Even if there is a need for government regulation, it does not mean that there is a need for international regulation. Indeed, standard be- liefs in the efficacy of competition among communities would argue the opposite.
Myth Four: Tiebout Competition. Communities competing against each other would make certain that the legal environment ensuring economic efficiency would be established. People would migrate to communities (countries) with strong property rights, and away from those without it.85
In a sense, Tiebout's argument is more robust than that of Smith and Coase; in Tiebout's world, there might be imperfections in mar- kets that necessitated government intervention, but each country would have an incentive to adopt the optimal regulatory system.
Given the restrictive conditions under which market competition en- sures economic efficiency within a country, it is not surprising that competition among communities does not generally result in global efficiency.8 6
85. See Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. POL.
ECON. 416, 418 (1956) (arguing that competition among communities results in efficiency). Tiebout himself only focused on competition in the supply of public goods and taxation.
86. See Joseph E. Stiglitz, The Theory of Local Public Goods, in THE
ECONOMICS OF PUBLIC SERVICES 274, 332 (Martin S. Feldstein & Robert P. Inman eds., 1977) (questioning Tiebout's argument and indicating that inefficiency can arise out of competition between communities because such competition is inevi- tably "imperfect"); Joseph E. Stiglitz, The Theory of Local Public Goods Twenty- Five Years After Tiebout: A Perspective, in LOCAL PROVISION OF PUBLIC SERVICES: THE TIEBOUT MODEL AFTER TWENTY-FIVE YEARS 17, 48 (George R.
Zodrow ed., 1983) (reanalyzing the inadequacies in Tiebout's assertion that com- munity competition leads to Pareto efficiency and arguing that the conclusion is valid only under highly restrictive conditions); Joseph E. Stiglitz, Public Goods in Open Economies with Heterogeneous Individuals, in LOCATIONAL ANALYSIS OF PUBLIC FACILITIES 55, 72-74 (Jacques-Franqois Thisse & Henry G. Zoller eds., 1983) (finding that under the implausible conditions under which the Tiebout con- clusion was valid, each community would have only a single type of individual of any given skill, and there would be unanimity in all voting about local taxes and
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It should be clear, however, that much of the demand for interna- tional regulation is not related to failures of Tiebout competition, and virtually none of the argumentation for such regulation is based on this analytic framework. Rather, the argument seems to be that the business community in the advanced industrial countries believes that developing countries have not provided as strong of property rights protection as they would like, and they use their political lev- erage to implement protections in developing countries that they have not been able to get themselves in their own countries.87 In short, it is a distributive motive, though cloaked in an efficiency ra- tionale: It is argued that it would be good for the developing coun- tries.88 But if strong property rights protections were beneficial for
expenditures). The fact that this describes no local community is evidence against the Tiebout hypothesis.
87. Using, of course, the argument that by providing such protection through a treaty, they will be able to attract more FDI. As we have seen, the evidence for such claims is weak, at best.
88. When I say "good" for developing countries, in the language of economics, this means a Pareto improvement, one which benefits all citizens, and which ac- cordingly would be supported by all, regardless of the political process. There is an alternative interpretation: Good for developing countries could mean good on av- erage or good for only some groups. Of course, if there were good redistributive mechanisms, good on average could be translated into good for all-the winners would compensate the losers. But in practice, losers know that such compensation is often not paid and therefore exert what political influence they can to stop such
"reforms." Similar reasoning holds for reforms that benefit some groups at the ex- pense of others. Evaluating policies in terms of whether the winner could compen- sate the losers (whether they do or do not) is sometimes referred to as the Hicks- Kaldor criterion. See, e.g., Alan 0. Sykes, The Welfare Economics of Immigration Law: A Theoretical Survey With An Analysis of U.S. Policy, in JUSTICE IN IMMIGRATION 158, 160 (Warren F. Schwarts ed., 1995) (referring to Hicks-Kaldor efficiency where a policy is superior when an individual who benefits from adopt- ing it compensates an individual who is detrimented sufficiently so that he remains benefited). In fact, I would argue that investment agreements may actually fail un- der this weaker criterion. However, one of the problems of globalization is that it is systematically associated with increasing inequality. Certain groups dominate the political processes obtaining agreements that benefit themselves, often at the ex- pense of the poor. The Hicks-Kaldor criterion simply ignores these distributive consequences. There is a third criterion-whether the policy (investment agree- ment) increases social welfare using an egalitarian social welfare function (of which the Rawlsian criterion is one example). See SAMUEL FREEMAN, JUSTICE AND THE SOCIAL CONTRACT: ESSAYS ON RAWLSIAN POLITICAL PHILOSOPHY 51
(2007) (describing Rawlsian political philosophy which argues that a policy is de- sirable only if it benefits the worst-off individual). In terms of this criterion, in- vestment treaties are also likely to fail.
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developing countries, presumably developed countries would have adopted such regulations on their own.
1. Why the Governments of a Developing Country Might Sign Agreements That Are Collectively Not in Their Interests Developing countries are in competition for investment from the advanced industrial countries. Even if it could be shown that signing such an agreement led to more investment in a cross-section empiri- cal study,89 it does not mean that developing countries as a whole benefit. As in other areas of competition, there can be a race to the bottom. The Nash equilibrium entails each developing country 'sacri- ficing its own interests (for example, with lower environmental or worker protections) in hope that it will gain enough additional in- vestment to more than offset the losses. But, of course, when they all do so, none gain. It is other factors which, in the end, determine which country benefits from the investment.9"
There is an equally bad possibility: there are differences among countries in their willingness to, for example, sacrifice the environ- ment to get more investment. BITs may be part of a signaling equi- librium, by which developing countries indicate how much they are willing to sacrifice in order to get this additional investment. In gen- eral, such signaling equilibria are inefficient.9t
2. Why Investment Agreements Might Collectively Be in the Interests of Developing Countries
There is one, more positive, argument for why a developing coun- try might want to sign a BIT: Governments might want to forbid
89. See supra note 7 and accompanying text.
90. Of course, there may be some additional investment in developing coun- tries as a whole, at the expense of developed countries. The other characteristics- wage advantages and infrastructure disadvantages-would seem to be of over- whelming importance, which partly explains the fact that these agreements do not seem to have had the desired effect. See V.N. BALASUBRAMANYAM, FOREIGN
DIRECT INVESTMENT IN DEVELOPING COUNTRIES: DETERMINANTS AND IMPACT
(2001), available at http://www.oecd.org/dataoecd/53/20/2407305.pdf (listing fac- tors foreign investors consider when deciding where to invest abroad). Not surpris- ingly, the existence of a treaty was not central.
91. See, e.g., Greenwald & Stiglitz, supra note 80 (arguing that signaling equi- libria are, in general, constrained Pareto inefficient).
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themselves from engaging in certain actions that might disadvantage investors, but they have difficulties in making credible commitments.
International agreements, such as BITs, increase the cost of abrogat- ing such promises, thereby making the commitment more credible.
But if this (an example of what is sometimes called "public failure,"
a limitation on governments that leads to potentially inefficient out- comes) were what motivated such agreements, presumably develop- ing countries would be asking for such agreements; they would be perceived as mutually beneficial. In practice, they are part of the de- mands developed countries impose on developing countries, often as part of trade agreements, acceded to by developing countries because the cost to the developing country is less than the surplus they be- lieve they will receive as a result of the trade deal.92