[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:]


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    Mr. Salmon. Thank you, Mr. Glassman. And now I turn to our 
next witness, Mr. Barrett.

            STATEMENT OF MR. PAUL M. BARRETT, AUTHOR

    Mr. Barrett. Thank you, Mr. Chairman. Thank you for your 
interest in my forthcoming book, Law of the Jungle, which 
describes the epic legal war over oil pollution in the rain 
forest in Ecuador. The events I have reported on for the past 
3\1/2\ years raise troubling questions about the rule of law in 
Ecuador. These events deserve your attention not only because 
of the threat they suggest to investor confidence in that 
country, but also the dangers they pose to the health and 
welfare of Ecuador's citizens.
    Portrayals of this controversy typically resemble a 
morality play or a fable: Indigenous tribe members fighting an 
evil, all powerful American oil company. A passive Latin 
American nation exploited by a mighty, industrial menace. David 
versus Goliath.
    In fact, the story is more complicated, as suggested by two 
clashing judgments from the Ecuadorian and American court 
systems. In February 2011, an Ecuadorian judge in the small 
city of Lago Agrio ruled that Chevron Corporation bears 
responsibility for severe environmental damage dating to the 
1970s. The judge imposed an historic $19 billion verdict 
against the company. Three years later, in response to a civil 
racketeering suit filed by Chevron, a Federal judge in New York 
ruled that the Ecuadorian judgment was a complete fraud: The 
culmination of an elaborate extortion scheme orchestrated by an 
American plaintiffs' attorney and aided and abetted by corrupt 
Ecuadorian lawyers and judicial officials.
    To understand the Chevron case, it is best to begin at the 
beginning. In the 1960s, Ecuador sought outside investment to 
take advantage of oil reserves in the Amazon region east of the 
Andes. Texaco, later acquired by Chevron, signed a series of 
agreements with the Ecuadorian Government resulting in 
production and export of oil via a pipeline over the Andes. The 
oil industry became the backbone of the Ecuadorian economy, 
raising the aggregate standard of living and contributing to 
improved social conditions as measured by such markers as 
decreased infant mortality and increased life expectancy.
    Unfortunately, while Ecuador became wealthier overall, 
economic inequality worsened. And people living near oil 
operations suffered from the side effects of unregulated 
industrial activity.
    Texaco, it should be emphasized, could have done a much 
better job of protecting the environment. It dug hundreds of 
unlined, open-air waste oil pits. It discharged into rain 
forest streams and rivers billions of gallons of tainted water. 
Texaco considered but rejected spending modest sums to reduce 
ecological harm.
    The human toll from Texaco's pollution was exacerbated, 
however, by Ecuadorian Government policies. While some of the 
rain forest residents affected by the contamination were 
members of tribes indigenous to the region, far more were 
farmers encouraged by the Government to move to the oil region 
under an official policy known as ``colonization.''
    Both Ecuador and Texaco profited from oil production. Some 
90 percent of the roughly $25 billion produced by oil 
activities in the 1970s and 1980s remained in Ecuador.
    In the early 1990s, the Ecuadorian Government nationalized 
its oil industry and sent Texaco packing. Back in the United 
States, Texaco faced an unfriendly ``welcome home.'' A group of 
American plaintiffs' attorneys filed a class-action suit in New 
York in 1993, accusing the company of environmental negligence. 
The courtroom war had begun.
    In Ecuador, Texaco negotiated a cleanup plan with the 
government under which Texaco assumed responsibility for 
``remediating'' one third of an agreed-upon list of 
contaminated sites. Ecuador took responsibility for the rest 
and gave the company a formal release from further liability. 
Three years later, right around the time Chevron was acquiring 
Texaco, the Federal courts in New York sided with the oil 
companies and told the plaintiffs, in essence, take your 
complaints to Ecuador.
    Chevron then learned the wisdom of the old adage ``be 
careful what you wish for.'' Sure enough, the lawsuit against 
Chevron restarted in the provincial courthouse in Lago Agrio in 
2003. Both sides employed tactics that would not pass muster in 
the United States. The plaintiffs' team, now headed by a brash, 
New York attorney named Steven Donziger, however, thoroughly 
outflanked Chevron when it came to unconventional legal 
tactics. Donziger cajoled and bullied Ecuadorian judges in 
private meetings and communications. He manipulated a 
supposedly neutral court-appointed expert, going so far as to 
arrange for the secret ghostwriting of the expert's submissions 
to the court.
    Ultimately, according to the March 4, 2014 opinion of U.S. 
District Judge Lewis Kaplin, Donziger's team ``wrote the Lago 
Agrio court's judgment themselves and promised $500,000 to the 
Ecuadorian judge to rule in their favor and signed the 
judgment.'' Donziger received ample cooperation from Ecuadorian 
judges eager to sell their influence to the highest bidder. 
Four out of the six judges who at one time or another presided 
over the Lago Agrio case were removed from office for 
misconduct during the course of that case. The course of this 
lawsuit in Ecuador and the litigation that underlay the $19 
billion verdict which is now being contested, was shot through 
with fraud and raised very serious questions about whether the 
Ecuadorian courts can handle a case like this and I would be 
pleased to answer more specific questions if you have them.
    [The prepared statement of Mr. Barrett follows:]


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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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