Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries. By Lauge N Skovgaard Poulsen

Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing... One long-standing justification proffered by scholars in support of international investment treaties is that such treaties facilitate flows of foreign direct investment into developing countries, and thus foster economic growth in the global South. Yet, with the exception of some notable contributions, much of the existing literature on investment treaty law has avoided real engagement with developing countries’ perspectives on the investment treaty regime. Although more recent studies have offered conceptual and normative analysis of an uneasy relationship between investment treaty law and developing countries, such scholarship does not always go far enough to provide empirically grounded insights into the real experiences of developing countries. Lauge Poulsen’s tremendously timely and long-awaited book examines, with the aid of empirical data, political science and econometrics, the historical patterns of participation by developing countries in the formation of investment treaty rules. Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries begins with ‘The curious case of Pakistan’—a fascinating if startling account of how Pakistan, a party to numerous bilateral investment treaties in past decades and a signatory in 1965 of the ICSID Convention, first learnt about international investment law in 2001. After a letter notified the Pakistani government of the first investor-state arbitration initiated against Pakistan, by a Swiss company Société Générale de Surveillance claiming more than US$110 million in damages, both Pakistan’s Secretary of Law and Attorney General appeared to be largely unaware of what the ICSID Convention and bilateral investment treaties were, and how investors could use those instruments to settle disputes with the government. The Pakistani example is illustrative of a broader trend Poulsen observes across many developing states. Poulsen’s book offers a much-needed turn from the purely legalistic narratives of investment treaty law to a sustained, empirically supported and conceptually tested analysis of the evolution of investment treaty law and the (limited and passive) role of developing countries therein. Why have developing countries been signing investment treaties which hurt them?1 Poulsen’s principal heuristic device is the theory of bounded rationality, which he harnesses as an alternative to existing explanations of participation by developing countries. The study draws on a rich survey of government officials, and reveals that governments of developing countries had been unaware of the far-reaching scope and implications of bilateral investment treaties until the first claims were filed against them. Poulsen rules out the explanation that developing countries were coerced into signing bilateral investment treaties (5–13), noting that ‘European governments were tempted to use quasi-coercive means to induce treaty adoption but mostly refrained from doing so.’ (69). Poulsen dismisses the ‘functionalist’ explanation, that treaties were actually indispensable in order to offer ‘credible commitment’ which would in turn attract capital. He also rejects the ‘emulation’ explanation, that developing countries were guided by a ‘logic of appropriateness’ in which BITs were emulated as an attribute of more developed states. The emerging empirical evidence suggests rather that ‘developing countries were not as rigorous and careful when negotiating investment treaties as has been assumed in previous accounts of the international investment regime.’ (70). Policy-makers signing investment treaties exhibited bounded rationality, making their decisions subject to cognitive constraints and prone to mistakes (17). Poulsen shows that national policymakers may well be goal-oriented and rational in the broadest sense of the word, but instances of their decision-making (such as signing treaties which hurt them) may often be a product of narcissistic learning, and biased by cognitive shortcuts: ‘although governments may have tried to pursue their own preferences when using investment treaties to compete for capital, systematic information processing biases among policy-makers could have resulted in predictably irrational behaviour both in terms of adoption patterns and treaty designs.’ (45) A significant achievement of the book is that it provides hitherto missing contextual details of the environment in which investment treaties were signed. The emerging picture reveals the lack of true participation by developing countries in the drafting and negotiation of their investment treaties. This is particularly vividly highlighted in an account of a treaty signing session at UNCTAD where, in lieu of real negotiations, the OECD model was actively promoted. Poulsen’s book, however, is much more than a first empirical study of the patterns of involvement by developing countries in investment treaty-making. It offers valuable interdisciplinary insights into why developing countries have by and large remained rule-takers rather than rule-makers, and what external and internal pressures continue to delimit their ability to influence the future of the evolving investment treaty regime. One is left to query whether bounded rationality affects developing country behaviour in other areas of treaty-making also. As Poulsen’s case studies focused primarily on investment treaty-making, further empirical studies are warranted to investigate factors underpinning the participation by developing states in other international treaty regimes. The book also complements, without acquiescing to, existing TWAIL perspectives, the latter having been criticised for a failure ‘to offer avenues for the constructive engagement of developing countries with the international investment regime.’2 The empirical findings prompt Poulsen to query whether higher levels of administrative capacity in developed states make them less prone than comparators with lower capacity to bias in ‘learning’ about design, content and implications of investment treaties. He argues that lack of expertise within the relevant government agencies in developing states contributes to the status quo bias, whereby bureaucrats are less likely to opt out of default treaty designs adopted by their predecessors (45). To pursue more rational investment treaty policies, developing states need to invest in in-house expertise, yet many developing countries still continue to be afflicted by insufficient legal capacity to engage with investment treaties and investor–state arbitration (194). One hopes the book will also inform the future strategies of international actors, such as UNCTAD and OECD, which have long contributed to, and continue to play a major role in, providing guidance on the design and reform of investment treaties. Assisting developing states with ready-made treaty blueprints—however sophisticated—is clearly not enough. To enable greater participation by developing countries in the making of investment treaty law, and thus enhance its legitimacy and credibility, international organisations should look into ways to encourage the shaping of ‘nationally-felt’3 approaches, facilitated by greater awareness and sustained home-grown legal capacity within such countries. One message that a reader can take away from Poulsen’s book is that international investment law is yet to become development-friendly. For it to become such, investment treaty policy concerns of host communities—both in developed and developing countries—should be heard and translated into concrete solutions through genuinely participatory, as opposed to tokenistic and top-down, treaty-making processes. Footnotes 1 To borrow a phrase from AT Guzman, ‘Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’ (1998) Virginia Journal of International Law 639. 2 AR Hippolyte, ‘Aspiring for a constructive TWAIL approach towards the international investment regime’ in SW Schill, CJ Tams and R Hofmann (eds), International Investment Law and Development: Bridging the Gap (Edward Elgar 2015) 218. 3 The term is borrowed from H Koh, ‘How Is International Human Rights Law Enforced?’ (1998) 74 Indiana LJ 1397, 1407. © The Author(s) 2018. Published by Oxford University Press. Available online at www.bybil.oxfordjournals.org This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The British Yearbook of International Law Oxford University Press

Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries. By Lauge N Skovgaard Poulsen

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Publisher
Oxford University Press
Copyright
© The Author(s) 2018. Published by Oxford University Press. Available online at www.bybil.oxfordjournals.org
ISSN
0068-2691
eISSN
2044-9437
D.O.I.
10.1093/bybil/bry009
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Abstract

One long-standing justification proffered by scholars in support of international investment treaties is that such treaties facilitate flows of foreign direct investment into developing countries, and thus foster economic growth in the global South. Yet, with the exception of some notable contributions, much of the existing literature on investment treaty law has avoided real engagement with developing countries’ perspectives on the investment treaty regime. Although more recent studies have offered conceptual and normative analysis of an uneasy relationship between investment treaty law and developing countries, such scholarship does not always go far enough to provide empirically grounded insights into the real experiences of developing countries. Lauge Poulsen’s tremendously timely and long-awaited book examines, with the aid of empirical data, political science and econometrics, the historical patterns of participation by developing countries in the formation of investment treaty rules. Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries begins with ‘The curious case of Pakistan’—a fascinating if startling account of how Pakistan, a party to numerous bilateral investment treaties in past decades and a signatory in 1965 of the ICSID Convention, first learnt about international investment law in 2001. After a letter notified the Pakistani government of the first investor-state arbitration initiated against Pakistan, by a Swiss company Société Générale de Surveillance claiming more than US$110 million in damages, both Pakistan’s Secretary of Law and Attorney General appeared to be largely unaware of what the ICSID Convention and bilateral investment treaties were, and how investors could use those instruments to settle disputes with the government. The Pakistani example is illustrative of a broader trend Poulsen observes across many developing states. Poulsen’s book offers a much-needed turn from the purely legalistic narratives of investment treaty law to a sustained, empirically supported and conceptually tested analysis of the evolution of investment treaty law and the (limited and passive) role of developing countries therein. Why have developing countries been signing investment treaties which hurt them?1 Poulsen’s principal heuristic device is the theory of bounded rationality, which he harnesses as an alternative to existing explanations of participation by developing countries. The study draws on a rich survey of government officials, and reveals that governments of developing countries had been unaware of the far-reaching scope and implications of bilateral investment treaties until the first claims were filed against them. Poulsen rules out the explanation that developing countries were coerced into signing bilateral investment treaties (5–13), noting that ‘European governments were tempted to use quasi-coercive means to induce treaty adoption but mostly refrained from doing so.’ (69). Poulsen dismisses the ‘functionalist’ explanation, that treaties were actually indispensable in order to offer ‘credible commitment’ which would in turn attract capital. He also rejects the ‘emulation’ explanation, that developing countries were guided by a ‘logic of appropriateness’ in which BITs were emulated as an attribute of more developed states. The emerging empirical evidence suggests rather that ‘developing countries were not as rigorous and careful when negotiating investment treaties as has been assumed in previous accounts of the international investment regime.’ (70). Policy-makers signing investment treaties exhibited bounded rationality, making their decisions subject to cognitive constraints and prone to mistakes (17). Poulsen shows that national policymakers may well be goal-oriented and rational in the broadest sense of the word, but instances of their decision-making (such as signing treaties which hurt them) may often be a product of narcissistic learning, and biased by cognitive shortcuts: ‘although governments may have tried to pursue their own preferences when using investment treaties to compete for capital, systematic information processing biases among policy-makers could have resulted in predictably irrational behaviour both in terms of adoption patterns and treaty designs.’ (45) A significant achievement of the book is that it provides hitherto missing contextual details of the environment in which investment treaties were signed. The emerging picture reveals the lack of true participation by developing countries in the drafting and negotiation of their investment treaties. This is particularly vividly highlighted in an account of a treaty signing session at UNCTAD where, in lieu of real negotiations, the OECD model was actively promoted. Poulsen’s book, however, is much more than a first empirical study of the patterns of involvement by developing countries in investment treaty-making. It offers valuable interdisciplinary insights into why developing countries have by and large remained rule-takers rather than rule-makers, and what external and internal pressures continue to delimit their ability to influence the future of the evolving investment treaty regime. One is left to query whether bounded rationality affects developing country behaviour in other areas of treaty-making also. As Poulsen’s case studies focused primarily on investment treaty-making, further empirical studies are warranted to investigate factors underpinning the participation by developing states in other international treaty regimes. The book also complements, without acquiescing to, existing TWAIL perspectives, the latter having been criticised for a failure ‘to offer avenues for the constructive engagement of developing countries with the international investment regime.’2 The empirical findings prompt Poulsen to query whether higher levels of administrative capacity in developed states make them less prone than comparators with lower capacity to bias in ‘learning’ about design, content and implications of investment treaties. He argues that lack of expertise within the relevant government agencies in developing states contributes to the status quo bias, whereby bureaucrats are less likely to opt out of default treaty designs adopted by their predecessors (45). To pursue more rational investment treaty policies, developing states need to invest in in-house expertise, yet many developing countries still continue to be afflicted by insufficient legal capacity to engage with investment treaties and investor–state arbitration (194). One hopes the book will also inform the future strategies of international actors, such as UNCTAD and OECD, which have long contributed to, and continue to play a major role in, providing guidance on the design and reform of investment treaties. Assisting developing states with ready-made treaty blueprints—however sophisticated—is clearly not enough. To enable greater participation by developing countries in the making of investment treaty law, and thus enhance its legitimacy and credibility, international organisations should look into ways to encourage the shaping of ‘nationally-felt’3 approaches, facilitated by greater awareness and sustained home-grown legal capacity within such countries. One message that a reader can take away from Poulsen’s book is that international investment law is yet to become development-friendly. For it to become such, investment treaty policy concerns of host communities—both in developed and developing countries—should be heard and translated into concrete solutions through genuinely participatory, as opposed to tokenistic and top-down, treaty-making processes. Footnotes 1 To borrow a phrase from AT Guzman, ‘Why LDCs Sign Treaties that Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’ (1998) Virginia Journal of International Law 639. 2 AR Hippolyte, ‘Aspiring for a constructive TWAIL approach towards the international investment regime’ in SW Schill, CJ Tams and R Hofmann (eds), International Investment Law and Development: Bridging the Gap (Edward Elgar 2015) 218. 3 The term is borrowed from H Koh, ‘How Is International Human Rights Law Enforced?’ (1998) 74 Indiana LJ 1397, 1407. © The Author(s) 2018. Published by Oxford University Press. Available online at www.bybil.oxfordjournals.org This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

Journal

The British Yearbook of International LawOxford University Press

Published: May 30, 2018

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