What Goes Around Comes Around: The Return of Rejected Western Standards on Investment Through Bilateral Investment Treaties

Amin George Forji, University of Helsinki
Abstract

The flight of capital from one country to another is nothing new. However, rules governing the entire regime of International Investment have expanded considerably since the end of the Second World War, thanks to Bilateral Investment Treaties (BITs) between home states of investors (Home State) and the state hosting the investment (Host State). The significance of this development is the stimulation of legal mechanisms to protect assets of investors in foreign countries.

BITs must be understood within the context of the huge interest attached to the inflows of Foreign Direct Investments (FDI) by developing countries during the last three decades. These countries have essentially reached a broadening consensus that attracting FDI inflows would result to gross investments leading to economic growth and development. Given the competitive nature of FDI, many of them have pinned their hopes on BITs as a means of bridging the wide development gap with the developed world. It is expected that a demonstrative commitment to investment protection would eventually improve their chances in the worldwide competition for foreign direct investment (FDI). Despite a modest start, BITs have emerged as universally accepted legal instruments for the promotion and protection of Foreign Investment.

BITs clauses are largely pro-investor standards of treatment, with expressive promises, for instance that foreign investors would be treated fairly and equitably, in a non-discriminatory manner vis-à-vis the domestic investors, and/ or on a Most-Favoured nation basis, and most importantly that in the event of disputes, the investors would have a right to direct recourse against the host state. Consequently, it is not only the number of BITs that are on the rise, but the numbers of countries involved as well as a corresponding surge in investor-to-state disputes.

It is clear that the political independence of developing countries even in the third millennium has not translated into economic independence. Studies on the effects of BITs on developing countries have been conflicting. While some have concluded that the treaties in fact have positive effects on FDI inflows , others have indicated that the effect is little, negligent or insignificant. Whichever way we look at the situation, the one thing that has become obvious is the fact that the inflow of FDI into developing countries is conditioned on the latter sacrificing their sovereignty for credibility. Thanks to their stringent provisions, BITs tend to function as facilitators par excellence in stabilising this unusual relationship. They are for lack of a better expression, instruments of Economic Hegemony.