Final Report Summary - POLECONINVESTREGIME (The political economy of the international investment regime)
Since the early 1990s, International investment agreement (IIA)s have proliferated rapidly. These agreements between sovereign states regulate the treatment of foreign investors and capital in their territory, and provide a layer of protection of property rights and transparency beyond that offered by domestic legislation and courts. They comprise Bilateral investment treaties (BIT)s, investment agreements involving several countries, and investment chapters in Regional trade agreement (RTA)s, such as North American Free Trade Agreement (NAFTA). By 2008, these agreements had formed a dense network of over 2 600 BITs and close to 250 RTAs with investment provisions. Most are agreements between a developed and a developing country, although recently, the number of IIAs between developing countries has started to grow. The international investment regime has therefore evolved into a decentralised network to promote and protect Foreign direct investment (FDI).
The objective of this project was to analyse the political and economic factors that account for the peculiar character of this regime, and to explain its development over time. Drawing on the concept referred to as 'legalisation' or 'judicialisation', i.e. the institutionalisation of international relations through law, the project sought to answer two related questions. First, why do countries choose to create a legalised, bilateral treaty framework to govern FDI? Second, what accounts for the evolution of the investment regime, i.e. its institutionalisation from general declarations to elaborate agreements, enforceable via third-party arbitration?
The principal finding is that evolution of the international investment regime is primarily driven by developed countries that use international law to nudge developing economies to adopt and maintain a liberal economic policy. Since many treaties include commitments by the host country to offer investors at least the same protection extended to those treated the most favourably (the so-called most-favoured-nation clause), the overall effect is an evolution of the investment regime towards ever-higher standards.
The first period of the project focused on developing an index scheme to measure three dimensions of legal obligation, precision and delegation. Interviews were conducted with investment treaty negotiators for Japan, Canada, and the United Kingdom, and legal experts were consulted on the index itself. During the second period of the project, the work focused on the analysis of the quantitative data on treaty clauses. As part of this effort, virtually all public (past and current) English-language BITs and a sizable subset of German French-language treaties have been collected and made electronically readable. To create a measure of the legal restrictiveness of, text analysis software was used to quantify the appearance of key words and phrases, and to score individual treaty texts based on the index scheme developed and refined in the first reporting period. Network analyses and diffusion studies showed that countries appear to adopt different treaty clauses in strategic and non-strategic fashion. Surprisingly, legal uncertainty seems to outweigh rational planning in many instances, but once countries have been targeted in arbitration tribunals, rapid learning leads to the revision of existing treaty texts.
The project has resulted in several peer-reviewed publications that have been accepted and will appear in 2013 and 2014, subject to journal publishing lead times. Beyond these scholarly results, the findings suggest that the expansion of BITs in the last two decades has had a number of unintended consequences. These are evident in the recent decision by Australia not to sign further BITs that include an investor-state dispute settlement procedure (following legal proceedings initiated over cigarette package branding legislation), and in the decision of South Africa to withdraw from all BITs. It appears that many countries entered investment treaties with little awareness of their full legal implications (to the extent that they could be known at the time), and that the promised benefits have not materialised in many instances. It could thus be said that the 1990s and early 2000s marked the zenith of the international investment regime, and that we will witness a reassertion of legal sovereignty by nation states over foreign investor rights.
The objective of this project was to analyse the political and economic factors that account for the peculiar character of this regime, and to explain its development over time. Drawing on the concept referred to as 'legalisation' or 'judicialisation', i.e. the institutionalisation of international relations through law, the project sought to answer two related questions. First, why do countries choose to create a legalised, bilateral treaty framework to govern FDI? Second, what accounts for the evolution of the investment regime, i.e. its institutionalisation from general declarations to elaborate agreements, enforceable via third-party arbitration?
The principal finding is that evolution of the international investment regime is primarily driven by developed countries that use international law to nudge developing economies to adopt and maintain a liberal economic policy. Since many treaties include commitments by the host country to offer investors at least the same protection extended to those treated the most favourably (the so-called most-favoured-nation clause), the overall effect is an evolution of the investment regime towards ever-higher standards.
The first period of the project focused on developing an index scheme to measure three dimensions of legal obligation, precision and delegation. Interviews were conducted with investment treaty negotiators for Japan, Canada, and the United Kingdom, and legal experts were consulted on the index itself. During the second period of the project, the work focused on the analysis of the quantitative data on treaty clauses. As part of this effort, virtually all public (past and current) English-language BITs and a sizable subset of German French-language treaties have been collected and made electronically readable. To create a measure of the legal restrictiveness of, text analysis software was used to quantify the appearance of key words and phrases, and to score individual treaty texts based on the index scheme developed and refined in the first reporting period. Network analyses and diffusion studies showed that countries appear to adopt different treaty clauses in strategic and non-strategic fashion. Surprisingly, legal uncertainty seems to outweigh rational planning in many instances, but once countries have been targeted in arbitration tribunals, rapid learning leads to the revision of existing treaty texts.
The project has resulted in several peer-reviewed publications that have been accepted and will appear in 2013 and 2014, subject to journal publishing lead times. Beyond these scholarly results, the findings suggest that the expansion of BITs in the last two decades has had a number of unintended consequences. These are evident in the recent decision by Australia not to sign further BITs that include an investor-state dispute settlement procedure (following legal proceedings initiated over cigarette package branding legislation), and in the decision of South Africa to withdraw from all BITs. It appears that many countries entered investment treaties with little awareness of their full legal implications (to the extent that they could be known at the time), and that the promised benefits have not materialised in many instances. It could thus be said that the 1990s and early 2000s marked the zenith of the international investment regime, and that we will witness a reassertion of legal sovereignty by nation states over foreign investor rights.
