Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries

Description

Modern investment treaties give private arbitrators power to determine whether governments should pay compensation to foreign investors for a wide range of sovereign acts. In recent years, particularly developing countries have incurred significant liabilities from investment treaty arbitration, which begs the question why they signed the treaties in the first place. Through a comprehensive and timely analysis, this book shows that governments in developing countries typically overestimated the economic benefits of investment treaties and practically ignored their risks. Rooted in insights on bounded rationality from behavioural psychology and economics, the analysis highlights how policy-makers often relied on inferential shortcuts when assessing the implications of the treaties, which resulted in systematic deviations from fully rational behaviour. This not only sheds new light on one of the most controversial legal regimes underwriting economic globalization but also provides a novel theoretical account of the often irrational, yet predictable, nature of economic diplomacy.

Lauge N. Skovgaard Poulsen is a Lecturer in International Political Economy at University College London.

'Well before the current hype in Europe over investor-state dispute settlement, Poulsen pioneered the view that many countries signed up to investment protection treaties in less than rational ways. This book provides careful, country-specific evidence in support, with eye-opening stories from across the world, ranging from Pakistan and Ghana to the Czech Republic, Costa Rica and South Africa. Countries simply assumed the economic benefits of investment treaties and underestimated the possibility and costs of legal claims. World Bank and UN officials promoted the treaties and so did Western lawyers and advisors. Debunking the rational premise of much of the academic scholarship, this book should be compulsory reading for a new generation of policymakers and scholars alike, if only to avoid the mistakes of the past and find better ways to address today's increasingly complex challenges of economic diplomacy.' Joost Pauwelyn, Graduate Institute, Geneva 'BITs don't have to be boring! Lauge N. Skovgaard Poulsen has developed a simple yet elegant framework based on bounded rationality to explain why many less developed countries have made rationally foolish choices when signing bilateral investment treaties. By slightly relaxing the strong assumptions of rationality, and combining it with careful in-depth case analysis, he provides a compelling account of the bilateral investment treaty regime and its sometimes perverse consequences.' Duncan Snidal, Nuffield College, Oxford 'In explaining why developing countries signed on to investment treaties that were arguably not in their interests, Poulsen adds greatly to Graham Allison's ground-breaking analysis of the Cuban Missile Crisis so that we can better understand how government decision-making - in rich as well as poor countries - works in practice.' Louis T. Wells, Herbert F. Johnson Professor of International Management, Emeritus, Harvard Business School, Massachusetts 'Lauge Poulsen makes a truly innovative contribution to political economy by using a rich set of insights from cognitive psychology and behavioral economics to explain the spread and impact of bilateral investment treaties. His thorough statistical and qualitative research convincingly demonstrates the superiority of this bounded-rationality theory over conventional rationalist accounts.' Kurt Weyland, Mike Hogg Professor in Liberal Arts, Department of Government, University of Texas, Austin 'Bounded Rationality and Economic Diplomacy will be fruitful reading not only for scholars of international political economy and international relations more broadly but also for those directly involved in treaty negotiations - diplomats, bureaucrats and international lawyers ... Given the strength of his argument and the compelling evidence he puts forth, one wonders why others have been so reluctant to relax the rationality assumption. Hopefully other scholars will follow Poulsen's lead and push to understand the extent to which bounded rationality can explain other puzzling results in political behavior and decision making.' Xander Slaski, Journal of Politics 'Lauge N. Skovgaard Poulsen's book is a superb contribution to this important body of research. Taking an international political economy perspective, the book sheds new light on the historical development of the international investment regime. ... the book presents a solid theoretical framework and a persuasive body of evidence that sustain a different account of why low- and middle-income countries signed investment treaties. These features make the book a must read for anybody interested in the forces that shaped the historical development of today's international investment regime, and in exploring new trajectories in international economic diplomacy.' Lorenzo Cotula, Journal of International Economic Law 'Lauge N. Skovgaard Poulsen's engaging and meticulously researched book is a timely contribution to International Political Economy scholarship. In Bounded Rationality and Economic Diplomacy, Poulsen poses the pertinent question: why did developing countries as diverse as China and the Marshall Islands ever sign up to an arbitration system that could later come back to bite them ... Poulsen should be commended for providing the most detailed analysis of the origins of bilateral investment treaties and investor - state dispute settlement to date. As ISDS cases inevitably become more prominent in the coming years, Poulsen's book will serve as an authoritative guide to their origins for scholars of international political economy and institutional design, but also anyone curious about this increasingly salient topic.' Claire Peacock, International Affairs 'Poulsen's extensively-researched but succinctly-written book is a tour de force. It should be read by all scholars and practitioners interested in the historical trajectory and ongoing policy issues associated with international investment treaties and arbitration, especially the topical issue of ISDS.' Luke Nottage, Journal of World Investment and Trade 'This is a provocative thesis that Poulsen pursues with great skill and success. The effort goes to show that a combination of qualitative and quantitative techniques, fusing both 'problem-solving' and critical methods, contributes a great deal to our understanding of this complex field.' David Schneiderman, The European Journal of International Law 'All scholars of international politics and perhaps others should read this interesting book. It makes valuable contributions, both specific and general. It develops an original, convincing explanation of the phenomenally rapid spread, especially during the 1990s, of bilateral investment treaties [BITs] involving developing countries, and of the treaties' puzzling content. It also demonstrating an insightful way to check and enrich rational choice analyses of many other political phenomena.' John S. Odell, International Relations