The development of foreign investment rules had already begun in the nineteenth century and was continuing as part of international law in the 1950s to 1970s, when states sought to entrench these rules at a multilateral level; however, the debacle caused as a result of the rules proposed by the majority culminated in the introduction of rules for foreign investment that were instead defined in Bilateral Investment Treaties (BITs). These BITs form part of the current framework for international investments. This framework provides the rules for actors to operate in matters of foreign investment; it is the platform on which actors relate to each other when there are matters of foreign investment involved. The current framework, or BIT regime, has the treaties as its main core, but it also comprises international arbitration conventions, national arbitration laws, and international arbitration institutions, the combination of which is necessary for the operation of the framework.
However, there is a lot to discover in the development and dynamics of the international investment framework. The first multilateral level forum in which rules for international investment were proposed was the United Nations. There was a clear debate between developed and developing countries about which rules should form the framework for international investments. Developed countries wanted to establish a mechanism that surpassed international law and by which, for any mistreatment on foreign property, developing countries would pay a prompt, adequate and effective compensation, and that any disputes arising therefrom would be detached from domestic courts. Developing countries, on the other hand, wanted to build a framework in keeping with the dictates of both international law and their own domestic laws regarding foreign investments, and to resolve disputes arising from these foreign investments using the courts with jurisdiction over the place where the investment was made.
The formal structure of the forum allowed developing countries’ interests to outweigh those of developed countries. Alliances of developing countries brought about by their shared interests helped them to obtain UN resolutions that favoured developing countries’ interests on matters of foreign investment.
However, noting that UN resolutions were not binding, only a few years after the last UN resolution favouring the interests of developing countries on international investments, developed countries initiated bilateral programs. Interestingly, BITs saw a boom of activity in the 1990s. These BITs contained rules on international investments that reflected the exact rules proposed by developed countries at the UN and which were the opposite of what developing countries were fighting for at a multilateral level. Therefore, scholars found a paradox in the actions of developing countries.
Pursuing explanations for the paradox, some scholars saw the rationale of BITs in the benefits they entailed. This was the case for Dolzer (1981), for example, who claimed that developing countries accepted BITs because of the benefits they provided. 1 One of the main arguments was that BITs would increase foreign direct investments (FDIs). Vandevelde (2005); Salacuse and Sullivan (2005) and some UN reports stated that by liberalizing their markets, developing countries had increased their FDIs. 2 And indeed, the purpose of the BITs is disclosed in their preamble, which states that countries intend to have mutual benefit and to increase their prosperity. 3
On the other hand, another main explanation was that BITs were instruments that arose from competition among developing countries. Guzman (1998) concluded that there were conflicting interests when a country acted on its own as opposed to as a group and that, therefore, developing countries were in a prisoner’s dilemma. 4 In another empirical study, Elkins et al. (2006) claimed that BITs emerged from the international competition among developing countries but that it was a ‘take it or leave it’ deal for developing countries. 5
However, these two explanations do not fit when including the South American region. Although this region is where the paradox is accentuated, as these countries were the ones fighting for particular rules at the multilateral level and which agreed to the opposite rules at a bilateral level, there is the case of Brazil, which has the highest FDI and is also the most competitive country in the region; yet, it has not ratified any BITs with developed countries. 6
Furthermore, the development in the area of international investments did not end with the boom of BITs in the 1990s. In the late 1990s and up until 2003, again another multilateral forum was used to pursue the regulation of foreign investments. This time such rules were proposed at the World Trade Organization (WTO). Those proposed by developed countries at the 1996 Singapore, 1999 Seattle, 2001 Doha and 2003 Cancun WTO ministerial conferences was not accepted by developing countries, and so a framework at this level could not be established.
However, similar to what once happened at the UN level, parallel to the WTO conferences, developing countries continued to sign BITs. In these BITs, these developing countries have agreed to investment and other issues (under the umbrella of investment protections) that they opposed at the WTO. 7
Thus, currently, the framework for international investments continues to be formed by the rules mainly contained in BITs. However, the puzzle remains because developing countries have continued to agree to a framework (bilateral) opposite to that which they fought for (multilateral). A prima facie, the paradox still seems to stand and the aforementioned explanations continue to not fit the South American countries’ scenario.
1.1 Paradigms of Power in the BIT Regime
It is worth remarking on how being trapped in a paradox can be connected to some presumptions of different paradigms of power in the international investment framework. Such as Kuhn (1974) explained, a paradigm provides its believers in the scientific community with a worldview, a set of coloured glasses, through which its members see the world. 8 Depending on the theory that we are using, the conclusions on how power is viewed are going to differ.
For realists, the power growth of one state means the power loss of another state. 9 Even under the regime theory that is based on an underlying assumption of the existence of cooperation in an anarchical world, realists such as Grieco (1988) have suggested that cooperation implies the loss of independence and security. 10 Therefore, under this lens, power is given by material resources that provide actors with power to do something, such as coerce another actor to do something it does not want to do. 11
A liberal lens, on the other hand, would tend to depart from concepts of power because of the belief that peace can be achieved through cooperation and institutions. 12 Thus, actors pursue cooperation because by coordinating actions at the international level, they can maximize their gains. However, cooperation can also be manifested by asymmetrical interdependence relations, as Keohane and Nye (1977) have suggested. In such relations, there are sources of influence that give actors a bargaining advantage in relation to the other actors. 13 Then, in this view, the resources and capabilities that actors have will determine a bargain.
Marxist, dependency and world system theories also have a material basis by which power is seen as resources or capabilities because their focus is on the capitalist world economy. The capitalist system allows those in control of production means to make other actors dependent on them. As Wallerstein (1984) has expressed it, ‘In a capitalist world-economy, the states are expressions of power.’ 14 Under such a paradigm, this control gives actors power to persuade, to impose on weak states. 15
It is natural that such paradigms would influence scholars when developing a concept of power. Weber defined power as the ‘probability that one actor within a social relationship will be in a position to carry out his will despite resistance, regardless of the basis on which this probability rests.’ 16 Weber further states that ‘all conceivable qualities of a person and all conceivable combinations of circumstances may put him in a position to impose his will in a given situation.’ 17 In a similar line of thought, Dahl (1957) defined power in the following way: ‘A has power over B to the extent that he can get B to do something that B would not otherwise do.’ 18 Under both conceptualizations of power, the perspective is concentrated on the actors in the relationship, of which one does not want to do something or resists it. Furthermore, there is an intention when manifesting power. The actor intends to use power cognitively, and there is also a cognitive intention by the other party of doing what he does not want to do.
Power, under these paradigms, is still seen as resources or capabilities, and it is analysed under a perspective of power ‘in relation’ to another actor, that is, relational power. However, aware of these distinctions, other scholars have pointed out the different taxonomies of power, adding important elements to the development of its concept. According to Lukes’s analysis of power, there is a one-dimensional view of power that focusses on the behaviour of actors and on an overt conflict of interests. The two-dimensional view of power criticises the one-dimensional view of power because there could be cases in which conflict is not overt and actors can manage the agenda. This two-dimensional view, however, keeps the focus on the behaviour of actors. Lukes’s three-dimensional view of power escapes the merely behavioural aspect, by alluding to the power to control the agenda in a way that issues can be kept out of politics; it includes the formation of values and ideas that can shape the ‘wanting’ of one of the actors. 19 By the same token, Barnett and Duvall (2005) also created a taxonomy of power that depends on how power has been analysed thus far. They state that there is compulsory power, which gives direct control by one actor over another; institutional power, the control over others through diffuse relations of interaction; structural power, the constituting of the subject’s capacities in relation to one another; and productive power, the use of subjectivity in systems of meaning. 20
The influence of the different paradigms in particular theories that are then used to analyse the international investment framework is no exception. Although assumptions of power in the intern...