“Suppose your growth economist identifies a poorly functioning legal system and the attendant uncertainty as one of the binding constraints on growth. One solution of the “governance-in-the-small” type is to “outsource” part of the country legal system to the outside world. The government can accomplish this, for example, by signing on to bilateral investment treaties (BITs) with major trading partners. These typically have arbitration clauses that enable foreign investors to seek redress under foreign jurisdictions in a variety of circumstances. One can presume that such clauses increase the comfort factor for foreign investors and that they may therefore help overcome the identified growth constraint. But is this strategy also good for governance-as-an-end? Probably not. Aside from creating an unhealthy distinction between domestic and foreign investors—the latter have the extra protection but the former don’t—such outsourcing of legal powers does nothing to strengthen domestic legal institutions. Insofar as it removes an important source of pressure for legal reform, the outsourcing may even delay the establishment of a healthy judiciary.”
I am sorry. I always listen carefully to what Dani Rodrik has to say and I usually agree but on this issue he sounds too much like your innocent and friendly neighborhood activist, or a consultant to governments, and his conclusions are, using his terminology, far from being first or second best.
Rodrik’s argument that the use of international arbitration does create “an unhealthy distinction between domestic and foreign investors”, ignores that most often those differences exist anyhow; and also that “the outsourcing may even delay the establishment of a healthy judiciary”, when it could just as easily help it along, by shoving it into the face of local investors how unfairly they are often treated by their own governments.
Of course the existence of local justice is of utmost importance, but so is the existence of a strong international systems that can help to settle disputes, since no matter how you look at it, in the long run it is always the weaker who will benefit the most from having access to well functioning international justice…since the strong is strong even without such systems.
Please, let us not confuse the tremendous, shocking and hurting disappointments that many development countries might have had with the international grievance mechanisms, with the fact that many or most of the contractual obligations brought up to arbitration were drawn up without properly considering the implications of having to submit to these mechanisms.
Instead of throwing away the international grievance mechanism with the bathtub water, help the countries to learn from their experiences and so they will duly consider the real implications next time they sign up a contracts with a foreign investors.
Much the contrary from what Rodrik holds, if our governments in many developing countries learn that they won’t get away that easy, they will also learn, little by little, that’s the pace of development, to negotiate better and more seriously… and from this it is very clear that the local investors are the one who stands most to benefit, long term.