The lecture began at 4:15 p.m., Wednesday, March 28, and was given by Joseph Stiglitz of Columbia University; the discussant was Rachel Kyte of the International Finance Corporation.
MULTINATIONAL CORPORATIONS: BALANCING RIGHTS AND RESPONSIBILITIES
By Joseph E. Stiglitz *
THE IMPORTANCE OF CORPORATIONS AND THE PROBLEMS THEY PRESENT
An increasing fraction of commerce within each country is conducted by corporations which are owned and controlled from outside its borders and which often conduct business in dozens of countries. These corporations have brought enormous benefits--indeed, many of the benefits attributed to globalization, such as the closing of the knowledge gap, the gap between developing and developed countries which is even more important than the gap in resources, is due in no small measure to multinational corporations. More important than the capital which corporations bring (1) are the transfer of technology, the training of human resources, and the access to international markets.
In recent years, especially following the collapse of the initiative to create a Multilateral Agreement on Investment (MAI) within the OECD, (2) there has been a proliferation of bilateral investment treaties (BITs) and investment provisions within bilateral free trade agreements. (3,4) (Some countries (such as Indonesia) have even passed laws providing similar investment guarantees, on their own.)
These agreements are purportedly designed to provide greater protection for investors, thereby encouraging cross-border investment. There is, to date, little evidence that they have done so. (5) Part of the reason is that they may in fact curtail development strategies, in ways which are adverse to growth. As the ECLAC (The UN Economic Commission on Latin America and the Caribbean) concluded, "countries often find that they have assumed obligations which, further down the road, will place limitations on their own development program." (6)
This paper is concerned with a set of more fundamental issues. Even if it could be established that BITs lead to increased investment, and even if that investment could be shown to lead to higher growth, as measured by increased GDP (gross domestic product), (7) it does not mean that societal welfare has been increased, especially once account is taken of resource depletion and environmental degradation. These agreements are designed to impose restraints on what governments can do--or at least to impose a high cost to their undertaking certain actions. Some of the activities which may be constrained may be important for promoting general societal well-being--even if profits of particular firms are affected adversely. It is this possibility which has made these agreements a subject of such concern and debate.
These agreements are, of course, not all identical; what they do is itself a subject of some controversy. Like any agreement, it depends on the interpretations of particular words, and the judicial processes through which these words are given meaning are one of the sources of dissatisfaction with the agreements. Different arbitration panels have interpreted even the same words differently, creating a high level of uncertainty, both among governments and investors, about exactly what these agreements do. (8) This article is focused not on any specific agreement but on the general thrust of these agreements, which goes substantially beyond protection against expropriation.
Many of the agreements--including some of their most controversial aspects--are concerned with the far broader issue of what happens when changes in regulations or other government policies adversely affect the value of a foreign-owned asset. (9) The agreements do not, of course, stop governments from changing regulations, taxes, or other government polices; but they may require that the government compensate those that are adversely affected, and in doing so, they increase the costs of governments changing regulations and or other government policies. …