time the former would rationalize the closure of its borders in September 1982 and the latter its expulsion of illegal aliens in January 1983 as necessary and expedient measures for counteracting economic and security strains. These strains, they said, were caused by the influx of Community citizens after the abolition of visas under the E C O W A S protocol. 4 0 I n spite of the problem of the first phase of free movement of people, however, the E C O W A S A u t h o r i t y at its 30 June to 2 July 1986 summit in Abuja, Nigeria, significantly approved the implementation of the second phase of the protocol. 4 1 But this has also not received the unquestioned support of some Member-States. Liberia, for instance, takes the position that it could not presently implement the second phase until the "Liberianization policy" allows Liberians to get priority consideration for employment and business opportunities, among other things. 42 Whatever qualifications there may be about putting the second phase into practice, however, its approval w i t h the full support of Nigeria demonstrates a major token of continued commitment to the Community. cc) Defence Pact The E C O W A S Treaty contains no specific provision for cooperation on defence. But during its 1978 meeting in Lagos the A u t h o r i t y adopted a Protocol on Non-Aggression intended to create a "friendly atmosphere, free of any fear of attack or aggression of one [S]tate by another" 4 3 to facilitate cooperation. The West African subregion has had its share of Africa's frontier disputes, sometimes involving violent clashes among citizens of neighbouring States. There have also been accusations and counter-accusations of plots to overthrow governments and problems of internal instability thought to be masterminded by external forces. Moreover, the E C O W A S tribunal, whose establishing provisions do not make its acceptance mandatory on Member-States, is inadequate as an instrument for ensuring the regional stability called for in the non-aggression pact. The protocol was the first purely political decision taken by E C O W A S . Although it could generate trust, it was thought to be an insufficient insurance against external aggression and externally-supported domestic insurrection and revolt, which could still threaten the Community's stability. A t the 1979 Dakar summit, therefore, the Authority happily welcomed two defence pact proposals submitted at their own initiatives by President Leopold Senghor of Senegal and Eyadema of Togo and directed the chairman of Council of 40 For a detailed analysis of the protocol and some of its problems, see Julius Emeka Okolo, Free Movement of Persons in E C O W A S and Nigeria's Expulsion of Illegal Aliens, in: The W o r l d Today 40 (1984), 428-436. 41 E C O W A S : Phase T w o Begins, in: West Africa, 7 July 1986, 1412.

42

West Africa , 3 November 1986, 2333.

43

See (note 3), 26.

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Ministers and the Executive Secretary to "convene a meeting of a technical commission of ministers composed of ministers of foreign affairs, defence, finance, economic affairs as well as chiefs of defence staff to consider the said documents and submit a harmonized draft defence pact to the next meeting of the summit". 4 4 After an initial failure to reach agreement on the pact owing to strong objections to the proposal from three Member-States: Cape Verde, Guinea-Bissau, and particularly Mali which saw the defence pact as a step toward the "colonial reconquest" of Africa and capable of splitting the continent into blocs dominated by outside powers, 45 a final draft produced by an eight-nation ministerial committee was signed by all States except the three objectors. Under the Protocol on Mutual Assistance on Defence, units from the armies of E C O W A S countries will constitute an allied force of the Community ( A A F C ) under a force commander and will, among other things, carry out joint military exercises. Ministers of defence and foreign affairs of Member-States constitute a Defence Council under the current chairmanship of the Authority, and the chief of staff from each State will form a Defence Commission. Provision is also made for a Deputy Executive Secretary for Military Affairs whose functions include updating plans for the movement of troops and logistics and initiating joint exercises, preparing and managing the military budget of the Secretariat, and studying and making proposals to the Executive Secretariat, in respect of matters relating to personnel and equipment within his jurisdiction. 4 6 Three categories of hostile military action that E C O W A S will handle are identified under the protocol. The first is aggression from a non-Member-State. A t the request of a Member-State the Authority shall meet and decide on the expediency of military action and entrust its execution to the force commander of A A F C . 4 7 The then Executive Secretary Diaby-Quattara had stated that the meeting would be held within forty-eight hours of a Member-State's request. 48 I n such a case of external aggression E C O W A S forces will go to the defence of the member. The second is conflict between two Member-States. The A u t h o r i t y is to meet urgently and take appropriate action for mediation in the form of deploying the A A F C as a peace-keeping force. 49 The third is internal conflict in a Member-State. When such a conflict is actively maintained and sustained from the outside, the A u t h o r i t y will 44

E C O W A S Document E C W / H S G / I I . 7 Rev. I and Official Journal of E C O W A S , 1 (1979), 13. 45

West Africa , 9 June 1980, 1038.

46

Protocol Relating to Mutual Assistance on Defence, in: Official Journal of E C O W A S , 3 (1981), 9-13. Relevant provisions of the protocol covered above are Arts. 7, 11, and 12. 47 Protocol Relating to Mutual Assistance on Defence, Arts. 6 and 16. 48 Africa Research Bulletin, 15 July 1981,6072. The delayed response would have allowed a powerful adversary enough time to devastate its victim before E C O W A S could come to the rescue. 49 Protocol Relating to Mutual Assistance on Defence, A r t . 17. 9GYIL32

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take action as in the case of external aggression. But if the conflict remains purely internal, Community forces shall not intervene. 50 The defence pact is an innovation of E C O W A S and has no counterpart in the integrative groupings of Latin America, Asia, and other parts of Africa. But i t has still not been ratified by the necessary seven Member-States to make it operative. However, E C O W A S Treaty has already been amended to include the Defence Council as one of the principal institutions of the Community and the Defence Commission as one of the technical and specialized commissions, 51 pending, of course, the ratification of the protocol. N o standing army is provided by the pact. Rather, the E C O W A S army exists only when needed in emergencies, raising doubts as to how troops w i t h different traditions, languages, training, and equipment could form an effective fighting force w i t h o u t more continuous training and socialisation than are envisaged. I t is not also clear how E C O W A S will handle external aggression against a francophone Member-State that has formal military ties w i t h France, particularly where France intervenes militarily, 5 2 or how i t proposes t o fund a cumbersome military administration and finance the material for arming a defence force during these hard times when it is endeavouring to establish itself as a sound economic union. 5 3 dd) Sectoral Industrial Planning and Related Matters As often happens when industrialism constitutes a State's ideology of development, industrialization is an issue which concerns E C O W A S Member-States. The Treaty, however, deals w i t h this issue. Article 29 provides, as a start to achieving industrial harmonization, that Member-States will furnish each other w i t h major feasibility and similar reports on projects within their territories, exchange information about technical partners and other foreign groups and report on their experience of industrial projects, and where possible undertake joint industrial studies and projects and finance research into the transfer of technology and development of new products based on raw materials found inside member countries. Article 30 states that members should promote a "similarity of industrial climate" in order to "avoid unhealthy rivalry and waste of resources". Article 31 calls for a maximum exchange of experts and training facilities and "division of labour" for projects, whereas Article 32 provides that industrial integration w i l l be 50

Loc citArt. 19. Additional Protocol Amending Article 4 of the Treaty of ECOWAS Relating to the Institutions of the Community. Official Journal of ECOWAS, 3 (1981), 7, 8. 52 France has existing defence and or military cooperation agreements with the ECOWAS States of Benin, Burkina Faso, Côte D'Ivoire, Mauritania, Niger, Senegal, and Togo. The Military Balance 1980-1981, London 1980, 57. 53 For a more detailed assessment of the Defence Pact, see Julius Emeka Okolo , Securing West Africa: The ECOWAS Defence Pact, in: The World Today, 39 (1983), 177-184. 51

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encouraged and as far as possible the Community's economic dependence on the outside world and disparity in the levels of development among Member-States will be eliminated. The provision about the elimination of disparity in levels of development among members (Article 32 paragraph 1) may be designed to allay the fears expressed by the LDCs during the negotiations, but one must wonder how this can be achieved between Nigeria and Cape Verde, for example. The main yardstick to be used in the allocation of industrial projects is the factor endowments of members and their various absorptive capabilities. In effect, natural resource potentials will be the basis for allocating each Member-State an industrial project, which should be undertaken either jointly by Member-States or between ECOWAS and foreign investors. E C O W A S is embarking on sectoral programs of industrial development. Sectoral development planning will not leave any Member-State lagging behind, since all will eventually have specific industrial projects undertaken by the Community. Indeed, in the interest of balanced and harmonized development, special treatment is to be accorded the relatively less developed Member-States, irrespective of economic costs, in order to prevent wider economic disparities. Moreover, sectoral planning will promote complementarity in production rather than wasteful competition, which is destructive for the goals of development of the integrative and cooperative enterprise. 54 Current E C O W A S activities in the area of industrialization are part of its preparation of medium-term (five-year) programs for various sectors for promotion of greater intraregional trade. The sectors include agriculture, telecommunications, transport, and postal services for which provisions are also made in the Treaty. Special care is taken to provide for the harmonization of Member-States' agricultural policies, development of joint agricultural training programs, 55 and harmonization of the exploitation of natural resources. 56 The Treaty further enjoins members to evolve common transport and communication programs, including road, railway, sea, and air transports and telecommunications and postal services to assist the cohesion of the Community and to promote movement of peoples, goods, and services. 57 The Treaty contains another significant provision that touches on industries: the agreement to harmonize energy policies by undertaking to exchange information on research, plan joint training, and harmonize mineral resources policies and practices as well as formulate a common energy and mineral policy. 5 8 As with the other features of the treaty industrial development 54

Arthur Davies y Cost-benefit analysis within E C O W A S , in: The W o r l d Today, 39 (1983), 170-176 (174). 55 E C O W A S Treaty, A r t . 34. 56

Loc. cit. y Art. 35.

57

Loc. cit. y Arts. 40-47. Loc. cit. , A r t . 48.

58

9*

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and harmonization and related provisions are designed to allay special concerns. Their inclusion highlights the importance the contracting parties attach to the issues. ee) Institutional Mechanisms and Treaty Implementation Before leaving the discussion of institutional structure and issues, there is need to examine the mechanisms established for the implementation of the Treaty. A variety of expressions is employed by the Treaty to connote different degrees of cooperation among the contracting parties. For example, Member-States agree to " cooperate " to avoid unhealthy rivalry and waste of resources (Article 30 (b)); to " use their best endeavours to bring about the merger of their national airlines ..." (Article 44), and to "promote close collaboration among their postal administrations" (Article 47 (2) (a)). They *undertake to prohibit the practice of dumping goods within the Community" (Article 19 (1)); and to "harmonize their energy and mineral resources policies" (Article 48 (2) (b)). A n d they "establish " the various institutions of the Community previously discussed. These agreements range from the hortatory to actual commitments to take concrete actions. I t is to the credit of the founding fathers that they established administrative institutions, including the technical and specialized agencies, that are capable of coping effectively w i t h the wide range of tasks outlined in the Treaty. The institutionalized and centralized Executive Secretariat w i t h its technical departments and more or less supranational officials, apart from serving the meetings, is capable of carrying out the integrative and cooperative functions of the Community. Whether it actually does so is a different question. 59

I I . Relations with Other Regional and International Bodies E C O W A S Treaty allows Member-States to belong to other regional or subregional associations provided that such membership does not "derogate from the provisions of this treaty". 6 0 What this provision does is to accord recognition to a multiplicity of subregional groupings — as many as 32 — existing side by side w i t h 59

A t the mid-1988 11th Summit of the Authority, a decision was made to require the Member-State t o whom the post of Executive Secretary is allocated to present a choice of three candidates as against the previous practice of presenting only one candidate. The Secretary is henceforth to be appointed on the basis of his presumed capacity to perform his duties effectively. I t has been suggested that Munu s outster had to do w i t h his inefficiency and lack of dynamism. E C O W A S leaders may now be looking for inspiration from a Secretariat that could persuade them t o give it a greater role in conception and initiation. If they are able t o get one, the Community will benefit. West Africa , 4 July 1988, 1195. 60

E C O W A S Treaty, A r t . 59 (1).

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E C O W A S , the most notable being the M R U and the francophone C E A O . 6 1 E C O W A S has found it difficult to accommodate especially these two organizations whose objectives and programs are more competitive than complementary to its own. Illustrative is an examination of the trade liberalization schemes of the three organizations. C E A O and M R U , both of which were created in 1973, aim to eliminate tariffs on trade and sometimes even call for the granting of preferential treatment in their respective intra-union trades. Prior to the inauguration of the C E A O Treaty, intra-CEAO trade was running at a much higher level than the average level for the rest of E C O W A S . 6 2 Presently, both C E A O and M R U are implementing trade liberalization programs whose provisions are evidently incompatible w i t h those of E C O W A S . For instance, while C E A O , like E C O W A S , has the ultimate goal of establishing a customs union w i t h a common external tariff (over a period of twelve years as compared to fifteen years of E C O W A S ) , it does not envisage a general free trade area within the customs union as is the case for E C O W A S . C E A O ' s trade liberalization scheme calls for a preferential trading area through the use of the Regional Cooperation Tax ( T C R ) , and a free trade will exist only for goods which are raw produce. M R U ' s scheme also envisages the establishment of a protected preferential trade area, embracing the entire markets of its member-countries. Under the provision of its "intra-union trade arrangement", goods of local origin consigned directly from one Member-State to another will be permitted to enter that Member-State without the payment of customs import duties and equivalent charges, and will be subject only to any non-discriminatory internal tax may be applicable in the Member-State of consumption. For M R U , a free trade area will exist for both raw products and manufactured goods using imported material which are specified on the M R U list of manufactured goods of local origin. 6 3 The coexistence of three trade liberalization schemes of E C O W A S , C E A O , and M R U has obviously some practical implications. The same product, say canned beans, would be traded within C E A O countries under the T C R preferential treatment and be subjected to the agreed T C R import duty rate. I n M R U , it would receive a protected preferential treatment and be subjected to the non-discriminatory internal tax. But in E C O W A S , i t would carry no import charges as long as i t is in accord w i t h the E C O W A S origin requirement. This, combined w i t h the relatively advanced stage of C E A O and M R U trade liberalization schems, would pose difficulties for intra-ECOWAS trade liberalization. 61 The three members of M R U comprise Guinea, Liberia, and Sierra Leone while C E A O is made up of Burkina Faso, Côte D'Ivoire, Mali, Mauritania, Niger, and Senegal, six nations in all.

62

West Africa, 24 May 1982, 1371.

63

Mano River Union starts trading, West Africa , 22 June 1981, 1399.

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What poses additional crucial problems for E C O W A S is the relatively advantageous share of C E A O and M R U States in their respective intra-union trades vis-à-vis their shares in E C O W A S . I t has been shown elsewhere that some States — Côte D'Ivoire in C E A O and Liberia in M R U — enjoy comparatively more favourable trade in their respective unions than in E C O W A S and that Côte D'Ivoire in fact enjoys increasing exports to C E A O States as its imports from them steadily decline. Given these realities, it should not be surprising that the calender for the implementation of E C O W A S trade liberalization was delayed as a result of objections, particularly from C E A O and M R U , and that their members may make less than total commitment to intra-ECOWAS trade liberalization and other programs for that matter. This is a major challenge which E C O W A S must face squarely. O n the international front, E C O W A S is gradually evolving as a body that will be representing its Member-States in the EEC. Although there are no direct formal ties with the latter, the Authority in 1984 had authorized E C O W A S to manage the resources allocated to West Africa under the Regional Cooperation Chapter of the African, Caribbean and Pacific/European Economic Community (ACP/EEC) Convention of Lomé (Lomé I I I ) for and on behalf of all the sixteen A C P countries of the West African subregion. T o ensure effective implemention, the Executive Secretary was directed to work closely with the Commission of the European Communities. 64 I t is possible that if this arrangement is properly handled, E C O W A S will not only manage resources but will also ultimately be able to harmonize the policies of its Member-States toward the EEC, if not constitute the sole West African subregional voice in future ACP/EEC negotiations. Indeed, one expects ECOWAS to be active during the Lomé I V negotiations scheduled to commence in mid-October 1988 and to maximize the greatest good for its Member-States.

I I I . The Future of E C O W A S The West African subregion is abundantly endowed with many of the world's natural resources and its fertile soil is able to yield a good deal of agricultural products. The existence of the E C O W A S Treaty w i t h its built-in collective awareness of the development needs and harmonious strategies gives a powerful impetus to the future development of the subregion. Although there is presently a 64 Official Journal of E C O W A S , 6 (1984), 22. The European Commission has contributed in financing some E C O W A S projects, such as the telecommunications project, and financing agreements have been signed by the Managing Director of the Fund w i t h the European Development Fund and the European Investment Bank. See Official Journal of E C O W A S , 4 (1982), 58.

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dearth of financial and technical resources in the area, supplies from external source will assist in the endeavour. The E C O W A S Treaty clearly sets out the process of integration and establishes the institutions for the realization of its objectives. The Authority which theoretically monopolizes decision-making has had to share this responsibility w i t h the experts and quasi-supranational officials and bureaucrats of the Secretariat, whose proposals, reports and recommendations on technical issues constitute significant inputs into decision-making. Moreover, the Secretariat with permanent headquarters in Nigeria enjoys significant latitude in fund raising for programs, invites tenders, awards contracts and supervises work in progress and, above all, serves as the "engine room" of the Community. These institution-building developments are the outgrowth of the harmonious atmosphere expressed in the Treaty. Conflicts such as that between the Secretariat and the Fund have enhanced further institution-building rather than the precipitation of a debilitating crisis. But E C O W A S is threading a thorny path toward the attainment of its integrative and cooperative goals. Nationalism and the pursuit of national interests have not disposed Member-States to surrendering aspects of their sovereignty for the higher objectives of the Community, partly the reason why is, out of the approximately seventy decisions so far adopted by the Authority since E C O W A S was inaugurated, only a few have been ratified and implemented. The trade liberalization scheme has not been effectively applied, showing rather lukewarm support from members, and across-border smuggling has increased. There have been conflicts over the (still partial) implementation of the protocol on free movement of persons; 65 Ghana's closure of its borders and Nigeria's expulsion of illegal aliens, principally Community citizens, caused uneasiness. The Defence Pact also harbours potential sources of conflict; the principle of unanimity — a key factor in the decision-making process of the Community — has been breached: the opposition of several Member-States to the creation of the pact at the initial stage raises doubts as to the chances of the Community to generate consensus in military strategies in times of emergency. Many have also doubted the possibility of E C O W A S leaders to forge a consensus given the existence of powerful enemies among their States and the absence of an E C O W A S patriotism. 6 6 The traditional dependence on former colonial and other external powers, the desire to reduce which had provided the impetus to move toward integration, has continued in various aspects, including trade, causing concern among the peoples of West Africa. 65 Ghana, for instance, still insists that citizens of E C O W A S Member-States should have at least 52 US dollars (a considerably large amount for them) before being allowed into the

country. African Concord , 12 July 1988, 8. 66

Apart from the jealousies and suspicions caused by differences in the sizes of MemberStates in terms of physical dimensions, population, G N P , and resource endowments, differences in political-economic orientations and ideologies, and irredentism especially in respect of the Ewes of Ghana and Togo and Sanwis of Côte D'Ivoire and Ghana, and frontier disputes have caused frictions.

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Moreover, financial limitations have constrained E C O W A S from frog-leaping into progress. I n 1986, the external debt of E C O W A S countries stood at $ 50 billion (the share of Nigeria alone, which most of the E C O W A S countries look up to, was approximately $ 25 billion or 50 per cent). This total debt of all E C O W A S Member-States represented over 52 per cent of their G N P , and for seven MemberStates it represented over 100 per cent. Debt-servicing in the subregion represented 18.53 per cent of exports of goods and services but in three Member-States, including Nigeria, it stood at about 30 per cent. 67 This deplorable situation partly explains why many members are not able to meet their financial obligations, thereby stalling the efforts of the Community to fully execute its programs. Because of the poverty of the subregion, a considerable proportion of the objectives of E C O W A S Treaty cannot be attained without external support from governments and international financial institutions. Some financial support has been realized, but there is no guarantee that it will steadily flow in for planned projects, especially in the light of the 6.7 per cent decline in 1986, in real terms, of the flow of financial resources from the outside world to sub-Saharan Africa. 68 The E C O W A S Fund is, of course, an institution that could facilitate the performance of the task of subregional development if, in addition to capital 69 subscription from the participating governments, it is able to count upon financial contributions from such agencies as the European Investment Bank, the African Development Bank (ADB) Group, the W o r l d Bank, and the OPEC Fund for International Development, etc. While all is not easy for E C O W A S , it has successfully executed a number of road projects which has facilitated such a rapid increase in inter-country traffic as to necessitate the establishment of motor/vehicle international insurance liability scheme for the subregion. The Brown Card Scheme, as it is called, aims at harmonizing insurance policies and easing insurance claims within the Community. I t came into effect on 1 January 1985 and has taken off in ten of the sixteen Member-States of E C O W A S . Such increased interaction among E C O W A S citizens, far ahead of the foot-dragging decision-making and execution of their governments, may in the long-run serve the best interest of E C O W A S by leading the governments on the path to greater commitment to integration. The Community has also succeeded in linking a number of towns across their borders through its telecommunications 67

E C O W A S , Annual Report of the Executive Secretary 1987-1988, 9. Loc. cit., 10. O u t of the 136 projects launched in 1987 as part of the E C O W A S Recovery Program (ERP), total funding has been secured for only 19. 31 have been selected for financing by the E C O W A S Fund; 76 have been submitted to donors who expressed interest in 31 of them; and 10 have not been submitted to donors owing to incomplete 68

studies. West Africa, 4 July 1988, 1197. 69

The Fund's capital is $ 400 million of which a total of $ 100 million has been called up. The first tranche of $ 50 million launched over eleven years ago still has about 7 per cent outstanding and only eleven of the Member-States had fully honoured their commitments.

West Africa, 4 July 1988, 1197.

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13 7

program ( I N T E L C O M ) . I n time the old system of routing calls to the various countries through Europe will cease completely. More positively, the Community has developed into a forum for enhancing understanding among Member-States, minimizing suspicions, and promoting inter-governmental consultations, which have grown more than ever. Adopted schemes on agricultural, energy, and industrial development and monetary cooperation show E C O W A S is interested not merely in the establishment of a customs union or common market but wants to become an economic union that coordinates domestic policies at the regional level. H o w E C O W A S responds to the problem of distribution of economic gains which has wrecked other T h i r d World integrative schemes should provide added insights concerning its stability. A response which encourages unrestrained competition in making resources allocations will make the Community unattractive especially to the less economically endowed States. If, however, the initial steps taken in the E C O W A S Treaty to guard against more developed States benefiting at the expense of the less developed in the distribution of industrial development is maintained and if Nigeria the most powerful of the countries in the subregion continues to make side payments, 70 the outlook for success would be heightened commensurately. From the perspective of some critics, there are formidable problems militating against such success. A t minimum, the existence of small unions with identical goals within the subregion does not enhance E C O W A S viability. Others less pessimistically inclined in evaluating the Community consider the ability of the E C O W A S Treaty in bringing together some of the world's most diverse people in terms of colonial history and experiences and ethnic and cultural differences into a projected zone of economic prosperity and social peace a remarkable accomplishment that has been nurtured by continued exploration of areas of cooperation. In summation, E C O W A S has faced a number of difficulties since it was created thirteen years ago. However, the underlying recognition of the need by the Member-States to reconcile their political and other differences in favour of a cooperative approach to development rather than unilateral action must be regarded as constructive and hopeful. T o the extent that E C O W A S Member-States recognize the benefits of integration, the future prospects of the Community become even much brighter. I n these circumstances, E C O W A S leaders will have to weigh carefully the needs of the citizens, the imperative of supporting the institutional arrangements made and reforms that may be introduced, and the development of a stronger political will and commitment for the maximization of E C O W A S economic and political goals. 70

Nigeria's presence in the Community w i t h its nearly 70 per cent of the total G N P of the subregion offers the prospects of greatly improved opportunities for import substituting industrialization. Occasionally, Nigeria pays up the rent for the E C O W A S Secretariat in Lagos. I t provided land at Abuja, where the federal capital is being moved, for the construction of the permanent headquarters for the Community and provided $ 5 million of the $ 15 million total estimated cost of the project.

Les rapports entre zone de pêche et zone économique exclusive Par Jean-Pierre Quéneudec

La généralisation des zones économiques exclusives dans la pratique contemporaine de nombreux Etats côtiers n'a pas fait disparaître les différentes zones de pêche qui ont été instituées par un certain nombre d'autres Etats au large de leurs côtes. En effet, si on dénombrait en 1988 un total de 74 zones économiques, selon le Bureau des affaires maritimes et du droit de la mer du Secrétariat général des Nations Unies , 22 Etats s'en tenaient toujours au concept de zone de pêche.1 De telle sorte que les deux types de zones coexistent à l'heure actuelle. Comme les zones de pêche et les zones économiques ont généralement la même étendue, à savoir une largeur maximum de 200 milles marins, la confusion est souvent faite entre elles et on les désigne sous le vocable général de zones de 200 milles. Ainsi, dans l'ouvrage publié dans la Série législative des Nations Unies sous le titre "Législation nationale et traités concernant le droit de la mer", elles sont répertoriées sous la même rubrique: "Les zones économiques ou zones de pêche". 2 La question se pose cependant de savoir si, hormis cette coïncidence quant à la largeur de 200 milles, il existe suffisamment de ressemblances ou d'analogies entre les deux institutions pour qu'on puisse procéder à une assimilation plus ou moins complète des zones de pêche et des zones économiques. Sans doute existe-t-il entre elles des éléments de similitude qui permettent de les rapprocher, voire même de les considérer comme relativement équivalentes. Ces éléments de similitude apparaissent assez clairement à l'analyse du régime juridique qui caractérise chacune des deux notions et qui comporte nombre de points communs; mais ils autorisent tout au plus à se prononcer en faveur d'une équivalence relative des deux notions. Contrairement à l'affirmation de certains auteurs, on peut difficilement prétendre qu'il existe une complète identité entre ces deux notions 3 et affirmer, par exemple, que "la pratique des Etats a continué à reconnaître aussi bien le concept de zone économique exclusive que le concept de même nature de zone de pêche exlusive". 4 1 2 3 4

Nations Unies , Bulletin du droit de la mer, no. 11, juillet 1988, 57. Nations Unies , ST/LEG/SER. B/19, New York 1980, 179-264 et 416-442. Daniel Patrick O'Connell , The International Law of the Sea, vol. 1, Oxford 1982, 563. Winston C. Extavour , The Exclusive Economic Zone, Geneve 1979, 315 (souligné par

nous).

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Force est de reconnaître qu'il existe cependant entre ces deux notions d'autres éléments qui montrent qu'elles ne sont pas totalement semblables et qui font ressortir la nécessité de les différencier nettement; car la nature juridique profondément différente de la zone de pêche et de la zone économique rend impossible une assimilation de l'une à l'autre.

I. Une équivalence relative Consacrée à la notion de zone économique exclusive, la Partie V de la Convention des Nations Unies sur le droit de la mer réserve, on le sait, une place essentielle et quantitativement importante aux droits de pêche. Sur les 21 articles que comporte cette Partie, 13 concernent les ressources biologiques et les activités de pêche (articles 61 à 73). A tel point que l'on a pu très justement faire remarquer que les droits souverains de l'Etat côtier sur les ressources biologiques représentaient l'élément central du concept de zone économique et que la pêche constituait en quelque sorte le pivot ou le coeur même du régime de cette zone. 5 Une pareille appréciation se vérifie surtout dans la pratique des Etats qui s'est instaurée sur la base des travaux de la 3ème Conférence des Nations Unies sur le droit de la mer, avant même l'adoption de la Convention de 1982, et qui s'est développée depuis lors en prenant appui sur le texte de la Convention ou, à tout le moins, en s'en inspirant. En d'autres termes, s'il est possible d'établir une certaine équivalence entre zone économique et zone de pêche, c'est essentiellement dans le cadre du droit international coutumier. I l n'est pas douteux, en effet, que l'on se trouve en présence de deux concepts consacrés aujourd'hui par le droit coutumier. 6 I l est possible de voir dans la pratique suivie par l'immense majorité des Etats côtiers à l'égard de ces deux notions ce que la Cour internationale de Justice avait naguère qualifié de "coutume constante et uniforme acceptée comme étant le droit". 7 Cette équivalence, qui n'est certes pas absolue, se manifeste non seulement en ce qui concerne les droits et les obligations de l'Etat côtier, mais aussi en ce qui concerne la nature des compétences exercées dans chacune de ces deux zones. 5

Voir Hugo Caminos , The Regime of Fisheries in the Exclusive Economic Zone, in: F. Orrego Vicuna (ed.), The Exclusive Economic Zone: A Latin-American Perspective, Boulder 1984, 143-158. Dans le même sens: Lothar Grünling, Die 200 Seemeilen-Wirtschaftszone, Berlin/Heidelberg 1983; Angela Del Vecchio , Zona economica esclusiva e Stati costieri, Firenze 1984. 6

Carl A. Fleischer , The Right to a 200-mile Economic Zone or a Special Fishing Zone, in: San Diego Law Review 14 (1977), 548-583; Carolyn Hudson , Fishery and Economic Zones as Customary International Law, in: ibid., 17 (1980), 661-689; David J. Attard, The Exclusive Economic Zone in International Law, Oxford 1987, 287. 7 C.I.J. , affaire colombo-péruvienne relative au droit d'asile, arrêt du 20 novembre 1950, CIJ Recueil 1950, 266 (277).

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1. Les Droits de L'Etat côtier I l peut sembler paradoxal d'affirmer l'existence d'une équivalence, même relative, entre zone de pêche et zone économique quant aux droits qui y sont reconnus à l'Etat côtier, alors que c'est précisément en ce domaine qu'apparaît prima facie la plus grande différence entre les deux notions. En effet, dans une zone de pêche réservée, les droits de l'Etat côtier sont beaucoup plus limités. L'Etat côtier n'y dispose de droits exclusifs qu'en matière d'exploitation des ressources biologiques de la mer. Cette limitation tient à la définition même de la zone de pêche, que la Cour internationale de Justice a présentée de la manière suivante dans son arrêt du 25 juillet 1974: "zone a l'intérieur de laquelle un Etat peut prétendre à une compétence exclusive en matière de pêcheries indépendamment de sa mer territoriale". 8 Dans une zone économique exclusive, il en va différemment. Les droits de l'Etat côtier, tels qu'ils sont définis par l'article 56 de la Convention de 1982, débordent largement l'exploitation des pêcheries. D'une part, ces droits portent sur l'ensemble des ressources naturelles de la zone, qu'il s'agisse de ressources biologiques ou d'autres ressources. D'autre part, ces droits ne se limitent pas au cadre des activités d'exploitation des ressources naturelles de la zone, mais ils concernent également l'exploration, ainsi que la conservation et la gestion de ces ressources. En outre, la juridiction ou compétence de l'Etat côtier s'étend aussi à la mise en place et à l'utilisation d'installations artificielles, aux activités de recherche scientifique marine et à la lutte contre la pollution des eaux de la mer; ce qui signifie que ses droits ne portent pas exclusivement sur les ressources de la zone, mais concernent également la zone économique elle-même en tant qu'espace maritime. Pour fondamentale qu'elle soit, cette différence de principe ne saurait cependant estomper totalement la similitude de fait que l'on peut constater à l'heure actuelle entre zones de pêche et zones économiques existantes, ces dernières apparaissant bien souvent comme étant avant tout des zones de pêche exclusives. I l en est ainsi, tout d'abord, en raison de l'incidence exercée par le régime du plateau continental sur celui de la zone économique. En effet, la Convention de 1982 établit deux régimes juridiques distincts pour la zone économique exclusive et pour le plateau continental. Sans doute, comme l'a souligné récemment la Cour internationale de Justice , "les deux institutions du plateau continental et de la zone économique exclusive sont liées dans le droit moderne". 9 La Convention de 1982 maintient néanmoins sous un régime juridique séparé les droits de l'Etat en matière d'exploitation des ressources du lit de la mer et du sous-sol de la zone économique, 8

C.I.J. , affaire de la compétence en matière de pêcheries (Royaume-Uni c; Islande), fond, arrêt, CIJ Recueil 1974, 3 (23), para. 52. 9 C . / . / . , affaire du Plateau continental (Jamahiriya arabe libyenne/mal te), arrêt du 3 juin 1985, CIJ Recueil 1985, 13 (33), para. 33.

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en précisant (article 56 § 3) que "les droits relatifs aux fonds marins et à leur sous-sol énoncés dans le présent article s'exercent conformément à la Partie V I " , c'est-à-dire conformément aux dispositions relatives au plateau continental. De sorte que le maintien d'un statut spécifique pour le plateau continental altère assez sensiblement la notion de zone économique et la réduit pratiquement à son élément liquide. Le statut de la zone économique exclusive se trouve en quelque sorte circonscrit à un régime juridique spécial pour les eaux, caractérisé avant tout par les droits souverains de l'Etat côtier sur les ressources biologiques de ces eaux. Encore convient-il de voir que, si ce régime s'applique en principe à l'exploitation de toutes les ressources biologiques de la zone, il ne vaut cependant pas pour l'exploitation des ressources vivantes appartenant à la catégorie des espèces sédentaires, qui sont exclues du régime de la zone économique par l'article 68 de la Convention. Pour les espèces sédentaires, c'est, en effet, le régime du plateau continental qui prévaut, selon l'article 77 § 4 de la Convention de 1982, qui reprend ici la règle énoncée par l'article 2 §4 de la Convention de 1958 sur le plateau continental. En établissant cette dualité de régimes juridiques, ces diverses dispositions conventionnelles tendent donc à rapprocher la zone économique d'une simple zone de pêche. La quasi équivalence de ces deux zones maritimes de juridiction nationale est encore plus nette si l'on s'attache à la pratique effectivement suivie par les Etats dans la mise en œuvre de ces dispositions conventionnelles. C'est ce qui ressort notamment d'un examen attentif de diverses législations nationales. I l convient de remarquer, en premier lieu, que, parmi les Etats qui ont institué une zone économique au large de leurs côtes, quelques-uns n'y revendiquent pas la totalité des droits qui, selon la Convention de 1982, s'attachent à la notion de zone économique exclusive. L'exemple le plus significatif à cet égard est, à n'en pas douter, celui des Etats-Unis. En effet, dans la zone économique exclusive qu'ils ont établie le 10 mars 1983, les Etats Unis n'entendent exercer aucune compétence concernant la recherche scientifique marine. 10 Cette solution est également celle qui avait été retenue en France par la loi du 16 juillet 1976 relative à la zone économique, 11 jusqu'à ce que ce texte soit modifié par la loi du 11 juillet 1986 portant sur la recherche scientifique marine. 12 Même lorsqu'ils reprennent dans leur droit interne l'énoncé de l'ensemble des droits reconnus à un Etat côtier dans sa zone économique, plusieurs Etats consacrent toutefois à la réglementation des activités de pêche l'essentiel des dispositions de leur législation nationale relative à la zone économique. T e l est notamment le cas 10 Jean-Pierre Quéneudec , La proclamation Reagan sur la zone économique exclusive des Etats-Unis, dans: Annuaire français de droit international ( A F D I ) X X I X (1983), 710-714 (712). 11 Guy de Lacharriere , La zone économique française de 200 milles, dans: A F D I X X I I (1976), 641-652 (648).

12

Journal Officiel

de la République française, 12 juillet 1986, 8702.

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de la loi norvégienne du 17 décembre 1976, 13 ainsi que de la loi adoptée le 26 juillet 1978 par le Vénézuéla 14 et de la proclamation du Kenya en date du 28 février 1979. 15 Q u i plus est, en instituant une zone économique exclusive, certains Etats ont simplement précisé qu'ils entendaient y exercer leur droit exclusif d'exploiter les ressources naturelles, sans faire mention des autres droits et pouvoirs prévus par la Convention. C'est, en particulier, ce qu'a prévu la loi espagnole du 20 février 1979. 16 C'est aussi la solution retenue par les Comores en 1976, 17 par H a ï t i en 1977, 18 par le Kampuchéa en 1978, 19 ainsi que par la loi néo-zélandaise du 26 septembre 1977 qui précise en outre que "les mers comprises dans la zone économique exclusive font partie des eaux des pêcheries de la Nouvelle-Zélande". 20 Inversement, d'autres Etats, ayant établi une simple zone de pêche, y appliquent un régime d'exploitation des ressources qui s'inspire plus ou moins étroitement des dispositions pertinentes de la Convention de 1982 portant sur la zone économique exclusive. O n peut citer en ce sens la loi adoptée en 1977 par les Bahamas,21 la loi japonaise de 1977 sur la zone de pêche, 22 et la loi du 13 octobre 1978 concernant le régime de la pêche dans la zone de pêche de la République démocratique allemande. 23 I l n'est donc pas étonnant que, face à cette pratique relativement étendue, on puisse affirmer que "la zone de pêche exclusive de 200 milles constitue en réalité une partie intégrante de la zone économique exclusive" et que son "statut juridique suit précisément le régime juridique de la pêche dans la zone économique exclusive". 24 C'est pourquoi le Tribunal arbitral institué par le compromis du 23 octobre 1985 entre la Canada et la France n'a pas hésité à "considérer qu'entre les Parties, les concepts de zone économique et de zone de pêche sont tenus pour équivalents sous le rapport des droits qu'y exerce un Etat côtier sur les ressources biologiques de la mer". 2 5 13

Nations Unies (note 2), 241-243.

14

Loc. cit., 261-264. Loc. cit., 228-230. Loc. cit., 250-252. Loc. cit., 15, 16. Loc. cit., 43. Loc. cit., 20, 21. Loc. cit., 65-82 (70). Loc. cit., 179-189. Loc. cit., 215-222.

15 16

17 18 19 20 21 22

23 24

Loc. cit., 208-211.

B. Kwiatkowska, Exclusive Economic Zone: General Evaluation, in: B. Vukas (ed.), Essays on the New Law of the Sea, Zagreb 1985, 99-117 (115). 25 Différend concernant le filetage à Pintérieur du golfe du Saint-Laurent (affaire de La Bretagne), sentence du Tribunal du 17 juillet 1986, para. 49, Revue générale de droit international public (RGDIP) 90 (1986), 713-757 (746).

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2. Les obligations de L'Etat côtier I l paraît a priori encore plus paradoxal de rendre équivalentes les obligations mises par le droit international à la charge des Etats côtiers dans une zone de pêche et dans une zone économique. En effet, selon une opinion communément répandue, seul le régime de la zone économique exclusive permettrait d'assujettir un Etat côtier à certaines obligations internationales en matière de conservation et de gestion des ressources biologiques. Ces obligations sont énoncées en termes plus ou moins précis par la Convention de 1982 sur le droit de la mer. I l s'agit, d'une part, de l'obligation générale d'éviter à la fois la surexploitation des ressources et leur sous-exploitation. I l s'agit, d'autre part, de deux obligations corrélatives: l'obligation de maintenir les stocks exploités à des niveaux permettant d'assurer le rendement maximum constant (article 61 § 3), et l'obligation de favoriser une exploitation optimale des ressources (article 62 § 1) en permettant à d'autres Etats d'exploiter le reliquat disponible lorsque la capacité d'exploitation de l'Etat côtier est inférieure à l'ensemble du volume admissible des captures autorisées (article 62 § 2). Rien de tel n'existerait en ce qui concerne la zone de pêche. Les conditions dans lesquelles cette notion est née et s'est développée dans la pratique des Etats n'auraient pas conduit au même souci d'établir une balance entre les droits et les devoirs de l'Etat côtier. Bien au contraire, l'institution de la zone de pêche étant apparue essentiellement comme "le produit d'un processus continu de revendications et de contre-revendications dans le contexte de différends précis", 2 6 son régime juridique se limiterait à la reconnaissance d'un droit exclusif de pêche et d'une juridiction exclusive en matière de pêche au profit de l'Etat côtier. 2 7 De ce fait même, la zone de pêche présenterait une différence essentielle par rapport à la zone économique, en ce sens que l'Etat côtier n'y serait assujetti à aucune obligation définie. Dans son opinion dissidente jointe à l'arrêt de la C.I.J. rendu le 24 février 1982 dans l'affaire du plateau continental entre la Tunisie et la Libye, le Juge Shigeru Oda semble faire sienne cette idée. Rappelant que "l'Etat côtier devra assumer certaines obligations concernant la conservation et l'utilisation des ressources halieutiques dans la zone économique exclusive", il en conclut: " A cet égard, le régime de la zone se différencie nettement de celui de la mer territoriale et de la notion de zone de pêche". 28 26

H. C. Dillard , opinion individuelle sous l'arrêt de la C.I.J. du 24 juillet 1974, supra (note 8), 54-71 (56). 27 Selon la définition qu'en donnait l'article 2 de la Convention sur la pêche signée à Londres le 9 mars 1964. 28 Shigeru Oda, opinion dissidente, CIJ Recueil 1982, 229, para. 121.

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I l paraît toutefois difficile de se ranger à cette opinion; car adopter un tel point de vue revient, semble-t-il, à se fier uniquement à certaines apparences qui, en l'occurrence, se révèlent trompeuses. I l n'y a pas, d'un côté, le concept de zone économique qui réalise un équilibre entre droits et obligations de l'Etat côtier et, d'un autre côté, le concept de zone de pêche dont le régime ne prescrit pas d'obligations venant compenser les droits reconnus à l'Etat côtier. La réalité n'obéit pas nécessairement à ce schéma quelque peu manichéen. I l convient de souligner que la formulation d'obligations internationales détaillées à la charge des Etats côtiers dans leur zone économique n'est réalisée que dans le texte de la Convention de 1982. Comme celle-ci n'est pas encore entrée en vigueur, il faudrait donc admettre que ces obligations existent de la même manière selon le droit coutumier, puisque seul celui-ci régit jusqu'à présent les zones économiques aussi bien que les zones de pêche. O r , il est loin d'être sûr que l'on puisse trouver dans le droit international coutumier des obligations formulées de façon aussi précise; car le droit coutumier ne saurait atteindre, en ce domaine particulier, la précision du droit conventionnel. Pour reprendre une formule utilisée par la Cour internationale de Justice dans un autre contexte, " i l ne faut pas rechercher dans le droit international coutumier un corps de règles détaillées (...) surtout dans une matière nouvelle et encore peu consolidée comme celle qui est liée à l'extension toute récente des revendications des Etats à des aires qui constituaient hier encore des zones de haute mer". 2 9 Dans le cadre du droit coutumier, les obligations pesant sur les Etats côtiers en matière de gestion des ressources biologiques de leurs zones de 200 milles ne peuvent guère apparaître que sous la forme de simples "standards" internationaux. De ce point de vue, il semble bien que l'on puisse dégager un principe général relatif à la conservation des ressources biologiques de la mer. T o u t Etat côtier serait en quelque sorte tenu d'assurer la conservation de ces ressources. I l ne s'agirait pas seulement pour lui de mettre en œuvre des mesures de protection des ressources en vue de satisfaire ses propres intérêts; mais cet impératif de conservation viserait à satisfaire également les intérêts de la communauté internationale. Les Etats ont, en effet, manifesté à différentes reprises ce souci de conservation des ressources, qui a d'ailleurs trouvé sa traduction dans plusieurs actes internationaux. Dès 1930, la Conférence de codification du droit international réunie à La Haye sous les auspices de la Société des Nations avait adopté une recommandation par laquelle elle engageait les Etats à adopter les "mesures de protection et de collaboration qui s'imposent pour la protection des richesses qui constituent un patrimoine commun". 3 0 C'est, peut-on dire, le même esprit qui a présidé par la suite 29 Cl] , affaire de la Délimination de la frontière maritime dans la région du golfe du Maine (Canada/Etats-Unis), arrêt du octobre 1984, CIJ Recueil 1984, 246 (299), para. 111. 30 Cité par Gilbert Gidel , Le droit international public de la mer, tome I I I , 1934,472 (note

3).

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à l'adoption de diverses conventions internationales relatives à la pêche: la convention de Londres de 1946 sur l'"overfishing", la convention de Washington de 1949 pour la conservation des pêcheries de l'Atlantique du Nord-Ouest, la convention de Londres de 1959 sur les pêcheries de l'Atlantique du Nord-Est, et naturellement la convention de Genève de 1958 sur la pêche et la conservation des ressources biologiques de la haute mer. Se fondant sur cette dernière, le Juge Dillard estimait d'ailleurs en 1974: " I l est permis de supposer, compte tenu de la pratique des Etats et du fait que la nécessité des mesures de conservation est de plus en plus largement reconnue et son urgence admise, que le principe que cette convention proclame peut constituer une norme de droit international coutumier". 3 1 Et, dans son arrêt du 25 juillet 1974, la C.I.J. avait elle-même affirmé: " L ' u n des progrès dont le droit international maritime est redevable à l'intensification de la pêche est que, à l'ancienne attitude de laisser faire à l'égard des ressources biologiques de la haute mer, se substitue désormais la reconnaissance qu'il existe un devoir de prêter une attention suffisante aux droits d'autres Etats ainsi qu' aux impératifs de la conservation dans l'intérêt de tous". 3 2 Aussi est-il sans doute permis de voir dans les dispositions des articles 61 et 62 de la Convention des Nations Unies sur le droit de la mer l'expression formelle et détaillée de ce principe général de conservation, qui est apparu d'abord dans le droit coutumier. Les raisons qui ont poussé un certain nombre d'Etats côtiers à instituer des zones de pêche exclusives, en réaction contre les abus auxquels aboutissait l'exercice d'une liberté à peu près complète de pêche, ont également présidé à l'élaboration de la notion de zone économique. O n ne peut méconnaître, en effet, que "la formulation du concept de zone économique exclusive, qui est orientée essentiellement vers la gestion et l'utilisation optimale des ressources, est due en grande partie à une réaction contre certains excès engendrés par le régime de liberté de la pêche en haute mer au-delà d'une mer territoriale étroite". 3 3 T o u t se passe désormais comme si l'on considérait que l'Etat côtier est le mieux à même d'assurer la conservation des ressources biologiques de la mer. Dans le cadre de cette sorte de fonction d'intérêt général qu'il assume, il est donc tenu de respecter une obligation générale de conservation des ressources, quel que soit le type de zone exclusive qu'il établit au large de ses côtes. Dans ces conditions, on ne peut, ici encore, que conclure à l'équivalence des notions de zone de pêche et de zone économique sous le rapport des obligations pesant sur l'Etat côtier quant à la gestion des ressources biologiques. 31

Dillard (note 26), 69.

32

C.I.J . (note 8), 31, para. 72 de l'arrêt. 33 Jean Carroz , Les problèmes de la pêche dans la Convention sur le droit de la mer et la pratique des Etats, dans: D. Bardonnet / M. Virally (eds.), Le nouveau droit de la mer, Paris 1983, 177-229 (218). 10 GYIL 32

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3. La nature des compétences de L'Etat côtier Envisagées sous l'angle de la nature des compétences qui y sont exercées par l'Etat côtier, les notions de zone de pêche et de zone économique sont assez largement identiques. Dans l'un et l'autre cas, l'Etat côtier peut mettre en œuvre des compétences de nature territoriale. L'article 73 de la Convention sur le droit de la mer, consacré à la mise en application des lois et règlements de l'Etat côtier dans sa zone économique exclusive, manifeste on ne peut plus clairement la nature territoriale des compétences que cet Etat est habilité à y exercer. D u reste, les dispositions de cet article reflètent dans l'ensemble l'état de la pratique suivie par la grande majorité des pays côtiers, telle qu'elle s'exprime notamment à travers les différentes législations nationales applicables tant dans les zones de pêche que dans les zones économiques. I l suffit, pour s'en convaincre, de parcourir la compilation des 78 législations nationales qui a été établie par le Bureau du Représentant spécial du Secrétaire général des Nations Unies pour le droit de la mer. 3 4 Pour chacune de ces zones de juridiction nationale, l'Etat côtier, dans l'exercice de ses droits exclusifs sur les ressources biologiques, se réserve effectivement le pouvoir de prendre, à l'égard des navires de pêche battant pavillon étranger, toutes les mesures qui sont nécessaires pour assurer le respect de ses lois et règlements en matière de pêche, aussi bien des mesures d'inspection, de perquisition, de déroutement ou de saisie, que des mesures d'instruction et des poursuites judiciaires. I l ne s'agit certes pas de l'ensemble des compétences qui s'attachent à ce qu'il est convenu d'appeler la "souveraineté territoriale", dans la mesure où l'on est ici en présence de zones maritimes dans lesquelles ne s'exercent que des compétences fonctionnelles, c'est-à-dire limitées à certains objets. I l n'en demeure pas moins que ces compétences sont exclusives dans les domaines auxquels elles s'appliquent. Cette exclusivité des compétences se traduit par la possibilité pour l'Etat côtier de rendre ses lois et règlements valables erga omnes et d'en assurer le respect en recourant au besoin à des actes de contrainte ou des actes d'exécution forcée, comme dans sa mer territoriale où il en a le monopole. C'est d'ailleurs le caractère exclusif des compétences ainsi exercées qui explique qu'à différentes reprises, face à la création par un Etat d'une zone de pêche réservée ou exclusive, on a parfois eu tendance à désigner une telle mesure comme représentant une "extension des eaux territoriales en matière de pêche". 35 O n en trouve encore une trace dans la législation danoise de 1976, qui désignait la zone de pêche 34 United Nations , The Law of the Sea: National Legislation on the Exclusive Economic Zone, the Economic Zone and the Exclusive Fishing Zone, New York 1986. 35 Voir , par exemple,/. Y. Morin , La zone de pêche exclusive du Canada, dans: Annuaire canadien de droit international, 1964, 77-106 (88).

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qu'elle instituait par l'expression "territoire de pêche du Royaume de Danemark". 3 6 C'est la raison pour laquelle, parlant de l'exercice de la juridiction de l'Etat côtier dans sa zone économique en cas de violation de ses lois et règlements par des navires étrangers, le Juge Oda pouvait affirmer, dans son opinion dissidente précitée: "Telle qu'elle est présentée, cette juridiction ne s'exerce pas différemment de celle qu'exerce l'Etat côtier dans les limites de sa mer territoriale; et en ce qui concerne la mise en valeur des ressources naturelles de la mer, la compétence de l'Etat côtier dans la zone économique exclusive équivaut à celle dont il jouit dans la mer territoriale". 3 7 Ajoutons que la même observation peut être faite à l'égard de la compétence mise en œuvre dans une zone de pêche. Les divers éléments que nous avons mentionnés militent tous dans le même sens: ils conduisent à reconnaître que les concepts de zone de pêche et de zone économique exclusive présentent suffisamment d'analogies pour être considérés comme équivalents. Toutefois, cette équivalence est toute relative. Elle ne saurait déboucher sur une assimilation qui est juridiquement impossible.

I I . Une assimilation impossible Si la zone économique est avant tout une zone de pêche exclusive, cela tient à la filiation directe que l'on constate entre les deux notions: la notion de zone économique est née dans le cadre et comme point d'aboutissement d'un mouvement de revendication des pays côtiers du tiers-monde en faveur de zones de pêche élargies. Ce qui avait d'ailleurs conduit le délégué du Sénégal au Comité des fonds marins à estimer que les projets relatifs à la création de la zone économique exclusive ne représentaient pas autre chose qu'une tentative de codification de la pratique des Etats en développement qui avaient institué des zones de pêche exclusives au-delà de leurs eaux territoriales. 38 Toutefois, la zone économique est aussi plus qu'une zone de pêche, celle-ci constituant simplement une partie intégrante de celle-là. I l y a, en quelque sorte, entre elles le même type de rapport que celui que l'on peut établir, mutatis mutandis , entre une zone de libre échange et une union douanière entre Etats. Selon la définition qu'en donne le G. A . T . T . , une zone de libre échange est "un groupe de deux ou plusieurs territoires douaniers entre lesquels les droits de douane et les autres réglementations commerciales restrictives (...) sont éliminés pour l'essentiel des échanges commerciaux portant sur les produits originaires des territoires 36

Act of 17 December 1976 on the Fishing Territory of the Kingdom of Denmark,

Nation Unies (note 2), 192. 37 38

10*

Oda (note 28), 233. Document A/AC.138/SC. II/SR. 51, 9 mars 1973.

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constitutifs de la zone de libre échange". Cet élément se retrouve également dans toute union douanière; mais celle-ci comporte en outre rétablissement d'un tarif douanier unique pour les échanges commerciaux entre les pays membres de l'union et les pays tiers et elle aboutit ainsi à "la substitution d'un seul territoire douanier à deux ou plusieurs territoires douaniers". 39 De la même manière, l'élément "zone de pêche" se retrouve nécessairement dans toute zone économique; mais celle-ci comporte un faisceau plus étendu de compétences qui peuvent être exercées par l'Etat côtier vis-à-vis des navires étrangers. Aussi, au-delà de la relative équivalence que l'on a pu précédemment établir entre les deux concepts, on est bien obligé d'admettre que l'on se trouve en présence de deux notions autonomes qui ne sont pas totalement réductibles l'une à l'autre. 4 0 En dépit des chevauchements existant entre elles et qui sont indéniables au stade actuel de développement du droit coutumier, on peut penser que cette autonomie s'accentuera au fur et à mesure des évolutions qui marqueront la mise en œuvre de la Convention de 1982, puis son entrée en vigueur. Cela ressort, semble-t-il, d'un examen des raisons profondes qui rendent impossible une assimilation de la zone économique à la zone de pêche et qui permettent d'esquisser dès présent un certain nombre de conséquences. 1. Les raisons Bien que les compétences mises en œuvre par un Etat côtier pour exercer ses droits sur les ressources dans une zone de pêche ou dans une zone économique soient de nature territoriale dans l'un et l'autre cas, on ne peut pas pour autant en inférer que les deux zones ont la même nature juridique. Sans doute, les range-t-on toutes deux dans la catégorie des "zones sous juridiction nationale", afin d'indiquer qu'elles ne sont pas soumises à la souveraineté pleine et entière de l'Etat côtier. O n sait que, par cette expression dont le sens n'est pas toujours très clair, on désigne aujourd'hui des espaces maritimes qui sont situés au-delà de la limite extérieure de la mer territoriale et dans lesquels un Etat côtier exerce certaines compétences à des fins limitées. En effet, la référence au terme juridiction "implique l'autorité d'un Etat pour dicter les règles applicables dans l'exercice des compétences qui lui sont reconnues et afin d'assurer l'exécution de ces règles face à d'autres Etats". 4 1 Cependant, alors que la zone de pêche demeure essentiellement une zone de haute mer, la zone économique exclusive apparaît comme un espace de nature 39

Article X X I V § 8 de PAccord général sur les tarifs douaniers et le commerce, tel que

modifié par le Protocole du 24 mars 1948, Recueil des Traités des Nations Unies , vol. 62, 57. 40 Attard (note 6), 149. 41 A. Arias-Schreiber , La nature juridique de la zone économique exclusive, dans: Académie diplomatique internationale (Colloque), Propos sur le nouveau droit de la mer, Paris 1985, 43-59 (53).

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différente; car il existe, au sein des espaces relevant de la juridiction d'un Etat côtier, plusieurs échelles de juridiction nationale. 42 La nature de haute mer d'une zone de pêche tient à ce que la compétence exclusive de l'Etat côtier ne peut s'y exercer qu'en ce qui concerne l'exploitation et la conservation des ressources biologiques de la mer. En dehors du domaine de la pêche, les biens, les personnes et les activités dans la zone en question relèvent uniquement de la loi du pavillon. O r , la compétence exclusive de l'Etat du pavillon est la caractéristique essentielle de la haute mer. Une zone de pêche a donc un statut résiduel de haute mer. Contrairement à l'affirmation contenue dans l'arrêt rendu le 25 juillet 1974 par la Cour internationale de Justice , qui y voyait "une troisième catégorie entre la mer territoriale et la haute mer", 4 3 c'est une zone de haute mer dans laquelle un Etat exerce une compétence exclusive en matière de pêche. Certaines législations nationales contiennent d'ailleurs une disposition expresse en ce sens, en particulier la loi adoptée par les Bahamas en 1977 sur les ressources de la pêche, qui précise: "Les eaux de la zone de pêche exclusive en dehors de la mer territoriale (...) demeurent assujetties au régime de la haute mer pour tout ce qui ne concerne pas l'exploration et l'exploitation, la conservation et la gestion des ressources de la pêche". 44 T o u t autre est, à cet égard, la situation de la zone économique. A u x termes de l'article 55 de la Convention de 1982, elle est qualifiée de "zone située au-delà de la mer territoriale et adjacente à celle-ci, soumise au régime juridique particulier établi par la présente partie, en vertu duquel les droits et la juridiction de l'Etat côtier et les droits et libertés des autres Etats sont gouvernés par les dispositions pertinentes de la Convention". Ce régime particulier qui la caractérise lui confère une nature hybride, en ce sens qu'elle constitue une zone de transition entre la bande côtière de souveraineté et les espaces de liberté. 4 5 Aussi, le Président de la 2ème Commission de la Conférence sur le droit de la mer pouvait-il valablement la présenter comme une "zone sut generis " en introduisant en mai 1976 le texte unique de négociation revise. 46 . La zone économique exclusive a été conçue par la Convention de 1982 comme un espace maritime au sein duquel s'exercent trois sortes de compétence à l'égard des personnes et des biens qui s'y trouvent ou concernant les événements et activités qui s'y déroulent: a) La compétence exclusive de l'Etat côtier s'applique à l'exploration, l'exploitation, la conservation et la gestion de toutes les ressources naturelles et à toute 42 43 44

0'Connell(note 3), vol. 2, 733. C.I.J. (note 8), 24. Fisheries Resources (Jurisdiction

(note 2), 181. 45

and Conservation) Act , 1977, Section 6, Nations Unies

J. P. Quéneudec , La zone économique, R G D I P 79 (1975), 321-353 (342-348). Document A/CONF.62/WP 8 / R E V . l / P A R T I I , Troisème Conférence des Nations Unies sur le droit de la mer, Documents officiels, 4th Sess., vol. 5 (1976), 163-186 (166). 46

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utilisation économique de la zone (article 56 § 1), à la mise en place et à l'utilisation d'îles artificielles, installations et ouvrages (article 60), ainsi qu'à la conduite des activités de recherche scientifique marine (article 246). Cette compétence recèle de surcroît une très large marge de pouvoir discrétionnaire qui tend à rapprocher son exercice de celui de la souveraineté territoriale proprement dite. b) La compétence exclusive de l'Etat du pavillon, énoncée à l'article 92 et rendue applicable dans la zone économique en vertu de l'article 58 § 2, joue uniquement à l'égard des navires étrangers y exerçant la liberté de navigation ou utilisant la zone à une autre fin internationalement licite liée à cette liberté et n'y menant aucune activité qui relève de la compétence exclusive de l'Etat côtier. c) En matière de protection et de préservation du milieu marin, la compétence de l'Etat côtier et celle de l'Etat du pavillon ne présentent aucun caractère d'exclusivité; elles sont, au contraire, plus ou moins imbriquées. I l s'agit, en effet, de compétences concurrentes en ce qui concerne l'édiction de règles de prévention (article 211). De même, s'il appartient de manière générale à l'Etat du pavillon de veiller au respect par ses navires de ces règles et de réprimer éventuellement leur violation (article 217), l'Etat côtier peut, de son côté, mettre en œuvre divers pouvoirs de contrôle et de sanction, selon une gradation qui dépend de la gravité et des conséquences de l'infraction (article 220); toutefois, la priorité est en principe accordée à la compétence répressive de l'Etat du pavillon, sauf en cas de manquement de celui-ci ou en cas de dommage grave causé à l'Etat côtier (article 228). A la différence des zones de pêche, les zones économiques ne sont donc pas conçues comme ayant la nature de zones de haute mer. I l en est ainsi, non seulement parce que la loi du pavillon n'y présente pas de caractère exclusif, mais aussi parce que la Convention de 1982 les a formellement exclues de la catégorie des espaces de haute mer, au même titre que les eaux intérieures, les eaux territoriales et les eaux archipélagiques (article 86). Si des incertitudes peuvent encore subsister à ce sujet, c'est uniquement parce que l'institution de la zone économique ne relève pour le moment que du droit coutumier. Sans doute, les règles coutumières relatives à la zone économique se sont-elles formées par référence aux textes de négociation successifs élaborés à partir de 1975 au sein de la Conférence des Nations Unies sur le droit de la mer et elles trouvent aujourd'hui un solide appui dans le texte même de la Convention adoptée en 1982 par cette Conférence. Cependant, le fait d'être en présence d'un droit qui demeure coutumier tant que la Convention n'est pas en vigueur empêche, peut-on dire, la nature véritable de la zone économique d'apparaître en pleine lumière et conduit parfois à l'assimiler à une zone de pêche, c'est-à-dire à en faire un espace de haute mer. 4 7 47 Voir V. S. Tsarev , The Juridical Nature of the Exclusive Economic Zone and the Legal Regime of Navigation of Foreign Vessels Therein, in: E. D. Brown / R. R. Churchill (eds.), The U N Convention on the Law of the Sea: Impact and Implementation, Proceedings of the Law of the Sea Institute, 19th Annual Conference, Honolulu 1987, 591-601.

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Parmi les manifestations récentes d'une telle attitude, on doit relever la décision rendue à New York le 23 novembre 1988 par VU. S. Court of International Trade dans l'affaire Koru North America v. United States S* Dans cette affaire, se trouvait soulevé le problème de la définition du pays d'origine de filets de poissons importés aux Etats-Unis. Les poissons avaient été péchés dans la zone économique exclusive de la Nouvelle-Zélande par divers navires battant pavillon de l'URSS et du Japon. Affrétés par une société néo-zélandaise pour lui permettre de capturer la totalité de son quota de pêche, ces navires avaient été temporairement enregistrés par les autorités de Wellington comme navires de pêche néo-zélandais. Débarqués et stockés en Nouvelle-Zélande, les poissons capturés par ces navires avaient reçu un certificat d'origine néo-zélandaise avant d'être expédiés en Corée du Sud pour y être préparés et conditionnés en vue de leur exportation vers les Etats-Unis. L'administration américaine des Douanes contestait l'origine néo-zélandaise de ces produits. En lui donnant raison sur ce point, le Tribunal a décidé qu'il s'agissait en fait de produits originaires de Corée du Sud, où ils avaient subis une transformation substantielle. Dans une partie de son jugement, il a toutefois développé une argumentation assez contestable. Considérant, d'une part, que le poisson avait été capturé en dehors de l'espace soumis à la souveraineté de la Nouvelle-Zélande et considérant, d'autre part, que cet Etat n'était pas investi d'une souveraineté absolue sur les ressources biologiques de sa zone économique, le Tribunal a estimé que, si ce poisson n'avait pas été transformé dans un pays tiers, il aurait pu avoir pour pays d'origine l'Etat du pavillon des navires qui l'avaient péché. Ce qui revient à dire que la zone économique exclusive est de même nature que la haute mer; car le pays d'origine du poisson capturé en haute mer est effectivement toujours déterminé par le pavillon du navire de pêche. Le raisonnement suivi par VU.S. Court of International Trade est d'autant plus surprenant que cette juridiction américaine, tout en prétendant se fonder sur la Convention de 1982, a refusé de voir que c'est précisément dans le cadre de cette Convention que se trouve affirmée la nature juridique particulière de la zone économique. T o u t laisse à penser que ce caractère sui generis de la zone économique ne pourra plus être mis en question à partir du moment où la Convention sera entrée en vigueur. I l en résultera un certain nombre de conséquences quant aux rapports de cette notion avec le concept de zone de pêche. 2. Les conséquences A u 31 décembre 1988, la Convention des Nations Unies sur le droit de la mer avait reçu 37 ratifications, 49 soit en moyenne six ratifications par an depuis 1982. Si 48

Ce jugement n'a pas encore été publié.

49

Nations Unies (note 1), No. 12, Décembre 1988, 7.

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ce rythme moyen se maintenait, le nombre des 60 ratifications requises pour l'entrée en vigueur pourrait être atteint au terme des quatre années à venir. D'ores et déjà, de nombreux Etats, même parmi ceux qui n'ont pas encore déposé un instrument de ratification ou d'adhésion, ont pris diverses mesures tendant à compléter ou à modifier leur législation interne afin de l'adapter au texte de la Convention. Si certains d'entre eux n'ont pu échapper à l'obligation de mettre leur législation nationale en harmonie avec ce texte conventionnel, en raison de la décision qu'ils ont prise de la ratifier, d'autres n'ont pas nécessairement agi dans la perspective d'une ratification prochaine de la Convention. Ces derniers ont parfois été mus, semble-t-il, par la volonté de conforter certaines dispositions de la Convention et de les faire ainsi apparaître comme l'expression écrite de règles généralement acceptées.50 Progressivement, plusieurs dispositions de la Convention sont, de la sorte, mises en œuvre dans la pratique avant même d'être rendues applicables en tant que règles conventionnelles. Tel est plus particulièrement le cas des dispositions relatives à la zone économique exclusive. O n constate toutefois que la démarche suivie a varié selon les Etats. Les uns ont simplement modifié les règles internes concernant la zone économique qu'ils avaient instituée avant l'adoption du texte final de la Convention. C'est ce qu'ont fait l'Indonésie en 1983, 51 Madagascar en 1985 52 et le Mexique en 1986. 53 Dans d'autres cas, on a assisté à un changement plus important de la législation interne d'Etats qui revendiquaient antérieurement une mer territoriale de 100 ou 200 milles marins et qui ont décidé de mettre leur législation en conformité avec la Convention. En 1984, le Gabon a ainsi ramené à 12 milles la largeur de sa mer territoriale et a créé une zone économique de 200 milles. 54 Son exemple a été suivi en 1986 par le Ghana. 55 Mais les changements les plus significatifs ont été le fait de quelques Etats qui ont transformé leur zone de pêche en zone économique. Cette transformation revêt ici une importance d'autant plus grande qu'elle a été réalisée par des Etats qui occupent une place prééminente dans l'évolution du droit international de la mer. Par une proclamation du 10 mars 1983, 56 les Etats Unis ont substitué une zone économique exclusive à la zone de conservation des pêcheries qu'ils avaient établie 50

Voir J. Ρ. Quéneudec , Chronique du droit de la mer, dans: A F D I X X X I I I (1987), 639-646. 51 Nations Unies (note 1), no. 7, avril 1986, 25-31. 52 Loc. cit., 40-43. 53

Loc. cit., 50-61.

54

Nations Unies (note 1), no. 9, avril 1987, 2-4.

55

Nations Unies (note 1), no. 8, novembre 1986, 15-20.

56

Nations Unies (note 1), 78, 79.

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en vertu d'une loi du 13 avril 1976. 57 De la même manière, un décret en date du 28 février 1984 a créé une zone économique au large des côtes de l ' U R S S 5 8 et a abrogé le décret du 10 décembre 1976 sur les mesures provisoires de conservation des ressources biologiques et de réglementation de la pêche dans les zone maritimes contiguës aux côtes de l'URSS. 5 9 Le Chili a fait de même en 1986, rompant ainsi avec une pratique qui remontait à 1947. 60 I l est tout à fait remarquable de relever que, si l'on excepte la déclaration britannique du 29 octobre 1986 relative à la juridiction maritime autour des îles Falkland, 61 aucune nouvelle zone de pêche n'a été instituée au cours de ces dernières années. Depuis la fin de la 3ème Conférence des Nations Unies sur le droit de la mer, chez des Etats qui ne revendiquaient jusque là aucune zone maritime au-delà de leur mer territoriale, seules des zones économiques ont vu le jour, comme celles créés en 1984 par la Guinée équatoriale, 62 en 1986 par la Roumanie 63 et par TrinitéTobago, 6 4 en 1987 par la Bulgarie. 65 Dans ces conditions, on est amené à se demander si la notion même de zone de pêche n'est pas appelée à disparaître à plus ou moins brève échéance. Certes, selon le droit international coutumier, rien n'oblige les Etats qui ont proclamé une zone de pêche au large de leurs côtes à la transformer en zone économique; surtout s'il s'agit d'Etats qui n'ont pas ratifié la Convention de 1982 ou, a fortiori, qui ne l'ont même pas signée. La question pourrait cependant se poser en des termes différents à partir du moment où la Convention sera en vigueur; car la Convention ignore le concept de zone de pêche et ne connaît en principe que la notion de zone économique exclusive. Après l'entrée en vigueur de la Convention, les Etats qui y seront parties pourraient-ils éventuellement conserver leur zone de pêche? A u nom de l'adage "qui peut le plus peut le moins", les Etats parties conserveraient-ils la liberté d'opter pour la création ou le maintien de zones de juridiction nationale ne couvrant qu'une partie des droits et obligations prévus dans le cadre de la zone économique exclusive? 57

Fishery Conservation and Management Act (1976), reproduced in: International Legal

Materials (I.L.M.) 15 (1976), 634-650. 58

Nations Unies (note 1), no. 4, février 1985, 31-40. Voir B. Kwiatkowska , New Soviet

Legislation on the 200-mile Economic Zone and Certain Problems of Evolution of Customary Law, in: Netherlands International Law Review 33 (1986), 24-64. 59

Voir I.L.M. 15 (1976), 1381-1383.

60

Nations Unies (note 54), 1.

61 Loc. cit., 17-19; Voir M. G. Kohen, La declaraciôn britanica de una zona de pesca alrededor de Malvinas, en: Revista espanola de derecho internacional 39 (1987), 487-499. 62

Nations Unies (note 1), no. 6, octobre 1985, 22-25. Nations Unies (note 55), 15-20. Voir E. Franckx, Romania's Proclamation of a 200-mile EEZ, in: International Journal of Estuarine and Coastal Law 2 (1987), 144-153. 63

64 65

Nations Unies (note 54), 5-16. Nations Unies (note 1), no. 10, novembre 1987, 9.

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Bien que la Convention ne mette à la charge des Etats côtiers aucune obligation de créer une zone économique exclusive, la recherche d'une application aussi cohérente que possible de ses dispositions essentielles pourrait néanmoins conduire à une certaine uniformisation des comportements des Etats parties qui souhaiteraient faire valoir leurs droits exclusifs sur les ressources ou exercer des compétences en matière de préservation du milieu marin au-delà de leur mer territoriale. Ces Etats seraient d'autant plus poussés dans cette voie que l'uniformisation est précisément l'un des objectifs déclarés de la politique suivie par le Secrétariat général des Nations Unies dans la mise en œuvre de la Convention, à l'égard de laquelle il joue un rôle non négligeable. 66 L'Assemblée générale de l ' O . N . U . a d'ailleurs fait valoir à plusieurs reprises depuis 1982 qu'il était "nécessaire que les Etats assurent l'application cohérente de la Convention et que les législations nationales soient harmonisées avec les dispositions de la Convention". 6 7 Une telle perspective conduit, d'autre part, à penser que la Communauté économique européenne devra, un jour ou l'autre, se poser la question du maintien ou de la transformation de la zone de pêche communautaire. Depuis le 1er janvier 1977, les limites de pêche des Etats membres ont été portées à 200 milles marins au large de leurs côtes bordant la mer du N o r d et l'Atlantique, en application de la résolution adoptée le 3 novembre 1976 par le Conseil des Communautés. 68 Celle-ci n'institue pas, à proprement parler, une zone de pêche communautaire, mais mentionne "les zones de pêche des Etats membres". En effet, la Communauté n'y exerce qu'une compétence ratione materiae , dans la mesure où elle ne dispose que du pouvoir de réglementer l'activité de pêche; les Etats membres demeurent compétents ratione loci pour assurer l'application et sanctionner la violation des règles communautaires. I l n'y a toutefois pas de qualification uniforme des espaces maritimes ainsi communautarisés; si trois Etats ont bien institué une zone économique (France, Espagne, Portugal), les autres Etats côtiers de la C.E.E. s'en tiennent au concept de zone de pêche. Depuis l'entrée en vigueur, le 1er juillet 1987, de l'Acte unique européen de 1986, qui prévoit une extension des pouvoirs de la Communauté en matière de préservat i o n de l'environnement et de recherche scientifique, il paraîtrait logique que soit instituée à plus ou moins long terme une "zone économique communautaire" ou, à t o u t le moins, que la Communauté incite ses membres à transformer les zones de pêche qui subsistent en zones économiques. 69 L'extension des pouvoirs d'action de 66 J. P. Quéneudec , Le rôle du Secrétariat de P O N U dans la mise en œuvre de la Convent i o n sur le droit de la mer, dans: Société française pour le droit international (Colloque de Nice), Les Nations Unies et le droit international économique, Paris 1986, 327-337. 67 Voir notamment la Résolution 43/18 du 1er novembre 1988 sur le droit de la mer, Nations Unies (note 1), no. 12, décembre 1988, 23-26. 68 Voir I . L . M . (1976), 1425; R G D I P 81 (1977), 503-505, 801-809. 69 Voir T. Treves , La Communauté européenne et la zone économique exclusive, dans: A F D I X X I I (1976), 653-677.

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la Communauté qui est réalisée par l'Acte unique concerne, en effet, des domaines qui entrent dans le champ d'application de la juridiction nationale au sein d'une zone économique exclusive. La constitution d'une zone économique commune, qui serait en quelque sorte le prolongement maritime du grand marché intérieur, se justifierait d'autant mieux que la Communauté a signé, le 7 décembre 1984, la Convention des Nations Unies sur le droit de la mer. Comme nous nous sommes efforcés de le montrer, les rapports qu'entretiennent les notions de zone de pêche et de zone économique exclusive sont assez complexes dans le droit international contemporain. Ils s'apprécient de façon sensiblement différente selon que l'on se situe sur le terrain du droit coutumier et de la pratique effectivement suivie par les Etats, ou selon que l'on se place dans la perspective plus dynamique de l'application de la Convention de 1982, c'est-à-dire en se situant dans l'ordre du droit conventionnel.

The Erebus Disaster By Francis Auburn

I. The Accident The idea of regular tourist flights to the Antarctic has been investigated by airlines for a considerable period of time. I n 1969, Air New Zealand examined the feasibility of trips to McMurdo, including landing there, 1 but the project was shelved. W i t h the introduction of wide-bodied jets it became possible to carry out single day return flights without landing. I n 1977 Q A N T A S , w i t h the Boeing 747, and Air New Zealand , w i t h the D C 10, commenced Antarctic tourist trips. One of the attractions for passengers was the low cost of viewing a continent which is generally beyond the capacity of most holiday ventures. A t a time when the Lindblad voyages to Antarctica cost several thousand dollars (excluding connecting air fares), Air New Zealand was charging $ N Z 299 for a day flight and selling 214-218 seats each time. 2 For Air New Zealand the Antarctic trips involved full passenger lists, limited flying time, 3 utilised spare plane capacity between seasons and attracted Japanese and U.S. visitors. 4 I n the nature of such flights it was apparent that the usual point-to-point cruising altitudes could not be maintained and that some reduction would be needed near specific scenic attractions. For Air New Zealand the planned turn around point and focus of major interest lay in the vicinity of Ross Island where the U.S. and New Zealand bases could be seen, together w i t h the natural attractions of the Ross Ice Shelf and M o u n t Erebus, a snow-covered volcano which is 3,794 metres high, contains a lava lake 5 and is still active. 6 T o facilitate viewing in this area it appeared that some Air New Zealand planes descended to a minimum of 305 metres (1,000 feet) over the sea in McMurdo 1

F. M. Auburn , The Ross Dependency, The Hague 1972, 39. Rosamunde J. Reich , Tourism in the Antarctic, Cambridge 1979, 34. 3 Michael Guy , White Out!, M a r y b o r o u g h 1980, 34. 4 Ken Hickson , Flight 910 to Erebus, Christchurch 1980, 198. 5 Haroun Tazieff, Erebus: Volcan Antarctique, Paris 1978, 125-127. 6 Harry Keys , Erebus — the Ice Dragon, in: New Zealand Alpine Journal (N.Z.A.J.) 32 (1979), 52-54. 2

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Sound. 7 This flight level required a route well clear of M o u n t Erebus and the neighbouring high land on Ross Island. Shortly after midday on 28th November 1979 Air New Zealand flight T E 901 crashed on the slopes of M o u n t Erebus at a height of 1,467 feet. 8 A l l 257 people on board were killed. The subsequent investigations and proceedings gave rise t o a number of legal and political issues. N e w Zealand is a small country. This first serious crash, involving the national airline which was then suffering from financial and other problems, called into question the management and operation of the company and also extended t o the C i v i l Aviation Division of the Ministry of Transport whose task was the regulation of such flights. T h e very scale of the disaster required detailed scrutiny. T h e issues were reviewed in several ways. T h e Report of the Chief Inspector of A i r Accidents has already been referred to. I t was followed by a Royal Commission (Mahon J) which was itself reviewed by the C o u r t of Appeal and the Privy Council and discussed in some detail by the Chief Inspector. Following the publication of the Royal Commission's report the role of the C i v i l Aviation Division was examined. Claims by the estates of passengers were filed in courts in N e w Zealand and the U n i t e d States and actions on behalf of the estates of the crew were initiated in the U.S. There was also considerable public controversy involving, among others, the Chief Inspector, Justice Mahon and Sir Robert Muldoon , the Prime Minister at the time. O n the international level issues of air safety, rule prescription and enforcement were raised in a test of the effectiveness of the Antarctic System. As the first major public and judicial inquiry into an accident in Antarctica the Erebus disaster could provide a pointer t o aspects of the minerals regime.

I I . T h e A i r Accident Report O n the day after the crash, M r . Chippindale , the Chief Inspector of A i r Accidents, arrived in the Ross Dependency t o commence the official investigation. Under the procedure prescribed by regulations pursuant t o the C i v i l Aviation A c t 1964, the Chief Inspector may investigate an accident involving an aircraft registered in N e w Zealand or w i t h i n the territorial limits of N e w Zealand. 9 This power extends t o an accident t o a N e w Zealand aircraft outside the territorial limits of New Zealand otherwise than in the territory of a contracting State. 10 So the Chief 7 8

Reich ( note 2).

Chief Inspector of Air Accidents , Office of Air Accidents Investigation, Ministry of Transport, New Zealand, Aircraft Accident Report N o . 79-139, Wellington 1980, 10 (hereafter cited as "Chief Inspector"). 9 Civil Aviation (Accident Investigation), Regulations 1978, Statutory Regulations (S.R.) 1978/112, Regulation 4 (1). 10 Loc. cit. y Regulation 24 (2).

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Inspector was duly empowered to act under New Zealand law 1 1 despite the disputed territorial status of the Ross Dependency. 12 According to the Regulations the main purpose of accident investigations is to determine the circumstances and causes of the accident w i t h a view to avoiding accidents in the future rather than to assign blame or liability to any person. 13 Where it appears to an Inspector that any degree of responsibility may be attached, notice shall be given to the person concerned, or his personal representative, and he may make a statement, give evidence, produce witnesses and examine witnesses. 14 But there is no provision for information to be supplied, or any rights given, to persons who may be entitled to claim any form of compensation as a result of the accident. A n Inspector has the power to summon witnesses and has custody of the damaged aircraft until he releases i t . 1 5 M r . Chippindale carried out a thorough investigation at the site of the crash and also visited the United States and the United Kingdom. N o one had seen the aircraft after it left New Zealand and there were no survivors. But it proved possible to reconstruct the relevant portions of the flight to a large degree by using the Digital Flight Date Recorder, 16 the Cockpit Voice Recorder 17 and photographs developed from passengers' cameras. The probable cause of the accident was held to have been the decision of the captain to continue the flight at low level toward an area of poor surface and horizon definition when the crew was not certain of the position and the subsequent inability to detect the rising terrain which intercepted the aircraft's flight path. 1 8 Particular emphasis was placed on the interpretation of the C V R to the effect that the flight engineers had expressed dissatisfaction w i t h the descent toward a cloud covered area and the crew were not certain of their position. 1 9 Civil Aviation Division approval of the flight and the crew briefing required that the plane fly above 16,000' in the McMurdo area. Descent to 6,000' was permitted in a specified sector south of Erebus subject to requirements regarding cloud base, visibility, monitoring and absence of snow showers. 20 The D C 10 crashed whilst flying well below 6,000' on the northern part of Ross Island. 11 The State Department confirmed that it had no objection to the New Zealand investigation, see Ron Chippindale , Problems of Large Aircraft Accident Investigation in Antarctica, in: ISASI Forum 2 (1982), 8-11. 12 Paul Heller , Conference on A i r New Zealand D C 10 Crash in Antarctica, Auckland 1980, 19. 13 See (note 9), Regulation 5. 14 Loc. cit., Regulation 15. 15 Loc. cit., Regulation 14, 12. 16 Commonly referred to as "Black Box". 17 Hereafter " C . V . R . " .

18 19 20

Chief Inspector (note 8), 53. Loc. cit. , 52, 53. Loc. cit., 34-36.

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Apparently the reason for not seeing M t . Erebus was the deceptive phenomenon of whiteout which is well-known to pilots with experience in polar regions. 21 Whiteout creates a visual illusion of clear conditions and is the most dangerous of all weather conditions in the Antarctic. 2 2 Navigation of the D C 10 is largely carried out by the Area Inertial Navigation System (A.I.N.S.) consisting of computer units which direct the aircraft according to geographical coordinates (waypoints) entered into a ground computer prior to the flight and routinely transferred to the aircraft computer. The pilot can disengage the A I N S from automatic control ("nav mode") and select a heading if, for instance, he wishes to avoid a cloud formation. When the required deviation is finished the pilot will select a course to intercept the programmed track and arm the nav mode which will maintain the original course. 23 U n t i l the day of the flight of T E 901, the McMurdo area waypoint had been entered as longitude 164°48Έ. This "false track" would have taken the D C 10 over the sea ice of McMurdo Sound. The waypoint actually used was 166°58Έ (Tacan), immediately south of Ross Island. This gave a "real track" over M o u n t Erebus. Some, at least, of the materials used at the route qualification briefing for the crew of the D C 10 showed the false track. I t was accepted that the crew had not been informed of the alteration of the waypoint from the false track to the real track. 2 4 N o evidence was found by M r . Chippindale to suggest that the crew had been misled by the error in the flight plan shown to them at the briefing. 25 H e also stated that the D C 10 had been contacted by the U.S. Navy A i r Traffic Centre at McMurdo but had not been located on the U.S. radar. 26 The Chippindale report contained some criticism of Air New Zealand , such as remarks on the inadequacy of the route briefing, and of the Civil Aviation Division, an example being the issue of requiring appropriate life-sustaining equipment in an area in which search and rescue would be especially difficult. 2 7 Even critics of the findings acknowledged that the Chief Inspector had carried out a daunting task with total dedication. 28 His report gave a detailed explanation of what had happened. But the essential question still remained. I f anything Chippindale 9s conclusions made the disaster even more difficult to understand. 21 22

Loc. cit. , 40, 41, 47, 53. Report of the Royal Commission to Inquire into the Crash on M ount Erebus , Antarctica,

of a D C 10 Aircraft Operated by A i r New Zealand Limited, Wellington 1981, 60, 61 (hereafter "Royal Commission"). 23 Loc. cit., 31, 32. 24 Loc. cit., 12, 13. 25 26 27 28

Chief Inspector (note 8), 44. Loc. cit., 9. Loc. cit., 24, 43, 44, 53. Royal Commission (note 22), 25.

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Both the pilot, Captain Collins , and the co-pilot, First Officer Cassin , were very experienced. A review of medical records, the post-mortems and toxicological investigations disclosed no relevant physical problems or any abnormalities. 29 Then why did these two veteran pilots fly a D C 10 with 257 people aboard at a height of 1,500' directly into an active volcano 12,450' high? One explanation mentioned in the Chief Inspector's report was that the pilots and the official commentator were under a misconception that the approach path was over sea level ice west of Mount Erebus. 30 But this possibility still did not explain why the three men could have been under such a disastrous misapprehension. I I I . Royal Commission The Civil Aviation Accident Investigation Regulations require that the Inspector shall, if it appears that any degree of responsibility may be attributable, if practicable give the person concerned notice and an opportunity to make representations. 3 1 The draft was sent for comment to Air New Zealand , the Civil Aviation Division and the personal representatives of the pilots. O n 10th March 1980, only nine days after the draft had been delivered for comment, the Attorney-General publicly announced that a Commission of Inquiry would be set up to investigate the disaster. 32 The appointment of Mahon J. to the Royal Commission was officially made three months later, a period extended four times. Endowed with powers under the Commissions of Inquiry Act, Mahon J. could compel the attendance of witnesses and require the production of documents. During the period of his appointment, the Royal Commissioner was absolutely immune from defamation suits in respect of his activities 33 but this immunity only extended to what was said or done in the course of the inquiry. 3 4 The Accident Investigation Regulations enable the Attorney-General, if he considers it expedient in the public interest, to direct that a public inquiry be held into any accident after the Chief Inspector has completed the gathering of facts related to the accident. Such a Court of Inquiry consists of a Magistrate or Judge and two or more assessors, having aeronautical or other special skill (not being an Inspector of A i r Accidents). The Court has the powers given by the Commissions of Inquiry A c t . 3 5 One of the criticisms levelled at the Royal Commission was that it lacked the technical assessors provided for in the Regulations. 36 Like the Royal 29

30 31

Chief Inspector (note 8), 21. Loc. cit., 48. See (note 9), Regulation 15.

32

Royal Commission (note 22), 26.

33

Re Erebus Royal Commission [1983] New Zealand Law Reports (N.Z.L.R.) 662, 667. Section 13 Commissions of Inquiry Act 1908. See (note 9), Regulation 17.

34 35

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Commission, a Court of Inquiry has extensive powers of compelling the production of evidence and is given them under the same legislation. One reason for not using the Court of Inquiry procedure presumably lay in the requirement that such a Court shall not be concerned w i t h the civil or criminal liability of any person arising out of the accident and no evidence relating to such liability shall be admitted unless the Court considers it necessary for establishing the place, time, causes or circumstances or any facts necessary to allow appropriate measures to be taken for the safety of persons engaged in aviation-related activities. 37 Such a limitation would have posed problems for that portion of the terms of reference of the Royal Commission looking at whether the crash was caused or contributed to by any person under specified conditions. 38 The Royal Commission was very different from the investigation carried out by the Chief Inspector. Mahon was a judge, Chippindale an expert in civil aviation and air accidents. The Chief Inspector's functions were performed by himself and his office w i t h the cooperation of outside agencies where required. Notice of the attribution of blame could be given to parties responsible but others, such as potential plaintiffs in civil actions who themselves could not be culpable, had no right to comment. The Royal Commission carried out extensive public hearings with counsel for all interested parties having the right of cross-examination. I t was inevitable that the Mahon inquiry would serve a number of purposes. Parties criticised in the Chief Inspector's report would attempt to argue that they were not at fault. Potentially culpable parties would try to persuade the Royal Commission that the blame should not be shifted on to their shoulders. The Commission was also concerned with wider issues of air safety. T w o counsel assisted Justice Mahon and no less than twenty-one lawyers represented other interests. The public hearings took seventy-five days, apart from the necessity for examining the situation at McMurdo and discussion in the United States and United Kingdom. Costs and disbursements amounted to $ N Z 500,000. 39 From the opening of the hearings it became apparent that the Royal Commission would have several aspects. Counsel would take all proper steps to uphold the position of those parties who might be the object of criticism: the pilots, Air New Zealand and the Civil Aviation Division. The Commission was to investigate the causes of the accident and apportion responsibility. A n d the estates of the potential litigants would be fully represented. This was the reason for the appearance of three 36 Ron Chippindale , Chief Inspector of A i r Accidents, Comments on the Report into the Accident Involving an A i r New Zealand DC-10 Aircraft in Antarctica on 28 November 1979 (6 May 1981), released by the Minister of Civil Aviation, 3 February 1982, 19 (hereafter "Comments"). The Royal Commission did have a distinguished technical consultant, Sir

Rochford Hughes , see Royal Commission (note 22), xv. 37

See (note 9), Regulation 18 (2).

38

Royal Commission (note 22), vi.

39

Loc. cit., xiii, xv, 167.

11 GYIL 32

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counsel for the consortium of deceased passengers. Having regard to the very large damage claims to be expected this capacity to cross-examine witnesses for the "other side" prior to the commencement of the hearing of civil actions was an opportunity to prepare for the litigation before an official body having the power to compel the appearance of witnesses. Suffering from other problems, apart from the Erebus disaster, Air New Zealand would have to defend itself against any attempts to add part of the blame for a major air crash to its pre-existing difficulties. 4 0 As the regulatory arm of government for air transport the Civil Aviation Division had been the subject of public criticism on other counts 4 1 and the Royal Commission was specifically requested to examine whether the practice and actions of the Division in respect of Flight T E 901 were such as might reasonably be regarded as necessary to ensure the safe operation of aircraft on flights such as T E 901. 42 I n effect the Royal Commission could be regarded as being a review of the work of the Chief Inspector. But it was not a court. The Commissions of Inquiry Act gives the power to investigate and report but not to alter legal rights. However exhaustive and authoritative its work may be, a Royal Commission's conclusions are regarded as matters of opinion and are not generally admissible in subsequent torts litigation. Yet the courts recognise that such inquiries deal w i t h matters of serious controversy. Their published findings can cause irreparable damage to the reputation of an individual or an organization. O f special concern to the courts has been the possibility that there may be a finding of criminal (or improper) conduct, condemning someone in the eyes of the public without the safeguards of a trial. I n recent years New Zealand has witnessed a number of Commissions of Inquiry set up to examine the possibility of criminal or improper behaviour. Whilst the Erebus Commission was hearing evidence, challenges to the activities of two other Commissions were brought before the New Zealand courts. 43 I t was apparent that, in a suitable case, action could be taken to ensure that a Royal Commission kept to its terms of reference and observed the requirements of administrative law. But it was not clear to what degree the courts would require a Royal Commission to afford an opportunity of rebuttal to those it considered responsible for serious impropriety. W i t h the report of Mr. Chippindale before it and the detailed cross-examination of witnesses it was inevitable that the Mahon Commission would amplify the 40 One list of alleged problems included defects in service, large increases in fuel costs, dropping load factors, keen competition internationally leading to a reduced share of the market, unprofitable internal routes and overstaffing. See K. du Fresne , W h y A i r New Zealand Dived into the Red, in: New Zealand Listener (11 A p r i l 1981), 17. 41

Allegations of reluctance to regulate cut-rate ticketing, mishandling of prosecution of a pilot and understaffing, see Editorial, in: National Business Review (6 July 1981), 6. 42 43

Royal Commission (note 22), vii. Re Marginal Lands Board Commission of Inquiry into Fitzgerald

Loan [1980] 2

N . Z . L . R . 395 (allegation of impropriety in granting of loan by public body) and Re Royal Commission on Thomas Case [1982] 1 N . Z . L . R . 252 (discussed under Court of Appeal).

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findings of the Chief Inspector. What was less expected was that the probable cause found by M r . Chippindale would be rejected. According to the Royal Commission the originating and dominating factor behind the disaster was the change in coordinates made without informing the crew. 44 N o t only did the conclusion differ radically from the Chief Inspector's report but so too did a number of crucial findings. M r . Justice Mahon* s analysis of the Cockpit Voice Recorder, which had preserved communications for the last thirty minutes of the flight, pointed out that preparation of the transcript for Mr. Chippindale had taken five days. After hearing the recording, the Commissioner concluded that the quality of the tape was very bad indeed. 45 H e considered that none of the views of the Chief Inspector on the uncertainty expressed by the flight engineers were substantiated. 46 O n this interpretation all five men on the flight deck of the D C 10 (the two pilots, two flight engineers and an experienced Antarctic guide) failed to realise that the plane was flying into M o u n t Erebus. Justice Mahon reviewed extensive evidence and held that the crew's failure to see the mountain was due to the whiteout. Neither pilot had had experience of low-level flying over snow. 4 7 As M r . Chippindale had pointed out there had not been a comprehensive briefing on this phenomenon. 48 Yet whiteout alone could not have caused the accident. Failing to inform the crew of the change in the computer track was the vital point. Justice Mahon stressed the "incredible accuracy" of the A I N S system and held that the pilots were justified in relying on it. Captain Collins had disengaged nav mode and himself guided the plane down to 3,000'. Then, twenty-five miles north of Erebus he had armed nav mode again, bringing the D C 10 back to the computer track. This had the effect of flying the plane straight into the slopes of the mountain. There was a strong inference that the Captain was mistaken as to where the nav track would take him. 4 9 Prior to the change the flight track had proceeded directly down McMurdo Sound to 164°48Έ, 77°53'S. Three (and possibly four) of the charts used to brief the crew had shown that track. O n the night before take-off Captain Collins had plotted the course in an atlas and had also used other topographical maps. I t was clear that he was relying on the false coordinates. 50 44 45

Royal Commission (note 22), 13. Loc. cit. , 36.

46

Loc. cit. y 43. Mahon also considered that the interpretation of data from the Black Box was mistaken, see Peter T. Mahon, The Mount Erebus Royal Commission: Some Lessons about Investigation and Interpretation of Evidence, in: Queensland Law Society Journal (Q.L.S.J.) 12 (1982), 287-290, and Verdict on Erebus, Auckland 1984, 279-284. 47 48

Royal Commission (note 22), 16, 71. Chief Inspector (note 8), 24, and Gordon Vette and John Macdonaldy Impact Erebus,

Auckland 1984, 100. 49 50

11*

Royal Commission (note 22), 31, 11, 12. Loc. cit., 86, 94.

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Francis Auburn

The central point of the case advanced by Air New Zealand and the C i v i l Aviation Division was that the height limitation had been contravened. Mahon J. termed this their main defence, put forward to obtain "absolution from their own numerous errors" by ascribing the disaster to a failure by Captain Collins to observe the minimum flight level of 16,000'. 51 A vital finding of Justice Mahon was that all Air New Zealand flights to McMurdo since October 1977 had performed a letdown well below 6,000' (the absolute C. A . D . minimum). Denial of knowledge by airline management and C . A . D . was met by a considerable body of evidence that the fact was widely known. The President of McDonnell-Douglas went on one flight and wrote an article stating that the plane descended to 3,000'. Air New Zealand itself arranged for 1,000,000 copies of this article to be distributed throughout New Zealand. But the Commissioner concluded that flights at 1,500 feet over McMurdo Sound in good visibility were quite safe. 52 The Commission's terms of reference specifically included air traffic control. After negotiations between the respective governments, some U.S. Navy personnel who had been members of the air traffic control system at the date in question, were interviewed in that country in the presence of a United States Navy lawyer. But neither the radar or the radio operator on duty at the time of the disaster were available. Apparently one had left the Navy and the other had preferred not to give evidence. 53 The effect of the requirement of the U.S. Navy that the witnesses be interviewed in that country was that the powers over witnesses under New Zealand law were not available. McMurdo A i r Traffic Control had not been told that the route of T E 901 overflew Erebus and would have disagreed with such a proposal. The 6,000 foot descent sector would also have been rejected because of the difficulty of radar surveillance. Once more it was asserted that the D C 10 had never appeared on the U.S. radar. Despite this testimony Justice Mahon concluded that the plane was probably visible on the screen for half a minute to a minute approximately thirty-eight miles north of McMurdo. H a d the radar operator viewed the D C 10 it would have been immediately noticed that the aircraft was not flying down the Sound. However, the operator may have believed that the pilot intended to fly away north. N o blame was attached to the operator for not advising the D C 10 of its true position. 5 4 I t will be noted that the evidence gathered in the United States was not apparently taken in the presence of the lawyers who appeared for the various parties and therefore was not subject to the same extent of cross-examination as was the verbal evidence taken by the Royal Commission in New Zealand. Apart from its main findings the report of the Commission castigated the conduct of b o t h A i r New Zealand and the C . A . D . Commenting on the stance of 51

52 53

54

Loc. cit. , 56, 79. Loc. cit., 75, 77, 78, 80. Peter T. Mahon, Verdict on Erebus, Auckland 1984, 158.

Royal Commission (note 22), 127, 128, 132, 133.

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some of the airline's witnesses, the Judge held sections of the evidence to have been palpably false and to have originated in a predetermined plan of deception which was part of an attempt to conceal a series of disastrous administrative blunders — "an orchestrated litany of lies". 55 Costs and disbursements of the Airline Pilots Association, the Collins and Cassin estates ($NZ 154,000) were ordered to be paid by Air New Zealand (2/3) and the Ministry of Transport (for C.A.D.) (1/3) as each had adopted an unsuccessful adversary stance as against the pilots. The government's costs of the inquiry were $ N Z 275,000. Air New Zealand was said to have materially and unnecessarily extended the duration of the inquiry. The airline's management had ascribed total culpability to the air crew. These allegations were "without foundation". Material information had only been disclosed by the airline reluctantly and at long intervals. Therefore Air New Zealand should pay $ N Z 150,000 towards the public costs of the Commission. 56 The Royal Commission reached very different findings from those of the Chief Inspector. N o t only did it shift the blame from the pilots to Air New Zealand and the C.A.D. but it also carried the implication that civil actions against the airline and the government could be feasible. By this time the crash had been investigated in detail by a technical expert, Mr. Chippindale , and through the extensive public hearings of the Royal Commission. Whilst it could have been expected that the parties criticised by Mahon would not leave his case against them unanswered, the extent of the rebuttal effort and its degree of success could not have been easily foreseen. I V . Chief Inspector's Comments In May 1981 the Chief Inspector prepared detailed comments on the Royal Commission report for the Minister of Civil Aviation. These views were made public in February 1982. Prior to the commencement of Mahon 9s investigation, Mr. Chippindale considered that the Royal Commission could well have put both himself and his office on trial. 5 7 H e made numerous criticisms of the Mahon report, both on small and on major issues. Here it is only possible to select some of the more central contentions. Mahon asserted that photographs taken within seconds of impact showed that T E 901 was flying in skies with clear visibility for at least 23 miles. 58 But no photographs had been taken in the direction of the flight towards Ross Island. Therefore the 23 miles of visibility only related to the left and right of the flight 55 56

57 58

Loc. cit., 150. Loc. cit., 166,167. Comments (note 36). Royal Commission (note 22), 10.

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Francis Auburn

path and were of little relevance. 59 Proof of reliance by Captain Collins on the false coordinates came from evidence by his wife and daughters that he plotted the course on an atlas and maps. 60 The Chief Inspector had asked the Collins family about such matters and found it remarkable that this information was not forwarded to him. 6 1 He doubted whether a track would have been plotted on so valuable a document as a limited edition atlas retailing for $ N Z 250. 62 M r . Chippindale did not consider the failure to notify the change of destination to be an "appalling error". The amendment to the track was two-dimensional and the responsibility for maintenance of a safe altitude remained that of the captain. 63 Despite the inroads computers have made in navigation and the accuracy of A I N S , crew must know where each waypoint is from an approved chart or map: 64 Capt. Collins may have been misled into thinking he was somewhere else but certain enough of his position to make a safe descent — never.

Other major differences related to minimum safe altitudes. Contrary to Mahon 65 the Chief Inspector held that Air New Zealand did not disregard the prescribed heights. 66 Mr. Chippindale continued to hold for his interpretation of the C V R . He asserted that his readout was correct. The section in the Royal Commission report on the C V R was the most disappointing area of its investigations. 67 Mahon' s ten factors causing the disaster 68 were assumptions and were stated too definitely. 69 The Royal Commission's findings conflicted w i t h the accepted view of the international airline fraternity around the world. Mr. Chippindale did not believe that the crew made the immaculate preparation for the descent euphemised by Mahon. Even if they had done so this did not absolve them from colliding with cloud-covered high ground particularly when the aircraft was fitted with such sophisticated navigation equipment. 70 The Judge's analysis as it stands brands the pilots in command of large airliners as unthinking automatons who when programmed to fly on a track take no steps to find out where the track leads or more importantly to maintain a continuous surveillance of the flight in relation to authenticated waypoints in order to ensure the safety of the aircraft at all times. 59 60 61 62 63 64 65 66 67 68 69 70

Comments (note 36), 4. Royal Commission (note 22), 94-99. Comments (note 36), 6. Loc. cit., 8, 15. Loc. cit., 7. Loc. cit., 8. Royal Commission (note 22), 18. Comments (note 36), 9. Loc. cit., 12. Royal Commission (note 22), 157, 158. Comments (note 36), 17. Loc. cit., 18, 19.

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Chippindale' s own report was the considered assessment of a group of extremely well qualified DC-10 experts, pilots and accident investigators who decided this accident could have been avoided if the crew had conducted the flight in accordance with the briefing in relation to minimum altitudes. 71 Chippindale rejected some of the main findings of the Royal Commission insofar as they conflicted with his own investigation. H e was not the only commentator who was unwilling to accept the conclusions of Mahon. A former Chairman of Air New Zealand was quoted as saying that the main cause was the fact that a pilot failed to locate himself in relation to ground features and flew his aircraft into the side of a mountain. Mahon was painstaking and sincere but wrong. 7 2 A n editorial in an aviation journal said that pilots should not descent below safety altitude in instrument meteorological conditions, trusting purely to their inertial navigation system when all other clues tell them that the system, or their understanding of it, is wrong. 7 3 I n January 1982, after the Court of Appeal decision, 74 the Chairman of the Board of Air New Zealand , who was also a qualified navigator, was quoted as preferring the Chief Inspector's findings to those of the Royal Commission, holding that 3/5 of the blame lay w i t h the pilots. 7 5

V . Civil Aviation Review Following the Royal Commission, the Chairman of the State Services Commission and the Secretary of Transport appointed Sir Richard Bolt and Mr. E. A. Kennedy to identify any areas of possible weakness offering scope for change and improvement in Civil Aviation Division (C.A.D.) organization and management. The main focus was on methods, management controls, organizational systems and procedures rather than on individual staff members themselves. 76 This inquiry examined the Chippindale and Mahon reports and the transcript of the evidence before the Royal Commission. C . A . D . personnel were interviewed. I t was not the main function of the review to agree or disagree w i t h the Royal Commission or the Chief Inspector but some discussion of the criticisms of C.A.D.was inescapable.77 71 72

Loc. cit., 19. Noel Holmes , To Fly a Desk, Wellington 1982, 185.

73

D. L.j Garbage In, Garbage O u t , in: Flight International 3760 (1981), 119. Examined below. 75 Mr. Rowling W i l l Meet A i r N Z in Wake of Head Office Row, in: New Zealand Herald (23 January 1982). 76 R. Bolt / E. A. Kennedy , Review of Civil Aviation Division in the Light of Reports by the Royal Commission of Inquiry and the Chief Inspector of Accidents on the Crash of a D C 10 Aircraft on M o u n t Erebus, Antarctica, Wellington 1981, 1 (hereafter " C . A . D . Review"). 74

77

Op. cit.,

1, 2.

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Justice Mahon had regarded the C.A.D. decision to dispense with a familiarisation flight to Antarctica for the pilot-in-command as wrong. 7 8 The Review indirectly justified C.A.D. on the grounds of the hitherto unblemished record of Air New Zealand . Answering the criticism that Air New Zealand overshadowed and dominated C.A.D., the Review asserted, from C.A.D. files, that there had been many instances of the Division overruling the airline. N o examples were cited. Contrary to Mahon, 79 the Review was assured by C.A.D. that it would not have approved a minimum height of 1,500 feet over McMurdo Sound in clear air. 8 0 N o explanation for the putative rejection of this apparently safe limit was given. C.A.D. officers who knew the height limits were adamant that they were unaware of low-flying (apart from one exception of a helicopter report) and had not seen the article circulated in a million copies. The inquiry was satisfied that this was the case. Whether the C . A . D . officers should have been aware of the actual flight levels was another question. 81 This Review suffered from a number of defects. Apparently evidence was not taken from outside sources having views differing from C.A.D. Detailed arguments were not presented. C.A.D. views on controversial matters were accepted without full explanations for the rejection of the contentions of the Royal Commission on the relevant points. Although the Review did state that there were some shortfalls in the overall performance of the Division in relation to Air New Zealand Antarctic operations much ground for excuse was made: 82 Prior to the disaster there were rather different perceptions. The officers of C A D were dealing w i t h an airline w i t h an impeccable record, whose operations had normally been found t o meet the highest professional standards. Those concerned w i t h the Division's regulatory and inspection processes therefore had a high degree of faith and trust in the professionalism of A N Z crews and operational management alike.

V I . C o u r t of Appeal Air New Zealand itself was not prepared to accept the criticism levelled at it by the Royal Commission. The airline continued to assert that pilot error was at least partly to blame. As there is no machinery for appeal from the findings of a Commission of Inquiry, Air New Zealand decided to commence court proceedings for review of specific sections of the report and to set aside the order for payment of $ 150,000 costs. The application for review was brought in the H i g h Court. The airline applied for removal of the matter to the Court of Appeal. I t contended that difficult 78 79 80

81 82

Royal Commission (note 22), 153. Royal Commission (note 22), 80. C.A.Dê Review (note 76), 3. Loc cit. , 4. Loc. cit., 5.

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questions of law were involved and they should be settled by that court. 8 3 Speight J. refused the application for the removal of the entire proceedings, having regard to the voluminous factual material involved, but ordered that the issues of law should be removed to the Court of Appeal. 84 Air New Zealand took this order to the Court of Appeal which decided that it should deal w i t h the entire case itself. N o precedent had been cited for a partial removal. I t is difficult to isolate issues of law from issues of fact. T w o considerations were held to be overriding. Firstly, the exceptional nature of the case due to the magnitude of the disaster, the public importance of the issues and the fact that the case related to the conduct of a H i g h Court judge. Justice could be more manifestly seen to be done if the complaints were dealt with by a court other than that of which he was a member. Secondly, it was important that the complaints be finally adjudicated as soon as reasonably possible. O n the approach of Speight J. there was the possibility of an appeal from the H i g h Court (largely on questions of fact), in addition to the hearing by the Court of Appeal on issues of law. 85 The Court of Appeal unanimously agreed that the order for costs should be struck down. The essential ground for this conclusion was that the order was based upon the airline's stance during the hearings and the finding of an "orchestrated litany of lies". I t was "in fact, though not in name, a punishment" 86 and beyond the jurisdiction of the Royal Commission. Persons interested must be afforded a fair opportunity of making their representations, adducing evidence and meeting prejudicial matter. 8 7 Section 4 A of the Commissions of Inquiry Act, introduced in 1980, strengthened this view. Natural justice required that allegations be stated plainly and put plainly to those accused. That had not been done. 88 A l l five judges agreed on these conclusions. But there were considerable differences between the joint judgment of Cooke , Richardson and Somers JJ. on the one hand and that of Woodhouse P. and McMullin J. on the other. The three judges sketched the complaints of Air New Zealand with relatively few comments. Mahon had severely criticised the order of the Chief Executive, Mr. Davis , to put all documents on file and shred those which were not relevant. 89 Air New Zealand pointed out that Mr. Chippindale had been informed of the change in waypoints, only copies had been ordered to be destroyed and Mr. Davis ' testimony on this point had not been contradicted. There was no evidence that important documents had been destroyed. 83 84 85 86 87 88 89

Murdoch v. British Israel Federation [1942] N . 2 . L . R . 600. Air New Zealand v. Mahon (1981) 7 Recent Law 287. Re Erebus Royal Commission (No. 1) [1981] 1 N . Z . L . R . 614, 617. Cock v. A. G. (1909) 28 N . Z . L . R . 405, 421. Re Royal Commission on State Services [1962] N . Z . L . R . 96, 117. Re Erebus Royal Commission (No. 2) [1981] 1 N . Z . L . R . 618, 666. Royal Commission (note 22), 20.

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Air New Zealand argued that the allegations of deliberate concealment and a concocted story had never been fully put to the relevant members of its staff. I t further contended that allegations of intimidation of a witness should have been put to the senior officer concerned. Another executive was not given an opportunity t o rebut implications concerning pages missing from the pilot's notebook. A l l parties to the court hearing accepted that the reference in this context was mistaken. 90 O n a narrow construction the three judges quashed the order for costs because it was based upon the unacceptable conclusion of an "orchestrated litany of lies". But it is significant that they did not wish to decide whether the law permits a court to strike down parts of a Royal Commission report which are not linked to a costs order. If jurisdiction exists these judges would have required a strong case for its exercise. O n balance such a case had not been made out for the other matters complained of. 9 1 Woodhouse P. and McMullin J. would have gone considerably further. Once the thesis of an organised conspiracy to perjure emerged in the Commissioner's thinking, he had power to re-convene the hearing to confront the alleged wrongdoers w i t h the allegations. 92 O n the factual issues the two judges embarked upon a detailed assessment which proved more critical of the Commission than the other judgment. As an example one may cite the approach to Justice Mahon* s criticism of Mr. Davis order for collection of documents: 93 A different comment upon para 48 is central in this part of the case. I t is very hard to understand why the chief executive officer of this airline should have had any duty to pass on for debate and public prejudgment the same material that in accord w i t h his responsibility had been properly and immediately placed before the appointed official required and well equipped to assess it.

There was criticism of the lack of evidence for the alleged intimidation of a witness by an executive and for passages leaving another senior staff member enveloped in suspicion. 94 During the Commission hearings Mr. Chippindale gave extensive evidence and continued to argue for pilot error. The Commission had held pilot error to be "without foundation". 9 5 I t was difficult for the two judges to understand why the Chief Inspector's viewpoint could not be genuinely shared by other educated observers. 96 Woodhouse and McMullin would apparently have been prepared to 90 91 92 93 94 95 96

See (note 88). Loc. cit. , 667. Loc. cit. , 628. Loc. cit., 638. Loc. cit., 642, 647. Royal Commission (note 22), 167. See (note 88), 649.

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extend the attack on the findings of fact. Their explanation of the facts was advanced in the public interest. 97 They regarded the statutory power of the Commission as being one of decision within s. 4 (2), Judicature Amendment Act 1972 and therefore capable of being set aside. Emphasis was placed upon the severe effects of the findings on reputations. Natural justice may demand the intervention of the courts if the evidence on which a person is condemned is insubstantial. 98 From their interpretation of the facts and law it may be suggested that the two judges were critical of additional findings of the Royal Commission. The judgment of the Court of Appeal in Re Erebus Royal Commission (No. 2) was given on the 22nd December 1981 when the Court had before it the appeal from the decision of the Full Court in Re Royal Commission on Thomas Case,99 together with further proceedings commenced by the New Zealand Police Association and those concerned at the findings of that Royal Commission. The decision on these matters was given on the 30th July 1982. 100 As the Thomas litigation raised some of the issues regarding the powers of a Royal Commission which could have been at issue in Re Erebus Royal Commission (No. 2) it will be briefly examined. In 1970 Arthur Thomas , a farmer of Pukekawa near Auckland, was charged with the murder of a neighbouring couple, Jeanette and Harvey Crewe. Thomas was tried and found guilty on circumstantial evidence. A re-trial was subsequently ordered and in 1973 Thomas was again convicted. After a protracted scientific investigation centering on ballistic evidence the government appointed a lawyer to examine the matter. Thomas was given a free pardon in 1979. In 1980 a Royal Commission headed by a retired New South Wales judge concluded that the conduct of two police officers in the original police investigation had been unsatisfactory and awarded Thomas nearly $ N Z 1,000,000. 101 The proceedings commenced by the New Zealand Police Association and others in April 1981 were based on four causes of action. The Association contended that the appointment of the Commission to inquire into and report on whether a person had committed a crime exceeded the jurisdiction of the Governor-General. Certain findings of criminal misconduct by two police officers were beyond the terms of reference of the Commission. Findings were made contrary to natural justice and in a manner which was unfair t o the officers. There was a real likelihood or reasonable grounds for suspecting that the Commissioners had been biassed against the police officers and others during the inquiry. 1 0 2 I t will be seen that the contentions of the Police Association raised some 97

Loc. cit., 652. Loc. cit. , 626, 627, 629. 99 [1980] 1 N . Z . L . R . 602. 100 [1982] 1 N . Z . L . R . 252. 101 Murder at Bitter H i l l , in: Time (15 December 1980), 21. 102 Re Royal Commission on Thomas Case [1982] 1 N . Z . L . R . 252. 98

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issues requiring discussion of similar principles to those potentially before the Court of Appeal in Erebus (No. 2). Although the allegations against the police in the Thomas litigation concerned crimes the issues were closely allied to the serious misconduct allegations dealt with in Erebus . I n both cases the extent of the jurisdiction of the Royal Commission and its duty to comply with natural justice were in question. Erebus (No. 2) appears to have been decided on narrow grounds. Some broad matters of principle, such as the extent of the duty owed by a Commission to comply with rules of natural justice and especially the obligation to put tentative conclusions to those who will be adversely affected by them, 1 0 3 were left open by the Court of Appeal. I n defining the powers of Commissions of Inquiry the decision of the Court of Appeal in the Thomas litigation can be seen as applying and expanding upon Erebus (No. 2). Any judge asked to undertake a Commission of Inquiry will presumably give considerable thought to the attitude of the Court of Appeal in Erebus (No. 2) before making his decision. 104 The case can be taken as part of a general tendency to expand judicial review of such bodies. During an interview in February 1982, Mahon explained why he did not put all his suspicions to the witnesses concerned. 105 One of the reasons was that in Maxwell v. Department of Trade and Industry the English Court of Appeal had held that Board of Trade inspectors appointed to investigate the affairs of a company were under no duty to confront a witness with all possible specific criticisms. I t was enough that the witness should have been aware in a general way of the points the inspectors had in mind. Lord Denning pointed out that an inspector's task is burdensome and thankless enough as it is. " I t would be intolerable if he were liable to be pilloried afterwards for doing it. N o one of standing would ever be found to undertake i t . " 1 0 6 But Maxwell had been the subject of attack on the grounds that such an inquiry could have serious repercussions, undermining the stability of companies and ruining reputations. "We manage things far better when an aircraft crashes than when a company does". 1 0 7 I t was of some significance that the earlier English Court of Appeal decision in Re Pergamon Press Ltd, 108 supporting a duty on inspectors to give a fair opportunity to persons whose conduct may be reported so as to lead to criminal or civil proceedings to contradict what was said against them, was cited by 103

J. F. Northey , The Erebus Enquiry, in: Recent Law 8 (1) (1982), 31, 32. Tony Black, Judges and Royal Commissions, in: New Zealand Law Journal (N.Z.L.J.) (1982), 37, 38. 104

105

Tony

Reidy

The Judge's Job, in: New Zealand Listener (13 March 1982), 12, 40 (40).

106

[1974] 2 W . L . R . 338, 346. 107 L. S. Sealy , Companies-Inquisition — Twentieth Century Style, in: Cambridge Law Journal 33 (1974), 225-228 (228). 108

[1971] Ch. 388.

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the Full Court in Thomas 109 but Maxwell was not so quoted. N o r was it clear that the inspector in Maxwell could be equated with a Commission of Inquiry. I n Maxwell the Court of Appeal pointed out that the investigation was private and there was no one to present a case to the inspector. Both elements existed in the Erebus Royal Commission. Therefore the unanimous decision of the New Zealand Court of Appeal on this issue in Re Erebus (No. 2) did not come as a complete surprise. The Court of Appeal proceedings were for judicial review. I t was emphasised that there could not be an appeal or investigation of the causes of the disaster. 110 But the legal questions could not be considered without reference to the issues and evidence at the inquiry. This point had already been made by the Court of Appeal in Re Erebus Royal Commission (No. 1)}U The intervention of the three judges in Erebus (No. 2) did not go beyond holding the finding of an orchestrated litany of lies as the basis of the costs order to be beyond the Commission's terms of reference and arrived at contrary to natural justice. But there were indications that these judges were not entirely satisfied with the findings of the Royal Commission. For instance they held that Mahon' s description of Davis ' alleged attempt to prevent the change of waypoints becoming publicly known was, taken by itself, at least an overstatement. 112 The two judges went further. Their lengthy consideration of Air New Zealand's complaints contained a number of direct criticisms of the Royal Commission. 1 1 3 I t was difficult to avoid the impression that this judgment was anything other than an attack on some of the findings of the Royal Commission. Causation was not examined by the Court of Appeal. But some pointers may be taken from their comparison of the Chief Inspector's views and those of the Commission. For example, the three judges specifically expressed no opinion on the diverging interpretations of the C V R . 1 1 4 The other judges seemed to have taken the two investigations as being of equal validity. 1 1 5 The relevant language ("orchestrated litany of lies") of the Mahon report was described as "carefully selected for maximum colour and bite ... the result of a search for sharp and striking expression in a report that would be widely read". 1 1 6 Overall the views of the Court of Appeal were a rebuff to the Royal Commission. Reading between the lines, Air New Zealand might have derived encouragement 109 110 111 112 113 114 115 116

[1980] 1 N . Z . L . R . 602. See (note 88), 620, 653. [1981] 1 N . Z . L . R . 614. See (note 88), 658. Loc. cit., 637, 642, 647. Loc. cit., 657. Loc. cit., 622, 649. Loc. cit., 663 (three judges).

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for further attempts to make inroads into the findings of Mahon. O n the other hand, the Court had not directly examined the substantive issues in a comprehensive manner. For instance, there was no discussion of Mahon' s conclusions on height limitations, whiteout and the role of McMurdo A i r Traffic Control. As one government member of parliament pointed out, the Court of Appeal had not held that the airline was "squeaky clean". Apparently concerned at the public criticism by the two judges in the Court of Appeal, Mahon offered to resign. I n January 1982 the government stated that the resignation would be accepted and it would be prepared to pay the costs of taking the case to the Privy Council. The Prime Minister took it upon himself to defend Air New Zealand and challenged M r . Mahon to name those who had lied to the Royal Commission. The judge responded that he would be willing to do so provided that the Royal Commission were reconvened. M r . Chippindale' s extensive comments on the Royal Commission report, written in May 1981 and made public in February 1982, have already been discussed. 117 Following the decision of the Court of Appeal, the Chief Inspector made known his views on the publicity concerning the accident. If the Judge's determination on the cause of the accident had been exposed to any process of review by persons knowledgeable in aviation lore, it would surely have been exposed as an illogical conclusion. 1 1 8 The change of waypoint cannot have been the dominant cause for even in its altered form the flight plan was safe to fly as printed. H a d it been flown by a crew of automatons, the aircraft would have flown over M t . Erebus turned and returned safely. The crew decided to descend the aircraft in an area on the opposite side of M t . Erebus to that approved for any descents and they must be responsible for this decision. 119 The Judge claimed that the amended flight plan directed the aircraft at M t . Erebus. I t did not, it gave the crew a plan to follow which would have taken the aircraft safely over M t . Erebus. Mahon' s findings on causation had not overturned those expressed in the A i r Accident Report. 1 2 0 The Judge had stated as fact many items of hypothesis and supposition. "This and his skill in rhetoric made his report a most convincing and persuasive document." 1 2 1 Sadly the Mahon report abounded in errors which indicated that it was not reviewed by any uninvolved technical assessor or the arguments tested by anyone familiar w i t h the particular accident or the investigation of large aircraft accidents. 122 H a d there been any means of challenging the Judge's findings on the cause of this accident there was a potential, certainly, for many 117

See Comments (note 36).

118

Ron Chippindale , Chief Inspector of A i r Accidents, A i r New Zealand DC-10 Accident: Publicity Following Court of Appeal Decision (18 January 1982), 1. 119 120 121 122

Op. cit., 2. Id. Id. Op. cit. , 3.

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knowledgeable appellants. 123 Clearly Chippindale still did not accept the conclusions of the Royal Commission insofar as they conflicted with his own views on causation. V I I . Privy Council The Privy Council appeal by Mahon against the decision of the Court of Appeal was heard for fourteen days in July 1983. If anything the affirmation by the Judicial Committee of the holding of the Court of Appeal may be seen as further support for the criticism of selected findings of the Royal Commission. In their judgment, the Privy Council held that the practice of having copies of the written briefs of evidence distributed at the moment when the particular witness went into the witness box and not before, had the inevitable consequence that the facts emerged piecemeal. W i t h the benefit of hindsight this contributed to colouring the Judge's view of the stance of the Air New Zealand management. 124 The Privy Council would hesitate long before rejecting the unanimous opinion of a New Zealand Court of Appeal as to how an ordinary New Zealander reading a report published for the information of New Zealanders would understand i t . 1 2 5 The appeal was disposed of on the ground that Mahon had by inadvertence failed to observe the rules of natural justice. Although the technical rules of evidence did not apply to a Royal Commission, there must be some material that tends logically to show the existence of facts consistent with the finding. 1 2 6 Three matters were reviewed to ascertain whether the finding that senior officials of the airline were guilty of a pre-determined plan of deception could be supported. O n low-flying, the Privy Council held that it was inconceivable that there was a concerted attempt at deception because a let down to 1,500 feet was permissible, under certain conditions and there was no rational basis for the 16,000 foot minimum. 1 2 7 O n the alleged destruction or concealment of documents to ensure that the extent of the slipshod management should not come to light, the Judicial Committee's analysis led to their view that no material of any probative value existed upon which to base a finding of a plan of this kind. 1 2 8 O n the adoption of the new southernmost waypoint there were breaches of natural justice in that the accusation had not been put to the persons involved and the inferences of fact made by the Royal Commission were not logical. 129 123

Id. Re Erebus Royal Commission [1983] N . Z . L . R . 662, 665, 666. For a discussion of this point see Mahon (note 53), 93. 125 Loc. cit. , 670. 126 Loc. cit., 671. 127 Loc. cit., 674. 128 Loc. cit., 679. 129 Loc. cit., 681. 124

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I t was emphasised that the Privy Council was not exercising the functions of an appellate court in civil litigation which is entitled to make its own assessment of the evidence and to determine whether it justifies the findings of fact made by the trial judge. 1 3 0 A t t e n t i o n was drawn to the restricted nature of the matters which the Judicial Committee had been called upon to decide. N o challenge was made to the findings of the Royal Commission clearing Collins and Cassin of pilot error, nor to numerous criticisms of the administration of the airline. 1 3 1 The Privy Council did not make a finding on the question of excess of jurisdiction, considering that the principles were best left to development by New Zealand courts. 1 3 2 From the viewpoint of administrative law the decision of the Privy Council presented a major new development in that natural justice was stated to demand that primary facts be based on some evidence of probative value. 1 3 3 The scope for the protection of reputations and other interests was the underlying issue 134 and the judgments of the Court of Appeal and the Privy Council indicated that New Zealand courts were prepared to expand the reach of judicial review for this purpose. The Privy Council stressed that their finding of several breaches of natural justice was wholly disassociated from any moral overtones. Dismissal of the appeal could not have any adverse effect upon the reputation of the judge. 1 3 5 The time had come for all parties to let bygones be bygones. 136 But Mahon' s resignation as a judge may be attributed to his interpretation of the decision of the Court of Appeal and, in particular, of the views of the two judges. The Privy Council cited that judgment favourably on several points. 1 3 7 I t is possible to construe the Privy Council's judgment as giving considerable support to the more extensive criticisms of factfinding presented by the two judges. O n the other hand, the Judicial Committee stated that the clearing of blame of the pilots by the Royal Commission was amply supported by the evidence. N o challenge had been made to this aspect of the Report nor to criticisms of inexcusable blunders by the airline's staff. 138 This lengthy discussion of the limits of the matters decided on the appeal was of interest because it dealt w i t h issues which were outside the ambit of the Privy Council's decision and expressed support for findings of the Royal Commission which differed from those of the Chief Inspector on the argument of pilot error. 130 131 132

Id. Loc. cit. , 684, 685. Loc. cit., 686.

133

K.J. Keith , The Erebus Case in the Privy Council, in: N.Z.L.J. (1984), 35-42 (37). D. E.J. Currie , Royal Commission Reports and Judicial Remedies, in: N.Z.L.J. (1984), 43-46. 134

135 136 137 138

Re Erebus Royal Commission [1983] N.Z.L.R. 662, 685. Loc. cit., 687. Loc. cit., 676, 680, 681, 682. Loc. cit., 665, 684, 685.

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The decision of the Privy Council was one on specific issues. That court's views on pilot error were not binding because that and many other matters were not the subject of the appeal. The limited nature of the review is further stressed by the fact that neither the Chief Inspector, the Civil Aviation Division nor the U.S. government were parties to the proceedings. From the comments of M r . Chippindale on the Royal Commission Report one would expect that he would continue to maintain the correctness of his own findings. V I I I . New Zealand Litigation After the publication of the report of the Royal Commission the claimants wishing to commence proceedings in New Zealand were in a position to initiate litigation, which they did in A p r i l 1981. Under New Zealand's Accident Compensation A c t , when death or personal injury result from accident which is covered by the legislation no proceedings may be brought for damages in any New Zealand c o u r t . 1 3 9 Compensation is limited to that provided within the framework of the Act. W i t h minor exceptions the Accident Compensation scheme covers all accidents within New Zealand but does not apply outside the territorial limits. Since the Act came into force the courts have been restricted to hearing accident claims where the cause of action arose before that date. New Zealanders resident overseas are generally not covered by the Act. But there had to be some exceptions to the territoriality principle. 1 4 0 One of them enables employees temporarily absent from the country to retain their cover under the A c t provided that their absence is exclusively or principally for the purposes of their employment in New Zealand. 1 4 1 So the dependents of crew members were entitled to claim under the scheme. This meant that they came within s. 5 of the Act and could not sue in a New Zealand c o u r t . 1 4 2 I t was possible that one or two of the passengers might have been covered by the A c t . 1 4 3 However the other passengers' estates could sue in New Zealand. The D C 10 crashed on Ross Island in the Ross Dependency. Although New Zealand claims this sector of Antarctica its efforts to enforce these assertions against interlopers (principally the United States) have been of a rather desultory nature. Precisely 139

s. 5. M. A. Vennell , The Accident Compensation System and the M o u n t Erebus Claims: The Effects of Inflation on Damage Awards, in: Recent Law 8 (1982), 295-304 (296). 141 s. 60. 142 The Accident Compensation Act does not prevent the commencement of litigation outside New Zealand. 143 Guy (note 3), 171. I n one instance the Accident Compensation Commission determined that a U.S. Professor of Geography on sabbatical killed in the crash was not covered by the Act because the flight was not principally for the purposes of his employment. Re Houghton [1982] New Zealand Accident Compensation Cases 464. 140

12GYIL 32

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which New Zealand laws are supposed to apply in the Ross Dependency is a constitutional puzzle that remains unsolved. 144 But in 1978 an amendment to the Accident Compensation Act had at least made it plain that this legislation did not apply in the Dependency. A detailed definition of "New Zealand" was introduced. I t covered the main islands, various minor islands, the Chatham and Kermadec groups and the territorial sea. Its effect was to exclude the Ross Dependency from the territorial ambit of the Accident Compensation scheme. 145 Although the estates of the passengers could sue in New Zealand, their claims faced the major obstacle of overcoming the low financial limits posed by the Warsaw Convention. But that treaty only applies to claims by passengers against airlines. There was a clear incentive for the plaintiffs' lawyers to seek further defendants. One potential target was the manufacturer of the D C 10, McDonnell Douglas. I n 1974, a Turkish Airlines D C 10 had crashed outside Paris killing all 346 on board. That accident was attributed to a fault in the cargo door. Total claims payments were $62,000,000 of which the share of McDonnell Douglas was a t h i r d . 1 4 6 Subsequently there were further publicised allegations of structural problems with the D C 10. As the company's headquarters are in California, it may be sued in that State which also has a doctrine of strict products liability favouring plaintiffs. Judicial experience of aircraft disaster litigation, high damage awards and contingency fees are some other attractions of this jurisdiction. But Mr. Chippindale held that the plane had been airworthy and operating normally up to the time of the accident. 147 Despite this, McDonnell Douglas was represented before the Royal Commission by three lawyers. Justice Mahon endorsed the findings of the Chief Inspector. The aircraft was operating perfectly in every respect. 148 So the main targets appeared to be Air New Zealand and C.A.D. Air New Zealand was apparently protected by the Warsaw Convention. This agreement is part of the domestic law of both New Zealand and the United States although there are differences in the applicable rules. Article 28 (1) of the translation of the French text which has the force of law in New Zealand gives the plaintiff the choice of bringing his action (a) where the carrier is ordinarily resident (b) at his principal place of business (c) where the carrier has the establishment at which the contract was made or (d) at the place of destination. Most of the passengers were from New Zealand, some from Japan and some from the United States. So if it turned out that tickets had been bought at Air New 144

Auburn (note 1), 68, 69. D. Cochrane , Accident Compensation Amendment Acts 1977 and 1978, in: N.Z.L.J. (1978), 448-451. 146 Stuart M. Speiser , Lawsuit, New Y o r k 1980, 466, 467. 147 Chief Inspector (note 8), 12, 13, 50. 148 Royal Commission ( note 22), 30. 145

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Zealand offices in the U.S. or Japan choice (c) could be applicable permitting the commencement of actions in those countries. 149 Apart from this possibility it might have been argued that a plaintiff could sue in (say) California because Air New Zealand could be regarded as being "ordinarily resident" or (under the U.S. version of Warsaw) having its "domicile" where it had a branch office. But U.S. courts have interpreted the word as having a meaning similar to common law domicile insofar as it can be extended to corporations. 150 The English Court of Appeal has taken the same approach. 151 One may assume that this construction of Article 28 (1) was the reason for the dismissal of at least one Erebus claim filed in Los Angeles against Air New Zealand in 1980. 152 By November 1981 it was reported that 113 passenger claims had been settled (70 in New Zealand, 24 in Japan and 19 in the United States). A consortium of New Zealand lawyers had commenced actions on behalf of the estates of 116 passengers for a total of $ N Z 78,000,000. 153 These proceedings cited Air New Zealand and C.A.D. as defendants. A n interesting omission was the U.S. government which might have been sued in respect of the alleged acts or defaults of McMurdo A i r Traffic Control. I t may be assumed that these activities of the American Navy in Antarctica were categorised as sovereign acts and entitled to immunity from suit. Even on the contention that New Zealand courts would adopt the restrictive theory of sovereign immunity enunciated by the House of Lords 1 5 4 it would be difficult to argue that McMurdo A i r Traffic Control were engaged in commercial transactions so as to deprive the United States government of the defence of sovereign immunity at common law in a New Zealand court. 1 5 5 C.A.D. being sued raised complications as between the two defendants. Air New Zealand was entitled to try to persuade the court that the Warsaw ceiling should apply to the passenger actions it faced. O n one calculation this would give a total possible liability of $ N Z 5,000,000 approximately to the consortium claimants. But C.A.D. was not sued under the Convention and could not invoke its limits. A further difficulty arose from the possibility (to be inferred from the Mahon report) 149

Benjamins v. British European Airways , 572 Federal Reporter Second (F. 2d.) 913

(1978). 150

People v. Giliberto , 383 N o r t h Eastern 2d 977 (1978). Rothmans of Pall Mall (Overseas) Ltd. v. Saudi Arabian Airlines Corporation [1980] 3 A l l England Reports (All E.R.) 359. 151

152 153 154

Guy (note 3), 192. Burgi v. Air New Zealand , A 676/81, H i g h Court, Auckland Registry.

I Congreso del Partido [ 1981 ] 3 Weekly Law Reports 328 discussed at first instance in Marine Steel v. Government of the Marshall Islands [1981] 2 N . Z . L . R . 1. 155 A.U.S. Navy assault vessel transporting equipment within the framework of that country's Antarctic Programme would be entirely non-commercial and entitled to sovereign immunity in a New Zealand court (Buckingham v. The A ircraft Hughes 500 D Helicopter), in: Recent Law 8 (1982), 176-177.

1*

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that Air New Zealand's proportion of any putative liability might be greater than that of C.A.D. There was more than one applicable ceiling to the actions against Air New Zealand. For domestic carriage New Zealand's Carriage by A i r Act provided a limit of $ N Z 42,000. The airline apparently suggested that this was the primarily relevant limit for passenger claims. 1 5 6 Domestic carriage takes place when the points of departure and destination are both situated in the same country (here, New Zealand) and there is no agreed stopping place outside the country. For international carriage the New Zealand ceiling, set by the airline's standard conditions of carriage, was $ N Z 58,000. 157 The same flight can be domestic for some passengers and international for others. 1 5 8 T o determine which category applies resort must be had to the individual ticket. 1 5 9 W i t h this caveat it may be generally presumed that for the New Zealand passengers the flight was domestic. 160 From the reported amount of the consortium claim it was clear that the plaintiffs argued that the limits were not applicable. Article 25 of the Warsaw Convention, in the text having the force of law in New Zealand, provided that the ceiling may be dispensed w i t h if damage results from an act or omission of the carrier or his servant "done w i t h intent to cause damage or recklessly and w i t h knowledge that damage will probably result". The same exception had been adopted for domestic carriage. I n the United States the test is "wilful misconduct" requiring a conscious intent to do or omit doing the act from which harm results to another, or an intentional omission of a manifest d u t y . 1 6 1 A n example of the application of the U.S. law to specific facts was the holding by a jury that when a crew became lost during a night approach and kept too low for too long the exception could not be invoked. 1 6 2 Such a decision on the facts would not affect the New Zealand courts interpretation of its own law, but did demonstrate that breaking the Warsaw limits was no easy task. O n the other hand, there were lines of argument tending to reduce the apparently substantial problem of avoiding the Warsaw ceiling. I n Goldman v. Thai Airways International Ltd. 163 the plaintiff was travelling from London to Bangkok on a Thai Airways plane. A t a time when his seat-belt was unfastened the aircraft went through severe clear air turbulence. Dr. Goldman was thrown from his seat, hit the ceiling and suffered a serious injury to his lower spine. A t first instance 156

Guy (note 3), 170, 171.

157

Heller (note 12), 14. Grey v. American Airlines Inc., 95 Federal Supplement (F. Supp.) 756 (1950). Grein v. Imperial Airways Ltd. [1937] 1 King's Bench 50. Heller (note 12), 10. Stuart M. Speiser / Charles F. Krause , Aviation Tort Law, vol. 1, Rochester 1978, 772,

158 159 160 161

773. 162 163

Re Air Crash in Bali Indonesia , 462 F. Supp. 1114 (1978). The Times , 2 April 1981.

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Chapman J., sitting without a jury, decided the case in favour of the plaintiff and awarded him damages of 41,850 pounds, four times the ceiling applicable under the United Kingdom legislation. The judge held that the captain had acted contrary to the instructions of the airline in not having the seat-belt signs lit when turbulence was expected. The captain must have known that some damage would occur. This view of the law in Goldman at first instance was criticised by a leading commentator on air law. 1 6 4 The interesting point about the judgment for the plaintiffs in the New Zealand action was not that the case was a strongly persuasive precedent (which it was not) but rather that the reasoning on the Warsaw ceiling relied upon a particular interpretation of views in the House of Lords in two landmark decisions. 165 I n relation to the offences of reckless driving causing death and reckless damage to property one approach taken, that of Lord Diplock , required that the defendant behave in such a manner as to create an obvious and serious risk of causing physical injury (or damage as the case may be) and also that the defendant act "without having given any thought to the possibility of there being any such risk or, having recognised that there was some risk involved, had nonetheless gone on to take i t " . 1 6 6 This test for recklessness comes close to the definition of negligence. Lord Diplock* s approach raised a number of questions. I t was far from clear that his view was the final word of the House of Lords on the issue. A criterion applicable to two specific offences of reckless behaviour was not necessarily utilisable for other contexts of the criminal law. "Reckless" in relation to offences may be quite different from the same term in civil litigation. The Warsaw Convention is an international treaty whose interpretation may well, as recent House of Lords decisions have emphasised, depart from the canons of construction of domestic law. O n the other hand the plaintiffs could have taken the Goldman decision, and its use of Caldwell and Lawrence , as some encouragement in their quest to break the Warsaw limit. Application of the ceiling on the facts of Goldman meant that he was entitled to only one quarter of the damages that Chapman J. decided that the plaintiff had actually suffered. Leading commentators have attacked such limits as grossly unfair and capable of leading to shocking results. 167 I f there were two possible interpretations of the Warsaw Convention in such a situation courts could well be subject t o arguments against such outcomes. Goldman itself later served as an illustration of the harsh effects of the Warsaw ceiling. I n May 1983, after the announcement by the New Zealand government of October 1982 that i t would not 164

Arnold Kean , The Quantum of Damages for Injuries Received by a Passenger, in: Journal of Business Law (1981), 468-470. 165 R. v. Caldwell [1982] Appeal Cases (A.C.) 341 and R. v. Lawrence [1982] A.C. 510. 166 167

R. v. Lawrence (loc. cit.), 526, 527.

Bin Cheng, Wilful Misconduct: From Warsaw to the Hague and from Brussels to Paris, in: Annal of Air and Space Law 2 (1977), 55, 98.

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insist on the Warsaw limits, the Court of Appeal reversed the decision at first instance. I t could not be accepted that the captain acted recklessly in not reacting to the weather forecast of clear air turbulence by warning the passengers of the danger. A n d the Warsaw Convention also required that the pilot be aware that damage probably result which was not the case on the facts. The Court of Appeal held that the House of Lords decisions did not govern the case because they concerned the meaning of "recklessly" in other statutes. I n construing legislation the first thing to do is to look at the context of the particular statute in question. Taking account of the rules for interpretation of treaties and the proceedings of the conference at which the treaty was prepared, it was necessary for the plaintiff to show that the defendant had knowledge that injury would probably result. 16 8 I t was reported that the reversal of the first instance holding left Dr. Goldman in a situation which he described as "totally u n j u s t " 1 6 9 and in which air law specialists might well agree with him, having regard to the relationship between the assessed damages and the amount that could be awarded on the application of the Warsaw ceiling. But the reversal of the decision of Chapman J. in Goldman did not affect the New Zealand litigation. In October 1982 the Minister of Justice announced that the government, Air New Zealand and the company's insurance underwriters had reached agreement that the government would pay an agreed (and at that stage unnamed) sum towards the settlement of the claims. From that point on Air New Zealand and its insurers assumed responsibility for the settlement or litigation of all outstanding claims. A n important part of the arrangement was that liability to pay damages would no longer be contested and A ir New Zealand would not seek to limit the damages in reliance on the Carriage by A i r Act. The government and the underwriters recognised that this course of action would avoid what could otherwise have been lengthy delays in arguing in court the respective liability of the defendants and would, as a consequence, facilitate the settling or disposal of the remaining claims. Those claims presented complex issues of damages. I t was hoped that the way had been made clear to settle many claims at an early date. But it was recognised that in some instances a court hearing might be necessary. 170 Apparently the then outstanding claims before the New Zealand court were subsequently settled.

168

Eveleigh J., in Goldman v. Thai Airways International Ltd. [1983] 1 All E.R. 693,

698-700. 169

John Witherowy A i r Injury Plunges A r t Dealer into Debt, in: The Times (7 May 1983). Statement by the H o n . / . K. McLay y Attorney-General (1 October 1982). Apparently the government paid a sum of $ N Z 26,000,000, see $ 6 m Erebus Payout, in: Evening Post (1 August 1983). 170

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I X . The Mason Case I t has previously been pointed out that at least one Erebus action by the estate of a passenger was commenced in the United States and dismissed under the jurisdictional rules of the Warsaw Convention. But four further cases were consolidated before the U.S. District Court at Los Angeles and damages well above the applicable Warsaw limits were awarded. 171 Initially Air New Zealand denied liability. A feature of the case of particular interest to the present study was the success of A ir New Zealand in March 1982 in resisting an attempt by the plaintiffs to strike out the airline's argument that New Zealand law applied. Judge Malcolm Lucas pointed out that the effect of this aspect of Air New Zealand's defence would have been to apply the New Zealand Carriage by A i r Act and the damage ceilings contained therein. Under the Court's interpretation of the Foreign Sovereign Immunities Act 1976 (U.S.) which governed the litigation the choice of law was that of the forum, namely California. That jurisdiction then utilised the test of the respective interests of the governmental entities involved to decide which legal system should be used to decide the case. 172 Judge Lucas pointed out that if only one jurisdiction had an interest in the application of its law, that law would apply. 1 7 3 In Mason the forum (California) had no provision limiting the damages which could be recovered. However, New Zealand did have limits and these were designed to protect air carriers. New Zealand's interest could be to protect airlines from large liability exposure and the possible resultant demise of airlines. In addition, the government of New Zealand could desire to protect Air New Zealand as the national airline. Clearly New Zealand had an interest to protect. Under the doctrine of comparative impairment the courts must decide the extent to which governmental interest would be more impaired if its law was not applied but do not weigh the worthiness of the respective interests. 174 The only connection California had to the accident was that the heirs of some of the deceased passengers in question resided in California and one of the passengers lived there at the time of death. California's sole interest was therefore to ensure that its residents received compensation for losses so that they did not become a burden on the State. New Zealand's interest was to protect itself from large damage awards which could affect the nation's economic strength and perhaps its national security. The flight was a domestic one carrying primarily New Zealand citizens. I t was investigated by New Zealand authorities and future decisions or regulations 171 Mason v. Air New Zealand , M D L Docket N o . 430-MML, US District Court, Central District of California. 172 Hurtado v. Superior Court , 11 California Reports (Cal.) 3d 574 (1974). 173 Bernkrant v. Fowler , 55 Cal. 2d 588 (1961). 174 Bernhard v. Harrah's Club , 16 Cal. 3d 313 (1976).

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evolved due to the accident could affect New Zealand and Air New Zealand . New Zealand's interest in regulating domestic air flights and protecting its national airline from civil liability of an unlimited nature would be significantly impaired if California's liability rules were applied. I t would be difficult and expensive for Air New Zealand to predict and to protect itself against the application of foreign liability rules which could result in a wide range of liability exposure. Californian public policy could not be invoked because there was no conflict between the policies of the two jurisdictions, on the Judge's view. Recognising that the order involved an issue of law which gave substantial ground for difference of opinion and could materially advance the ultimate termination of the litigation, Judge Lucas certified the issue as immediately appealable. W i t h respect, it is submitted that the Court's invocation of the much-discussed governmental interests rule for choice of law is a good illustration of the manifold problems of such an open-ended test. Among the objections to the particular strands of the interlocutory decision, it may be pointed out that the Mason case was in fact covered by insurance so there was no apparent danger of financial disaster for Air New Zealand . Airlines, including Air New Zealand , are regularly accustomed to carrying passengers from a wide variety of jurisdictions with varying damage ceilings. T E 901 did carry a substantial number of U.S. and Japanese passangers and it may be assumed that the Antarctic flights would have been an additional incentive to come to New Zealand and also to fly Air New Zealand on the other legs of their trip. The outcome of this order was that similar issues of the New Zealand damages limits and the same question of recklessness were held to apply in Mason as arose in the New Zealand passenger cases. But despite this initial victory it was stated that about four months after the order was made that Lloyds agreed not to contest liability in Mason and also consented to waiving the arguments on the damage ceiling. 1 7 5 I n December 1982, Judge Lucas awarded a total of more than $ N Z 1,380,000 to the plaintiffs in Mason. 176 X . Beattie and Its Implications The crew were covered by the Accident Compensation Act and therefore their dependents could not commence actions in a New Zealand court. 1 7 7 But the Act does not prevent actions outside New Zealand. Claims were therefore filed against the U.S. government in the United States 178 based upon the allegations that Navy 175

Len Bloxham , Erebus Decision Surprises, in: The Press (13 October 1982), quoting Mr.

Daniel Cathcart who acted for the plaintiffs in Mason (note 171). 176

See A i r New Zealand Ordered to Pay $ 1.38 m, in: The Press (27 December 1982). See New Zealand Litigation (above). 178 Beattie et al. v. U.S., Civil Action N o . 82-3520, U.S. District Court, District of Columbia. 177

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personnel failed to warn the crew of the whiteout, failed to warn the aircraft that it was descending into mountainous terrain and that the navy was negligent in selection, training and supervision of personnel. I t will be recalled that Mahon had absolved the radar operator of blame within the Commission terms of reference. O n the other hand he had stated that he was "not here concerned w i t h any question of liability of the United States Navy at common law". 1 7 9 These claims were brought under the Federal T o r t Claims which lays down the conditions under which the United States government may be sued. One of the instances exempted from the Act is "any claim arising in a foreign country". 1 8 0 Accordingly the government moved to dismiss the case on the assertion that the claims were not cognizable under the Act. In June 1984, Judge Harold Greene dismissed the motion. The Judge, citing State Department Congressional testimony in 1981, commented that the position of the U.S. government w i t h respect to the future of Antarctica was somewhat equivocal. That position was that the continent was not subject to the rule of the U.S. or any other nation. O n this view the claim did not arise in a foreign country as the term is commonly understood. "Antarctica is not a foreign country; it is not a country at all". Taking this interpretation of the statute the motion would fail. However the government argued that the term "foreign country" could exclude from the reach of the A c t any territory over which the U.S. does not exercise jurisdiction or sovereignty. I n support of this contention it was pointed out that some possible reasons for the foreign country exception were a reluctance to extend the benefits of the A c t to foreign populations, 1 8 1 the absence of U.S. courts at the place where the t o r t occurred and the difficulty of bringing witnesses to a trial in the U.S. O n the other hand it was argued that the exception related to cases in which sovereignty was vested in another nation and Congress did not want to subject the U.S. government to liability depending on the law of a foreign power. 1 8 2 N o clear-cut answer emerged from the cases. I n somewhat similar instances U.S. laws and practices have been applied in Antarctica. Martin v. Commissioner 183 held that "foreign country" defined in income tax regulations as "territory under the sovereignty of a government other than that of the United States" 1 8 4 was not applicable to Antarctica. A number of U.S. statutes directly or by necessary implication reached the same conclusion. T o the extent that there is any assertion of governmental authority in Antarctica it 179

Royal Commission (note 22), 133.

180

28 United States Code (U.S.C.) § 2680 (k).

181

Burna v. U.S., 240 F. 2d 720 (1957).

182

U.S. v. Spelar , 338 United States Report (U.S.) 217, 221 (1949). 50 Tax Cases (T.C.) 59 (1968). 26 Code of Federal Regulations (C.F.R.) § 1.911-3 (d) (1983).

183 184

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appears to be predominantly that of the United States in the form of search and rescue and control of air transportation. 185 If the allegations in the complaint were true and the motion to dismiss were granted no one would be held liable for the negligence and the estates of the deceased would not be able to claim or receive damages for the actions. Since there is neither foreign sovereignty nor foreign law in Antarctica the responsible parties could not be reached under the law of any other nation. The allegedly negligent persons were U.S. personnel and it was therefore neither surprising nor shocking that U.S. law should be applied. The government also argued that venue was improperly laid and that District of Columbia law should not be applied. Both contentions were rejected. T o r t claims against the government may be prosecuted only " i n the judicial district ... wherein the act or omission complained of occurred". 1 8 6 But the complaint included allegations that the Department of Defense failed to use due care in the selection, training and supervision of the naval personnel at McMurdo and to establish reasonable standards of training and performance for the operation of the facilities at the base. A claim within the meaning of the Federal T o r t Claims Act arises at the place where the negligent acts occurred but not necessarily at the place of accident or injury. A considerable body of precedent justified allowing actions in similar situations even though the primary effect of the tort was abroad. Records relating to U.S. naval operations in Antarctica, including those on the crash, were located in the District of Columbia. Officials acting in the District were alleged to be ultimately responsible actors in the chain of circumstances leading to the accident. 1 8 7 Although this was an interlocutory decision at first instance there are some parallels with the Arctic ice island case, U.S. v. Escamilla 188 which was not discussed by Judge Greene in Beattie. Similar views based on U.S. nationality and the absence of any other available court were advanced. 189 Whether the latter argument is fully acceptable requires some clarification. O n the contention of the U.S. government there might be no remedy under the law of any other nation. But this would not be the case on the views of some of the other countries. The New Zealand government does regard its law as applicable to that area of Antarctica in which the crash took place. One may assume that the court's views on the absence of a remedy abroad were not directed at the inapplicability of the Federal T o r t Claims Act to actions outside the U.S. but rather to the fear that no remedy at all would be available to 185 186 187

Citing Auburn (note 1), 74, 75. 28 U.S.C. § 1402 (b). In re A ir Crash Disaster Near Saigon , Vietnam on April 14,1975 ,476 F. Supp. 512,527

(1979). 188 189

467 F. 2d 341 (1972). F. M. Auburn , Antarctic Law and Politics, London 1982, 189.

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the estates of the crew. However the rights accorded by the New Zealand Accident Compensation Act were available to the estates and had been invoked. Once again the difficulties raised by the unclear position of the U.S. government regarding Antarctica were evident. The decision is mainly based upon the official attitude of the U.S. government. However there are also elements of a holding that U.S. governmental authority has been applied in Antarctica to justify the invocation of the Federal T o r t Claims Act (FTCA). This goes some way to supporting an assertion of the rights of the U.S. to exercise its authority at international law, as distinct from the implementation of the views of the State Department. Judge Greene pointed out that his ruling on the meaning of "foreign country" was not free from doubt. This may be taken with the difficulties on jurisdiction in Escamilla. The two decisions indicate the problems to be faced by courts in attempting to find the intent of the legislature in relation to the application of statutes to areas like Antarctica. The decision was affirmed by the Court of Appeals by a majority of 2/1. 1 9 0 For the majority, Judge Wilkey stated that Antarctica had never been and was not now subject to the sovereignty of any nation. United States activities in Antarctica were cited to show that the U.S. does not treat this "admittedly sovereignless l a n d " 1 9 1 like a foreign country. Adding the official view that the United States does not recognize territorial sovereignty but maintains its basis to claims the Judge concluded that a common sense interpretation of the F T C A makes it obvious that Antarctica is not a foreign country within any ordinary meaning of the term. Analysis of the intention of Congress and the cases led to the conclusion that "foreign country" is not to be extended beyond the ordinary meaning. The legislative history of the section was interpreted to mean that Congress wished to ensure that the U.S. government would not be subject to liabilities dependent on the laws of a foreign power, which was not the case for Antarctica. Analogous statutes and decisions showed a cumulative persuasive effect. Across a broad scheme of regulations Congress and the courts have consistently held that Antarctica is not a "foreign country". Reference was made to the Martin decision. Citing Judge Greene's utilisation of The Ross Dependency , Judge Wilkey held that " . . . to the extent that there is any assertion of governmental authority in Antarctic, it appears to be predominantly that of the United States". 192 Outer space has often been used as an analogy for Antarctica. Under the Space Treaty parties retain jurisdiction over their own objects and persons. The court would create a hardship if it held there was jurisdiction but did not reach the same 190 191 192

756 F. 2d 91 (1984). Loc. cit. , 95. Loc. cit., 99.

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conclusion on venue. There was no contention that venue lay elsewhere. "The government, consistent with its position that there is no law in Antarctica, maintains that venue exists nowhere." 1 9 3 O n choice of law the F T C A directs application of the law of the place where the act or omission occurred which leads the court to a place where no civil tort law applies. O f the two forums w i t h the greatest interest in the outcome of the litigation — Antarctica and the United States — only one has any civil law to apply. Antarctica has no forum "because Antarctica is not a 'country' foreign or otherwise". 1 9 4 The conclusion is supported by the international law principle of exercise of jurisdiction over nationals. In contrast to the strong interests of the District of Columbia forum "there is no foreign sovereign even to assert a countervailing interest in Antarctica". 1 9 5 I n his dissent Judge Scalia argued that the continent was not one without a sovereign but one of disputed territory. 1 9 6 The crash site was within the Ross Dependency which is claimed by New Zealand. The majority had misconstrued a passage from The Ross Dependency in holding that the U.S. controls air transport in Antarctica. Judge Scalia argued that the majority interpretation of "foreign country" would create a conflict between the legislation and the Antarctic Treaty. The only basis for the assertion of jurisdiction is territorial sovereignty. Such a course is insensitive to the delicate modus vivendi which the Executive has worked out among nations with claims or potential claims to this important part of the world. 1 9 7 Like the decision at first instance the judgments in the Court of Appeals go directly to the issue of sovereignty. Utilising the nationality principle does diminish New Zealand's claim as does the refusal to accept that there is any legal system in the Ross Dependency. I t is especially noteworthy that the majority view does not consider the interests of New Zealand since it is based solely upon the U.S. government's purported attitude to claims. The majority specifically denied the existence of a sovereign or a legal system in the Ross Dependency. This is in contrast to the previously cited attitude of Judge Lucas in Mason. Judge Scalia underlined the sovereignty implications of the majority view. The fact that the New Zealand government, which must have known of the litigation, did not apparently seek to file an amicus curiae brief, must reflect upon its assertions of sovereignty. I n July 1988, Judge Greene delivered his judgment on the merits, rejecting the claims of the estates of the crew. The Judge held that, apart from the negligence of 193 194 195 196 197

Loc. Loc. Loc. Loc.

cit., 104. cit., 105. cit. cit., 106 quoting Auburn (note 1) and (note 189).

Loc. cit.,

114.

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Air New Zealand which was taken as stipulated by both parties, the crew of T E 901 was negligent in that: (1) they did not plot the aircraft's actual position in flight from the A I N S , (2) they did not plot the position in flight from the airborne radar, (3) they descended below 16,000 feet contrary to prudent airmanship and A ir New Zealand policy, (4) the appearance of Beaufort Island, a prominent navigational landmark, on the right of the flight path should have alerted the crew to the erroneous course, (5) they proceeded in the face of adverse meteorological conditions, including the whiteout. (6) 5 or 6 persons were milling around in the cockpit during the critical period, causing distraction. I t may be noted that this part of the judgment was not essential to it, in view of the holding that the defendant was not liable. The inclusion of such striking contradictions to the Royal Commission emphasises the contrast between the judgment in this case and the findings of Mahon J. Although there was no formal contractual undertaking, there was a duty arising from an informal undertaking to render services, relied on by the crew, even though it was not for consideration. Despite the limitations involved, U.S. Navy personnel did customarily offer services to civilian aircraft in the region and the practice was well-known to Air New Zealand personnel. Although there was no routine duty of care, there was such a duty on the facts of this case. When the pilot told the U.S. Navy operators that he wished to descend V M C ("visual meteorological conditions"), he was effectively taking responsibility on himself for separating the aircraft from the ground. For Flight 901 to descend below 16,000 feet whilst lost would have been contrary to the most basic tenets of good airmanship. Even if (which the court rejected) the crew justifiably expected radar guidance, the crew's own negligence vitiated any controller fault. The decision to descend was solely the crew's and the air traffic controllers had no influence over it. Although inadmissible as opinion, parts of the Mahon Report were admitted. Those parts held admissible were rejected by the court as untrustworthy for a number of reasons including: ( 1 ) some parts were contrary to facts undisputed or clearly established at the trial, (2) some parts were largely based on hearsay and speculation and on the judge's ex parte interviews with witnesses who could have been produced at the trial. Even if the excluded portions of the Royal Commission Report had been admitted, they would not have changed the result.

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X I . Recommendation X - 8 I n the Antarctic System it is the accepted view of governments that the Consultative Meetings deal with law and politics whilst the Scientific Committee on Antarctic Research (SCAR) coordinates scientific research. For several reasons, including the lack of formal ties between SCAR and the Antarctic Treaty and the refusal of the Consultative Parties to clearly define the areas of competence reserved to their Meetings, grey areas have emerged. 198 I t may be emphasised that this problem is not accidental but rather should be seen as an inevitable consequence of the ramshackle structure of the system. One of the grey areas is logistics. SCAR's task of coordination demands detailed attention to this topic. O n the other hand transport coordination and related issues tend to give rise to political and legal problems which the Consultative Meetings are supposed to monopolise. Logistics is basically carried out by government departments or contractors. As might be expected the members of the Logistics Working Group tend to be civil servants responsible for Antarctic support and services. 199 This Group is perhaps the clearest example of the practical connection between SCAR and the Consultative Parties. O f special relevance here is the Working Group's Subcommittee on the Cooperative Air Transport System in Antarctica. 2 0 0 Prior to the D C 10 crash both SCAR and a Consultative Meeting had discussed air safety. The Tenth Meeting, held two months before the accident, had recommended notification to commercial aircraft operators that the then present level of tourist overflight activity exceeded existing capabilities for air traffic control, communications and search and rescue in the Antarctic. I t might interfere with normal operational flights in support of scientific programmes and exceeded the capacity of Antarctic operations to respond adequately to an unplanned emergency landing. 201 This Recommendation poses difficulties of interpretation. Reference to the "present level of tourist overflight activity" would seem to apply to the two companies whose planes were regularly carrying out such flights at the time — Q A N T A S and Air New Zealand . O n the other hand it is somewhat surprising that diplomatic representatives of Australia and New Zealand approved a recommendation 2 0 2 at an international meeting which appeared to refer to certain aspects of the operation of airlines owned by the governments of the two countries. One 198 199 200

Auburn (note 189), 179. In 1988 the Group was predominantly composed of government employees.

CATSA. Recommendation X-8. See also Recommendation X-3 "recognising that possible future trans-polar commercial air traffic . . . may give rise to a changing pattern of needs of raw and processed meteorological data". 202 Due to the requirement of unanimity. 201

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would have expected that such action would be carried out by consultations between the relevant government departments and the airlines. Another unsolved question arises from the reference to overflight activity exceeding "existing capabilities for air traffic control, communications... ". I t will be recalled that the Royal Commission was specifically requested to report on air traffic control and did indeed canvass the role of McMurdo A i r Traffic Control and communications. I t is therefore noteworthy that neither the Royal Commission report nor that of the Chief Inspector of A i r Accidents discussed Recommendation X-8, although the Commission was aware of its existence 203 and one may assume that the Civil Aviation Division would have been consulted by the Department of Foreign Affairs when the proposal was tabled at the Consultative Meeting. The close practical relationship between SCAR and the Consultative Meetings has already been emphasised. Most matters that form the subject of recommendations have been discussed previously by SCAR. Recommendations X-8 was no exception. A t its meeting in July 1977 the SCAR Working Group on Human Biology and Medicine expressed concern for the problems of medical logistics that development of air traffic in the Antarctic could pose. I n the event of an air disaster medical aid would have to be provided and possibly the carriage of surgical teams to an isolated or insufficiently equipped station. 2 0 4 I n May 1978 the Working Group on Logistics, under the heading of "Effects of Tourism and Private Expeditions in the Antarctic Treaty Area", 2 0 5 examined trips by ship and plane. The sole reference to aircraft concerned charters from Australia and New Zealand. The Working Group considered these flights could pose problems in the future because the International Civil Aviation Organization ( I C A O ) air traffic control and flight information services do not extend south of 60°S. A n aircraft carrying 350 passengers which is unable to land in the Antarctic would require extensive search and rescue facilities if any mishap occurred. The Working Group considered that such overflights should be identified as self-supported expeditions and information on their routes and timetable should be advised to the Treaty Nations in advance. 206 The SCAR Meeting of Delegates resolved to invite National SCAR Committees to draw the attention of their governments to the likelihood of further increases in tourist activities. I t was desirable that governments accelerate the exchange of Antarctic tourist information so that all operators would be aware of tourist programmes in advance of the visits. Appendix 3, containing the Working 203 204 205

Exhibit 113, Transcript of Proceedings. Scientific Committee on Antarctic Research (SCAR) Bulletin 58 (1978), 10-12 (12).

Recommendation X-8 was entitled "Effects of Tourists and Non-Government Expeditions in the Antarctic Treaty Area". 206 Appendix 3, Working Group on Logistics, Fifteenth Meeting of SCAR (May 1978) X V - S C A R - 9 A (Revised).

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Group's views cited previously, was to be conveyed to governments. 207 Relying on the general course of procedure in the Antarctic system it may be presumed that this Appendix was part of the material considered by the Consultative Parties in drafting Recommendation X-8. In October 1980, the Cooperative A i r Transport System Antarctica (CATSA) Subcommittee of the SCAR Working Group on Logistics discussed the "recent occurrence" of commercial and private aviation operations in Antarctica. There was general agreement that Recommendation X-8 stated a valid and continuing concern that recent commercial tourist over-flight activity exceeded the existing capabilities for air traffic control, communications and search and rescue. Some commercial and private air operators assumed that existing air support corresponded to I C A O standards elsewhere. This was not so for air traffic control, communications, search and rescue and operational weather support. "The facts of this situation are apparently being misunderstood, misinterpreted or ignored". I t was recommended that SCAR appeal directly or through governments to I C A O to bring this matter to the attention of air operators and governments. SCAR decided to request National Committees to bring the C A T S A report to the attention of governments and that SCAR itself should bring it to the notice of I C A O . 2 0 8 Comparing Recommendation X-8 and the C A T S A report it appears that C A T S A did not mention two issues noted by the Consultative Parties (interference with normal operational flights and exceeding capacity for responding to an unplanned emergency). The three issues common to Recommendation X-8 and the C A T S A report were air traffic control, communications and search and rescue. T o these C A T S A added operational weather support. A l l four matters specified by C A T S A were raised directly or indirectly by the investigations of the D C 10 crash. SCAR's decision to convey the C A T S A report to governments (through national SCAR Committees) and I C A O requires some consideration. The Consultative Parties have repeatedly rejected attempts by outside bodies to have any say in Antarctic affairs unless requested by the Consultative Parties, themselves. Examples include proposals by the Economic and Social Council, the United Nations Environment Program and the Food and Agriculture Organization to offer advice to mount projects in the region. If scientific advice is to be sought SCAR is the chosen source. The Consultative Parties are particularly concerned at any suggestion of unwanted intervention by U . N . organs or specialised agencies due to a fear that the Group of 77 may utilise this means of pressing for a common heritage approach to Antarctica and its natural resources. 209 This was clearly illustrated by 207

R E C X V - G E N 9 , Meeting of Delegates, Fifteenth Meeting of SCAR (May 1978) XV-SCAR-32 (Revised). 208 Recommendation X V I - G E N 4, Sixteenth Meeting of SCAR (October 1980) X V I SCAR 29/30 Rev. 209 Peter Beck, Another Sterile Annual Ritual, in: Polar Record 24 (150) (1988), 207-212.

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their reaction to the U . N . debate on Antarctica. SCAR's direct communication of concern to I C A O rather than restricting itself to informing governments (essentially Consultative Parties) suggests that C A T S A , the Logistics Working Group and SCAR itself regarded the issue as a serious one and that SCAR was not satisfied that the Consultative Parties could effectively deal with the matter alone. SCAR wrote to I C A O in April 1981, drawing its attention to Recommendation X-8, stating the commercial overflights continued despite that recommendation and conveying the essential elements of the C A T S A report, SCAR had brought the matter to the attention of governments with active Antarctic research programmes. I C A O was requested to inform Contracting States and air operators. In October 1981, I C A O responded to the effect that inquiries had been made to all regional offices. N o flights by commercial or private operators were planned during the next eighteen months. Q A N T A S might be planning for future scheduled flights between Sydney and Buenos Aires. I n any event I C A O felt certain that Q A N T A S , one of the world's foremost carriers, and the Government of Australia, the overseer of its flight operations, would take painstaking care in assuring the complete safety of such operations, should they decide to go ahead with their long-range plan. In November 1981, SCAR thanked I C A O for its information and was gratified to know that the information I C A O was able to gather regarding commercial airline intentions was reliable. I n view of the "present lack of activity in flights over the Antarctic" I C A O considered that no further action, other than monitoring the situation, was necessary at that time. 2 1 0 The contrast between the action of SCAR and the lack of interest of the Antarctic Treaty Consultative Meeting ( A T C M ) is noteworthy. SCAR exerted unprecedented pressure, going to the lengths of contacting I C A O directly. The A T C M apparently did nothing. A t the time of the S C A R / I C A O correspondence Aerolineas Argentinas was carrying out regular flights between Argentina and New Zealand which were advertised as transpolar. Information supplied by the airline and the New Zealand Civil Aviation Division indicates that the flights did not in fact cross any part of the Antarctic land mass and only traversed the ocean south of 60°S for a minor part of the route. This route and type of flight was quite different from the low-level descents over the continent which SCAR was concerned about. But the Argentinian flights demonstrated that commercial flights could well be contemplated nearer the continent and that some form of action by the Consultative Parties was needed for the future. In 1984, Chile's SCAR Report stated that a Boeing 737 with 100 passengers from the tourist vessel Royal Viking Sky flew over the South Shetlands and the Antarctic Peninsula, including Teniente Marsh station. A further five flights in a Cessna 404 210

Letter from Chief, Public Information Office, International Civil Aviation Organization (18 December 1981). 13 GYIL 32

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carried a total of 30 tourists to the station. 2 1 1 I t appears that these were run by a Chilean enterprise from Punta Arenas in cooperation with the Chilean A i r Force. 2 1 2 In December 1985 a Cessna T i t a n 404 chartered by a Chilean airline to a U.S. travel agency crashed off the coast of King George Island on a trip from Punta Arenas to Teniente Marsh station killing eight U.S. tourists and two Chileans. 213 I t might be thought that the D C 10 crash would have been studied as intensively by Consultative Meetings as it was by the New Zealand authorities and all useful lessons learned from it. A n example is the need to fully brief pilots on the whiteout phenomenon which played a major part in the disaster. A t a Consultative Meeting in July 1981 no public mention was apparently made of Recommendation X-8. The only reference to the disaster was a proposal that the accident site be declared a tomb and that the area be left in peace. 214 A t the 1987 Consultative Meeting, a meeting of experts was recommended to examine air safety. 215 I t may be noted that the Meeting did not take any material action on the issue, despite the wealth of evidence on the continuing dangers involved. The Consultative Parties have repeatedly asserted a collective monopoly over Antarctic decision-making. Rights of this nature have been insisted on in public and also behind closed doors. Central to this claim is the argument that they must also shoulder the correlative responsibilities, particularly those involving the difficult issues of jurisdiction to make enforceable rules. The Erebus crash was a major air disaster which obviously called for a full review of flight safety and procedures. New Zealand did this. But the Consultative Parties collectively did nothing. If the Antarctic System was not prepared to act in this case one may seriously question the capacity and interest of the Consultative Meeting to make and enforce any effective prescriptive regime. Since the Consultative Parties as a whole have taken no action after a major air crash, outsiders may doubt their concern to ensure that there will be effective and enforced rules for the safety of minerals operations as required by the Convention in the Regulation of Antarctic Mineral Resource Activities. 2 1 6 Such criticism also lends force to views that the Treaty nations being unwilling to carry responsibilities have no generally acceptable right to reserve Antarctic decision-making for themselves. 211

Instituto Antartico Chileno (ed.), Informe de las Actividades Antarticas de Chile, Santiago 1984, 30. 212 See Sintesis Noticiosa, in: Boletin Antartico Chileno 2 (1983), 45-46 (46). 213 10 Die in A i r Crash, in: Antarctic 10 (1985), 432. 214 Recommendation XI-3. New Zealanders and persons attached to the New Zealand Antarctic Research Programme are forbidden entry within half a kilometre of the site at all times. Removal of any crash material is totally prohibited. See New Zealand Antarctic Research Programme, Antarctic Operations Manual, Christchurch 1988, 60. 215 216

Recommendation XIV-9. Art. 4 (4) (a).

Central American Integration: Evolution, Experiences and Perspectives By Mechthild Minkner

I. Introduction Since the end of the 'Seventies, Central America has been going through a crisis of political and economic viability previously unknown in its history. Besides Costa Rica, where democratic tradition is relatively deep-rooted, the region is polarized by political and socio-economic turmoil. The conflicts have debilitated the traditional political order and the social structures in an irreversible way. A t the beginning of the 'Eighties as an effect of the international economic recession, aggravated by erroneous domestic policies and socio-political unrest, the Central American economies have collapsed. Consequently, the already high level of rural and urban poverty is rising, and the modest progress in health, nutrition, housing and education of the previous decades is continuously being eroded. The crisis of the Central American countries is far from being a national problem. From the beginning, it turned into a regional conflict, heavily influenced by the interests of the two superpowers and their proxies. This fact is of great concern, complicating the establishment of distinctive political and socio-economic structures. The integration of the region has been seriously affected by the political and social conflicts as well as the economic recession. After an initial period of significant contribution to regional growth, today the Central American integration process is suffering a real backlash concerning trade, investment, institutions and payments system. Regional institutions and national governments are showing a remarkable incapacity to reorganize the integration scheme as an indispensable instrument to resolve the region's crisis. The adjustment programmes of the most important financial institutions ( A I D , I M F and World Bank) do not comprise a suitable reinforcement of the integration process. Furthermore, the key measure of promoting non-traditional exports to third markets undermines directly or indirectly the capacity of the countries to serve the region. I n contrast, the InterAmerican Development Bank and the European Community are supporting firmly the reactivation of integration. The EC and its member countries not only cooperate in different types of economic projects, but also promote actively the 13*

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political dialogue and the implementation of the Esquipulas I I — peace plan, inextricably linked to any success of the integration effort. I t is the purpose of the first part of this contribution to analyse the historical background, origins and stages of the Central American integration process. The following chapters deal with the creation of the Central American Common Market ( C A C M ) , the institutional organization, and the main effects of this integrationist effort, including the impact of the current economic crisis. After touching the behaviour of the private and public sector toward integration, the key issues concerning the attempts of reactivation of the integration process and the cooperation offered by the main political and economic partners will be analysed. The article concludes with an overall assessment of the C A C M , the integration movement and its perspectives.

I I . Central American Integration: an Overview 1. Historical Background , Political and Economic Origins of the Integration Movement Central America's history of political and economic unity goes back to the pre-colonial Mayan empire. From the 1420s until 1821 the area was governed by Spain as the Captaincy General of Guatemala. Since the disintegration of the Captaincy into the five sovereign units of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, there have been at least twenty-five unsuccessful attempts at unification. 1 The Federal Republic of Central America, the earliest effort, was proclaimed in November 1824, and after an intensive struggle between conservatives and liberals, between federalists and unionists it was buried 15 years later. The latest failure occurred in 1946, when Guatemala and El Salvador attempted to form a political union. The main reasons for the continuous failures were on the one hand the political climate with short wars, strong isolationist dictators and internal struggles for power, and on the other hand the enormous influence of Great Britain and later the United States of America on the type and requirements of the integration process. The regional bonds began to strengthen in the early 1950s. Bilateral treaties among various Central American countries were signed to establish free trade for selected products. The Multilateral Treaty of Free Trade and Economic Integration was signed in 1958 by Guatemala, Honduras and El Salvador. I t was essentially a commitment to establish a regional free trade zone and common external tariff on a step-by-step basis. I n 1960, however, the piecemeal approach was abandoned and 1 Royce Q. Shaw , Central America: Regional Integration and National Political Development, Boulder 1978, 1; Thomas L. Karnes , The Failure of Union. Central America 1842-1975, Tempe 1976.

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a General Treaty on Central American Integration, to be in effect for twenty years, was approved. A t this time, instead of super-imposing the ultimate objective of political federation, the attempt was to add to the national system a real dimension in the form of a series of common newly created economic interests. 2 Policymakers turned to integration as a means of achieving a sufficiently large market to allow efficient industrialization within Central America. The integration scheme conceived by the Economic Commission for Latin America (ECLA) was based on four main development constraints: a) the very similar economic structure; b) the insufficient domestic capital formation and the limited financial resources; c) the small size of the internal market and the d) high natural population growth. 3 ECLA's proposal centred on gradual integration with industrialization, promoted by the public sector. The private sector associated with public and foreign capital, is conceived as the principle motor of development. The strong connection between industry and agriculture is estimated to be the most important element of the industrialization process. The so-called integration industries, allocated among the member countries, would take advantage of the larger regional market. But by 1960, the focus of integration turned to a free trade scheme promoted by the more industrialized countries and encouraged by U.S. policy-makers. A t the same time, Guatemala promoted the creation of a subregional organization following the pattern of the United States and the Organization of American States (OAS). W i t h the Organization of the Central American States ( O D E C A ) , established with the objective of promoting political integration, it was trying to consolidate its position within the region, because of growing difficulties with the U.S. and the internal opposition. O n the one hand, the generality was one of the major causes of O D E C A ' s failure. O n the other hand, Central American technocrats were persuing their limited economic objectives and not willing to subordinate the pragmatic interests of economic integration to a very vague political "reunification". The technocrats' skepticism was justified. I n 1953, the Guatemalan government of Jacoho A rbenz> suspected of communist tendencies because of limited land reform, accused the other countries of using O D E C A to form a political-military pact against it. Guatemala withdrew from the organization, which since the beginning had been racked by ideological confrontations and unable to make any progress toward its primordial objectives of searching for joint and peaceful solutions to the countries' economic, social and political problems.

2

Carlos Castillo , Growth and Integration in Central America, New Y o r k 1966, 77. Inforpress Centroamericana , El futuro del Mercado Comun Centroamericano. Alcances y perspectivas después de veinte anos de funcionamiento, Guatemala 1983, 32, 33. 3

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2. Stages of the Integration Process I n spite of the political turmoil and of O D E C A ' s failure, the Committee for Economic Cooperation, the forum of the Ministers of Economy, met every year. The Ministers worked closely with the technocrats of E C L A , encharged with the task of outlining the programme of economic integration. a) 1st period (1951-1960) During the first period of the integration movement, the main activities were the preparation of a broad range of technical studies and of the legal basis for integration via a variety of instruments and institutions. This phase concluded with the signing of the three basic treaties of the Central American Common Market ( C A C M ) : the Multilateral Treaty for Central American Free Trade and Economic Integration (1958), which dealt primarily with removing tariff barriers; the Central American Agreement on Tariff Equalization (1959), a key step toward the establishment of uniform external tariffs; and the General Treaty on Central American Economic Cooperation (1960), amplifying the 1958 treaty to a virtually complete free trade area. The ratification process took nearly another three years (Guatemala, El Salvador and Nicaragua: June 1961; Honduras: April 1962; Costa Rica: September 1963). Although the General Treaty with its three organs (the Central American Economic Council; the Executive Council; the Permanent Secretariat, SIECA) was the most significant component of the Central American Common Market , various institutions and mechanisms of financial and monetary cooperation were created between 1961 and 1969: the Central American Bank of Economic Integration , CABEI; the Central American Monetary Council , C M C A ; the Central American Monetary Stabilization Fund , F O C E M . These institutions, together w i t h several others, created for special or consultative functions before 1960 (e. g. the Central American University Council , C S U C A ; the Central American Institute of Nutrition , I N C A P ; the Central American Institute of Public Administration , ICAP; the Central American Institute for Industrial Research and Technology , I C A I T I ) , formed a broad range technical level for complementing and implementing the legal base. Additionally, in 1962 a new O D E C A Charter was signed. But the functioning of the instrument of political integration has been very limited. The revised charter of O D E C A contained a provision for the Central American Defence Council ( C O N D E C A ) , and the following year Guatemala, Honduras and Nicaragua signed the treaty creating it. El Salvador has joined since then, and Costa Rica, a country without armed forces since the end of the 'Forties, has sent observers. The three sides of the integration, the political/symbolic, the military/security and the economic/technical, have never had an intimate or effective relationship. I t was a deliberate compartmentalization of the integration process w i t h a modest overlap in participants and some treaty provisions of mutual

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deference. 4 This is of major relevance for understanding both the relative success of the economic issue and the subsequent debacle in the political and military areas. Schmitter characterizes the development of the institutional structure as a 'spill-around-effect\ 5 That means a proliferation of independent efforts at regional coordination in distinct functional spheres, but without proper reinforcement at the level of regional decision-making. b) 2nd period (1960-1965) During the first years after the General Treaty of Economic Integration became effective, there was a period of normality and optimism generated by the integrationist programme. O n the one hand, free trade in the region was established and the external tariff regulations were standardized to more than 90 per cent. O n the other hand, those bodies created to support and guide economic integration reached a remarkable level of consolidation. Furthermore, very real progress was made in the economic performance of the region. The annual growth rate of gross domestic product (GDP) increased from 4.6 % (1950-60) to 5.9 % (1960-70); intraregional exports grew from US$ 30 million in 1960 to US$ 170 million in 1966 (1970: US$ 286 million); the share of intraregional trade in total trade increased from 7 % (1960) to 26 % (1970).6 c) 3rd period (1965-1969) In the mid-1960s, there was no direct indication that the Common Market would shortly enter a critical stage. But, at this time, the economic performance of the region as a whole was faced with serious problems in the countries' balances of payments. Honduras as an individual case began to insist on its particular concern about the lack of balanced distribution of industrial opportunities and about some negative negotiating preferential terms for Honduras, complaints by Nicaragua about the unequal benefits of integration complicated the picture. These difficulties with the less developed countries of the area came to a peak when in 1969 a brief war broke out between Honduras and El Salvador, the two countries most united by commercial, social and historical ties. Border disputes, arising in part from the population pressure in El Salvador and subsequent migration into Honduras, were mainly responsible for several days of fighting. O n the bilateral level, diplomatic and other relations were disrupted. O n the multilateral one, Honduras, additionally facing a rising trade deficit, withdrew from the free trade area by imposing duties on Common Market imports at the end of December 1970. 4

Philippe C. Schmitter , Central American Integration: Spill-over, Spill-Around or Encapsulation?, Berkeley 1970, 3. 5 Schmitter (note 4), 39. 6 Inforpress Centroamericana (note 3), 43; SI EC A (ed.), 25 anos de integracion (en cifras), Guatemala 1986, 16, 22.

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d) 4th period (1970-1975) I n order to solve this backlash in the region's integration, in 1971 the remaining four coùntries established a "Normalization Commission" to propose reform measures to re-establish the five countries-market. Meanwhile, by 1973 Honduras had reached roughly equivalent trade agreements with the neutral three, and efforts for restructuring the Common Market continued. O n the basis of an extensive S I E C A / E C L A study on integrated Central American development a programme of action and reform was elaborated by a H i g h Level Committee. The final result (March 1976) was a completely revised draft treaty, proposing the creation of the Central American Economic and Social Community. 7 I t contained considerable changes in the institutional framework and laid out a long-term plan for integration not only in traditional economic areas such as trade and fiscal policy, but also in social issues such as employment or education. This ambitious scheme, delegating to a higher degree economic and policy control to a regional body, has probably now been shelved forever. e) 5th period (1975-1980) Since then, the primary obstacle to progress on the "normalization" front, has been the ups and downs in the border disputes between Honduras and El Salvador. Moreover, the bilateral trade arrangements which Honduras signed with Nicaragua, Guatemala and Costa Rica the first two years and which have been subsequently extended with some modifications in the list of products, undermined the necessity of renegotiating the integration scheme. I n addition, Honduras was still a member of the majority of specialized regional organizations established before 1960, and maintained close working contacts with the policy-making and technical bodies of the C A C M . The break-down of the "five countries-market" with the departure of Honduras was not a very surprising moment. Many factors already indicated some years ago the possibility of a collapse: balance of payments crises; unbalanced growth between the member countries; lack of strong regional institutions, failure of coordinating national economic policies; relative exhaustion of the "easy" phase of import substitution; increased economic dependence on external finance and imports; loss of internal support, especially from the entrepreneurial side.8 f) 6th period: the Post-1979 Crisis After 1979, the region was plagued not only by convulsions similar to civil war, but also by the worst economic crisis of this century. 9 W i t h serious foreign trade 7

Shaw (note 1), 185-192.

8

Shaw (note 1), 13; Inforpress Centroamericana (note 3), 46-54; The World Bank, Central

America: Special Report on the Common Market, Washington 1980, 3.

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difficulties, worsening regional terms of trade, declining demand for regional exports, increasing pressure from external debt on their international reserves and rising restrictions on capital flow to the region, the countries saw themselves unable to fulfill their commitments under the General Treaty. The growing political and military tensions between neighbouring States and growing domestic polarization within individual States relegated the priority of integration to a secondary position. Since then, on the political and technical level efforts have been made periodically for restructuring the integration scheme, but the crises have caused a dramatic drop in intraregional trade (US$ 1.1 billion in 1980 to US$ 490 million in 1985) and in G D P (-6 % 1980-83). 10 Furthermore, the countries began to accumulate growing arrears from intraregional commerce. Policy-makers and technocrats searched for means and ways to ease the crisis affecting intra-regional payments as one of the main reasons for the backlash in trade. Attempts to seek major external financial support have been unsuccessful until now. I n September 1984, on the occasion of the first Ministerial Conference between Central America and the EC in San José ("San José I " ) , efforts were renewed to reactivate the process and re-establish the functioning of the Executive Council. 1 1 Under the pressure of the economic adjustment programmes launched by the World Bank in Costa Rica, a new Central American Tariff and Customs Agreement was elaborated and signed at the end of 1984 by the four countries. This came into force at the beginning of 1986. Since then, the re-establishment of the integration process has received direct support by international institutions such as the U n i t e d Nations, the Inter-American Development Bank and the Economic Commission for Latin America, by the member countries of the Contadora Group and by the European Communities. Political support for the integration process was given by the countries themselves at the various meetings of the Esquipulas peace process held since 1896. The direct activity of the integration bodies also increased considerably; proposals on how to deal with the integration crisis within the perspective of an export-oriented growth model were made by institutions and individuals. Although the vast majority of experts inside and outside the region recognizes the importance of reactivating integration for solving the crisis 12 , until now the integration process is still locked in its stagnation and remains very much in the transitory state of the early 1980s. 9 There is an abundant literature dealing w i t h the crisis of Central America. Cf. e. g. Rigoberto Garcia (ed.), Central America: Crisis and Possibilities, Stockholm 1988; Maria Eugenia Gallardo / José Roberto Lopez, Centroamérica: La crisis en cifras, San José, Costa Rica 1986; Mechthild Minkner , Verschuldung in Zentralamerika. Zur Problematik kleiner Schuldnerländer, Hamburg 1987. 10

SIECA (note 6), 12, 29. Instituto de Relaciones Europeo-Latinoamericanas (IRELA)> A New Stage in Central American Integration?: The Institutional Dimension, Madrid 1988, 10 ei seq. 11

12

The newest recommendation came from the International Commission for Central American Recovery and Development , Pobreza, conflicto y esperanza: un momento critico para Centroamérica, Report, February 1989, 92-107.

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I I I . The Central American Common Market: a Successful Attempt at Economic Integration? The Central American Common Market ( C A C M ) was created by the General Treaty on Central American Integration, 13 signed in Managua on 13 December 1960 by El Salvador, Guatemala, Honduras and Nicaragua. I t had a term of 20 years and entered into force in June 1961. Costa Rica joined the General Treaty in July 1962. The ultimate objective of the General Treaty was to improve the standard of living of the population by integrating the national economies and by promoting a joint venture the development of the five countries. The main elements and regulations of the General Treaty were: — The creation of a Common Market within the next 5 years on the basis of a Central American free trade zone and a common and uniform external tariff. — Free trade for all products w i t h the exception of those items included in the bilateral agreements signed between 1951 and 1957. — Restrictions on commerce, tariff concessions and exemptions for products traded within the region are not allowed. — Central banks would guarantee the Member States the convertibility of their national currencies. — Prohibition of the member countries' subsidising directly the price of exported products or manufactured inputs. General fiscal incentives or specific internal tax exemptions for promoting the production offered individually by the member countries do not fall under this rule. — Traffic and transport without any restriction or tax imposition would be guaranteed among the countries. — The regime for Central American Integration Industries was to be maintained and complemented within 6 months. — The Central American Bank of Integration (CABEI) was to be created, aiming to promote development on the basis of regional equilibrium. — Fiscal incentives for industrial development were to be standardized within 6 months. — The Permanent Secretariat of the General Treaty of Central American Integration, SIECA, was to be established.

SIECA and C A B E I have been complemented by constituting or strengthening specific institutions in order to facilitate the implementation of the integration scheme. Examining the above-mentioned characteristics, the General Treaty was a set of continuous obligations to be met within 5 years (removal of all exemptions and of exceptions t o free regional trade and the formation of a common external tariff) or within 6 months to one year (establishing and operating a regional development bank; protocols fixing the identity, location and performance of integration indus13 SIECA (ed.), Der Gemeinsame Markt Mittelamerikas. Verträge und Durchführungsbestimmungen, Guatemala 1962.

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tries; a treaty establishing uniform fiscal incentives for industrial development etc.) in order to elaborate a number of interrelated endeavors. There was no guarantee that the agreement would be fulfilled either in qualitative or in quantitative terms. Schmitter 14 underlines that the " . . . latent if not manifest spirit of the Central American agreement lies in the provision of an institutional framework, a set of interrelated policy instruments ... I t is a regional treaty based not on harmonious exploitation of consensus, but at least potentially upon the creative manipulation of conflict." 1. The Role of ECLA and the United States As already outlined above, the Common Market has a background in integration going back to the beginning of the 'Fifties with a comprehensive effort in institution-building and elaboration of the necessary technical studies. In the first period (1951-1959) integration doctrine, leadership, guidance and financing of the E C L A shaped decisively the path of integration, including the development strategy of import substitution. E C L A dominated the first stage for the following reasons: 15 a) The industrialization strategy of import substitution was feasible for small countries only by integrating them; b) it provided the countries with an institutional framework on a multilateral level and without considerable interference by the political sphere; c) the ECLA-Secretariat guided the development of the process; d) E C L A dominated the technical part because it had the personnel, the experience and the instruments; e) E C L A controlled the early stages of the integration process providing the financing. Although E C L A tried to keep the costs of integration low and to stress the mainly technical side of integration, it could not escape the political influence of the governments. Confrontation emerged on the question of the regional allocation of industries, on the ratification of the integration treaties and in asking the governments for deeper involvement in the integration process. Additionally, E C L A was losing ground, because the results appeared too meager, the dominance of the process was resented by local integrationists, because there were substantial differences in the integration approach, and because financing was inadequate. In the first period the United States did not support the integration process, arguing that there was too much State intervention, an anti-private sector bias, and the tendency to create regional monopolies via the common external tariffs, to establish too many exceptions in commerce and to concede a prominent role to the planning process. The United States disagreed not only with the integrationist 14

Schmitter (note 4), 7. Inforpress Centroamericana (note 3), 32-36; Shaw (note 1), 17-25; Alfredo Guerra Borges , Hechos, experiencias y opciones de la integracion economica centroamericana, San José, Costa Rica, Julio 1987, 2-7. 15

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industries but was also opposed to the possible trade diversion effects of the import substitution programme. I t was clear that the United States would only assist the integration process if some of the elements were substantially re-oriented. Since E C L A lost ground because of differences with the countries about the speed, the content and the financing of integration, the United States gained more and more influence on the process by diplomatic means, by establishing the Regional Office for Central America and Panama Affairs (ROCAP) and by furnishing extensive amounts of money. The final version of the General Treaty was completely different from the first proposals and the general integration approach of the E C L A . Three basic principles, which were decisive throughout the whole course of the integration process, have been abandoned: a) gradualism, i. e. integration being developed step-by-step and without fixing a time limit a priori in order to smooth distortions and adjust the national economies; b) reciprocity, i. e. the allocation of industries among the countries according to a general plan; c) "restricted integration", i. e. specialization in terms of the optimal allocation of activities with the concession of free trade; d) harmonization of the process, i. e. the elaboration of a general plan of integration for the harmonized allocation of the productive forces. I t should be emphasized that the United States did not force the transformed integration scheme upon the countries, but advocated and backed up the position of the local elite, which coincided with its own. 2. Development and Effects

of the CACM until 1969

During the first decade convergence toward integration was facilitated by the prior pattern of consultations, the growth in regional commerce, the relatively prosperous economic situation in general and the fact that the political unrest in the region was still manageable. W i t h o u t any doubt the region's development process has considerably benefitted by integration. However, the fulfillment and experiences were significantly different in the various areas. a) Trade Liberalization and External Tariff The initial schedule of commitments of the General Treaty was met even faster than anticipated. A t the end of the five-year period, intra-regional trade had been liberalized in all but 90 % of the 1,276 items of the regional tariffs nomenclature; a common external tariff was in force covering 97 % of these items. 16 As a consequence of the liberalization together w i t h a relatively favourable political and economic situation, intra-regional exports 1 7 increased from US$ 30 16

Statistical data on exports etc. cf. e.g. SIECA (note 3); Gallardo / Lopez (note 9).

(note6); Inforpress

Centroamericana

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million in 1960 to US$ 286 million in 1970. Between 1970 and 1978 this amount rose three times reaching its peak in 1980 at US$ 1.2 billion. The distribution of trade growth among the countries was very unequal. Guatemala and El Salvador, the most industrialized countries, together exported in 1960 nearly 63 % of total intra-regional exports, whereas Nicaragua and Honduras, the least developed countries, had a share of only 22 %. In 1970, the relative importance of the regional market for the individual countries was as follows: Guatemala exported 36 %, El Salvador 26 %, Nicaragua 16 %, Costa Rica 16 % and Honduras 6 % of the regional total. In 1980, we find a still more unbalanced situation: Guatemala and El Salvador with 64 %, Honduras and Nicaragua's share reduced to 14 %, while Costa Rica nearly meets El Salvador's position with about 22 % of intra-regional exports. Various factors have had a positive influence on Costa Rica's situation: the industrial diversification efforts of former years, the favourable political scenery, the drastic devaluation of the national currency as a consequence of the debt crisis and the adjustment process. Trade liberalization, the enlarged market and increasing amounts of foreign credit and capital, partly attracted by the considerable incentives, not only produced a remarkable growth rate of the economy as a whole but also of the industrial sector. 18 The industrial growth rate was 12 % per annum on average between 1960 and 1970, raising the share of the manufacturing sector from 13.5 % in 1961 to 17.5 % in 1970. A t the same time, there was a tendency toward important changes in the composition of the sector by products. Although the traditional nondurable consumer products (food, beverages, tobacco, textiles — leather) were by far the most important items with 69 % in 1965, in 1970 durable consumer goods, semifinished products and simple capital goods increased their share from 31 % to 37 %. A t the same time, capital formation, another bottleneck in the development of the Central American countries, rose from US$ 353 million in 1960 to US$ 836 million in 1970, with a slight increase of its importance in global demand. The unequal participation of the countries in the benefits of trade liberalization, in industrialization and capital formation, relegated the less developed countries, especially Honduras, to the position of supplier of raw materials. That means a similar development pattern we find between the developing and the developed countries was imposed or intensified by the integration process. As the impact of integration, which was very promising at the beginning, began to fall, complaints about other obstacles to trade (e. g. custom treatment; differential enforcement of sanitary regulations, unfair commercial practices etc.) were repeatedly presented to the regional organs. 17

Schmitter (note 4), 7. Inforpress Centroamericana (note 3), 61-70; Rigoberto Garcia , Integracion or Desintegracion: The Central American Common Market, in: Rigoberto Garcia (ed.) (note 9), 89-92; SI EC A (ed.), Evoluciôn y estado actual del Mercado Comun Centroamericano y sus posibilidades de funcionamiento a corto plazo, vol. 1, Guatemala 1971, 33-36. 18

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The common external tariff raised substantially the level of protection. This tendency, together with the increase in freely traded regional goods, made it difficult for the countries to manipulate the fiscal revenues and the amount of imports at times of balance of payments or public budget problems. National governments perceived of this as losing control over what had been an indispensable instrument of economic policy. Another effect of the common external tariff was the necessity to revise the level of protection in the light of emerging possibilities in investment and trade. The member countries understood very quickly that multinational negotiation and decision-making not only committed them to making concessions, but also was a very inflexible and bureaucratic process, hardly appropriate for meeting short-term economic policy objectives.

b) Integration Industries By incorporating the 1958 Agreement on the Regime for Central American Integration Industries into the General Treaty, the Central American and the E C L A experts shared the expectation that by offering immediate access to a reserved regional market a rational industrialization process would take place by attracting large-scale industries and avoiding the duplication of small-scale investments. Multilateral policy decisions would regulate the allocation on a reciprocal and equitable basis. Additionally, integrationists and technocrats hoped that in this way foreign and regional participation in the strategic parts of manufacturing, e. g. the intermediate or the capital goods, could be balanced. They also expected that distributing the integration industries by deliberate intergovernmental negotiations could mean that these planning activities would be applied later to other spheres, e. g. the agricultural or social areas. Rejection of the industrial integration scheme by the United States, the complexity of the whole administrative and ratification process, the low level of regional priority and coordination and the contradiction between "national" (mostly foreign private) and regional interests have been the main factors hampering the real functions of the scheme. The 1963 and other modifications to the original scheme — the elaboration of a list of regional industrial priorities without specifying the exact location of the future plants — attempted to simplify the procedural process. U n t i l now, the sheer facts as well as the technical evaluations indicate that a) the results were very meager; b) each government tended to try to obtain for itself the greatest number of projects; c) little attention was paid to the equitable development of the region and to improving, in particular, the basic requirements of the less developed members; d) demanding a high number of industries was more a question of national prestige than of realization chances.19 By the end of the 'Sixties only four projects had been 19 Alliance for Progress , Report on Central American National Development Plans and the Process of Economic Integration, Washington 1966, 103-105.

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approved. The first, a tire and tube plant in Guatemala, needed six years to become operative. c) Harmonization of Fiscal Incentives The harmonization of fiscal incentives 20 for regional development was originally conceived as a very important element of integration. Since the beginning, experts were afraid that national governments would engage in a ruinous competition to attract foreign investment as a way to solve partially the countries' capital shortage. This would lead to an "artificial" industrial allocation, loss of tax revenues and bargaining power and most probably discrimination against the less developed members. Since the investment opportunities for foreign capital have not been equalized, these fears have been confirmed since the 1960s. Duplication of investment efforts, sectoral over-capacities, high production costs and low competitiveness because of over-protection against imports from third countries, "waste" of public revenues and corrupt participation in the incentive scheme. These effects have largely been reinforced by over-evaluation of the national currencies. d) Financing of the Integration Process Multilateral financing of regional integration was implemented by establishing the Central American Bank for Economic Integration (CABEI) 2 1 , which was created by the signing of the General Treaty on 13 December 1960. C A B E I was constituted as an independent body not functioning as an integral part of a coordinated integrationist strategy. The first provision of capital was made by the member countries, followed by the United States furnishing US$ 30 million for the integration fund. Since then, C A B E I has increased its resources with loans from bilateral and multilateral sources, especially from U S - A I D and the Inter-American Development Bank (IDB). The Bank's major purpose is to promote and finance the economic integration and the balanced economic development of the member countries, in accordance with its nature as the financing organization. Since the creation of the Fund for Central American Integration in 1965, its main activity became the financing of the infrastructure, with nearly two-thirds of the loan portfolio (US$ 225 million) in 1971. I n accordance w i t h the objective of promoting balanced economic development, priority was given to supporting projects of the less developed members, Honduras and Nicaragua, w i t h almost 50 % of the total financing. W i t h o u t any doubt CABEI, as an institution at the disposal of both the public and the private sector of the countries, had a very positive effect on the integration process. I t was an inducement for Costa Rica to join the integration 20

Cf. e. g. The World Bank (note 8), 48-53. SI EC A (note 18), 122-128; CABEI (Centroamérica y el Banco Centroamericano de Integracion Economica), Tegucigalpa 1985, 1-13. 21

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process and to attract external public capital, which the countries would not individually receive. Although C A B E I developed satisfactorily in the first decade, the institutional and financial level presented several problems originating in the type of integration, the structure of the Bank and the economic and political situation of the region, which hampered a more effective engagement. These problems were: 22 a) the smallness of the contribution by the countries themselves; b) the eligibility for credits by some international financial institutions; c) the lack of well-prepared projects by the member countries; d) the relatively high costs of elaborating the projects by the Bank itself and obtaining the necessary pre-investment financing; e) the conservative credit policy and the propensity to lend to foreign enterprises; f) lack of trained local personnel; g) debt servicing problems; h) conflicts over the nationality of its president 23 ; the delay and length of the administrative process. e) Institutions and Mechanisms for Monetary Policy One year after signing the General Treaty the central banks of the region agreed to establish a clearing house for regional payments. 24 By 1966, the major part of these payments was cleared through it, stimulating the use of local currencies for trade operations and substituting the former system of utilizing U.S.banks. Lessons from the first years of operation were that, in general, the Treaty did not pay the necessary attention to providing mechanisms for resolving the monetary, credit and foreign exchange problems, and that major disturbances of the mechanism could be originated by foreign exchange controls and speculative capital flights, by serious balance of payments and foreign reserve problems. The Central American Monetary Council as a more formally organized institution was created in 1964. The manifest objective of this new authority was to lay the basis for a regional monetary union by promoting uniformity in the exchange systems as well as stability and convertibility of the Central American currencies, the coordination of monetary with fiscal policies and the provision of financial assistance t o correct temporary disequilibria in the balances of payments. For the latter, the Central American Monetary Stabilization Fund (FOCEM) was constituted in October 1969. Although a step forward to solving the urgent problems of harmonizing the monetary, credit and foreign exchange policies, in fact, these remained under national responsibility. The crisis of the 'Eighties showed openly the lack of coordination and its catastrophic consequences. 22

Cf. e. g. Schmitter (note 4), 10; SIECA (note 18), 125, 126. Also about the last president of the Bank have been conflicts, especially between Costa Rica and Honduras. 24 Cf. e. g. José Roberto Lopez, La ruptura de la Camara de Compensaciôn Centroamericana: Origen, desarrollo y perspectivas en el contexto del conflicto regional, San José, Costa Rica 1987 (mimeo). 23

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f) Organs of the General Treaty As superior organs the General Treaty established a) the Central American Economic Council, composed of the Ministers of Economic Affairs, responsible for directing the integration process; b) the Executive Council, composed of the Vice-Ministers of Economic Affairs, which submits proposals to the Economic Council and secures the fulfillment of the decisions; c) the Permanent Secretariat (SIECA) as the technical-administrative unit of the above organs. The whole institutional structure of the integration process and its effectiveness has been deeply influenced by the fact that these main organs of integration had relatively little power. The decision-making process continued to be realized by diplomatic means with often lengthy and laborious procedures. The performance of the specific institutions was mixed. In some cases, there was little evidence of a clear and immediate functional link between the policy areas; the individual institutions worked with a distinct set of policy-makers, and they had no subordination under any common body of the integration process. The Executive Council made great efforts to cope with a steadily more laborious agenda of problems. This demanded more and more regular meetings, fixed in December 1964 for the Economic Council at three to five-day meetings four times per annum and a one-week meeting each month for the Executive Council. SIECA was able to expand its role and meet the increasing demands as the technical-economic body of the superior organs. Analytical studies and organizing compromises to facilitate the meetings of the two Councils were its main obligations. During the first decade institutional convergence was facilitated by the prior pattern of consultations and by the remarkable results of the integration process. Political and economic relations among the Central American countries still functioned smoothly. Thus, convergence was only in part the direct result of the integration process; partly it was an attendant circumstance. 3. The 1969-Crisis and the Attempts at Reconstruction of the Common Market The first severe crisis of the C A C M was triggered by the dissatisfaction of the less developed countries with the integration process. Especially Honduras 2 5 , as the least developed member, complained about the unequal distribution of the benefits originated by the enlarged market. Disillusion about the integration process was mixed with dissatisfaction about the failure of domestic socio-economic policies, aggravated by political disintegration and border disputes with El Salvador. The Honduran objection was based on its claim to preferential treatment deducible from the principle of "balanced growth". Although the General Treaty 25

Cf. e. g. Inforpress

14 GYIL 32

Centroamericana (note 3), 46-57; Shaw (note 1), 131-172.

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does not mention this principle, theory and practice have proved that integration requires a smoothly functioning reciprocity in the distribution of benefits. In the case of Honduras, the economic indicators, e. g. quantity and composition of the exports to the region as well as volume and type of imports from the region, general growth rate, per capita income or the countries' share of regional Gross Domestic Product (GDP) showed a negative tendency compared with the other members. After ten years of Common Market development Honduras remained at the stage of deep underdevelopment, being still the most agricultural country, not much benefitted by the expansion of the industrial sector and with mainly raw material exports of agricultural origin to the other countries. In 1970, with a share of 6.3 % (US$ 18 million) of total regional exports, Honduras was placed very much behind the other countries (Costa Rica and Nicaragua: 16.1 % each; El Salvador: 25.8 %; Guatemala: 37.5 %). In 1969, the value of the industrial production of Honduras amounted to US$ 82.4 million of El Salvador to US$ 186.5 million. Thus, Honduras was the major market in the region for the Salvadoran industrial exports. Since the beginning of the 470s Honduras has been financing increasing amounts of imports and investments with external capital (1970:2.4 %; 1978:4.5 % of the fixed capital formation) accumulating by the beginning of the 1980s relatively high foreign debts with a rising debt service burden. The "structural inertia" of the Honduran economy was far more due to the internal lack of political far-sightedness showed by the dominant rural pressure groups toward the necessary reforms to modernize the political and economic structure than to the functioning of the integration process. But the political leadership exploited in a skillful way the discontent of the organized groups, deviating their attention from the internal bottlenecks to the apparently failed integration efforts. After successful negotiations for conceding preferential treatment to Honduras, the protocol was signed in September 1966. But the other four countries, especially El Salvador, were reluctant to ratify and to deposit it. Even after the protocol became legally effective, it never became operative. Particularly Nicaragua, as the second least developed country, insisted on similar treatment as was conceded to Honduras. But, as already underlined, the major obstacles to solving the controversy were internal. The traditional class of landlords and agricultural exporters demanded a profound reorientation of the C A C M , confining the leading role to the agricultural sector. These demands were part of a more general approach to fostering an inward-oriented development "subsidized" by the State. Honduras proclaimed that the unbalanced distribution of integration effects was reflected by the rising deficit of its trade balance with the region. Between 1961 and 1971 Honduras accumulated a deficit of US$ 85 million. W i t h the growing disequilibria of their balances of payments, the countries introduced increasing restrictions to free trade, on the one hand to force the other members to respond to certain demands (e. g. preferential treatment); on the other hand to exploit the integration results for covering discontent about domestic policy failures. In

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Honduras e. g. the main economic problems during this period were blamed on an external source: the Common Market. Thus, the number of disruptions of free trade were due more to changing political conditions in the countries than to changing economic conditions. Most analysts concluded that controversies which plagued the Common Market in the late 1960s demonstrated that "politicization" was occurring. As Fagan 26 underlines, this process has not resulted in growth in the level of integration. O n the contrary, the effect was a stagnation of the integration effort. The "soccer war" of 1969 was the ultimate motive for Honduras to withdraw from the regional market. Behind the decision of the Lopez Arellano Government and the Parliament was the struggle for power among the representatives of the traditional agrarian elite and of more progressive economic groups. The latter, most of them trying to strengthen their engagement in the manufacturing sector, had firm expectations of expanding their market for industrial products into the region. That means the "soccer war" had no immediate connection with the frustrated participation of Honduras in the integration process. But the Common Market triggered an increase in nationalistic sentiments and the dissatisfaction of the Honduran Government encouraged it to become more aggressive in its bilateral relationship with El Salvador. Although Honduras' intention was only to precipitate a Common Market crisis to force El Salvador to agree to the preferential treatment, together with the border disputes and the internal pressure because of the migration of landless Salvadorans to Honduras and their consecutive expulsion, it resulted in an attack on Honduras after serious incidents during a soccer game between the two countries. While nationalistic passions remained between the two adversaries, the integrationist institution tried to repair the backlashes to the integration process, approaching the problems at three different levels: a) a mediator was created to resolve the bilateral problems; b) the Economic Council was to elaborate the interim procedures which would allow the C A C M to function; c) a working group was constituted to undertake a more detailed study on how to reconstruct the C A C M . But in the following months neither the process of resolving the bilateral issues nor the negotiations for a modus operandi of the market made definitive progress. W i t h o u t any doubt there could be only little progress on the integration front until the bilateral problems were eased. A t the end the modus operandi proposal 27 was a comprehensive document to restructure the regional market scheme. I t comprised inter alia the transfer of decision-making on industrial development to the Common Market institutions, the establishment of a compensatory development fund for the least developed members and the coordination of 26

Stuart Fagan , Central American Economic Integration: The Politics of Unequal Benefits, Berkeley 1979, 62-69. 27 Shaw (note 1), 173-184. 1*

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national agricultural policies. El Salvador, considering the long-term effects, refused to sign it. When by the end of 1970 Honduras' balance of payments and its situation regarding international reserves became critical and at the same time it was unable to obtain the preferential treatment urgently needed to quench the internal opposition, it froze its membership in the C A C M by switching, with Decree 97, to bilateral trade agreements granting tariff concessions based on reciprocity. Thus, the Common Market was reduced to a "four countries scheme". The disrupted trade was restored within a year in the "mutilated" market and continued to increase. Even Honduras, after a fall in trade to nearly 50 % (1968: US$ 30 million; 1970: US$ 18 million), was able to reach the same level by 1974. Through the 1970s Honduras maintained its position, trading on a bilateral basis w i t h the neutral countries. The attempt to revive the "five countries market" with an ambitious proposal for forming the Central American Economic and Social Community ( C A E S C O ) 2 8 based on the so-called "Decade Study" of SIECA, failed. While the modus operandi had been an attempt to solve the Common Market by improving the current institutional and operational structure (with special concern of the least developed members), the C A E S C O tried to resolve the crisis by pushing the integration to a higher level of cooperation. But after an intensive tug-of-war over more than four years the proposal was shelved, probably forever. The main points, which provoked strong opposition, were: joint economic planning for the region; controlled allocation of industries favouring the least developed countries; coordinated social policy; joint trade and export promotion toward third markets; strengthening of the role of the public sector to guide the development process; creation of a compensation mechanism for the least developed countries; restructuring of the integration institutions, conferring them more competence and higher political ranking. The restructuring efforts basically failed for three main reasons: a) The Honduras-Salvadoran dispute mixed with domestic problems in both countries remained unsolved, b) The regional trade could not only be maintained, but also be considerably expanded outside the framework of the C A C M (1970: US$ 286 million; 1980: US$ 1.129 million), c) There was strong opposition, especially from the private sector, to the basic principles of proposals like the role of the State or the allocation modus of the industrial projects. Looking at the problem of a long-term perspective, Shaw 29 concludes that the greatest obstacle to the transformation of the C A C M was that the political elites were essentially satisfied with the integration situation. They were mainly interested in the financing of the BCIE, the expansion of trade and in the prolongation of the very lucrative system of fiscal incentives. 28 29

Shaw (note 1), 185-191. Shaw (note 1), 226.

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The appraisal of the performance of the Common Market by scholars has considerable differences. " O r t h o d o x " economic analysis argued that the expansion of trade and increased competition in the Common Market demonstrate the usefulness of the market mechanism in Central America and converted the C A C M into an "engine of growth". In the same breath industrial planning was blamed for being the main disutility to regional integration. O n the contrary views as represented by C E P A L and SIECA underlined the lack of cooperation and planning which led to industrial duplication; for them the C A C M relied too heavily on the market mechanisms. Some analysts pointed out that integration failed to a great extent because of the avoidance working out controversies at a high political level. Another argument was that the integration depended too heavily on external financial and technical assistance, mainly from the United States. The governments of the member countries received the main benefits of the integration without any major financial effort. The U.S. financing always "helped out", although the costs constantly rose. Schmitter 30 concluded that if the member countries were obliged to provide their resources, it could be expected that their behaviour would change. Furthermore, scholars and experts point to the failure to increase the authority of the regional institutions and to develop a regional constituency among the entrepreneurs, the trade unions, the cooperatives and the "grass-root" organizations to help protect regional against national interests. Most analyses explaining the positive and negative effects of the Common Market fail to consider adequately the influence of the political leadership on the integration process. That means the impact of domestic political events on regional politics and decision-making and vice versa is not adequately considered. Shaw e.g. 31 in his study of the Central American integration movement draws the conclusion that the crises of the C A C M were not mainly the result of the members' balance of payments or distribution problems; rather, they were based on deliberate political considerations by the countries' political elite. The politicians, on the one hand, saw integration as an instrument to increase the pace of economic growth. They believed that economic growth would help to avoid socio-economic upheaval. When the C A C M began to operate, Honduras, Nicaragua and Costa Rica shared the commitment to free trade and the market mechanism. But in the late 1960s, when they were confronted with a marginalized position in the industrial development and consequently in trade expansion, they demanded a concentration on improving the distribution of the benefits of integration. The interest of the integration bureaucracy was to elevate their domestic political status by fulfilling the integration goals in the most effective way. However, the successive crises were not the failure of the integration strategy of the technocrats, but rather of attempts by politicians to use the C A C M to resolve their domestic political problems. In general, Shaw states that the " . . . reason that the Common Market 30 31

Schmitter (note 4), 43. Shaw (note 1), 215-221.

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failed to progress to higher levels of integration after the late '60s, and the reason that the Common Market is not likely to be effectively restructured for the foreseeable future, is that the political elite allowed the integration programme to progress far enough to achieve their goals but not further." 3 2 4. The Post-1979 Crisis of the CACM The Institute for Latin American Integration ( I N T A L ) and the Inter-American Development Bank (IDB) in the introduction to their annual report call attention to the fact that the " . . . Central American Common Market acted within the same limitations as in previous years... The dispute between Honduras and El Salvador continue to be the main hurdle in the Central American restructuring process." 33 In the overall stagnant integration process, the reports have mentioned for years as positive elements, the moderate progress in drafting and negotiating the new tariff regulations on imports; several meetings on the highest political level and a more effective functioning of integration on a lower level and progress in the execution of infrastructure projects. When in 1980 the crisis escalated, I N T A L and I D B point out in their report a list of negative factors: the prolongation of the differences between El Salvador and Honduras; the internal political crisis in El Salvador; the economic crisis faced by Nicaragua as a consequence of the internal conflict; a lack of political decision on the parts of the governments with regard to the Central American Economic and Social Community Treaty presented by the H i g h Level Committee in 1976; distribution problems; conflicts between regional and national policies; obstacles and lack of agility in the decision-making process with regard to resolutions to be applied at the regional level; differences that developed at the governmental level between national interests and regional objectives; stagnant exports and a projected increase in total imports; and a slight decrease in intra-regional trade. 34 The problems enumerated in the report are of an extremely varied nature and origin; domestic and regional problems are mixed with failures in the functioning of the integration institutions as well as political and economic phenomena, effects of the crisis of the late 1970s. The current socio-political turmoil and the deep economic recession added a new dimension to the "situation of permanent crisis" of the C A C M since 1969. What at first sight appeared to be only a serious balance of payments shock, combined with a rising debt burden, resulted in a crisis of viability of the development model of the Central American countries, their 32

Shaw (note 1), 226. Institute for Latin American Integration / Inter-American Latin American Integration Process in 1977, Buenos Aires 1978, 34 Institute for Latin American Integration / Inter-American Latin American Integration Process in 1979, Buenos Aires 1980, 33

Development Bank , The 149. Development Bank , The 183.

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political structure and institutions. Furthermore, the subregion as a whole seemed to be debating between options not only related to the nature of the economic and political system but to the cultural and prevailing values in society. The internal disintegration and polarization of the individual countries, the differences among the regimes of the subregion, external pressure expecially from the U.S., the concession of financial support according to political alliances, are factors which explain the setbacks or the near breakdown of the integration process. I n 1980, Honduras and El Salvador signed a peace treaty, which put a formal end to the controversies. According to the analysis of the previous situation, this treaty was expected to establish a basis for renewing trade between the two countries and reincorporating Honduras into the multilateral system. Today, nine years later, the integration process still shows the same stagnant level, highly shaped by U.S. pressure. The prices of the agricultural export products of the region are depressed, the demand of the industrialized countries curbed, capital flow and the high debt service have seriously depleted the international reserve of the countries so that their import and production capacity has nearly collapsed. The victory of the revolutionary movement in Nicaragua in 1979, the continuing guerilla activity in El Salvador, Guatemala and Nicaragua and the emergence of the East-West dimension in the conflict threatened many times to convert Central America into a regional battlefield in an undeclared war. Socio-political unrest combined with deep-rooted economic problems led the Common Market to some sort of breakdown. But the dramatic domestic situations induced the governments to relegate integration problems to a secondary position. The level of regional trade was hampered by the economic recession in the countries and, facing the collapse of their international reserves, restrictions on trade and foreign exchange were introduced; private credit sources nearly dried up because of the high political and economic risk.

I V . The Virtual Collapse of the Integration Process: Effect of the Crisis of the 1980s Despite continuous initiatives, there has not been any real and definitive resolution of the internal problems of the member countries. The regional focus of the conflicts such as the border dispute between Honduras and El Salvador, the crossing of refugees and migrants as well as the penetration of guerrilla activities have been contained in the last year, supported by influence and pressure by the U.S., the European countries and the United Nations. The regional phenomenon of polarization has been converted in a "single country-problem" through U.S. intervention in: Nicaragua. T o a great extent under diplomatic and economic pressure by the U.S., the Armed Forces returned to the barracks. They gave way to the second (Guatemala, El Salvador) or third (Honduras) round of civil govern-

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ments. In Guatemala and El Salvador under the surface of an apparently improving situation with the Christian-Democratic Governments, social and political unrest and the violation of human rights continue. Since the beginning, the pacification efforts have been disturbed by national, regional and international factors. The most promising initiative, the Contadora-Group, finally failed because of U.S. intervention. But it gave way to the understanding that the regional peace process could only succeed by involving the highest political level of the member countries themselves. The five Presidents of Central America demonstrated their political will on 7 August 1987 when they signed the Peace Plan for Central America. Since then, the implementation has been confronted with a variety of problems hindering more rapid positive developments. T o a great extent, Nicaragua made unilateral concessions, partly for tactical reasons. I t announced e. g. general elections for February 1990, previously scheduled for November that year. Apart from the political conflicts and the rejection of the "socialist" experiment in Nicaragua, the economic recession, the shortage of foreign exchange, the debt burden, the need for adjustment and the abundant U.S. aid created strong pressure to dissolve the cooperative integration bonds, urgently needed for the future development of the region. 1. The Evolution of Regional Trade As of 1978, the crisis began to cause a drop in regional trade. 35 The total value of US$ 925 million in intra-zonal exports in 1978 fell to US$ 842 million in 1979, which could be recuperated in 1980, when regional exports amounted to US$ 1.259 million. The temporary revitalization was largely due to the increase of Salvadoran and Nicaraguan imports from Costa Rica and Guatemala as a consequence of the damages to production capacity caused by the insurrectionary movements in both countries. From 1981, intraregional exports declined constantly, adding up to about US$ 411 million in 1986, the level of 1973. By 1987, intraregional exports recovered slightly and were still under 10 % of the total exports of Central America (1980: 25.4 %). The drop in intraregional trade caused, by far, more damage than suspected at first glance, because commerce between the countries had been greatly diversified during the previous 20 years. The regional share of imports in total imports was 24 % in 1970, falling to under 9 % in the '80s. Import capacity was mainly concentrated on the three most important countries. Despite of the innumerous problems and setbacks, regional commerce continued to function with its own dynamic and complexity, difficult to interrupt. Trade has been maintained as far as possible w i t h conventional and unconventional forms of transactions (e. g. countertrade) and payments. During the '80s the major problems affecting intraregional trade have been: 35

SIECA 1986 (note 6), 12; Inforpress

Centroamericana , N r . 779, 10. 3. 1988.

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— The accumulation of trade deficits, especially by Nicaragua, which could be liquidated neither by automatic compensation nor by foreign exchange. El Salvador and Honduras also accumulated arrears w i t h their trade partners. As a consequence of the cumulation of regional debt, the compensation mechanism collapsed. — The countries' production for the Common Market has been constantly decreasing due to demand and payment problems, war damages, the lack of foreign exchange and financing, the shortage of raw materials, transport problems etc. — The considerable devaluation of the foreign exchange rate, executed by Costa Rica without coordination with the other members, deepened the disequilibria in commerce. — The Governments implemented different types of trade and foreign exchange restriction to protect their international reserves. — The introduction of the new tariff system and the copious U.S. aid encouraged extra-zonal imports. — The costs and prices of regional manufactured products rose constantly due to the low utilization of production capacity. — The general climate of insecurity and hostility in the region combined w i t h pressure by the U.S. and bilateral or multilateral institutions to orient exports almost exclusively to third markets, as well as the incentives for extra-regional exports, diverted regional trade.

After 6 years of decreasing figures, 1987 ended with a slightly better result (US$ 501 million). For 1987/88 SIECA expects a growth of about 5 % (US$ 28 million). Trade results in 1989 will depend very much on the progress in the internal and regional peace processes, the availability of financing, the dismantling of trade restriction and the putting into force of a functioning payments system. Finally, after about 10 years of tug-of-war, the new Common External Tariff and Customs System was signed in December 1984 and put into force in January 1986. The system was accepted by the member countries, with the exception of Honduras. U n t i l now the implementation has been rather precarious. Furthermore, the countries are making extensive use of the safeguard clause; the negotiation on the products has progressed very slowly. The uniformity of the external common tariff was debilitated in previous years, e. g. by the withdrawal of Honduras and the consecutive introduction of a bilateral trade base, the unilateral actions taken by the countries on different occasions and by the trade deviation in the case of Honduras (countertrade with the Socialist countries). The second important reason for introducing a new system was the inertia of the present scheme in adapting to the profound changes in the world economy. The tariff system in force until 1986, although with nominally uniform duties, contained a broad variety of real protection against imports. Only by transforming the system would it be possible to develop a fruitful integration of the Central American countries into the world economy. The new system has, inter alia , the following advantages: — I t rationalizes the tariffs applied to extra-zonal imports.

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— The protection is reasonably graduated and lowered, aiming to promote competition. — The new Tariff System was negotiated and adapted as a multilateral instrument in a situation of deep conflict and turbulance. Thus, although Honduras did not sign the Treaty, it is of great political significance. I t is the first time for 15 years that member countries have agreed on a new multilateral instrument, which is under the discouraging circumstances an outstanding achievement. 2. Performance

of the Industrial Sector

Developments in the industrial sector of Central America since the beginning of the 480s were indicative, in general terms, of a deep economic recession. The above-mentioned decrease in intraregional trade (1981-86: 78 %) was, inter alia , a reflection of the difficulties faced by the region's industrial sector, because a high percentage of the traded goods are manufactured products. Garcia characterizes the Central American industries of the '80s as " . . . dependent, non-competitive, capital intensive, with scarce generation of employment and technology, inefficient w i t h high idle capacity and non-selective in the generation of new industries. " 3 6 By 1987, it was estimated that on average 18 % of G D P was produced by the industrial sector. Almost 60 % of industrial output was still generated by the traditional consumer goods industries. The industries were highly dependent on extraregional imports. Furthermore, by 1982 about 30 % of the industrial sector (measured in industrial employment and fixed assets) were partially or completely foreignowned. 37 During the '80s, the decrease of consumption and production made it difficult for the companies to meet their operating costs. Declining demand forced numerous enterprises to shut down. The growing difficulties in obtaining foreign exchange, added to the fact that Central American industries are working with high amounts of imported inputs, and that bottlenecks in financing plagued the companies as well as more competition because of the dismantling of tariff barriers and different types of subsidies, combined w i t h general alteration of investment conditions etc. produced some sort of de-industrialization. A t the same time, under great pressure from international financial institutions, but also from its own domestic policy advisers, the region's industrial sector initiated the first steps of what in the end perhaps would be a sharp change in direction. The pressure and the changing conditions of the international economic context would push the countries to continue the industrialization process least dependent on the C A C M ; their new role would be as long-term exporter of non-traditional and traditional agro-industrial exports to third markets. 36 37

Garcia (note 18), 91, 92. Garcia (note 18), 91.

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3. The Situation of the Institutional Framework The three key institutions of the integration — the Permanent Secretariat (SIECA), the Central American Bank of Economic Integration (CABEI) and the Central American Monetary Council ( C M C A ) — have been affected in different ways by the above-mentioned problems. Although the existence of no single institution has been seriously questioned, in general all of them are suffering from three major problems: — In the majority of the institutions the functioning of the directing organs has been suspended for years. Thus, the administration level did not have the necessary guidance. — The financing of the integration institutions was notoriously diminished. I n many cases, the Governments did not pay their quotas. Consequently, the realization of the programmes has been delayed. Furthermore, the financial shortages produced frustration in the personnel, lowering their dedication and productivity. — U n t i l now, the regional institutions are poorly adapted to the changing conditions of integration. Furthermore, they have increasing difficulties in coordinating the more and more atomized institutional structures of the countries involved in the integration process.

During the '80s, CABEI, on the one hand, has lacked the necessary resources to grant new loans. O n the other hand, it has encountered difficulties in disbursing loans already contracted. CABEI's financial capacity began to decline when private foreign banks began to reduce sharply credits to the area. A t the same time, its efforts to open external sources by attracting new members and credit possibilities have not been as successful as anticipated. C A B E I faced the problem of a tendency toward bilateralism by some international sources of finance. The downward trend of investment in recent years, both private and public, has restricted the availability of projects that could be financed by CABEI. The same economic recession increased the need to enhance the availability of investment projects. The decline in economic activity has impaired the payment capacity of the Bank's member countries, thus bringing an increase in arrears with the Bank. The problem of indebtedness, forced the Bank to adopt more rigorous standards for analysing projects and a more careful approach in its operations. During its institutional life C A B E I has directed on average some 40 % of its credits toward infrastructure. The operation capacity of the Bank has been affected by various measures taken by the member countries, such as exchange restrictions or implementing the inconvertibility of their own currencies. Despite increasing financial problems, the Bank tried to maintain its favourable orientation toward the region's development and integration. This has been possible, to a great extent, because of the qualified human resources the institution has. As of 1987, CABEI's personnel reached about 440 employees, of which 34 %

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are international staff. 38 I n spite of its continuous effort to train personnel, there is some conviction in Central America that CABEFs operational effectiveness has been debilitated and thus needs to be strengthened. The Central American Monetary Council ( C M C A ) , created as part of the Central American Central Bank System in 1964, is composed of the heads of the Central Banks of the five countries. I n order to respond to the constantly declining regional trade, one of the most urgent tasks of the C M C A since the beginning of the crisis has been to deal w i t h the problem of financing intraregional trade. The Central American Clearing House (CCC), planned to operate as a multilateral clearing institution to facilitate intraregional payments through the use of the countries' currencies, has registered a dramatic decline in its total transactions. A t least four main reasons 39 have been responsible for this: a) the exhaustion of the international reserve (1985: US$ 410 million); b) the capital flight (1977-84: about US$ 3.7 billion); c) the dramatic decline in regional trade (about 75 %) and d) the adjustment measures. Consequences were, inter alia , a) the decrease in compensation payments in the total value of trade; b) the accumulation of outstanding debts among the countries; c) the relative increase of payments in U.S. currency ("dollarization" of the economy). I n 1980, all intraregional transactions were handled by the C C C ; between 1982 and 1985 the share totalled on average 70 % to 80 %. U n t i l 1987, it experienced a violent drop to 20 % of intraregional operations. That means that at the end of 1986 trade relations through the C C C have largely been suspended. I n 1986, the outstanding intraregional debt amounted to about US$ 742 million; Nicaragua's debt only reached 63 °?o or US$ 470 million, while Costa Rica and Guatemala were the biggest creditors w i t h US$ 369 million and US$ 245 million. 4 0 But then, the countries' restricted international liquidity and the low rank of intraregional debts were the main reasons that debt payment is still pending. This situation has meant that the C M C A has to deal on the one hand w i t h the intraregional debt, and on the other hand, with the finding of new ways of payment. SIECA as the technical body of the C A C M has been considerably weakened in many of its departments and in its whole functioning. A t the beginning of 1988, the Meeting of the Vice-Ministers responsible for Integration and Regional Development was entrusted w i t h the task of restructuring SIECA. The new structure was adopted at the beginning of 1988. The main problem of reorganization is the lack of a comprehensive study for restructuring the integration process. 38

Central American Bank for Economic Integration , X X V I Annual Report (1986-87),

Tegucigalpa 1987, 71. 39 40

Cf. e. g. Lopez (note 24), 38. Lopez (note 24), 38.

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4. The Behaviour of the Public and Private Sectors Toward the Integration Process in Crisis The severe economic crisis along w i t h the deep political polarization, partly combined w i t h military conflicts, induced the governments to be more concerned w i t h instituting defensive policies to overcome their own national crises than w i t h furthering the cause of Central American economic integration. Many of the measures taken by the countries are, or have the potential to be, a real obstacle to intraregional trade. The pressure of multilateral and bilateral financial institutions on the governments to adopt a "new" strategy of development, emphasizing exports to third markets detracts the attention of the public and private sector from the regional area. The Caribbean Initiative (CBI), declaring the US-market to be a free trade zone for Central America and the Caribbean, point in the same direction, as do the variety of incentives and technical assistance given by U S - A I D to foster extraregional exports. The pattern of behaviour of the public sector has been heavily influenced by the political conflicts, which precluded on many occasions during the last ten years working meetings at the ministerial level, which are vital to the integration process. The state of tension in conjunction with the domestic problems of the countries poses a real threat to stability and peace in the region. I t also has a negative effect far beyond the Common Market on the entire integration process itself " . . . jeopardizing the level of solidarity and interdependence which the five countries have thus far managed to achieve." 41 I n the last five years the Central American governments have released numerous statements declaring the urgent need to reactivate and restructure the integration process, but the declarations have not been backed by the corresponding political decisions. There were serious attempts by some member countries, pressured by U.S. institutions, to decrease interdependence and to create a polarized structure, e. g. by constituting the Central American Democratic Community (Costa Rica, El Salvador, Honduras) and establishing political criteria for entrance into an economic "community". Nicaragua and Guatemala have been excluded, because of their "non-democratic" governments. Another initiative was to create a tripartite free-trade zone (Honduras, El Salvador, Guatemala). The region's private sector, especially the traditional groups, are very reluctant to support the reactivation of integration. However, parts of the industrial sector and their organizations, which are suffering economically from the setback in regional trade, are engaged in the efforts to revitalize the Common Market. I n general, the entrepreneurial groups in the more industrialized countries of El Salvador and Guatemala, and in recent years also Costa Rica, backed the integra41

Institute for Latin American Integration / Inter-American

Latin American Integration Process in 1981, Buenos Aires 1981, 118.

Development Bank , The

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tion efforts more firmly in order to expand their regional market chances. O n the other hand, in Nicaragua and Honduras the few family groups engaged in the regional market lost influence because of changing development policy and the greater attractiveness of extra-regional business. The entrepreneurs, interested in returning to levels of normality in commerce, promoted the use of barter as a provisional means to overcoming the existing payment problems. The barter began already in 1981 between Costa Rica and Nicaragua as well as between Guatemala and both Nicaragua and El Salvador. Consequently, the business organization urged the Governments to elaborate a banking mechanism to support this. The Federation of Chambers of Commerce of Central America ( F E C A M C O ) issued various statements to reactivate the C A C M and to promote the consumption of regional goods. 42 A similar urgent call came from the Federation of Chambers of Industry and Commerce of Central America ( F E C A I C A ) , demanding that at the political level the necessary legal measures for revitalizing the integration scheme would be adopted. 43 I n 1988, as an effect of the restructuring of SIECA, the Presidents of these organizations were integrated as counselors into the Permanent Secretariat. 44

V . The Attempts at Integrational Restructuring i n the '80s Since the escalation of the crisis, and especially under the pressure of the foreign financial institutions to present joint proposals to overcome the regional conflicts, there have been increasing efforts to restructure the various dimensions of the Common Market and to design new areas of cooperation. 1. The Common External Tariff

and the Fiscal Incentive Systems

O n the occasion of the coming to an end of the General Treaty in 1981, the W o r l d Bank evaluated in 1980 the performance of the C A C M up to that time. The Bank recommended the examination of the Common External Tariff System in order to reduce the too high level of effective protection, to create a flexible promotive instrument for development, to reduce customs, tariffs and preferences (also nominally) and to facilitate their administration. 45 42

Institute for Latin American Integration / Inter-American

Development Bank , The

Latin American Integration Process in 1982, 132. 43 Loc. cit , 180. 44 La Federaciôn de Empresas Privadas de Centroamérica y Panama (FEDEPRICAP) also sent a representative as counsellor to SIECA. Cf. SIECA, Carta Informativa, No. 318, April 1988, 18. 45

The World Bank (note 8), VI-IX.

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The uniformity of the external common tariff was debilitated in previous years, e. g. by the withdrawal of Honduras and the consecutive introduction of a bilateral trade base, the unilateral actions taken by the countries in different opportunities and by the trade deviation in the case of Nicaragua (countertrade w i t h the Socialist countries). The second important reason for introducing a new system was the inertia of the present scheme to adapt to the profound changes in the world economy. The tariff system in force until 1986, although with nominal uniformed duties, conducted to a broad variety of real protections on imports. Only by transforming the system, it would be possible to develop a fruitful inversion of the Central American countries into the world economy. After more than 10 years of varied series of proposals and negotiations, on 14 December 1984, the members of the "four countries market" signed the Agreement on the Central American Tariff and Customs System. 46 The negotiations were "accelerated" due to the fact that Costa Rica would otherwise impose the new tariff unilaterally because of the conditioning of the adjustment programme of the W o r l d Bank. The Agreement will be in force for 10 years and it will be renewed by tacit consent for successive periods. SIECA played a decisive role in the elaboration and negotiation of the new System. The Agreement and its Protocols as of 1 October 1985 stipulated that the new Uniform Nomenclature ( N A U C A II), w i t h tariffs expressed in ad valorem terms, go into effect finally on 1 January 1986. The new Common External T a r i f f 4 7 reduced the differences in effective protection among the countries. I n the former System the effective protection varied from 136% in Costa Rica to 47% in Guatemala. W i t h the new System the effective protection is practically equalized (Guatemala: 91.5%; Nicaragua: 95%). The dispersion of protection among branches was also significantly lowered. The standard deviation of the effective protection is not more than 50 % in each country, while in the former System it reached almost 100%. Beside Costa Rica, there is no tendency to reduce the effective protection by the new System. I n the case of Guatemala, the average of the effective protection is now considerably higher than before. The former level in Costa Rica surpassed by far the level in the other countries. The majority of the products have a common external tariff. National tariffs are allowed for some products like cars, petrol, or liquors. Honduras participated merely as an "observer" in the negotiations. But part of the private sector is extremely interested in the application of the System because of three basic reasons: a) The Common External Tariff System gives higher protection than the national System (83 % instead of 65 %); b) the adhesion is 46

Institute for Latin American Integration / Inter-American

Development Bank , The

Latin American Integration Process in 1984, Buenos Aires, 192-200. 47 Juan Alberto Fuentes , La integracion econômica centroamericana: nuevas perspectivas a partir de la turbulencia, in: Revista de la Integracion y del Desarrollo de Centroamérica, No. 37, 80-83.

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gradual and flexible; c) the perception dominates within the private sector that Honduras might benefit more from the trade in a near future. 48 Concerning the new System, inter alia , the following problems still have to be resolved: a) A r t . 26 permits the application of restrictions other than import duties, if the country considers it pertinent; b) there is no consensus on how to reduce effective protection in the future; c) experts are afraid governments could abuse A r t . 26 and authorize the unlimited exemption from duties for extra-regional imports. Legitimate reasons for implementing the escape clause are "serious balance of payments disequilibrium" , "sudden widespread shortages of raw materials and basic finished products", "market disorders" and "unfair trade practices". 49 The Central American Tariff and Customs Council, responsible for administering the new System, has to elaborate exhaustive regulations for this type of clause, which are very vague and will be subject to different interpretations by the member countries. The implementation and consolidation of the new System will still continue for some time. Only the future will show, which of the objectives of the tariff reform will be fulfilled: strengthening development in the production sector or, attending to fiscal and balance of payments needs. U n t i l now, the countries are making extensive use of the safeguard clause; the negotiation for the products progressed very slowly. However, it should be underlined that the new System has, inter alia , the following advantages: — I t rationalizes the tariffs applicated to extra-zonal imports. — The protection was reasonably graduated and lowered aiming to promote competition. — The new Tariff System was negotiated and adapted as a multilateral instrument in a situation of deep conflict and turbulance. Thus, although Honduras did not sign the Treaty, it is of great political significance. The first time after 15 years that member countries agreed on a new multilateral instrument, which is under the discouraging circumstances an outstanding achievement.

The Central American Agreement on Fiscal Incentives for Industrial Development ( R E I F A L D I ) 5 0 was signed in 1962, but was not ratified until 1969. Regulations for implementing R E I F A L D I were never fully put into practice. The principle benefits granted include exonerations from duties on imported inputs and capital equipment and from income and related taxes. The incentives were at first intended to expire between 1973 und 1975; but further extensions were agreed upon first until December 1983 and afterwards until 1985. Between national 48

Interviews w i t h the industrial sector in 1986 and 1988 in San Pedro Sula and Teguci-

galpa. 49

200. 50

Institute for Latin American Integration I Inter-American Development Bank (note 42), Cf The World Bank (note 8), 48-53.

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systems and regional regulations, the majority of enterprises managed on the grounds of "reclassification" to obtain the maximum of benefits. The R E I F A L D I (1960:137 firms; 1970: 520 firms) has been extremely costly for the governments; but the exact loss of import revenues due strictly to fiscal incentives is difficult to quantify. SIECA undertook to estimate the magnitude: import taxes as share of total tax revenues declined from 48 % 1960 to 20 % in 1975/76. The disadvantages of the fiscal incentives have been: a) as already mentioned, the loss of revenues; b) it tended to promote the location of industries inappropriate to resource endowment, w i t h low value added and both high import and capital intensity; c) i t protected from external competition and did not encourage the establishment of industries with economic viability. The development strategy of the countries, fostering exports to third markets, will demand not only the reform of the tariff system but also a restructuring of the national incentive systems. 2. Regional Cooperation in the Industrial and Agricultural

Sector

a) Industrial Cooperation The W o r l d Bank evaluated in 1980 the performance of the C A C M up to that time and made, inter alia , the following recommendations: 51 a) to implement a regional industrialization strategy, which would promote production using as far as possible domestic resources and improve the regional structure of industry; b) to review the tax incentive system and the common external tariff, in order to reduce the too high level of effective protection, to create more flexible promotive instruments, to reduce customs, tariffs and preferences (also nominally) and to facilitate their administration; c) to work out of a regional approach to promoting industrial exports to third markets w i t h emphasis on marketing aids as well as on the application of a regional promotion system; d) to introduce a "project approach w i t h a regional content", i. e., the promotion of specific projects in order to improve the export capacity of less developed countries such as Honduras and Nicaragua and to raise the benefits of integration.

These proposals were made by the World Bank at a time when the region appeared to many to be largely free of crises and conflicts; when the "market of the five" (and thus the reintegration of Honduras) as well as industrialization and economic integration were regarded as accepted aims of development. A n efficient and more complex industrial structure, adjustment to the changing economic environment as well as the reduction of "misinvestments" are to be achieved via a common industrial strategy and the expansion of exports to third markets. I n other words, the World Bank proposes the improvement of the existing approach 51

The World Bank (note 8), Chapters V I - I X .

15GYIL 32

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Mechthild Minkner

and adding elements such as exports to third markets, in order to give integration a new push. I n 1986, SIECY, BCIE and I C A I T I put forward a plan for the revival of trade and for solving intraregional payments problems. 52 The reactivation takes as its starting-point the existing integration structure. I n the short term, intra-zonal trade is to be activated by the improvement of the regional payments system (Derecho de Importation Centroamericana , D I C A , negotiations on intraregional debts). This, together w i t h the reduction of non-tariff barriers, is intended to stimulate demand and to cause the presently idle capacities in industry and trade to be utilized. I n the medium term, the promotion of regional industrial complementarity by the diversification of existing firms and the setting up of new ones via a multi-sectoral policy will play a central role. Negotiation rounds between industrialists and traders, as well as a regional information network, are intended to take responsibility of coordination and to lead to as balanced a trade as possible. I n the case of these recommendations, too — they were cemented in the five countries in 1987 by a detailed "Proposal for the reactivation of industrial production and trade in complementary goods" based on statistics and answers to questionnaires from 280 industrial firms from the region — the starting-point is to use the existing structures and institutions and get them going again (aprovechar y poner afuncionar lo que y a tenemos is the magic formula). Intra-zonal trade is again conceded a decisive role in the development of the countries (as opposed to the frequent overemphasis on third market exports by U S - A I D , the W o r l d Bank and the I M F , which in part are aiming purely at the stabilization of the balance of payments). The C A C M , however, is to function as a compensatory element to the fluctuations from the outside, the closer agreement and interdependence is, the stronger will be the region's position in relation to the international environment. Furthermore, the structure and interdependence of the national economies is to be improved by the stimulation of a complementary industrialization within the region. I n contrast to the promotion of the individual economies which has often dominated since the escalation of the crisis, emphasis is laid here on the strengthening of the economic interdependence of the region. This is to be developed, in contrast to the previous mechanism, by direct contacts between private and public firms and by new forms of horizontal cooperation within the region. Included in this exchange of complementary products to be negotiated in regular meetings is a mode of payment varying from case to case. The basic principle is to be the establishment of trade flows between the countries which are as balanced as possible.

52 SIECA / BCEI / ICAITI , Propuesta para Reactivar la Produccion Industrial y el Intercambio de Bienes Complementarios en la Region Centroamericana (Documento Base), Guatemala 1987.

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b) Cooperation in Agriculture The promotion of agricultural production could play a key role in reactivating the development of the region. Agriculture is of fundamental importance not only for income and employment and thus for reducing poverty in rural areas, but also because of its potential for industrialization and exports. Furthermore, the sector contributes significantly to foreign exchange and fiscal revenues. The magnitude of development problems, the smallness of the countries and the limited financial resources call for coordination and integrated efforts also in the agricultural sector. Although at the beginning E C L A envisaged the fundamental role of agriculture in its studies and project drafts, the integration approach of the General Treaty did not concede the necessary importance to the agriculture because of the influence of the U.S. The current restructuring efforts put more emphasis on fostering cooperation in that area. The Inter American Institute for Agricultural Cooperation ( I I C A ) elaborated in July 1988 a preliminary study 5 3 identifying a) areas of concerted action (commercialization of some products to third markets; transportation; inclusion of agricultural products in intra-regional trade taking into consideration the elasticity of supply and the different levels of industrialization of the countries) and b) areas of joint programmes (Food Security Systems; research and technology; incorporation of new areas for exports and food production by irrigation; development of fishery and aqua-culture; economic and organizational promotion of the campesinos ; promotion of agro-industrial development; optimization of investments in sugar industries; implementation of sanitarian programmes; promotion of non-traditional exports). The final proposal will be presented to the Meeting of the Ministers of Agriculture in 1989. Analyzing the proposals for cooperation and coordination on a regional level, they would be much more effective if at the same time there were reforms on the national level such as the incorporation and redistribution of land, the definition and improvement of the role of the State and the design of adequate price and credit policies for the agricultural sector, especially for the small landholders. The increase and redistribution of income on the internal and regional markets are vital for reducing poverty and social polarization in the Central American countries.

53

Instituto Inter amer icano de Cooper acion para la Agricultura , Estrategia de acciôn

conjunta para la reactivacion agropecuaria en los paises del Istmo Centroamericano y la Republica Dominicana: Ideas para discusiôn (Version preliminar), San José/Costa Rica 1988, 43-61. 15*

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Mechthild Minkner

3. Legal Aspects and Institutional Framework When Honduras withdrew from the C A C M at the end of December 1970, a Commission to Restore Normality to the Common Market was constituted (20 June 1971). O n 1 and 2 December 1972, the Commission accepted the regular functioning of the Meeting of Ministers and Vice-Ministers of Economic Affairs as "transitory" bodies of the C A C M . That means that the two organs assumed the functions originally conferred to the Economic and Executive Councils. The basic intent of the construction was to keep the C A C M alive. Although there has remained some degree of juridical ambiguity, for almost two decades the C A C M has worked with this institutional and legal transition. After years of structural erosion, on 27 July 1984 the Meeting of Ministers in charge of Central American economic integration passed Resolution 1/84, proposing the re-establishment of the Economic and Executive Councils. 54 Having in mind the critical economic and political situation and the development needs of the region, the Resolution aimed at the institutional and juridical adjustment of the integration process. The idea was to develop the original integration structure. That means the organs would be vested with all the responsibilities and powers accorded by the treaties. But basic differences remained among the Ministers on whether to approve a modus operandi for the existing transitory bodies or to return to the institutional structure as was agreed in the '60s. The alternative — to agree upon a transitory normative regime — was partly fostered by the need to negotiate on a common basis on the joint conference between the Foreign Ministers of the EC, of Central America and the Contadora Group on 27 and 28 September 1984 ("San José I"). But neither the functions nor the membership were fully restored. Honduras remained marginalized from the decision-making process of the C A C M . Since then, various projects of institutional restructuring have been proposed. One of the most comprehensive proposals was presented by IRELAS's staff in November 1988 as an institutional contribution to the International Commission for Recovery and Development of Central America. 55 I t combines the most recent initiatives for restructuring the C A C M with some elements suggested by the experiences of the last 20 years. The basic principle of the scheme is that the long-term interests of Central American integration demand that the organs address the political as well as the economic aspects of the process. I R E L A ' s project consists of a hierarchically organized structure w i t h clear differentiation of authority: a) the Regional Steering Committee of Vice-Presidents; b) the Committee of Ministers of Regional Integration; c) the Central American Parliament; d) the Central American 54

Institute for Latin American Integration I Inter-American Development Bank (note 45),

187-192. 55

Institute for European-Latin American Relations (note 11), 25-37.

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229

Economic and Social Council; e) a Regional Secretariat that would furnish technical and administrative support to all regional bodies. 56

Some elements of the restructuring proposal have already been materialized. For example, the Steering Committee was put into practice by the Meeting of Central American Vice-Presidents on two occasions: — The constitutive Treaty of the Central American Parliament 57 integrates the VicePresidents into the institutional structure of the Parliament and accords specific tasks in the integration process. The Treaty establishes them as the main body for promoting integration. Vice-Presidents' recommendations will be transmitted to the Presidents, who have to take the corresponding political decision. — The Vice-Presidents are responsible for all tasks related t o the United Nations' Special Plan for Economic Cooperation for Central America (PEC). These functions are formalized at the appendix of the institutional structure for the implementation of the PEC. Furthermore, the Vice-Presidents consider themselves the highest level for making decisions on all aspects related to foreign aid for supporting the integration process.

The functions of the proposed Steering Committee are partially overlapping with those of Foreign Ministers. As the second level I R E L A proposes the Committee of Ministers of Regional Integration. That means creating a separate Ministry or cabinet post. Today this level is incorporated by the Meeting of Ministers Responsible for Central American Integration and Regional Development, composed of the Ministers of Economic Affairs. Historically, they have been responsible for the economic aspects of integration. I n the September and October Meetings of 1987 it was decided that they assume responsibility for: — monitoring economic integration, instructing SIECA and other integration institutions to agree on instruments to foster regional trade, to restructure industries and t o improve agricultural production; — coordinating and supervising the international aspects of integration in its economic dimension.

I n September 1988, the Meeting of Vice-Presidents agreed that the Ministers of Economic Affairs, in their role as promotors of economic integration, would provide them w i t h the necessary support for their activities. Consequently, i t is very unlikely that in the forseeable future special Ministries will be constituted. This also means that the coordination between the different national Ministries engaged in aspects concerning regional integration will be essential, as will be cooperation between the ministerial levels and the integration institutions. Since the beginning of the 480s the idea of a regional Parliament has been promoted. Experts underline that a new dynamic for integration could be provided 56 57

Loc. cit. Institute for European-Latin American Relations , A Central American Parliament?: A

Study in Political Feasibility, Madrid 1986.

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Mechthild Minkner

by such an institution. The idea materialized rather quickly because of Guatemalan efforts, supported by cooperation by the EC. The constitutive Treaty was signed by the Presidents of the five countries in October 1987. But until May 1989, the treaty had not been ratified by the Costa Rican legislature. The Treaty proposes the constitution of three organs: a) the Meeting of Presidents as the political decision-making level; b) the Meeting of Vice-Presidents as the main counselling body; c) the Parliament itself with 20 deputies from each country, directly elected for 5 years. The character of the Parliament would be deliberative and recommendatory; it would be an organ for analysis and discussion of integrational issues, for proposals and stimulation for the integration process. I t might promote in a very significant way confidence and understanding of common interests in the region. The Parliament could strengthen the democratic values and procedures legitimating a new integration style more broadly based on the commitment of the public and the organized groups involved in the democratic election process. This involvement of constituencies might have a positive effect on the decision-making level. The expectations as to what the Central American Parliament should be are very demanding, although the extent of its stimulus to integration cannot be foreseen. The strongest opposition to the Parliament comes from Costa Rican politicians. 58 The most prominent representative is the former Minister and well-known expert on Constitutional law, Fernando Volio , of the Liberacion Nacional Party. The arguments of this fraction in the National Assembly are: — The Resolutions of the Parliament would be "binding" for Costa Rica. The content of A r t . 5 and A r t . 19 are taken as indicative for this interpretation. A r t . 5 confers to the Parliament the right to appoint to, or to remove from, their post the highest personnel of the integration bodies. A r t . 19 would oblige the Costa Rican Government t o contribute to the financing of the Parliament. — Costa Rica as a deep-rooted parliamentary democracy should not be tied in its political evolution to other countries daily threatened w i t h the return to a military government or w i t h the establishment of a "communist" model of society as in the case of Nicaragua. — National security is of greater priority than membership in the Parliament as an act of solidarity w i t h the region. — The Parliament's impact, as a purely deliberative body would be weakened further as only politicians w i t h a declining influence would be put forward for election to this regional institution.

U n t i l now, a broader public has been excluded from participating in the recommendations and decisions-making process of integration. The Central American Economic and Social Council proposed by I R E L A was already envisaged in the institutional restructuring of 1976 (project of Central American Economic and Social Community ). The Central American Economic and Social Committee was 58

Volio firme en combatir el parlamento istmico, in: La Nacion , 3. A p r i l 1989.

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conceived as an organ consisting of representatives from the non-governmental sector, especially business and labour. I R E L A ' s project includes, furthermore, representatives of non-governmental institutions (NGO's) and the churches. Experts believe that formal linkages to the organized community are vital to create firm support for integration. A t the same time, this type of council would enable broader social interests to be taken into account in a systematic manner. I t would also constitute a suitable horizontal linkage between important non-governmental groups. The Executive Commission of Esquipulas I I (Meeting of Ministers of Foreign Affairs) agreed to establish an Economic and Social Subcommission as their link w i t h the Ministers Responsible for Economic Integration. SIECA, as the Permanent Secretariat of the Common Market, is envisaged in I R E L A ' s recommendations as separate from the institutional hierarchy. By integrating representatives whose administrative activities were placed directly under the aegis of specific regional bodies into a broader technical team, intercommunication and unified decision-making should be strengthened. A t the present moment it is unlikely that these reform measures would be taken into account. But in any case, a reform of the current structure of SIECA was planned during 1987 and was put into force at the beginning of 1988. 59 The reorganization is an attempt to adapt the Permanent Secretariat to the new integration circumstances and to be able to assume important functions in the Esquipulas I I peace process. SIECA now consists of the Secretary General and the Legal Adviser, a SubSecretary and five divisions: a) Central American Common Market (day-to-day problems of trade, of industrial reactivation and complementation, of infrastructure and agriculture); b) Integration and Development (analysis and reports for the CACM-area); c) International Trade Relations (promotion of commerce to third markets); d) Information and Technical Support (data collection and processing); e) Administration and Finance. SIECA will be counselled by the former Secretaries of SIECA and by the Presidents of the regional business organizations; representatives of labour and cooperatives will be integrated at the same level. During 1988, SIECA has been putting into practice and reorganizing its working structure, which at least potentially tends to intensify concrete support to the countries engaged in the integration process. I n the last two years SIECA, together w i t h regional and international institutions, has participated decisively in elaborating proposals and plans for revitalizing the integration process and, furthermore, the whole development process in Central America. The Immediate Action Plan, 60 approved on 22 January 1988, by all pertinent regional decision-making bodies and presented to the EC for financial cooperation at the "San José I V ' - M e e t i n g in Hamburg, has been formulated by 59

Nueva Organizaciôn de la SIECA, in: SIECA , Carta Informativa, No. 318, 23, 24.

60

Cf. Report of the International Commission for Central American Recovery and Devel-

opment (note 12), Annex 1, 134-147.

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Mechthild Minkner

SIECA. The first part (Emergency Plan) was integrated in the Plan of Economic Cooperation for Central America (PEC), approved by the General Assembly of the U n i t e d Nations on 12 May 1988. The PEC comprises four priority areas, of which the t h i r d is dedicated t o the problems of economic reactivation and the consolidat i o n of interrelationship and integration in the region. T h e Central American Bank of Economic Integration (CABEI) continues t o be seen in many sectors of Central America as the unique institution which survived the integration turmoil. Nevertheless, the Bank has been affected in various ways by the crisis. Since 1986, C A B E I is engaged in adapting the institution in different areas (capital stock, personnel, organization, activities) t o new realities. Fresh resources have been provided increasing the authorized capital of the Bank and opening it to extra-regional members as well as expanding the Fund for Economic and Social Development of Central America ( F O N D E C A ) . The most significant change in institutional structure was that the President of the Bank ceased to be one of the Directors who represent their respective countries. T h e Executive President is now a regional official. This reform notably confers t o this post more independence from national interests and pressures. The new organizational structure 6 1 was adopted in January 1984, consisting of Controllership (administrative and internal auditing), Financial Management (capturing of new financing), Planning Division (internal and project planning as well as all kinds of studies for the Bank's activities), Operations Management (supervision of the offices in the member countries). Together w i t h the new institutional approach there began a shift away from financing regional projects t o supporting national projects. Since overcoming the crisis in each country this is seen as the best way t o sustain the project of integration. Furthermore, the crisis calls for a clearer policy approach by C A B E I taking into account the specific situation of each country w i t h i n the integration scheme. This orientation might lead t o considerable controversy because it w i l l deviate from the principle of giving preferential support to the less developed countries. The member countries of C A B E I identified the reactivation of industries, the expansion of agricultural production and export promotion as the today's priority areas. After more than 20 years of concentrating on credit for infrastructure, this would mean a profound reorientation in lending policy. I n order t o finance the renewed development agenda of the region and to strengthen its technical capability, the Bank is undergoing a process of operational restructuring, of reviewing policy elements and of designing new elements of control, promotion and technical cooperation. Fundamental t o the Bank's future effectiveness is the improvement and diversification of its capacity for counselling the Governments engaged in the integration process as well as the expansion of its capital basis. T h e foreign exchange and payments crisis 62 continues t o be the most critical problem for reactivating regional trade. But there has been a definitive break61

Central American Bank for Economic Integration (note 38), 63-65.

62

Cf. e. g. Lopez (note 24), 22-63\Juan Hector Vidal , Integracion economica y cooperaci-

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through neither in financing the intraregional balance of payments deficit nor in creating functioning payment instruments. The Central American Import Right ( D I C A ) is planned as a complementary and temporary measure pending the return to normalized activities of the Central American Clearing House. The D I C A is designed as an instrument for using local currencies, for providing trade credit (validity of the document: 18 months) and for serving as a mechanism of adjustment between the various exchange rates. Naturally, trade deficits originating in production problems or in foreign exchange scarcity for imports cannot be solved by D I C A . But there is also a problem with the general acceptance of D I C A as a means of payments. Only Guatemala and El Salvador use the D I C A ; Honduras and Nicaragua are acting only as issuing countries. I t means that on the one hand trade disequilibria are restricting the use of D I C A , which is designed as a multilateral instrument. O n the other hand the weakness of D I C A is that national governments try to ensure a given level of bilateral commerce. Reviewing the situation of the institutional infrastructure, it is obvious that all integration organs will continue to face significant challenges. There is the need to elaborate and implement new mechanisms as well as to adapt them to new circumstances. Some people are of the opinion that it would be of considerable advantage to rationalize the institutional framework by having fewer bodies with a clearer structure and responsibilities. Three basic problems restrict the improvement of the institutional infrastructure: a) the failure of a coherent strategy of integration, of which the restructuring of the institutional scheme is an integral part; b) the lack of institutional cooperation and of clearer responsibilities; d) weakness in technical capacity; e) failure of appropriate guidance by the political and monitoring level. 4. The Report of the Sanford Commission and the Castillo Study : Two Comprehensive Approaches to Integration and Development of Central America. In February 1989, the Comisiôn International para la Recuperacion y el Desarrollo de Centroamérica (Sanford Commission) presented its report. A t the beginning of the chapter dealing with the situation and proposals t o stimulate integration it is stated, " . . . that broad regional cooperation is essential not only for the revival of the economy in Central America but also for the strengthening of the pacification and peace p r o c e s s . . a n d " . . . that the Central American Common Market (offers) great opportunities for the recovery and development of Central America — " 6 3 The Commission recommends a number of regional policies which should be implemented in the short to medium term: 6 4 on monetaria y financiera de los Bancos Centrales de Centroamérica: experiencias y perspectivas, in: Revista de la Integracion y el Desarrollo de Centroamérica, N o . 37, 22-38. 63

International Commission for Central American Recovery and Development (note 12),

92. 64

International Commission for Central American Recovery and Development (note 12),

92-107.

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Mechthild Minkner

a) the restoration of the free trade zone, in order to reactivate regional trade and to promote exports to world markets; the provision of compensation for the disadvantaged countries; b) the coordination of national economic policies (especially monetary and exchangerate policies), essential for a maximally balanced and stable volume of trade; c) the working out of investment programmes for the promotion of regional exports, which can only be achieved by extensive cooperation between the countries and in coordination w i t h financiers and trading partners; d) the solving of the intraregional debt problem and the revival of the compensation mechanism, in order to be able to use national currencies; e) the strengthening of regional institutions, especially the SIECA, the C A B E I and the C M C A , and the promotion of institutional coherence; f) cooperation at an international level related to the Central American countries and to multilateral and bilateral institutions and to the governments.

The relatively general recommendations, which do, however, touch upon some particular weak points (