The development of expropriation insurance: the role of corporate preferences and state initiatives
Published online by Cambridge University Press: 22 May 2009
As part of the Marshall Plan, the United States Government developed a state-sponsored program of insurance against currency inconvertibility in Western Europe, which grew slowly into a worldwide program insuring US-based multinational corporations against expropriation, war and revolution as well as inconvertibility. Two hypotheses—one based on corporate preferences, the other on state initiatives—can be used to predict the program's development between 1948 and 1974. While there is some independent scope for state policy, corporate preferences appear to be crucial: state policy on this issue has served corporate interests, and state initiatives on expropriation insurance are constrained by private investment decisions. The basic harmony between private investors and the state on expropriation insurance issues is explained by their shared goal of private capital accumulation.
- Copyright © The IO Foundation 1978
1 The corollary hypothesis is omitted for empirical reasons: on this issue there were only minor divisions within the Executive Branch.
2 This problem persists, see US, House, Committee on Foreign Affairs, Hearings on Overseas Private Investment Corporation, 93rd Cong., 2d sess., 1974, p. 35Google Scholar.
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6 The most accessible record of these concerns is Congressional testimony. Many examples could be cited: the 1948 House Foreign Affairs Committee hearings on the post-war recovery program; the 1949 House Banking Committee hearings on the Export-Import Bank; the 1949 House Foreign Affairs Committee hearings on the extension of the European Recovery Program; plus a number of other House and Senate hearings.
In addition, most major business associations published special reports covering the European Recovery Program or Point IV. See, for example, the CED, An American Program of European Economic Cooperation (1948)Google Scholar; the Chamber of Commerce of the United States, The Point Four Program (1949)Google Scholar; the NAM, The Bold New Plan (1949)Google Scholar; the National Foreign Trade Council, Private Enterprise and the Point IV Program (1949)Google Scholar, plus the NFTC convention reports and recommendations; the United States Council of the International Chamber of Commerce, Intelligent International Investment (1949)Google Scholar; etc.
7 Until OPIC was passed in 1969, the guaranty program was administered by various foreign aid agencies. As the focus of aid shifted from Europe to underdeveloped countries, the focus of guaranty insurance also changed. By 1959, it was limited to underdeveloped countries.
8 The treaties had a simple purpose. If the US government paid an insurance claim, then it received the company's title to the impounded currency or expropriated investment just as a regular insurance company would. The treaty was designed to clarify the US government's legal right to hold that title and to negotiate compensation for its holdings.
9 The laws are the Economic Cooperation Act of 1948, 62 Stat. 144–145 (1948); Economic Cooperation Act of 1949, 63 Stat. 51–52(1949); Economic Cooperation Act of 1950, 64 Stat. 198–199(1950); Mutual Security Act of 1951,65 Stat. 384 (1951).
10 US, Congress, House, Committee on Foreign Affairs, Hearings on the Mutual Security Act of 1954, 83rd Cong., 2nd sess., 1954, p. 1196Google Scholar.
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13 Many of the panels have similar titles and most are referred to by the name of their chairmen: Paley, Randall, Johnson, Fairless, Boeschenstein, and Wriston. In addition, individual studies were done by Gray, Rockefeller, Grace, and Straus on similar topics, usually at the President's request.
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24 Their support still had clear limits. They wanted a program that helped manage political risks, not a substitute for diplomatic protection. As such, their demands for better guaranty insurance were consistent with their demands for stronger State Department action to deter expropriation.
25 Memorandum from Don Daughters to O'Donnell, Kenneth, “Suggestions for Improvement AID/State Operations,” 06 13, 1962, p. 10Google Scholar, “A.I.D. 1/62–6/62” Folder, Box 68, President's Office Files, Departments and Agencies, John F. Kennedy Library, Waltham, Massachusetts. Page contains handwritten marginal notes by President Kennedy.
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27 Foreign Assistance Act of 1961, 75 Stat. 429–32 (1961).
28 Investor complaints about AID's administration were voiced repeatedly during OPIC hearings. Strong statements came from the NAM and a senior consultant to the Bank of America. For a re-statement of these complaints see Hornbostel, Peter A., “Investment Guaranties: Bureaucracy Clogs the Flow,” Columbia Journal of World Business, IV (03–04 1969): 37–47Google Scholar.
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32 We will continue to equate the terms “political risk insurance” and “guaranty insurance.” OPIC's own terminology is different.
33 Foreign Assistance Act of 1969, 83 Stat. 809–818.
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40 According to a GAO audit, claims against OPIC totaled $369.5 million as of April 10, 1973. OPIC took many of these claims to arbitration. It eventually lost most of them, but not until its charter had been renewed.
Even with these losses, OPIC managed to protect its operating balances through a variety of credit arrangements. Its main tactic was to negotiate compensation agreements with the Chilean junta. The junta agreed to pay most expropriated investors and issued long-term bonds to do so. OPIC then guaranteed payment of those bonds. The insured corporation was given the guaranteed bonds, which could be discounted for cash, plus a cash payment from OPIC. This arrangement saved OPIC's current reserves, but left it with long-term liabilities owed by foreign governments.
As of April 1977, OPIC had paid or guaranteed more than $246 million to investors in over 60 claims. $96 million was paid in cash; the rest was in guaranteed bonds. As disputes were settled and bonds repaid, about one-third of that money was recovered. But, as of April 1977, OPIC was still liable for $111 million in foreign government bonds. Its reserves amounted to $210 million. See OPIC, Topics, VI (03–04 1977): 1–2Google Scholar.
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42 This discussion of the AFL-CIO, like our other analyses of recent guaranties legislation, is based partly on confidential interviews. Those interviews were conducted with congressmen and committee staff (on both sides), and officials in AID, OPIC, and the White House. There are serious scholarly problems in relying on anonymous interviews; this research uses them primarily to amplify the public record.
43 The 1974 revisions are at 88 Stat. 763–768. For a statement of OPIC's administrative changes see US, Congress, House, Committee on Foreign Affairs. Hearings on the Overseas Private Investment Corporation, 93rd Cong., 2d sess., 1974, pp. 20–68Google Scholar.
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46 Because of bureaucratic in-fighting and multiple decision channels, the assumption of rational policy hierarchies does not hold in some policy areas. However, it does hold for guaranty insurance, which has had consistent and undivided support within the Executive Branch. Hence, more complicated forms of bureaucratic analysis can be discarded in this case in favor of the parsimonious state-initiatives hypothesis.