[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
BUILDING PROSPERITY IN LATIN AMERICA: INVESTOR CONFIDENCE IN THE RULE
OF LAW
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
THE WESTERN HEMISPHERE
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JULY 30, 2014
__________
Serial No. 113-212
__________
Printed for the use of the Committee on Foreign Affairs
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COMMITTEE ON FOREIGN AFFAIRS
EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida ENI F.H. FALEOMAVAEGA, American
DANA ROHRABACHER, California Samoa
STEVE CHABOT, Ohio BRAD SHERMAN, California
JOE WILSON, South Carolina GREGORY W. MEEKS, New York
MICHAEL T. McCAUL, Texas ALBIO SIRES, New Jersey
TED POE, Texas GERALD E. CONNOLLY, Virginia
MATT SALMON, Arizona THEODORE E. DEUTCH, Florida
TOM MARINO, Pennsylvania BRIAN HIGGINS, New York
JEFF DUNCAN, South Carolina KAREN BASS, California
ADAM KINZINGER, Illinois WILLIAM KEATING, Massachusetts
MO BROOKS, Alabama DAVID CICILLINE, Rhode Island
TOM COTTON, Arkansas ALAN GRAYSON, Florida
PAUL COOK, California JUAN VARGAS, California
GEORGE HOLDING, North Carolina BRADLEY S. SCHNEIDER, Illinois
RANDY K. WEBER SR., Texas JOSEPH P. KENNEDY III,
SCOTT PERRY, Pennsylvania Massachusetts
STEVE STOCKMAN, Texas AMI BERA, California
RON DeSANTIS, Florida ALAN S. LOWENTHAL, California
DOUG COLLINS, Georgia GRACE MENG, New York
MARK MEADOWS, North Carolina LOIS FRANKEL, Florida
TED S. YOHO, Florida TULSI GABBARD, Hawaii
SEAN DUFFY, Wisconsin JOAQUIN CASTRO, Texas
CURT CLAWSON, Florida
Amy Porter, Chief of Staff Thomas Sheehy, Staff Director
Jason Steinbaum, Democratic Staff Director
------
Subcommittee on the Western Hemisphere
MATT SALMON, Arizona, Chairman
CHRISTOPHER H. SMITH, New Jersey ALBIO SIRES, New Jersey
ILEANA ROS-LEHTINEN, Florida GREGORY W. MEEKS, New York
MICHAEL T. McCAUL, Texas ENI F.H. FALEOMAVAEGA, American
JEFF DUNCAN, South Carolina Samoa
RON DeSANTIS, Florida THEODORE E. DEUTCH, Florida
SEAN DUFFY, Wisconsin ALAN GRAYSON, Florida
C O N T E N T S
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Page
WITNESSES
The Honorable James K. Glassman, visiting fellow, American
Enterprise Institute (former Under Secretary for Public
Diplomacy and Public Affairs, U.S. Department of State)........ 6
Mr. Paul M. Barrett, author...................................... 27
The Honorable Jose W. Fernandez, partner, Gibson, Dunn, &
Crutcher LLP (former Assistant Secretary, Bureau of Economic,
Energy and Business Affairs, U.S. Department of State)......... 33
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable James K. Glassman: Prepared statement.............. 9
Mr. Paul M. Barrett: Prepared statement.......................... 29
The Honorable Jose W. Fernandez: Prepared statement.............. 35
APPENDIX
Hearing notice................................................... 54
Hearing minutes.................................................. 55
The Honorable Theodore E. Deutch, a Representative in Congress
from the State of Florida: Material submitted for the record... 56
BUILDING PROSPERITY IN LATIN AMERICA:
INVESTOR CONFIDENCE IN THE
RULE OF LAW
----------
WEDNESDAY, JULY 30, 2014
House of Representatives,
Subcommittee on the Western Hemisphere,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2200 Rayburn House Office Building, Hon. Matt Salmon
(chairman of the subcommittee) presiding.
Mr. Salmon. A quorum being present, the subcommittee will
come to order. I will start by recognizing myself and the
acting ranking member today, Mr. Connolly, is acting as the
ranking member. Mr. Sires took ill today and we miss him, but
we are thrilled to have Mr. Connolly here today. And without
objection, the members of the subcommittee can present brief
remarks if they choose or they can submit them for the record.
And now I will yield myself as much time as I may consume to
present my opening remarks.
Good afternoon and welcome to this hearing on Investor
Confidence in the Rule of Law in the Western Hemisphere. This
hearing is really just a confirmation of our subcommittee's
effort to be at the forefront of the discussion of how to bring
greater growth and prosperity to our hemisphere. And as I have
said countless times before, the United States should be
unapologetic in promoting the principles of entrepreneurship,
economic freedom, and free trade. Indeed, the promotion of
these principles is a powerful foreign policy tool that can
bring freedom and democracy to people all over the world. The
crucial element to all of this though is the rule of law.
Unless there is transparency, predictability, and the clear
laws that are not subject to the whim of the executive,
investors will lose confidence and entrepreneurs will look for
better markets in which to launch their innovations and create
jobs.
The humanitarian crisis along our border underscores the
importance of policies to promote economic freedom and the rule
of law to bring about opportunity, peace, and prosperity. We
are seeing thousands of children taking a treacherous journey
at the mercy of human smugglers from Central America up to the
United States. It is true that the President's statements
undermining our immigration laws have increased and encouraged
this mass migration havoc but these children are desperately
trying to get away from countries that lack rule of law and
economic opportunity.
Elsewhere in the region, we have seen leftist populist
leaders systematically undermine the rule of law, while
enacting policies that have all but destroyed their economies.
Venezuela, a nation rich in resources continues to face record
inflation, scarcity, and insecurity. An economist at Goldman
Sachs recently said that the level of macro economic
dysfunction in Venezuela is so deep that the story is no longer
just about oil prices. Meanwhile, Heritage Foundation's index
of economic freedom described Venezuela as having perfected the
art of the 21st century corruption where government leaders act
with complete impunity where their entire formal economy now
operates on a black market.
President Maduro combines gross mismanagement of
Venezuela's economy with undemocratic and heavy-handed tactics
to silence his critics, from the violent crackdown of
protesters to the arrest and imprisonment of opposition leader
Leopoldo Lopez, Venezuela continues to be an embarrassment to
our hemisphere's democratic sensibilities. I must say, I am
extremely disappointed with the Obama administration's lack of
leadership all over the world, including right here in our own
hemisphere. Every day, we see the results of American
disengagement. And of a President more interested in
apologizing for our country than defending our values.
The very clear result is that our friends and allies no
longer trust us and our adversaries no longer fear us. In the
Americas, President Obama's perceived weakness has cleared the
way for Russia, China, and Iran to establish economic and
diplomatic influence right at our doorstep. This reality should
give us all great pause. Just this past week, a Venezuelan
general, a close ally of the late President Hugo Chavez, and
known associate of FARC narcotics traffickers, was arrested on
U.S. drug charges on the Dutch island Aruba. Astonishingly, The
Netherlands chose to acquiesce to Venezuelan pressure,
releasing General Carvajal to return to Venezuela for a hero's
welcome on grounds that he had diplomatic immunity on the
island. The sad fact is that U.S. credibility worldwide has
been so damaged that a Venezuelan who had been blacklisted by
Treasury for aiding FARC terrorists in narcotrafficking, was
released by our Dutch allies under Venezuelan pressure. Recall
that this body passed a Venezuela sanctions bill in May after
President Maduro's continued violent aggression and repression
of protesters. And we have been pressing the administration to
move forward with some form of punitive measure to show the
Venezuelan Government and the world that we are not going to
stand by as the rights of freedom seekers are trampled by
undemocratic dictators.
I was gratified to receive a phone call from Assistant
Secretary Jacobson yesterday letting me know that the
administration would announce today that visa denials and
prohibitions over 20 Venezuelan Government officials complicit
in violent repression of protesters in opposition. This action
on the part of the administration is so long overdue and merely
a step in the right direction. The administration must be
unrelenting in reaffirming our commitment to protecting basic
democratic rights worldwide.
Blatant disregard for democratic values and the rule of law
have affected Argentina's economic outlook. Another country
rich in natural resources and human capital, Argentina has been
under the stranglehold to the leftist populist policies of
Cristina Kirchner and her late husband, Nestor, before her.
Plagued by corruption and a stated policy that flouts the rule
of law, Argentina is an economic basket case. In fact, unless
drastic, last minute measures are taken, Argentina is scheduled
to default on billions of dollars to bond holders today. The
consequences of a second default in 13 years will be dire for
the Argentinian people and their economy.
I am looking forward to hearing witnesses' analysis of this
looming default and what long-term impacts will be for
Argentina and for the region.
Ecuador poses another challenge in the region. Insulated to
some degree by a dollarized economy, Correa's authoritarian
approach to both the economy and governance in general places
Ecuador among the least democratic nations in the Americas.
Arbitrary regulations and media laws that stifled dissent are
disappointing, the hallmark of the Andean country. More
important, President Correa has consistently coupled his
attacks against democracy and free trade with open antipathy to
the United States and her interests. Meanwhile, the Obama
administration has failed to come up with a strategy to deal
with the ALBA bloc countries, Ecuador, Bolivia, Venezuela,
Cuba, Nicaragua and encourage more market friendly and
democratic values in our region.
It seems clear to me that a commitment to the rule of law
coupled with free trade and economic liberty will lead to
stronger and more vibrant democracies. We should all be
encouraged by the exciting free trade bloc known as the Pacific
Alliance, as well as the prospect that energy reforms in
Mexico, could bring about greater North American energy
independence and security.
The Western Hemisphere is commercially and culturally
vibrant and the United States should do more to encourage the
opening of markets and opportunity to nations currently
strangled by populism. This will do much to empower citizens to
make them less dependent on government, thereby making
governments less powerful and less authoritarian. But to
realize these goals of a more prosperous and free Western
Hemisphere, the U.S. has got to do the leading.
As we are seeing around the globe today, the unraveling of
U.S. leadership is not just embarrassing, it threatens peace
and stability. You cannot turn on the news on any station
without seeing our failed leadership completely across the
globe. Now it is time to turn the tide and reengage to inspire
regional laborers to seek freedom and economic prosperity
through open markets that are protected by the rule of law. And
I am eager to hear from witnesses about how the United States
can work constructively to improve transparency in the rule of
law in our hemisphere.
And I would now recognize Mr. Connolly.
Mr. Connolly. Mr. Chairman, thank you, and thank you on
behalf of our mutual friend, Albio Sires, who is under the
weather and cannot be here. He has asked me to read his
statement into the record. If I may, and before I do that, I am
taking advantage of your graciousness and hospitality. I could
not disagree with you more and I completely disassociate myself
from most of what you just said.
The rhetoric coming out of my friend on the other side of
the aisle----
Mr. Duffy. I am glad the record notes that.
Mr. Connolly. Thank you. I know it will come as a shock to
you, but this notion that we are retreating from leadership and
oh, my God, any problem in the world is somehow the fault of
this President, we might as well blame him for hurricanes in
the Caribbean, too. The unraveling if there was such of
American leadership traces directly to the cowboy diplomacy, go
it alone policies of the previous administration, George W.
Bush, who did incalculable damage to the standing of the United
States, all over the world.
And I can tell you that someone who has been in foreign
policy for a long time, the notion that somehow people are
worried about us retreating, they may be worried about whether
you are going to stay, but they are not worried about our
retreating. In fact, the demands on us continue to grow and
that is why things like the Trans-Pacific Partnership are so
important and why there is so much excitement about it in the
region that once again the United States is exercising
leadership and providing a counterbalance with China, but that
is just an editorial comment.
Mr. Salmon. That is welcome.
Mr. Connolly. Thank you, Mr. Chairman. I thank you. Now on
behalf of Mr. Sires:
``Thank you, Mr. Chairman. This hearing comes at a
time when the United States and its closest neighbors
face the daunting task of addressing the needs of
thousands of Central American child migrants escaping
one of the most impoverished and violent regions of the
world. Elsewhere, we see the benefits of decades long
democratic consolidation and economic prosperity in
Brazil, Mexico, and Colombia, for example, alongside
political and social unrest in Venezuela, as you said,
Mr. Chairman, and economic uncertainty in Argentina.
``We have also borne witness to a dictatorship in
Cuba that after 50 years continues to act with impunity
restricting basic human rights, freedoms of expression,
and economic opportunity. Indeed, the road to democracy
in our hemisphere has been long and fraught and
challenging. The lack of inclusive participation by all
members of society and the growing economic prosperity
of the region has made the Americas vulnerable to anti-
democratic forces. Additionally, weak state presence
and corrupt governance has allowed drug traffickers to
act within impunity in many of these countries while
economic and fiscal insecurity has hampered sustainable
progress and further encouraged immigration aborad.
Without a doubt, respect for and application of the
rule of law of today is central to the stability and
economic prosperity of our neighbors.
``While all nations in the hemisphere other than Cuba
are now ruled by elected leaders, democratic progress
has been beset by the inability to ensure political
accountability, public goods and safety and uphold the
rule of law. In Mexico and Central America, drug-
related crime and violence have set back democracy and
public security. While in Venezuela, Bolivia, Ecuador,
and Nicaragua, elected leaders have abused executive
office to consolidate power, limit the rights of
freedoms of political dissent, and dismantle
institutional checks and balances. We have learned that
elections do not make a democracy alone, nor do they
guarantee legitimacy. In the same vein, a country's
laws mean little if they are arbitrarily imposed,
inefficient, corrupt, or unenforced. In part, these
points reinforce the importance of the rule of law.
``The rule of law ensures political rights, civil
rights, civil liberties, mechanisms of accountability.
They, in turn, affirm political equality of citizens
and constrain potential abuses of the state. In this
fashion, the rule of law works in tandem with other
pillars of democracy. Without a robust rule of law,
defended by an independent judiciary, rights are not
safe, and equality and dignity of all citizens at risk.
In fact, for some time now, we have witnessed a
breakdown of the judicial system in some countries in
the region, whereby Supreme Courts have been dismissed
and Judges are being appointed heavily in favor of one
party over another.
``With respect to economic prosperity, a rule of law
framework that encompasses government effectiveness,
regulatory and judicial accountability, and anti-
corruption, has been shown to have a significant impact
in making countries more attractive to foreign
investment. On the one hand, while the rule of law
provides the institutional framework to protect basic
political and human rights, it also on the other
provides the private sector the confidence it needs to
operate within a formal economy and contribute to the
country's economic growth.
``A business owner or a corporation is more likely to
succeed in an environment whereby laws are public,
transparent, and applied neutrally without prejudice.
Additionally, a rule of law framework that provides
clear and consistent legal rules for the formation and
preservation of contracts, investments, and settlement
disputes, encourages competitiveness and provides
assurances to firms that contracts will, in fact, be
upheld and honored in a rule of law.
``Whether or not the rule of law is a prerequisite
for economic growth or vice versa is maybe a matter of
debate. The economic success of China comes to mind in
that regard. What is not uncertain is the vital role
that the rule of law ultimately plays in fostering
sustained economic growth and development.
``I look forward to hearing from our panelists
regarding the rule of law in Latin America and how it
has impacted economic growth and investor confidence
and welcome our witnesses here today. Thank you, Mr.
Chairman, for your graciousness.''
Mr. Salmon. I thank the gentleman. Pursuant to Committee
Rule 7, the members of the subcommittee will be permitted to
submit written statements to be included in the official
hearing record. Without objection, the hearing record will be
open for 7 days to allow statements, questions, and extraneous
materials for the record, subject to the length limitation in
the rules.
I would like to introduce the panel now. First, we would
like to introduce Ambassador Glassman. James K. Glassman served
as the U.S. Undersecretary of State for Public Diplomacy and
Public Affairs and chairman for the Broadcasting Board of
Governors. Currently, he is a Visiting Fellow at the American
Enterprise Institute. He holds a B.A. degree from Harvard
University.
Mr. Paul Barrett is the author of Law of the Jungle. That
has got to be about Congress. I feel like I am living in the
jungle or a jungle book. A book that describes his findings of
the Chevron case in Ecuador and is scheduled to be published in
September. He is a graduate of Harvard Law School and is also
an adjunct professor at New York University Law School.
And then finally, Mr. Jose Fernandez. Mr. Fernandez is a
corporate partner in the New York Office of Gibson, Dunn &
Crutcher, and co-chair of the firm's Latin America Practice
Group. He served as the Assistant Secretary of State for
Economic, Energy and Business Affairs as well as the State
Department's principal representative in the Committee on
Foreign Investment in the United States. He received his B.A.
in History from Dartmouth College and holds a J.D. from
Columbia University School of Law.
You all understand the lighting system. It is green for the
first 4 minutes and when it turns amber, you have got time to
wrap up. And at the end the red light comes on and it is time
to be done. After, we are going to have a series of questions
for the panelists.
So let us begin. Mr. Glassman, I would like to recognize
you first. Thank you.
STATEMENT OF THE HONORABLE JAMES K. GLASSMAN, VISITING FELLOW,
AMERICAN ENTERPRISE INSTITUTE (FORMER UNDER SECRETARY FOR
PUBLIC DIPLOMACY AND PUBLIC AFFAIRS, U.S. DEPARTMENT OF STATE)
Ambassador Glassman. Thank you, Mr. Chairman, members of
the subcommittee. Mr. Chairman, as you said, the recent surge
of undocumented children is just the latest reminder of the
absolute fact that a stable and prosperous Latin America is
critical, not just to Latin Americans themselves, but to all of
us here in the United States.
Many Latin American countries have made significant
economic progress in recent years, among them, Chile, Colombia,
Costa Rica, Uruguay, Peru, and Mexico. But the performance of
Bolivia, Ecuador, and lately Brazil is disappointing. Their
economies suffer in various degrees from a lack of respect for
the rule of law, crucial to attracting the capital investment
that fuels growth.
Aside from the sad cases of Cuba and Venezuela, the worst
offender in this regard is Argentina. It ranks 166 out of 178
countries on the index of economic freedom. Argentina has
abundant natural resources and a workforce that has proven
itself in the past. In 1908, it was the seventh wealthiest
country in the world. Today, it is 55th.
This very day, the grace period in Argentina's court-
ordered debt repayments runs out and we shall soon know if it
has defaulted for the eighth time in its history. But default
or not, Argentina has done enormous damage by setting an
example for other irresponsible countries to follow. After
Argentina missed payments on $100 billion in bonds in 2001, the
country bullied creditors into settling at pennies on the
dollar, doctored its economic statistics, expropriated a
Spanish energy company, and defied 100 court judgments. Through
it all, the U.S. largely stood on the sidelines. Argentina even
remains a member of the prestigious G20, the group of nations
charged with keeping the world economy stable.
Argentina's success at flouting the financial world order
inspired Ecuador which defaulted in 2008 and Belize, which
threatened creditors with a restructuring offer even worse than
Argentina's. Now, it is the turn of Puerto Rico, a U.S.
territory since 1898. Puerto Rico's economy is in shambles. In
the eighth year of recession, its workforce has declined by one
third. Meanwhile, the island has piled up debt of $73 billion.
If it were a state, Puerto Rico, population 3.7 million would
rank behind only California and New York as the third most
indebted.
Rather than trying to reform a sick economy with a bloated
public sector and high taxes, the Governor of Puerto Rico,
Governor Alejandro Padilla has chosen the Argentine way.
On June 25th, apparently preparing for default, Puerto Rico
passed a law called the Recovery Act that strips basic rights
from creditors who own about one third of the island's bonds,
including, I note, many unsuspecting U.S. investors with money
in mutual funds, while protecting other bond holders, many of
them hedge funds. But this Argentine-style ploy does not seem
to be making credit rating agencies wary of what Puerto Rico
might do next quickly downgraded both types of bonds well below
the threshold of junk status. And now Puerto Rico is facing
lawsuits from U.S. investors that could drag on for years.
Also, reminiscent of Argentina is Puerto Rican Government's
disregard for the rule of law in dealing with businesses. One
visible case involves a bank called Doral which overpaid its
taxes a decade ago and then entered into a series of agreements
with Puerto Rico's Treasury Department for refunds. Suddenly,
in May, the government declared that deal null and void. Rather
than imitating Argentina, Puerto Rico needs to cut its budget,
reduce taxes, institute economic policies that encourage
investment, rescind its Recovery Act, restore the rule of law
and negotiate faithfully with creditors.
For the protection of our own taxpayers in the United
States who could end up holding the bag, the U.S. should
perform a full audit and set up a financial control board with
authority over borrowing, hiring, firing, and contracts such as
the boards that succeeded in New York and the District of
Columbia. If the United States and other countries had been
tougher with Argentina, its dangerously seductive model would
have been rendered unattractive. Now the U.S. has a chance to
rectify matters by guiding Puerto Rico to the prosperity that
its people deserve.
Mr. Chairman, when it comes to promoting prosperity and
stability in Latin America by encouraging strict adherence to a
just legal system, the United States should not stand by. We
must take the lead. Our own security and prosperity demand it.
Thank you.
[The prepared statement of Ambassador Glassman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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Mr. Salmon. Thank you, Mr. Glassman. And now I turn to our
next witness, Mr. Barrett.
STATEMENT OF MR. PAUL M. BARRETT, AUTHOR
Mr. Barrett. Thank you, Mr. Chairman. Thank you for your
interest in my forthcoming book, Law of the Jungle, which
describes the epic legal war over oil pollution in the rain
forest in Ecuador. The events I have reported on for the past
3\1/2\ years raise troubling questions about the rule of law in
Ecuador. These events deserve your attention not only because
of the threat they suggest to investor confidence in that
country, but also the dangers they pose to the health and
welfare of Ecuador's citizens.
Portrayals of this controversy typically resemble a
morality play or a fable: Indigenous tribe members fighting an
evil, all powerful American oil company. A passive Latin
American nation exploited by a mighty, industrial menace. David
versus Goliath.
In fact, the story is more complicated, as suggested by two
clashing judgments from the Ecuadorian and American court
systems. In February 2011, an Ecuadorian judge in the small
city of Lago Agrio ruled that Chevron Corporation bears
responsibility for severe environmental damage dating to the
1970s. The judge imposed an historic $19 billion verdict
against the company. Three years later, in response to a civil
racketeering suit filed by Chevron, a Federal judge in New York
ruled that the Ecuadorian judgment was a complete fraud: The
culmination of an elaborate extortion scheme orchestrated by an
American plaintiffs' attorney and aided and abetted by corrupt
Ecuadorian lawyers and judicial officials.
To understand the Chevron case, it is best to begin at the
beginning. In the 1960s, Ecuador sought outside investment to
take advantage of oil reserves in the Amazon region east of the
Andes. Texaco, later acquired by Chevron, signed a series of
agreements with the Ecuadorian Government resulting in
production and export of oil via a pipeline over the Andes. The
oil industry became the backbone of the Ecuadorian economy,
raising the aggregate standard of living and contributing to
improved social conditions as measured by such markers as
decreased infant mortality and increased life expectancy.
Unfortunately, while Ecuador became wealthier overall,
economic inequality worsened. And people living near oil
operations suffered from the side effects of unregulated
industrial activity.
Texaco, it should be emphasized, could have done a much
better job of protecting the environment. It dug hundreds of
unlined, open-air waste oil pits. It discharged into rain
forest streams and rivers billions of gallons of tainted water.
Texaco considered but rejected spending modest sums to reduce
ecological harm.
The human toll from Texaco's pollution was exacerbated,
however, by Ecuadorian Government policies. While some of the
rain forest residents affected by the contamination were
members of tribes indigenous to the region, far more were
farmers encouraged by the Government to move to the oil region
under an official policy known as ``colonization.''
Both Ecuador and Texaco profited from oil production. Some
90 percent of the roughly $25 billion produced by oil
activities in the 1970s and 1980s remained in Ecuador.
In the early 1990s, the Ecuadorian Government nationalized
its oil industry and sent Texaco packing. Back in the United
States, Texaco faced an unfriendly ``welcome home.'' A group of
American plaintiffs' attorneys filed a class-action suit in New
York in 1993, accusing the company of environmental negligence.
The courtroom war had begun.
In Ecuador, Texaco negotiated a cleanup plan with the
government under which Texaco assumed responsibility for
``remediating'' one third of an agreed-upon list of
contaminated sites. Ecuador took responsibility for the rest
and gave the company a formal release from further liability.
Three years later, right around the time Chevron was acquiring
Texaco, the Federal courts in New York sided with the oil
companies and told the plaintiffs, in essence, take your
complaints to Ecuador.
Chevron then learned the wisdom of the old adage ``be
careful what you wish for.'' Sure enough, the lawsuit against
Chevron restarted in the provincial courthouse in Lago Agrio in
2003. Both sides employed tactics that would not pass muster in
the United States. The plaintiffs' team, now headed by a brash,
New York attorney named Steven Donziger, however, thoroughly
outflanked Chevron when it came to unconventional legal
tactics. Donziger cajoled and bullied Ecuadorian judges in
private meetings and communications. He manipulated a
supposedly neutral court-appointed expert, going so far as to
arrange for the secret ghostwriting of the expert's submissions
to the court.
Ultimately, according to the March 4, 2014 opinion of U.S.
District Judge Lewis Kaplin, Donziger's team ``wrote the Lago
Agrio court's judgment themselves and promised $500,000 to the
Ecuadorian judge to rule in their favor and signed the
judgment.'' Donziger received ample cooperation from Ecuadorian
judges eager to sell their influence to the highest bidder.
Four out of the six judges who at one time or another presided
over the Lago Agrio case were removed from office for
misconduct during the course of that case. The course of this
lawsuit in Ecuador and the litigation that underlay the $19
billion verdict which is now being contested, was shot through
with fraud and raised very serious questions about whether the
Ecuadorian courts can handle a case like this and I would be
pleased to answer more specific questions if you have them.
[The prepared statement of Mr. Barrett follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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STATEMENT OF THE HONORABLE JOSE W. FERNANDEZ, PARTNER, GIBSON,
DUNN, & CRUTCHER LLP (FORMER ASSISTANT SECRETARY, BUREAU OF
ECONOMIC, ENERGY AND BUSINESS AFFAIRS, U.S. DEPARTMENT OF
STATE)
Mr. Fernandez. Thank you, Mr. Chairman. Thank you for
holding this hearing and this is an issue I commend this
subcommittee for talking about.
I first came across the issue of rule of law in Latin
America as a young lawyer in 1985. I had been named the head of
the ABA's--American Bar Association--Latin American Law
Committee and I decided to go down to Central America that was
undergoing the civil wars of the 1980s. I remember going to the
Supreme Court Library with the head of the Supreme Court of El
Salvador and asking him where he had his law books. And he
looked at me sort of funny and he showed me the library and it
turned out the library had no new books since 1968. And yet,
every day they were deciding cases.
I mentioned this incident not to illustrate the challenges
of the rule of law, that the challenges of the rule of law are
something that is odd. I mention it to illustrate that the
challenges of the rule of law are not new. They are long
standing and will take a long time to fix. And while we can
help, these challenges will only be overcome with domestic
support and local buy-in from local governments, lawyers,
private enterprise and civil society. But until they are
addressed, these challenges will continue to hinder all
commercial activity in Latin America, be it from domestic
investors or foreign investors.
To be sure, we have a number of bright spots in the Latin
American rule of law firmament according to the World Justice's
Project Rule of Law Index for 2014 which ranks 99 countries
based on indicators such as constraints in governmental powers,
absence of corruption, open government, regulatory enforcement
and the like. You have got countries such as Uruguay, Chile,
and sometimes Costa Rica that actually do quite well in these
rankings and sometimes they even outrank the United States. But
for the most part, overall, the region falls to the bottom
third in most of the factors used by the WJP.
And why doesn't the U.S. investor decide to put his money
in a country? And in 30 years of practice, I have come to the
conclusion that in part, it is about the opportunity, but it is
also based on that investor's perception of whether the legal
system is transparent, stable, and free from bias and
corruption, where the property rights are enforced and whether
fundamental personal rights are also respected. And in all of
these scores, Latin America certainly is doing better than it
did 20, 25 years ago, but it still has a long way to go.
According to Transparency International, their corruption
perception index which ranks the perceived levels of public
sector corruption in the 177 countries around the world, over
two thirds of the nations in the Americas scored less than 50
which indicates a serious corruption problem. Venezuela, which
has been mentioned here several times, was 160th out of 177
countries in the Transparency International corruption index.
And when Transparency asked people in Latin America whether
they thought that high ranking government official exposed for
taking government money was likely to be prosecuted or
punished, less than 30 percent of Latin Americans answered yes.
That is the lowest percentage of any region in the world.
Another indicator is Latin America does not do much better.
Central America, Venezuela, and several other countries rank
among the most dangerous countries in the world and yet the
conviction rates in Latin America are abysmal. In Panama, only
12 percent of burglars are captured, prosecuted, and punished.
And that 12 percent is the highest percentage in all of Latin
America. In Venezuela, that number is 1 percent.
For murder cases, for homicides, Honduras has seen a 250
percent increase in homicides in the last few years. But the
impunity rate in Honduras is 90 percent. Even Mexico, a study
last year showed that 80 percent of homicides go unpunished
without conviction or even trial.
I experienced the consequences of a failing rule of law
system when I led the team that negotiated the Partnership for
Growth agreement between El Salvador and the U.S. last year.
And one of the things that I learned there is that when you
talk to businesses who were not investing in El Salvador and
asked them why, they said it is crime and it is insecurity. You
even had circumstances where employers agreed with employees
that they would pay them on random weeks. They would pay them
on one week and then they wouldn't pay them for another month.
Then they would pay them the next day. And why was that?
Because if they paid them on a regular schedule, those
employees would be robbed and assaulted in their buses on the
way home. Just imagine investing in that kind of a scenario.
But there are a number of ways that the U.S. can help here
and I would like to be able to talk about that during the
discussion. Obviously, the MCC is helping. Obviously, programs
such as USAID's programs to support the administration of
justice in Latin America. It seems to me that as we negotiate
free trade agreements, bilateral investment treaties and the
like, we ought to make sure that investor-state arbitration
provisions are included and we ought to be negotiating even
more free trade agreements with our partners in Latin America.
At the end of the day, the U.S. is blessed with a legal
system that is admired throughout the world and we can help
Latin America improve its rule of law system, not really by
grafting our traditions on to these other countries, but by
partnering with them as they seek our support to improve their
judicial and enforcement institutions. Thank you.
[The prepared statement of Mr. Fernandez follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
----------
Mr. Salmon. Thank you, Mr. Fernandez. That concludes the
opening statements and I would like to yield myself 5 minutes
to ask questions and then I will yield to the ranking member.
Ambassador Glassman, to what extent does the diminished
U.S. diplomatic presences in Bolivia and Ecuador hinder the
U.S.'s ability to support U.S. companies and investors in those
countries? And what resources or recourse does U.S. investors
have if they encounter difficulties with governments such as
Bolivia that have revoked bilateral investment treaties and
eschewed participation in international dispute resolution
mechanisms?
Ambassador Glassman. Well, the quick answer to that is very
little. It is a major problem, not just for American investors,
but I would say for those countries themselves because they are
the ones who are being denied the kind of prosperity that they
should have through a sound rule of law. But I do think that in
many ways, the U.S. should become much more concerned and
engaged in Latin America countries, both those that are not
abiding by the rule of law and those that are who really need
encouragement. I am sad to say that I don't think we have been
doing that.
Mr. Salmon. I would agree with you. I guess on another
front Ecuador has shown little regard for property rights,
particularly intellectual property rights. In fact, this year,
USTR again placed Ecuador on the specialty 301 Watch List due
to failure to adequately protect U.S. intellectual property.
And these anti-innovation policies, they do harm the U.S., but
they also harm Ecuador which is locking her people out of
today's knowledge-intensive economy.
What tools do we have in our arsenal to encourage Ecuador
to adequately respect property rights, both tangible and
intangible?
Ambassador Glassman. I really think that one of the major
tools that we have is the bully pulpit. The State Department
does issue a report every year that covers the economic climate
in countries like Ecuador. My written statement does refer to
that. I just want to quote one sentence from it. This is about
Ecuador:
``Frequent changes in Ecuador's tax code make business
planning difficult, in general, the legal complexity
resulting from the inconsistent application and
interpretation of existing laws complicates enforcement
of contracts and increases the risks and cost of doing
business in Ecuador.''
We have the means through what the Secretary of State says,
what the President might say to affect the policies of Ecuador.
And I think that we should be talking about it.
Mr. Salmon. Mr. Fernandez, to what extent is corruption an
impediment to a healthy investment climate? And do you know to
what extent does the United States support anti-corruption
initiatives in Latin America? Which countries have improved
their anti-corruption capabilities as a result of such
assistance?
Mr. Fernandez. Corruption is an issue in Latin America in a
number of countries and it is an issue for U.S. investors in
large part because we are constrained, they are constrained by
the Foreign Corrupt Practices Act. And that is something that
will have repercussions back at home.
I have found that it differs depending on the country. You
look at countries such as Chile, as Uruguay, or you and I would
go into court there and feel that we can get a good hearing. In
other countries, it is a problem and it is many, many countries
where what we have tried to do in government was to support
transparency efforts, to work with the American Bar
Association, to work with others to support anti-corruption
measures.
Ultimately though, we have got to be able to get the
support of the local population because they are the ones that
ultimately are hurt by corruption. Corruption hurts for the
most part poor people, people who can't pay. And I think that
is part of what we need to do more of over the years.
Mr. Salmon. Well, Peru is maybe a more positive example,
they are experiencing growth somewhere between 4 and 5 percent
and they will be probably for the next 4 or 5 years. What are
they doing different compared to its counterparts such as
Venezuela and other countries to create jobs and effect
domestic investment?
Mr. Fernandez. Mr. Chairman, I actually represented Peru
when they privatized their phone company 20 years ago and I
would like to take credit for a little bit of their growth. One
of the things that they did is they did away with a lot of the
government bureaucracy. It became a lot easier to get permits
in Peru in order to do business. The more red tape that you
have in these countries, the easier it is for somebody to get
paid. So that is something that they did. They also provided a
number of guarantees for investors and they also made very
specific statements that they were going to welcome foreign
investment. That, I should say, in many cases has not made the
ruling Presidents quite popular. They have had to buck a lot of
political pressure. But overall, if you look at the macro
growth in Peru, a lot of it is due to the fact that they made
it very clear for the last couple of decades since they did
away with the shining path, that they are going to support
foreign investments and that they are going to do anything that
they can in order to attract and keep the foreign investor.
Mr. Salmon. Thank you. My time has expired. Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman. And I have to first
want to associate myself with Mr. Connolly in regards to the
opening remarks. I couldn't disagree with you more in reference
to your opening statement. I just wanted that to be clear for
the record because I think it is important as we discuss the
prosperity, building prosperity in Latin America that
oftentimes I don't like to get into even if some sides do it,
they say two wrongs don't make a right, etcetera. I get upset
if somebody is name calling the United States. I don't think we
should go back and name calling them and back and forth with
Presidents, particularly when I have had the opportunity to
travel to certain places.
And when I look at say the President of Bolivia, for
example, who is the first indigenous President in the country's
history and how proud those individuals are of their President,
I don't think that--I know even when we don't like our
President, whoever that President is, to be name called by
anyone else and I don't think that we should do it with them.
When I think about some of the countries that we are
talking about and I really appreciate the testimony of all of
the witnesses here, I think they were extremely important, but
when I think about governance and access to government to a
large part until recently many of the people that were
impoverished and indigenous and others had no access to
government at all. I mean that's why some people who are
elected is because of the fact that poorest of the poor in
these communities didn't, couldn't access government and didn't
vote in elections.
It reminded me as we celebrate the 50th anniversary of the
Voting Rights bill here in the United States of America. Just
50 years ago, a lot of folks could not vote in the United
States of America. We have come a long way and sometimes it is
difficult to expect somebody else to make the same kind of
progress that we made in almost 240 years, we are asking them
to make in a smaller period of time. But when I look at it, the
American economic ties to Latin America continues to deepen in
many places like Chile, Peru, and Mexico's participation in TPP
negotiations represents a great step forward in multi-lateral
collaboration on trade and despite actually sometimes what we
hear, Bolivia, believe it or not for some has nearly tripled
its per capita income since the early 2000s and attracted a
record $2 billion in foreign direct investment last year. So
clearly Bolivia is open for business. Ecuador has taken steps
to foster small business development and to improve market
access. And its economy has averaged more than 5 percent growth
annually since 2010. It is obvious that Americans are doing
business there and still investing in Latin America even where
there are challenges because I am not saying that there are not
challenges. There are very big challenges that we still have
got to confront. And I think that you have indicated what some
of those challenges are in your testimony.
But my thing is just imagine how many more opportunities
there would be if we could tackle some of the toughest
challenges facing American businessmen and women. I believe as
you have indicated, we have to have strong rule of law, respect
for intellectual property rights, and a fair and independent
judiciary are absolutely essential for fostering an environment
conducive to doing business. In fact, it is one of the main
reasons why I support free trade agreements because I believe
that we can lift up the standards, but not bring down the
standards as some say. So we need to lift up the standards.
That is why I also support trade capacity building. When I
voted for CAFTA, one of the few Democrats that did so. I
thought trade capacity building was absolutely essential if we
were going to pass that bill so that they would have the
capacity to grow and trade and improve their institutions. That
is tremendous. So I believe the free movement of goods and
services is at the heart of all stable democracies, as long as
everybody has the chance to participate.
I am a strong supporter of Colombia. Yet, I had some
Colombians that came in that were from the Pacific Coast who
wanted to make sure that they were included in the trade
agreement because we could have disparity if they are not and
if they don't develop that capacity.
So my question after going through my little statements
there is this. I will ask Mr. Fernandez because the other thing
is I do believe in doing things multilaterally and I want to
talk about how we can help. Does the Inter-American Development
Bank or any other regional multilateral institutions have any
programs in place to improve the climate for investment in
Latin America and Caribbean countries which we see that there
is some problems? Is there anything that you know of that
nature?
Mr. Fernandez. Well, my information is a little bit dated
now, I have been out of government for a few months, but USAID
has very strong programs in Latin America to improve the rule
of law. They fund organizations such as the American Bar
Association, MCC, the IDB as well. I think you have a number of
programs and you have a number of organizations in the U.S.
that help. I think we need to support them. One of the problems
that we found when I ran the ABA's rule of law initiative for
Latin America is that sometimes the programs were cut. And I
remember writing and drafting an arbitration, commercial
arbitration law for Central America in order to make sure that
U.S. investors didn't have to go to the Salvadoran Supreme
Court in order to get their disputes heard. And just as we were
done our funding was cut simply because of the civil strike in
Central America stopped and therefore the interest stopped.
I think we need to realize that in places like Venezuela
corruption was there before the current administration. These
things have been going on for a long, long time. And I think,
not to by the way in any case minimize what is going on there,
which is a tragedy both human and otherwise, but I think it is
going to take us a while. I think we have to make sure that we
support them and that we are steadfast be it a Republican
administration or a Democratic administration. Thank you.
Mr. Meeks. Thank you. Mr. Glassman, do you want to add
anything?
Ambassador Glassman. First of all, I would just like to say
that I have been an admirer of your support for free trade for
a long time. And I think that ultimately is one of the most
important ways that we can help in the United States. So I
certainly hope that TPP does go through.
I would just say that as far as Bolivia and Ecuador are
concerned, Bolivia ranks 158th on the Economic Freedom Index
and Ecuador is 159th. They have a long way to go. In general
though, I would associate myself with your comments about the
progress that Latin America has made and from a very, very
difficult past. But there is, I think, wide disparities as I
said in my testimony between some countries and other countries
and it is not ideological.
I mean Peru is actually a good example of a country which
you might say has a kind of a left of center government where
it is very clear that the administration understands that in
order to attract the kind of business that will lift everybody
up, it needs to be much more friendly to business and abide
much more by the rule of law.
Mr. Meeks. Thank you.
Mr. Salmon. Thank you. The Chair recognizes Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman. It is difficult for a
nation which is in debt to the tune of almost $18 trillion to
discuss or preach to other nations about their looming debt
crises, but having said that let me just say that I am deeply
concerned about the direction of Argentina and its ability to
influence other Latin American countries in following its poor
example.
I agree with you, Mr. Chairman, that we should be doing all
that we can to laud the positive examples of countries such as
Mexico, Chile, Colombia, Uruguay, Peru, Barbados, St. Lucia,
Costa Rica, because they have all shown great promise in taking
actions that value economic freedom and growth.
I think we do, however, have a responsibility to discuss
the rule of law. In fact, the U.S. bond holders who might face
significant risk and U.S. taxpayers who in the case of Puerto
Rico might be on the hook should there be some sort bail out
there. I am concerned when government tears up an agreement as
we saw with Doral and thus weakens the rule of law.
So I would like to address a few questions to Ambassador
Glassman first. Do you believe Puerto Rico is at risk of
defaulting on its debt?
Ambassador Glassman. I do. And probably more important so
do very, very close observers of Puerto Rico at places like
Nuveen and other bond houses that really watch these things.
Barclays. Thomas Weyl at Barclays is probably the most closest
observer of what is going on in Puerto Rico among finance
people, says that Puerto Rico is very close certainly.
Mr. Duncan. Just as a side note, Morningstar reported that
67 percent of all United States municipal bond funds have
exposure to Puerto Rico, general obligation to that agency
debt. Because Puerto Rico is a U.S. territory rather than an
independent nation, would you say, Ambassador, that U.S.
taxpayers are responsible for bailing out Puerto Rico if it
defaults on its debts?
Ambassador Glassman. I don't know the answer to that
question, but my guess is that if worse comes to worse that we
will be on the hook. And I think that the U.S. Congress should
be extremely vigilant about what is happening in Puerto Rico
right now. So it may turn out that we have no legal obligation,
but I kind of doubt that. And we need to watch it.
Just your reference to bond mutual funds, in my written
testimony I talk about the fact that many state bond municipal
funds, mutual funds have very heavy reliance on Puerto Rican
bonds and that will come as a shock I think to many small
investors. For example, I point out that in its most recent
report, Oppenheimer Rochester Maryland Municipal Bond Fund owns
about 25 percent--has about 25 percent of its assets in Puerto
Rican bonds because they are triple tax free.
One of the problems that has developed in Puerto Rico is
that borrowing has been quite easy because its bonds are so
attractive. They are triple tax free. It doesn't matter what
state you live in, the interest is exempt from federal, state,
and local tax.
Mr. Duncan. And I would say that there is probably a lot of
pension funds which are struggling financially anyway that are
heavily invested. Let me shift gears because I read an article
in the Washington Post by Mike Debonis back in January 2011 he
was talking about the Financial Control Board here in DC. So in
your testimony, you mention the U.S. could consider a federally
appointed Financial Control Board to help manage Puerto Rico's
financial situation. What would that look like and what would
be the impact of such an entity? And do you think that is the
right idea?
Ambassador Glassman. I think it is a good idea. I don't
know whether we are there yet, but I think it is time to start
looking at it and the Financial Control Boards both in New York
and Washington, DC, were very effective. So the Washington
Control Board went into effect in 1995 and was disbanded in
2001. It had very broad powers, including the powers to approve
any bond issues, hiring, firing. It had a distinguished board
that included Alice Rivlin, the former Vice Chair of the Fed.
And it worked very effectively, so I think that U.S. Congress
should take a look at the possibility right now of a Financial
Control Board.
I am not saying it should be instituted now, but I think
preparations ought to be made. We are talking about $73 billion
in debt. That is a lot of debt for a U.S. territory with a
population of 3.7 million. And with some very poor institutions
like the Puerto Rican Electric Power Authority. A majority of
its generating capacity comes from oil which is very expensive
and needs much more capital investment to get to natural gas
and some of the other better fuels. So I do think now is the
time to start looking at it, that is for sure.
Mr. Duncan. My time is about up, but with no more
participation, let me just ask you does Puerto Rico have a
balanced budget amendment?
Ambassador Glassman. I don't know the answer to that. The
last time I looked there was----
Mr. Duncan. Is there a requirement in their constitution?
Ambassador Glassman. I don't know the answer to that.
Mr. Duncan. They should and we should, Ambassador. And that
is the point I wanted to make.
Ambassador Glassman. Right. Thank you.
Mr. Duncan. They should and we should. Thank you. I yield
back.
Mr. Salmon. Thank you, Mr. Duffy. Oh, he is gone. Mr.
DeSantis.
Mr. DeSantis. Thank you, Mr. Chairman. Thanks to the
witnesses.
Mr. Glassman, I just wanted to touch on a couple of things
domestically because I have really respected your writing and I
think you have always been a supporter of pro-growth policies
here. And specifically with the rule of law, I know that you
had written about the problems with the Chrysler and GM
bankruptcies at the onset of this administration. I look back
at that from the beginning to even use TARP funds which was
first done by Bush, then by Obama. The law did not provide for
that. And then, of course, the problems with the actual
bankruptcy where the creditors were basically pushed out in
favor of the unions. So I guess my question is, is that whole
enterprise, do you think that that has left some lasting
damage?
Ambassador Glassman. I do. I think that the treatment of
the bond holders of GM and Chrysler who were, as you say,
shunted aside for what I would say were political reasons or
certainly were not treated the way they should have been
treated, has left some lasting damage.
This is a hearing about rule of law and the United States,
as several members have already said, it has not been perfect.
One of the things that disregard for the rule of law does is it
raises the cost of capital for corporations, for governments
and I think that the behavior of the government during that
period I think was damaging going forward, yes.
Mr. DeSantis. And I am concerned, too, if you look at how
the healthcare has worked. There was a problem when the law
kicked in last year. People started getting their plans
canceled. We did some in the House. They didn't want it
reopened in the Senate, so the administration said okay well,
just keep your plan. So now I have constituents who will call
me and say look, my plan was canceled. They said I could keep
it, can I keep it next year? I am like well, the law of the
books says it is illegal, but they say they are not going to
enforce it and so you end up in the situation, I have
businesses saying okay, is this employer mandate going to
apply? Now they say if I have 87 employees I am in a different
zone even though the statute doesn't say anything. And of
course, our Oversight Committee just put out a report where the
administration and the insurance companies are going back and
forth and they are trying to kind of figure out ooh, maybe we
can take this money for the reinsurance and risk corridors and
all that.
So I guess what I am seeing is kind of the administration
arm of government working with really big institutions in the
private sector divising rules as they go along. I don't think
that is conducive to a really solid pro-growth future here.
What are your thoughts on that? Am I right to be concerned?
Ambassador Glassman. I do think you are right to be
concerned. I just read that quote from the State Department
about Ecuador which talked about how they keep changing their
tax laws, keep changing all sorts of laws. And that has
discouraged investment. There is no doubt what investors want
is stability, confidence in the rule of law and the United
States stands pretty high up on the charts, but we are far from
being perfect. And when we neglect the rule of law, when we
neglect consistency, it hurts prosperity ultimately.
Mr. DeSantis. Without question. I think Lincoln's first big
speech was 1838 and he said, ``Founding Fathers have passed and
the memory of the Revolution is gone.'' The rule of law, we all
have to rally around that and really respect our institutions
and respect what that does for our freedoms. I think what he
said then is true today.
Let me ask you about, now getting back to the rule of law
in Latin America. The courts, how would you rate the courts in
places like Bolivia, Ecuador, and Argentina? It seems like what
I read is they are generally very negative, particularly with
corruption, so if the witnesses would like to express their
views, I would appreciate that.
Mr. Fernandez. They vary. I have been involved in a number
of countries where it has been fine for my clients to go to the
courts in those jurisdictions, as I mentioned, Chile, Uruguay.
For the most part though I think you have a much more slower
court system in Latin America, much more paper intensive. The
quality of the judges differs. For the most part, I think
foreign investors in these countries would prefer to go into
international arbitration. And that is why if you look at the
trade agreements that are out there, the Trans-Pacific
Partnership, Bilateral Investment Treaty models, in all of them
we have put in international arbitration investor state
arbitration. Those are the kinds of cases that will give our
investors the assurances that their rights will be enforced.
And it seems to me we ought to make sure that those are
included in the final version of anything that we sign.
Ambassador Glassman. Can I just add to that? You know, we
were talking earlier about the Argentina case which may be
resolved one way or another today and in order to sell those
bonds that it later defaulted on, in the 1990s, Argentina had
to agree that any case involving the bonds would be adjudicated
in New York Courts. That is the only way that American
investors could rely on Argentina. And I think that says a lot,
as does the fact that international arbitration is a part of
these treaties.
Mr. Barrett. The Ecuadorian court system did not cover
itself in glory during the long pendency of the Chevron case.
The record shows clearly without any ambiguity that the judges
involved in that case basically made themselves available to
sell their influence to the highest bidder. This was explicit.
They were going from one party to the other party saying how
much would you pay me, how much would you pay me?
The judge who ultimately signed his name to the $19 billion
verdict against Chevron, when called to testify under oath in
Federal Court in New York, and I was in the courtroom for his
entire testimony, seemed entirely unfamiliar with his own work.
He said that he spoke and read only Spanish and when asked how
then was the case that he had made rather erudite references to
American law, French law, UK law, Australian law, he explained
those were the product of the research of one person, his 18-
year-old typist who had found these references in internet
research.
Now having listened to all of this and being in a position
of authority, Judge Kaplan concluded that this judge really had
almost nothing to do with this 188-page ruling that has had so
much impact and then, in fact, other people wrote it and he was
interested in being paid a bribe for it. So sadly, in one of
the biggest commercial cases ever in the country, the situation
was just shot through with fraud in Ecuador.
Mr. DeSantis. Great. I really appreciate the testimony. I
yield back.
Mr. Salmon. I think we are going to have another round of
questions. We have got some more time. Can you stay just for a
few other questions?
Mr. Barrett, your experience with Ecuador was pretty
extensive, given the Chevron case and your reference to the
lack of real integrity for the judicial system there in Ecuador
is frightening. If you were general counsel for any large
company in the United States, and they were considering opening
up shop in Ecuador, what advice would you give them right now?
Mr. Barrett. You are asking me to practice law without a
license?
Mr. Salmon. Okay, let us say you weren't general counsel.
Let us say you are CFO. Now I am asking you to practice----
Mr. Barrett. It is getting worse and worse and more
dangerous.
Mr. Salmon. Either way. I mean given your experience don't
you think it is going to have a chilling effect on future
investment?
Mr. Barrett. Rather than putting myself in that position,
let us just make the observation that the oil industry remains
the backbone of the Ecuadorian economy. At one time, the U.S.
oil industry was core to operating that. The U.S. oil industry
saved the oil services companies which are still there is now
completely gone and in fact, the Chinese dominate the oil
fields in Ecuador which I think is troubling from the point of
view of political influence in Ecuador. Ecuador is very much in
hock to China. And if one is concerned primarily about
environmental issues, I think you would be concerned about the
Chinese operating the oil fields as opposed to American
companies today.
So I think in that industry in any event, the petroleum
industry, U.S. companies have voted with their feet and have
left the country. So that would be one precedent I would look
at.
Mr. Salmon. Absolutely. Ambassador Glassman, you mentioned,
I can't remember whether it was in the body of your initial
testimony or in response to a question, but that the United
States can and should exert the bully pulpit to try to lead
some of these other countries. Do you think that currently our
Government is doing everything that it can to try to lead these
countries in the right direction? And if not, what more should
be done?
Ambassador Glassman. No, I don't think it is. And I think
that in my testimony I talk about, my written testimony, I talk
about the Argentina case which has now gone on for 13 years.
And the United States did some things that were good,
absolutely, where for example, it refused to vote yes on
credits to Argentina from the Inter-American Development Bank.
But there was a lot more it could have done. And one example of
that is the G20. So Argentina is a member of the Group of 20
which in itself is fantastic. Well, it was very surprising, let
us put it that way.
So about 2 years ago, I did a study with Alex Brill of the
American Enterprise Institute and looked at the question who
should be a member of the G20? If you had objective criteria,
what would they be? And who would qualify and who would not?
And without going into all the details, Argentina ranked last
among the current members of the G20 and there were about 20
countries that should have been on the list instead.
Well, the United States could easily have put pressure on
Argentina through the G20 and told Argentina shape up or we
will take some action to expel you. It is almost a mockery of
the whole financial system that it is still a member. So that
is an example. I would also say that there are things that the
United States can do to encourage countries that are trying to
do the right thing and one example in my testimony is is Mexico
which has taken great strides, its energy reform will be very
important to the United States, and NAFTA has been very
important to Mexico and the United States. And yet, we see the
steel industry and the sugar industry in the United States
filing anti-dumping cases against Mexico, which I think very
much violate the spirit of NAFTA. And we have seen very little
in the way of government support for the kinds of things, for
encouragement of free trade from Mexico.
So I think there are lots of things that can be done and we
are not seeing enough of those things.
Mr. Salmon. Well, I don't want to limit you just to the
testimony today. If you have other thoughts that our Government
can and should be doing, and you wanted to draft a memo for
members of this committee, I promise you we will put it to good
use. And I would really appreciate it.
Ambassador Glassman. Thank you, Mr. Chairman.
Mr. Salmon. Thank you. Mr. Duncan.
Mr. Duncan. I just want to return real quickly to the rule
of law and what has gone on with Doral down in Puerto Rico and
in the Ambassador's written testimony in repudiating any of
this debt to Doral, Puerto Rico is sending the worst possible
message to other businesses, I agree. Who would want to
continue to invest down there with this sort of environment and
then it goes on to say that what company would want to overpay
the government in light of Doral? Better to under pay and have
the government fight for the money than to over pay and sitting
there waiting on the government to repay you. The fact that
they tore up an agreement for Doral to basically withhold or
underpay its tax liability going forward until it reclaimed or
recouped all of its money was, I think, a workable solution.
Ambassador, what possibility is there that Argentina will
default on its debt? What is the real possibility? They have
got the money, wouldn't you agree? From what I understand, they
have got the money. It is just a matter of principle now.
Ambassador Glassman. Yes. They do have the money. I think
that there are elements of the government that are simply
ideologically opposed to a settlement. But I also think that it
is becoming clear to Argentina that it can't join the
international financial community unless it gets this done. Now
over the last 13 years, partly because of high commodity
prices, it has been possible for Argentina to continue to have
a half decent economy. But that has really changed quite a bit
in recent years.
So I mean I don't know the answer to that question. It is
going to happen probably in the next few hours.
Mr. Duncan. That is the G20. How can you allow a country to
remain in an organization that is supposed to work on economic
stability around the globe and they are defaulting on their
debt?
Ambassador Glassman. Right. It baffles me. I don't know the
answer to that question. It really does not deserve, in my
opinion, to be in the G20, Argentina.
Could I just make one comment?
Mr. Duncan. Yes, sir.
Ambassador Glassman. About what you said about Doral. I say
in my written testimony that the Doral case may also be a
factor in a distressing report by Reuters that Puerto Rico's
tax collections are running 27 percent behind budget. And
nearly all that shortfall comes from corporate income taxes. So
we don't know for sure if that is because corporations are
saying oh, I don't want to overpay because I will get in the
same kind of fix that Doral--and by the way, other companies
have gotten into. But at any rate, there is this vast shortfall
in corporate income taxes. And when people don't pay their
taxes, and businesses don't pay their taxes, that is one of the
best signs that a government does not have confidence.
Mr. Duncan. I think that is a great statement. Mr. Barrett,
I just ask you to chime in. It is a jungle out there. And you
have written about the jungle. If Argentina defaults on its
debt and you have got actions like Puerto Rico with Doral, what
is the fix? From your standpoint as an author looking in, if
you are going to write about this, what would you say the
answer would be to the financial stability of these Latin
American countries?
Mr. Barrett. I am just going to have to be modest and not
only not practice law or be a CFO, but I think that is a little
bit beyond my level of credentials. I would want to inject just
one thought here from the investor's point of view which is I
think part of what you are driving at, I think all of these
events are going to cause and ought to cause investors to be
more cautious. And I think the marketplace is going to respond
to these events. And it will be much more difficult to get
large economic projects done in places like Puerto Rico and
Argentina as a result and the people who will suffer will be
the residents of those countries.
Mr. Duncan. Mr. Chairman, in their sense of time, I hope
they don't follow the U.S.'s example of printing money in QE1,
QE2, QE3, QE4, wherever we are at in the QE ratios because I
don't think that is the answer. And I think having a balanced
budget, I think doing things responsibly, paying your creditors
back, and living within your means is a great start. That is an
example that we can--that is a message we can send to them, but
that is a message we should follow as a nation as well.
Mr. Salmon. So we just can't fall back on our old parental
statement of just do it because I said so?
Mr. Duncan. No, I don't think that is fair and I yield
back.
Mr. Salmon. Mr. DeSantis.
Mr. DeSantis. Thank you, Mr. Chairman. Mr. Glassman, just
turning to trade and particularly the issue that has come up
where corporations--our tax system is so bad here that they
actually can go incorporate overseas, acquiring an overseas
company, move the headquarters, and then they are paying much
less in terms of a corporate tax rate. I think the President is
basically saying he wants to just chain companies here. I don't
see how--that may even make it worse. So what would you
recommend we do in order to attract capital here so that people
are going to want to have businesses here, expand them, and not
be driven away by our own policies?
Ambassador Glassman. Well, I think there is little doubt
what we need to do and I think there is something close to a
consensus, but there are differences on some points. And that
is lower our corporate tax, marginal corporate tax rate so that
it is more in line with the rest of the world. So right now, it
is 35 percent, 40 percent including state taxes, versus 24
percent for the average OECD developed country, so we are way,
way out of line. Everybody has been cutting them for the
obvious reason of attracting business. We have not.
Second, go to a territorial system which is almost what the
rest of the world has, so you pay taxes where you do business.
And third, close loopholes. I think the closing of the
loopholes and the increased business would mean you would get
at least as much revenue as you are getting right now for the
corporate tax which is very low. So what a normal corporation
does or many corporations do is they pay the tax abroad. Let us
say it is 20 percent. And then rather than bringing the money
back to the United States and paying an additional 15 percent,
they leave it abroad. So they have got $2 trillion abroad.
In 2004, Congress closed what I think was a major loophole
which was businesses were just opening a PO Box in the Cayman
Islands and shifting all their assets there. And instead,
defined very closely what an inversion is. And frankly, I think
that law is perfectly fine. But no company would want to invert
if we had a corporate--the kind of corporate tax reform that I
just outlined and I think most Members of Congress want. So
that is the imperative. That is the thing that is necessary.
And in a way, maybe it is ironic but this inversion controversy
which by the way only really involves a handful of companies, I
think may finally drive corporate tax reform which I would love
to see happen before the end of this year.
Mr. DeSantis. One of the things that frustrates me just as
a first termer is the way kind of Washington will score
proposals. So for example, we were talking about you have all
this money parked overseas as you said. Let us let people bring
it back on a holiday very reduced rate, maybe like 5 percent.
It could help for the Highway Fund or do other things if people
want to do that. That would actually be scored as the
government is ``losing money.'' Even though they wouldn't bring
it back under current rates, if you are lowering the rates, the
way they will analyze it is saying oh, well, the government is
going to lose all this money. So do you think there is a
problem with the scoring conventions here? Because it seems to
me that they don't account for behavioral changes when policy
makers are changing incentives.
Ambassador Glassman. Absolutely. There is just no doubt
about that. We need some kind of dynamic scoring. There is a
problem though, of course, because there may be a lack of
objectivity involved in dynamic scoring, but I think we all
know that if tax rates dropped to zero or very low or their tax
changes, that it does change people's behavior. There is just
no doubt about that.
Let me just also say that a company that does one of these
inversions, so called, I prefer to call them foreign tax
relocations because I think inversions have kind of a negative
quality. A company, first of all, has to buy a very large
company abroad. It has to be the main reason that they are
doing the merger. It can't be just for tax reasons. And after
that is done, you have the very strong possibility and
likelihood of money that is earned abroad coming back to the
United States because it doesn't have that extra layer of
taxation. But ultimately, we don't want to rely on these
inversions of a few companies.
What we really need, what would really liberate the U.S.
economy is to have the same kind of corporate tax system the
rest of the world has and then the imagination and ingenuity,
energetic nature of the American people will show that we can
compete and beat anybody. But right now, we are just hobbling
ourselves with this corporate tax system. And by the way, not
raking in very much in the way of tax revenue.
Mr. DeSantis. I appreciate that. And part of the
frustration we have is that we seem to shoot ourselves in the
foot with some of these things with the economy. If our tax
policies were competitive, people would flock here. This is a
good place to be in spite of some of the problems that we
discussed, we are still better off, but man, when you are
creating these huge disincentives, capital is mobile and in
this world-wide economy, it is going to move or it is going to
stay offshore.
Mr. DeSantis. Thanks, Mr. Chairman. I yield back.
Mr. Salmon. Ambassador Glassman, I would submit that if we
put this proposal right now for a vote with this panel, that it
would be unanimous. We would all vote to lower the corporate
taxes down to a rate that is reasonable with the rest of the
Western world and bring our companies back to the United States
and let them repatriate without the penalties. And common sense
tells you that the revenues would skyrocket if that happens,
besides the fact that something is better than nothing which to
me even an idiot can understand that. The other piece of it is
that it does influence behavior and investment and jobs growth
and it makes all the sense in the world.
Our motive today in this hearing was not to simply just
cast aspersions and beat people over the head, countries that
don't necessarily agree with our democratic values or even
agree with us on rule of law issues. It is not just to brow
beat. Our goal is to use the bully pulpit, as you said, Mr.
Glassman. It is to try to encourage other countries of the
world to try to employ more free market solutions because that
rising tide does lift all boats and it creates jobs and it
helps their economies and it helps their people.
And as we started by saying that just by seeing this great
spillover of people coming from Central America, the truth is
that if they had other things driving their economy other than
narcotrafficking, and they do, but I mean narcotrafficking has
become such a big part of what is happening in Central America
right now that the gang violence, the cartel violence, it has
just gotten out of control and if they had security and
economic stability, they wouldn't have this crisis. They
wouldn't. And we all recognize that.
And so what we are suggesting today for Bolivia, for
Argentina, for Ecuador, for Venezuela is that we want to see
them succeed. We truly do. We want their people to feel like
they are not oppressed. We want their people to feel like they
can succeed and they can cover their children's education, that
they can put food on the table and that they can have a
positive environment to raise their families like we want to
have. We are not trying to just humiliate. We are trying to
help and edify and that was the purpose of today's hearing was
and we hope that it is seen as constructive. I think the panel
did a phenomenal job outlining some of the things that can make
those countries even better.
Mr. Duncan. Will the gentleman, yield?
Mr. Salmon. Absolutely.
Mr. Duncan. Let me just say for the record, I am not
personally bashing Argentina. I love the country. I love the
people. I think them settling with their creditors would help
the economy, it would help their bond rating, and it would give
them the ability to actually attract investments. So it is just
the suggestion of how to do things, in our humble opinion,
better. I don't want that to be misconstrued because I want to
see the best for the country. I would love to see them back in
that top seven, Ambassador, as economic viability.
Mr. Salmon. Besides the Pope is from there, and you want to
get to heaven.
Mr. Duncan. I would love to go shoot doves. I yield back.
Mr. Salmon. Thank you very much and this hearing is now
adjourned.
[Whereupon, at 3:23 p.m., the subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Record
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Material submitted for the record by the Honorable Theodore E. Deutch,
a Representative in Congress from the State of Florida
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