In a short paper, Kevin Gallagher and Elen Shrestha discuss the issue of whether investment treaty arbitration is biased against developing countries. They first note the argument of those who say there is no bias:
Defenders claim that the system does not unfairly subject developing countries to arbitral panels. When these arguments are made, they often rely on the relatively recent empirical work by legal scholar Susan Franck (Franck 2009; Franck 2007). Franck’s work suggests that developing countries are not subject to more claims under the system, and that investors do not win the majority of cases. When foreign investors do win, the awards paid are not necessarily large amounts.
More specifically, Franck empirically analyzes investment treaty arbitration awards publicly available before June 1, 2006 to better understand trends in investment treaty arbitrations including main players (investors and respondent governments), arbitration outcomes (win-loss rates and amounts awarded v. amounts claimed), costs of arbitration and nationality and gender of arbitrators.
Franck’s study found that the bulk of the cases (around 90%) did indeed originate from high income countries of which 32 cases were from the U.S. Among the respondent governments, 70% were non-OECD (or developing) countries. However, only few came from low-income countries and high proportion of arbitration (45%) were subjected against upper middle income developing countries. In terms of arbitration outcomes, the ultimate winners did not appear to be significantly different for investors and respondent countries. Investors on average won less than half of the cases and even when they won, they did not win big. U.S. seemed to follow the similar trend and lose more. The study found a statistically significant difference between amounts claimed and awarded. Thus Franck concluded that although there are rooms for improvement, investment arbitration was functioning in an unbiased manner.
In 2009, using 2007 arbitration award data, Franck conducted econometric analysis to study the relationship among development status of the respondent government, development status of the presiding arbitrator and arbitration outcome (both in terms of win -loss and amounts awarded). Franck found no significant relationship between development status of the respondent country, development status of the presiding arbitrator and outcome of the arbitration.
Then, they question the view that there is no bias:
This working paper critically analyzes parts of Franck’s work and concludes that such work may be limited in explaining the development impacts of investor-state dispute resolution. In the order they will appear in this working paper, our main concerns are:
- There is a lack of adequate sample composition and size to conduct rigorous empirical work from which an analyst could draw such bold lessons.
- Discounting the fact that developing countries are subject to a disproportionate number of claims is not to be overlooked, especially when looking at claims by the United States.
- Relative to government budgets and in per capita terms developing countries pay significantly more in damages than developed nations do.
They elaborate on on each point. Here is more on their point number 2:
It is clear from the data that developing countries are subject to more claims than are developed countries. What is more, the argument that the least developing countries are not subject to many claims does not highlight the fact that least developed countries are subject to significantly more claims than their share of global foreign investment or of their share of global BITS.
developing countries are not only subject to the most claims but they are subject to many more claims than their proportion of global investment.
I haven't followed this debate very closely, but it seems to me that the empirical data on cases is really about the more basic point of whether the system is biased against developing countries by its nature. For example, people/companies in rich countries invest abroad more and therefore, presumably, they benefit more from the system. It would be surprising if the data on cases filed do not provide support for the proposition that rich country investors benefit more.
There is also the issue of the threat of cases, which the authors talk about:
It is commonly held that threats of claims against government occur much more frequently than actual cases. A truly representative empirical analysis of the impact of investment arbitration on developing countries would include such data. Of course such data does not exist.
Of course, even if there is bias, one response might be that in FTAs at least, developing countries are getting something in return for their decision to subject themselves to investment treaty arbitration, such as bound tariff reductions on their exports to rich countries.
One final thought. Perhaps the biggest bias here is not against developing countries, but rather in favor of "foreign investors," wherever they are from. Often these are big multinationals from the richest countries, but that's not always the case. For example, Colombia's largest cement company recently bought several cement plants in Alabama, Georgia and South Carolina, and the company thus stands to benefit if the U.S.-Colombia FTA, with its investor-state provisions, is completed. This raises the following question: Of all the individuals, groups and other entities that are out there in the world, why do only "foreign investors" have access to this special international remedy?