Emeritus Professor M. Sornarajah
Faculty of Law National University of Singapore
Foreign investment has been promoted as one panacea for the ailing economy of Sri Lanka. One of the tenets held out by the financial institutions from which Sri Lanka now obtains aid and advice on coping with the current economic crisis is to ensure that there are laws and instruments favourable to the attraction of foreign investment in the country. It is an advice that these financial institutions have held out at moments of economic crises to all affected countries. There is considerable experience as to outcomes of such advice. It appears that the present government in Sri Lanka, as past governments have, adopts the idea that foreign investment will drive the economic development of Sri Lanka. The correctness of this idea has to be assessed.
At what is a conference on law, it is incumbent on me to look at the law on foreign investment. The theory that the government has adopted attracting foreign investment in order to further economic growth mandates the existence of a particular structure of a legal framework. The structure is driven by preferred principles of international law and the reception of those principles in domestic law. What the principles of international law on the subject are constitute principles mandated by the leading states of the world which are exporters of capital and the homes of large multinational corporations which are the purveyors of foreign investment. This is to be expected. If the capital of multinational corporations is to flow into developing states, these states must ensure that adequate protection is to be given to such capital. The standards of such protection are stated by the home states of these multinational
corporations, principally the United States along with its European allies. One must not forget that this picture is now changing in that the United States, once the largest exporter of capital is now also its largest recipient. This has come about due to the rise of China, India and to a lesser extent, erstwhile developing countries like Singapore, Indonesia, South Africa and Brazil. These latter states are fast becoming exporters of capital and are joining the rank of countries which mandate strong external rules on investment protection with some reservation which they now share with the erstwhile developed states of the West.
The aim of this paper is to outline the domestic law of Sri Lanka on foreign investment. It then deals with the investment treaties that Sri Lanka has made in the hope of giving the impression that stable conditions for investments will be retained. If they are not, the foreign investor could seek compensation. It is axiomatic that the domestic law and the law created in the international sphere must work in tandem if the theory behind constructing liberal regimes of foreign investment are to succeed. It would appear that there is a divergence that takes place in the law as domestic law has developed views that resent the privileges that are conferred on foreign investors. This ingrained attitude of resentment can be seen in Supreme Court decisions like the Eppawela Phosphates Case and the Chunnakam Oil Spill case both of which involved foreign investment. The construction of the Port City was also contested. There is inherent hostility to foreign investment that is shown when environmental and other interests are affected. It is necessary to construct a legal regime that takes local interests into account rather than adopt a general theory that liberal legal regimes alone will bring about inflows of foreign investment.
Despite the existing liberal legal regime, foreign investment has not come into the country to any significant extent. The reasons for this are explored. The flow of foreign investment is not about the law alone. A state in which there is constant communal and
religious bickering, a frequent change of governments, widespread corruption and a wealth disparity cannot expect to attract the type of beneficial foreign investment needed for development. The paper concludes with suggestions as to what could be done to promote sustainable foreign investment in the North.
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