¹ Indeed, in a country like China, sitting on 1.3 trillion dollars of reserves, there is little value to the capital itself.

² The initiative to create an Mai collapsed in October 1998 when the French Prime Minister Lionel Jospin announced his government was withdrawing from the talks. The developing countries were worried that new obligations would be imposed on them and that the agreement would bring them little benefit. For additional details, see G. de Jonquieres, Retreat Over OECD Pact on Investment, Fin. Times, Oct. 21, 1998. There is an interesting parallel with the failure of the multilateral trade talks: each was followed by a proliferation of bilateral agreements that were in general even more disadvantageous to the developing countries.

³ These so-called free trade agreements are not really free trade agreements but managed trade agreements. A free trade agreement would eliminate not only tariffs but also non-tariff barriers and subsidies. None of the FTAs (so-called Free Trade Agreements) do that. For a further discussion, see, e.g., Joseph E. Stiglitz & A. Charlton, Fair Trade for All (2005); Joseph E. Stiglitz, Making Globalization Work (2006).

⁴ The number of such agreements has been increasing so rapidly that it is hard to keep track. According to the UN Conference on Trade and Development (UNCTAD), which tries to monitor them, the numbers almost doubled between 1995 and 2005, going from 1,322 to 2,495. During 2005, 70 Bits were concluded. This is the fewest concluded in any year since 1995. These figures only include Bits, which make up slightly less than half of all International Investment Agreements (ILA). Nations, United, Developments in International Investment Agreements in 2005, IIA Monitor No. 2 (2006)Google Scholar.

⁵ See M. Hallward-Driemeier, Do Bilateral Investment Treaties Affect FDI? Only a Bit and they Could Bite, Policy Research Working Paper No. 3121, Washington, DC: World Bank, August 2003. UNCTAD found similar results in Bilateral Investment Treaties in the Mid-1990s (1998). While some studies have come to the opposite conclusion, the weight of the evidence is on the side that these agreements have had little if any effect. The article by Neumayer, E. and Spess, L., Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries? (33 World Dev. 1567-85 (2005))CrossRefGoogle Scholar found a positive correlation between Bits and FDI. The article by Salcuse, J. and Sullivan, N., Do Bits Really Work? An Evaluation of Bilateral Investment Treaties and Grand Bargain (46 Harv. Int’l L. J. 46 67-130 (2005))Google Scholar, also found a positive correlation. But other authors have found the results disappear when the sample is altered, and/or when Bit characteristics are controlled for. A broader study by Tobin and Rose-Ackerman, for instance, found no positive effects. See J. Tobin & S. Rose-Akerman, Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties, Yale Center for Law, Economics and Public Policy, Working Paper No. 239, 2004, cited in Gallagher, K. P. & Birch, M. B. L., Do Investment Agreements Attract Investment? Evidence from Latin America, 7 J. World Inv. & Trade 961-74 (2006)Google Scholar. What is clear from this literature is that there is no compelling evidence that these bilateral investment agreements have an economically, or statistically, significant effect on growth, let alone societal well-being. This paper will provide part of the explanation for why that may be so. For a current bibliography on this issue, see A. Cosby, “International Investment Agreements and Sustainable Development: Achieving the Millennium Development Goals,” International Institute for Sustainable Development, Winnipeg, Canada, September 2005, available at <http://www.iisd.org/pdf/2005/investment_iias.pdf>.

⁶ Foreign Investment in Latin America and the Caribbean 2000, Santiago, Chile: United Nations, June 2001, p. 15.

⁷ An increase in foreign investment might not lead to higher growth if, for instance, foreign investment displaced domestic investment. It is important, of course, to measure growth appropriately, taking into account the depletion of natural resources and the degradation of the environment. Moreover, countries should focus not on GDP (which most of the empirical studies do), but on NNP (Net National Product). The former looks at output produced within a country, the latter at the (net) income of the citizens of the country. If output goes up, but all of the resulting increased income goes to foreigners, it obviously is of little benefit to the citizens of the country. Using these concepts, it is even easier to see how foreign investment could increase but the well-being of the citizens decrease. Some of the mines in Papua New Guinea, for instance, caused significant environmental degradation; the low royalties the country received may not have been enough to compensate for this damage.

There is another dimension to societal well being about which we will have little to say: foreign investment can lead to an increase in inequality; standard measures of GDP per capita look only at averages. Median income could be going down even as average income increases, so most citizens of the country could be made worse off. Mines which pollute rivers can decrease incomes of poor fishermen, even if the mines create a few high paying jobs.

⁸ The most notorious examples involved arbitration of cases in Argentina and Czech Republic. See fn. 39 below. Another example is provided by decisions concerns standards of compensation. While most panels have ruled against compensation for lost profits, in the famous Karaha Bodas case in Indonesia, a Swiss Panel awarded $319 million to the private party (including $58 million interest), while the original investment was only $111 million (See Kurniawan, Moch. N. “Pertamina should pay compensation to Karaha: Experts.” Jakarta Post, March 20, 2002 and Aglionby, John and Taufan Htdayat. “Pertamina settles power dispute.” The Financial Times, March 22, 2007, Companies International p 16. (The lost profits may have been particularly large in this case, because of possible corruption in the award of the contract under Suharto—one of several aspects of the case that might it particular galling to Indonesians. So too was the view that they had been encouraged by outside advisers to cancel the disadvantageous, and possibly corrupt, contract. For additional information, see <http://www.karahabo-das.com/legalkeypoints.php>).

⁹ There are important questions even of what that means, on which I shall comment briefly below. Also, as I have already commented, and I explain in greater detail below, there is ongoing controversy about what these agreements really do entail. The persistence of this ambiguity is itself a flaw, in part related to defects in the dispute resolution mechanism, also discussed below.

¹⁰ For instance, if the government builds a highway near a piece of land, the value of the land may increase enormously: a windfall gain to the landowner. If the government is unable to appropriate for itself these gains, it may have insufficient incentives (or resources) for undertaking these value enhancing investments. Yet while firms insist on being compensated when the government takes actions which decrease the value of their property, they are less enthusiastic about sharing the gains that arise from government actions; investment agreements may even preclude such attempts, unless the government has imposed (in a presumably “fair and equitable” and “non-discriminatory” manner) a capital gains tax. Imposing taxes that would recapture the gains would have the further advantage of discouraging lobbying (or outright corruption) to pass legislation or to make investments that increase asset values.

¹¹ To be fair, some of the advocates of regulatory takings provisions see it as not just instrumental (i.e. reducing the scope for regulatory takings will enhance economic efficiency) but believe that such provisions are necessary for a just society ( it is unfair, in some fundamental sense, to deprive people of their property; partial deprivation through regulation is also fundamentally unfair). We shall discuss these issues briefly below (cf. discussion of endangered species).

¹² The Supreme Court has utilized a three-prong test, developed in Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978), (which reviewed and upheld a landmark preservation law which placed restrictions on the ability of owners of landmark buildings to alter the buildings appearances in a number of ways) to analyze when regulation has gone “too far,” constituting a taking and therefore requiring compensation from the Government. These factors are: the character of the government action, the economic impact of the regulation on the landowner, and the distinct investment-backed expectations of the landowner. Laws and regulations that focus on restricting public nuisance, and protecting the health and safety of the community, have not required compensation. See, e.g., Hadacheck v. Sebastian, 239 U.S. 394, 410-12 (1915) (barring brick manufacturers from residential areas). Village of Euclid v. Ambler Realty Company (1926) was the first case to review and uphold municipal zoning regulations. Subsequently, in Berman v Parker (1954), the Supreme Court ruled that private property could be taken for public purpose rather than simply public use. This case led to other cases which allowed cities to exercise eminent domain over blighted neighborhoods.

¹³ See Kelo v. City of New London, Conn., 545 U.S. 469 (2005). This much discussed case focused on the interpretation of “public use” in the 5th Amendment of the U.S. Constitution, in the context of eminent domain. The Court’s decision that the taking of private property to transfer to private companies (primarily Pfizer) in order to boost economic development in the City was constitutional, continues to generate great opposition.

¹⁴ These regulatory takings initiatives have found success in Oregon in 2004, with the passing of Measure 37, requiring just compensation for any land use regulation passed after the statute was implemented; and also in Arizona in 2006, when voters overwhelmingly supported Proposition 207 (cited as the “Private Property Rights Protection Act”),. However, initiatives failed to garner sufficient voter support in Washington (Initiative 933), California (Proposition 90), and Idaho (Proposition 2).

The initiative in Oregon has faced legal challenge in Oregon Courts. Although plaintiffs attempting to overturn Measure 37 gained success in the lower courts, the Oregon Supreme Court found the measure constitutional, and reversed this decision, therefore clearing the way for the initiative to continue functioning. See MacPherson v. Dept. of Administrative Purposes, 340 Or. 117, 130 P.3d 308 (Or. 2006).

Since the Kelo case 26 states have enacted bills restricting the scope of Kelo. in 3 states a constitutional amendment reducing the scope was ratified, and in an additional 2 states legislation passed bills only to have them vetoed by the governor. The National Conference of State Legislatures maintains a list of passed bills/amendments at: <http://www.ncsl.org/programs/natres/annualmtgupdate06.htm>. As an example, the state of Illinois SB 3086: “Prohibits the use of eminent domain to confer a benefit on a particular private entity or for a public use that is merely a pretext for conferring a benefit on a particular private entity. Limits the use of eminent domain for private development unless the area is blighted and the state or local government has entered into a development agreement with a private entity.”

¹⁵ Congress passed the Treasury, Postal Services and General Government Appropriations Act, 1997 (Pub. L. No. 104-208, §645, 110 Stat. 3009 (1997)) in 1997, requiring the Office of Management and Budget to prepare a detailed analysis of the costs and benefits of each regulatory action of the Federal Government. There have been a series of House bills in the 109th Congress attempting to implement greater limits on eminent domain and regulation by Federal government: however, these proposals have all died in the Senate. See Private Property Rights Protection Act 2005, H.R. 4128, 109th Cong. (2005); Threatened and Endangered Species Recovery Act, H.R. 3824, 109th Cong. (2005); Private Property Rights Implementation Act, H.R. 4772, 109th Cong. (2006).

¹⁶ Because of the one-off nature of this form of international dispute settlement, different tribunals have seemingly taken different positions and may even resolve similar cases in different ways. It is clear, for instance, from the discussion below that many investors believe that Chapter 11 provides such protection. The arbitration panels seem, however, to be sensitive to the controversial nature of the regulatory takings/expropriations perspective, and few tribunals have found governments liable for expropriation when regulations have been at issue. It is more typical for tribunals to find some other treaty breach (failure to provide “fair and equitable treatment” for example) than to rule that there has been an expropriation. in the Methanex case (Methanex Corporation v. United States of America, Final Award of the Tribunal on Jurisdiction and Merits, August 3, 2005), the presiding tribunal, in a 2005 final ruling, came out quite strongly in favor of the Us—which had to argue that its methanol regulations did not constitute a regulatory taking in violation of Chapter 11. For a precis of the outcome see Item 1 in <http://www.iisd.org/pdf/2005/investment_investsd_aug22_2005.pdf>.

¹⁷ At the time, there was considerable debate within the White House about whether to pursue its passage, with higher priority being assigned to domestic issues (deficit reduction, health care reform, welfare reform). It was partly at the urging of the Council of Economic Advisers that the adoption of NAFTA was added to the list, and the CEA was involved in all of the important decisions that led up to its passage. I had an occasion subsequently to ask Mickey Kantor, who at the time was the U.S. Trade Representative, and thus the person directly responsible for trade agreements like NAFTA, whether he was aware at the time of the full import of Chapter 11. He pointed out, rightly, that the Clinton Administration had inherited the text from the Bush Administration, so besides the concerns about labor and environment that got reflected in side-letters to the agreement, little attention was paid to the details of what was inside the agreement. A recent article describes the public vetting: “Chapter 11 came into effect in 1994. One of the first sections of NAFTA to be completed, it was settled with little fanfare and virtually no public scrutiny.” More to the point, in the same article, Abner Mika, President Clinton’s General Counsel, is quoted: “If congress had known that there was anything like this in NAFTA, they would never have voted for it.” See A. Nikiforuk, “11 Feet Under,” Toronto Global and Mail, Nov 26, 2004, Report on Business, p 58.

¹⁸ Others have come to similar conclusions. For instance, M. Hallward-Driemeier, op cit, fn 6: “In addition to the size of the awards and the constraints placed on policymakers, some American critics are concerned that Chapter Eleven is causing an “end run” around the constitution and are decidedly antidemocratic - the terms and consequences of Chapter Eleven were never publicized or debated prior to signing; that there is no room for public comment or even public scrutiny of the arbitration procedures; and limited mechanisms for appeal.”

¹⁹ See for instance the statement of Pakistan’s Attorney General at ICSID cited in Investment Treaty News, published by the International Institute for Sustainable Development, December 1, 2006, available at <http://www.iisd.org/pdf/2006/itn_decl_2006.pdf>.

²⁰ Interestingly, as this article goes to press, the investment provisions of the Korea-Us bilateral trade agreement have become one of the major focal points of opposition. I have had discussions with very senior government officials of a small Asian country which is under pressure to sign a bilateral investment agreement with the U.S. They too have gradually become aware of some of the problems of these agreements—within the region, the experience of Indonesia, discussed earlier, seems particularly salient. They were, however, not confident that they could resist American political pressure.

²¹ See the UNCTAD study at <http://www.UNCTAD.org/en/docs/webiteiit20052_en.pdf>. Although investment treaties have been negotiated since the late 1950s, there is no public evidence of their having been used in arbitrations prior to the mid 1980s. Two cases alone - those by the majority shareholders of Yukos against Russia and those by disgruntled bondholders against Argentina - involve claims of more than a billion dollars each.

For a discussion of the exponentially increasing role of litigation in addressing trade disputes, specifically at the WTO, see A. Beattie, “From a Trickle to a Flood—How Lawsuits are Coming to Dictate the Terms of Trade,” Financial Times, Mar. 20 2007, at 13.

²² This set of theories has been most forcefully articulated in the works of Richard Posner. See Posner, R. Economic Analysis of Law, 7th ed., Wolters Kluwer Law and Business, 2007 Google Scholar, and Posner, R., Law and Economics, Vols I-III, co-edited with Parisi, F., Edward Elgar Publishing, 1997 Google Scholar.

²³ This school typically also sees there being strong economic forces to maintain competition (so, for instance, there is little need for anti-trust action). For example, even when there is a natural monopoly (a single firm dominates the market, because of increasing returns to scale), competition for the market—to be mat single firm—is so strong that efficiency is ensured. See Baumol, W., Panzar, J., and Willig, R., Contestable Markets & the Theory of Industry Structure, Academic Press, 1988 Google Scholar. Like much of the rest of this theory, it rests on weak foundations: if there are even arbitrarily small sunk costs, then markets are not contestable; potential competition does not suffice to ensure economic efficiency. See, e.g. Farrell, J., “Cheap Talk, Coordination, and Entry,” Rand Journal of Economics, 18(1), Spring 1987, 34-39 CrossRefGoogle Scholar, Stiglitz, J. E., “Technological Change, Sunk Costs, and Competition,” Brookings Papers on Economic Activity, 3, 1987, (also in special issue oí Microeconomics, Baily, M.N. and Winston, C. (eds.), 1988, pp. 883-947)Google Scholar; and Dasgupta, P. and Stiglitz, J. E., “Potential Competition, Actual Competition and Economic Welfare,” European Economic Review, 32, May 1988, pp. 569-77CrossRefGoogle Scholar.

²⁴ For an exposition, see Stiglitz, J. E. “Information and the Change in the Paradigm in Economics,” in Les Prix Nobel; The Nobel Prizes 2001, Frangsmyr, Tore (ed.), The Nobel Foundation, 2002, pp. 472-540 Google Scholar abbreviated version in , American Economic Review, 92(3), June 2002, pp. 460-501. See below for a more extensive discussion of the limitations of the “old” paradigm.

²⁵ See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204,116 Stat. 745 (codified as amended in scattered sections of 11,15, 18, 28, and 29 U.S.C.). Section 201 concerns what other business the auditor can perform with an audited company. They are prevented from providing the “issuer, contemporaneously with the audit, any non-audit service.”

²⁶ This revisionist view has also changed perspectives on other non-market institutions. Previously, some had argued that non-market institutions arose to address market failures (see, e.g. North, D., Structure and Change in Economic History, New York: WW Norton, 1981.)Google Scholar For instance, because of moral hazard, markets provide only limited insurance, and gaps in market insurance are filled in, in part, by non-market institutions, like families. Putting aside the functionalist fallacy, a closer analysis of the interactions between these non-market institutions and markets shows that they may, in fact, be dysfunctional; that is, while they may arise to fill in holes left by the market, markets respond to these non-market institutions, with the net result that the overall level of insurance, and economic welfare, may be decreased: the non-market institutions, which are less efficient in risk sharing than the market institutions, crowd out the market institutions. See Arnott, R. and Stiglitz, J. E., “Moral Hazard and Non-Market Institutions: Dysfunctional Crowding Out or Peer Monitoring,” American Economic Review, 81(1), March 1991, pp. 179-90Google Scholar. North’s more recent works, Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990 and Understanding the Process of Economic Change, Princeton University Press, 2005, seem to reflect a recognition of the limitations in the earlier view. For a broader discussion of these issues, see Stiglitz, J. E., “Challenges in the Analysis of the Role of Institutions in Economic Development,” in Villa Borsig Worbhop Series 2000: The Institutional Foundations of a Market Economy, Kochendorfer-Lucius, Gudrun and Pleskovic, Boris (eds.), German Foundation for (DSE), 2001, pp. 15-28 Google Scholar.

²⁷ This particular problem could be remedied by allowing trade sanctions to be marketable. See, e.g. Charlton and Stiglitz, op. cit.

²⁸ See, for instance, Lochner v New York, 198 U.S. 45 (1905) which struck down a New York state law limiting the number of hours a baker could work each week, on the basis that the law was an “unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract.” Muller v Oregon, 208 U.S. 412 (1908); allowed restrictions on women working, because it was viewed to a reasonable restriction. Finally, West Coast Hotel Co. v Parrish, 300 U.S. 379 (1937). allowed states to pass minimum wage laws: in the end, bom states and the federal government were allowed to pass such laws.

²⁹ Some argued that the Constitution prohibited state minimum wage laws (as interfering with interstate commerce or interfering with the basic freedom to contract) but did not give the Federal government the power to pass such laws. See the cases mentioned in fn. 29 restricting state’s rights to pass minimum rights laws. Yet in Adkin’s v Children’s Hospital in 1923 the Supreme Court found that federal minimum wage legislation for women was unconstitutional. The possibility of the creation of “no man’s” lands is of particular concern in globalization; at least within the United States, there are relatively easy ways of “fixing” the problem posed by such gaps. and the government has at least fiscal resources to address some of the adverse consequences.

³⁰ In Making Globalization Work, op cit. I cite many examples where the U.S. Trade Representative has pushed for policies (such as on intellectual property), which while they may increase profits of certain corporate interests, may be against the broader interests of the United States. (Also, see below, fn. 63)

³¹ Concern about this has led the U.S., in the recent Korea-Us Free Trade Agreement to include provisions which ensure that Korean investors in the U.S. do not have more rights and protections than U.S. investors.

³² See Greenwald, B. and Stiglitz, J. E., “Information, Finance and Markets: The Architecture of Allocative Mechanisms,” Industrial and Corporate Change, 1(1), 1992, pp. 37-63 CrossRefGoogle Scholar.

³³ I take this view, recognizing that some have argued that corporations do enjoy some protection under the U.S. Constitution. See Santa Clara County v. Southern Pacific Railroad Co., 1882 U.S. 394 (1886) which many interpret as granting 14th Amendment due process protection to corporations.

³⁴ The 1932 edition was published by Macmillan; the revised edition (1967) was published by Harcourt Brace.

³⁵ “Credit Markets and the Control of Capital,” Journal of Money, Banking, and Credit, 17(2), May 1985, pp. 133-152.

³⁶ The problems are related not only to imperfect, asymmetric, and costly information, but to fact that good management of a firm is a public good (in the technical, Samuelsoman sense): all shareholders benefit if firm profits increase as a result of better management. As a public good, there will be an undersupply of oversight of corporate management. See the discussion below, Economic Theory and the Regulation of Investment.

³⁷ Earlier, I had explored limitations on alternative mechanisms for corporate control, such as takeovers. See, e.g. “Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs,” Bell Journal of Economist, 3(2), Autumn 1972, pp. 458-482; “Ownership, Control and Efficient Markets: Some Paradoxes in the Theory of Capital Markets,” in Economic Regulation: Essays in Honor of James R. Nelson, Kenneth D. Boyer and William G. Shepherd (eds.), Michigan State University Press, 1982, pp. 311-341. For a more recent contribution showing how managers can ensconce themselves and act in ways that are not in the interests of their shareholders, see Edlin, A. and Stiglitz, J. E. “Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies,” American Economic Review, 85(5), December 1995, pp. 1301-1312 Google Scholar. See also, Hart, Oliver and Grossman, Sanford, “Takeover Bids, the Free-rider Problem and the Theory of the Corporation,” Bell Journal of Economics, 11 (1), 1980, pp. 42-641 Google Scholar.

³⁸ The two most notable examples were the 3 October 2006 ruling of the ICSID tribunal in the Lg&E v. Argentina Case (ICSID Case no. ARB/02/1, Decision on Liability, available at <http:/ita.law.uvic.ca/docjumentsLgeargentina Liabiliity.pdf>, on the issue of the “state of necessity,” and the result in Cms v. Argentina (ICSID Case No. ARB/01/8 Award 12 May 2005, 44 I.L.M. 1205 (2005); and the Lauder and CME cases in the Czech Republic (CME Czech Republic B.V. v. Czech Republic UNCITRAL (The NetherlanDS/Czech Republic Bit), and Lauder v. Czech Republic, UNCITRAL. (United States/Czech Republic Bit). For a discussion of the former set of cases, see Remiseli, A., “Necessity in International investment Arbitration—An Unnecessary Split of Opinions in Recent ICSID cases? Comments on CMS v. Argentina and Lg&E v. Argentina,” Journal of World Investment and Trade, 8(2), April 2007, pp. 191-214 Google Scholar.

³⁹ As already noted, the bilateral agreement between the U.S. and Korea attempts to address the problem of foreign investors having greater protections than domestic investors. It also seems to ensure that there is more transparency in the arbitration process. Other agreements subsequent to NAFTA have attempted to limit the extent to which such provisions can inhibit environmental regulations. Whether these modifications have the benefits alleged has yet to be fully tested; and while there have been some procedural reforms (e.g. concerning transparency) under NAFTA, many of the problems cannot be addressed without the cumbersome process of treaty renegotiation— again, a central objection to these agreements—or without the voluntary agreement of all parties.

⁴⁰ A law (or resource allocation) is said to be Pareto Optimal if there is no other law (or resource allocation) such that everyone is better off. If there is a single Pareto Optimal legal structure, then presumably there will be unanimity in support; but if there are multiple Pareto Optimal legal structures, there will be trade-offs, with some individuals better off under one, others under another.

⁴¹ There may, of course, be efficiency gains from standardization; but these efficiency gains need to be compared with the efficiency losses—the standardized rules may be less suited to the economic situation of some, or all, of the countries than a more tailored set of rules; and there may be large distributive consequences which more than offset the efficiency gains—the standard may be tailored to provide advantages to the rich and powerful, to the disadvantage of others.

⁴² Indeed, many of the foreign investment disputes involve a local subsidiary incorporated in the host state, where the foreign parent invokes the international treaty rights, in an effort to get better treatment for its investments in the host state.

⁴³ Developing countries for a long time resisted any formal commitment not to expropriate, opposing, for instance, the Hull Rule, named after Secretary of State CordeŮ Hull, articulated in 1932, which called for “prompt, adequate and effective” compensation. (See Steiner, H.J., Vagts, D.F., and Koh, H.H., Transnational Legal Problems, 456-57, 1994 Google Scholar, and Guzman, A.T., “Explaining the Popularity of Bilateral Investment Treaties: Why LDC’s Sign Treaties that Hurt Them,” Virginia Journal of International Law, 38 (639), 1998, pp. 639-89Google Scholar. Investment treaties typically do not prohibit expropriation but only commit expropriating governments to providing compensation. This focuses attention on the issue of the bases of compensation. See the section “Standards of Compensation.”

⁴⁴ As in the Indonesian case cited earlier.

⁴⁵ UNCTAD provides data on FDI flows to developing countries. in constant value terms (2000 US$), net FDI flows to developing countries (inflows - outflows) in 1990 were $29.2 billion. This rose to $163.3 billion in 1999, an increase of 5.6 times. Net flows remained below this level until 2005. Since then they have increased to $176.9 billion, an increase of 8% from 1999 levels.

⁴⁶ See, for instance, the discussions in Diamond, Jared, Collapse, Penguin, 2005 Google Scholar, and in Chapter 5 of J. E. Stiglitz, Making Globalization Work, op cit.

⁴⁷ This is true in both developed and developing countries. See Diamond, Jared, Collapse, Penguin: 2005 Google Scholar.

⁴⁸ See, for instance, the findings in United States of America v Phillip Morris USA Inc, Civil Action No. 99-2496 (Gk)and the evidence submitted in Schwab v. Philip MorrisUSA, 06-4666, U.S. Court of Appeals for the 2d Circuit (New York) Page 259 details the former court’s finding that: “In the 1950s, Defendants Began Their Joint Campaign to Falsely Deny and Distort the Existence of a Link Between Cigarette Smoking and Disease, Even Though Their Internal Documents Recognized its Existence” The full findings are available at: <www.usdoj.gov/civil/cases/tobacco2/amended opinion.pdf> (accessed on Nov 25, 2007).

⁴⁹ See Ball, J., “Exxon Softens Climate Change Stance,” The Wall Street Journal, January 11, 2007 Google Scholar, A2: “Its top executives have openly questioned the scientific validity of claims that fossil-fuel emissions are warming the planet, and it has funded outside groups that have challenged such claims in language sometimes stronger than the company itself has used.” For instance, it funded the Competitive Enterprise Institute, a Washington-based think tank that ran television ads saying that carbon dioxide (the main greenhouse gas) is helpful.

⁵⁰ In Angola, BP announced that they would “publish what they paid” to the government; the government responded by threatening to demand that they leave—and the other oil companies quickly went along with the demands of the government. See N. Shaxson, “Bp to give details of Angola operations,” The Financial Times, February 12, 2001, p 29 and “Global Corruption Report 2003,” Transparency International.

⁵¹ See, e.g. J. Diamond, Collapse, op cit.

⁵² As was the case with the recent issuance of a compulsory license by the Thai government for an AIDS medication. Mehta, Harish. “Cheap life-saving drugs: Thailand shows the way; Bangkok’s move wins praise from UN and health groups but flak from Western drug firms.” The Business Times Singapore, Oct 18, 2007.

⁵³ This is also a concern with “voluntary” trade preferences granted by developed countries to developing countries, that can be withdrawn almost at will (e.g. under the system of Generalized System of Preferences, or GSP). See Charlton and Stiglitz, op. cit.

⁵⁴ Pressure for renegotiation is often done behind closed doors and is therefore hard to document. As Chief Economist of the World Bank, however, I saw ample evidence that this was occurring.

⁵⁵ While the United States strongly criticized Suharto’s corruption, after his departure, the U.S. ambassador insisted that the contracts should nonetheless be honored. (The ambassador was later rewarded by being put on the Board of one of the American mining companies whose contracts might otherwise have been contested.) in some cases, the terms of the contracts are so unfavorable to the developing country that the only plausible explanation is that of corruption. See, for instance, the extensive discussion of Enron’s electricity contracts in India (discussed, e.g. in Chapter 10, of J.E. Stiglitz, Roaring Nineties, New York: W.W. Norton, 2003), or the Bolivian gas contracts or the Karaha Bodas case in Indonesia, already referred to, where the American investor was expected to get (in present discount value terms) a pure profit of .$150 million on an investment of only $111 million.

⁵⁶ I was an expert witness in the case. For a brief discussion, see J. E. Stiglitz, Making Globalization Work, op. cit.

⁵⁷ State of Alabama v Exxon Mobil Corp., No. cv-99-2368. For a brief discussion, see J. E. Stiglitz, Making Globalization Work, op. cit.

⁵⁸ More recently, when it was observed that U.S. government royalties from oil and gas did not seem to increase commensurately with gas and oil prices in the post-Iraq years, it appeared that the contracts were not only secret but also had provisions that they could not be disclosed even by the U.S. government. It subsequently turned out that an “error” had been made in the signing of the contract, which allowed the oil companies to receive a larger fraction of the increase in prices than they would normally have been allowed. Not surprisingly, some suspected foul play. See E.L. Andrews, “Us Royalty Plan to Give Windfall to Oil Companies,” The New York Times, February 14, 2005, p Al and E.L. Andrews, “Interior Dept. Near 2 Pacts on Leases for Oil Drilling,” The New York Times, Sept 15, 2006, p C2.

⁵⁹ See, for instance, Chile’s failure to overturn an ICSID arbitral described in <http://www.iisd.org/pdf/2007/itn_mar27_2007.pdf>. MTD Equity SDN. Bhd. & MTD Chile S.A. v. Chile (Republic of).

⁶⁰ They use these asymmetries of bargaining power to get a better deal for themselves. They may know that particular interests within these countries are especially interested in reaching a trade agreement; a disadvantageous investment agreement is part of the price developing countries may feel they have to pay to get the trade agreement that they want.

⁶¹ The U.S. Trade Representative is also wont to say, when it comes to discussions of provisions which seem particularly unfair (countries have to eliminate their subsidies, but the U.S. does not do so, for its agricultural subsidies): we have no choice, our hands are tied, our Congress simply won’t allow us to pass a “fair” trade agreement. This is the best deal you can get. Increasingly, though, some developing countries are responding: we have democracies too, and our democracies will not allow us to pass another unfair trade agreement; we will be voted out of office. The spread of democracy may be inhibiting the scope for agreements that are known to be as unbalanced as those of the past. That may be one of the reasons why many of the Investment Agreements are negotiated quietly, with little public discussion.

⁶² In many cases, the position of the trade ministers may seem markedly out of sync with broader positions taken by the government. For instance, while a center piece of the Clinton Administration was extending access to affordable health care, and while it was highly critical of the pharmaceutical companies, in its international negotiations, it was totally supportive of their position on intellectual property, which had the effect of reducing access even to life saving medicines. When the consequences of this became public, it became a major source of embarrassment to the Administration. See Chapter 5, J. E. Stiglitz, Making Globalization Work, op. cit.

⁶³ This perspective is often attributed to J. B. Clark, Distribution of Wealth, 1899. to be fair, many advocates of free market economics have in mind a quite different model of the market economy, one in which entrepreneurship plays a central role, a perspective associated with Knight, F.H., Risk, Uncertainty, and Profit, Boston, Ma: Hart, Schaffner & Marx; Houghton Mifflin Company, 1921 Google Scholar and Hayek, F. A. (see, e.g. F.A. Hayek, “The Use of Knowledge in Society,” American Economic Review, 38 (September 1945), p 519-30.)Google Scholar But while these ideas have been highly influential, modern economic analysis rests more heavily on the neoclassical analysis growing out of the work of Clark and Walras.

⁶⁴ A. Smith, Wealth of Nations, originally published in 1776.

⁶⁵ R.H. Coase, “The Problem of Social Cost,” Journal of Law and Economics, 3, October 1960, p 1-44.

⁶⁶ It was not until the 1950s, 175 years after Smith’s “conjecture” about the efficiency of competitive markets, that Arrow and Debreu succeeded in establishing the conditions under which markets yield efficient outcomes. There are a host of “market failures,” situations in which markets by themselves do not lead to Pareto efficiency, and in which appropriate government intervention can, in principle at least, make everyone better off. See Arrow, Kenneth J.,. “An Extension of the Basic Theorems of Classical Welfare Economics,” Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, Neyman, J., ed., Berkeley: University of California Press, 1951 pp. 507-532 Google Scholar and Debreu, Gerard, The Theory of Value, New Haven: Yale University Press, 1959 Google Scholar.

⁶⁷ See J.E. Stiglitz, “Information and the Change in the Paradigm in Economics,” op cit.

⁶⁸ The theory of imperfect information also helped explain why markets might be absent. See, e.g. Akerlof, G., “The Market for “Lemons:” Qualitative Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, 84(3), 1970, pp. 488-500 CrossRefGoogle Scholar.

⁶⁹ Greenwald, B. and Stiglitz, J.E., “Externalities in Economies with Imperfect Information and Incomplete Markets,” Quarterly Journal of Economics, 101(2), May 1986, pp. 229-264 CrossRefGoogle Scholar. For a more detailed analysis focusing on the problems posed by moral hazard and insurance, see Arnott, R. and Stiglitz, J. E., “The Welfare Economics of Moral Hazard,” in Risk, Information and Insurance: Essays in the Memory of Karl H. Borch, Louberge, H. (ed.), Norwell: Kluwer Academic Publishers, 1990, pp. 91-122 Google Scholar. For a more accessible exposition, see Stiglitz, J. E., The Invisible Hand and Modern Welfare Economics,” in Information Strategy and Public Policy, Vines, D. and Stevenson, A. (eds.), Oxford: BASIL Blackwell, 1991, pp. 12-50 Google Scholar. For a more diagrammatic exposition, see Arnott, R., Greenwald, B., and Stiglitz, J.E., “Information and Economic Efficiency,” Information Economics and Policy, 6(1), March 1994, pp. 77-88 CrossRefGoogle Scholar.

⁷⁰ Coase himself was aware of the importance of bargaining costs, but did not fully appreciate the inefficiencies to which it can give rise when there are transactions costs and information imperfections. The view developed within the law and economics profession that the presence of transactions costs implied that one should assign property rights in a way that minimized them (the least cost avoider). See, e.g. Calabresi, G., “Transaction Costs, Resource Allocation, and Liability Rules—A Comment,” Journal of Law and Economics, 11(1), April 1968, pp. 67-73 CrossRefGoogle Scholar. But this either ignores the distributional consequences of such assignments or implies that they can be “undone” costlessly (see the discussion of myth 3 below). Moreover, it does not address the essential public policy issue: given the potentially large bargaining costs, are there other public policy interventions which might lead to better outcomes, i.e. simply assigning “well defined” property rights may not be the best way to approach the problem of externalities. See Farrell, J., “Information and the Coase Theorem,” Journal of Economic Perspectives, 1(2), Autumn 1987, pp. 113-129 CrossRefGoogle Scholar.

⁷¹ Sometimes, one can devise costly sorting mechanisms to identify the injured and the injurers, but the costs of running such a system may be high, markedly greater than those associated with an efficient regulatory system.

⁷² This is sometimes called the “Second Fundamental Theorem of Welfare Economics.”

⁷³ See J. E. Stiglitz, “Information and the Change in the Paradigm in Economics,” op. cit. For instance, the nature of the agency problems in society depend on the distribution of wealth; if farmers own their own land, there is no need to resort to sharecropping or monitor wage labor. See Stiglitz, J.E., “Incentives and Risk Sharing in Sharecropping,” Review of Economic Studies, 1974, 41(2) pp. 219-255 CrossRefGoogle Scholar.

The argument parallels the analysis which shows that distributional concerns need to be taken into account in determining the optimal supply of public goods. See, e.g. Lau, L. J., Sheshinski, E., and Stiglitz, J. E., “Efficiency in the Optimum Supply of Public Goods,” Econometrica, 46(2), March 1978, pp. 269-284 CrossRefGoogle Scholar and J. E. Stiglitz, “Pareto Efficient Taxation and Expenditure Policies, With Applications to the Taxation of Capital, Public Investment, and Externalities,” presented at conference in honor of Agnar Sandmo, January 1998.

⁷⁴ See Tiebout, C.M., “A Pure Theory of Local Expenditures,” The Journal of Political Economy, 64(5), Oct. 1956, p 416-424, Tiebout himself only focused on competition in the supply of public goods and taxationCrossRefGoogle Scholar.

⁷⁵ See Stiglitz, J. E., “Theory of Local Public Goods,” in The Economics of Public Services, Feldstein, M.S. and Inman, R.P. (eds.), MacMillan Publishing Company, 1977, pp. 274-333 CrossRefGoogle Scholar. (Paper presented to IEA Conference, Turin, 1974.); Stiglitz, J. E., “The Theory of Local Public Goods Twenty-Five Years After Tiebout: A Perspective,” in Local Provision of Public Services: The Tiebout Model After Twenty-Five Years, Zodrow, G.R. (ed.), Academic Press, 1983, pp. 17-53 CrossRefGoogle Scholar; and Stiglitz, J. E., “Public Goods in Open Economies with Heterogeneous Individuals,” in Locational Analysis of Public Facilities, Thisse, J.F. and Zoller, H.G. (eds.), North-Holland Publishing Company, 1983, pp. 55-78 Google Scholar.

⁷⁶ Using, of course, the argument that by providing such protection through a treaty, they will be able to attract more foreign direct investment. As we have seen, the evidence for such claims is weak, at best.

⁷⁷ Evaluating policies in terms of whether the winner could compensate the losers (whether they do or do not) is sometimes called the Hicks-Kaldor criterion. in fact, I would argue that the investment agreements may actually fail under this weaker criterion. However, one of the problems of globalization is that it is systematically associated with increasing inequality, with groups that dominate the political processes getting agreements that benefit themselves, often at the expense of the poor. The Hicks-Kaldor criterion simply ignores these distributive consequences. There is a third criterion—whether the policy (investment agreement) increases social welfare, using an egalitarian social welfare function (of which the Rawlsian criterion is one example). in terms of this criterion, the investment treaties are also likely to fail.

⁷⁸ And recall from footnote 6 that the weight of evidence is against this conclusion.

⁷⁹ Of course, there may be some additional investment in developing countries as a whole, at the expense of developed countries. The other characteristics (wage advantages, infrastructure disadvantages) would seem to be of overwhelming importance, which partly explains the fact that these agreements do not seem to have had the desired effect. See, e.g. V.N. Balasubramanyam, “Foreign Direct Investment in Developing Countries: Determinants and Impacts”, paper prepared for OECD Global Forum on International Investment”, Mexico City, Nov. 26-27, 2001. He sets forth a long list of factors which foreign investors look at when making FDI locational decisions. Not surprisingly, the existence of a treaty was not central.

⁸⁰ See, for instance, Greenwald and Stiglitz, 1984, op cit or R. Arnott, B. Greenwald, and J.E. Stiglitz, op cit. 1994.

⁸¹ Often, as we note elsewhere, the developing countries are not fully cognizant of the costs of these provisions. It is not clear that they would have signed them, had they been fully apprised of the consequences. Moreover, some developing countries willingly bind their hands by means of such agreements, often in the mistaken belief that the BITs will yield massive new flows of FDI. (Indeed, as in the case of Indonesia noted earlier, a country can provide these investor guarantees, with commercial arbitration, through legislation, not even part of an international agreement; but, of course, in these instances the legislation can be reversed far more easily.) Sometimes, the government, in signing the agreements, may be more reflecting business interests and ideology; and as we note, domestic businesses can, by incorporating abroad, take advantage of these provisions intended to attract foreign firms.

The fact that there are South-South agreements implies that there are pressures other than from the developed country MNCs driving these agreements. Egypt, for instance, has dozens of Bits with countries in Africa, Asia, Eastern Europe and Latin America. (See the UNCTAD BIT database at www.unctadxi.org) Still, the fact that South-South Bits often “do not go as far as North-South Bits in terms of setting new policy standards and privileges for transnational corporations” (<www.bilaterals.org/rubrique.php3?id_rubrique=58>) is evidence of the effect of Northern bargaining power.

⁸² Alfred Marshall was one of the great economists of the last part of the 19th century and early part of the 20th. At the turn of the century, he was asked to describe both the achievements of economics up to that point and the limitations. He noted its failure to deal with modern corporation. See Marshall, A., “The Old Generation of Economists and the new,” Quarterly Journal of Economics, vol. 11 (January 1897), pp. 115-135 CrossRefGoogle Scholar.

⁸³ For an overview see Kelly, G., Kelly, D., Gamble, A., eds. Stakeholder Capitalism, New York: St. Martin’s Press; London: Macmillan Press in association with the Political Economy Research Centre, 1997 Google Scholar. For an alternative analytic framework comparing different forms of capitalism see Masahiko, Aoki, Toward a Comparative Institutional Analysis, Cambridge, Mass: MIT Press, 2001 Google Scholar.

⁸⁴ State contingent markets are markets for the delivery of particular goods at particular locations at particular dates in the event of particular contingencies (which fully describe the world) occurring.

⁸⁵ See Stiglitz, J. E., “On the Optimality of the Stock Market Allocation of Investment,” Quarterly Journal of Economics, 86(1), February 1972, pp. 25-60 CrossRefGoogle Scholar and Stiglitz, J.E., “The Inefficiency of the Stock Market Equilibrium,” Review of Economic Studies, XLIX, April 1982, pp. 241-2611CrossRefGoogle Scholar.

⁸⁶ For an early exposition of the ensuing problems, see J. E. Stiglitz, “Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs,” op cit.

⁸⁷ See Grossman, S. and Stiglitz, J. E., “Stockholder Unanimity in the Making of Production and Financial Decisions,” Quarterly Journal of Economics, 94(3), May 1980, pp. 543-566 CrossRefGoogle Scholar and “On Value Maximization and Alternative Objectives of the Firm,” Journal of Finance, 32(2), May 1977, pp. 389-402 CrossRefGoogle Scholar.

⁸⁸ Op cit.

⁸⁹ The language is due to Ross, S.A., “The Economic Theory of Agency: The Principal’s Problem.” The American Economic Review, 63(2), May 1973, p 134-139 Google Scholar. Among the earliest analysis of the Principal-Agent problem was that of J.E. Stiglitz, “Incentives and Risk Sharing in Sharecropping,” op cit (originally written in 1969] While the setting of the problem was that of the landlord trying to ensure that his tenant farmer maximized the return he received, I pointed out that the problem was essentially that of the owners of the firm trying to ensure that the manager acted in ways consonant with their interests.

⁹⁰ See Edlin and Stiglitz, op. cit.

⁹¹ It is interesting that in spite of the importance (at least in theory) of the takeover mechanism, particularly in ensuring discipline for managers, there was little formal literature in this area, until my 1972 paper on take-overs, op cit. There is by now a large literature showing empirically that the take-over mechanism does not work well, e.g., suggesting that take-overs often lead to a decrease in the value of the taking over firm (even if the firm taken over benefits). Agrawal, A., Jaffe, J., Mandelker, G.N., “The Post-Merger Performance of Acquiring Firms: A Re-Examination of an Anomaly,” The Journal of Finance, 47(4), Sep., 1992, p 1605-1621 CrossRefGoogle Scholar, and Ravenscraft, D., and Scherer, F. M., Mergers, Selloffs and Economic Efficiency, The Brookings Institution, Washington, DC, 1987 Google Scholar. There are a number of reasons for the failure of the take-over mechanism. Grossman and Hart, op cit point out that if a small shareholder believes that the takeover will be successful and will increase the value of the firm, it would not pay him to sell but to free ride on the successes, sharing in the capital gains. Only if he believes that the take-over will decrease the value of the firm—and will be successfully completed—will he be easily induced to sell his shares.

⁹² That is, all shareholders benefit if the firm’s profits are increased. See fn. 37.

⁹³ The earliest of these is called the dividend paradox, which I described in 1973 (“Taxation, Corporate Financial Policy and the Cost of Capital,” Journal of Public Economics, 2, February 1973, pp. 1-34). Since I wrote my paper, a much larger fraction of the revenue of corporations is distributed to households in a tax preferred way.

⁹⁴ While tax paradoxes are the most obvious deviation from shareholder value maximization, there are others: many closed end mutual funds sell for a market value less than the value of their shares. There is a simple action— dissolving the firm—which would lead to an increase in shareholder value. Since this paradox was first discussed in the 1970s, the magnitude of the discount in closed end mutual funds in some parts of the world has actually increased, and a number of funds have been created to take-over these mutual funds, to realize shareholder potential. The difficulties that they have encountered illustrate the problems of corporate governance and take-over mechanisms more generally. Other paradoxes relate to forms of compensation, i.e. that there are forms of compensation which provide as good incentives, with less total (corporate plus individual) taxes and better risk sharing properties than those commonly employed by firms. See, e.g. Stiglitz, J. E., Roaring Nineties, New York: W.W. Norton, 2003 Google Scholar. Other paradoxes related to inventory accounting (the choice of FIFO vs. LIFO) and the use of accelerated depreciation. See, e.g. Stiglitz, J. E., “Ownership, Control and Efficient Markets: Some Paradoxes in the Theory of Capital Markets,” in Economic Regulation: Essays in Honor of James R. Nelson, Boyer, Kenneth D. and Shepherd, William G. (eds.), Michigan State University Press, 1982, pp. 311-341 Google Scholar; and Stiglitz, J. E., “Design of Labor Contracts: Economics of Incentives and Risk-Sharing,” in Incentives, Cooperation and Risk Sharing, Nalbantian, H. (ed.), Totowa, NJ: Rowman & Allanheld, 1987, pp. 47-68 Google Scholar.

⁹⁵ See Edlin, A. and Stiglitz, J. E. “Discouraging Rivals: Managerial Rent-Seeking and Economic Inefficiencies,” American Economic Review, 85(5), December 1995, pp. 1301-1312 Google Scholar.

⁹⁶ Firms would, of course, prefer to raise more of their capital long term, rather than to be kept on a short leash by banks, and there would be certain efficiency gains from doing so, insulating firms from the risk of volatility in short term capital markets. But the monitoring benefits associated with short term (bank) credit are such as to lead to the optimal contract being shorter term than the investment projects which they finance. See Patrick Rey and J. E. Stiglitz,, “Short-term Contracts as a Monitoring Device,” NBER Working Paper 4514, 1993.

⁹⁷ See J. E. Stiglitz, 1985, op cit.

⁹⁸ Moreover, the bank may provide a set of conditions that the firm must satisfy, if the bank is to roll over its loans; the firm still has the right to reject those conditions, even if it means the firm would be forced into bankruptcy.

⁹⁹ Those who believe that markets solve all problems believe that competition in contract terms (e.g. degree of flexibility, severance pay, etc) should lead to efficiency in contract terms. The basic insight of Arrow op cit and Debreu op cit was to show that this simplistic reasoning was wrong, that competitive markets led to efficiency only under a set of highly restrictive conditions. As we have noted, Greenwald and Stiglitz, 1986 op cit showed that essentially whenever information is imperfect or markets incomplete, the competitive contract equilibrium is not Pareto efficient.

(Arrow and Debreu focused on competitive equilibria in which there were prices/markets for all goods, at all dates, in all states of nature (under all contingencies). This assumption was obviously not satisfied in the real world. Subsequent research attempt to model the nature of competitive equilibria in which market participants competed over contract terms. See, e.g. Stiglitz, 1974, op cit. The problems with which we are concerned here arise because contracts are themselves incomplete, for reasons which will be discussed at greater length below.)

¹⁰⁰ Analogous to those imposed by the most creditor-friendly bankruptcy laws.

¹⁰¹ In technical terms, this is referred to as imposing a pooling equilibrium. A competitive market equilibrium cannot be characterized by pooling [one of the central results of Rothschild-Stiglitz (see Rothschild, M. and Stiglitz, J. E., “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information,” Quarterly Journal of Economics, 90(4), November 1976, pp. 629-649)]CrossRefGoogle Scholar. The inefficiencies in contractual equilibria are, however, not limited to problems of signaling. in moral hazard models, contracts by one party affect reservation levels and behavior within other contracts. See, e.g. Rey, P. and Stiglitz, J. E., “Moral Hazard and Unemployment in Competitive Equilibrium,” October 1993 Google Scholar, and Arnott, R. and Stiglitz, J. E., “Labor Turnover, Wage Structure & Moral Hazard: The Inefficiency of Competitive Markets,” Journal of Labor Economics, 3(4), October 1985, pp. 434-462 CrossRefGoogle Scholar.

¹⁰² Asymmetric information can also explain why the economy may get stuck at an inefficient contractual equilibria. See Stiglitz, J.E., “Contract Theory and Macroeconomic Fluctuations,” in Contract Economics, Werin, L. and Wijkander, H. (eds.), BASIL Blackwell, 1992, pp. 292-322 Google Scholar. The problem is that if a standard emerges (and there are good reasons why that might be the case), then any attempt to deviate from that standard can be interpreted as a signal; moreover, if the other party believes that the party proposing the change is more informed, he may infer that the reason that that party wants to change the contract is to give himself a larger share of the value (rather than, as he is likely to argue, to increase the efficiency of the contract).

¹⁰³ This is seen most obviously in efficiency wage models, where wages affect productivity either because of effects on incentives, selection, morale, or labor turnover. For instance, in the Shapiro-Stiglitz “shirking” model, firms must pay a high enough wage to induce individuals not to shirk. The requisite wage depends on the unemployment rate and the rate of time that individuals remain in the unemployment pool. Firms that have a policy of letting go of labor more easily lead to higher labor turnover, and, at any unemployment rate, a shorter duration in the unemployment pool. This means that the equilibrium unemployment rate will be higher. More generally, it is optimal to throw “sand in the wheels”: some friction, e.g. associated with mandatory severance pay. See Shapiro, C. and Stiglitz, J. E., “Equilibrium Unemployment as a Worker Discipline Device,”, American Economic Review, 74(3), June 1984, pp. 433-444 Google Scholar; R. Arnott and J. E. Stiglitz, 1985, op cit; P. Rey and J. E. Stiglitz, “Moral Hazard and Unemployment in Competitive Equilibrium 1993, op cit; Stiglitz, J. E., “Alternative Theories of Wage Determination and Unemployment in L.D.C.’s: The Labor Turnover Model,” Quarterly Journal of Economics, 88(2), May 1974, pp. 194-227 CrossRefGoogle Scholar; Stiglitz, J. E., “Alternative Theories of Wage Determination and Unemployment: The Efficiency Wage Model,” in The Theory and Experience of Economic Development: Essays in Honor of Sir Arthur W. Lewis, Gersovitz, M., et al. (eds.), London: George Allen & Unwin, 1982, pp. 78-106 Google Scholar; and Stiglitz, J. E., “Prices and Queues as Screening Devices in Competitive Markets,” in Economic Analysis of Markets and Games: Essays in Honor of Frank Hahn, Gale, D. and Hart, O. (eds.), Cambridge: MIT Press, 1992, pp. 128-166 Google Scholar.

¹⁰⁴ The East Asia crisis called attention to macro-economic externalities arising from excessive borrowing, especially in foreign currency. The size of some of the recent claims made through Bits is sufficiently large that they could, in fact, have macro-economic externalities.

¹⁰⁵ Op. cit.

¹⁰⁶ In models of perfect competition, there are no asymmetries of bargaining power. in reality, there are. Legislation protecting workers’ rights reflects a concern for these asymmetries in bargaining powers. Asymmetries in globalization, which have led to greater liberalization for capital (so capital can move more freely) than for labor have exacerbated these imbalances.

¹⁰⁷ Recall the point that we have repeatedly made: market equilibria may or may not be efficient. When there are multiple equilibria, none of the equilibrium may be efficient, or one may be, and others may not be; or all of them may be efficient, with some groups better off (and others worse off) in one equilibrium compared to another.

¹⁰⁸ The market fundamentalist view would have it that if there is a competitive equilibrium contract which specifies, say, compulsory arbitration through commercial courts, it must be efficient. But we have already explained why in general contract equilibrium, even in competitive markets, are not Pareto efficient. But investment agreements are not just contracts between two private parties, but between two public bodies, and even if it were the case that competitively determined contract equilibria were Pareto efficient, it does not mean that these agreements lead to Pareto efficiency. (See the discussion above concerning Tiebout equilibria.)

¹⁰⁹ I have referred to the kind of inefficiency exhibited by Pareto dominated multiple equilibria as a “structural inefficiency” as opposed to the case where there is just a marginal distortion, e.g. too much or too little investments. Indeed, given the value of say all other investments, it might not be possible to improve the equilibrium by altering the levels of a particular investment. But when all decisions are changed, in a coordinated way, a Pareto improvement can be achieved. See, for instance, J. E. Stiglitz, “On the Optimality of the Stock Market Allocation of Investment,” 1972, op cit, of course, even when there are not these structural inefficiencies, there are myriad marginal inefficiencies, where government interventions could lead to Pareto improvements.

¹¹⁰ As we have noted earlier, one of the central criticisms of the Chicago law and economics school is that it focuses on efficiency.

¹¹¹ Under many US and Canadian and Japanese agreements typically, US (or Canadian or Japanese as the case may be) investors will enjoy the rights to establish or invest on a national-treatment basis. What this means is that if that country allows private businesses (including corporations) to set up in a given sector of the economy, then it must let the US (or other) investors similarly to invest. in other words, the ukraine could not let local businesspersons own and operate a retail supermarket while banning US nationals from doing so. The treaties often exclude certain sectors (for example, the US does not give a right to establishment (on the national treatment basis) in certain sensitive sectors like airlines, broadcasting, etc.). Strikingly, many developing countries have not shown the same degree of foresight when it comes to excluding delicate sectors; indeed the U.S. often exploits their limited scope for identifying such sectors by insisting on a negative list, i.e. entry should be allowed in all sectors except those identified, rather than a positive list, which would enable the country to focus on some sectors where it believes foreign entry would be advantageous, or at least not seriously disadvantageous. There is opposition to a trade/investment treaty with the US in several countries because they doubt their capacity to identify every sector where a carve-out would be needed to protect against US investment/ownership. (More recent agreements tend to have focused more on rights of establishment; older agreements often did not, so perhaps the majority of agreements today still do not include such provisions.)

¹¹² For a discussion of the importance of limited liability for the functioning of capitalism, see Greenwald, B. and Stiglitz, J. E., “Information, Finance and Markets: The Architecture of Allocative Mechanisms,” Industrial and Corporate Change, 1(1), 1992, pp. 37-63 CrossRefGoogle Scholar.

¹¹³ One of the often cited examples is the Bechtel Cochabamba case. Though based in the U.S., Bechtel established a post office in the Netherlands, so that ICSID could have jurisdiction. See Anderson, S. and Grusky, S., Challenging Corporate Investor Rule, Institute for Policy Studies, Washington, D.C. April, 2007 Google Scholar. More telling, two of the three arbitrators at ICSID seemingly were enthusiastic about Bechtel’s strategy describing bilateral investment treaties as “portals” through which investors from a multitude of third countries might choose to make onward investments into the developing world, and thereby enjoy the treaty protections. See the summary of the tribunal ruling at: <http://www.iisd.org/pdf/2005/itn_dec20_2005.pdf>.

¹¹⁴ In one controversial ICSID ruling, a tribunal split 2-to-l on the question as to whether this particular type of treaty-shopping is legitimate. See: <http://www.iisd.org/pdf/2004/investment_investsdjunell_2004.pdf>. When treaty obligations undermine national policies, these can have seriously adverse policies for a country. See the discussion below on Black Empowerment in South Africa.

¹¹⁵ These were among the disturbing aspects of the Myers case ((S.D. Meyers v. Government of Canada, (NAFTA Ch. 11 Arb. Trib. Oct 21, 2002) discussed at greater length below.

¹¹⁶ Again, neither the American government, nor any other government, to my knowledge, has ever provided these kinds of protections to its own domestic investors.

¹¹⁷ I have argued elsewhere that there are some sectors where ownership may matter—but then, one should be worried about private ownership, whether foreign or domestic. For instance, a private firm owning a plant making atomic bombs might have an incentive to sell it to the highest bidder. Economic incentives could be sufficiently great as to overcome regulator proscriptions. See Stiglitz, J. E., Globalization and its Discontents, New York: WW Norton, 2002 Google Scholar.

¹¹⁸ Bruce Babbitt, Secretary of the Interior, et al., petitioners, v. Sweet Home Chapter of Communities for a Greater Oregon et al., 515 U.S. 687 (1995).

¹¹⁹ There is an important distinction, I believe, between regulatory takings, discussed below, and the Endangered Species Act, in which private parties are asked to provide a public good (the preservation of a species). Interestingly, Coase’s analysis of property rights (op. cit) would suggest that there is in fact little difference; what is required is only certainty of property rights. It is only the change in property rights associated with the passage of the law that is of concern. With the law now on the books for more than three decades, to change it again (to compensate owners when a spotted owl alights on their property) would again represent the kind of “uncertainty” to property rights regime that should be criticized; the change would represent an undeserved windfall to the owners of the assets.

¹²⁰ See Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/l (NAFTA).(For a discussion, see <www.investmentclaims.com/decisions/Metalclad-Mexico-Award-30Aug2000.pdf> (accessed Nov 25, 2007). Ever since foreign investors have latched onto that “precedent” to argue that regulatory takings should be compensable under BITs. by and large, however, tribunals have declined to find states liable for expropriation except where there has been some substantial deprivation (i.e. not just a new regulation or tax which imposes a few million dollars more in costs on a hundred-million dollar project).

By contrast, in the Methanex case (Methanex Corporation v. United States of America, Final Award of the Tribunal on Jurisdiction and Merits, August 3, 2005 case (.) the presiding tribunal, in a 2005 final ruling, came out quite strongly in favor of the US (who had to defend the California measures). As in the other aspects of these agreements, there is still uncertainty in this realm, which bodes ill for governments looking to exercise their core regulatory/corporate governance/social justice functions. The fact that arbitration panels have not provided a string of pro-investor rulings in these expropriation cases may not be as comforting as it may seem: they have found other grounds (such as fair and equitable treatment) to rule in favor of investors.

¹²¹ Sometimes, the provisions extend to taxes, and for good reason: It is often possible to achieve any regulatory outcome through the imposition of an appropriate set of taxes.

¹²² There is a view (receiving increasing support) that countries should be able to repudiate debts incurred by earlier non-democratic governments, when the funds did not go to support the benefit of the individuals in the society. These debts are called odious debts. See, for instance, Chapter 9 in J. E. Stiglitz, Making Globalization Work, op cit. and the references cited there. by the same token, we can think of odious treaties, in which illegitimate governments incur obligations, which do no inure to the benefit of the majority of the citizens of the country. Subsequently, democratically elected governments should, in this view, be freed from having to honor obligations imposed by odious treaties.

¹²³ Fortunately, in the handful of cases which have emerged to date on taxation-as-expropriation, it appears that the threshold is high (i.e. would have to be a confiscatory tax with very heavy repercussions). The point I am emphasizing is that the principle that there be compensation for loss value as a result in changes in government policy of any form would appear to be very dangerous.

¹²⁴ Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/l (NAFTA).

¹²⁵ In the NAFTA Methanex case, the Tribunal enquired into the process by which the decisions were made (was the governor influence by political concerns) to determine whether the outcomes were fair and equitable, but ultimately ruled against Methanex.

¹²⁶ One of the problems is that the Tribunals often seem to look both at discriminatory effect and at intent, was the action intended to discriminate against the particular firm, even if similar actions could have been undertaken and justified, e.g. on environmental grounds? The difficulty is that in political processes different actors may have different objectives. Some may see economic advantages in acting discriminatorily, but others may be motivated by genuine worries about the environment. Parsing out the real motive is an impossible task, not one for which the commercial tribunals are well equipped to address. The discriminatory effect can arise from regulations intended to protect the environment. For instance, in the area of trade, countries impose heavy taxes and regulations on large cars to reduce both pollution and congestion. The effect of such taxes and regulations is to discriminate against American large, polluting cars. It may be the intent of some in the domestic automobile industry to discriminate; but there is a compelling social rationale for such taxes and regulations, even in the absence of any domestic automobile industry.

¹²⁷ As always, there is ambiguity in the interpretation of the findings. The tribunal, in its ruling, was quite clear in its finding that the relevant Canadian Minister had made various public statements which suggested that the government’s intention was, in fact, a protectionist one. See for e.g. Paras 194 and 195 of the First Partial Award which summarize the finding of protectionist intent: <http://www.investmentclaims.com/decisions/Sdmyers-Canada-lstPartialAward-13Nov2000.pdf>. Still, even if this particular government minister had had protectionist intents, had a Canadian firm tried to ship hazardous wastes across the borders, others with jurisdiction might have successfully taken action, in compliance with the Basle Convention, especially so if there was a threat of sanctions (which the U.S. has occasionally discussed, for those contemplating breaking the convention).

¹²⁸ Again, technically, the agreements do not override the treaty obligations; they only mean that the country has to pay compensation.

¹²⁹ See, in particular, Metalclad case op cit, though the issues at dispute were far more complicated. They included the processes by which the restrictions were imposed (the creation of a nature preserve, established in the final days of the governor’s term of office) and the nature of the assurances that the site could be used for the disposal of hazardous wastes. Any firm working in a federal system should know that an official at one level of government cannot provide assurances about either the law or what will happen at another level of government. Moreover, we have argued that governments should have the right to take actions which they see as in the interests of their citizens, including creating conservancy areas. in all democracies, a wide range of actions are taken in the final days of an elected government, in the hopes that such actions will not be easily reversed. Those within a conservancy area are typically not compensated for any loss of value that results (nor do they have to compensate the government for any increase in value which might result). The presumption should be that the government was acting in the interests of its citizens in undertaking this action; any complaint that the government exceeded its authority (say acting in an arbitrary or capricious way) should have been addressed within domestic courts or through domestic political processes.

¹³⁰ Especially in federal systems, foreign investors should know that one level of government cannot provide blanket assurances about what actions another level might undertake—yet many foreign investors seem to insist that they do so, and to sue when such assurances fail. Without subverting the whole federal system, the best that a higher level authority can do is to use what influence it has. Yet, the MTD v. Chile case (MTD Equity SDN. Bhd. & MTD Chile S.A. v. Chile (Republic of), ICSID Case No. ARB/01/7 (Malaysia/Chile BIT) held Chile liable for BIT breaches because that country’s foreign investment review agency had approved an investment, which later could not obtain local land-rezoning permissions.

¹³¹ See the case of Chile, described in footnote 60 and item 2 in: <http://www.iisd.org/pdf/2007/itn_mar27_2007.pdf>.

¹³² See the section “Rights and Responsibilities” for a more thorough discussion of these issues.

¹³³ And even at the time, many thought that these contracts were poorly designed; there were important contingencies in which severe problems would arise; some of those contingencies did arise. No one should have anticipated that in the event of those contingencies (a major devaluation of the currency) that it would be likely that the country would be able or willing to continue to pay utilities in prices linked to the dollar. One can interpret the high profits they got before convertibility (the fixed exchange rate system) broke as compensation for the losses that they would likely suffer afterwards. Otherwise, it is hard to justify the terms the investors got in these contracts.

¹³⁴ That is, this was not just a zero sum game. Had the utilities got what they wanted, the losses to the rest of society would have been greater than the gains to the utilities.

¹³⁵ One interpretation of what contract law should do (beyond enforcing contracts) is to fill in the gaps in incomplete contracts, thinking through what the parties might reasonably have agreed to, had they thought through this particular contingency ex ante (recognizing that there are an infinity of contingencies, so that no contract can anticipate all of them).

¹³⁶ Another approach that seems to be invoked in judging the reasonableness of an action that is analogous to that used in trade disputes is the reliance on “scientific” evidence. in trade, for instance, European objections to the import of genetically modified foods has been objected to on the grounds that there is no scientific basis for such objections (though the “precautionary” principle might suggest that, since there is, at least in the minds of many, some risk that cannot be fully ascertained, it should be permissible to impose restrictions). The question is, if citizens of a country wish to prohibit the sale of genetically modified foods, should they have the right to do so, even if it adversely affects a trading partner? Other areas of public policy are not subjected to such “scientific” discipline. Two NAFTA suits involved prohibitions against particular chemicals believed by many to have adverse health and environmental effects, the Ethyl Corporation suit against Canada for banning methylcyclopendtadienyl manganese tricarbonyl (MMT) and the Methanex suit against the US for banning MTBE, a gasoline additive. in the former case, there was little evidence of adverse effects (and Canada paid compensation); in the latter case, there was (and the tribunal dismissed the suit.)

¹³⁷ Though, as already noted, there is insurance against explicit expropriation.

¹³⁸ Governments might set the premiums to reflect the likelihood of the passage of various kinds of regulations, e.g. a 20% premium for the passage of a regulation that would restrict the ability of a toxic waste dump to be created on a particular site. Note that if they set the premium below the actuarial value, they bear the cost.

¹³⁹ This highlights one of the difficulties of the usual interpretation of the Coase theorem, which argues that it does not make any difference how one assigns property rights, as long as they are clearly assigned. But the assignment cannot be to a class of potential individuals/firms (e.g. smokers, steel companies), because the assignment may increase the numbers in that class. The assignment has to be to particular individuals or firms.

¹⁴⁰ Not all regulations, however, should be viewed as attempts to control externalities. Some can be viewed as part of the provision of a public good. The endangered species act imposes costs on those unlucky enough to have a spotted owl nest on their tree. (Some theoretical models in economics view public goods as an extreme form of externalities, where the increase in consumption of a good by one individual affects all others in an equivalent way.)

¹⁴¹ See Chapter 6, Stiglitz, J.E., Globalization and its Discontents, New York: WW Norton, 2002 Google Scholar.

¹⁴² Even if it is not a matter of simply national loyalty, governments and domestic firms are engaged in a “repeated game” which calls for cooperative actions, especially in any arena thought to be important by the government.

¹⁴³ This is part of the U.S. argument in an ongoing NAFTA Chapter 11 case, where the US is being sued by a (nominally) Canadian mining company that objects to back-filling regulations imposed upon open pit mines Mining is a historically highly-regulated sector, and California is a highly-regulated jurisdiction; as such, the US argues that no investor could reasonably expect that regulations would remain static over the long haul.

¹⁴⁴ In the NAFTA Myers case (S.D. Meyers v. Government of Canada, (NAFTA Ch. 11 Arb. Trib. Oct 21, 2002) (involving an American firm which was precluded from exporting wastes to America, which Canada claimed contravened the Basle Agreement on the shipment of hazardous wastes across boundaries and which committed countries to maintaining adequate waste disposal facilities within their boundaries), the Tribunal awarded $6.05 Million Canadian plus interest for lost business opportunity. This case was disturbing on two grounds: compensation was provided not to a “real investor,” but simply to a firm engaged in business; and compensation was provided for lost profits. Were these standards to be sustained, potential liabilities under investment agreements could soar.

¹⁴⁵ In one recent case (Azurix v. Argentina) the tribunal ruled that Azurix (an Enron subsidiary which made a number of ill-considered water services investments) had wildly overbid for the Argentina concession, and that Azurix apparently planned to turn around and pressure Argentina into renegotiating the terms of its contract at a later date. Notably, the tribunal took this into account and reduced significantly the lost profits which Azurix sought. See the ΓΓΝ reporting on the case (items 1 and 2) here: <http://www.iisd.org/pdf/2006/itnjuly26_2006.pdf>.

¹⁴⁶ Understandable, given the high costs of raising tax revenue.

¹⁴⁷ See the discussion of the Chilean case earlier. (MTD Equity SDN. Bhd. & MTD Chile S.A. v. Chile (Republic of))

¹⁴⁸ Loewen Group, Inc. and Raymond L. Loewen vs. United States of America (Merits) (26 June 2003), 42 ILM 811, 7 ICSID Rep 442, 15 (5) World Trade and ARB Mat 97, as discussed in Harten, op. cit. The tribunal found that the trial was “a disgrace.”

¹⁴⁹ The issue of responsibilities as well as rights also enters into the determination of appropriate compensation. For instance, in the Metalclad case, the company had an obligation to clean up certain hazardous material on its site, which it failed to do. But in determining the appropriate compensation, the Tribunal only looked to its investments, not netting out the cost of the unfulfilled obligations. More generally, many investment suits have entailed a breach on the part of the investor in fulfilling its obligations, with the inevitable dispute as to who is to blame for the breach.

¹⁵⁰ Damage to the environment and to the health and safety of workers is only one example of the failure of corporations to live up to their responsibilities. Many concessions have provisions which require the firm to undertake certain levels of investment. Disputes often arise over whether firms have complied with these provisions. Sometimes the multinationals use accounting “tricks,” to claim that they have done more investment that they actually have. (Bolivia made such claims against some of the hydrocarbon companies in 2006.) Sometimes the multinationals claim that they could not comply with the contract because the government has not provided requisite protection for its people and assets (Bechtel claimed that in its dispute over the highly controversial water project at Cochabamba. Bechtel’s management of the project had elicited massive protests. Strong civil society protests in the U.S. are viewed to be responsible for Bechtel eventually dropping the suit. See S. Anderson and S. Grusky, Challenging Corporate Investor Rule, op cit.).

¹⁵¹ Obviously, legal frameworks would need to be more complex, to avoid the risk that all “owners” wishing to avoid responsibility by keeping shares under the 20% threshold.

¹⁵² Indeed, there is a widespread perception in Indonesia that the cancellation was encouraged, if not demanded, by the IMF. See for instance, Vasutó, S.N. “IMF official praises Jakarta for its steps in tackling crisis.” Business Times (Singapore), Sept 18, 1997. Among the steps that the Indonesian government had taken was cancellation of the power infrastructure projects.

¹⁵³ One might ask, is this position inconsistent with the earlier argument that it may be appropriate for there to be different standards in different countries? The concern is that developing countries are in a disadvantageous bargaining position vis-à-vis large MNC’s, and that without such protections, MNC’s may be able to use their economic and political power to the disadvantage of those (especially the poor) within the developing countries. The provisions called for in this section would serve to redress, to some extent, these imbalances.

¹⁵⁴ I have discussed the broader issue of the distorted incentives facing management in Roaring Nineties, op. cit. Stock options have, for instance, led to distortions in the information provided to the market. Sarbanes-Oxley recognized the distorted incentives confronting accounting firms (a problem to which Arthur Levitt, then head of the SEC, had previously called attention) but did nothing about the problems of stock options.

¹⁵⁵ For instance, the U.S. refused to extradite (without explanation) the officials of Union Carbide, so that they could stand trial in India for Bhopal disaster, in which thousands were killed and hundreds of thousands injured. No one from Union Carbide has been held accountable, and the compensation paid to the innocent victims is widely viewed as grossly inadequate. See in re Union Carbide Corp. Gas Plant Disaster at Bhopal, India 809 F.2d 195, 197-201 (2nd Cir. 1987) (dismissing the case to India on forum non conveniens grounds, and not requiring extradition of individuals). The $470 million settlement paid by Union Carbide has been challenged, so far unsuccessfully, on various grounds in U.S. Federal Courts. For the most recent ruling, see Bano v. Union Carbide Corporation, 198 Fed.Appx. 32, 2006 Wl 2336428 (2nd Cir. 2006) (dismissing the appeal from District Court rulings under the Alien Tort Claims Act).

¹⁵⁶ For a more thorough treatment of the issues discussed here, see H.H.A. Van Harten, 2007, op cit.

¹⁵⁷ Some recent decisions suggest some improvements in the processes. in the Methanex case cited earlier, the NAFTA panel allowed an Amicus Curiae filing and agreed to an open hearing. NAFTA trade ministers adopted a statement urging arbitral tributes to permit amicus briefs; the three governments are committed to requesting open hearings (but their requests may not be honored, especially if objected to by the private party bringing the suit). Evidently, there is some discussion in ICSID of allowing one party to the dispute to insist on secrecy.

¹⁵⁸ Only three NAFTA cases have been appealed, and in only one was any action taken. in the S. D. Meyers, Inc. case involving a U.S. Waste Disposal firm challenging a temporary Canadian ban on the disposal of toxic Pcb, the appellate court narrowly circumscribed grounds for appeal: “To cast aside the tribunal decision it would be necessary to find the tribunal’s decisions exceed its jurisdiction and be “patently unreasonable”, “clearly irrational”, “totally lacking in reality” or a “flagrant denial of justice”.” Cited in Stephen McBride, op cit at p. 769.

¹⁵⁹ For examples, see the discussion above, and the cases and articles cited there.

¹⁶⁰ Argentina has also even raised the question of a conflict of interest in the ICSID itself; it is part of the World Bank, and yet Argentina has an on-going debtor relationship with the World Bank.

¹⁶¹ Op. cit. p. 174.

¹⁶² Loewen, para. 233.

¹⁶³ See Stiglitz, J. E., “On Liberty, the Right to Know and Public Discourse: The Role of Transparency in Public Life,” in Globalizing Rights, Gibney, Matthew (ed.), Oxford: Oxford University Press, 2003, pp. 115-156 Google Scholar. (Originally presented as 1999 Oxford Amnesty Lecture, Oxford, January 1999.)

¹⁶⁴ Broad-Based Black Economic Empowerment Act 53 of 2003.

¹⁶⁵ This proposition will be played out soon, as several Italian investors in South Africa’s mining industry have commenced proceedings at the International Centre for Settlement of Investment Dispute (ICSID), claiming that the Beea violates the terms of bilateral investment treaties between Italy (and Luxembourg) and South Africa. See Luke Peterson, “South Africa’s Bilateral Investment Treaties,” available at <www.fes-globalization.org/publications/Fes_Ocp26_Peterson_Sa_Bits.pdf> and Investment Treaty News (items 2 and 3) at: <http://www.iisd.org/pdf/2007/itn_febl4_2007.pdf>. The South Africa case has yet to be resolved by a tribunal, and it may be that the arbitrators show especial concern for the social context in that particular case, given the publicity it has attracted. But as Luke Peterson has pointed out, arbitrators often are not aware of the local context of investments. (Peterson, Luke Eric. “South Africa’s Bilateral Investment Treaties.” Dialogue on Globalization ? Occasional Papers, No 26, Nov 2006, Fes Geneva, at <http://library.fes.de/pdf-files/iez/global/04137.pdf>).

¹⁶⁶ Investment treaties often throw the entire domestic court process out the window, and allow investors to leapfrog directly to international arbitration. (But see Loewen, above.) Moreover, there is a tendency in some — but not all cases — for tribunals to take a very strict review of domestic measures ( e.g. not taking into account the political-give-and-take and imperfections which are necessarily part of any domestic legislation or regulations). This is an issue which is still evolving, but there is growing recognition (including by international lawyers that some arbitrators are not inclined to follow the example of other international courts and tribunals and to show some degree of deference when it comes to second-guessing the decisions of elected governments.

There are some obvious examples where domestic courts fail; in Zimbabwe, there appears to be a complete lack of effective domestic recourse for those who have been stripped of property. in the realm of international human rights law, where domestic courts are entrusted to resolve these issues in the first instance, with only a limited role for international tribunals on the margins — and after the local court processes have been exhausted. Such an approach might be appropriate here. Later, we discuss an alternative framework, which might work in the absence of an international commercial court.

¹⁶⁷ See in re Uranium Antitrust Litigation, 480 F.Supp. 1138 (D.C. Ill. 1979). For a discussion of the underlying economics and law, see Paul L., Joskow “Commercial Impossibility, the Uranium Market and the Westinghouse Case.” The Journal of Legal Studies, Vol. 6, No. 1. (Jan., 1977), pp. 119-176 Google Scholar.

¹⁶⁸ Note the difference between the approach taken to criminal justice under the International Criminal Court and these commercial cases. in the case of the International Criminal Court, the matter is only turned over to the international tribunal after a failure of domestic courts to take action. by contrast, the arbitration panels under the investment treaties appear to trump domestic courts.

¹⁶⁹ See 11 U.S.C. §901 et seq. (2000).

¹⁷⁰ See Making Globalization Work, op. cit.

¹⁷¹ F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004).

¹⁷² See Brief of Amici Curiae Economists Joseph E. Stiglitz and Peter R. Ország in Support of Respondents, 2004 WL 533934 (U.S.).

¹⁷³ This was one of the central messages of A. Charlton and J. E. Stiglitz, Fair Trade for All, op cit.

¹⁷⁴ Similarly, during financial crises where domestic and foreign creditors both have claims over assets of domestic firms, the principles which guide such resolutions will inevitably have differential effects on domestic and foreign claimants. For instance, in the 1997-1998 Korean crisis, domestic creditors had lent against collateralized assets, while the foreign creditors had lent, unsecured, to the “mother” company. The result was that Korean claimants recouped a larger fraction of what was owed. But this was not discrimination. Pressure was put on Korea to change the prioritization of claims to ensure a “fair” outcome between domestic and foreign creditors. in my judgment, that was wrong.

¹⁷⁵ There is an argument for such discrimination: the elasticity of supply of foreign firms may be greater than that of domestic firms. There is a reverse argument: the government has a variety of instruments by which it can lean on domestic firms to behave in ways which are consistent with broader national policies and objectives, meaning that the social returns to domestic investment may well be substantially higher than those from foreign investment. on balance, I believe that with few exceptions it is a mistake to provide preferential treatment to foreign firms.

¹⁷⁶ As we noted earlier, the agreement had been largely negotiated and agreed upon during President Bush’s Administration. The secrecy and complexity of these agreements has served some of the negotiators well. Having written complex agreements, they enter private practices to litigate them. This is illustrated by one of Bush’s negotiators for Chapter 11 (Dan Price), who, after leaving the Administration developed a very lucrative sideline in using these Bits for arbitration (acting on behalf of Vivendi, Cargill, Allianz and others) which capitalized on these investor-state arbitration provisions. in the ever “revolving door” so common in Washington, Price was then appointed as Deputy National Security Advisor for International Economic Affairs in the second Bush White House. (See the bio of Dan Price at <http://www.whitehouse.gov/news/releases/2007/05/20070531.html>.)

¹⁷⁷ This is not the only asymmetry. We have noted that corporations can lay claim to losses from changes in regulations, but governments cannot lay claim to gains to the corporations as a result of changes in regulations. Indeed, we argued that the adoption of a BIT itself (in the expansive interpretations) constitutes a change in the assignment of property rights (relative to what they had been), thus enhancing asset values.

¹⁷⁸ Especially if they do charge appropriate premiums.

¹⁷⁹ In the specific sense defined in the section on nondiscrimination.

¹⁸⁰ And should provide no pre-establishment rights.

¹⁸¹ Even when firms are domestically incorporated, suits under investment treaties can still arise, as we have noted.

¹⁸² The South African Empowerment legislation discussed earlier provides a striking illustration. They spent years debating — very publicly and very intensely — how far property rights should go, balancing these rights with other social objectives. The resulting national constitution represents a very delicate, and quite progressive, balance. Yet, the investment treaties which were then signed by South Africa, without any real public debate, much less parliamentary scrutiny, strike a different balance and have already put at risk important pieces of national regulation.

¹⁸³ When the agreements are part of a larger trade agreement, they can be seen as a method by which the “surplus” which the developing country might have enjoyed from the agreement is appropriated by the developed country.