Do World Bank ranking improvements attract FDI?

These days, I steer clear of debates about estimating the impact of trade agreements. Any public policy conversation that rapidly devolves into whose unrealistic assumptions are better seems like a debate better had behind closed doors at econ seminars and ComicCon. I’ll stick to the text of the agreement, which I can simply read in a single PDF file, thank you very much.

However, Simon Lester highlights an interesting aspect of a recent Peterson Institute study on the TPP. The study attempts to estimate how many non-trade barriers (i.e. regulations and other government actions) might be “actionable” under the agreement. The authors then project increases in FDI that might be triggered by removal of these regulations.

Like Simon, I read the original Peterson report. Like Simon, I don’t understand the non-trade barrier aspect of it.

According to researchers at Tufts University, who analyzed the previous Peterson report on TPP…

The results obtained by  Petri, Plummer and Zhai ( 2012)  depend strongly on the  projected  increase in foreign direct investment, estimated to generate , on average, 33 percent of the TPP ’s  total income gains…

Given  the  difficulty  of  predicting  FDI  flows,  the  authors  estimate  the  FDI  effect through  two series of assumptions . First, the potential increase in FDI stocks is estimated through a parameter  that expresses the impact of changes in the World Bank Doing Business rank. The parameter is  the  same  for  all  participating  countries, implying  the  same  increase  in  stock  of  FDI  for  any  country  that climbs  a  given  number  of  ranks.  Once  the  parameter  is  estimated,  it  is  used  to  calculate  the  potential  change  in  FDI  stocks.  It  is assumed that  signing the  TPP will  put  all  countries above the  ninetieth  percentile of the ranking , and that all FDI stocks will increase  by  at   least  50  percent  of  the  difference  between  the  predicted  level  and  their  current  level. Secondly,  the  “actual”  FDI  increase  is  calculated  from  the  potential  increase , assuming  that the  TPP investment  provisions  eliminate a  maximum  of  two – thirds of  investment  barriers  and  that  each  country  achieve s this , depending  on  the  number  of  FDI  provisions  it  accepts. This  procedure  is  used to  justify the  assumption that  FDI  will  play  a  major  role  in  making the  TPP economically  successful…

I don’t know if a similar procedure is used in the more recent Peterson report, and it’s difficult to compare since the methodology appendices the Tufts crew refer to are not freely available online. (And the Tufts study doesn’t provide page citations, so you can’t reverse engineer through Google Books.)

In any case, the point about the World Bank Doing Business rankings caught me eye, and comes perilously close to my current research interests on investment.

It turns out that the link between changes in World Bank’s rankings and FDI are anything but clear. World Bank economist Dinuk Jayasuriya found the following:

for the average country,  [marginal] improvement in the official Doing Business Rankings is likely to  increase FDI into a country…  Nevertheless, there  appears  to  be  no  evidence  to  suggest  large  improvements  in  Doing  Business  Rankings… attract significantly greater FDI inflows. When  focusing  on  developing  countries  in  isolation, the  relationship  is  insignificant.

In other words, in estimates that included rich countries, minor increases in DB rankings helped things. But when rich countries are taken out of the sample, there’s no benefit to moving up the ranking ladder. And countries don’t appear to get more FDI when they make a lot of improvements rather than just a little.

Similarly, a more recent study by Adrian Corcoran and Robert Gillanders concluded:

 

Regulation has been found to matter for local investment and entrepreneurship and
in this paper we have sought to empirically assess the proposition that better
business regulatory environments, as defined by the World Bank’s Ease of Doing
Business measure, will attract more foreign direct investment. Using data on a large
proportion of the world’s countries we found evidence that this was true on average.
Going deeper, we found that most of this effect can be explained solely by how easy
it is to trade across borders, with other components of doing business having little or
no effect. We also found that the effect was not present in the world’s poorest, and
therefore most eager for FDI, region, Sub-Saharan Africa. Neither was it present for
the OECD.

Again, there are heterogeneous effects depending on what region of the world you are in. And the regulations related outright to trade were more important than those indirectly related, i.e. purely domestic regulations that might affect longer term FDI.

I’m thankfully not a macro or trade modeler – see minutes 5 in this video for Adam Posen’s take on the difference (and minutes 1:40-1:50 for an impromptu debate between Tufts and Peterson folks).

But an emerging literature suggests we don’t yet know much about how FDI is affected by policy changes that are inherently difficult to put into numbers.

Leave a comment

Filed under Uncategorized

Review: Road from Mont Pelerin

What is “neoliberalism”, and who is responsible for it? Economist John Williamson once wondered whether it was anything “more than an intellectual swear word.” Certainly on the left, certainly outside the US, that is how it used. Take a typical Bernie Sanders tirade against “corporate power”, substitute “neoliberal power”, and you’ve got the flavor.

51iy3hzxybl-_sy344_bo1204203200_A recently republished volume tackles this question from the careful perspective of expert historians and scholars. While neoliberalism is today laid at the doorstep of Ronald Reagan and Margaret Thatcher, “The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective” retraces the origin story back to 1947. That was the year that a group of upstart libertarian-leaning scholars met in Switzerland to found the Mont Pelerin Society. Centered around economist and philosopher Friedrich Hayek, the academic/social convening group would go on to cultivate Nobel Prize winning economists and the leaders of today’s top right-leaning and libertarian think tanks.

The book is edited by Philip Mirowski and Dieter Plehwe. They pull together case studies on the origins of the movement in France, UK, US, and Germany; and the impact of the movement on Chile, Peru, and the UN.

The best chapters cover the evolution of Mont Pelerin thinking on core issue areas -labor unions, corporate monopolies, and economic development. Spoiler alert: libertarian positions on these questions were more varied than they appear today.

Take the chapter on unions. Yves Steiner shows that Swiss and German participants in the 1947 Mont Pelerin conference approved of unions as a tool to re-educate workers about market-favoring values. Contracting between private-sector unions and private-sector employers could also foreclose the need for intervention by state labor ministries. However, a wave of labor legislation in the US prompted American participants to see matters differently. Unions were only possible, in this story, due to the state sanctioning of the coercive closed shop. This coercion against the individual leads to monopolies, which in turn lead to inflation. In the end, US-based scholars – and their patrons from Dupont (which underwrote some MPS events) – won the day.

A similar transformation took place with anti-trust. The chapter by Rob Van Horn shows that Chicago-based economists and German “ordoliberals” in the 1930s and 40s agreed that the state should be active in breaking apart large monopolies – a threat to competition. By the 1950s, however, Chicago economists came around to the view that competition between firms would eventually destroy monopolies, and competition within firms for control would similarly have a salutary effect. Also, they suggested that politicians and courts where too quick to find monopolies were none could be proven. In short, governments’ hamfisted efforts to curtail monopoly would simply take us further from the market – which is to be avoided.

Finally, chapters by Plehwe and Jennifer Bair convincingly detail the almost accidental neoliberal interest in economic development – an association that is now most prominent. Early MPS scholars were more preoccupied with the threat of communism than developmentalist states. The first several MPS meetings did not even feature papers on development. But in 1949, Truman made his famous four points speech advocating state-facilitated aid and development; in the following years, interventions by Argentine economist Raul Prebisch and Bandung Conference participants would argue for the necessity of import substitution-led industrialization. These events grabbed MPS leaders’ attention. They realized that the frontline of the intellectual debate over the role of the state in economies was going to be happening in the Third World, where (thanks to decolonization) there were now many more states to curtail. By 1958, Dupont and other corporate leaders had funded a conference at Princeton University to focus intellectual energy on development issues.

These early MPS development interventions were more philosophical than economic, arguing that lazy cultural traits and politics would get in the way of growth and state-led industrialization. Instead, poor countries should be satisfied with their place in the global value chain, whether as sources of cheap labor, natural resources, or agricultural commodities. If technocratic dictatorships had to tamp down popular demands for a different path, so be it.

It took decades before the spirit of Bandung percolated up into the international governance space more substantially. The New International Economic Order debates at the UN were made possible by the growing political might of oil producing states in the 1970s. By then, MPS members had honed their  development critique -and were ready to play the influence game in Washington and other capitals.  The rest is history.

Pair this book with Steve Teles’ Rise of the Conservative Legal Movement: you’ll get a good sense of how leveraging university affiliations, government connections, business dollars, and good old-fashioned “bro’ing out” at nice Swiss resorts provide the cement for lasting hegemonic influence.

UPDATE: A few passages show how neoliberals are not totally anti-state; they need a certain type of state. For French neoliberals, “the state creates the framework within which competition is free. It begins to clarify what a neoliberal state must be: a regulator that punishes deviations from the ‘correct’ legal framework.” (p.50) In the German ordoliberal tradition, weak states were those “incapable of defending against the united onslaught of interest crowds. The state is pulled to piece by avaricious interests”. In contrast, they wanted a strong (or “total”) state that could protect itself against democratic demands (p. 111). In other words, courts!

Leave a comment

Filed under Uncategorized

Review: Hidden Wealth of Nations

Gabriel Zucman (@gabriel_zucman) has put out an anti-tax haven manifesto, The Hidden Wealth of Nations.

His major contribution is to assemble in a one-stop, accessible history of tax havens, and an estimate of how much they cost the public. Based on copious statistical research, Zucman estimates $7.6 trillion (or eight percent of global wealth) is held in tax havens. A third of this is held in Switzerland, which plays a fulcrum role for other tax havens around the world. All of this adds up to $190 billion in lost tax revenue. For comparison purposes, this is over 40 percent the size of the US government deficit.

Against narratives that the status quo is a free market outgrowth, Zucman demonstrates zucman2015bookcoverthe key role of public institutions. Swiss banks, for example, were made profitable on the basis of deposits by the Swiss government, which moreover served as a lender of last resort. The governments of Panama and other tax havens mounted complementary tax haven industrial policies. Moreover, Switzerland’s foreign policy of neutrality amounted to another form of subsidy, as it could attract deposits other nations couldn’t. Finally, the US and other Allied Powers allowed Swiss banks to misrepresent assets’ true owners, giving up the massive leverage they had at the end of World War II to force a clean-up of questionable accounts.

By highlighting the key role played by the state, Zucman opens up a clear reform path. Much as governments made choices to only lightly regulate and cooperate on tax haven activity in the past, they can make a decision for more robust governance in the future.

His recommendation: to unify and expand private depositaries of wealth into a public global utility. This recommendation is not surprising: Zucman’s focus is above all on data collection. But he pairs it with a recommendation to levy trade sanctions on tax havens equivalent to their contribution to tax avoidance.

While this proposal will have its detractors in the international trade law bar (which tends to favor liberalization over other goals), Zucman’s economic logic is unassailable. Simply put, current government policy subsidizes tax havens – re-balancing sanctions would better approximate the free market outcome. He makes some attempt to square this with WTO rules, but his conclusion about EU constraints is blunt – kick tax havens out the EU, on the logic that they’ve commercialized (and thus forfeited) their sovereignty.

Although not a major focus of the book, Zucman alludes to the role of victimhood discursive strategies employed by the wealthy in their fight against accountability. For many years, Swiss banks sold financial secrecy as a protection for persecuted minorities in other countries, such as (in an earlier era) victims of the Holocaust. Whatever the ethics of this strategy, Zucman shows there’s weak empirics: Holocaust victims’ accounts were very few compared to those of standard tax avoiders. It’s an interesting sidebar – one with clear parallels in the investment arbitration space. There, narratives of human rights protections for victims of government abuse help justify a system that seems more geared towards business interests than protecting regulatory space.

Zucman’s major contribution is to bring some of Jeremy Bentham into the debate on multinational taxation. Bentham famously thought that the law should be simple and easy for everyone to understand. As a participant on the margins of the tax debate, I find most interventions anything but. With an economy of words (the book is only a bit over 100 pages, and the font is big!), he cuts through the legalese and economese to offer some valuable pearls of wisdom.

Leave a comment

Filed under Uncategorized

TransCanada is suing the US over #KeystoneXL. The US might lose.

I have a piece in the Washington Post’s MonkeyCage today. Here is the lede:

On Jan. 6, TransCanada went to court to claim that the Obama administration’s failure to approve the Keystone XL pipeline violates U.S. obligations under the North American Free Trade Agreement, or NAFTA. The company is asking for $15 billion in compensation from U.S. taxpayers.

This mixes two challenges confronting President Obama and Democratic politicians in recent years. Environmentalists have turned the ecologically questionable tar sands pipeline into a no-fly-zone in domestic politics. Meanwhile, labor and other groups have made opposition to NAFTA-style deals essential for their electoral support. In the face of this pressure from the left, even one-time advocates of both the pipeline and trade deals like Hillary Clinton have reversed course on both.

The U.S. has never lost an ISDS lawsuit. Keystone might break the winning streak. 

To read the full piece, head over to the WaPo website.

Leave a comment

Filed under Uncategorized

Called it

Yesterday, TransCanada launched a NAFTA claim against the US. Four years ago, I called it.

I’m pretty sure that I am the first person to suggest that the Keystone XL issue was a good candidate for investor-state dispute settlement (ISDS). Dateline: 1/19/2012.

As I’m thumbing through the company’s legal filings, I’m even more convinced that the claim has legal merit. Here’s some things you never want to do if you want to avoid a legal claim in general, let alone an ISDS claim:

  • Say that your decision-making was motivated by politics, as Obama did in his official statement announcing rejection of the Keystone XL decision.
  • Allow an approval process for a foreign investor to drag on five times longer than the average wait time.
  • Make a decision that runs against your all of your own on-the-record scientific assessments.
  • Grant permits to carry the same product from the same place during the same period you are stalling the permit consideration in question.
  • Approve other cross-border pipeline applications by US investors and investors of third countries.
  • Allow domestic production of oil sands.
  • Suggest that only proposed pipelines with enough already sunk costs will be considered, and then go back on that word.
  • Help the company manage its political and legal relationships with subfederal officials.
  • Signal at the highest level (Sec. Clinton) a predisposition to approve something that has not gone through standard regulatory process.
  • Suggest – as Obama did – that decision will only be motivated by carbon emission considerations, before then moving goal post and evaluation metrics to more diffuse “national interest”.
  • Make excuses for delays that lack credibility.
  • Add layers to review not strictly required by law.
  • Allow lots of variance in between what you (White House) say and subfederal officials say, what you say and Congress says, or what you  and your agencies say.
  • In sum, don’t allow an investor to develop anything like “reasonable expectations” of things going their way, if things aren’t going to go their way.

I may be mis-characterizing some parts of the claim or underlying issues – let me know if I am. But from a quick read, it seems like these are the grievances as TransCanada perceives them.

Whether it’s reasonable to expect states to navigate politically tricky waters in pristine ways is a broader question – one I’ll address in future posts. But as a legal matter, the US behavior seems to clearly implicate issues under NAFTA’s provisions on national treatment, most-favored nation treatment, and fair and equitable treatment. (The expropriation claim – TransCanada’s fourth – seems weakest.)

From FOIA materials I’ve gotten over the years, I know that USTR weighs in on the NAFTA/WTO compatibility of proposed regulations. I find it impossible to believe that they did not do so with the Keystone case over 2008-2015, especially since prominent legal blogs raised the issue consistently after I first did. The above ham-fisted moves suggest that USTR’s advice was not being followed, that it wasn’t solicited/offered (unlikely), or that the political cover of an adverse legal ruling might have been desirable. This last scenario effectively passes the buck for a politically tough decision to unelected adjudicators.

One can imagine a different path. Obama could have stopped the process much earlier, and not sent mixed signals to the pipeline operator. That would have been a better protection, although not airtight. After all, consistency in policy-making is a near article-of-faith in the arbitration community, and the Bush administration had already put out a favorable tone it its relation to the Keystone issue. Obama might have paid a price for reversal, no matter how early.

I’ll have more to say about the politics of this latest TransCanada move in future posts.

Leave a comment

Filed under Uncategorized

After WTO case, Congress repeals beef labels

Last week, Congress passed the $1.1 trillion Omnibus Bill to keep the government running. And do lots of other stuff, as Tessa Berenson’s listicle reports.

 

Buried in this massive legislation was Section 759, which reads like a nothing burger:

 

(a) Section 281 of the Agricultural Marketing Act of 1946 (7 U.S.C. 1638) is amended— (1)by striking paragraphs (1) and (7); (2) by redesignating paragraphs (2), (3), (4), (5), (6), (8), and (9) as paragraphs (1), (2), (3), (4), (5), (6), and (7), respectively; and (3) in paragraph (1)(A) (as so redesignated)— (A) in clause (i), by striking beef, and , pork,; and (B) in clause (ii), by striking ground beef, and , ground pork,.
(b) Section 282 of the Agricultural Marketing Act of 1946 (7 U.S.C. 1638a) is amended— (1) in subsection (a)(2)— (A) in the heading, by striking beef, and pork,; (B) by striking beef, and pork, each place it appears in subparagraphs (A), (B), (C), and (D); and (C) in subparagraph (E)— (i) in the heading, by striking beef, pork,; and (ii) by striking ground beef, ground pork, each place it appears; and (2) in subsection (f)(2)— (A) by striking subparagraphs (B) and (C); and (B) by redesignating subparagraphs (D) and (E) as subparagraphs (B) and (C), respectively
Unless you are an agribusiness lobbyist, you wouldn’t realize that this language repeals country of origin labels for meats.

coolabel_406x250
This congressional action is noteworthy, for a few reasons.
It suggests a congressional realignment on food regulation. In the oughts, consumers were increasingly grossed out by meat production in the fast food industry. Eric Schlosser wrote an expose on the practices (Fast Food Nation), which later became a movie. I can’t unread this phrase from the book:
The days when hamburger meat was ground in the back of a butcher shop, out of scraps from one or two sides of beef, are long gone. Like the multiple sex partners that helped spread the AIDS epidemic, the huge admixture of animals in most American ground beef plants has played a crucial role in spreading E. coli 0157:H7. A single fast food hamburger now contains meat from dozens or even hundreds of different cattle.
By 2008, one of the prices a Democratic Congress put on a new Farm Bill was for the Bush administration to approve more transparent labeling for the origin of beef. It was left for the Obama administration to actually write the rule for so-called country of origin labeling (COOL), which it did soon after taking office. Fast forward to 2015, and a Republican controlled Congress stealthily repeals that accomplishment, with an assist from Obama.
Moreover, international law cast a shadow on the whole process. Even before the Bush administration left office, Canada and Mexico were threatening to challenge COOL at the World Trade Organization (WTO). They claimed the whole scheme violated trading rules, and in 2012, the group’s appellate body sided with them… in part. Ujal Singh Bhatia of India, Ricardo Ramirez Hernandez of Mexico, and Peter Van den Bossche of Belgium – the adjudicators assigned to the case – found that the US labels placed a burden on the use of Mexican and Canadian beef and pork cuts. But they found that the two countries overreached in their arguments on ground beef and pork. (For an extensive analysis of some of the quirkier aspects of their decision, see this piece I wrote at the time.  For the legal decisions themselves, see the WTO website.) The US made some changes to COOL in an effort to comply with the WTO decision. Ultimately, further groups of adjudicators ruled against these efforts as well. And earlier this month, the WTO authorized over $1 billion in
sanctions against the US.
The case upset the emerging narrative about North American harmony. Wunderkid Justin Trudeau has being lauded for lessening Canadian tensions with the US, and gushing over his admiration for Obama. But in one of her first acts in office, Trudeau’s trade minister (and former journalist) Chrystia Freeland was threatening a trade war with the US over COOL.
It also shows the limits of the social science concepts we use to understand the intersection between domestic and international law. There has long been a worry that global trading rules could make for a “regulatory chill” on domestic regulation. In this story, international legal rulings (or the threat thereof) are a neoliberal superstructure that have a chilling effect on more interventionist public interest regulations.
Scholars have found scarce evidence of regulatory chill, and have even argued for a “California effect”, whereby countries race to the top (not the bottom) in an effort to build an eco-friendly brand.
This WTO case is neither chilling effect or California effect. Indeed, congressional leaders cited the WTO loss as the reason for repealing COOL. Yet they went further than the ruling actually required, repealing the labels for ground beef and pork as well. As the pro-COOL National Farmers Union said last week:

The language to repeal most significant components of COOL is contained as a rider in the 2016 Appropriations Act. Johnson noted that the language goes well beyond the WTO dispute, repealing COOL for ground beef and pork – two products that were explicitly found to be trade compliant.

“Clearly this language was produced by long-time COOL opponents who legislated in the dark of the night under the guise of solving an issue, when really their intentions completely undermine the will of American consumers and producers,” said Johnson. “NFU is furious that yet again the dysfunction of Congress has enabled this to happen.”

 

I call this a chilling inflect. It occurs when domestic political actors weaken their own laws – rhetorically making use of international legal orders, but going beyond them to chart their own additional deregulatory course.

Leave a comment

Filed under Uncategorized

Australia Beats Philip Morris

In the most high-profile investment dispute in recent history, Australia has emerged victorious. The challenge was brought by tobacco company Philip Morris against public health regulations.

According to Investment Arbitration Reporter, the three arbitrators appointed to hear the case dismissed the case for lack of jurisdiction. Australia asked the tribunal to block the dispute from going forward, as the US company appeared to be opportunistically gaming the system by claiming a Hong Kong nationality.

A few takeaways.

The case may be a fleeting first attempt to crack down on the creeping multilateralist nature of the investor-state dispute settlement (ISDS) system – where companies can claim to be from anywhere and benefit from any treaty in the 3,200-strong investment treaty network. In other words, arbitrators may demand that a company be from where it says it is from.

It also shows that arbitrators are not political masochists. John Oliver dedicated a show to ridiculing the claim and stoking public outrage. This effort (and others) was so successful that tobacco got carved out of the Trans-Pacific Partnership deal.

Were three arbitrators really going to risk further roll back of the system (and future paydays)? This is a case of the system watching out for itself. To hand Big Tobacco a victory – after the Australian Supreme Court had already ruled against the industry – would have invited substantial overhaul of ISDS.

Ironically, critics’ success makes their work harder. Every time anti-ISDS activists have made a poster child out of a threatening case before it was decided (Loewen, Pac Rim), arbitrators ended up ruling against the investor.* These state victories make the system appear less objectionable. The case may help the TPP, at least at the margin.

At the same time, the Australia ruling has downsides for ISDS advocates. If businesses perceive that arbitrators have a weak spine in the face of political pressure, then they will be less likely to go to the considerable expense of launching ISDS claims. It will also make it harder for them to credibly make threats to sue other states over tobacco policy.

+++

*Pac Rim launched a case under CAFTA and a Salvadoran law. The CAFTA part of the claim was dismissed, and I would be surprised if the other part were not also.

Leave a comment

Filed under Uncategorized