IS THE WASHINGTON CONSENSUS REALLY DEAD? AN EMPIRICAL ANALYSIS OF FET CLAIMS IN INVESTMENT ARBITRATION.

• Author: Chriki, David
• Position: Fair and equitable

Abstract

Goodbye Washington Consensus? More than a decade has passed since economists and policy makers have claimed that the attempt to prescribe a set of measures and policies that will enhance economic development, known as the Washington Consensus, was doomed to failure and is no longer relevant. This paper demonstrates that the Washington Consensus is in fact enforced on states through the interpretation and application of international investment agreements (IIAs), and specifically the fair and equitable (FET) standard. Using an innovative empirical analysis of all public investment arbitration awards published until 2015 in which FET claims are discussed (N=120), the results presented here infer that cases involving measures inconsistent with the Washington Consensus have up to a 45 percent higher chance of being found in violation of FET than other cases (p

Table of Contents I. Introduction II. IIAs, FET and States' Regulatory Space III. The Rise and Fall of the Washington Consensus and its Effects on IIAs and FET IV. Empirical Analysis--The Role of the Washington Consensus in the Application of the FET Standard by Investment Tribunals A. Previous Empirical Studies of Investment Arbitration B. Empirical Strategy C. Data D. Results V. Conclusion I. Introduction

In a well-known article titled "Goodbye Washington Consensus, Hello Washington Confusion?" published more than a decade ago, Dani Rodrik declared that "it is fair to say that nobody really believes in the Washington Consensus anymore. The question now is not whether the Washington Consensus is dead or alive; it is what will replace it." (1) The Washington Consensus is a term describing the main policies prescribed by international financial organizations such as the World Bank during the 1990s to enhance development. (2) Critics have stressed that the Washington Consensus reflects a neo-liberal economic ideology that does not suit all states and could hinder their development. (3) Throughout the early 2000s the Consensus lost its popularity, with many recognizing its drawbacks and abandoning its guidelines. Consequently, Rodrik and others have claimed the Consensus is dead and no longer plays a role in the policy frameworks of states. (4)

This paper argues that despite Rodrik's declaration, the Washington Consensus is still here. The international investment legal framework it left behind, based on thousands of international investment agreements (IIAs), still calls states to obey this supposedly long-gone Washington Consensus. I explore this possibility here by focusing on one of the most frequently invoked clauses in international investment arbitration disputes: Fair and Equitable Treatment (FET). (5) The article demonstrates that there is a statistically significant greater chance that arbitration tribunals will determine a state violated the FET standard if it adopted measures inconsistent with the Washington Consensus. Accordingly, this paper stresses that if states want to adopt measures that are inconsistent with the Washington Consensus, they should strive actively to allow such measures by adapting their IIAs respectively.

IIAs are agreements between two or more states aiming to afford protection to foreign investors and promote foreign investments. (6) The Washington Consensus's call to abolish barriers impeding the entry of foreign direct investments (FDI) (7) supported the making of IIAs. Consequently, IIAs proliferated during the 1990s as the Washington Consensus reached its peak. Most IIAs include investor-state dispute settlement (ISDS) provisions, which allow investors to submit claims of alleged violations of IIAs to an international investment arbitration tribunal. These tribunals are usually capable of granting investors pecuniary awards, which range from dozens to hundreds of millions of dollars that states are obligated to pay to investors as result of their claim. Tribunals strive to interpret IIAs in line with their objectives and the circumstances upon which they agreed. Therefore, if IIAs were concluded with the intentions of introducing objectives coinciding with the Washington Consensus, then their interpretation and application could align with it as well. Such a conclusion is supported by literature stressing that liberal or neo-liberal ideologies, which align to a certain extent with the Washington Consensus, affect the arbitrators' interpretation of IIAs. (8) I will examine the above argument in this paper by focusing on the application of FET by investment arbitration tribunals.

The FET standard is required by almost all IIAs. While I will discuss further the precise content of the standard below, for now it is sufficient to say that it generally requires states to provide a consistent and transparent legal framework that protects investors' legitimate expectations, among other obligations. (9) Given the indeterminacy of FET, it is applied on a case to case basis at the tribunal's discretion. Since its application is subject to the tribunal's interpretation, (10) it could be subject to the principles set out by the Washington Consensus.

Indeed, the empirical analysis presented in this paper, based on all publicly available decisions on merits up to 2015 (inclusive), (11) infers that tribunals apply FET in correlation with Washington Consensus policies. Particularly, trade regulations, measures that hinder property rights and negative treatment of privatized assets that may imply an effort to withdraw privatization--increase the chances a tribunal will find a violation of FET.

This paper offers three main contributions to existing literature. First, it demonstrates that the FET standard is not as un predictable as generally considered. Though the FET standard can be applied in various circumstances, this paper concludes that there are certain measures that are likely to be found in violation of it--namely, measures that are inconsistent with the Washington Consensus. When considering whether or not to adopt a measure, states often consider its effects on their exposure to investment arbitration claims. Identifying measures that are more likely be in violation with the FET standard could assist states in this process by narrowing the uncertainty that may be involved in arbitration proceedings. Second, it opposes the common perception that the Washington Consensus is no longer relevant by suggesting that the international investment legal framework is still affected by it. This is important, because it implies that if states wish to adopt measures that are inconsistent with the Washington Consensus--for example, withdrawing from privatizations or imposing new trade regulations, such as those recently advocated by the Trump administration--they would be exposed to investment arbitration claims. Mitigating these risks will require amending their IIAs correspondingly, stating their new objectives clearly.

Third and finally, the empirical analysis offers a somewhat new methodological approach compared to existing literature analyzing the outcomes of investment arbitration. Empirical literature examining variables that account for investment arbitration outcomes generally fail to account for arbitration claims' contexts, reflected in the facts of the cases and the cause of action in each case. Rather, outcomes of arbitration cases are mainly predicted by accounting for the identity of the parties to the disputes, the background of the arbitrators, and their legal services. (12) Assuming that the facts of a case and the cause of action do matter, this raises concerns over an omitted variable bias in the results of existing literature. The model adopted in this paper aims to address these concerns by (a) focusing only on one specific cause of action, namely, FET claims; and (b) by using a model that includes variables that represent the measures taken by the respondent states challenged by the claimant, therefore accounting for the factual bases of the claims.

The paper is structured as follows. Part II provides further background on IIAs, focusing on the implications for states' regulatory space resulting from their prescribed ISDS mechanisms and in view of the indeterminacy of provisions such as FET. Part III offers a basic background of the rise and fall of the Washington Consensus and its role in the proliferation of IIAs. Part IV then presents the main argument of this paper: that one can anticipate some correlation between FET and the Washington Consensus. Following this theoretical background, Part V presents empirical support for this claim. Finally, Part VI concludes by discussing the implications of the findings of this paper for states.

2. IIAs, FET and States' Regulatory Space

   International investment agreements between two or more states aim to afford protection to foreign investors and promote foreign investments. (13) To achieve thL goal, IIAs include various provisions, requiring, for example, that each state will avoid unlawful expropriation of alien property and afford foreign investors fair and equitable treatment. A unique characteristic of IIAs, when compared to other international law instruments, is that they typically allow investors to submit arbitration claims directly against states that have allegedly breached the provisions set out in the IIA, and to receive compensations for their losses. This ISDS mechanism is quite different from the dispute settlement mechanism provided by trade agreements, which only provide dispute settlement mechanisms between states, and grant preference to amicable agreements between disputing states before allowing states to resort to a binding dispute settlement mechanism. While state-to-state dispute settlement mechanisms are affected by political constraints of states, (14) such restraints are less apparent in ISDS mechanisms. Thus, investors are more likely to turn to a dispute settlement mechanism when states may have violated the provisions of an...