23 Aug International Investment Law Symposium: Is Foreign Direct Investment a Blessing or a Grift?
Mohsen al Attar and Rafael Quintero Godinez
Investment is a heavy word. It stumbles rather than rolls off the tongue, perhaps because the speaker is aware of its convoluted character. It invokes images of factories, infrastructure, workers, money, and men (in suits or in hard hats, usually both). Most of all, investment conveys an evolutionary trajectory; one that is ideological and transcendental and, by extension, universal. By disembedding the economic system from the social one, by conflating market value with human wellbeing (sometimes human worth), investment acquires the status that religion once held, commanding belief and fealty in equal measure. In a sea of provincialism, investment is the aspiration all can prostrate before.
Like other fields structured through a neoclassical prism, we note that the debate about foreign direct investment (FDI) is guided by assumptions rather than evidence. The premise is familiar: FDI facilitates economic upgrade, nurtures jobs and new technologies, and lifts living standards. In exchange for this largesse, investors deserve bespoke protections and a specialised adjudicatory system, in the name of global public interest of course. This is a comfortable narrative and one that has taken on the quality of gospel rather than hypothesis. Yet, advocates of this narrative sidestep growing unease toward missing evidence of the changes FDI precipitates FOR human development. They also fail to mention that almost 40 percent of global FDI amounts to phantom investments in corporate shells with neither substance nor actual links to the host state’s economy. Even the OECD acknowledges this, declaring mergers and acquisitions the financial witchcraft of Wall Street and lamenting its negligible impact on local welfare; it’s hard to imagine Netflix producing a programme about greenfield investments in renewable energies.
Still, politicians and media celebrate record numbers of FDI that mostly consist of hocus pocus. Local political actors campaign that their party is more trusted by transnational capital, that they will lure seas of FDI to the region, and that the incoming jobs will more than offset the state’s slashing of social welfare. The benefits of FDI do not accrue automatically, we are told, policies only lay the groundwork! So which policy aims does FDI promote, how does it propose to do this, and what does success look like? Perhaps the OECD provides the most edifying framework, entreating states to implement FDI-friendly policies by adopting its rules of thumb. To no one’s surprise, these rules include: “respect for the rule of law, quality regulation, transparency and openness and integrity”. And let’s not forget the free transfer of funds clause; how else can capital-exporting states and creditors expatriate their profits? FDI is valuable, to be sure, but valuable to whom and for what purpose, however, are questions for which answers are often presumed rather than investigated. Is FDI a blessing or a grift? Are its proponents worshippers, benefactors, useful idiots, or all of the above?
Under the weight of a controversial record, it is easy to see why Third World states enjoy a paradoxical relationship to FDI and the investment framework. There is no denying that the Global South welcomes FDI, though this feels like a laughable understatement; they hound FDI, surrendering much sovereignty (and dignity) in the process. Because of the gap between capital-importing and capital-exporting states, the former feel compelled to do as the latter say, accommodating the wishes, demands, and impositions creditors and the International Financial Institutions (IFIs) foist upon them. In a world where cash is king, where IFIs hold the key to salvation (or ruin), and where neoclassical and neoliberal precepts are constitutionalised across terms of reference and of trade, it is difficult for Third World states to do otherwise.
And yet, debate across the Third World is riddled with condemnations: opposition parties, civil society organisations, and social movements unite against their governments, accusing them of selling out their populations for a song and a whistle. Sometimes, even governments condemn the IFIs – and themselves! – for succumbing to demands they wish they could resist. Recall the experience of Michael Manley, the former prime minister of Jamaica, in his encounter with the IMF. Reeling from the energy crisis in the 1970s, his government borrowed money to offset the spiralling costs of fuel-based imports. With private banks offering little help, he resorted to the World Bank and IMF, proposing a long-term structural investment plan devised to boost infrastructure across the island and create conditions for a viable post-colonial society. His plan was unacceptable with the IFIs insisting on short-term repayments, which Jamaica could only achieve by implementing colossal cuts across vital sectors including education, health, and agriculture. As was standard with structural adjustment plans, Jamaica also removed safeguards for local industry and farming products. Despite Manley’s awareness of the implications of the prescription, he complied. When reflecting on it years later, he admits that he didn’t know what else to do. His choice was to surrender Jamaica’s economic sovereignty to foreign investors or to watch his society disintegrate as the financial lifeline was severed. We might describe this a Pyrrhic victory, but we must also question what type of framework forces the victims of historic exploitation to choose between their left arm and right leg. We also wonder if this experience caused Manley to rethink his earlier quip about what was good enough for England being good enough for him.
Third World challenges to FDI and the attendant legal regime are plentiful and we direct readers to the works of Akinkugbe, Anghie, Miles, Perrone, Sattorova, Sornarajah, and many others (Afronomicslaw is an excellent source of material on the debate). We also showcase the Symposium we launched today. Three months ago, we invited scholars to contribute to a discussion on FDI in Latin America and the Caribbean. We raised the concerns detailed above: while we acknowledge that FDI can play a role in fostering development in host states, we wondered about the regional Economic Commission’s verdict: “there is no evidence to suggest that FDI contributed to significant changes in the region’s productive structure over the course of the decade.” We were heartened by the spirited response, but also perplexed by its one-sidedness.
Of the proposals submitted, not one sought to defend the investment frame. Instead, we received a raft of critiques that, to varying degrees, excoriated FDI and investment law for precipitating countless social dislocations. Opinio Juris enjoys a wide readership and we anticipated that some would boost the assumptions upon which the model rests. While not reading too much into this, it seems to validate something we observed more broadly within the debate. Scholarship on international investment law (IIL) is split. On one side, we find the operational-instrumental-doctrinal variety that engages with the contours as adumbrated. Many of these contributions take the assumptions about FDI for granted, treating law, political economy, and international relations as separate fields of research. Without being churlish, their role is to evaluate the mechanics of IIL and to propose improvements that will strengthen compliance with the rules as they are. On the other side – so far apart we term this a schism – are scholars who condemn the assumptions and regime. They might express sympathy for the ambitions of host states (though not of investors), and propose reform that would amplify sovereignty and human development, while curbing investor expectations and privileges. They are unapologetic about their opposition to the status quo. We find this schism troubling and reflect on it in our concluding section.
In the days ahead, Opinio Juris will publish a series of essays exploring the relationship between FDI, IIL, and human development. In anticipation, we provide a primer to the field, setting out in this essay the historical basis of legal protections for foreign investors, the legitimation challenge the regime faces, and an overview of the contributions colleagues crafted. We conclude with a discussion of the schism, using Walter Rodney’s dialectics of development to explain why both strands of the debate come up short, ignoring the core purpose of FDI and the investment regime: to ensure that the Third World “continues to be a source for the accumulation of capital to be reinvested in Western Europe.”
(Certain) Aliens Should Have Rights Too
Capitalism’s development was gradual, emerging from the liberating action of world trade circa the 15th-16th centuries. The proliferation of market economies, successive migratory waves, and the establishment of embryonic value chains were characteristic of the era. With merchants travelling far and wide, quarrels were frequent between aliens (not yet foreign investors) and (mainly) European states. To minimise disruption to the nascent economic relations, colonial powers concluded treaties of navigation and commerce, articulating general principles governing the treatment of aliens, including the protection of property and freedom. Great Britain and France formalised one of the first treaties in 1606. Its greatest novelty was the conservator of commerce role: merchants were identified and entrusted to settle complaints about merchandise transported between states, indigenous communities excluded.
In the beginning, aliens, usually European or US citizens, were provided rights which former colonies were obligated to protect. Ensuing developments granted them rights which positioned them above nationals, protections which acquired the status of international minimum standard. If states violated these rights without proper redress, European powers acted as proxies interposing diplomacy to enforce the protections: for example, by establishing international claims commissions, forerunners of today’s arbitral panels. To illustrate, post Latin American wars of independence, the US and European states launched claims commissions against Mexico in 1839 and 1848, Ecuador in 1862, Peru in 1863 and 1868, and Venezuela in 1866 and 1888 to settle injuries to the property of their respective citizens. It’s worth pointing out that armed interventions were auxiliary to claims commissions with the British landing their military in Latin American states on at least 40 occasions while launching 60 arbitrations between 1820 and 1914. We leave you to guess how often the violence went in the other direction. Commissions did not substitute gunboat diplomacy; if anything, gunboats ushered states to arbitration, with the rules imposed ex post facto. “The effort to liberate foreign investment from constraints posed by local contexts has been a source of international conflict at least since the 19th century” Koskenniemi remarks, “when Latin American governments began to insist on applying national treatment to foreign businesses”.
The next decisive moment in the treatment of aliens occurred at the 1944 Bretton Woods Conference, which established the rules and institutions for the postwar monetary and financial order. Not only did the Bretton Woods agreements further open the world economy, they also formalised a capitalist order that favoured a liberal multilateral system of finance, trade, and investment relations. Complicit in the desired protections, the World Bank refused to lend to governments that nationalised property without planning for acceptable compensation. During the 1950s there were at least three instances in which the Bank contributed to the settlement of international economic disputes including the expropriations of the Anglo-Iranian Oil Company and the Suez Canal Company, and to resolve a dispute over the repayment of a loan issued pre-World War II between the City of Tokyo and French bondholders. The World Bank’s support for the private adjudication of alien property has long exhibited a palpable Eurocentric hue.
It is worth reflecting that FDI’s supposed value to local development was not a motivating factor in the establishment of the investment regime, at least not until Third World states raised the temperature.
Failing to Convince
Because of its problematic one-sided history, the regulatory regime has suffered multiple legitimacy challenges. Its current crisis has come about due to three complications precipitated by arbitral panels: they render inconsistent decisions, favour granting extensive protections to investors, and are insensitive toward overriding policy objectives proffered by host states. In short, the system seems rigged to protect the proprietary rights of wealthy foreign entities at the expense of local populations, which it was always meant to be. Arbitral panels are central to the complications, there is no denying this. However, each complication evinces evidence of the overriding structural bias of the system: sovereignty, human rights, and development might be rhetorically popular but they are legally peripheral.
Despite the absence of consensus toward resolving these complications, legal scholars focus on neo-formalist and neo-functionalist solutions. Neo-formalists treat the law as autonomous from other forms of reasoning, implying that we should make decisions without recourse to non-legal normative factors. For example, they suggest that arbitrators could improve by settling disputes via the comparative public law method of interpretation, to encourage the sampling of solutions from disparate public law regimes. Neo-functionalists use law for purposive, goal-oriented interventions. Favoured by international organisations, proposals often include reform packages that advance policy-based exceptions to investment. They even recommend that treaties include clauses to compel investors to comply with domestic laws and standards of corporate social responsibility.
There is no objective solution to these normative complications and we observe the implementation of both types of reform proposals. The Total Tribunal employed comparative public law to concretise “legitimate expectations”, which they achieved by recourse to general principles of law. NAFTA 2.0 includes a caveat to investment protection where governments adopt measures to protect legitimate public welfare objectives. In the same vein, modern Indian International Investment Agreements as well as the Southern African Development Community Model Bilateral Investment Treaty Template contain provisions on compliance with domestic laws and on corporate social responsibility.
Despite these responses, the flaws persist. Recent state-of-the-art assessments reiterate the concern about inconsistency in interpretation and bias against states. Moreover, arbitral panels demonstrate woeful unfamiliarity with the application of human rights law. We return to our introductory remarks: which policy aims does the investment regime bolster and how do we use FDI and its legal protections to achieve them? Drawing on Koskenniemi’s thesis of structural bias, we can only conclude that the greatest challenge to the reform of the regime is sectarianism with a dash of solipsism. International investors are a special class of legal actors, central to the global political economy yet just beyond everyone’s jurisdiction. They can operate without much regard to the aims, objectives, and laws of host states. Arbitrators preserve the solipsistic thinking of investors, translating special interests into general principles of the regime. Normative conflict is the only possible outcome as each demographic battles over jurisdictional lines. For example, a clever argument recently pursued to support the injection of human rights into the adjudication of panels is the ‘necessity defence’ under customary international law. Do prospective violations of human rights or ecological sustainability amount to a “grave and imminent peril”, permitting states to breach their investment treaty obligations? While this might seem like overreach, some investment tribunals have asserted that human rights provide the contours to corral investment protections. Of course, we admit the majority of arbitral panels are not so amenable, evincing the structural bias that we expect of them. We return to Koskenniemi: “every conceptual move is a move in a game of power where the one that has mastery over the concept will also have the power to decide”.
Investment law’s troublesome interplay with human rights also manifests at the policy level. Recall the OECD’s PFI, or what the organisation labels with shameless hyperbole as the “most comprehensive and systematic approach for improving investment conditions ever developed”. At its core, the PFI endorses macroeconomic stability and political predictability as key factors in making a state a desirable destination for FDI since surveys of investors reveal that “policy predictability” is their chief concern. Curiously, the PFI avoids discussion of the poverty and inequality that flow from macroeconomic stabilisation policies. The OECD treats the collapse of social protection or the violations of human rights as collateral damage in the pursuit of FDI. This is hardly surprising when we consider the direction that FDI flows in, who benefits from the expansion of protections, and the regime’s historic devotion to Euro-American economic interests.
If the protection of the proprietary rights of aliens linked to former colonial powers is the basis of the regime, it is difficult to identify a space for the developmental aspirations of local populations; the challenge is ideological first and structural second. Our contributors are equally sceptical and we turn to their essays next.
The Economic and Epistemic Violence of Structural Bias
Our symposium begins with familiar names: Nicolás Perrone and Leonardo Stanley. Their critique of the “quantitative FDI model” highlights several vital points: the impact of FDI on (un)sustainable development, its acceleration of relative poverty domestically and international inequality, and the privileging of transnational corporations embedded in global value chains to the detriment of disembedded (excluded) domestic firms. Perrone and Stanley do not end there, detailing the gains Third World states could achieve by shifting to a qualitative model that centres the social dimension of investment to reduce the dislocations we regularly lament. They also tell us why this will be difficult, and we commend their optimism in the face of dubious circumstances.
Jodi-Ann Stephenson is equally uneasy with FDI and its legal protections as imagined. While the preceding contribution links the societal impact of investment to neoliberalism, Stephenson centres “the imperial space within which the rules of foreign investment protection originated” in her discussion of the framework. Channeling the works of timeless Caribbean intellectuals, she bemoans the “colonial mindset” in the design of the regime. Many post-colonial states are beset by colonial legacies that curtail their ability to meaningfully influence either the type of investment or of legal obligations they are subjected to. While Stephenson opens with common themes such as regulatory chill and prejudicial arbitral awards, she uses governmental responses to the pandemic to accentuate her point about the continuing violence of colonial legacies. Despite being lawyers, we were sickened by our profession when we learned that “international law firms are advising current and potential clients on how host state measures [to combat the pandemic] could give rise to lucrative ISDS claims.” The statistics are nauseating with “at least 116 new ICSID claims” filed during the height of the pandemic and against brutally impoverished states. Like Perrone and Stanley, Stephenson is hopeful and concludes with a “way forward” that entreats Third World states to use public policy exceptions to protect the interests of their populations.
In the next submission, Ximena Sierra-Camargo examines one of the concomitants of FDI – extractive industries – and its facilitation of accumulation by dispossession in both literal and figurative terms. We learn that in the 1990s, Colombia reformed its investment laws to provide “extremely favorable conditions for foreign investors in the mining sector”. Implicitly drawing on Gilbert Rist, Sierra-Camargo laments the “development discourse” promoted by the World Bank for seeking to standardise mining policy at the continental level (both in Latin America and the Caribbean and in Africa), an approach that pleases Barrick Gold but ignores local conditions and punishes local populations. Perhaps what stands out most in Sierra-Camargo’s contribution is the collusion she documents between Canada and Colombia. Canada’s reputation took a battering this year as the world learned of its genocidal campaigns against First Nations; absconding the corpses of children has a way of doing that. We wonder what colleagues will think when they realise that the country’s attitude toward indigenous peoples elsewhere is equally sadist. In contrast to the others, Sierra-Camargo sees little to salvage in a regime that “updates colonial logics of exploitation.”
Our doctrinal colleagues will delight in the next contribution. Jason Haynes and Antonius Hippolyte provide a cutting critique of FDI, demonstrating that offering “investors significant concessions, or turn[ing] a blind eye to investors’ activities [can] prove detrimental to the host-state” especially when they are expected to compromise on human rights and environmental protection to secure the funds. To substantiate their impassioned critique, Haynes and Hippolyte dive deep into three case studies: Argentina, Bolivia, and Costa Rica. Possessing extensive knowledge of the ISDS claims levelled against these states, they verify that “Argentina is paying more in compensation to foreign investors than the [FDI] which is being injected into its economy.” Our heart rates spiked when we read about the Aguas del Tunari claim against Bolivia, and the manner in which the company gerrymandered a restructuring of their corporate holdings to shift majority ownership to a Dutch company and invoke the Netherlands-Bolivia BIT. It seems lawyers have graduated from forum shopping to forum engineering (though we chuckled a little when we learned that this case contributed to the election of Evo Morales … life has a palpable taste for irony). Like Sierra-Camargo, Haynes and Hippolyte do not regard FDI as a panacea for underdevelopment. To the contrary, Third World states “have paid a high price for overestimating [its] value.”
Gerardo Centeno García provides our penultimate piece. To understand García’s contribution, it is necessary that we familiarise ourselves with Mexican history. With regards to local development, what stands out is the role of state-owned enterprises in building much of the infrastructure, especially in the energy sector. Collectivism enjoys a long history in the country, even if the latest legal reforms sabotage it; the North American Free Trade Agreement dismantled the ejido system and the Reforma Energetica, the new energy law, supplanted “the national ownership of energy resources” with a free market model, welcoming “private parties in generation and commercialization activities”. García draws on Honor Brabazon to explain the shift in Mexico’s cosmogony from a collectivist ethos to one of neoliberal legality. Distinguishing himself from some of the other contributors, García closes with a fitting discussion about the challenge of corruption in legal reform.
We conclude our symposium with a breath of interdisciplinarity. Alicia Nicholls problematises the relationship between FDI and sustainable development goals (SDGs), placing emphasis on the plight of the Caribbean, an agglomeration of small island developing states that holds the mantle of the most indebted region in the world. Originally devised by European imperial powers as agricultural, mineral, and human export colonies, these islands have long struggled with the challenges of economic diversification, on one end, and wide-scale impoverishment on the other (worsening ecological precarity could be the straw that breaks the region’s back). For FDI to provide a leg-up, it must help the region “diversify from monocrop to industrialised economies.” Yet, across the Caribbean, “FDI goes mainly to tourism, financial services, and extractive industries” or non-SDG-related sectors. Making matters worse, “FDI is also procyclical” with Barbados and other islands witnessing “a precipitous drop in real estate FDI inflows from the United Kingdom after the Brexit referendum.” Nicholls is adamant that for FDI to benefit local populations, governments should not only be guided by the SDGs as targets but should also stimulate investment by “their local private sectors and diaspora communities.” We opted to conclude with Nicholls’ piece as she presents a promising research agenda and policy strategy. We recognise that the SDGs are not a panacea either and that the adoption of the SGDs as a barometer for FDI is a tad utopian, but we’re also aware of the plight of the Third World. As Nicholls argues, pursuing greater equivalency between foreign, domestic, and diaspora investors or directing regional investment promotion agencies toward SDG-related sectors are viable short-term innovations.
FDI’s True Purpose: Advancing European Development
Each contribution to this symposium raises the bar of critical scholarship on FDI and IIL, consolidating into a convincing counter-narrative about the costs of FDI for the Third World. Needless to say, as Third Worlders whose countries are hooked on FDI, we get no joy in verifying the validity of our hypothesis. Still, in coordinating this symposium, in reading through the submissions, and in reflecting on our introductory remarks, we can’t help but feel that something is missing. When examining the history of alien protections, when evaluating the timing of their development, it appears that the complications caused by FDI are not only the fault of arbitral panels (Sornarajah) or the capitalist structural bias that colours their thinking (Koskenniemi). For the Third World, the disadvantages of the system go much deeper than this. As always, Walter Rodney is elucidative when exploring the subtext of global political economy and his insights on FDI outpace those of contemporary critics:
“Today, in many African countries, foreign ownership is still present, although the armies and flags of foreign powers have been removed. So long as foreigners own land, mines, factories, banks, insurance companies, means of transportation, newspapers, power stations, then for so long will the wealth of Africa flow outwards into the hands of those elements. In other words, in the absence of direct political control, foreign investment insures that the natural resources and the labor of Africa produce economic value which is lost to the continent.”
In a world where economic relations are predicated on a predatory mindset, one continent’s loss is another continent’s gain. Beginning with Colon and expanding ever since, aliens have always invested in the Third World; today’s FDI has a very long tail. Investment provides access to labour, resources, lands, and markets, without which European living standards would be on life support or, likely, stillborn. Rodney was savvy to this, dedicating two full chapters in his seminal text to exploring the role of Africa in spurring the development of Europe. The dialectics of development are FDI’s dirty little secret for Euro-America is dependent on the wealth of those they exploit and FDI is the currency of access. Indeed, one of the greatest successes of FDI rhetoric is persuading Third World peoples that their exploitation is to their benefit. So effective is the narrative they even offer special rights to the exploiters for the privilege of being instrumentalised and dispossessed.
During the colonial era, Third World societies were integrated into an emergent system in a manner that was disadvantageous and have been struggling against their unenviable status ever since. Without this context, we tussle over the definitions of development, the breadth of responsibilities of investors, and the CVs of arbitrators, each of which obscures the role of FDI and IIL in preserving the underlying patterns of exploitation and unequal exchange that pervade the global economy. This is what we find most peculiar about the contours of the debate: it rarely accounts for who benefits, an omission that collapses the explanatory potential of our interventions.
If the dialectics of development were evident to a 20-something postgrad back in 1972, what happened in the ensuing half century to blur our vision and to stymie our thinking? The crux of the conundrum is that FDI and IIL are operating as they were intended to, proving to be a highly effective mechanism for the transfer of Third World wealth to Euro-American centres of capital. Until we admit that the corollary of development is exploitation, with all the consequences this implies, the FDI grift will continue to bamboozle.