Investor-State Treaty Regimes and Arbitral Processes Exploratory Research Beth A. Simmons Straus Institute, 2009-2010 Introduction to the Topic Characteristics of the emerging “regime” for the facilitation and protection of FDI Uniqueness of the emerging system Growing questions of legitimacy Largely bilateral Largely North-South Special status of investors in dispute settlement Asymmetrical aspects Not especially transparent Law BIT by BIT? Law through litigation? Increasingly, state actors are resisting: exit and voice My purpose: to develop a theory of the way this system works WTO Trade Disputes and ICSID Investment Disputes number of new ICSID arbitrations number of new GATT/WTO disputes 60 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Introduction to the Topic Characteristics of the emerging “regime” for the facilitation and protection of FDI Uniqueness of the emerging system Growing questions of legitimacy Largely bilateral Largely North-South Special status of investors in dispute settlement Asymmetrical aspects Not especially transparent Law BIT by BIT? Law through litigation? Increasingly, state actors are resisting: exit and voice My purpose: to develop a theory of the way this system works Comparison of defendants in trade and investment disputes GATT/WTO defendants by incom e category low er middle income 9% low income 4% ICSID respondents by income category low income 19% upper middle income 14% high income 73% high income 4% upper middle income 42% low er middle income 35% References to "ICSID", UNCITRAL" and "International Arbitration" in U.S. news sources, 1990-2009 "ICSID" hits "UNCITRAL" hits "International Arbitration" hits Source: LexisNexis database 70 60 50 450 400 350 300 250 40 30 200 150 20 100 10 50 0 0 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 ICSID and UNCITRAL hits 80 500 International Arbitration hits 90 References to "ICSID, "UNCITRAL" and "International Arbitration" in world news sources, 1990-2009 ICSID hits UNCITRAL hits Int. Arbitration hits 200 Source: LexisNexis database 140 120 1000 800 100 80 60 600 400 40 20 0 200 0 International Arbitration hits 1200 160 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 ICSID and UNCITRAL hits 180 1400 Outline of presentation The rise of BITs BITs as bargains – a look at contents The consequences of BITs Trends in arbitration Push-back: annulment proceedings Conclusions The Rise of BITs Cumulative BITs world wide 3000 2500 2000 1500 1000 500 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 0 Average number of BITs negotiated each year by… left governments center government right governments 3.5 3 Average, left = 1.45/year** Average, center = 1.72/year Average, right = 1.67/year* 2.5 2 1.5 1 0.5 20 05 20 03 20 01 19 99 19 97 19 95 19 93 19 91 19 89 19 87 19 85 19 83 19 81 0 Why the BIT mania? Technology for joint gains Spread of neo-liberal ideas of development But also High stakes Tough competition Hard times High stakes 200 4 Number of Treaties Signed Average Foreign Direct Investment 150 N um ber of Treaties Signed 3 2 100 50 1 0 1960 1970 1980 Year 1990 2000 Tough Competition Predictors that a developing will ratify a BIT with any other country: Ratification in countries with similar infrastructure Ratification in countries with similar work force Ratification in countries with similar export profile Developing countries do what their closest economic competitors for capital do. Hard Times World GDP Growth and BITs cumulative BITs world GDP growth 5 per. Mov. Avg. (world GDP growth) 6000 5 4.5 4 3.5 4000 3 3000 2.5 2 2000 1.5 1 1000 0.5 0 0 1980 1985 1990 1995 Year 2000 2005 World GDP growth Number of treaties signed 5000 Average Growth Rates Preceding Any BIT Signing Any BIT signed No BITsigned 4 3.5 growth rate 3 2.5 2 1.5 Note: difference in mean growth rates is statistically significant (p<.05) in years -3 and -2. 1 0.5 0 -4 -3 -2 -1 0 1 Year (0=year of BIT signing) 2 3 4 Average Growth Rates Preceding BITs Sprees (>4 BITs/year) BIT spree no BIT spree 4.5 4 3.5 growth rate 3 2.5 2 Note: difference in mean growth rates is statistically significant (p<.05) in years -3,-2,-1 and 0. 1.5 1 0.5 0 -4 -3 -2 -1 0 1 Year (0=BITs spree year) 2 3 4 BITs as bargains: a look at contents Getting the text – not as easy as it sounds. Deciding what to code – not as obvious as it may seem. Starting point: dispute settlement clauses. Simple assumptions: Capital importing countries want as much local control as they can get away with Investors want a dispute as removed from local host country institutions as possible Hypothesis: host countries in weak bargaining positions lose more sovereign control in the event of disputes Hard-to-find BITs texts found texts missing 250 150 100 50 0 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 20 01 20 04 number of new BITs 200 "missing" = could not be found on UNCTAD or major country-specific websites Source: Allee and Peinhardt, 2010 year How random are the “hard-to-find” BITs? texts found texts missing 10 (less dem) polity scale (more dem) 8 6 4 2 0 -2 -4 -6 -8 -10 poorer partner richer partner combined Mean democracy scores of countries' whose BITs texts are "easy" versus "difficult" to find are significantly different (p=.0000). "Found" BIT texts are likely to be a biased (highly democratic) sample. BITs as bargains: a look at contents Getting the text – not as easy as it sounds. Deciding what to code – not as obvious as it may seem. Starting point: dispute settlement clauses. Simple assumptions: Capital importing countries want as much local control as they can get away with Investors want a dispute as removed from local host country institutions as possible Hypothesis: host countries in weak bargaining positions lose more sovereign control in the event of disputes Number of New BITs that Mention ICSID no mention of ICSID mentions ICSID 140 120 100 80 60 40 20 0 04 20 01 20 98 19 95 19 92 19 89 19 86 19 83 19 80 19 77 19 74 19 71 19 68 19 65 19 62 19 59 19 year Numbert of new BITs that Mention UNCITRAL no mention of UNCITRAL mentions UNCITRAL 140 120 100 80 60 40 20 0 04 20 01 20 98 19 95 19 92 19 89 19 86 19 83 19 80 19 77 19 74 19 71 19 68 19 65 19 62 19 59 19 BITs as bargains: a look at contents Getting the text – not as easy as it sounds. Deciding what to code – not as obvious as it may seem. Starting point: dispute settlement clauses. Simple assumptions: Capital importing countries want as much local control as they can get away with Investors want a dispute as removed from local host country institutions as possible Hypothesis: host countries in weak bargaining positions lose more sovereign control in the event of disputes What explains the choice of dispute settlement provisions? Results of a series of probit models; dependent variable: presence or absence of particular kind of clause ICSID provision UNCITRAL provision Neither ICSID nor Local body provision Exhaust Local remedies UNCITRAL Growth past 3-yrs (host) -.005 (p=.422) -.021*** (p=.003) .027** (p=.012) .024*** (p=.000) .028** (p=.028) Joint democracy .038*** (p=.000) .011 (p=.112) -.034*** (p=.000) -.005 (p=.315) -.007 (p=.477) Difference in development .096 (p=.102) -.054 (p=.427) -.078 (p=.261) -.283*** (p=.000) -.203** (p=.015) Year .061*** (p=.000) .093*** (p=.000) -.061*** (p=.000) .050*** (p=.001) -.037* (p=.098) # obs. 1213 1213 1213 1204 1205 Pseudo R2 .120 .091 .135 .082 .053 Data on provisions: Allee and Peinhardt 2010. Effect of Grow th Rate on probability of clause relating to local recourse The consequences of the host business cycle for BITs dispute settlement clauses… 0.8 0.6 0.4 0.2 0 10% growth Effect of Grow th Rate on probability of no ICSID or UNCITRAL clauses Effect of Grow th Rate on probability of an UNCITRAL clause 0.1 probability probability 0.08 0.06 0.04 0.02 0 10% grow th -10% grow th -10% growth 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 10% growth -10% growth What are the consequences of signing BITs? Great source of collected articles: Sauvant, Karl P., and Lisa E. Sachs. 2009. The Effect of Treaties on Foreign Direct Investment. Oxford: OUP Effect of BITs signings/ratifications on FDI flows: very little if any, conditional on: good domestic institutions (Hallward-Driemeier 2003; Rose-Ackerman and Tobin 2005) and the capital source (Gallagher and Birch 2006). Some positive benefits Eggera and Pfaffermayr 2004; Neumayer and Spess 2004; Kerner 2009). The most predictable outcome of ratifying BITs… BITs: If you Ratify, They Will Litigate… BITs and ICSID cases, world wide number of new cases cumulative BITs world wide 40 6000 5000 30 4000 25 20 3000 15 2000 10 1000 5 0 0 1980 1985 1990 1995 year 2000 2005 cumulative BITs number of ICSID cases 35 BITs: If you Ratify, They Will Litigate… BITs and ICSID cases, Latin America Number of Latin American cases cumulative BITs, L.A. 25 700 500 15 400 300 10 200 5 100 0 0 1980 1985 1990 1995 year 2000 2005 cumulative BITs number of ICSID cases 600 20 BITs: If you Ratify, They Will Litigate… BITs and ICSID cases, Argentina Number of Argentine cases cumulative BITs, Argentina 18 60 16 12 40 10 30 8 6 20 4 10 2 0 0 1980 1985 1990 1995 year 2000 2005 cumulative BITs number of ICSID cases 50 14 Growth in Investor-State Arbitration, ICSID Cases number of new cases 40 35 30 25 20 15 10 5 Year 20 08 20 05 20 02 19 99 19 96 19 93 19 90 19 87 19 84 19 81 19 78 19 75 19 72 0 Average number of arbitrations by… left governments center governments right governments 0.6 0.5 0.4 0.3 0.2 0.1 20 08 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 0 Average number of arbitrations by… left govs center govs right govs excluding Argentina 0.35 0.3 0.25 0.2 0.15 0.1 0.05 20 08 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 0 Economic Conditions prior to Arbitrations World GDP Growth and Arbitration 5 per. Mov. Avg. (world GDP growth) 40 7 35 6 30 5 25 4 20 3 15 2 10 5 1 0 0 1976 1981 1986 1991 Year 1996 2001 2006 World GDP growth number of new cases 5 per. Mov. Avg. (number of new cases) Economic Conditions prior to Arbitrations Latin America & Caribbean GDP Growth and Arbitration 5 per. Mov. Avg. (Number of Latin American cases) 5 per. Mov. Avg. (Latin America GDP Growth) 25 10 6 15 4 10 2 0 5 -2 0 -4 1972 1977 1982 1987 1992 year 1997 2002 2007 Latin America & Caribbean GDP growth number of new cases 8 20 Economic Conditions prior to Arbitrations Arbitration and GDP Growth - Argentina (5-year moving averages) 5 per. Mov. Avg. (Number of Argentine cases) 5 per. Mov. Avg. (Argentine GDP growth) 18 15 16 number of new cases 10 14 12 5 10 0 8 6 -5 4 -10 2 0 -15 1972 1977 1982 1987 1992 year 1997 2002 2007 Conditions associated with arbitration Dependent variable: arbitration in a given year (probit coefficients, p-values) Explanatory Variables: Model 2 Model 3 Model 4 Model 5 Log of arbitration, (t-1) .202*** (p=.000) .215*** (p=.001) .224*** (p=.001) .220*** (p=.000) log of cumulative # of BITs .133*** (p=.000) .255*** (p=.000) .119** (p=.011) .224*** (p=.000) Year .029*** (p=.000) .024*** (p=.001) .030*** (p=.000) .025*** (p=.000) Log inflation (t-2) .067* (p=.055) -- -- -- Log change in reserves (t-2) -- -.088*** (p=.002) -- -- FDI outflows (t-2) -- -- -.004** (p=.027) -- Change in foreign debt service/GDP(t-3) -- -- -- -.009** (p=.047) Overall R2 .074 .096 .079 .092 # of countries 162 118 155 130 Total # observations 2739 2065 2094 2037 It’s the economy, stupid! Annulments No appeals of ICSID tribunal decisions (compare WTO DSM). Annulments on only very narrow grounds absence of proper reasoning manifest "excess of powers" And yet… ICSID: Awards and annulment registrations awards annulment registrations 18 16 14 12 10 8 In 2008 the number of new registrations for annulment proceedings exceeded the number of awards on the merits* made by ICSID tribunals in that year *excluding awards on jurisdiction and settlements parties requested to be written in the form of awards 6 4 2 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 0 A Closer Look at Annulment Attempts… Argentina 8 Egypt 4 Chile 3 Ecuador 2 Malaysia 2 Peru 2 Cameroon 1 DRC 1 Gabon 1 Guinea 1 Guyana 1 Indonesia 1 Kazakhstan 1 Morocco 1 Philippines 1 Seychelles 1 United Arab Emirates 1 Central SE Asia Asia 3% 13% Middle East 19% Africa 16% Latin America 49% high low income income 3% 9% lower middle 41% upper middle 47% Sectors in which annulments have been sought… Other 22% Agricultural products 3% Extractive Industries 9% Financial Services 9% Water, Gas, Electricity 26% Broadcasting and Telecoms 3% Transportation and distribution 13% Consumer Goods 6% Construction 9% ICSID: Awards and annulment registrations awards annulment registrations Average democracy score, post 2006: 6/10 18 16 Average democracy score, through 2006: 2/10 14 12 10 8 6 4 2 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 0 Things to think about The model that BITs are freely accepted fully-informed contracts should be re-examined. Though not coerced, many developing countries entered these agreements under “stressful” conditions. Bargaining asymmetries have consequences: Rapid BIT spread Poor terms Insufficient consideration of the risks Systemically – result is an asymmetrical regime that gives investors much more than was “customary” and puts most of the risk of economic vulnerability on states. Many are questioning the payoffs (attracting more litigation than investment?) Fortunately, there are pressures for change… United States Net FDI 200 150 50 0 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 billions of US dollars 100 -50 -100 -150 Complainants and Forums: Canadian, UNCITRAL: Mexican, UNCITRAL: ICSID: -200 year Reasonable responses Reduce the asymmetries. Interpret contracts flexibly Allow for appeals. Rely more on an insurance regime than a litigation regime.