The Impact of Foreign Investor Protections on Domestic Inequality

A prominent element of international economic governance is the provision of legal protections to foreign investors as codified in international investment agreements (IIAs). This essay will explore how these investment protections undermine the capabilities of host governments, particularly developing countries, to reduce essential aspects of domestic inequality.

Bilateral investment treaties (BITs) and investment chapters in free trade agreements between developed and developing countries are the two forms of IIAs.  In these agreements, states make the promise that foreign investors will be protected from arbitrary and unfair treatment–both in terms of process and policy actions–by the host government. The current dominant form of these BITs^[1] exposes host countries to litigation costs and monetary penalties should their policies and actions be judged to be in violation of their investor protection obligations.

These treaties between sovereign states have been promoted by Western governments based on the argument that providing strong commercial protections to foreign investors will increase the flow of investment in developing countries (Montes 2015). The rationale for investor protection is the view that courts in developing and non-Western countries are relatively underdeveloped and “too biased, too slow and sometimes too corrupt” (CEO/TNI 2012, 11) to provide foreign investors a fair and independent dispute settlement system in case of conflicts with the host state. These treaties provide that these disputes would be decided by a “neutral” body of legal experts meant to act independently in arbitration panels. The most prominent convenor of arbitration panels for these treaties is the International Center for Settlement of Investment Dispute (ICSID), hosted by the World Bank.

^[1] From hereon, for convenience and given that their provisions are highly comparable, we will use the term “BITs” also to refer to both bilateral investment treaties and investment chapters in free trade agreements.  The important difference between BITs and investment chapters is that while a BIT can be terminated as a stand-alone treaty, abrogating the obligations in an investment chapter in a free trade agreement will require withdrawal from the whole agreement, including, for example, any mutual trade concessions in the other parts of the treaty.