    [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

                                  ----------
                                                                       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]

                                  ----------

        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:]

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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:]

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                                  ----------

        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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