The lecture began at 4:15 p.m., Wednesday, March 28, and was given by Joseph Stiglitz of Columbia University; the discussant was Rachel Kyte of the International Finance Corporation.
MULTINATIONAL CORPORATIONS: BALANCING RIGHTS AND RESPONSIBILITIES
By Joseph E. Stiglitz *
THE IMPORTANCE OF CORPORATIONS AND THE PROBLEMS THEY PRESENT
An increasing fraction of commerce within each country is conducted by corporations which are owned and controlled from outside its borders and which often conduct business in dozens of countries. These corporations have brought enormous benefits--indeed, many of the benefits attributed to globalization, such as the closing of the knowledge gap, the gap between developing and developed countries which is even more important than the gap in resources, is due in no small measure to multinational corporations. More important than the capital which corporations bring (1) are the transfer of technology, the training of human resources, and the access to international markets.
In recent years, especially following the collapse of the initiative to create a Multilateral Agreement on Investment (MAI) within the OECD, (2) there has been a proliferation of bilateral investment treaties (BITs) and investment provisions within bilateral free trade agreements. (3,4) (Some countries (such as Indonesia) have even passed laws providing similar investment guarantees, on their own.)
These agreements are purportedly designed to provide greater protection for investors, thereby encouraging cross-border investment. There is, to date, little evidence that they have done so. (5) Part of the reason is that they may in fact curtail development strategies, in ways which are adverse to growth. As the ECLAC (The UN Economic Commission on Latin America and the Caribbean) concluded, "countries often find that they have assumed obligations which, further down the road, will place limitations on their own development program." (6)
This paper is concerned with a set of more fundamental issues. Even if it could be established that BITs lead to increased investment, and even if that investment could be shown to lead to higher growth, as measured by increased GDP (gross domestic product), (7) it does not mean that societal welfare has been increased, especially once account is taken of resource depletion and environmental degradation. These agreements are designed to impose restraints on what governments can do--or at least to impose a high cost to their undertaking certain actions. Some of the activities which may be constrained may be important for promoting general societal well-being--even if profits of particular firms are affected adversely. It is this possibility which has made these agreements a subject of such concern and debate.
These agreements are, of course, not all identical; what they do is itself a subject of some controversy. Like any agreement, it depends on the interpretations of particular words, and the judicial processes through which these words are given meaning are one of the sources of dissatisfaction with the agreements. Different arbitration panels have interpreted even the same words differently, creating a high level of uncertainty, both among governments and investors, about exactly what these agreements do. (8) This article is focused not on any specific agreement but on the general thrust of these agreements, which goes substantially beyond protection against expropriation.
Many of the agreements--including some of their most controversial aspects--are concerned with the far broader issue of what happens when changes in regulations or other government policies adversely affect the value of a foreign-owned asset. (9) The agreements do not, of course, stop governments from changing regulations, taxes, or other government polices; but they may require that the government compensate those that are adversely affected, and in doing so, they increase the costs of governments changing regulations and or other government policies. (It should be clear that these agreements are not symmetric: many government policies and investments lead to unanticipated increases in the value of assets. But while companies demand compensation when there is a change that lowers asset values, they do not offer to give the government back the increase in value from these positive changes. Indeed, attempts by the government to capture the increase in value that results from government actions that might positively impact the value of the assets might themselves be subject to investor suits, unless such recapture is guaranteed in the treaty itself. (10)
Governments, of course, are constantly changing regulations, taxes, and other policies, and making investments which have a variety of impacts on firms. The general stance in all sovereigns, especially in democracies, is that it should be the right of each government to make these changes, without paying compensation for any resulting changes in the value of assets. In the United States, the debate has centered on regulatory takings, with anti-environmentalists arguing for compensation. They know that by increasing the cost of environmental regulations, they will reduce their scope. (11) They have argued that the Constitution protects against the arbitrary taking of property without full compensation, and they have contended that such takings should even then be highly restricted, e.g. to the construction of roads. However, courts have consistently rejected that view. (12) Indeed, in a highly controversial case, the Supreme Court sustained the right of eminent domain to takings of land for developmental purposes, in which the land taken would subsequently be used by private parties. (13) Disappointed with these Court rulings, conservatives and anti-environmentalists have turned elsewhere. In some states, they have successfully passed initiatives to provide compensation for regulatory takings, (14) though such initiatives have not yet been fully tested in the courts. They have introduced legislation into Congress, but so far, such legislation has failed to pass, though legislation requiring the Administration to provide a cost benefit analysis of any regulatory taking has been approved. (15) I was in the Clinton Administration (as a member, and later, Chairman, of the Council of Economic Advisers, CEA) during a period of particularly intensive efforts by some in Congress to have such legislation adopted. There was remarkable agreement among all the offices of the White House--the Council of Economic Advisers (CEA), the Office of Science and Technology (OSTP), the Office of Information and Regulatory Affairs (OIRA) (of the Office of Management and Budget, OMB) and the Council on Environmental Quality (CEP). We all believed that such legislation would unduly circumscribe the ability to legislate needed regulations for protecting the environment, workers, consumers, and investors, and we were supported in this by President Clinton and Vice-President Gore. We successfully defeated all such efforts to provide compensation for "regulatory takings."
My interest in the subject at hand arose partly because at the same time that we were fighting back--successfully--these regulatory takings initiatives, we were also working hard for the passage of NAFTA (the North American Free Trade Agreement), which, in its Chapter 11, contained language which has subsequently been interpreted (at least in some cases (16)) as a regulatory takings provisions. Had President Clinton known about this, I feel confident that he would, at a minimum, have demanded a side-letter providing an interpretation of Chapter 11 that precluded such an interpretation. But we never had a discussion on the topic in the White House, and I am convinced that President Clinton was not apprised of the risk of such an interpretation. (17) In the subsequent fast track passage in Congress, the issue too did not get much, if any, discussion. This highlights one of the main criticisms of these agreements--that they are, in their nature, not democratic; that, indeed, that may be their main rationale: to circumvent normal democratic processes and to get protections for investors that they would never have obtained had there been an open and public discussion. (18) If the U.S., in adopting such an agreement, was not fully aware of its import, this is even more likely to be the case in developing countries. (19,20)
The consequences are just becoming apparent, as the number of suits under these agreements has soared. One recent count has the number of cases under arbitration as exceeding 200 since the mid 1980s--entailing claims of tens of billions of dollars. (21)
In this paper, I want to focus on some foundational issues:
Is there a need for international economic agreements concerning the regulation of multinational corporations?
If there is, what should be the scope for such multinational agreements, and what global institutional arrangements might be most effective?
In particular, should governments have the right to restrict entry of corporations (as opposed to people or capital) from abroad? Should they have the right to insist on incorporation inside their own country?
Who should be protected by such agreements?
What should be the extent of protection of property against changes in regulation, taxation, or other government policies? What should be the standard of compensation?
Should these agreements be more balanced, imposing responsibilities as well as rights, and enhancing the ability of host countries to impose sanctions against those that fail to live up to their responsibilities?
Are there legitimate reasons that a country might wish to discriminate between foreign and domestic firms? Should investment treaties be limited to prohibiting such discrimination? What are the costs and benefits of such a restriction?
If the requisite global institutional arrangements can not be created (at...