Investor State Dispute Settlement - Things heating up?

I usually do not write about investment issues. That is not my forte. However, have been coming across a lot of pieces on the issue of Investor State Dispute Settlement (ISDS) that caught my attention. The ISDS provision in an investment agreement essentially permits private investors to initiate a dispute against the State where it has invested in cases of alleged violations of the State's obligations under the investment treaty.

The IELP blog carried this piece on the latest Australian FTA with Japan that apparently does not have an ISDS provision. The recent example of this FTA establishes that the issue is not resolved and will continue to arise in international negotiations. The pros and cons of having ISDS provisions have been debated ad naseum. Two pieces on varying positions are an interesting read.

This piece called "Profiting from Injustice" essentially argues against having provisions of ISDS due a variety of reason including that it is fuelled by law firms, arbitrators and financiers and is essentially not neutral. 

Countering the above premise, a detailed piece in the Harvard Journal of International Law argues against the "re-statification" of investment state disputes essentially arguing in favour of the existing ISDS provisions.

A whole lot of literature, interests and impacts. Issues about what constitutes "neutrality" itself? is there a pro-investor or pro-state bias? What trend would coming bilateral, plurilateral agreements follow? Is there a middle ground?

Of governments and their role

An interesting piece titled "Don't give up on the power of governments" on globalisation and role of governments in challenging times is found here. While governments are often compared, at times unfairly, with well performing corporates, the enormity of the challenges are often under estimated.

"But, on another level, the attempt to rate government alongside business and the media is fundamentally misguided: no sector operates at the scale of responsibility, accountability, and expectation that governments do. 

Business decides for itself where to invest and grow. Media indulge themselves in a fast-moving news cycle. Government enjoys neither luxury. It cannot simply pack up and move on when it faces a loss or is bored with a story. Government must stay put – and must often clean up the messes left behind by those who do not. On a good day, it may even get to make improvements. 

The problem for governments, more often than not, is that in attempting to respond to and reconcile often conflicting individual, family, and national needs, their ability to deliver results efficiently and effectively has declined. As a result, trust in government has plummeted."

Often n the debate on globalisation, the issue is of the State versus the market. The debate is ideological at times and is fuelled by prejudice rather than rationale. May be there is a middle path of recognizing the limitations of both unbridled State power as well as inescapable market failure, of recognizing their respective roles and of working together to make lives better.

Trade and sub-national interests

I came across this interesting website titled "Trade Benefits America" that maps benefits of trade to states within the country as contrasted to the national level.Normally, trade analysis is limited to the benefits a country gets in terms of national outcomes - jobs, GDP growth, investment and export growth. Going to the sub-national level is normally not attempted. This website maps perceived benefits right upto the State level on many parameters. It makes trade look more relevant and grounded.

I had blogged about this issue some time back here.

Some lessons to be learnt for countries having federal polities.

Role of the State and trade agreements

The role of the State and government in a globalised world is a subject matter of great debate especially depending on which side of the spectrum you come from. Is the role of the State incompatible with free trade and globalisation? Can they co-exist? Does free trade and globalisation necessarily mean reduction of the role of the State in economic activity and governance?

I had written about this a long time ago in this blog piece that I "searched out" here - on State Capitalism and globalisation. A more recent piece is the rather critical one wherein Martin Khor alleges that regional trade agreements are reducing the role of the State, especially State Owned Enterprises with provisions relating to them found in these agreements.

Titled "The Role of the State in Developing Countries under Attack from New FTAs", he argues:

"Naturally, there are pros and cons to any agreement, including the FTAs. Any potential gain for a country in exports or investments should be weighed against potential losses to domestic producers and consumers, and especially the loss to the government in policy space and potential pay-outs to companies claiming compensation under the FTAs' investment rules. 

But if developing countries have to come under new international rules that curb the role of the state and that re-shape the structure of their economy, then the prospects for future development will be adversely affected."

The role of the State, State owned enterprises and government are a source of constant challenge in discussions on liberlaisation and globalisation. How do international trade agreements address this question? Does GATT/WTO distinguish between a State led economy and a liberalised economy? Does it prefer one over the other? Is there place for a mixed economy in this discourse? Can we build a model for a mixed discourse?

Globalization and inequality - Middle path?

One of the questions about the impact of globalization is its impact on inequality? Does it aggravate it or lessen it? How should a State deal with pursuing a globalized agenda as well as addressing the inequities it breeds? Is there a path to find that equilibrium or are they incompatible goals?

Dani Rodrik in a not so recent interview asserted that globalization does lead to increasing inequality but also alluded to a possibility of open economies reducing inequality. 

"There is no question that globalization has aggravated inequality within countries.  But we need to think of globalization in this context as part of a cluster of developments: new technologies, greater emphasis on markets, decline in unionization, and fiscal paralysis of many states. All these have had the consequence of raising the returns to skills and talents and reducing the bargaining power of blue collar workers and those who are unable to move across national borders with the same ease as capital. 

But there are exceptions too.  One of the most encouraging trends in the last couple of decades is the decline in inequality in Brazil, Chile, and many other Latin American countries, which have traditionally been among the most unequal in the world. This shows that broad social programs as well as more narrowly targeted anti-poverty programs can still be pursued and are effective in open economies."

A welfare state pursuing globalization is a distinct possibility? If one does not seek extremities, there is perhaps a way which seeks an open economy based on a strong interventionist state to address poverty alleviation and inequality. How this balance is sought and implemented is where the problem lies. the devil is normally int he details and the path to finding that balance often leads to excesses. One would have to understand and contextualize the roles of the State and market to find this balance.

State, private sector business, international trade and national interest

A lot has been written about the future of the Doha round of negotiations as well as the further of WTO itself. 

I found this piece by Aldo Matteucci straightforward and simple. It offers a number of solutions to the present political impasse and how the complex international trading system must be navigated. I have blogged about what constitutes "national interest" in the context of international trade, especially in the context of private businesses here and here. This question becomes all the more intriguing considering the fact that governments are the sole participants at the WTO. While internal consultation processes take into account varied domestic interests, including business or private sector interests, there is a feeling that the multilateral institution should do more to take into account "non-State" interests. 

On private sector involvement the piece comments:

"Under the main heading “WTO and you” the organization’s website recognizes journalists, students, Parliamentarians, and NGOs. It is slightly puzzling that those who are directly affected by the international trading system – firms that in one way or another trade over the border – have no dedicated portal in the organization or specified and institutional role to play. Of course contacts take place, but what is needed is a definition of the private sector’s role in managing the trading system. 

The current situation reflects the traditional approach where the state was the sole representative of the national interest. In a complex trading system, where many firms have become “transnational”, the role of the country of origin loses focus. At least in the problem-defining and the solution-shaping phase (i.e. in setting the agenda, the objectives, and a list of desirable outcomes) the voice of the private sector should be recognized directly and in a structured manner. Firms should have a choice of channel in which to voice their concerns. This would be the best way to secure their support for the process. Involving the private sector in a multilateral structure might collaterally lead to more nuanced national positions and may become a stabilizing factor (not to speak of chances of getting agreements through Parliament)."

What the choice of channel should be and to what extent non-state actors should have a role in representing "national interest" is a debatable issue. However, a state-business collaborative effort would seem the only way that a meaningful intervention can be made in the complex arena of international trade.

Is economic nationalism and protectionism the same?

I have often written about the issues of protectionism, globalization and the role of the State in this blog here and here.Often, the role of the state and market are seen as mutually exclusive. Increasing globalization and integration of markets is seen as a natural corollary to the reducing influence and role of the State and government. However, is this analysis true? China is often taken as an example that defies this logic of increasing connectedness to the globalized market while retaining strong state presence. Is there a middle path where the role of the State and market and co-exit which is not antithetical to world trade rules? Is there a legitimate role for the state to play apart from being a facilitator and regulator? Is state intervention always protectionism? Can protectionism also exist in highly liberalized markets with other forms of State support?

Yale GlobalOnline has a refreshing piece by Anthony P. D’Costa on economic nationalism, role of the state and globalization. He essentially avers that the state can play a role of a promoter instead of being "protectionist" in a globalized world.He brands this as 'economic nationalism" wherein the State does not necessarily retreat but plays a more constructive role in promoting the welfare of its citizens.

"The concept of economic nationalism is used for selective engagement with the world economy. Rather than the orthodox notion of economic nationalism, defensive in nature and nation-centered, I offer a more dynamic understanding – economic nationalism in motion. This version, first proposed in theReview of International Political Economy, 2009, suggests that the practice is influenced by pragmatic considerations rather than ideology – akin to Deng Xiaoping’s proverbial cat that catches mice irrespective of its color – especially under fluid circumstances of economic growth, emerging competitive industries and, most importantly, as national capitalists mature. Earlier economic nationalism meant protection; today it’s promotion, though the basic motive for both is ensuring national economic interests. This ability to navigate changing circumstances and priorities pragmatically contributes to the dynamic movement of the practice of economic nationalism. 

Behind economic nationalism in motion is a particular kind of state-business nexus where the two operate in a public-private partnership. The key difference with this form is that the state explicitly promotes national capital at home and abroad for national economic gain, although prestige can also play a role, when a public-relations agenda drives hosting a major sports events or acquiring state- of-the-art technologies for pet projects without thorough cost-benefit analysis. 

Fostering national economic development and competitiveness, promoting national companies and brands, is part of the economic-nationalism-in-motion portfolio. Market-driven globalization is not incompatible with state intervention. States must identify the conditions under which such economic nationalism can be undertaken and the instruments at their disposal to negotiate the forces of economic globalization."

Thus, in this model all state intervention and promotion is not necessarily viewed as protectionism. Active state involvement to safeguard national interest, branding, promotion of national corporations (State Capitalists) are all part of this mission. Is this compatible with WTO rules? Is there anything in the GATT/WTO that prohibits this? Is this the middle path that emerging economies should undertake to negotiate globalization without abandoning it? However, there is a thin line between State involvement and control - and one must tread that line very carefully.

Random musings on Protectionism, Globalization and the Third Way

                                      (Photo Credit: loco's photos - Flickr)

The respective roles of the State and market has long been a subject of intense debate in a globalizing world. Closely linked to this is the role of free trade and protectionist policies in a country's developmental agenda. Are there any "right" answers in this debate? Or are the contours of this debate blurred? This blogpost does not seek to offer any answers to the complex issue of the role of the State, free trade and protectionist policies in international development. I came across a few pieces that do touch upon this topic that I thought would be worth sharing:

1.No Third Way to the Market: Milton Friedman has argued that privatization should go the whole hog in sectors which require it. Critical of the role of the State in a market economy, he argues against piecemeal privatization that, according to him, is more counterproductive. Offering examples of partial privatization of the airline industry and the Postal Industry in the U.S. he concludes:

"Few rules exist for overcoming this tyranny of the status quo. But one is clear: if a government activity is to be privatized or eliminated, do it completely. Do not compromise by partial privatization or partial reduction of state control. That simply leaves a core of determined opponents in place who will work diligently (and often successfully) to reverse the change."

 2.Is the Great State debate Outdated: Arguing that appropriate policy decisions should be taken at appropriate levels of local, state, national and global governance, Kemal Dervis has argued that public policy must take into account these stratification.

"In today’s interdependent world, the debate about the role of public policy, the size and functions of government, and the legitimacy of public decision-making should be conducted with the four levels of governance much more clearly in focus. The levels often will overlap (infrastructure and clean energy issues, for example), but democracy could be greatly strengthened if the issues were linked to the levels at which decisions can best be taken."

3. Stop Complaining about Outsourcing: Relying on the positive impact comparative advantage and good old division of labour has on the economy, Sheldon Richman argues that there is no alternative to liberalizing trade and reducing the role of protectionism since the latter hurts the less privileged more than the rich. It concludes by saying :"Global cooperation beats trade war every time."

4. Seven Moral Arguments for Free Trade: This 2001 Cato post summarizes the arguments in favor of free trade and open markets. While some of the points are definitely contestable, the general thrust of the arguments seem to suggest that a protectionist, state led model hurts the poor more than the well off.

"When all of the arguments are weighed, it should become clear that a policy of free trade is moral as well as efficient. Free trade limits the power of the state and enhances the freedom, autonomy, and self-responsibility of the individual. It promotes virtuous and responsible personal behavior. It brings people together in “communities of work” that cross borders and cultures. It opens the door for ideas and evangelism. It undermines the authority of dictators by expanding the freedom, opportunity, and independence of the people they try to control. It promotes peace among nations. It helps the poor to feed and care for themselves and creates a better future for their children. For which of these virtues should we reject free trade?"

5. Free Trade is Not the Same Thing as Protectionism: Finally, I had to end with Simon Lester's pick questioning an article that equated seeking increased access to markets with protectionist tendencies of imposing antidumping and countervailing duties. Though not related to the debate, it underscores the need to be consistent with policies that impact local markets as well as access to outside markets.

6.The Economics of Outsourcing: America need to understand and adapt to such developments: Essentially arguing for free trade, this piece emphasizes that the globalized world is here to stay and the response to it is not protectionism but participating in it.

"Freer trade and cheaper communications have spurred globalization in recent decades, exposing once-insulated parts of the economy to foreign competition. Americans can’t cling to the jobs of the past. We need to find the best opportunities in the global economy. In the new international division of labor, we can be the managers, consultants, and even facilitators of outsourcing.

Trade and new technologies are a lot alike. They both upset the existing economic order, undermining some products, industries, and professions while giving rise to new ones. America’s prosperity has been built on wave after wave of such upheavals, with new jobs continually replacing old ones. That’s why American workers are insurance salesmen and dentists, not blacksmiths and buggy-whip makers. We don’t have to know exactly where the new jobs are. We only need faith in the American people and the capitalist system.

Politicians’ attacks on outsourcing won’t work any better than the Luddites’ assaults on technological innovation. If their argument prevails, it is a path to decline. America will be better off if we grab the opportunities arising out of globalization. That is the only thing that will work."

The random musings throw open myriad issues related to the role of the State, markets and international trade in the developmental trajectory of a nation. Do international trade, reduced barriers ipso facto lead to improvements of living conditions of the marginalized? Does trade enhance the capacity of people to engage in the market? For people outside the formal economy, what role does international trade and access to markets have in improving living standards? Does the role of the State always create negative impacts? While questioning State capitalism or other forms of State support, it is often forgotten that large industrialized economies of today were also built on heavy State support and encouragement. It is often brought to light that State subsidies in free market economies are also pretty large. Thus, is the debate of State vs. markets a simplistic one? Does the WTO framework prevent the State from being an active partner in the developmental path? Can their be a constructive role of the State in the globalized world which recognizes the power of the market and global interconnectedness but harnesses the regulatory intervention of the State? For some the State is a bad word while it is the market for others. Can we go beyond these constructs to find the middle path? Is there a middle path at all?