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October 27, 2007


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I kind of like the idea of encouraging direct American corporate investment abroad, because I've always thought that nobody will willingly bomb a country where they have investments. And since America is now de facto a corporate state, that seems to be to be a way to foment peace. But maybe that's naive.

Also, and on an entirely unrelated note, I'd like to take this opportunity to complain bitterly about Yet Another Day of Rain in Ponce, where (as we know) it never rains, except when it does. And right now it does, a lot. Stupid not-quite-hurricanes.


To be fair, roughly 0% of that social rate of return actually went to Panama for a good long time.

(There's some evidence for Álfaro's view with regards to the early isthmian republic. According to William D. McCain -- a Mississippi relative of John, I believe, and a rather disturbing man in his own right -- investment in Panama went up sharply after independence but before the Canal was opened. Mainly United Fruit and speculation, producing a whole lot of graft, nothing, and some bananas.)


So my tacit American acceptance of trickle-down (to wit, investment in an area must logically produce at least some local social good) is naive? I hate that.

But I like the word "isthmian". That's a keeper.


In this case, the lack of local gains from foreign investment was deliberate. American policy with regards to the Panama Canal was carefully designed to minimize any economic spillovers to Panamanians. ('Minimize' is too mild a word; 'extinguish' might be a better one.)

It's a rather sordid story. But I'm sure there are investors who would like to emulate it, which is one reason why I personally distrust Werker's conclusion, although his op-ed does make me feel nostalgic for the boom-boom nineties.

Noel Maurer

Carlos: I think "capture" is the word you're looking for. Why let the Panamanians enjoy any benefits when you can enjoy 'em yourself? Even if efforts to capture the spillovers shrink the total pie, it still increases the value of your share.


Noel, I wouldn't use the word "capture", because profit wasn't the motive. To be generous, one might call it a policy of autonomy. But the people who made those policies recorded their reasons, and it was mainly dickishness. "Let it injure them."

Noel Maurer

Good point. But dickishness is /probably/ not why modern investors would try to emulate the Canal builders, no? Chinese builders in Angola or Sudan aren't going to try to screw the Angolans or Sudanese out of spite; they're going to try to screw them to retain as much of the surplus as possible.

Then again, I could be very wrong about that. In either direction.

Doug M.

Woo, good post.

I want to chew on this, but here are a couple of throwaway comments.

1) Most development aid is wasted.

Definitions: "Most" means "somewhere between half and 90%". "Wasted" here doesn't necessarily mean the money is pissed away, only that it produces very little real return for either the donor or the host country.

2) That said, some development aid can provide truly spectacular payoffs. Child inoculation programs are probably the, um, poster child for this, mostly because they're so damn cheap that the cost/benefit ratio is awesome. But there are examples in many categories (including my own specialty, legal and regulatory reform).

3) Money does not flow towards the high-payoff forms of aid because there is no compelling reason for it to do so.

4) The science of how to do aid has only just barely left the alchemical age. Things that you'd think were basic basic -- like benchmarks, conditionalities, and the bare rudiments of accountability -- were controversial as recently as the 1980s. Determining where to spend money, how to spend money, and whether money has been well spend -- all these things are still quite shockingly primitive.

5) Aid has been massively politicized from every possible angle since forever, world without end, amen. It's silly to even try pretending otherwise.

N.B., (5) is a cause of (4). Often there are strong incentives /not/ to know if money is being well spent.

6) All donors are not created equal; donor competence varies sharply from organization to organization, and also over time.

To give an example that's very close at hand, USAID used to suck rather horribly. It underwent a major overhaul in the Clinton administration. And one of the major... what's the double negative of "achievement"? When you could screw up massively, and don't? Well, one of the major not-screwups of the Bush administration was not undoing the Clintonistas good work with USAID. Yes, they dicked around with family planning and appointing religious conservatives and whoremongering telecom executives, but overall the agency has come through seven years of Republican administration pretty well.

If this sounds like praising with faint damns, well perhaps. But on the other hand the Clinton revamp of USAID was very similar to the Clinton revamp of FEMA. Both agencies were in great shape in 2000. So.

Very broadly speaking, the best aid comes from small bilateral donors (you'll be shocked to hear that the Swedes and Canadians are good) and from multilaterals where some strong private donor has taken a clear interest (Bill Gates Foundation). But that's a broad generalization, and there are a lot of interesting exceptions.

Um, throwaway, right. More in a day or so.

Doug M.


I think, too, that host-investor relations have more options in 2007 than they did in 1904. The U.S. depended on customary international law, which grossly favored the investor nation. I suppose the custom stopped with Cárdenas and PEMEX in 1938, but the U.S. hung on to the concept like grim death until the Reagan administration -- which is a little surprising. Or maybe not.

Nowadays, these things are regulated by bilateral investment treaties, which go into much more detail about investor-host obligations. There's also a somewhat more reliable mechanism of arbitrating disputes, which typically doesn't involve Marines. Also, unlike Panama, but presumably in the case of Angola and the PRC, *both* sides take part in the treaty negotiations, not just one.

(I ain't telling Noel anything he doesn't know, of course.)

So if Angola feels that the PRC is acting in bad faith, there are recourses; and more importantly, there are consequences.

It's interesting to contemplate what could bring down a bilateral international order. A cheery Monday thought.

Doug M.

The international pecking order was harsher back then, too. You had a handful of Great Powers, then a very sharp dropoff through a small group of middleweight-but-still-respectable countries, then wogs all the way down.

In no way was a great power expected to pay any heed to a minor one, unless for its own reasons it felt like it -- and everyone accepted this.

Today there are a bunch of international organizations, from the UN on down, that give small and backwards countries a literal seat at the table. In the Belle Epoque, a Panama or Bulgaria or Siam didn't even have that.

Doug M.

Noel Maurer

Carlos: The BIT regime has two problems, one from the host's point of view, the other from the investor's.

(None of what follows is anything that you don't know either, of course.)

From the host's point of view, the treaties tend to treat renegotiation by the investor very differently than renegotiation by the host. So, to give a concrete example, Suez can raise water rates and renege on its service promises, and there's nothing Argentina can do except dare the company to go home. (And since it was an /operating/ company, going home was a very easy option.)

But when Argentina turns around and freezes rates after the big devaluation in 2001, Suez screams and --- with France's vocal support --- takes Argentina to arbitration. Suez wasn't alone: Argentina now faces about $750m in adverse decisions coming from the crisis, with billions more of claims still winding their way through the process.

Now, hosts don't always lose. There is at least one case where an investor renegotiated and the host won when it balked at the renegotiation. The host was the Philippines. In 2002, a German airport-builder renegotiated its contract. The Philippines rejected the renegotiation and fined the company. Arbitrators then found in favor of the Philippine government.

The precedent, though, is limited, because the case was just so ... well ... Filipino. Fraport "renegotiated" with Joseph Ejército Estrada, which involved the company making favors it wasn't allow to make and the president taking actions he wasn't allowed to take. The Philippine being the Philippines, however, the supreme court rejected Estrada's action and junked Fraport's contract, later fining the company. So all the arbitrators did in the Fraport case was back up the Philippine Supreme Court's decision.

Usually when investors wriggle out of their contractual obligations, they do it in a subtler and less blatantly illegal way. It took the combination of Estrada's venality, Estrada's incompetence, and the fact that the Philippines really does have separation-of-powers despite everything to get the decision.

Most arbitration takes place in the International Center for the Settlement of Investment Disputes, run by the World Bank. The acronym is ICSID, pronounced "Ick-sid," and sounds so ominously unpleasant that every year I have several students who insist on saying I-C-S-I-D instead.

From the investor's point of view, the problem is ICSID's limited ability to sanction recalcitrant hosts. If the hosts need the IMF, then the system works; if they don't (like Argentina) then it might not. Considering that Argentina has threatened to simply ignore ICSID rulings, this is a serious threat.

The U.S. started to do things differently with NAFTA. NAFTA's investor protections are both stronger than the ones in a typical BIT. In addition, they're backed up by trade sanctions. And most strongly of all, it's hard for the executive branch to intervene in a NAFTA tribunal decision. A new U.S. administration, for example, would almost certainly side with Argentina at ICSID, and that could be decisive; it would have a hard time siding with Nicaragua on a CAFTA panel.


Much of the opposition to USROK in Seoul and CAFTA in San José stems from the strength of the investor protections in the treaties, which are (probably rightly) seen as a little humiliating.

To be fair, which the U.S. has unsurprisingly won all the NAFTA investor cases brought against it, Canada and Mexico have only lost two.

Doug: One of the most interesting unresolved questions in international relations (inasmuch as the subfield makes any sense, but don't get me started) is whether international institutions make a difference in-and-of-themselves, or whether they are just an epiphenomenon of changing norms or power balances. One of the neat things about Eric's U.N. paper is that it's one of the few studies that's actually tried to answer the question in a falsifiable way, and it comes down on the side that international institutions do, in fact, matter enough for governments to spend a lot of money to try to influence their decisions. (I think Bernard would appreciate that metric.) In other words, it seems to matter that smaller countries have a seat at the table, above and beyond changes in social norms, governmental forms, or the ability to project power.

Be interested in hearing more of your thoughts on aid.

Doug M.

Briefly (before bedtime): the two interpretations of international institutions aren't exclusive; they can be epiphenomenal and still matter.

I think the "don't matter" school has a broad streak of wishful thinking, especially in the US: if only the United Nations /didn't/ matter! But it does. Maybe not a lot, but some.

These tend to be the same people who are impatient with the whole notion of soft power, and who think that "realism" means international relations are really a Hobbesian anarchy.

-- The latter point has become an instant lose-a-letter-grade, I start tuning out your argument marker for me. International relations obviously /aren't/ anarchic; they weren't even back in the Belle Epoque. People who take this as their starting point are IMO talking about what's inside their heads more than what's out in the observable world.

Aid anon. Noel, do your colleagues read this blog?

Doug M.


Whoops, minor point I wanted to make to Michael earlier: "trickle-down" refers to the political idea that a more regressive tax and transfer structure will stimulate the economy, much like Zeus did to Danae. The phrase isn't used much by those people who advocate it, as part of their general program of message control.

Economists and hangers-on use the word "spillover" to describe the side-effects on third parties (externalities) caused by an economic transaction, which uses a similar liquid metaphor. There are positive spillovers and negative ones.

A primary party might, out of self-interest, want to capture some of the positive spillovers for their own gain (if possible), which is what Noel was alluding to above. In theory, one can internalize these spillovers by charging for the privilege. One could even charge for public health improvements, if one wanted to be a dick about it.

Then there's the multiplier effect, which is sort of the ideological opposite of the trickle-down theory -- here, output increases with spending -- and as such, is better supported by empirical evidence.

Bernard Guerrero

"One of the neat things about Eric's U.N. paper is that it's one of the few studies that's actually tried to answer the question in a falsifiable way, and it comes down on the side that international institutions do, in fact, matter enough for governments to spend a lot of money to try to influence their decisions. (I think Bernard would appreciate that metric.)"

Very much so. The prior two sentences already had me doing a "hmmnnn." I'll have to read the paper when we get settled in; IIRC I actually have a download in my pdf files already. Anyway, back to packing. Later, y'all.

Noel Maurer

Hi, Doug. Do my colleagues read this? I'm not sure. I know that Eric and Laura have the URL, but that's about it. Eric and I have been back-and-forth a little on email.

He pointed out a flaw in my argument, which I should probably add as an "update" in the main body of the post. I just keep hoping that Eric will point out the error here in comments.

I do know that I have at least one high school buddies lurking here, though. That means you, Joe. Show y'self!


Ah, yes, spillover sounds more cultivated and less Reagan. (Goes to show: you can take the boy out of Indiana without taking Indiana out of the boy.)

So company towns are the ultimate spillover capture method.

Noel Maurer

Unless the company town is the spillover --- there are places where the value to the workers of receiving service directly from the employer is less than the cost to the employer of providing them.

I'm thinking of Aurora Gomez-Galvarriato's work on housing and company stores in mining camps in northern Mexico, not the more obviously (although one never knows) exploitative version in the industrial East.


But wait -- why does the value to the workers have anything to do with it? Isn't the spillover the value to everybody *but* the workers (i.e. the "side effects"?)

Noel Maurer

If the workers earn more than they could from their next-best-option (whether directly or from in-kind benefits) then that's a spillover. The owners of the investment aren't capturing that value, but passing some of it along to their local employees.


But then it's ... oh, I see. The spillover is how much more the workers earned than they could have earned elsewhere, taken as a total function of benefits (pay plus non-pay bennies). In a sense it's wasted money on the part of an investor, because we all ignore the possible good faith and loyalty of working for a company that pays a living wage, which is hard to get in these parts nowadays.

But if the employer spends more on those services than they're "worth" to the worker (how is *that* calculated? The amount for which they could have been obtained elsewhere?) then it really is wasted money.

Boy. I thought working out DNS and mail hosting problems was irritating and hard. You people have all too many fuzzy areas.

Noel Maurer

Michael: you got it! Of course, you've introduced a wrinkle, which is that not all spillovers are lost to the owner of the investment. Frex, if higher wages lead to proportionately higher output from the workers, then the investor both produces a spillover --- higher wages for the locals --- and reaps a return from the additional expenditure.

The other part, about company stores, isn't as complicated as it sounds. How do you know if there's a spillover? Just ask two questions. Did the workers receive the services for less than they could have from other sources? Did the employers make less money from providing them than they could have doing other things, like (say) investing in government bonds? If the answer to both questions is "yes," then you can be pretty clear that the company store wasn't exploitative.

Still, things get fuzzy. Carlos has problems with the Popperian paradigm, but in the above case it's true that converse doesn't hold --- "yes" to the questions means spillovers, but "no" does not mean that there are not spillovers.

Should I post here about the Philippines? That's some fuzzy results we're getting about agriculture in the American period, fuzzier than my cute old cat, Max.

Doug, didn't you also have a cat named Max?

Doug M.

Yes. He died.

Doug M.

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