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An International Framework for the Protection of Investment
By N. Stephan Kinsella
Published in: Philadelphia Lawyer, p. 20 (Fall 1997)
[For current author info as of 12-2001: see: www.KinsellaLaw.com]
Draft submitted: May differ slightly from published version
We’ll take and take until not even the nails in their shoes are left. We will take
American investments penny by penny until nothing is left.
—Fidel Castro, 1960
Less than seventy-five years after it officially began, the contest between capitalism
and socialism is over: capitalism has won.
—Robert Heilbroner, 1989
In the not-too-distant past, socialism and central planning were held up as ideals, and
capitalism, private property rights, and free trade were scorned; today the reverse is the case. One
reason for this change is the spectacular and unambiguous collapse of various forms of socialism and
central economic planning around the globe, which has led to an unprecedented and widespread
appreciation of the benefits of free trade and private property. Most serious people now
acknowledge, albeit sometimes reluctantly and inconsistently, the essential role of free trade and
private property for civilized human survival. But whatever the reason for this change in the
evaluation of capitalism, it is hard to deny the growing recognition, among both industrialized and
emerging countries, of the importance of protecting the private property rights of investors and of
reducing political risk so as to make foreign direct investment more feasible and attractive to
investors.
Despite these improvements, investors are often wary of investing in foreign countries, since
there is a danger of expropriation–direct or indirect, sudden or gradual–of their investments by the
host state. This wariness is heightened when one of the jurisdictions is a relatively unstable,
developing regime, where property and contract rights are uncertain. Many of these regimes, such
as Russia, Cuba, Mexico, Libya, have expropriated or nationalized foreign investment in the past and
have not fully, consistently, or even substantially embraced capitalism or respect for private property
rights. For this reason, the “political risk” of investing in emerging economies is often prohibitively
high. This is unfortunate, since it is these countries that desperately need injections of Western
capital and know-how, in order to help them rise out of the decimation caused by decades of
inefficient and brutal central planning.
One way to help investors overcome this wariness is to strengthen the protection of foreign
investment through the use of treaties. By entering into a treaty, a state “internationalizes” the
commitments contained therein—i.e., breach of the obligations undertaken in a treaty is an
independent and serious breach of international law, under the principle pacta sunt servanda
(agreements are to be respected). Host states are, therefore, reluctant to breach a treaty obligation
that was voluntarily and expressly undertaken. Accordingly, by signing a treaty with one or more
states, a prospective host state can bind itself under international law to respect foreign investment,
thereby rendering any arguable uncertainty in general principles of international law moot–even if
the host state itself has resisted the Western interpretation of international law.
Currently, some regional treaties, such as NAFTA and the Treaty of the Establishment of the
Caribbean Common Market (the Andean Agreement), do address investment protection issues on
a regional basis, but they are not universal. Similarly, there has been a growing nexus of so-called
bilateral investment treaties (BITs), which also obligate the signatory parties to respect the property
rights of foreign investors. Hundreds of which have been executed to date (America, for example,
has concluded dozens of these BITs with countries ranging from Albania to Zaire). However, since
a separate BIT must be negotiated for every separate pair of countries, this has led to an
overwhelmingly huge and unwieldy number of BITs, many having different standards and scope.
Many pairs of countries are not even covered.
The proposed Multilateral Agreement on Investment (MAI) may repaid this gap. Currently
being negotiated by the twenty-nine member-countries of the Organization for Economic
Cooperation and Development (OECD),
the MAI would obligate its signatories to respect foreign
investment through a binding treaty. Although mostly industrialized, developed countries are
negotiating the treaty, it is hoped that once the MAI is ratified, a wide number of countries, including
developing nations, will join in the agreement, thus making the standards for protection of foreign
investment more universal and uniform that those provided by the inconsistent patchwork of bilateral
and regional treaties. Talks on the MAI were initiated in early 1995 and are expected to be concluded
by mid-1998. Among other things, the MAI is expected to provide for non-discrimination, limits on
expropriation, and effective dispute resolution.
Under the proposed MAI, for example, host states are expected to agree to expropriate
foreign investment only if the expropriation is: (a) for a public purpose, (b) performed in a non-discriminatory manner, and–the most essential protection–(c) accompanied by full compensation.
The dispute resolution measures should provide for a predictable and peaceable means of settling
disputes between foreign investors and the host state, and also for disputes between the investor’s
home state and the host state.
In explicitly calling for a full-compensation standard, the MAI should remove the uncertainty
that has settled on the compensation standard in decades past. In a sense, the MAI signals the re-emergence of a framework for the protection of foreign investment, which had existed in one form
or another until it was watered down in the socialist turmoil of this century. Additionally, since states
are reluctant to breach treaties, tying investment protection standards to a treaty should cause
developing states to be even more reluctant to expropriate foreign investment in breach of the MAI’s
standards. These standards promise to apply more universally and uniformly than the standards
provided by the inconsistent patchwork of BITs and other regional treaties.
Thus, the MAI should serve to lower political risk and increase foreign direct investment. It
is also ossible that the MAI negotiations will be expanded to include provisions to inhibit and deter
investments in property expropriated without compensation or otherwise in violation of international
law–similar to the prohibitions against trafficking in illegally confiscated property in the so-called
Helms-Burton, or Libertad, Act of 1996, which should help further dissuade host states from illegally
expropriating investment.
The MAI should improve on other current mechanisms and practices for protecting
investment as well. For example, some developing states provide for investment protection in
national legislation, such as investment codes. These laws, however, may be changed at will by the
host state, without necessarily violating international law. Since states are less likely to breach a
treaty than to change their own laws, the MAI would give investors more security in their property
rights.
Another technique open to some investors is the negotiation of agreements directly between
the investor and the host state, referred to as concessions or investor-state agreements. These
agreements, like treaties, can provide for strong protection of the investor’s property and other rights,
and can be structured to make the host state obligated under international law to respect the
agreement. This option is expensive to negotiate, however, and not usually feasible for smaller
investors, whereas a treaty such as the MAI would protect all investors.
Foreign investors also often deal with political risk by acquiring political risk insurance.
Such insurance is available from a number of sources, including state-sponsored insurance agencies
such as the United States’ Overseas Private Investment Corporation (OPIC), private insurers such
as Lloyd’s of London, and multilateral agencies such as the World Bank’s Multilateral Investment
Guarantee Agency (MIGA). Of course, investors would prefer to be have political risk itself lowered
so that expropriation is less likely (and so that political risk insurance becomes cheaper).
Additionally, government-sponsored insurance, which dominates the field, is morally and
economically problematic since it involves redistribution of wealth and the economic inefficiencies
that inevitably accompany government intervention in the market.
Thus the MAI is also to be
welcomed, to the extent that it reduces the resort to government-sponsored investment insurance
schemes.
Today we seem to be entering a golden age of international trade, with ever-diminishing
barriers and increasing economic integration and foreign investment. This tendency is more
advanced amongst the industrialized economies of the West, but is spreading to developing
countries, as they begin to crave foreign investment.
The MAI promises to improve on the present international system for the protection of
foreign direct investment. If it is ratified by a large number of both developing and developed states,
the MAI stands to benefit both investors and host states, thereby further increasing the wealth of
nations.
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