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How two businessmen wrote the rules of globalisation

Hartley Shawcross and Hermann Josef Abs’ 1950s dream has come to define investor-state relations.

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In 2002, Argentina’s GDP shrank by 64 per cent. An IMF-mandated austerity programme had deepened the country’s recession, tripling urban poverty rates in just three years. When the government hesitated to implement further cuts in late 2001, the IMF withdrew its assistance. The economy entered free fall.

Thirty-nine people were killed in a wave of protests and strikes that December, leading President Fernando de la Rúa to flee Buenos Aires in a helicopter. Fearing societal collapse, the new administration set about defaulting on the country’s debt, devaluing the currency and freezing utility bills. Though these measures eventually led the country out of crisis, they hit the profits of foreign multinationals, who promptly demanded $80bn in compensation.

These lawsuits were not taken to any court in Argentina, which would have evaluated the claims against Argentine law and Argentine public interest. Instead, special corporate courts were convened for each case outside of the country. The outcomes would hinge entirely on Argentina’s bilateral investment treaties with the US and European nations – obscure and vaguely worded documents, signed under Washington’s orders in the 1990s.

In the 19th century, America had similarly demanded special treatment for foreign investors. It was the Argentine jurist Carlos Calvo who, in 1868, asserted that sovereignty required each state to be allowed to set its own rules. Calvo’s anti-colonial movement spread rapidly in the mid-20th century, as revolution and decolonisation swept the globe. Newly independent governments frequently found that their natural resources had been signed away to investors on exceedingly generous terms.

They were in no mind, or position, to pay compensation for these plundered assets. Instead, riding high on the back of inflated commodity prices, they began to expropriate foreign direct investments in record numbers.

The 1970s saw a surge in expropriations
Expropriations of foreign direct investments, 1960–75
Source: Poulsen (2015)

“Some influential international lawyers in the West thought that full compensation was not applicable in the case of the Russian Revolution,” says Nicolás Perrone, author of Investment Treaties and the Legal Imagination.

“During the interwar period, they argued that international law could not have rules that could prevent a country from choosing its own economic system. One of the things that investors in the 1960s feared the most was that they could apply that same doctrine to the post-colonial moment.”

Decolonisation shifted power in multilateral institutions
Membership of the League of Nations and UN, 1920–89
Source: United Nations

The issue reached a climax at the UN in 1974, when developing states announced a New International Economic Order. Among other things, this was an attempt to legitimise and entrench Calvo’s doctrine in international law – a direct challenge to their former colonial masters.

Yet, just 17 years later, Calvo’s home country would concede defeat, the end of a battle that would set the terms of globalisation.

A Magna Carta for capitalism

As Europe emerged from the horrors of the Second World War, it became clear that states could no longer demand unfettered sovereignty. In among the sombre unpicking of atrocities taking place at Nuremberg, however, came another plea of “never again” – from the German industrialists who had seen their foreign assets seized as reparations.

Loudest among these voices was Hermann Josef Abs. As a director of Deutsche Bank during the war, Abs had helped to oversee the expropriation of Europe’s Jews; as a director of poison gas manufacturer IG Farben he had had no small culpability in their extermination too.

Investment Monitor: Who wrote the rules of globalisation? 

Sensing the fear that decolonisation had now put into the hearts of other countries’ investors, in 1957 Abs presented what he christened a “Magna Carta for capitalism”.

The Magna Carta envisioned a world in which investors everywhere would be protected by US-style property rights, enforceable in an international tribunal. This meant not just protection from expropriation, but also “indirect expropriation” – regulations or taxes deemed to be excessively burdensome.

In an unlikely alliance, Abs teamed up with Shell’s Hartley Shawcross - who had served as Britain's chief prosecutor at Nuremberg - and toured Europe and North America touting his Magna Carta as a solution to the growing Calvoist revolt in the Global South. However, the idea that developing states would sign up to such a charter was widely dismissed, with one contemporary pointedly describing the Magna Carta as “a statement of banker’s terms [seeking] to be elevated to the dignity of law”.

The globalisation coup

How did this hopelessly ambitious dream of two businessmen come to be realised so comprehensively four decades later? States appear to have had little interest in the system, known as investor-state dispute settlement (ISDS), initially, while the evidence of corporate lobbying is largely fragmentary and circumstantial.

“One of the things that I’ve confronted is how we interpret silence,” says Taylor St John, author of The Rise of Investor-State Arbitration. “Does it mean that they weren’t active, or does it mean that we haven’t found the places where they might have been having conversations and really trying to be active?”

In his book, Perrone pieces together these fragments, arguing that they do add up to show sustained interest in the system from certain investors.

Whether or not the World Bank was acting at the behest of investors behind the scenes, its officials led the advance of ISDS from the 1960s onwards.

The World Bank's strategy was to strip the Magna Carta of its most controversial component: the substantive rights granted to investors. These would later be re-introduced through bilateral investment treaties, skillfully avoiding the united opposition of the Global South.

What remained was a set of rules governing arbitration and an institution to host it, the International Centre for the Settlement of Investment Disputes (ICSID). Yet, even winning consent for the ICSID required tact. 

“The way the consultations on the ICSID were organised suggests that the World Bank was very, very aware of the potential that these countries… were unlikely to sign it,” says St John.

“There were four regional conferences, but the World Bank claimed it couldn’t circulate records between these conferences because that would be “too expensive”. So you have, for instance, an Argentine official making what could be persuasive arguments against the ICSID, and Indian and Nigerian officials saying very similar things – but these three officials did not get to hear each other, so they could not form a united opposition.”

[See also: The multinationals suing governments over their pandemic response]

The strategy was an overwhelming success in the Global South, but Western states seemed to have little interest in incorporating ISDS into their treaties. The German and US governments both feared that ISDS would remove their discretion over whether to pursue an investor’s claim, upending delicate Cold War diplomatic strategies.

Nonetheless, from 1968 the treaties gradually came to include ISDS, its spread closely tracking the lobbying tour of ICSID’s secretary-general. By 1988, only 28 treaties had been signed containing ISDS, but the stage had been set for an explosion.

Just as the 1970s boom in commodity prices had empowered the Global South to imagine and demand a New International Economic Order, so the collapse and debt crisis of the 1980s shifted the ground from underneath their feet.

The New International Economic Order fell with commodity prices
Number of expropriations, indexed number of BITs* signed and indexed commodity prices** (2006 = 100), 1960–2006
Source: Poulsen (2015)/UNCTAD/World Bank

With these countries clearly desperate for new sources of finance, the World Bank and Western governments gently shepherded them towards ISDS, promising that such stringent protections would more or less guarantee increased investment.

Yet, the British government privately admitted that it was “probably unrealistic to expect an individual investor to be greatly concerned about [ISDS]”, while the World Bank’s own surveys found that only “professional advisors… would be people to concern themselves with such minutia”.

Developing countries signed up to ISDS in droves, however.

The system takes hold

Few of these countries had any real idea of the potency of what they were signing up to. Many of the treaties were negotiated in mere days, if not hours.

Up until that point, ISDS had largely been seen by governments in the Global North and South alike as a minor technical innovation. Even where bilateral investment treaties (BITs) did contain ISDS, interstate diplomacy remained the overwhelmingly preferred method to resolve investment disputes.

The US government was the first to discover the potency of ISDS. In 1991, with Argentina pushed into a hyperinflationary spiral by the debt crisis, the US offered President Menem a deal. He would get a BIT, supposedly boosting inward investment, but only if he agreed to sign up to ISDS – burying the Calvo doctrine once and for all, and locking Menem’s neoliberal reforms into international law.

By 1995, commercial lawyers also began to take notice. “Explorers have set out to discover a new territory for international arbitration,” wrote one. “They have already landed on a few islands, and they have prepared maps showing a vast continent beyond.”

Cases flooded in. Argentina served as the opening salvo in a series of lawsuits against countries in Latin America, soon prompting Ecuador, Bolivia and Venezuela to quit the ICSID.

Governments in the Global North were also shocked by the potency of the regime. Canada soon found itself sued over its ban on a toxic gasoline additive, Germany over restrictions on coal-fired power plants, and Australia over requiring plain packaging on cigarettes.

By 2016, mass protests against ISDS had scuppered the Transatlantic Trade and Investment Partnership (TTIP) and led to a multilateral reform effort at the UN. Today, experts and politicians voice fears that countries may be sued for actions taken to control the Covid-19 pandemic or to support the transition to clean energy.

Yet, the policy response has been strangely muted. Possibly fearing reputational damage, no developing country has entirely freed itself from ISDS. Meanwhile, discussions at the UN are dominated by lawyers whose livelihoods depend on the system, narrowing the discussion to a choice between procedural tinkering and the establishment of a permanent, multilateral court.

Arbitrators are the loudest voice in the room
Non–governmental attendees of UNCITRAL* Working Group III, by category
Source: UNCITRAL

The current system is patently unsustainable, and irrational even from the point of view of business. The costs and unpredictability of the system make it inaccessible for all but the largest investors – just 1 per cent of all ISDS compensation has gone to companies with an annual revenue of less than $1bn.

If President Biden joins the EU in pushing for a permanent court, these issues may be resolved. Yet, it would also represent the fulfilment of a dream fundamentally at odds with the promises of democracy and decolonisation.

This conflict may not be neatly resolvable. Long-term investments demand stability, yet the premise of self-rule is the right to demand change.

Beyond ISDS, the insulation of economic policy from democratic politics has proceeded apace in recent decades – from central bank independence, to the EU's Fiscal Compact, to the spread of tax havens. Simultaneously enabling globalisation and fostering its populist nemesis, this tendency may be the central political fact of our era.

[See also: Why privatising foreign aid doesn’t work]