The Corporate Architecture of Impunity
Lex Mercatoria, market authoritarianism and popular resistance
STATE OF POWER 2020
January 18, 2020
On 24 April 2013, the eight-storey Rana Plaza building in Dhaka collapsed, killing 1,129 people, most of them female textile factory workers producing garments for international fashion brands. The building had been designed for shops and offices, not to hold the five factories that operated there. Its improper use caused the building to deteriorate rapidly, and the risk of collapse was clear before the disaster. Despite the workers’ protests, however, the factory managers refused to halt production, with the connivance of the municipal government.
As in many other cases, the factories’ main clients were transnational corporations (TNCs). The factories in Bangladesh form part of their supply chains, and those operating in the Rana Plaza building were producing clothes for well-known brands such as Benetton, El Corte Inglés, Loblaw, Primark, and Walmart. Their parent companies publicly proclaimed a commitment to ensure that their suppliers respect workers’ health and safety standards. But that did nothing to prevent the building from collapsing, nor did it guarantee any sanctions or punishments for the individuals or companies that benefited from the profits derived from lowering labour and safety standards.
The case of the Rana Plaza is one of many that reveals the reality of TNCs and human rights: first, TNCs frequently violate human rights through the business activities that take place all along their global production chains; and second the vast majority of these violations have ended either in impunity or, in the best-case scenario, with compensation negotiated out of court, which lets the guilty parties off the hook.
This reality has been affirmed by the Office of the United Nations High Commissioner for Human Rights (UNHCHR) in a 2016 report:
“Human rights impacts caused by business activities give rise to causes of action in many jurisdictions, yet private claims often fail to proceed to judgment and, where a legal remedy is obtained, it frequently does not meet the international standard of ‘adequate, effective and prompt reparation for harm suffered’.”
The report summarises the difficulties facing the victims of human rights violations: ‘fragmented, poorly designed or incomplete legal regimes; lack of legal development; lack of awareness of the scope and operation of regimes; structural complexities within business enterprises; problems in gaining access to sufficient funding for private law claims; and a lack of enforcement’. It states that: ‘Those problems have all contributed to a system of domestic law remedies that is “patchy, unpredictable, often ineffective and fragile”’. Along similar lines, in her 2015 report on contemporary forms of slavery, the Special Rapporteur expressed concern that these are occurring in global supply chains.
Another report prepared for the Office of the UNHCHR by Dr Jennifer Zerk, details 22 cases of gross human rights abuses committed by corporations. These include, for example, the case of Blackwater, which was accused under the Alien Tort Statute of acting negligently and failing to apply due diligence in the screening and training of its employees, some of whom committed murder and war crimes in Iraq in 2007. None of the cases that are now closed ended with a judgment finding any corporation guilty of having committed a violation of human rights. A high percentage ended with the victims accepting an out-of-court settlement.
Rana Plaza is a case in point. The Rana Plaza Coordination Committee set up in October 2013, chaired by the International Labour Organization (ILO) and including representatives of the government, unions, the clothing companies involved, and non-government organizations (NGOs) undertook to determine the losses that should be covered, and ensure that adequate assistance was provided to victims and their families to present claims for compensation.
In January 2014, the ILO established the Rana Plaza Donor Trust Fund and a year later announced that it had raised $30 million required to pay compensation to the more than 2,800 victims who had made claims. Financial compensation was the sole remedy offered. The guilty parties remain unpunished, and the victims have not even received full and adequate compensation.
We are therefore facing an angulo muerto (‘legal dead end’), whereby national and international law not only fails victims and allows the TNCs to go scot free, but even encourages human rights violations within certain large transnational businesses.
This impunity derives both from the nature and strategies of these businesses and from their increasingly close – or, as de Sousa Santos puts it, ‘promiscuous’ – relationship with the state.
Appalling in itself, this impunity is simply the most striking facet of the many different components of the complex and problematic relationship between TNCs, human rights and democracy.
It is important, however, not to approach the issue solely from the angle of analysing what their production strategies imply for human rights, but also to examine the role of international law forged by TNCS to protect their investments, the phenomenon of state capture, and the way corporations have established and maintained the ‘market authoritarianism’ that enables such corporate violations to occur.
Impacts of the investment protection regime on Latin America1
The 282 known arbitration claims by investors against countries in Latin America and the Caribbean mean that it is the region with the second highest number of disputes in the world. The vast majority of completed cases were settled in favour of the investor, with Latin American states being ordered or agreeing to pay a total of US$ 31 billion as a result of these claims. This is more than three times the amount that the World Bank, the Inter-American Development Bank and the Development Bank of Latin America have together made available to the region’s countries in the form of loans to tackle the COVID-19 crisis as of July 2020.2
The sums demanded by investors in the pending claims (where the amount is known) total US$ 40 billion.
Transnational Corporations: structures and strategies
The Portuguese scholar, Boaventura de Sousa Santos, argues that we are living through a phase of ‘disorganised capitalism’, characterised by the collapse of many previously common forms of organisation.
The principle of ‘free markets’ has reached such unprecedented intensity that it is colonising the state and the community. The role and functions of the state are being reorganised as a consequence of the close relationship (or capture) between political and economic power, the market authoritarianism exercised by the International Financial Institutions (IFIs), the exorbitant power of TNCs and the growing concentration of wealth.
De Sousa Santos describes how these factors have diluted the sovereignty and powers of the state, particularly its capacity to respect, promote and protect human rights.
Cutting back the functions of the state is facilitated by two main factors: first, the very structure of TNCs allows them to elude and evade the power of any given the state to apply sanctions beyond the reach of its own jurisdiction; second, because the TNCs’ capacity to move production seeking the lowest standards of human rights protection in the broadest sense, forces states, especially the weakest, in a permanent race to the bottom as they compete to attract foreign investment. If we add corporate capture, the state’s inability to respect, promote and protect human rights is a foregone conclusion.
To understand this process, we need to examine the history and emergence of TNCs. These ‘new’ players, many of which date back many years, were initially referred to as ‘multinational corporations’. From the 1970s, they began to be called ‘transnational corporations’– which is more appropriate because multinational suggests a merging of capital from several countries when in reality these businesses are usually a single entity that conducts its business in several countries but is usually owned by capital based in one country.
Deterritorialisation – displacing risks and responsibilities downwards and profits upwards
While capital remains concentrated, production has become decentralised and delocalised. TNCs are thus able to locate the various production stages in different factories or workplaces, often spread across different countries. They have few links to the local territory, life or market and choose locations due to the local incentives offered by jurisdictions and communities that compete with each other.
The way TNCs work in different countries is through supply chains. This may take the form of foreign direct investment (FDI) by multinational enterprises (MNEs) in wholly owned subsidiaries or in joint ventures in which the MNE has direct responsibility for the employment relationship. It may also include the increasingly predominant model of international sourcing whereby the TNCs contracts or subcontracts suppliers and firms for specific goods, inputs and services.
We are looking at large, flexible, mobile businesses that engage intensively in subcontracting and outsourcing throughout their supply chains, taking advantage of differences in labour conditions to use the strategy of dumping of social, environmental, and human rights in general – to reduce social or environmental costs and thus increase their profits.
In this model, production structured along lengthy supply chains displaces downwards costs, risks, obligations and responsibilities, while concentrating the main benefits in the parent company.
In most cases production is outsourced to a large number of small and medium enterprises (SMEs), usually located in free trade zones (FTZs) or export processing zones (EPZs). The parent or brand companies manage ‘non-productive’ activities such as research, innovation, marketing and logistics.
These offshoring and decentralisation strategies, the direction of which is clearly North–South but is beginning to spread horizontally, are clearly reflected in the Transnationality Index of the United Nations Conference on Trade and Development (UNCTAD).
This shows that on average, the world’s top 100 MNCs each have more than 500 affiliates based across over 50 countries. They have seven tiers in their ownership structure (in other words ownership links to affiliates could potentially cross six borders), and include 20 holding companies owning affiliates across multiple jurisdictions, with almost 70 entities in offshore investment funds.
In poorer countries, there is a clear relationship between the degree of participation in these decentralised, outsourced production structures and the increased presence of FDI. And to attract that investment and participation in global supply chains, poorer countries offer a range of incentives, including reducing the standards of human rights protection.
Social and environmental dumping
As part of their de-territorialising strategy, TNCs also seek to evade established regulatory frameworks and legal jurisdictions governing labour, environmental, fiscal and other matters, as well as the mechanisms to guarantee rights, which are still developed at the national level.
This strategy frees TNCs from national legislation, because the rights enshrined in the country where its parent company is domiciled do not apply, and at the same time it can avoid the obligations that may arise from the activities of trade unions, especially collective agreements.
This allows the corporation, for example, to free its decisions, especially those concerning workers’ rights, from oversight by trade unions and reduces their power., It also enables them to evade the liabilities that might be incurred by companies situated at other stage of their supply chains with regard to human rights and the environment.
All these practices come under the broad and somewhat vague concept of dumping, usually categorised as social or fiscal, but also applicable both to the environment and to human rights.
Corporate capture of the state
These dumping strategies go hand in hand with a ‘promiscuous relationship between the state and businesses’, also known as ‘corporate capture’.
Oxfam describes this as ‘the exercise of abusive influence by an elite, for its own interests and priorities and in detriment to the common interest, over the cycle of public policies and state entities [or others that are regional or international in scope], with potential effects on [economic, political or social] inequality and the correct exercise of democracy’.
As examples of capture, Oxfam cites the tax privileges given to Honduran companies between 1990 and 2016, and also in the Dominican Republic, which offers companies the most tax incentives in the Caribbean region. These tax incentives aimed at attracting FDI are rampant across Latin America and the Caribbean and undermine the ability of the governments offering them to collect and redistribute corporate tax revenue.
Another clear example of capture is in Ecuador. When Lenín Moreno took power in 2017, he brought representatives from the Chamber of Commerce and large export firms into ministerial portfolios such as the economy and finance, foreign trade and labour.
Some of the regulations since approved show a clear determination to defend major corporate interests. These include overturning a tax aimed at preventing land speculation, reducing debts owed by employers to the Ecuadorian Social Security Institute, fewer workplace inspections, and new labour laws to facilitate temporary contracts and flexible working hours.
In the process, Ecuador lost revenue equivalent to 1.2% of gross domestic product (GDP) in 2019, or $1.31 billion, increased income poverty from 21% in December 2017 to 25% today, and the Gini coefficient rose from 0.462 in June 2017 to 0.478 in June 2019, indicating an increase in inequality.
When governments are captured by – or complicit in – the competition to attract FDI, this quickly becomes a race to the bottom, meaning a gradual and widespread reduction in standards on rights and their protection.
Lex Mercatoria: corporate capture as neoliberal strategy
The structure of corporations and their offshoring strategies, combined with corporate capture, has allowed the rise of a global legal order known as Lex Mercatoria.
According to a widely accepted definition, first developed in the world of social movements and later adopted in critical science, Lex Mercatoria can be defined as a new global economic and legal order that comprises a broad set of norms in international law, along with an extensive web of national legislation, aimed primarily at promoting trade and protecting the interests of foreign investors.
Pistor describes this as a global normative framework that allows transnational capital to constantly choose the national laws that benefit it. This global normative framework was consolidated during the so-called ‘Washington Consensus’, implemented in Latin America in the 1980s using guidelines laid down by the International Monetary Fund (IMF), although its origins could be dated back to the 1970s during the civilian–military dictatorships in the Southern Cone countries. It then spread to the European Union (EU) through what can now be called the ‘Brussels Consensus’, implemented at the height of the so-called ‘euro crisis’.
This new ‘global law’ has several facets. First, it includes the norms we have just mentioned: the guidelines, adjustment policies and conditional loans from the IFIs and their rules on state development.
Second, it includes trade and investment agreements, such as lowering tariffs, the gradual liberalisation of services, opening up markets to new products (agro-toxins, for example), the downward harmonisation of regulatory standards and giving foreign investors extraordinary privileges in claims against the state.
These have been integral to the mega-regional free trade agreements (FTAs), such as the Trans-Pacific Partnership (TPP), the ultimately unsuccessful Transatlantic Trade and Investment Partnership (TTIP), the trade agreement between Canada and the EU (CETA), and all the others recently negotiated by the EU.
They not only succeed in changing domestic legislation in favour of corporations, but also have a ‘chilling effect’ (even when not passed) as countries fear to promote policies that might deter FDI or prompt legal actions (through investor-state dispute (ISDS) mechanisms).
In many ways, trade and investment agreements serve as a ‘padlock’, armour-plating corporations to prevent possible future privatisation and business regulations.
In fact, governments that dared to do so in the ‘post-neoliberal cycle’ in Latin America (2000–2015) were subjected to a total of 267 ISDS claims by foreign investors, equivalent to 28% of all known claims worldwide to date. Argentina, Venezuela and Mexico came in first, third and sixth place in the global list of countries with the highest number of such claims, of which several are related to human rights and environmental issues, or the Chevron-Ecuador case.
Both pillars of Lex Mercatoria continue to grow. While the political influence of IMF is regaining importance, especially in Latin America, trade and investment agreements are already constraining the behaviour of the vast majority of the countries.
For instance, we should remember that, since 2015 the EU has finalised and adopted trade agreements with Ecuador, Canada and Japan, the Economic Partnership Agreement (EPA) with the Southern African Development Community (SADC), provisional EPAs with Ghana and Côte d’Ivoire, and the Deep and Comprehensive Free Trade Agreement (DCFTA) with Ukraine. If the agreement between the EU and Mercosur – for which a political agreement was reached in June 2019 – is concluded, 41% of the trade in goods between the EU and the rest of the world will be covered by these trade agreements.
Market authoritarianism and popular protest
A term that encapsulates the key defining features of Lex Mercatoria is “market authoritarianism” – implacable and difficult to grasp, dictated by a diffuse supra-sovereign state, and able to impose its will through legal and political mechanisms tailored to its interests.
This form of authoritarianism has dramatically shaped contemporary global societies, their democratic orientation and human rights. But it has also faced legal strategies against TNC impunity, popular resistance against trade and investment agreements as well as against IMF policies and demands for alternatives throughout the world.
Starting with national-level proposals, an outstanding example of legal strategies against the impunity of TNC is the Loi sur le devoir de vigilance des sociétés-mères et sociétés donneuses d’ordre, adopted by the French National Assembly on 21 February 2017.
At the international level, the most important fight at legal level is the so called ‘Binding Treaty’ process. While the process brings together different old social struggles, it was officially launched on 26 June 2014 with the adoption in the United Nations Human Rights Council of Resolution 26/9, which established ‘an open-ended intergovernmental working group on transnational corporations and other business enterprises with respect to human rights; whose mandate shall be to elaborate an international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’.
Beyond legal paths of resistance to the imposition of Lex Mercatoria, there have been many popular forms of protest against it, growing everywhere during the last decade, from ‘Occupy Wall Street’, Spain’s 15M (2011), the ‘Arab Spring’ (2012–2013) the gilets jaunes in France (2018 onwards) to the recent popular resistance movements in Argentina (2017), Ecuador or Chile (2019).
The latest protests in Latin America are the perfect example as they emerged at a time when the IMF had returned to the region, with almost unchanged policy guidelines, following a change in the political cycle that brought to power governments such as those headed by Macri (Argentina), Temer/Bolsonaro (Brazil) and Moreno (Ecuador).
Returning to the case of Ecuador, a direct connection can be traced between the IMF’s demands, its agreement with the government of Lenín Moreno, and popular protest. Despite extensive repression, the government was eventually forced by the mobilisations of social movements, mostly the indigenous movement, to back down a measure considered ‘fundamental’ for the country.
Ecuador’s example underlines the incompatibility of today’s neoliberalism with the wellbeing of the population as a whole, and with democracy itself. It suggests that the social and environmental dispossession demanded by the mechanisms to defend corporate interests can no longer be implemented by democratic means, nor withstand popular will, whether direct (elections) or mediated (parliaments).
Ecuador’s experience – and that of many others –shows the potential for popular activism to obtain victory and a reconfiguration of forces in defence of human rights against market authoritarianism (against the imposition of the Lex Mercatoria).
Thus, as Nancy Fraser correctly points out, the growing popular resistance movements not only demonstrate the incompatibility between neoliberalism and democracy but also show that people are aware of it.
Here it is essential to recall that the IFIs’ proposals (particularly its structural adjustment policies) are not subject to public approval, and in many cases do not even have to be validated by the legislative branch. This means that they are left to the discretion of the executive, which shrugs off the political cost by resorting to an alleged inability to resist the demands of economic adjustment, despite angry social rejection and conflicts which cannot be contained via democratic means.
Governments committed to the IMF line therefore need to use force to impose the economic and social measures demanded by market authoritarianism, either by means of lawfare measures against political adversaries or by directly repressing protests with police and military crackdowns.
So – and this is the terrible reality – it seems clear that the premises of neoliberalism can be implemented only through authoritarianism and violent containment of the popular will. Thus, making ‘market authoritarianism’ effective can be achieved only at the cost of strangling democracy and silencing the voice of the people through the use of state-endorsed force.
The future is uncertain. Attempts to impose Lex Mercatoria will continue but there will also be social victories along the way, along with the increasingly widespread conviction that we are facing a profound and epoch-making alternative: ‘democracy or markets’.