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Contents

CURRENT REPORTS

CURRENT REPORTS Investment agreements

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by Martin Khor

The tide is turning against the controver-sial system in which foreign companiesare allowed to sue governments of theirhost countries in a foreign court for mil-lions or billions of dollars.

At first it was the developing coun-tries that started to rebel against the sys-tem, known as investor-state disputesettlement (ISDS), which is embeddedwithin bilateral investment treaties(BITs) or in free trade agreements (FTAs).

South Africa, Indonesia and Boliviahave withdrawn from the BITs theysigned with other countries, followingcases taken against them by multina-tional companies that made claims of upto $3 billion, in the case of Indonesia ver-sus a British oil company.

Other developing countries are re-viewing their BITs or weighing whetherto sign up to FTAs they are negotiatingthat contain the ISDS system.

It is a matter of time before many ofthem decide to pull out or give noticethat they are allowing existing BITs toexpire without being renewed.

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More surprising is that the disquietagainst ISDS has spread to prominentdeveloped countries, their institutionsand establishment media.

The German government shockedEurope when it announced it would notsign up to a free trade agreement that theEuropean Commission had concludedwith Canada on behalf of the 28 Euro-pean Union states because it contains theISDS system. It is inconceivable that theFTA can take effect if Europe’s biggesteconomy refuses to be part of it.

Germany has also made clear it doesnot want the ISDS system to be insidethe Transatlantic Trade and InvestmentPartnership (TTIP) that the EuropeanCommission is negotiating with theUnited States.

This is a remarkable turnaroundsince Germany has been one of the mainadvocates of BITs. One reason for this isthat two cases have been brought againstthe country by a Swedish company

claiming many billions of euros of lostprofits because of new German policiesto phase out nuclear power and totighten emissions regulations in powerplants. That the country’s environmen-tal policies are being challenged in suchan audacious way, and that this is madepossible by a skewed ISDS system, out-raged the public, the parliament and thegovernment.

Germany was not the first devel-oped country to turn around. A fewyears ago, Australia decided not to en-ter any new BITs or FTAs that containISDS, after its government was sued forbillions of dollars by Philip Morris forits policy requiring minimum display ofcorporate logos on cigarette packages.The new Australian government hassince watered down this ban by consid-ering membership of FTAs with ISDS ona case-by-case basis.

Meanwhile, two of the new top offi-cials of the European Commission, thePresident and the Trade Commissioner,both made known their scepticism if notopposition to ISDS when they took of-fice a few weeks ago. The Trade Com-missioner even called ISDS “toxic”. Bothofficials hinted that they would make itdifficult for future EU trade deals to con-tain ISDS.

The new EC leaders were partly re-sponding to the European Parliament,many of whose members are stronglyopposed to having ISDS in the TTIP.

European non-governmental orga-nizations are also up in arms againstISDS, accusing the international tribu-nals that hear the cases of being heavilybiased in favour of investors and againstthe states, and also of being riddled withconflict-of-interest situations.

The same 10 to 20 law firms act aslawyers in some cases and as arbitratorsin others. In one case, the chair of a tri-bunal that ruled against Argentina waslater found to be a board member of theparent company of the firm that suedand won. Yet a review panel ruled thatthe decision would remain and that therewas no need for the case to be heardagain by another panel.

2 Tide turns on investor treaties

3 Investment treaties bring more riskthan benefit

5 Cosmetic changes to fundamentallyflawed World Bank report

7 Trade deals sow seeds of injustice

9 Water services flowing back intopublic hands

ANALYSIS11 TTIP may lead to EU dis-integration,

unemployment, instability

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Another blow against the ISDS sys-tem came when the Secretary-General ofthe OECD, the club of developed coun-tries, wrote an opinion piece on the “in-creasing problems” of the investmenttreaties.

Then the Financial Times and TheEconomist, the two most prominent pro-free enterprise newspapers in the West-ern world, also joined in the onslaughtagainst BITs. The FT even published afull-page article on what it headlined as“toxic deals.”

The winds of change were also evi-dent when many governments and or-ganizations spoke in favour of urgentreform of the whole ISDS system at theWorld Investment Forum organized by

the UN Conference on Trade and Devel-opment in Geneva in October.

The criticisms against ISDS includethat the provisions of the treaties areproblematic, the arbitration system isbiased and flawed, and that nationallaws, parliaments and government poli-cies are being seriously undermined byallowing foreign investors to bypassthem by taking up cases in internationaltribunals that do not take account of thenational laws when making their deci-sions.��

Martin Khor is Executive Director of the SouthCentre, an intergovernmental policy think-tank ofdeveloping countries, and former Director of theThird World Network. This article first appearedin The Star (Malaysia) (24 November 2014).

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by Kevin P. Gallagher

As they negotiate a mega-trade and in-vestment deal with the United States –the Transatlantic Trade and InvestmentPartnership (TTIP) – Germany and therest of Europe have recently started toquestion the merits of signing treatiesthat allow private investors to sue theirgovernments over new regulations topromote economic prosperity.

This is old news to emerging-mar-ket and developing countries that haveexperienced an onslaught of corporatesuits against their governments as theyhave attempted to foster policies for hu-man rights and environmental protectionthat create inclusive growth for their citi-zens. While Europe debates the costs andbenefits of signing a deal with the US thatallows such loopholes, pioneering na-tions such as South Africa and Ecuadoroffer sober lessons.

Both South Africa and Ecuador havebeen subject to pasts where ultra-rightregimes favoured foreign-driven elites.By the turn of the century both countrieshad toppled such regimes in favour ofnew governments focused on correctingpast inequities and putting their coun-tries on a path of broad-based equitableprosperity.

Yet, to allay fears, once these new re-gimes took office, South Africa and Ec-uador both signed or inherited whateverthey could to send the “right” signals to

the world investment community thatthey were open for business and that theboat wouldn’t be rocked.

Then each country discovered thatthey had signed on to treaties that al-lowed the very interests they toppled totake them to secret tribunals that couldpotentially overturn the very founda-tions of the new societies they sought tojustify. That’s right, if you signed a tradeor investment deal with the US or a Eu-ropean nation over the past few decades,you are under much more scrutiny thanif you are simply a member of the WorldTrade Organization (WTO), where juststates file claims against each other. Thedeals across Western and developingcountries, more often than not, allowprivate firms to directly sue a govern-ment.

In South Africa, foreign investorsfound loopholes to sue the South Afri-can government in private for its poli-cies to promote greater equality in itslucrative mining sector. South Africa hadrequired that these companies be partlyowned by “historically disadvantagedpersons.”

In Ecuador, foreign investors at-tacked the country for new environmen-tal regulations that enjoined foreignfirms to clean up their act and engagewith local and indigenous communitiesthat had long been exploited.

After foreign firms attacked theblack empowerment law, South Africaput in process an all-inclusive multi-stakeholder review of all its bilateral in-vestment treaties. The government con-cluded that these treaties were inconsis-tent with its new constitution that aimedto restore the human rights and improvethe employment prospects of South Af-ricans. Bilateral investment treaties, thereview found, “pose risks and limitationson the ability of the government to pur-sue its constitutional-based transforma-tion agenda.” Since this review, SouthAfrica has further concluded that “bilat-eral investment treaties were now out-dated and posed growing risks topolicymaking in the public interest.”

On that basis, the government hasrecently moved to terminate many of itsbilateral investment treaties. South Af-rica is far from thumbing its nose at for-eign capital. Alongside the carefully ne-gotiated withdrawal from its treaties,South Africa is willing to renegotiatethem.

Similarly, Ecuador – attacked byOccidental Petroleum corporation undersecret tribunals – has begun to withdrawfrom its treaties as well. Occidental andothers confront Ecuador’s new constitu-tion that aims to rectify past inequitiesand seek better treatment for indigenouspeoples and to protect the country’s richecological heritage.

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Both countries stand on strongmoral and economic grounds. First, bothcountries have been subject to regimesthat have exacerbated severe inequities.Second, trade and investment treatieshave not proven to deliver their prom-ised benefits.

Such treaties boast that they willbring more foreign investment and thatsuch investment boosts economicgrowth. However, the majority of eco-nomic analysis shows that such treatiesdo not bring foreign investment and thatforeign investment, when it does come,is not necessarily correlated with growth.Brazil, a nation that has refused to signsuch treaties, remains the second-largestrecipient of emerging-market and devel-oping-country foreign investment in theworld.

Indeed, a recent United NationsConference on Trade and Development(UNCTAD) report confirms that invest-ment treaties are not strongly correlatedwith attracting foreign investment. Inaddition, new research by the Peterson

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Institute for International Economics fur-ther confirms that when foreign invest-ment does come to a nation, it is not nec-essarily correlated with economicgrowth. Indeed, in many cases foreignfirms put locals out of business for animpact that is a net negative.

Both South Africa and Ecuador haveremained in good standing despite theirre-evaluation of these policies, as theGermans and other Europeans inevita-bly will as well. South Africa continuesto receive record amounts of foreign in-vestment. In the case of Ecuador, thatcountry has investments upwards of 23%of GDP, while Latin America as a wholehas investments at a mere 20.5%. More-over, Ecuador’s credit rating has beenupgraded in recent years and has pavedits way back to global capital markets –despite the country’s disdain towardobscure trade and investment treaties.

The world of global economic gov-ernance, and global capital marketsthemselves, have begun to realize thatelevating the rights of private capitalover national governments can createmore political and economic risk thanbenefit. Nations such as South Africa andEcuador should be praised for their pro-gressive action. Nations such as Ger-many and their counterparts in Europeshould follow their lead and make surethe TTIP allows for the continuity ofmarket capitalism and welfare forcitzenries.��

Kevin P. Gallagher is the author of Ruling Capi-tal: Emerging Markets and the Reregulation ofCross-border Finance. He is a professor at thePardee School of Global Studies, Boston Univer-sity. This article is reproduced from the TripleCrisis website (triplecrisis.com, 24 November2014).

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CURRENT REPORTS World Bank

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by Tiago Stichelmans

The 2015 edition of the World Bank’swidely distributed Doing Business reportreceived a lot of media attention. How-ever, it did not tackle the serious criti-cisms made by the World Bank’s Inde-pendent Evaluation Group (IEG), civilsociety organizations (CSOs) and an In-dependent Panel appointed by the Bankitself to review the report. In fact, therewere only minor changes compared withprevious versions of the report.

Created by the World Bank in 2002,Doing Business ranks the business climateof 189 countries on the basis of 10 indi-cators. The following three main changesto Doing Business 2015 fail to address fun-damental flaws.

1. Rankings: “Distance to fron-tier” to give a clearer picture of reality

The most notable change in the 2015report is the way rankings are calculated.Rankings were first introduced in 2005to make the report more influentialamong policymakers. The Bank’s chiefeconomist Kaushik Basu argues, in theforeword of the report, that rankingsmake “possible meaningful internationalcomparisons of the regulatory perfor-mance of economies, contributing, alongthe way, to increasing the accountabil-ity of political actors”.

However, after criticism by the In-dependent Panel on the methodologyused for the rankings, the Bank decidedto use a “distance to frontier” measure.This introduces a cardinal logic to therankings by indicating, in addition to therank, the actual “distance” to the bestperformance for each indicator and forthe aggregated best performance. Thischange allows clearer comparisons to bemade between countries’ performances,as well as comparisons for each country’sperformance over time. However, this isa cosmetic reform since the main featureof the report remains the ranks of eachcountry. This reform does not answer thecriticism expressed by the IndependentPanel or civil society organizations,which had called for the removal of the

aggregate rankings.The Independent Panel outlined

several problems with the rankings sys-tem in its report.

First, it explained that the rankingswere an “arbitrary method of summa-rizing vast amounts of complex informa-tion as a single number. Changing theweight accorded to a particular indica-tor can easily change an item’s ranking”.Currently, the Bank uses a subjectiveway of weighting the 10 different indi-cators’ scores to produce the aggregateranking. The ranking itself is merely thecountries put in order, according to theBank’s subjective scores. It is these finalresults that attract media attention, withlittle consideration for the information’ssubjectivity.

Second, in line with the IEG’s gen-eral criticism of the Bank’s investmentclimate work, Doing Business indicatorsdo not consider the social or economicbenefits of regulation, making therankings a dubious measure in terms ofthe Bank’s goals of eradicating povertyand promoting shared prosperity. TheBank defines Doing Business as an at-tempt to measure how governments pro-vide a positive business environment.According to the Bank, governmentsshould fight against “excessively bur-densome regulations [which] can lead tolarge informal and less-productive sec-tors, less entrepreneurship and lowerrates of employment growth”. However,as many experts have pointed out, notall the indicators are self-evidentlylinked to higher rates of economicgrowth. For example, the US EconomicPolicy Institute showed in a study thatlow corporate tax rates do not necessar-ily increase the rate of economic growth.Taking this into consideration, the levelof corporate taxation in the “payingtaxes” indicator is misleading.

Furthermore, there is no empiricalevidence that the rankings are linked topoverty impact or even to economicgrowth, which is the core attack from

emerging markets on the report. For ex-ample, many of the world’s fastest-grow-ing economies come very low down thelist – China is at number 90, India is at142 – while poor economic performancecan happily coincide with excellent Do-ing Business scores. For example,Macedonia (2.1% average economicgrowth between 2010 and 2013) is atnumber 30 and South Africa (2.7% aver-age economic growth between 2010 and2013) is at number 43. In that sense, Do-ing Business rankings push for de-regu-latory reforms without clear evidencethat these are important for achieving theBank’s goals. This situation led someemerging countries to attack the report,leading to its review. Their critiques aresummarized in the Independent Panelreport.

Third, rankings tend to push coun-tries to manipulate the indicators to im-prove their rankings instead of trying toimprove the reality that the indicators tryto capture. In 2012, Russian PresidentVladimir Putin ordered the governmentto improve Russia’s Doing Business rank-ing from 120th in 2011 to 50th by 2015and 20th in 2018. Although the 2015 tar-get was missed, Russia witnessed a no-table improvement, as it is currentlyranked at 62. Analysis by the Russiandaily newspaper Kommersant, however,reveals that this improvement is basedon cosmetic reforms and not on a realimprovement in the business environ-ment in Russia. The ease with which re-sults can be manipulated and the waythat this tends to shift the focus of gov-ernments away from reforms with realimpact on development is a major con-cern.

Eurodad’s main concern is that theypush countries to dedicate important ef-forts to improving their rankings, despitethe fact that these reforms may not bringany benefits to their poorest population,and may divert attention and effortsfrom other, more important reforms. Inso far as the rankings promote contro-versial policies, they can even be harm-ful to the poor. Given that the rankingsare highly subjective and are not statis-tically sound, Eurodad is among themany voices that are calling for them tobe abandoned. Furthermore, as abenchmarking exercise, Doing Businessgives the idea that business environ-ments should be inspired by “best” prac-tices. This conception of a policy reformagenda denies the fact that every coun-try lives in a specific and complex con-text, which should be the starting pointin determining the kind of reforms that

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CURRENT REPORTS World Bank

are needed.2. Inclusion of a second city for

the 11 biggest economiesPreviously, the Doing Business data

was collected on the basis of a standard-ized scenario of the business regulationsfaced by a fictitious firm that has 60 em-ployees, is based in the country’s largestbusiness city, and has exports worthmore than 10% of its sales (among othercharacteristics). This year, the secondlargest city was included in the datasample of the 11 countries with morethan 100 million inhabitants.

The Bank claims that this reform isan answer to the Independent Panel re-port and its methodological recommen-dations. The Panel criticized the fact thatusing only one city “has the potential tocreate a distorted picture in larger coun-tries and those with a federal system”.However, the data sample still ignoresrural areas where many small- and me-dium-sized enterprises (SMEs) are lo-cated in the developing world.

The Bank has ignored other impor-tant critiques regarding its methodologi-cal approach to data collection, in par-ticular, the use of law firms as the mainsource of data. This approach impliesthat data may be disconnected from re-ality on the ground. Concrete applicationof laws and regulations, as well as cor-ruption, are absent from the report. Thiscan push governments to focus on thereform of their regulatory frameworkwith little regard for its concrete imple-mentation. The Doing Business team triedto resolve this by expanding the datacollected for several of its indicators (seebelow) but, as pointed out by the Inde-pendent Panel, “there are inherent lim-its to what their methodology canachieve”.

In addition, the Independent Panelpoints to the “one size fits all” approachof the report’s methodology, which fo-cuses on “whether one specific rule doesor does not exist in different countries.This effectively disregards other legalsolutions that achieve the same goal.”

3. Changes within the indicatorsDoing Business expanded the data

collected for three out of its 11 indica-tors (the 2016 edition will include an ex-pansion of five other indicators). Theobjective of this expansion is to improvethe assessment of the quality of the regu-lations. This year, the report introducesmore features on the strength of legalrights and depth of credit informationand on minority shareholders’ rights. It

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CURRENT REPORTS Intellectual property

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Trade agreements have become a tool ofchoice for governments, working withcorporate lobbies, to push new rules torestrict farmers’ rights to work withseeds. Until some years ago, the mostimportant of these was the World TradeOrganization (WTO)’s Agreement onTrade-Related Aspects of IntellectualProperty Rights (TRIPS). Adopted in1994, the TRIPS Agreement is the first in-ternational treaty to establish global stan-dards for “intellectual property” rightsover seeds. The goal is to ensure thatcompanies like Monsanto or Syngenta,which spend money on plant breedingand genetic engineering, can controlwhat happens to the seeds they produceby preventing farmers from reusingthem – in much the same way as Holly-wood or Microsoft try to stop peoplefrom copying and sharing films or soft-ware by putting legal and technologicallocks on them.

But seeds are not software. The verynotion of “patenting life” is hugely con-tested. For this reason, the WTO agree-ment was a kind of global compromisebetween governments. It says that coun-tries may exclude plants and animals(other than microorganisms) from theirpatent laws, but they must provide someform of intellectual property protectionover plant varieties, without specifyinghow to do that.

Trade agreements negotiated out-side the WTO, especially those initiatedby powerful economies of the globalNorth, tend to go much further. Theyoften require signatory countries topatent plants or animals, or to follow therules of the Geneva-based Union for theProtection of New Plant Varieties(UPOV) that provide patent-like rightsover crop varieties. Whether in the formof patent laws or UPOV, these rules gen-erally make it illegal for farmers to save,exchange, sell or modify seeds they savefrom so-called protected varieties. In fact,in 1991 the UPOV convention was modi-fied to give even stronger monopolypowers to agribusiness companies at theexpense of small and indigenous farm-ing communities. This 1991 version of

UPOV now gets widely promotedthrough trade deals.

The North American Free TradeAgreement – signed by Mexico, Canadaand the US, at about the same time theTRIPS Agreement was being finalized –was one of the first trade deals negoti-ated outside the multilateral arena tocarry with it the tighter seedprivatization noose. It obliged Mexico tojoin the UPOV club of countries givingexclusive rights to seed companies tostop farmers from recycling and reusingcorporate seeds. This set a precedent forall US bilateral trade agreements thatfollowed, while the European Union, theEuropean Free Trade Association (EFTA,composed of Iceland, Liechtenstein, Nor-way and Switzerland) and Japan alsojumped on the same idea.

A non-stop process of diplomaticand financial pressure to get countriesto privatize seeds “through the backdoor” (these trade deals are negotiatedin secret) has been going on since then.The stakes are high for the seed indus-try. Globally, just 10 companies control55% of the commercial seed market.

But for these corporations, that mar-ket share is still not enough. Across Asia,Africa and Latin America, some 70-80%of the seeds farmers use are farm-savedseeds, whether from their own farms orfrom neighbours or nearby communities.In these unconquered territories, theagribusiness giants want to replace seedsaving with seed markets and take con-trol of those markets. To facilitate this,they demand legal protections from gov-ernments to create and enforce corporatemonopoly rights on seeds. This is wherefree trade agreements (FTAs) come in asa perfect vehicle to force countries tochange their laws.

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GRAIN has been tracking how tradedeals signed outside the multilateral sys-tem are coercing countries to adopt theindustry’s wishlist of intellectual prop-erty rights for seeds, and ratchet up glo-bal standards in that process, for 15

years. A recent update of our dataset(www.grain.org/attachments/3247/download) shows that this trend is notletting up. In fact, there are worrisomesigns on the horizon.

� The most important recent gainsfor Monsanto, DuPont, Limagrain andSyngenta – the world’s top seed compa-nies – have come from new trade dealsaccepted by Latin American states. In2006, the US (home to Monsanto andDuPont) closed major deals with Peruand Colombia forcing both countries toadopt UPOV 1991. The EFTA states(home to Syngenta) did the same in 2008and the EU (home to Limagrain) in 2012.In Central America, a similar patternoccurred. The US secured a very power-ful Central America Free Trade Agree-ment (CAFTA) in 2007, forcing all coun-tries to adhere to UPOV 1991. EFTA didthe same last year.

� An important step towards stron-ger proprietary seed markets was re-cently taken in Africa. After 10 years oftalks, Economic Partnership Agreements(EPAs) were concluded between the EUand sub-Saharan African states in 2014.Most of them “only” liberalize trade ingoods for now, but also contain a com-mitment to negotiate common intellec-tual property standards with Brussels.The expectation is that those standardswill be based on what the Caribbeanstates already agreed to in their 2008EPA: an obligation to at least considerjoining UPOV. This is significant becauseuntil now African states have been un-der no obligation to adopt UPOV as astandard, and actually tried to come upwith their own systems of plant varietyprotection. And while it’s true that Afri-can entities like the anglophone AfricanRegional Intellectual Property Organiza-tion (ARIPO) and the francophone Afri-can Intellectual Property Organization(OAPI) are already joining UPOV, un-der the EU trade deals, countries them-selves would be the ones to join. Furthertowards the horizon, Africa is harmoniz-ing within itself as its subregional tradeblocs merge and unite to form a singlecontinental free trade zone, supposedlyby 2017. This is expected to bring with itan internal harmonization of intellectualproperty laws across the continent, likelytightening the noose even further.

� The Trans-Pacific Partnership(TPP) agreement is possibly the scariestFTA under negotiation right now interms of what it may do to farmers’ rightsto control seeds in Asia and the Pacific.This is because the US, which is leadingthe talks with 11 other Pacific Rim coun-

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CURRENT REPORTS Intellectual property

tries, is playing hardball. Leaked nego-tiating text from May 2014 shows the UScalling not only for UPOV 1991 to beapplied in all TPP states but also for theoutright patenting of plants and animals.We don’t yet know whether these de-mands will also appear in the Transat-lantic Trade and Investment Partnership(TTIP) currently being negotiated be-tween the US and the EU, as the text re-mains inaccessible to the public.

� While the extent of what has tobe privatized expands, so do the penal-ties for disrespecting these norms. Un-der numerous FTAs, countries like theUS require that farmers who infringe onthese new intellectual property rights onseeds face punishment under criminallaw instead of civil law. In some cases,like the recently concluded EU-CanadaComprehensive Economic and TradeAgreement (CETA), the mere suspicionof infringement could see a farmer’s as-sets seized or their bank accounts frozen.

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The good news is that social move-ments are not taking this sitting down.They are becoming very active, vocal,bold and organized about this. In 2013,Colombians from all walks of life wereshaken up when they saw firsthand howUS and European FTAs could result intheir own government violently destroy-ing tonnes of seeds saved by farmerswho did not know what the new ruleswere. The outrage, breaking out in themidst of a massive national agrarianstrike, was so strong that the governmentactually agreed to suspend the law tem-porarily and re-examine the issue di-rectly with farmers’ representatives.

In 2014, it was Guatemala’s turn tobe rocked when the general public real-ized that the government was pushingthrough the adoption of UPOV 1991without proper debate because of tradedeals like CAFTA. People were furiousthat indigenous communities were notconsulted as is required, especially whenthe purpose of the law – ultimately – isto replace indigenous seeds with com-mercial seeds from foreign companieslike Monsanto or Syngenta. After monthsof pressure, the government backeddown and repealed the law. But – as inColombia – this retreat is only temporarywhile other measures will be looked at.In yet other parts of Latin America, likein Chile and Argentina, new laws toimplement UPOV 91, often dubbed“Monsanto Laws”, are also being in-tensely and successfully resisted by so-cial movements.

In Africa too, waves of public pro-

test are rising against the plant varietyprotection regimes which countries arenow going into. In Ghana, a vibrant cam-paign is under way to stop the countryfrom adopting UPOV 1991 legislation.Elsewhere, civil society networks like thebroad-based Alliance for Food Sover-eignty in Africa are filing appeals to stopARIPO from adopting UPOV-based leg-islation and joining the union.

Corporate interest groups havepushed too far trying to privatize whatpeople consider a commons. This is notlimited to seeds. The same process hasbeen going on with land, minerals, hy-drocarbons, water, knowledge, theInternet, even important microorgan-isms, like avian flu a few years ago orthe Ebola virus today. People are fight-ing back to stop these things falling un-

der the exclusive control of a few corpo-rations or defence ministries. A goodway to take part in this battle is to jointhe campaigns to stop important newtrade deals like TTIP, CETA, TPP and theEPAs – and to get old ones like the USand European deals with Mexico, Cen-tral America, Colombia or Chile re-scinded. Trade deals are where a lot ofthese rules do get written and that iswhere they should be erased.��

GRAIN is a small international non-profit orga-nization that works to support small farmers andsocial movements in their struggles for commu-nity-controlled and biodiversity-based food sys-tems. This article is reproduced from “Trade dealscriminalise farmers’seeds”, which was publishedas part of the Against the Grain series of opinionpieces on recent trends and developments in theissues that GRAIN works on (www.grain.org/ar-ticle/categories/13-against-the-grain).

also introduces a measure of the strengthof the legal framework for insolvency.

In general, this reform fails to solvemost of the problems with the indicators.As pointed out by the IndependentPanel, there is no “scientific evidence tosupport the report’s current selection ofindicators”. The report fails to explainhow the selection of indicators is relevantto the Bank’s goals of eradicating pov-erty and promoting shared prosperity.It seems that the main rationale behindthe selection of criteria is the idea thatregulation is always “red tape” that pre-vents business development, job cre-ation, economic growth and ultimatelypoverty eradication.

In addition, some indicators needadditional information in order to givea relevant assessment of the area they arecovering. From that perspective, the ex-tension of the qualitative aspects of theindicators is a step in the right direction.For example, the inclusion of “reliabil-ity of supply” in the “getting electricity”indicator will give a clearer picture of thereality. The same kind of reform shouldhave been designed for the “gettingcredit” indicator, which does not includeany measure of the availability of creditfor firms.

This misleading indicator drove theZambian government to undertake a re-form programme that improved its “get-ting credit” ranking. According to a pa-per produced by the Jesuit Centre forTheological Reflection and the Catholicaid agency CAFOD, this programme hadlittle impact on local micro and smallenterprises. These smaller businesses arelargely excluded from the reforms or arelacking the information about how to

benefit from them. Such reforms are anexample of an intervention designed toimprove a country’s ranking and to at-tract foreign direct investments over pri-oritizing the real needs of local andsmaller businesses.

Two other indicators are particularlyproblematic. Despite data from the“labour market regulation” indicator notaffecting a country’s overall ranking, thisinformation is still collected and in-cluded on the Doing Business website.This indicator continues to see labourmarket regulations in terms of costsrather than benefits. It has been widelycriticized by many actors, including theInternational Trade Union Confedera-tion (ITUC).

Finally, the “paying taxes” indicatorcontinues to reward lower corporate taxrates, although not automatically. This“race to the bottom” has negative effectson development, as outlined by a recentInternational Monetary Fund (IMF) pa-per.

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Doing Business 2015 comes at the endof an extensive review process. How-ever, it does little to address the majorconcerns that were raised during thatprocess. The result is a highly publicizedreport that tells us very little, has lim-ited relevance to poverty alleviation, andmay end up promoting the wrong re-forms. If the report continues in its cur-rent manifestation, CSOs, includingEurodad, will continue to oppose thismisguided exercise.��

Tiago Stichelmans is Policy and Networking Ana-lyst at Eurodad, the European Network on Debtand Development, from the website of which(eurodad.org) this article is reproduced.

(continued from page 6)

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CURRENT REPORTS Essential services

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by Emanuele Lobina, Satoko Kishimoto and Olivier Petitjean

Cities, regions and countries worldwideare increasingly choosing to close thebook on water privatization and to“remunicipalize” services by taking backpublic control over water and sanitationmanagement. In many cases, this is a re-sponse to the false promises of privateoperators and their failure to put theneeds of communities before profit.

A new report, “Here to Stay: WaterRemunicipalisation as a Global Trend”,published by Public Services Interna-tional Research Unit (University ofGreenwich), Transnational Institute andMultinational Observatory looks at thegrowing remunicipalization of watersupply and sanitation services as anemerging global trend and presents themost complete overview of cases so far.In the last 15 years there have been atleast 180 cases of water remunicipaliza-tion in 35 countries, in both the globalNorth and South, including high-profilecases in Europe, the Americas, Asia andAfrica. Major cities that haveremunicipalized include Accra (Ghana),Berlin (Germany), Budapest (Hungary),Buenos Aires (Argentina), KualaLumpur (Malaysia), La Paz (Bolivia),Maputo (Mozambique) and Paris(France). By contrast, in this same periodthere have been very few cases ofprivatization in the world’s large cities:for example Nagpur (India), which hasseen great opposition and criticism, andJeddah (Saudi Arabia).

Despite more than three decades ofrelentless promotion of privatization andpublic-private partnerships (PPPs) by in-ternational financial institutions and na-tional governments, it now appears thatwater remunicipalization is a policy op-tion that is here to stay. Direct experi-ence with common problems of privatewater management – from lack of infra-structure investments to tariff hikes toenvironmental hazards – has persuadedcommunities and policymakers that thepublic sector is better placed to providequality services to citizens and promotethe human right to water.

Remunicipalization refers to the re-turn of previously privatized water sup-ply and sanitation services to local au-thorities or to public control morebroadly speaking. This typically occursafter the termination of private contractsby local governments or their non-re-newal, but the process is not always (oronly) on a municipal scale. Regional andnational authorities have considerableinfluence over services funding andpolicy, and in some cases act directly aswater operators, so the process unfoldswithin this broader context.

Whatever its form and scale,remunicipalization is generally a collec-tive reaction against the unsustainabilityof water privatization and PPPs. Becauseof the unpopularity of privatization, pri-vate water companies have used theirmarketing propaganda to encouragepeople to believe that concessions, leasecontracts and other PPPs are quite dis-tinct from privatization; they are not. Infact, all these terms refer to the transferof services management control to theprivate sector. Policymakers must beaware of the high costs and risks of wa-ter privatization, and as such they havea lot to learn from the experiences ofpublic authorities which have chosenremunicipalization and are working todevelop democratically accountable andeffective public water operations.

The key findings of the “Here toStay” report are as follows:

1. Water remunicipalization is anemerging global trend

As of October 2014, the global list ofknown water remunicipalizations thatoccurred from 2000 to 2014 features 180cases. As the mapping of this process isstill in its early days, we expect manymore cases to come to light as workprogresses. This strong remunicipali-zation trend is observable both in theglobal North and in the global South: 136cases were found in high-income coun-tries – where local authorities benefitfrom greater administrative resourcesand are less subject to the lending con-

ditionality of multilateral banks –whereas 44 cases were from low- andmiddle-income countries.

In the global North, the list of citiesthat have remunicipalized their waterservices includes capitals such as Paris(France) and Berlin (Germany) and ma-jor US cities such as Atlanta and India-napolis. Beyond the symbolically pow-erful cases of cities like Paris, manysmaller municipalities are opting forpublic control as well: for example, inFrance alone more than 50 municipali-ties have terminated their private man-agement contracts or decided not to re-new them. In the global South,remunicipalization also involves formerflagships of water privatization, includ-ing Buenos Aires (Argentina), La Paz(Bolivia), Johannesburg (South Africa),Dar es Salaam (Tanzania) and KualaLumpur (Malaysia). In Jakarta (Indone-sia), there is also a strong ongoing cam-paign to remunicipalize the city’s waterservices.

2. Remunicipalization is accelerat-ing dramatically

The number of cases in high-incomecountries shows a marked acceleration:81 took place between 2010-14, whileonly 41 had occurred between 2005-09.Thus the pace of remunicipalization hasdoubled over the last five years. Thistrend is even stronger in some countriessuch as France: eight cases between 2005-09 compared to 33 cases since 2010. Thehigh-profile 2010 remunicipalization inParis in particular has influenced manyother municipalities in and outsideFrance such as Spain.

3. Reasons to remunicipalize areuniversal

As illustrated by the cases discussedin the report, the factors leading to wa-ter remunicipalization are similar world-wide. The false promises of waterprivatization that have led toremunicipalization include: poor perfor-mance of private companies (e.g., in Dares Salaam, Accra, Maputo), under-in-vestment (e.g., Berlin, Buenos Aires), dis-putes over operational costs and priceincreases (e.g., Almaty, Maputo, India-napolis), soaring water bills (e.g., Berlin,Kuala Lumpur), difficulties in monitor-ing private operators (e.g., Atlanta), lackof financial transparency (e.g., Grenoble,Paris, Berlin), workforce cuts and poorservice quality (e.g., Atlanta, Indianapo-lis).

4. Remunicipalization is more of-

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CURRENT REPORTS Essential services

ten initiated through termination ofprivate contracts

Most cases of remunicipalizationaround the world have occurred follow-ing the termination of private contractsbefore they were due to expire, with theexception of France where most localgovernments have waited until the re-newal date to end water privatization.At the global level, 92 cases ofremunicipalization followed contractualtermination, while 69 cases were non-renewals of private contracts after ex-piry. This means that in the great major-ity of cases, private contracts proved sounsustainable that local governmentsopted to remunicipalize even thoughthey knew that they may have to paycompensation. While the best way toavoid the costs of remunicipalization isnot to privatize in the first place, this alsosuggests that terminating a private con-tract is feasible and often less costly thancontinuing with privatization in the longrun.

5. Leading the remunicipalizationtrend are countries with long experienceof private water management

It is no accident that France, thecountry with the longest history of wa-ter privatization and home to the lead-ing water multinationals, presents somany cases of remunicipalization.French local authorities and citizens haveexperienced firsthand the “private man-agement model” that Veolia and Suezhave exported around the world. In thepast few years, many French cities havedecided to follow in the footsteps ofGrenoble and Paris and take back con-trol of their water services. An evenlarger number of contracts are comingup for renewal in the next few years andit is expected that many more French cit-ies will remunicipalize.

6. Remunicipalization tends to im-prove access and quality of water ser-vices

By eliminating the profit maximiza-tion imperative of the private sector,water remunicipalization often leads toenhanced access and quality of services.The equal or greater efficiency of publicwater services and lower prices can beobserved in cases as diverse as Paris(France), Arenys de Munt (Spain) andAlmaty (Kazakhstan). In some cases thenew public operators also dramaticallyincreased investments in the water sys-tems, such as in Grenoble (France),

Buenos Aires (Argentina) and Arenys deMunt (Spain). The social benefits of wa-ter remunicipalization have been visiblein Arenys de Munt (Spain), where thelocal government and the new publicoperator restructured the tariff system toguarantee access to water for low-incomehouseholds. In Buenos Aires (Argen-tina), achieving universal access to wa-ter has become a top priority for the newpublic operator AySA. Since remunici-palization, AySA has extended trainingprogrammes for employees who workwith poor neighbourhood residents toexpand service access.

7. Remunicipalization offers op-portunities to build democratic gover-nance

Remunicipalization allows forstrengthening accountability and trans-parency. In Paris and Grenoble (France),the new public water operators have in-troduced advanced forms of public par-ticipation. First, civil society representa-tives sit on the board of directors togetherwith local government representatives,and have equal voting rights. This allowscivil society to partake in decisions onthe management of this most essentialpublic service, and to make operationsresponsive to the interests of local com-munities. Second, citizen observatorieshave been established to open spaces forcitizens to engage in strategic decisionson investment, technology options andtariff setting. Both cities consider that fullinformation disclosure is a fundamentalcondition for accountability, transpar-ency and participation.

8. Remunicipalization carries exter-nal risks including possible litigation

Successful remunicipalization re-quires careful planning and assessmentof external risks, even more so for coun-tries of the South which are under thegrip of pro-private multilateral agencies.Decision-makers need to be aware thattransaction costs of remunicipalizationmay include paying compensation toprivate operators for their foregone prof-its. When a private contract is terminatedbefore its expiry date, private companiescan sue local governments to receivepayment of the full profits granted un-der the contract.

A private concessionaire in Arenysde Munt (Spain) fiercely obstructed theremunicipalization process by filingcomplaints against the city council. TheUS city of Indianapolis was forced to pay

a $29 million fee to French multinationalVeolia to terminate the 20-year contractover a decade early. Berlin residents havehad to accept very high costs to buy backthe shares held by two private operators.Private concessionaires sued Tucumanand Buenos Aires (Argentina) before aninternational arbitration tribunal to ob-tain compensation. The risk of having topay hefty compensation can distort thedecision-making process of local govern-ments which are considering terminationand remunicipalization (e.g., Jakarta,Indonesia; Szeged, Hungary; Arezzo,Italy). But in other cases the potentialbenefits are so clear that local authori-ties are ready to face such risks.

9. Public-public partnerships cansupport remunicipalization efforts

Public water operators and nationalor regional associations are increasinglyhelping each other through theremunicipalization process. In Spain, theregional public company Aguas delHuesna (Andalusia) facilitatedremunicipalization for 22 municipalities.The remunicipalized water operatorsfrom Paris and Grenoble played a keyrole in helping other local authorities inFrance and elsewhere to remunicipalizeand improve their water services. Frenchlocal authorities and public water opera-tors have benefited from the exchangeof experience and knowledge onremunicipalization that has been facili-tated by associations of local govern-ments and public enterprises. The re-gional institution CONGIAC inCatalonia also played a key role inArenys de Munt’s remunicipalizationprocess from decision making to imple-mentation. There are other such ex-amples across boundaries: After failedPPP experiments, the Mozambican gov-ernment entered into a not-for-profitpartnership with a Dutch public watercompany focusing on local capacitybuilding. Cooperation between publicwater companies as part of public-pub-lic partnerships is a viable alternative tocostly PPPs and the most effective wayto assist public water authorities in im-proving services.��

The above is extracted from the report “Here toStay: Water Remunicipalisation as a GlobalTrend” (November 2014) published by PublicServices International Research Unit (PSIRU),University of Greenwich; Transnational Institute(TNI); and Multinational Observatory. The fullreport is available on the PSIRU websitewww.psiru.org.

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Analysis

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by Jeronim Capaldo

The European Union and the United States are currently ne-gotiating the Transatlantic Trade and Investment Partnership(TTIP), a major trade agreement intended to further integratetheir economies.

In today’s low-tariff reality, TTIP focuses on removingnon-tariff trade barriers between countries, such as differingstandards set in the EU and in the US for given consumer goodsand services. The underlying logic is the same as in traditionalliberalizations: reducing the costs of trade – whether elimi-nating tariffs or other impediments – is supposed to lead to ahigher trade volume and overall economic benefits.

Unfortunately, experience has shown that this appealingreasoning is often misleading.

As is common for trade agreements, TTIP negotiationshave been accompanied by a series of econometric studies pro-jecting net economic gains for all countries involved. In theEU, advocates have pointed to four main studies mostly pro-jecting small and deferred net benefits alongside a gradualsubstitution of intra-EU trade with trans-Atlantic trade.

This leads the European Commission, TTIP’s main advo-cate in Europe, into a paradox: its proposed policy reformwould favour economic dis-integration in the EU. TTIP mightalso lead to other serious consequences for the EU and itsmembers. Recent literature has shown that the main studiesof TTIP do not provide a reliable basis for policy decisions asthey rely heavily on an unsuitable economic model.

Assessing TTIP with the United Nations Global PolicyModel, a model based on more plausible assumptions on eco-nomic adjustment and policy trends, we found very differentresults. Evaluated with the UN model, TTIP would lead to netlosses in terms of GDP, personal incomes and employment inthe EU.

In particular, we project that labour incomes will decreasebetween 165 and 5,000 euros per worker depending on thecountry. We also project a loss of approximately 600,000 jobs,a continuing downward trend of the labour share in total in-come, and potentially destabilizing dynamics in asset prices.

Our projections point to bleak prospects for EUpolicymakers. Faced with higher vulnerability to any crisescoming from the US and unable to coordinate a fiscal expan-sion, they would be left with few options to stimulate theeconomy: favouring an increase of private lending (with therisk of fuelling financial imbalances), seeking competitive de-valuations or a combination of the two.

We draw two general conclusions. First, as suggested inrecent literature, existing assessments of TTIP do not offer a

suitable basis for important trade reforms. Indeed, when awell-reputed but different model is used, results change dra-matically.

Second, seeking a higher trade volume is not a sustain-able growth strategy for the EU. In the current context of aus-terity, high unemployment and low growth, requiring thateconomies become more competitive would further harm eco-nomic activity. Our results suggest that any viable strategy torekindle economic growth in Europe would have to build ona strong policy effort in support of labour incomes.

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Most assessments of TTIP predict gains in terms of tradeand GDP for both the EU and the US. Some also predict gainsfor non-TTIP countries, suggesting that the agreement wouldcreate no losers in the global economy. If this were the case,TTIP would be the key to a more efficient allocation of globalresources, with some countries achieving higher welfare andall others enjoying at least the same welfare as before.

Unfortunately, as Raza and colleagues (2014) have shown,these desirable results rely on multiple unrealistic assump-tions and on methods that have proven inadequate to assessthe effects of trade reform.

Furthermore, once the calculations are reviewed, it ap-pears that several of these studies share the same question-able economic model and database. The convergence of theirresults is, therefore, not surprising and should not be taken asproviding independent confirmation of their predictions.

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Quantitative arguments in favour of TTIP come mostlyfrom four widely cited econometric studies: Ecorys (2009),CEPR (2013), CEPII (2013) and Bertelsmann Stiftung (2013).

CEPR has been very influential: the European Commis-sion has relied on it as the main analysis of the economic ef-fects of TTIP, going as far as presenting some of its findings asfacts. However, the EC’s reference to CEPR as an “indepen-dent report” seems misleading since the study’s cover pageindicates the EC as the client for whom the study has beenproduced. Ecorys was also commissioned by the EC as part ofa wider project encompassing economic, environmental andsocial assessments.

Methodologically, the similarities among the four studiesare striking. While all use World Bank-style Computable Gen-

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Analysis

eral Equilibrium (CGE) models, the first two studies also useexactly the same CGE. The specific CGE they use is called theGlobal Trade Analysis Project (GTAP), developed by research-ers at Purdue University. All but Bertelsmann use a version ofthe same database (again from GTAP).

The limitations of CGE models as tools for assessment oftrade reforms emerged during the liberalizations of the 1980sand 1990s. The main problem with these models is their as-sumption on the process leading to a new macroeconomicequilibrium after trade is liberalized.

Typically, as tariffs or trade costs are cut and all sectorsbecome exposed to stronger international competition, thesemodels assume that the more competitive sectors of theeconomy will absorb all the resources, including labour, re-leased by the shrinking sectors (those that lose business to in-ternational competitors).

However, for this to happen, the competitive sectors mustexpand enough to actually need all those resources. Moreover,these resources are assumed to lack sector-specific features,so they can be re-employed in a different sector.

Under these assumptions, an assembly-line employee ofan automobile factory can instantly take up a new job at a soft-ware company as long as her salary is low enough. Suppos-edly, this process is driven by speedy price changes that allowan appropriate decrease of labour costs and, consequently, thenecessary expansion of the competitive sectors.

In practice, however, this “full employment” mechanismhas rarely operated. In many cases, less competitive sectorshave contracted quickly while more competitive ones haveexpanded slowly or insufficiently, leaving large numbers ofworkers unemployed. One need only look at the experienceof Europe in the last decade to see that full employment doesnot re-establish itself even if job seekers are willing to workinformally and at relatively low pay.

A critical point is that the distribution of gains and lossesis rarely uniform within economies. If workers in competitivesectors may benefit from higher salaries, while those in shrink-ing sectors lose, the economy as a whole may be worse off.This is because in some countries domestic demand is mostlysupported by the incomes earned in traditional occupations.In practice, aside from their high social costs, these transitionshave led to a drop in domestic demand that CGE-based calcu-lations have often overlooked.

Moreover, most CGEs rely on misleading assumptions onthe pattern of international trade, imposing a fixed structureon the market share that each country has in its export mar-kets, and on a static analysis that does not explain how econo-mies reach a new equilibrium.

For example, when Country A expands trade with Coun-try B, the rest of the world’s economies do not simply standstill. Countries C, D and E will find that they are more or lesscompetitive in these markets as a result of the A-and-B tradechanges. This effect is known as “trade diversion”, and hasbeen a significant by-product of recent trade integration ini-tiatives.

Finally, the strategy chosen to simulate a “TTIP future”has a strong impact on the results. Ecorys assumes that so-called “non-trade barriers” impose a given cost on trade andthat TTIP can remove up to one half of them. CEPR and CEPIIborrow this approach but assume a lower share. These barri-ers can include what other stakeholders refer to as consumerand environmental regulations. Phasing them out may be dif-

ficult and could impose important adjustment costs not cap-tured by the models.

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All assessments project large increases in bilateral US andEU exports. In CEPR and CEPII, US bilateral exports increaseby 36.6% and 52% respectively in the long term, compared to28% and 48% for the EU. According to CEPR, the net increasein total exports will be 8% in the US and 5.9% in the EU.

However, in all cases, these increases in trans-Atlantictrade are achieved at the expense of intra-EU trade. Implic-itly, this means that imports from the US and imports fromnon-TTIP countries through the US will replace a large por-tion of current trade among EU countries.

If these projections were true, higher trans-Atlantic inter-dependence would heighten the EU’s exposure to fluctuationsin US import demand. This is an under-examined consequenceof certain patterns of trade liberalization. Even if higher ex-ports were to bring higher demand and economic activity (alink that doesn’t always work in practice, as discussed), morereliance on the US as an export market would also make theEU vulnerable to macroeconomic conditions in North America.

If Europe could effectively implement countercyclicalpolicies, this greater interdependence would not necessarilybe a problem. However, the EU’s current institutional struc-ture lacks a central fiscal authority while in practice prevent-ing national governments, through the Maastricht treaty, fromimplementing any fiscal expansion. This constellation of fac-tors indicates that TTIP might usher in a period of higher in-stability in Europe.

The remaining two studies raise similar concerns. InBertelsmann, aggregate figures for bilateral export increase andnet increase are not readily available but results exhibit thesame pattern as in other studies.

While bilateral exports are predicted to increase by morethan 60% for the EU and more than 80% for the US, intra-EUexports are expected to decrease between 25% and 41%. Thisimplication raises the same concerns about vulnerability toUS economic shocks as the other studies.

Finally, as noted above, the rest of the world does not standstill when two economies integrate. Applying Bertelsmann’spercentages to recorded trade data with EU exports to theworld as a whole, Raza et al. (2014) calculate that the overallimpact of TTIP on EU global exports, including those to non-TTIP countries, would be negative.

Furthermore, Felbermayr and Larch (2013) find that TTIPwill have a negative effect on non-TTIP countries’ exports, ina pattern observed after other trade agreements. In otherwords, both exports and imports of non-TTIP countries areprojected to decrease, with uncertain or negative net effects.

CEPR and CEPII do not find negative effects on non-TTIPcountries, assuming ad hoc effects (spillovers) that allow ex-ports in the rest of the world to grow.

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Given the small net effects on exports, most assessmentspredict small increases in TTIP countries’ GDP.

In Ecorys, CEPR and CEPII, GDP increases less than 0.5%in both the EU and the US. This means that, at the end of thesimulation period in 2027, GDP would be 0.5% higher in a

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TTIP scenario than in the baseline, non-TTIP scenario, imply-ing negligible effects on annual GDP growth rates.

This is a defining aspect of the results: Ecorys, CEPR andCEPII point to a one-time increase in the level of GDP, not toan increase in the growth rate of GDP. Furthermore, this one-time increase is small and projected to occur only over thecourse of 13 years.

Bertelsmann reports higher figures (5.3% for the EU and13.9% for the US) but provides little detail on the study’s meth-odology. It is, therefore, unclear how the results compare tothose of other studies.

Furthermore, given the assumptions on spillover effects,CEPR estimates that all regions of the world would benefitfrom long-term GDP increases. However, Felbermayr andLarch (2013) indicate that this expectation contradicts previ-ous experiences of trade agreements such as CUSFTA, NAFTAand MERCOSUR since these agreements typically affect therelative trade prices between members and non-members.

Despite the small projected increases in GDP, some stud-ies suggest that TTIP might lead to large increases in personalincomes in the long term. In often-cited examples, Ecorys esti-mates that the average EU household would gain 12,300 eu-ros over the work life of household members, while CEPR es-timates that the same household would earn 545 euros moreevery year.

However, as noted above, these estimates are misleadingsince the studies provide no indication of the distribution ofincome gains: they are simply averages. With EU wages fall-ing as a share of GDP since the mid-1990s, it is far from certainthat any aggregate gains will translate into income increasesfor households living on income from wages (as opposed tocapital).

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Finally, most studies are not informative on the potentialconsequences of TTIP on employment. While CEPII does notdiscuss employment effects, CEPR and Ecorys assume a fixedsupply of labour. This amounts to excluding by assumptionany consequences of TTIP on employment – wages are as-sumed to fall or rise enough to ensure that all workers remainemployed regardless of the level of economic activity.

On the other hand, Bertelsmann predicts that TTIP willlead to the creation, in the long term, of approximately onemillion jobs in the US and 1.3 million jobs in the EU. How-ever, these positive figures are strongly dependent on the pe-riod chosen in the estimation.

Using data up to 2010, the authors estimate that econo-mies where labour and labour income are more protected (forexample, by higher unemployment benefits) suffer from higherunemployment, concluding that any cost reductions intro-duced by TTIP would lead to positive employment effects inthose countries.

When more recent data is taken into account, this conclu-sion ceases to hold since all countries – not just those withstronger labour protection – appear to have experienced higherand persistent unemployment.

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To obtain a more realistic TTIP scenario, we need to movebeyond CGE models. A convenient alternative is provided by

the United Nations Global Policy Model (GPM), which informsinfluential publications such as the UN Conference on Tradeand Development (UNCTAD)’s Trade and Development Report.

The GPM is a demand-driven, global econometric modelthat relies on a dataset of consistent macroeconomic data forevery country. Two features make the GPM particularly use-ful in the analysis of a large trade agreement.

Firstly, the model assumes a more realistic mechanismleading to macroeconomic equilibrium. All models that makethese types of projections necessarily make assumptions onthe way economies will stabilize after a policy change, whichin this case is the introduction of TTIP.

The most important difference between the GPM and theCGE models described is that, in the GPM, the full-employ-ment assumption is replaced by the Keynesian principle of“effective demand”. This means that the level of economicactivity is driven by aggregate demand rather than produc-tive efficiency. Consequently, a cost-cutting trade reform mayhave adverse effects on the economy if the “costs” that it “cuts”are the labour incomes that support aggregate demand.

Unlike in CGE models, changes in income distributioncontribute to determining the level of economic activity. Theabsence of this mechanism in many commonly used modelshas often led to major errors in assessing the impact of tradereforms.

Secondly, the GPM provides an explicit analysis of themacroeconomic workings of every world region. This, in turn,has two important benefits. It means that the model can pro-vide well-founded information on the economic interactionsamong all regions, rather than just assuming that a given pro-portion of a country’s income will be spent on imports fromother countries.

It also means that the GPM allows us to assess whether agiven policy strategy is globally sustainable. For example, theGPM shows that, when sought by every country, a strategy ofexport-driven growth may lead to adverse consequences suchas a net loss of trade.

A third valuable feature of the GPM is its estimation ofemployment. Using International Labour Organization (ILO)data, the GPM specifies how a given change in GDP growthaffects employment growth, and vice versa.

A critical advantage of the specification used is that thesegrowth-and-employment relationships (which economists call“Okun’s relationships”) are not constant over time. In this way,the GPM recognizes that different factors might affect the re-lationship between output and employment at different mo-ments in history. Thus, the model is able to account for recentpuzzles such as “jobless growth.”

Given the large amount of data that must be processed toestimate and simulate the GPM, we keep the analysis trac-table by aggregating some countries into blocs. With this, welose specific analysis for these countries.

Despite its limitations, the GPM offers a useful perspec-tive on the consequences of agreements such as TTIP. Indeed,it offers a “big picture” and insights into several importantadjustment mechanisms that are often overlooked by othermodels.

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Our country aggregation leaves the world’s largest econo-mies as independent units. In the TTIP area, the United States,

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Analysis

the United Kingdom, Germany, France and Italy appear asstandalone economies.

The remaining countries are aggregated into two blocs:“Other Northern and Western Europe”

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